** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For thequarterly period ended June 30, 2007 or**

** **

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(D) OF THE SECURITIESEXCHANGE 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 offices) |       | (Zip Code)           |

 

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) has filedall 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   Noo

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 largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large Accelerated  Filer o |   | Accelerated  Filer o |   | Non-Accelerated  Filer  x |
|---------------------------------|--------|---------------------------|--------|--------------------------------|

 

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

As of July 16, 2007, there were 27,769,647 Common Units and 530,353Management Units outstanding.

 

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BUCKEYE GPHOLDINGS L.P.

INDEX
| **PART I— FINANCIAL  INFORMATION** | **Page** |
|-----------------------------------------|----------|
|                                    |     |   |   |
| Item 1.                                 |     | Condensed  Consolidated Financial Statements (Unaudited) |   |
|                                    |     |   |   |
|                                    |     | Condensed Consolidated Statements of Income for the  three and six months ended June 30, 2007 and 2006 | 1 |
|                                    |     |   |   |
|                                    |     | Condensed Consolidated Balance Sheets as of June 30,  2007 and December 31, 2006 | 2 |
|                                    |     |   |   |
|                                    |     | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2007 and 2006 | 3 |
|                                    |     |   |   |
|                                    |     | Condensed Consolidated Statement of Changes in  Partners’ Capital for the six months ended June 30, 2007 | 4 |
|                                    |     |   |   |
|                                    |     | Notes to Condensed Consolidated Financial Statements | 5 |
|                                    |     |   |   |
| Item 2.                                 |     | Management’s  Discussion and Analysis of Financial Condition and | 21 |
|                                    |     | Results of  Operations |   |
|                                    |     |   |   |
| Item 3.                                 |     | Quantitative  and Qualitative Disclosures About Market Risk | 39 |
|                                    |     |   |   |
| Item 4.                                 |     | Controls and  Procedures | 39 |
|                                    |     |   |   |
| PART  II— OTHER INFORMATION        |     |
|                                    |     |   |   |
| Item 1.                                 |     | Legal Proceedings | 40 |
|                                    |     |   |   |
| Item 1A.                                |     | Risk Factors | 40 |
|                                    |     |   |   |
| Item  6.                                |     | Exhibits | 41 |

 

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PART I — FINANCIAL INFORMATION

Item1. Condensed Consolidated Financial Statements

**Buckeye GP Holdings L.P.**

**Condensed Consolidated Statements of Income**

**(In thousands, except per unit amounts)**

**(Unaudited)**
| **Three Months Ended** | ** ** | ** ** | ** ** | **Six Months Ended**                                    | ** ** |
|----------------------------------|------------|------------|------------|-------------------------------------------------------------------|------------|
| **June 30,**                | ** ** | ** ** | ** ** | **June 30,**                                                 | ** ** |
| **2007**                         | ** ** | **2006**   | ** ** | ** **                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                             |       |       |       |                                                              |       |   |   |   |   |
| $                                | 124,951    |       | $          | 111,495                                                           |       | Revenues |   | $ | 249,895 |   | $ | 217,240 |   |
|                             |       |       |       |                                                              |       |   |   |   |   |
|                             |       |       |       | Costs and expenses:                                               |       |   |   |   |   |
| 63,609                           |       | 53,570     |       | Operating  expenses                                               |       | 123,908 |   | 104,831 |   |
| 10,001                           |       | 10,018     |       | Depreciation and  amortization                                    |       | 19,708 |   | 19,122 |   |
| 7,127                            |       | 6,534      |       | General and  administrative                                       |       | 13,431 |   | 12,449 |   |
| 80,737                           |       | 70,122     |       | Total costs and  expenses                                         |       | 157,047 |   | 136,402 |   |
|                             |       |       |       |                                                              |       |   |   |   |   |
| 44,214                           |       | 41,373     |       | Operating income                                                  |       | 92,848 |   | 80,838 |   |
|                             |       |       |       |                                                              |       |   |   |   |   |
|                             |       |       |       | Other income (expense):                                           |       |   |   |   |   |
| 334                              |       | 302        |       | Investment income                                                 |       | 634 |   | 622 |   |
| (13,104                          | )          | (16,211    | )          | Interest and  debt expense                                        |       | (26,980 | ) | (31,940 | ) |
|                             |       |       |       |                                                              |       |   |   |   |   |
| (12,770                          | )          | (15,909    | )          | Total other  income (expenses)                                    |       | (26,346 | ) | (31,318 | ) |
|                             |       |       |       |                                                              |       |   |   |   |   |
| 31,444                           |       | 25,464     |       | Income before  equity income and non-controlling interest expense |       | 66,502 |   | 49,520 |   |
|                             |       |       |       |                                                              |       |   |   |   |   |
| 2,258                            |       | 1,415      |       | Equity income                                                     |       | 4,044 |   | 2,795 |   |
|                             |       |       |       |                                                              |       |   |   |   |   |
| (29,571                          | )          | (24,892    | )          | Non-controlling  interest expense                                 |       | (60,476 | ) | (48,089 | ) |
|                             |       |       |       |                                                              |       |   |   |   |   |
| $                                | 4,131      |       | $          | 1,987                                                             |       | Net income |   | $ | 10,070 |   | $ | 4,226 |   |
|                             |       |       |       |                                                              |       |   |   |   |   |
|                             |       |       |       | Net income per  partnership unit:                                 |       |   |   |   |   |
| $                                | 0.15       |       |       |                                                              | Basic      |   | $ | 0.36 |   |   |   |
| $                                | 0.15       |       |       |                                                              | Diluted    |   | $ | 0.36 |   |   |   |
|                             |       |       |       |                                                              |       |   |   |   |   |
|                             |       |       |       | Weighted average number  of units outstanding:                    |       |   |   |   |   |
| 28,073                           |       |       |       | Basic                                                             |       | 27,983 |   |   |   |
| 28,300                           |       |       |       | Diluted                                                           |       | 28,300 |   |   |   |

 

 

See Notes to condensed consolidated financialstatements.

1

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**Buckeye GP Holdings L.P.**

**Condensed Consolidated Balance Sheets**

**(In thousands)**

**(Unaudited)**
| ** **                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Assets:                                                                       |       |              |       |                  |       |
| Current assets:                                                               |       |              |       |                  |       |
| Cash and cash equivalents                                                     |       | $                 | 24,051     |                  | $          | 20,220 |   |
| Trade receivables                                                             |       | 42,658            |       | 51,030                |       |
| Construction and pipeline relocation receivables                              |       | 11,953            |       | 12,189                |       |
| Inventories                                                                   |       | 14,059            |       | 14,286                |       |
| Prepaid and other current assets                                              |       | 32,347            |       | 34,175                |       |
| Total current assets                                                          |       | 125,068           |       | 131,900               |       |
|                                                                          |       |              |       |                  |       |
| Property, plant and equipment, net                                            |       | 1,794,298         |       | 1,738,199             |       |
|                                                                          |       |              |       |                  |       |
| Goodwill                                                                      |       | 234,603           |       | 234,603               |       |
| Other non-current assets                                                      |       | 107,191           |       | 107,883               |       |
| Total assets                                                                  |       | $                 | 2,261,160  |                  | $          | 2,212,585 |   |
|                                                                          |       |              |       |                  |       |
| Liabilities and  partners’ capital:                                      |       |              |       |                  |       |
| Current liabilities:                                                          |       |              |       |                  |       |
| Current portion of long-term debt                                             |       | $                 | 6,107      |                  | $          | 6,037 |   |
| Accounts payable                                                              |       | 21,879            |       | 26,650                |       |
| Accrued and other current liabilities                                         |       | 73,325            |       | 69,774                |       |
| Total current liabilities                                                     |       | 101,311           |       | 102,461               |       |
|                                                                          |       |              |       |                  |       |
| Long-term debt                                                                |       | 981,336           |       | 1,014,412             |       |
| Other non-current liabilities                                                 |       | 82,485            |       | 82,570                |       |
| Non-controlling interest                                                      |       | 857,087           |       | 772,525               |       |
| Total liabilities                                                             |       | 2,022,219         |       | 1,971,968             |       |
|                                                                          |       |              |       |                  |       |
| Commitments and contingent liabilities                                        |       | —            |       | —                |       |
|                                                                          |       |              |       |                  |       |
| Partners’ capital:                                                       |       |              |       |                  |       |
| General Partner— Common Units                                            |       | 7                 |       | 7                     |       |
| Limited Partners— Common Units                                           |       | 234,061           |       | 232,202               |       |
| Management Units                                                              |       | 3,156             |       | 6,926                 |       |
| Equity gains on issuance of Buckeye Partners, L.P.  limited partnership units |       | 1,717             |       | 1,482                 |       |
| Total partners’ capital                                                  |       | 238,941           |       | 240,617               |       |
| Total  liabilities and partners’ capital                                 |       | $                 | 2,261,160  |                  | $          | 2,212,585 |   |

 

 

See Notes tocondensed consolidated financial statements.

2

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**Buckeye GP Holdings L.P.**

**Condensed Consolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**
| ** **                                                                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Cash flows from operating  activities:**                                       |       |                                          |       |   |   |
| Net income                                                                       |       | $                                             | 10,070     |   | $ | 4,226 |   |
| Adjustments to  reconcile net income to net cash provided by operating activity: |       |                                          |       |   |   |
| Non-cash charge for  Management Unit expense                                     |       | 1,179                                         |       | — |   |
| Value of ESOP shares  released                                                   |       | 2,355                                         |       | 2,073 |   |
| Depreciation and  amortization                                                   |       | 19,708                                        |       | 19,122 |   |
| Non-controlling  interest                                                        |       | 60,476                                        |       | 48,089 |   |
| Equity earnings from  equity investments of Buckeye Partners, L.P.               |       | (4,044                                        | )          | (2,795 | ) |
| Distributions from  equity investments of Buckeye Partners, L.P.                 |       | 3,589                                         |       | 3,167 |   |
| Amortization of  debt discount                                                   |       | 25                                            |       | 25 |   |
| Amortization of  option grants                                                   |       | 222                                           |       | 239 |   |
| Change in assets  and liabilities, net of amounts related to acquisitions:       |       |                                          |       |   |   |
| Trade  receivables                                                               |       | 8,372                                         |       | (1,072 | ) |
| Construction and  pipeline relocation receivables                                |       | 236                                           |       | (2,421 | ) |
| Inventories                                                                      |       | 227                                           |       | (419 | ) |
| Prepaid and  other current assets                                                |       | 1,828                                         |       | (12,418 | ) |
| Accounts  payables                                                               |       | (4,770                                        | )          | (4,055 | ) |
| Accrued and  other current liabilities                                           |       | 3,393                                         |       | 14,734 |   |
| Other  non-current assets                                                        |       | 2,727                                         |       | (225 | ) |
| Other  non-current liabilities                                                   |       | (1,882                                        | )          | 2,476 |   |
| Total  adjustments from operating activities                                     |       | 93,641                                        |       | 66,520 |   |
| Net cash  provided by operating activities                                       |       | 103,711                                       |       | 70,746 |   |
|                                                                             |       |                                          |       |   |   |
| **Cash flows from investing  activities:**                                       |       |                                          |       |   |   |
| Capital  expenditures                                                            |       | (36,966                                       | )          | (44,028 | ) |
| Acquisitions and  equity investments                                             |       | (39,320                                       | )          | (92,790 | ) |
| Net expenditures  for disposal of property, plant and equipment                  |       | (167                                          | )          | (139 | ) |
| Deposit to  restricted cash                                                      |       | —                                        |       | (612 | ) |
| Net cash (used  in) investing activities                                         |       | (76,453                                       | )          | (137,569 | ) |
|                                                                             |       |                                          |       |   |   |
| **Cash flows from financing  activities:**                                       |       |                                          |       |   |   |
| Net proceeds  from issuance of Buckeye Partners, L.P. limited partnership units  |       | 82,171                                        |       | 64,105 |   |
| Proceeds from  exercise of units options                                         |       | 1,895                                         |       | 486 |   |
| Distributions to  non-controlling partners of Buckeye Partners, L.P.             |       | (61,302                                       | )          | (54,848 | ) |
| Proceeds from  issuance of long-term debt                                        |       | 86,300                                        |       | 127,000 |   |
| Payment of  long-term debt                                                       |       | (119,331                                      | )          | (72,209 | ) |
| Distributions to  Limited Partners                                               |       | (13,160                                       | )          | — |   |
| Net cash (used  in) provided by financing activities                             |       | (23,427                                       | )          | 64,534 |   |
|                                                                             |       |                                          |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                            |       | 3,831                                         |       | (2,289 | ) |
| Cash and cash  equivalents—Beginning of year                                |       | 20,220                                        |       | 28,984 |   |
| Cash and cash  equivalents—End of period                                    |       | $                                             | 24,051     |   | $ | 26,695 |   |
|                                                                             |       |                                          |       |   |   |
| ***Supplemental  cash flow information:***                                       |       |                                          |       |   |   |
| Cash paid during  the period for interest (net of amount capitalized)            |       | $                                             | 26,117     |   | $ | 30,382 |   |
| Capitalized  interest                                                            |       | $                                             | 902        |   | $ | 1,010 |   |
| Cash paid during  the period for income tax                                      |       | $                                             | 587        |   | $ | 65 |   |
| ***Non-cash  changes in assets and liabilities:***                               |       |                                          |       |   |   |
| Fair value hedge accounting                                                      |       | $                                             | 118        |   | $ | 599 |   |

 

See Notes tocondensed consolidated financial statements.

3

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**BuckeyeGP Holdings L.P.**

**Condensed Consolidated Statement of Partners’Capital**

**(In thousands)**

**(Unaudited)**
| ** **                                                                | ** ** | **General  Partners  Common  Units** | ** ** | **Limited  Partners  Common  Units** | ** ** | **Management  Units** | ** ** | **Equity  Gains on  Issuance of  Buckeye LP  Units** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|---------------------------------------------------------------------|------------|-----------|------------|
| Partners’  capital—January 1, 2007                              |       | $                                    | 7          |                                 | $          | 232,202               |       | $                                                                   | 6,926      |      | $          | 1,482 |   | $ | 240,617 |   |
| Net income*                                                               |       | —                               |       | 10,070                               |       | —                |       | —                                                              |       | 10,070    |       |
| Distributions                                                             |       | —                               |       | (13,160                              | )          | —                |       | —                                                              |       | (13,160   | )          |
| Recognition of  value of Management Units                                 |       | —                               |       | —                               |       | 1,179                 |       | —                                                              |       | 1,179     |       |
| Conversion of  Management Units                                           |       | —                               |       | 4,949                                |       | (4,949                | )          | —                                                              |       | —    |       |
| Equity gains on  issuance Buckeye Partners, L.P limited partnership units |       | —                               |       | —                               |       | —                |       | 235                                                                 |       | 235       |       |
|                                                                      |       |                                 |       |                                 |       |                  |       |                                                                |       |      |       |
| Partners’ capital—June  30, 2007                                |       | $                                    | 7          |                                 | $          | 234,061               |       | $                                                                   | 3,156      |      | $          | 1,717 |   | $ | 238,941 |   |

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*                    Comprehensiveincome equals net income.

See Notes tocondensed consolidated financial statements.

 

4

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**BUCKEYEGP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

1.  BASIS OF PRESENTATION

Buckeye GP Holdings L.P.(“BGH”) is a publicly traded (NYSE symbol: BGH) master limited partnershiporganized on June 15, 2006 under the laws of the state of Delaware.  BGH owns 100% of Buckeye GP LLC (“Buckeye GP”),which is the general partner of Buckeye Partners, L.P. (the “Partnership” or “Buckeye”).  The Partnership is also a publicly traded(NYSE symbol: BPL) master limited partnership which was organized in 1986 underthe laws of the state of Delaware.  Asdiscussed below in Note 2, effective June 25, 2007, BGH’s limited partnershipunits are owned approximately 62% by BGH GP Holdings, LLC, approximately 1% bycertain members of Buckeye GP’s senior management and approximately 37% by thepublic.  MainLine Management LLC, aDelaware limited liability company (“MainLine Management”), is the generalpartner of BGH, and is wholly owned by BGH GP Holdings, LLC.

BGH’s only business isthe ownership of Buckeye GP.  Buckeye GP’sonly business is the management of the Partnership and its subsidiaries.  At June 30, 2007, Buckeye GP owned anapproximate 0.6% general partner interest in the Partnership. Buckeye GP alsoowns 100% of and controls MainLine GP, Inc. which, together with Buckeye GP,owns 100% of and controls MainLine L.P. (“MainLine” or the “OperatingSubsidiary GP”). The Operating Subsidiary GP is the general partner of, andowns an approximate 1% interest in, certain of the Partnership’s operatingsubsidiaries.

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’s commonunits.  The reorganization and IPOoccurred on August 9, 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 financial informationfor BGH included in this report includes the financial information of MainLineas the predecessor of BGH.  See Note 10for a further discussion.

In connection with theclosing of the IPO, on August 9, 2006 BGH and Buckeye GP restructured the ownershipof Buckeye GP.  MainLine Sub LLC (“MainLineSub”), which was then a wholly-owned subsidiary of BGH and the owner of BuckeyeGP, assigned all of its rights under the Fourth Amended and Restated IncentiveCompensation Agreement, dated as of December 15, 2004, between MainLine Sub andBuckeye to Buckeye GP.  Thereafter,Buckeye and Buckeye GP amended and restated that agreement by entering into theFifth Amended and Restated Incentive Compensation Agreement, dated as of August9, 2006 (the “Incentive Compensation Agreement”).  Also on August 9, 2006, Buckeye GP enteredinto the Amended and Restated Agreement of Limited Partnership of BuckeyePartners, L.P. (the “Partnership Agreement”). The amendments to the Incentive Compensation Agreement and the PartnershipAgreement reflect the assignment of the Incentive Compensation Agreement toBuckeye GP and recharacterize the payments Buckeye GP receives under theIncentive Compensation Agreement and the Partnership Agreement as distributionsin respect of its general partner interest rather than compensationpayments.  On August 18, 2006, MainLineSub was merged with and into BGH.

Commencing in the fourth quarter of 2006, theseamendments resulted in changes in the method used to allocate the Partnership’sincome between Buckeye GP and the Partnership’s limited partners.

All of the employees who provide services to BGH, thePartnership and the Partnership’s subsidiaries are employed by Buckeye PipeLine Services Company (“Services Company”). Pursuant to a services agreement,Services Company is reimbursed by BGH or the Partnership’s subsidiaries for thecost of the employees who provide 

5

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thoseservices.  BGH is responsible for thetotal compensation, including benefits, paid to the four highest salariedofficers performing duties for Buckeye GP with respect to the functions ofoperations, finance, legal, marketing, business development, treasury, orperforming the function of president of Buckeye GP, which correspond to BGH’snamed executive officers.  The Partnershipis generally responsible for all other employee costs.  Services Company is owned by an employeestock ownership plan (the “ESOP”). Services Company owned approximately 5.4% ofthe publicly traded limited partner units of the Partnership at June 30, 2007.

At June 30, 2007, BGH had no operating assets otherthan its general partner ownership interest in Buckeye and Buckeye’s operatingsubsidiaries.  Buckeye owns and operatesone of the largest independent refined petroleum products pipeline systems in theUnited States in terms of volumes delivered, with approximately 5,400 miles ofpipeline, serving 16 states, and operates another approximately 2,700 miles ofpipeline serving 2 states under agreements with major oil and chemicalcompanies. As of June 30, 2007, the Partnership also owns and operates 51refined petroleum products terminals with aggregate storage capacity ofapproximately 20 million barrels in Illinois, Indiana, Massachusetts, Michigan,Missouri, New York, Ohio, Pennsylvania and Wisconsin.

Buckeye conducts all of its operations throughsubsidiary entities.  These operatingsubsidiaries are Buckeye Pipe Line Company, L.P. (“Buckeye Pipe Line”), LaurelPipe 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 hereinafter referred to as an “OperatingSubsidiary” and they are collectively referred to as the “OperatingSubsidiaries.”

The Partnership’s Operating Subsidiaries conductbusiness in three reportable operating segments:  Pipeline Operations, Terminalling andStorage, and Other Operations.  BGH alsohas certain consolidating level assets, which consist principally of goodwillassociated with the purchase of Buckeye’s general partnership interest.  See Note 13 for a further discussion.

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

BGH has determined that Services Company is a variableinterest entity (“VIE”) under the provisions of FASB InterpretationNo. 46R — Consolidation of Variable Interest Entities (“FINNo. 46R”). Using criteria established in FIN No. 46R, BGH hasdetermined that Buckeye GP is the primary beneficiary of Services Company,although 100% of the equity interest of Services Company is owned by the ESOP.Accordingly, as required by FIN No. 46R, Services Company has beenconsolidated in the financial statements of BGH.

BGH’s condensed consolidated balance sheet includes anon-controlling interest liability that reflects the portion of the Partnershipowned by its partners other than BGH and Services Company.  Similarly, BGH’s condensed consolidatedincome statements include non-controlling interest expense that reflects theportion of the earnings due to the Partnership’s partners other than BGH andServices Company.

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 limitedpartnership units (“LP Units”) that it owns and its general partner interestsin certain of the Operating Subsidiaries and (iii) the senior administrativecharge.  

6

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Commencing with the IPO,BGH recognizes its share of Buckeye’s income as the sum of (i) the amount ofincentive compensation BGH would have received had only Buckeye’s net income forthe period 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 change was to reduce BGH’s netincome for the three and six months ended June 30, 2007 by approximately $2.2million and $2.8 million, respectively, of which $0.5 million and $0.9 millionfor the three and six months ended June 30, 2007, respectively, represents theabsence of income related to the senior administrative charge in 2007 comparedto 2006.  The remaining $1.7 million and$1.9 million for the three and six months ended June 30, 2007 represents thedifference between income recognition for incentive compensation under BGH’snew methodology compared to the amount that would have been recognized had theIncentive Compensation Agreement and Partnership Agreement not been amended.

In the opinion of management, the condensedconsolidated financial statements of BGH, which are unaudited except that thebalance sheet as of December 31, 2006 is derived from audited financial state­ments,include all adjustments necessary to present fairly BGH’s financial position asof June 30, 2007, along with the results of operations for the three and sixmonths ended June 30, 2007 and 2006 and cash flows for the six months endedJune 30, 2007 and 2006.  The results ofoperations for the six months ended June 30, 2007 are not necessarilyindicative of the results to be expected for the full year ending December 31,2007.

Pursuant to the rules and regulations of theSecurities and Exchange Commis­sion, the condensed consolidated financialstatements do not include all of the information and notes normally includedwith financial statements prepared in accordance with accounting principlesgenerally 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 Annual Report on Form 10-K asfiled with the Securities and Exchange Commission on March 26, 2007.

2.  SIGNIFICANT EVENT

On April 3, 2007, Carlyle/Riverstone BPL Holdings II,L.P. (“Carlyle/Riverstone”), certain members of senior management of Buckeye GPand other limited partners (collectively, the “Sellers”) entered into aPurchase Agreement (the “Purchase Agreement”) with BGH GP Holdings, LLC (the “Buyer”).  The Buyer is a limited liability companyowned by affiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso &Company (“Kelso”) and Lehman Brothers Holdings Inc.  (“Lehman Brothers”). The Purchase Agreementprovided for the sale by the Sellers to the Buyer of their 62.9% limitedpartner interest in BGH and Carlyle/Riverstone’s ownership interest in MainLineManagement LLC (“MainLine Management”), which is the general partner of BGH.

On June 25, 2007, the Purchase Agreement was amendedto provide that the members of management who were parties to the PurchaseAgreement would retain a portion of their limited partner interest in BGH. Alsoon June 25, 2007, the sale transaction closed. Total consideration paid was $411.6 million.  The transaction constituted a change ofcontrol of BGH and, indirectly, Buckeye.

In connection with the closing of the transaction,William H. Shea, Jr. resigned as Chairman of the Board, President and ChiefExecutive Officer of the general partners of BGH and Buckeye and as a directorof each entity.  Forrest E. Wylie waselected as Chairman of the Board, President and Chief Executive Officer of thegeneral partners of BGH and Buckeye and as a director of each entity.Furthermore, in connection with the closing of the transaction, Michael B.Hoffman, E. Bartow Jones and Andrew W. Ward, each of whom is affiliated withCarlyle/Riverstone, resigned from their positions as directors of the generalpartners of BGH and Buckeye.  Daniel R.Revers and Robb E. Turner, each of whom is affiliated with ArcLight, wereappointed to the Board of Directors of the general partners of BGH andBuckeye.  In addition, Frank J. Loverroand Christopher L. Collins, each of whom is affiliated with Kelso, wereappointed to the Board of Directors of the general partner of BGH, and MichaelB. Goldberg and Irvin K. Culpepper, Jr., each of whom also is affiliated withKelso, were appointed to the Board of Directors of the general partner ofBuckeye.

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3.  CONTINGENCIES

Claims and Proceedings

The Partnership and the Operating Subsidiaries in theordinary course of business are involved in various claims and legalproceedings, some of which are covered by insurance. The Partnership isgenerally unable to predict the timing or outcome of these claims andproceedings. Based upon its evaluation of existing claims and proceedings andthe probability of losses relating to such contingencies, the Partnership hasaccrued certain amounts relating to such claims and proceedings, none of whichare considered material.

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.

EnvironmentalContingencies

In accordance with its accounting policy, thePartnership recorded operating expenses of $1.8 million and $2.2 million forthe three months ended June 30, 2007 and 2006, respectively, and $4.0 millionand $3.9 million for the six months ended June 30, 2007 and 2006, respectively,related to environmental contingencies unrelated to claims and proceedings.

4.  ACQUISITIONS AND EQUITY INVESTMENTS

The acquisitions discussed below were accounted for asacquisitions of assets rather than the acquisitions of businesses, as definedin Statement of Financial Accounting Standards No. 141 — “BusinessCombinations.”

On January 16, 2007, Buckeyeacquired two refined petroleum products terminals located in Flint andWoodhaven, Michigan for approximately $22.0 million, including a deposit of$1.0 million that was paid in 2006. The preliminary allocated fair value of theacquired assets is as follows (in thousands):
| Land                                          |   | $      | 8,581  |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Buildings                                     |   | 2,593  |   |
| Machinery,  equipment, and office furnishings |   | 10,862 |   |
|                                          |   | $      | 22,036 |   |

 

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On February 27, 2007,Buckeye acquired a refined products terminal in Marcy, New York forapproximately $2.3 million. The allocated fair value of the acquired assets isas follows (in thousands):
| Land                                          |   | $     | 505    |   |
|-----------------------------------------------|--------|-------|--------|--------|
| Buildings                                     |   | 192   |   |
| Machinery,  equipment, and office furnishings |   | 1,566 |   |
|                                          |   | $     | 2,263  |   |

 

On March 15, 2007, Buckeyecompleted the acquisition of two refined petroleum products terminals locatedin Green Bay and Madison, Wisconsin and the purchase of a fifty percent interestin a third terminal located in Milwaukee, Wisconsin for approximately $15.2million.  Buckeye has allocated, on apreliminary basis, the cost of the acquisition to the various tangible assetsacquired which principally consist of property, plant and equipment.

In the first quarter of 2007Buckeye invested $0.9 million in West Texas LPG Pipe Line L.P. to be used forcapital expenditures.

5.DEBT AND CREDIT FACILITIES

Debt consists of the following:
| ** **                                                        | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                                        | ** ** | **(In thousands)** | ** ** |
| *BGH:*                                                            |       |                    |       |                  |       |
| Revolving Line of Credit                                          |       | $                       | —     |                  | $          | — |   |
| *Services  Company:*                                              |       |                    |       |                  |       |
| 3.60% ESOP Notes due March 28, 2011                               |       | 23,971                  |       | 27,184                |       |
| Retirement premium                                                |       | (681                    | )          | (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                       |       | 115,000                 |       | 145,000               |       |
| Total debt                                                        |       | $                       | 988,290    |                  | $          | 1,021,322 |   |
| Other, including  unamortized discounts and fair value hedges (1) |       | (847                    | )          | (873                  | )          |
|                                                              |       |                    |       |                  |       |
| Subtotal long- term debt                                          |       | 987,443                 |       | 1,020,449             |       |
| Less: current  maturities                                         |       | (6,107                  | )          | (6,037                | )          |
| Total long-term  debt                                             |       | $                       | 981,336    |                  | $          | 1,014,412 |   |

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(1)             TheJune 30, 2007 and December 31, 2006 amounts include $1.4 million and $1.5million, respectively, related to an adjustment to fair value associated with ahedge of fair value and ($2.3) million and ($2.4) million, respectively, inunamortized discounts.

Thefair value of the consolidated debt was estimated to be $946.3 million and$990.0 million at June 30, 2007 and December 31, 2006, respectively. The valueof the consolidated debt was calculated using interest rates currentlyavailable to BGH, the Partnership and Services Company for issuance of debtwith similar terms and remaining maturities and approximate market values onthe respective dates.

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*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 credit facility may be usedfor working capital and other partnership purposes. BGH has pledged all of thelimited 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

·                  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 BGH Credit Agreement is subject tosatisfaction of certain customary conditions precedent to revolving loans andcompliance with terms and conditions included in the BGH Credit Agreement. TheBGH Credit Agreement requires BGH to maintain leverage and funded debt coverageratios. The leverage ratio covenant requires BGH to maintain, as of the lastday of each fiscal quarter, a ratio of the total funded indebtedness of BGH andits Restricted Subsidiaries, measured as of the last day of each fiscalquarter, to the aggregate dividends and distributions received by BGH and itsRestricted Subsidiaries from the Partnership, plus all other cash received byBGH and the Restricted Subsidiaries, measured for the preceding twelve months,less expenses, of not more than 2.50 to 1.00. The BGH Credit Agreement defines “RestrictedSubsidiaries” as certain of BGH’s wholly owned subsidiaries.  The funded debt coverage ratio covenantrequires BGH to maintain, as of the last day of each fiscal quarter, a ratio oftotal consolidated funded debt of BGH and all of its subsidiaries to theconsolidated EBITDA, as defined in the BGH Credit Agreement, of BGH and all ofits subsidiaries, measured for the preceding twelve months, of not more than5.25 to 1.00, subject to a provision for increases to 5.75 to 1.00 inconnection with future acquisitions. At June 30, 2007, BGH’s funded debtcoverage ratio was 4.27 to 1.00.

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 its RestrictedSubsidiaries’ business; or

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

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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;

·                  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;

·                  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.

Inaddition, the BGH Credit Agreement provides for a “change of control” event ofdefault that is triggered if (i) MainLine Management ceases to be the solegeneral partner of BGH, (ii) BGH GP Holdings, LLC ceases to own and control100% of MainLine Management, (iii) (A) Arclight, Kelso, Lehman Brothers,and each of their respective affiliates, individually or collectively, cease toown and control at least 35% of the outstanding equity interests of BGH GP Holdings,LLC, and (B) any person, entity or group owns and controls a larger percentageof the outstanding equity interests of BGH GP Holdings, LLC than iscollectively owned by Arclight, Kelso, Lehman Brothers, and their affiliates.  BGH received the consent of theBGH Credit Agreement lenders in connection with the sale of Carlyle/Riverstone’sinterest in BGH as described in Note 2, and entered into an amendment to theBGH Credit Agreement to reflect the change in ownership following the sale.

*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 Noteswere issued 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 June 30, 2007,the value of the Partnership’s LP Units owned by Services Company exceeded the125% requirement.

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*The Partnership*

Asnoted above, the Partnership has four series of publicly issued notes payablewith an aggregate principal balance of approximately $850.0 million and withinterest rates ranging from 4.625% to 6.750%. The Partnership makes quarterly interest payments on each note with theprincipal balances outstanding under each respective series to be paid on orbefore the due dates as shown above.

OnNovember 13, 2006 the Partnership entered into a new $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 onamounts outstanding under the Credit Facility at June 30, 2007 was 5.7%.

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. The Partnership also hadcommitted $1.6 million and $2.1 million of the Credit Facility to supportoutstanding letters of credit at June 30, 2007 and December 31, 2006,respectively.

The Credit Facilitycontains covenants and provisions that:

·                  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” as definedin the Credit Facility. The Credit Facility defines EBITDA for periods prior tothe fourth quarter of 2006 as earnings before interest, taxes, depreciation,depletion, amortization and incentive compensation payments to Buckeye GP, andfor periods commencing after October 1, 2006 as earnings before interest,taxes, depreciation, depletion and amortization, in each case excluding theincome of certain majority-owned subsidiaries and equity investments (butincluding distributions from those majority-owned subsidiaries and equityinvestments).

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 June 30, 2007 the Partnership’s FundedDebt Ratio was 4.01 to 1.00.

Inaddition, the Credit Facility provides for a “change of control” event ofdefault that is triggered if (i) BGH GP Holdings, LLC ceases to own and control100% of MainLine Management, (ii) (A) Arclight, Kelso, Lehman Brothers and eachof their respective affiliates, individually or collectively, cease to own andcontrol at least 35% of the outstanding equity interests of BGH GP Holdings,LLC, and (B) any person, entity or group owns and controls a 

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larger percentage of theoutstanding equity interests of BGH GP Holdings, LLC, than is collectivelyowned by Arclight, Kelso, Lehman Brothers, and their affiliates,  (iii) BGH ceases to own 100% of Buckeye GP or(iv) Buckeye GP ceases to be the sole general partner of Buckeye.  Buckeye received the consent of the CreditFacility lenders in connection with the sale of Carlyle/Riverstone’s interestin BGH as described in Note 2, and entered into an amendment to the CreditFacility to reflect the change in ownership following the sale.

AtJune 30, 2007 the Partnership was in compliance with all of the covenants underthe Credit Facility.

In December 2004, thePartnership terminated an interest rate swap agreement associated with the4.625% Notes due June 15, 2013 and received proceeds of $2.0 million.  In accordance with FASB Statement No. 133 — “Accountingfor Derivative Instruments and Hedging Activities”, the Partnership hasdeferred the $2.0 million gain as an adjustment to the fair value of the hedgedportion of the Partnership’s debt and is amortizing the gain as a reduction ofinterest expense over the remaining term of the hedged debt.  Accordingly, interest expense was reduced by$59 thousand in the three months ended June 30, 2007 and 2006, and $118thousand in the six months ended June 30, 2007 and 2006.

6.  PREPAIDAND OTHER CURRENT ASSETS

Prepaid and other current assets consist of the following:
|                        | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Prepaid  insurance     |       | $                       | 3,513      |                  | $          | 7,728 |   |
| Insurance  receivables |       | 10,244                  |       | 12,093                |       |
| Ammonia  receivable    |       | 6,998                   |       | 6,284                 |       |
| Other                  |       | 11,592                  |       | 8,070                 |       |
| Total                  |       | $                       | 32,347     |                  | $          | 34,175 |   |

 

7.  ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and othercurrent liabilities consist of the following:

|                                     | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Taxes — other  than income     |       | $                       | 8,420      |                  | $          | 5,858 |   |
| Accrued employee  benefit liability |       | 2,340                   |       | 2,340                 |       |
| Environmental  liabilities          |       | 12,347                  |       | 12,498                |       |
| Interest                            |       | 17,170                  |       | 16,961                |       |
| Retainage                           |       | 1,767                   |       | 940                   |       |
| Payable for  ammonia purchase       |       | 6,627                   |       | 6,072                 |       |
| Compensation and  vacation          |       | 8,884                   |       | 8,606                 |       |
| Other                               |       | 15,770                  |       | 16,499                |       |
| Total                               |       | $                       | 73,325     |                  | $          | 69,774 |   |

 

 

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8.  EARNINGS PER UNIT

BGH has presentedearnings per unit only for the three and six month periods ended June 30, 2007because it was not a public company during the three and six month periodsended June 30, 2006.  The following tablereconciles the weighted average number of units in computing the income perunit.

|                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                      | ** ** | **2007**                         | ** ** | **2007**                       | ** ** |
| ** **                                      | ** ** | **(In thousands)**          | ** ** |
| Basic:                                          |       |                             |       |                           |       |
| Average common units outstanding                |       | 27,215                           |       | 27,077                         |       |
| Average management  units outstanding           |       | 858                              |       | 906                            |       |
|                                            |       |                             |       |                           |       |
| Average units for basic                         |       | 28,073                           |       | 27,983                         |       |
|                                            |       |                             |       |                           |       |
| Diluted:                                        |       |                             |       |                           |       |
| Units used for basic  calculation               |       | 28,073                           |       | 27,983                         |       |
| Dilutive effect of  additional management units |       | 227                              |       | 317                            |       |
|                                            |       |                             |       |                           |       |
| Average units for diluted                       |       | 28,300                           |       | 28,300                         |       |

 

9.CASH DISTRIBUTIONS

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 July 26, 2007, MainLine Management declared aquarterly cash distribution of $0.25 per unit payable on August 31, 2007, tounitholders of record on August 6, 2007. The total cash distribution to BGH unitholders will amount toapproximately $7.1 million.

10. 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.

EffectiveJanuary 1, 2006, the Partnership adopted the fair value measurement andrecognition provisions of Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment”(“SFAS No. 123R”), using the modified prospective basis transition method.Under this method, unit-based compensation expense recognized in the firstquarter of 2006 includes: (a) compensation expense for all grants madeprior to, but not yet vested as of, January 1, 2006, based on the grant datefair value estimated in accordance with the original provisions of SFAS No.123, and (b) compensation expense for all grants made on or after January1 to June 30, 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 retirement eligibility provisions of the Option Plan, thePartnership follows the non-substantive vesting method and recognizescompensation expense immediately for options granted to retirement-eligibleemployees, or over the period from the grant date to the date retirementeligibility is achieved. Unit-based 

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compensationexpense recognized in the condensed consolidated statements of income is basedupon options ultimately expected to vest. In accordance with SFAS No. 123R,forfeitures have been estimated at the time of grant and will be revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. Forfeitures were estimated based upon historical experience.

The impact of adopting theaccounting provisions of SFAS No. 123R for the Option Plan is immaterial to BGH’sconsolidated 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 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 varied from that of MainLine’s B Units for which they were exchanged.  Seventy percent, or 953,400 Management Units,were vested immediately on the IPO date. The remaining 30% or 408,600 of the Management Units were scheduled tovest over a three year period with 136,200 of the Units vesting on May 4, ofeach 2007, 2008 and 2009. As disclosed in Note 2, the sale of the majorityinterest in BGH constituted a change of control of BGH that triggered theimmediate vesting and expense recognition of the remaining unamortized value ofthe Management Units. Also, coincident with the aforementioned sale,approximately 61% or 831,647 of the Management Units were exchanged for CommonUnits.

Under the provisions ofSFAS No. 123R, BGH recognized deferred compensation for the Management Units(i) for which vesting was accelerated compared to the B Units for which theywere exchanged, and (ii) that were now deemed probable of vesting compared toBGH’s previous estimates.  BGH determinedthat these criteria applied to 272,400 Management Units, the fair value ofwhich was $4.6 million at August 9, 2006.

Of the total deferredcompensation recognized of $4.6 million, BGH recognized approximately $3.5million as an expense from August 9 (the IPO date) through December 31, 2006(with an offsetting increase in partners’ capital).  BGH charged $1.0 million and $1.1 million ofnon-cash unit compensation expense against earnings for the Management Units inthe three and six months ended June 30, 2007, respectively. There are noadditional Management Units available for grant in connection with BGH’s UnitCompensation Plan.

11.RELATED PARTY TRANSACTIONS

Commencingon May 4, 2004 and ending on August 9, 2006 BGH had agreed to pay toCarlyle/Riverstone an annual management fee of $0.3 million.  General and administrative expenses includeapproximately $0.1 million and $0.2 million for the three and six month endedJune 30, 2006 related to this management fee.

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

12.PENSIONS AND OTHER POSTRETIREMENT BENEFITS

ServicesCompany sponsors a retirement income guarantee plan (a defined benefitplan)  (the “RIGP”) which generallyguarantees employees hired before January 1, 1986, a retirement benefit atleast equal to the benefit they would have 

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receivedunder a previously terminated defined benefit plan. Services Company’s policyis to fund amounts necessary to at least meet the minimum funding requirementsof 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 must have beenhired prior to January 1, 1991 and meet certain service requirements. ServicesCompany does not pre-fund this postretirement benefit obligation.

In December 2006, BGH adopted Statement of FinancialAccounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension 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 June 30, 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 and six months ended June 30, 2007 byapproximately $1.0 million and $1.9 million, respectively.

For the three months ended June 30, 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:
|                                           | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **RIGP**                                            | ** ** | **Retiree Medical  Plan** | ** ** |
| ** **                                | ** ** | **(In thousands)**                             | ** ** |
| Components of  net periodic benefit cost: |       |                                                |       |   |   |   |   |   |   |
| Service cost                              |       | $                                                   | 248        |   | $ | 179 |   | $ | 100 |   | $ | 225 |   |
| Interest cost                             |       | 252                                                 |       | 215 |   | 508 |   | 725 |   |
| Expected return on plan assets            |       | (205                                                | )          | (211 | ) | — |   | — |   |
| Amortization of prior service benefit     |       | (114                                                | )          | (115 | ) | (860 | ) | (125 | ) |
| Amortization of unrecognized losses       |       | 144                                                 |       | 111 |   | 381 |   | 273 |   |
| Net periodic benefit  costs               |       | $                                                   | 325        |   | $ | 179 |   | $ | 129 |   | $ | 1,098 |   |

 

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For the six months ended June 30, 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:
|                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **RIGP**                                          | ** ** | **Retiree Medical  Plan** | ** ** |
| ** **                                | ** ** | **(In thousands)**                           | ** ** |
| Components of  net periodic benefit cost: |       |                                              |       |   |   |   |   |   |   |
| Service cost                              |       | $                                                 | 495        |   | $ | 461 |   | $ | 200 |   | $ | 450 |   |
| Interest cost                             |       | 505                                               |       | 500 |   | 1,016 |   | 1,450 |   |
| Expected return on plan assets            |       | (410                                              | )          | (423 | ) | — |   | — |   |
| Amortization of prior service benefit     |       | (227                                              | )          | (227 | ) | (1,719 | ) | (250 | ) |
| Amortization of unrecognized losses       |       | 287                                               |       | 306 |   | 762 |   | 548 |   |
| Net periodic  benefit costs               |       | $                                                 | 650        |   | $ | 617 |   | $ | 259 |   | $ | 2,198 |   |

 

A minimum funding contribution is not required for2007.

13.  SEGMENTINFORMATION

Allof Buckeye’s operations are conducted through Buckeye and its operatingsubsidiaries.  Based on the financialinformation provided to senior management, BGH has determined that Buckeye’soperations are appropriately presented in three reportable operating segments:Pipeline Operations, Terminalling and Storage and Other Operations. BGH alsohas certain consolidated-level assets, principally consisting of goodwill,which are not allocable to the individual reporting segments because they arenot used by the chief operating decision maker to make decisions or to allocateresources. However, BGH does have another $11.4 million of goodwill included inits Terminalling and Storage Segment. BGH’s reportable operating segmentsconsist of the following:

PipelineOperations:

The Pipeline Operations segment receives petroleumproducts including gasoline, jet and diesel fuel and other distillates fromrefineries, connecting pipelines, and 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, Nevada, NewJersey, New York, Ohio, Pennsylvania and Tennessee.

Terminallingand Storage:

The Terminalling and Storage segment provides bulkstorage and terminal throughput services. This segment owns and operates 51 terminals that have the capacity tostore an aggregate of approximately 20 million barrels of refined petroleumproducts.  The terminals are located inIllinois, Indiana, 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 oil and chemical companies and are located in Texas andLouisiana.  This segment also performspipeline construction management services, typically for cost plus a fixed fee,for these same customers.  The OtherOperations segment also includes the Partnership’s ownership and operation ofan ammonia pipeline acquired in November 2005 and its majority ownership of theSabina Pipeline in Texas.

Financial information about each segment is presentedbelow. Each segment uses the same accounting policies as those used in thepreparation of 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** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                       | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(In thousands)**          | ** ** | **(In thousands)**        | ** ** |
| Revenue:                                         |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                              |       | $                                | 92,427     |                           | $          | 86,538 |   | $ | 186,178 |   | $ | 168,405 |   |
| Terminalling and Storage                         |       | 23,948                           |       | 18,441                         |       | 47,536 |   | 36,609 |   |
| Other Operations                                 |       | 8,576                            |       | 6,516                          |       | 16,181 |   | 12,226 |   |
| Total                                            |       | $                                | 124,951    |                           | $          | 111,495 |   | $ | 249,895 |   | $ | 217,240 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Operating,  general and administrative expenses: |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                              |       | $                                | 50,284     |                           | $          | 43,127 |   | $ | 99,058 |   | $ | 86,650 |   |
| Terminalling and Storage                         |       | 14,378                           |       | 12,334                         |       | 27,037 |   | 21,886 |   |
| Other Operations                                 |       | 6,074                            |       | 4,643                          |       | 11,244 |   | 8,744 |   |
| Total                                            |       | $                                | 70,736     |                           | $          | 60,104 |   | $ | 137,339 |   | $ | 117,280 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Depreciation and  amortization:                  |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                              |       | $                                | 8,220      |                           | $          | 8,478 |   | $ | 16,207 |   | $ | 16,089 |   |
| Terminalling and Storage                         |       | 1,434                            |       | 1,142                          |       | 2,739 |   | 2,246 |   |
| Other Operations                                 |       | 347                              |       | 398                            |       | 762 |   | 787 |   |
| Total                                            |       | $                                | 10,001     |                           | $          | 10,018 |   | $ | 19,708 |   | $ | 19,122 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Total costs and  expenses:                       |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                              |       | $                                | 58,504     |                           | $          | 51,605 |   | $ | 115,265 |   | $ | 102,739 |   |
| Terminalling and Storage                         |       | 15,812                           |       | 13,476                         |       | 29,776 |   | 24,132 |   |
| Other Operations                                 |       | 6,421                            |       | 5,041                          |       | 12,006 |   | 9,531 |   |
| Total                                            |       | $                                | 80,737     |                           | $          | 70,122 |   | $ | 157,047 |   | $ | 136,402 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| Operating  income:                               |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                              |       | $                                | 33,923     |                           | $          | 34,933 |   | $ | 70,913 |   | $ | 65,666 |   |
| Terminalling and Storage                         |       | 8,136                            |       | 4,965                          |       | 17,760 |   | 12,477 |   |
| Other Operations                                 |       | 2,155                            |       | 1,475                          |       | 4,175 |   | 2,695 |   |
| Total                                            |       | $                                | 44,214     |                           | $          | 41,373 |   | $ | 92,848 |   | $ | 80,838 |   |

 

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|                          | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **June 30,**              | ** ** |
| ** **               | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| ** **               | ** ** | **(In thousands)**        | ** ** |
| Capital  expenditures:   |       |                           |       |   |   |
| Pipeline Operations      |       | $                              | 29,375     |   | $ | 31,332 |   |
| Terminalling and Storage |       | 6,075                          |       | 9,487 |   |
| Other Operations         |       | 1,516                          |       | 3,124 |   |
| Consolidating-level      |       | —                         |       | 85 |   |
| Total                    |       | $                              | 36,966     |   | $ | 44,028 |   |
|                     |       |                           |       |   |   |
| Acquisitions:            |       |                           |       |   |   |
| Pipeline Operations      |       | $                              | 860        |   | $ | 79,286 |   |
| Terminalling and Storage |       | 38,460                         |       | 13,504 |   |
| Total                    |       | $                              | 39,320     |   | $ | 92,790 |   |

 

 
|                          | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** |
| ** **               | ** ** | ** **              | ** ** | ** **            | ** ** |
| Assets*:                 |       |                    |       |                  |       |
| Pipeline Operations      |       | $                       | 1,606,938  |                  | $          | 1,608,243 |   |
| Terminalling and Storage |       | 366,429                 |       | 318,917               |       |
| Other Operations         |       | 68,883                  |       | 68,310                |       |
| Consolidating-level      |       | 218,910                 |       | 217,115               |       |
| Total                    |       | $                       | 2,261,160  |                  | $          | 2,212,585 |   |

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

14. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board(“FASB”) adopted FASB Interpretation No. 48 “Accounting for Uncertainty inIncome Taxes” (“FIN 48”). FIN 48 sets forth a recognition thresholdand measurement attribute for financial statement recognition of positionstaken or expected to be taken in income tax returns. Only tax positions meetinga “more-likely-than-not” threshold of being sustained should be recognizedunder FIN 48. FIN 48 also provides guidance on derecognizing,classification of interest and penalties and accounting and disclosures forannual and interim financial statements. FIN 48 is effective for fiscalyears beginning after December 15, 2006. The cumulative effect of thechanges arising from the initial application of FIN 48 is required to bereported as an adjustment to the opening balance of retained earnings in theperiod of adoption. The adoption of FIN 48 had no material impact on the financialstatements 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, the FASB issued Statement of Financial AccountingStandards No. 159 (“SFAS No. 159”).  SFASNo. 159 permits entities to choose to measure many financial instruments andcertain other items at fair value that currently are not required to be measuredat fair value.   SFAS No. 159 iseffective no later than fiscal years beginning 

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after November 15, 2007.  ThePartnership does not believe that the adoption of SFAS No. 159 will have amaterial impact on its financial statements.

15. SUBSEQUENT EVENT

On July 24, 2007, thePartnership announced that it had entered into a definitive agreement toacquire the membership interests in Lodi Gas Storage LLC (“Lodi Gas”) from anaffiliate of ArcLight.  Lodi Gas owns andoperates a natural gas storage cavern near Lodi, California and an expansionfacility, known as Kirby Hills, located approximately 45 miles west of the Lodifacility.  The combined Lodi and KirbyHills facilities provide approximately 22 billion cubic feet (“Bcf”) of workinggas capacity and are connected to Pacific Gas and Electric’s intrastate gaspipelines that service natural gas demand in the San Francisco and Sacramentoareas.  Lodi Gas also has an applicationpending with the California Public Utilities Commission (the “CPUC”) to permitan expansion of the Kirby Hills facility, which will provide an additional 12Bcf of working gas capacity following estimated capital expenditures in 2008 ofapproximately $40.0 million.

The purchase price for LodiGas is approximately $440.0 million, of which approximately $428.0 million willbe paid at closing and approximately $12.0 million will be paid upon approvalof the Kirby Hills facility expansion by the CPUC.  The transaction is subject to customaryclosing conditions including approval of the Partnership’s purchase by theCPUC.  The Partnership anticipatesclosing the transaction in the fourth quarter of 2007.

Effective as of July 27, 2007, Mr. Robert B. Wallaceresigned his position of Senior Vice President, Finance and Chief FinancialOfficer, of MainLine Management and also resigned a similar position at BuckeyeGP.  The board of directors of  MainLine Management elected Mr. Vance E.Powers as Acting Chief Financial Officer of MainLine Management, effective uponMr. Wallace’s resignation.  Mr. Powerswas also elected by the board of directors of Buckeye GP to serve as ActingChief Financial Officer of Buckeye GP, effective upon Mr. Wallace’sresignation.

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

RESULTSOF OPERATIONS

*Overview*

The following discussion provides an analysis of thefinancial condition and results of operations for Buckeye GP Holdings L.P. (“BGH”)and each of BGH’s operating segments, including an overview of itsliquidity and capital resources and other related matters.  The following discussion and analysis shouldbe read in conjunction with accompanying condensed consolidated financialstatements and related notes included in this report and Annual Report on Form10-K for the year ended December 31, 2006.

BGH owns and controls Buckeye GP LLC (“Buckeye GP”),which is the general partner of Buckeye Partners, L.P. (the “Partnership” or “Buckeye”),a publicly traded Delaware limited partnership. BGH is managed by its general partner, MainLine Management LLC (“MainLineManagement”).  BGH’s only cash-generatingassets are its partnership interests in Buckeye, comprised primarily of thefollowing:

·                  theincentive distribution rights in Buckeye;

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

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

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

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

The following table summarizes BGH’s cash received inthe three and six months ended June 30, 2007 and 2006 as a result of itspartnership interests in Buckeye:
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                        | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                        | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**          | ** ** | **(In thousands)**        | ** ** |
| Incentive  distributions from Buckeye                                                             |       | $                                | 7,338      |                           | $          | 6,174 |   | $ | 14,141 |   | $ | 11,896 |   |
| Distributions  from the ownership of 243,914 of Buckeye’s GP Units                           |       | 195                              |       | 183                            |       | 387 |   | 363 |   |
| Distributions  from the ownership of 80,000 of Buckeye’s LP Units                            |       | 64                               |       | 60                             |       | 127 |   | 119 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       | 237                              |       | 286                            |       | 618 |   | 628 |   |
|                                                                                              |       | $                                | 7,834      |                           | $          | 6,703 |   | $ | 15,273 |   | $ | 13,006 |   |

 

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*BuckeyeGP Holdings L.P.*

BGH is a Delaware limited partnership formed on June15, 2006 in order to facilitate the reorganization of MainLine L.P. (“MainLine”)and its affiliates and to effect an initial public offering (“IPO”) of theCommon Units of BGH.  The reorganizationand IPO occurred on August 9, 2006.

As discussed below under *SignificantEvent,*effective June 25, 2007*, *BGH’s limited partnership unitsare owned approximately 62% by BGH GP Holdings, LLC, approximately 1% bycertain members of Buckeye GP’s senior management and approximately 37% by thepublic.   Prior to the IPO, BGH had noactivity and MainLine owned and controlled Buckeye GP.

Coincident with the IPO, the equity interests ofMainLine were exchanged for the equity interests of BGH.  Accordingly, the financial information forBGH prior to the IPO date of August 9, 2006 included in this report includesthe financial information of MainLine.

In connection with the IPO, BGH and Buckeye GPrestructured the ownership of Buckeye GP. MainLine Sub LLC (“MainLine Sub”), which was then a wholly-ownedsubsidiary of BGH and the owner of Buckeye GP, assigned all of its rights underthe Fourth Amended and Restated Incentive Compensation Agreement, dated as ofDecember 15, 2004, between MainLine Sub and Buckeye to Buckeye GP.  Thereafter, Buckeye and Buckeye GP amendedand restated that agreement by entering into the Fifth Amended and RestatedIncentive Compensation Agreement, dated as of August 9, 2006 (the “IncentiveCompensation Agreement”).  On August 9,2006, Buckeye GP also entered into the Amended and Restated Agreement ofLimited Partnership of Buckeye 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 re-characterize the payments BuckeyeGP receives under the Incentive Compensation Agreement as distributions inrespect of its general partner interest rather than compensation payments.  On August 18, 2006, MainLine Sub was mergedwith and into BGH.  These changesresulted in changes in the method used to allocate Buckeye’s income betweenBuckeye GP and Buckeye’s limited partners.

None of these changes affect the amount or timing ofcash distributions or incentive distributions from Buckeye to Buckeye GP.  Buckeye’s criteria for determining the amountof cash distributions and its policies regarding the timing of such cashdistributions remain unchanged. Commencing with the fourth quarter of 2006, Buckeye ceased recordingincentive compensation payable to Buckeye GP as an expense and instead recordedsuch payments as distributions from partners’ capital.

Prior to the IPO, BGH recognized its share of Buckeye’sincome as the sum of (i) the incentive compensation payments received (to whichBGH was contractually entitled and which were recorded as an expense in Buckeye’sfinancial statements), (ii) its proportionate share of Buckeye’s remaining netincome based on its ownership of the general partner interest in Buckeye,80,000 of Buckeye’s LP Units that it owns and its general partner interests incertain of the Operating Subsidiaries and (iii) the senior administrativecharge.  Commencing with the IPO, BGHrecognizes its share of Buckeye’s income as the sum of (i) the amount ofincentive compensation BGH would have received had only Buckeye’s net incomefor the period been entirely distributed (which income, commencing with thefourth quarter of 2006 now includes the incentive compensation paymentspreviously recorded by Buckeye as an expense) and (ii) its proportionate shareof the remaining net income of Buckeye and the Operating Subsidiaries.

The effect of this change was to reduce BGH’s netincome for the three and six months ended June 30, 2007 by approximately $2.2million and $2.8 million, respectively, of which $0.5 million and $0.9 millionfor the three and six months ended June 20, 2007, respectively, represents theabsence of income related to the senior administrative 

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chargein 2007 compared to 2006.  The remaining$1.7 million and $1.9 million for the three and six months ended June 30, 2007represents the difference between income recognition for incentive compensationunder BGH’s new methodology compared to the amount that would have beenrecognized had the Incentive Compensation Agreement and Partnership Agreementnot been amended.

*Significant Event*

On April 3, 2007, Carlyle/Riverstone BPL Holdings II,L.P. (“Carlyle/Riverstone”), certain members of senior management of Buckeye GPand other limited partners (collectively, the “Sellers”) entered into aPurchase Agreement (the “Purchase Agreement”) with BGH GP Holdings, LLC (the “Buyer”).  The Buyer is a limited liability companyowned by affiliates of ArcLight Capital Partners, LLC (“ArcLight”), Kelso &Company (“Kelso”) and Lehman Brothers Holdings Inc (“Lehman Brothers”).  The Purchase Agreement provided for the saleby the Sellers to the Buyer of their 62.9% limited partner interest in BGH andCarlyle/Riverstone’s ownership interest in MainLine Management LLC (“MainLineManagement”), which is the general partner of BGH.

On June 25, 2007, the Purchase Agreement was amendedto provide that the members of management who were parties to the PurchaseAgreement would retain a portion of their limited partner interest in BGH. Alsoon June 25, 2007, the sale transaction closed. Total consideration paid was $411.6 million.  The transaction constituted a change ofcontrol of BGH and, indirectly, Buckeye.

In connection with the closing of the transaction,William H. Shea, Jr. resigned as Chairman of the Board, President and ChiefExecutive Officer of the general partners of BGH and Buckeye and as a directorof each entity.  Forrest E. Wylie waselected as Chairman of the Board, President and Chief Executive Officer of thegeneral partners of BGH and Buckeye and as a director of each entity.Furthermore, in connection with the closing of the transaction, Michael B.Hoffman, E. Bartow Jones and Andrew W. Ward, each of whom is affiliated withCarlyle/Riverstone, resigned from their positions as directors of the generalpartners of BGH and Buckeye.  Daniel R.Revers and Robb E. Turner, each of whom is affiliated with ArcLight, wereappointed to the Board of Directors of the general partners of BGH andBuckeye.  In addition, Frank J. Loverroand Christopher L. Collins, each of whom is affiliated with Kelso, wereappointed to the Board of Directors of the general partner of BGH, and MichaelB. Goldberg and Irvin K. Culpepper, Jr., each of whom also is affiliated withKelso, were appointed to the Board of Directors of the general partner ofBuckeye.

*Subsequent Event*

On July 24, 2007, thePartnership announced that it had entered into a definitive agreement toacquire the membership interests in Lodi Gas Storage LLC (“Lodi Gas”) from anaffiliate of ArcLight.  Lodi Gas owns andoperates a natural gas storage cavern near Lodi, California and an expansionfacility, known as Kirby Hills, located approximately 45 miles west of the Lodifacility.  The combined Lodi and KirbyHills facilities provide approximately 22 billion cubic feet (“Bcf”) of workinggas capacity and are connected to Pacific Gas and Electric’s intrastate gaspipelines that service natural gas demand in the San Francisco and Sacramentoareas.  Lodi Gas also has an applicationpending with the California Public Utilities Commission (the “CPUC”) to permitan expansion of the Kirby Hills facility, which will provide an additional 12Bcf of working gas capacity following estimated capital expenditures in 2008 ofapproximately $40.0 million.

The purchase price for LodiGas is approximately $440.0 million, of which approximately $428.0 million willbe paid at closing and approximately $12.0 million will be paid upon approvalof the Kirby Hills facility expansion by the CPUC.  The transaction is subject to customaryclosing conditions including approval of the Partnership’s purchase by theCPUC.  The Partnership anticipatesclosing the transaction in the fourth quarter of 2007.

Effective as of July 27, 2007, Mr. Robert B. Wallaceresigned his position of Senior Vice President, Finance and Chief FinancialOfficer, of MainLine Management and also resigned a similar position at BuckeyeGP.  The board of directors of MainLineManagement elected Mr. Vance E. Powers as Acting Chief Financial Officer of MainLineManagement, effective upon Mr. Wallace’s resignation.  Mr. Powers was also elected by the board ofdirectors of Buckeye GP to serve as Acting Chief Financial Officer of BuckeyeGP, effective upon Mr. Wallace’s resignation.

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*Resultsof Operations*

The results of operations discussed below principallyreflect the activities of Buckeye. Since the accompanying condensedconsolidated financial statements of BGH include the consolidated results ofBuckeye, BGH’s consolidated statements are substantially similar to Buckeye’sexcept 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’scondensed consolidated financial statements.

·                  Eliminationof Intercompany Transactions—Intercompany obligations and payments betweenBuckeye, 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’s principal line of business is thetransportation, terminalling and storage of petroleum products in the UnitedStates for major integrated oil companies, large refined petroleum productmarketing companies and major end users of petroleum products on a fee basisthrough facilities owned and operated by Buckeye. Buckeye also operatespipelines owned by third parties under contracts with major oil and chemicalcompanies, and performs certain construction activities, generally for theowners of those third-party pipelines.

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

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*Operating Segments*

As fully described in Note 13 to the accompanyingcondensed consolidated financial statements, BGH has determined that itsoperations are appropriately presented in three operating segments, which arethe same as Buckeye’s operating segments: Pipeline Operations; Terminalling andStorage; and Other Operations.

*Results of Operations*

Summary operating results for BGHwere as follows:
| ** **                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(In thousands)**          | ** ** | **(In thousands)**        | ** ** |
| Revenue                                                   |       | $                                | 124,951    |                           | $          | 111,495 |   | $ | 249,895 |   | $ | 217,240 |   |
| Costs and  expenses                                       |       | 80,737                           |       | 70,122                         |       | 157,047 |   | 136,402 |   |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Operating income                                          |       | 44,214                           |       | 41,373                         |       | 92,848 |   | 80,838 |   |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Other income  (expenses)                                  |       | (12,770                          | )          | (15,909                        | )          | (26,346 | ) | (31,318 | ) |
| Income before  equity income and non-controlling interest |       | 31,444                           |       | 25,464                         |       | 66,502 |   | 49,520 |   |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Equity income                                             |       | 2,258                            |       | 1,415                          |       | 4,044 |   | 2,795 |   |
| Non-controlling  interest expense                         |       | (29,571                          | )          | (24,892                        | )          | (60,476 | ) | (48,089 | ) |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Net income                                                |       | $                                | 4,131      |                           | $          | 1,987 |   | $ | 10,070 |   | $ | 4,226 |   |

 

Revenuesand operating income by operating segment were as follows:

25

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| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                           | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                           | ** ** | **(In thousands)**          | ** ** | **(In thousands)**        | ** ** |
| Revenue:                                                             |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                                                  |       | $                                | 92,427     |                           | $          | 86,538 |   | $ | 186,178 |   | $ | 168,405 |   |
| Terminalling and Storage                                             |       | 23,948                           |       | 18,441                         |       | 47,536 |   | 36,609 |   |
| Other Operations                                                     |       | 8,576                            |       | 6,516                          |       | 16,181 |   | 12,226 |   |
| Total                                                                |       | $                                | 124,951    |                           | $          | 111,495 |   | $ | 249,895 |   | $ | 217,240 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Operating  income:                                                   |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                                                  |       | $                                | 33,923     |                           | $          | 34,933 |   | $ | 70,913 |   | $ | 65,666 |   |
| Terminalling and Storage                                             |       | 8,136                            |       | 4,965                          |       | 17,760 |   | 12,477 |   |
| Other Operations                                                     |       | 2,155                            |       | 1,475                          |       | 4,175 |   | 2,695 |   |
| Total                                                                |       | $                                | 44,214     |                           | $          | 41,373 |   | $ | 92,848 |   | $ | 80,838 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Total costs and  expenses (including depreciation and amortization): |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                                                  |       | $                                | 58,504     |                           | $          | 51,605 |   | $ | 115,265 |   | $ | 102,739 |   |
| Terminalling and Storage                                             |       | 15,812                           |       | 13,476                         |       | 29,776 |   | 24,132 |   |
| Other Operations                                                     |       | 6,421                            |       | 5,041                          |       | 12,006 |   | 9,531 |   |
| Total                                                                |       | $                                | 80,737     |                           | $          | 70,122 |   | $ | 157,047 |   | $ | 136,402 |   |
|                                                                 |       |                             |       |                           |       |   |   |   |   |
| Depreciation and  amortization:                                      |       |                             |       |                           |       |   |   |   |   |
| Pipeline Operations                                                  |       | $                                | 8,220      |                           | $          | 8,478 |   | $ | 16,207 |   | $ | 16,089 |   |
| Terminalling and Storage                                             |       | 1,434                            |       | 1,142                          |       | 2,739 |   | 2,246 |   |
| Other Operations                                                     |       | 347                              |       | 398                            |       | 762 |   | 787 |   |
| Total                                                                |       | $                                | 10,001     |                           | $          | 10,018 |   | $ | 19,708 |   | $ | 19,122 |   |

 

SecondQuarter of 2007 compared to Second Quarter of 2006

Total revenues for thequarter ended June 30, 2007 were $125.0 million, $13.5 million or 12.1% greaterthan revenue of $111.5 million for the same period in 2006. This improvement inthe second quarter of 2007 was driven mainly by increased revenues in thePipelines Operations segment as discussed below.

PipelineOperations:

Revenue from Pipeline Operations was $92.4 million inthe second quarter of 2007 compared to $86.5 million in the second quarter of2006. The revenue increase in the second quarter of 2007 of $5.9 million or6.8% was primarily the result of:

·                  An approximate$8.1 million increase in base transportation revenue caused primarily by anindexed-based tariff increase of approximately 6.1% implemented on July 1, 2006and a market-based tariff increase of approximately 4.5% implemented on May 1,2007.  Product volumes (as shown below)were flat in the second quarter of 2007 as compared to the second quarter of2006;

·                  An approximate$2.9 million reduction in revenue representing primarily the settlement ofoverages and shortages on product deliveries;

·                  Anapproximate $1.7 million increase in construction management revenue due to aconstruction contract entered into by WesPac Pipelines—Memphis LLC (“WesPac—Memphis”)to construct a pipeline connection for a third party; and

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·                  An approximate$1.0 million reduction in jet fuel revenue from lower volume on a productsupply arrangement in connection with WesPac Pipelines - Reno LLC (“WesPac -Reno”).

Productdeliveries for the second quarter ended June 30, 2007 and 2006 were as follows:

|             | ** ** | **Average Barrels Per Day**          | ** ** |
|-------------|------------|-----------------------------------------------------|------------|
| ** **  | ** ** | **Three Months Ended June 30,** | ** ** |
| **Product** | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Gasoline    |       | 743,000                                             |       | 734,200 |   |
| Distillate  |       | 291,100                                             |       | 281,700 |   |
| Jet Fuel    |       | 363,400                                             |       | 359,200 |   |
| LPG’s  |       | 22,300                                              |       | 33,800 |   |
| NGL’s  |       | 19,800                                              |       | 21,900 |   |
| Other       |       | 4,200                                               |       | 10,500 |   |
| Total       |       | 1,443,800                                           |       | 1,441,300 |   |

 

In the second quarter of 2007, certain of thePartnership’s Operating Subsidiaries filed pipeline tariffs reflectingincreased rates on average of approximately 4.5%.  Tariff rate increases were not filed inconnection with certain of the Partnership’s pipelines regulated by stateregulatory agencies which represent approximately 8% of the Partnership’spipeline volumes.  These tariff rateincreases are expected to generate approximately $14.7 million in additionalrevenue on an annual basis.

Terminallingand Storage:

Revenue from theTerminalling and Storage segment was $23.9 million in the second quarter of2007 compared to $18.4 million in the second quarter of 2006. The revenueincrease in the second quarter of 2007 of $5.5 million or 29.9% was primarilythe result of:

·                  An approximate$3.2 million increase in base revenue primarily related to increases inthroughput volumes and charges for product additives in the second quarter of2007 compared to the second quarter of 2006;

·                  Incrementalrevenue of $1.7 million in the second quarter of 2007 compared to the secondquarter of 2006 primarily due to the acquisition of six terminals in 2007 asmore fully described in Note 4 to the accompanying condensed consolidatedfinancial statements; and

·                  Incrementalrevenue of $0.6 million in the second quarter of 2007 compared to the secondquarter of 2006 due to the commencement of certain butane blending agreementsin the latter part of 2006.

Average daily throughputfor the refined products terminals for the quarters ended June 30, 2007 and2006 were as follows:
|                                    | ** ** | **Average Barrels Per Day  Three Months Ended June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                                                    | ** ** | **2006** | ** ** |
| Refined products  throughput (bpd) |       | 570,100                                                                                     |       | 514,700 |   |

 

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Other Operations:

Revenue from theOther Operations segment was $8.6 million in the second quarter of 2007compared to $6.5 million in the second quarter of 2006. The revenue increase inthe second quarter of 2007 of $2.1 million or 32.3% was primarily the resultof:

·                  An increase of $1.3 million in pipelinemaintenance and operating revenue related to additional operating contractssigned in the latter part of 2006;

·                  An increase of $0.4 million in constructionmanagement revenue caused primarily by the additional contracts noted above;and

·                  An increase of $0.4 million in incidentalrevenue due to the sale of miscellaneous equipment.

*Operating Expenses:*

Costs and expenses forthe three months ended June 30, 2007 and 2006 were as follows:

|                                | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Payroll and  payroll benefit   |       | $                                | 24,827     |   | $ | 21,186 |   |
| Depreciation and  amortization |       | 10,001                           |       | 10,018 |   |
| Operating power                |       | 8,096                            |       | 7,047 |   |
| Outside service                |       | 10,654                           |       | 7,643 |   |
| Property and  other taxes      |       | 5,262                            |       | 4,093 |   |
| Construction  management       |       | 3,009                            |       | 1,424 |   |
| All other                      |       | 18,888                           |       | 18,711 |   |
| Total                          |       | $                                | 80,737     |   | $ | 70,122 |   |

 

Payrolland payroll benefits were $24.8 million in the second quarter of 2007, anincrease of $3.6 million compared to the second quarter of 2006.  Of this increase, approximately $0.2 millionis related to recent acquisitions. Increases in salaries and wages of $1.7 million resulted from anincrease in the number of employees and overtime pay due to the Partnership’sexpanded operations and higher wage rates. The Partnership also experienced increases in payroll due to a decreasein capitalized payroll of $0.8 million. BGH’s payroll expense increased by $1.0 million due to an increase innon-cash unit based compensation expense as a result of the vesting ofmanagement units in connection with the sale as discussed previously.  Payroll benefits increased by $0.7 milliondue to higher medical costs, increases in salaries and wages and number ofemployees.  This increase was offset by adecrease of $1.0 million in payroll benefits due to lower employee benefitscosts resulting from an amendment to Buckeye Pipe Line Services Company’s (“ServicesCompany”) postretirement health care and life insurance benefits plan.

Depreciation and amortization expense was $10.0million in the second quarter of 2007, which was consistent with depreciationand amortization expense in the second quarter of 2006.

Operating power costs were $8.1 million in the threemonths ended June 30, 2007, an increase of $1.0 million from the same period in2006.  Approximately, $0.9 million ofthis increase resulted from power rate increases and higher power supplyadditive expense.  Operating powerconsists primarily of electricity required to operate pipeline pumpingfacilities.

Outside services costs increased $3.1 million from$7.6 million in the second quarter of 2006 to $10.7 million in the secondquarter of 2007.  Of this increase,approximately $0.3 million of the increase is due maintenance on natural gasengines that were purchased in 2006 and $0.3 million is due an increase inactivity on an operations and 

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maintenancecontract.  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 IPO, this senior administrative charge was recognized as income byBGH.  In connection with the IPO, Buckeyepays the senior administrative charge directly to BGH’s general partner,MainLine Management, which resulted in an increase in outside service costsduring the second quarter of 2007.  Theremainder of the increase is due to an increase in pipeline and terminalmaintenance activities. Outside services costs consist principally ofthird-party contract services for pipeline and terminal maintenance activities.

Property and other taxes were $5.3 million in thesecond quarter of 2007, an increase of $1.2 million compared to the secondquarter of 2006.  Property and othertaxes related to recent acquisitions was $0.1 million.  The remaining increase was caused primarilyby higher real property tax assessments in several states.

Construction management costs were $3.0 million in thesecond quarter of 2007, an increase of $1.6 million from the second quarter of2006.  The increase is due primarily to aconstruction contract entered into by WesPac—Memphis to construct a pipelineconnection for a third party.

All other costs were $18.9 million in the three monthsended June 30, 2007, an increase of $0.2 million compared to $18.7 million inthe same period in 2006.  Insurance costsand rental expense increased by $1.6 million over the second quarter of2006.  Other costs related to recentacquisitions were $0.4 million.  Expensesrelated to terminal additives increased by $0.4 million which is a result of anincrease in terminal activity.  Theseincreases were offset by a decrease of $0.9 million in costs associated withfuel purchases related to a product-supply arrangement and a decrease of $0.6million in casualty losses. Non-recurring professional fees in the three months ended June 30, 2006include approximately $1.4 million of legal, accounting and tax fees related toplanning for BGH’s IPO in 2006. The remainder of the increases related tovarious other pipeline operating costs.

Costs and expenses attributable to Buckeye, Services Company and BGHwere as follows:
|                                                      | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **June 30,**                | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(In thousands)**          | ** ** |
| Total cost and  expenses:                            |       |                             |       |   |   |
| Attributable to  Buckeye                             |       | $                                | 78,694     |   | $ | 68,442 |   |
| Elimination of  Buckeye deferred charge              |       | (1,170                           | )          | (1,175 | ) |
| Elimination of  Buckeye senior administrative charge |       | —                           |       | (475 | ) |
| Net effect of  ESOP charges                          |       | 1,189                            |       | 1,018 |   |
| Attributable to  BGH                                 |       | 2,024                            |       | 2,312 |   |
| Total                                                |       | $                                | 80,737     |   | $ | 70,122 |   |

 

Amounts attributable to BGH consist of the following:
|                       | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **June 30,**                | ** ** |
| ** **            | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **            | ** ** | **(In thousands)**          | ** ** |
| Attributable to  BGH: |       |                             |       |   |   |
| Payroll and  benefits |       | $                                | 1,525      |   | $ | 574 |   |
| Professional  fees    |       | 239                              |       | 1,556 |   |
| Other                 |       | 260                              |       | 182 |   |
| Total                 |       | $                                | 2,024      |   | $ | 2,312 |   |

 

Payroll and benefits costs include salaries andbenefits for the four highest paid executives performing services on behalf ofBuckeye as well as allocations of the cost of Buckeye personnel performingadministrative services directly for BGH. For the three months ended June 30, 2007 BGH incurred $1.0 million ofnon-cash unit based compensation expense from the vesting of management unitsas a result of the sale of the controlling interest in BGH (as discussedpreviously). Non-recurring professional fees in the three months ended June 302006 include 

29

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approximately$1.4 million of legal, accounting and tax fees related to planning for BGH’sIPO in 2006.  Other costs include certainstate franchise taxes, insurance costs, depreciation and miscellaneous otherexpenses.

Other income (expenses)for the three months ended June 30, 2007 and 2006 were as follows:
|                            | ** ** | **Other Income (Expenses)** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(In thousands)**               | ** ** |
| Investment  income         |       | $                                     | 334        |   | $ | 302 |   |
| Interest and  debt expense |       | (13,104                               | )          | (16,211 | ) |
| Total                      |       | $                                     | (12,770    | ) | $ | (15,909 | ) |
|                       |       |                                  |       |   |   |
| Equity income              |       | $                                     | 2,258      |   | $ | 1,415 |   |

 

Other income (expenses) was a net expense of $12.8million in the second quarter of 2007, compared to a net expense of $15.9million during the second quarter of 2006. Investment income for the three months ended June 30, 2007 wasconsistent with investment income generated during the three months ended June30, 2006.

Interest expense was $13.1 million in the three monthsended June 30, 2007, a decrease of $3.1 million from the three months endedJune 30, 2006.  The decrease is due tothe absence of $2.9 million of interest expense associated with BGH’s priorterm loan which was extinguished in conjunction with the IPO.

Equity income increased by $0.8 million in the secondquarter of 2007 compared to the second quarter of 2006.  The increase is principally a result of anincrease in equity income earned from the Partnership’s approximate 25%interest in West Shore Pipe Line Company and 20% interest in West Texas LPGPipeline Limited Partnership.

Six Months of 2007compared to Six Months of 2006

Total revenue for the six months ended June 30, 2007 was $249.9million, $32.7 million, or 15.1%, greater than revenue of $217.2 million forthe same period in 2006. This improvement was driven mainly by increasedrevenues in the Pipelines Operations and Terminalling and Storage segments asdiscussed below.

Pipeline Operations:

Revenue from PipelineOperations was $186.2 million for the six months ended June 30, 2007 comparedto $168.4 million for the six months ended June 30, 2006. The net increase inthe first six months of 2007 of $17.8 million or 10.6% was primarily the resultof:

·                  An approximate$14.5 million increase in base transportation revenue caused primarily by anindexed-based tariff increase of approximately 6.1% implemented on July 1, 2006and a market-based tariff increase of 4.5% implemented on May 1, 2007.  Product volumes (as shown below) increased byapproximately 1% in the first six months of 2007 as compared to the first sixmonths of 2006;

·                  An approximate$3.1 million reduction in revenue representing primarily the settlement ofoverages and shortages on product deliveries;

·                  Incrementalrevenue of $2.2 million in the second quarter of 2007 compared to 2006resulting from the commissioning of the terminal and pipeline at the MemphisInternational Airport by WesPac—Memphis, in April 2006;

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·                  Anapproximate $2.2 million increase in construction management revenue due to aconstruction contract entered into by WesPac—Memphis to construct a pipelineconnection for a third party;

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

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

·                  An approximate$1.0 million reduction in jet fuel revenue from lower volume on a productsupply arrangement in connection with WesPac - Reno.

Product deliveries for thesix months ended June 30, 2007 and 2006 were as follows:

|             | ** ** | **Average Barrels Per Day**        | ** ** |
|-------------|------------|---------------------------------------------------|------------|
| ** **  | ** ** | **Six Months Ended June 30,** | ** ** |
| **Product** | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Gasoline    |       | 715,200                                           |       | 712,800 |   |
| Distillate  |       | 327,900                                           |       | 324,200 |   |
| Jet Fuel    |       | 357,900                                           |       | 345,900 |   |
| LPG’s  |       | 21,200                                            |       | 23,800 |   |
| NGL’s  |       | 19,900                                            |       | 17,800 |   |
| Other       |       | 7,200                                             |       | 10,500 |   |
| Total       |       | 1,449,300                                         |       | 1,435,000 |   |

 

Terminalling and Storage:

Revenue from theTerminalling and Storage segment was $47.5 million for the six months endedJune 30, 2007 compared to $36.6 million for the six months ended June 30, 2006.  The net increase in the first six months of2007 of $10.9 million or 29.8% was primarily the result of:

·                  An approximate$7.2 million increase in base revenue primarily related to increases inthroughput volumes and charges for product additives in the first six months of2007 compared to the first six months of 2006;

·                  Incrementalrevenue of $2.3 million in the first six months of 2007 compared to the firstsix months of 2006 primarily due to the acquisition of six terminals in 2007 asmore fully described in Note 4 to the accompanying condensed consolidatedfinancial statements; and

·                  Incrementalrevenue of $1.4 million in the first six months of 2007 compared to the firstsix months of 2006 due to the commencement of certain butane blending agreementsin the latter part of 2006.

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Average daily throughputfor the refined products terminals for the six months ended June 30, 2007 and2006 was as follows:

|                                    | ** ** | **Average Barrels Per Day  Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                                                  | ** ** | **2006** | ** ** |
| Refined products  throughput (bpd) |       | 553,100                                                                                   |       | 484,200 |   |

 

Other Operations:

Revenue from theOther Operations segment was $16.2 million in the first six months of 2007compared to $12.2 million in the first six months of 2006. The net increase inthe first six months of 2007 of $4.0 million or 32.8% was primarily the resultof:

·                  An increase of $2.2 million in pipelinemaintenance and operating revenue related to additional operating contractssigned in the latter part of 2006;

·                  An increase of $1.1 million in constructionmanagement revenue caused primarily by the additional contracts noted above;and

·                  An increase of $0.4 million in incidentalrevenue due to the sale of miscellaneous equipment.

*OperatingExpenses:*

Costs and expenses for the six month period ended June30, 2007 and 2006 were as follows:

|                                | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Payroll and  payroll benefit   |       | $                                | 47,995     |   | $ | 42,510 |   |
| Depreciation and  amortization |       | 19,708                           |       | 19,122 |   |
| Operating power                |       | 15,414                           |       | 14,137 |   |
| Outside service                |       | 16,731                           |       | 12,235 |   |
| Property and  other taxes      |       | 11,445                           |       | 9,199 |   |
| Construction  management       |       | 4,704                            |       | 1,986 |   |
| All other                      |       | 41,050                           |       | 37,213 |   |
| Total                          |       | $                                | 157,047    |   | $ | 136,402 |   |

 

Payroll and payroll benefits were $48.0 million forthe six months ended June 30, 2007 an increase of $5.5 million compared to thesame period in 2006.  Of this increase,approximately $0.4 million related to recent acquisitions.  Increases in salaries and wages of $3.3million resulted from an increase in the number of employees and overtime paydue to the Partnership’s expanded operations and higher wage rates.  The Partnership also experienced increases inpayroll and payroll benefits due to a decrease in capitalized payroll of $1.2million.  Payroll and payroll benefitsincreased by $0.9 million due to higher medical costs and increases in salariesand wages and number of employees. BGH’s payroll expense increased by $1.1million due to an increase in non-cash unit based compensation expense as aresult of the vesting of management units as a result of the sale of the controlling interest in BGH (as discussedpreviously).  Employee stock ownershipplan (“ESOP”) related costs increased by $0.6 million over the same period in2006. These increases were partially offset by a decrease of $0.5 million as aresult of a reduction of the fair value of the Partnership’s “top-up” liabilityunder the Services Agreement, which requires the Partnership to make cashpayments to Services Company in amounts sufficient for Services Company’s ESOPto make payments due under its Note Agreement. Payroll benefit expenses also decreased by $1.9 million due to 

32

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loweremployee benefits costs resulting from an amendment to Services Company’spostretirement health care and life insurance benefits plan.

Depreciation and amortization expense was $19.7million for the first six months ended June 30, 2007, an increase of $0.6million from the comparable period of 2006 which is primarily due to recentacquisitions and first quarter 2007 depreciation expense related to thecommissioning of the terminal and pipeline at the Memphis International Airportby WesPac—Memphis in April 2006.

Operating power costs of $15.4 million in the firstsix months of 2007 were $1.3 million higher than the same period in 2006.Recent acquisitions caused $0.2 million of the increase.  Approximately, $0.9 million of this increaseresulted from power rate increases and higher power supply additiveexpense.  Operating power consistsprimarily of electricity required to operate pipeline pumping facilities.

Outside services costs were $16.7 million in the firstsix months of 2007, or $4.5 million greater than the same period in 2006. Ofthis increase, approximately $0.3 million of the increase is due maintenance onnatural gas engines that were purchased in 2006 and $0.3 million is due to anincrease in activity on an operation and maintenance contract.  Approximately, $0.3 million of the increaseis related to corporate development initiatives.  Approximately $0.9 million of this increaseis due to an annual senior administrative charge that is paid by Buckeye toaffiliates of its general partner for certain management functions supplied bythose affiliates.  Prior to BGH’s IPO, this senior administrative charge was recognized as income by BGH. In connection with the IPO, Buckeye pays the senior administrative chargedirectly to BGH’s general partner, MainLine Management, which resulted in anincrease in outside service costs during the first half of 2007. Theremainder of the increase is due to additional pipeline and tank inspectionsand maintenance work that occurred during the first half of 2007.

Property and other taxes increased by $2.2 millionfrom $9.2 million in the first six months of 2007 to $11.4 million for the sameperiod in 2006. Of this increase, $0.3 million related to recentacquisitions.  In the first six months of2007, the Partnership expensed $0.6 million of excise taxes which related toactivity at the Partnership’s terminals. The remainder of the increase is due to higher real property assessmentsover the same period in 2006.

Construction management costs were $4.7 million in thefirst six months of 2007, which is an increase of $2.7 million from the sameperiod in 2006. The increase is primarily due to a construction contractentered into by WesPac - Memphis to construct a pipeline connection for a thirdparty.

All other costs were $41.0 million, an increase of$3.8 million in the first six months of 2007 compared to the first six monthsof 2006. The increase reflects $0.7 million of costs associated with fuelpurchases by WesPac—Reno related to a product-supply arrangement.  Other costs related to recent acquisitionswere $1.0 million.  Insurance costsincreased by $1.6 million over the comparable period of 2006.  Rental expense increased over the first sixmonths of 2006 by $0.8 million.  Expensesrelated to terminal additives increased by $0.8 million which is a result of anincrease in terminal activity.  Theseincreases were offset by a decrease in casualty losses of $0.5 million.  Non-recurring professional fees in the sixmonths ended June 30, 2006 include approximately $2.2 million of legal,accounting and tax fees related to planning for BGH’s IPO in 2006.  The remainder of the increases related tovarious other pipeline operating costs resulting from Buckeye’s expandedoperations.

Costs and expenses attributable to Buckeye, ServicesCompany and BGH were as follows:
|                                                      | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **June 30,**              | ** ** |
| ** **                                           | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(In thousands)**        | ** ** |
| Total cost and  expenses:                            |       |                           |       |   |   |
| Attributable to  Buckeye                             |       | $                              | 153,365    |   | $ | 133,695 |   |
| Elimination of  Buckeye deferred charge              |       | (2,344                         | )          | (2,349 | ) |
| Elimination of  Buckeye senior administrative charge |       | —                         |       | (950 | ) |
| Net effect of  ESOP charges                          |       | 2,795                          |       | 2,046 |   |
| Attributable to  BGH                                 |       | 3,231                          |       | 3,960 |   |
| Total                                                |       | $                              | 157,047    |   | $ | 136,402 |   |

 

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Amountsattributable to BGH consist of the following:
|                       | ** ** | **Six Months Ended** | ** ** |
|-----------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **June 30,**              | ** ** |
| ** **            | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| ** **            | ** ** | **(In thousands)**        | ** ** |
| Attributable to  BGH: |       |                           |       |   |   |
| Payroll and  benefits |       | $                              | 2,151      |   | $ | 996 |   |
| Professional  fees    |       | 437                            |       | 2,642 |   |
| Other                 |       | 643                            |       | 322 |   |
| Total                 |       | $                              | 3,231      |   | $ | 3,960 |   |

 

Payroll and benefits costs include salaries andbenefits for the four highest paid executives performing services on behalf ofBuckeye as well as allocations of the cost of Buckeye personnel performingadministrative services directly for BGH. For the six months ended June 30,2007 BGH incurred $1.1 million of non-cash unit based compensation expense fromthe vesting of management units as result of the sale of the controlling interestin BGH (as discussed previously). Non-recurring professional fees in the six months ended June 30, 2006include approximately $2.2 million of legal, accounting and tax fees related toplanning for BGH’s IPO in 2006.  Othercosts include certain state franchise taxes, insurance costs, depreciation andmiscellaneous other expenses.

Otherincome (expense) for the six month periods ended June 30, 2007 and 2006 was asfollows:

|                            | ** ** | **Other Income (Expenses)** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(In thousands)**               | ** ** |
| Investment  income         |       | $                                     | 634        |   | $ | 622 |   |
| Interest and  debt expense |       | (26,980                               | )          | (31,940 | ) |
| Total                      |       | $                                     | (26,346    | ) | $ | (31,318 | ) |
|                       |       |                                  |       |   |   |
| Equity income              |       | $                                     | 4,044      |   | $ | 2,795 |   |

 

Otherincome (expense) was a net expense of $26.3 million during the six months endedJune 30, 2007, compared to a net expense of $31.3 million during the sameperiod in 2006.  Investment income forthe six months ended June 30, 2007 was consistent with investment incomegenerated during the six months ended June 30, 2006.

Interest expense was $27.0 million in the six monthsended June 30, 2007, a decrease of $5.0 million.  The decrease is due to the absence of $5.7million of interest expense associated with BGH’s prior term loan which wasextinguished in conjunction with the IPO, partially offset by an increase of$0.9 million at Buckeye, which was principally due to higher average balancesoutstanding under, and higher interest rates on, Buckeye’s 5-year revolvingcredit facility.

Equity income increased by $1.2 million from the sixmonths ended June 30, 2006 to $4.0 million for the six months ended June 30,2007.  The increase is a result of equityincome earned from the Partnership’s approximate 25% interest in West ShorePipe Line Company and 20% interest in West Texas LPG Pipeline LimitedPartnership.

LIQUIDITY AND CAPITALRESOURCES

Until BGH’s IPO on August9, 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.

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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 depends primarily on Buckeye’sability to generate cash beyond its working capital requirements.  Buckeye’s primary future sources of liquidityare operating cash flow, proceeds from borrowings under Buckeye’s revolvingcredit facility and proceeds from the issuance of Buckeye LP Units.

BGH’s principal use ofcash is the payment of its operating expenses and distributions to itsunitholders.  BGH generally 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.  In 2007 BGH paid cash distributions of $0.225per unit on February 28, 2007 and $0.24 per unit per unit on May 31rst. Totalcash distributed to BGH unitholders in the first six months of 2007 wasapproximately $13.2 million. On July 26, 2007 MainLine Management declared adistribution of $0.25 per unit to be paid on August 31, 2007 to unitholders ofrecord as of August 6, 2007. This distribution is expected to be approximately$7.1 million dollars.

***Debt***

*BGH*

On August 9, 2006, BGH entered into a five-year, $10.0million revolving credit facility with SunTrust Bank, as both administrativeagent and lender (the “BGH Credit Agreement”). See Note 5 to BGH’s condensed consolidated financial statements for adescription of the terms of the BGH Credit Agreement.  During the six months ended June 30, 2007,BGH borrowed and repaid $0.6 million under the BGH Credit Agreement.

Inaddition, the BGH Credit Agreement provides for a “change of control” event ofdefault that is triggered if (i) MainLine Management ceases to be the solegeneral partner of BGH, (ii) BGH GP Holdings, LLC ceases to own and control100% of MainLine Management, (iii) (A) Arclight, Kelso, Lehman Brothers,and each of their respective affiliates, individually or collectively, cease toown and control at least 35% of the outstanding equity interests of BGH GP Holdings,LLC, and (B) any person, entity or group owns and controls a larger percentageof the outstanding equity interests of BGH GP Holdings, LLC, than iscollectively owned by Arclight, Kelso, Lehman Brothers, and their affiliates.  BGH received the consent of theBGH Credit Agreement lenders in connection with the sale of Carlyle/Riverstone’sinterest in BGH as described in Note 2, and entered into an amendment to theBGH Credit Agreement to reflect the change in ownership following the sale.

*Services Company*

Services Company hadtotal debt outstanding of $23.3 million and $26.3 million at June 30, 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 5 to BGH’s condensed consolidated financial statements for adescription of the terms of the 3.60% ESOP Notes.

*Buckeye*

*At June30, 2007, Buckeye had $965.0 million in aggregate outstanding long-term debt,consisting of $125.0 million of the 5.125% Notes due 2017, $275.0 million ofthe 5.300% Notes due 2014, $300.0 million of the 4 5/8% Notes due 2013, $150.0million of the 6 3⁄4% Notes due 2033 and $115.0 million outstanding under acredit facility.*

On November 13, 2006 Buckeye entered into a new $400.0million, 5-year revolving credit facility (the “Credit Facility”) with asyndicate of banks.  See Note 5 to BGH’scondensed consolidated financial statements for a description of the terms ofthe Credit Facility.

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Inaddition, the Credit Facility provides for a “change of control” event ofdefault that is triggered if (i) BGH GP Holdings, LLC ceases to own and control100% of the sole general partner of BGH, (ii) (A) Arclight, Kelso,Lehman Brothers and each of their respective affiliates, individually orcollectively, cease to own and control at least 35% of the outstanding equityinterests of BGH GP Holdings, LLC, and (B) any person, entity or group owns andcontrols a larger percentage of the outstanding equity interests of BGH GPHoldings, LLC, than is collectively owned by Arclight, Kelso, Lehman Brothers,and their affiliates,  (iii)BGH ceases to own 100% of Buckeye GP or (iv) Buckeye GP ceases to be MainLineManagement.  Buckeye received the consentof the Credit Facility lenders in connection with the sale ofCarlyle/Riverstone’s interest in BGH as described in Note 2, and entered intoan amendment to the Credit Facility to reflect the change in ownership followingthe sale.

*CashFlows from Operations*

The components of cashflows from operations for the six months ended June 30, 2007 and 2006 were asfollows:

|                                                    | ** ** | **Cash Flow from Operations** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                      | ** ** |
| Net income                                         |       | $                                            | 10,070     |   | $ | 4,226 |   |
| Value of ESOP  shares released                     |       | 2,355                                        |       | 2,073 |   |
| Depreciation and  amortization                     |       | 19,708                                       |       | 19,122 |   |
| Non-controlling  interest                          |       | 60,476                                       |       | 48,089 |   |
| Changes in  current assets and current liabilities |       | 9,286                                        |       | (5,651 | ) |
| Changes in other  assets and liabilities           |       | 845                                          |       | 2,251 |   |
| Other                                              |       | 971                                          |       | 636 |   |
| Total                                              |       | $                                            | 103,711    |   | $ | 70,746 |   |

 

Cash flows from operations were $103.7 million for thefirst six months of 2007 compared to $70.7 million for the first six months of2006, an increase of $33.0 million. The primary driver of this increase is theimprovement in Buckeye’s net income for the period of in 2007 compared to 2006,as well as favorable fluctuations in working capital. Depreciation andamortization was $19.7 million for the first six months of 2007 compared to$19.1 million during the same period in 2006. The increase resulted principallyfrom depreciation and amortization related to ongoing capital additions.  Cash provided by working capital was $9.3million in the first six months of 2007 as compared to cash used for workingcapital of $5.7 million in the first six months of 2006.

In the first six months of 2007, cash provided byworking capital resulted primarily from reductions in both trade receivables of8.4 million and prepaid and other current assets of $1.8 million and anincrease in accrued and other current liabilities of $3.4 million that wasoffset primarily by reductions in accounts payable of $4.8 million.  The reduction in trade receivables is due toimprovement in timing collections.  Thereduction in prepaid and other current assets is a result of a decrease ininsurance receivables partially offset by an increase in excise taxreceivables.  The increase in accrued andother current liabilities is due to timing of property tax payments.  The decrease in accounts payable resultedfrom timing of invoice payments at year end of 2006.

During the six months endedJune 30, 2006, cash used for working capital resulted from increases in tradereceivables of $1.1 million, construction and pipeline relocation receivablesof $2.4 million and prepaid and other current assets of $12.4 million and adecrease in accounts payable of $4.1 million.  The decreases in cash werepartially offset by an increase in accrued and other current liabilities of$14.7 million.  The increase in trade receivables is partly due toactivity at Buckeye NGL which commenced operations in January 2006.  Theincrease in construction and pipeline relocations receivables is due to anincrease in relocation project activity.  Prepaid and other current assetsincreased due to an increase in insurance receivables and an increase in areceivable for activity on a 29-mile ammonia pipeline acquired in November2005.  The decrease in accounts payable resulted from the timing ofinvoice payments at year end of 2005.  The increase in accrued and othercurrent liabilities is due to

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activity on the 29-mileammonia pipeline as well as an increase in amounts accrued by Buckeye forenvironmental liabilities.

*Cash Flows from Investing Activities*

Net cash used in investing activities for the sixmonths ended June 30, 2007 and 2006 are as follows:
|                                      | ** ** | **Investing Activities**                                       | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                           | ** ** | **For the Six Months Ended June 30,** | ** ** |
| ** **                           | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(In thousands)**                                             | ** ** |
| Capital  expenditures                |       | $                                                                   | (36,966    | ) | $ | (44,028 | ) |
| Acquisitions and  equity investments |       | (39,320                                                             | )          | (92,790 | ) |
| Other                                |       | (167                                                                | )          | (751 | ) |
| Total                                |       | $                                                                   | (76,453    | ) | $ | (137,569 | ) |

 

In the six months ended June 30, 2007, Buckeyeexpended $38.4 million primarily for the acquisition of six terminals andrelated assets and $0.9 million for an additional investment in West TexasLPG Pipe Line L.P. See Note 4 to BGH’s condensed consolidated financialstatements for a further discussion.

Inthe six months ended June 30, 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.

Capital expenditures aresummarized below:
|                                  | ** ** | **Capital Expenditures**                                       | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                       | ** ** | **For the Six Months Ended June 30,** | ** ** |
| ** **                       | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                             | ** ** |
| Sustaining  capital expenditures |       | $                                                                   | (15,794    | ) | $ | (11,325 | ) |
| Expansion and  cost reduction    |       | (21,172                                                             | )          | (32,703 | ) |
| Total                            |       | $                                                                   | (36,966    | ) | $ | (44,028 | ) |

 

Buckeye incurred $15.8million and $11.3 million of sustaining capital expenditures and $21.2 millionand $32.7 million of expansion and cost reduction expenditures in the first sixmonths of 2007 and 2006, respectively. Expansion and cost reduction projects in2007 include a capacity expansion project in Illinois to handle additional LPG volumesas well as ongoing capacity improvements by WesPac—Memphis. Expansion and costreduction projects in 2006 include the completion of the base operations ofWesPac—Memphis, the capacity expansion project in Illinois, and the addition ofpipelines, tankage, and equipment to meet handling requirements for ultra-lowsulfur diesel.

BGH estimates sustaining capital expenditures, all ofwhich are attributable to Buckeye, will be approximately $32.0 million for allof 2007.

*CashFlows from Financing Activities*

During the first sixmonths of 2007, BGH borrowed and repaid $1.3 million under the BGH CreditAgreement.  BGH’s distributions to itsunitholders totaled $13.2 million in the first six months of 2007.

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On March 5, 2007, Buckeyeissued 1.5 million LP Units in an underwritten public offering at $48.25 per LPUnit.  On March 14, 2007, theunderwriters 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, including the overallotment option and after underwriter’s discountof $0.75 per LP and offering expenses, were approximately $82.2 million, andwere used to reduce amounts outstanding under the Partnership’s CreditFacility.

On March 7, 2006, Buckeyeissued 1.5 million LP Units in an underwritten public offering at $44.22 per LPUnit. Proceeds from the offering, after underwriter’s discount of $1.45 per LPUnit and offering expenses were approximately $64.1 million, and were used toreduce amounts outstanding under the Credit Facility.

During the first sixmonths of 2007 and 2006, the Partnership borrowed $85.0 million and $127.0million under its Credit Facility, respectively, and repaid $115.0 million and$65.0 million, respectively   Payments onthe 3.60% ESOP Notes were $3.2 million for the six months ended June 30, 2007.

Distributionsto non-controlling interests, consisting primarily of Buckeye’s distributionsto holders of its LP Units, were $61.3 million in the first six months of 2007compared to $54.8 million in the first six months of 2006.  The increase in distributions resulted fromadditional LP Units outstanding as a result of the Partnership’s issuance of1.7 million LP Units in March 2007 and the issuance of 1.5 million LP Units inMarch 2006 as well as an increase in the cash distribution rate to $0.80 per LPunit in the second quarter of 2007 compared to $0.75 per LP unit in the secondquarter of 2006.

OTHER MATTERS

Accounting Pronouncements

See Note 14 to BGH’s condensedconsolidated financial statements for a description of certain accountingpronouncements.

Forward LookingStatements

The information contained above in this Management’sDiscussion and Analysis and elsewhere in this Form 10-Q includes forward-lookingstatements. Such statements use forward-looking words such as “anticipate,” “continue,”“estimate,” “expect,” “may,” “believe,” “will,” or other similar words,although some forward-looking statements are expressed differently.  These statements discuss future expectationsand contain projections.  Specificfactors that could cause actual results to differ from those in theforward-looking statements include, but are not limited to: (1) BGH’s abilityto pay distributions to its unitholders; (2) BGH’s expected receipt ofdistributions and incentive distributions from Buckeye; (3) anticipated trendsin Buckeye’s business; (4) price trends and overall demand for petroleumproducts in the United States in general and in Buckeye’s service areas inparticular (which may be affected by economic activity, weather, alternativeenergy sources, conservation and technological advances); (5) changes, if any,in laws and regulations, including, among others, safety, tax and accountingmatters or Federal Energy Regulatory Commission or applicable state regulationof  Buckeye’s tariff rates; (6) liabilityfor environmental claims; (7) security issues affecting Buckeye’s assets,including, among others, potential damage to its assets caused by acts of waror terrorism; (8) construction costs, unanticipated capital expenditures andoperating expenses to expend, repair or replace Buckeye’s assets; (9)availability and cost of insurance on Buckeye’s assets and operations; (10)Buckeye’s ability to successfully identify and complete strategic acquisitionsand make cost saving changes in operations; (11) expansion in the operations ofBuckeye’s competitors; (12) Buckeye’s ability to integrate any acquiredoperations into its existing operations; (13) shut-downs or cutbacks at majorrefineries that use Buckeye’s services; (14) deterioration in Buckeye’s laborrelations; (15) changes in real property tax assessments; (16) disruptions tothe air travel system; (17) interest rate fluctuations and other capital marketconditions; (18) BGH’s future results of operations; (19) BGH’s liquidity andability to finance its activities; (20) market conditions in Buckeye’sindustry; (21) conflicts of interest between Buckeye, its general partner andBGH; (22) the treatment of Buckeye or BGH as a corporation for federal incometax purposes or if BGH or Buckeye become subject to entity-level taxation forstate tax purposes; and (23) the impact of governmental legislation andregulation on BGH and Buckeye.

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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 suchstatements.  When consideringforward-looking statements, you should keep in mind the risk factors and othercautionary statements in BGH’s Annual Report on Form 10-K for 2006, includingthose described in the “Risk Factors” section of that report.  Further, we undertake no obligation to updatepublicly any forward-looking statement whether as a result of new informationor future events.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

*Market Risk—Trading Instruments*

Currently, neither BGHnor Buckeye has any derivative instruments and do not currently engage inhedging activity with respect to trading instruments.

*Market Risk—Other than TradingInstruments*

Buckeye is exposed torisk resulting from changes in interest rates. Buckeye does not have material commodity or foreign exchange risk.Buckeye is exposed to fair value risk with respect to the fixed portion of itsfinancing arrangements (the 5.125% Notes, the 5.30% Notes, the 4.625% Notes andthe 6.750% Notes) and to cash flow risk with respect to its variable rateobligations (the Credit Facility). Fair value risk represents the risk that thevalue of the fixed portion of Buckeye’s financing arrangements will rise orfall depending on changes in interest rates. Cash flow risk represents the riskthat interest costs related to the Credit Facility will rise or fall dependingon changes in interest rates.

AtJune 30, 2007, Buckeye had total fixed-rate debt obligations having a facevalue of $850 million, consisting of $125 million of the 5.125% Notes, $275 millionof the 5.30% Notes, $300 million of the 4.625% Notes and $150 millionof the 6.750% Notes. At June 30, 2007, Services Company had fixed debtobligations of approximately $24.0 million of its 3.60% ESOP Notes. Theaggregate fair value of these fixed obligations at June 30, 2007 wasapproximately $831.0 million.  A 1%decrease in rates for obligations of similar maturities would have increasedthe aggregate fair value of these obligations by $59.4 million at June 30,2007.  Buckeye’s variable debt obligationunder the Credit Facility was $115 million at June 30, 2007. Based on thebalances outstanding at June 30, 2007, a 1% increase or decrease in interestrates would increase or decrease consolidated annual interest expense by $1.1million.

In December 2004, thePartnership terminated an interest rate swap agreement associated with the4.625% Notes due June 15, 2013 and received proceeds of $2.0 million.  In accordance with FASB Statement No. 133—“Accountingfor Derivative Instruments and Hedging Activities”, the Partnership hasdeferred the $2.0 million gain as an adjustment to the fair value of the hedgedportion of the Partnership’s debt and is amortizing the gain as a reduction ofinterest expense over the remaining term of the hedged debt.  Accordingly, interest expense was reduced by$59 thousand for the three months ended June 30, 2007 and 2006, respectively,and $118 thousand for the six months ended June 30, 2007 and 2006.

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 

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Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regardingdisclosure.   A controls system cannotprovide absolute assurance, however, that the objectives of the controls systemare met, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within a company have beendetected.

(b)       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, MainLine Management’sinternal control over financial reporting for BGH.

PART II—OTHERINFORMATION

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 statementsof BGH in 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.

Item 1A. RiskFactors

The reader should carefully consider, in connectionwith the other information in this report, the factors discussed in Part I,“Item 1A: Risk Factors” of BGH’s 2006 Annual Report on Form 10-K. Thesefactors could cause our actual results to differ materially from those statedin forward-looking statements contained in this document and elsewhere. Inaddition to the factors included in the Form 10-K, the reader should alsoconsider the following risk factor:

*Buckeye’spending acquisition of the Lodi natural gas storage facilities may not beconsummated. If consummated, Buckeye may not realize the expected benefits fromthe transaction.*

The purchase and sale agreement for the Lodi naturalgas storage facilities contains conditions that, if not satisfied or waived,could result in the acquisition not occurring. Among other customary closingconditions, consummation of the acquisition is conditioned on the expiration orearly termination of the waiting period under the Hart-Scott-Rodino AntitrustImprovements Act of 1976 and the approval of the California Public UtilitiesCommission for the change in control of the Lodi facilities. Additionally, thepurchase and sale agreement provides both parties with the right to terminatethe agreement prior to consummation under certain limited circumstances,including the right for Buckeye to terminate the agreement if any event occursthat would have a material adverse effect on the assets, business, properties,financial condition or results of operations of Lodi. 

If Buckeye does not consummate the acquisition ofLodi, Buckeye will not realize any of the anticipated benefits of owning andoperating the assets. If Buckeye does consummate the Lodi acquisition,Buckeye’s estimates regarding earnings, operating cash flow and capitalexpenditures resulting from the transaction may prove to be incorrect.Additionally, Buckeye may encounter difficulties in the assimilation of a newbusiness, and Buckeye may experience unanticipated inefficiencies orcosts.  The facilities may also besubject to operational hazards and unforeseen interruptions such as naturaldisasters, adverse weather, accidents, fires, explosions, hazardous materialsreleases and other events beyond Buckeye’s control, for which Buckeye may notbe adequately insured.  Furthermore, adecline or interruption in natural gas transportation on Pacific Gas andElectric’s intrastate gas pipelines on which the Lodi facilities rely couldhave a material adverse effect on Buckeye’s utilized capacity.  As a result of any of the foregoing factors,our revenues and, therefore, our ability to pay cash distributions on ourunits, could be adversely affected.

 

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Item 6.  Exhibits

(a)     Exhibits

10.1 First Amendment to Credit Agreement, dated as of May 18, 2007, byand among Buckeye Partners, L.P., as borrower, SunTrust Bank, as administrativeagent, and the lenders signatory thereto.

10.2 First Amendment to Credit Agreement, dated as ofMay 18, 2007, by and among Buckeye GP Holdings L.P., as borrower, SunTrustBank, as administrative agent, and the lenders signatory thereto.

10.3 Amended and Restated Employment and Severance Agreement, dated asof June 25, 2007, by and among Stephen C. Muther, Buckeye GP Holdings L.P. andBuckeye Pipe Line Services Company (incorporated by reference to Exhibit 10.1to the registrant’s Current Report on Form 8-K filed on June 27, 2007).

10.4 Amended and Restated Severance Agreement, dated as of June 25,2007, by and among Robert B. Wallace, Buckeye GP Holdings L.P. and Buckeye PipeLine Services Company (incorporated by reference to Exhibit 10.2 to theregistrant’s Current Report on Form 8-K filed on June 27, 2007).

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

31.2 Certification of Acting 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 Acting Chief Financial Officer, Pursuant to 18U.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: July 30,  2007 | By:  | VANCE E. POWERS                                               |     |   |
|                 |      |                                                          |     |   |
|                 |      | Vance E. Powers                                               |     |   |
|                 |      | Acting Chief Financial Officer                                |     |
| * *             | * *  | *(Principal Accounting and*                                   | * * |
| * *             | * *  | *Financial Officer)*                                          | * * |

 

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