**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**  (Mark One)**

**x**Annual Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

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

**Forthe transition period from                          to                          **

**Commissionfile number 001-32963**

**Buckeye GP Holdings L.P.**

**(Exact name of registrant as specified in its charter)**

| **Delaware**                    |   | **11-3776228**         |
|---------------------------------|--------|------------------------|
| (State or other jurisdiction of |   | (IRS Employer          |
| incorporation or organization)  |   | Identification number) |

 

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

 

**Registrant’s telephone number,including area code:**(610) 904-4000

Securities registered pursuant to Section 12(b) ofthe Act:

|                                                          |   | **Name of each exchange on** |
|----------------------------------------------------------|--------|------------------------------|
| **Title of each class**                                  |   | **which registered**         |
| Common Units representing limited partnership  interests |   | New York Stock Exchange      |

 

Securities registeredpursuant to Section 12(g) of the Act:

**None**

**(Title of class)**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes **o****     **No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes **o**     No x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

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

| Large accelerated filer** **o |   | Accelerated filer** **o |   | Non-accelerated  filer x |
|------------------------------------|--------|------------------------------|--------|-------------------------------|

 

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

There was no public market for the registrant’s commonunits as of June 30, 2006 (the last business day of its most recentlycompleted second fiscal quarter).

As of March 22, 2007there were 26,938,000 Common Units and 1,362,000 Management Units outstanding.

 

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**TABLE OFCONTENTS**
|                   | ** **   | ** **                                                                                                     | ** ** | **Page** |
|-------------------|--------------|----------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   | *** *** | *** ***                                                                                                   |       |     |
| **Item 1.**       | *** *** | ***Business***                                                                                                 |       | 3        |
| **Item 1A.**      | *** *** | ***Risk  Factors***                                                                                            |       | 27       |
| **Item 1B.**      | *** *** | ***Unresolved Staff Comments***                                                                                |       | 42       |
| **Item 2.**       | *** *** | ***Properties***                                                                                               |       | 42       |
| **Item  3.**      | *** *** | ***Legal  Proceedings***                                                                                       |       | 43       |
| **Item 4.**       | *** *** | ***Submission of Matters to a Vote of Security Holders***                                                      |       | 44       |
| **PART II**  |         |                                                                                                           |       |     |
| **Item 5.**       | *** *** | ***Market for the Registrant’s LP Units, Related  Unitholder Matters, and Issuer Purchases of LP Units*** |       | 45       |
| **Item  6.**      | *** *** | ***Selected  Financial Data***                                                                                 |       | 45       |
| **Item 7.**       | *** *** | ***Management’s Discussion and Analysis of Financial  Condition and Results of Operations***              |       | 47       |
| **Item 7A.**      | *** *** | ***Quantitative and Qualitative Disclosures About Market  Risk***                                              |       | 71       |
| **Item 8.**       | *** *** | ***Financial Statements and Supplementary Data***                                                              |       | 73       |
| **Item 9.**       | *** *** | ***Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure***                    |       | 115      |
| **Item 9A.**      | *** *** | ***Controls and Procedures***                                                                                  |       | 115      |
| **Item  9B.**     | *** *** | ***Other  Information***                                                                                       |       | 115      |
| **PART III** |         |                                                                                                           |       |     |
| **Item 10.**      | *** *** | ***Directors, Executive Officers and Corporate Governance***                                                   |       | 115      |
| **Item 11.**      | *** *** | ***Executive Compensation***                                                                                   |       | 119      |
| **Item 12.**      | *** *** | ***Security Ownership of Certain Beneficial Owners and  Management and Related Unitholder Matters***           |       | 132      |
| **Item 13.**      | *** *** | ***Certain Relationships and Related Transactions and  Director Independence***                                |       | 134      |
| **Item 14.**      | *** *** | ***Principal Accountant Fees and Services***                                                                   |       | 137      |
| **PART IV**  |         |                                                                                                           |       |     |
| **Item 15.**      | *** *** | ***Exhibits and Financial Statement Schedule***                                                                |       | 139      |

 

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**PART I**

**Item 1.**                        *Business*

**Buckeye GP HoldingsL.P.**

Buckeye GP Holdings L.P. (“BGH”) is a publicly tradedmaster limited partnership (NYSE symbol: BGH) organized on June 15, 2006under the laws of the state of Delaware. BGH owns 100% of Buckeye GP LLC (“BuckeyeGP”), which is the general partner of Buckeye Partners, L.P. (the “Partnership”or “Buckeye”). The Partnership is also a publicly traded (NYSE symbol: BPL)master limited partnership which was organized in 1986 under the laws of thestate of Delaware. BGH’s limited partnership units are owned approximately 54%by affiliates of Carlyle/Riverstone Global Energy and Power Fund II, L.P. (“Carlyle/Riverstone”),approximately 37% by the public and approximately 9% by certain members ofBuckeye GP’s senior management. MainLine Management LLC, a Delaware limitedliability company (“MainLine Management”), is the general partner of BGH, andis wholly-owned by Carlyle/Riverstone.

BGH’s only business is the ownership of Buckeye GP. BuckeyeGP’s only business is the management of the Partnership and its subsidiaries. AtDecember 31, 2006, Buckeye GP owned an approximate 0.6% interest in thePartnership. Buckeye GP also owns 100% of and controls MainLine GP, Inc.which, together with Buckeye GP, owns 100% of and controls MainLine L.P. (“MainLine”or the “Operating Subsidiary GP”). The Operating Subsidiary GP is the generalpartner of, and owns an approximate 1% interest in, certain of the Partnership’soperating subsidiaries.

BGH was formed on June 15, 2006 in order to facilitatethe reorganization of MainLine and its affiliates and to effect an initialpublic offering (“IPO”) of BGH common units. The reorganization and IPOoccurred on August 9, 2006 and, prior to such date, BGH had no activity. Priorto the reorganization, MainLine owned and controlled Buckeye GP. On August 9,2006, BGH sold 10.5 million common units in the IPO, the net proceeds ofwhich were approximately $168.3 million. BGH used the net proceeds fromthe IPO, along with cash on hand, to repay all of the then-outstandingindebtedness of MainLine and to make distributions to its pre-IPO equity owners.The BGH common units sold in the IPO represent approximately 37% of theoutstanding equity of BGH, which includes common units (“Common Units”) andmanagement units (“Management Units”).

BGH’s only cash-generatingasset is its ownership interest in Buckeye GP.  Buckeye GP generates cash and earningsprimarily through its ownership of the general partner interest along withincentive distribution rights in Buckeye, and its approximate one percentgeneral partner interest in certain of the Buckeye’s operating subsidiaries. BGH’scash flow is, therefore, directly dependent upon the ability of the Partnershipand its operating subsidiaries to make cash distributions to its partners. Theactual amount of cash that BGH will have available for distribution will dependprimarily on Buckeye’s ability to generate cash beyond its working capitalrequirements.

**Buckeye Partners, L.P.**

The Partnership is principally engaged in thetransportation, terminalling and storage of refined petroleum products formajor integrated oil companies, large refined products marketing companies andmajor end users of petroleum products on a fee basis through facilities ownedand operated by the Partnership. The Partnership also operates pipelines ownedby third parties under contracts with major integrated oil and chemicalcompanies and performs pipeline construction activities, generally for these samecustomers.

The Partnership owns and operates one of the largestindependent refined petroleum products pipeline systems in the United States interms of volumes delivered, with approximately 5,400 miles of pipeline serving17 states, and operates approximately 2,500 miles of other pipelines underagreements with major oil and chemical companies. As of December 31, 2006,the Partnership also owns and operates 

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45 active refinedpetroleum products terminals with aggregate storage capacity of approximately17.6 million barrels in Illinois, Indiana, Massachusetts, Michigan,Missouri, New York, Ohio and Pennsylvania.

The Partnership’s pipelines service approximately 100delivery locations, transporting refined petroleum products, includinggasoline, jet fuel, diesel fuel, heating oil, kerosene and natural gas liquids,from major supply sources to terminals and airports located within end-usemarkets. These pipelines also transport other refined products, such as propaneand butane, refinery feedstocks and blending components. The Partnership’stransportation services are typically provided on a common carrier basis underpublished tariffs for customers. The Partnership’s geographical diversity,connections to multiple sources of supply and extensive delivery system helpcreate a stable base business. The Partnership is an independent transportationprovider that is not affiliated with any oil company or marketer of refinedpetroleum products and generally does not own the petroleum products that ittransports.

The Partnershipcurrently conducts all of its operations through seven operating subsidiaries,which are referred to as the “Operating Subsidiaries”:

·       *Buckeye PipeLine Company, L.P.* (“Buckeye Pipe Line”), which owns an approximate2,643-mile interstate common carrier refined petroleum products pipelinesystem serving major population centers in eight states. It is the primary jetfuel transporter to John F. Kennedy International Airport (“JFK”), LaGuardiaAirport, Newark Liberty International Airport and certain other airports withinits service territory.

·       *Laurel PipeLine Company, L.P.* (“Laurel”), which owns an approximate 345-milerefined petroleum products pipeline connecting five Philadelphia arearefineries to 10 delivery points across Pennsylvania.

·       *Wood RiverPipe Lines LLC* (“Wood River”), which owns six refined petroleumproducts pipelines with aggregate mileage of approximately 925 miles located inIllinois, Indiana, Missouri and Ohio.

·       *Buckeye PipeLine Transportation LLC* (“BPL Transportation”), which owns a refinedpetroleum  products pipeline system withaggregate mileage of approximately 478 miles located in New Jersey, New York,and Pennsylvania.

·       *EvergladesPipe Line Company, L.P.* (“Everglades”), which owns an approximate 37-mileintrastate common carrier refined petroleum products pipeline connecting PortEverglades, Florida to Ft. Lauderdale-Hollywood International Airport andMiami International Airport. It is the primary jet fuel provider to MiamiInternational Airport.

·       *Buckeye NGLPipe Lines LLC*(“Buckeye NGL”), which owns an approximate 350-milenatural gas liquids pipeline, acquired in January 2006, extendinggenerally from the Wattenberg, Colorado area to Bushton, Kansas.

·       *Buckeye PipeLine Holdings, L.P.* (“BPH”), which, through its subsidiary BuckeyeTerminals, LLC (“Buckeye Terminals”), owns (or in certain instances leases fromother Operating Subsidiaries) and operates 45 refined petroleum productsterminals with aggregate storage capacity of approximately 17.6 millionbarrels. BPH also owns interests in 574 miles of pipelines in the Midwest,Southwest and West Coast. BPH operates, through its subsidiary Buckeye GulfCoast Pipe Lines, L.P. (“BGC”), pipelines in the Gulf Coast region for thirdparties. BPH also holds minority stock interests in two midwest refinedpetroleum products pipelines and a natural gas liquids pipeline system.

Beginning in the fourth quarter of 2004 and continuinginto 2006, the Partnership substantially expanded its business operationsthrough equity investments and asset acquisitions of approximately $850.0 million.BGH’s operations are presented in three reportable operating segments: (i) PipelineOperations, (ii) Terminalling and Storage and (iii) Other Operations.

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The following chartdepicts the Partnership’s and BGH’s ownership structure as of December 31,2006.

Ownership percentages in the chart are approximate.

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**Business Activities**

The following discussiondescribes the business activities of BGH’s operating segments, which are thesame as the Partnership’s operating segments. Detailed information regardingrevenues, operating income and total assets of each segment can be found inNote 20, Segment Information, to BGH’s consolidated financial statements.

***Pipeline Operations***

The Partnership owns and operates petroleum productspipelines which receive refined petroleum products from refineries, connectingpipelines and bulk and marine terminals, and transports those products to otherlocations. In 2006, the Pipeline Operations segment accounted for approximately76% of BGH’s consolidated revenues.

The Partnershiptransported an average of approximately 1,450,300 barrels of refined petroleumproducts per day in 2006. The following table shows the volume and percentageof refined petroleum products transported over the last three years.

**Volumeand Percentage of Petroleum Products Transported(1)**(Volume inthousands of barrels per day)

| ** **             | ** ** | **Year ended December 31,** |
|------------------------|------------|--------------------------------------------|
| ** **             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** |
| ** **             | ** ** | **Volume**                                 | ** ** | **Percent** | ** ** | **Volume** | ** ** | **Percent** | ** ** | **Volume** | ** ** | **Percent** |
| Gasoline               |       | 722.3                                      |   |   | 49.8 | % |   | 721.2 |   |   | 52.0 | % |   | 609.0 |   |   | 50.7 | % |
| Jet fuels              |       | 351.3                                      |   |   | 24.2 |   |   | 319.6 |   |   | 23.1 |   |   | 273.1 |   |   | 22.8 |   |
| Middle  distillates(2) |       | 324.2                                      |   |   | 22.4 |   |   | 323.6 |   |   | 23.4 |   |   | 293.0 |   |   | 24.4 |   |
| Natural gas  liquids   |       | 19.8                                       |   |   | 1.4 |   |   | — |   |   | — |   |   | — |   |   | — |   |
| Other products         |       | 32.7                                       |   |   | 2.2 |   |   | 21.0 |   |   | 1.5 |   |   | 25.5 |   |   | 2.1 |   |
| Total                  |       | 1,450.3                                    |   |   | 100.0 | % |   | 1,385.4 |   |   | 100.0 | % |   | 1,200.6 |   |   | 100.0 | % |

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(1)          Excludes local producttransfers.

(2)          Includes diesel fuel,heating oil, kerosene and other middle distillates.

Pipelines in BGH’sPipeline Operations segment provide transportation service in the followingstates: California, Colorado, Connecticut, Florida, Illinois, Indiana, Kansas,Massachusetts, Michigan, Missouri, New Jersey, Nevada, New York, Ohio,Pennsylvania and Tennessee.

*Pennsylvania—NewYork—New Jersey*

Buckeye Pipe Line serves major population centers inPennsylvania, New York and New Jersey through approximately 928 miles of pipeline.Refined petroleum products are received at Linden, New Jersey from 17 majorsource points, including two refineries, six connecting pipelines and ninestorage and terminalling facilities. Products are then transported through twolines from Linden, New Jersey to Macungie, Pennsylvania. From Macungie, thepipeline continues west through a connection with the Laurel pipeline toPittsburgh, Pennsylvania (serving Reading, Harrisburg, Altoona/Johnstown andPittsburgh, Pennsylvania) and north through eastern Pennsylvania into New York(serving Scranton/Wilkes-Barre, Binghamton, Syracuse, Utica, Rochester and, viaa connecting carrier, Buffalo, New York). Buckeye Pipe Line leases capacity inone of the pipelines extending from Pennsylvania to upstate New York to a majoroil pipeline company. Products received at Linden, New Jersey are alsotransported through one line to Newark International Airport and through twoadditional lines to JFK and LaGuardia airports and to commercial refinedpetroleum products terminals at Long Island City and 

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Inwood, New York. Thesepipelines supply JFK, LaGuardia and Newark airports with substantially all ofeach airport’s jet fuel requirements.

In addition, BPL Transportation’s pipeline systemdelivers refined petroleum products from the Valero refinery located inPaulsboro, New Jersey to destinations in New Jersey, Pennsylvania, and New York.A portion of the pipeline system extends from Paulsboro, New Jersey to deliverproducts to Malvern, Pennsylvania. From Malvern, a pipeline segment deliversrefined products to locations in upstate New York, while another segmentdelivers products to central Pennsylvania. Two shorter pipeline segmentsconnect the Valero refinery to the Colonial pipeline system and thePhiladelphia International Airport, respectively.

The Laurel pipeline systemtransports refined petroleum products through a 345-mile pipelineextending westward from five refineries and a connection to the Colonialpipeline system in the Philadelphia area to Reading, Harrisburg,Altoona/Johnstown and Pittsburgh, Pennsylvania.

*Illinois—Indiana—Michigan—Missouri—Ohio*

Buckeye Pipe Line and Norco Pipe Line Company, LLC (“Norco”),a subsidiary of BPH, transport refined petroleum products through 2,025 milesof pipeline in northern Illinois, central Indiana, eastern Michigan, westernand northern Ohio and western Pennsylvania. A number of receiving lines anddelivery lines connect to a central corridor which runs from Lima, Ohio throughToledo, Ohio to Detroit, Michigan. Refined petroleum products are received at arefinery and other pipeline connection points near Toledo, Lima, Detroit andEast Chicago, Indiana. Major market areas served include Peoria, Illinois;Huntington/Fort Wayne, Indianapolis and South Bend, Indiana; Bay City, Detroitand Flint, Michigan; Cleveland, Columbus, Lima and Toledo; Ohio, andPittsburgh, Pennsylvania.

Wood River owns sixrefined petroleum products pipelines with aggregate mileage of approximately925 miles located in the midwestern United States. Refined petroleum productsare received at the ConocoPhillips Wood River refinery in Illinois andtransported to the Chicago area, to a terminal in the St. Louis, Missouri area,to the Lambert-St. Louis Airport, to receiving points across Illinois andIndiana and to Buckeye Pipe Line’s pipeline in Lima, Ohio. At the Partnership’stank farm located in Hartford, Illinois, one of Wood River’s pipelines alsoreceives refined petroleum products from the Explorer pipeline, which aretransported to the Partnership’s 1.3 million barrel terminal located on theOhio River in Mt. Vernon, Indiana.  WoodRiver also owns an approximately 26-mile pipeline that extends fromMarathon’s Wood River Station in southern Illinois to a third party terminal inthe East St. Louis, Missouri area.

*Colorado—Kansas*

Buckeye NGL**transports natural gas liquids via an approximate 350-milepipeline, acquired in January 2006, which extends generally from theWattenberg, Colorado area to Bushton, Kansas.

*Other RefinedProducts Pipelines*

Buckeye Pipe Line serves Connecticut and Massachusettsthrough an approximate 112-mile pipeline (the “Jet Lines System”) thatcarries refined petroleum products from New Haven, Connecticut to Hartford,Connecticut and Springfield, Massachusetts.

Everglades transports primarily jet fuel on anapproximate 37-mile pipeline from Port Everglades, Florida to Ft.Lauderdale-Hollywood International Airport and Miami International Airport. Evergladessupplies Miami International Airport with substantially all of its jet fuel requirements.

WesPac Pipelines—Reno LLC(“WesPac Reno”) owns an approximate 3.0 mile pipeline serving the Reno/TahoeInternational Airport. WesPac Pipelines—San Diego LLC (“WesPac San Diego”) ownsan approximate 4.3 mile pipeline serving the San Diego International Airport. WesPacPipelines—Memphis 

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LLC (“WesPacMemphis”) owns and operates an approximate 11-mile pipeline and relatedterminal facilities that  primarily serveFederal Express Corporation at the Memphis International Airport. Each of theWesPac entities originally was a joint venture between BPH and Kealine PartnersLLC. In May 2005, BPH purchased the membership interest in WesPac Renoowned by Kealine Partners for approximately $2.5 million. Since this purchase,BPH has owned 100% of WesPac Reno. BPH has a 75% ownership interest in WesPacMemphis and a 50% ownership interest in WesPac San Diego. Kealine Partners ownsthe remaining interest in these two joint ventures. As of December 31,2006, the Partnership had provided $52.8 million in intercompany financing  to these WesPac entities.

*Equity Investments*

BPH owns a 24.99% equity interest in West Shore PipeLine Company (“West Shore”). West Shore owns a pipeline system that originatesin the Chicago, Illinois area and extends north to Green Bay, Wisconsin andwest and then north to Madison, Wisconsin. The pipeline system transportsrefined petroleum products to markets in northern Illinois and Wisconsin. Theother equity holders of West Shore are major oil companies. The pipeline isoperated under contract by Citgo Pipeline Company.

BPH also owns a 20% equity interest in West Texas LPGPipeline Limited Partnership (“WTP”). WTP owns a pipeline system that deliversnatural gas liquids to Mont Belvieu, Texas for fractionation.  The natural gas liquids are delivered to theWTP pipeline system from the Rocky Mountain region via connecting pipelines andfrom gathering fields located in west and central Texas. The majority ownersand the operators of WTP are affiliates of ChevronTexaco, Inc.

BPH also owns a 40% equityinterest in Muskegon Pipeline LLC (“Muskegon”). The majority owner of Muskegonis Marathon Pipe Line LLC (“Marathon”). Muskegon owns an approximate 170-milepipeline that delivers petroleum products from Griffith, Indiana to Muskegon,Michigan. The pipeline is operated by Marathon Pipe Line LLC.

***Terminalling and Storage***

Through BPH and its subsidiary, Buckeye Terminals,LLC, BGH’s Terminalling and Storage segment owns and operates 45 terminalslocated in Illinois, Indiana, Massachusetts, Michigan, Missouri, New York, Ohioand Pennsylvania that provide bulk storage and throughput services and have thecapacity to store an aggregate of approximately 17.6 million barrels of refinedpetroleum products. In addition, Buckeye Terminals owns four currently idleterminals with an aggregate storage capacity of approximately 863,000 barrels.In 2006, the Terminalling and Storage segment accounted for approximately 18%of BGH’s consolidated revenue.

The Partnership’s refined petroleum products terminalsreceive products from pipelines (and, in certain cases, barges) and distributethem to third parties, who in turn deliver them to end-users and retail outlets.The Partnership’s refined petroleum products terminals play a key role inmoving refined products to the end-user market by providing storage andinventory management, distribution, blending to achieve specified grades ofgasoline, and other ancillary services that include the injection of ethanoland other additives. Typically, the Partnership’s terminal facilities consistof multiple storage tanks and are equipped with automated truck loadingequipment that is available 24 hours a day.

The Partnership’s refined petroleum products terminalsderive most of their revenues from terminalling fees paid by customers. A feeis charged for receiving refined petroleum products into the terminal anddelivering them to trucks, barges, or pipelines. In addition to terminallingfees, the Partnership’s revenues are generated by charging customers fees forblending and injecting additives, and, in certain instances, leasing terminalcapacity to customers on either a short-term or long-term basis. Of thePartnership’s 45 refined petroleum products terminals, 32 are connected to thePartnership’s pipelines and 13 are not.

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The tablebelow sets forth the total average daily throughput for the refined petroleumproducts terminals in each of the years presented:

| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Refined products  throughput (barrels per day) |       | 494,300                                    |       | 419,200 |   | 160,900 |   |

 

Thefollowing table outlines the number of terminals and storage capacity inbarrels (“bbls”) by state as of December 31, 2006:

| **State**     | ** ** | ** ** | ** ** | **Number of  Terminals**             | ** ** | **Storage Capacity** | ** ** |
|---------------|------------|------------|------------|-------------------------------------------|------------|---------------------------|------------|
| ** **    | ** ** | ** ** | ** ** | **(In thousands of bbls)** | ** ** |
| Illinois      |       |       | 5          |                                      |       |                      | 1,574      |   |   |
| Indiana       |       |       | 9          |                                      |       |                      | 6,847      |   |   |
| Massachusetts |       |       | 1          |                                      |       |                      | 106        |   |   |
| Michigan      |       |       | 6          |                                      |       |                      | 1,792      |   |   |
| Missouri      |       |       | 2          |                                      |       |                      | 345        |   |   |
| New York      |       |       | 9          |                                      |       |                      | 2,067      |   |   |
| Ohio          |       |       | 9          |                                      |       |                      | 3,501      |   |   |
| Pennsylvania  |       |       | 4          |                                      |       |                      | 1,372      |   |   |
| Total         |       |       | 45         |                                      |       |                      | 17,604     |   |   |

 

***Other Operations***

The business of BGC’s OtherOperations segment consists primarily of pipeline operation and maintenanceservices and pipeline construction services for third parties pursuant tocontractual arrangements. BGC is a contract operator of pipelines owned inTexas by major petrochemical companies. At December 31, 2006, BGC had 14operations and maintenance contracts in place to operate and maintainapproximately 2,500 miles of pipeline. In addition, BGC owns an approximate 23-milepipeline located in Texas and leases a portion of the pipeline to a third-partychemical company. Subsidiaries of BGC also own an approximate 63% interest in acrude butadiene pipeline between Deer Park, Texas and Port Arthur, Texas. Volumesof crude butadiene are transported on this line, known as the Sabina pipeline. BGCalso owns and operates an ammonia pipeline located in Texas that was acquiredin November 2005. In addition, BGC provides engineering and constructionmanagement services to major chemical companies in the Gulf Coast area. In2006, the Other Operations segment accounted for approximately 6% of  BGH’s consolidated revenue.

**Competition andOther Business Considerations**

The Operating Subsidiaries conduct business withoutthe benefit of exclusive franchises from government entities. In addition, theOperating Subsidiaries’ pipeline operations generally operate as commoncarriers, providing transportation services at posted tariffs and withoutlong-term contracts. The Operating Subsidiaries generally do not own theproducts they transport. Demand for the services provided by the OperatingSubsidiaries derives from demand from end users for petroleum products in theregions served and the ability and willingness of refiners and marketers tosupply such demand by deliveries through the Operating Subsidiaries’ pipelines.Demand for refined petroleum products is primarily a function of price,prevailing general economic conditions and weather. The Operating Subsidiaries’businesses are, therefore, subject to a variety of factors partially orentirely beyond their control. Multiple sources of pipeline entry and multiplepoints of delivery, however, have historically helped maintain stable totalvolumes even when volumes at particular source or destination points havechanged.

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The consolidated Buckeye customer base wasapproximately 214 customers in 2006 and 160 customers in 2005. Affiliates ofShell contributed 11% in 2006 and 13% in 2005 of consolidated BGH revenue. Forthe year ended December 31, 2004, no customer contributed more than 10% ofconsolidated revenue. Approximately 5% of the 2006 consolidated revenue wasgenerated by Shell in the Pipeline Operations segment; the remaining 6% ofconsolidated revenue was in the Terminalling and Storage segment. The 20 largestcustomers accounted for 53% and 63% of consolidated BGH revenue in 2006 and2005, respectively.

Generally, pipelines are the lowest cost method forlong-haul overland movement of refined petroleum products. Therefore, theOperating Subsidiaries’ most significant competitors for large volume shipmentsare other pipelines, some of which are owned or controlled by major integratedoil companies. Although it is unlikely that a pipeline system comparable insize and scope to the Operating Subsidiaries’ pipeline system will be built inthe foreseeable future, new pipelines (including pipeline segments that connectwith existing pipeline systems) could be built to effectively compete with theOperating Subsidiaries in particular locations.

The Operating Subsidiaries compete with marinetransportation in some areas. Tankers and barges on the Great Lakes account forsome of the volume to certain Michigan, Ohio and upstate New York locationsduring the approximately eight non-winter months of the year. Barges arepresently a competitive factor for deliveries to the New York City area, thePittsburgh area, Connecticut and locations on the Ohio River such as Mt.Vernon, Indiana and Cincinnati, Ohio, and locations on the Mississippi Riversuch as St. Louis, Missouri.

Trucks competitively deliver refined products in anumber of areas served by the Operating Subsidiaries. While their costs may notbe competitive for longer hauls or large volume shipments, trucks competeeffectively for smaller volumes in many local areas served by the OperatingSubsidiaries. The availability of truck transportation places a significantcompetitive constraint on the ability of the Operating Subsidiaries to increasetheir tariff rates.

Privately arranged exchanges of refined petroleumproducts between marketers in different locations are another form ofcompetition. Generally, such exchanges reduce both parties’ costs byeliminating or reducing transportation charges. In addition, consolidationamong refiners and marketers that has accelerated in recent years has altereddistribution patterns, reducing demand for transportation services in somemarkets and increasing them in other markets.

Distribution of refined petroleum products depends toa large extent upon the location and capacity of refineries. However, becausethe Partnership’s business is largely driven by the consumption of fuel in itsdelivery areas and the Operating Subsidiaries’ pipelines have numerous sourcepoints, BGH does not believe that the expansion or shutdown of any particularrefinery is likely, in most instances, to have a material effect on thebusiness of the Partnership. Certain of the pipelines which were acquired fromShell on October 1, 2004 emanate from a refinery owned by ConocoPhillipsand located in the vicinity of Wood River, Illinois. While these pipelines are,in part, supplied by connecting pipelines, a temporary or permanent closure ofthe ConocoPhillips Wood River refinery could have a negative impact on volumesdelivered through these pipelines.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Forward-LookingInformation—Competition and Other Business Conditions.”

The Operating Subsidiaries’ mix of productstransported tends to vary seasonally. Declines in demand for heating oil duringthe summer months are, to a certain extent, offset by increased demand forgasoline and jet fuel. Overall, operations have been only moderately seasonal,with somewhat lower than average volumes being transported during March, April andMay and somewhat higher than average volumes being transported inNovember, December and January.

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Many of the general competitive factors discussedabove, such as demand for refined petroleum products and competitive threatsfrom methods of transportation other than pipelines, also impact thePartnership’s terminal operations. In addition, the Partnership’s terminalsgenerally compete with other terminals in the same geographic market.  Many competitive terminals are owned by majorintegrated oil companies. These major oil companies may have the opportunityfor product exchanges that are not available to the Partnership’s terminals. Whilethe Partnership’s terminal throughput fees are not regulated, they are subjectto price competition from competitive terminals and alternate modes oftransporting refined petroleum products to end users such as retail gasstations.

Other independent pipelinecompanies, engineering firms, major integrated oil companies and petrochemicalcompanies compete with BGC to operate and maintain pipelines for third-partyowners. In addition, in many instances it is more cost-effective forpetrochemical companies to operate and maintain their own pipelines than toenter into agreements for BGC to operate and maintain such pipelines. Numerous engineeringand construction firms compete with BGC for pipeline construction business.

**Employees**

None of BGH, thePartnership or any of the Operating Subsidiaries have any employees. TheOperating Subsidiaries are managed and operated by employees of Buckeye PipeLine Services Company, a Pennsylvania corporation (“Services Company”). ServicesCompany is reimbursed by the Operating Subsidiaries pursuant to a servicesagreement for the cost of providing employee services. Similarly, compensationand benefit costs for the four highest-salaried officers are reimbursed by BGHto Services Company pursuant to an Executive Employment Agreement (see Note 1to BGH’s consolidated financial statements). In December 2006, ServicesCompany had a total of 867 full-time employees, 171 of whom were represented bytwo labor unions. The Operating Subsidiaries (and their predecessors) havenever experienced any work stoppages or other significant labor problems.

**CapitalExpenditures**

The Partnership makes capital expenditures in order tomaintain and enhance the safety and integrity of its pipelines, terminals andrelated assets, to expand the reach or capacity of its pipelines and terminals,to improve the efficiency of its operations and to pursue new businessopportunities. See “Pipeline and Terminal Maintenance and Safety Regulation”and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.”

During 2006, the Partnership made approximately $92.8million of capital expenditures, of which $30.2 million related to maintenanceand integrity projects and $62.6 million related to expansion and costreduction projects.

In 2007, the Partnership anticipates capitalexpenditures of approximately $80.0 million, of which approximately $30.0million is projected to be sustaining capital expenditures for maintenance andintegrity projects and approximately $50.0 million is projected to be forexpansion and cost reduction projects. See “Pipeline and Terminal Maintenanceand Safety Regulation” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources.”

BGH’s capital expendituresare not significant.

**Regulation**

***General***

Buckeye Pipe Line, Wood River, BPL Transportation,Buckeye NGL and Norco operate pipelines subject to the regulatory jurisdictionof the Federal Energy Regulatory Commission (“FERC”) under the InterstateCommerce Act and the Department of Energy Organization Act. FERC regulationsrequire that 

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interstate oil pipelinerates be posted publicly and that these rates be “just and reasonable” andnon-discriminatory. FERC regulations also enforce common carrier obligationsand specify a uniform system of accounts. In addition, the OperatingSubsidiaries are subject to the jurisdiction of certain other federal agencieswith respect to environmental and pipeline safety matters.

The Operating Subsidiariesare also subject to the jurisdiction of various state and local agencies,including, in some states, public utility commissions which have jurisdictionover, among other things, intrastate tariffs, the issuance of debt and equitysecurities, transfers of assets and pipeline safety. The Partnership’s Laurelsubsidiary operates a pipeline in intrastate service across Pennsylvania, andits tariff rates are regulated by the Pennsylvania Public Utility Commission. ThePartnership’s Wood River subsidiary operates a pipeline in intrastate servicein Illinois and tariff rates related to this pipeline are regulated by theIllinois Commerce Commission.

***FERC Rate Regulation***

The generic oil pipeline rate regulations issued underthe Energy Policy Act of 1992 rely primarily on an index methodology, thatallows a pipeline to change its rates in accordance with an index (currentlythe change in the Producer Price Index****plus 1.3%)that FERC believes reflects cost changes appropriate for application topipeline rates. The tariff rates of each of Wood River, BPL Transportation,Buckeye NGL and Norco are governed by this generic FERC index methodology, andtherefore are subject to change annually according to the index. If PPI +1.3%is negative, then Wood River, BPL Transportation, Buckeye NGL and Norco couldbe required to reduce their rates if they exceed the new maximum allowablerate.

In addition, FERC had a longstandingrule that pass-through entities, like the Partnership and the OperatingSubsidiaries, may not claim an income tax allowance for income attributable tonon-corporate limited partners in justifying the reasonableness of their ratesthat are based on their cost of service. (Buckeye GP believes only a smallpercentage of the Partnership’s limited partnership units are held bycorporations). Further, in a July 2004 decision involving an unrelatedpipeline limited partner, the United States Court of Appeals for the Districtof Columbia Circuit overruled a prior FERC decision allowing a limitedpartnership to claim a partial income tax allowance. On May 4, 2005, theFERC adopted a new policy providing that all entities owning public utilityassets—oil and gas pipelines and electric utilities—would be permitted toinclude an income tax allowance in their cost-of-service rates to reflect theactual or potential income tax liability attributable to their public utilityincome, regardless of the form of ownership. FERC determined that anypass-through entity seeking an income tax allowance in a rate proceeding mustestablish that its partners have an actual or potential income tax obligationon the entity’s public utility income. The amount of any income tax allowancewill be reduced accordingly to the extent that any of the partners do not havean actual or potential income tax obligation. This reduction will be reflectedin the weighted income tax liability of the entity’s partners. Whether apipeline’s owners have an actual or potential income tax liability will bereviewed by the FERC on a case-by-case basis. This policy was applied by FERCin June 2005 with an order involving an unrelated pipeline limited partnership.FERC concluded that the pipeline should be afforded an income tax allowance onall of its partnership interests to the extent that the ultimate owners ofthose interests had an actual or potential income tax obligation during theperiods at issue.  In December 2005,FERC reaffirmed its new income tax allowance policy as it applied to thatpipeline.  FERC’s tax allowance policyhas been appealed to the United States Court of Appeals for the District ofColumbia Circuit.  The ultimate outcomeof these proceedings is not certain and could result in changes to the FERC’streatment of income tax allowances.

A shipper or FERC could cite thesedecisions in a protest or complaint challenging indexed rates maintained bycertain of the Partnership’s Operating Subsidiaries. If a challenge werebrought and FERC were to find that some of the indexed rates exceed either themaximum allowable rate or levels justified by the cost of service, FERC couldorder a reduction in the indexed rates and could require reparations. As aresult, BGH’s results of operations could be adversely affected.

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Under FERC’s rules, as an alternative to indexedrates, a pipeline is also allowed to charge market-based rates if the pipelineestablishes that it does not possess significant market power in a particularmarket. The final rules became effective on January 1, 1995.

Buckeye Pipe Line’s ratesare governed by an exception to the rules discussed above, pursuant tospecific FERC authorization. Buckeye Pipe Line’s market-based rate regulationprogram was initially approved by FERC in March 1991 and was subsequentlyextended in 1994. Under this program, in markets where Buckeye Pipe Line doesnot have significant market power, individual rate increases: (a) will notexceed a real (i.e., exclusive of inflation) increase of 15% over any two-yearperiod (the “rate cap”), and (b) will be allowed to become effectivewithout suspension or investigation if they do not exceed a “trigger” equal tothe change in the Gross Domestic Product implicit price deflator since the dateon which the individual rate was last increased, plus 2%. Individual ratedecreases will be presumptively valid upon a showing that the proposed rateexceeds marginal costs. In markets where Buckeye Pipe Line was found to have significantmarket power and in certain markets where no market power finding was made: (i) individualrate increases cannot exceed the volume-weighted average rate increase inmarkets where Buckeye Pipe Line does not have significant market power since thedate on which the individual rate was last increased, and (ii) anyvolume-weighted average rate decrease in markets where Buckeye Pipe Line doesnot have significant market power must be accompanied by a correspondingdecrease in all of Buckeye Pipe Line’s rates in markets where it does havesignificant market power. Shippers retain the right to file complaints orprotests following notice of a rate increase, but are required to show that theproposed rates violate or have not been adequately justified under themarket-based rate regulation program, that the proposed rates are undulydiscriminatory, or that Buckeye Pipe Line has acquired significant market powerin markets previously found to be competitive.

The Buckeye Pipe Lineprogram was subject to review by FERC in 2000 when FERC reviewed the indexselected in the generic oil pipeline regulations. FERC decided to continue thegeneric oil pipeline regulations with no material changes and did not modify ordiscontinue Buckeye Pipe Line’s program. BGH cannot predict the impact that anychange to Buckeye Pipe Line’s rate program would have on Buckeye Pipe Line’soperations. Independent of regulatory considerations, it is expected thattariff rates will continue to be constrained by competition and other marketfactors.

***Environmental Regulation***

The Operating Subsidiaries are subject to federal,state and local laws and regulations relating to the protection of theenvironment. Although Buckeye believes that the operations of the OperatingSubsidiaries comply in all material respects with applicable environmental lawsand regulations, risks of substantial liabilities are inherent in pipelineoperations, and there can be no assurance that material environmentalliabilities will not be incurred. Moreover, it is possible that otherdevelopments, such as increasingly rigorous environmental laws, regulations andenforcement policies, and claims for damages to property or injuries to personsresulting from the operations of the Operating Subsidiaries, could result in substantialcosts and liabilities to the Partnership. See “Legal Proceedings” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidityand Capital Resources—Environmental Matters.”

The Oil Pollution Act of 1990 (“OPA”) amended certainprovisions of the federal Water Pollution Control Act of 1972, commonlyreferred to as the Clean Water Act (“CWA”), and other statutes as they pertainto the prevention of and response to petroleum product spills into navigablewaters. The OPA subjects owners of facilities to strict joint and severalliability for all containment and clean-up costs and certain other damagesarising from a spill. The CWA provides penalties for the discharge of petroleumproducts in reportable quantities and imposes substantial liability for thecosts of removing a spill. State laws for the control of water pollution alsoprovide varying civil and criminal penalties and liabilities in the case ofreleases of petroleum or its derivatives into surface waters or into theground.

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Contamination resulting from spills or releases ofrefined petroleum products sometimes occurs in the petroleum pipeline industry.The Operating Subsidiaries’ pipelines cross numerous navigable rivers andstreams. Although BGH believes that the Operating Subsidiaries comply in allmaterial respects with the spill prevention, control and countermeasurerequirements of federal laws, any spill or other release of petroleum productsinto navigable waters may result in material costs and liabilities to thePartnership.

The Resource Conservation and Recovery Act (“RCRA”),as amended, establishes a comprehensive program of regulation of “hazardouswastes.” Hazardous waste generators, transporters, and owners or operators oftreatment, storage and disposal facilities must comply with regulationsdesigned to ensure detailed tracking, handling and monitoring of these wastes.RCRA also regulates the disposal of certain non-hazardous wastes. As a resultof these regulations, certain wastes typically generated by pipeline operationsare considered “hazardous wastes.”

The Comprehensive Environmental Response, Compensationand Liability Act of 1980 (“CERCLA”), also known as “Superfund,” governs therelease or threat of release of a “hazardous substance.” Releases of ahazardous substance, whether on or off-site, may subject the generator of thatsubstance to liability under CERCLA for the costs of clean-up and otherremedial action. Pipeline maintenance and other activities in the ordinarycourse of business generate “hazardous substances.”  As a result, to the extent a hazardoussubstance generated by the Operating Subsidiaries or their predecessors mayhave been released or disposed of in the past, the Operating Subsidiaries mayin the future be required to remediate contaminated property. Governmentalauthorities such as the Environmental Protection Agency (“EPA”), and in someinstances third parties, are authorized under CERCLA to seek to recoverremediation and other costs from responsible persons, without regard to faultor the legality of the original disposal. In addition to its potentialliability as a generator of a “hazardous substance,” the property orright-of-way of the Operating Subsidiaries may be adjacent to or in theimmediate vicinity of Superfund and other hazardous waste sites. Accordingly,the Operating Subsidiaries may be responsible under CERCLA for all or part ofthe costs required to cleanup such sites, which costs could be material.

The Clean Air Act, amended by the Clean Air Act Amendmentsof 1990 (the “Amendments”), imposes controls on the emission of pollutants intothe air. The Amendments required states to develop facility-wide permittingprograms over the past several years to comply with new federal programs.Existing operating and air-emission requirements like those currently imposedon the Operating Subsidiaries are being reviewed by appropriate state agenciesin connection with the new facility-wide permitting program. It is possiblethat new or more stringent controls will be imposed on the OperatingSubsidiaries through this program.

The Operating Subsidiariesare also subject to environmental laws and regulations adopted by the variousstates in which they operate. In certain instances, the regulatory standardsadopted by the states are more stringent than applicable federal laws.

***Pipeline and Terminal Maintenance and SafetyRegulation***

The pipelines operated by the Operating Subsidiariesare subject to regulation by the United States Department of Transportation (“DOT”)under the Hazardous Liquid Pipeline Safety Act of 1979 (“HLPSA”), which governsthe design, installation, testing, construction, operation, replacement andmanagement of pipeline facilities. HLPSA covers petroleum and petroleumproducts and requires any entity that owns or operates pipeline facilities tocomply with applicable safety standards, to establish and maintain a plan ofinspection and maintenance and to comply with such plans.

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The Pipeline Safety Reauthorization Act of 1988requires coordination of safety regulation between federal and state agencies,testing and certification of pipeline personnel, and authorization ofsafety-related feasibility studies. The Partnership has a drug and alcoholtesting program that complies in all material respects with the regulationspromulgated by the Office of Pipeline Safety and DOT.

HLPSA also requires, among other things, that theSecretary of Transportation consider the need for the protection of theenvironment in issuing federal safety standards for the transportation ofhazardous liquids by pipeline. The legislation also requires the Secretary ofTransportation to issue regulations concerning, among other things, theidentification by pipeline operators of environmentally sensitive areas; thecircumstances under which emergency flow restricting devices should be requiredon pipelines; training and qualification standards for personnel involved inmaintenance and operation of pipelines; and the periodic integrity testing ofpipelines in unusually sensitive and high-density population areas by internalinspection devices or by hydrostatic testing. Effective in August 1999,the DOT issued its Operator Qualification Rule, which required a writtenprogram by April 27, 2001, for ensuring operators are qualified to performtasks covered by the pipeline safety rules. All persons performing coveredtasks were required to be qualified under the program by October 28, 2002.The Partnership filed its written plan and has qualified its employees andcontractors as required and requalified the employees under its plan in 2005. OnMarch 31, 2001, DOT’s rule for Pipeline Integrity Management in HighConsequence Areas (Hazardous Liquid Operators with 500 or more Miles ofPipeline) became effective. This rule sets forth regulations that requirepipeline operators to assess, evaluate, repair and validate the integrity ofhazardous liquid pipeline segments that, in the event of a leak or failure,could affect populated areas, areas unusually sensitive to environmental damageor commercially navigable waterways. Under the rule, pipeline operators wererequired to identify line segments which could impact high consequence areas byDecember 31, 2001. Pipeline operators were required to develop “BaselineAssessment Plans” for evaluating the integrity of each pipeline segment by March 31,2002 and to complete an assessment of the highest risk 50% of line segments by September 30,2004, with full assessment of the remaining 50% by March 31, 2008.Pipeline operators will thereafter be required to re-assess each affectedsegment in intervals not to exceed five years. The Partnership has implementedan Integrity Management Program in compliance with the requirements of thisrule.

In December 2002, the Pipeline Safety ImprovementAct of 2002 (“PSIA”) became effective. The PSIA imposes additional obligationson pipeline operators, increases penalties for statutory and regulatoryviolations, and includes provisions prohibiting employers from taking adverseemployment action against pipeline employees and contractors who raise concernsabout pipeline safety within the company or with government agencies or thepress. Many of the provisions of the PSIA are subject to regulations to beissued by the Department of Transportation. The PSIA also requires publiceducation programs for residents, public officials and emergency responders anda measurement system to ensure the effectiveness of the public educationprogram. The Partnership implemented a public education program that complieswith these requirements and the requirements of the American PetroleumInstitute Recommended Practice 1162. While the PSIA imposes additionaloperating requirements on pipeline operators, Buckeye GP does not believe thatcosts of compliance with the PSIA are likely to be material.

**The PipelineInspection, Protection, Enforcement, and Safety Act of 2006 (“PIPES Act”),which became effective on December 24, 2006, among other things, reauthorizedHLPSA, strengthened damage prevention measures designed to protect pipelinesfrom excavation damage, removed the exemption from regulation of pipelinesoperating at less than 20 percent of maximum yield strength in rural areas, andrequired pipeline operators to manage human factors in pipeline controlcenters, including controller fatigue. While the PIPES Act imposes additionaloperating requirements on pipeline operators, Buckeye GP does not believe thatcosts of compliance with the PIPES Act are likely to be material.**

The Partnership also has certain contractualobligations to Shell for testing and maintenance of certain of the pipelinesthat the Partnership acquired from Shell in October 2004. In 2003, Shellentered 

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into a consent decree withthe EPA arising out of a June 1999 incident unrelated to the assetsacquired by the Partnership. The consent decree included requirements fortesting and maintenance of two of the pipelines (the “North Line” and the “EastLine”) acquired from Shell, the creation of a damage prevention program,submission to independent monitoring and various reporting requirements. In thepurchase agreement with Shell, the Partnership agreed to perform, at its ownexpense, the work required of Shell on the North Line and the East Line underthe consent decree. The Partnership’s obligations to Shell with respect to theconsent decree extend to approximately 2008, a date five years from the date ofthe consent decree.

Buckeye believes that the OperatingSubsidiaries currently comply in all material respects with HLPSA, the PSIA,the PIPES Act and other pipeline safety laws and regulations. However,the industry, including the Partnership, will incur additional pipeline andtank integrity expenditures in the future, and the Partnership is likely toincur increased operating costs based on these and other governmentregulations. During 2006, the Partnership’s integrity expenditures for theseprograms were approximately $20.1 million (of which $9.6 million wascapitalized and $10.5 million was expensed). The Partnership expects 2007integrity expenditures for these programs to be approximately $23 millionof which approximately $13 million will be capitalized and $10 millionwill be expense.

The Operating Subsidiaries are also subject to therequirements of the Occupational Safety and Health Act (“OSHA”) and comparablestate statutes. The Partnership believes that the Operating Subsidiaries’operations comply in all material respects with OSHA requirements, includinggeneral industry standards, record-keeping, hazard communication requirements,training and monitoring of occupational exposure to benzene, asbestos and otherregulated substances.

BGH cannot predict whetheror in what form any new legislation or regulatory requirements might be enactedor adopted or the costs of compliance. In general, any such new regulationscould increase operating costs and impose additional capital expenditurerequirements, but the Partnership does not presently expect that such costs orcapital expenditure requirements would have a material adverse effect on itsresults of operations or financial condition.

**Tax Considerationsfor Unitholders**

This section is a summary of material taxconsiderations that may be relevant to holders (“Unitholders”) of BGH commonunits (“Common Units”). It is based upon the Internal Revenue Code of 1986, asamended, regulations promulgated thereunder and current administrative rulingsand court decisions, all of which are subject to change. Subsequent changes insuch authorities may cause the tax consequences to vary substantially from theconsequences described below. Unless the context otherwise requires, referencesin this section to “us,” “we,” or “our” are references to BGH.

No attempt has been madein the following discussion to comment on all federal income tax mattersaffecting BGH or the Unitholders. Moreover, the discussion focuses onUnitholders who are individual citizens or residents of the United States andhas only limited application to corporations, estates, trusts, non-residentaliens or other Unitholders subject to specialized tax treatment, such astax-exempt institutions, foreign persons, individual retirement accounts, REITsor mutual funds.  **UNITHOLDERSARE URGED TO CONSULT, AND SHOULD DEPEND ON, THEIR OWN TAX ADVISORS IN ANALYZINGTHE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE OWNERSHIPOR DISPOSITION OF COMMON UNITS.**

***Characterization of BGH for Tax Purposes***

A partnership is not a taxable entity and incurs nofederal income tax liability. Instead, partners are required to take intoaccount their respective allocable share of items of income, gain, loss anddeduction of the partnership in computing their federal income tax liability, regardlessof whether distributions are 

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made. Distributions ofcash by a partnership to a partner are generally not taxable unless the amountof cash distributed to a partner is in excess of the partner’s tax basis in hispartnership interest. Allocable shares of partnership tax items are generallydetermined by a partnership agreement. However, the IRS may disregard such anagreement in certain instances and re-determine the tax consequences ofpartnership operations to the partners.

Section 7704 of the Internal Revenue Codeprovides that publicly traded partnerships (such as BGH) will, as a generalrule, be taxed as corporations. However, an exception, referred to as the “QualifyingIncome Exception,” exists with respect to publicly traded partnerships of which90% or more of the gross income for every taxable year consists of “qualifyingincome.”  Qualifying income includesinterest, dividends, real property rents, gains from the sale or disposition ofreal property, and most importantly for Unitholders “income and gains derivedfrom the exploration, development, mining or production, processing, refining,transportation (including pipelines transporting gas, oil or products thereof),or the marketing of any mineral or natural resource (including fertilizer,geothermal energy and timber),” and gain from the sale or disposition ofcapital assets that produce such income. BGH’s share of any such income fromBuckeye also would constitute qualifying income to BGH.

Buckeye is engaged primarily in the refined petroleumproducts transportation business. BGH believes that at least 90% or more ofBuckeye’s gross income constitutes, and has constituted, qualifying income and,accordingly, that Buckeye will continue to be classified as a partnership andnot as a corporation for federal income tax purposes. BGH’s only cashgenerating asset is its ownership interest in the Buckeye GP, which ownsgeneral partner interests and incentive distributions rights in Buckeye andgeneral partner interests in Buckeye’s operating subsidiaries. BGH believesthat at least 90% or more of its gross income constitutes, and has constituted,qualifying income and, accordingly, that BGH will continue to be classified asa partnership and not as a corporation for federal income tax purposes.

If BGH fails to meet the Qualifying Income Exception,other than a failure that is determined by the IRS to be inadvertent and thatis cured within a reasonable time after discovery, BGH will be treated as if ithad transferred all of its assets, subject to liabilities, to a newly formedcorporation, on the first day of the year in which it fails to meet theQualifying Income Exception, in return for stock in that corporation, and thendistributed that stock to its Unitholders in liquidation of their interests inBGH. This contribution and liquidation should be tax-free to Unitholders andBGH so long as BGH, at that time, does not have liabilities in excess of thetax basis of its assets. Thereafter, BGH would be treated as a corporation forfederal income tax purposes.

If BGH were taxable as acorporation in any taxable year, either as a result of a failure to meet theQualifying Income Exception or otherwise, BGH’s items of income, gain, loss anddeduction would be reflected only on BGH’s tax return rather than being passedthrough to the Unitholders, and BGH’s net income would be taxed to it atcorporate rates. Moreover, if Buckeye were taxable as a corporation in anytaxable year, BGH’s share of Buckeye’s items of income, gain, loss anddeduction would not be passed through to BGH, and Buckeye would pay tax on itsincome at corporate rates. If BGH or Buckeye were taxable as corporations,losses recognized by Buckeye would not flow through to BGH and lossesrecognized by BGH would not flow through to BGH’s Unitholders, as the case maybe. In addition, any distribution made by BGH to a Unitholder (or by Buckeye toBGH) would be treated as either taxable dividend income, to the extent ofcurrent or accumulated earnings and profits, or, in the absence of earnings andprofits, a nontaxable return of capital, to the extent of the Unitholder’s taxbasis in his Common Units (or BGH’s tax basis in BGH’s aggregate interest inBuckeye), or taxable capital gain, after the Unitholder’s tax basis in hisCommon Units (or BGH’s tax basis in BGH’s aggregate interest in Buckeye) isreduced to zero. Accordingly, taxation of either BGH or Buckeye as acorporation would result in a material reduction in a Unitholder’s cash flowand after-tax return.

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***Flow-Through of Taxable Income***

BGH will not pay anyfederal income tax. Instead, each Unitholder will be required to report on hisincome tax return his share of BGH’s income, gains, losses and deductionswithout regard to whether corresponding cash distributions are received by him.Consequently, BGH may allocate income to a Unitholder even if he has notreceived a cash distribution. Each Unitholder will be required to include inincome his allocable share of BGH’s income, gains, losses and deductions forBGH’s taxable year ending with or within his taxable year. BGH’s taxable yearends on December 31.

***Treatment of BGH’s Distributions***

Distributions by us to a Unitholder generally will notbe taxable to the Unitholder for federal income tax purposes to the extent ofhis tax basis in his Common Units immediately before the distribution. BGH’scash distributions in excess of a Unitholder’s tax basis generally will beconsidered to be gain from the sale or exchange of the Common Units. Anyreduction in a Unitholder’s share of BGH’s liabilities for which no partner,including BGH’s general partner, bears the economic risk of loss, known as “nonrecourseliabilities,” will be treated as a distribution of cash to that Unitholder. Tothe extent BGH’s distributions cause a Unitholder’s “at risk” amount to be lessthan zero at the end of any taxable year, the Unitholder must recapture anylosses deducted in previous years.

A decrease in a Unitholder’spercentage interest in BGH because of the issuance of additional Common Unitswill decrease his share of BGH’s nonrecourse liabilities, and thus will resultin a corresponding deemed distribution of cash. A non-pro rata distribution ofmoney or property may result in ordinary income to a Unitholder, regardless ofhis tax basis in his Common Units, if the distribution reduces the Unitholder’sshare of BGH’s “unrealized receivables,” including depreciation recapture,and/or substantially appreciated “inventory items,” both as defined in theInternal Revenue Code, and collectively, “Section 751 Assets.”  To that extent, he will be treated as havingbeen distributed his proportionate share of the Section 751 Assets andhaving exchanged those assets with us in return for the non-pro rata portion ofthe actual distribution made to him. This latter deemed exchange will generallyresult in the Unitholder’s realization of ordinary income, which will equal theexcess of (1) the non-pro rata portion of that distribution over (2) theUnitholder’s tax basis for the share of Section 751 Assets deemedrelinquished in the exchange.

***Basis of Common Units***

A Unitholder will have aninitial tax basis for its Common Units equal to the amount paid for the CommonUnits plus its share of BGH’s liabilities. A Unitholder’s tax basis will beincreased by his share of BGH’s income and by any increase in his share of BGH’sliabilities. A Unitholder’s basis will be decreased, but not below zero, by itsshare of BGH’s distributions, by its share of BGH’s losses, by any decrease inits share of BGH’s liabilities and by its share of BGH’s expenditures that arenot deductible in computing BGH’s taxable income and are not required to becapitalized.

***Loss Limitations***

The deduction by a Unitholder of his share of BGH’slosses will be limited to the tax basis in his Common Units and, in the case ofan individual Unitholder or a corporate Unitholder, if more than 50% of thevalue of the corporate Unitholder’s stock is owned directly or indirectly byfive or fewer individuals or some tax-exempt organizations, to the amount forwhich the Unitholder is considered to be “at risk” with respect to BGH’sactivities, if that is less than his tax basis. A Unitholder must recapturelosses deducted in previous years to the extent that distributions cause his atrisk amount to be less than zero at the end of any taxable year. Lossesdisallowed to a Unitholder or recaptured as a result of these limitations willcarry forward and will be allowable to the extent that his tax basis or at riskamount, whichever is the 

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limiting factor, issubsequently increased. Upon the taxable disposition of a Common Unit, any gainrecognized by a Unitholder can be offset by losses that were previouslysuspended by the at risk limitation but may not be offset by losses suspendedby the basis limitation. Any excess loss above that gain previously suspendedby the at risk or basis limitations is no longer utilizable.

In general, a Unitholder will be at risk to the extentof the tax basis of his Common Units, excluding any portion of that basisattributable to his share of BGH’s nonrecourse liabilities, reduced by anyamount of money he borrows to acquire or hold his Common Units, if the lenderof those borrowed funds owns an interest in BGH, is related to the Unitholderor can look only to the Common Units for repayment. A Unitholder’s at riskamount will increase or decrease as the tax basis of the Unitholder’s CommonUnits increases or decreases, other than tax basis increases or decreasesattributable to increases or decreases in his share of BGH’s nonrecourseliabilities.

The passive loss limitations generally provide thatindividuals, estates, trusts and some closely-held corporations and personalservice corporations can deduct losses from passive activities, which aregenerally corporate or partnership activities in which the taxpayer does notmaterially participate, only to the extent of the taxpayer’s income from thoseactivities. The passive loss limitations are applied separately with respect toeach publicly traded partnership. However, the application of the passive losslimitations to tiered publicly traded partnerships is uncertain. BGH will takethe position that any passive losses BGH generates that are reasonablyallocable to BGH’s investment in Buckeye will only be available to offset BGH’spassive income generated in the future that is reasonably allocable to BGH’sinvestment in Buckeye and will not be available to offset income from otherpassive activities or investments, including other investments in privatebusinesses or investments BGH may make in other publicly traded partnerships,such as Buckeye, or salary or active business income. Further, a Unitholder’sshare of BGH’s net income may be offset by any suspended passive losses fromthe Unitholder’s investment in BGH, but may not be offset by the Unitholder’s currentor carryover losses from other passive activities, including those attributableto other publicly traded partnerships. Passive losses that are not deductiblebecause they exceed a Unitholder’s share of income BGH generates may bededucted in full when he disposes of his entire investment in us in a fullytaxable transaction with an unrelated party.

The IRS could take the position that for purposes ofapplying the passive loss limitation rules to tiered publicly tradedpartnerships, such as Buckeye and BGH, the related entities are treated as onepublicly traded partnership. In that case, any passive losses generated by BGHwould be available to offset income from a Unitholder’s investment in Buckeye. However,passive losses that are not deductible because they exceed a Unitholder’s shareof income generate by BGH would not be deductible in full until a Unitholderdisposes of his entire investment in both BGH and Buckeye in a fully taxabletransaction with an unrelated party.

The passive loss rules are applied after otherapplicable limitations on deductions, including the at risk rules and thebasis limitation.

***Deductibility of Interest Expense***

The deductibilityof a non-corporate taxpayer’s “investment interest expense” is generallylimited to the amount of that taxpayer’s “net investment income.” Investmentinterest expense includes:

·       intereston indebtedness properly allocable to property held for investment;

·       BGH’sinterest expense attributed to portfolio income; and

·       theportion of interest expense incurred to purchase or carry an interest in apassive activity to the extent attributable to portfolio income.

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The computation of aUnitholder’s investment interest expense will take into account interest on anymargin account borrowing or other loan incurred to purchase or carry a unit.Net investment income includes gross income from property held for investment andamounts treated as portfolio income under the passive loss rules, lessdeductible expenses, other than interest, directly connected with theproduction of investment income, but generally does not include gainsattributable to the disposition of property held for investment. The IRS hasindicated that net passive income earned by a publicly traded partnership willbe treated as investment income to its Unitholders. In addition, theUnitholder’s share of BGH’s portfolio income will be treated as investmentincome.

***Entity Level Collections***

If BGH is required orelects under applicable law to pay any federal, state, local or foreign incometax on behalf of any Unitholder or its general partner or any formerUnitholder, BGH is authorized to pay those taxes from BGH’s funds. Thatpayment, if made, will be treated as a distribution of cash to the Unitholderon whose behalf the payment was made. If the payment is made on behalf of aperson whose identity cannot be determined, BGH is authorized to treat thepayment as a distribution to all current Unitholders. BGH is authorized toamend its  partnership agreement in themanner necessary to maintain uniformity of intrinsic tax characteristics of theCommon Units and to adjust later distributions, so that after giving effect tothese distributions, the priority and characterization of distributionsotherwise applicable under its partnership agreement is maintained as nearly asis practicable. Payments by BGH as described above could give rise to anoverpayment of tax on behalf of an individual Unitholder in which event theUnitholder would be required to file a claim in order to obtain a credit orrefund.

***Allocation of Income, Gain, Loss and Deduction***

In general, if BGH has a net profit, its items ofincome, gain, loss and deduction will be allocated among BGH’s Unitholders inaccordance with their percentage interests in BGH. If BGH has a net loss forthe entire year, that loss will be allocated to the Unitholders in accordancewith their percentage interests in BGH to the extent of their positive capitalaccounts.

Specified items of BGH’s income, gain, loss anddeduction will be allocated to account for the difference between the tax basisand fair market value of BGH’s assets at the time of the initial offering of itsCommon Units, referred to in this discussion as “Contributed Property.”  The effect of these allocations to aUnitholder purchasing Common Units will be essentially the same as if the taxbasis of BGH’s assets were equal to their fair market value at the time of theinitial offering of the Common Units. In addition, items of recapture incomewill be allocated to the extent possible to the partner who was allocated thededuction giving rise to the treatment of that gain as recapture income inorder to minimize the recognition of ordinary income by some Unitholders. Finally,although BGH does not expect that its operations will result in the creation ofnegative capital accounts, if negative capital accounts nevertheless result,items of its income and gain will be allocated in an amount and manner toeliminate the negative balance as quickly as possible.

An allocation ofitems of BGH’s income, gain, loss or deduction, other than an allocationrequired by the Internal Revenue Code to eliminate the difference between apartner’s “book” capital account, credited with the fair market value ofContributed Property, and “tax” capital account, credited with the tax basis ofContributed Property, referred to in this discussion as the “Book-TaxDisparity,” will generally be given effect for federal income tax purposes indetermining a partner’s share of an item of income, gain, loss or deductiononly if the allocation has substantial economic effect. In any other case, aUnitholder’s share of an item will be determined on the basis of his interestin BGH, which will be determined by taking into account all the facts andcircumstances, including:

·       hisrelative contributions to BGH;

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·       theinterests of all the Unitholders in profits and losses;

·       theinterest of all the Unitholders in cash flow; and

·       the rights of all theUnitholders to distributions of capital upon liquidation.

***Treatment of Short Sales***

A Unitholder whoseCommon Units are loaned to a “short seller” to cover a short sale of CommonUnits may be considered as having disposed of those Common Units. If so, theUnitholder would no longer be treated for tax purposes as a partner for thoseCommon Units during the period of the loan and may recognize gain or loss fromthe disposition. As a result, during this period:

·       anyof BGH’s income, gain, loss or deduction with respect to those units would notbe reportable by the Unitholder;

·       anycash distributions received by the Unitholder as to those Common Units would befully taxable; and

·       allof these distributions would appear to be ordinary income.

Unitholders desiring toassure their status as partners and avoid the risk of gain recognition from aloan to a short seller are urged to modify any applicable brokerage accountagreements to prohibit their brokers from borrowing their Common Units. The IRShas announced that it is actively studying issues relating to the tax treatmentof short sales of partnership interests.

***Alternative Minimum Tax***

Each Unitholder will berequired to take into account his distributive share of any items of BGH’sincome, gain, loss or deduction for purposes of the alternative minimum tax. Thecurrent minimum tax rate for noncorporate taxpayers is 26% on the first$175,000 of alternative minimum taxable income in excess of the exemption amountand 28% on any additional alternative minimum taxable income. Unitholders areurged to consult with their tax advisors as to the impact of an investment inunits on their liability for the alternative minimum tax.

***Tax Rates***

In general, the highesteffective United States federal income tax rate for individuals is currently35% and the maximum United States federal income tax rate for net capital gainsof an individual is currently 15% (such rate to be increased to 20% for taxableyears beginning after December 31, 2010) if the asset disposed of was heldfor more than 12 months at the time of disposition.

***Section 754 Election***

BGH will make the election permitted by Section 754of the Internal Revenue Code. This election is irrevocable without the consentof the IRS. The election will generally permit BGH to adjust a Common Unitpurchaser’s tax basis in BGH’s assets (“inside basis”) under Section 743(b) ofthe Internal Revenue Code to reflect his purchase price. This election does notapply to a person who purchases Common Units directly from us. The Section 743(b) adjustmentbelongs to the purchaser and not to other Unitholders. For purposes of thisdiscussion, a Unitholder’s inside basis in BGH’s assets will be considered tohave two components: (1) his share of BGH’s tax basis in BGH’s assets (“commonbasis”) and (2) his Section 743(b) adjustment to that basis.

A Section 754 election is advantageous if thetransferee’s tax basis in his Common Units is higher than the Common Units’share of the aggregate tax basis of BGH’s assets immediately prior to thetransfer. In 

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that case, as a result ofthe election, the transferee would have, among other items, a greater amount ofdepreciation and depletion deductions and his share of any gain or loss on asale of BGH’s assets would be less. Conversely, a Section 754 election isdisadvantageous if the transferee’s tax basis in his Common Units is lower thanthose Common Units’ share of the aggregate tax basis of BGH’s assetsimmediately prior to the transfer. A basis adjustment is required regardless ofwhether a Section 754 election is made in the case of a transfer of aninterest in BGH if BGH has a substantial built-in loss immediately after thetransfer, or if BGH distributes property and has a substantial basis reduction.Generally a built-in loss or a basis reduction is substantial if it exceeds$250,000.

The calculations involvedin the Section 754 election are complex and will be made on the basis ofassumptions as to the value of BGH’s assets and other matters. There is noassurance that the determinations made by BGH will prevail if challenged by theIRS and that the deductions resulting from them will not be reduced ordisallowed altogether.

***Accounting Method and Taxable Year***

BGH uses the year ending December 31as its taxable year and the accrual method of accounting for federal income taxpurposes. Each Unitholder will be required to include in income his share ofBGH’s income, gain, loss and deduction for its taxable year ending within orwith the Unitholder’s taxable year. In addition, a Unitholder who has a taxableyear ending on a date other than December 31 and who disposes of all ofhis Common Units following the close of BGH’s taxable year but before the closeof the Unitholder’s taxable year must include his share of BGH’s income, gain,loss and deduction in income for his taxable year, with the result that he willbe required to include in income for his taxable year his share of more thanone year of BGH’s income, gain, loss and deduction.

***Tax Treatment of Operations***

BGH uses the adjusted tax basis of its various assetsfor purposes of computing depreciation and cost recovery deductions and gain orloss on any disposition of such assets. If BGH or Buckeye disposes ofdepreciable property, all or a portion of any gain may be subject to therecapture rules and taxed as ordinary income rather than capital gain.

The costs incurred inselling BGH’s units (i.e., syndication expenses) must be capitalized and cannotbe deducted by BGH currently, ratably or upon BGH’s termination. Uncertaintiesexist regarding the classification of costs as organization expenses, which maybe amortized, and as syndication expenses, which may not be amortized, butunderwriters’ discounts and commissions are treated as syndication costs.

***Valuation of Properties***

The federal income taxconsequences of the ownership and disposition of Common Units will depend inpart on BGH’s estimates of the relative fair market values, and the initial taxbases, of BGH’s assets and Buckeye’s assets. Although BGH may from time to timeconsult with professional appraisers regarding valuation matters, BGH will makemany of the relative fair market value estimates itself. These estimates anddeterminations of basis are subject to challenge and will not be binding on theIRS or the courts. If the estimates of fair market value or basis are laterfound to be incorrect, the character and amount of items of income, gain, lossor deductions previously reported by Unitholders might change, and Unitholdersmight be required to adjust their tax liability for prior years and incurinterest and penalties with respect to those adjustments.

***Disposition of Common Units***

Gain or loss will be recognized on a sale of Commonunits equal to the difference between the amount realized and the Unitholder’stax basis for the Common Units sold. A Unitholder’s amount realized will be 

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measured by the sum of thecash or the fair market value of other property received by him plus his shareof BGH’s nonrecourse liabilities. Because the amount realized includes aUnitholder’s share of BGH’s nonrecourse liabilities, the gain recognized on thesale of Common Units could result in a tax liability in excess of any cashreceived from the sale.

Prior distributions from BGH in excess of cumulativenet taxable income for a unit that decreased a Unitholder’s tax basis in thatCommon Unit will, in effect, become taxable income if the Common Unit is soldat a price greater than the Unitholder’s tax basis in that Common Unit, even ifthe price received is less than the Unitholder’s original cost.

Except as noted below, gain or loss recognized by aUnitholder, other than a “dealer” in Common Units, on the sale or exchange of aCommon Unit held for more than one year will generally be taxable as capitalgain or loss. Capital gain recognized by an individual Unitholder on the saleof Common Units held more than 12 months will generally be taxed at a maximumrate of 15% (such rate to be increased to 20% for taxable years beginning afterDecember 31, 2010). However, a portion of this gain or loss will beseparately computed and taxed as ordinary income or loss under Section 751of the Internal Revenue Code to the extent attributable to assets giving riseto depreciation recapture or other “unrealized receivables” or to “inventoryitems” of BGH or Buckeye. The term “unrealized receivables” includes potentialrecapture items, including depreciation recapture. Ordinary income attributableto unrealized receivables, inventory items and depreciation recapture mayexceed net taxable gain realized upon the sale of a Common Unit and may berecognized even if there is a net taxable loss realized on the sale of a CommonUnit. Thus, a Unitholder may recognize both ordinary income and a capital lossupon a sale of Common Units. Net capital losses may offset capital gains and nomore than $3,000 of ordinary income, in the case of individuals, and may onlybe used to offset capital gains in the case of corporations.

The IRS has ruled that a partner who acquiresinterests in a partnership in separate transactions must combine thoseinterests and maintain a single adjusted tax basis for all those interests. Upona sale or other disposition of less than all of those interests, a portion ofthat tax basis must be allocated to the interests sold using an “equitableapportionment” method. Treasury Regulations under Section 1223 of theInternal Revenue Code allow a selling Unitholder who can identify Common Unitstransferred with an ascertainable holding period to elect to use the actualholding period of the Common Units transferred. Thus, according to the ruling,a Unitholder will be unable to select high or low basis Common Units to sell aswould be the case with corporate stock, but, according to the regulations, maydesignate specific Common Units sold for purposes of determining the holdingperiod of units transferred. A Unitholder electing to use the actual holdingperiod of Common Units transferred must consistently use that identificationmethod for all subsequent sales or exchanges of Common Units. A Unitholderconsidering the purchase of additional Common Units or a sale of Common Unitspurchased in separate transactions is urged to consult his tax advisor as tothe possible consequences of this ruling and application of the regulations.

Specific provisionsof the Internal Revenue Code affect the taxation of some financial products andsecurities, including partnership interests, by treating a taxpayer as havingsold an “appreciated” partnership interest, one in which gain would berecognized if it were sold, assigned or terminated at its fair market value, ifthe taxpayer or related persons enter(s) into:

·       ashort sale;

·       anoffsetting notional principal contract; or

·       afutures or forward contract with respect to the partnership interest orsubstantially identical property.

Moreover, if a taxpayerhas previously entered into a short sale, an offsetting notional principalcontract or a futures or forward contract with respect to the partnershipinterest, the taxpayer will be 

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treatedas having sold that position if the taxpayer or a related person then acquiresthe partnership interest or substantially identical property. The Secretary ofthe Treasury is also authorized to issue regulations that treat a taxpayer thatenters into transactions or positions that have substantially the same effectas the preceding transactions as having constructively sold the financialposition.

***Allocations Between Transferors and Transferee***

In general, BGH’s taxable income and losses will bedetermined annually, will be prorated on a monthly basis and will besubsequently apportioned among the Unitholders in proportion to the number ofCommon Units owned by each of them as of the opening of the applicable exchangeon the first business day of the month (the “Allocation Date”). However, gainor loss realized on a sale or other disposition of BGH’s assets other than inthe ordinary course of business will be allocated among the Unitholders on theAllocation Date in the month in which that gain or loss is recognized. As aresult, a Unitholder transferring Common Units may be allocated income, gain,loss and deduction realized after the date of transfer.

The use of this method may not be permitted underexisting Treasury Regulations. If this method is not allowed under the TreasuryRegulations, or only applies to transfers of less than all of the Unitholder’sinterest, BGH’s taxable income or losses might be reallocated among theUnitholders. BGH is authorized to revise its method of allocation between Unitholders,as well as Unitholders whose interests vary during a taxable year, to conformto a method permitted under future Treasury Regulations.

A Unitholder who owns Common Units at any time duringa quarter and who disposes of them prior to the record date set for a cashdistribution for that quarter will be allocated items of BGH’s income, gain,loss and deductions attributable to that quarter but will not be entitled toreceive that cash distribution.

***Notification Requirements***

A Unitholder who sells anyof its Common Units is generally required to notify BGH in writing of that salewithin 30 days after the sale (or, if earlier, January 15 of the yearfollowing the sale). A purchaser of such Common Units who purchases the CommonUnits from another Unitholder is also generally required to notify BGH inwriting of that purchase within 30 days after the purchase. Upon receiving suchnotifications, BGH is required to notify the IRS of that transaction and tofurnish specified information to the transferor and transferee. Failure tonotify BGH of a purchase may, in some cases, lead to the imposition ofpenalties. However, these reporting requirements do not apply to a sale by anindividual who is a citizen of the United States and who effects the sale or exchangethrough a broker who will satisfy such requirements.

***Constructive Termination***

BGH****willbe considered to have been terminated for federal tax purposes if there is asale or exchange of 50% or more of the total interests in BGH’s capital andprofits within a twelve-month period. A constructive termination results in theclosing of BGH’s taxable year for all Unitholders. In the case of a Unitholderreporting on a taxable year other BGH’s taxable year, the closing of BGH’staxable year may result in more than twelve months of BGH’s taxable income orloss being includable in his taxable income for the year of termination. Aconstructive termination could result in an increase in the amount of taxableincome to be allocated to BGH’s Unitholders if the termination results in atermination of Buckeye. BGH would be required to make new tax elections after atermination, including a new election under Section 754 of the InternalRevenue Code, and a termination could result in a deferral of BGH’s deductions fordepreciation. A termination could also result in penalties if BGH were unableto determine that the termination had occurred. Moreover, a termination mighteither accelerate the application of, or subject BGH to, any tax legislationenacted before the termination.

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***Withholding***

If BGH was required orelected under applicable law to pay any federal, state or local income tax onbehalf of any Unitholder, BGH is authorized to pay those taxes from its funds. Suchpayment, if made, will be treated as a distribution of cash to the Unitholderon whose behalf the payment was made. If the payment is made on behalf of aperson whose identity cannot be determined, BGH is authorized to treat thepayment as a distribution to a current Unitholder.

***Unrelated Business Taxable Income***

Certain entities otherwiseexempt from federal income taxes (such as individual retirement accounts,pension plans and charitable organizations) are nevertheless subject to federalincome tax on net unrelated business taxable income and each such entity mustfile a tax return for each year in which it has more than $1,000 of grossincome from unrelated business activities. MainLine Management believes thatsubstantially all of BGH’s gross income will be treated as derived from anunrelated trade or business and taxable to such entities. The tax-exempt entity’sshare of BGH’s deductions directly connected with carrying on such unrelatedtrade or business are allowed in computing the entity’s taxable unrelatedbusiness income.  **ACCORDINGLY,TAX-EXEMPT ENTITIES SUCH AS INDIVIDUAL RETIREMENT ACCOUNTS, PENSION PLANS ANDCHARITABLE TRUSTS ARE ENCOURAGED TO CONSULT THEIR PROFESSIONAL TAX ADVISORSREGARDING THE TAX IMPLICATIONS OF THEIR OWNERSHIP OF COMMON UNITS.**

***Foreign Unitholders***

Non-resident aliens and foreign corporations, trustsor estates that own Common Units will be considered to be engaged in businessin the United States because of the ownership of Common Units. As aconsequence, they will be required to file federal tax returns to report theirshare of BGH’s income, gain, loss or deduction and pay federal income tax atregular rates on their share of BGH’s net income or gain. Moreover, under rules applicableto publicly traded partnerships, BGH withholds at the highest applicableeffective tax rate from cash distributions made quarterly to foreignUnitholders. Each foreign Unitholder must obtain a taxpayer identificationnumber from the IRS and submit that number to BGH’s transfer agent on a Form W-8BENor applicable substitute form in order to obtain credit for these withholdingtaxes. A change in applicable law may require BGH to change these procedures.

In addition, because a foreign corporation that ownsCommon Units will be treated as engaged in a United States trade or business,that corporation may be subject to the United States branch profits tax at arate of 30%, in addition to regular federal income tax, on its share of BGH’sincome and gain, as adjusted for changes in the foreign corporation’s “U.S. netequity,” which are effectively connected with the conduct of a United Statestrade or business. That tax may be reduced or eliminated by an income taxtreaty between the United States and the country in which the foreign corporateUnitholder is a “qualified resident.”  Inaddition, this type of Unitholder is subject to special information reportingrequirements under Section 6038C of the Internal Revenue Code.

In a published ruling, theIRS has taken the position that gain realized by a foreign partner who sells orotherwise disposes of a limited partner unit will be treated as effectivelyconnected with a United States trade or business of the foreign partner, andthus subject to federal income tax, to the extent that such gain isattributable to appreciated personal property used by the limited partnershipin a United States trade or business. Moreover, a foreign partner is subject tofederal income tax on gain realized on the sale or disposition of a Common Unitto the extent that such gain is attributable to appreciated United States realproperty interests; however, a foreign Unitholder will not be subject tofederal income tax under this rule unless such foreign Unitholder hasowned more than 5% in value of BGH’s Common Units during the 

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five-yearperiod ending on the date of the sale or disposition, provided the Common Unitsare regularly traded on an established securities market at the time of thesale or disposition.

***Regulated Investment Companies***

A regulated investmentcompany, or “mutual fund,” is required to derive 90% or more of its grossincome from specific sources including interest, dividends and gains from thesale of stocks or securities, foreign currency or specified related sources,and net income derived from the ownership of an interest in a “qualifiedpublicly traded partnership.”  BGHexpects that it will meet the definition of a “qualified publicly tradedpartnership.”

***State Tax Treatment***

During 2006, Buckeye owned property or conductedbusiness in the following states: California, Colorado, Connecticut, Florida,Illinois, Indiana, Kansas, Massachusetts, Michigan, Missouri, Nevada, NewJersey, New York, Ohio, Pennsylvania, Tennessee, and Texas. A Unitholder willlikely be required to file state income tax returns and to pay applicable stateincome taxes in many of these states and may be subject to penalties forfailure to comply with such requirements. Some of the states have proposed thatBGH withhold a percentage of income attributable to Buckeye operations withinthe state for Unitholders who are non-residents of the state. In the event thatamounts are required to be withheld (which may be greater or less than aparticular Unitholder’s income tax liability to the state), such withholdingwould generally not relieve the non-resident Unitholder from the obligation tofile a state income tax return.

A new entity level tax onthe portion of BGH’s income that is generated in Texas will begin in BGH’s taxyear ending in 2007. Specifically, the Texas margin tax will be imposed at amaximum effective rate of 0.7% of BGH’s gross income apportioned to Texas. Impositionof such a tax on BGH by Texas will reduce the cash available for distributionto Unitholders.

**AvailableInformation**

BGH files annual, quarterly, and current reports andother documents with the Securities and Exchange Commission (the “SEC”) underthe Securities Exchange Act of 1934. The public can obtain any documents thatBGH files with the SEC at *http://www.sec.gov*.BGH also makes available free of charge its Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,and any amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after filingsuch materials with, or furnishing such materials to, the SEC, on or throughBGH’s Internet website, *www.buckeyegpholdings.com*.BGH is not including the information contained on its website as a part of, orincorporating it by reference into, this Annual Report on Form 10-K.

You can also findinformation about BGH at the offices of the New York Stock Exchange (“NYSE”),20 Broad Street, New York, New York 10005 or at the NYSE’s Internet site(www.nyse.com). The NYSE requires the chief executive officer of each listedcompany to certify annually that he is not aware of any violation by thecompany of the NYSE corporate governance listing standards as of the date ofthe certification, qualifying the certification to the extent necessary. TheChief Executive Officer of BGH provided such certification to the NYSE in 2006without qualification. In addition, the certifications of MainLine Management’sChief Executive Officer and Chief Financial Officer required by Sections 302and 906 of the Sarbanes-Oxley Act have been included as exhibits to BGH’sAnnual Report on Form 10-K.

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**Item 1A.**                *Risk Factors*

In this Item 1A,references to “we”, “us” and “our” mean Buckeye GP Holdings L.P., and itsconsolidated subsidiaries. References to “Buckeye” mean Buckeye Partners, L.P.and its consolidated subsidiaries.

**Risks Inherent in our Dependence on Distributions from Buckeye**

*Our primary cash-generating assets are our general partner interests inBuckeye, which consist primarily of GP units and the incentive distributionrights in Buckeye. Our cash flow is, therefore, directly dependent upon the abilityof Buckeye to make cash distributions to its partners.*

The amount of cash that Buckeye can distribute to its partners eachquarter, including the amount of incentive distributions, principally dependsupon the amount of cash Buckeye generates from its operations, which willfluctuate from quarter to quarter based on, among other things:

·       fluctuations in prices for petroleum products and overall demand forpetroleum products in the United States in general, and in Buckeye’s serviceareas in particular (economic activity, weather, alternative energy sources,conservation and technological advances may affect petroleum product prices anddemand);

·       changes in laws and regulations, including environmental, safety and tax laws and regulations and theregulation of  Buckeye’s tariff rates;

·       liability for environmental claims;

·       availability and cost of insurance on Buckeye’s assets and operations;

·       shut-downs or cutbacks at major refineries that supply petroleum productstransported on Buckeye’s pipelines or stored in Buckeye’s terminals;

·       deterioration in Buckeye’s labor relations;

·       prevailing economic conditions; and

·       disruptions to the air travel system.

In addition, the actual amountof cash Buckeye will have available for distribution will depend on otherfactors, some of which are beyond its control, including:

·       the level of capital expenditures it makes;

·       the availability, if any, and cost of acquisitions;

·       debt service requirements;

·       fluctuations in working capital needs;

·       restrictions on distributions contained in Buckeye’s credit facility andsenior notes;

·       Buckeye’s ability to borrow under its revolving credit facility; and

·       the amount, if any, of cash reserves established by Buckeye’s generalpartner, Buckeye GP, in its discretion for the proper conduct of Buckeye’sbusiness.

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Becauseof these factors, Buckeye may not have sufficient available cash each quarterto continue to pay distributions at the level of its most recent quarterlydistribution of $0.7875 per LP unit, or any other amount. You should also beaware that the amount of cash that Buckeye has available for distributiondepends primarily upon its cash flow, including cash flow from financialreserves and working capital borrowings, and is not solely a function ofprofitability, which will be affected by non-cash items. As a result, Buckeyemay be able to make cash distributions during periods when Buckeye recordslosses and may not be able to make cash distributions during periods whenBuckeye records net income. Please read “—Risks Inherent in Buckeye’s Business”for a discussion of risks affecting Buckeye’s ability to generate cash flow.

***A reduction in Buckeye’s distributions will disproportionately affect theamount of cash distributions to which we are currently entitled.***

Ourownership of the incentive distribution rights in Buckeye entitles us toreceive specified percentages of the amount of cash distributions made byBuckeye to its limited partners. Most of the cash we receive from Buckeye isattributable to our ownership of the incentive distribution rights. Accordingly,any reduction in quarterly cash distributions from Buckeye would have theeffect of disproportionately reducing the amount of the distributions that wereceive from Buckeye.

***Our right to receive incentive distributions will terminate if Buckeye’sgeneral partner is removed.***

Ourright to receive incentive distributions will terminate if Buckeye GP isremoved as general partner of Buckeye, effective upon the date of such removal.

***Buckeye may issue additional LP units or other equity securities, whichmay increase the risk that Buckeye will not have sufficient available cash tomaintain or increase its cash distribution level per LP unit.***

BecauseBuckeye distributes to its partners most of the cash generated by itsoperations, it relies primarily upon external financing sources, including debtand equity issuances, to fund its acquisitions and expansion capitalexpenditures. Accordingly, Buckeye has wide latitude to issue additional LPunits on terms and conditions established by Buckeye GP. We receive cashdistributions from Buckeye and its subsidiary operating partnerships on thegeneral partner interests and incentive distribution rights that we own.Because most of the cash we receive from Buckeye is attributable to ourownership of the incentive distribution rights, payment of distributions onadditional Buckeye LP units may increase the risk that Buckeye will be unableto maintain or increase its quarterly cash distribution per LP unit, which inturn may reduce the amount of incentive distributions we receive and theavailable cash that we have to distribute to our Unitholders.

***In the future, we may not have sufficient cash to maintain the level ofour quarterly distributions.***

Becauseour primary source of operating cash flow consists of cash distributions fromBuckeye, the amount of distributions we are able to make to our Unitholders mayfluctuate based on the level of distributions Buckeye makes to its partners,including us. Buckeye may not continue to make quarterly distributions at itscurrent level of $0.7875 per LP unit, or may not distribute any other amount,or increase its quarterly distributions in the future. In addition, while wewould expect to increase or decrease distributions to our Unitholders ifBuckeye increases or decreases distributions to us, the timing and amount ofsuch changes in our distributions, if any, will not necessarily be comparableto the timing and amount of any changes in distributions made by Buckeye.Factors such as reserves established by the board of directors of our generalpartner for our estimated general and administrative expenses of being a publiccompany as well as other operating expenses, reserves to satisfy our debtservice requirements, if any, and reserves for future distributions by us mayaffect the distributions we make to our Unitholders. Prior to making anydistributions to our Unitholders, we will reimburse our general partner and itsaffiliates for all 

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direct and indirect expenses incurred by them on ourbehalf. Our general partner will determine the amount of these reimbursedexpenses. The reimbursement of these expenses, in addition to the other factorslisted above, could reduce the amount of available cash that we have to makedistributions to our Unitholders.

***Buckeye’s practice of distributing all of its available cash may limitits ability to grow, which could impact distributions to us and the availablecash that we have to distribute to our Unitholders.***

Becauseour primary cash-generating assets are general partner interests in Buckeye,including the incentive distribution rights, our growth will be dependent uponBuckeye’s ability to increase its quarterly cash distributions. Buckeye hashistorically distributed to its partners most of the cash generated by itsoperations. As a result, it relies primarily upon external financing sources,including debt and equity issuances, to fund its acquisitions and expansioncapital expenditures. Accordingly, to the extent Buckeye is unable to financegrowth externally, its ability to grow will be impaired because it distributessubstantially all of its available cash. Also, if Buckeye incurs additionalindebtedness to finance its growth, the increased interest expense associatedwith such indebtedness may reduce the amount of available cash that we candistribute to you.

***Restrictions in Buckeye’s credit facility could limit its ability to makedistributions to us.***

Buckeye’scredit facility contains covenants limiting its ability to incur indebtedness,grant liens, engage in transactions with affiliates and make distributions tous. The facility also contains covenants requiring Buckeye to maintain certainfinancial ratios. Buckeye is prohibited from making any distribution toUnitholders if such distribution would cause an event of default or otherwiseviolate a covenant under this facility. Please read “Management’s Discussionand Analysis of Financial Condition and Results of Operation—Liquidity andCapital Resources—The Partnership” for more information about Buckeye’s creditfacility.

***Risks Inherent in Buckeye’s Business***

Because we are directlydependent on the distributions we receive from Buckeye, risks to Buckeye’soperations are also risks to us. We have set forth below risks to Buckeye’sbusiness and operations, the occurrence of which could negatively impactBuckeye’s financial performance and decrease the amount of cash it is able todistribute to us.

***Changes in petroleum products demand and distribution may adverselyaffect Buckeye’s business.***

Demand for the services providedby Buckeye’s operating subsidiaries depends upon the demand for petroleumproducts in the regions served. Prevailing economic conditions, price andweather affect the demand for petroleum products. Changes in transportation andtravel patterns in the areas served by Buckeye’s pipelines also affect thedemand for petroleum products because a substantial portion of the petroleumproducts transported by Buckeye’s pipelines and throughput at its terminals isultimately used as fuel for motor vehicles and aircraft. If these factorsresult in a decline in demand for petroleum products, the business of Buckeye’soperating subsidiaries would be particularly susceptible to adverse effectsbecause they operate without the benefit of either exclusive franchises fromgovernment entities or long-term contracts.

Energyconservation, changing sources of supply, structural changes in the oilindustry and new energy technologies also could adversely affect Buckeye’sbusiness. We cannot predict or control the effect of each of these factors onBuckeye or us.

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***Certain of Buckeye’s pipelineoperations charge tariff rates which are subject to regulation and change byFERC.***

Buckeye Pipe Line, Wood River,BPL Transportation, Buckeye NGL and Norco are interstate common carriersregulated by FERC under the Interstate Commerce Act and the Department ofEnergy Organization Act. FERC’s primary ratemaking methodology is priceindexing. This methodology is used to establish rates on the pipelines owned byWood River, BPL Transportation, Buckeye NGL and Norco. The indexing methodallows a pipeline to increase its rates by a percentage equal to the change inthe annual producer price index for finished goods, or PPI, plus 1.3 percent.If the percentage change in PPI plus 1.3 is negative, Buckeye could be requiredto reduce the rates charged by Wood River, BPL Transportation, Buckeye NGL andNorco if they exceed the new maximum allowable rate. In addition, changes inthe percentage might not be large enough to fully reflect actual increases inthe costs associated with these pipelines, thus hampering Buckeye’s ability torecover its costs.

Buckeye Pipe Line is authorizedto charge rates set by market forces, subject to limitations, rather than byreference to costs historically incurred by the pipeline, in 15 regions andmetropolitan areas. The Buckeye Pipe Line program is an exception to thegeneric oil pipeline regulations FERC issued under the Energy Policy Act of1992. The generic rules rely primarily on an index methodology that allowsa pipeline to change its rates in accordance with an index that FERC believesreflects cost changes appropriate for application to pipeline rates. In thealternative, a pipeline is allowed to charge market-based rates if the pipelineestablishes that it does not possess significant market power in a particularmarket.

TheBuckeye Pipe Line rate program was reevaluated by FERC in July 2000, andwas allowed to continue with no material changes. We cannot predict the impact,if any, that a change in FERC’s method of regulating Buckeye Pipe Line wouldhave on Buckeye’s operations, financial condition or results of operations.

***Buckeye’s partnership status maybe a disadvantage to it in calculating cost of service for rate-makingpurposes.***

In the past, FERC ruled thatpass-through entities, like Buckeye, could not claim an income tax allowancefor income attributable to non-corporate limited partners in justifying thereasonableness of their rates. Further, in a July 2004 decision involvingan unrelated pipeline limited partnership, the United States Court of Appealsfor the District of Columbia Circuit overruled a prior FERC decision allowing alimited partnership to claim a partial income tax allowance. On May 4,2005, FERC adopted a new policy providing that all entities owning publicutility assets—oil and gas pipelines and electric utilities—would be permittedto include an income tax allowance in their cost-of-service rates to reflectthe actual or potential income tax liability attributable to their publicutility income, regardless of the form of ownership. FERC determined that anypass-through entity seeking an income tax allowance in a rate proceeding mustestablish that its partners have an actual or potential income tax obligationon the entity’s public utility income. The amount of any income tax allowancewill be reduced accordingly to the extent that any of the partners do not havean actual or potential income tax obligation. This reduction will be reflectedin the weighted income tax liability of the entity’s partners. Whether apipeline’s ultimate owners have actual or potential income tax liability willbe reviewed by FERC on a case-by-case basis. Although this new policy isgenerally favorable for pipelines that are organized as pass-through entities,it still entails risk due to the case-by-case review requirement. This policywas applied by FERC in June 2005 with an order involving an unrelatedpipeline limited partnership. FERC concluded that the pipeline should beafforded an income tax allowance on all of its partnership interests to theextent that the owners of those interests had an actual or potential income taxobligation during the periods at issue. In December 2005, FERC reaffirmedits new income tax allowance policy as it applied to that pipeline. FERC’s taxallowance policy has been appealed to the United States Court of Appeals forthe District of Columbia Circuit. The ultimate outcome of these proceedings isnot certain and could result in changes to FERC’s treatment of income taxallowances.

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Ashipper or FERC could cite these decisions in a protest or complaintchallenging index rates maintained by certain of Buckeye’s operatingsubsidiaries. If a challenge were brought and FERC were to find that some ofthe indexed rates exceed levels justified by the cost of service, FERC couldorder a reduction in the indexed rates and could require reparations. As aresult, Buckeye’s results of operations could be adversely affected.

***Environmental regulation mayimpose significant costs and liabilities on Buckeye.***

Buckeye’s operating subsidiaries are subject to federal, state and locallaws and regulations relating to the protection of the environment. Risks ofsubstantial environmental liabilities are inherent in Buckeye’s operations, andBuckeye’s operating subsidiaries may incur material environmental liabilities.Additionally, Buckeye’s costs could increase significantly and Buckeye couldface substantial liabilities, if, among other developments:

·       environmental laws, regulations and enforcement policies become morerigorous; or

·       claims forproperty damage or personal injury resulting from the operations of theoperating subsidiaries are filed.

***Existing or future state or federal government regulations relating tocertain chemicals or additives in gasoline or diesel fuel could require capitalexpenditures or result in lower pipeline volumes and thereby adversely affectBuckeye’s results of operations, thereby reducing Buckeye’s ability to makedistributions to Unitholders, including us.***

Changesmade to governmental regulations governing the components of refined petroleumproducts may necessitate changes to Buckeye’s pipelines and terminals which mayrequire significant capital expenditures or result in lower pipeline volumes.For example, the increasing use of ethanol as a fuel additive, which is blendedwith gasoline at product terminals, may lead to reduced pipeline volumes andrevenue which may not be totally offset by increased terminal blending feesBuckeye may receive at its terminals.

***Department of Transportation regulations may impose significant costs andliabilities on Buckeye.***

Buckeye’spipeline operations are subject to regulation by the Department ofTransportation. These regulations require, among other things, that pipelineoperators engage in a regular program of pipeline integrity testing to assess,evaluate, repair and validate the integrity of their pipelines, which, in theevent of a leak or failure, could affect populated areas, unusually sensitiveenvironmental areas, or commercially navigable waterways. In response to theseregulations, Buckeye’s operating subsidiaries conduct pipeline integrity testson an ongoing and regular basis. Depending on the results of these integritytests, Buckeye’s operating subsidiaries could incur significant and unexpectedcapital and operating expenditures, not accounted for in anticipated capital oroperating budgets, in order to repair such pipelines to ensure their continuedsafe and reliable operation.

***Terrorist attacks couldadversely affect Buckeye’s business.***

Sincethe attacks of September 11, 2001, the United States government has issuedwarnings that energy assets, specifically our nation’s pipeline infrastructure,may be the future target of terrorist organizations. These developments havesubjected Buckeye’s operations to increased risks. Any future terrorist attackon Buckeye’s facilities, those of Buckeye’s customers and, in some cases, thoseof other pipelines, refineries or terminals, could significantly disruptBuckeye’s operations, require substantial expenditures for replacement andrepair of pipelines, refineries or terminals or otherwise have a materialadverse effect on Buckeye’s business.

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***Buckeye’s operations are subject to operational hazards and unforeseeninterruptions for which Buckeye may not be adequately insured.***

Buckeye’soperations are subject to operational hazards and unforeseen interruptions suchas natural disasters, adverse weather, accidents, fires, explosions, hazardousmaterials releases, and other events beyond Buckeye’s control. These eventsmight result in a loss of equipment or life, injury, or extensive propertydamage, as well as an interruption in Buckeye’s operations. Buckeye’s operatingsubsidiaries’ operations are currently covered by property, casualty, workers’compensation and environmental insurance policies. In the future, however,Buckeye may not be able to maintain or obtain insurance of the type and amountdesired at reasonable rates. As a result of market conditions, premiums anddeductibles for certain insurance policies have increased substantially, andcould escalate further. In some instances, certain insurance could becomeunavailable or available only for reduced amounts of coverage. For example,insurance carriers are now requiring broad exclusions for losses due to warrisk and terrorist acts. If Buckeye were to incur a significant liability forwhich it was not fully insured, it could reduce the amount of available cashBuckeye has, thereby reducing Buckeye’s ability to make distributions toUnitholders, including us.

***Competition could adverselyaffect Buckeye’s operating results.***

Generally, pipelines are thelowest cost method for long-haul overland movement of petroleum products.Therefore, Buckeye’s most significant competitors for large volume shipmentsare other existing pipelines, many of which are owned and operated by majorintegrated oil companies. In addition, new pipelines (including pipelinesegments that connect with existing pipeline systems) could be built toeffectively compete with Buckeye in particular locations.

Buckeye competes with marinetransportation in some areas. Tankers and barges on the Great Lakes account forsome of the volume to certain Michigan, Ohio and upstate New York locationsduring the approximately eight non-winter months of the year. Barges arepresently a competitive factor for deliveries to the New York City area, thePittsburgh area, Connecticut and locations on the Ohio River such as Mt.Vernon, Indiana and Cincinnati, Ohio, and locations on the Mississippi River suchas St. Louis, Missouri.

Trucks competitively deliverpetroleum products in a number of areas that Buckeye serves. While their costsmay not be competitive for longer hauls or large-volume shipments, truckscompete effectively for incremental and marginal volumes in many areas thatBuckeye serves. The availability of truck transportation places a significantcompetitive constraint on Buckeye’s ability to increase its operatingsubsidiaries’ tariff rates.

Privatelyarranged exchanges of petroleum products between marketers in differentlocations are another form of competition. Generally, these exchanges reduceboth parties’ costs by eliminating or reducing transportation charges. Inaddition, consolidation among refiners and marketers that has accelerated inrecent years has altered distribution patterns, reducing demand fortransportation services in some markets and increasing them in other markets.

***Mergers among Buckeye’s customers and competitors could result in lowervolumes being shipped on Buckeye’s pipelines and stored in Buckeye’s terminals,thereby reducing the amount of cash Buckeye generates.***

Mergersbetween existing Buckeye customers could provide strong economic incentives forthe combined entities to utilize their existing pipeline and terminal systemsinstead of Buckeye’s. As a result, Buckeye could lose some or all of thevolumes and associated revenues from these customers and Buckeye couldexperience difficulty in replacing those lost volumes and revenues. Becausemost of Buckeye’s operating costs are fixed, a reduction in volumes wouldresult in not only a reduction of revenues, but also a decline in net incomeand cash flow of a similar magnitude, which would reduce Buckeye’s ability tomeet its financial obligations and pay cash distributions to us.

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***Buckeye may incur liabilities related to assets Buckeye has acquired.These costs and liabilities may not be covered by indemnification rights thatBuckeye may have against the sellers of the assets.***

Someof the assets Buckeye has acquired have been used for many years to distribute,store or transport petroleum products. Releases of petroleum products into theenvironment may have occurred prior to Buckeye’s acquisition from terminals oralong pipeline rights-of-way that require remediation. In addition, releasesmay have occurred in the past that have not yet been discovered, which couldrequire costly future remediation. If a significant release or event occurredin the past, the liability for which was not retained by the seller or forwhich indemnification from the seller is not available, it could adverselyaffect Buckeye’s financial position and results of operations.

***A decline in production at the ConocoPhillips Wood River refinery couldmaterially reduce the volume of refined petroleum products Buckeye transports.***

Amajority of the refined petroleum products transported on Wood River’s pipelinesystem is produced at ConocoPhillip’s Wood River refinery. A decline inproduction at the ConocoPhillips Wood River refinery could materially reducethe volume of refined petroleum products Buckeye transports on certain of thepipelines owned by Wood River. As a result, Buckeye’s revenues and, therefore,Buckeye’s ability to pay cash distributions to us could be adversely affected.The ConocoPhillips Wood River refinery could partially or completely shut downits operations, temporarily or permanently, due to factors affecting itsability to produce refined petroleum products such as unscheduled maintenanceor catastrophes,  labor difficulties,environmental proceedings or other litigation,  loss of significant downstream customers, or legislation or regulationthat adversely impacts the economics of refinery operations.

***Potential future acquisitions and expansions, if any, may affect Buckeye’sbusiness by substantially increasing the level of Buckeye’s indebtedness andcontingent liabilities and increasing Buckeye’s risks of being unable toeffectively integrate these new operations.***

From time to time, Buckeyeevaluates and acquires assets and businesses that Buckeye believes complementits existing assets and businesses. Acquisitions may require substantialcapital or the incurrence of substantial indebtedness. If Buckeye consummatesany future acquisitions, Buckeye’s capitalization and results of operations maychange significantly.

Acquisitionsand business expansions involve numerous risks, including difficulties in theassimilation of the assets and operations of the acquired businesses,inefficiencies and difficulties that arise because of unfamiliarity with newassets and the businesses associated with them and new geographic areas and thediversion of management’s attention from other business concerns. Further,unexpected costs and challenges may arise whenever businesses with differentoperations or management are combined, and Buckeye may experience unanticipateddelays in realizing the benefits of an acquisition. Following an acquisition,Buckeye may discover previously unknown liabilities associated with the acquiredbusiness for which Buckeye has no recourse under applicable indemnificationprovisions.

**Risks Inherent in Ownership of Our Common Units**

***Cost reimbursements due our general partner, MainLine Management, may besubstantial and will reduce our cash available for distribution to holders ofour units.***

Priorto making any distribution on our units, we will reimburse our general partnerfor expenses it incurs on our behalf. The reimbursement of expenses couldreduce the amount of cash we have to make distributions to holders of ourunits. Our general partner will determine the amount of these expenses. Inaddition, our general partner and its affiliates may perform other services forus for which we will be charged fees as determined by our general partner.

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***Our Unitholders do not elect our general partner or vote on our generalpartner’s directors. An affiliate of our general partner owns a sufficientnumber of common units to allow it to block any attempt to remove our generalpartner.***

Unlike the holders of commonstock in a corporation, our Unitholders have only limited voting rights onmatters affecting our business and, therefore, limited ability to influencemanagement’s decisions regarding our business. Our public Unitholders did notelect our general partner or the directors of our general partner and will haveno right to elect our general partner or the directors of our general partneron an annual or other continuing basis in the future.

Furthermore, if our publicUnitholders are dissatisfied with the performance of our general partner, theywill have little ability to remove our general partner. Our general partner maynot be removed except upon the vote of the holders of at least 80% of theoutstanding common and management units voting together as a single class.Because affiliates of our general partner own more than 20% of our outstandingunits, our general partner currently cannot be removed without the consent ofour general partner and its affiliates.

Our Unitholders’ voting rightsare further restricted by the provision in our partnership agreement providingthat any units held by a person that owns 20% or more of any class of unitsthen outstanding, other than our general partner and its affiliates, cannot bevoted on any matter. In addition, our partnership agreement contains provisionslimiting the ability of our Unitholders to call meetings or to acquireinformation about our operations, as well as other provisions limiting ourUnitholders’ ability to influence the manner or direction of our management.Additionally, our partnership agreement provides that our general partner, inits sole discretion, may at any time adopt a unitholder rights plan similar toa shareholder rights plan for corporations.

As aresult of these provisions, the price at which our common units will trade maybe lower because of the absence or reduction of a takeover premium in thetrading price.

***Carlyle/Riverstone owns a controlling interest in us and owns our generalpartner and can determine the outcome of all matters voted upon by ourUnitholders.***

Carlyle/Riverstoneowns approximately 54% of our limited partner interests and owns our generalpartner. As a result, Carlyle/Riverstone is able to control the outcome of anymatter that comes before a unitholder vote.

***The control of our general partner may be transferred to a third party,and that party could replace our current management team, in each case, withoutunitholder consent.***

Ourgeneral partner may transfer its general partner interest to a third party in amerger or in a sale of all or substantially all of its assets without theconsent of our Unitholders. Furthermore, the owner of our general partner maytransfer its ownership interest in our general partner to a third party. Thenew owner of our general partner would then be in a position to replace theboard of directors and officers of our general partner and to control thedecisions taken by the board of directors and officers.

***Increases in interest rates maycause the market price of our common units to decline.***

Anincrease in interest rates may cause a corresponding decline in demand forequity investments in general, and in particular for yield-based equityinvestments such as our common units. Any such increase in interest rates orreduction in demand for our common units may cause the trading price of ourcommon units to decline.

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***If in the future we cease to manage and control Buckeye through ourownership of the general partner interests in Buckeye, we may be deemed to bean investment company under the Investment Company Act of 1940.***

Ifwe cease to manage and control Buckeye and are deemed to be an investmentcompany under the Investment Company Act of 1940, we would either have toregister as an investment company under the Investment Company Act of 1940,obtain exemptive relief from the Securities and Exchange Commission or modifyour organizational structure or our contract rights to fall outside thedefinition of an investment company. Registering as an investment companycould, among other things, materially limit our ability to engage intransactions with affiliates, including the purchase and sale of certainsecurities or other property to or from our affiliates, restrict our ability toborrow funds or engage in other transactions involving leverage and require usto add additional directors who are independent of us and our affiliates, andreduce the price of our common units.

***You may not have limitedliability if a court finds that unitholder action constitutes control of ourbusiness.***

Under Delaware law, you could beheld liable for our obligations to the same extent as a general partner if acourt determined that the right or the exercise of the right by our Unitholdersas a group to remove or replace our general partner, to approve some amendmentsto the partnership agreement or to take other action under our partnershipagreement constituted participation in the “control” of our business.Additionally, the limitations on the liability of holders of limited partnerinterests for the liabilities of a limited partnership have not been clearlyestablished in many jurisdictions.

Our general partner generallyhas unlimited liability for the obligations of the partnership, such as itsdebts and environmental liabilities, except for those contractual obligationsof the partnership that are expressly made without recourse to our generalpartner.

Inaddition, Section 17-607 of the Delaware Revised Uniform LimitedPartnership Act provides that, under some circumstances, a unitholder may beliable to us for the amount of a distribution for a period of three years fromthe date of the distribution.

***We are directly dependent on Buckeye for our growth. As a result of thefiduciary obligations of Buckeye’s general partner, which is our wholly ownedsubsidiary, to the Unitholders of Buckeye, our ability to pursue businessopportunities independently may be limited.***

Wecurrently intend to grow primarily through the growth of Buckeye. While we arenot precluded from pursuing business opportunities independent of Buckeye,Buckeye’s general partner, which is our wholly owned subsidiary, has fiduciaryduties to Buckeye Unitholders which could make it difficult for us to engage inany business activity that is competitive with Buckeye. Those fiduciary dutiesare applicable to us because we control the general partner through our abilityto elect all of its directors. Accordingly, we may be unable to diversify oursources of revenue in order to increase cash distributions to you.

***Our credit agreement contains operating and financial restrictions thatmay limit our business and financing activities.***

The operating and financial restrictions and covenants in our creditagreement could restrict our ability to finance future operations or capitalneeds or to expand or pursue our business activities. For example, our creditagreement restricts our ability to:

·       make distributions if any default or event of default occurs;

·       incur additional indebtedness or guarantee other indebtedness;

·       grant liens or make certain negative pledges;

·       make certain loans or investments;

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·       make any material change to the nature of our business, includingconsolidations, liquidations and dissolutions; or

·       enter into a merger, consolidation, sale and leaseback transaction orsale of assets.

If weviolate any of the restrictions, covenants, ratios or tests in our creditagreement, a significant portion of our indebtedness may become immediately dueand payable, and our lenders’ commitment to make further loans to us mayterminate. We might not have, or be able to obtain, sufficient funds to makethese accelerated payments.

**Risks Related to Conflicts of Interest**

***Buckeye GP owes fiduciary duties to Buckeye and Buckeye’s Unitholders,which may conflict with our interests.***

Conflicts of interest exist andmay arise in the future as a result of the relationships between us and ouraffiliates, including Buckeye’s general partner, on one hand, and Buckeye andits limited partners, on the other hand. The directors and officers of BuckeyeGP have fiduciary duties to manage Buckeye in a manner beneficial to us,Buckeye GP’s owner. At the same time, Buckeye GP has a fiduciary duty to manageBuckeye in a manner beneficial to Buckeye and its limited partners. The boardof directors of Buckeye GP may resolve any such conflict of interest and hasbroad latitude to consider the interests of all parties to the conflict. Theresolution of these conflicts may not always be in our best interest or that ofour Unitholders.

For example, conflicts of interest may arise in the following situations:

·       the allocation of shared overhead expenses to Buckeye and us;

·       the interpretation and enforcement of contractual obligations between usand our affiliates, on one hand, and Buckeye, on the other hand;

·       the determination of the amount of cash to be distributed to Buckeye’spartners and the amount of cash to be reserved for the future conduct ofBuckeye’s business;

·       the determination of whether Buckeye should make acquisitions and on whatterms;

·       the determination of whether Buckeye should use cash on hand, borrow orissue equity to raise cash to finance acquisitions or expansion capitalprojects, repay indebtedness, meet working capital needs, pay distributions orotherwise; and

·       any decisionwe make in the future to engage in business activities independent of Buckeye.

***The fiduciary duties of ourgeneral partner may conflict with the fiduciary duties of Buckeye’s generalpartner.***

Conflicts of interest may arisebecause of the relationships among Buckeye GP, Buckeye and us. Our generalpartner has fiduciary duties to manage our business in a manner beneficial tous and our Unitholders and the owner of our general partner. Simultaneously, amajority of our general partner’s directors and all of its officers are alsodirectors and officers of Buckeye GP, which has fiduciary duties to manage thebusiness of Buckeye in a manner beneficial to Buckeye and Buckeye’sUnitholders. Our partnership agreement contains various provisions modifyingand restricting the fiduciary duties that might otherwise be owed by ourgeneral partner. The resolution of these conflicts may not always be in ourbest interest or that of our Unitholders.

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***Potential conflicts of interest may arise among our general partner, itsaffiliates and us. Our general partner has limited fiduciary duties to us andour Unitholders, which may permit it to favor its own interests to thedetriment of us and our Unitholders.***

Affiliatesof our general partner, together with the executive officers of our generalpartner, own an approximately 63% limited partner interest in us, representedby common and management units. In addition, Carlyle/Riverstone owns ourgeneral partner. Conflicts of interest may arise among our general partner andits affiliates, on the one hand, and us and our Unitholders, on the other hand.As a result of these conflicts, our general partner may favor  its own interests and the interests of itsaffiliates over the interests of our Unitholders. These conflicts include,among others, the following situations:

*Conflicts Relating to Control:*

·       our general partner is allowed to take into account the interests ofparties other than us in resolving conflicts of interest, which has the effectof limiting its fiduciary duty to our Unitholders;

·       our general partner determines whether or not we incur debt and thatdecision may affect our or Buckeye’s credit ratings;

·       our general partner has limited its liability and has reduced itsfiduciary duties under our partnership agreement, while also restricting theremedies available to our Unitholders for actions that, without theselimitations and reductions, might constitute breaches of fiduciary duty. As aresult of purchasing units, our Unitholders consent to some actions andconflicts of interest that might otherwise constitute a breach of fiduciary orother duties under applicable state law;

·       our general partner controls the enforcement of obligations owed to us byit and its affiliates;

·       our general partner decides whether to retain separate counsel,accountants or others to perform services for us; and

·       ourpartnership agreement gives our general partner broad discretion inestablishing financial reserves for the proper conduct of our business. Thesereserves also will affect the amount of cash available for distribution.

*Conflicts Relating to Costs:*

·       our general partner determines the amount and timing of asset purchasesand sales, capital expenditures, borrowings, issuances of additionalpartnership securities and reserves, each of which can affect the amount ofcash that is available to be distributed to our Unitholders;

·       our general partner determines which costs incurred by it and itsaffiliates are reimbursable by us; and

·       ourpartnership agreement does not restrict our general partner from causing us topay it or its affiliates for any services rendered on terms that are fair andreasonable to us or entering into additional contractual arrangements with anyof these entities on our behalf.

***Our reimbursement of expenses ofour general partner will limit our cash available for distribution.***

Ourgeneral partner may make expenditures on our behalf for which it will seekreimbursement from us. In addition, under Delaware partnership law, our generalpartner has unlimited liability for our obligations, such as our debts andenvironmental liabilities, except for our contractual obligations that areexpressly made without recourse to our general partner. To the extent ourgeneral partner incurs obligations on our behalf, we are obligated to reimburseor indemnify it. If we are unable or unwilling to reimburse or indemnify ourgeneral partner, our general partner may take actions to cause us to make 

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payments of these obligations and liabilities. Any suchpayments could reduce the amount of cash available for distribution to ourUnitholders and cause the value of our common units to decline.

***Our partnership agreement contains provisions that reduce the remediesavailable to Unitholders for actions that might otherwise constitute a breachof fiduciary duty by our general partner. It will be difficult for a unitholderto challenge a resolution of a conflict of interest by our general partner orby its conflicts committee.***

Whenever our general partnermakes a determination or takes or declines to take any action in its capacityas our general partner, it will be obligated to act in good faith, which meansit must reasonably believe that the determination or other action is in ourbest interests. Whenever a potential conflict of interest exists between us andour general partner, the board of directors of our general partner may resolvesuch conflict of interest. If the board of directors of our general partnerdetermines that its resolution of the conflict of interest is on terms no lessfavorable to us than those generally being provided to or available fromunrelated third parties or is fair and reasonable to us, taking into accountthe totality of the relationships between us and our general partner, then itshall be presumed that in making this determination, our general partner actedin good faith. A unitholder seeking to challenge this resolution of theconflict of interest would bear the burden of overcoming such presumption. Thisis different from the situation of Delaware corporations, where a conflictresolution by an interested party would be presumed to be unfair and theinterested party would have the burden of demonstrating that the resolution wasfair.

Furthermore,if our general partner obtains the approval of its conflicts committee, theresolution will be conclusively deemed to be fair and reasonable to us and nota breach by our general partner of any duties it may owe to us or ourUnitholders. This is different from the situation of Delaware corporations,where a conflict resolution by a committee consisting solely of independentdirectors would merely shift the burden of demonstrating unfairness to theplaintiff. As a result, Unitholders will effectively not be able to challenge adecision by the conflicts committee.

***Our general partner’s affiliatesmay compete with us.***

Ourpartnership agreement provides that our general partner will be restricted fromengaging in any business activities other than acting as our general partnerand those activities incidental to its ownership of interests in us. Affiliatesof our general partner are not prohibited from engaging in other businesses oractivities, including those that might be in direct competition with us. Specifically,our general partner is owned, and we are partially owned, byCarlyle/Riverstone, which also owns, through affiliates, an interest in thegeneral partner of Magellan Midstream Partners, L.P., and an interest in thegeneral partner of SemGroup, L.P. SemGroup transports and stores crude oil,natural gas, natural gas liquids, refined products and asphalt through itsownership and operation of proprietary and common carrier pipelines, terminals,storage tanks, processing plants, underground storage facilities and atransportation fleet. Additionally, an affiliate of Carlyle/Riverstone is amember of a group of investors that has agreed to purchase Kinder Morgan, Inc.,which owns the general partner interest in Kinder Morgan Energy Partners, L.P.(“Kinder Morgan”), a publicly traded partnership engaged in the transportationand distribution of petroleum products primarily in the Midwestern UnitedStates. In January 2007, the Federal Trade Commission approved the closingof the transaction on the condition that Carlyle/Riverstone relinquish itscontrol of Magellan Midstream Partners. Although neither Buckeye, on the onehand, nor Magellan Midstream Partners, SemGroup and Kinder Morgan on the otherhand, has extensive operations in the geographic area primarily served by theother entities, Buckeye will compete directly with Magellan Midstream Partners,SemGroup, Kinder Morgan, and perhaps other entities in which Carlyle/Riverstoneor its affiliates have an interest for acquisition opportunities throughout theUnited States and potentially will compete with one or more of these entitiesfor new business or extensions of the existing services provided by Buckeye’soperating subsidiaries, creating actual and potential conflicts of  interest between Buckeye and our affiliates.

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***Our executive officers faceconflicts in the allocation of their time to our business.***

Ourgeneral partner shares administrative personnel with Buckeye’s general partnerto operate both our business and Buckeye’s business. Our general partner’sofficers, who are also the officers of Buckeye’s general partner, haveresponsibility for overseeing the allocation of time spent by administrativepersonnel on our behalf and on behalf of Buckeye. These officers face conflictsregarding these time allocations which may adversely affect our or Buckeye’sresults of operations, cash flows, and financial condition. These allocationsmay not necessarily be the result of arms- length negotiations between Buckeye’sgeneral partner and our general partner.

***Our general partner may cause us to issue additional common units orother equity securities without your approval, which would dilute yourownership interests.***

Our general partner may cause us to issue an unlimited number ofadditional common units or other equity securities of equal rank with thecommon units, without unitholder approval. The issuance of additional commonunits or other equity securities of equal rank will have the following effects:

·       our Unitholders’ proportionate ownership interest in us will decrease;

·       the amount of cash available for distribution on each common unit maydecrease;

·       the relative voting strength of each previously outstanding common unitmay be diminished; and

·       the marketprice of the common units may decline.

***Our general partner has a call right that may require you to sell yourcommon units at an undesirable time or price.***

Ifat any time more than 90% of the outstanding common units are owned by ourgeneral partner and its affiliates, our general partner will have the right,which it may assign to any of its affiliates or to us, but not the obligation,to acquire all, but not less than all, of the remaining common units held byunaffiliated persons at a price equal to the greater of (x) the average ofthe daily closing prices of the common units over the 20 trading days precedingthe date three days before notice of exercise of the call right is first mailedand (y) the highest price paid by our general partner or any of itsaffiliates for common units during the 90 day period preceding the date suchnotice is first mailed. As a result, you may be required to sell your commonunits at an undesirable time or price and may not receive any return on yourinvestment. You may also incur a tax liability upon a sale of your commonunits. Our general partner and its affiliates currently own approximately 63%of the common and management units.

**Tax Risks to CommonUnitholders**

Unitholders are urged toread the section entitled “Tax Considerations for Unitholders” beginning on page 16for a more complete discussion of the expected material federal income taxconsequences of owning and disposing of common units.

***If BGH or Buckeyewere treated as a corporation for federal income tax purposes, or if BGH orBuckeye were to become subject to a material amount of entity-level taxationfor state tax purposes, then BGH’s cash available for distribution toUnitholders would be substantially reduced.***

The value of our investment in Buckeye depends largelyon Buckeye being treated as a partnership for federal income tax purposes,which requires that 90% or more of Buckeye’s gross income for every taxableyear consist of qualifying income, as defined in Section 7704 of theInternal Revenue Code. Buckeye may not meet this requirement or current law maychange so as to cause, in either event, Buckeye to be treated as a corporationfor federal income tax purposes or otherwise subject to federal income tax.Moreover, the 

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anticipated after-taxeconomic benefit of an investment in the common units depends largely on BGHbeing treated as a partnership for federal income tax purposes. BGH has notrequested, and does not plan to request, a ruling from the Internal RevenueService as to BGH’s or Buckeye’s treatment as a partnership for federal incometax purposes.

If Buckeye were treated as a corporation for federalincome tax purposes, Buckeye would pay federal income tax on its taxable incomeat the corporate tax rate, which is currently a maximum of 35%. Distributionsto BGH would generally be taxed again as corporate distributions, and noincome, gains, losses, deductions or credits would flow through to BGH. As aresult, there would be a material reduction in BGH’s anticipated cash flow anddistributions to Unitholders, likely causing a substantial reduction in thevalue of the common units.

If BGH were treated as a corporation for federalincome tax purposes, BGH would pay federal income tax on BGH’s taxable incomeat the corporate tax rate. Distributions to Unitholders would generally betaxed again as corporate distributions, and no income, gains, losses,deductions or credits would flow through to the Unitholders. Because a taxwould be imposed upon BGH as a corporation, BGH’s cash available fordistribution to Unitholders would be substantially reduced. Thus, treatment ofBGH as a corporation would result in a material reduction in BGH’s anticipatedcash flow, likely causing a substantial reduction in the value of the commonunits.

Current law may change, causing BGH or Buckeye to betreated as a corporation for federal income tax purposes or otherwisesubjecting BGH or Buckeye to entity level taxation. For example, a new entitylevel tax on the portion of BGH’s income that is generated in Texas will beginin our tax year ending in 2007. Specifically, the Texas margin tax will beimposed at a maximum effective rate of 0.7% of BGH’s gross income apportionedto Texas. Imposition of such a tax on BGH by Texas will reduce the cashavailable for distribution to Unitholders.

***If the IRS conteststhe federal income tax positions that BGH or Buckeye take, it may adverselyaffect the market for common units or Buckeye limited partner units, and thecosts of any contest will reduce cash available for distribution to ourUnitholders.***

BGH has not requested aruling from the IRS with respect to BGH’s treatment as a partnership forfederal income tax purposes or any other matter that affects BGH. Moreover,Buckeye has not requested any ruling from the IRS with respect to its treatmentas a partnership for federal income tax purposes or any other matter thataffects Buckeye. The IRS may adopt positions that differ from the positions BGHor Buckeye take. It may be necessary to resort to administrative or courtproceedings to sustain some or all of the positions BGH or Buckeye take. Acourt may disagree with some or all of the positions BGH or Buckeye take. Anycontest with the IRS may materially and adversely impact the market for BGH’scommon units or Buckeye’s limited partner units and the price at which theytrade. In addition, the cost of any contest between Buckeye and the IRS willresult in a reduction in cash available for distribution to Buckeye unitholdersand thus indirectly by BGH, as a unitholder and as the owner of the generalpartner of Buckeye. Moreover, the costs of any contest between BGH and the IRSwill result in a reduction in cash available for distribution to BGH’sUnitholders and thus will be borne indirectly by BGH’s Unitholders.

***Unitholders may berequired to pay taxes on their share of BGH’s income even if they do notreceive any cash distributions from BGH.***

Unitholders will berequired to pay any federal income taxes and, in some cases, state and localincome taxes on their share of BGH’s taxable income, whether or not theUnitholders receive cash distributions from BGH. Unitholders may not receivecash distributions from BGH equal to their share of BGH’s taxable income oreven equal to the tax liability that results from the taxation of their shareof BGH’s taxable income.

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***Tax gain or loss on disposition of our common unitscould be more or less than expected.***

If a Unitholder sells hisor her common units, the Unitholder will recognize a gain or loss equal to thedifference between the amount realized and the adjusted tax basis in thosecommon units. Prior distributions to a Unitholder in excess of the total nettaxable income allocated to them, which decreased the tax basis in theUnitholder’s common units will, in effect, become taxable income to theUnithholder if the common units are sold at a price greater than their taxbasis in those common units, even if the price they receive is less than theoriginal cost. A substantial portion of the amount realized, whether or notrepresenting gain, may be ordinary income to the Unitholder. In addition, if aUnitholder sells his or her common units, the Unitholder may incur a taxliability in excess of the amount of cash the Unitholder receives from thesale.

***The reporting of partnership tax information iscomplicated and subject to audits.***

BGH will furnish eachUnitholder with a Schedule K-1 that sets forth the Unitholder’s share of BGH’sincome, gains, losses and deductions. BGH cannot guarantee that these scheduleswill be prepared in a manner that conforms in all respects to statutory orregulatory requirements or to administrative pronouncements of the IRS. Further,BGH’s tax return may be audited, which could result in an audit of a Unitholder’sindividual tax return and increased liabilities for taxes because ofadjustments resulting from the audit.

***There are limits on the deductibility of BGH’s lossesthat may adversely affect Unitholders.***

There are a number oflimitations that may prevent Unitholders from using their allocable share ofBGH’s losses as a deduction against unrelated income. In the case of taxpayerssubject to the passive loss rules (generally, individuals and closely-heldcorporations), any losses generated by BGH will only be available to offset BGH’sfuture income and cannot be used to offset income from other activities,including other passive activities or investments. Unused losses may bededucted when the Unitholder disposes of the Unitholder’s entire investment inBGH in a fully taxable transaction with an unrelated party. A Unitholder’sshare of BGH’s net passive income may be offset by unused losses from BGHcarried over from prior years, but not by losses from other passive activities,including losses from other publicly traded partnerships. Other limitationsthat may further restrict the deductibility of BGH’s losses include the at-riskrules and the prohibition against loss allocations in excess of commonunit tax basis.

***Tax-exempt entitiesand foreign persons face unique tax issues from owning common units that mayresult in adverse tax consequences to them.***

Investment in common unitsby tax-exempt entities, including employee benefit plans and individualretirement accounts (known as IRAs), and non-U.S. persons raises issues uniqueto them. For example, virtually all of BGH’s income allocated to organizationsexempt from federal income tax, including individual retirement accounts andother retirement plans, will be unrelated business taxable income and will betaxable to such a Unitholder. Distributions to non-U.S. persons will be reducedby withholding taxes imposed at the highest effective applicable tax rate, andnon-U.S. persons will be required to file United States federal income taxreturns and pay tax on their share of our taxable income.

***BGH treats eachpurchaser of our common units as having the same tax benefits without regard tothe common units purchased. The IRS may challenge this treatment, which couldadversely affect the value of the common units.***

Because BGH cannot matchtransferors and transferees of common units, BGH will adopt depreciation andamortization positions that may not conform with all aspects of existingTreasury Regulations. A successful IRS challenge to those positions couldadversely affect the amount of tax 

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benefitsavailable to BGH’s Unitholders. It also could affect the timing of these taxbenefits or the amount of gain from your sale of common units and could have anegative impact on the value of BGH’s common units or result in audits of andadjustments to BGH’s Unitholders’ tax returns.

***The sale orexchange of 50% or more of BGH’s capital and profit interests during anytwelve-month period will result in the termination of BGH’s partnership forfederal income tax purposes.***

BGH will be considered tohave terminated BGH’s partnership for federal income tax purposes if there is asale or exchange of 50% or more of the total interests in BGH’s capital andprofits within a twelve-month period. Likewise, Buckeye will be considered tohave terminated its partnership for federal income tax purposes if there is asale or exchange of 50% or more of the total interests in Buckeye’s capital andprofits within a twelve-month period. A termination would, among other things,result in the closing of BGH’s taxable year or Buckeye’s taxable year for allUnitholders and could result in a deferral of depreciation deductions allowablein computing BGH’s taxable income or Buckeye’s taxable income for the year inwhich the termination occurs, as the case may be. Thus, if this occurs, aUnitholder will be allocated an increased amount of federal taxable income forthe year in which BGH or Buckeye are considered to be terminated as apercentage of the cash distributed to the Unitholder with respect to thatperiod. Although the amount of increase cannot be estimated because it dependsupon numerous factors including the timing of the termination, the amount couldbe material. If treated as a new partnership, BGH or Buckeye must make newelections and could be subject to penalties if BGH or Buckeye are unable todetermine that a termination occurred.

***Unitholders may besubject to state and local taxes and return filing requirements as a result ofinvesting the common units.***

In addition to federalincome taxes, Unitholders will likely be subject to other taxes, includingstate and local taxes, unincorporated business taxes and estate, inheritance orintangible taxes that are imposed by the various jurisdictions in which BGH orBuckeye do business or own property now or in the future, even if Unitholdersdo not reside in any of those jurisdictions. Unitholders likely will berequired to file state and local income tax returns and pay state and localincome taxes in some or all of these jurisdictions. Further, Unitholders may besubject to penalties for failure to comply with those requirements. It is theresponsibility of each Unitholder to file all United States federal, state andlocal tax returns that may be required of such Unitholder.

***Unitholders mayhave negative tax consequences if BGH defaults on its debt or sell assets.***

If BGH defaults on any ofits debt, the lenders will have the right to sue BGH for non-payment. Thiscould cause an investment loss and negative tax consequences for Unitholdersthrough the realization of taxable income by Unitholders without acorresponding cash distribution. Likewise, if BGH were to dispose of assets andrealize a taxable gain while there is substantial debt outstanding and proceedsof the sale were applied to the debt, Unitholders could have increased taxableincome without a corresponding cash distribution.

**Item 1B.**               *Unresolved Staff Comments*

None.

**Item 2.**                     *Properties*

As of December 31, 2006, the principal facilitiesof the Partnership included approximately 5,400 miles of 6-inch to 24-inchdiameter pipeline, approximately 100 delivery points and 45 active bulk storageand terminal facilities with aggregate capacity of approximately 17.6 millionbarrels. In addition, the 

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Partnership owns fourcurrently idle terminals with an aggregate storage capacity of 863,000 barrels.The Partnership’s pipelines are used by its Pipeline Operations segment and itsterminals and storage facilities are used in its Terminalling and Storagesegment. Properties used in the Partnership’s Other Operations segment includea 63% interest in a crude butadiene pipeline between Deer Park, Texas and PortArthur, Texas, known as the Sabina pipeline, a 23-mile pipeline located inTexas that is leased to a third-party chemical company and a 29-mile ammoniapipeline located in Texas. The Operating Subsidiaries and their subsidiariesown substantially all of these facilities. The Partnership’s and BGH’scorporate headquarters in Breinigsville, Pennsylvania is approximately 75,000square feet in size and are leased.

In general, the Partnership’s pipelines are located onland owned by others pursuant to rights granted under easements, leases,licenses and permits from railroads, utilities, governmental entities andprivate parties. Like other pipelines, certain of the Operating Subsidiaries’rights are revocable at the election of the grantor or are subject to renewalat various intervals, and some require periodic payments. The OperatingSubsidiaries have not experienced any revocations or lapses of such rightswhich were material to their business or operations, and BGH  has no reason to expect any such revocationor lapse in the foreseeable future. Most delivery points, pumping stations andterminal facilities are located on land owned by the Operating Subsidiaries.

Buckeye GP believes thatthe Operating Subsidiaries have sufficient title to their material assets andproperties, possess all material authorizations and revocable consents fromstate and local governmental and regulatory authorities and have all othermaterial rights necessary to conduct their business substantially in accordancewith past practice. Although in certain cases the Operating Subsidiaries’ titleto assets and properties or their other rights, including their rights tooccupy the land of others under easements, leases, licenses and permits, may besubject to encumbrances, restrictions and other imperfections, none of suchimperfections are expected by Buckeye GP to interfere materially with theconduct of the Operating Subsidiaries’ businesses.

**Item 3.**                        *Legal Proceedings*

BGH, the Partnership and the Operating Subsidiaries,in the ordinary course of business, are involved in various claims and legalproceedings, some of which are covered in whole or in part by insurance. BGH isunable to predict the timing or outcome of these claims and proceedings.

With respect to environmental litigation, certainOperating Subsidiaries (or their predecessors) have been named in the past asdefendants in lawsuits, or have been notified by federal or state authoritiesthat they are potentially responsible parties (“PRPs”) under federal laws or arespondent under state laws relating to the generation, disposal or release ofhazardous substances into the environment. In connection with actions broughtunder CERCLA and similar state statutes, the Operating Subsidiary is usually oneof many PRPs for a particular site and its contribution of total waste at thesite is usually *de minimis*.

Although there is no material environmental litigationpending against BGH, the Partnership or the Operating Subsidiaries at thistime, claims may be asserted in the future under various federal and statelaws, and the amount of any potential liability associated with such claimscannot be estimated. See “Business—Environmental Matters.”

**In the thirdquarter of 2006, the Partnership received penalty assessments from the IRS inthe aggregate amount of $4.3 million based on a failure to timely file excisetax information returns relating to its terminal operations from January 2005through February 2006. The Partnership filed the information returns withthe IRS on May 10, 2006. In January 2007, the Partnership agreed topay the IRS approximately $0.6 million to settle and resolve the penaltyassessment. The settlement is subject to the negotiation and execution of aclosing agreement between the Partnership and the IRS. The negotiated penaltyassessment has been recorded as an expense in BGH’s consolidated financialstatements in the fourth quarter of 2006.**

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In March, 2007, Buckeye was named asa defendant in an action entitled Madigan v. Buckeye Partners, L.P. filed inthe U.S. District Court for the Central District of Illinois. The action wasbrought by the State of Illinois Attorney General acting on behalf of theIllinois Environmental Protection Agency. The complaint alleges that Buckeyeviolated various Illinois state environmental laws in connection with a productrelease from Buckeye’s terminal located in Harristown, Illinois on or aboutJune 11, 2006 and various other product releases from Buckeye’s terminalsand pipelines in the State of Illinois during the period 2001 through 2006. Thecomplaint seeks to recover state oversight costs, damages, and civil penaltiesand seeks injunctive action requiring Buckeye to remediate the environmentalcontamination resulting from the product releases. Buckeye believes it hasmeritorious defenses to the allegations set forth in the complaint. Althoughit is possible that this complaint, if adversely determined, could, dependingon the relative amount involved have a material effect on the Partnership for afuture period, BGH does not believe that the outcome of the complaint will havea material effect on BGH’s consolidated financial condition or results ofoperations.

**Item 4.**                        *Submission of Matters to a Vote of Security Holdersy*

No matters were submitted to a vote of the holders ofCommon Units during the fourth quarter of the fiscal year endedDecember 31, 2006.

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**PART II**

**Item 5.**                        *Market for the Registrant’s Common Units, Related Unitholder Matters,and Issuer Purchases of Common Units*

BGH’sCommon Units are listed and traded principally on the New York Stock Exchange.The high and low sales prices of the Common Units, as reported in the New YorkStock Exchange Composite Transactions, were as follows:

| ** **  | ** ** | **2006**   | ** ** |
|-------------|------------|------------|------------|
| **Quarter** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
| Third**     |       | $          | 16.23      |   | $ | 14.89 |   |
| Fourth      |       | 16.38      |       | 15.44 |   |
|             |            |            |            |  |  |  |  |  |  |

 

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**Data is from the initial trading date of August 4,2006 to September 30, 2006.

On August 9, 2006, BGH sold 10.5 millioncommon units in an IPO at $17.00 per Common Unit. The net proceeds wereapproximately $168.3 million. BGH used the net proceeds, along with cashon hand, to repay certain outstanding indebtedness under a term loan and tomake distributions to its pre-IPO equity owners. 

BGH has gathered tax information from its known Commonand Management Unitholders and from brokers/nominees and, based on theinformation collected, BGH estimates its number of beneficial Common and ManagementUnitholders to be approximately 3,100 at December 31, 2006.

Cashdistributions paid in respect of periods after the IPO date of August 9,2006 were as follows:

| **Record Date**   | ** ** | ** **             | ** ** | **Payment Date** | ** ** | **Amount Per Unit** | ** ** |
|------------------------|------------|------------------------|------------|-----------------------|------------|-------------------------------|------------|
| November 6,  2006 |       | November 30, 2006 |       |                  | $          | 0.125                         |       |   |
|                        |            |                        |            |                       |            |                               |            |  |  |  |

 

On January 26, 2007, the General Partnerannounced a quarterly distribution of $0.225 per unit payable on February 28,2007, to Unitholders of record on February 6, 2007. The total cashdistribution to Unitholders amounted to approximately $6.4 million.

BGH expects to payquarterly cash distributions to the extent that it has sufficient cash fromoperations after establishment of cash reserves and payment of fees andexpenses, including reimbursement of expenses of its general partner. If the Partnershipis successful in implementing its business strategy and increasingdistributions to its partners, BGH generally would expect to increasedistributions to its Unitholders, although the timing and amount of any suchincrease in BGH’s distributions will not necessarily be comparable to anyincrease in the Partnership’s distributions. However, BGH cannot assure thatany distributions will be declared or paid. 

**Item 6.**                        *Selected Financial Data*

The following tablepresents summary historical consolidated financial data for BGH as of December 31,2006, 2005 and 2004 and for the years ended December 31, 2006 and 2005 andthe period May 4, 2004—December 31, 2004, along with such informationfor Glenmoor Ltd., as predecessor, as of December 31, 2003 and 2002 andfor the period January 1, 2004—May 4, 2004 and the years ended December 31,2003 and 2002. BGH’s predecessor acquired the general partner interests ofBuckeye on May 4, 2004. Prior to May 4, 2004, Buckeye’s generalpartner interests were owned by Glenmoor. The information in the table for allperiods except 2002 is derived from the audited financial statements of BGH orGlenmoor, as appropriate. The financial information for Glenmoor as of and forthe year ended 

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December 31,2002 is unaudited but, in the opinion of management, includes all adjustments,consisting of normal, recurring accruals, that BGH considers necessary for fairpresentation of the financial position and results of operations as of and forthe year ended December 31, 2002.

Because BGH owns andcontrols the general partner of the Partnership, the statements reflect BGH’sownership interest in the Partnership on a consolidated basis, which means thatBuckeye’s financial results are consolidated with BGH’s financial results. Thefinancial statements of Services Company, which employs the employees whomanage and operate BGH and Buckeye, are also consolidated into BGH’s financialstatements. BGH has no separate operating activities apart from those conductedby Buckeye, and its cash flows consist primarily of distributions from Buckeyeon the partnership interests that BGH owns. Accordingly, the summary historicalconsolidated financial data set forth in the following table primarily reflectsthe operating activities and results of operations of Buckeye. The limitedpartner interests in Buckeye not owned by BGH or its affiliates are reflectedas a liability on BGH’s balance sheet and the non-affiliated partners’ share ofincome from Buckeye is reflected as an expense in BGH’s results of operations. 

The summary historicalconsolidated financial data for the periods presented reflects the effect ofthe asset acquisitions Buckeye made during these periods from the date of eachacquisition, but not on a pro forma or full period basis.

***Data is in thousands except per unit numbers***
|                                                      | ** ** | **Buckeye GP Holdings L.P.** | ** ** | **Glenmoor(1)**                       | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **Year ended  December 31**       | ** ** | **Year ended  December 31** | ** ** | **May 4 to  December 31,** | ** ** | **January 1 to  May 4,** | ** ** | **Year ended  December 31** | ** ** | **Year ended  December 31** | ** ** |
| ** **                                           | ** ** | **2006**                                    | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | ** **                                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| *Income  Statement Data:*                            |       |                                        |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                              |       |                                        | $          | 461,760                               |       |   |   | $ | 408,446 |   |   |   | $ | 226,014 |   |   |   | $ | 97,529 |   |   |   | $ | 272,947 |   |   |   | $ | 247,345 |   |   |
| Depreciation and amortization                        |       |                                        | 39,629     |                                  |       |   | 32,408 |   |   |   | 15,158 |   |   |   | 6,388 |   |   |   | 17,960 |   |   |   | 16,098 |   |   |
| Operating income                                     |       |                                        | 164,873    |                                  |       |   | 155,869 |   |   |   | 80,765 |   |   |   | 35,088 |   |   |   | 105,497 |   |   |   | 100,976 |   |   |
| Interest and debt expense                            |       |                                        | 60,702     |                                  |       |   | 55,366 |   |   |   | 28,212 |   |   |   | 9,756 |   |   |   | 27,704 |   |   |   | 25,275 |   |   |
| Premium paid on retirement of debt(2)(3)             |       |                                        | —     |                                  |       |   | — |   |   |   | — |   |   |   | 3,531 |   |   |   | 45,464 |   |   |   | — |   |   |
| Non-controlling interest expense                     |       |                                        | 103,066    |                                  |       |   | 99,704 |   |   |   | 55,310 |   |   |   | 22,830 |   |   |   | 22,583 |   |   |   | 64,081 |   |   |
| Net income                                           |       |                                        | 8,734      |                                  |       |   | 6,986 |   |   |   | 1,203 |   |   |   | 1,124 |   |   |   | 13,606 |   |   |   | 13,944 |   |   |
| Net income from Aug. 9 to Dec. 31, 2006(4) |       |                                        | $          | 2,599                                 |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Units outstanding—diluted                       |       |                                        | 28,300     |                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income per unit—diluted(4)                  |       |                                        | $          | 0.09                                  |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Distributions per unit                               |       |                                        | $          | 0.125                                 |       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                                                      |            |                                             |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                        | ** ** | **Buckeye GP Holdings L.P.** | ** ** | **Glenmoor(1)**             | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **December 31,  2006**                 | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
| ** **                                        | ** ** | ** **                                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** |
| *Balance Sheet Data:*                             | ** ** |                                        | ** ** | ** **                  |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total assets                                      |       |                                        | $          | 2,212,585                   | ** ** |   |   | $ | 2,040,832 | ** ** |   |   | $ | 1,747,758 | ** ** |   |   | $ | 948,195 |   |   |   | $ | 877,925 | ** ** |   |
| Total debt, including current portion             |       |                                        | 1,020,449  | ** **                  |       |   | 1,104,660 | ** ** |   |   | 1,015,225 | ** ** |   |   | 508,721 |   |   |   | 470,500 | ** ** |   |
| Total  partners’ capital or equity (deficit) |       |                                        | 240,617    | ** **                  |       |   | 80,442 | ** ** |   |   | 67,980 | ** ** |   |   | (7,642 | ) |   |   | 5,680 | ** ** |   |
|                                                   |            |                                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)           BGH’s predecessor acquired thegeneral partner interests of Buckeye, and commenced operations, on May 4,2004. Financial information for Glenmoor includes that of the general partnerof Buckeye and its subsidiaries for the periods presented prior to theiracquisition by BGH.

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(2)           Net income forthe period of January 1 to May 4, 2004 includes an expense of $3.5 millionrelated to a yield maintenance premium paid on the retirement of Glenmoor’sterm loan which was repaid on May 4, 2004.

(3)           Net income in2003 includes an expense of $45.5 million related to a yield maintenancepremium paid by Buckeye on the retirement of $240.0 million in seniornotes.

(4)           Net income perunit—diluted—is presented only for the period that BGH was a public company—August 9,2006—December 31, 2006.

**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

The following discussion provides an analysis of thefinancial condition and results of operations for Buckeye GP Holdings L.P. (“BGH”)and each of BGH’s operating segments, including an overview of itsliquidity and capital resources and other related matters. The followingdiscussion and analysis should be read in conjunction with the consolidatedfinancial statements and related notes included in this Annual Report on Form 10-Kfor the year ended December 31, 2006.

BGH owns andcontrols Buckeye GP LLC (“Buckeye GP”), which is the general partner of BuckeyePartners, L.P. (the “Partnership” or “Buckeye”), a publicly traded Delawarelimited partnership. BGH is managed by its general partner, MainLine ManagementLLC (“MainLine Management”). BGH’s only cash-generating assets are itspartnership interests in Buckeye, comprised primarily of the following:

·       thegeneral partner interests in Buckeye (representing 243,914 general partnerunits (the “GP Units”), or an approximate 0.6% interest in  Buckeye);

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

·       80,000Buckeye LP units; and

·       theincentive distribution rights in Buckeye.

The incentive distribution rights noted above entitleBGH to receive amounts equal to specified percentages of the incremental amountof cash distributed by Buckeye to each of the holders of Buckeye’s limitedpartner units (the “LP Units”) when target distribution levels for each quarterare exceeded. The 2,573,146 LP units originally issued to Buckeye’s EmployeeStock Ownership Plan are excluded for the purpose of calculating incentivedistributions. The target distribution levels begin at $0.325 and increase insteps to the highest target distribution level of $0.525 per eligible LP unit. WhenBuckeye makes quarterly distributions above this level, the incentivedistributions include an amount equal to 45% of the incremental cashdistributed to each eligible LP Unitholder for the quarter, or approximately29.5% of total incremental cash distributed by Buckeye above $0.525 per LPunit.

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

Incentive payments paid byBuckeye totaled $24.9 million in 2006, $20.2 million in 2005 and $14.0 millionin 2004. Buckeye paid distributions per Unit of $3.03 in 2006, $2.83 in 2005and $2.64 in 2004. Distributions by Buckeye’s operating subsidiaries in respectof their general partner interests totaled $1.3 million in $2006, and $1.0 millionin both 2005 and 2004.

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**Overview**

*Buckeye GP Holdings L.P.*

BGH is a Delaware limited partnership formed on June 15,2006 in order to facilitate the reorganization of MainLine L.P. (“MainLine”)and its affiliates and to effect an initial public offering (“IPO”) of theCommon Units of BGH. The reorganization and IPO occurred on August 9, 2006.BGH sold 10.5 million Common Units in the IPO, the net proceeds of whichwere approximately $168.3 million. BGH used the net proceeds from the IPO,along with cash on hand, to repay all outstanding indebtedness under a termloan and to make distributions to its pre-IPO equity owners.

BGH’s limited partnership units are ownedapproximately 54% by affiliates of Carlyle/Riverstone Global Energy and PowerFund II, L.P. (“Carlyle/Riverstone”), approximately 9% by certain members ofMainLine Management’s and Buckeye GP’s senior management and approximately 37%by the public.  BGH had no activity andMainLine owned and controlled Buckeye GP prior to the IPO.

Coincident with the IPO, the equity interests ofMainLine were exchanged for the equity interests of BGH. Accordingly, thefinancial information for BGH included in this report includes the financialinformation of MainLine.

In connection with the IPO, BGH and Buckeye GPrestructured the ownership of Buckeye GP. MainLine Sub LLC (“MainLine Sub”),which was then a wholly-owned subsidiary of BGH and the owner of Buckeye GP,assigned all of its rights under the Fourth Amended and Restated IncentiveCompensation Agreement, dated as of December 15, 2004, between MainLineSub and Buckeye to Buckeye GP. Thereafter, Buckeye and Buckeye GP amended andrestated that agreement by entering into the Fifth Amended and RestatedIncentive Compensation Agreement, dated as of August 9, 2006 (the “IncentiveCompensation Agreement”). Also on August 9, 2006, Buckeye and Buckeye GP enteredinto the Amended and Restated Agreement of Limited Partnership of BuckeyePartners, L.P. (the “Partnership Agreement”). The amendments to the IncentiveCompensation Agreement and the Partnership Agreement reflect the assignment ofthe Incentive Compensation Agreement to Buckeye GP and recharacterize thepayments Buckeye GP receives under the Incentive Compensation Agreement asdistributions in respect of its general partner interest rather thancompensation payments. On August 8, 2006, MainLine Sub was merged with andinto BGH. These changes, commencing in the fourth quarter of 2006, resulted inchanges in the method used to allocate Buckeye’s income between Buckeye GP andBuckeye’s limited partners (the “Partnership LP Unitholders”).

None of these changes affect the amount or timing ofcash distributions or incentive distributions from Buckeye to BGH. Buckeye’scriteria for determining the amount of cash distributions and its policiesregarding the timing of such cash distributions remain unchanged. Because thequarterly unit distribution related to Buckeye’s second quarter was declaredprior to August 9, 2006 and, therefore, the related incentive compensationattributable to Buckeye GP became payable prior to such date, incentivecompensation paid in the third quarter of 2006 was recorded as an expense byBuckeye, consistent with Buckeye’s prior practice. Commencing with the fourthquarter of 2006, Buckeye ceased recording incentive compensation payable toBuckeye GP as an expense and instead recorded such payments as distributionsfrom equity.

Buckeye pays an annual senior administrative charge toaffiliates of its general partner for certain management functions supplied bythose affiliates. The senior administrative charge totaled $1.9 million in2006 and 2005 and approximately $1.0 million in 2004. Prior to the IPO,this senior administrative charge was recognized as income by BGH. Inconnection with the IPO, Buckeye now pays the senior administrative chargedirectly to BGH’s general partner, MainLine Management.

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Prior to the IPO, BGH recognized its share ofBuckeye’s income as the sum of (i) the incentive compensation paymentsreceived (to which BGH was contractually entitled and which were recorded byBuckeye as an expense in Buckeye’s financial statements), (ii) itsproportionate share of Buckeye’s remaining net income based on its ownership ofthe general partner interest in Buckeye, 80,000 of Buckeye’s LP Units that itowns and its general partner interests in certain of the Operating Subsidiariesand (iii) the senior administrative charge. Commencing with the IPO, BGHrecognizes its share of Buckeye’s income as the sum of (i) the amount ofincentive compensation BGH would have received had only Buckeye’s net incomefor the period been entirely distributed (which income, commencing with thefourth quarter of 2006 now includes the incentive compensation paymentspreviously recorded by Buckeye as an expense) and (ii) its proportionateshare of the remaining net income of Buckeye and the Operating Subsidiaries.

The effect of this change was to reduce BGH’s netincome in 2006 by approximately $1.2 million, of which $0.7 millionrepresents the absence of income related to the senior administrative chargesubsequent to the IPO and $0.5 million represents the difference betweenincome recognition for incentive compensation under BGH’s new methodologycompared to the amount that would have been recognized had the IncentiveCompensation Agreement and Partnership Agreement not been amended.

*Results of Operations*

Theresults of operations discussed below principally reflect the activities ofBuckeye. Because the enclosed consolidated financial statements of BGH includethe consolidated results of Buckeye, BGH’s consolidated statements aresubstantially similar to Buckeye’s except as noted below:

·       Interestof non-controlling partners in Buckeye—BGH’s consolidated balance sheetincludes a non-controlling interest liability that reflects the proportion ofBuckeye owned by its partners other than BGH. Similarly, the ownership interestsin Buckeye held by its partners other than BGH are reflected in BGH’sconsolidated income statement as non-controlling interest expense. Thesenon-controlling interest liabilities and expenses are not reflected inBuckeye’s consolidated financial statements.

·       BGH’scapital structure—In addition to incorporating the assets and liabilities ofBuckeye, BGH’s consolidated balance sheet includes BGH’s own indebtedness andrelated debt placement costs, and the partners’ capital on BGH’s consolidated balancesheet represents BGH’s partners’ capital as opposed to the capital reflected inBuckeye’s balance sheet, which reflects the ownership interest of all itspartners, including its owners other than BGH. Consequently, BGH’s incomestatement reflects additional interest expense, interest income and debtamortization expense that is not reflected in Buckeye’s consolidated financialstatements. 

·       Inclusionof Buckeye Pipe Line Services Company—The financial statements of ServicesCompany are consolidated into BGH’s financial statements. The consolidated financialstatements of Buckeye do not include the financial statements of ServicesCompany. 

·       BGH’sG&A expenses—BGH incurs general and administrative expenses that areindependent from Buckeye’s operations and are not reflected in Buckeye’sconsolidated financial statements.

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

*Buckeye Partners,L.P.*

Buckeye’s principal line of business is thetransportation, terminalling and storage of petroleum products in the UnitedStates for major integrated oil companies, large refined petroleum product 

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marketing companies andmajor end users of petroleum products on a fee basis through facilities ownedand operated by Buckeye. Buckeye also operates pipelines owned by third partiesunder contracts with major integrated oil and chemical companies, and performscertain construction activities, generally for the owners of those third-partypipelines.

Buckeye’s direct subsidiaries are Buckeye Pipe LineCompany, L.P. (“Buckeye Pipe Line”), Laurel Pipe Line Company, L.P. (“Laurel”),Everglades Pipe Line Company, L.P. (“Everglades”), Buckeye Pipe Line Holdings,L.P. (“BPH”), Wood River Pipe Lines LLC (“Wood River”), Buckeye Pipe LineTransportation LLC (“BPL Transportation”) and Buckeye NGL Pipe Lines LLC (“BuckeyeNGL”). Each of these entities is referred to as an “Operating Subsidiary” andthey are collectively referred to as the “Operating Subsidiaries.” Buckeye ownsan approximately 99% interest in each Operating Subsidiary except that it ownsa 100% interest in each of Wood River, BPL Transportation and Buckeye NGL.

Buckeye’s pipeline systemand terminals generate a substantial portion of its cash flows. The revenuesgenerated by Buckeye’s businesses are significantly influenced by demand forrefined petroleum products. Operating expenses are principally fixed costsrelated to routine maintenance and system integrity as well as field and supportpersonnel. Other costs, including power, fluctuate with volumes transported inBuckeye’s pipelines or stored in its terminals. Expenses resulting fromenvironmental remediation projects have historically included costs fromprojects relating both to current and past events. For further discussion ofenvironmental matters, see “Business—Regulation—Environmental Regulation” underItem 1 of this Annual Report on Form 10-K. Results of operations arealso affected by factors that include general economic conditions, weather,competitive conditions, seasonal factors and regulation. See Item 1—“Business—Competitionand Other Business Considerations.”

**Strategic Actions**

Buckeye’s primarybusiness strategies are to generate stable cash flows, increase pipeline andterminal throughput and pursue strategic cash-flow accretive acquisitions thatcomplement Buckeye’s existing asset base, improve operating efficiencies, andallow increased cash distributions to its partners. In the years 2004, 2005 and2006, Buckeye significantly expanded its operations through the following assetacquisitions:

·       OnOctober 1, 2004, Buckeye acquired five refined petroleum productspipelines with an aggregate mileage of approximately 900 miles and 24 refinedproducts terminals with an aggregate storage capacity of 9.3 millionbarrels (the “Midwest Pipelines and Terminals”) from Shell Oil Products U.S. (“Shell”)for a purchase price of $517.0 million.

·       InMay 2005, Buckeye acquired a refined petroleum products pipeline system comprisingapproximately 478 miles of pipeline and four refined products terminals withaggregate storage capacity of approximately 1.3 million barrels locatedprincipally in the northeastern United States (the “Northeast Pipelines andTerminals”) from affiliates of ExxonMobil Corporation (“ExxonMobil”) for apurchase price of $175.0 million. 

·       InDecember 2005, Buckeye acquired a 26-mile pipeline and a 40% interest in ajoint venture company that owns another refined petroleum products pipeline andterminal in the midwestern United States. It also acquired a refined petroleum products terminal andrelated assets (including certain railroad offloading facilities) located inTaylor, Michigan for a purchase price of $20.0 million.

·       OnJanuary 1, 2006, Buckeye acquired a refined petroleum products terminallocated in Niles, Michigan, with aggregate storage capacity of 630,000 barrelsfrom affiliates of Shell for a purchase price of $13.0 million. 

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·       OnJanuary 31, 2006, Buckeye acquired a natural gas liquids pipeline (the “NGLPipeline”) with aggregate mileage of approximately 350 miles from BP Pipelines(North America) Inc. for approximately $87.0 million, including a depositof $7.7 million paid in December 2005. The NGL Pipeline extendsgenerally from Wattenberg, Colorado to Bushton, Kansas. 

The acquired assets havebeen included in Buckeye’s operations from their dates of acquisition. 

**Operating Segments**

BGH has determinedthat its operations are appropriately presented in three operating segments,which are the same as Buckeye’s operating segments: 

·       PipelineOperations; 

·       Terminallingand Storage; and 

·       Other Operations. 

***Pipeline Operations***

The Pipeline Operationssegment receives petroleum products including gasoline, jet fuel, diesel fueland other distillates and natural gas liquids from refineries, connectingpipelines and bulk and marine terminals and transports those products to otherlocations by pipeline for a fee. As of December 31, 2006, this segmentowned and operated approximately 5,400 miles of pipelines in the followingstates: California, Colorado, Connecticut, Florida, Illinois, Indiana, Kansas,Massachusetts, Michigan, Missouri, New Jersey, Nevada, New York, Ohio,Pennsylvania and Tennessee.

***Terminalling and Storage***

The Terminalling and Storagesegment provides bulk storage and terminal throughput services. This segmentconsists of 45 active terminals that have the capacity to store an aggregate ofapproximately 17.6 million barrels of refined petroleum products. Theterminals are located in Illinois, Indiana, Massachusetts, Michigan, Missouri,New York, Ohio and Pennsylvania.

***Other Operations***

The Other Operationssegment consists primarily of Buckeye’s operation of third-party pipelinesowned principally by major petrochemical companies pursuant to operations andmaintenance contracts. The third party pipelines are located primarily in Texas.This segment also includes the provision by Buckeye, through its Buckeye GulfCoast subsidiary, of pipeline construction management services, typically on acost plus a fixed fee basis. The Other Operations segment also includes Buckeye’sownership and operation of an ammonia pipeline acquired in November 2005,and its majority ownership of a crude butadiene pipeline located in Texas.

*2004 Reconcilation*

BGH’sconsolidated financial results have been prepared to reflect the periods of BGH’sownership of the general partner interest of Buckeye separate from that ofGlenmoor LLC (“Glenmoor”), which was BGH’s predecessor. Accordingly, BGH’sconsolidated statements of income for 2004 do not present BGH’s predecessor’s ownershipduring the period from January 1 through May 4, 2004. In order tomake these two periods comparable to the other full-year periods, BGH hascombined these two periods to reflect financial results for the twelve monthsended December 31, 2004. BGH believes that an analysis of results forthree full-year periods is more meaningful than a separate analysis whichcompares only partial-year periods. Generally Accepted Accounting Principles (“GAAP”)do not allow for such a combination in 

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historical financial statements. The results for eachpartial-year period have been added together without any attempt to adjust theamounts for pro forma effects. BGH believes that, while its purchase of thegeneral partner interest in Buckeye resulted in an increase in the recordedbasis of BGH’s assets, that such increase did not have a material effect on theindividual line items of revenue and expense. Purchase accounting adjustments,which are more fully described in Note 3 to the consolidated financialstatements, were principally related to goodwill, which is not amortized. Thefollowing schedule combines the two periods to provide full year 2004 results:

| ** **                                                        | ** ** | ** **                  | ** ** | ** **              | ** ** | **Non-GAAP**          | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | ** **                  | ** ** | ** **              | ** ** | **Combined**          | ** ** |
| ** **                                                        | ** ** | **January 1, to** | ** ** | **May 4, to** | ** ** | **Year End**     | ** ** |
| ** **                                                        | ** ** | **May 4,**             | ** ** | **December 31,**   | ** ** | **December 31,** | ** ** |
| ** **                                                        | ** ** | **2004**                    | ** ** | **2004**                | ** ** | **2004**              | ** ** |
| ** **                                                        | ** ** | **(In thousands)**     | ** ** |
| Revenue                                                           |       |                        | $          | 97,529                  |       |                  |       | $ | 226,014 |   |   |   | $ | 323,543 |   |   |
| Costs and  expenses                                               |       |                        | 62,441     |                    |       |                  | 145,249    |   |   |   | 207,690 |   |   |
| Operating income                                                  |       |                        | 35,088     |                    |       |                  | 80,765     |   |   |   | 115,853 |   |   |
| Other income  (expenses)                                          |       |                        | (13,104    | )                       |       |                  | (27,959    | ) |   |   | (41,063 | ) |   |
| Income before  equity income and non-controlling interest expense |       |                        | 21,984     |                    |       |                  | 52,806     |   |   |   | 74,790 |   |   |
| Equity income                                                     |       |                        | 1,970      |                    |       |                  | 3,707      |   |   |   | 5,677 |   |   |
| Non-controlling interest  expense                                 |       |                        | (22,830    | )                       |       |                  | (55,310    | ) |   |   | (78,140 | ) |   |
| Net  income                                                       |       |                        | $          | 1,124                   |       |                  |       | $ | 1,203 |   |   |   | $ | 2,327 |   |   |

 

***Summary Operating Results***

Summaryoperating results, which include BGH for 2006 and 2005, and the non-GAAPcombined amounts for BGH and Glenmoor for 2004, were as follows:

| ** **                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**                    | ** ** |
| Revenue                                                           |       | $                                          | 461,760    |   | $ | 408,446 |   | $ | 323,543 |   |
| Costs and  expenses                                               |       | 296,887                                    |       | 252,577 |   | 207,690 |   |
| Operating income                                                  |       | 164,873                                    |       | 155,869 |   | 115,853 |   |
| Other income  (expenses)                                          |       | (59,292                                    | )          | (54,482 | ) | (41,063 | ) |
| Income before  equity income and non-controlling interest expense |       | 105,581                                    |       | 101,387 |   | 74,790 |   |
| Equity income                                                     |       | 6,219                                      |       | 5,303 |   | 5,677 |   |
| Non-controlling  interest expense                                 |       | (103,066                                   | )          | (99,704 | ) | (78,140 | ) |
| Net  income                                                       |       | $                                          | 8,734      |   | $ | 6,986 |   | $ | 2,327 |   |

 

The improvement in revenues and operating income in2006 compared to 2005, and 2005 compared to 2004, is generally due to theexpansion of Buckeye’s operations through acquisitions, internal growthprojects, and increases in interstate pipeline tariff rates and terminallingthroughput fees. 

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Revenuesand operating income by operating segment for each of the three years ended December 31,2006, 2005 and 2004, were as follows:

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **               | ** ** | **(In thousands)**                    | ** ** |
| *Revenues:*              |       |                                       |       |   |   |   |   |
| Pipeline Operations      |       | $                                          | 350,909    |   | $ | 306,849 |   | $ | 264,160 |   |
| Terminalling and Storage |       | 81,267                                     |       | 68,822 |   | 26,232 |   |
| Other Operations         |       | 29,584                                     |       | 32,775 |   | 33,151 |   |
| Total                    |       | $                                          | 461,760    |   | $ | 408,446 |   | $ | 323,543 |   |
| *Operating  income:*     |       |                                       |       |   |   |   |   |
| Pipeline Operations      |       | $                                          | 133,039    |   | $ | 121,546 |   | $ | 99,871 |   |
| Terminalling and Storage |       | 25,879                                     |       | 28,038 |   | 11,307 |   |
| Other Operations         |       | 5,955                                      |       | 6,285 |   | 4,675 |   |
| Total                    |       | $                                          | 164,873    |   | $ | 155,869 |   | $ | 115,853 |   |

 

***2006 Compared to 2005***

*Revenues*

Totalrevenues for the year ended December 31, 2006 were $461.8 millionand increased by $53.4 million or 13% from revenue of $408.4 millionin 2005.

*Pipeline Operations*

Revenue from the PipelineOperations segment was $350.9 million in 2006 compared to $306.8 millionin 2005. The increase of $44.1 million was due primarily to higher volumesassociated with pipeline assets acquired in 2006, or acquired in 2005 andoperated for a full year in 2006, as well as tariff rate increases inconnection with certain of Buckeye’s pipelines. More specifically, the increasein revenue in 2006 as compared to 2005 was due in part to:

·       BPLTransportation revenue of $6.9 million (BPL Transportation’s assets wereacquired on May 5, 2005);

·       BuckeyeNGL revenue of $10.8 million (Buckeye NGL’s assets were acquired on January 31,2006);

·       a1.2% or $1.7 million increase  netof BPL Transportation revenue, in gasoline transportation revenue, on a 2.3%decline in gasoline volumes;

·       a13.0% or $6.4 million increase net of BPL Transportation revenue, in jetfuel transportation revenue on an 8.2% increase in jet fuel volumes delivered;

·       an8.7% or $5.9 million increase net of BPL Transportation revenue, indistillate transportation revenue on comparable distillate volumes delivered;

·       a$4.0 million increase in incidental revenue primarily from increasedrevenues under a product supply arrangement in connection with WesPac-Reno, LLC(“WesPac-Reno”);

·       a$6.5 million increase in other revenue principally resulting fromcommencement of the pipeline and terminal operations serving the MemphisInternational Airport (the “Memphis Terminal”) in April 2006; and

·       a$5.5 million decrease in transportation settlement revenue, representingthe settlement of overages and shortages on product deliveries.

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Product deliveries for each of the threeyears ended December 31 were as follows:

| ** **           | ** ** | **Average Barrels per Day** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| *Product*            |       |                                       |       |   |   |   |   |
| Gasoline             |       | 722,300                                    |       | 721,200 |   | 609,000 |   |
| Jet fuel             |       | 351,300                                    |       | 319,600 |   | 273,100 |   |
| Distillate           |       | 324,200                                    |       | 323,600 |   | 293,000 |   |
| Natural gas  liquids |       | 19,800                                     |       | — |   | — |   |
| LPG’s           |       | 22,500                                     |       | 16,300 |   | 21,100 |   |
| Other                |       | 10,200                                     |       | 4,700 |   | 4,400 |   |
| Total                |       | 1,450,300                                  |       | 1,385,400 |   | 1,200,600 |   |

 

During the approximateeight months in 2005 that Buckeye owned the BPL Transportation pipeline system,volumes on the BPL Transportation pipeline system averaged 74,400 barrels perday. Volumes on all of Buckeye’s other pipelines (excluding the BPLTransportation pipeline system) averaged 1,335,800 barrels per day for2005.

*Terminalling andStorage*

Terminalling and Storage revenues were $81.3 millionin 2006 and increased by $12.4 million from Terminalling and Storagerevenues generated in 2005.

Terminal acquisitions increased Terminalling andStorage revenues by $5.9 million for the year ended December 31, 2006compared to 2005. The increase in terminal revenue associated with acquisitionsreflects terminals acquired in 2006 and terminals acquired in 2005 and operatedfor a full year in 2006.

Terminalling and Storage revenues at existingterminals owned by Buckeye were $75.4 million for the year ended December 31,2006, an increase of $6.5 million from Terminalling and Storage revenuesgenerated by those terminals in 2005.

Averagedaily throughput for all refined petroleum products terminals for the years endedDecember 31 was as follows:

| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Refined products  throughput (barrels per day) |       | 494,300                                    |       | 419,200 |   | 160,900 |   |

 

*Other Operations*

Revenuefrom Other Operations of $29.6 million for the year ended December 31,2006 decreased by $3.1 million from 2005 primarily as a result ofthe absence of a large construction project which provided approximately $7.7 millionof revenue in 2005.

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*Operating Expenses*

Costsand expenses for the years ended December 31, 2006, 2005 and 2004 were asfollows:

| ** **                     | ** ** | **Operating Expenses** | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **2006**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands)**     | ** ** |
| Payroll and  payroll benefits  |       | $                           | 91,886     |   | $ | 82,725 |   | $ | 71,481 |   |
| Depreciation and  amortization |       | 39,629                      |       | 32,408 |   | 21,546 |   |
| Operating power                |       | 28,967                      |       | 26,240 |   | 22,976 |   |
| Outside services               |       | 34,543                      |       | 22,510 |   | 18,921 |   |
| Property and  other taxes      |       | 21,251                      |       | 16,802 |   | 13,316 |   |
| Construction  management       |       | 8,390                       |       | 8,932 |   | 12,287 |   |
| All other                      |       | 72,221                      |       | 62,960 |   | 47,163 |   |
| Total                          |       | $                           | 296,887    |   | $ | 252,577 |   | $ | 207,690 |   |

 

Payroll and payroll benefits costs were $91.9 millionin 2006, an increase of $9.2 million from 2005. Of this increase,approximately $3.5 million was related to the hiring of additionalemployees as a result of recent acquisitions by Buckeye. Increases in salariesand wages of $6.0 million resulted from an increase in the number ofemployees and overtime pay due to Buckeye’s expanded operations and higher wagerates. Buckeye also experienced an increase in benefit costs of $0.4 million.These increases were partially offset by an increase of capitalized payroll of$0.8 million resulting from increased charges to capital projects byinternal personnel and a decrease in severance pay. Buckeye incurred expense of$0.4 million for severance pay in 2005 which did not occur during 2006. Payrolland benefits expense was also reduced by $1.1 million in 2006 compared to2005 as a result of lower incentive compensation accruals. In 2006, Buckeyeaccrued approximately $0.9 million in annual incentive compensation foremployees, compared to approximately $2.0 million in bonuses in 2005. BGHpaid approximately $2.0 million in 2006 primarily to its executives inconnection with the completion of BGH’s initial public offering on August 9,2006.

BGH also incurred approximately $3.5 million ofnon-cash unit based compensation expense in both 2005 and 2006 related to thevesting of its Management Units. It is expected that BGH will incurapproximately $0.5 million in both 2007 and 2008 and $0.1 million in2009 of unit based compensation expense related to its Management Units.

Depreciation and amortization expense of $39.6 millionincreased by $7.2 million in 2006 over 2005. Depreciation related torecent acquisitions was $3.5 million. Buckeye incurred depreciationexpense of $0.7 million related to the Memphis Terminal which commencedoperations in April 2006. The remaining increase resulted from assetsplaced into service during 2006.

Operating power costs, consisting primarily ofelectricity required to operate pumping facilities, were $29.0 million in2006, an increase of $2.8 million over 2005. Recent acquisitions added $2.1 millionto operating power expense. The remainder of the increase was principally dueto higher rates associated with purchases of electricity.

Outside services costs, consisting principally ofthird-party contract services for maintenance activities, were $34.5 millionin 2006, an increase of $12.0 million over 2005. Outside services costs related torecent acquisitions were $1.1 million. Buckeye incurred an additional $6.8 millionfor pipeline inspection and maintenance costs related to an operating servicecontract. The remainder of the increase was due to additional pipeline and tankinspections and maintenance work that occurred during 2006 as compared to 2005.

Property and other taxes were $21.3 million in2006, an increase of $4.4 million over 2005. Of this increase, $1.1 millionrelated to recent acquisitions. As more fully discussed in Note 5 to theconsolidated 

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financial statements,Buckeye incurreda $0.6 million charge related to a penalty assessment received from theIRS for failure to file excise taxinformation in a timely fashion. Theseincreases were offset by a reimbursement of $0.9 million in 2006 forcertain property taxes under an operating service agreement. The remainder of theincrease was due to increased real estate property assessments over the sameperiod in 2005.

Construction management costs were $8.4 millionin 2006, a decrease from the prior year of $0.5 million. The decrease wasa result of the absence of a significant construction contract that wascompleted in 2005.

All other costs were $72.2 million in 2006compared to $63.0 million in 2005, an increase of $9.2 million. Theincrease reflects $3.1 million of costs associated with fuel purchases byWesPac Reno related to a product supply arrangement, with corresponding revenueincluded in Buckeye’s incidental revenue. Other costs related to recentacquisitions were $2.4 million. Buckeye had an increase in other expensesof $3.5 million related to the Memphis Terminal which commenced operationsin April 2006. These increases were partially offset by a decrease incasualty losses of $2.5 million. The remainder of the increases related tovarious pipeline operating costs resulting from Buckeye’s expanded operations.

Costsand expenses by segment for the years ended December 31, 2006, 2005, and2004 were as follows:

| ** **                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(In thousands)**                    | ** ** |
| *Total  costs and expenses:* |       |                                       |       |   |   |   |   |
| Pipeline Operations          |       | $                                          | 217,870    |   | $ | 185,303 |   | $ | 164,289 |   |
| Terminalling and Storage     |       | 55,388                                     |       | 40,784 |   | 14,924 |   |
| Other Operations             |       | 23,629                                     |       | 26,490 |   | 28,477 |   |
| Total                        |       | $                                          | 296,887    |   | $ | 252,577 |   | $ | 207,690 |   |

 

Costsand expenses attributable to Buckeye, Services Company and BGH were as follows:

| ** **                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(In thousands)**                    | ** ** |
| *Total  costs and expenses:*                        |       |                                       |       |   |   |   |   |
| Attributable to Buckeye                             |       | $                                          | 284,693    |   | $ | 247,133 |   | $ | 201,399 |   |
| Elimination of Buckeye deferred charge              |       | (4,698                                     | )          | (4,698 | ) | (4,698 | ) |
| Elimination of Buckeye senior administrative charge |       | (1,154                                     | )          | (1,900 | ) | (975 | ) |
| Net effect of ESOP charges                          |       | 5,997                                      |       | 4,783 |   | 6,505 |   |
| Attributable to BGH                                 |       | 12,049                                     |       | 7,259 |   | 5,459 |   |
| Total                                               |       | $                                          | 296,887    |   | $ | 252,577 |   | $ | 207,690 |   |

 

Amountsattributable to BGH consist of the following:

| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **              | ** ** | **(In thousands)**                    | ** ** |
| *Attributable  to BGH:* |       |                                       |       |   |   |   |   |
| Payroll and benefits    |       | $                                          | 7,370      |   | $ | 5,061 |   | $ | 3,830 |   |
| Professional fees       |       | 3,633                                      |       | 1,644 |   | 1,580 |   |
| Other                   |       | 1,046                                      |       | 554 |   | 49 |   |
| Total                   |       | $                                          | 12,049     |   | $ | 7,259 |   | $ | 5,459 |   |

 

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Payroll and benefits in2006 include $2.0 million in bonuses paid primarily to executives inconnection with the BGH IPO. BGH also incurred approximately $3.5 millionof non-cash unit based compensation expense in both 2005 and 2006 related tothe vesting of its Management Units. It is expected that BGH will incurapproximately $0.5 million in both 2007 and 2008 and $0.1 million in2009 of unit based compensation expense related to its Management Units. SeeNote 14 to BGH’s consolidated financial statements for a further discussion.

Professional fees in 2006and 2005 include legal, accounting and tax fees related to planning for BGH’sIPO. Professional fees in 2004 include legal and accounting fees related to theorganizational structure of BGH’s predecessor and its subsidiaries. Other costsinclude certain state franchise taxes, insurance costs, depreciation andmiscellaneous other expenses.

Totalother income (expense) for the years ended December 31, 2006, 2005 and2004 were as follows:

| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(In thousands)**                    | ** ** |
| Investment income                   |       | $                                          | 1,410      |   | $ | 884 |   | $ | 436 |   |
| Interest and debt  expense          |       | (60,702                                    | )          | (55,366 | ) | (37,968 | ) |
| Premium paid on  retirement of debt |       | —                                     |       | — |   | (3,531 | ) |
| Total                               |       | $                                          | (59,292    | ) | $ | (54,482 | ) | $ | (41,063 | ) |

 

Interest and debt expensefor the year ended December 31, 2006 was $5.3 million higher than2005. Buckeye incurred approximately $3.3 million of additional interestexpense in 2006 because its 5.125% Notes that were issued in June of 2005were outstanding for all of 2006. The balance of the increase in interestexpense in 2006 resulted from higher average balances outstanding and higherinterest rates on Buckeye’s revolving credit facility. Also recorded in 2006 aspart of the IPO and repayment of a term loan was a reduction in interestexpense of $1.9 million related to the liquidation of two interest rateswaps and an interest rate cap, as well as a charge of $1.6 million relatedto the write-off of previously deferred financing costs.

***2005 Compared to2004***

*Revenues*

Totalrevenues for the year ended December 31, 2005 were $408.4 millionand increased by $84.9 million or 26.2% from revenue of $323.5 millionin 2004.

*Pipeline Operations:*

Revenuefrom pipeline transportation of petroleum products was $306.8 million in2005 compared to $264.0 million in 2004. The increase of $42.8 millionin transportation revenue was primarily the result of:

·       aWood River transportation revenue increase of $23.5 million (Wood River’sassets were acquired on October 1, 2004);

·       BPLTransportation revenue of $12.1 million (BPL Transportation’s assets wereacquired on May 5, 2005);

·       a3.7% average tariff rate increase effective May 1, 2005, and a 2.8%average tariff rate increase effective May 1, 2004;

·       a2.8% or $3.5 million increase, net of Wood River and BPL Transportation,in gasoline transportation revenue on a 1.0% decrease in gasoline volumesdelivered;

·       a3.2% or $1.3 million increase, net of Wood River and BPL Transportation,in jet fuel transportation revenue on a 0.5% increase in jet fuel volumesdelivered;

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·       a4.2% or $2.7 million increase, net of Wood River and BPL Transportation,in distillate transportation revenue on a 2.4% increase in distillate volumesdelivered;

·       adecrease in liquefied petroleum gas (“LPG”) transportation revenue of $1.0 millionas a result of lower LPG volumes delivered;

·       adecrease in transportation settlement revenue, representing the settlement ofoverages and shortages on product deliveries, of $3.4 million; and

·       a$3.7 million increase in incidental revenue primarily from increasedrevenues under a product supply arrangement in connection with WesPac Reno.

*Terminalling and Storage:*

Terminalling and storagerevenues were $68.8 million in 2005 and increased by $42.5 millionfrom 2004.

The terminals acquiredfrom Shell on October 1, 2004 (the “Shell Terminals”) generatedterminalling and storage revenues of $48.9 million in 2005. This was $39.7 milliongreater than the terminalling and storage revenues generated by the Shellterminals during the three months they were owned by Buckeye in 2004. Theterminals acquired from ExxonMobil on May 5, 2005 (the “ExxonMobilTerminals”) generated terminalling and storage revenues of $3.9 million in2005.

Terminalling and storagerevenues at other facilities owned by Buckeye were $16.0 million in 2005,a decline of $1.1 million from 2004. The decline in revenue resulted froma decrease in throughput charges of $1.8 million that was partially offsetby a $0.7 million increase in rent and incidental charges.

*Other Operations:*

Revenue from Other Operationsof $32.8 million for the year ended December 31, 2005 decreased by$0.4 million from 2004. Revenues from Other Operations activities includerevenue from pipeline construction activities of $12.0 million, contractoperating services of $14.2 million and rental revenues of $6.6 million.

*Operating Expenses*

Payroll and payrollbenefits costs were $82.7 million in 2005, an increase of $11.2 millionover 2004. Of this increase, approximately $7.4 million, which representpayroll and payroll benefit costs for the first nine months of 2005, is relatedto employees added as a result of the acquisition of the Midwest Pipelines andTerminals on October 1, 2004. Employees hired in connection with theacquisition of the Northeast Pipelines and Terminals added $2.0 million ofpayroll and payroll benefits costs. Of the remaining increase, approximately$3.1 million resulted from increases in wage rates in 2005 compared to2004, which was partially offset by a decrease in ESOP related expenses of $1.8 million.

Depreciation andamortization expense of $32.4 million increased by $10.9 million in2005 over 2004. Depreciation related to the Midwest Pipelines and Terminals forthe first nine months of 2005 was $7.6 million. The Northeast Pipelinesand Terminals added $2.3 million of depreciation expense in 2005. Theremaining increase of $1.0 million resulted from Buckeye’s ongoingmaintenance and expansion capital program.

Operating power,consisting primarily of electricity required to operate pumping facilities, was$26.2 million in 2005, an increase of $3.3 million over 2004. TheMidwest Pipelines and Terminals added $2.3 million in operating powercosts from January 1 through September 30, 2005, and the NortheastPipelines and Terminals added $1.7 million in operating power costs fromthe date of acquisition in May 2005. Increases in operating power coststhat resulted from the acquisitions of the Midwest Pipelines and Terminals andNortheast Pipelines and Terminals were partially offset by a decrease of $0.8 millionat BGC related to the loss of an operations and maintenance contract with athird party in 2004.

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Outside services costs,consisting principally of third-party contract services for maintenanceactivities, were $22.5 million, an increase of $3.6 million over2004. Outside services costs related to the Midwest Pipelines and Terminals andNortheast Pipelines and Terminals were $4.5 million for the first ninemonths of 2005 and $0.8 million, respectively. The increases werepartially offset by a decrease of $0.8 million at BGC due to the loss ofan operating contract in 2004. The remaining difference is a result of timingof maintenance projects conducted by Buckeye.

Property and other taxeswere $16.8 million in 2005, an increase of $3.5 million over 2004.Property and other taxes related to the Midwest Pipelines and Terminals were$1.9 million for the first nine months in 2005. The Northeast Pipelinesand Terminals added $1.3 million of property and other taxes since itsdate of acquisition in May 2005. Of the remaining increase, Buckeyeexperienced higher real property tax assessments in several states.

Construction managementcosts were $8.9 million in 2005, a decrease from the prior year by $3.4 million.The decrease in construction management costs is a result of the completion ofa major construction contract with a chemical company which began in 2004 andwas completed in the first quarter of 2005.

All other costs were $63.0 millionin 2005 compared to $47.2 million in 2004, an increase of $15.8 million.Other costs related to the Midwest Pipelines and Terminals during the firstnine months of 2005 and Northeast Pipelines and Terminals since theiracquisition in May 2005 added $7.1 million and $3.8 million,respectively. Buckeye experienced an increase of $3.5 million in costsrelated to a product supply arrangement over such costs in 2004. Casualtylosses, net of the Midwest Pipelines and Terminals and Northeast Pipelines andTerminals, increased by $1.1 million primarily as a result of pipeline andterminal product releases in 2005.

Other income (expenses)was a net expense of $54.5 million in 2005, compared to a net expense of$41.1 million in 2004. Investment income in 2005 was consistent withinvestment income generated in 2004.

BGH incurred interest anddebt expense of $55.4 million in 2005 compared to $38.0 millionincurred in 2004, which is an increase of $17.4 million. BGH incurredadditional interest and debt expense in 2005 compared to 2004 due to anincrease in the amounts outstanding under its term loan. Approximately $11.3 millionof the interest expense incurred in 2005 related to Buckeye’s 5.30% Notes due2014, which were issued in October 2004 in connection with the acquisitionof the Midwest Pipelines and Terminals. Buckeye incurred approximately $3.2 millionin interest expense related to the 5.125% Notes due 2017, which were issued in June 2005primarily in connection with the acquisition of the Northeast Pipelines andTerminals. Interest expense was reduced by $2.6 million in 2004 as aresult of Buckeye’s interest rate swap in effect until December 2004.Increases in interest expense in 2005 were partially offset by an increase incapitalized interest which is due to an increase in the number of capitalprojects in 2005.

In 2004, BGH expensed $3.5 millionof deferred financing costs related to its prior credit facility. Such expensewas not incurred during 2005.

Equity income in 2005 of$5.3 million was consistent with equity income generated in 2004.

**Liquidity and Capital Resources**

Until BGH’s IPO on August 9,2006, BGH’s only capital requirement, apart from Buckeye’s capitalrequirements, was its debt service under its term loan. Concurrent with BGH’sIPO, the term loan was repaid in full. Buckeye’s capital requirements consistof maintenance and capital expenditures, expenditures for acquisitions and debtservice requirements.

As noted in “Overview”above, BGH’s only cash-generating asset is its ownership interest in Buckeye GP.BGH’s cash flow is, therefore, directly dependent upon the ability of Buckeyeand its operating subsidiaries to make cash distributions to Buckeye’spartners. The actual amount of cash that Buckeye will 

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haveavailable for distribution depends primarily on Buckeye’s ability to generatecash beyond its working capital requirements. Buckeye’s primary future sourcesof liquidity are operating cash flow, proceeds from borrowings under Buckeye’srevolving credit facility and proceeds from the issuance of Buckeye LP Units.

BGH’s principal use ofcash is the payment of its operating expenses and distributions to itsUnitholders. BGH generally makes quarterly cash distributions of substantiallyall of its available cash, generally defined as consolidated cash receipts lessconsolidated cash expenditures and such retentions for working capital,anticipated cash expenditures and contingencies as MainLine Management deemsappropriate. On October 26, 2006, MainLine Management declared a cashdistribution of $0.125 per unit (after the proration described below)payable on November 30, 2006 to Unitholders of record on November 6,2006. The initial quarterly distribution resulted from BGH’s proration of itsavailable cash in the third quarter based upon the closing date of BGH’s IPO onAugust 9, 2006, to the end of the quarter on September 30, 2006. Thetotal cash distribution to Unitholders with respect to the distribution of$0.125 per unit was approximately $3.5 million.

***Debt***

*BGH*

On August 9, 2006,BGH entered into a five-year $10.0 million revolving credit facility withSunTrust Bank, as both administrative agent and lender (the “BGH CreditAgreement”). The BGH Credit Agreement may be used for working capital and otherpartnership purposes. BGH has pledged all of the limited liability companyinterests in Buckeye GP LLC as security for its obligations under the BGHCredit Agreement. AtDecember 31, 2006, there were no borrowings under the BGH CreditAgreement.

TheBGH Credit Agreement permits BGH to prepay all loans under the credit facilityat any time without premium or penalty (other than customary LIBOR breakagecosts). Borrowings under the BGH Credit Agreement bear interest under one oftwo rate options, selected by BGH, equal to either:

·       thegreater of (1) the federal funds rate plus 0.5% and (2) SunTrust Bank’sprime commercial lending rate; or

·       LIBOR,plus a margin which can range from 0.40% to 1.40%, based on the ratingsassigned by Standard & Poor’s Rating Services and Moody’s InvestorServices to the senior unsecured non-credit enhanced long-term debt of Buckeye.

BGH’s ability to borrowamounts under the Credit Agreement is subject to satisfaction of certaincustomary conditions precedent to revolving loans and compliance with terms andconditions included in the Credit Agreement. The Credit Agreement defines “RestrictedSubsidiaries” as certain of BGH’s wholly owned subsidiaries. The CreditAgreement requires BGH to maintain leverage and funded debt coverage ratios.The leverage ratio covenant requires BGH to maintain, as of the last day ofeach fiscal quarter, a ratio of the total funded indebtedness of BGH and itsRestricted Subsidiaries, measured as of the last day of each fiscal quarter, tothe aggregate dividends and distributions received by BGH and its RestrictedSubsidiaries from Buckeye, plus all other cash received by BGH and theRestricted Subsidiaries, measured for the preceding twelve months, lessexpenses, of not more than 2.50 to 1.00. The funded debt coverage ratiocovenant requires BGH to maintain, as of the last day of each fiscal quarter, aratio of total consolidated funded debt of BGH and all of its subsidiaries tothe consolidated EBITDA, as defined in the BGH Credit Agreement, of BGH and allof its subsidiaries, measured for the preceding twelve months, of not more than5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 inconnection with future acquisitions.

TheBGH Credit Agreement prohibits BGH from declaring dividends or distributions ifany default or event of default, as defined in the BGH Credit Agreement, hasoccurred or would result from such a declaration. In addition, the BGH CreditAgreement contains covenants and provisions requiring BGH to 

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adhere to certain covenants and limiting the abilityof BGH and its Restricted Subsidiaries to, among other things:

·       incuror guarantee indebtedness;

·       makecertain negative pledges and grant certain liens;

·       makecertain loans, acquisitions and investments;

·       makeany material changes to the nature of BGH or Restricted Subsidiaries’ business;or

·       enterinto a merger, consolidation or sale of assets.

If anevent of default exists under the BGH Credit Agreement, the lender will be ableto terminate the BGH Credit Agreement and accelerate the maturity of alloutstanding loans, as well as exercise other rights and remedies. The followingare some of the events which would constitute an event of default under the BGHCredit Agreement:

·       failureto pay any principal, interest, fees, expenses or other amounts when due;

·       failureof any representation or warranty to be true and correct in any materialrespect;

·       failureto perform or otherwise comply with the covenants in the BGH Credit Agreementor other loan documents, subject to certain grace periods;

·       defaultby BGH or any Restricted Subsidiary on the payment of any other indebtedness inexcess of $5.0 million or default by Buckeye or any of its subsidiaries onthe payment of any indebtedness in excess of $25.0 million, or any defaultin the performance of any obligation or condition with respect to suchindebtedness beyond the applicable grace period if the effect of the default isto permit or cause the acceleration of the indebtedness;

·       bankruptcyor insolvency events involving BGH;

·       theentry against BGH of a judgment in excess of specified amounts, or otherwisehaving a material adverse effect, that is not stayed, discharged or deferredwithin specified periods;

·       achange in control of BGH (as such term is defined in the BGH Credit Agreement);

·       theinvalidity or unenforceability of any material provision in the BGH CreditAgreement or related documents; and

·       the occurrence of certainevents with respect to employee benefit plans subject to ERISA.

*Services Company*

Services Company had totaldebt outstanding of $26.3 million and $32.3 million at December 31,2006 and 2005 respectively, consisting of 3.60% Senior Secured Notes (the “3.60%ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-partylender. The 3.60% ESOP Notes were issued on May 4, 2004. The 3.60% ESOPNotes are collateralized by Services Company’s common stock and are guaranteedby Services Company. In addition, Buckeye has committed that, in the event thatthe value of Buckeye’s LP Units owned by Services Company falls below 125% ofthe balance payable under the 3.60% ESOP Notes, Buckeye will fund an escrowaccount with sufficient assets to bring the value of the total collateral (thevalue 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 toBuckeye when the value of Buckeye’s LP Units owned by Services Company’sreturns to an amount that exceeds the 125% minimum. At December 31, 2006,the value of Buckeye’s LP Units owned by Services Company exceeded the 125%requirement.

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*Buckeye*

At December 31, 2006,Buckeye had $995.0 million in aggregate outstanding long-term debt,consisting of $125.0 million of the 5.125% Notes due 2017, $275.0 millionof the 5.300% Notes due 2014, $300.0 million of the 45¤8%Notes due 2013, $150.0 million of the 63¤4% Notes due2033 and $145.0 million outstanding under a credit facility.

On November 13, 2006Buckeye entered into a new $400 million 5-year revolving creditfacility (the “Credit Facility”) with a syndicate of banks. The CreditFacility, which replaced Buckeye’s previous $400 million credit facility,contains a one-time expansion feature to $600 million subject to certainconditions. Borrowings under the Credit Facility are guaranteed by certain ofBuckeye’s subsidiaries. The Credit Facility matures on November 13, 2011,but may be extended for up to two additional 12-month periods undercertain circumstances. The weighted average interest rate on amountsoutstanding under the Credit Facility at December 31, 2006 was 5.59%.

Borrowings under theCredit Facility bear interest under one of two rate options, selected byBuckeye, equal to either (i) the greater of (a) the federal fundsrate plus 0.5% and (b) SunTrust Bank’s prime rate plus an applicablemargin, or (ii) LIBOR plus an applicable margin. The applicable margin isdetermined based on the current utilization level of the Credit Facility and onratings assigned by Standard & Poor’s and Moody’s Investor Servicesfor Buckeye’s senior unsecured non-credit enhanced long-term debt.  At December 31, 2006 andDecember 31, 2005, Buckeye had $145.0 million and $50.0 millionoutstanding under the Credit Facility and its predecessor credit facility,respectively, and had committed $2.1 million and $1.7 million insupport of letters of credit, respectively. At December 31, 2006, Buckeyehad $252.9 million available under the credit facility,

TheCredit Facility contains covenants and provisions that:

·       RestrictBuckeye and certain of its subsidiaries’ ability to incur additionalindebtedness based on a Funded Debt Ratio described below;

·       ProhibitBuckeye and certain of its subsidiaries from creating or incurring certainliens on their property;

·       ProhibitBuckeye and certain of its subsidiaries from disposing of property material totheir operations; and

·       Limitconsolidations, mergers and asset transfers by Buckeye and certain of itssubsidiaries.

The Credit Facilityrequires that Buckeye and certain of its subsidiaries maintain a maximum “FundedDebt Ratio” which is calculated using “EBITDA” as defined in the CreditFacility. The Credit Facility defines EBITDA for periods prior to the fourthquarter of 2006 as earnings before interest, taxes, depreciation, depletion,amortization and incentive compensation payments to Buckeye GP, and for periodscommencing after October 1, 2006 as earnings before interest, taxes,depreciation, depletion and amortization, in each case excluding the income ofcertain majority-owned subsidiaries and equity investments (but includingdistributions from those majority-owned subsidiaries and equity investments).

Buckeye’s Funded DebtRatio at the end of any quarterly period equals the ratio of the long-term debtof Buckeye and certain of its subsidiaries (including the current portion, ifany) to EBITDA for the previous four fiscal quarters. As of the end of anyfiscal quarter, the Funded Debt Ratio may not exceed 4.75 to 1.00, subject to aprovision for increases to 5.25 to 1.00 in connection with future acquisitions.At December 31, 2006 Buckeye’s Funded Debt Ratio was 4.40 to 1.00.

The Credit Facilityprovides for a “change of control” event of default that will be triggered if (i) Carlyle/Riverstoneceases to beneficially own 100% of the sole general partner of BGH, (ii) BGHceases to own 100% of Buckeye GP or (iii) Buckeye GP ceases to be the solegeneral partner of Buckeye.

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At December 31, 2006Buckeye was in compliance with all of the covenants under the Credit Facility.

***Cash Flows from Operations***

The components ofcash flows from operations for the years ended December 31, 2006, 2005 and2004 were as follows:

| ****                                          | ** ** | **Cash Flows from Operations** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **(In thousands)**                       | ** ** |
| Net income                                    |       | $                                             | 8,734      |   | $ | 6,986 |   | $ | 2,327 |   |
| Premium paid on  retirement of long-term debt |       | —                                        |       | — |   | 3,531 |   |
| Value of ESOP shares  released                |       | 4,077                                         |       | 5,012 |   | 7,148 |   |
| Depreciation and  amortization                |       | 39,629                                        |       | 32,408 |   | 21,546 |   |
| Non-controlling  interests                    |       | 103,066                                       |       | 99,704 |   | 78,140 |   |
| Changes in current  assets and liabilities.   |       | (8,310                                        | )          | (979 | ) | (13,758 | ) |
| Changes in other assets  and liabilities      |       | 3,568                                         |       | 5,832 |   | 5,272 |   |
| Other                                         |       | 4,428                                         |       | 1,974 |   | (179 | ) |
| Total                                         |       | $                                             | 155,192    |   | $ | 150,937 |   | $ | 104,027 |   |

 

Cash flows from operationswere $155.2 million in 2006, compared to $150.9 million in 2005, anincrease of $4.3 million. The principal reason for the increase was theincrease in the BGH’s net income of $1.7 million and an increase of $7.2 millionin depreciation and amortization, a non-cash expense, which were partiallyoffset by increased working capital requirements in 2006 as compared to 2005 of$7.3 million   Depreciation and amortizationincreased principally from the acquisition of new assets in 2005 and 2006, aswell as the Buckeye’s ongoing capital programs.

During 2006, the increasein cash used in working capital resulted primarily from increases in tradereceivables of $12.2 million and prepaid insurance and other currentassets of $22.7 million. The increase in trade receivables was principallydue to the expansion of the Buckeye’s business (the acquisition of the NGLPipeline and certain terminals along with the commencement of operations atWesPac—Memphis), as well as the timing of pipeline billings at year-end. Theincrease in prepaid and other current assets resulted from receivables of $6.3 millionrelated to activities on the ammonia pipeline purchased by the Buckeye in November 2005,increases of $8.6 million resulting from amounts determined to berecoverable from insurance companies related to environmental remediationexpenditures, an increase in prepaid insurance of $3.0 million as well asother increases totaling $4.0 million. A portion of the insurancereceivables related to amounts billed to the insurance companies, with thebalance relating to anticipated future expenditures at identified remediationsites. These decreases in cash were partially offset by increases in accountspayable of $8.0 million and in accrued and other current liabilities of$20.8 million. Of the increase in accrued and other current liabilities,$6.1 million related to payables arising from activity on the ammoniapipeline purchased in November 2005, $5.5 million related to thecurrent portion of environmental liabilities (a portion of which is recoverablefrom insurance as described above) and $7.3 million related to othercurrent liabilities

Cash flows from operationswere $150.9 million in 2005, compared to $104.0 million in 2004, anincrease of $46.9 million. The reasons for the increase were an increasein net income, an increase in depreciation and amortization of $10.9 million(a non-cash expense), an increase in non-controlling interest, and a decreasein working capital, which were partially offset by the premium paid onretirement of long-term debt that occurred in 2004 that did not recur in 2005.Net income in 2005 increased by $4.7 million over net income in 2004,which is a result of an increase in incentive distributions offset by anincrease in interest expense and the premium paid on the retirement oflong-term debt of $3.5 million. Depreciation and amortization increased by$10.9 million as a result of the inclusion of the Midwest Pipelines andTerminals for twelve months in 2005 compared to three months in 2004, as wellas the 

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additionof the Northeast Pipelines and Terminals in May 2005, along with ongoingcapital additions. Also, in 2004 BGH experienced a $13.8 million increasein working capital resulting from the operations Buckeye acquired with theMidwest Pipelines and Terminals which was not repeated in 2005 (working capitalincreased by $1.0 million). In 2005, increases in trade and otherreceivables of $6.4 million and construction and pipeline relocationreceivables of $1.2 million (related to timing of pipeline billings) wereprincipally offset by a reduction in prepaid and other current assets of $5.6 millionand an increase in accounts payable and accrued liabilities of $1.6 million.In 2004, trade receivables increased by $15.4 million and constructionreceivables increased by $4.4 million. The increase in trade receivableswas related to increased outstanding billings related primarily to the terminalassets acquired as part of the Midwest Pipelines and Terminals. In connectionwith terminal revenue, Buckeye bills on a monthly basis, compared to the weeklybasis used in pipeline billings. Construction and pipeline relocationreceivables increased in 2004 due to an increase in construction activity inthe fourth quarter. Prepaid and other current assets increased by $4.3 millionin 2004, principally related to Buckeye’s insurance receivables associated withenvironmental claims. Partially offsetting these reductions in 2004 cash flows fromoperations were increases in accounts payable of $1.9 million and accruedand other current liabilities of $8.7 million. The 2004 increase inaccrued and other current liabilities resulted from an increase in accruedinterest payable related to the timing of the semi-annual interest payments dueon Buckeye’s 5.30% Notes issued in October 2004 and an increase in Buckeye’saccrued environmental liabilities offset by a reduction in amounts accrued forBuckeye’s defined benefit plan.

***Cash Flows from Investing Activities***

Net cash used ininvesting activities for the years ended December 31, 2006, 2005 and 2004were as follows:

| ** **                           | ** ** | **Investing Activities** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(In millions)**        | ** ** |
| Capital expenditures                 |       | $                             | 92.8       |   | $ | 77.8 |   | $ | 72.8 |   |
| Acquisitions and equity  investments |       | 94.3                          |       | 210.2 |   | 761.0 |   |
| Other                                |       | (6.6                          | )          | 3.2 |   | (3.2 | ) |
| Total                                |       | $                             | 180.5      |   | $ | 291.2 |   | $ | 830.6 |   |

 

In 2006, Buckeye paid$94.3 million related to acquisitions, including $79.3 millionrelated to the NGL Pipeline, $13.0 million related to the acquisition ofthe Niles, Michigan terminal and approximately $2.0 million formiscellaneous asset acquisitions. The primary source of other cash of $6.6 millionin 2006 relates to the liquidation of restricted cash of $5.1 million as aresult of the re-payment the term loan as part of the use of proceeds of BGH’s  IPO.

In 2005, cash used for acquisitions and equityinvestments consisted of $176.3 million for the Northeast Pipelines andTerminals with the balance expended in connection with a terminal acquisitionin Taylor, Michigan, a deposit of $7.7 million for the NGL Pipeline, thepurchase of an ammonia pipeline located near Houston, TX and the acquisition ofthe 25% of WesPac—Reno not previously owned by Buckeye. In 2004, acquisitions andequity investments consisted of the acquisition of the Midwest Pipelines andTerminals. In addition, in December 2005, Buckeye acquired anapproximately 26-mile pipeline and a 40% interest in Muskegon PipelineLLC (“Muskegon”), which owns an approximately 170-mile pipeline whichextends from Griffith, IN to Muskegon, MI (together, the “Pipeline Interests”).The Pipeline Interests were acquired in exchange for consideration thatincluded capacity lease agreements (with purchase options) related to one of Buckeye’spipelines and a terminal. Buckeye has recorded the Pipeline Interests at theirestimated fair values of $20.1 million, with $4.8 million allocatedto the 26-mile pipeline and $15.3 million allocated to the 40%interest in Muskegon.

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Capital expendituresare summarized below:

| ** **                        | ** ** | **Capital Expenditures** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(In millions)**        | ** ** |
| Sustaining capital  expenditures: |       |                          |       |   |   |   |   |
| Operating infrastructure          |       | $                             | 20.6       |   | $ | 12.9 |   | $ | 11.0 |   |
| Pipeline and tank  integrity      |       | 9.6                           |       | 10.5 |   | 21.8 |   |
| Total sustaining                  |       | 30.2                          |       | 23.4 |   | 32.8 |   |
| Expansion and cost  reduction     |       | 62.6                          |       | 54.4 |   | 40.0 |   |
| Total                             |       | $                             | 92.8       |   | $ | 77.8 |   | $ | 72.8 |   |

 

In 2006, Buckeye incurred$30.2 million of sustaining capital expenditures and $62.6 million ofexpansion and cost reduction expenditures. The increase in sustaining capitalexpenditures related principally to construction of leasehold improvements toBuckeye’s new administrative offices in Breinigsville, PA and transitioncapital expenditures related to assets purchased in late 2005 and in 2006. Expansionprojects in 2006 included $12.4 million to complete an approximate 11-milepipeline and related terminal facilities to serve the Memphis InternationalAirport, $12.1 million for the addition of pipelines, tankage andequipment to meet new handling requirements for ultra-low sulfur diesel, and$11.9 million for a capacity expansion in Illinois to handle additionalLPG volumes. Other expansion projects underway in 2006 included variousethanol-blending and butane-blending projects at pipeline stations and terminalsowned by Buckeye, and an expansion of pipeline and terminal infrastructure atthe Memphis International Airport to accommodate a new generation of cargoplanes for Federal Express Corporation. The Memphis International Airportproject is owned by WesPac Pipelines—Memphis, a 75%-owned subsidiary ofBuckeye.

Buckeye expects to spendapproximately $80.0 million in capital expenditures in 2007, of whichapproximately $30.0 million is expected to relate to sustaining capitalexpenditures and $50.0 million is expected to relate to expansion and costreduction projects. Sustaining capital expenditures include renewals andreplacement of tank floors and roofs and upgrades to station and terminallingequipment, field instrumentation and cathodic protection systems.

During 2005, Buckeye’scapital expenditures of $77.8 million increased by $5.0 million from$72.8 million in capital expenditures in 2004. In 2005, sustaining capitalexpenditures decreased by $9.4 million to $23.4 million principallyas a result of a reduction in pipeline and tank integrity capital expendituresof $11.3 million, which was only partially offset by an increase inoperating infrastructure expenditures of $1.9 million. The reduction inpipeline and tank integrity expenditures occurred because (1) Buckeyecompleted much of the integrity work required, including electronic internalinspections, other integrity expenditures and associated repairs andimprovements, as part of its comprehensive plan to comply with legalrequirements and to improve the reliability of Buckeye’s pipelines andterminals (see “Business—Regulation—Environmental Regulation” and “Business—Regulation—Pipelineand Terminal Maintenance and Safety Regulation”) and (2) an increasingamount of Buckeye’s integrity expenditures were charged to expense in 2005compared to 2004.

Until December 31,2005, Buckeye’s initial integrity expenditures had been capitalized as partof  pipeline cost when such expendituresimproved or extended the life of the pipeline or related assets. Subsequentintegrity expenditures have been expensed as incurred. As of January 1,2006, Buckeye began charging all internal inspection integrity expenditures toexpense, whether or not such expenditures were for the initial or subsequentinternal inspection.   In 2006, approximately $10.5 million ofintegrity costs were expensed compared to $3.0 million in 2005 and $0.9 millionin 2004. Buckeye expects to charge approximately $10.0 million ofintegrity expenditures to expense in 2007.

Expansion and cost reductioncapital expenditures were $54.4 million in 2005, an increase of $14.4 millionfrom $40.0 million in 2004. The majority of these expenditures related totwo major projects. 

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During2005, Buckeye expended $33.7 million on an approximately 11-milepipeline and associated terminal to serve Federal Express at the MemphisInternational Airport. The project entered commercial service in the firstquarter of 2006. In 2004, approximately $10.3 million was expended inconnection with this project. Also in 2005, Buckeye expended approximately $9.3 millionto complete a major expansion of Buckeye’s Laurel pipeline across Pennsylvania.In 2004, approximately $11.0 million was expended in connection with thisproject.  The remaining $11.4 millionof expansion and cost reduction capital expended in 2005 related to variousother projects including a butane blending project associated with Buckeye’sMacungie, Pennsylvania station. In 2004, Buckeye expended approximately $12.8 millionto complete the replacement of approximately 45 miles of pipeline in theMidwest between Lima, Ohio and Huntington, Indiana. The pipeline replacementproject improved the reliability of the pipeline and expanded its capacity.

***Cash Flows fromFinancing Activities***

BGH’s, Buckeye’s, andServices Company’s financing transactions are summarized as follows:

*Equity Securities:*

As described above, BGHraised approximately $168.3 million, net of underwriters’ discount andexpenses, in the IPO. BGH used the proceeds from the offering plus availablecash from operations and the liquidation of MainLine’s interest expense reserveaccount and its three derivative instruments, to repay principal and accruedinterest on MainLine’s then-outstanding term loan, as well as makedistributions of $7.7 million to BGH’s pre-IPO equity owners.

On March 7, 2006,Buckeye issued 1.5 million LP Units in an underwritten public offering at$44.22 per LP Unit. Proceeds from the offering, after underwriter’sdiscount of $1.45 per LP Unit and offering expenses, were approximately$64.1 million and were used to reduce amounts outstanding under the CreditFacility.

On May 17, 2005,Buckeye issued 2.5 million LP Units in an underwritten public offering at$45.20 per LP Unit. Proceeds from the offering, after underwriters’ discount of$1.80 per LP Unit and offering expenses, were approximately $108.4 million.Proceeds from the offering were used to reduce amounts outstanding under theCredit Facility.

On February 7, 2005,Buckeye issued 1.1 million LP Units in an underwritten public offering at$45.00 per LP Unit. Proceeds from the offering, after underwriters’ discount of$1.46 per LP Unit and offering expenses, were approximately $47.7 million.Proceeds from the offering were used to reduce amounts outstanding under theCredit Facility and to fund Buckeye’s expansion and cost reduction capitalexpenditures.

On October 19, 2004,Buckeye issued 5.5 million LP Units in an underwritten public offering at$42.50 per LP Unit. Proceeds from the LPUnit offering were approximately $223.3 million after underwriters’discount of $1.806 per LP Unit and offering expenses and were used to reduceamounts outstanding under the Credit Facility.

On May 4, 2004,MainLine, the predecessor to BGH, issued: (1) 14,595 Class A Units toMainLine Management LLC for $14,595; (2) 134,985,405 Class A Units toCarlyle/Riverstone BPL Holdings II, L.P. for $134,985,405; (3) 8,000,000 Class AUnits to Trust Under Agreement of Alfred W. Martinelli dated December 29,1992, David J. Martinelli, Susan Martinelli Shea and William H. Shea, Jr.,Trustees F/B/O Susan Martinelli Shea for $8,000,000; (4) 1,400,000 Class AUnits to Stephen C. Muther for $1,400,000; (5) 500,000 Class A Unitsto Brian K. Jury for $500,000; (6) 500,000 Class A Units to TrustUnder Agreement of Alfred W. Martinelli dated December 29, 1992, David J.Martinelli and William H. Shea, Jr., Trustees F/B/O David Martinelli for$500,000; (7) 400,000 Class A Units to Eric A. Gustafson for 

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$400,000;and (8) 150,000 Class A Units to Robert A. Malecky for $150,000.Aggregate proceeds of approximately $145.95 million were used to purchaseMainLine’s predecessor, Glenmoor*.*

*Debt proceeds and payments*

On June 30, 2005,Buckeye sold $125.0 million aggregate principal amount of its 5.125% Notesdue July 1, 2017 in an underwritten public offering. Proceeds from thenote offering, after underwriters’ fees and expenses, were approximately $123.5 million.Proceeds from the offering were used in part to repay $122.0 million thatwas outstanding under the Credit Facility.

On October 1, 2004,in connection with the acquisition of the Midwest Pipelines and Terminals,Buckeye borrowed a total of $490.0 million, consisting of $300.0 millionunder a 364-day interim loan (the “Interim Loan”) and $190.0 millionunder the Credit Facility. On October 12, 2004, Buckeye sold $275.0 millionaggregate principal amount of its 5.300% Notes due 2014 in an underwrittenpublic offering. Proceeds from the note offering, after underwriter’s discountand commissions, were approximately $272.1 million. Proceeds from the noteoffering, together with additional borrowings under the Credit Facility, wereused to repay the Interim Loan.

In addition to the above,Buckeye borrowed $177.0 million, $250.0 million and $320.0 million,and repaid $82.0 million, $273.0 million and $247.0 millionunder the Credit Facility (and its predecessor facility) in 2006, 2005 and2004, respectively.

Payments on ServiceCompany’s ESOP loans were $6.0 million, $5.6 million and $49.3 millionin 2006, 2005 and 2004 respectively.

In December 2004,MainLine entered into a term loan for $180.0 million. The proceeds fromthe term loan were used to refund the amounts outstanding under a prior creditfacility and pay a distribution of $80 million. The $169.0 millionamount outstanding under the term loan was repaid with proceeds of BGH’s IPO onAugust 9, 2006. In connection with the repayment of the loan, BGH expensed$1.6 million of previously deferred financing costs, and recorded areduction to interest and debt expense of $1.9 million as a result ofliquidating an interest rate cap and two interest rate swaps agreements.

*Distributions*

Distributions tonon-controlling interests consisting primarily of Buckeye’s distributions toholders of its LP Units increased to $113.5 million in 2006 compared to$97.8 million in 2005 and $74.9 million in 2004. Distributions in2006 increased over 2005 and distributions in 2005 increased over 2004primarily as a result of increases in Buckeye’s LP Unit distribution rate andthe issuances of 1.5 million LP Units in 2006, 3.6 million LP Unitsin 2005 and 5.5 million LP Units in 2004.

Total distributions by BGHto its Unitholders in 2006 amounted to $19.0 million in 2006, of which$3.5 million was paid to Unitholders after the effective date of the IPO August 9,2006.

*Other Financing*

In December 2004, Buckeye terminated an interestrate swap agreement associated with its 4.625% Notes due July 15,2013 and received proceeds of $2.0 million. In 2004 interest expense wasreduced by $2.6 million as a result of the swap agreement. In accordancewith FASB Statement No. 133—“Accounting for Derivative Instruments andHedging Activities,” Buckeye deferred the $2.0 million gain as anadjustment to the fair value of the hedged portion of Buckeye’s debt and isamortizing the gain as a reduction of interest expense over the remaining termof the hedged debt. Interest expense was reduced by $0.2 million duringeach of the years ended December 31, 2006 and 2005 related to theamortization of the gain on the interest rate swap.

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*Operating Leases*

The Operating Subsidiaries lease certain land andrights-of-way. Minimum future lease payments for these leases as of December 31,2006 were approximately $4.9 million for each of the next three years.Substantially all of these lease payments may be canceled at any time shouldthe leased property no longer be required for operations.

Buckeye leases space in an office building and certainoffice equipment. Buckeye leases certain computing equipment and automobiles. Futureminimum lease payments under these non-cancelable operating leases at December 31,2006 were as follows: $1.3 million for 2007, $1.1 million for 2008,$0.9 million for 2009, $1.0 million for 2010, $1.1 million for2011 and $10.2 million in the aggregate thereafter.

Rent expense underoperating leases was $10.3 million, $8.7 million and $8.5 millionfor 2006, 2005 and 2004, respectively.

*ContractualObligations*

Contractual obligations are summarized in thefollowing table:

| ** **                                            | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                      | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                                            | ** ** | **(In thousands)**                   | ** ** |
| Long-term debt                                        |       | $                                         | 1,021,322  |   | $ | 6,037 |   | $ | 12,583 |   | $ | 152,702 |   | $ | 850,000 |   |
| Interest payable  on fixed long-term debt obligations |       | 544,205                                   |       | 46,216 |   | 91,482 |   | 90,259 |   | 316,248 |   |
| Acquisitions                                          |       | 21,000                                    |       | 21,000 |   | — |   | — |   | — |   |
| Operating leases                                      |       | 15,600                                    |       | 1,311 |   | 1,993 |   | 2,058 |   | 10,238 |   |
| Rights-of-way  payments                               |       | 24,365                                    |       | 4,873 |   | 9,746 |   | 9,746 |   | — |   |
| Purchase  obligations                                 |       | 25,700                                    |       | 25,700 |   | — |   | — |   | — |   |
| Total contractual cash  obligations                   |       | $                                         | 1,652,192  |   | $ | 105,137 |   | $ | 115,804 |   | $ | 254,765 |   | $ | 1,176,486 |   |
|                                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest payable on fixed long-term debt obligationsincludes semi-annual payments required for Buckeye’s 45¤8%Notes, its 63¤4%Notes, its 5.300% Notes and its 5.125% Notes. It also includes interest due onServices Company’s 3.6% ESOP Notes.

Amounts for acquisitions represent amounts for whichBuckeye was contractually obligated to close in January 2007, includingtwo refined petroleum products terminals located in Flint, Michigan andWoodhaven, Michigan.  Buckeye closed onthese acquisitions on January 16, 2007.

Purchase obligations generally represent commitmentsfor recurring operating expenses or capital projects.

Buckeye’s obligations related to its pension andpostretirement benefit plans are discussed in Note 13 in its accompanyingconsolidated financial statements.

Buckeye’s interest payableunder its Credit Facility is not reflected in the above table because suchamounts depend on outstanding balances and interest rates which will vary fromtime to time. Based on balances outstanding and rates in effect at December 31,2006, annual interest payments would be $8.1 million.

*EnvironmentalMatters*

The Operating Subsidiariesare subject to federal, state and local laws and regulations relating to theprotection of the environment. These laws and regulations, as well as Buckeye’sown standards relating to 

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protectionof the environment, cause the Operating Subsidiaries to incur current andongoing operating and capital expenditures. Environmental expenses are incurredin connection with emergency response activities associated with the release ofpetroleum products to the environment from Buckeye’s pipelines and terminals,and in connection with longer term environmental remediation efforts which mayinvolve, for example, groundwater monitoring and treatment. Buckeye regularlyincurs expenses in connection with these environmental remediation activities. In2006, the Operating Subsidiaries incurred operating expenses of $6.2 millionand at December 31, 2006, had $29.2 million accrued for environmentalmatters. At December 31, 2006, Buckeye estimates that approximately $8.0 millionof environmental expenditures incurred will be covered by insurance. Theserecovery amounts have not been included in expense in the financial statements.Buckeye maintains environmental liability insurance covering all of itspipelines and terminals with a per occurrence deductible in the amount of $3.0 million.Expenditures, both capital and operating, relating to environmental matters areexpected to continue due to Buckeye’s commitment to maintaining highenvironmental standards and to complying with increasingly rigorousenvironmental laws.

**Employee StockOwnership Plan**

Services Company provides an employee stock ownershipplan (the “ESOP”) to the majority of its employees hired before September 16,2004. Effective September 16, 2004, new employees do not participate inthe ESOP, as well as certain employees covered by a union multiemployer pensionplan. The ESOP owns all of the outstanding common stock of Services Company.

Services Company stock isreleased to employee accounts in the proportion that current payments ofprincipal and interest on the 3.6% ESOP Notes bear to the total of allprincipal and interest payments due under the 3.6% ESOP Notes. Individualemployees are allocated shares based upon the ratio of their eligiblecompensation to total eligible compensation. Eligible compensation generallyincludes base salary, overtime payments and certain bonuses. Except for theperiod March 1, 2003 through November 1, 2004, Services Company stockheld in employee accounts received stock dividends in lieu of cash. The ESOPwas amended to eliminate the payment of stock dividends on allocations madeafter February 28, 2003. Based upon provisions contained in the AmericanJobs Creation Act of 2004, the plan was amended further to reinstate thisfeature on allocations made after November 1, 2004. Total ESOP relatedcosts charged to earnings were $5.6 million and $6.9 million for theyears ended December 31, 2006 and 2005, respectively, and $3.4 millionfor the period January 1 to May 4, 2004 and $6.6 million for theperiod May 4 to December 31, 2004.

**Off-Balance SheetArrangements**

BGH does not have anyoff-balance sheet arrangements except for operating leases.

**Critical AccountingPolicies and Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to selectappropriate accounting principles from those available, to apply thoseprinciples consistently and to make reasonable estimates and assumptions thataffect revenues and associated costs as well as reported amounts of assets andliabilities. The following describes the estimation risk underlying BGH’scritical accounting policies and estimates:

*DepreciationMethods and Estimated Useful Lives of Property, Plant and Equipment*

Property, plant and equipment is generally recorded atcost or fair value. Approximately 79% of BGH’s consolidated assets consist ofproperty, plant and equipment such as pipeline and related transportationfacilities, land, rights-of-way, buildings, leasehold improvements andmachinery and equipment. The most significant of these assets are pipelines andrelated facilities, which, consistent with 

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industry practice, aregenerally depreciated on a straight line basis over an estimated life of50 years. Depreciation is the systematic and rational allocation of anasset’s cost or fair value, less its residual value (if any), to the periods itbenefits. Straight line depreciation results in depreciation expense beingincurred evenly over the life of an asset.

The determination of an asset’s useful life requiresassumptions regarding a number of factors including technological change,normal depreciation and actual physical usage. If any of these assumptionssubsequently change, the estimated useful life of the asset could change andresult in an increase or decrease in depreciation expense that could have amaterial impact on our financial statements.

At December 31, 2006and 2005, the net book value of BGH’s consolidated property plant and equipmentwas $1.7 billion and $1.6 billion, respectively. Depreciation expensewas $39.0 million and $32.2 million for the years ended December 31,2006 and 2005, respectively. BGH does not believe there is a reasonablelikelihood that there will be a material change in the future estimated usefullife of these assets. In the past, BGH has generally not deemed it necessary tomaterially change the depreciable lives of its assets. However, a 10% reductionin the depreciable life of these assets, from 50 to 45 years, wouldincrease annual depreciation expense, and reduce operating income byapproximately $3.9 million annually.

*Reserves forEnvironmental Matters*

As discussed under “EnvironmentalMatters” above, Buckeye’s operating subsidiaries are subject to federal, stateand local laws and regulations relating to the protection of the environment.Environmental expenditures that relate to current operations are expensed orcapitalized as appropriate. Expenditures that relate to existing conditionscaused by past operations, and which do not contribute to current or futurerevenue generation, are expensed. Liabilities are recorded when environmentalassessments and/or clean-ups are probable, and the costs can be reasonablyestimated based upon past experience and advice of outside engineering,consulting and law firms. Generally, the timing of these accruals coincideswith Buckeye’s commitment to a formal plan of action. Accrued environmentalremediation related expenses include estimates of direct costs of remediationand indirect costs related to the remediation effort, such as compensation andbenefits for employees directly involved in the remediation activities and feespaid to outside engineering, consulting and law firms. Historically, BGH’sestimates of direct and indirect costs related to remediation efforts havegenerally not required material adjustments. However the accounting estimatesrelative to environmental matters are uncertain because; (1) estimatedfuture expenditures related to environmental matters are subject to costfluctuations and can change materially, (2) unanticipated liabilities mayarise in connection with environmental remediation projects and may impact costestimates, and (3) changes in federal, state and local environmentalregulations can significantly increase the cost or potential liabilitiesrelated to environmental matters. Buckeye maintains insurance which coverscertain environmental expenditures. During 2006, 2005 and 2004, Buckeye’soperating subsidiaries incurred environmental related operating expenses, netof insurance recoveries, of $6.2 million, $9.3 million and $6.2 million,respectively. At December 31, 2006 and 2005, Buckeye’s operatingsubsidiaries had accrued $29.2 million and $21.4 million,respectively, for environmental matters. The environmental accruals are revisedas new matters arise, or as new facts in connection with environmental remediationprojects require a revision of estimates previously made with respect to theprobable cost of such remediation projects. Changes in estimates ofenvironmental remediation for each remediation project will affect operatingincome on a dollar-for-dollar basis up to Buckeye’s self-insurance limit.Buckeye’s self-insurance limit is currently $3.0 million per occurrence.

**Related PartyTransactions**

With respect to relatedparty transactions see Note 17 to the consolidated financial statements andItem 13 “Certain Relationships and Related Transactions and DirectorIndependence.”

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**Recent AccountingPronouncements**

See Note 2 to BGH’sconsolidated financial statements for a description of certain new accountingpronouncements issued in the year ended December 31, 2006.

**Forward-LookingInformation**

The information contained above in this Management’sDiscussion and Analysis and elsewhere in this Annual Report on Form 10-K includes “forward-looking statements,” withinthe meaning of the Private Securities Litigation Reform Act of 1995. Suchstatements use forward-looking words such as “anticipate,” “continue,” “estimate,”“expect,” “may,” “believe,” “will,” or other similar words, although someforward-looking statements are expressed differently. These statements discussfuture expectations and contain projections. Specific factors that could causeactual results to differ from those in the forward-looking statements include,but are not limited to: (1) BGH’s ability to pay distributions toits Unitholders; (2) BGH’s expected receipt of distributions and incentivedistributions from Buckeye; (3) anticipated trends in Buckeye’s business; (4) pricetrends and overall demand for petroleum products in the United States ingeneral and in Buckeye’s service areas in particular (which may be affected byeconomic activity, weather, alternative energy sources, conservation andtechnological advances); (5) changes, if any, in laws and regulations,including, among others, safety, tax and accounting matters or Federal EnergyRegulatory Commission regulation of Buckeye’s tariff rates; (6) liability for environmental claims; (7) securityissues affecting Buckeye’s assets, including, among others, potential damage toits assets caused by acts of war or terrorism; (8) unanticipated capitalexpenditures and operating expenses to repair or replace Buckeye’s assets; (9) availabilityand cost of insurance on Buckeye’s assets and operations; (10) Buckeye’sability to successfully identify and complete strategic acquisitions and make costsaving changes in operations; (11) expansion in the operations of Buckeye’scompetitors; (12) Buckeye’s ability to integrate any acquired operations intoits existing operations; (13) shut-downs or cutbacks at major refineries thatuse Buckeye’s services; (14) deterioration in Buckeye’s labor relations; (15)changes in real property tax assessments; (16) disruptions to the airtravel system; (17) interest rate fluctuations and other capital marketconditions; (18) BGH’s future results of operations; (19) BGH’s liquidityand ability to finance its activities; (20) market conditions in Buckeye’sindustry; (21) conflicts of interest between Buckeye, its general partner andBGH; (22) the treatment of Buckeye or BGH as a corporation for federal incometax purposes or if BGH or Buckeye become subject to entity-level taxation forstate tax purposes; and (23 the impact of governmental legislation andregulation on BGH and Buckeye.

These factors are notnecessarily all of the important factors that could cause actual results todiffer materially from those expressed in any of our forward-looking statements.Other unknown or unpredictable factors could also have material adverse effectson future results. Although the expectations in the forward-looking statementsare based on our current beliefs and expectations, we do not assumeresponsibility for the accuracy and completeness of such statements. Whenconsidering forward-looking statements, you should keep in mind the riskfactors and other cautionary statements in this Report on Form 10-K,including those described in the “Risk Factors” section of this Report. Further,we undertake no obligation to update publicly any forward-looking statementwhether as a result of new information or future events.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk

***Market Risk—Trading Instruments***

Currently, neither BGH norBuckeye has any instruments and both do not currently engage in hedgingactivity with respect to trading instruments.

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***Market Risk—Other than TradingInstruments***

Buckeye is exposed to fair value risk with respect tothe fixed portion of its financing arrangements (the 5.125% Notes, the 5.30%Notes, the 4.625% Notes and the 6.750% Notes) and cash flow risk with respectto its variable rate obligations on its Credit Facility. Fair value riskrepresents the risk that the value of the fixed portion of the respectivefinancing arrangements will rise or fall depending on changes in interestrates. Cash flow risk represents the risk that interest costs related to theCredit Facility will rise or fall depending on changes in interest rates.

At December 31, 2006, Buckeye had total fixeddebt obligations having a face value of $850 million, consisting of $125 millionof the 5.125% Notes, $275 million of the 5.30% Notes, $300 million ofthe 4.625% Notes and $150 million of the 6.750% Notes. Services Companyhad fixed debt obligations of approximately $26.3 million at December 31,2006 of its 3.60% ESOP Notes. The fair value of these obligations at December 31,2006 was approximately $990 million. A 1% decrease in rates forobligations of similar maturities would have increased the fair value of theseobligations by $65.0 million at December 31, 2006. Buckeye’s variabledebt obligation under the Credit Facility was $145 million at December 31,2006. Based on the balances outstanding at December 31, 2006, a 1%increase or decrease in interest rates would increase or decrease consolidatedannual interest expense by $1.5 million.

In December 2004, Buckeye terminated an interestrate swap agreement associated with the 4.625% Notes due July 15, 2013 andreceived proceeds of $2.0 million. In 2004 interest expense was reduced by$2.6 million as a result of the swap agreement. In accordance with FASBStatement No. 133—“Accounting for Derivative Instruments and HedgingActivities,” Buckeye deferred the $2.0 million gain as an adjustment tothe fair value of the hedged portion of Buckeye’s debt and is amortizing thegain as a reduction of interest expense over the remaining term of the hedgeddebt. Interest expense was reduced by $0.2 million during each of theyears ended December 31, 2006 and 2005 related to the amortization of thegain on the interest rate swap.

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**Item 8.****                        *Financial Statements and Supplementary Data***

**BUCKEYE GP HOLDINGSL.P.**

**Index to FinancialStatements**
|                                                                                                                                                                                                                                        | ** ** | Page  Number |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| Financial Statements and  Report of Independent Registered Public Accounting Firm                                                                                                                                                      | ** ** | 73           |
| Report of Independent Registered Public Accounting  Firm                                                                                                                                                                               | ** ** | 74           |
| Consolidated Statements of Income for the years ended  December 31, 2006 and 2005, the period May 4, 2004-December 31,  2004 and the period January 1, 2004-May 4, 2004 (Predecessor)                         | ** ** | 75           |
| Consolidated  Balance Sheets—December 31, 2006 and 2005                                                                                                                                                                      | ** ** | 76           |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006 and 2005, the period May 4, 2004-December 31,  2004 and the period January 1, 2004-May 4, 2004 (Predecessor)                     | ** ** | 77           |
| Consolidated Statement of Changes in Owners’ Equity  for the years ended December 31, 2006 and 2005, the period May 4,  2004-December 31, 2004 and the period January 1, 2004-May 4,  2004 (Predecessor) | ** ** | 78           |
| Notes to Consolidated Financial Statements                                                                                                                                                                                             | ** ** | 80           |

 

Schedules are omitted because they are either notapplicable or not required or the information required is included in theconsolidated financial statements or notes thereto.

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Partners of Buckeye GP Holdings L.P.

We have audited the accompanying consolidated balancesheets of Buckeye GP Holdings L.P. and subsidiaries, formerly MainLine L.P. andsubsidiaries, (the “Successor”) as of December 31, 2006 and 2005, and therelated consolidated statements of income, cash flows, and partners’ capital ofthe Successor for the years ended December 31, 2006 and 2005 and theperiod May 4, 2004 to December 31, 2004 and of Glenmoor, Ltd. andsubsidiaries (the “Predecessor”) for the period January 1, 2004 to May 4,2004 (collectively, the “Companies”). These consolidated financial statementsare the responsibility of the Companies’ management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Companies are not required to have, nor were we engaged toperform, an audit of their internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompanies’ internal control over financial reporting. Accordingly, we expressno such opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

As discussed in Notes 2 and 13 to the consolidatedfinancial statements, the Successor adopted the provisions of Statement ofFinancial Accounting Standards No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106, and 132(R),” as of December 31, 2006.

In our opinion, such consolidatedfinancial statements present fairly, in all material respects, the financialposition of the Successor as of December 31, 2006 and 2005, and theresults of its operations and its cash flows for the years ended December 31,2006 and 2005 and the period May 4, 2004 to December 31, 2004, andthe Predecessor’s results of its operations and its cash flows for the period January 1,2004 to May 4, 2004 in conformity with accounting principles generallyaccepted in the United States of America.

*DELOITTE & TOUCHE LLP*Philadelphia, PennsylvaniaMarch 21, 2007

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**BUCKEYE GP HOLDINGS L.P.CONSOLIDATED STATEMENT OF INCOME(with Predecessor information prior to May 4, 2004 Commencement ofOperations)(In thousands, except per Unit amounts)**
|                                                                                                    | ** ** | ** ** | ** ** | **Buckeye GP Holdings L.P.** | ** ** | **Predecessor**                           | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                         | ** ** | ** ** | ** ** | **Year ended  December 31,**      | ** ** | **May 4 to  December 31,** | ** ** | **January 1 to  May 4,** | ** ** |
| ** **                                                                                         | ** ** | **Note**   | ** ** | **2006**                                    | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2004** | ** ** |
| Revenue                                                                                            |       | 2,  20     |       | $                                           | 461,760    |                                      | $          | 408,446 |   |   | $ | 226,014 |   |   |   | $ | 97,529 |   |   |
| Costs and  expenses:                                                                               |       |       |       |                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating expenses                                                                                 |       | 5          |       | 227,374                                     |       | 196,750                                   |       |   | 116,203 |   |   |   | 49,712 |   |   |
| Depreciation and amortization                                                                      |       | 2,6,8,9,20 |       | 39,629                                      |       | 32,408                                    |       |   | 15,158 |   |   |   | 6,388 |   |   |
| General and administrative expenses                                                                |       | 5,  20     |       | 29,884                                      |       | 23,419                                    |       |   | 13,888 |   |   |   | 6,341 |   |   |
| Total costs and expenses                                                                           |       |       |       | 296,887                                     |       | 252,577                                   |       |   | 145,249 |   |   |   | 62,441 |   |   |
| Operating income                                                                                   |       | 20         |       | 164,873                                     |       | 155,869                                   |       |   | 80,765 |   |   |   | 35,088 |   |   |
| Other income  (expenses):                                                                          |       |       |       |                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Investment income                                                                                  |       |       |       | 1,410                                       |       | 884                                       |       |   | 253 |   |   |   | 183 |   |   |
| Interest and debt expense                                                                          |       |       |       | (60,702                                     | )          | (55,366                                   | )          |   | (28,212 | ) |   |   | (9,756 | ) |   |
| Premium paid on retirement of debt                                                                 |       |       |       | —                                      |       | —                                    |       |   | — |   |   |   | (3,531 | ) |   |
| Total other income (expenses)                                                                      |       |       |       | (59,292                                     | )          | (54,482                                   | )          |   | (27,959 | ) |   |   | (13,104 | ) |   |
| Income before equity income and non-controlling  interest expense                                  |       |       |       | 105,581                                     |       | 101,387                                   |       |   | 52,806 |   |   |   | 21,984 |   |   |
| Equity income                                                                                      |       |       |       | 6,219                                       |       | 5,303                                     |       |   | 3,707 |   |   |   | 1,970 |   |   |
| Non-controlling  interest expense                                                                  |       |       |       | (103,066                                    | )          | (99,704                                   | )          |   | (55,310 | ) |   |   | (22,830 | ) |   |
| Net income                                                                                         |       |       |       | 8,734                                       |       | $                                         | 6,986      |   |   | $ | 1,203 |   |   |   | $ | 1,124 |   |   |
| Less: Net income  prior to initial public offering on August 9, 2006                          |       |       |       | (6,135                                      | )          |                                      |       |   |   |   |   |   |   |   |   |
| Net income subsequent  to initial public offering on August 9, 2006 to December 31, 2006 |       |       |       | $                                           | 2,599      |                                      |       |   |   |   |   |   |   |   |   |   |
| Net income per  partnership unit:                                                                  |       |       |       |                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                                                              |       | 18         |       | $                                           | 0.09       |                                      |       |   |   |   |   |   |   |   |   |   |
| Diluted                                                                                            |       | 18         |       | $                                           | 0.09       |                                      |       |   |   |   |   |   |   |   |   |   |
| Weighted average  number of units outstanding:                                                     |       |       |       |                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                                                              |       |       |       | 27,891                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted                                                                                            |       |       |       | 28,300                                      |       |                                      |       |   |   |   |   |   |   |   |   |

 

See Notes to consolidated financial statements.

75

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**BUCKEYE GP HOLDINGS L.P.CONSOLIDATED BALANCE SHEET(In thousands)**
|                                                                               | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **Notes**  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Assets:                                                                       |       |       |       |                  |       |   |   |
| Current assets:                                                               |       |       |       |                  |       |   |   |
| Cash and cash equivalents                                                     |       | 2          |       | $                     | 20,220     |   | $ | 28,984 |   |
| Trade receivables                                                             |       | 2          |       | 51,030                |       | 38,864 |   |
| Construction and pipeline relocation receivables                              |       | 2          |       | 12,189                |       | 10,571 |   |
| Inventories                                                                   |       | 2          |       | 14,286                |       | 12,997 |   |
| Prepaid and other current assets                                              |       | 7          |       | 34,175                |       | 12,325 |   |
| Total current assets                                                          | ** ** | ** ** |       | 131,900               |       | 103,741 |   |
| Property, plant and equipment, net                                            |       | 2,4,8      |       | 1,738,199             |       | 1,587,741 |   |
| Restricted cash                                                               |       | 2          |       | —                |       | 5,117 |   |
| Goodwill                                                                      |       | 2,6        |       | 234,603               |       | 234,603 |   |
| Other non-current assets                                                      |       | 4,6,9      |       | 107,883               |       | 109,630 |   |
| Total assets                                                                  | ** ** | ** ** |       | $                     | 2,212,585  |   | $ | 2,040,832 |   |
| Liabilities and  partners’ capital:                                      |       |       |       |                  |       |   |   |
| Current  liabilities:                                                         |       |       |       |                  |       |   |   |
| Current portion of long-term debt                                             |       | 11         |       | $                     | 6,037      |   | $ | 7,811 |   |
| Accounts payable                                                              | ** ** | ** ** |       | 26,650                |       | 18,648 |   |
| Accrued and other current liabilities                                         |       | 5,  10     |       | 69,774                |       | 48,824 |   |
| Total current liabilities                                                     |       |       |       | 102,461               |       | 75,283 |   |
| Long-term debt                                                                |       | 11         |       | 1,014,412             |       | 1,096,849 |   |
| Other non-current liabilities                                                 |       | 5,12,13    |       | 82,570                |       | 76,536 |   |
| Non-controlling interest                                                      |       | 2          |       | 772,525               |       | 711,722 |   |
| Total liabilities                                                             | ** ** | ** ** |       | 1,971,968             |       | 1,960,390 |   |
| Partners’  capital:                                                      |       |       |       |                  |       |   |   |
| General Partner—Common Units                                             | ** ** | ** ** |       | 7                     |       | — |   |
| Limited Partners—Common Units                                            | ** ** | ** ** |       | 232,202               |       | — |   |
| Management Units                                                              | ** ** | ** ** |       | 6,926                 |       | — |   |
| General Partner                                                               | ** ** | ** ** |       | —                |       | 7 |   |
| Limited Partners—A Units                                                 | ** ** | ** ** |       | —                |       | 74,132 |   |
| Limited Partners—B Units                                                 | ** ** | ** ** |       | —                |       | 3,473 |   |
| Equity gains on issuance of Buckeye Partners, L.P.  limited partnership units | ** ** | ** ** |       | 1,482                 |       | 1,316 |   |
| Accumulated other comprehensive income                                        | ** ** | ** ** |       | —                |       | 1,514 |   |
| Total partners’ capital                                                  | ** ** | ** ** |       | 240,617               |       | 80,442 |   |
| Total liabilities  and partners’ capital                                 | ** ** | ** ** |       | $                     | 2,212,585  |   | $ | 2,040,832 |   |

 

See Notes to consolidated financial statements.

76

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**BUCKEYE GP HOLDINGS L.P.CONSOLIDATED STATEMENT OF CASH FLOWS(with Predecessor information prior to May 4, 2004 Commencement ofOperations)(In thousands)**
|                                                                                                     | ** ** | ** ** | ** ** | **Buckeye GP Holdings L.P.** | ** ** | **Predecessor**                   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                          | ** ** | ** ** | ** ** | **Years ended  December 31,**     | ** ** | **May 4-  December 31** | ** ** | **January 1-  May 4** | ** ** |
| ** **                                                                                          | ** ** | **Notes**  | ** ** | **2006**                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                               | ** ** | ** ** |       |                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Net income                                                                                          | ** ** | ** ** |       | $                                           | 8,734      |                              | $          | 6,986 |   |   | $ | 1,203 |   |   |   | $ | 1,124 |   |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                  | ** ** | ** ** |       |                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Premium paid on  retirement of long-term debt                                                       | ** ** | ** ** |       | —                                      |       | —                            |       |   | — |   |   |   | 3,531 |   |   |
| Non-cash charge  for Management Unit expense                                                        | ** ** | ** ** |       | 3,453                                       |       | —                            |       |   | — |   |   |   | — |   |   |
| Value of ESOP  shares released                                                                      | ** ** | ** ** |       | 4,077                                       |       | 5,012                             |       |   | 4,554 |   |   |   | 2,594 |   |   |
| Depreciation and  amortization                                                                      |       | 6,8,20     |       | 39,629                                      |       | 32,408                            |       |   | 15,158 |   |   |   | 6,388 |   |   |
| Amortization of  deferred compensation                                                              | ** ** | ** ** |       | —                                      |       | 3,473                             |       |   | — |   |   |   | — |   |   |
| Non-controlling  interest                                                                           |       | 2          |       | 103,066                                     |       | 99,704                            |       |   | 55,310 |   |   |   | 22,830 |   |   |
| Equity earnings                                                                                     | ** ** | ** ** |       | (6,219                                      | )          | (5,303                            | )          |   | (3,707 | ) |   |   | (1,970 | ) |   |
| Distributions from  equity investments                                                              | ** ** | ** ** |       | 6,815                                       |       | 3,764                             |       |   | 3,958 |   |   |   | 1,324 |   |   |
| Amortization of  debt discount                                                                      | ** ** | ** ** |       | 50                                          |       | 40                                |       |   | 142 |   |   |   | 74 |   |   |
| Amortization of  option grants                                                                      | ** ** | ** ** |       | 329                                         |       | —                            |       |   | — |   |   |   | — |   |   |
| Change in assets and liabilities, net of amounts  related to acquisitions:                          | ** ** | ** ** |       |                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Trade receivables                                                                                   |       | 2          |       | (12,166                                     | )          | (6,366                            | )          |   | (10,141 | ) |   |   | (5,245 | ) |   |
| Construction and pipeline  relocation receivables                                                   |       | 2          |       | (1,618                                      | )          | (1,209                            | )          |   | (4,312 | ) |   |   | (87 | ) |   |
| Inventories                                                                                         |       | 2          |       | (618                                        | )          | (575                              | )          |   | (29 | ) |   |   | (196 | ) |   |
| Prepaid and other  current assets                                                                   |       | 7          |       | (22,733                                     | )          | 5,606                             |       |   | (2,584 | ) |   |   | (1,684 | ) |   |
| Accounts payable                                                                                    |       |       |       | 8,002                                       |       | 1,569                             |       |   | 9,648 |   |   |   | (7,793 | ) |   |
| Accrued and other  current liabilities                                                              |       | 5,10       |       | 20,823                                      |       | (4                                | )          |   | 6,018 |   |   |   | 2,647 |   |   |
| Other non-current  assets                                                                           |       | 4,6,9      |       | (810                                        | )          | 2,349                             |       |   | 1,496 |   |   |   | 904 |   |   |
| Other non-current  liabilities                                                                      |       | 5,12       |       | 4,378                                       |       | 3,483                             |       |   | 2,296 |   |   |   | 576 |   |   |
| Total adjustments  from operating activities                                                        |       |       |       | 146,458                                     |       | 143,951                           |       |   | 77,807 |   |   |   | 23,893 |   |   |
| Net cash provided  by operating activities                                                          |       |       |       | 155,192                                     |       | 150,937                           |       |   | 79,010 |   |   |   | 25,017 |   |   |
| Cash flows from investing activities:                                                               |       |       |       |                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                               |       | 8,20       |       | (92,817                                     | )          | (77,831                           | )          |   | (62,567 | ) |   |   | (10,196 | ) |   |
| Acquisitions                                                                                        |       | 4, 20      |       | (94,253                                     | )          | (210,158                          | )          |   | (761,005 | ) |   |   | — |   |   |
| Net proceeds from  (payments for) disposal of property, plant and equipment                         |       |       |       | 1,485                                       |       | (2                                | )          |   | 3,585 |   |   |   | (2 | ) |   |
| Release of  (deposit to) restricted cash                                                            |       | 2          |       | 5,117                                       |       | (3,161                            | )          |   | (1,956 | ) |   |   | 1,514 |   |   |
| Net cash used in  investing activities                                                              |       |       |       | (180,468                                    | )          | (291,152                          | )          |   | (821,943 | ) |   |   | (8,684 | ) |   |
| Cash flows from financing activities:                                                               |       |       |       |                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Net proceeds from  issuance of Buckeye GP Holdings L.P. units                                       |       |       |       | 168,324                                     |       | —                            |       |   | — |   |   |   | — |   |   |
| Net proceeds from  issuance of Buckeye Partners, L.P. units                                         |       |       |       | 64,092                                      |       | 156,101                           |       |   | 223,296 |   |   |   | — |   |   |
| Debt issuance  costs                                                                                |       |       |       | (535                                        | )          | (1,282                            | )          |   | (11,829 | ) |   |   | — |   |   |
| Proceeds from  exercise of unit options                                                             |       |       |       | 1,360                                       |       | 1,401                             |       |   | 1,099 |   |   |   | 478 |   |   |
| Proceeds from  issuance of long-term debt                                                           |       |       |       | 177,000                                     |       | 374,767                           |       |   | 1,159,216 |   |   |   | 59,134 |   |   |
| Capital  contributions                                                                              |       |       |       | 2                                           |       | —                            |       |   | 145,950 |   |   |   | 22,218 |   |   |
| Payment of  long-term debt                                                                          |       | 11         |       | (261,261                                    | )          | (285,373                          | )          |   | (636,045 | ) |   |   | (77,805 | ) |   |
| Premium paid on  retirement of long-term debt                                                       |       |       |       | —                                      |       | —                            |       |   | — |   |   |   | (3,531 | ) |   |
| Settlement of  hedge of long-term debt                                                              |       |       |       |                                        |       |                              |       |   | 2,000 |   |   |   |   |   |   |
| Distributions to  non-controlling partners of Buckeye Partners, L.P.                                |       |       |       | (113,480                                    | )          | (97,767                           | )          |   | (57,339 | ) |   |   | (17,603 | ) |   |
| Distribution to shareholders  of Glenmoor                                                           |       |       |       | —                                      |       | —                            |       |   | — |   |   |   | (7,529 | ) |   |
| Distributions to  Limited Partners                                                                  |       |       |       | (18,990                                     | )          | —                            |       |   | (80,000 | ) |   |   | — |   |   |
| Net cash provided  by (used in) financing activities                                                |       |       |       | 16,512                                      |       | 147,847                           |       |   | 746,348 |   |   |   | (24,638 | ) |   |
| Net (decrease)  increase in cash and cash equivalents                                               |       |       |       | (8,764                                      | )          | 7,632                             |       |   | 3,415 |   |   |   | (8,305 | ) |   |
| Cash and cash  equivalents at beginning of period                                                   |       |       |       | 28,984                                      |       | 21,352                            |       |   | 17,937 |   |   |   | 28,054 |   |   |
| Cash and cash  equivalents at end of period                                                         |       |       |       | $                                           | 20,220     |                              | $          | 28,984 |   |   | $ | 21,352 |   |   |   | $ | 19,749 |   |   |
| *Supplemental cash flow information:*                                                               |       |       |       |                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Cash paid for  interest (net of amount capitalized)                                                 |       |       |       | $                                           | 56,792     |                              | $          | 53,467 |   |   | $ | 15,650 |   |   |   | $ | 12,663 |   |   |
| Capitalized  interest                                                                               |       |       |       | $                                           | 1,845      |                              | $          | 2,325 |   |   | $ | 718 |   |   |   | $ | 126 |   |   |
| Cash paid for  income taxes                                                                         |       |       |       | $                                           | 218        |                              | $          | 897 |   |   | $ | 520 |   |   |   | $ | 10 |   |   |
| *Non-cash changes in assets and liabilities:*                                                       |       |       |       |                                        |       |                              |       |   |   |   |   |   |   |   |   |
| Deferred  consideration associated with acquisition of pipeline interests                           |       |       |       | $                                           | —     |                              | $          | 20,100 |   |   | $ | — |   |   |   | $ | — |   |   |
| Addition to  property accrued in non-current liabilities                                            |       |       |       | $                                           | 3,200      |                              |       |   |   |   |   |   |   |   |   |   |
| Fair value hedge  accounting                                                                        |       |       |       | $                                           | (235       | )                                 | $          | 1,290 |   |   | $ | 2,423 |   |   |   | $ | (2,634 | ) |   |
| Environmental  liabilities related to acquisition of Northeast and Midwest Pipelines and  Terminals |       |       |       | $                                           | —     |                              | $          | (2,332 | ) |   | $ | 4,890 |   |   |   | $ | — |   |   |

 

See Notes to consolidated financial statements.

77

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**PREDECESSORCONSOLIDATED STATEMENT OF CHANGES IN OWNERS’ (DEFICIT)(January 1, to May 4, 2004)(In thousands)**
|                                                 | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Equity  Gains on  Issuance of  Buckeye LP  units** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------|------------|
| Stockholders’  equity at Jan. 1, 2004 |       |              | $          | 6                                |       |                     |       | $                                             | 4,794      |                                                                |       |      | $          | (12,462 | ) |   |   | $ | (348 | ) |   |   | $ | 368 |   |   | $ | (7,642 | ) |
| Net income and comprehensive income             |       |              | —     |                             |       |                     | —     |                                          |       |                                                                | 1,124      |      |       |   | — |   |   |   | — |   |   | 1,124 |   |
| Capital contribution                            |       |              | —     |                             |       |                     | 22,218     |                                          |       |                                                                | —     |      |       |   | — |   |   |   | — |   |   | 22,218 |   |
| Cash dividend declared                          |       |              | —     |                             |       |                     | —     |                                          |       |                                                                | (7,529     | )         |       |   | — |   |   |   | — |   |   | (7,529 | ) |
| Stockholders’  equity at May 4, 2004  |       |              | $          | 6                                |       |                     |       | $                                             | 27,012     |                                                                |       |      | $          | (18,867 | ) |   |   | $(348 | ) |   |   | $368 |   |   | $ | 8,171 |   |

 

See Notes to consolidated financial statements.

78

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**BUCKEYE GP HOLDINGSL.P.CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL(May 4, 2004-December 31, 2006)(In thousands)**

| ** **                                                                                                                             | ** ** | **General  Partner  Common  Units** | ** ** | **Limited  Partner—  Common  Units** | ** ** | **Manage-  ment  Units** | ** ** | **General  Partner** | ** ** | **Limited  Partners A  Units** | ** ** | **Limited  Partners B  Units** | ** ** | **Equity  Gains on  Issuance of  Buckeye LP  Units** | ** ** | **Accumu-  lated  Other  Compre-  hensive  Income** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------|------------|--------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------|------------|
| Partners’ capital  at May 4, 2004                                                                                            |       |                                | $          | —                                    |       |                     |       | $                    | —     |                                |       |                                | $          | —                                                              |       |                                                |       | $         | 15         |   |   |   | $ | 145,935 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 145,950 |   |
| Net income                                                                                                                             |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | 1,203      |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,203 |   |
| Changes in fair  value of cash flow hedges, net                                                                                        |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | — |   |   |   | (11 | ) |   | (11 | ) |
| Comprehensive  income                                                                                                                  |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | 1,203      |   |   |   | — |   |   |   | — |   |   |   | (11 | ) |   | 1,192 |   |
| Cash distribution                                                                                                                      |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | (8         | )                                                   |       |      | (79,992    | ) |   |   | — |   |   |   | — |   |   |   | — |   |   | (80,000 | ) |
| Equity gains on  issuance of Buckeye LP Units                                                                                          |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | 838 |   |   |   | — |   |   | 838 |   |
| Partners’ capital  at December  31, 2004                                                                                     |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | 7          |                                                |       |      | 67,146     |   |   |   | — |   |   |   | 838 |   |   |   | (11 | ) |   | 67,980 |   |
| Net income                                                                                                                             |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | 6,986      |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 6,986 |   |
| Change in fair  value of cash flow hedges, net                                                                                         |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | — |   |   |   | 1,525 |   |   | 1,525 |   |
| Comprehensive  income                                                                                                                  |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | 6,986      |   |   |   | — |   |   |   | — |   |   |   | 1,525 |   |   | 8,511 |   |
| Equity gains on  issuance of Buckeye LP units                                                                                          |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | 478 |   |   |   | — |   |   | 478 |   |
| Recognition of  value of limited partners’ B Units                                                                                |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | 4,986 |   |   |   | — |   |   |   | — |   |   | 4,986 |   |
| Unamortized  compensation limited partner B Units                                                                                      |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | (1,513 | ) |   |   | — |   |   |   | — |   |   | (1,513 | ) |
| Partners’ capital  at December 31, 2005                                                                                      |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | 7          |                                                |       |      | 74,132     |   |   |   | 3,473 |   |   |   | 1,316 |   |   |   | 1,514 |   |   | 80,442 |   |
| Net income through  August 8, 2006                                                                                                |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | 6,135      |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 6,135 |   |
| Net income  August 9 Through December 31, 2006                                                                               |       |                                | —     |                                      |       |                     | 2,599      |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 2,599 |   |
| Settlement of  interest rate swaps                                                                                                     |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | — |   |   |   | (1,514 | ) |   | (1,514 | ) |
| Comprehensive  income                                                                                                                  |       |                                | —     |                                      |       |                     | 2,599      |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | 6,135      |   |   |   | — |   |   |   | — |   |   |   | (1,514 | ) |   | 7,220 |   |
| Exchange of GP  units and Limited Partner—A and B Units for General Partner and Limited  Partner—Common and Management Units |       |                                | 7          |                                      |       |                     | 80,267     |                 |       |                                | 3,473      |                                |       |                                                                | (7         | )                                                   |       |      | (80,267    | ) |   |   | (3,473 | ) |   |   | — |   |   |   | — |   |   | — |   |
| Issuance of  Limited Partner—Common Units                                                                                         |       |                                | —     |                                      |       |                     | 168,324    |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 168,324 |   |
| Recognition of  value of  Management Units                                                                                             |       |                                | —     |                                      |       |                     | —     |                 |       |                                | 3,453      |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 3,453 |   |
| Distributions to Limited  Partner—Common Unit                                                                                     |       |                                | —     |                                      |       |                     | (18,990    | )                    |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | (18,990 | ) |
| Capital  contribution                                                                                                                  |       |                                | —     |                                      |       |                     | 2          |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 2 |   |
| Equity gains on  issuance of Buckeye Partners, L.P. limited partnership units                                                          |       |                                | —     |                                      |       |                     | —     |                 |       |                                | —     |                                |       |                                                                | —     |                                                |       |      | —     |   |   |   | — |   |   |   | 166 |   |   |   | — |   |   | 166 |   |
| Partners’ capital at December 31, 2006                                                                                       |       |                                | $          | 7                                         |       |                     |       | $                    | 232,202    |                                |       |                                | $          | 6,926                                                               |       |                                                |       | $         | —     |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 1,482 |   |   |   | $ | — |   |   | $ | 240,617 |   |

 

See Notes to consolidated financial statements.

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**BUCKEYE GP HOLDINGS L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1**.   ORGANIZATION

Buckeye GP Holdings L.P. (“BGH”)is a publicly traded master limited partnership (NYSE symbol: BGH) organized onJune 15, 2006 under the laws of the state of Delaware. BGH owns 100% ofBuckeye GP LLC (“Buckeye GP”), which is the general partner of BuckeyePartners, L.P. (the “Partnership” or “Buckeye”). The Partnership is also apublicly traded (NYSE symbol: BPL) master limited partnership which wasorganized in 1986 under the laws of the state of Delaware. BGH’s limitedpartnership units are owned approximately 54% by affiliates ofCarlyle/Riverstone Global Energy and Power Fund II, L.P. (“Carlyle/Riverstone”),approximately 9% by certain members of Buckeye GP’s senior management andapproximately 37% by the public. MainLine Management LLC, a Delaware limitedliability company (“MainLine Management”), is the general partner of BGH, andis wholly owned by Carlyle/Riverstone.

BGH’s only business is theownership of Buckeye GP. Buckeye GP’s only business is the management of thePartnership and its subsidiaries. At December 31, 2006, Buckeye GP ownedan approximate 0.6% interest in the Partnership. Buckeye GP also owns 100% ofand controls MainLine GP, Inc. which, together with Buckeye GP, owns 100%of and controls MainLine L.P. (the “Operating Subsidiary GP”). The OperatingSubsidiary GP is the general partner of and owns an approximate 1% interest incertain of the Partnership’s operating subsidiaries.

BGH was formed on June 15,2006 in order to facilitate the reorganization of MainLine L.P. (“MainLine”)and its affiliates and to effect an initial public offering (the “IPO”) of BGH commonunits. The reorganization and IPO occurred on August 9, 2006 and, prior tosuch date, BGH had no activity. Prior to the reorganization, MainLine owned andcontrolled Buckeye GP. On August 9, 2006, BGH sold 10.5 million commonunits in the IPO, the net proceeds of which were approximately $168.3 million. BGHused the net proceeds from the IPO, along with cash on hand, to repay all ofthe outstanding indebtedness of MainLine and to make distributions to itspre-IPO equity owners. The BGH common units sold in the IPO representapproximately 37% of the outstanding equity of BGH, which includes common units(the “Common Units”) and management units (the “Management Units”).

Coincident with the IPO,the equity interests of MainLine were exchanged for the equity interests of BGH.This exchange of equity interests was accounted for as a transfer betweenentities under common control in accordance with Statement of FinancialAccounting Standards No. 141, “Business Combinations.” Accordingly, thefinancial information for BGH included in this report includes the financialinformation of MainLine. See Note 14 for a further discussion.

MainLine was formed inearly 2004 in order to purchase the general partner interest of the Partnership.On May 4, 2004, MainLine purchased all of the membership interests ofGlenmoor LLC (“Glenmoor” or the “Predecessor”), a Delaware limited liabilitycompany for $235.0 million (see Note 3).

In connection with theclosing of the IPO, on August 9, 2006 the Partnership and Buckeye GPrestructured the ownership of Buckeye GP.  MainLine Sub LLC (“MainLine Sub”), which wasthen a wholly-owned subsidiary of BGH and the owner of Buckeye GP, assigned allof its rights under the Fourth Amended and Restated Incentive CompensationAgreement, dated as of December 15, 2004, between MainLine Sub and thePartnership to Buckeye GP. Thereafter, Buckeye and Buckeye GP amended andrestated that agreement by entering into the Fifth Amended and RestatedIncentive Compensation Agreement, dated as of August 9, 2006 (the “IncentiveCompensation Agreement”). Also on August 9, 2006, Buckeye and Buckeye GP enteredinto the Amended and Restated Agreement of Limited Partnership of BuckeyePartners, L.P. (the “Partnership Agreement”). The amendments to the IncentiveCompensation Agreement and the Partnership Agreement reflect the assignment ofthe Incentive Compensation Agreement to Buckeye GP and recharacterize thepayments Buckeye GP receives under 

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theIncentive Compensation Agreement and the Partnership Agreement as distributionsin respect of its general partner interest rather than compensation payments. OnAugust 8, 2006, MainLine Sub was merged with and into BGH.

These changes resulted inchanges, commencing in the fourth quarter of 2006, in the method used toallocate the Partnership’s income between Buckeye GP and the Partnership’slimited partners. See Note 2 for further discussion.

All of the employees whoprovide services to BGH, the Partnership and its subsidiaries are employed byBuckeye Pipe Line Services Company (“Services Company”). Pursuant to a servicesagreement, Services Company is reimbursed by BGH or the Partnership’ssubsidiaries for the cost of the employees who provide those services. BGH isresponsible for the total compensation, including benefits, paid to the fourhighest salaried officers performing duties for Buckeye GP with respect to thefunctions of operations, finance, legal, marketing, business development,treasury, or performing the function of president of Buckeye GP.  The Partnership is generally responsible forall other employee costs. Services Company is owned by an employee stockownership plan (the “ESOP”). Services Company owned approximately 5.9% of thepublicly traded limited partner units of the Partnership at December 31,2006.

*Description of the Partnership’s Business*

The Partnership’sprincipal line of business is the transportation, terminalling and storage ofpetroleum products in the United States for major integrated oil companies,large refined product marketing companies and major end users of petroleumproducts on a fee basis through facilities owned and operated by thePartnership. The Partnership also operates and maintains pipelines owned bythird parties under contracts with major integrated oil and chemical companies,and performs certain construction activities, generally for the owners of thesethird-party pipelines.

The Partnership owns andoperates one of the largest independent refined petroleum products pipelinesystems in the United States in terms of volumes delivered, with approximately5,400 miles of pipeline, serving 17 states, and operates another approximately2,500 miles of pipeline under agreements with major oil and chemical companies.As of December 31, 2006, the Partnership also owns and operates 45 activerefined petroleum products terminals with aggregate storage capacity ofapproximately 17.6 million barrels in Illinois, Indiana, Massachusetts,Michigan, Missouri, New York, Ohio and Pennsylvania.

The Partnership conductsall of its operations through subsidiary entities. These operating subsidiariesare Buckeye Pipe Line Company, L.P. (“Buckeye Pipe Line”), Laurel Pipe LineCompany, L.P. (“Laurel”), Everglades Pipe Line Company, L.P. (“Everglades”),Buckeye Pipe Line Holdings, L.P. (“BPH”), Wood River Pipe Lines LLC  (“Wood River”), Buckeye Pipe LineTransportation LLC (“BPL Transportation”) and Buckeye NGL Pipe Lines LLC (“BuckeyeNGL”). Buckeye NGL commenced operations on January 31, 2006 with theacquisition of a natural gas liquids pipeline located in Colorado and Kansas(see Note 4). Each of these entities is referred to hereinafter as an “OperatingSubsidiary” or collectively as the “Operating Subsidiaries.”  The Partnership owns an approximate 99%limited partner interest in each Operating Subsidiary except Wood River, BPLTransportation and Buckeye NGL, in each of which it owns a 100% limitedliability company interest. The percentage of each Operating Subsidiary notowned by the Partnership is owned by the Operating Subsidiary GP.

BPH owns, directly orindirectly, a 100% interest in each of Buckeye Terminals, LLC (“BuckeyeTerminals”), NORCO Pipe Line Company, LLC (“Norco”), Buckeye Gulf Coast PipeLines, L.P. (“BGC”), Buckeye Texas Pipe Line Company, L.P. and WesPac Pipelines—RenoLLC (“WesPac Reno”). BPH also owns a 75% interest in WesPac Pipelines—MemphisLLC, and a 50% interest in WesPac Pipelines—San Diego LLC (together with WesPacReno, collectively known as “WesPac”), an approximate 25% interest in WestShore Pipe Line Company (“West Shore”), a 20% interest in West Texas LPGPipeline Limited Partnership (“WTP”) and a 40% interest in Muskegon PipelineLLC 

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(“Muskegon”).Subsidiaries of BPH also own approximately 63% of two partnerships which own acrude butadiene pipeline between Deer Park, Texas and Port Arthur, Texas thatwas completed in March 2003 (the “Sabina Pipeline”).

The Partnership’sOperating Subsidiaries conduct business in three reportable operatingsegments:  Pipeline Operations,Terminalling and Storage and Other Operations. BGH also has certainconsolidating level assets, which consist principally of goodwill associatedwith the purchase of Buckeye’s general partnership interest. See Note 20 for afurther discussion.

**2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Basis of Presentation*

The consolidated financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States of America (“GAAP”) and the rules of the USSecurities and Exchange Commission.

The consolidated financialstatements of the Predecessor for the period January 1 to May 4, 2004include the accounts of Glenmoor and its wholly owned subsidiaries, thePartnership and its Operating Subsidiaries as well as Services Company on aconsolidated basis.

The consolidated financialstatements for BGH for the period May 4 to December 31, 2004 and theyears ended December 31, 2005 and 2006, include the accounts of MainLineor BGH and their respective wholly owned subsidiaries with the Partnership andits Operating Subsidiaries as well as Services Company on a consolidated basis.

In June 2005, theEmerging Issues Task Force (the “EITF”) of the Financial Accounting StandardsBoard (the “FASB”) issued EITF Consensus 04-05 which requires generalpartners of a limited partnership to consolidate the limited partnership if thegeneral partner is deemed to control the limited partnership. Using criteriaestablished in EITF Consensus 04-05, BGH has determined thatconsolidation of the Partnership into the financial statements is appropriatefor all periods presented, including those of the Predecessor.

BGH has determined thatServices Company is a variable interest entity (“VIE”) under the provisions ofFASB Interpretation No. 46R—Consolidation of Variable Interest Entities (“FINNo. 46R”). Using criteria established in FIN No. 46R, BGH hasdetermined that Buckeye GP is the primary beneficiary of Services Company,although 100% of the equity interest of Services Company is owned by the ESOP.Accordingly, as permitted by FIN No. 46R, Services Company has beenconsolidated in the financial statements of BGH and the Predecessor for allperiods presented.

The Partnership is subjectto the Uniform System of Accounts for Pipeline Companies, as prescribed by theFederal Energy Regulatory Commission (“FERC”). Certain Operating Subsidiariesare subject to rate regulation as promulgated by FERC. Reports to FERC differfrom the accompanying consolidated financial statements, which have beenprepared in accordance with GAAP accounting principles in that such reportscalculate depreciation over estimated useful lives of the assets as prescribedby FERC.

All significantintercompany transactions have been eliminated in consolidation.

*Changes in Incentive Compensation Payments to BGH*

The general partner of the Partnership historicallyreceived incentive compensation payments from the Partnership under anIncentive Compensation Agreement, which payments were based on cashdistributions to the Partnership’s limited partners. As described in Note 1, theIncentive Compensation Agreement and the Partnership Agreement were amended torecharacterize the incentive payments received by Buckeye GP as distributionpayments with respect to the general partner interest rather than compensationpayments. These amendments were effective for payments related to Partnership 

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distributions declaredafter August 9, 2006. Accordingly, effective in the fourth quarter of2006, these payments are characterized as distributions rather thancompensation payments from the Partnership to Buckeye GP.

Buckeye pays an annual senior administrative charge toaffiliates of its general partner for certain management functions supplied bythose affiliates. The senior administrative charge totaled $1.9 million in2006 and 2005 and approximately $1.0 million in 2004. Prior to the IPO,this senior administrative charge was recognized as income by BGH. Inconnection with the IPO, Buckeye now pays the senior administrative chargedirectly to BGH’s general partner, MainLine Management.

Prior to the IPO, BGH recognized its share of Buckeye’sincome as the sum of (i) the incentive compensation payments received (towhich BGH was contractually entitled and which were recorded by Buckeye as anexpense in Buckeye’s financial statements), (ii) its proportionate shareof Buckeye’s remaining net income based on its ownership of the general partnerinterest in Buckeye, 80,000 of Buckeye’s LP Units that it owns and its generalpartner interests in certain of the Operating Subsidiaries and (iii) thesenior administrative charge. Commencing with the IPO, BGH recognizes its shareof Buckeye’s income as the sum of (i) the amount of incentive compensationBGH would have received had only Buckeye’s net income for the period beenentirely distributed (which income, commencing with the fourth quarter of 2006now includes the incentive compensation payments previously recorded by Buckeyeas an expense) and (ii) its proportionate share of the remaining netincome of Buckeye and the Operating Subsidiaries.

The effect of this changewas to reduce BGH’s net income in 2006 by approximately $1.2 million, of which$0.7 million represents the absence of income related to the senioradministrative charge subsequent to the IPO and $0.5 million represents thedifference between income recognition for incentive compensation under BGH’snew methodology compared to the amount that would have been recognized had theIncentive Compensation Agreement and Partnership Agreement not been amended.

*Use of Estimates*

The preparation of BGH’sconsolidated financial statements in conformity with GAAP necessarily requiresmanagement to make estimates and assumptions. These estimates and assumptions,which may differ from actual results, will affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements, as well as the reported amounts ofrevenue and expense during the reporting period.

*Revenue Recognition*

Revenue from thetransportation of petroleum products is recognized as products are delivered. Revenuesfor terminalling, storage and rental operations are recognized as the servicesare performed. Revenues from contract operation and construction services offacilities and pipelines not directly owned by the Partnership are recognizedas the services are performed. Contract and construction services revenuetypically includes costs to be reimbursed by the customer plus an operator fee.

*Non-ControllingInterest*

The consolidated balancesheets include a non-controlling interest liability that reflects the portionof the Partnership owned by its partners other than BGH and Services Company.Similarly, the consolidated income statements include non-controlling interestexpense that reflects the portion of the earnings due to the Partnership’spartners other than BGH and Services Company.

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*Cash and CashEquivalents*

All highly liquid debtinstruments purchased with an original maturity of three months or less areclassified as cash equivalents.

*Restricted Cash*

MainLine was required tomaintain a debt service reserve account consisting of cash equivalents for thebenefit of the holders of its former $180 million term loan that was repaidwith the proceeds of BGH’s IPO (see Note 11).

*Trade Receivables*

Trade receivablesrepresent valid claims against non-affiliated customers and are recognized whenproducts are sold or services are rendered. The Partnership extends creditterms to certain customers based on historical dealings and to other customersafter a review of various credit indicators, including the customers’ creditrating.

*Construction andPipeline Relocation Receivables*

Construction and pipeline relocation receivables representvalid claims against non-affiliated customers for services rendered in constructing,maintaining and/or operating pipelines and are recognized when services arerendered.

*Inventories*

Inventories, consisting ofmaterials and supplies such as pipes, valves, pumps, electrical/electroniccomponents, drag reducing agent and other miscellaneous items are carried atthe lower of cost or market based on the first-in, first-out method.

*Equity Investments*

Investments greater than20% in entities in which the Partnership does not exercise control areaccounted for using the equity method. Under this method, an investment isrecorded at acquisition cost plus the Partnership’s equity in undistributedearnings or losses since acquisition, reduced by distributions received andamortization of excess net investment. Excess net investment is the amount bywhich the initial investment exceeds the proportionate share of the book valueof the net assets of the investment. Management evaluates equity methodinvestments for impairment whenever events or circumstances indicate that thereis a loss in value of the investment which is other than temporary. In theevent that the loss in value of an investment is other than temporary, thePartnership records a charge to earnings to adjust the carrying value to fairvalue. There were no equity investment impairments during 2006, 2005 or2004.  BGH has no equity methodinvestments other than those maintained by the Partnership.

*Property, Plant andEquipment*

Property, plant and equipment consists primarily ofpipeline and related transportation facilities and equipment. For financialreporting purposes, depreciation on pipeline assets is calculated using thestraight-line method over the estimated useful life of 50 years. Other plantand equipment is depreciated on a straight line basis over an estimated life of5 to 50 years. Additions and betterments are capitalized and maintenance andrepairs are charged to income as incurred. Generally, upon normal retirement orreplacement, the cost of property (less salvage) is charged to the depreciationreserve, which has no effect on income.

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Thefollowing table represents the depreciation life for the major asset componentsof BGH and Partnership assets:

| ** **                         | ** ** | **Life in Years** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| Right of way                       |       |                        | 50         |   |   |
| Line pipe and  fittings            |       |                        | 50         |   |   |
| Buildings                          |       |                        | 50         |   |   |
| Pumping equipment                  |       |                        | 50         |   |   |
| Oil tanks                          |       |                        | 50         |   |   |
| Office furniture  and equipment    |       |                        | 18         |   |   |
| Vehicles and  other work equipment |       |                        | 11         |   |   |
| Servers and software               |       |                        | 5          |   |   |

 

*Goodwill andIntangible Assets*

BGH does not amortizegoodwill. Goodwill is reviewed for impairment at the reporting unit level,which is consistent with BGH’s operating segments, annually on January 1for potential impairment based on the carrying value of the reporting unitcompared to its fair value. Intangible assets that have finite useful lives areamortized over their useful lives.

*Long-Lived Assets*

BGH regularly assesses therecoverability of its long-lived assets whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. BGH assesses recoverability based on estimated undiscounted futurecash flows expected to result from the use of the asset and its eventualdisposal. The measurement of an impairment loss is based on the differencebetween the carrying amount and fair value of the assets.

*Asset RetirementObligations*

BGH accounts for asset retirement obligations inaccordance with Statement of Financial Accounting Standards No. 143 “Accountingfor Asset Retirement Obligations” (“SFAS No. 143”) as amended by FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”) which was effective December 31, 2005. SFAS No. 143requires that the fair value of a liability related to the retirement oflong-lived assets be recorded at the time a legal obligation is incurred. FIN47 clarifies the term conditional asset retirement obligation as used in SFAS No. 143as a legal obligation to perform an asset retirement activity in which thetiming or method of settlement are conditional on a future event that may ormay not be within the control of the entity. Once an asset retirementobligation is identified and a liability is recorded, a corresponding asset isrecorded at that time which is then depreciated over the remaining useful lifeof the asset. After the initial measurement, the obligation is periodicallyadjusted to reflect changes in the asset retirement obligation’s fair value. Ifand when it is determined that a legal obligation has been incurred, the fairvalue of any liability is determined based on estimates and assumptions relatedto retirement costs, future inflation rates and credit-adjusted risk-freeinterest rates.

The Operating Subsidiaries’assets generally consist of underground refined petroleum products pipelinesinstalled along rights-of-way acquired from land owners and relatedabove-ground facilities that are owned by the Operating Subsidiaries. ThePartnership is unable to predict if and when its pipelines, which generallyserve high-population and high-demand markets, will become completely obsoleteand require decommissioning. Further, the Operating Subsidiaries’ rights-of-wayagreements typically do not require the dismantling and removal of thepipelines and reclamation of the rights-of-way upon permanent removal of thepipelines from service. Accordingly, the Partnership has recorded no liability,or corresponding asset, in conjunction with the adoption of SFAS No. 143and FIN 47 because the future 

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dismantlementand removal dates of the Partnership’s assets, and the amount of any associatedcosts, are indeterminable.

*Debt Issuance Costs*

Costs incurred for debtborrowings are capitalized as paid and amortized over the life of theassociated debt instrument. When debt is retired before its scheduled maturitydate, any remaining placement costs associated with that debt are expensed.

*Fair Value andHedging Activities*

At December 31, 2006 and 2005, cash, tradereceivables, construction and pipeline relocation receivables, prepaid andother current assets, and all current liabilities are reported in theconsolidated balance sheets at amounts which approximate fair value due to therelatively short period to maturity of these financial instruments. The fairvalue of debt was calculated using interest rates currently available to BGH,the Partnership and Services Company for issuance of debt with similar termsand remaining maturities and approximate market values on the respective dates(see Note 11).

BGH’s accounts for hedging activities in accordancewith SFAS No. 133 “Accounting for Financial Instruments and HedgingActivities,” SFAS No. 138 “Accounting for Certain Derivative Instrumentsand Certain Hedging Activities, an amendment of FASB Statement No. 133”and  SFAS No. 149, “Amendment ofStatement No. 133 on Derivative Instruments and Hedging Activities.”  These statements establish accounting andreporting standards requiring that derivative instruments (including certainderivative instruments embedded in other contracts) be recorded on the balancesheet at fair value as either assets or liabilities.

The accounting for changes in the fair value of aderivative instrument depends on the intended use of the derivative and itsresulting designation, which is established at the inception of the derivativeinstrument. SFAS No. 133 provides for a short-cut method which permitsgains and losses on certain derivatives qualifying as fair value hedges todirectly offset the changes in value of the hedged item in the Partnership’sincome statement, and for BGH to assume no hedge ineffectiveness with respectto the hedged financial instrument.

In 2003, the Partnership entered into an interest rateswap contract with a financial institution (see Note 11). The Partnershipdesignated the swap as a fair value hedge at the inception of the contract andutilized the short-cut method provided for in SFAS No. 133. The interestrate swap was terminated on December 8, 2004.

In 2004, BGH entered into three derivativetransactions associated with its debt agreements. One of these transactions wasnot designated as a hedge while the other two transactions were designated as hedgesof variations in cash flows related to BGH’s then-outstanding $180 million termloan. During 2005, BGH entered into another derivative transaction associatedwith its debt agreement which was designated as a hedge of variations in cashflows (See Note 11).

When entering intointerest rate swap transactions, BGH becomes exposed to both credit risk andmarket risk. Credit risk occurs when the value of the swap transaction ispositive, and BGH is subject to the risk that the counterparty will fail to performunder the terms of the contract. BGH is subject to market risk with respect tochanges in value of the swap. BGH manages its credit risk by only entering intoswap transactions with major financial institutions with investment-gradecredit ratings. BGH manages its market risk by associating each swaptransaction with an existing debt obligation. BGH’s practice is to have theBoard of Directors of MainLine Management or of Buckeye GP, as appropriate,approve each swap transaction.

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*Capitalization ofInterest*

Interest on borrowed fundsis capitalized on projects during construction based on the approximate averageinterest rate of debt.

*Income Taxes*

For federal and state income tax purposes, BGH and itssubsidiaries and the Partnership and the Operating Subsidiaries, except forBGC, are not taxable entities. Accordingly, the taxable income or loss of BGH,which may vary substantially from income or loss reported for financialreporting purposes, is generally includable in the federal and state income taxreturns of the individual partners of BGH. The aggregate difference in thebasis of BGH’s net assets for financial and tax reporting purposes cannot bereadily determined because information regarding each partner’s tax attributesis not available to BGH.

Effective August 1, 2004, BGC elected to betreated as a taxable corporation for federal income tax purposes. Accordingly,BGC has recognized deferred tax assets and liabilities for temporarydifferences between the amounts of assets and liabilities measured forfinancial reporting purposes and the amounts measured for federal income taxpurposes. Changes in tax legislation are included in the relevant computationsin the period in which such changes are effective. Deferred tax assets arereduced by a valuation allowance when the amount of any tax benefit is notexpected to be realized. Total income tax expense, all of which related to BGC,for the years ended December 31, 2006 and 2005 was $0.6 million and $0.9million, respectively, and for the period August 1, 2004 to December 31,2004, income tax expense was $0.5 million. Income tax expense is included inoperating expenses in the enclosed consolidated statements of income.

Effective January 1,1999, Services Company elected to be taxed as a Subchapter S corporationfor federal and state income tax purposes. Services Company is generallynot a taxable entity for federal and state income taxes. Rather, ServicesCompany’s income or loss is includable in the federal and state income taxreturns of its shareholder, the ESOP. As a result of the election, ServicesCompany became liable for federal and state income taxes on any gains on thesale of any Partnership LP Units through December 31, 2008 up to thedifference between the market value and the tax basis of the Partnership’s LPUnits on January 1, 1999.  At December 31,2006 and 2005, Services Company had unrealized built-in gains associated withthis election of $21.9 million and $22.3 million, respectively.

*EnvironmentalExpenditures*

Environmental expendituresthat relate to current operations are expensed or capitalized as appropriate.Expenditures that relate to an existing condition caused by past operations,and do not contribute to current or future revenue generation, are expensed.Liabilities are recorded when environmental assessments and/or clean-ups areprobable, and the costs can be reasonably estimated. Generally, the timing ofthese accruals coincides with the Partnership’s commitment to a formal plan ofaction. Accrued environmental remediation related expenses include direct costsof remediation and indirect costs related to the remediation effort, such ascompensation and benefits for employees directly involved in the remediationactivities and fees estimated to be paid to outside engineering, consulting andlaw firms. The Partnership maintains insurance which may cover certainenvironmental expenditures.

*Pensions*

Services Company sponsorsa defined contribution plan (see Note 13), defined benefit plans (see Note 13)and an employee stock ownership plan (the “ESOP”) (see Note 15) that provideretirement benefits to certain regular full-time employees. Certain hourlyemployees of Services Company are covered by a defined contribution plan undera union agreement (see Note 13).

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*Postretirement BenefitsOther Than Pensions*

Services Company providespost-retirement health care and life insurance benefits for certain of itsretirees. Certain other retired employees are covered by a health and welfareplan under a union agreement (see Note 13).

*Unit Option andDistribution Equivalent Plan*

The Partnership has a UnitOption and Distribution Equivalent Plan, which, effective January 1, 2006,is accounted for under the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”*).*SFAS 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. See Note 14 for a furtherdiscussion of the Partnership’s Unit Option and Distribution Equivalent Plan.

*ComprehensiveIncome*

BGH accounts forcomprehensive income in accordance with Statement of Financial AccountingStandards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”).BGH’s comprehensive income is determined based on net income adjusted forchanges in other comprehensive income (loss) from changes in the fair value ofBGH’s cash flow hedges. SFAS No. 130 requires BGH to report totalcomprehensive income, which is included in BGH’s consolidated statements ofchanges in owners’ equity.

*Earnings per Unit*

Earnings per unit iscalculated for BGH only from the date of its IPO on August 9, 2006. Basicearnings per unit is determined by dividing the net income by the weightedaverage number of Common Units and vested Management Units outstanding for theperiod of August 9, 2006 to December 31, 2006. Diluted earnings perunit is calculated using the weighted average of all units outstanding,including Common Units and vested and unvested Management Units.

*Major Customers andConcentration of Credit Risk*

The Partnership has aconcentration of trade receivables due from major integrated oil companies,major petroleum refiners, major petrochemical companies, large regionalmarketing companies and large commercial airlines. These concentrations ofcustomers may affect the Partnership’s overall credit risk in that thecustomers may be similarly affected by changes in economic, regulatory or otherfactors. The Partnership’s customer base was approximately 214 customers in2006 and 160 customers in 2005. Affiliates of Shell Oil Products U.S. (“Shell”)contributed 11% of consolidated revenue in 2006 and 13% in 2005. For theperiods January 1 to May 4, 2004 and May 4 to December 31,2004, no customer contributed more than 10% of consolidated revenue. Approximately5% of the 2006 consolidated revenue was generated by Shell in the PipelineOperations segment; the remaining 6% of consolidated revenue was generated byShell in the Terminalling and Storage segment. The 20 largest customersaccounted for 53% and 63% of consolidated revenue in 2006 and 2005,respectively. The Partnership manages its credit risk through a credit approvalprocess. For certain customers, prepayments are required. The Pipeline Operationssegment bills its customers on a weekly basis, and the Terminalling and Storagesegment on at least a monthly basis. The effect of these billing practices isto reduce credit risk. The Partnership does not maintain an allowance fordoubtful accounts due to its favorable collections experience.

*Recent AccountingPronouncements*

In July 2006, the Financial Accounting StandardsBoard (“FASB”) adopted FASB Interpretation No. 48 “Accounting forUncertainty in Income Taxes” (“FIN 48”). FIN 48 sets forth a recognition

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threshold and measurementattribute for financial statement recognition of positions taken or expected tobe taken in income tax returns. Only tax positions meeting a “more-likely-than-not”threshold of being sustained should be recognized under FIN 48.FIN 48 also provides guidance on derecognizing, classification of interestand penalties and accounting and disclosures for annual and interim financialstatements. FIN 48 is effective for fiscal years beginning after December 15,2006. The cumulative effect of the changes arising from the initial applicationof FIN 48 is required to be reported as an adjustment to the openingbalance of retained earnings in the period of adoption. BGH does not expect theadoption of FIN 48 to have a material impact on its financial statements.

In September 2006, the FASB adopted Statement ofFinancial Accounting Standards No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158requires companies to recognize a net liability or asset and an offsettingadjustment to accumulated other comprehensive income in connection withreporting on the funded status of defined benefit pension and other postretirementbenefit plans. SFAS No. 158 requires prospective application, and therecognition and disclosure requirements are effective for  BGH’s fiscal year ending December 31,2006. Additionally, SFAS No. 158 requires companies to measure planassets and obligations at their year-end balance sheet date. This requirementis effective for fiscal years ending after December 15, 2008. See Note 13for the effects of the adoption of SFAS No. 158.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (“SFAS No. 157”). This statementclarifies the definition of fair value, establishes a framework for measuringfair value, and expands the disclosures on fair value measurements. SFASNo. 157 is effective for fiscal years beginning after November 15,2007 and interim periods within that year. BGH is still determining the impact,if any, of the adoption of SFAS No. 157 on its financial statements.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB No. 108”). SAB No. 108provides guidance on how prior year misstatements should be taken intoconsideration when quantifying misstatements in current year financialstatements for purposes of determining whether the current year’s financialstatements are materially misstated. SAB No. 108 was effective forfiscal years ending after November 15, 2006. The adoption of SAB 108 didnot have any have any impact on BGH’s financial statements.

In February 2007, theFASB issued SFAS No. 159 “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value thatcurrently are not required to be measured at fair value. This Statement iseffective no later than fiscal years beginning on or after November 15,2007. BGH is currently evaluating the impact this standard may have on itsconsolidated financial statements.

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**3.**                 BUSINESSCOMBINATION

As discussed in Note 1, MainLine  completed the acquisition of 100% of themember interests of the Predecessor on May 4, 2004 for a purchase price of$235.0 million adjusted for $9.0 million for certain working capital amounts.The acquisition was funded by $145.9 million of equity contributed byCarlyle/Riverstone and the management limited partners and a $100.0 millionSenior Secured Credit Facility from a consortium of financial institutions. Theacquisition was accounted for using the purchase method of accounting. The fairvalue of assets acquired, net of liabilities assumed is as follows (inthousands):

| Receivables                                               |   | $       | 3,993   |   |
|-----------------------------------------------------------|--------|---------|---------|--------|
| Other current  assets                                     |   | 8,958   |    |
| Investment in  Buckeye’s 2% general partner interest |   | 242,793 |    |
| Other assets                                              |   | 4,620   |    |
| Payables and  accrued liabilities                         |   | (16,334 | )       |
| Total purchase  price                                     |   | $       | 244,030 |   |

 

Fairvalues for assets acquired were determined by MainLine. MainLine allocated thefair value of its $242.8 million investment in the Partnership’s 2% generalpartner interest using a combination of appraised and market-based values. Theallocation of the investment in the Partnership was ascribed to the underlyingnet assets of the Partnership as follows (in thousands):

| Receivables                                                          |   | $       | 548     |   |
|----------------------------------------------------------------------|--------|---------|---------|--------|
| Other current  assets                                                |   | 753     |    |
| Property, plant  and equipment                                       |   | 27,244  |    |
| Goodwill                                                             |   | 223,516 |    |
| Other assets                                                         |   | 1,431   |    |
| Debt                                                                 |   | (832    | )       |
| Current  liabilities                                                 |   | (8,951  | )       |
| Other liabilities                                                    |   | (916    | )       |
| Total investment  in the Partnership’s general partner interest |   | $       | 242,793 |   |

 

MainLine purchased the general partner interests at avalue which created goodwill because it believed that the stable cash flowsproduced by the Partnership combined with industry acquisition opportunitiescreated an attractive opportunity to generate and increase cash flows. BGHbelieves that the $223.5 million of goodwill will be deductible by its partnerson their tax returns. Goodwill has been allocated to the individual reportingunits to which the goodwill relates (see Note 6).

Thefollowing unaudited summarized pro forma consolidated income statementinformation assumes that the above mentioned acquisition had occurred as of January 1,2004 and that MainLine was in existence. These pro forma unaudited financialresults were prepared for comparative purposes only and are not indicative ofactual results that would have occurred if MainLine had completed thisacquisition as of January 1, 2004 or the results that will be attained inthe future (in thousands):

| ** **                                                               | ** ** | **Revenues**  | ** ** | **Net Income** | ** ** |
|--------------------------------------------------------------------------|------------|---------------|------------|---------------------|------------|
| ** **                                                               | ** ** | **Unaudited** | ** ** |
| As reported for  the period May 4 to December 31, 2004         |       | $             | 226,014    |                |       | $ | 1,203 |   |   |
| Pro forma  adjustments for the period January 1 to May 4, 2004 |       | 97,529        |       |                | 562        |   |   |
| Pro forma for the year ended December 31, 2004                      |       | $             | 323,543    |                |       | $ | 1,765 |   |   |

 

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**4.**                 BUCKEYEACQUISITIONS AND EQUITY INVESTMENTS

*2006 Acquisitions*

| Rights-of-way                                |   | $      | 3,003  |   |
|----------------------------------------------|--------|--------|--------|--------|
| Buildings and  leasehold improvements        |   | 1,198  |   |
| Machinery,  equipment and office furnishings |   | 82,799 |   |
| Total                                        |   | $      | 87,000 |   |

 

On January 1, 2006,the Partnership acquired a refined petroleum products terminal located inNiles, Michigan from Shell for $13.0 million.

*2005 Acquisitions*

In December 2005,the Partnership acquired a refined petroleum products terminal and relatedassets (including railroad offloading facilities and customer contracts)located in Taylor, Michigan for $20.0 million. The allocated fair value, basedon allocations by the Partnership, of the assets acquired is summarized asfollows (in thousands):

| Land                                         |   | $     | 1,000  |   |
|----------------------------------------------|--------|-------|--------|--------|
| Buildings and  leasehold improvements        |   | 1,896 |   |
| Machinery,  equipment and office furnishings |   | 8,904 |   |
| Customer  contracts                          |   | 8,200 |   |
| Total                                        |   | $     | 20,000 |   |

 

Effective December 1, 2005, the Partnershipacquired from affiliates of Marathon Oil Company an approximately 26-milepipeline and a 40% interest in Muskegon. Muskegon owns an approximately 170-milepipeline which extends from Griffith, Indiana to Muskegon, Michigan. Thepipeline and the interest in Muskegon (collectively, the “Pipeline Interests”)were acquired in exchange for consideration that included capacity leaseagreements (with purchase options) related to one of the Partnership’spipelines and a terminal. The Partnership has recorded the Pipeline Interests(and the corresponding obligations) at their estimated fair values of $20.1million, with $4.8 million allocated to the 26-mile pipeline and $15.3million allocated to the 40% interest in Muskegon. In connection with thetransaction, the parties also entered into throughput agreements related tocertain of the Partnership’s pipelines and terminals.

On May 5, 2005, the Partnership acquired arefined petroleum products pipeline system with approximately 478 miles ofpipeline and four petroleum products terminals with aggregate storage capacityof approximately 1.3 million barrels located in the northeastern United States(the “Northeast Pipelines and Terminals”) for a purchase price of $175.0million from affiliates of ExxonMobil.

In connection with the closing of the NortheastPipelines and Terminals transaction, the Partnership entered into throughputagreements with ExxonMobil relating to each of the acquired petroleum productsterminals. The throughput agreements have an initial term of five years andrenew automatically for five successive three-year terms unless terminated byExxonMobil. The agreements provide that the Partnership will reserve storagecapacity at the terminals for ExxonMobil. The parties also agreed on theterminalling fees to be charged for volumes throughput at the terminals byExxonMobil. The amount of storage capacity reserved for ExxonMobil was basedinitially on historical usage, and adjusts periodically based on ExxonMobil’sactual usage.

ThePartnership’s cost of the Northeast Pipelines and Terminals totaled $178.6million, which consisted of the purchase price of $175.0 million, accruedenvironmental obligations of $2.3 million, and 

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direct acquisition costs of $1.3 million. Theallocated fair value, based on allocations by the Partnership of the assetsacquired is summarized as follows (in thousands):

| Material and  supplies inventory             |   | $       | 1,972   |   |
|----------------------------------------------|--------|---------|---------|--------|
| Prepaid expenses                             |   | 288     |    |
| Land                                         |   | 3,630   |    |
| Rights-of-way                                |   | 14,079  |    |
| Buildings and  leasehold improvements        |   | 4,043   |    |
| Machinery,  equipment and office furnishings |   | 154,633 |    |
| Total                                        |   | $       | 178,645 |   |

 

In the fourth quarter of 2005, the Partnership recordedan expense of $2.2 million associated with additional environmental costsidentified with the Northeast Pipelines and Terminals acquisition.

In November 2005, thePartnership acquired an approximately 29-mile ammonia pipeline located inTexas and, in a separate transaction, the 25% membership interest inWesPac-Reno that it did not previously own for approximately $3.5 million and$2.5 million, respectively.

*2004 Acquisitions*

On October 1, 2004, the Partnership acquired fromShell five refined petroleum products pipelines with aggregate mileage ofapproximately 900 miles and 24 petroleum products terminals with aggregatestorage capacity of approximately 9.3 million barrels located in the midwesternUnited States for a purchase price of approximately $517.0 million (the “MidwestPipelines and Terminals”). All five of therefined petroleum products pipelines are interstate common carriers regulatedby the FERC.

In connection with the acquisition of the MidwestPipelines and Terminals, the Partnership entered into a terminalling agreementand a transportation agreement with Shell, each with an initial term of threeyears. The terminalling and transportation agreements provide for a minimumrevenue commitment from Shell averaging approximately $35.7 million per yearfor the initial three-year term following the closing of the acquisition. Theterminalling agreement may be extended, at the option of Shell, for four,two-year periods with the committed revenues for subsequent years based uponthe revenues produced by Shell’s use of the terminals in the prior year. Bothof these agreements provide that if an event occurs beyond the control ofeither the Partnership or Shell, Shell has the right to reduce its revenuecommitments during the period of interruption. Through December 31, 2006,Shell has exceeded its minimum revenue commitment.

As part of the acquisition of these assets, Shellagreed to retain liabilities and expenses related to active environmentalremediation projects. In addition, Shell agreed to indemnify the Partnershipfor certain environmental liabilities arising from pre-closing conditionsrelating to the operation of the acquired pipelines, tank farms or terminals,so long as the Partnership provides notice of those conditions within two yearsof the closing of the acquisition. Shell’s indemnification obligation issubject to a $250,000 per-claim deductible and a $29.3 million aggregateliability.  The Partnership agreed toperform certain monitoring activities at its own expense associated with certainsites which are or could become subject to environmental remediation. ThePartnership accrued as part of its purchase price approximately $4.9 millionrelated to its obligation to monitor these sites.

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ThePartnership’s total cost of the Midwest Pipelines and Terminals totaled $523.7million, which consisted of the purchase price of $517.0 million, the accruedenvironmental monitoring costs of $4.9 million discussed above, plusdirect acquisition costs of $1.8 million. The allocated fair value based onallocations by the Partnership of assets acquired is summarized as follows (inthousands):

| Material and  supplies inventory             |   | $       | 1,014   |   |
|----------------------------------------------|--------|---------|---------|--------|
| Land                                         |   | 28,989  |    |
| Rights-of-way                                |   | 29,491  |    |
| Buildings and  leasehold improvements        |   | 13,586  |    |
| Machinery,  equipment and office furnishings |   | 450,601 |    |
| Total                                        |   | $       | 523,681 |   |

 

In the fourth quarter of2005, the Partnership recorded a reduction of expense of $3.1 millionassociated with a reduced estimate of the cost of the Partnership’s obligationto perform certain environmental monitoring activities at these sites. Managementcontinues to evaluate on an ongoing basis the amounts required for theseobligations.

*Summary*

The acquisitions discussedabove were accounted for as acquisitions of assets rather than the acquisitionsof businesses, as defined in Statement of Financial Accounting Standards No. 141—“BusinessCombinations.”  Accordingly, thePartnership allocated the cost of the assets acquired using appraised values onthe date of acquisition.  In conjunctionwith the appraisals, the Partnership determined that a significant portion ofthe value of the purchases relate to the physical assets acquired, which aregenerally depreciated over 50 years. The acquired pipelines and related assetswere allocated to the Pipeline Operations segment; the acquired terminals andrelated assets were allocated to the Terminalling and Storage segment. Note 20summarizes the allocation of the acquisitions by segment.

**5.**                 CONTINGENCIES

*Claimsand Proceedings*

BGH, the Partnership, and theOperating Subsidiaries in the ordinary course of business are involved invarious claims and legal proceedings, some of which are covered by insurance. BGHis generally unable to predict the timing or outcome of these claims andproceedings. Based upon its evaluation of existing claims and proceedings andthe probability of losses relating to such contingencies, BGH has accruedcertain amounts relating to such claims and proceedings, none of which areconsidered material.

In thethird quarter of 2006, the Partnership received penalty assessments from theIRS in the aggregate amount of $4.3 million based on a failure to timely fileexcise tax information returns relating to its terminal operations from January 2005through February 2006. The Partnership filed the information returns withthe IRS on May 10, 2006. In January 2007, the Partnership agreed topay the IRS approximately $0.6 million to settle and resolve the penaltyassessment. The settlement is subject to the negotiation and execution of aclosing agreement between the Partnership and the IRS. The negotiated penaltyassessment has been recorded as an expense in BGH’s consolidated financialstatements in the fourth quarter of 2006.

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*EnvironmentalContingencies*

In accordance with its accountingpolicy on environmental expenditures, the Partnership recorded operatingexpenses, net of insurance recoveries, of $6.2 million, $9.3 million and $6.2million for 2006, 2005 and 2004, respectively, which were related toenvironmental expenditures unrelated to claims and proceedings.****Expenditures, both capital and operating, relating toenvironmental matters are expected to continue due to the Partnership’scommitment to maintaining high environmental standards and to increasinglystrict environmental laws and government enforcement policies. Additionaldiscussions regarding environmental expenditures are contained in Notes 2(Summary of significant accounting policies), 10 (Accrued and other currentliabilities) and 12 (Other non-current liabilities).

In March, 2007, Buckeye was named asa defendant in an action entitled Madigan v. Buckeye Partners, L.P. filed inthe U.S. District Court for the Central District of Illinois. The action wasbrought by the State of Illinois Attorney General acting on behalf of theIllinois Environmental Protection Agency. The complaint alleges that Buckeyeviolated various Illinois state environmental laws in connection with a productrelease from Buckeye’s terminal located in Harristown, Illinois on or about June 11,2006 and various other product releases from Buckeye’s terminals and pipelinesin the State of Illinois during the period 2001 through 2006. The complaintseeks to recover state oversight costs, damages, and civil penalties and seeksinjunctive action requiring Buckeye to remediate the environmentalcontamination resulting from the product releases. Buckeye believes it hasmeritorious defenses to the allegations set forth in the complaint. Althoughit is possible that this complaint, if adversely determined, could, dependingon the relative amount involved have a material effect on the Partnership for afuture period, BGH does not believe that the outcome of the complaint will havea material effect on BGH’s consolidated financial condition or results ofoperations.

**6.   GOODWILLAND INTANGIBLE ASSETS**

BGH accounts for goodwill using Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets (“SFASNo. 142”),” which establishes financial accounting and reporting guidancefor acquired goodwill and other intangible assets. Under SFAS No. 142,goodwill and indefinite-lived intangible assets are no longer amortized but arereviewed at least annually for impairment. Intangible assets that have finiteuseful lives will continue to be amortized over their useful lives.

SFAS No. 142requires that goodwill be tested for impairment at least annually utilizing atwo-step methodology. The initial step requires BGH to determine the fair valueof each of its reporting units and compare it to the carrying value, includinggoodwill, of such reporting unit. If the fair value exceeds the carrying value,no impairment loss is recognized. However, a carrying value that exceeds itsfair value may be an indication of impaired goodwill. The amount, if any, ofthe impairment would then be measured and an impairment loss would berecognized. BGH’s goodwill of $234.6 million was mainly from the acquisitionsof Glenmoor and six terminals acquired by the Partnership in June 2000.

| ** **                | ** ** | **December 31,**   | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** |
| Pipeline  Operations      |       | $                       | 198,632    |   | $ | 198,632 |   |
| Terminalling and  Storage |       | 22,789                  |       | 22,789 |   |
| Other Operations          |       | 13,182                  |       | 13,182 |   |
| Total                     |       | $                       | 234,603    |   | $ | 234,603 |   |

 

In 2005, MainLine received $41,000 from the formerowners of Glenmoor for the final reconciliation related to the purchase priceof Glenmoor. The $41,000 was charged to goodwill. The impairment testingperformed each January 1st has determined that no impairment had beenincurred in 2006, 2005 or 2004.

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The Partnership’s amortizable intangible assetsconsist of contracts acquired in acquisitions. The contracts were acquired inconnection with the acquisition of BGC in March 1999 and the Taylor,Michigan terminal acquired in December 2005 (see Note 4).

For the years 2006, 2005and 2004, consolidated amortization expense related to amortizable intangibleassets was $0.6 million, $0.2 million and $0.2 million, respectively. BGH’sconsolidated amortization expense related to amortizable intangible assets isestimated to be $0.6 million per year for the years 2007 though 2011. The customercontracts are being amortized over periods ranging from 15 to 25 years (seeNote 9).

**7.   PREPAIDAND OTHER CURRENT ASSETS**

Prepaidand other current assets consist of the following:

| ** **             | ** ** | **December 31,**   | ** ** |
|------------------------|------------|-------------------------|------------|
| ** **             | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Prepaid insurance      |       | $                       | 7,728      |   | $ | 4,684 |   |
| Insurance  receivables |       | 12,093                  |       | 3,513 |   |
| Ammonia  receivable    |       | 6,284                   |       | — |   |
| Other                  |       | 8,070                   |       | 4,128 |   |
| Total                  |       | $                       | 34,175     |   | $ | 12,325 |   |

 

**8.   PROPERTY,PLANT AND EQUIPMENT**

Property,plant and equipment consist of the following:

| ** **                                   | ** ** | **December 31,**   | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| Land                                         |       | $                       | 41,197     |   | $ | 42,068 |   |
| Rights-of-way                                |       | 88,452                  |       | 84,690 |   |
| Buildings and  leasehold improvements        |       | 68,916                  |       | 65,741 |   |
| Machinery,  equipment and office furnishings |       | 1,559,145               |       | 1,368,663 |   |
| Construction in  progress                    |       | 130,307                 |       | 146,439 |   |
| Total property  plant and equipment          |       | 1,888,017               |       | 1,707,601 |   |
| Less: accumulated  depreciation              |       | (149,818                | )          | (119,860 | ) |
| Property, plant and equipment, net           |       | $                       | 1,738,199  |   | $ | 1,587,741 |   |

 

Depreciation expense was$39.0 million and $32.2 million for the years ended December 31, 2006 and2005, respectively, and $6.3 million for the period January 1 to May 4,2004 and $15.1 million for the period May 4 to December 31, 2004.

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**9.   OTHERNON-CURRENT ASSETS**

Othernon-current assets consist of the following:

| ** **                                                                                                                                  | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                                                                                  | ** ** | **(In thousands)** | ** ** |
| Contracts  acquired in acquisitions, net of accumulated amortization of $2,218 and $1,620  at December 31, 2006 and 2005, respectively |       | $                       | 9,582      |   | $ | 1,980 |   |
| Investment in  West Shore                                                                                                                   |       | 30,490                  |       | 31,323 |   |
| Investment in WTP                                                                                                                           |       | 29,878                  |       | 29,835 |   |
| Investment in  Muskegon                                                                                                                     |       | 15,622                  |       | 15,430 |   |
| Deposit for  natural gas liquids pipeline (see Note 4)                                                                                      |       | —                  |       | 7,745 |   |
| Cost of issuing  debt                                                                                                                       |       | 8,869                   |       | 11,489 |   |
| Rate swap value                                                                                                                             |       | —                  |       | 1,514 |   |
| Other                                                                                                                                       |       | 13,442                  |       | 10,314 |   |
| Total                                                                                                                                       |       | $                       | 107,883    |   | $ | 109,630 |   |

 

**10.   ACCRUEDAND OTHER CURRENT LIABILITIES**

Accruedand other current liabilities consist of the following:

| ** **                                        | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(In thousands)** | ** ** |
| Taxes—other than  income                     |       | $                       | 5,858      |   | $ | 6,569 |   |
| Accrued employee  benefit liability (see Note 13) |       | 2,340                   |       | — |   |
| Environmental  liabilities                        |       | 12,498                  |       | 6,996 |   |
| Interest                                          |       | 16,961                  |       | 16,648 |   |
| Retainage                                         |       | 940                     |       | 639 |   |
| Payable for  ammonia purchase                     |       | 6,072                   |       | — |   |
| Compensation and  vacation                        |       | 8,606                   |       | 8,751 |   |
| Other                                             |       | 16,499                  |       | 9,221 |   |
| Total                                             |       | $                       | 69,774     |   | $ | 48,824 |   |

 

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**11.   DEBT ANDCREDIT FACILITIES**

Debtconsists of the following:

| ** **                                                            | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                            | ** ** | **(In thousands)** | ** ** |
| *BGH.:*                                                               |       |                    |       |   |   |
| Revolving Credit Agreement                                            |       | $                       | —     |   | $ | — |   |
| Term Loan                                                             |       | —                  |       | 173,250 |   |
| *Services Company:*                                                   | * *   | * *                | * *   | * * | * * |
| 3.60% ESOP Notes due March 28, 2011                              |       | 27,184                  |       | 33,617 |   |
| Retirement premium.                                                   |       | (862                    | )          | (1,284 | ) |
| *The Partnership:*                                                    | * *   | * *                | * *   | * * | * * |
| 4.625% Notes due July 15, 2013                                   |       | 300,000                 |       | 300,000 |   |
| 6.75%Notes due August 15, 2033                                   |       | 150,000                 |       | 150,000 |   |
| 5.30%Notes due October 15, 2014                                  |       | 275,000                 |       | 275,000 |   |
| 5.125% Notes due July 1, 2017                                    |       | 125,000                 |       | 125,000 |   |
| Borrowings under Revolving Credit Facility                            |       | 145,000                 |       | 50,000 |   |
| Total debt                                                            |       | 1,021,322               |       | 1,105,583 |   |
| Other, including unamortized discounts and changes  in fair value (1) |       | (873                    | )          | (923 | ) |
| Subtotal long-term debt                                               |       | 1,020,449               |       | 1,104,660 |   |
| Less: current maturities                                              |       | (6,037                  | )          | (7,811 | ) |
| Total long-term  debt                                                 |       | $                       | 1,014,412  |   | $ | 1,096,849 |   |

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(1)          The December 31,2006 amount includes $1.5 million related to an adjustment to fair valueassociated with a hedge of fair value and ($2.4) million in unamortizeddiscounts. The December 31, 2005 amount includes $1.8 million related toan adjustment to fair value associated with a hedge of fair value and ($2.7)million in unamortized discounts.

The fair value of theconsolidated debt was estimated to be $990.0 million and $1,114.0 million at December 31,2006 and 2005, respectively. The value of the consolidated debt was calculatedusing interest rates currently available to BGH, the Partnership and ServicesCompany for issuance of debt with similar terms and remaining maturities andapproximate market values on the respective dates.

*BGH*

On August 9, 2006, BGH entered into a five-year$10.0 million revolving credit facility with SunTrust Bank, as bothadministrative agent and lender (the “BGH Credit Agreement”). The BGH CreditAgreement may be used for working capital and other partnership purposes. BGHhas pledged all of the limited liability company interests in Buckeye GP assecurity for its obligations under the BGH Credit Agreement. At December 31, 2006, therewere no borrowings under the BGH Credit Agreement.

The BGH CreditAgreement permits BGH to prepay all loans under the credit facility at any timewithout premium or penalty (other than customary LIBOR breakage costs). Borrowingsunder the BGH Credit Agreement bear interest under one of two rate options,selected by BGH, equal to either:

·       thegreater of (1) the federal funds rate plus 0.5% and (2) SunTrust Bank’sprime commercial lending rate; or

·       LIBOR,plus a margin which can range from 0.40% to 1.40%, based on the ratingsassigned by Standard & Poor’s Rating Services and Moody’s InvestorServices to the senior unsecured non-credit enhanced long-term debt of thePartnership.

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BGH’s ability to borrow amounts under the CreditAgreement is subject to satisfaction of certain customary conditions precedentto revolving loans and compliance with terms and conditions included in theCredit Agreement. The Credit Agreement defines “Restricted Subsidiaries” ascertain of BGH’s wholly owned subsidiaries. The Credit Agreement requires BGHto maintain leverage and funded debt coverage ratios. The leverage ratiocovenant requires BGH to maintain, as of the last day of each fiscal quarter, aratio of the total funded indebtedness of BGH and its Restricted Subsidiaries,measured as of the last day of each fiscal quarter, to the aggregate dividendsand distributions received by BGH and its Restricted Subsidiaries from thePartnership, plus all other cash received by BGH and the RestrictedSubsidiaries, measured for the preceding twelve months, less expenses, of notmore than 2.50 to 1.00. The funded debt coverage ratio covenant requires BGH tomaintain, as of the last day of each fiscal quarter, a ratio of totalconsolidated funded debt of BGH and all of its subsidiaries to the consolidatedEBITDA, as defined in the BGH Credit Agreement, of BGH and all of itssubsidiaries, measured for the preceding twelve months, of not more than 5.25to 1.00, subject to a provision for increases to 5.75 to 1.00 in connection withfuture acquisitions.

The BGH CreditAgreement prohibits BGH from declaring dividends or distributions if anydefault or event of default, as defined in the BGH Credit Agreement, hasoccurred or would result from such a declaration. In addition, the BGH CreditAgreement contains covenants and provisions requiring BGH to adhere to certaincovenants and limiting the ability of BGH and its Restricted Subsidiaries to,among other things:

·       incuror guarantee indebtedness;

·       makecertain negative pledges and grant certain liens;

·       makecertain loans, acquisitions and investments;

·       makeany material changes to the nature of BGH or Restricted Subsidiaries’ business;or

·       enterinto a merger, consolidation or sale of assets.

If an event ofdefault exists under the BGH Credit Agreement, the lender will be able toterminate the BGH Credit Agreement and accelerate the maturity of alloutstanding loans, as well as exercise other rights and remedies. The followingare some of the events which would constitute an event of default under the BGHCredit Agreement:

·       failureto pay any principal, interest, fees, expenses or other amounts when due;

·       failureof any representation or warranty to be true and correct in any materialrespect;

·       failureto perform or otherwise comply with the covenants in the BGH Credit Agreementor other loan documents, subject to certain grace periods;

·       defaultby BGH or any Restricted Subsidiary on the payment of any other indebtedness inexcess of $5.0 million or default by the Partnership or any of its subsidiarieson the payment of any indebtedness in excess of $25.0 million, or any defaultin the performance of any obligation or condition with respect to suchindebtedness beyond the applicable grace period if the effect of the default isto permit or cause the acceleration of the indebtedness;

·       bankruptcyor insolvency events involving BGH;

·       theentry against BGH of a judgment in excess of specified amounts, or otherwisehaving a material adverse effect, that is not stayed, discharged or deferredwithin specified periods;

·       achange in control of BGH (as such term is defined in the BGH Credit Agreement);

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·       theinvalidity or unenforceability of any material provision in the BGH CreditAgreement or related documents; and

·       theoccurrence of certain events with respect to employee benefit plans subject toERISA.

Prior to August 9, 2006, MainLine was party to aSenior Secured Credit Facility (the “Term Loan”) with a consortium of financialinstitutions under which MainLine had originally borrowed $180.0 million andhad $169.0 million outstanding at the time of BGH’s IPO. In accordance withrequirements under the Term Loan, MainLine had previously entered into twointerest rate swap agreements.

All amounts outstandingunder the Term Loan of $169.0 million were repaid with proceeds of BGH’s IPO,together with cash on hand, on August 9, 2006. In connection with therepayment of the loan in the third quarter of 2006, BGH expensed $1.6 millionof previously deferred financing costs, and , as discussed below, recorded areduction to interest and debt expense of $1.9 million as a result ofliquidating an interest rate cap and the two interest rate swaps agreements.

*Services Company*

Services Company had totaldebt outstanding of $26.3 million and $32.3 million at December 31, 2006and 2005 respectively, consisting of 3.60% Senior Secured Notes (the “3.60%ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-partylender. The 3.60% ESOP Notes were issued on May 4, 2004. The 3.60% ESOPNotes are collateralized by Services Company’s common stock and are guaranteedby Services Company. In addition, the Partnership has committed that, in theevent that the value of the Partnership’s LP Units owned by Services Companyfalls below 125% of the balance payable under the 3.60% ESOP Notes, thePartnership will fund an escrow account with sufficient assets to bring thevalue of the total collateral (the value of the Partnership’s LP Units owned byServices Company and the escrow account) up to the 125% minimum. Amountsdeposited in the escrow account are returned to the Partnership when the valueof the Partnership’s LP Units owned by Services Company’s returns to an amountthat exceeds the 125% minimum. At December 31, 2006, the value of thePartnership’s LP Units owned by Services Company exceeded the 125% requirement.

*The Partnership*

On June 30, 2005, the Partnership sold $125.0million aggregate principal of its 5.125% Notes due July 1, 2017 in anunderwritten public offering. Proceeds from the note offering, afterunderwriters’ fees and expenses, were approximately $123.9 million. Proceedsfrom the offering were used in part to repay $122.0 million under thePartnership’s 5-year Revolving Credit Agreement.

In connection with the Midwest Pipelines and Terminalsacquired from Shell on October 1, 2004, the Partnership borrowed a totalof $490.0 million, consisting of $300.0 million under a 364-day interimloan (the “Interim Loan”) and $190.0 million under the Partnership’s $400.0million five-year revolving credit facility. On October 12, 2004, thePartnership sold $275.0 million aggregate principal of its 5.300% Notes due2014 in an underwritten public offering (the “5.300% Note Offering”). Proceedsfrom the 5.300% Note Offering, net of underwriter’s discount and commissions,were approximately $272.1 million. Proceeds from the 5.300% Note Offering,together with additional borrowings under the Credit Facility, were used torepay the Interim Loan. On October 19, 2004, the Partnership issued 5.5million LP units in an underwritten public offering (the “LP Unit Offering”). Proceedsfrom the LP Unit Offering were approximately $223.3 million, after underwriters’discount and expenses, and were used to reduce amounts outstanding under theCredit Facility.

On November 13, 2006 the Partnership entered intoa new a $400 million 5-year revolving credit facility (the “CreditFacility”) with a syndicate of banks. The Credit Facility, which replaced thePartnership’s previous $400 million credit facility, contains a one-time expansionfeature to $600 million 

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subject to certainconditions. Borrowings under the Credit Facility are guaranteed by certain ofthe Partnership’s subsidiaries. The Credit Facility matures on November 13,2011, but may be extended for up to two additional 12-month periods undercertain circumstances. The weighted average interest rate on amountsoutstanding under the Credit Facility at December 31, 2006 was 5.59 %.

Borrowings under the Credit Facility bear interestunder one of two rate options, selected by the Partnership, equal to either (i) thegreater of (a) the federal funds rate plus 0.5% and (b) SunTrust Bank’sprime rate plus an applicable margin, or (ii) LIBOR plus an applicablemargin. The applicable margin is determined based on the current utilizationlevel of the Credit Facility and on ratings assigned by Standard &Poor’s and Moody’s Investor Services for the Partnership’s senior unsecurednon-credit enhanced long-term debt.  At December 31,2006 and December 31, 2005, the Partnership had $145.0 million and $50.0million outstanding under the Credit Facility and its predecessor creditfacility, respectively, and had committed $2.1 million and $1.7 million insupport of letters of credit, respectively.

The Credit Facilitycontains covenants and provisions that:

·       Restrictthe Partnership and certain of its subsidiaries’ ability to incur additionalindebtedness based on a Funded Debt Ratio described below;

·       Prohibitthe Partnership and certain of its subsidiaries from creating or incurringcertain liens on their property;

·       Prohibitthe Partnership and certain of its subsidiaries from disposing of propertymaterial to their operations; and

·       Limitconsolidations, mergers and asset transfers by the Partnership and certain ofits subsidiaries.

The Credit Facility requires that the Partnership andcertain of its subsidiaries maintain a maximum “Funded Debt Ratio” which iscalculated using “EBITDA” as defined in the Credit Facility. The CreditFacility defines EBITDA for periods prior to the fourth quarter of 2006 asearnings before interest, taxes, depreciation, depletion, amortization andincentive compensation payments to Buckeye GP, and for periods commencing afterOctober 1, 2006 as earnings before interest, taxes, depreciation,depletion and amortization, in each case excluding the income of certainmajority-owned subsidiaries and equity investments (but including distributionsfrom those majority-owned subsidiaries and equity investments).

The Partnership’s Funded Debt Ratio at the end of anyquarterly period equals the ratio of the long-term debt of the Partnership andcertain of its subsidiaries (including the current portion, if any) to EBITDAfor the previous four fiscal quarters. As of the end of any fiscal quarter, theFunded Debt Ratio may not exceed 4.75 to 1.00, subject to a provision forincreases to 5.25 to 1.00 in connection with future acquisitions. At December 31,2006 the Partnership’s Funded Debt Ratio was 4.40 to 1.00.

The Credit Facility provides for a “change of control”event of default that will be triggered if (i) Carlyle/Riverstone ceasesto beneficially own 100% of the sole general partner of BGH, (ii) BGHceases to own 100% of Buckeye GP or (iii) Buckeye GP ceases to be the solegeneral partner of Buckeye.

At December 31, 2006the Partnership was in compliance with all of the covenants under the CreditFacility.

*DerivativeInstruments*

In 2004, BGH had purchased an interest rate cap on anotional amount of $50.0 million for $375,000. Under the interest rate cap, ifthe variable interest rate BGH paid on a former loan exceeded 5.0%, the lenderwould pay BGH the difference between the variable rate in effect on the $50.0million notional amount and the capped rate. BGH did not designate the interestrate cap as a cash flow hedge and, 

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accordingly, changes invalue of the cap have been reflected in income. The interest rate cap wasterminated in connection with BGH’s IPO.

In accordance with requirements of the Term Loan, BGHentered into two interest rate swap agreements. BGH designated thesetransactions as hedges of BGH’s cash flow risk associated with the Term Loan.The first agreement, which terminated on December 22, 2005, was for anotional amount of $172.8 million and called for BGH to receive floating ratepayments based on the notional amount times a rate equal to three-month LIBORin exchange for paying a fixed rate based on the notional amount times 3.029%.The interest rate swap was effective December 22, 2004, the date ofclosing of the Term Loan and terminated on December 22, 2005. Thethree-month LIBOR reset on dates that coincided with the reset dates for thevariable interest rate of the Term Loan. The second agreement was for anotional amount of $86.0 million and called for BGH to receive floating ratepayments based on the notional amount times a rate equal to three-month LIBORin exchange for paying a fixed rate based on the notional amount times 3.853%.The agreement became effective on December 22, 2005 and was terminated inconnection with BGH’s IPO. During 2005, BGH entered into another interest rateswap agreement. This agreement was for a notional amount of $12.0 million andcalled for BGH to receive the floating rate payments based on the notionalamount times a rate equal to three-month LIBOR in exchange for paying a fixedrate based on the notional amount times 4.54%. This agreement was terminated inconnection with the IPO.

BGH recorded a gain of approximately $1.9 million upontermination of the interest rate cap and the two outstanding interest rate swapagreements.

In December 2004, thePartnership terminated an interest rate swap agreement associated with its4.625% Notes due July 15, 2013 and received proceeds of $2.0 million. In2004 interest expense was reduced by $2.6 million as a result of the swap agreement.In accordance with FASB Statement No. 133—“Accounting for DerivativeInstruments and Hedging Activities,” the Partnership deferred the $2.0 milliongain as an adjustment to the fair value of the hedged portion of thePartnership’s debt and is amortizing the gain as a reduction of interestexpense over the remaining term of the hedged debt. Interest expense wasreduced by $0.2 million during each of the years ended December 31, 2006and 2005 related to the amortization of the gain on the interest rate swap.

*Consolidated Debt MaturityTable.*

Thefollowing table shows scheduled maturities of the principal amounts ofconsolidated debt obligations for the next 5 years and in total thereafter (inthousands).

| 2007       |   | $       | 6,037     |   |
|------------|--------|---------|-----------|--------|
| 2008       |   | 6,289   |      |
| 2009       |   | 6,294   |      |
| 2010       |   | 6,177   |      |
| 2011       |   | 146,525 |      |
| Thereafter |   | 850,000 |      |
| Total debt |   | $       | 1,021,322 |   |

 

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**12.   OTHERNON-CURRENT LIABILITIES**

Othernon-current liabilities consist of the following:

| ** **                                          | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(In thousands)** | ** ** |
| Accrued employee  benefit liabilities (see Note 13) |       | $                       | 40,933     |   | $ | 40,829 |   |
| Accrued  environmental liabilities                  |       | 16,691                  |       | 14,397 |   |
| Deferred  consideration                             |       | 20,100                  |       | 20,100 |   |
| Other                                               |       | 4,846                   |       | 1,210 |   |
| Total                                               |       | $                       | 82,570     |   | $ | 76,536 |   |

 

**13.   PENSIONSAND OTHER POSTRETIREMENT BENEFITS**

*RIGP and RetireeMedical Plan*

Services Company sponsors a retirement incomeguarantee plan (a defined benefit plan) (the “RIGP”) which generally guaranteesemployees hired before January 1, 1986, a retirement benefit at leastequal to the benefit they would have received under a previously terminateddefined benefit plan. Services Company’s policy is to fund amounts necessary toat least meet the minimum funding requirements of ERISA.

Services Company also provides post-retirement healthcare and life insurance benefits to certain of its retirees. To be eligible forthese benefits an employee had to be hired prior to January 1, 1991 andmeet certain service requirements. Services Company does not pre-fund thispostretirement benefit obligation.

As discussed in Note 2, BGH adopted the provisions ofSFAS No. 158 as of December 31, 2006. In connection with adoptingSFAS No. 158, Buckeye recorded an increase in other comprehensive incomeof approximately $0.8 million, consisting of an increase of $4.6 millionrelated to the postretirement benefits plan and a decrease of $3.8 millionrelated to the RIGP. These SFAS 158 adjustments were reclassified tonon-controlling interest in BGH’s 2006 consolidated balance sheet.

In December 2006 Services Company amended thepostretirement health care and life insurance plan (the “Retiree Medical Plan”)to freeze amounts payable to Medicare-eligible beneficiaries at $2,500 per yearcommencing in 2008. This change had the effect of reducing BGH’s postretirementbenefit obligation by approximately $20.4 million. Because this amendment wasadopted near year-end, the effects of the amendment did not impact BGH’s netincome. However, coincident with the adoption of SFAS No. 158, theamendment did result in an increase in other comprehensive income of $20.4million, which is included in the total adjustment of $4.6 million described above.BGH expects that this plan amendment will result in a decrease inpostretirement benefits expense of approximately $4.0 million in 2007.

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Areconciliation of the beginning and ending balances of the benefit obligationsunder the RIGP and the Retiree Medical Plan is as follows:

| ** **                               | ** ** | **RIGP**                | ** ** | **Retiree Medical Plan** | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **2006**                | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(In thousands)** | ** ** |
| **Change in benefit obligation**         | ** ** | ** **              | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit obligation at  beginning of year |       | $                       | 20,679     |                               | $          | 17,945 |   | $ | 50,235 |   | $ | 44,179 |   |
| Service cost                             |       | 922                     |       | 976                                |       | 857 |   | 789 |   |
| Interest cost                            |       | 1,000                   |       | 998                                |       | 2,948 |   | 2,628 |   |
| Actuarial loss (gain)                    |       | (1,816                  | )          | 1,626                              |       | 3,452 |   | 5,209 |   |
| Change in assumptions                    |       | —                  |       | 300                                |       | — |   | — |   |
| Amendment(1)                             |       | —                  |       | —                             |       | (20,401 | ) | (665 | ) |
| Benefit payments                         |       | (1,487                  | )          | (1,166                             | )          | (2,073 | ) | (1,905 | ) |
| Benefit obligation at end of year        |       | $                       | 19,298     |                               | $          | 20,679 |   | $ | 35,018 |   | $ | 50,235 |   |

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(1)          In 2005, the RetireeMedical Plan was amended to increase the retail drug deductible. In 2006, theRetiree Medical Plan was amended to fix amounts payable to Medicare-qualifiedplan participants at $2,500 per year commencing in 2008.

Areconciliation of the beginning and ending balances of the fair value of planassets under the RIGP and the Retiree Medical Plan is as follows:

| ** **                                      | ** ** | **RIGP**                | ** ** | **Retiree Medical Plan** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2006**                | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** |
| **Change in plan assets**                       | ** ** | ** **              | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value of plan assets at  beginning of year |       | $                       | 11,033     |                               | $          | 9,603 |   | $ | — |   | $ | — |   |
| Actuarial return on plan  assets                |       | 922                     |       | 796                                |       | — |   | — |   |
| Employer contribution                           |       | 575                     |       | 1,800                              |       | 2,073 |   | 1,905 |   |
| Benefits paid                                   |       | (1,487                  | )          | (1,166                             | )          | (2,073 | ) | (1,905 | ) |
| Fair value of plan assets at  end of year       |       | $                       | 11,043     |                               | $          | 11,033 |   | $ | — |   | $ | — |   |
| Funded status at end of year                    |       | $                       | (8,255     | )                                  | $          | (9,646 | ) | $ | (35,018 | ) | $ | (50,235 | ) |

 

Amountsrecognized in BGH’s balance sheet as liabilities consist of the following:

| ** **                                            | ** ** | **RIGP**                | ** ** | **Retiree Medical Plan** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2006**                | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| Accrued employee benefit liabilities—current     |       | $                       | —     |                               | $          | — |   | $ | 2,340 |   | $ | — |   |
| Accrued  employee benefit liabilities—noncurrent |       | $                       | 8,255      |                               | $          | 3,770 |   | $ | 32,678 |   | $ | 37,059 |   |

 

Amountsrecognized in Buckeye’s 2006 accumulated other comprehensive income are shownin the table below. However, these SFAS 158 adjustments were re-classified tonon-controlling interest in BGH’s 2006 consolidated balance sheet.

| ** **                  | ** ** | **RIGP**                | ** ** | **Retiree Medical Plan** | ** ** |
|-----------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                  | ** ** | **2006**                | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(In thousands)** | ** ** |
| Net actuarial loss (gain)   |       | $                       | 5,278      |                               |       | $ | — |   |   | $ | 17,613 |   |   | $ | — |   |   |
| Prior service cost (credit) |       | (1,438                  | )          |                               | —     |   |   | (22,238 | ) |   | — |   |   |
| Total                       |       | $                       | 3,840      |                               |       | $ | — |   |   | $ | (4,625 | ) |   | $ | — |   |   |

 

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Informationregarding the accumulated benefit obligation in excess of plan assets for theRIGP is as follows:

| ** **                      | ** ** | **RIGP**           | ** ** |
|---------------------------------|------------|--------------------|------------|
| ** **                      | ** ** | **2006**           | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Projected benefit  obligation   |       | $19,298            |       | $20,679 |   |
| Accumulated  benefit obligation |       | $11,067            |       | $12,341 |   |
| Fair value of plan  assets      |       | $11,043            |       | $11,033 |   |

 

The weightedaverage assumptions used in accounting for the RIGP and the Retiree MedicalPlan were as follows:

| ** **                                                                     | ** ** | **RIGP**   | ** ** | **Retiree Medical Plan** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**   | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Weighted average expense assumptions for the years ended  December 31** | ** ** | ** ** | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                                  |       | 5.40       | %          | 5.30                               | %          | 5.50 | % | 5.75 | % | 6.00 | % | 6.25 | % |
| Expected return on plan assets                                                 |       | 8.50       | %          | 8.50                               | %          | 8.50 | % | N/A |   | N/A |   | N/A |   |
| Rate of compensation increase                                                  |       | 4.00       | %          | 4.00                               | %          | 4.00 | % | N/A |   | N/A |   | N/A |   |

 

| ** **                                                             | ** ** | **RIGP**   | ** ** | **Retiree Medical  Plan** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **2006**   | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Weighted-average  balance sheet assumptions as of December 31** | ** ** | ** ** | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                          |       | 5.70       | %          | 5.40                           | %          | 5.75 | % | 5.75 | % |
| Rate of  compensation increase                                         |       | 4.00       | %          | 4.00                           | %          | N/A |   | N/A |   |

 

The assumed rate of cost increase in the RetireeMedical Plan in 2006 was 9.00% for both non-Medicare eligible and Medicareeligible retirees. The assumed annual rates of cost increases declines eachyear through 2011 to a rate of 4.50%, and remain at 4.50% thereafter for bothnon-Medicare eligible and Medicare eligible retirees.

Assumedhealthcare cost trend rates have a significant effect on the amounts reportedfor the healthcare plans. The effect of a 1.00% change in the health care costtrend rate for each future year would have had the following effects on 2006results:

| ** **                                                | *** *** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|-----------------------------------------------------------|--------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** **   | **(In thousands)**               | ** ** |
| Effect on total service cost and interest cost components |         |                                  | $          | 519                                   |       |   |   | $ | (500 | ) |   |
| Effect on postretirement  benefit obligation              |         |                                  | $          | 1,460                                 |       |   |   | $ | (1,400 | ) |   |

 

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Thecomponents of the net periodic benefit cost recognized for the RIGP and theRetiree Medical Plan were as follows:

| ** **                                   | ** ** | **RIGP**                | ** ** | **Retiree Medical Plan** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **2006**                | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| **Components  of net periodic benefit cost** |       |                    |       |                               |       |   |   |   |   |   |   |   |   |
| Service cost                                 |       | $                       | 922        |                               | $          | 976 |   | $ | 816 |   | $ | 857 |   | $ | 789 |   | $ | 743 |   |
| Interest cost                                |       | 1,000                   |       | 998                                |       | 900 |   | 2,948 |   | 2,628 |   | 2,510 |   |
| Expected return on plan assets               |       | (860                    | )          | (762                               | )          | (569 | ) | — |   | — |   | — |   |
| Amortization of prior service  benefit       |       | (454                    | )          | (454                               | )          | (467 | ) | (690 | ) | (400 | ) | (315 | ) |
| Amortization of unrecognized  losses         |       | 612                     |       | 804                                |       | 654 |   | 1,542 |   | 793 |   | 524 |   |
| Net periodic benefit cost                    |       | $                       | 1,220      |                               | $          | 1,562 |   | $ | 1,334 |   | $ | 4,657 |   | $ | 3,810 |   | $ | 3,462 |   |

 

During 2004, the recognition of the MedicarePrescription Drug Law resulted in decreases in service costs of $27,000,interest costs of $97,900 and amortization of unrecognized loss of $161,900.

During2007, Buckeye expects that the following amounts currently included in othercomprehensive income will be recognized in its consolidated statement ofincome:

| ** **                                  | ** ** | **RIGP**                | ** ** | **Retiree Medical  Plan** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **(In thousands)** | ** ** |
| Amortization of  unrecognized losses        |       | $                       | 462        |                           |       | $ | 1,580 |   |   |
| Amortization of prior  service cost benefit |       | $                       | (454       | )                              |       | $ | (3,235 | ) |   |

 

BGHestimates the following benefit payments, which reflect expected futureservice, as appropriate, will be paid in the years indicated:

| ** ** | ** ** | **RIGP**                | ** ** | **Retiree Medical  Plan** | ** ** |
|------------|------------|-------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **(In thousands)** | ** ** |
| 2007       |       | $                       | 2,565      |                           |       | $ | 2,340 |   |   |
| 2008       |       | 2,527                   |       |                           | 2,244      |   |   |
| 2009       |       | 2,831                   |       |                           | 2,334      |   |   |
| 2010       |       | 3,533                   |       |                           | 2,437      |   |   |
| 2011       |       | 3,076                   |       |                           | 2,582      |   |   |
| 2012-2016  |       | 14,032                  |       |                           | 14,417     |   |   |
|            |            |                         |            |                                |            |  |  |  |  |

 

BGH expects to receive Medicare prescription subsidiesof $317,000 in 2007 and, due to the change in the Retiree Medical Plandiscussed above, will not receive any Medicare prescriptions subsidies in 2008or thereafter.

A minimum funding contribution is not required to bemade to the RIGP during 2007. Funding requirements for subsequent years areuncertain and will significantly depend on whether the plan’s actuary changesany assumptions used to calculate plan funding levels, the actual return onplan assets and any legislative or regulatory changes affecting plan fundingrequirements. For tax planning, financial planning, cash flow management orcost reduction purposes, BGH may increase, accelerate, decrease or delaycontributions to the plan to the extent permitted by law.

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BGHdoes not fund the Retiree Medical Plan and, accordingly, no assets are investedin the plan. A summary of investments in the RIGP are as follows at December 31,2006 and 2005:

| ** **                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Mutual funds—equity securities |       |     | 58         | %        |       |   | 45 | % |   |
| Mutual funds—money market      |       |     | 17         |     |       |   | 29 |   |   |
| Coal lease                          |       |     | 25         |     |       |   | 26 |   |   |
| Total                               |       |     | 100        | %        |       |   | 100 | % |   |

 

The RIGP investment policydoes not target specific asset classes, but seeks to balance the preservationand growth of capital in the plan’s mutual fund investments with the incomederived with proceeds from the coal lease. While no significant changes in theasset allocation of the plan are expected during the upcoming year, ServicesCompany may make changes at any time.

*Retirement and SavingsPlan*

Services Company also sponsors a retirement andsavings plan (the “Retirement Plan”) through which it provides retirementbenefits for substantially all of its regular full-time employees, except thosecovered by certain labor contracts. The Retirement Plan consists of twocomponents. Under the first component, Services Company contributes 5% of eacheligible employee’s covered salary to an employee’s separate account maintainedin the Retirement Plan. Under the second component, for all employees notparticipating in the ESOP, Services Company makes a matching contribution intothe employee’s separate account for 100% of an employee’s contribution to theRetirement Plan up to 6% of an employee’s eligible covered salary. For ServicesCompany employees who participate in the ESOP, Services Company does not make amatching contribution. Total costs of the Retirement Plan were approximately$4.3 million and $3.6 million for the years ended December 31, 2006 and2005, respectively, and $1.0 million and $1.9 million for the periods January 1to May 4, 2004 and May 4 to December 31, 2004, respectively.

Services Company also participates in a multi-employerretirement income plan that provides benefits to employees covered by certainlabor contracts. Pension expense for the plan was $164,000 and $175,000 for theyears ended December 31, 2006 and 2005, respectively, and $118,000 and$72,000 for the periods January 1 to May 4, 2004 and May 4 to December 31,2004, respectively.

In addition, ServicesCompany contributes to a multi-employer postretirement benefit plan thatprovides health care and life insurance benefits to employees covered bycertain labor contracts. The cost of providing these benefits was approximately$143,000 and $135,000 for the years ended December 31, 2006 and 2005,respectively and $52,000 and $79,000 for the periods ended January 1 to May 4,2004 and May 4 to December 31, 2004, respectively.

**14.**   UNITCOMPENSATION PLANS

The Partnership sponsors a Unit Option andDistribution Equivalent Plan (the “Option Plan”), pursuant to which it grantsoptions to purchase LP Units at 100% of the market price of the LP Units on thedate of grant to key employees of Services Company. The options vest threeyears from the date of grant and expire ten years from the date of grant. Asoptions are exercised, the Partnership issues new LP Units. ThePartnership has not historically repurchased, and does not expect to repurchasein 2007, any of its LP Units.

Effective January 1, 2006, the Partnershipadopted the fair value measurement and recognition provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”),using the modified prospective basis transition method. Under this method,unit-based compensation expense recognized for the year ended December 31,2006 includes: 

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(a) compensationexpense for all grants made prior to, but not yet vested as of, January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, and (b) compensation expense forall grants made on or after January 1, 2006, based on the grant date fairvalue estimated using the Black-Scholes option pricing model. The Partnershiprecognizes compensation expense for awards granted on or after January 1,2006, on a straight-line basis over the requisite service period.

For the retirement eligibility provisions of theOption Plan, the Partnership follows the non-substantive vesting method andrecognizes compensation expense immediately for options granted toretirement-eligible employees, or over the period from the grant date to thedate retirement eligibility is achieved. Unit-based compensation expenserecognized in the consolidated statements of income for the year ended December 31,2006 is based upon options ultimately expected to vest. In accordance with SFASNo. 123R, forfeitures have been estimated at the time of grant and will berevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures were estimated based upon historical experience.

The impact of adopting the accounting provisions ofSFAS No. 123R for the Option Plan is immaterial to BGH’s consolidatedfinancial statements.

Thefair value of unit options granted to employees was estimated using theBlack-Scholes option pricing model with the following weighted-averageassumptions for the years ended December 31, 2006, 2005 and 2004, respectively:

| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected dividend  yield                   |       | 6.9      | %          | 6.0      | %          | 6.2      | %          |
| Expected unit  price volatility            |       | 20.7     | %          | 16.2     | %          | 16.5     | %          |
| Risk-free  interest rate                   |       | 4.6      | %          | 4.0      | %          | 3.0      | %          |
| Expected life (in  years)                  |       | 6.5      |       | 4.0      |       | 4.0      |       |
| Weighted-average  fair value at grant date |       | $        | 4.52       |     | $          | 3.56     |       | $ | 2.79 |   |
|                                            |            |          |            |          |            |          |            |  |  |  |

 

The expected volatility is based on historicvolatility of the Partnership’s market-traded LP Units. EffectiveJanuary 1, 2006, the Partnership has elected to use the simplified methodfor the expected life which is the option vesting period of three years plusthe option term of ten years divided by two. The risk-free interest rate iscalculated using the U.S. Treasury yield curves in effect at the time of grant,for the periods within the expected life of the options.

Thefollowing is a summary of the changes in the LP Unit options outstanding underthe Option Plan as of December 31, 2006, 2005 and 2004:

| ** **                                                      | ** ** | **2006**          | ** ** | **2005**            | ** ** | **2004**          | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|-------------------|------------|
| ** **                                                      | ** ** | ** **        | ** ** | **Weighted**        | ** ** | ** **        | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                      | ** ** | **Units**         | ** ** | **Average**         | ** ** | **Units**         | ** ** | **Average** | ** ** | **Units** | ** ** | **Average** | ** ** |
| ** **                                                      | ** ** | **Under  Option** | ** ** | **Exercise  Price** | ** ** | **Under  Option** | ** ** | **Exercise  Price** | ** ** | **Under  Option** | ** ** | **Exercise  Price** | ** ** |
| Outstanding at  beginning of year                               |       | 246,900           |       |                | $          | 39.44             |       |   | 222,300 |   |   | $ | 37.14 |   |   | 215,000 |   |   | $ | 31.15 |   |   |
| Granted                                                         |       | 87,000            |       |                | 44.69      |              |       | 61,700 |   |   | 45.88 |   |   | 66,400 |   |   | 41.76 |   |   |
| Exercised                                                       |       | (35,500           | )          |                | 34.70      |              |       | (37,100 | ) |   | 36.37 |   |   | (59,100 | ) |   | 20.31 |   |   |
| Forfeitures                                                     |       | —            |       |                | —     |              |       | — |   |   | — |   |   | — |   |   | — |   |   |
| Outstanding at  end of year                                     |       | 298,400           |       |                | $          | 41.44             |       |   | 246,900 |   |   | $ | 39.44 |   |   | 222,300 |   |   | $ | 37.14 |   |   |
| Options  exercisable at year-end                                |       | 92,600            |       |                | $          | 35.33             |       |   | 73,800 |   |   | $ | 32.96 |   |   | 52,400 |   |   | $ | 30.71 |   |   |
| Weighted average fair  value of options granted during the year |       | $                 | 4.52       |                |       |              |       |   | $ | 3.56 |   |   |   |   |   | $ | 2.79 |   |   |   |   |   |
|                                                                 |            |                   |            |                     |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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At December 31, 2006, the aggregate intrinsicvalue of options outstanding and exercisable was $1,491,000 and $1,033,000,respectively. The aggregate intrinsic value represents the total intrinsicvalue that would have been received by the option holders had all optionholders exercised their options on December 31, 2006. Intrinsic value isdetermined by calculating the difference between the Partnership’s closing LPUnit price on the last trading day of 2006 and the exercise price, multipliedby the number of LP Units. The total intrinsic value of options exercisedduring the year ended December 31, 2006 was $363,000. The total number ofin-the-money options exercisable as of December 31, 2006 was 92,600. As ofDecember 31, 2006, total unrecognized compensation cost related tounvested options was $300,000. The cost is expected to be recognized over aweighted average period of 1.2 years. At December 31, 2006, 570,900 LPUnits were available for grant in connection with the Option Plan. The totalfair value of options vested during the years ended December 31, 2006,2005, and 2004 was $302,900, $312,200 and $224,000, respectively.

Thefollowing table summarizes information relating to LP Unit options outstandingunder the Option Plan (all of which are vested or expected to vest) at December 31,2006:

| ** **        | ** **               | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------|--------------------------|------------------------------|------------|------------------------------|------------|
| ** **        | ** **               | **Options**                  | ** ** | **Weighted Average**    | ** ** | **Weighted** | ** ** | **Options** | ** ** | **Weighted** | ** ** |
| **Range of** | ** **               | **Outstanding**              | ** ** | **Remaining**                | ** ** | **Average** | ** ** | **Exercisable** | ** ** | **Average** | ** ** |
| ** **        | **Exercise Prices** | ** **                   | ** ** | **at 12/31/06**         | ** ** | **Contractual Life** | ** ** | **Exercise Price** | ** ** | **at 12/31/06** | ** ** | **Exercise Price** | ** ** |
| $25.00 to $30.00  |                     |                         | 14,100     |                         |       |   | 2.6 Years |   |   |   | $ | 27.32 |   |   |   | 14,100 |   |   |   | $ | 27.32 |   |   |
| $30.01 to $35.00  |                     |                         | 17,500     |                         |       |   | 4.1 Years |   |   |   | $ | 33.90 |   |   |   | 17,500 |   |   |   | $ | 33.90 |   |   |
| $35.01 to $40.00  |                     |                         | 66,000     |                         |       |   | 5.9 Years |   |   |   | $ | 37.70 |   |   |   | 61,000 |   |   |   | $ | 37.59 |   |   |
| $40.01 to $45.00  |                     |                         | 140,500    |                         |       |   | 8.3 Years |   |   |   | $ | 43.66 |   |   |   | — |   |   |   | $ | — |   |   |
| $45.01 to $50.00  |                     |                         | 60,300     |                         |       |   | 8.3 Years |   |   |   | $ | 45.85 |   |   |   | — |   |   |   | $ | — |   |   |
| Total             |                     |                         | 298,400    |                         |       |   | 7.3 Years |   |   |   | $ | 41.44 |   |   |   | 92,600 |   |   |   | $ | 35.33 |   |   |
|                   |                          |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

UntilApril 29, 2004, the Partnership offered a unit option loan programwhereby optionees could borrow, at market rates, up to 95% of the purchaseprice of the LP Units and up to 100% of the applicable income tax withholdingobligation in connection with such exercise. At December 31, 2006, twoemployees had outstanding loans under the unit option loan program. Theaggregate borrowings outstanding at December 31, 2006 and 2005 were$390,000 and $535,000, respectively, of which $355,000 and $483,000,respectively, were related to the purchase price of the LP Units.

*Unit CompensationPlan*

MainLine’s equity consisted of class A units (“AUnits”) and class B units (“B Units”). On May 4, 2004, MainLineissued 16,216,668 of its B Units to certain members of senior management for noconsideration under a Unit Compensation Plan. The B Units were subordinate tothe A Units. One half, or 8,108,334, of the B Units (“Time Based B Units”)vested ratably over five years. The remainder, or 8,108,334 of the B Units (“PerformanceBased B Units”) vested over five years only if certain performance targetsbased on the incentive compensation received by MainLine from the Partnershipwere met.

Coincident with the IPO, the equity interests ofMainLine were exchanged for the equity interests of BGH. The total 145,950,000of A Units of MainLine were exchanged for 16,438,000 Common Units of the BGH. The16,216,668 B Units of MainLine were exchanged for 1,362,000 Management Units ofthe BGH. The 9% cumulative annual return on MainLine’s A Units and GP Units waseliminated as part of the exchange. The Management Units are exchangeable forCommon Units on a one for one basis at the option of the holder. The vestingschedule of the Management Units of the BGH varies from that of MainLine’s B Unitsfor which they were exchanged. Seventy percent, or 953,400 Management Units,were vested immediately upon their exchange, and the remaining 30% or 408,600of the Management Units vest over a three year period with 136,200 of the Unitsvesting on each May 4, of 2007, 2008 and 2009.

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MainLine recorded no compensation expense for the TimeBased B Units for the years ended December 31, 2005 and 2004. Although thegrant date of May 4, 2004 represented the measurement date for the TimeBased B Units (the date both the number of units available for purchase and thepurchase price (zero) were known), there was a nominal fair value for theseunits at the grant date. Under the modified prospective transition methodpermitted by SFAS No. 123R, compensation expense for the Time Based BUnits subsequent to January 1, 2006 is measured based on the nominal fairvalue established at the grant date.

Prior to January 1, 2006, MainLine recognizeddeferred compensation for the Performance Based B Units when it was probable thatthe performance target specified in MainLine’s partnership agreement would bemet. The cost of this deferred compensation was recognized over the respectiveservice periods of the performance targets until December 31, 2005.MainLine recorded compensation expense for the Performance Based B Units of$3.5 million in general and administrative expenses in the consolidatedstatements of income for the year ended December 31, 2005. Under themodified prospective transition method permitted by SFAS No. 123R, compensationexpense for the Performance Based B Units subsequent to January 1, 2006was measured based on the nominal fair value established at the grant date. Accordingly,MainLine recorded no compensation expense related to the Performance Based BUnits subsequent to December 31, 2005.

As noted above, in connection with the IPO, on August 9,2006 the holders of MainLine’s B Units exchanged all of the B Units for1,362,000 Management Units of BGH. Under the provisions of SFAS No. 123R,BGH recognized deferred compensation for the Management Units for which both (i) vestingwas accelerated compared to the B Units for which they were exchanged, and (ii) werenow deemed probable of vesting compared to BGH’s previous estimates. BGHdetermined that these criteria applied to 272,400 Management Units, the fairvalue of which was $4.6 million at August 9, 2006. There are no additionalManagement Units available for grant in connection with BGH’s Unit CompensationPlan.

Of the total deferredcompensation recognized of $4.6 million, BGH recognized approximately $3.5million as an expense since the IPO in 2006 (with an offsetting increase inpartners’ capital) and will recognize the balance of $1.1 million as an expenseratably in future periods ending May 4, 2009.

**15.   EMPLOYEESTOCK OWNERSHIP PLAN**

Services Company provides the ESOP to the majority ofits employees hired before September 16, 2004. Effective September 16,2004, new employees do not participate in the ESOP, as well as certainemployees covered by a union multiemployer pension plan. The ESOP owns all ofthe outstanding common stock of Services Company.

Services Company stock isreleased to employee accounts in the proportion that current payments ofprincipal and interest on the ESOP Notes bear to the total of all principal andinterest payments due under the ESOP Notes. Individual employees are allocatedshares based upon the ratio of their eligible compensation to total eligiblecompensation. Eligible compensation generally includes base salary, overtime paymentsand certain bonuses. Except for the period March 1, 2003 through November 1,2004, Services Company stock held in employee accounts received stock dividendsin lieu of cash. The ESOP was amended to eliminate the payment of stockdividends on allocations made after February 28, 2003. Based uponprovisions contained in the American Jobs Creation Act of 2004, the plan wasamended further to reinstate this feature on allocations made after November 1,2004. Total ESOP related costs charged to earnings were $5.6 million and $6.9million for the years ended December 31, 2006 and 2005, respectively, and$3.4 million for the period January 1 to May 4, 2004 and $6.6 millionfor the period May 4 to December 31, 2004.

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**16.   LEASESAND COMMITMENTS**

The Operating Subsidiaries lease certain land andrights-of-way. Minimum future lease payments for these leases as ofDecember 31, 2006 are approximately $4.9 million for each of the next fiveyears. Substantially all of these lease payments can be canceled at any timeshould they not be required for operations.

Buckeye leases space in an office building and certaincopying equipment and charges these costs to the Operating Subsidiaries. ThePartnership leases certain computing equipment and automobiles. Future minimumlease payments under these non-cancelable operating leases at December 31,2006 were as follows: $1.3 million for 2007, $1.1 million for 2008, $0.9million for 2009, $1.0 million for 2010, $1.1 million for 2011 and $10.2million in the aggregate thereafter

Rent expense underoperating leases was $10.3 million and $8.7 million for the years endedDecember 31, 2006 and 2005, respectively, and $3.2 million for the periodJanuary 1 to May 4, 2004 and $5.3 million for the period May 4to December 31, 2004.

**17.   RELATEDPARTY TRANSACTIONS**

Commencing on May 4, 2004 and ending onAugust 9, 2006 BGH had agreed to pay to Carlyle/Riverstone an annualmanagement fee of $300,000. General and administrative expenses include $0.2million, $0.3 million and $0.2 million in 2006, 2005 and 2004 respectively forthe management fee

Services Company and thePartnership are considered related parties with respect to BGH and thePredecessor. As discussed in Note 1, the consolidated financial statements forBGH and the Predecessor include the accounts of Services Company and thePartnership on a consolidated basis, as such all intercompany transactions havebeen eliminated.

*Other Related PartyTransactions*

MainLine Management is owned by Carlyle/Riverstone. OnJanuary 25, 2005, affiliates of Carlyle/Riverstone acquired general andlimited partner interests in SemGroup, L.P. (“SemGroup”). SemGroup transportsand stores crude oil, natural gas, natural gas liquids, refined products andasphalt through its ownership and operation of proprietary and common carrierpipelines, terminals, storage tanks, processing plants, underground storagefacilities and a transportation fleet. Carlyle/Riverstone’s total combinedinterest in SemGroup is approximately 30%. One of the members of the seven-memberboard of directors of SemGroup’s general partner is a nominee ofCarlyle/Riverstone, with three votes on that board.

The Partnership provides terminal and pipelinetransportation services to an affiliate of SemGroup. The Partnership receivedapproximately $518,000 and $0 in revenue from the affiliate of SemGroup in 2006and 2005, respectively. Carlyle/Riverstone also has an ownership interest inthe general partner of Magellan Midstream Partners, L.P. (“Magellan”). ThePartnership does not have a significant relationship with Magellan and does nothave extensive operations in the geographic areas primarily served by Magellan.

Also, an affiliate of Carlyle/Riverstone is a memberof a group that has agreed to acquire Kinder Morgan, Inc. Among otherassets, Kinder Morgan, Inc. owns the general partner interest of KinderMorgan Energy Partners, L.P. (“Kinder Morgan”), a publicly traded partnershipengaged in the transportation and distribution of petroleum products andnatural gas that is a Partnership customer and competes with the Partnership toa limited extent in the midwestern United States. If this acquisition iscompleted, all transactions between the Partnership and Kinder Morgan, Inc.and its affiliates will become related party transactions.  In January 2007, the Federal TradeCommission approved the closing of the transaction on the condition thatCarlyle/Riverstone relinquish its control of Magellan Midstream 

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Partners. Carlyle/Riverstonehas done so, and representatives of Carlyle/Riverstone have resigned from theBoard of Directors of the general partners of Magellan and its parent companyMagellan Midstream Partners.

The Partnership does compete directly with KinderMorgan, Magellan or SemGroup for acquisition opportunities throughout theUnited States and potentially will compete with these entities for new businessor extensions of the existing services provided by the Operating Subsidiaries.

The board of directors ofMainLine Management has adopted a policy to address board of director conflictsof interests. In compliance with this policy, Carlyle/Riverstone has adoptedprocedures internally to ensure that BGH’s and the Partnership’s confidentialinformation is protected from disclosure to competing companies in whichCarlyle/Riverstone has an interest. As part of these procedures, none of thenominees of Carlyle/Riverstone who serve on the board of directors of MainLineManagement or Buckeye GP will also serve on the board of directors of thegeneral partners of Kinder Morgan, Magellan or SemGroup or on the boards ofdirectors of other competing companies in which Carlyle/Riverstone owns aninterest.

**18.   EARNINGSPER UNIT**

Theearnings per unit calculation, for the period ended December 31, 2006,reflects only the results since the closing of BGH’s IPO on August 9, 2006.Accordingly, the results from January 1 through August 8, 2006 havebeen excluded from the calculation. The following table presents the number ofunits used in computing the income per unit and the weighted average number ofunits outstanding (in thousands):

| ** **                                                | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|
| Common units  issued as part of IPO                       |       |                        | 16,438     |   |   |
| Common units sold  as part of IPO                         |       |                        | 10,500     |   |   |
| Management units  issued as part of IPO                   |       |                        | 1,362      |   |   |
| Total units  outstanding-diluted                          |       |                        | 28,300     |   |   |
| *Weighted average  number of units outstanding—basic |       |                        | 27,891     |   |   |

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*                    Forthe period ended December 31, 2006, 409,000 of non-vested Management Unitswere excluded from the basic earnings per unit calculation.

**19.   CASHDISTRIBUTIONS**

BGH generally makes quarterly cash distributions ofsubstan­tially all of its available cash, generally defined as consolidatedcash receipts less consolidated cash expenditures and such retentions forworking capital, anticipated cash expenditures and contingencies as MainLineManagement deems appropriate. On October 26, 2006, MainLine Managementdeclared a cash distribution of $0.125 per unit (after the proration describedbelow) payable on November 30, 2006 to Unitholders of record on November 6,2006. The initial quarterly distribution resulted from BGH’s proration of itsavailable cash in the third quarter based upon the closing date of BGH’s IPO onAugust 9, 2006, to the end of the quarter on September 30, 2006. Thetotal cash distribution to Unitholders with respect to the distribution of$0.125 per unit was approximately $3.5 million. BGH also used its availablecash remaining after payment of the distribution to make distributions to itspre-IPO equity owners, and to pay cash bonuses of approximately $2.0 million toits named executive officers and certain other employees of Services Company.

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On January 26, 2007,the General Partner announced a quarterly distribution of $0.225 per unitpayable on February 28, 2007, to Unitholders of record on February 6,2007. The total cash distribution to Unitholders amounted to approximately $6.4million.

**20.   SEGMENTINFORMATION**

Based on the financialinformation provided to senior management, BGH has determined that itsoperations are appropriately presented in three reportable operating segments:Pipeline Operations, Terminalling and Storage and Other Operations. BGH alsohas certain consolidated-level assets, principally consisting of goodwill,which are not allocable to the individual reporting segments because they arenot used by the chief operating decision maker to make operating decisions orto allocate resources. BGH has allocated approximately $11.4 million ofgoodwill to the Terminalling and Storage Segment. BGH’s reportable operatingsegments consist of the following:

*Pipeline Operations*

The Pipeline Operationssegment receives refined petroleum products including gasoline, jet and dieselfuel and other distillates from refineries, connecting pipelines, and bulk andmarine terminals and transports those products to other locations for a fee. Thissegment owns and operates approximately 5,400 miles of pipeline systems inthe following states: California, Connecticut, Florida, Illinois, Indiana,Massachusetts, Michigan, Missouri, New Jersey, Nevada, New York, Ohio,Pennsylvania and Tennessee.

*Terminalling andStorage*

The Terminalling andStorage segment provides bulk storage and throughput services. This segmentowns and operates 45 terminals that have the capacity to store an aggregate ofapproximately 17.6 million barrels of refined petroleum products. The terminalsare located in Indiana, Illinois, Massachusetts, Michigan, Missouri, New York,Ohio and Pennsylvania.

*Other Operations*

The Other Operations segment consists primarily of thePartnership’s contract operation and maintenance of third-party pipelines ownedprincipally by major petrochemical companies located in Texas. This segmentalso performs construction management services, typically for cost plus a fixedfee, for these same customers. The Other Operations segment also includes thePartnership’s ownership and operation of the ammonia pipeline acquired in November 2005and its majority ownership of the Sabina Pipeline.

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Financialinformation about each segment is presented below. Each segment uses the sameaccounting policies as those described in the summary of significant accountingpolicies (see note 2). All inter-segment revenues, operating income and assetshave been eliminated. All three years are presented on a consistent basis.

| ** **                        | ** ** | **Buckeye GP Holdings L.P.**              | ** ** | **Predecessor**                           | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **For the years ended  December 31** | ** ** | **May 4, to  December 31** | ** ** | **January 1,  to May 4** | ** ** |
| ** **                        | ** ** | **2006**                                                 | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(In thousands)**                                       | ** ** | ** **                                |
| *Revenues:*                       |       |                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Pipeline Operations               |       | $                                                        | 350,909    |                                      | $          | 306,849 |   |   | $ | 181,420 |   |   |   | $ | 82,740 |   |   |
| Terminalling and Storage          |       | 81,267                                                   |       | 68,822                                    |       |   | 21,012 |   |   |   | 5,220 |   |   |
| Other Operations                  |       | 29,584                                                   |       | 32,775                                    |       |   | 23,582 |   |   |   | 9,569 |   |   |
| Total                             |       | $                                                        | 461,760    |                                      | $          | 408,446 |   |   | $ | 226,014 |   |   |   | $ | 97,529 |   |   |
| *Operating  income:*              |       |                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Pipeline Operations               |       | $                                                        | 133,039    |                                      | $          | 121,546 |   |   | $ | 68,460 |   |   |   | $ | 31,411 |   |   |
| Terminalling and Storage          |       | 25,879                                                   |       | 28,038                                    |       |   | 9,220 |   |   |   | 2,087 |   |   |
| Other Operations                  |       | 5,955                                                    |       | 6,285                                     |       |   | 3,085 |   |   |   | 1,590 |   |   |
| Total                             |       | $                                                        | 164,873    |                                      | $          | 155,869 |   |   | $ | 80,765 |   |   |   | $ | 35,088 |   |   |
| *Depreciation  and amortization:* |       |                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Pipeline Operations               |       | $                                                        | 32,809     |                                      | $          | 26,844 |   |   | $ | 13,398 |   |   |   | $ | 5,947 |   |   |
| Terminalling and Storage          |       | 5,180                                                    |       | 4,212                                     |       |   | 1,040 |   |   |   | 130 |   |   |
| Other Operations                  |       | 1,640                                                    |       | 1,352                                     |       |   | 720 |   |   |   | 311 |   |   |
| Total                             |       | $                                                        | 39,629     |                                      | $          | 32,408 |   |   | $ | 15,158 |   |   |   | $ | 6,388 |   |   |
| *Capital  expenditures:*          |       |                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Pipeline Operations               |       | $                                                        | 79,521     |                                      | $          | 70,261 |   |   | $ | 59,546 |   |   |   | $ | 7,742 |   |   |
| Terminalling and Storage          |       | 9,852                                                    |       | 6,966                                     |       |   | 1,629 |   |   |   | 1,949 |   |   |
| Other Operations                  |       | 3,301                                                    |       | 545                                       |       |   | 1,260 |   |   |   | 505 |   |   |
| Consolidating- level              |       | 143                                                      |       | 59                                        |       |   | 132 |   |   |   | — |   |   |
| Total                             |       | $                                                        | 92,817     |                                      | $          | 77,831 |   |   | $ | 62,567 |   |   |   | $ | 10,196 |   |   |
| *Acquistions  and investments:*   |       |                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Pipeline Operations               |       | $                                                        | 79,826     |                                      | $          | 161,021 |   |   | $ | 343,225 |   |   |   | $ | — |   |   |
| Terminalling and Storage          |       | 14,427                                                   |       | 45,637                                    |       |   | 175,565 |   |   |   | — |   |   |
| Other Operations                  |       | —                                                   |       | 3,500                                     |       |   | — |   |   |   | — |   |   |
| Consolidating- level              |       | —                                                   |       | —                                    |       |   | 242,215 |   |   |   | — |   |   |
| Total                             |       | $                                                        | 94,253     |                                      | $          | 210,158 |   |   | $ | 761,005 |   |   |   | $ | — |   |   |

 

| ** **               | ** ** | **December 31,**   | ** ** |
|--------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** |
| Assets*:                 |       |                    |       |   |   |
| Pipeline Operations      |       | $                       | 1,608,243  |   | $ | 1,466,512 |   |
| Terminalling and Storage |       | 318,917                 |       | 288,972 |   |
| Other Operations         |       | 68,310                  |       | 61,383 |   |
| Consolidating- level     |       | 217,115                 |       | 223,965 |   |
| Total                    |       | $                       | 2,212,585  |   | $ | 2,040,832 |   |

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*                    Allequity investments shown in Note 9 are included in the assets of PipelineOperations.

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**21.   QUARTERLYFINANCIAL DATA (UNAUDITED)**

Summarizedquarterly financial data for 2006 and 2005 are set forth below. Quarterlyresults were influenced by seasonal and other factors inherent in BGH’s business.

| ** **       | ** ** | **1st Quarter**    | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** | **Total** | ** ** |
|------------------|------------|-------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|-----------|------------|
| ** **       | ** ** | **2006**                | ** ** | **2005**             | ** ** | **2006**             | ** ** | **2005**             | ** ** | **2006**  | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(In thousands)** | ** ** |
| Revenue          |       | $                       | 105,745    |                 | $          | 95,889               |       | $                    | 111,495    |      | $          | 101,916 |   | $ | 116,519 |   | $ | 102,366 |   | $ | 128,001 |   | $ | 108,275 |   | $ | 461,760 |   | $ | 408,446 |   |
| Operating income |       | 39,465                  |       | 36,128               |       | 41,373               |       | 38,673               |       | 40,336    |       | 39,696 |   | 43,699 |   | 41,372 |   | 164,873 |   | 155,869 |   |
| Net income       |       | 2,239                   |       | 1,228                |       | 1,987                |       | 1,919                |       | 1,504     |       | 2,471 |   | 3,004 |   | 1,368 |   | 8,734 |   | 6,986 |   |
|                  |            |                         |            |                      |            |                      |            |                      |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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**Item9.****                        *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure***

None.

**Item 9A.****                *Controls and Procedures***

(a)           Evaluation ofDisclosure Controls and Procedures.

The management ofMainLine Management, with the participation of its Chief Executive Officer andChief Financial Officer, evaluated the effectiveness of its disclosure controlsand procedures for BGH as of the end of the period covered by this report. Basedon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that MainLine Manaagement’s disclosure controls and procedures as ofthe end of the period covered by this report are designed and functioningeffectively to provide reasonable assurance that the information required to bedisclosed by BGH in reports filed under the Securities Exchange Act of 1934, asamended, is (i) recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms and (ii) accumulatedand communicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regardingdisclosure.  A controls system cannotprovide absolute assurance, however, that the objectives of the controls systemare met, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within a company have beendetected.

(b)          Management’sReport on Internal Control over Financial Reporting.

Thisannual report does not include a report of management’s assessment regardinginternal control over financial reporting or an attestation report of BGH’sregistered public accounting firm due to a transition period established by rules ofthe Securities and Exchange Commission for newly public companies.

(c)           Change inInternal Control over Financial Reporting.

Nochange in MainLine Management’s internal control over financial reporting forBGH occurred during BGH’s most recent fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, MainLine Management’sinternal control over financial reporting.

**Item 9B.****               *Other Information***

None.

**Item 10.****                 *Directors, Executive Officers and Corporate Governance***

BGH does not havedirectors or officers. The executive officers of MainLine Management performall management functions for BGH in their capacities as officers and directorsof MainLine Management. The directors and officers of MainLine Management areselected by Carlyle/Riverstone BPL Holdings II, L.P., as sole member ofMainLine Management. See Item 13, “Certain Relationships and RelatedTransactions, and Director Independence.”

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**Directors of theGeneral Partner**

Setforth below is certain information concerning the directors of MainLineManagement.

| **Name, Age and Present   Position with General Partner**                                                  | ** ** | **Business Experience During Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| William H.  Shea, Jr., 52  Chairman of the Board, President and Chief Executive Officer and Director* |       | Mr. Shea was named Chairman of the Board on  August 9, 2006 and President and Chief Executive Officer and a director  of MainLine Management on May 4, 2004. He also serves as a director of  Buckeye GP. Since September 2000, Mr. Shea has been the President  and Chief Executive Officer of Buckeye GP. Mr. Shea serves on the Board  of Trustees of The Franklin Institute.                                                                                                                                                                                                                                                                                                        |
| W. Barnes  Hauptfuhrer, 52  Director†                                                                 |       | Mr. Hauptfuhrer became a director of MainLine  Management on September 13, 2006. He is Chairman and Chief Executive  Officer of Chapter IV Investors, LLC, an investment firm he founded in  February 2006. He previously served as Co-Head of the  Corporate & Investment Banking Division of Wachovia Corporation from  September 2001 to May 2004 and served as Senior Executive Vice  President of Wachovia Corporation from February 2002 to May 2004.  From May 2004 to February 2006, Mr. Hauptfuhrer was a private  investor and a consultant to Wachovia Corporation. Mr. Hauptfuhrer also  serves as a director of National Gypsum Company. |
| Michael B.  Hoffman, 56  Director                                                                          |       | Mr. Hoffman became a director of MainLine  Management on May 4, 2004. He also serves as a director of Buckeye GP.  He has served as a Managing Director at Riverstone Holdings, LLC since  January 2003. Mr. Hoffman is on the Board of Trustees of Lenox Hill  Hospital and Manhattan Eye, Ear and Throat Hospital. Prior to joining Riverstone  Holdings, LLC, Mr. Hoffman was a Senior Managing Director and Co-Head of  M&A Advisory at The Blackstone Group, where he was also a member of  Blackstone’s Principal Group Investment Committee.                                                                                                                                 |
| Frank S.  Sowinski, 50  Director†                                                                     |       | Mr. Sowinski became a director of the MainLine  Management on August 4, 2006. Prior to such date, he was a director of  Buckeye GP. Since January 2006, he has been a Management Affiliate of  Midorean Partners, a private equity investor. He served as Executive Vice President  of Liz Claiborne, Inc. from January 2004 until October 2004.  Mr. Sowinski served as Executive Vice President and Chief Financial  Officer of PWC Consulting, a systems integrator company, from May 2002  to October 2002. He was a Senior Vice President of the Dun &  Bradstreet Corporation from October 2000 to April 2001.                                  |

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| Andrew W. Ward,  39  Director  |   | Mr. Ward became a director of MainLine  Management on May 4, 2004. He also serves as a director of Buckeye GP.  He is currently a Managing Director of Riverstone Holdings, LLC where he  served as a Principal from March 2002 to December 2004. Prior to  joining Riverstone Holdings, LLC, Mr. Ward was a Limited Partner and  Managing Director with Hyperion Partners/Ranieri & Co., a private  equity fund that specialized in investments in the financial services and  real estate sectors. |
|--------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| E. Bartow Jones,  30  Director |   | Mr. Jones became a director of the General  Partner on October 31, 2006. He also serves as a director of Buckeye GP.  Mr. Jones became a Vice President of Riverstone Holdings, LLC in 2005.  From 2001 to 2005, he was an associate at Riverstone Holdings, LLC.                                                                                                                                                                                                                                                       |

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*                    Isalso a director of Services Company.

†                     Isa non-employee director of our General Partner and is not otherwise affiliatedwith our General Partner or its parent companies.

**Executive Officersof the General Partner**

Setforth below is certain information concerning the executive officers ofMainLine Management who also serve in similar positions in Services Company.

| **Name, Age and Present Position**                                                   | ** ** | **Business Experience During Past Five Years**                                                                                                                                                                                                                                                                                                                                                                 |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| William H. Shea,  52*Chairman of the Board, President and Chief Executive Officer*   |       | Mr. Shea was named  Chairman of the Board on August 9, 2006 and President and Chief  Executive Officer and a director of MainLine Management on May 4, 2004.  He also serves as a director of Buckeye GP. Since September 2000,  Mr. Shea has been the President and Chief Executive Officer of Buckeye  GP. Mr. Shea serves on the Board of Trustees of The Franklin Institute. |
| Stephen C. Muther,  57*Executive Vice President, Administration, and  Legal Affairs* |       | Mr. Muther became  Executive Vice President, Administration and Legal Affairs of MainLine  Management on February 1, 2007. Mr. Muther had served as Senior  Vice President, Administration, General Counsel and Secretary of MainLine  Management since May 4, 2004. He has served in these same capacities for  Buckeye GP since 1990.                                                    |
| Robert B.  Wallace, 45*Senior Vice President, Financeand Chief Financial Officer*    |       | Mr. Wallace became  the Senior Vice President, Finance and Chief Financial Officer of MainLine  Management on September 1, 2004. He serves in the same capacity for  Buckeye GP. Mr. Wallace was an executive director in the UBS Energy  Group from September 1997 to February 2004.                                                                                                 |

 

**Section 16(a)   Beneficial OwnershipReporting Compliance**

Pursuant to Section 16(a) ofthe Exchange Act, the General Partner’s executive officers and directors, andpersons beneficially owning more than 10% of BGH’s Common Units, are requiredto file with the Commission reports of their initial ownership and changes inownership of BGH’s limited partnership units. Based solely on its review ofForms 3, 4 and 5 furnished to it and written representations from its 

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executiveofficers and directors, MainLine Management believes that for 2006, allexecutive officers and directors who were required to file reports under Section 16(a) compliedwith such requirements.

**Committees of the Board of Directors**

***Audit Committee***

MainLine Management has anaudit committee (the “Audit Committee”) composed of Frank S. Sowinski(Chairman), and W. Barnes Hauptfuhrer. The members of the Audit Committee areindependent, non-employee directors of MainLine Management and are notofficers, directors or otherwise affiliated with MainLine Management or itsparent companies. MainLine Management’s board of directors has determined thatno Audit Committee member has a material relationship with MainLine Management.The board of directors has also determined that each of Messrs. Sowinskiand Hauptfuhrer qualifies as an audit committee financial expert as defined inItem 407(d)(5) of Regulation S-K.

The Audit Committeeprovides independent oversight with respect to BGH’s internal controls,accounting policies, financial reporting, internal audit function andindependent auditors. The Audit Committee also reviews the quality,independence and objectivity of the independent and internal auditors. TheAudit Committee has sole authority as to the retention, evaluation,compensation and oversight of the work of the independent auditors. Theindependent auditors report directly to the Audit Committee. The AuditCommittee also has sole authority to approve all audit and non-audit servicesprovided by the independent auditors. The charter of the Audit Committee isavailable at BGH’s website at *www.buckeyegpholdings.com*.

The Audit Committee mayact as a conflicts committee or a special committee at the request of theMainLine Management to determine matters that may present a conflict ofinterest between MainLine Management and BGH.

The Audit Committee hasestablished procedures for the receipt, retention and treatment of complaintsit receives regarding accounting, internal accounting controls or auditingmatters and the confidential, anonymous submission by our employees of concernsregarding questionable accounting or auditing matters. These procedures arepart of the Business Code of Conduct and are available at BGH’s website at *www.buckeyegpholdings.com*.

***Communication withthe Board of Directors***

A Unitholder or otherinterested party who wishes to communicate with the non-management directors ofthe General Partner may do so by contacting Stephen C. Muther, Executive VicePresident—Administration and Legal Affairs, at the address or phone numberappearing on the front page of this Annual Report on Form 10-K.Communications will be relayed to the intended Board recipient except ininstances where it is deemed unnecessary or inappropriate to do so pursuant tothe procedures established by the Audit Committee. Any communications withheldwill nonetheless be recorded and available for any director who wishes toreview it.

***Compensation Committee***

As a limited partnershipthat is listed on the New York Stock Exchange, BGH is not required to have aCompensation Committee. Prior to January 2007, MainLine Management’s boardof directors served as its compensation committee and made all compensationdecisions for the officers and directors of MainLine Management. In January 2007,MainLine Management’s board of directors formed a Compensation Committee, whichis composed of two independent directors (as that term is defined in theapplicable NYSE rules and Rule 10A-3 of the Exchange Act) andone director who is not independent. The independent directors are Frank S.Sowinski and W. Barnes Hauptfuhrer. The non-independent director is Andrew W.Ward, who is affiliated with Carlyle/Riverstone.

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**Corporate Governance Matters**

BGH has adopted a Code ofEthics for Directors, Executive Officers and Senior Financial Officers thatapplies to, among others, the Chairman, President, Chief Financial Officer andController of MainLine Management, as required by Section 406 of theSarbanes Oxley Act of 2002. Furthermore, BGH has adopted Corporate GovernanceGuidelines, a Business Code of Conduct and a charter for its Audit Committee.Each of the foregoing is available on BGH’s website at *www.buckeyegpholdings.com*. BGH willprovide copies, free of charge, of any of the foregoing upon receipt of awritten request. BGH intends to disclose amendments to, or director andexecutive officer waivers from, the Code of Ethics, if any, on its website, orby Form 8-K to the extent required.

You canalso find information about BGH at the offices of the New York Stock Exchange(“NYSE”), 20 Broad Street, New York, New York 10005 or at the NYSE’s Internetsite (*www.nyse.com*). The NYSE requires thechief executive officer of each listed company to certify annually that he isnot aware of any violation by the company of the NYSE corporate governancelisting standards as of the date of the certification, qualifying thecertification to the extent necessary. The Chief Executive Officer of MainLineManagement provided such certification to the NYSE in 2006 withoutqualification. In addition, the certifications of MainLine Management’s ChiefExecutive Officer and Chief Financial Officer required by Section 302 ofthe Sarbanes-Oxley Act have been included as exhibits to BGH’s Annual Report onForm 10-K.

**Item 11.**                 *Executive Compensation*

**Overview**

Inpreparation for its initial public offering of Buckeye GP Holdings L.P. inAugust 2006, its partnership and corporate organization was restructured.In Items 11 (Executive Compensation), 12 (Security Ownership of CertainBeneficial Owners and Management and Related Unitholder Matters) and 13(Certain Relationships and Related Transactions, and Director Independence),when we are referring to Buckeye GP Holdings L.P. or its predecessor companies,we will use the terms “we,” “us,” “our” and other similar terms.

We are managed by ourgeneral partner, MainLine Management LLC which we call MainLineManagement.  Our general partner is 100%owned by Carlyle/Riverstone BPL Holdings II, L.P. (which we call“Carlyle/Riverstone”). We are owned approximately 54% by Carlyle/Riverstone,approximately 37% by the public and approximately 9% by our management. We own100% of Buckeye GP LLC, which is the general partner of Buckeye Partners, L.P.,which we refer to as “Buckeye.” We refer to Buckeye GP LLC as “Buckeye GP.”Buckeye is a publicly traded (NYSE: BPL) master limited partnership organizedin 1986 under the laws of the state of Delaware. All of Buckeye’s and ouremployees are employed by and receive employee benefits from Buckeye Pipe LineServices Company, a Pennsylvania corporation that we refer to as “ServicesCompany.” Pursuant to a services agreement and an executive employmentagreement, we and Buckeye reimburse Services Company for the costs of employingthese employees.

**Compensation Discussion and Analysis**

***NamedExecutive Officers***

We do not have officers or directors. Our business ismanaged by the board of directors of our general partner, and the executiveofficers of our general partner perform all of our management functions. Thus,the executive officers of our general partner are our executive officers. TheSEC rules that prescribe the content of this Compensation Discussion andAnalysis require us to discuss not only the compensation of our executiveofficers and directors, but also that of any executive officers of oursubsidiaries if certain requirements are met. Our executive officers are:

·       William H. Shea, Jr., President and ChiefExecutive Officer;

·       Robert B. Wallace, Senior Vice President, Finance andChief Financial Officer; and

·       Stephen C. Muther, Executive Vice President,Administration and Legal Affairs.

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Each ofthese executive officers is also an executive officer of Buckeye. Pursuant tothe terms of an Exchange Agreement between Buckeye GP (which we own), Buckeyeand several of Buckeye’s subsidiaries, we are responsible for the totalcompensation of our executive officers and Eric A. Gustafson, who is Buckeye’sSenior Vice President, Operations and Technology, regardless of whether theservices for which such officers are compensated were performed for us or forBuckeye and its subsidiaries. Therefore, this Compensation Discussion andAnalysis is focused on the total compensation of Messrs. Shea, Wallace,Muther and Gustafson, to whom we refer in this discussion as our “namedexecutive officers.”

***Our Responsibility for Compensation***

In 1997, in connection with arestructuring of Buckeye’s ESOP, Buckeye GP (which we own) entered into anExchange Agreement with Buckeye and several of its operating subsidiaries,pursuant to which Buckeye GP permanently released Buckeye and its operatingsubsidiaries from their obligation to reimburse Buckeye GP for certaincompensation and fringe benefit costs for executive level duties performed byBuckeye GP with respect to operations, finance, legal, marketing and businessdevelopment, and treasury, as well as the President of Buckeye GP. Inconnection with a subsequent restructuring in 2004, the Exchange Agreement wasamended to provide that such release included all compensation and fringebenefit costs for the four highest salaried officers of Buckeye GP, whichcorresponds to our named executive officers. Accordingly, the totalcompensation of our named executive officers discussed in this analysis is paidby us for services our named executive officers perform for us and for Buckeyeand its operating subsidiaries.

Prior toour initial public offering on August 9, 2006, we were a private companythat had been owned by Carlyle/Riverstone and by members of our management(including some of our named executive officers) and members of their familiesand trusts for their benefit. Our predecessor company was purchased byCarlyle/Riverstone in 2004. In connection with its purchase of our predecessorcompany in 2004, Carlyle/Riverstone negotiated employment agreements andcompensation arrangements with our general partner’s executive officers thatincluded provisions regarding salaries and benefits that are still effectivetoday. As a result, the context in which decisions were made regarding the 2006compensation of our named executive officers was that of a private companyboard of directors that was controlled by Carlyle/Riverstone determining howbest to allocate that private company’s resources in order to compensate itsofficers.

***Compensation Committee***

As alimited partnership that is listed on the New York Stock Exchange, we are notrequired to have a Compensation Committee. However, because we are responsiblefor the payment of ours and Buckeye’s named executive officers’ compensation,our general partner’s board of directors formed a Compensation Committee in January 2007.The committee is composed of two independent directors (as that term is definedin the applicable NYSE rules and Rule 10A-3 of the ExchangeAct) and one director who is not independent. The independent directors areFrank S. Sowinski and W. Barnes Hauptfuhrer. The non-independent director isAndrew W. Ward, who is affiliated with Carlyle/Riverstone. Because allcompensation decisions for our named executive officers in 2006 were made byour general partner’s board of directors prior to our IPO, Messrs. Sowinskiand Hauptfuhrer did not have any involvement in those compensation decisions.Our Compensation Committee will determine our policies and philosophiesregarding the compensation of our named executive officers in the future.

***Types of Compensation***

In 2006, the compensation we paid toour named executive officers had four components: salary and benefits,non-equity incentive plan compensation, nonqualified deferred compensation andvesting of previously issued equity-based awards.

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As discussed above, the salaries ofour named executive officers were determined by private negotiations betweenthose officers and our general partner prior to us becoming a public company.Pursuant to their employment arrangements (which are described in more detailin the narrative discussion that follows the Summary Compensation Table), Mr. Shea’ssalary is not less than $400,000 per year, and each of Messrs. Wallace,Muther and Gustafson have salaries of not less than $300,000 per year. In 2006,each of these named executive officers’ salaries equaled their respectiveminimum amounts. Neither we nor our Compensation Committee has engaged in anybenchmarking of these salaries against those of similarly situated executivesin peer companies. Our named executive officers also participate in ServicesCompany’s ESOP (for which all regular full-time employees of Services Companyhired before September 16, 2004 are eligible) and Service’s Company’sRetirement and Saving Plan (for which all employees except those coveredby certain labor contracts are eligible).

In early 2006, Carlyle/Riverstonecommunicated to our named executive officers its desire to complete an initialpublic offering of our common units. Our general partner’s board of directors,which at that time had no independent directors, informed the named executiveofficers that it had established a pool of up to $2.0 million for the paymentof cash awards to the named executive officers and other employees upon theconsummation of an initial public offering of our common units. Following thecompletion of our initial public offering on August 9, 2006, we paid atotal of $1,737,500 to the named executive officers as set forth in the SummaryCompensation Table. The $2.0 million amount of this non-equity incentive awardpool was determined by our general partner’s board of directors in consultationwith Carlyle/Riverstone, and was paid out of funds that Carlyle/Riverstone hadalready determined would have been distributed to Carlyle/Riverstone and ourother pre-IPO owners were it not for Carlyle/Riverstone’s and our generalpartner’s board of directors desire to use the $2.0 million for incentiveawards.

Our general partner’s board ofdirectors and Carlyle/Riverstone determined to allocate this bonus pool amongthose of our and Buckeye’s employees (including our named executive officers)based on Carlyle/Riverstone’s evaluation of their relative contributions to the work required for our IPO.

Our named executive officers alsoreceived nonqualified deferred compensation in 2006 in the form ofcontributions by us to their Buckeye Benefit Equalization Plan accounts. TheEqualization Plan is a non-qualified deferred compensation plan and providesthat any employee whose company contributions to qualified pension and savingsplans have been limited due to IRS limits on compensation allowable forcalculating benefits under qualified plans will receive an equivalent benefitunder the Benefit Equalization Plan for company contributed amounts they wouldhave received under qualified plans if there were no IRS limits on compensationlevels. Each named executive officer participated in this plan prior to our IPOand continued to participate in this plan thereafter.

Each ofour named executive officers owns management units that we issued in 2006 inexchange for the contribution of B units in MainLine that were issued in 2004. Theinitial compensation decisions regarding both the number of MainLine B unitsawarded to the named executive officers and also the vesting schedules of thoseB units were made by our general partner’s board of directors in 2004. Eachmanagement unit is currently convertible into one common unit at the electionof the holder of the management unit. Prior to our IPO, our general partner’sboard of directors determined that in connection with our IPO, 20% of the B unitsheld by our named executive officers would vest on an accelerated basisimmediately upon the completion of our IPO. The decision to accelerate thevesting of these units was the result of private negotiations between ourpre-IPO board of directors and our named executive officers, and was based onthe named executive officers’ contributions to the work required for our IPO. Adescription of the management units and their vesting schedules is contained inthe narrative discussion following the Summary Compensation Table below.

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***Tax and Accounting Implications***

*Deductibility ofExecutive Compensation*

We believe that thecompensation paid to the named executive officers is generally fully deductibleby us and our limited partners for federal income tax purposes. However, we canapprove compensation that will not meet these requirements in order to ensurecompetitive levels of total compensation for our executive officers.

*Nonqualified DeferredCompensation*

On October 22, 2004,the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicableto nonqualified deferred compensation arrangements. While the final regulationshave not become effective yet, we believe we are operating in good faithcompliance with the statutory provisions which were effective January 1,2005. A more detailed discussion of our nonqualified deferred compensationarrangements for 2006 is provided in the narrative discussion accompanying the “NonqualifiedDeferred Compensation Table” below.

*Accounting forStock-Based Compensation*

Effective January 1,2006, we began accounting for stock-based payments, including our managementunits, in accordance with the requirements of SFAS No. 123R.

**CompensationCommittee Report**

As discussed in the CompensationDiscussion and Analysis, all decisions regarding the compensation of our namedexecutive officers in 2006 were made prior to the formation of our CompensationCommittee and prior to the dates on which Mr. Sowinski and Mr. Hauptfuhrerjoined our general partner’s board of directors.

In lightof the foregoing, as required by Item 407(e)(5) of Regulation S-K, theCompensation Committee has reviewed and discussed the Compensation Discussionand Analysis with our management, and, based on such review and discussions,has recommended to the Board of Directors the inclusion of the CompensationDiscussion and Analysis in this annual report on Form 10-K.

THE COMPENSATION COMMITTEE

W. Barnes HauptfuhrerFrank S. SowinskiAndrew W. Ward

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**2006 Summary Compensation Table**
| Name and Principal  Position  (a)                             | ** ** | **Year  (b)** | ** ** | **Salary ($)  (c)** | ** ** | **Stock  Awards ($)  (e)(1)** | ** ** | **Option  Awards ($)  (f)(2)** | ** ** | **Non-Equity  Incentive Plan  Compensation ($)  (g)(3)** | ** ** | **All Other  Compen-  sation ($)  (i)(4)** | ** ** | **Total ($)  (j)** | ** ** |
|-------------------------------------------------------------------------|------------|---------------|------------|--------------------------|------------|------------------------------------|------------|-------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------|------------|
| William H. Shea, Jr.                                               |       |          | 2006       |                     |       |                               | $          | 400,000                             |       |                                                               |       | $                                                    | 1,035,615  |                    |       |   | $ | — |   |   |   | $ | 500,000 |   |   |   | $ | 74,214 |   |   | $ | 2,009,829 |   |
| *President and  Chief Executive Officer*                           |       |          |       |                     |       |                               |       |                                |       |                                                               |       |                                                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert B. Wallace                                                       |       |          | 2006       |                     |       |                               | $          | 300,000                             |       |                                                               |       | $                                                    | 345,205    |                    |       |   | $ | — |   |   |   | $ | 575,000 |   |   |   | $ | 48,683 |   |   | $ | 1,268,888 |   |
| *Senior  Vice President, Finance and Chief Financial Officer* |       |          |       |                     |       |                               |       |                                |       |                                                               |       |                                                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stephen C. Muther                                                       |       |          | 2006       |                     |       |                               | $          | 305,770                             |       |                                                               |       | $                                                    | 690,410    |                    |       |   | $ | — |   |   |   | $ | 575,000 |   |   |   | $ | 57,040 |   |   | $ | 1,628,220 |   |
| *Executive Vice President, Administration,  and Legal Affairs*          |       |          |       |                     |       |                               |       |                                |       |                                                               |       |                                                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Eric A. Gustafson                                                       |       |          | 2006       |                     |       |                               | $          | 300,000                             |       |                                                               |       | $                                                    | 517,807    |                    |       |   | $ | 5,201 |   |   |   | $ | 87,500 |   |   |   | $ | 114,839 |   |   | $ | 1,025,347 |   |
| *Senior Vice President Operations and Technology*             | * *   |          |       |                     |       |                               |       |                                |       |                                                               |       |                                                 |       |                    |       |   |   |   |   |   | * * |   |   |   | * * | * * | * * |

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(1)             The amounts in column (e) reflect the amountsrecognized in the financial statements for the fiscal year endedDecember 31, 2006, in accordance with SFAS 123(R). The awards relate tomanagement units that were issued to the named executive officers in exchangefor MainLine L.P (our predecessor company) Class B limited partner units thatwere granted to such officers in 2004.

In August 2006, we became a publicly tradedcompany in an initial public offering at a price of $17.00 per unit. Concurrentwith the initial public offering, we acquired all the limited partner units ofMainLine L.P. in exchange for our common and management units. When our commonunits and management were exchanged for the MainLine L.P. limited partnerunits, the prior grants of MainLine L.P. limited partner units were exchangedfor equivalent value of our common and management units. See the narrativediscussion immediately following this table for further discussion of thisexchange and the assumptions used for the valuation of the management units.

(2)             The amounts in column (f) reflect the amountsrecognized in the financial statements for fiscal year ended December 31,2006, in accordance with SFAS 123(R), for option awards of Buckeye’s limitedpartner units made pursuant to the Buckeye Pipe Line Services Company UnitOption and Distribution Equivalent Plan. The current named executive officersare not eligible for option awards under this program. Mr. Gustafson hasoutstanding option awards that were granted to him under this program prior tohis becoming a named executive officer. See Note 14 to the financial statementscontained in this report on Form 10-K for a further discussion ofthe assumptions related to unit option expense. These option awards weregranted to Mr. Gustafson prior to 2004, and were not granted ascompensation for any service to us.

(3)             The amounts in column (g) were paid to the namedexecutive officers in connection with our initial public offering. See the“Compensation Discussion and Analysis” for a more detailed discussion of theseincentive awards.

(4)             The amounts in column (i) reflect foreach named executive officer:

·        a 5% company contribution to the BuckeyePipe Line Services Company Retirement and Savings Plan on wages of up to$220,000, amounting to $11,000 for each named executive officer;

·        the value of Buckeye Pipe Line ServicesCompany stock allocated to each named executive officer, in accordance with theterms of the Buckeye Pipe Line Services Company Employee Stock Ownership Plandescribed in the accompanying narrative, amounting to $22,285 for Mr. Sheaand $22,744 for each of the other named executive officers;

·        for Mr. Gustafson, the payment ofdistribution equivalents under the Buckeye Pipe Line Services Company UnitOption and Distribution Equivalent Plan which were equal to $60,033. Pursuantto the plan, distribution equivalents were calculated by multiplying (i) thenumber of Buckeye’s limited partner units subject to such options that have notvested by (ii) two times Buckeye’s per limited partner unit regularquarterly distribution; and

·        contributions to each named executive officer’s accountunder the Buckeye Pipe Line Services Company Benefit Equalization Plan. Theamounts set forth in column (i) represent only the BGH contributions toeach named executive officer’s account for 2006. A description of the plan andthe amounts of contributions and earnings credited to each named executiveofficer’s account in 2006 are set forth in the “2006 Nonqualified DeferredCompensation Table” and the accompanying narrative discussion below.

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***Employment Agreements***

We and Mr. Shea are parties to an employmentagreement, dated as of May 4, 2004. Mr. Shea’s base salary under hisemployment agreement is not less than $400,000 per year (less applicable taxesand withholdings). The employment agreement is terminable at any time for anyreason by us or Mr. Shea. Under the employment agreement, Mr. Shea isemployed by Services Company. Pursuant to an exchange agreement and anexecutive employment agreement between Services Company and us, we reimburseServices Company for all payments to Mr. Shea and the cost of Mr. Shea’sbenefits under the employment agreement.

We and Mr. Mutherare parties to an employment and severance agreement, dated as of May 4,2004.  Mr. Muther’s base salaryunder his employment agreement is not less than $300,000 per year (lessapplicable taxes and withholdings).  Mr. Muther’s employment agreement isterminable at any time for any reason by us or Mr. Muther, subject to ourobligations to pay Mr. Muther severance under certain circumstances.Pursuant to the employment agreement, Mr. Muther is employed by ServicesCompany. Pursuant to an exchange agreement and an executive employmentagreement between Services Company and us, we reimburse Services Company forall payments to Mr. Muther and the cost of Mr. Muther’s benefitsunder the employment agreement.

Mr. Wallace’s base salary is $300,000 per year(less applicable taxes and withholdings). Mr. Wallace is not party to anyemployment agreement with us, but he does have a severance agreement pursuantto which he may be entitled to severance payments to be paid by us upon histermination as described in “Potential Payments Upon Termination or Change inControl” below.

Mr. Gustafson’s basesalary is $300,000 (less applicable taxes and withholdings) per year and ispaid by us. He is not party to any employment agreement or severance agreementwith us.

***Conversion of MainLine B Units to Buckeye GP HoldingsL.P. Management Units***

Our predecessor company was a limited partnershipnamed MainLine L.P. MainLine was formed by Carlyle/Riverstone in 2004 solelyfor the purpose of purchasing Buckeye GP. MainLine’s equity consisted of Class AUnits and Class B Units. When Carlyle/Riverstone purchased Buckeye GP,MainLine instituted a Unit Compensation Plan, and in 2004 MainLine issued, orreserved for issuance, 16,216,668 Class B Units to certain members ofsenior management (including Messrs. Shea, Muther and Gustafson). Mr. Wallacereceived the reserved Class B Units when he was elected by MainLine as theSenior Vice President, Finance and Chief Financial Officer of Buckeye GP in September 2004.All of the Class B Units were issued for no consideration because theywere deemed to have only a nominal value as a result of being subject tosubordination to the Class A Units upon the liquidation of MainLine. The Class AUnits also carried a 9% cumulative annual return to which their holders wereentitled prior to any distribution to the holders of the Class B Units.One half, or 8,108,334, of the Class B Units were scheduled to vest ratablyover five years. The remainder, or 8,108,334, of the Class B Unitsinitially were scheduled to vest over five years only if certain performancetargets based on the dollar amounts of incentive compensation payments receivedby MainLine from Buckeye were met.

Coincident with our initial public offering, theequity interests of MainLine were exchanged for the equity interests in us. Thetotal 145,900,000 of Class A Units of MainLine were exchanged for16,438,000 of our common units. The 16,216,668 Class B Units of MainLine(including those owned by Messrs. Shea, Wallace, Muther and Gustafson)were exchanged for 1,362,000 of our management units. The 9% cumulative annualreturn on MainLine’s Class A Units and general partner interest waseliminated as part of the exchange. Our management units are exchangeable forour common units on a one to one basis at the option of the holder. The vestingschedule of the management units received by management in the exchange variesfrom that of the MainLine Class B Units for which they were exchanged. Basedon the achievement of performance targets and the passage of time, 50% of the Class BUnits would have been 

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vested prior to theexchange. Pursuant to the terms of the exchange, 70%, or 953,400 managementunits, became vested immediately upon the exchange, and the remaining 30%, or408,600 of the management units, vest over a three year period with 136,200 ofthe units vesting on each May 4 of 2007, 2008 and 2009.

MainLine recorded no compensation expense for thetime-based Class B Units for the years ended December 31, 2006 and2005. Although the grant date of May 4, 2004 represented the measurementdate for the time-based Class B Units (the date both the number of unitsavailable for purchase and the purchase price ($0) were known), there was anominal fair value for these units at the grant date. Under Statement ofFinancial Accounting Standards No. 123 (Revised) (SFAS No. 123R),which we adopted January 1, 2006, compensation expense for the time-based Class BUnits subsequent to January 1, 2006 is measured based on the nominal fairvalue established at the grant date.

Prior to January 1, 2006, MainLine recognizeddeferred compensation expense for the performance-based Class B Units whenit was probable that the performance target specified in MainLine’s partnershipagreement would be met. The cost of this deferred compensation was recognizedover the respective service periods of the performance-based Class B Unitsuntil December 31, 2005. MainLine recorded compensation expense for theperformance-based Class B Units of $3.5 million in general andadministrative expenses in its consolidated financial statements for the yearended December 31, 2005. Under SFAS No. 123R however, compensationexpense for the performance-based Class B Units subsequent to January 1,2006 is measured based on the nominal fair value established at the grant date.Accordingly, MainLine recorded no compensation expense related to theperformance-based Class B Units from January 1, 2006 to August 9,2006.

As noted above, in connection with our initial publicoffering, on August 9, 2006 the holders of MainLine’s Class B Unitsexchanged all of the Class B Units for 1,362,000 of our management units.Under the provisions of SFAS No. 123R, we recognized deferred compensationexpense for the management units for which both (i) vesting wasaccelerated compared to the MainLine Class B Units, and (ii) were nowdeemed probable of vesting compared to MainLine’s previous estimates. Wedetermined that these criteria applied to 272,400 management units, the fairvalue of which was $4.6 million at August 9, 2006. There are no additionalmanagement units available for grant.

Of the total deferred compensation recognized of $4.6 million, werecognized approximately $3.3 million as an expense in the third quarter of2006 (with an offsetting increase in partners’ capital). Approximately $2.6million of this was attributable to the exchange of management units for Messrs. Shea,Wallace, Muther and Gustafson as set forth in the Summary Compensation Tableabove. We will recognize the balance of $1.3 million as an expense ratably inperiods commencing August 9, 2006 and ending May 4, 2009.

***Retirement and Other Benefits***

The majority of Services Company’s regular full-timeemployees hired before September 16, 2004 (including our named executiveofficers) participate in its employee stock ownership plan, or ESOP, which is aqualified plan. Services Company owns 2,313,395 of Buckeye’s limited partnerunits. The ESOP owns all of the outstanding common stock of Services Company,or 2,313,395 shares. Accordingly, one share of Services Company common stock isgenerally considered to have a value equal to one of Buckeye’s limited partnerunits. Under the ESOP, Services Company common stock is allocated to employeeaccounts quarterly. Individual employees are allocated shares based on theratio of their eligible compensation to the aggregate eligible compensation ofall ESOP participants. Eligible compensation generally includes base salary,overtime payments and certain bonuses. The value of shares accumulated by anemployee in the ESOP is payable to the employee, upon termination of employmentor, transferable to other qualified plans in accordance with the terms of theESOP plan.

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Services Company also sponsors a Retirement and SavingsPlan through which it provides retirement benefits for substantially all of itsregular full-time employees (including our named executive officers), exceptthose covered by certain labor contracts. The retirement plan consists of twocomponents. Under the first component, Services Company contributes 5% of eacheligible employee’s covered salary to an employee’s separate account maintainedin the retirement plan. Under the second component, for all employees notparticipating in the ESOP, Services Company makes a matching contribution intothe employee’s separate account for 100% of an employee’s contribution to theretirement plan up to 6% of an employee’s eligible covered salary. For ServicesCompany employees who participate in the ESOP, Services Company does not make amatching contribution. Each of our named executive officers receives thecontribution equal to 5% of his salary (subject to certain IRS limits)annually, and these amounts are fully vested upon contribution. Because each ofour named executive officers participates in the ESOP, we do not make anymatching contributions to the retirement plan on their behalf.

Services Company alsosponsors a Benefit Equalization Plan, which is described in detail in thenarrative discussion following the “Nonqualified Deferred Compensation Table”below.

**2006 Grants of Plan-Based AwardsTable**

| ** **                | ** ** | **Estimated Possible Payouts Under Non-Equity Incentive Plan Awards** | ** ** |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **Name  (a)**             | ** ** | **Threshold ($)  (c)**                                                                         | ** ** | **Target ($)  (d)(1)** | ** ** | **Maximum ($)  (e)** | ** ** |
| William H. Shea, Jr. |       |                                                                                                | $          | — |   |   | $ | 500,000 |   |   | $ | — |   |   |
| Robert B. Wallace         |       |                                                                                                | $          | — |   |   | $ | 575,000 |   |   | $ | — |   |   |
| Stephen C. Muther         |       |                                                                                                | $          | — |   |   | $ | 575,000 |   |   | $ | — |   |   |
| Eric A. Gustafson         |       |                                                                                                | $          | — |   |   | $ | 87,500 |   |   | $ | — |   |   |

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(1)          The amountsin column (d) were paid to the named executive officers in connection withour initial public offering. In early 2006, MainLine and its owner,Carlyle/Riverstone, communicated to the named executive officers their desireto complete an initial public offering of our common units. The board ofdirectors of the general partner of MainLine, which at that time had noindependent directors, informed the named executive officers that it hadestablished a pool of up to $2.0 million for the payment of cash awards to thenamed executive officers and other employees upon the consummation of an initialpublic offering of our common units. Following the completion of the initialpublic offering on August 9, 2006, we paid a total of $1,737,500 to thenamed executive officers as set forth in this table.

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**2006 Outstanding Equity Awards at Fiscal Year-End Table**

|                           | ** ** | **Option Awards**                                                                        | ** ** | **Stock Awards**                                                                          | ** ** |
|---------------------------|------------|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| **Name  (a)**             | ** ** | **Number of  Securities  Underlying  Unexercised  Option (#)  Exercisable  (b)(1)** | ** ** | **Number of  Securities  Underlying  Unexercised  Option (#)  Unxercisable  (c)(1)** | ** ** | **Option  Exercise  Price ($)  (e)** | ** ** | **Option  Expiration  Date  (f)** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested (#)  (g)(2)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have Not  Vested ($)  (h)(3)** | ** ** |
| William H. Shea, Jr. |       |                                                                                          | —     |                                                                                           |       |   | — |   |   |   | $ | — |   |   |   | — |   |   |   | 122,580 |   |   | $ | 2,007,860 |   |
| Robert B. Wallace         |       |                                                                                          | —     |                                                                                           |       |   | — |   |   |   | $ | — |   |   |   | — |   |   |   | 40,860 |   |   | $ | 669,287 |   |
| Stephen C. Muther         |       |                                                                                          | —     |                                                                                           |       |   | — |   |   |   | $ | — |   |   |   | — |   |   |   | 81,720 |   |   | $ | 1,338,574 |   |
| Eric A. Gustafson         |       |                                                                                          | 3,700      |                                                                                           |       |   | — |   |   |   | $ | 38.12 |   |   |   | 2/21/13 |   |   |   | 61,290 |   |   | $ | 1,003,930 |   |
|                      |       |                                                                                          | —     |                                                                                           |       |   | 3,700 |   |   |   | $ | 42.10 |   |   |   | 2/26/14 |   |   |   |   |   |   |   |   |

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(1)          The amounts in columns (b) and(c) relate to options to purchase Buckeye’s limited partner units underits Unit Option and Distribution Equivalent Plan, which were granted prior to2006.  All options vest after theexpiration of three years from the grant date of the option. The optionsreported in column (c) vested on February 26, 2007. Our namedexecutive officers do not participate in the plan. The options set forth abovewere granted prior to Mr. Gustafson becoming a named executive officer.

(2)          The awards reported incolumn (g) relate to our management units, which vest at the rate of 331¤3%per year. The remaining vesting dates for our management units are May 4,2007, 2008 and 2009.

(3)          Theclosing market price of our common units on December 29, 2006 was $16.38.

**2006 Option Exercises and Stock Vested Table**

| ** **                 | ** ** | **Stock Awards**                                                  | ** ** |
|----------------------------|------------|------------------------------------------------------------------------|------------|
| **Name  (a)**              | ** ** | **Number of  Shares  Acquired on  Vesting (#)  (d)(1)** | ** ** | **Value Realized  on Vesting ($)  (e)(2)** | ** ** |
| William H.  Shea, Jr. |       |                                                                   | 204,300    |   |   |   | $ | 3,473,100 |   |   |
| Robert B. Wallace          |       |                                                                   | 68,100     |   |   |   | $ | 1,157,700 |   |   |
| Stephen C. Muther          |       |                                                                   | 136,200    |   |   |   | $ | 2,315,400 |   |   |
| Eric A. Gustafson          |       |                                                                   | 102,150    |   |   |   | $ | 1,736,550 |   |   |

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(1)          Coincident with ourinitial public offering, the equity interests in MainLine (our predecessorcompany) were exchanged for the equity interests in us. The named executiveofficers exchanged Class B units in MainLine for management units in us thatentitled them to receive an aggregate amount of 1,021,500 of our management unitsupon vesting. Our limited partner units that are subject to vesting are knownas management units. The management units shown in column (d) representthe management units that vested in 2006, which amounted to fifty percent ofthe total management units granted to the named executive officers at the endof 2006. Twenty percent of the management units vested in prior years (based onthe vesting of the MainLine limited partner units for which they wereexchanged), bringing the vested management units to seventy percent of thetotal management units. The remaining thirty percent of the management unitsvest over a three year period with vesting on each May 4 of 2007, 2008 and2009.

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(2)          Thevalue shown in column (e) is calculated by multiplying the number ofmanagement units vested from column (d) by $17.00, which was theAugust 9, 2006 initial public offering price of our common units. Thisvalue was used because, although 50% of the management units vested prior tosuch date (through the vesting of the MainLine limited partner units for whichthey were exchanged), there was no market for such units at the time ofvesting, and the value of such units at vesting cannot be determined. Accordingly,the value of the fully vested management units that were issued in connectionwith the exchange on August 9, 2006 was used.

**2006 Non-Qualified Deferred Compensation Table**

| **Name  (a)**        | ** ** | **Contributions  in Last  Fiscal Year ($)  (c)(1)** | ** ** | **Aggregate  Earnings  in Last  Fiscal Year ($)  (d)** | ** ** | **Aggregate Balance  at Last Fiscal  Year-End ($)  (f)** | ** ** |
|----------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| William H. Shea,  Jr |       |                                                               | $          | 40,929                                                                |       |                                                                         |       | $ | 41,638 |   |   |   | $ | 574,890 |   |   |
| Robert B. Wallace    |       |                                                               | $          | 14,939                                                                |       |                                                                         |       | $ | 767 |   |   |   | $ | 30,560 |   |   |
| Stephen C. Muther    |       |                                                               | $          | 23,296                                                                |       |                                                                         |       | $ | 41,214 |   |   |   | $ | 411,828 |   |   |
| Eric A. Gustafson    |       |                                                               | $          | 21,062                                                                |       |                                                                         |       | $ | 7,912 |   |   |   | $ | 98,776 |   |   |

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(1)          The aggregate amounts ofcontributions in the last fiscal year for each named executive officer areincluded in column (i) of the Summary Compensation Table above.

Theamounts reflected in the table above were credited to accounts of the namedexecutive officers under the Buckeye Pipe Line Services Company BenefitEqualization Plan. The equalization plan is a non-qualified deferredcompensation plan and provides that any employee whose company contributions toqualified pension and savings plans have been limited due to IRS limits oncompensation allowable for calculating benefits under qualified plans willreceive an equivalent benefit under the Equalization Plan for companycontributed amounts they would have received under qualified plans if therewere no IRS limits on compensation levels. Employee deferrals are not allowedunder the equalization plan. In addition, the equalization plan provides thatany employee with a balance in the plan will be credited with earnings on thatbalance at a rate that is equivalent to the actual earnings that the employeerealizes on his or her investments in the Buckeye Pipe Line Services CompanyRetirement and Savings Plan. Employees may periodically change their investmentelections in the Retirement and Savings Plan in accordance with its terms andthe terms of the documents governing the investments in which they currentlyparticipate. Amounts accumulated by an employee in the equalization plan arepayable to the employee in a lump sum upon termination of employment.  The employee may also receive a distributionof all or a portion of his or her account balance in the event of a “hardship”as defined in the plan document and upon determination by the committee thatadministers the plan, and an employee may receive payment of a portion (asdescribed in the plan) of the employee’s account balance in the event of thedeath of the employee. The table below shows the fund options available underthe Retirement and Savings Plan and their annual rate of return for the yearended December 31, 2006.

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| **Name of Fund**                            | ** ** | ** ** | ** ** | **Rate of Return** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------------------------|------------|
| American Century  Stable Asset Fund                   |       |       | 3.90       | %                            |       |
| PIMCO Total  Return Fund                              |       |       | 3.74       | %                            |       |
| Oakmark Equity  and Income Fund                       |       |       | 10.82      | %                            |       |
| SSgA S&P 500  Fund-D                              |       |       | 15.65      | %                            |       |
| American Century  Income & Growth-Inst. Fund |       |       | 17.40      | %                            |       |
| SSgA MSCI EAFE  Index Fund-C                          |       |       | 25.98      | %                            |       |
| American Century  Small Cap Value-Inst. Fund          |       |       | 15.83      | %                            |       |
| American Value  Portfolio Fund                        |       |       | 18.75      | %                            |       |
| American Funds  Growth Fund of America-R4             |       |       | 10.91      | %                            |       |
| Lord Abbett  Developing Growth-A Fund                 |       |       | 12.45      | %                            |       |
| Templeton Foreign-A Fund                              |       |       | 19.93      | %                            |       |

 

**Potential Paymentsupon Termination or Change in Control**

***Severance and Continued Benefits***

Mr. Shea is party to a benefits continuationagreement with us that is dated January 1, 2004. Pursuant to the benefitscontinuation agreement, upon thetermination of Mr. Shea’s employment for any reason within two yearsfollowing a change in control of Buckeye, Mr. Shea will be entitled tocontinued coverage under Services Company’s medical and dental benefits anddisability insurance plans and policies at the same level of coverage that Mr. Sheaenjoyed prior to such termination for 36 months after the effective date ofsuch termination. Mr. Shea’s eligibility to continue receiving thesemedical, dental and disability insurance benefits will cease if Mr. Sheaobtains new employment that provides him with eligibility for medical, dentaland disability insurance benefits without a pre-existing condition limitation. Forpurposes of Mr. Shea’s benefits continuation agreement, a “change ofcontrol” is defined as the acquisition (other than by us and our affiliates) of80 percent or more of Buckeye’s limited partner units, 51 percent or more ofthe general partnership interests owned by Buckeye GP or 50 percent or more ofthe voting equity interest of Buckeye and Buckeye GP on a combined basis.

Mr. Muther’s employment and severance agreementalso provides that we will pay severance payments and allow Mr. Muther tocontinue certain medical and dental benefits following a termination of Mr. Muther’semployment by us (and our affiliates). Thisagreement replaced and amended earlier employment and severance agreementsunder which Buckeye was obligated to provide certain severance payments to Mr. Mutheron termination. Although we are obligated for Mr. Muther’s compensation,severance and benefits under the current employment and severance agreement,Buckeye remains liable for certain severance costs to the extent it would havebeen liable for them under the old agreements and for amounts that accrued in Mr. Muther’sretirement plans prior to the 1997 date of the original exchange agreementdiscussed above. Under the employment and severance agreement, Mr. Mutheris entitled to the payment of severance and the continuation of certainbenefits following (a) an involuntary termination of Mr. Muther’semployment for any reason other than for “cause” or (b) a voluntarytermination of employment by Mr. Muther for “good reason,” which includes,in certain circumstances, a termination in connection with a change of controlof Buckeye. Under either of these circumstances, Mr. Muther would receivea cash severance payment from us of 3.0 times his annualized base salary at thetime of his termination.  Assuming aqualifying termination of employment on December 31, 2006, Mr. Mutherwould receive a lump-sum severance payment equal to $900,000. In addition, wewill provide certain continued medical and dental benefits to Mr. Mutherunder Services Company’s plans for a period of 18 months following histermination (36 months if his termination were in connection with a change ofcontrol). Mr. Muther’s eligibility to continue receiving these medical anddental benefits will cease if Mr. Muther obtains new employment thatprovides him with eligibility for medical benefits without a pre-existingcondition limitation. Also, if the first day of the calendar month on orfollowing Mr. Muther’s 62nd 

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birthday will be less than18 months after his termination (36 months if his termination is in connectionwith a change of control), then the cash severance payment described above willbe reduced to an amount equal to a fraction of such amount, the numerator ofwhich is the number of days from the date of Mr. Muther’s termination tothe first day of the calendar month on or following Mr. Muther’s 62ndbirthday, and the denominator of which is 548 (1095 if Mr. Muther’stermination was in connection with a change of control). For purposes of Mr. Muther’semployment agreement, “change of control” is defined similarly to such term in Mr. Shea’sbenefits continuation agreement discussed above. Mr. Muther is alsoeligible for severance under the Severance Pay Plan for Employees of BuckeyePipe Line Services Company, which is described below in the discussionregarding Mr. Gustafson. If Mr. Muther is terminated such that bothplans are triggered, however, the amount of the payments he would receivepursuant to his employment and severance agreement will be reduced by any amountshe receives pursuant to the severance pay plan.  As of December 31, 2006, the severancepayable to Mr. Muther pursuant to his employment and severance agreementexceeds the amount payable under the severance pay plan.

BGH and Mr. Wallace are parties to a severanceagreement, dated as of September 1, 2004, which provides for the paymentof severance and the continuation of certain benefits under Services Company’smedical and dental plans and policies following a voluntary termination ofemployment by Mr. Wallace after a change of control has occurred and uponthe occurrence of certain specified adverse changes in Mr. Wallace’semployment conditions (such as a decrease in salary, material reduction ofduties or authority, removal from eligibility to participate in benefit plansor transfer to a work location that is more than 100 miles from his currentwork location). Mr. Wallace’s severance agreement provides for a severancepayment from us of 2.0 times Mr. Wallace’s annualized base salary at thetime of termination. Assuming a qualifying termination of employment on December 31,2006, Mr. Wallace would receive a lump-sum severance payment equal to$600,000. In addition, we will provide certain continued benefits to Mr. Wallaceunder Services Company’s medical and dental plans and policies for a period of12 months following his termination. Mr. Wallace’s eligibility to continuereceiving these medical and dental benefits will cease if he obtains newemployment that provides him with eligibility for medical benefits without apre-existing condition limitation. For purposes of Mr. Wallace’s severanceagreement, “change of control” is defined similarly to such term in Mr. Shea’sbenefits continuation agreement discussed above.

In addition to any applicable severance paymentsdescribed above, assuming Mr. Shea, Mr. Muther and Mr. Wallacewere each terminated as of December 31, 2006, under circumstances thatentitled them to receive the continued medical, dental and disability benefitsdescribed above, the value of such benefits is estimated to be approximately$44,181 for Mr. Shea, $24,726 for Mr. Muther and $16,484 for Mr. Wallace,except if Mr. Muther’s termination were in connection with a change ofcontrol, the value of his benefits would be $49,452. In valuing these benefits,we used the estimated rates applicable under the Comprehensive Omnibus BudgetReconciliation Act (COBRA) for terminated employees. Upon termination, allnamed executive officers would be entitled to coverage under COBRA. COBRAcoverage for Messrs. Shea, Wallace and Muther would begin upon theexpiration of their respective benefit continuation periods set forth above.

If Mr. Gustafson’semployment were terminated involuntarily, he would be eligible for severancepayments under the Severance Pay Plan for Employees of Buckeye Pipe LineServices Company. Subject to certain limitations, upon an involuntarytermination, Mr. Gustafson would be entitled to receive a lump-sumseverance payment equal to eight weeks of his base pay plus two weeks’ base payfor each year of service over 4 years. Except in the case of a change ofcontrol (as defined in the plan), however, the severance payment cannot exceedone year’s base pay, which for Mr. Gustafson is $300,000.  Assuming an involuntary termination ofemployment on December 31, 2006, Mr. Gustafson would receiveseverance payments equal to approximately $272,000. If Mr. Gustafson wereto be involuntarily terminated within two years after a “change of control,” hewould be entitled to receive one year’s base pay plus the severance payallowance he would have been entitled to receive under the above formula, orapproximately 

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$565,000.For the purposes of the severance pay plan, a “change of control” will occur ifany person (as such term is used in sections 13(d) and 14(d) of theSecurities Exchange Act of 1934), except Buckeye GP, us or our affiliatesbecomes the beneficial owner or the holder of proxies, in the aggregate, of 80%or more of Buckeye’s limited partner units then outstanding.

*PlanPayouts*

Upon termination, each namedexecutive officer would become entitled to distributions of the aggregatebalances of his benefits equalization plan account and ESOP account. If suchofficers had been terminated as of December 31, 2006, each of them wouldbe entitled to receive the amounts set forth opposite his name in column (f) ofthe “Nonqualified Deferred Compensation Table” for his benefits equalizationplan balance. As of December 31, 2006, the value of Mr. Shea’s ESOPaccount was $452,254, Mr. Wallace’s ESOP account was $64,890, Mr. Muther’sESOP account was $501,836 and Mr. Gustafson’s ESOP account was $460,890.

As noted in the “Outstanding EquityAwards at Fiscal Year-End Table” above, Mr. Gustafson owns 3,700 unvestedoptions to purchase Buckeye units pursuant to the Unit Option and DistributionEquivalent Plan. Under the terms of the plan, if Buckeye experiences a changeof control as defined in the plan, and the acquiring entity does not assume theoptions under the plan or otherwise provide for options to purchase theacquiror’s equity securities of equal value, then Mr. Gustafson’s unvestedoptions would become vested upon the change of control. Upon vesting inconnection with a change of control, Mr. Gustafson would realize valueequal to 3,700 options times the amount, if any, by which the then currentmarket price of Buckeye’s limited partner units exceeds $42.10, the exerciseprice for such options. Under the Unit Option and Distribution Equivalent Plan,a change of control of Buckeye would occur if (1) its Unitholders approvea merger or consolidation of Buckeye with any other entity, other than a mergeror consolidation which would result in Buckeye’s Unitholders retaining at least75% of the total equity interest of the surviving entity, as represented by thepercentage of units or equity securities of Buckeye or such surviving entityheld by Buckeye’s Unitholders immediately after such merger or consolidation, (2) aplan of complete dissolution of Buckeye is adopted or its Unitholders approve anagreement for the sale or disposition by Buckeye (in one transaction or aseries of transactions) of all or substantially all of its assets, or (3) Buckeye’sgeneral partner is removed, or any person or entity except one or more of theequity interest holders of Buckeye’s general partner or any employee benefitplan of Buckeye’s general partner, together with all affiliates of such personor entity, becomes the beneficial owner, or the holder of proxies, in theaggregate of 51% or more of Buckeye’s general partnership interests.

Finally, upon a sale of us as setforth in the unit agreements that govern the vesting of management units, allunvested management units willimmediately vest. If a sale of us had occurred on December 31, 2006, the30% of unvested management units described in the narrative accompanying theSummary Compensation Table under the heading “Conversion of MainLine B Units toBuckeye GP Holdings L.P. Management Units,” would have immediately vested. Inconnection with such vesting, Mr. Shea would have realized $2,007,860; Mr. Wallacewould have realized $669,287; Mr. Muther would have realized $1,338,574and Mr. Gustafson would have realized $1,003,930.  For purposes of the unit agreements, a sale ofus would occur if:

·       a third party orgroup of third parties acting in concert acquire all or substantially all ofour equity securities or all or substantially all of our consolidated assets(in either case, whether by merger, consolidation, recapitalization, transferof equity securities or otherwise); or

·       Carlyle/Riverstoneceases to hold at least 20% of the common units it held immediately prior toour initial public offering.

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Underthe unit agreements, the issuance of newcommon units by us cannot be deemed to cause a sale of us, however.

**2006 Director Compensation Table**

| **Name  (a)**          | ** ** | **Fees Earned or  Paid in Cash ($)  (b)** | ** ** | **Total ($)  (h)** | ** ** |
|------------------------|------------|--------------------------------------------------------------------|------------|-------------------------|------------|
| W. Barnes  Hauptfuhrer |       |                                                               | $          | 15,667                  |       |   | $ | 15,667 |   |
| Frank S. Sowinski      |       |                                                               | 19,000     |                    |       | 19,000 |   |
| Totals                 |       |                                                               | $          | 34,667                  |       |   | $ | 34,667 |   |

 

***Director Compensation***

In 2006, directors of our general partner received anannual fee of $35,000 plus $1,000 for each board of directors and committeemeeting attended. Additionally, the Chairman of the Audit Committee receives anannual fee of $10,000. Messrs. Shea, Hoffman, Leuschen and Ward do notreceive any fees for service as directors. Directors’ fees paid by our generalpartner in 2006 to its directors amounted to $34,667. The directors’ fees werereimbursed by us. Effective March 21, 2007, the annual director fee willbe increased to $50,000 plus $1,250 for each board of directors and committeemeeting attended.

**Item 12.**                 *Security Ownership of Certain Beneficial Owners and Management andRelated Unitholder Matters*

***Buckeye GP Holdings L.P.***

The following table sets forth certain information regardingthe beneficial ownership of our units by:

·       eachperson who is known to us to beneficially own more than 5% of such units to beoutstanding;

·       ourgeneral partner;

·       eachof the named executive officers of our general partner;

·       eachof the directors of our general partner; and

·       allof the directors and named executive officers of our general partner as agroup.

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Allinformation with respect to beneficial ownership has been furnished by therespective directors, officers or 5% or more Unitholders, as the case may be.

| ** **                                                                             | ** ** | **Beneficially Owned  After Offering** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Name of Beneficial Owner:**                                           | ** ** | ** **                                       | ** ** | **BGH  Common  Units** | ** ** | **Percent** | ** ** |
| Carlyle/Riverstone  BPL Holdings II, L.P.(a)                                           |       | 15,204,728                                       |       |   | 53.7 | % |   |
| MainLine  Management LLC                                                               |       | 2,830                                            |       |   | * |   |   |
| William H.  Shea, Jr.                                                             |       | 1,281,464                                        | (b)(c)     |   | 4.5 | % |   |
| Michael B.  Hoffman                                                                    |       | —                                           |       |   | — |   |   |
| Frank S. Sowinski                                                                      |       | 8,100                                            |       |   | * |   |   |
| W. Barnes  Hauptfuhrer                                                                 |       | —                                           |       |   | — |   |   |
| Andrew W. Ward                                                                         |       | —                                           |       |   | — |   |   |
| E. Bartow Jones                                                                        |       | —                                           |       |   | — |   |   |
| Stephen C. Muther                                                                      |       | 430,079                                          | (c)        |   | 1.5 | % |   |
| Robert B. Wallace                                                                      |       | 147,463                                          | (c)        |   | * |   |   |
| Eric A. Gustafson                                                                      |       | 249,351                                          |       |   | * |   |   |
| All directors and named  executive officers as  a group (consisting of 9 persons) |       | 2,116,457                                        | (b)(c)     |   | 7.5 | % |   |
|                                                                                        |            |                                                  |            |  |  |  |  |  |  |

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*                    Less than onepercent (1%).

(a)           Includes common unitsowned by MainLine Management LLC. Carlyle/Riverstone BPL Holdings II, L.P. isultimately governed by a management committee which includes Messrs. Hoffmanand Ward, all of whom are directors of our general partner. Entities owning theequity interests of Carlyle/Riverstone BPL Holdings II, L.P. include investmentpartnerships affiliated with Carlyle/Riverstone. The Carlyle/Riverstonepartnerships are associated with Riverstone Holdings, LLC (“Riverstone”) andThe Carlyle Group (“Carlyle”). Riverstone is based in New York, New York andwas organized in May 2000 specifically for the purpose of originatingprivate equity investments in the energy and power industry. Carlyle is aglobal private equity firm, based in Washington, D.C., that originates,structures and acts as lead equity investor in management-led buyouts,strategic minority equity investments, equity private placements,consolidations and build-ups, and growth capital financings. The address ofCarlyle/Riverstone BPL Holdings II, L.P. is 712 Fifth Avenue, 51st Floor, NewYork, NY 10019.

(b)          Includes unitsbeneficially owned by Trust Under Agreement of Alfred W. Martinelli dated December 29,1992, Susan Martinelli Shea and William H. Shea, Jr., Trustees F/B/O SusanMartinelli Shea. Because Mr. Shea is a trustee and the trust is for thebenefit of a member of Mr. Shea’s family, Mr. Shea may be deemed tohave beneficial ownership of the common units owned by the trust. Mr. Sheadisclaims beneficial ownership of all such common units.

(c)           Includesmanagement units, which are convertible into common units, at the election ofthe holder, on a one-for-one basis.

***Buckeye Partners, L.P.***

Services Company owns approximately 5.9% of theoutstanding Buckeye LP units as of February 15, 2007. No other person orgroup is known to be the beneficial owner of more than 5% of the Buckeye LPunits as of March  21, 2007.

The following table setsforth certain information, as of February 26, 2007, concerning thebeneficial ownership of Buckeye’s LP units by each director of Buckeye GP, theChief Executive Officer of Buckeye 

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GP, the other named executive officers of Buckeye GPand by all directors and executive officers of Buckeye GP as a group. Suchinformation is based on data furnished by the persons named. Based oninformation furnished to Buckeye GP by such persons, no director or executiveofficer of Buckeye GP owned beneficially, as of such date, more than 1% of anyclass of Buckeye’s equity securities or those of our subsidiaries outstandingat that date.

| **Name**                                                                     | ** ** | ** ** | ** ** | **Number of Buckeye  LP Units(1)** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| Buckeye GP  Holdings L.P.                                                    |       |       | 80,000     |                                              |       |
| Brian F. Billings                                                            |       |       | 17,500     |                                              |       |
| Eric A. Gustafson                                                            |       |       | 11,200     |                                              |       |
| Michael B. Hoffman                                                           |       |       | 80,000     | (2)                                               |       |
| E. Bartow Jones                                                              |       |       | 80,000     | (2)                                               |       |
| Edward F. Kosnik                                                             |       |       | 14,000     |                                              |       |
| Joseph A. LaSala, Jr.                                                   |       |       | 0          |                                              |       |
| Stephen C. Muther                                                            |       |       | 23,100     |                                              |       |
| Jonathan O’Herron                                                       |       |       | 26,800     |                                              |       |
| William H. Shea, Jr.                                                    |       |       | 100,200    | (2)(4)                                            |       |
| Robert B. Wallace                                                            |       |       | 1,000      |                                              |       |
| Andrew W. Ward                                                               |       |       | 80,000     | (2)                                               |       |
| All directors and  executive officers as  a group (consisting of 11 persons) |       |       | 193,800    | (3)                                               |       |

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(1)          Unlessotherwise indicated, the persons named above have sole voting and investmentpower over the Buckeye LP units reported.

(2)          Includesthe 80,000 Buckeye LP units owned by us, over which the indicated persons sharevoting and investment power by virtue of their membership on the Board ofManagers of our general partner. Such individuals expressly disclaim beneficialownership of such Buckeye LP units.

(3)          The80,000 Buckeye LP units owned by us are included in the total only once.

(4)          Includes18,800 Buckeye LP units for which the person indicated shares voting andinvestment power with his spouse.

**Item 13.**                 *Certain Relationships and Related Transactions, and DirectorIndependence*

**General Partner Reimbursement and Distributions**

***Reimbursement ofGeneral Partner Costs and Expenses***

Our general partnermanages us pursuant to our Agreement of Limited Partnership. Under thisagreement, our general partner and certain related parties are entitled toreimbursement of all direct and indirect costs and expenses related to managingus.

***Ownership ofBuckeye GP***

We own100% of the membership interest of Buckeye GP. Our cash flows consist ofdistributions from Buckeye on the partnership interest Buckeye GP owns, whichconsists of the following:

·       243,914GP units in Buckeye;

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·       theincentive distribution rights in Buckeye; and

·       approximatelya 1% general partner interest in each of Buckeye Pipe Line, Laurel, Evergladesand BPH.

We also own 80,000 Buckeye LP units, representing a deminimis limited partner interest in Buckeye.

Buckeye GP manages the operations and activities ofBuckeye and indirectly manages the operations and activities of Buckeye PipeLine, Laurel, Everglades and BPH.

Cash distributions from Buckeye are generally madeapproximately 99.4% to its LP Unitholders (including the Buckeye LP units weown), and approximately 0.6% to Buckeye GP, as holder of Buckeye’s GP units. Inaddition, if distributions exceed the target levels in excess of the minimumquarterly distribution, Buckeye GP is entitled to receive incentivedistributions equal to an increasing percentage of such cash distributions.Specifically, subject to certain limitations and adjustments, if a quarterlycash distribution from Buckeye on its limited partner units exceeds a target of$0.325 per limited partner unit, Buckeye will pay Buckeye GP, in respect ofeach outstanding Buckeye limited partner unit, incentive distributions equal to(i) 15% of that portion of the distribution per Buckeye limited partnerunit which exceeds the target quarterly amount of $0.325 but is not more than$0.35, plus (ii) 25% of the amount, if any, by which the quarterlydistribution per Buckeye limited partner unit exceeds $0.35 but is not morethan $0.375, plus (iii) 30% of the amount, if any, by which the quarterlydistribution per Buckeye limited partner unit exceeds $0.375 but is not morethan $0.40, plus (iv) 35% of the amount, if any, by which the quarterlydistribution per Buckeye limited partner unit exceeds $0.40 but is not morethan $0.425, plus (v) 40% of the amount, if any, by which the quarterlydistribution per Buckeye limited partner unit exceeds $0.425 but is not morethan $0.525, plus (vi) 45% of the amount, if any, by which the quarterlydistribution per Buckeye limited partner unit exceeds $0.525. Buckeye GP isalso entitled to an incentive distribution, under a comparable formula, inrespect of special cash distributions exceeding a target special distribution amountper Buckeye limited partner unit. The target special distribution amountgenerally means the amount which, together with all amounts distributed perBuckeye limited partner unit prior to the special distribution compoundedquarterly at 13% per annum, would equal $10.00 (the initial public offeringprice of the limited partner units split two-for-one) compounded quarterly at13% per annum from the date of the closing of Buckeye’s initial public offeringin December 1986. Incentive payments paid by Buckeye for quarterly cashdistributions totaled $24.9 million, $20.2 million and $14.0 millionin 2006, 2005 and 2004, respectively. No special cash distributions have everbeen paid by Buckeye.

If Buckeye’s general partner withdraws or is removed,and a successor general partner is elected by Buckeye’s limited partners, thesuccessor general partner is required to buy Buckeye’s GP units for a cashprice equal to the fair market value. The fair market value of the GP unitsincludes the value of all the rights associated with being Buckeye’s generalpartner, including, without limitation, the general partner’s pro rata interestin Buckeye and the right to receive incentive distributions.

Upon Buckeye’sliquidation, the partners, including Buckeye’s general partner, will beentitled to receive liquidating distributions according to their particularcapital account balances.

***Management Fee***

Our general partner isentitled to be paid an annual management fee for certain management functionsit provides to Buckeye GP pursuant to a Management Agreement between ourgeneral partner and Buckeye GP. The management fee includes an annual “SeniorAdministrative Charge” of not less than $975,000 and reimbursement for certaincosts and expenses. The disinterested directors of Buckeye GP approve theamount of the management fee on an annual basis. Amounts paid to our generalpartner and its predecessors in 2006 amounted to $1,900,000 for the SeniorAdministrative Charge. There were no other reimbursed expenses to our generalpartner pursuant to the Management Agreement in 2006.

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***Carlyle/Riverstone***

We are owned by affiliates of Carlyle/RiverstoneGlobal Energy and Power Fund II, L.P., certain directors and members ofmanagement of our general partner or Buckeye GP and trusts for the benefit oftheir families (including Messrs. Shea, Wallace, Muther and Gustafson),and the public. We own Buckeye GP, and, therefore, benefit from payments madeby Buckeye to Buckeye GP, such as the distributions described above. Because wedistribute substantially all of our available cash to our Unitholders quarterlyand because certain members of management (including Messrs. Shea,Wallace, Muther and Gustafson) receive these distributions as our Unitholders,these members of management may have an indirect material interest in suchpayments.

Except for compensation that we pay, the materialportions of which are described in this report, our policy is to avoidtransactions between us and the directors and officers (including members oftheir families) of our general partner in which such persons would have amaterial interest. In furtherance of this policy, we have adopted CorporateGovernance Guidelines, a Business Code of Conduct and a Code of Ethics forDirectors, Executive Officers and Senior Financial Employees, which generallyrequire the reporting to management of transactions or opportunities thatconstitute conflicts of interest so that they may be avoided. These guidelinesand codes are available on our web site at www.buckeyegpholdings.com.

Except for the arrangements with Carlyle/Riverstone describedin this report, we also have a policy of avoiding transactions between us andholders of 5% or more of our limited partner units.

Pursuant to our Corporate Governance Guidelines, anytransaction between us and our officers and directors or holders of 5% of moreof our limited partner units that should be avoided pursuant to these policiesmust be reviewed and approved by our Board of Directors (other than any boardmember having a material interest in the transaction in question). The Board ofDirectors will only approve transactions that are on terms objectivelydemonstrable to be no less favorable to us than those generally being providedto or available from unrelated third parties, or that are otherwise determinedto be fair and reasonable to us, taking into account the totality of therelationships among the parties involved, including other transactions that maybe particularly favorable or advantageous to us.

**DirectorIndependence**

Section 303A.00of the NYSE Listed Company Manual states that the NYSE listing standardsrequiring a majority of directors to be independent do not apply to publiclytraded limited partnerships like us. Two of our general partner’s six directorsare “independent” as that term is defined in the applicable NYSE rules andRule 10A-3 of the Exchange Act. In determining the independence ofeach director, our general partner has adopted certain categorical standards.Our general partner’s independent directors as determined in accordance withthose standards, are: W. Barnes Hauptfuhrer and Frank S. Sowinski.  Pursuant to such categorical standards, adirector will not be deemed independent if:

·       the director is,or has been within the last three years, our employee, or an immediate familymember is, or has been within the last three years, our executive officer;

·       the director hasreceived, or has an immediate family member who has received, during anytwelve-month period within the last three years, more than $100,000 in directcompensation from us, other than director and committee fees and pension orother forms of deferred compensation for prior service (provided suchcompensation is not contingent in any way on continued service);

·       (i) thedirector or an immediate family member is a current partner of a firm that isour internal or external auditor; (ii) the director is a current employeeof such a firm; (iii) the director has an immediate family member who is acurrent employee of such a firm and who participates in the firm’s audit,assurance or tax compliance (but not tax planning) practice; or (iv) thedirector or an 

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immediatefamily member was within the last three years (but is no longer) a partner oremployee of such a firm and personally worked on our audit within that time;

·       the director oran immediate family member is, or has been within the last three years,employed as an executive officer of another company where any of our presentexecutive officers at the same time serve or served on that company’scompensation committee;

·       the director isa current employee, or an immediate family member is a current executiveofficer, of a company that has made payments to, or received payments from, usfor property or services in an amount which, in any of the last three fiscalyears, exceeds the greater of $1 million, or 2% of such other company’sconsolidated gross revenues; or

·       the directorserves as an executive officer of a charitable organization and, during any ofthe past three fiscal years, we made charitable contributions to the charitableorganization in any single fiscal year that exceeded $1 million or two percent,whichever is greater, of the charitable organization’s consolidated grossrevenues.

For thepurposes of these categorical standards, the term “immediate family member”includes a person’s spouse, parents, children, siblings, mothers andfathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, andanyone (other than domestic employees) who shares such person’s home.

***Meetings of Non-Management Directors***

Ournon-management directors meet in executive session at least two times per yearoutside of the presence of any management directors and any other members ofour management who may otherwise be present. During at least one session peryear, only independent directors are present. The directors present at eachexecutive session select a presiding director for that session.

***Director Attendance of Meetings***

Ourgeneral partner’s board of directors held two meetings in fiscal year 2006.Each director attended more than 75 percent of the aggregate of the totalnumber of meetings of the board and the total number of meetings of thecommittees on which he served during the portions of the year that such personwas a director.

**Item 14.**                 *Principal Accountant Fees and Services*

Thefollowing table summarizes the aggregate fees billed to BGH by Deloitte &Touche, LLP, the member firm of Deloitte Touche Tohmatsu, and their respectiveaffiliates (collectively, the “Deloitte Entities”).

| ** **    | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| Audit fees(1) |       | $        | 186,400    |     |       | — |   |   |
| Tax fees(2)   |       | 116,758  |       |     | —     |   |   |
| Total         |       | $        | 303,158    |     |       | — |   |   |

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(1)          Audit fees include feesfor the audit of BGH’s consolidated financial statements as well as the reviewsof BGH’s quarterly consolidated financial statements.

(2)          Tax fees consist of feesfor tax consultation and tax compliance services.

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**Procedures for Audit Committee Pre-Approval of Auditand Permissible Non-Audit Services of Independent Auditor**

As outlined in its charter, the Audit Committee of theboard of directors is responsible for reviewing and approving, in advance, anyaudit and any permissible non-audit engagement or relationship between us andour independent auditors. The Deloitte Entities’ engagement to conduct ouraudit was pre-approved by the Audit Committee. Additionally, all permissiblenon-audit services by the Deloitte Entities have been reviewed and pre-approvedby the Audit Committee, as outlined in the pre-approval policies and proceduresestablished by the Audit Committee.

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**PART IV**

**Item 15.**                 *Exhibits and Financial Statement Schedules*

(a)          The following documentsare filed as a part of this Report:

(1)          Financial Statements—seeIndex to Financial Statements.

(2)   Exhibits, including those incorporated by reference. The followingis a list of exhibits filed as part of this Annual Report on Form 10-K.Where so indicated by footnote, exhibits which were previously filed areincorporated by reference. For exhibits incorporated by reference, the locationof the exhibit in the previous filing is indicated in parentheses.

Exhibit Number(Referenced to Item 601 of Regulation S-K)
|                      | ** ** | ** **                | ** ** | ** **                                                                                                                                                                                                                                                                    | ** ** | ** **           | ** ** | **Incorporated by reference** | ** ** |
|----------------------|------------|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|
| **Exhibit   Number** | ** ** | **Exhibit   Description** | ** ** | **Registrant**                                                                                                                                                                                                                                                                | ** ** | **Filed   herewith** | ** ** | **Form**                                | ** ** | **Period   ending** | ** ** | **Exhibit** | ** ** | **Filing   Date** | ** ** |
|                 | 3.1        |                      |       | Certificate of Limited Partnership of Buckeye GP  Holdings L.P., dated March 27, 2006                                                                                                                                                                                    |       |                 | BGH        |                                    |       |   |   |   |   | S-1 |   |   |   |   | 3.1 |   |   | 4/20/06 |   |
|                 | 3.2        |                      |       | First Amended and Restated Agreement of Limited  Partnership of Buckeye GP Holdings L.P., dated as of August 9, 2006                                                                                                                                                     |       |                 | BGH        |                                    |       |   |   |   |   | 8-K |   |   |   |   | 3.1 |   |   | 8/14/06 |   |
|                 | 10.1       |                      |       | Amended &  Restated Contribution, Conveyance and Assumption Agreement, dated as of  August 9, 2006, among the limited partners of MainLine L.P., MainLine  L.P., Buckeye GP LLC, Buckeye GP Holdings L.P., MainLine Management LLC, and  MainLine GP, Inc. |       |                 | BGH        |                                    |       |   |   |   |   | 8-K |   |   |   |   | 10.1 |   |   | 8/14/06 |   |
|                 | 10.2       |                      |       | Indenture, dated as of  July 10, 2003, between Buckeye Partners, L.P. and SunTrust Bank, as  Trustee                                                                                                                                                                     |       |                 | BPL        |                                    |       |   |   |   |   | S-4 |   |   |   |   | 4.1 |   |   | 9/19/03 |   |
|                 | 10.3       |                      |       | First Supplemental  Indenture, dated as of July 10, 2003, between Buckeye Partners, L.P. and  SunTrust Bank, as Trustee                                                                                                                                                  |       |                 | BPL        |                                    |       |   |   |   |   | S-4 |   |   |   |   | 4.2 |   |   | 9/19/03 |   |
|                 | 10.4       |                      |       | Second Supplemental  Indenture, dated as of August 19, 2003, between Buckeye Partners, L.P.  and SunTrust Bank, as Trustee                                                                                                                                               |       |                 | BPL        |                                    |       |   |   |   |   | S-4 |   |   |   |   | 4.3 |   |   | 9/19/03 |   |
|                 | 10.5       |                      |       | Third Supplemental  Indenture, dated as of October 12, 2004, between Buckeye Partners, L.P.  and SunTrust Bank, as Trustee                                                                                                                                               |       |                 | BPL        |                                    |       |   |   |   |   | 8-K |   |   |   |   | 4.1 |   |   | 10/14/04 |   |
|                 | 10.6       |                      |       | Fourth Supplemental  Indenture, dated as of June 30, 2005, between Buckeye Partners, L.P. and  SunTrust Bank, as Trustee                                                                                                                                                 |       |                 | BPL        |                                    |       |   |   |   |   | 8-K |   |   |   |   | 4.1 |   |   | 6/30/05 |   |
|                 | 10.7       |                      |       | Amended and Restated  Agreement of Limited Partnership of Buckeye Partners, L.P., dated as of  August 9, 2006                                                                                                                                                            |       |                 | BGH        |                                    |       |   |   |   |   | 8-K |   |   |   |   | 10.2 |   |   | 8/14/06 |   |

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|        | 10.8  |   |   | Amended and Restated  Agreement of Limited Partnership of Buckeye Pipe Line Company, L.P., as  amended and restated as of August 9, 2006(1)                                                                                                                                               |   |   | BGH |   |   |   |   |   |   | 8-K   |   |     |   |   | 10.4   |   |   | 8/14/06  |   |
|--------|-------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----|--------|--------|--------|--------|--------|--------|-------|--------|----------|--------|--------|--------|--------|--------|----------|--------|
|   | 10.9  |   |   | Amended and Restated  Management Agreement between MainLine L.P. and Buckeye Pipe Line Company,  L.P., as amended and restated as of August 9, 2006(2)                                                                                                                                    |   |   | BGH |   |   |   |   |   |   | 8-K   |   |     |   |   | 10.5   |   |   | 8/14/06  |   |
|   | 10.10 |   |   | Services Agreement, dated  as of December 15, 2004, among Buckeye Partners, L.P., certain of its  subsidiaries and Buckeye Pipe Line Services Company                                                                                                                                     |   |   | BPL |   |   |   |   |   |   | 8-K   |   |     |   |   | 10.3   |   |   | 12/20/04 |   |
|   | 10.11 |   |   | Fourth Amended and  Restated Exchange Agreement, dated as of August 9, 2006, among MainLine  Sub LLC, Buckeye Partners, L.P., Buckeye Pipe Line Company, L.P., Everglades  Pipe Line Company, L.P., Laurel Pipe Line Company, L.P., Buckeye Pipe Line  Holdings, L.P., and Buckeye GP LLC |   |   | BGH |   |   |   |   |   |   | 8-K   |   |     |   |   | 10.6   |   |   | 8/14/06  |   |
|   | 10.12 |   |   | Acknowledgement and  Agreement, dated as of May 6, 2002, between Buckeye Partners, L.P. and  Glenmoor, Ltd.                                                                                                                                                                               |   |   | BGH |   |   |   |   |   |   | S-1   |   |     |   |   | 10.13  |   |   | 4/20/06  |   |
|   | 10.13 | *      |   | Amended and Restated  Employment and Severance Agreement, dated as of May 4, 2004, by and  among Stephen C. Muther and MainLine Sub LLC (f/k/a Glenmoor LLC)                                                                                                                              |   |   | BGH |   |   |   |   |   |   | S-1/A |   |     |   |   | 10.14  |   |   | 5/30/06  |   |
|   | 10.14 | *      |   | Employment Agreement,  dated as of May 4, 2004, by and among William H. Shea, Jr. and  MainLine Sub LLC                                                                                                                                                                              |   |   | BGH |   |   |   |   |   |   | S-1/A |   |     |   |   | 10.15  |   |   | 5/30/06  |   |
|   | 10.15 | *      |   | Severance Agreement,  dated as of September 1, 2004, by and among Robert B. Wallace and  MainLine Sub LLC                                                                                                                                                                                 |   |   | BGH |   |   |   |   |   |   | S-1/A |   |     |   |   | 10.16  |   |   | 5/30/06  |   |
|   | 10.16 | *      |   | Director Recognition  Program of Buckeye GP LLC                                                                                                                                                                                                                                                |   |   | BPL |   |   |   |   |   |   | 10-K  |   | 12/31/98 |   |   |   |   |   | 3/22/99  |   |
|   | 10.17 |   |   | Amended and Restated  Management Agreement, dated as of December 15, 2004, among Buckeye GP  LLC and MainLine Sub LLC                                                                                                                                                                     |   |   | BPL |   |   |   |   |   |   | 8-K   |   |     |   |   | 10.9   |   |   | 12/20/04 |   |
|   | 10.18 | *      |   | Amended and Restated Unit  Option and Distribution Equivalent Plan of Buckeye Partners, L.P., dated as  of April 24, 2002                                                                                                                                                                 |   |   | BPL |   |   |   |   |   |   | 10-Q  |   | 3/31/02  |   |   | 10.11  |   |   | 5/9/02   |   |
|   | 10.19 | *      |   | Amended and Restated Unit  Option Loan Program of Buckeye Pipe Line Company dated as of April 24,  2002                                                                                                                                                                                   |   |   | BPL |   |   |   |   |   |   | 10-Q  |   | 3/31/02  |   |   | 10.12  |   |   | 5/9/02   |   |
|   | 10.20 |   |   | Fifth Amended and  Restated Incentive Compensation Agreement, dated as of August 9, 2006,  between Buckeye Partners, L.P. and Buckeye GP LLC                                                                                                                                              |   |   | BGH |   |   |   |   |   |   | 8-K   |   |     |   |   | 10.3   |   |   | 8/14/06  |   |

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|        | 10.21 |   |   | Credit Agreement, dated  as of August 6, 2004, among Buckeye Partners, L.P., SunTrust Bank and  the other signatories thereto                                                                                      |   |   | BPL    |   |   |   |   |   |   | 8-K    |   |     |   |   | 10.2   |   |   | 10/5/04  |   |
|--------|-------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|----------|--------|--------|--------|--------|--------|----------|--------|
|   | 10.22 |   |   | First Amendment to Credit  Agreement, dated as of December 15, 2004, among Buckeye Partners, L.P.,  SunTrust Bank and the other signatories thereto                                                                |   |   | BPL    |   |   |   |   |   |   | 10-K   |   | 12/31/04 |   |   | 10.16  |   |   | 3/14/05  |   |
|   | 10.23 |   |   | Second Amendment to  Credit Agreement, dated as of July 29, 2005, among Buckeye Partners,  L.P., SunTrust Bank and the other signatories thereto                                                                   |   |   | BPL    |   |   |   |   |   |   | 10-K   |   | 12/31/05 |   |   | 10.15  |   |   | 2/27/06  |   |
|   | 10.24 |   |   | Third Amendment to Credit  Agreement, dated as of October 28, 2005, among Buckeye Partners, L.P.,  SunTrust Bank and the other signatories thereto                                                                 |   |   | BPL    |   |   |   |   |   |   | 10-K/A |   | 12/31/05 |   |   | 10.16  |   |   | 8/15/06  |   |
|   | 10.25 |   |   | Amended and Restated  Executive Employment Agreement, dated as of August 9, 2006, among  Buckeye GP LLC, MainLine Sub LLC, MainLine L.P., MainLine GP, Inc. and  Buckeye Pipe Line Services Company           |   |   | BGH    |   |   |   |   |   |   | 8-K    |   |     |   |   | 10.7   |   |   | 8/14/06  |   |
|   | 10.26 |   |   | Credit Agreement, dated  August 9, 2006, among Buckeye GP Holdings L.P., as borrower, SunTrust  Bank, as administrative agent, and the lenders signatory thereto                                                   |   |   | BGH    |   |   |   |   |   |   | 8-K    |   |     |   |   | 10.8   |   |   | 8/14/06  |   |
|   | 10.27 |   |   | Supplement to Pledge  Agreement— Additional Pledgor, dated as of September 15, 2006, among  Buckeye GP Holdings L.P., as borrower, SunTrust Bank, as administrative  agent, and the lenders signatory thereto |   |   | BGH    |   |   |   |   |   |   | 10-Q   |   | 9/30/06  |   |   | 10.9   |   |   | 11/6/06  |   |
|   | 10.28 |   |   | Credit Agreement, dated  November 13, 2006, among Buckeye Partners, L.P., as borrower, SunTrust  Bank, as administrative agent, and the lenders signatory thereto                                                  |   |   | BPL    |   |   |   |   |   |   | 8-K    |   |     |   |   | 10.1   |   |   | 11/16/06 |   |
|   | 10.29 | *      |   | Benefits Continuation  Agreement, dated January 1, 2004, by and between Glenmoor, Ltd. and  William H. Shea, Jr.                                                                                                   |   |   |   |   |   |   | X      |   |   |   |   |     |   |   |   |   |   |     |   |
|   | 10.30 | *      |   | Amended and Restated Unit  Agreement, dated August 9, 2006, by and between Robert B. Wallace and Buckeye  GP Holdings L.P.(3)                                                                                           |   |   |   |   |   |   | X      |   |   |   |   |     |   |   |   |   |   |     |   |
|   | 21.1  |   |   | List of subsidiaries of  Buckeye GP Holdings L.P.                                                                                                                                                                       |   |   |   |   |   |   | X      |   |   |   |   |     |   |   |   |   |   |     |   |
|   | 31.1  |   |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934                                                                                               |   |   |   |   |   |   | X      |   |   |   |   |     |   |   |   |   |   |     |   |
|   | 31.2  |   |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934                                                                                               |   |   |   |   |   |   | X      |   |   |   |   |     |   |   |   |   |   |     |   |

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|        | 32.1 |   |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350 |   |   |   |   |   |   | X |   |   |   |   |   |   |   |   |   |   |   |   |
|--------|------|--------|--------|-----------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|   | 32.2 |   |   | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350 |   |   |   |   |   |   | X |   |   |   |   |   |   |   |   |   |   |   |   |

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*                     Represents management contract or compensatory plan orarrangement.

(1)           The Amended and Restated Agreement of LimitedPartnership of Everglades Pipe Line Company, L.P., Laurel Pipe Line Company, L.P.and Buckeye Pipe Line Holdings, L.P. are not filed because they are identicalto Exhibit 10.8 except for the identity of the partnership.

(2)           The Amended and Restated Management Agreement betweenMainLine L.P. and each of Everglades Pipe Line Company, L.P., Laurel Pipe LineCompany, L.P. and Buckeye Pipe Line Holdings, L.P. are not filed because theyare identical to Exhibit 10.9 except for the identity of the partnership.

(3)    Messrs.Muther and Gustafson and a trust for the benefit of Mr. Shea’s family arealso parties to Amended and Restated Unit Agreements with Buckeye GP HoldingsL.P. Those agreements are not filed because they are identical to Exhibit 10.30except for the number of units contained therein.

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**SIGNATURES**

**Pursuant to the requirements of Section 13 of 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.**

|                             |       | BUCKEYE GP HOLDINGS L.P.                                                       |
|-----------------------------|------------|--------------------------------------------------------------------------------|
|                        |       |            (Registrant) |
| ** **                  | ** ** | By:                                                                            | MainLine Management LLC |
| ** **                  | ** ** |                                                                           | as General Partner |
| Dated: March 26,  2007 | * *   | By:                                                                            | /s/  WILLIAM H. SHEA, JR. |
|                        |       |                                                                           | William H.  Shea, Jr. |
|                        |       |                                                                           | *(Principal  Executive Officer)* |

 

**Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.**

| Dated: March 26, 2007  | By:      | /s/  W. BARNES HAUPTFUHRER         |
|-----------------------------|----------|------------------------------------|
|                        |     | W. Barnes Hauptfuhrer              |
| * *                    | * * | *Director*                         |
| Dated: March 26,  2007 | By:      | /s/  E. BARTOW JONES               |
|                        |     | E. Bartow Jones                    |
|                        |     | *Director*                         |
| Dated: March 26,  2007 | By:      | /s/  WILLIAM H. SHEA, JR.     |
|                        |     | William H.  Shea, Jr.         |
|                        |     | *Director*                         |
| Dated: March 26,  2007 | By:      | /s/  FRANK S. SOWINSKI             |
|                        |     | Frank S.  Sowinski, Jr.       |
|                        |     | *Director*                         |
| Dated: March 26,  2007 | By:      | /s/  ROBERT B. WALLACE             |
|                        |     | Robert B. Wallace                  |
|                        |     | *Principal  Financial Officer and* |
|                        |     | *Principal  Accounting Officer*    |
| Dated: March 26,  2007 | By:      | /s/  ANDREW W. WARD                |
|                        |     | Andrew W. Ward                     |
|                        |     | *Director*                         |

 

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