**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**

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

**For thequarterly period ended March 31, 2007 or**

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

**For thetransition period from                              to                              **

**Commissionfile number 001-32963**

**BUCKEYEGP HOLDINGS L.P.**

(Exact name of registrant as specified in its charter)

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

 

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

 

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

**Not Applicable**

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

Indicate by checkmark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x    No  o

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

Large AcceleratedFiler  o    Accelerated Filer o   Non-Accelerated Filer x

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

As of April 19, 2007, there were 26,938,000 Common Units and 1,362,000Management Units outstanding.

 

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**BuckeyeGP Holdings L.P.**

**Index**
|          | PART I- FINANCIAL  INFORMATION                                                                          |   |
|----------|---------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                    |   |
| Item 1.  | Financial Statements  (Unaudited)                                                                       |   |
|     |                                                                                                    |   |
|     | Condensed  Consolidated Statements of Income for the three months ended March 31, 2007  and 2006        |   |
|     |                                                                                                    |   |
|     | Condensed  Consolidated Balance Sheets March 31, 2007 and December 31, 2006                             |   |
|     |                                                                                                    |   |
|     | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2007 and 2006    |   |
|     |                                                                                                    |   |
|     | Consolidated  Statement of Changes in Partners’ Capital for the three months ended March  31, 2007 |   |
|     |                                                                                                    |   |
|     | Notes to  Condensed Consolidated Financial Statements                                                   |   |
|     |                                                                                                    |   |
| Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             |   |
|     |                                                                                                    |   |
| Item 3.  | Quantitative  and Qualitative Disclosures About Market Risk Results                                     |   |
|     |                                                                                                    |   |
| Item 4.  | Controls and  Procedures                                                                                |   |
|     |                                                                                                    |   |
|     | PART II- OTHER  INFORMATION                                                                             |   |
|     |                                                                                                    |   |
| Item 1.  | Legal Proceedings                                                                                       |   |
|     |                                                                                                    |   |
| Item  6. | Exhibits                                                                                                |   |

 

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PART I - FINANCIAL INFORMATION

Item1. Financial Statements

**BuckeyeGP Holdings L.P.**

**CondensedConsolidated Statements of Income**

**(Inthousands, except per unit amounts)**

**(Unaudited)**
| ** **                                                        | ** ** | **Three Months Ended   March 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Revenues                                                          |       | $                                                      | 124,944    |   | $ | 105,745 |   |
|                                                              |       |                                                   |       |   |   |
| Costs and expenses:                                               |       |                                                   |       |   |   |
| Operating  expenses                                               |       | 60,299                                                 |       | 51,261 |   |
| Depreciation and  amortization                                    |       | 9,707                                                  |       | 9,104 |   |
| General and  administrative                                       |       | 6,304                                                  |       | 5,915 |   |
| Total costs and  expenses                                         |       | 76,310                                                 |       | 66,280 |   |
|                                                              |       |                                                   |       |   |   |
| Operating income                                                  |       | 48,634                                                 |       | 39,465 |   |
|                                                              |       |                                                   |       |   |   |
| Other income (expense):                                           |       |                                                   |       |   |   |
| Investment  income                                                |       | 300                                                    |       | 320 |   |
| Interest and  debt expense                                        |       | (13,876                                                | )          | (15,729 | ) |
|                                                              |       |                                                   |       |   |   |
| Total other  income (expenses)                                    |       | (13,576                                                | )          | (15,409 | ) |
|                                                              |       |                                                   |       |   |   |
| Income before  equity income and non-controlling interest expense |       | 35,058                                                 |       | 24,056 |   |
|                                                              |       |                                                   |       |   |   |
| Equity income                                                     |       | 1,786                                                  |       | 1,380 |   |
| Non-controlling  interest expense                                 |       | (30,905                                                | )          | (23,197 | ) |
|                                                              |       |                                                   |       |   |   |
| Net income                                                        |       | $                                                      | 5,939      |   | $ | 2,239 |   |
|                                                              |       |                                                   |       |   |   |
| Net income per  partnership unit:                                 |       |                                                   |       |   |   |
| Basic                                                             |       | $                                                      | 0.21       |   |   |   |
| Diluted                                                           |       | $                                                      | 0.21       |   |   |   |
|                                                              |       |                                                   |       |   |   |
| Weighted average number  of units outstanding:                    |       |                                                   |       |   |   |
| Basic                                                             |       | 27,891                                                 |       |   |   |
| Diluted                                                           |       | 28,300                                                 |       |   |   |
|                                                              |       |                                                   |       |   |   |

 

See Notes tocondensed consolidated financial statements.

1

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**BuckeyeGP Holdings L.P.**

**CondensedConsolidated Balance Sheets**

**(Inthousands)**

**(Unaudited)**
| ** **                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Assets:                                                                       |       |               |       |                  |       |
| Current assets:                                                               |       |               |       |                  |       |
| Cash and cash equivalents                                                     |       | $                  | 23,233     |                  | $          | 20,220 |   |
| Trade receivables                                                             |       | 40,552             |       | 51,030                |       |
| Construction and pipeline relocation receivables                              |       | 9,059              |       | 12,189                |       |
| Inventories                                                                   |       | 14,500             |       | 14,286                |       |
| Prepaid and other current assets                                              |       | 32,401             |       | 34,175                |       |
| Total current assets                                                          |       | 119,745            |       | 131,900               |       |
|                                                                          |       |               |       |                  |       |
| Property, plant and equipment, net                                            |       | 1,783,632          |       | 1,738,199             |       |
|                                                                          |       |               |       |                  |       |
| Goodwill                                                                      |       | 234,603            |       | 234,603               |       |
| Other non-current assets                                                      |       | 108,674            |       | 107,883               |       |
| Total assets                                                                  |       | $                  | 2,246,654  |                  | $          | 2,212,585 |   |
|                                                                          |       |               |       |                  |       |
| Liabilities and  partners’ capital:                                      |       |               |       |                  |       |
| Current liabilities:                                                          |       |               |       |                  |       |
| Current portion of long-term debt                                             |       | $                  | 6,010      |                  | $          | 6,037 |   |
| Accounts payable                                                              |       | 15,493             |       | 26,650                |       |
| Accrued and other current liabilities                                         |       | 66,009             |       | 69,774                |       |
| Total current liabilities                                                     |       | 87,512             |       | 102,461               |       |
|                                                                          |       |               |       |                  |       |
| Long-term debt                                                                |       | 977,930            |       | 1,014,412             |       |
| Other non-current liabilities                                                 |       | 82,993             |       | 82,570                |       |
| Non-controlling interest                                                      |       | 857,669            |       | 772,525               |       |
| Total liabilities                                                             |       | 2,006,104          |       | 1,971,968             |       |
|                                                                          |       |               |       |                  |       |
| Commitments and contingent liabilities                                        |       | —             |       | —                |       |
|                                                                          |       |               |       |                  |       |
| Partners’ capital:                                                       |       |               |       |                  |       |
| General Partner- Common Units                                                 |       | 7                  |       | 7                     |       |
| Limited Partners- Common Units                                                |       | 231,773            |       | 232,202               |       |
| Management Units                                                              |       | 7,053              |       | 6,926                 |       |
| Equity gains on issuance of Buckeye Partners, L.P.  limited partnership units |       | 1,717              |       | 1,482                 |       |
| Total partners’ capital                                                  |       | 240,550            |       | 240,617               |       |
| Total  liabilities and partners’ capital                                 |       | $                  | 2,246,654  |                  | $          | 2,212,585 |   |

 

See Notes tocondensed consolidated financial statements.

2

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**BuckeyeGP Holdings L.P.**

**CondensedConsolidated Statements of Cash Flows**

**(Inthousands)**

**(Unaudited)**
| ** **                                                                       | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                       |       |                                                   |       |   |   |
| Net income                                                                       |       | $                                                      | 5,939      |   | $ | 2,239 |   |
| Adjustments to  reconcile net income to net cash provided by operating activity: |       |                                                   |       |   |   |
| Non-cash charge  for Management Unit expense                                     |       | 127                                                    |       | — |   |
| Value of ESOP  shares released                                                   |       | 1,148                                                  |       | 1,047 |   |
| Depreciation and  amortization                                                   |       | 9,707                                                  |       | 9,104 |   |
| Non-controlling  interest                                                        |       | 30,905                                                 |       | 23,197 |   |
| Equity earnings  from equity investments of Buckeye Partners, L.P.               |       | (1,786                                                 | )          | (1,380 | ) |
| Distributions  from equity investments of Buckeye Partners, L.P.                 |       | 1,276                                                  |       | 1,980 |   |
| Amortization of  debt discount                                                   |       | 12                                                     |       | 13 |   |
| Amortization of  option grants                                                   |       | 134                                                    |       | 172 |   |
| Change in assets  and liabilities, net of amounts related to acquisitions:       |       |                                                   |       |   |   |
| Trade receivables                                                                |       | 10,478                                                 |       | (3,620 | ) |
| Construction and pipeline relocation receivables                                 |       | 3,130                                                  |       | (1,674 | ) |
| Inventories                                                                      |       | (214                                                   | )          | (564 | ) |
| Prepaid and other current assets                                                 |       | 816                                                    |       | (5,962 | ) |
| Accounts payables                                                                |       | (11,126                                                | )          | (6,919 | ) |
| Accrued and other current liabilities                                            |       | (2,827                                                 | )          | 822 |   |
| Other non-current assets                                                         |       | 157                                                    |       | (1,447 | ) |
| Other non-current liabilities                                                    |       | 297                                                    |       | 2,841 |   |
| Total adjustments from operating activities                                      |       | 42,234                                                 |       | 17,610 |   |
| Net cash provided by operating activities                                        |       | 48,173                                                 |       | 19,849 |   |
|                                                                             |       |                                                   |       |   |   |
| **Cash  flows from investing activities:**                                       |       |                                                   |       |   |   |
| Capital expenditures                                                             |       | (17,373                                                | )          | (18,328 | ) |
| Acquisitions                                                                     |       | (38,468                                                | )          | (92,790 | ) |
| Net expenditures for disposal of property, plant and  equipment                  |       | (72                                                    | )          | (113 | ) |
| Deposit to restricted cash                                                       |       | —                                                 |       | (551 | ) |
| Net cash used in investing activities                                            |       | (55,913                                                | )          | (111,782 | ) |
|                                                                             |       |                                                   |       |   |   |
| **Cash  flows from financing activities:**                                       |       |                                                   |       |   |   |
| Net proceeds from issuance of Buckeye Partners, L.P.  limited partnership units  |       | 82,404                                                 |       | 64,155 |   |
| Proceeds from exercise of units options                                          |       | 1,016                                                  |       | 362 |   |
| Distributions to non-controlling partners of Buckeye  Partners, L.P.             |       | (29,778                                                | )          | (26,667 | ) |
| Proceeds from issuance of long-term debt                                         |       | 70,600                                                 |       | 115,000 |   |
| Payment of long-term debt                                                        |       | (107,121                                               | )          | (70,677 | ) |
| Distributions to Limited Partners                                                |       | (6,368                                                 | )          | — |   |
| Net cash provided by financing activities                                        |       | 10,753                                                 |       | 82,173 |   |
|                                                                             |       |                                                   |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                            |       | 3,013                                                  |       | (9,760 | ) |
| Cash and cash  equivalents —Beginning of year                               |       | 20,220                                                 |       | 28,984 |   |
| Cash and cash  equivalents—End of period                                    |       | $                                                      | 23,233     |   | $ | 19,224 |   |
|                                                                             |       |                                                   |       |   |   |
| ***Supplemental  cash flow information:***                                       |       |                                                   |       |   |   |
| Cash paid during the period for interest (net of  amount capitalized)            |       | $                                                      | 17,470     |   | $ | 16,622 |   |
| Capitalized interest                                                             |       | $                                                      | 415        |   | $ | 701 |   |
| Cash paid during the period for income tax                                       |       | $                                                      | 332        |   | $ | 13 |   |
|                                                                             |       |                                                   |       |   |   |
| ***Non-cash  changes in assets and liabilities:***                               |       |                                                   |       |   |   |
| Equity gains on issuance of Buckeye L.P. units                                   |       | $                                                      | 235        |   | $ | 166 |   |
| Fair value hedge  accounting                                                     |       | $                                                      | 59         |   | $ | 439 |   |

 

See Notes tocondensed consolidated financial statements.

3

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**Buckeye GPHoldings L.P.**

**CondensedConsolidated Statement of Partners’ Capital**

**(Inthousands)**

**(Unaudited)**
| ** **                                                                | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Equity**           | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|-------------|------------|--------------|------------|----------------|------------|----------------------|------------|------------|------------|
| ** **                                                                | ** ** | **General** | ** ** | **Limited**  | ** ** | ** **     | ** ** | **Gains on**    | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **Partner** | ** ** | **Partners** | ** ** | ** **     | ** ** | **Issuance of** | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **Common**  | ** ** | **Common**   | ** ** | **Management** | ** ** | **Buckeye LP**  | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **Units**   | ** ** | **Units**    | ** ** | **Units**      | ** ** | **Units**            | ** ** | **Total**  | ** ** |
| Partners’  capital- January 1, 2007                                  |       | $           | 7          |         | $          | 232,202        |       | $                    | 6,926      |       | $          | 1,482 |   | $ | 240,617 |   |
| Net income*                                                               |       | —      |       | 5,939        |       | —         |       | —               |       | 5,939      |       |
| Distributions                                                             |       | —      |       | (6,368       | )          | —         |       | —               |       | (6,368     | )          |
| Recognition of  value of Management Unit                                  |       | —      |       | —       |       | 127            |       | —               |       | 127        |       |
| Equity gains on  issuance Buckeye Partners, L.P limited partnership units |       | —      |       | —       |       | —         |       | 235                  |       | 235        |       |
|                                                                      |       |        |       |         |       |           |       |                 |       |       |       |
| Partners’ capital-  March 31, 2007                                   |       | $           | 7          |         | $          | 231,773        |       | $                    | 7,053      |       | $          | 1,717 |   | $ | 240,550 |   |

 

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*Comprehensiveincome equals net income.

See Notes tocondensed consolidated financial statements.

4

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**BUCKEYE GPHOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

1.               BASIS OFPRESENTATION

Buckeye GP Holdings L.P.(“BGH”) is a publicly traded (NYSE symbol: BGH) master limited partnership  organized on June 15, 2006 under the laws ofthe 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 a publicly traded(NYSE symbol: BPL) master limited partnership which was organized in 1986 underthe laws of the state of Delaware.  BGH’slimited partnership 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 limited liability company (“MainLineManagement”), is the general partner of BGH, and is wholly owned byCarlyle/Riverstone.

BGH’s only business isthe ownership of Buckeye GP.  Buckeye GP’sonly business is the management of the Partnership and its subsidiaries.  At March 31, 2007, Buckeye GP owned anapproximate 0.6% interest in the Partnership. Buckeye GP also owns 100% of andcontrols MainLine GP, Inc. which, together with Buckeye GP, owns 100% of andcontrols MainLine L.P. (“MainLine” or the “Operating Subsidiary GP”). TheOperating Subsidiary GP is the general partner of, and owns an approximate 1%interest in, certain of the Partnership’s operating subsidiaries.

BGH was formed on June15, 2006 in order to facilitate the reorganization of MainLine and itsaffiliates and to effect an initial public offering (the “IPO”) of BGH common units.  The reorganization and IPO occurred on August9, 2006 and, prior to such date, BGH had no activity.  Prior to the reorganization, MainLine ownedand controlled Buckeye GP.  On August 9,2006, BGH sold 10.5 million common units in an underwritten IPO, the netproceeds of which were approximately $168.3 million.  BGH used the net proceeds from the IPO, alongwith cash on hand, to repay all of the then-outstanding indebtedness ofMainLine and to make distributions to its pre-IPO equity owners.  The BGH common units sold in the IPOrepresent approximately 37% of the outstanding equity of BGH, which includescommon units (“Common Units”) and management units (“Management Units”).

Coincident with the IPO,the equity interests of MainLine were exchanged for the equity interests ofBGH.  Accordingly, the financialinformation for BGH included in this report includes the financial informationof MainLine as the predecessor of BGH.  SeeNote 9 for a further discussion.

In connection with theclosing of the IPO, on August 9, 2006 BGH and Buckeye GP restructured theownership of Buckeye GP.  MainLine SubLLC (“MainLine Sub”), which was then a wholly-owned subsidiary of BGH and theowner of Buckeye GP, assigned all of its rights under the Fourth Amended andRestated Incentive Compensation Agreement, dated as of December 15, 2004,between MainLine Sub and Buckeye to Buckeye GP. Thereafter, Buckeye and Buckeye GP amended and restated that agreementby entering into the Fifth Amended and Restated Incentive CompensationAgreement, dated as of August 9, 2006 (the “Incentive Compensation Agreement”).  Also on August 9, 2006, Buckeye and BuckeyeGP entered into the Amended and Restated Agreement of Limited Partnership ofBuckeye Partners, L.P. (the “Partnership Agreement”).  The amendments to the Incentive CompensationAgreement and the Partnership Agreement reflect the assignment of the IncentiveCompensation Agreement to Buckeye GP and recharacterize the payments Buckeye GPreceives under the Incentive Compensation Agreement and the PartnershipAgreement as distributions in respect of its general partner interest ratherthan compensation payments.  On August18, 2006, MainLine Sub was merged with and into BGH.

These changes commencingin the fourth quarter of 2006, resulted in changes in the method used toallocate the Partnership’s income between Buckeye GP and the Partnership’slimited partners.

5

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On April 3, 2007, Carlyle/Riverstone, certain members of management andcertain other parties agreed to sell their approximate 63 % limited partnershipinterest in BGH to a newly formed company owned by affiliates of ArcLightCapital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”) and LehmanBrothers Holdings Inc. (“Lehman Brothers”). See Note 14 for a discussionof this event.

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 is responsible for the totalcompensation, including benefits, paid to the four highest salaried officersperforming duties for Buckeye GP with respect to the functions of operations,finance, legal, marketing, business development, treasury, or performing thefunction of president of Buckeye GP, which correspond to BGH’s named executiveofficers.  The Partnership is generallyresponsible for all other employee costs. Services Company is owned by an employee stock ownership plan (the “ESOP”).Services Company owned approximately 5.5% of the publicly traded limitedpartner units of the Partnership at March 31, 2007.

At March 31, 2007, BGHhad no operating assets other than its general partner ownership interest inBuckeye and Buckeye’s operating subsidiaries. Buckeye owns and operates one of the largest independent refinedpetroleum products pipeline systems in the United States in terms of volumesdelivered, with approximately 5,400 miles of pipeline, serving 17 states, andoperates another approximately 2,700 miles of pipeline under agreements withmajor oil and chemical companies. As of March 31, 2007, the Partnership alsoowns and operates 50 active refined petroleum products terminals with aggregatestorage capacity of approximately 20.0 million barrels in Illinois, Indiana,Massachusetts, Michigan, Missouri, New York, Ohio, Pennsylvania and Wisconsin.

Buckeye conducts all ofits operations through subsidiary entities. These operating subsidiaries are Buckeye Pipe Line Company, L.P. (“BuckeyePipe Line”), Laurel Pipe Line Company, L.P. (“Laurel”), Everglades Pipe LineCompany, L.P. (“Everglades”), Buckeye Pipe Line Holdings, L.P. (“BPH”), WoodRiver Pipe Lines LLC (“Wood River”), Buckeye Pipe Line Transportation LLC (“BPLTransportation”) and Buckeye NGL Pipe Lines LLC (“Buckeye NGL”).  These entities are hereinafter referred to asan “Operating Subsidiary” or collectively as the “Operating Subsidiaries.”

The Partnership’sOperating Subsidiaries conduct business in three reportable operatingsegments:  Pipeline Operations,Terminalling and Storage and Other Operations. BGH also has certain consolidating level assets, which consistprincipally of goodwill associated with the purchase of Buckeye’s generalpartnership interest.  See Note 12 for afurther discussion.

In June 2005, theEmerging Issues Task Force (the “EITF”) of the Financial Accounting StandardsBoard (the “FASB”) issued EITF Consensus 04-05 which requires general partnersof a limited partnership to consolidate the limited partnership if the generalpartner is deemed to control the limited partnership. Using criteriaestablished in EITF Consensus 04-05, BGH has determined that consolidation ofthe Partnership into the financial statements is appropriate.

BGH has determined thatServices Company is a variable interest entity (“VIE”) under the provisions ofFASB Interpretation No. 46R — Consolidation of Variable InterestEntities (“FIN No. 46R”). Using criteria established in FIN No. 46R,BGH has determined that Buckeye GP is the primary beneficiary of ServicesCompany, although 100% of the equity interest of Services Company is owned bythe ESOP. Accordingly, as permitted by FIN No. 46R, Services Company hasbeen consolidated in the financial statements of BGH .

BGH’s condensedconsolidated balance sheet includes a non-controlling interest liability thatreflects the portion of the Partnership owned by its partners other than BGHand Services Company.  Similarly, BGH’scondensed 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.

Buckeye pays an annualsenior administrative charge to affiliates of its general partner for certainmanagement functions supplied by those affiliates.  The senior administrative charge wasapproximately $0.5 million in each of 

6

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the first three months of2007 and 2006. Prior to the IPO, this senior administrative charge wasrecognized 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, BGHrecognized its share of Buckeye’s income as the sum of (i) the incentivecompensation payments received (to which BGH was contractually entitled andwhich were recorded 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, BGH recognizes itsshare of Buckeye’s income as the sum of (i) the amount of incentivecompensation BGH would have received had only Buckeye’s net income for theperiod been entirely distributed (which income, commencing with the fourthquarter of 2006 now includes the incentive compensation payments previouslyrecorded by Buckeye as an expense) and (ii) its proportionate share of theremaining net income of Buckeye and the Operating Subsidiaries.

The effect of this changewas to reduce BGH’s net income in the first three months of 2007 byapproximately $0.6 million, of which $0.5 million represents the absence ofincome related to the senior administrative charge in 2007 compared to 2006 and$0.1 million represents the difference between income recognition for incentivecompensation under BGH’s new methodology compared to the amount that would havebeen recognized had the Incentive Compensation Agreement and PartnershipAgreement not been amended.

In the opinion ofmanagement, the condensed consolidated financial statements of BGH, which areunaudited except that the balance sheet as of December 31, 2006 is derived fromaudited financial state­ments, include all adjustments necessary to presentfairly BGH’s financial position as of March 31, 2007, along with the results ofoperations for the three months ended March 31, 2007 and 2006 and cash flowsfor the three months ended March 31, 2007 and 2006.  The results of operations for the threemonths ended March 31, 2007 are not necessarily indicative of the results to beexpected for the full year ending December 31, 2007.

Pursuant to the rules andregulations of the Securities and Exchange Commis­sion, the condensedconsolidated financial statements do not include all of the information andnotes normally included with financial statements prepared in accordance withaccounting principles generally accepted in the United States of America.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements of BGH and the notes thereto for the year ended December 31, 2006contained in BGH’s Form 10-K as filed with theSecurities and Exchange Commission on March 26, 2007.

2. CONTINGENCIES

Claims and Proceedings

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.The Partnership is generally unable to predict the timing or outcome of theseclaims and proceedings. Based upon its evaluation of existing claims andproceedings and the probability of losses relating to such contingencies, thePartnership has accrued certain amounts relating to such claims andproceedings, none of which are considered material.

In the third quarter of2006, the Partnership received penalty assessments from the IRS in theaggregate 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 with theIRS on May 10, 2006. In January 2007, the Partnership agreed to pay the IRSapproximately $0.6 million to settle and resolve the penalty assessment. Thesettlement is subject to further administrative review within the IRS and the negotiationand execution of a closing agreement between the Partnership and the IRS. Thenegotiated penalty assessment was recorded as an expense in the consolidatedfinancial statements in the fourth quarter of 2006.

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InMarch 2007, Buckeye was named as a defendant in an action entitled *Madigan v. Buckeye Partners, L.P*. filed in the U.S. DistrictCourt for the Central District of Illinois. The action was brought by the Stateof Illinois Attorney General acting on behalf of the Illinois EnvironmentalProtection Agency. The complaint alleges that Buckeye violated various Illinoisstate environmental laws in connection with a product release from Buckeye’sterminal located in Harristown, Illinois on or about June 11, 2006 and variousother product releases from Buckeye’s terminals and pipelines in the State ofIllinois during the period of 2001 through 2006. The complaint seeks to recoverstate oversight costs, damages, and civil penalties and seeks injunctive actionrequiring Buckeye to remediate the environmental contamination resulting fromthe product releases. Buckeye believes it has meritorious defenses to theallegations set forth in the complaint.

EnvironmentalContingencies

In accordance with itsaccounting policy on environmental expenditures, the Partnership recordedoperating expenses, net of insurance recoveries, of $2.2 million and $1.8million for the three month periods ended March 31, 2007 and 2006 respectively,which were related to environmental expenditures unrelated to claims andproceedings.

3.  ACQUISITIONS

OnJanuary 16, 2007, Buckeye acquired two refined petroleum products terminalslocated in Flint and Woodhaven, Michigan for approximately $22.0 million,including a deposit of $1.0 million that was paid in 2006.

OnFebruary 27, 2007, Buckeye acquired a refined products terminal in Marcy, NewYork for approximately $2.3 million.

OnMarch 15, 2007, Buckeye completed the acquisition of two refined petroleumproducts terminals located in Green Bay and Madison, Wisconsin and the purchaseof a fifty percent interest in a third terminal located in Milwaukee, Wisconsinfor approximately $15.2 million.

The acquisitionsdiscussed above were accounted for as acquisitions of assets rather than theacquisitions of businesses, as defined in Statement of Financial AccountingStandards No. 141 — “Business Combinations.” Accordingly, Buckeye hasallocated, on a preliminary basis, the cost of each acquisition to the varioustangible assets acquired, principally property, plant and equipment.  Buckeye is in the process of determining thefinal allocations.

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4.  DEBT AND CREDIT FACILITIES

Debt consists of thefollowing:
| ** **                                                        | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                                        | ** ** | **(In thousands)** | ** ** |
| *BGH:*                                                            |       |                    |       |                  |       |
| Revolving Line of Credit                                          |       | $                       | —     |                  | $          | — |   |
| *Services  Company:*                                              |       |                    |       |                  |       |
| 3.60% ESOP Notes due March 28, 2011                               |       | 25,570                  |       | 27,184                |       |
| Retirement premium                                                |       | (769                    | )          | (862                  | )          |
| *The  Partnership:*                                               |       |                    |       |                  |       |
| 4.625% Notes due July 15, 2013                                    |       | 300,000                 |       | 300,000               |       |
| 6.750% Notes due August 15, 2033                                  |       | 150,000                 |       | 150,000               |       |
| 5.300% Notes due October 15, 2014                                 |       | 275,000                 |       | 275,000               |       |
| 5.125% Notes due July 1, 2017                                     |       | 125,000                 |       | 125,000               |       |
| Borrowings under Revolving Credit Facility                        |       | 110,000                 |       | 145,000               |       |
| Total debt                                                        |       | $                       | 984,801    |                  | $          | 1,021,322 |   |
| Other, including unamortized discounts and fair  value hedges (1) |       | (861                    | )          | (873                  | )          |
|                                                              |       |                    |       |                  |       |
| Subtotal long- term debt                                          |       | 983,940                 |       | 1,020,449             |       |
| Less: current maturities                                          |       | (6,010                  | )          | (6,037                | )          |
|                                                              |       |                    |       |                  |       |
| Total long-term  debt                                             |       | $                       | 977,930    |                  | $          | 1,014,412 |   |

 

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(1) The March 31, 2007 and December 31, 2006 amountsinclude $1.4 million and $1.5 million, respectively, related to an adjustmentto fair value associated with a hedge of fair value and ($2.3) million and ($2.4)million, respectively, in unamortized discounts.

Thefair value of the consolidated debt was estimated to be $965.1 million and $990.0million at March 31,2007 and December 31, 2006, respectively. The value of theconsolidated debt was calculated using interest rates currently available toBGH, the Partnership and Services Company for issuance of debt with similarterms and remaining maturities and approximate market values on the respectivedates.

*BGH*

OnAugust 9, 2006, BGH entered into a five-year $10.0 million revolving creditfacility with SunTrust Bank, as both**administrativeagent and lender (the “BGH Credit Agreement”). The BGH Credit Agreement may beused for working capital and other partnership purposes. BGH has pledged all ofthe limited liability company interests in Buckeye GP as security for itsobligations under the BGH Credit Agreement.

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:

·                  the greater of (1) the federal funds rate plus 0.5% and (2) SunTrustBank’s prime commercial lending rate; or

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

BGH’sability to borrow amounts under the Credit Agreement is subject to satisfactionof certain customary conditions precedent to revolving loans and compliancewith terms and conditions included in the Credit Agreement. 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 the Partnership, 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 Credit Agreement defines “RestrictedSubsidiaries” as certain of BGH’s wholly owned subsidiaries.  The funded debt coverage ratio covenant requiresBGH to maintain, 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 connectionwith 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 adhere to certaincovenants and limiting the ability of BGH and its Restricted Subsidiaries to,among other things:

·                  incur or guarantee indebtedness;

·                  make certain negative pledges and grant certain liens;

·                  make certain loans, acquisitions and investments;

·                  make any material changes to the nature of BGH or RestrictedSubsidiaries’ business; or

·                  enter into a merger, consolidation or sale of assets.

Ifan event of default exists under the BGH Credit Agreement, the lender will beable to 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:

·                  failure to pay any principal, interest, fees, expenses or other amountswhen due;

·                  failure of any representation or warranty to be true and correct in anymaterial respect;

·                  failure to perform or otherwise comply with the covenants in the BGHCredit Agreement or other loan documents, subject to certain grace periods;

·                  default by BGH or any Restricted Subsidiary on the payment of any otherindebtedness in excess of $5.0 million or default by the Partnership or any ofits subsidiaries on the payment of any indebtedness in excess of $25.0 million,or any default in the performance of any obligation or condition with respectto such indebtedness beyond the applicable grace period if the effect of thedefault is to permit or cause the acceleration of the indebtedness;

·                  bankruptcy or insolvency events involving BGH;

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·                  the entry against BGH of a judgment in excess of specified amounts, orotherwise having a material adverse effect, that is not stayed, discharged ordeferred within specified periods;

·                  a change in control of BGH (as such term is defined in the BGH CreditAgreement);

·                  the invalidity or unenforceability of any material provision in the BGHCredit Agreement or related documents; and

·                  the occurrence of certain events with respect to employee benefit planssubject to ERISA.

Thepropsed sale of the interest in BGH owned by Carlyle/Riverstone, certain membersof senior management and other limited partners would result in a change ofcontrol. BGH intends to seek the consent of the BGH Credit Agreement lenders inconnection with the sale of its general partner interests as further describedin Note 14.

*Services Company*

ServicesCompany’s 3.60% Senior Secured Notes (the “3.60% ESOP Notes”) due March 28,2011 are payable by the ESOP to a third-party lender. The 3.60% ESOP Notes wereissued on May 4, 2004. The 3.60% ESOP Notes are collateralized by ServicesCompany’s common stock and are guaranteed by Services Company. In addition, thePartnership has committed that, in the event that the value of the Partnership’sLP Units owned by Services Company falls below 125% of the balance payableunder the 3.60% ESOP Notes, the Partnership will fund an escrow account withsufficient assets to bring the value of the total collateral (the value of thePartnership’s LP Units owned by Services Company and the escrow account) up tothe 125% minimum. Amounts deposited in the escrow account are returned to thePartnership when the value of the Partnership’s LP Units owned by ServicesCompany’s returns to an amount that exceeds the 125% minimum. At March 31, 2007,the value of the Partnership’s LP Units owned by Services Company exceeded the125% requirement.

*The Partnership*

Asnoted above, the Partnership has four publicly issued notes payable with anaggregate principal balance of approximately $850.0 million with interest ratesranging from 4.625% to 6.750%.  ThePartnership makes quarterly interest payments on each note with the principalbalances to be paid on or before the due dates as shown above.

OnNovember 13, 2006 the Partnership entered into a new a $400 million 5-yearrevolving credit facility (the “Credit Facility”) with a syndicate of banks.The Credit Facility, which replaced the Partnership’s previous $400 millioncredit facility, contains a one-time expansion feature to $600 million subjectto certain conditions. Borrowings under the Credit Facility are guaranteed bycertain of the Partnership’s subsidiaries. The Credit Facility matures onNovember 13, 2011, but may be extended for up to two additional 12-monthperiods under certain circumstances. The weighted average interest rate on amountsoutstanding under the Credit Facility at March 31, 2007 was 5.6%.

Borrowingsunder the Credit Facility bear interest under one of two rate options, selectedby the Partnership, equal to either (i) the greater of (a) the federal fundsrate plus 0.5% and (b) SunTrust Bank’s prime rate plus an applicable margin, or(ii) LIBOR plus an applicable margin. The applicable margin is determined basedon the current utilization level of the Credit Facility and on ratings assignedby Standard & Poor’s and Moody’s Investor Services for the Partnership’ssenior unsecured non-credit enhanced long-term debt.  In addition to the principal balance notedabove, the Partnership also had committed $2.1 million outstanding in lettersof credit at March 31, 2007 and December 31, 2006.

TheCredit Facility contains covenants and provisions that:

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·                  Restrict the Partnership and certain of its subsidiaries’ ability toincur additional indebtedness based on a Funded Debt Ratio described below;

·                  Prohibit the Partnership and certain of its subsidiaries from creatingor incurring certain liens on their property;

·                  Prohibit the Partnership and certain of its subsidiaries from disposingof property material to their operations; and

·                  Limit consolidations, mergers and asset transfers by the Partnershipand certain of its subsidiaries.

TheCredit Facility requires that the Partnership and certain of its subsidiariesmaintain a maximum “Funded Debt Ratio” which is calculated using “EBITDA” asdefined in the Credit Facility. The Credit Facility defines EBITDA for periodsprior to the fourth quarter of 2006 as earnings before interest, taxes,depreciation, depletion, amortization and incentive compensation payments toBuckeye GP, and for periods commencing after October 1, 2006 as earnings beforeinterest, taxes, depreciation, depletion and amortization, in each caseexcluding the income of certain majority-owned subsidiaries and equityinvestments (but including distributions from those majority-owned subsidiariesand equity investments).

ThePartnership’s Funded Debt Ratio at the end of any quarterly period equals theratio of the long-term debt of the Partnership and certain of its subsidiaries(including the current portion, if any) to EBITDA for the previous four fiscalquarters. As of the end of any fiscal quarter, the Funded Debt Ratio may notexceed 4.75 to 1.00, subject to a provision for increases to 5.25 to 1.00 inconnection with future acquisitions. At March 31, 2007 the Partnership’s FundedDebt Ratio was 4.07 to 1.00.

TheCredit Facility provides for a “change of control” event of default that willbe triggered if (i) Carlyle/Riverstone ceases to beneficially own 100% of thesole general partner of BGH, (ii) BGH ceases to own 100% of Buckeye GP or (iii)Buckeye GP ceases to be the sole general partner of Buckeye. The proposedsale of the interest in BGH owned by Carlyle/Riverstone, certain members ofsenior management and other limited partners to the entity formed by ArcLight,Kelso and Lehman Brothers would result in a change of control as defined in theCredit Facility. Buckeye intends toseek the consent of the Credit Facility lenders in connection with the sale ofBGH’s general partner as further described in Note 14.

AtMarch 31, 2007 the Partnership was in compliance with all of the covenantsunder the Credit Facility*.*

5.                                       PREPAID AND OTHER CURRENT ASSETS

Prepaidand other current assets consist of the following:
|                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Prepaid  insurance     |       | $                  | 5,413      |                  | $          | 7,728 |   |
| Insurance  receivables |       | 10,660             |       | 12,093                |       |
| Ammonia  receivable    |       | 5,501              |       | 6,284                 |       |
| Other                  |       | 10,827             |       | 8,070                 |       |
| Total                  |       | $                  | 32,401     |                  | $          | 34,175 |   |

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6.  ACCRUED ANDOTHER CURRENT LIABILITIES

Accrued and other currentliabilities consist of the following:
| ** **                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                | ** ** | **(In thousands)** | ** ** |
| Taxes—other than  income             |       | $                  | 7,988      |                  | $          | 5,858 |   |
|  Accrued  employee benefit liability |       | 2,340              |       | 2,340                 |       |
| Environmental  liabilities                |       | 12,679             |       | 12,498                |       |
| Interest                                  |       | 13,034             |       | 16,961                |       |
| Retainage                                 |       | 1,281              |       | 940                   |       |
| Payable for  ammonia purchase             |       | 4,359              |       | 6,072                 |       |
| Compensation and  vacation                |       | 7,933              |       | 8,606                 |       |
| Other                                     |       | 16,395             |       | 16,499                |       |
| Total                                     |       | $                  | 66,009     |                  | $          | 69,774 |   |

 

7.  EARNINGS PER UNIT

BGH has presentedearnings per unit only for the three months ended March 31, 2007 because it wasnot a public company during the three month period ended March 31, 2006.  The following table presents the number ofunits used in computing the income per unit and the weighted average number ofunits outstanding (in thousands):
|                                                             | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **2007**           | ** ** |
| 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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*For the period endedMarch 31, 2007, 409,000 of non-vested Management Units were excluded from thebasic earnings per unit calculation.

8.CASH DISTRIBUTIONS

BGH generally makesquarterly cash distributions of substan­tially all of its available cash, generallydefined as consolidated cash receipts less consolidated cash expenditures andsuch retentions for working capital, anticipated cash expenditures andcontingencies as MainLine Management deems appropriate.

On April 26, 2007, MainLineManagement declared a quarterly cash distribution of $0.24 per unit payable onMay 31, 2007, to Unitholders of record on May 7, 2007.  The total cash distribution to BGH Unitholderswill amount to approximately $6.8 million.

9. UNIT-BASED COMPENSATION

The Partnership sponsorsa Unit Option and Distribution Equivalent Plan (the “Option Plan”), pursuant towhich it grants options to purchase LP Units at 100% of the market price of theLP Units on the date of grant to key employees of Services Company.  The options vest three years from the date ofgrant and expire ten years from the date of grant. As options are exercised,the Partnership issues new LP Units. The Partnership has not historicallyrepurchased, and does not expect to repurchase in 2007, any of its LP Units.

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Effective January 1,2006, the Partnership adopted the fair value measurement and recognitionprovisions of Statement of Financial Accounting Standards No. 123 (revised2004), “Share-Based Payment” (“SFASNo. 123R”), using the modified prospective basis transition method. Under thismethod, unit-based compensation expense recognized in the first quarter of 2006includes: (a) compensation expense for all grants made prior to, but notyet vested as of, January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS No. 123, and(b) compensation expense for all grants made on or after January 1 toMarch 31, 2006, based on the grant date fair value estimated using theBlack-Scholes option pricing model.  ThePartnership recognizes compensation expense for awards granted on or afterJanuary 1, 2006, on a straight-line basis over the requisite service period.

For the retirementeligibility provisions of the Option Plan, the Partnership follows thenon-substantive vesting method and recognizes compensation expense immediatelyfor options granted to retirement-eligible employees, or over the period fromthe grant date to the date retirement eligibility is achieved. Unit-basedcompensation expense recognized in the condensed consolidated statements ofincome is based upon options ultimately expected to vest. In accordance withSFAS No. 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 adoptingthe accounting provisions of SFAS No. 123R for the Option Plan is immaterial toBGH’s consolidated financial statements.

*UnitCompensation Plan*

MainLine’s equity priorto the IPO consisted of class A units (“A Units”) and class B units (“B Units”).  On May 4, 2004, MainLine issued 16,216,668 ofits B Units to certain members of senior management for no consideration undera Unit Compensation Plan. The B Units were subordinate to the A Units. Onehalf, or 8,108,334, of the B Units (“Time Based B Units”) vested ratably overfive years. The remainder or 8,108,334 of the B Units (“Performance Based BUnits”) vested over five years only if certain performance targets based on theincentive compensation received by MainLine from the Partnership were met.

Coincident with the IPO,the equity interests of MainLine were exchanged for the equity interests ofBGH.  The total 145,950,000 of A Units ofMainLine were exchanged for 16,438,000 Common Units of BGH.  The 16,216,668 B Units of MainLine wereexchanged for 1,362,000 Management Units of BGH.  The 9% cumulative annual return on MainLine’sA Units and GP Units was eliminated 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 vesting schedule of the Management Unitsof BGH varies from that of MainLine’s B Units for which they wereexchanged.  Seventy percent, or 953,400Management Units, were vested immediately upon their exchange, and theremaining 30% or 408,600 of the Management Units vest over a three year periodwith 136,200 of the Units vesting on May 4, of each 2007, 2008 and 2009.

MainLine recorded nocompensation expense for the Time Based B Units.  Although the grant date of May 4, 2004represented the measurement date for the Time Based B Units (the date both thenumber of units available for purchase and the purchase price (zero) wereknown), there was a nominal fair value for these units at the grant date. Underthe modified prospective transition method permitted by SFAS No. 123R,compensation expense for the Time Based B Units subsequent to January 1, 2006is measured based on the nominal fair value established at the grant date.

Prior to January 1, 2006,MainLine recognized deferred compensation for the Performance Based B Unitswhen it was probable that the performance target specified in the partnershipagreement would be met. The cost of this deferred compensation was recognizedover the respective service periods of the performance targets until December31, 2005. Under the modified prospective transition method permitted by SFASNo. 123R, compensation expense for the Performance Based B Units subsequent toJanuary 1, 2006 was measured based on the nominal fair value established at thegrant date.  Accordingly, MainLine recordedno compensation expense related to the Performance Based B Units in the threemonths ended March 31, 2006.

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As noted above, inconnection with the IPO, on August 9, 2006 the holders of MainLine’s B Unitsexchanged all of the B Units for 1,362,000 Management Units of BGH. Under theprovisions of SFAS No. 123R, BGH recognized deferred compensation for theManagement Units for which both (i) vesting was accelerated compared to the BUnits for which they were exchanged, and (ii) were now deemed probable ofvesting compared to BGH’s previous estimates. BGH determined that these criteria applied to 272,400 Management Units,the fair value of which was $4.6 million at August 9, 2006.  There are no additional Management Unitsavailable for grant in connection with BGH’s Unit Compensation Plan.

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 recognized approximately $0.1 million as an expense inthe three months ended March 31, 2007.

10.RELATED PARTY TRANSACTIONS

Commencing on May 4, 2004 and ending on August 9, 2006BGH had agreed to pay to Carlyle/Riverstone an annual management fee of$300,000. General and administrative expenses include approximately $0.1million for the three month period ended March 31, 2006 related to this managementfee.  

Services Company and the Partnership are consideredrelated parties with respect to BGH.  Asdiscussed in Note 1, the condensed consolidated financial statements for BGH includethe accounts of Services Company and the Partnership on a consolidated basis, andall intercompany transactions have been eliminated.

OtherRelated Party Transactions

MainLine Management is currentlyowned by Carlyle/Riverstone. On January 25, 2005, affiliates ofCarlyle/Riverstone acquired general and limited 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 combined interest in SemGroup isapproximately 30%.  One of the members ofthe seven-member board of directors of SemGroup’s general partner is a nomineeof Carlyle/Riverstone.

The Partnership provides terminal and pipelinetransportation services to an affiliate of SemGroup.  The Partnership recorded approximately $0.1million and $0.2 million in revenue from the affiliate of SemGroup for the threemonths ended March 31, 2007 and 2006, respectively.  Carlyle/Riverstone previously had anownership interest in the general partner of Magellan Midstream Partners, L.P.(“Magellan”).  The Partnership did nothave a significant relationship with Magellan and did not have extensiveoperations 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 other assets, Kinder Morgan, Inc. ownsthe general partner interest of Kinder Morgan Energy Partners, L.P. (“KinderMorgan”), a publicly traded partnership engaged in the transportation anddistribution of petroleum products and natural gas that is a Partnershipcustomer and competes with the Partnership to a limited extent in the MidwesternUnited States.  If this acquisition iscompleted, all transactions between the Partnership and Kinder Morgan, Inc. andits affiliates will become related party transactions.  In January 2007, the Federal Trade Commissionapproved the closing of the Kinder Morgan transaction on the condition thatCarlyle/Riverstone relinquish its control of Magellan Midstream Partners.  Carlyle/Riverstone has done so, andrepresentatives of Carlyle/Riverstone have resigned from the Board of Directorsof the general partners of Magellan and its parent company, Magellan MidstreamPartners.

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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 of MainLine Management hasadopted a policy to address board of director conflicts of interests.  In compliance with this policy,Carlyle/Riverstone has adopted procedures internally to ensure that BGH’s andthe Partnership’s confidential information is protected from disclosure tocompeting companies in which Carlyle/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.

On April  3,2007, Carlyle/Riverstone, certain members of senior management and certainother parties agreed to sell their approximate 63% limited partnership interestin BGH to a newly formed company owned by affiliates of  ArcLight, Kelso and Lehman Brothers. See Note14 for additional information.

11.       PENSIONS AND OTHER POSTRETIREMENTBENEFITS

Services Company sponsors a retirement incomeguarantee plan (a defined benefit plan) (the “RIGP”) which generally guarantees employees hired before January1, 1986, a retirement benefit at least equal to the benefit they would havereceived under a previously terminated defined benefit plan. Services Company’spolicy is to fund amounts necessary to at least meet the minimum fundingrequirements of ERISA.

Services Company also provides a post-retirementhealth care and life insurance plan (the “Retiree Medical Plan”) to certain ofits retirees. To be eligible for these benefits an employee had to be hiredprior to January 1, 1991 and meet certain service requirements. ServicesCompany does not pre-fund this postretirement benefit obligation.

In December 31, 2006, BGH 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. 158 requires companies torecognize a net liability or asset and an offsetting adjustment to accumulatedother comprehensive income in connection with reporting on the funded status ofdefined benefit pension and other postretirement benefit plans. The SFAS 158adjustments are reclassified to non-controlling interest in BGH’s March 31, 2007and December 31, 2006 condensed consolidated financial statements.

In December 2006, Services Company amended the RetireeMedical Plan to freeze amounts payable to Medicare-eligible beneficiaries at$2,500 per year commencing in 2008.  Thischange had the effect of reducing BGH’s postretirement benefit obligation atDecember 31, 2006 by approximately $20.4 million and reducing the RetireeMedical Plan expense for the three months ended March 31, 2007 by approximately$1.0 million.

In the three months ended March 31, 2007 and 2006, thecomponents of the net periodic benefit cost recognized by the Partnership forServices Company’s RIGP and Retiree Medical Plan were as follows:
|                                          | ** ** | ** **              | ** ** | **Retiree Medical ** | ** ** |
|------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **RIGP**                | ** ** | **Plan**                       | ** ** |
| ** **                               | ** ** | **2007**                | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(In thousands)** | ** ** |
| ** **                               | ** ** | ** **              | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Components of net periodic benefit cost: |       |                    |       |                           |       |   |   |   |   |
| Service cost                             |       | $                       | 248        |                           | $          | 282 |   | $ | 100 |   | $ | 225 |   |
| Interest cost                            |       | 253                     |       | 285                            |       | 508 |   | 725 |   |
| Expected return on plan assets           |       | (205                    | )          | (212                           | )          | — |   | — |   |
| Amortization of prior service  benefit   |       | (114                    | )          | (112                           | )          | (860 | ) | (125 | ) |
| Amortization of unrecognized  losses     |       | 143                     |       | 195                            |       | 381 |   | 275 |   |
| Net periodic benefit cost                |       | $                       | 325        |                           | $          | 438 |   | $ | 129 |   | $ | 1,100 |   |

 

16

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The Partnership previously disclosed in its financialstatements for the year ended December 31, 2006 that a minimum fundingcontribution was not required to be made during 2007 to Services Company’s RIGP.

12.  SEGMENTINFORMATION

Based on the financial information provided to seniormanagement, BGH has determined that its operations are appropriately presentedin three reportable operating segments: Pipeline Operations, Terminalling andStorage and Other Operations. BGH also has certain consolidated-level assets,principally consisting of goodwill, which are not allocable to the individualreporting segments because they are not used by the chief operating decisionmaker to make operating decisions or to allocate resources. BGH has allocatedapproximately $11.4 million of goodwill to the Terminalling and StorageSegment. BGH’s reportable operating segments consist of the following:

PipelineOperations:

The Pipeline Operations segment receives petroleumproducts including gasoline, jet and diesel fuel and other distillates fromrefineries, connecting pipelines, bulk and marine terminals and transportsthose products to other locations for a fee. This segment owns and operates approximately 5,400 miles of pipelinesystems in the following states: California, Colorado, Connecticut, Florida,Illinois, Indiana, Kansas, Massachusetts, Michigan, Missouri, New Jersey,Nevada, New York, Ohio, Pennsylvania and Tennessee.

Terminallingand Storage:

The Terminalling and Storage segment provides bulkstorage and terminal throughput services. This segment owns and operates 50 terminals that have the capacity tostore an aggregate of approximately 20.0 million barrels of refined petroleumproducts.  The terminals are located inIndiana, Illinois, Massachusetts, Michigan, Missouri, New York, Ohio,Pennsylvania, and Wisconsin.

OtherOperations:

The Other Operations segment consists primarily of thePartnership’s contract operation of third-party pipelines, which are ownedprimarily by major petrochemical companies and are located in Texas.  This segment also performs pipeline constructionmanagement services, typically for cost plus a fixed fee, for these samecustomers.  The Other Operations segmentalso includes the Partnership’s ownership and operation of an ammonia pipelineacquired in November 2005 and its majority ownership of the Sabina Pipeline inTexas.

Financial information about each segment is presentedbelow. Each segment uses the same accounting policies as those used in thepreparation of the BGH’s condensed consolidated financial statements. Allinter-segment revenues, operating income and assets have been eliminated.  All periods are presented on a consistentbasis.

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|                                 | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **March 31,**               | ** ** |
| ** **                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **(In thousands)**          | ** ** |
| Revenue:                        |       |                             |       |   |   |
| Pipeline Operations             |       | $                                | 93,750     |   | $ | 81,867 |   |
| Terminalling and Storage        |       | 23,589                           |       | 18,168 |   |
| Other Operations                |       | 7,605                            |       | 5,710 |   |
| Total                           |       | $                                | 124,944    |   | $ | 105,745 |   |
|                            |       |                             |       |   |   |
| Operating  income:              |       |                             |       |   |   |
| Pipeline Operations             |       | $                                | 36,988     |   | $ | 30,735 |   |
| Terminalling and Storage        |       | 9,625                            |       | 7,511 |   |
| Other Operations                |       | 2,021                            |       | 1,219 |   |
| Total                           |       | $                                | 48,634     |   | $ | 39,465 |   |
|                            |       |                             |       |   |   |
| Depreciation and  amortization: |       |                             |       |   |   |
| Pipeline Operations             |       | $                                | 7,988      |   | $ | 7,610 |   |
| Terminalling and Storage        |       | 1,305                            |       | 1,104 |   |
| Other Operations                |       | 414                              |       | 390 |   |
| Total                           |       | $                                | 9,707      |   | $ | 9,104 |   |
|                            |       |                             |       |   |   |
| Capital  expenditures:          |       |                             |       |   |   |
| Pipeline Operations             |       | $                                | 15,519     |   | $ | 14,183 |   |
| Terminalling and Storage        |       | 840                              |       | 3,940 |   |
| Other Operations                |       | 1,014                            |       | 112 |   |
| Consolidating- level            |       | —                           |       | 93 |   |
| Total                           |       | $                                | 17,373     |   | $ | 18,328 |   |
|                            |       |                             |       |   |   |
| Acqusitions:                    |       |                             |       |   |   |
| Pipeline Operations             |       | $                                | —     |   | $ | 79,286 |   |
| Terminalling and Storage        |       | 38,468                           |       | 13,504 |   |
| Total                           |       | $                                | 38,468     |   | $ | 92,790 |   |

 

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|                          | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** |
| Assets*:                 |       |                    |       |                  |       |
| Pipeline Operations      |       | $                       | 1,602,832  |                  | $          | 1,608,243 |   |
| Terminalling and Storage |       | 358,699                 |       | 318,917               |       |
| Other Operations         |       | 66,894                  |       | 68,310                |       |
| Consolidating- level     |       | 218,229                 |       | 217,115               |       |
| Total                    |       | $                       | 2,246,654  |                  | $          | 2,212,585 |   |

 

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

13. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, theFinancial Accounting Standards Board (“FASB”) adopted FASB InterpretationNo. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”).FIN 48 sets forth a recognition threshold and measurement attribute forfinancial statement recognition of positions taken or expected to be taken inincome 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 afterDecember 15, 2006. The cumulative effect of the changes arising from theinitial application of FIN 48 is required to be reported as an adjustmentto the opening balance of retained earnings in the period of adoption. Theadoption of FIN 48 had no material impact on the financial statements of BGH.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”). This statement clarifies the definition of fair value, establishes aframework for measuring fair value, and expands the disclosures on fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning afterNovember 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 February 2007, FASB issued Statement of FinancialAccounting Standards No. 159 (“SFASNo. 159”).  SFAS 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue that currently are not required to be measured at fair value.  SFAS No. 159 is effective no later thanfiscal years beginning after November 15, 2007. BGH is currently evaluating the impact this standard may have on itsconsolidated financial statements.

14. SUBSEQUENTEVENTS

On April 3, 2007, BGH announcedthat Carlyle/Riverstone, certain members of management and other limitedpartners of BGH signed an agreement to sell the general partner of BGH and theirapproximate 63% limited partner interest in BGH to an entity formed byaffiliates of ArcLight, Kelso and Lehman Brothers.  The remaining approximately 37% of limitedpartner interest in BGH is publicly traded. The closing of the transactions contemplated by the purchaseagreement is subject to customary closing conditions, including receipt ofregulatory approvals.  The sale of thegeneral partner of BGH would result in a change in control of BGH and,indirectly, Buckeye.

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Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations

RESULTSOF OPERATIONS

*Overview*

Thefollowing discussion provides an analysis of the financial condition andresults of operations for Buckeye GP Holdings L.P. (“BGH”) and each of BGH’soperating segments, including an overview of its liquidity and capitalresources and other related matters.  Thefollowing discussion and analysis should be read in conjunction with accompanyingcondensed consolidated financial statements and related notes included in this reportand Annual Report on Form 10-K for the year ended December 31, 2006.

BGHowns and controls Buckeye GP LLC (“Buckeye GP”), which is the general partnerof Buckeye Partners, L.P. (the “Partnership” or “Buckeye”), a publicly tradedDelaware limited partnership.  BGH ismanaged by its general partner, MainLine Management LLC (“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.

BGH’searnings and cash flows are, therefore, directly dependent upon the ability ofBuckeye and its operating subsidiaries to make cash distributions to Buckeye’spartners. The actual amount of cash that Buckeye will have available fordistribution will depend primarily on Buckeye’s ability to generate earningsand cash flows beyond its working capital requirements.

Incentive distributions paidby Buckeye totaled $6.8 million and $5.7 million in the first three months of2007 and 2006, respectively.  Buckeye paiddistributions per Unit of $0.7875 and $0.7375 in the first three months of 2007and 2006, respectively.  Distributions byBuckeye’s operating subsidiaries in respect of their general partner intereststotaled $0.4 million and $0.3 million the first three months of 2007 and 2006,respectively.

The following tablesummarizes BGH’s cash received in the first quarter of 2007 and 2006 as aresult of its partnership interests in Buckeye: 
|                                                                                                   | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**          | ** ** |
| Incentive  distributions                                                                          |       | $                                | 6,803      |   | $ | 5,722 |   |
| Distributions  from the ownership of 243,914 of Buckeye’s general partner units              |       | 192                              |       | 180 |   |
| Distributions  from the ownership of 80,000 of Buckeye’s limited partner units               |       | 63                               |       | 59 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’ operating subsidiaries. |       | 381                              |       | 342 |   |
| Total                                                                                             |       | $                                | 7,439      |   | $ | 6,303 |   |

 

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*BuckeyeGP Holdings L.P.*

BGH is a Delaware limitedpartnership formed on June 15, 2006 in order to facilitate the reorganizationof MainLine L.P. (“MainLine”) and its affiliates and to effect an initialpublic offering (“IPO”) of the Common Units of BGH.  The reorganization and IPO occurred on August9, 2006.

BGH’s limited partnershipunits are owned approximately 54% by affiliates of Carlyle/Riverstone GlobalEnergy and Power Fund II, L.P. (“Carlyle/Riverstone”), approximately 9% bycertain members of MainLine Management’s and Buckeye GP’s senior management andapproximately 37% by the public.  Priorto the IPO, BGH had no activity and MainLine owned and controlled Buckeye GP.

Coincident with the IPO,the equity interests of MainLine were exchanged for the equity interests ofBGH.  Accordingly, the financialinformation for BGH included in this report includes the financial informationof MainLine.

In connection with theIPO, BGH and Buckeye GP restructured 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 Buckeye toBuckeye GP.  Thereafter, Buckeye andBuckeye GP amended and restated that agreement by entering into the Fifth Amendedand Restated Incentive Compensation Agreement, dated as of August 9, 2006 (the “IncentiveCompensation Agreement”).  On August 9,2006, Buckeye and Buckeye GP also entered into the Amended and RestatedAgreement of Limited Partnership of Buckeye Partners, L.P. (the “PartnershipAgreement”).  The amendments to theIncentive Compensation Agreement and the Partnership Agreement reflect theassignment of the Incentive Compensation Agreement to Buckeye GP andre-characterize the payments Buckeye GP receives under the IncentiveCompensation Agreement as distributions in respect of its general partnerinterest rather than compensation payments. On August 18, 2006, MainLine Sub was merged with and into BGH.  These changes resulted in changes in themethod used to allocate Buckeye’s income between Buckeye GP and Buckeye’slimited partners (the “Partnership LP Unitholders”).

None of these changesaffect the amount or timing of cash distributions or incentive distributionsfrom Buckeye to BGH.  Buckeye’s criteria fordetermining the amount of cash distributions and its policies regarding thetiming of such cash distributions remain unchanged.  Commencing with the fourth quarter of 2006,Buckeye ceased recording incentive compensation payable to Buckeye GP as an expenseand instead recorded such payments as distributions from partners’ capital.

Buckeye pays an annualsenior administrative charge to affiliates of its general partner for certainmanagement functions supplied by those affiliates.  The senior administrative charge wasapproximately $0.5 million in each of the first three months of 2007 and2006.  Prior to the IPO, this senioradministrative charge was recognized as income by BGH.  In connection with the IPO, Buckeye now paysthe senior administrative charge directly to BGH’s general partner, MainLineManagement.

Prior to the IPO, BGHrecognized its share of Buckeye’s income as the sum of (i) the incentivecompensation payments received (to which BGH was contractually entitled andwhich were recorded 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, BGH recognizes its share of Buckeye’s income asthe sum of (i) the amount of incentive compensation BGH would have received hadonly Buckeye’s net income for the period been entirely distributed (whichincome, commencing with the fourth quarter of 2006 now includes the incentivecompensation payments previously recorded by Buckeye as an expense) and (ii)its proportionate share of the remaining net income of Buckeye and theOperating Subsidiaries.

Theeffect of this change was to reduce BGH’s net income in the first three monthsof 2007 by approximately $0.6 million, of which $0.5 million represents theabsence of income related to the senior administrative charge in 

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2007compared to 2006 and $0.1 million represents the difference between incomerecognition for incentive compensation under BGH’s new methodology compared tothe amount that would have been recognized had the Incentive CompensationAgreement and Partnership Agreement not been amended.

*Significant Event*

On April 3, 2007, BGH announcedthat Carlyle/Riverstone, certain members of senior management and other limitedpartners have signed an agreement to sell the general partner of BGH and theirapproximate 63% limited partner interest in BGH to an entity formed byaffiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company(“Kelso”) and Lehman Brothers Holdings Inc. (“Lehman Brothers”).  The remaining approximately 37% of limitedpartner interest in BGH is publicly traded. The closing of the transactions contemplated by the PurchaseAgreement is subject to customary closing conditions, including receipt ofregulatory approvals.  The sale ofMainLine Management would result in a change in control of BGH and, indirectly,Buckeye.

*Resultsof Operations*

Theresults of operations discussed below principally reflect the activities ofBuckeye. Because the accompanying condensed consolidated financial statementsof BGH include the consolidated results of Buckeye, BGH’s consolidatedstatements are substantially similar to Buckeye’s except as noted below:

·                  Interestof non-controlling partners in Buckeye — BGH’s condensed consolidated balancesheet includes a non-controlling interest liability that reflects theproportion of Buckeye owned by its partners other than BGH. Similarly, theownership interests in Buckeye held by its partners other than BGH arereflected in BGH’s condensed consolidated income statement as non-controllinginterest expense. These non-controlling interest liabilities and expenses arenot reflected in Buckeye’s condensed consolidated financial statements.

·                  BGH’scapital structure—In addition to incorporating the assets and liabilities ofBuckeye, BGH’s condensed consolidated balance sheet includes BGH’s ownindebtedness and related debt placement costs, and the partners’ capital on BGH’sbalance sheet represents BGH’s partners’ capital as opposed to the capitalreflected in Buckeye’s balance sheet, which reflects the ownership interest ofall its partners, including its owners other than BGH. Consequently, BGH’sincome statement reflects additional interest expense, interest income and debtamortization expense that is not reflected in Buckeye’s financial statements.

·                  Inclusionof Buckeye Pipe Line Services Company—The financial statements of Buckeye PipeLine Services Company (“Services Company”), which employs the employees whomanage and operate the assets of Buckeye, are consolidated into BGH’s financialstatements. The financial statements of Buckeye do not include the financialstatements of Services Company.

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

·                  Eliminationof Intercompany Transactions—Intercompany obligations and payments betweenBuckeye and its consolidated subsidiaries and BGH and Services Company arereflected in Buckeye’s consolidated financial statements but are eliminated inBGH’s consolidated financial statements.

*BuckeyePartners, L.P.*

Buckeye’sprincipal line of business is the transportation, terminalling and storage ofpetroleum products in the United States for major integrated oil companies,large refined petroleum product marketing companies and major end users ofpetroleum products on a fee basis through facilities owned and operated byBuckeye.  Buckeye also operates pipelinesowned by third parties under contracts with major integrated oil and chemicalcompanies, and performs certain construction activities, generally for theowners of those third-party pipelines.

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Buckeye’sdirect subsidiaries are Buckeye Pipe Line Company, 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 (“WoodRiver”), Buckeye Pipe Line Transportation LLC (“BPL Transportation”) andBuckeye NGL Pipe Lines LLC (“Buckeye NGL”). 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.

*Operating Segments*

Asfully described in Note 12 in the accompanying condensed consolidated financialstatements, BGH has determined that its operations are appropriately presentedin three operating segments, which are the same as Buckeye’s operatingsegments: Pipeline Operations, Terminalling and Storage and Other Operations.

*Results of Operations*

Summary operating results for BGHwere as follows:
|                                                           | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **March 31,**               | ** ** |
| ** **                                                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(In thousands)**          | ** ** |
|                                                      |       |                             |       |   |   |
| Revenue                                                   |       | $                                | 124,944    |   | $ | 105,745 |   |
| Costs and  expenses                                       |       | 76,310                           |       | 66,280 |   |
| Operating income                                          |       | 48,634                           |       | 39,465 |   |
| Other income  (expenses)                                  |       | (13,576                          | )          | (15,409 | ) |
| Income before  equity income and non-controlling interest |       | 35,058                           |       | 24,056 |   |
| Equity income                                             |       | 1,786                            |       | 1,380 |   |
| Non-controlling  interest expense                         |       | (30,905                          | )          | (23,197 | ) |
| Net income                                                |       | $                                | 5,939      |   | $ | 2,239 |   |

 

Revenues and operating income by operating segment wereas follows:
|                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **               | ** ** | **(In thousands)**                          | ** ** |
| ** **               | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Revenues:                |       |                                             |       |   |   |
| Pipeline Operations      |       | $                                                | 93,750     |   | $ | 81,867 |   |
| Terminalling and Storage |       | 23,589                                           |       | 18,168 |   |
| Other Operations         |       | 7,605                                            |       | 5,710 |   |
| Total                    |       | $                                                | 124,944    |   | $ | 105,745 |   |
|                     |       |                                             |       |   |   |
| Operating  income:       |       |                                             |       |   |   |
| Pipeline Operations      |       | $                                                | 36,988     |   | $ | 30,735 |   |
| Terminalling and Storage |       | 9,625                                            |       | 7,511 |   |
| Other Operations         |       | 2,021                                            |       | 1,219 |   |
| Total                    |       | $                                                | 48,634     |   | $ | 39,465 |   |

 

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*PipelineOperations:*

Revenue fromPipeline Operations was $93.8 million in the first quarter of 2007 compared to$81.9 million in the first quarter of 2006. The revenue increase in 2007 of $11.9million or 14.5 % was primarily the result of:

·                  An approximate $6.6million increase in base revenue caused by average tariff increases of 6.1%implemented in June and July of 2006, combined with a volume increase ofapproximately 0.3% in the first quarter of 2007 as compared to the firstquarter of 2006;

·                  Incrementalrevenue of $2.2 million in 2007 as compared to 2006 resulting from thecommissioning of the terminal and pipeline project that serves the MemphisInternational Airport (“WesPac - Memphis Project”) in April of 2006;

·                  Incrementalrevenue of $1.2 million in the first quarter of 2007 caused by three months ofrevenue from Buckeye NGL in 2007 as compared to two months of revenue in 2006because Buckeye NGL was acquired on January 31, 2006; and

·                  Recognition andcollection of $1.8 million in revenue in the first quarter of 2007 from theresolution of a product measurement issue with a customer.

Product deliveries for each of the quarters ended March 31, 2007and 2006 were as follows:

|             | ** ** | **Barrels Per Day**                        | ** ** |
|-------------|------------|------------------------------------------------------|------------|
| ** **  | ** ** | **Three Months Ended March 31,** | ** ** |
| **Product** | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Gasoline    |       | 687,100                                              |       | 691,100 |   |
| Distillate  |       | 365,100                                              |       | 367,100 |   |
| Jet Fuel    |       | 352,300                                              |       | 332,500 |   |
| LPGs        |       | 20,100                                               |       | 13,800 |   |
| NGLs        |       | 20,000                                               |       | 13,700 |   |
| Other       |       | 10,100                                               |       | 10,500 |   |
| Total       |       | 1,454,700                                            |       | 1,428,700 |   |

 

*Terminalling and Storage:*

Revenue from theTerminalling and Storage segment was $23.6 million in the first quarter of 2007as compared to $18.2 million in the first quarter of 2006. The revenue increasein the first quarter of 2007 of $5.4 million or 29.8 % was primarily the resultof:

·                  An approximate $3.0million increase in base revenue primarily related to increases in throughputvolumes and charges for product additives in the first quarter of 2007 ascompared to the first quarter of 2006;

·                  Incrementalrevenue of $1.7 million in the first quarter of 2007 as compared to the firstquarter of 2006 due to the commencement of certain butane blending agreementsin the latter part of 2006; and

·                  Incrementalrevenue of $0.7 million in the first quarter of 2007 as compared to the firstquarter of 2006 primarily due to the acquisition of six terminals in 2007 asmore fully described in Note 3 to the accompanying condensed consolidatedfinancial statements.

Average daily throughput for the refined products terminals for the quartersended March 31 was as follows:

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|                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                               |       |                                                 |       |   |   |
| Refined products  throughput (bpd) |       | 536,000                                              |       | 447,400 |   |

 

*Other Operations:*

Revenue from theOther Operations segment was $7.6 million in the first quarter of 2007 ascompared to $5.7 million in the first quarter of 2006. The revenue increase in thefirst quarter of 2007 of $1.9 million or 33.2% was primarily the result of:

·                  An increase of $1.0 million caused byadditional operating contracts signed in the latter part of 2006; and

·                  An increase of $0.7 million in constructionmanagement revenue in the first quarter of 2007 as compared to the firstquarter of 2006.

*OperatingExpenses:*

Costs and expensesfor the three months ended March 31, 2007 and 2006 were as follows:
|                                | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Payroll and  payroll benefits  |       | $                                | 23,168     |   | $ | 21,324 |   |
| Depreciation and  amortization |       | 9,707                            |       | 9,104 |   |
| Operating power                |       | 7,318                            |       | 7,090 |   |
| Outside services               |       | 6,077                            |       | 4,592 |   |
| Property and  other taxes      |       | 6,183                            |       | 5,106 |   |
| Construction  management       |       | 1,695                            |       | 562 |   |
| All other                      |       | 22,162                           |       | 18,502 |   |
| Total                          |       | $                                | 76,310     |   | $ | 66,280 |   |

 

Payroll andpayroll benefits were $23.2 million in the first quarter of 2007, an increaseof $1.8 million compared to the first quarter of 2006.  Of this increase, approximately $0.2 millionis related to recent acquisitions and first quarter of 2007 operations at the WesPac- Memphis Project.  Increases in salariesand wages of $1.7 million resulted from an increase in the number of employeesand overtime pay due to the Partnership’s expanded operations and higher wagerates.  The Partnership also experiencedincreases in payroll due to a decrease in capitalized payroll of $0.3million.  Employee stock ownership plan (“ESOP”)related costs increased by $0.6 million over the same period in 2006.  Payroll benefit expenses also decreased by$1.0 million due to lower employee benefits costs resulting from an amendmentto Services Company’s postretirement health care and life insurance benefitsplan.

Depreciation andamortization expense was $9.7 million in the first quarter of 2007, an increaseof $0.6 million from the first quarter of 2006. Depreciation related to assets acquired over the last year anddepreciation expense related to WesPac - Memphis was $0.5 million.  The remaining increase in depreciation andamortization expense resulted from the Partnership’s ongoing maintenance andexpansion capital program.

Operating powercosts were $7.3 million in the three months ended March 31, 2007, an increaseof $0.2 million from the same period in 2006. The majority of the increase was related to recent acquisitions andfirst quarter of operations for the WesPac – Memphis Project.  Operating power consists primarily ofelectricity required to operate pumping facilities.

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Outside servicescosts increased $1.5 million from $4.6 million in the first quarter of 2006 to$6.1 million in the first quarter of 2007. Of this increase, $0.5 millionrelated to corporate development initiatives and public awarenessprograms.  Approximately $0.5 million ofthis increase is due to an annual senior administrative charge that is paid byBuckeye to affiliates of its general partner for certain management functionssupplied by those affiliates.  Prior toBGH’s initial public offering, this senior administrative charge was recognizedas income by BGH.  In connection with theIPO, Buckeye pays the senior administrative charge directly to BGH’s generalpartner, MainLine Management, which resulted in an increase in outside servicecosts during the first quarter of 2007. The remainder of the increase is due to an increase in pipeline andterminal maintenance activities. Outside services costs consist principally ofthird-party contract services for pipeline and terminal maintenance activities.

Property and othertaxes were $6.2 million in the first quarter of 2007, an increase of $1.1million compared to the first quarter of 2006. Property and other taxes related recent acquisitions was $0.2million.  The Partnership expensed $0.6million of excise taxes in the first quarter of 2007 which related to activityat the Partnership’s terminals.  Of theremaining increase of $0.3 million, BGH and the Partnership experienced higherreal property tax assessments in several states.

Constructionmanagement costs were $1.7 million in the first quarter of 2007, an increase of$1.1 million from the first quarter of 2006. Of this increase, $0.5 million relates to a construction contract enteredinto by WesPac Pipe Lines – Memphis LLC to construct a pipeline connection fora third party.  The remainder of theincrease is due to an increase in construction activity.

All other costswere $22.2 million in the three months ended March 31, 2007, an increase of $3.7million compared to $18.5 million in the same period in 2006.  The increase reflects $1.6 million of costsassociated with fuel purchases related to a product-supply arrangement.  Insurance costs increased by $0.9 millionover the first quarter of 2006.  Othercosts related to recent acquisitions were $0.6 million.  Expenses related to terminal additivesincreased by $0.4 million which is a result of an increase in terminalactivity. Professional fees in the first three months of 2006 includeapproximately $0.9 million of legal, accounting and tax fees related toplanning for BGH’s IPO. The remainder of the increases related to various otherpipeline operating costs.

Costs and expensesby segment for the quarters ended March 31, 2007 and 2006 were as follows:
|                           | ** ** | **Costs and Expenses by Segment** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                              | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(In thousands)**                               | ** ** |
|                      |       |                                                  |       |   |   |
| Pipeline  Operations      |       | $                                                     | 56,762     |   | $ | 51,133 |   |
| Terminalling and  Storage |       | 13,964                                                |       | 10,657 |   |
| Other Operations          |       | 5,584                                                 |       | 4,490 |   |
| Total                     |       | $                                                     | 76,310     |   | $ | 66,280 |   |

 

Costs and expensesattributable to Buckeye, Services Company and BGH were as follows:
|                                                     | ** ** | **2007**                | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                          | ** ** | **(In thousands)** | ** ** |
| Total costs and  expenses:                          |       |                    |       |     |       |
| Attributable to Buckeye                             |       | $                       | 74,671     |     | $          | 65,253 |   |
| Elimination of Buckeye deferred charge              |       | (1,174                  | )          | (1,174   | )          |
| Elimination of Buckeye senior administrative charge |       | —                  |       | (475     | )          |
| Net effect of ESOP charges                          |       | 1,606                   |       | 1,028    |       |
| Attributable to BGH                                 |       | 1,207                   |       | 1,648    |       |
| Total                                               |       | $                       | 76,310     |     | $          | 66,280 |   |

 

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Amounts attributableto BGH consist of the following:
|                       | ** ** | **2007**                | ** ** | **2006** | ** ** |
|-----------------------|------------|-------------------------|------------|----------|------------|
| ** **            | ** ** | **(In thousands)** | ** ** |
| Attributable to  BGH: |       |                    |       |     |       |
| Payroll and benefits  |       | $                       | 626        |     | $          | 423 |   |
| Professional fees     |       | 198                     |       | 1,086    |       |
| Other                 |       | 383                     |       | 139      |       |
| Total                 |       | $                       | 1,207      |     | $          | 1,648 |   |

 

Payroll andbenefits costs include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye as well as allocations ofthe cost of Buckeye personnel performing administrative services directly forBGH. BGH also incurred $0.1 million of a non-cash expense in the first quarterof 2007 related to the vesting of its Management Units.  Professional fees in the first three monthsof 2006 include approximately $0.9 million of legal, accounting and tax feesrelated to planning for BGH’s IPO.  Othercosts include certain state franchise taxes, insurance costs, depreciation andmiscellaneous other expenses.

Other income(expenses) for the three months ended March 31, 2007 and 2006 were as follows:
|                            | ** ** | **Other Income (Expenses)** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(In thousands)**               | ** ** |
|                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Investment  income         |       | $                                     | 300        |   | $ | 320 |   |
| Interest and  debt expense |       | (13,876                               | )          | (15,729 | ) |
| Total                      |       | $                                     | (13,576    | ) | $ | (15,409 | ) |
|                       |       |                                  |       |   |   |
| Equity income              |       | $                                     | 1,786      |   | $ | 1,380 |   |

 

Other income(expenses) was a net expense of $13.6 million in the first quarter of 2007,compared to a net expense of $15.4 million during the first quarter of2006.  Investment income for the threemonths ended March 31, 2007 was consistent with investment income generatedduring the three months ended March 31, 2006.

Interest expensewas $13.9 million in the three months ended March 31, 2007, a decrease of $1.8 millionfrom the three months ended March 31, 2006. The decrease is due to the absence of $2.8 million of interest expenseassociated with BGH’s prior term loan which was extinguished in conjunctionwith the IPO, partially offset by an increase of $1.0 million at Buckeye, whichwas principally due to higher average balances outstanding under, and higherinterest rates on, Buckeye’s 5-year revolving credit facility.

Equity incomeincreased by $0.4 million in the first quarter of 2007 compared to the firstquarter of 2006.  The increase isprincipally a result of equity income earned from Buckeye’s approximate 40%interest in Muskegon Pipeline LLC which was acquired in December 2005.

LIQUIDITY AND CAPITALRESOURCES

Until BGH’s IPO onAugust 9, 2006, BGH’s only capital requirement, apart from Buckeye’s capitalrequirements, was its debt service under its term loan.  Concurrent with BGH’s IPO, the term loan wasrepaid in full.  Buckeye’s capitalrequirements consist of maintenance and capital expenditures, expenditures foracquisitions and debt service requirements.

As noted in “Overview”above, BGH’s only cash-generating asset is its ownership interest in BuckeyeGP.  BGH’s cash flow is, therefore,directly dependent upon the ability of Buckeye and its operating subsidiariesto make cash distributions to Buckeye’s partners. The actual amount of cashthat Buckeye will have available for distribution 

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depends primarily onBuckeye’s ability to generate cash beyond its working capitalrequirements.  Buckeye’s primary futuresources of liquidity are operating cash flow, proceeds from borrowings underBuckeye’s revolving credit facility and proceeds from the issuance of BuckeyeLP Units.

BGH’s principaluse of cash is the payment of its operating expenses and distributions to itsUnitholders.  BGH generally makesquarterly cash distributions of substan­tially all of its available cash,generally defined as consolidated cash receipts less consolidated cashexpenditures and such retentions for working capital, anticipated cashexpenditures and contingencies as MainLine Management deems appropriate.  On January 25, 2007, MainLine Managementdeclared a cash distribution of $0.225 per unit payable on February 28, 2007 toUnitholders of record on February 5, 2007. The total cash distribution to BGH Unitholders with respect to thedistribution of $0.225 per unit was approximately $6.4 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”).  See Note 4 to BGH’scondensed consolidated financial statements for a description of the terms ofthe BGH Credit Agreement.  During the threemonths ended March 31, 2007 BGH borrowed and repaid $0.6 million under the BGHCredit Agreement.  The proposed sale ofthe interest in BGH owned by Carlyle/Riverstone, certain members of senior managementand other limited partners to the entity formed by ArcLight, Kelso and LehmanBrothers would result in a change of control as defined in the BGH CreditAgreement.  BGH intends to seek the consent of the BGH Credit Agreement lenders inconnection with the sale of its general partner interest.

*Services Company*

Services Company hadtotal debt outstanding of $24.8 million and $26.3 million at March 31, 2007 andDecember 31, 2006 respectively, consisting of 3.60% Senior Secured Notes (the “3.60%ESOP Notes”) due March 28, 2011 payable by the ESOP to a third-party lender.See Note 4 to BGH’s condensed consolidated financial statements for adescription of the terms of the 3.60% ESOP Notes.

*Buckeye*

*AtMarch 31, 2007, Buckeye had $960.0 million in aggregate outstanding long-termdebt, 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 4 5/8% Notes due 2013,$150.0 million of the 6 3⁄4% Notes due 2033 and $110.0 million outstanding undera credit facility.*

On November 13, 2006 Buckeye entered into a new $400million 5-year revolving credit facility (the “Credit Facility”) with asyndicate of banks.  See Note 4 to BGH’scondensed consolidated financial statements for a description of the terms ofthe Credit Facility.

The Credit Facility provides for a “change of control”event of default that will be triggered if (i) Carlyle/Riverstone ceases tobeneficially own 100% of the sole general partner of BGH, (ii) BGH ceases toown 100% of Buckeye GP or (iii) Buckeye GP ceases to be the sole generalpartner of Buckeye.  The proposed sale ofthe interest in BGH owned by Carlyle/Riverstone, certain members of seniormanagement and other limited partners to the entity formed by ArcLight, Kelsoand Lehman Brothers would result in a change of control as defined in theCredit Facility. Buckeye intends toseek the consent of the Credit Facility lenders in connection with the sale ofBGH’s general partner.

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*CashFlows from Operations*

The components of cash flows from operations for thethree months ended March 31, 2007 and 2006 were as follows:
|                                            | ** ** | **Cash Flows from Operations** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                       | ** ** |
| Net income                                 |       | $                                             | 5,939      |   | $ | 2,239 |   |
| Value of ESOP  shares released             |       | 1,148                                         |       | 1,047 |   |
| Depreciation and  amortization             |       | 9,707                                         |       | 9,104 |   |
| Non-controlling  interests                 |       | 30,905                                        |       | 23,197 |   |
| Changes in  current assets and liabilities |       | 257                                           |       | (17,917 | ) |
| Changes in other  assets and liabilities   |       | 454                                           |       | 1,394 |   |
| Other                                      |       | (237                                          | )          | 785 |   |
| Total                                      |       | $                                             | 48,173     |   | $ | 19,849 |   |

 

Cash flows from operations were $48.2 million for thefirst three months of 2007 compared to $19.9 million for the first three monthsof 2006, an increase of $28.3 million. The primary driver of this increase isthe improvement in Buckeye’s net income for the period (both the net income allocatedto BGH and the net income allocated to non-controlling interests) of $14.7million in 2007 compared to 2006 (which included incentive compensation expenseof $5.7 million), as well as favorable fluctuations in working capital.Depreciation and amortization was $9.7 million for the first quarter of 2007compared to $9.1 million during the same period in 2006. The increase resultedprincipally from depreciation and amortization related to ongoing capitaladditions.  Cash provided by workingcapital was $0.3 million in the first quarter of 2007 as compared to cash usedfor working capital of $17.9 million in the first quarter of 2006.

In the first quarter of 2007, cash provided by workingcapital of $0.3 million resulted primarily from reductions in both trade andconstruction and pipeline relocation receivables of $13.6 million that wasoffset primarily by reductions in accounts payable of $11.1 million and inaccrued and other current liabilities of $2.8 million.

In the first quarter of 2006, cash used for workingcapital of $17.9 million resulted from increases in prepaid and other currentassets of $5.9 million, construction and pipeline relocation receivables of$1.7 million, and trade receivables of $3.6 million and a decrease in accountspayable of $6.9 million.  Prepaid andother current assets increased due to an increase in insurance receivables andan increase in a receivable for activity on the 29-mile ammonia pipelineacquired in November 2005. The increase in construction and pipeline relocationreceivables is due to an increase in pipeline relocation activity in the firstquarter of 2006.  Trade receivablesincreased due to an increase in the Partnership’s pipeline and terminalactivities due to its acquisitions. The decrease in accounts payable resultedfrom the timing of invoice payments at year end of 2005 as well as lowermaintenance and outside service activities in the first quarter compared toyear end.

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*Cash Flows from Investing Activities*

Net cash used in investing activities for the threemonths ended March 31, 2007 and 2006 are as follows:
|                               | ** ** | **Investing Activities**                                      | ** ** |
|-------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                    | ** ** | **For the Three Months Ended  March 31,** | ** ** |
| ** **                    | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(In thousands)**                                            | ** ** |
| Capital  expenditures         |       | $                                                                  | (17,373    | ) | $ | (18,328 | ) |
| Investments and  acquisitions |       | (38,468                                                            | )          | (92,790 | ) |
| Other                         |       | (72                                                                | )          | (664 | ) |
| Total                         |       | $                                                                  | (55,913    | ) | $ | (111,782 | ) |

 

In the threemonths ended March 31, 2007, Buckeye expended $38.5 million primarily for theacquisition of six terminals and related assets. See Note 3 to BGH’s condensedconsolidated financial statements for a further discussion.

In the threemonths ended March 31, 2006, Buckeye expended $92.8 million related toacquisitions, including $79.3 million related to the NGL Pipeline, $12.5million related to the acquisition of the Niles, Michigan terminal andapproximately $1.0 million for miscellaneous asset acquisitions.

Capitalexpenditures are summarized below:
|                                  | ** ** | **Capital Expenditures**                                      | ** ** |
|----------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                       | ** ** | **For the Three Months Ended  March 31,** | ** ** |
| ** **                       | ** ** | **2007**                                                           | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                            | ** ** |
| Sustaining  capital expenditures |       | $                                                                  | 7,170      |   | $ | 5,589 |   |
| Expansion and  cost reduction    |       | 10,203                                                             |       | 12,739 |   |
| Total                            |       | $                                                                  | 17,373     |   | $ | 18,328 |   |

 

Buckeye incurred $7.2million and $5.6 million of sustaining capital expenditures and $10.2 millionand $12.7 million of expansion and cost reduction expenditures in the firstthree months of 2007 and 2006, respectively. Expansion and cost reductionprojects in 2007 include a capacity expansion project in Illinois to handleadditional LPG volumes as well as ongoing capacity improvements to WesPac -Memphis Project. Expansion and cost reduction projects in 2006 include thecompletion of the base operations of the WesPac - Memphis Project.

BGH estimates sustaining capital expenditures, all ofwhich are attributable to Buckeye, will be approximately $30.0 million for allof 2007.

*CashFlows from Financing Activities*

During the firstthree months of 2007, BGH borrowed and repaid $0.6 million under the BGH CreditAgreement.  BGH’s distributions to itsUnitholders totaled $6.4 million in the first three months of 2007.

On March 5, 2007,Buckeye issued 1.5 million LP Units in an underwritten public offering at$48.25 per LP Unit.  On March 14, 2007,the underwriters exercised a portion of their overallotment option and,accordingly, the Partnership issued an additional 208,600 LP Units at $48.25per LP Unit.  Total proceeds from theoffering, 

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includingthe overallotment option and after underwriter’s discount of $0.75 per LP andoffering expenses, were approximately $82.4 million, and were used to reduceamounts outstanding under Buckeye’s Credit Facility.

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’s discount of$1.45 per LP Unit and offering expenses were approximately $64.1 million, andwere used to reduce amounts outstanding under Buckeye’s Credit Facility.

Payments on the 3.60%ESOP Notes were $1.5 million for the three months ended March 31, 2007.  During the first three months of 2007 and2006, the Partnership borrowed $70.0 million and $115.0 million under itsCredit Facility and repaid $105 million and $65 million, respectively.

Distributions tonon-controlling interests, consisting primarily of Buckeye’s distributions toholders of its LP Units, were $29.8 million in the first three months of 2007compared to $26.7 million in the first three months of 2006.  The increase resulted principally fromadditional LP Units outstanding as a result of Buckeye’s issuance of 1.5million of its LP Units in March 2006 and increases in Buckeye’s per-unitdistribution amount.  Buckeye LP Unitsissued in March 2007 did not receive Buckeye’s first quarter distribution.

# OTHER MATTERS

Accounting Pronouncements

See Note 13 to BGH’scondensed consolidated financial statements for a description of certainaccounting pronouncements.

# Forward Looking Statements

The informationcontained above in this Management’s Discussion and Analysis and elsewhere inthis Form 10-Q includes “forward-looking statements,” within the meaning of thePrivate Securities Litigation Reform Act of 1995. Such statements useforward-looking words such as “anticipate,” “continue,” “estimate,” “expect,” “may,”“believe,” “will,” or other similar words, although some forward-lookingstatements are expressed differently. These statements discuss future expectations and containprojections.  Specific factors that couldcause actual results to differ from those in the forward-looking statementsinclude, but are not limited to: (1) BGH’s ability to pay distributions to itsUnitholders; (2) BGH’s expected receipt of distributions and incentivedistributions from Buckeye; (3) anticipated trends in Buckeye’s business; (4)price trends 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 forenvironmental claims; (7) security issues affecting Buckeye’s assets,including, among others, potential damage to its assets caused by acts of waror terrorism; (8) unanticipated capital expenditures and operating expenses torepair or replace Buckeye’s assets; (9) availability and cost of insurance onBuckeye’s assets and operations; (10) Buckeye’s ability to successfullyidentify and complete strategic acquisitions and make cost saving changes inoperations; (11) expansion in the operations of Buckeye’s competitors; (12)Buckeye’s ability to integrate any acquired operations into its existingoperations; (13) shut-downs or cutbacks at major refineries that use Buckeye’sservices; (14) deterioration in Buckeye’s labor relations; (15) changes in realproperty tax assessments; (16) disruptions to the air travel system; (17) interestrate fluctuations and other capital market conditions; (18) BGH’s futureresults of operations; (19) BGH’s liquidity and ability to finance itsactivities; (20) market conditions in Buckeye’s industry; (21) conflicts ofinterest between Buckeye, its general partner and BGH; (22) the treatment ofBuckeye or BGH as a corporation for federal income tax purposes or if BGH orBuckeye become subject to entity-level taxation for state tax purposes; and(23) the impact of governmental legislation and regulation on BGH and Buckeye.

These factors are not necessarily all of the importantfactors that could cause actual results to differ materially from thoseexpressed in any of our forward-looking statements.  Other unknown or unpredictable factors couldalso have material adverse effects on future results.  Although the expectations in theforward-looking statements are based on our current beliefs and expectations,we do not assume responsibility for the accuracy and completeness of 

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suchstatements. When considering forward-looking statements, you should keep inmind the risk factors and other cautionary statements in BGH’s Annual Report onForm 10-K for 2006, including those described in the “Risk Factors”section of that report. Further, we undertake no obligation to update publiclyany forward-looking statement whether as a result of new information or futureevents.

# Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk

###### *Market Risk – Trading Instruments*

Currently, neither BGH nor Buckeye has any derivative instrumentsand do not currently engage in hedging activity with respect to tradinginstruments.

### Market Risk – *Other than TradingInstruments*

Buckeye is exposed to risk resulting from changes in interestrates.  Buckeye does not have significantcommodity or foreign exchange risk. Buckeye is exposed to fair valuerisk with respect to the fixed portion of its financing arrangements (the5.125% Notes, the 5.30% Notes, the 4.625% Notes and the 6.750% Notes) and to cashflow risk with respect to its variable rate obligations (the Credit Facility).Fair value risk represents the risk that the value of the fixed portion of therespective financing arrangements will rise or fall depending on changes ininterest rates. Cash flow risk represents the risk that interest costs relatedto the Credit Facility will rise or fall depending on changes in interestrates.

At March 31, 2007, Buckeye had total fixed rate debtobligations having a face value of $850 million, consisting of$125 million of the 5.125% Notes, $275 million of the 5.30% Notes,$300 million of the 4.625% Notes and $150 million of the 6.750%Notes. At March 31, 2007 Services Company had fixed debt obligations ofapproximately $24.8 million of its 3.60% ESOP Notes. The aggregate fair valueof these fixed obligations at March 31, 2007 was approximately $965.1 million.  A 1% decrease in rates for obligations ofsimilar maturities would have increased the aggregate fair value of theseobligations by $66.4 million at March 31, 2007. Buckeye’s variable debt obligation under the Credit Facility was $110 millionat March 31, 2007. Based on the balances outstanding at March 31, 2007, a 1%increase or decrease in interest rates would increase or decrease consolidatedannual interest expense by $1.1 million.

Item 4. Controlsand Procedures

(a)       Evaluationof Disclosure 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.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that MainLine Management’sdisclosure controls and procedures for BGH as of the end of the period coveredby this report are functioning effectively to provide reasonable assurance thatthe information required to be disclosed by MainLine Management in reportsfiled on behalf of BGH under the Securities Exchange Act of 1934 is (i)recorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms and (ii) accumulated and communicated tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absoluteassurance, however, that the objectives of the controls system are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected.

(b)       Changes in Internal Controlover Financial Reporting

No change in MainLine Management’s internal control over financialreporting for BGH occurred during BGH’s most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, MainLineManagement’s internal control over financial reporting for BGH.

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PARTII — OTHER INFORMATION

Item 1. LegalProceedings

In the third quarter of 2006, the Partnership receivedpenalty assessments from the IRS in the aggregate amount of $4.3 million basedon a failure to timely file excise tax information returns relating to itsterminal operations from January 2005 through February 2006. The Partnershipfiled the information returns with the IRS on May 10, 2006. In January 2007,the Partnership agreed to pay the IRS approximately $0.6 million to settle andresolve the penalty assessment. The settlement is subject to furtheradministrative review within the IRS and the negotiation and execution of aclosing agreement between the Partnership and the IRS. The negotiated penaltyassessment was recorded as an expense in the consolidated financial statementsin the fourth quarter of 2006.

In March 2007, Buckeye was named as a defendant in anaction entitled *Madigan v. Buckeye Partners, L.P*.filed in the U.S. District Court for the Central District of Illinois. Theaction was brought by the State of Illinois Attorney General acting on behalfof the Illinois Environmental Protection Agency. The complaint alleges thatBuckeye violated various Illinois state environmental laws in connection with aproduct release from Buckeye’s terminal located in Harristown, Illinois on orabout June 11, 2006 and various other product releases from Buckeye’s terminalsand pipelines in the State of Illinois during the period of 2001 through 2006.The complaint seeks to recover state oversight costs, damages, and civilpenalties and seeks injunctive action requiring Buckeye to remediate theenvironmental contamination resulting from the product releases. Buckeyebelieves it has meritorious defenses to the allegations set forth in thecomplaint.

Item6.  Exhibits

(a)     Exhibits

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

31.2 Certification of Chief Financial Officer pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934.

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

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

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SIGNATURE

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|   | BUCKEYE GP HOLDINGS L.P. |
|--------|--------------------------|
|   |   (Registrant) |   |
|   |                     |   |
|   | By:                      | MainLine Management LLC |
|   |                     |  as General Partner |
|        |                          |  |  |

 

 
| Date: May 1, 2007 | By:    | ROBERT B. WALLACE |                              |
|------------------------|--------|-------------------|-----------------------------------|
|                   |   |              |
|                   |   |              | Robert B.  Wallace                |
|                   |   |              | Senior Vice  President, Finance   |
|                   |   |              |  and Chief Financial Officer |
|                   |   |              | *(Principal  Accounting and*      |
|                   |   |              | * Financial Officer)*        |
|                        |        |                   |                                   |  |

 

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