**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

**FORM 10-Q**

**x**                               Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

**For the quarterly period endedSeptember 30, 2006 or**

**o**                                 Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

**For the transition period from                               to                               **

**Commission file number 001-32963**

**BUCKEYE GP HOLDINGS L.P.**

(Exact name of registrantas specified in its charter)

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

 

| **5002 Buckeye Road**            |   |       |
|----------------------------------|--------|------------|
| **P. O.  Box 368**               |   |       |
| **Emmaus,  PA**                  |   | **18049**  |
| (Address of principal  executive |   | (Zip Code) |
| offices)                         |   |       |

 

Registrant’s telephonenumber, including area code:    **484-232-4000**

**Not Applicable**

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

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

Large Accelerated Filer  o  Accelerated Filer  o  Non-AcceleratedFiler  x

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

As of November 2,2006, there were 26,938,000 Common Units and 1,362,000 Management Unitsoutstanding.

 

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BUCKEYE GP HOLDINGS L.P.

INDEX
|          | ** ** | ** **                                                                                                    | ** ** | ** ** |
|----------|------------|---------------------------------------------------------------------------------------------------------------|------------|------------|
| PART I.  |       | FINANCIAL STATEMENTS                                                                                          |       |       |
|     |       |                                                                                                          |       |       |
| Item 1.  |       | Financial Statements (Unaudited)                                                                              |       |       |
|     |       |                                                                                                          |       |       |
|     |       | Condensed  Consolidated Statements of Income for the three and nine months ended  September 30, 2006 and 2005 |       |       |
|     |       |                                                                                                          |       |       |
|     |       | Condensed  Consolidated Balance Sheets September 30, 2006 and December 31, 2005                               |       |       |
|     |       |                                                                                                          |       |       |
|     |       | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2006 and 2005       |       |       |
|     |       |                                                                                                          |       |       |
|     |       | Consolidated  Statement of Changes in Partners’ Capital for the nine months ended September  30, 2006    |       |       |
|     |       |                                                                                                          |       |       |
|     |       | Notes  to Condensed Consolidated Financial Statements                                                         |       |       |
|     |       |                                                                                                          |       |       |
| Item  2. |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |       |       |
|     |       |                                                                                                          |       |       |
| Item  3. |       | Quantitative  and Qualitative Disclosures About Market Risk                                                   |       |       |
|     |       |                                                                                                          |       |       |
| Item  4. |       | Controls  and Procedures                                                                                      |       |       |
|     |       |                                                                                                          |       |       |
| PART II. |       | Other  Information                                                                                            |       |       |
|     |       |                                                                                                          |       |       |
| Item 1.  |       | Legal  Proceedings                                                                                            |       |       |
|     |       |                                                                                                          |       |       |
| Item 1A. |       | Risk Factors                                                                                                  |       |       |
|     |       |                                                                                                          |       |       |
| Item  2. |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                  |       |       |
|     |       |                                                                                                          |       |       |
| Item 6.  |       | Exhibits                                                                                                      |       |       |

 

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**BUCKEYE GP HOLDINGS L.P.Condensed Consolidated Statements of Income(In thousands, except per Unit amounts)(Unaudited)**
| **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | **Nine Months Ended  September 30,**                                   | ** **                                                        |
|---------------------------------------|------------|------------|------------|------------------------------------------------------------------------|-------------------------------------------------------------------|
| **2006**                              | ** ** | **2005**   | ** ** | ** **                                                             | ** **                                                        | **2006** | ** ** | **2005** | ** ** |
|                                  |       |       |       |                                                                   |                                                              |   |   |   |   |
| $                                     | 116,519    |       | $          | 102,366                                                                |                                                              | Revenue |   | $ | 333,759 |   | $ | 300,171 |   |
|                                  |       |       |       |                                                                   |                                                              |   |   |   |   |
|                                  |       |       |       | Costs and expenses:                                                    |                                                              |   |   |   |   |
| 55,451                                |       | 48,920     |       | Operating  expenses                                                    |                                                              | 160,282 |   | 145,485 |   |
| 10,323                                |       | 8,249      |       | Depreciation and  amortization                                         |                                                              | 29,445 |   | 23,747 |   |
| 10,409                                |       | 5,501      |       | General and  administrative expenses                                   |                                                              | 22,858 |   | 16,442 |   |
| 76,183                                |       | 62,670     |       | Total costs and  expenses                                              |                                                              | 212,585 |   | 185,674 |   |
|                                  |       |       |       |                                                                   |                                                              |   |   |   |   |
| 40,336                                |       | 39,696     |       | Operating income                                                       |                                                              | 121,174 |   | 114,497 |   |
|                                  |       |       |       |                                                                   |                                                              |   |   |   |   |
|                                  |       |       |       | Other income  (expenses):                                              |                                                              |   |   |   |   |
| 317                                   |       | 482        |       | Investment  income                                                     |                                                              | 939 |   | 830 |   |
| (14,940)                              |       | (14,192    | )          | Interest and  debt expense                                             |                                                              | (46,880 | ) | (41,244 | ) |
| (14,623)                              |       | (13,710    | )          | Total other  income (expenses)                                         |                                                              | (45,941 | ) | (40,414 | ) |
|                                  |       |       |       |                                                                   |                                                              |   |   |   |   |
| 25,713                                |       | 25,986     |       | Income before equity  income and non-controlling interest expense      |                                                              | 75,233 |   | 74,083 |   |
| 1,803                                 |       | 1,213      |       | Equity income                                                          |                                                              | 4,598 |   | 3,678 |   |
| (26,012)                              |       | (24,728    | )          | Non-controlling  interest expense                                      |                                                              | (74,101 | ) | (72,143 | ) |
|                                  |       |       |       |                                                                   |                                                              |   |   |   |   |
| $                                     | 1,504      |       | $          | 2,471                                                                  |                                                              | Net income |   | $ | 5,730 |   | $ | 5,618 |   |
| 1,909                                 |       |       |       | Less: Net income prior  to initial public offering on August 9, 2006   |                                                              | 6,135 |   |   |   |
|                                  |       |       |       |                                                                   |                                                              |   |   |   |   |
| $                                     | (405)      |       |       |                                                                   | Net loss subsequent to  initial public offering on August 9, 2006 |   | $ | (405 | ) |   |   |
|                                  |       |       |       |                                                                   |                                                              |   |   |   |   |
| 27,891                                |       |       |       | Weighted average number  of units outstanding – basic and diluted |                                                              | 27,891 |   |   |   |
| $                                     | (0.01)     |       |       |                                                                   | Loss per unit – basic  and diluted                           |   | $ | (0.01 | ) |   |   |

 

See Notes tocondensed consolidated financial statements.

1

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**BUCKEYE GP HOLDINGS L.P.Condensed Consolidated Balance Sheets(In thousands)(Unaudited)**
| ** **                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Assets                                                                        |       |                   |       |                  |       |
| Current assets:                                                               |       |                   |       |                  |       |
| Cash and cash equivalents                                                     |       | $                      | 31,655     |                  | $          | 28,984 |   |
| Trade receivables                                                             |       | 40,690                 |       | 38,864                |       |
| Construction and pipeline relocation receivables                              |       | 11,796                 |       | 10,571                |       |
| Inventories                                                                   |       | 13,985                 |       | 12,997                |       |
| Prepaid and other current assets                                              |       | 22,765                 |       | 12,325                |       |
| Total current assets                                                          |       | 120,891                |       | 103,741               |       |
|                                                                          |       |                   |       |                  |       |
| Property, plant and equipment, net                                            |       | 1,722,096              |       | 1,587,741             |       |
| Restricted cash                                                               |       | —                 |       | 5,117                 |       |
| Goodwill                                                                      |       | 234,603                |       | 234,603               |       |
| Other non-current assets                                                      |       | 98,367                 |       | 109,630               |       |
|                                                                          |       |                   |       |                  |       |
| Total assets                                                                  |       | $                      | 2,175,957  |                  | $          | 2,040,832 |   |
|                                                                          |       |                   |       |                  |       |
| Liabilities and  partners’ capital                                       |       |                   |       |                  |       |
| Current liabilities:                                                          |       |                   |       |                  |       |
| Current portion of long-term debt                                             |       | $                      | 6,060      |                  | $          | 7,811 |   |
| Accounts payable                                                              |       | 17,108                 |       | 18,648                |       |
| Accrued and other current liabilities                                         |       | 59,243                 |       | 48,824                |       |
| Total current liabilities                                                     |       | 82,411                 |       | 75,283                |       |
|                                                                          |       |                   |       |                  |       |
| Long-term debt                                                                |       | 1,002,901              |       | 1,096,849             |       |
| Other  non-current liabilities                                                |       | 78,399                 |       | 76,536                |       |
| Non-controlling  interest                                                     |       | 769,922                |       | 711,722               |       |
|                                                                          |       |                   |       |                  |       |
| Total liabilities                                                             |       | 1,933,633              |       | 1,960,390             |       |
|                                                                          |       |                   |       |                  |       |
| Commitments and  contingent liabilities                                       |       | —                 |       | —                |       |
|                                                                          |       |                   |       |                  |       |
| Partners’  capital:                                                      |       |                   |       |                  |       |
| General Partner – Common Units                                           |       | 7                      |       | —                |       |
| Limited Partners – Common Units                                          |       | 234,036                |       | —                |       |
| Management Units                                                              |       | 6,799                  |       | —                |       |
| General Partner                                                               |       | —                 |       | 7                     |       |
| Limited Partners – A Units                                               |       | —                 |       | 74,132                |       |
| Limited Partners – B Units                                               |       | —                 |       | 3,473                 |       |
| Equity gains on issuance of Buckeye Partners, L.P.  limited partnership units |       | 1,482                  |       | 1,316                 |       |
| Accumulated other comprehensive income                                        |       | —                 |       | 1,514                 |       |
| Total partners’ capital                                                  |       | 242,324                |       | 80,442                |       |
|                                                                          |       |                   |       |                  |       |
| Total  liabilities and partners’ capital                                 |       | $                      | 2,175,957  |                  | $          | 2,040,832 |   |

 

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)**
| ** **                                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                 |       |                                                |       |   |   |
| Net income                                                                             |       | $                                                   | 5,730      |   | $ | 5,618 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:     |       |                                                |       |   |   |
| Non-cash charge for Management Unit expense                                            |       | 3,326                                               |       | — |   |
| Value of ESOP shares released                                                          |       | 3,047                                               |       | 3,895 |   |
| Depreciation and amortization                                                          |       | 29,445                                              |       | 23,747 |   |
| Amortization of deferred compensation                                                  |       | —                                              |       | 2,638 |   |
| Non-controlling interest                                                               |       | 74,101                                              |       | 72,143 |   |
| Equity earnings                                                                        |       | (4,598                                              | )          | (3,678 | ) |
| Distributions from equity investments                                                  |       | 4,460                                               |       | 2,428 |   |
| Amortization of debt discount                                                          |       | 38                                                  |       | 28 |   |
| Amortization of option grants                                                          |       | 294                                                 |       | — |   |
| Change in assets  and liabilities, net of amounts related to acquisitions:             |       |                                                |       |   |   |
| Trade receivables                                                                      |       | (1,826                                              | )          | (403 | ) |
| Construction and pipeline relocation receivables                                       |       | (1,225                                              | )          | 1,729 |   |
| Inventories                                                                            |       | (317                                                | )          | 25 |   |
| Prepaid and other current assets                                                       |       | (11,323                                             | )          | 5,075 |   |
| Accounts payable                                                                       |       | (1,540                                              | )          | (6,655 | ) |
| Accrued and other current liabilities                                                  |       | 10,291                                              |       | 847 |   |
| Other non-current assets                                                               |       | 1,857                                               |       | 224 |   |
| Other non-current liabilities                                                          |       | 1,864                                               |       | 1,371 |   |
| Total adjustments from operating activities                                            |       | 107,894                                             |       | 103,414 |   |
| Net cash provided by operating activities                                              |       | 113,624                                             |       | 109,032 |   |
|                                                                                   |       |                                                |       |   |   |
| Cash flows from  investing activities:                                                 |       |                                                |       |   |   |
| Capital expenditures                                                                   |       | (62,324                                             | )          | (51,906 | ) |
| Acquisitions                                                                           |       | (93,330                                             | )          | (178,813 | ) |
| Net proceeds from disposal of property, plant and  equipment                           |       | 130                                                 |       | 61 |   |
| Release of (deposit to) restricted cash                                                |       | 5,117                                               |       | (3,115 | ) |
| Net cash used in investing activities                                                  |       | (150,407                                            | )          | (233,773 | ) |
|                                                                                   |       |                                                |       |   |   |
| Cash flows from  financing activities:                                                 |       |                                                |       |   |   |
| Net proceeds from issuance of Limited Partner-  Common Units                           |       | 168,509                                             |       | — |   |
| Net proceeds from issuance of Buckeye Partners,  L.P.units                             |       | 64,092                                              |       | 156,101 |   |
| Debt issuance costs                                                                    |       | —                                              |       | (1,282 | ) |
| Proceeds from exercise of unit options                                                 |       | 559                                                 |       | 1,337 |   |
| Proceeds from issuance of long-term debt                                               |       | 147,000                                             |       | 324,767 |   |
| Payment of long-term debt                                                              |       | (242,737                                            | )          | (283,493 | ) |
| Distributions to non-controlling partners of Buckeye  Partners, L.P.                   |       | (83,634                                             | )          | (71,654 | ) |
| Distributions to Limited Partner- common units                                         |       | (14,335                                             | )          | — |   |
| Net cash provided by financing activities                                              |       | 39,454                                              |       | 125,776 |   |
|                                                                                   |       |                                                |       |   |   |
| Net increase in cash  and cash equivalents                                             |       | 2,671                                               |       | 1,035 |   |
| Cash and cash  equivalents at beginning of period                                      |       | 28,984                                              |       | 21,352 |   |
| Cash and cash  equivalents at end of period                                            |       | $                                                   | 31,655     |   | $ | 22,387 |   |
|                                                                                   |       |                                                |       |   |   |
| Supplemental  cash flow information:                                                   |       |                                                |       |   |   |
| Cash paid for  interest (net of amount capitalized)                                    |       | $                                                   | 49,818     |   | $ | 42,297 |   |
| Capitalized  interest                                                                  |       | $                                                   | 1,271      |   | $ | 1,860 |   |
| Cash paid for  income taxes                                                            |       | $                                                   | 12         |   | $ | 1,095 |   |
|                                                                                   |       |                                                |       |   |   |
| Non-cash changes  in assets and liabilities:                                           |       |                                                |       |   |   |
| Fair value hedge accounting                                                            |       | $                                                   | (176       | ) | $ | 1,396 |   |
| Environmental  obligations related to acquisition of Northeast Pipelines and Terminals |       | $                                                   | —     |   | $ | (2,332 | ) |

 

See Notes tocondensed consolidated financial statements.

3

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**BUCKEYE GP HOLDINGS L.P.Consolidated Statement of Changes in Partners’ Capital(In thousands)(Unaudited)**

** **
| ** **                                                                                                                           | ** ** | **General  Partner –  Common  Units** | ** ** | **Limited  Partner –  Common  Units** | ** ** | **Manage-  ment  Units** | ** ** | **General  Partner** | ** ** | **Limited  Partners A  Units** | ** ** | **Limited  Partners B  Units** | ** ** | **Equity  Gains  on Issuance  of Buckeye  LP units** | ** ** | **Accumu-  lated  Other  Compre-  hensive  Income** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------|------------|
| Partners’ capital  at December 31, 2005                                                                                         |       | $                                               | —     |                                            | $          | —                   |       | $                    | —     |                                | $          | 7                                   |       | $                                                                   | 74,132     |                                                | $          | 3,473     |       | $ | 1,316 |   | $ | 1,514 |   | $ | 80,442 |   |
| Net income  through August 8, 2006                                                                                                   |       | —                                          |       | —                                          |       | —                   |       | —               |       | 6,135                               |       | —                              |       | —                                                              |       | —                                              |       | 6,135     |       |
| Net (loss) August  9, through September 30, 2006                                                                                     |       | —                                          |       | (405                                            | )          | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                              |       | (405      | )          |
| Settlement of  interest rate swaps                                                                                                   |       | —                                          |       | —                                          |       | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | (1,514                                              | )          | (1,514    | )          |
| Comprehensive  income                                                                                                                |       | —                                          |       | (405                                            | )          | —                   |       | —               |       | 6,135                               |       | —                              | -          | —                                                              |       | (1,514                                              | )          | 4,216     |       |
| Exchange of GP  Units and Limited Partner- A and B Units for General Partner and Limited  Partner- Common and Management  Units |       | 7                                               |       | 80,267                                          |       | 3,473                    |       | (7                   | )          | (80,267                             | )          | (3,473                              | )          | —                                                              |       | —                                              |       | —    |       |
| Issuance of  Limited Partner – Common Units                                                                                     |       | —                                          |       | 168,509                                         |       | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                              |       | 168,509   |       |
| Recognition of  value of  Management Units                                                                                      |       | —                                          |       | —                                          |       | 3,326                    |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                              |       | 3,326     |       |
| Distributions to  Limted Partner- Common Units                                                                                       |       | —                                          |       | (14,335                                         | )          | —                   |       | —               |       | —                              |       | —                              |       | —                                                              |       | —                                              |       | (14,335   | )          |
| Equity gains on  issuance of Buckeye Partners, L.P. limited partnership  units                                                  |       | —                                          |       | —                                          |       | —                   |       | —               |       | —                              |       | —                              |       | 166                                                                 |       | —                                              |       | 166       |       |
| Partners’ capital at  September 30, 2006                                                                                        |       | $                                               | 7          |                                            | $          | 234,036                  |       | $                    | 6,799      |                                | $          | —                              |       | $                                                                   | —     |                                                | $          | —    |       | $ | 1,482 |   | $ | — |   | $ | 242,324 |   |

** **

** **

 

 

 

See Notes tocondensed consolidated financial statements.

4

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BUCKEYEGP HOLDINGS L.P.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

1. BASIS OF PRESENTATION

In the opinion of management, the accompanyingcondensed consolidated financial statements of Buckeye GP Holdings L.P. (the “Partnership”),which are unaudited except that the Balance Sheet as of December 31, 2005 isderived from audited financial statements, include all adjustments necessary topresent fairly the Partnership’s financial position as of September 30, 2006,along with the results of the Partnership’s operations for the three and ninemonths ended September 30, 2006 and 2005 and its cash flows for the nine monthsended September 30, 2006 and 2005.  Theresults of operations for the three and nine months ended September 30, 2006are not necessarily indicative of the results to be expected for the full yearending December 31, 2006.

The Partnership is a limited partnership organized onJune 15, 2006 under the laws of the state of Delaware.  The Partnership owns 100% of Buckeye GP LLC (“BuckeyeGP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”).  Buckeye is a publicly traded (NYSE:BPL)master limited partnership organized in 1986 under the laws of the state ofDelaware.  The Partnership’s limitedpartnership units are owned approximately 54% by affiliates ofCarlyle/Riverstone Global Energy and Power Fund II, L.P. (“Carlyle/Riverstone”),approximately 9% by certain members of Buckeye GP’s senior management andapproximately 37% by the public. MainLine Management LLC, a Delaware limited liability company (“MainLineManagement”), is the general partner of the Partnership, and is wholly owned byCarlyle/Riverstone. The Partnership’s primary business is the management ofBuckeye.  The Partnership owns anapproximate 2% overall general partner interest in Buckeye and its operatingsubsidiaries.

The Partnership’s condensed consolidated financialresults include Buckeye and its operating subsidiaries and Buckeye Pipe LineServices Company, a Pennsylvania corporation (“Services Company”).  The limited partner interests in Buckeye notowned by the Partnership or Services Company are reflected as non-controllinginterest expense or non-controlling interest in the condensed consolidatedstatements of income and balance sheets. The differences between the financial statements of the Partnership andBuckeye are primarily attributable to (a) amounts reported as non-controllinginterests and (b) additional general and administrative expenses attributableto the Partnership.

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 the Partnership and the notes thereto for the year ended December31, 2005 included in the Partnership’s registration statement on Form S-1, asamended (Registration No. 333-133433) and as filed with the Securities andExchange Commission on July 25, 2006.

*The Partnership’sIPO and Related Transactions*

The Partnership was formed on June 15, 2006 in orderto facilitate the reorganization of MainLine L.P. (“MainLine”) and itsaffiliates and to effect an initial public offering (the “IPO”) of thePartnership’s common units.  Thereorganization and IPO occurred on August 9, 2006, and prior to such date, thePartnership had no activity.  Prior tothe reorganization, MainLine owned and controlled Buckeye GP.  On August 9, 2006, the Partnership sold 10.5million common units in an underwritten IPO, the net proceeds of which wereapproximately $168.5 million.  ThePartnership used the net proceeds from the IPO, along with cash on hand, torepay all outstanding indebtedness under MainLine’s Term Loan and to makedistributions to its pre-IPO equity owners. The common units sold in the IPO represent approximately 37.1% of theoutstanding equity of the Partnership, which includes common units (“CommonUnits”) and management units (“Management Units”).

Coincident with the IPO, the equity interests ofMainLine were exchanged for the equity interests of the Partnership.  MainLine’s 149,950,000 A Units were exchangedfor 16,438,000 Common Units of the Partnership. MainLine’s 16,216,668 B Unitswere exchanged for 1,362,000 Management Units of the Partnership. The 

5

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Management Units areexchangeable for Common Units on a 1 to 1 basis at the option of theholder.  This exchange of equityinterests was accounted for as a transfer between entities under common controlin accordance with Statement of Financial Accounting Standards No. 141, “BusinessCombinations.” Accordingly, the financial information for the Partnershipincluded in this report includes the financial information of MainLine as thepredecessor to the Partnership.

In connection with the closing of the IPO, thePartnership and Buckeye GP restructured the ownership of Buckeye GP.  This restructuring will not have any impacton the amounts or timing of cash distributions paid to the unitholders of thePartnership.  MainLine Sub LLC (“MainLineSub”), which was then a wholly-owned subsidiary of the Partnership and theowner of Buckeye GP, assigned all of its rights under the Fourth Amended andRestated Incentive Compensation Agreement, dated as of December 15, 2004,between MainLine Sub and the Partnership to Buckeye GP.  Thereafter, the Partnership and Buckeye GPamended and restated that agreement by entering into the Fifth Amended andRestated Incentive Compensation Agreement, dated as of August 9, 2006 (the “IncentiveCompensation Agreement”).  On August 9,2006, the Partnership and Buckeye GP also entered into the Amended and RestatedAgreement of Limited Partnership of Buckeye Partners, L.P. (the “PartnershipAgreement”).  The amendments to theIncentive Compensation Agreement and the Partnership Agreement reflect theassignment of the Incentive Compensation Agreement to Buckeye GP andrecharacterize the payments Buckeye GP receives under the IncentiveCompensation Agreement and the Partnership Agreement as distributions inrespect of its general partner interest rather than compensation payments.  On August 18, 2006, MainLine Sub was mergedwith and into the Partnership.

These amendments will result in certain prospectivechanges to the Partnership’s financial statements.  Prior to the IPO, MainLine recognized itsshare of Buckeye’s income as the sum of (i) the incentive compensation paymentsreceived (to which it was contractually entitled and which were recorded byBuckeye as an expense in Buckeye’s financial statements) and (ii) itsproportionate share of Buckeye’s income based on the general partner interestsin Buckeye and certain of Buckeye’s operating subsidiaries and distributionsreceived on the 80,000 Buckeye LP Units that it owns.  As a result of the above restructuring,including the recharacterization of the payments related to the IncentiveCompensation Agreement and Partnership Agreement as distributions in respect ofa general partner interest, in the fourth quarter of 2006, Buckeye will ceaserecording incentive compensation as an expense in its financial statements and,instead, will record incentive distribution payments as distributions fromequity.

Commencing in the fourth quarter of 2006, thePartnership will recognize as its share of Buckeye’s income the amount ofincentive distributions and residual equity share of Buckeye’s income that itwould have received if Buckeye’s income had been entirely distributed.  Beginning in the fourth quarter, Buckeye’sincome will include the incentive distributions that previously would have beendeducted.  This change will not affectthe timing or amounts of cash that the Partnership receives from Buckeye withrespect to incentive distributions on its general or limited partner interests.

Also in connection with the IPO, in the third quarterof 2006, the Partnership:

·                  Incurred$3.3 million of non-cash compensation expense as a result of a change to itsUnit Compensation Plan (see Note 8);

·                  Incurred$1.6 million in non-cash interest and debt expense related to the write-off ofpreviously deferred financing costs associated with the repayment of allamounts outstanding under MainLines’s previous term loan (see Note 4); and

·                  Realizeda $1.9 million reduction in interest and debt expense on the liquidation ofcash flow hedges as the result of the repayment of MainLine’s previous termloan (see Note 4).

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*Description of theBusiness*

At September 30, 2006, the Partnership had nooperating assets other than its general partner ownership interest in Buckeyeand its operating subsidiaries.  Buckeye’sprincipal line of business is the transportation, terminalling and storage ofpetroleum products in the United States for major integrated oil companies,large refined product marketing companies and major end users of petroleumproducts on a fee basis through facilities owned and operated by Buckeye.Buckeye also operates and maintains pipelines owned by third parties undercontracts with major integrated oil and chemical companies, and performscertain construction activities, generally for the owners of these third-partypipelines.

All of the employees who provide services to thePartnership and its subsidiaries, and Buckeye and its subsidiaries, areemployed by Services Company.  Pursuantto a services agreement, Services Company is reimbursed by Buckeye’ssubsidiaries for the cost of the employees who provide services to the Buckeyesubsidiaries. The Partnership is responsible for the total compensation,including benefits, paid to the four highest salaried officers performingduties for Buckeye GP with respect to the functions of operations, finance,legal, marketing, business development, treasury, or performing the function ofpresident of Buckeye GP. The four highest salaried officers are William H.Shea, Jr., Stephen C. Muther, Robert B. Wallace, and Eric A. Gustafson.  Services Company is owned by an employeestock ownership plan (the “ESOP”). Services Company owned approximately 5.9% ofthe publicly traded limited partner units of Buckeye at September 30, 2006.

As of September 30, 2006 and 2005, Buckeye conductedall of its operations through subsidiary entities.  These operating subsidiaries are Buckeye PipeLine Company, L.P. (“Buckeye Pipe Line”), Laurel Pipe Line Company, L.P. (“Laurel”),Everglades Pipe Line Company, L.P. (“Everglades”), Buckeye Pipe Line HoldingsL.P. (“BPH”), Wood River Pipe Lines LLC (“Wood River”), Buckeye Pipe LineTransportation LLC (“BPL Transportation”) and Buckeye NGL Pipe Lines LLC (“BuckeyeNGL”).  Buckeye NGL commenced operationson January 31, 2006 with the acquisition of a natural gas liquids pipelinelocated in Colorado and Kansas (See Note 3). These entities are hereinafterreferred to individually as an “Operating Subsidiary” or collectively as the “OperatingSubsidiaries.” Buckeye owns an approximate 99% ownership interest in each OperatingSubsidiary and 100% interest in Wood River, BPL Transportation and Buckeye NGL.

Buckeye’s Operating Subsidiaries conduct business inthree reportable operating segments: Pipeline Operations, Terminalling and Storage and Other Operations.  See Note 10 for a further discussion.

2.               CONTINGENCIES

*Claims andProceedings*

Buckeye and its Operating Subsidiaries in the ordinarycourse of business are involved in various claims and legal proceedings, someof which are covered by insurance.  ThePartnership is generally unable to predict the timing or outcome of theseclaims and proceedings. Based on its evaluation of existing claims andproceedings and the probability of losses relating to such contingencies,Buckeye has accrued certain amounts relating to such claims and proceedings,none of which are considered material.

Buckeye has received penalty assessments from theInternal Revenue Service (“IRS”) in the aggregate amount of $4.3 million basedon a failure to file excise tax information returns relating to its terminaloperations from January 2005 through February 2006.  Buckeye filed the information returns withthe IRS on May 10, 2006.  The Partnershipbelieves Buckeye had reasonable cause for the failure to file the informationreturns on a timely basis, and Buckeye intends to seek the elimination of theasserted penalties.  The assertedpenalties are for the failure to file information returns rather than anyfailure to pay taxes due as no taxes were owed by Buckeye in connection withsuch information returns.  The timing oroutcome of this claim, and the total costs to be incurred by Buckeye inconnection therewith, cannot be reasonably estimated at this time.

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*EnvironmentalExpenditures*

In accordance with its accounting policy onenvironmental expenditures, Buckeye recorded operating expenses, net ofinsurance recoveries, of $1.5 million and $0.7 million for the three monthsended September 30, 2006 and 2005, respectively, and $5.4 million and $6.3million for the nine months ended September 30, 2006 and 2005, respectively,which were related to environmental expenditures unrelated to claims andproceedings.  Expenditures, both capitaland operating, relating to environmental matters are expected to continue dueto Buckeye’s commitment to maintaining high environmental standards and toincreasingly strict environmental laws and government enforcement policies.

3.               ACQUISITIONS

On January 1, 2006, Buckeye acquired a refinedpetroleum products terminal located in Niles, Michigan from affiliates of ShellOil Products, U.S. (“Shell”) for $13.0 million. On January 31, 2006, Buckeye completed the acquisition of a natural gasliquids pipeline, which extends generally from Wattenberg, Colorado to Bushton,Kansas, from BP Pipelines (North America) Inc. for approximately $87.0 million,which includes a deposit of $7.7 million paid in December 2005.  Buckeye NGL acquired the natural gas liquidspipeline and Buckeye Terminals, LLC, a subsidiary of BPH, acquired the refinedpetroleum products terminal.  Buckeyealso completed certain miscellaneous asset acquisitions during the first ninemonths of 2006 which approximated $1 million.

In connection with each of these acquisitions, Buckeyedetermined that the transaction represented the acquisition of various assets,and not the acquisition of a business, as that term is defined in Statement ofFinancial Accounting Standards No. 141 — “Business Combinations.”  Accordingly, Buckeye has allocated, on apreliminary basis, the cost of each acquisition to the various tangible assetsacquired, principally property, plant and equipment.  Buckeye is in the process of determining thefinal allocation.

In December 2005, Buckeye acquired a refined petroleumproducts terminal and related assets (including certain railroad offloadingfacilities) located in Taylor, Michigan for $20 million. Buckeye allocated, ona preliminary basis, the cost of the assets to the tangible terminal assetsacquired, and is in the process of determining the final allocation.

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4.               DEBT AND CREDIT FACILITIES

Debt consists of the following:
| ** **                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                            | ** ** | **(In thousands)**     | ** ** |
| MainLine L.P.:                                                        |       |                   |       |                  |       |
| Term Loan                                                             |       | $                      | —     |                  | $          | 173,250 |   |
| Services  Company:                                                    |       |                   |       |                  |       |
| 3.60% ESOP Notes due March 28, 2011                                   |       | 28,806                 |       | 33,617                |       |
| Retirement premium                                                    |       | (960                   | )          | (1,284                | )          |
| Buckeye:                                                              |       |                   |       |                  |       |
| 4.625% Notes due June 15, 2013                                        |       | 300,000                |       | 300,000               |       |
| 6.750% Notes due August 15, 2033                                      |       | 150,000                |       | 150,000               |       |
| 5.30% Notes due October 15, 2014                                      |       | 275,000                |       | 275,000               |       |
| 5.125% Notes due July 1, 2017                                         |       | 125,000                |       | 125,000               |       |
| Borrowings under Revolving Credit Facility                            |       | 132,000                |       | 50,000                |       |
| Total principal debt                                                  |       | 1,009,846              |       | 1,105,583             |       |
| Other, including  unamortized discounts and changes in fair value (1) |       | (885                   | )          | (923                  | )          |
| Subtotal  long-term debt                                              |       | 1,008,961              |       | 1,104,660             |       |
| Less current maturities of debt                                       |       | (6,060                 | )          | (7,811                | )          |
| Long-term debt                                                        |       | $                      | 1,002,901  |                  | $          | 1,096,849 |   |

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(1)             TheSeptember 30, 2006 amount includes $1,589,000 related to an adjustment to fairvalue associated with a hedge of fair value and $2,474,000 in unamortizeddiscounts.  The December 31, 2005 amountincludes $1,765,000 related to an adjustment to fair value associated with ahedge of fair value and $2,688,000 in unamortized discounts.

*The Partnership*

On August 9, 2006, the Partnership entered into afive-year $10 million revolving credit facility with SunTrust Bank, as bothadministrative agent and lender (the “Credit Agreement”).  At September 30, 2006, there were noborrowings against the Credit Agreement. The credit facility may be used forworking capital and other partnership purposes. The Partnership has pledged allof the limited liability company interests in Buckeye GP to SunTrust Bank assecurity for its obligations under the Credit Agreement.

The Credit Agreement permits the Partnership to prepayall loans under the credit facility at any time without premium or penalty(other than customary LIBOR breakage costs). Borrowings under the Credit Agreement bear interest under one of tworate options, selected by the Partnership, equal to either:

·                  the greater of(1) the federal funds rate plus 0.5% and (2) SunTrust Bank’s prime commerciallending rate; or

·                  LIBOR, plus amargin which can range from 0.40% to 1.40%, based on the ratings assigned byStandard & Poor’s Rating Services and Moody’s Investor Services to thesenior unsecured non-credit enhanced long-term debt of Buckeye.

The Partnership’s ability to borrow amounts under theCredit Agreement is subject to satisfaction of certain customary conditionsprecedent to revolving loans and compliance with terms and conditions includedin the Credit Agreement.

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The Credit Agreement defines “Restricted Subsidiaries”as certain of the Partnership’s and certain of its wholly owned subsidiaries.

The Credit Agreement requires the Partnership tomaintain leverage and funded debt coverage ratios. The leverage ratio covenantrequires the Partnership to maintain, as of the last day of each fiscalquarter, a ratio of the total funded indebtedness of the Partnership and itsRestricted Subsidiaries, measured as of the last day of each fiscal quarter, tothe aggregate dividends and distributions received by the Partnership and itsRestricted Subsidiaries from Buckeye, plus all other cash received by thePartnership and the Restricted Subsidiaries, measured for the preceding twelvemonths, less expenses, of not more than 2.50 to 1.00. The funded debt coverageratio covenant requires the Partnership to maintain, as of the last day of eachfiscal quarter, a ratio of total consolidated funded debt of the Partnershipand all of its subsidiaries to the consolidated EBITDA, as defined in theCredit Agreement, of the Partnership and all of its subsidiaries, measured forthe preceding twelve months, of not more than 5.25 to 1.00, subject to aprovision for increases to 5.75 to 1.00 in connection with future acquisitions.

The Credit Agreement prohibits the Partnership fromdeclaring dividends or distributions if any default or event of default, asdefined in the Credit Agreement, has occurred or would result from such adeclaration. In addition, the Credit Agreement contains covenants andprovisions requiring the Partnership to adhere to certain covenants andlimiting the ability of the Partnership and its Restricted Subsidiaries to,among other things:

·                  incur orguarantee indebtedness;

·                  make certainnegative pledges and grant certain liens;

·                  make certainloans, acquisitions and investments;

·                  make anymaterial changes to the nature of the Partnership or Restricted Subsidiaries’business; or

·                  enter into amerger, consolidation or sale of assets.

If an event of default exists under the CreditAgreement, the lender will be able to terminate the Credit Agreement andaccelerate the maturity of all outstanding loans, as well as exercise otherrights and remedies.  The following aresome of the events which would constitute an event of default under the CreditAgreement:

·                  failure to payany principal, interest, fees, expenses or other amounts when due;

·                  failure of anyrepresentation or warranty to be true and correct in any material respect;

·                  failure toperform or otherwise comply with the covenants in the Credit Agreement or otherloan documents, subject to certain grace periods;

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

·                  bankruptcy orinsolvency events involving the Partnership;

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

·                  a change incontrol of the Partnership (as such term is defined in the Credit Agreement);

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·                  the invalidityor unenforceability of any material provision in the Credit Agreement orrelated documents; and

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

*MainLine L.P.*

Prior to August 9, 2006, MainLine was party to aSenior Secured Credit Facility (“Term Loan”) with a consortium of financialinstitutions arranged by Goldman Sachs Credit Partners under which MainLine had$169.0 million outstanding.  Borrowingsunder the Term Loan bore interest under one of two variable rate optionsselected by MainLine.

The Term Loan had replaced MainLine’s $100,000,000Senior Secured Credit Facility (the “Prior Term Loan”). In accordance withrequirements under the Prior Term Loan, MainLine had purchased an interest ratecap from Goldman Sachs Capital Markets, L.P. on a notional amount of $50million for $375,000.  In accordance withrequirements under the Term Loan, MainLine had entered into two interest rateswap agreements with Goldman Sachs Capital Markets L.P.

All amounts outstanding under the Term Loan of $169.0million were repaid with proceeds of the Partnership’s IPO, together with cashon hand, on August 9, 2006.  Inconnection with the repayment of the Term Loan in the third quarter of 2006,the Partnership expensed $1.6 million of previously deferred financing costs,and recorded a reduction to interest and debt expense of $1.9 million as aresult of liquidating the interest rate cap and the two interest rate swaps.

*Services Company*

Services Company’s debt consists of 3.60% SeniorSecured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOPto a third-party lender. The 3.60% ESOP Notes were issued May 4, 2004.  The 3.60% ESOP Notes are collateralized byServices Company’s common stock and are guaranteed by Services Company. Inaddition, Buckeye has committed that, in the event that the value of Buckeye’sLP units owned by Services Company falls below 125% of the balance payableunder the 3.60% ESOP Notes, Buckeye will fund an escrow account with sufficientassets to bring the value of the total collateral (the value of Buckeye’s LPunits owned by Services Company and the escrow account) up to the 125% minimum.Amounts deposited in the escrow account are returned to Buckeye when the valueof Buckeye’s LP units owned by Services Company’s returns to an amount which exceedsthe 125% minimum. At September 30, 2006, the value of Buckeye’s LP units ownedby Services Company exceeded the 125% requirement.

*Buckeye*

Buckeye has a $400 million 5-year revolving creditfacility (“Buckeye’s Credit Facility”) with a syndicate of banks led bySunTrust Bank. Buckeye’s Credit Facility contains a one-time expansion featureto $550 million subject to certain conditions. Borrowings under Buckeye’sCredit Facility are guaranteed by certain of Buckeye’s subsidiaries. Buckeye’sCredit Facility matures on August 6, 2009. The weighted average interest rateon amounts outstanding under Buckeye’s Credit Facility at September 30, 2006was 5.9%.

Borrowings under Buckeye’s Credit Facility bearinterest under one of two rate options, selected by Buckeye, equal to either(i) the greater of (a) the federal funds rate plus one half of one percent and(b) SunTrust Bank’s prime rate or (ii) the LIBOR plus an applicable margin. Theapplicable margin is determined based on ratings assigned by Standard & Poor’sand Moody’s Investor Services for Buckeye’s senior unsecured non-creditenhanced long-term debt. The applicable margin will increase during any periodin which Buckeye’s Funded Debt Ratio (described below) exceeds 5.25 to 1.0. AtSeptember 30, 2006 and December 31, 2005, Buckeye had $132 million and $50million outstanding under Buckeye’s Credit Facility, respectively, and hadcommitted $1.7 million and $1.3 million in support of letters of credit,respectively.

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Buckeye’s Credit Facility contains covenants andprovisions that:

·                  Restrict Buckeyeand certain of its subsidiaries’ ability to incur additional indebtedness basedon certain ratios described below;

·                  Prohibit Buckeyeand certain of its subsidiaries from creating or incurring certain liens on theirproperty;

·                  Prohibit Buckeyeand certain of its subsidiaries from disposing of property material to theiroperations; and

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

Buckeye’s Credit Facility requires that Buckeye andcertain of its subsidiaries maintain a maximum “Funded Debt Ratio” and aminimum “Fixed Charge Coverage Ratio,” both of which are calculated using “AdjustedEBITDA.” Prior to the restructuring of Buckeye GP on August 9, 2006, Buckeye’s CreditFacility defined Adjusted EBITDA as earnings before interest, taxes,depreciation, depletion, amortization and incentive compensation payments toBuckeye GP, for the four preceding fiscal quarters. Incentive compensationpayments were historically included in this definition because Buckeyeaccounted for them as an expense. Because Buckeye will no longer account forthe incentive compensation as an expense, it amended its Credit Facilityeffective as of the restructuring to define Adjusted EBITDA as earnings beforeinterest, taxes, depreciation, depletion and amortization, for the fourpreceding fiscal quarters. Accordingly, calculations of Buckeye’s Funded DebtRatio and Fixed Charge Coverage Ratio that include incentive compensationpayments that are accounted for as an expense (i.e., those that became payableprior to August 9, 2006) were made using the prior definition of AdjustedEBITDA, and calculations of such ratios beginning in the fourth quarter of 2006will be made using the current definition. See Note 1 to these condensed consolidated financial statements for adescription of Buckeye GP’s restructuring.

The Funded Debt Ratio equals the ratio of thelong-term debt of Buckeye and certain of its subsidiaries (including thecurrent portion, if any) to Adjusted EBITDA. As of the end of any fiscalquarter, the Funded Debt Ratio may not exceed 4.75 to 1.00, subject to aprovision for increases to 5.25 to 1.00 in connection with future acquisitions.At September 30, 2006, Buckeye’s Funded Debt Ratio was 4.50 to 1.00.

The Fixed Charge Coverage Ratio is defined as theratio of Adjusted EBITDA to the sum of payments for interest and principal ondebt plus certain capital expenditures required for the ongoing maintenance andoperation of Buckeye’s assets.  Buckeyeis required to maintain a Fixed Charge Coverage Ratio of greater than 1.25 to1.00 as of the end of any fiscal quarter. As of September 30, 2006, Buckeye’sFixed Charge Coverage Ratio was 2.65 to 1.00.

*Covenants.* The Partnership andits subsidiaries, Services Company, and Buckeye and its Operating Subsidiariesare in compliance with the various covenants of the debt agreements atSeptember 30, 2006.

*Derivative Instruments.* AtSeptember 30, 2006, the Partnership had no trading derivative instrumentsoutstanding.  In December 2004, Buckeyeterminated an interest rate swap agreement associated with the 4.625% Notes dueJune 15, 2013 and received proceeds of $2.0 million. In accordance with FASBStatement No. 133— “Accounting for Derivative Instruments and HedgingActivities,” Buckeye has deferred the $2.0 million gain as an adjustment to thefair value of the hedged portion of its debt and is amortizing the gain as areduction of interest expense over the remaining term of the hedged debt.Interest expense was reduced by $59 thousand during each of the three monthsended September 30, 2006 and 2005 and $176 thousand during each of the ninemonths ended September 30, 2006 and 2005, related to the amortization of thegain on the interest rate swap.

*Fair Value of Financial Instruments*At September 30, 2006 and December 31, 2005, cash and cash equivalents, tradereceivables, construction and pipeline relocation receivables, prepaid andother current assets, restricted cash, and all current liabilities are reportedin the condensed consolidated balance sheets at amounts which approximate fairvalue due to the relatively short period to maturity of these financialinstruments.

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The fair value of the Partnership’s debt was estimatedto be $977 million and $1,114 million at September 30, 2006 and December 31,2005 respectively.  The value wascalculated using interest rates currently available to the Partnership forissuance of debt with similar terms and remaining maturities and approximatemarket values on the respective dates.

During the period January 1 to August 9, 2006, thePartnership had no ineffectiveness with respect to its cash flow hedges and,accordingly, no change in the fair value of the hedge was reflected in netincome.  At December 31, 2005, the fairvalue of the interest rate swaps was a non-current asset of $1.5 million.

5.  PREPAIDAND OTHER CURRENT ASSETS

Prepaid and other current assets consist of thefollowing:
|                        | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Prepaid  insurance     |       | $                       | 1,456      |                  | $          | 4,684 |   |
| Insurance  receivables |       | 8,532                   |       | 3,513                 |       |
| Ammonia  receivable    |       | 5,877                   |       | —                |       |
| Other                  |       | 6,900                   |       | 4,128                 |       |
| Total                  |       | $                       | 22,765     |                  | $          | 12,325 |   |

 

6.  ACCRUEDAND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consist of thefollowing:
|                               | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Taxes—other than  income |       | $                       | 5,831      |                  | $          | 6,569 |   |
| Environmental  liabilities    |       | 8,438                   |       | 6,996                 |       |
| Interest                      |       | 13,686                  |       | 16,648                |       |
| Retainage                     |       | 744                     |       | 639                   |       |
| Payable for ammonia  purchase |       | 5,650                   |       | —                |       |
| Compensation and  vacation    |       | 7,910                   |       | 8,751                 |       |
| Other                         |       | 16,984                  |       | 9,221                 |       |
| Total                         |       | $                       | 59,243     |                  | $          | 48,824 |   |

 

7.  (LOSS)PER UNIT

The loss per unit calculations for the periods endedSeptember 30, 2006, reflect only the results since the closing of thePartnership’s IPO on August 9, 2006. Accordingly, the results from January 1 through August 8, 2006, havebeen excluded from the calculation.  Thefollowing table presents the number of units used in computing the loss perunit and the weighted average number of units outstanding (in thousands):
|                                                                         | ** ** | **September 30, 2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| Common units  issued as part of IPO                                     |       | 16,438                           |       |
| Common units  sold as part of IPO                                       |       | 10,500                           |       |
| Management units  issued as part of IPO                                 |       | 1,362                            |       |
| Total units outstanding                                                 |       | 28,300                           |       |
|                                                                    |       |                             |       |
| *Weighted average  number of units outstanding — basic and diluted |       | 27,891                           |       |

 

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*For the periods ended September 30, 2006, 409,000 ofnon-vested Management Units were excluded from the calculation of the dilutedloss per unit because their effect would be anti-dilutive.

8. UNIT-BASED COMPENSATION

Prior to January 1, 2006, management accounted for itsunit-based compensation plans using the recognition and measurement provisionsof Accounting Principles Board Opinion No. 25 (“APB No. 25”), and relatedinterpretations, as permitted by Statement of Financial Accounting StandardsNo. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amendedby Statement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure” (“SFAS No. 148”). 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”), for both of its unitoption plans using the modified prospective basis transition method.

The Partnership has two unit-based compensation plans.

*Option Plan*

Buckeye has a Unit Option and Distribution EquivalentPlan (the “Option Plan”). The Option Plan grants options to purchase limitedpartner units (“LP units”) at 100% of the market price of the LP units on thedate of grant. Generally the options vest three years from the date of grantand expire ten years from date of grant. Buckeye recognizes compensationexpense for awards granted on or after January 1, 2006 at the grant-date fairvalue reduced by estimated forfeitures on a straight-line basis over therequisite service period. The impact of adopting the accounting provisions ofSFAS No. 123R for the Option Plan is immaterial to the condensed consolidatedfinancial statements.

*Unit CompensationPlan*

MainLine had a Unit Compensation Plan utilizing the BUnits issued to senior management of MainLine. On May 4, 2004, MainLine issued16,216,668 B Units to certain members of senior management for noconsideration. The B Units were subordinate to the A Units. One half, or8,108,334, of the B Units (“Time Based B Units”) vested ratably over fiveyears. The remainder, or 8,108,334 of the B Units (“Performance Based B Units”)vested over five years only if certain performance targets based on theincentive compensation received by MainLine from Buckeye were met.

Coincident with the IPO, the equity interests ofMainLine were exchanged for the equity interests of the Partnership.  The total 149,950,000 of A Units and GP Unitsof MainLine were exchanged for 16,438,000 Common Units of the Partnership.  The 16,216,668 B Units of MainLine wereexchanged for 1,362,000 Management Units of the Partnership.  The 9% cumulative annual return on MainLine’sA Units and GP Units was eliminated as part of the exchange.  The Management Units are exchangeable forCommon Units on a 1 to 1 basis at the option of the holder.  The vesting schedule of the Management Unitsof the Partnership varies from that of MainLine’s B Units for which they wereexchanged.  Seventy percent, or 953,400Management Units, were vested immediately upon their exchange, and theremaining 30% or 408,600 of the Management Units vest over a three year periodwith 136,200 of the Units vesting on each May 4, of 2007, 2008 and 2009.

MainLine recorded no compensation expense for the TimeBased B Units for the three and nine month periods ended September 30, 2006 and2005. Although the grant date of May 4, 2004 represented the measurement datefor the Time Based B Units (the date both the number of units available forpurchase and the purchase price (zero) were known), there was a nominal fairvalue for these units at the grant date. Under the modified prospectivetransition method permitted by SFAS No. 123R, compensation expense for the TimeBased B Units subsequent to January 1, 2006 is measured based on the nominalfair value established at the grant date.

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Prior to January 1, 2006, MainLine recognized deferredcompensation for the Performance Based B Units when it was probable that theperformance target specified in MainLine’s partnership agreement would be met.The cost of this deferred compensation was recognized over the respectiveservice periods of the performance targets until December 31, 2005. MainLinerecorded compensation expense for the Performance Based B Units of $0.7 millionand $2.6 million in general and administrative expenses in the condensedconsolidated statements of income in the three and nine month periods endedSeptember 30, 2005, respectively.  Underthe modified prospective transition method permitted by SFAS No. 123R,compensation expense for the Performance Based B Units subsequent to January 1,2006 is measured based on the nominal fair value established at the grantdate.  Accordingly, MainLine recorded nocompensation expense related to the Performance Based B Units subsequent toDecember 31, 2005.

As noted above, in connection with the IPO, on August9, 2006 the holders of MainLine’s B Units exchanged all of the B Units for1,362,000 Management Units of the Partnership. Under the provisions of SFAS No.123R, the Partnership recognized deferred compensation for the Management Unitsfor which both  (i) vesting was acceleratedcompared to the B Units, and (ii) were now deemed probable of vesting comparedto the Partnership’s previous estimates. The Partnership determined that these criteria applied to 272,400Management Units, the fair value of which was $4.6 million at August 9,2006.  There are no additional ManagementUnits available for grant in connection with the Unit Compensation Plan.

Of the total deferred compensation recognized of $4.6million, the Partnership recognized approximately $3.3 million as an expense inthe third quarter of 2006 (with an offsetting increase in Partners’ Capital)and will recognize the balance of $1.3 million as an expense ratably in futureperiods ending May 4, 2009.

9.  PENSIONSAND OTHER POSTRETIREMENT BENEFITS

Services Company sponsors a retirement income guarantyplan (the “Defined Benefit Plan”), which is a defined benefit plan andgenerally guarantees employees hired before January 1, 1986 a retirementbenefit at least equal to the benefit they would have received under apreviously terminated defined benefit plan. Services Company’s policy is to fund the Defined Benefit Plan withamounts necessary to at least meet the minimum funding requirements underERISA.

Services Company also provides postretirement healthcare and life insurance benefits to certain of its retirees (“PostretirementBenefit”).  To be eligible for thesebenefits, an employee must have been hired prior to January 1, 1991 withrespect to health care benefits and January 1, 2002 with respect to lifeinsurance benefits, and the employee must satisfy certain age and servicerequirements.  Services Company does notpre-fund this postretirement benefit obligation.

In the three months ended September 30, 2006 and 2005,the components of the net periodic benefit cost recognized by the Partnershipfor the Defined Benefit Plan and postretirement health care and life insuranceplan were as follows:
| ** **                              | ** ** | **Pension Benefits** | ** ** | **Postretirement  Benefits** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2006**                  | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**   | ** ** |
| Components of net periodic benefit cost |       |                      |       |                         |       |   |   |   |   |
| Service cost                            |       | $                         | 231        |                         | $          | 258 |   | $ | 193 |   | $ | 203 |   |
| Interest cost                           |       | 250                       |       | 264                          |       | 709 |   | 689 |   |
| Expected return on plan assets          |       | (211                      | )          | (195                         | )          | — |   | — |   |
| Amortization of prior service  benefit  |       | (113                      | )          | (120                         | )          | (208 | ) | (86 | ) |
| Amortization of unrecognized  losses    |       | 152                       |       | 213                          |       | 469 |   | 144 |   |
| Net periodic benefit cost               |       | $                         | 309        |                         | $          | 420 |   | $ | 1,163 |   | $ | 950 |   |

 

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In the nine months ended September 30, 2006 and 2005,the components of the net periodic benefit cost recognized by the Partnershipfor the Defined Benefit Plan and postretirement health care and life insuranceplan were as follows:
| ** **                              | ** ** | **Pension Benefits** | ** ** | **Postretirement  Benefits** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2006**                  | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**   | ** ** |
| Components of net periodic benefit cost |       |                      |       |                         |       |   |   |   |   |
| Service cost                            |       | $                         | 692        |                         | $          | 718 |   | $ | 643 |   | $ | 612 |   |
| Interest cost                           |       | 750                       |       | 734                          |       | 2,159 |   | 2,066 |   |
| Expected return on plan assets          |       | (634                      | )          | (543                         | )          | — |   | — |   |
| Amortization of prior service  benefit  |       | (340                      | )          | (334                         | )          | (458 | ) | (259 | ) |
| Amortization of unrecognized  losses    |       | 458                       |       | 591                          |       | 1,019 |   | 431 |   |
| Net periodic benefit cost               |       | $                         | 926        |                         | $          | 1,166 |   | $ | 3,363 |   | $ | 2,850 |   |

 

The Partnership previously disclosed in its financialstatements for the year ended December 31, 2005 that a minimum fundingcontribution was not required to be made during 2006.  However, a voluntary contribution ofapproximately $575,000 was made to the plan in September of 2006.

10.  SEGMENTINFORMATION

All of the Partnership’s operations are conductedthrough Buckeye and its Operating Subsidiaries. Based on the financialinformation provided to senior management, Buckeye presents its operations inthree reportable operating segments: Pipeline Operations, Terminalling and Storage and Other Operations. ThePartnership also has certain consolidated-level assets, principally consistingof goodwill, which are not allocable to the individual reporting segmentsbecause they are not used by the chief operating decision maker to makeoperating decisions or to allocate resources. However, Buckeye has recordedapproximately $11.4 million of goodwill in its Terminalling and Storagesegment.  The Partnership’s reportableoperating segments are:

*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 transportsthese products to other locations for a tariff charge.  This segment owns and operates approximately5,350 miles of pipelines in the following states: California, Colorado,Connecticut, Florida, Illinois, Indiana, Kansas, Massachusetts, Michigan,Missouri, New Jersey, Nevada, New York, Ohio, Pennsylvania and Tennessee.  This segment also includes the operations ofBuckeye NGL.

*Terminalling andStorage*

The Terminalling and Storage segment provides bulkstorage and terminal throughput services. This segment owns and operates 45 terminals that have the capacity tostore an aggregate of approximately 17.6 million barrels of refined petroleumproducts.  The terminals are located inIllinois, Indiana, Massachusetts, Michigan, Missouri, New York, Ohio andPennsylvania.

*Other Operations*

The Other Operations segment consists primarily ofBuckeye’s contract operation and maintenance of third-party pipelines, whichare owned primarily by major petrochemical companies and are located inTexas.  This segment also performspipeline construction management services, typically for cost plus a fixed fee,for these same customers.  The OtherOperations segment also includes Buckeye’s ownership and operation of interestsin two petrochemical pipelines.

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Financial information about each segment is presentedbelow. Each segment uses the same accounting policies as those used in thepreparation of the Partnership’s condensed consolidated financial statements.All inter-segment revenues, operating income and assets have beeneliminated.  All periods are presented ona consistent basis.
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(In thousands)**                              | ** ** | **(In thousands)**                             | ** ** |
| Revenues:                       |       |                                                 |       |                                                |       |   |   |   |   |
| Pipeline Operations             |       | $                                                    | 91,188     |                                                | $          | 79,563 |   | $ | 259,592 |   | $ | 226,938 |   |
| Terminalling and Storage        |       | 18,661                                               |       | 15,774                                              |       | 55,271 |   | 47,921 |   |
| Other Operations                |       | 6,670                                                |       | 7,029                                               |       | 18,896 |   | 25,312 |   |
| Total                           |       | $                                                    | 116,519    |                                                | $          | 102,366 |   | $ | 333,759 |   | $ | 300,171 |   |
|                            |       |                                                 |       |                                                |       |   |   |   |   |
| Operating  income:              |       |                                                 |       |                                                |       |   |   |   |   |
| Pipeline Operations             |       | $                                                    | 35,440     |                                                | $          | 32,780 |   | $ | 101,106 |   | $ | 91,195 |   |
| Terminalling and Storage        |       | 3,325                                                |       | 4,828                                               |       | 15,803 |   | 17,866 |   |
| Other Operations                |       | 1,571                                                |       | 2,088                                               |       | 4,265 |   | 5,436 |   |
| Total                           |       | $                                                    | 40,336     |                                                | $          | 39,696 |   | $ | 121,174 |   | $ | 114,497 |   |
|                            |       |                                                 |       |                                                |       |   |   |   |   |
| Depreciation and  amortization: |       |                                                 |       |                                                |       |   |   |   |   |
| Pipeline Operations             |       | $                                                    | 8,365      |                                                | $          | 6,952 |   | $ | 24,454 |   | $ | 19,802 |   |
| Terminalling and Storage        |       | 1,528                                                |       | 971                                                 |       | 3,774 |   | 2,966 |   |
| Other Operations                |       | 430                                                  |       | 326                                                 |       | 1,217 |   | 979 |   |
| Total                           |       | $                                                    | 10,323     |                                                | $          | 8,249 |   | $ | 29,445 |   | $ | 23,747 |   |

 
|                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(In thousands)**                             | ** ** |
|                     |       |                                                |       |   |   |
| Capital expenditures:    |       |                                                |       |   |   |
| Pipeline Operations      |       | $                                                   | 48,425     |   | $ | 48,104 |   |
| Terminalling and Storage |       | 11,038                                              |       | 3,449 |   |
| Other Operations         |       | 2,755                                               |       | 353 |   |
| Consolidating-level      |       | 106                                                 |       | — |   |
| Total                    |       | $                                                   | 62,324     |   | $ | 51,906 |   |
|                     |       |                                                |       |   |   |
| Acquisitions:            |       |                                                |       |   |   |
| Pipeline Operations      |       | $                                                   | 79,826     |   | $ | 153,592 |   |
| Terminalling and Storage |       | 13,504                                              |       | 25,221 |   |
| Total                    |       | $                                                   | 93,330     |   | $ | 178,813 |   |

 
|                          | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** |
| *Assets:                 |       |                    |       |                  |       |
| Pipeline Operations      |       | $                       | 1,580,655  |                  | $          | 1,466,512 |   |
| Terminalling and Storage |       | 310,130                 |       | 288,972               |       |
| Other Operations         |       | 67,915                  |       | 61,383                |       |
| Consolidating-level      |       | 217,257                 |       | 223,965               |       |
| Total                    |       | $                       | 2,175,957  |                  | $          | 2,040,832 |   |

 

* All equity investments are included in the assets of PipelineOperations.

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11.  CASHDISTRIBUTIONS

The Partnership generally makes quarterly cashdistributions of substan­tially all of its available cash, generally defined asconsolidated cash receipts less consolidated cash expenditures and suchretentions for working capital, anticipated cash expenditures and contingenciesas MainLine Management deems appropriate. On October 26, 2006, MainLine Management declared a cash distribution of$0.125 per unit (after the proration described below) payable on November 30,2006 to Unitholders of record on November 6, 2006. As described in theprospectus contained in the Partnership’s registration statement on Form S-1,as amended (Registration No. 333-133433), that was filed with the Securitiesand Exchange Commission on July 25, 2006, the initial quarterly distributionresulted from the Partnership’s proration of its available cash from the thirdquarter based upon the portion of the third quarter beginning on the closingdate of the Partnership’s IPO, which was August 9, 2006, to the end of thequarter on September 30, 2006.  The totalcash distribution to Unitholders with respect to the distribution of $0.125 perunit will amount to approximately $3,537,500. As further described in the prospectus contained in the registrationstatement, the Partnership will use its available cash remaining after paymentof the distribution to make distributions to its pre-IPO equity owners, and topay cash bonuses of up to $2.0 million to officers of MainLine Management andto certain employees of Services Company. Included in these bonuses will be aone-time cash bonus of up to $700,000 payable to William H. Shea, Jr., aone-time cash bonus of up to $650,000 payable to Stephen C. Muther and aone-time cash bonus of up to $650,000 payable to Robert B. Wallace.

12.  RECENTACCOUNTING 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 Partnership does not expect that the adoption of FIN 48will have a material impact on its financial statements.

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.  The Partnershipis still determining the impact, if any, of the adoption of SFAS No. 157 on itsfinancial statements.

In September 2006, the FASB adopted Statement ofFinancial Accounting Standards No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires companies to recognize a net liabilityor asset and an offsetting adjustment to accumulated other comprehensive incomein connection with reporting on the funded status of defined benefit pensionand other postretirement benefit plans. SFAS No. 158 requires prospectiveapplication, and the recognition and disclosure requirements are effective forthe Partnership’s fiscal year ending December 31, 2006. Additionally,SFAS No. 158 requires companies to measure plan assets andobligations at their year-end balance sheet date.  This requirement is effective for fiscalyears ending after December 15, 2008.  Itis estimated that upon adoption of SFAS No. 158, Buckeye will record an initialincrease in liabilities, and an offsetting reduction to accumulated othercomprehensive income and equity, in the range of $15.0 to $17.0 million in thefourth quarter of 2006 to record the funded status of its defined benefitpension and post retirement healthcare and life insurance benefit.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB No. 108”). SAB No. 108 providesguidance on how prior year misstatements should be taken into considerationwhen quantifying misstatements in current year financial statements forpurposes of determining 

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whether the current year’sfinancial statements are materially misstated. SAB No. 108 becomeseffective for fiscal years ending after November 15, 2006.  The Partnership does not expect that theadoption of SAB No. 108 will have an impact on its financial statements.

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

RESULTS OFOPERATIONS

*Overview*

Buckeye GP Holdings L.P. (the “Partnership”) is aDelaware limited partnership formed on June 15, 2006 in order to facilitate thereorganization of MainLine L.P. (“MainLine”) and its affiliates and to effectan initial public offering (“IPO”) of Common Units of the Partnership.  The reorganization and IPO occurred on August9, 2006.  Following the IPO, thePartnership’s limited partnership units are owned approximately 54% byaffiliates of Carlyle/Riverstone Global Energy and Power Fund II, L.P. (“Carlyle/Riverstone”),approximately 9% by certain members of Buckeye GP’s senior management andapproximately 37% by the public.  ThePartnership had no activity prior to the IPO. Prior to the IPO, MainLine owned and controlled Buckeye GP LLC (“BuckeyeGP”), which is the general partner of Buckeye Partners, L.P. (“Buckeye”), apublicly traded Delaware master limited partnership.

Coincident with the IPO, the equity interests ofMainLine were exchanged for the equity interests of the Partnership.  MainLine’s 149,950,000 A Units were exchangedfor 16,438,000 Common Units of the Partnership. MainLine’s 16,216,668 B Unitswere exchanged for 1,362,000 Management Units of the Partnership. TheManagement Units are exchangeable for Common Units on a 1 to 1 basis at theoption of the holder.  This exchange ofequity interests was accounted for as a transfer between entities under commoncontrol in accordance with Statement of Financial Accounting Standards No. 141,“Business Combinations.” Accordingly, the financial information for thePartnership included in this report includes the financial information ofMainLine as the predecessor to the Partnership.

On August 9, 2006, the Partnership sold 10.5 millioncommon units in the IPO, the net proceeds of which were approximately $168.5million.  The Partnership used the netproceeds from the IPO, along with cash on hand, to repay all outstandingindebtedness under a Senior Secured Credit Facility with a consortium offinancial institutions arranged by Goldman Sachs Credit Partners (the “TermLoan”) and to make distributions to its pre-IPO equity owners.  The common units sold in the IPO representapproximately 37.1% of the outstanding equity of the Partnership, whichincluded the Common Units and the Management Units.

As a result of the exchange of equity interests, thePartnership recorded non-cash compensation expense of approximately $3.3million (with an offsetting increase in equity) in the third quarter of 2006related to a change in the scheduled vesting of the Partnership’s ManagementUnits compared to the scheduled vesting of MainLine’s B Units.  The Partnership also anticipates annualcharges of approximately $0.5 million per year during the new vesting periodwhich ends May 4, 2009.

The Partnership also recorded non-cash interest anddebt expense of approximately $1.6 million in the third quarter of 2006 relatedto the write-off of previously deferred financing costs associated with theTerm Loan repaid on August 9, 2006.

The Partnership also recorded a $1.9 million reductionof interest and debt expense due to the liquidation of cash flow hedgesresulting from the repayment of the Partnership’s Term Loan.

The Partnership’s only cash-generating asset is itsownership interest in Buckeye GP, which owns (i) general partner units, or GPUnits, in Buckeye, (ii) incentive distribution rights in Buckeye, (iii) 80,000limited partnership units, or LP Units, in Buckeye and (iv) an approximate onepercent general partner interest in each of Buckeye’s subsidiary operatingpartnerships.  The Partnership’s cashflow is, therefore, directly dependent upon the ability of Buckeye and itsoperating subsidiaries to make cash distributions to Buckeye’s partners. Theactual amount of cash that Buckeye will have available for distribution willdepend primarily on Buckeye’s ability to generate cash beyond its workingcapital requirements.

In connection with the IPO, the Partnership andBuckeye GP restructured the ownership of Buckeye GP.  MainLine Sub LLC (“MainLine Sub”), which wasthen a wholly-owned subsidiary of the Partnership and the owner 

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of Buckeye GP, assignedall of its rights under the Fourth Amended and Restated Incentive CompensationAgreement, dated as of December 15, 2004, between MainLine Sub and Buckeye toBuckeye GP.  Thereafter, Buckeye andBuckeye GP amended and restated that agreement by entering into the Fifth Amendedand Restated Incentive Compensation Agreement, dated as of August 9, 2006 (the “IncentiveCompensation Agreement”).  On August 9,2006, Buckeye and Buckeye GP also entered into the Amended and RestatedAgreement of Limited Partnership of Buckeye Partners, L.P. (the “PartnershipAgreement”).  The amendments to theIncentive Compensation Agreement and the Partnership Agreement reflect theassignment of the Incentive Compensation Agreement to Buckeye GP andrecharacterize the payments Buckeye GP receives under the IncentiveCompensation Agreement and the Partnership Agreement as distributions inrespect of its general partner interest rather than compensation payments.  On August 18, 2006, MainLine Sub was mergedwith and into the Partnership.  However,Buckeye’s recording of incentive payments as equity distributions rather thanan expense will likely result in a relative increase in reported net income forBuckeye, and a change in the method of attribution of that income, forfinancial reporting purposes, between Buckeye GP and Buckeye’s LP Unitholders.

As discussed above, none of these changes affect theamount or timing of cash distributions or incentive distributions from Buckeyeto the Partnership.  Buckeye’s criteriafor determining the amount of cash distributions and its policies regarding thetiming of such cash distributions remain unchanged.  Because the quarterly unit distribution wasdeclared prior to August 9, 2006 and, therefore, the related incentivecompensation attributable to Buckeye GP became payable prior to such date,incentive compensation paid in the third quarter of 2006 was recorded as anexpense by Buckeye, consistent with Buckeye’s prior practice.  Commencing with the fourth quarter of 2006,Buckeye will cease recording incentive compensation payable to Buckeye GP as anexpense and instead will record such payments as distributions from equity.

*Overview ofBuckeye*

Buckeye is a master limited partnership which operatesthrough subsidiary entities (the “Operating Subsidiaries”).  These Operating Subsidiaries are Buckeye PipeLine Company, L.P. (“Buckeye Pipe Line”), Laurel Pipe Line Company, L.P. (“Laurel”),Everglades Pipe Line Company, L.P. (“Everglades”), Buckeye Pipe Line Holdings,L.P. (“BPH”), Wood River Pipe Lines LLC (“Wood River”), Buckeye Pipe LineTransportation LLC (“BPL Transportation”) and Buckeye NGL Pipe Lines LLC (“BuckeyeNGL”). Buckeye is principally engaged in the transportation, terminalling andstorage of refined petroleum products on a fee basis through facilities ownedand operated by Buckeye.  Buckeye alsooperates and maintains pipelines owned by third parties under contracts withmajor integrated oil and chemical companies, and performs certain constructionactivities, generally for the owners of these third-party pipelines.

In May 2005, Buckeye acquired a refined petroleumproducts pipeline system comprising approximately 478 miles of pipeline andfour refined products terminals with aggregate storage capacity ofapproximately 1.3 million barrels located in the northeastern United Statesfrom affiliates of ExxonMobil Corporation (the “Northeast Pipelines andTerminals”) for approximately $175.0 million. In December 2005, Buckeye acquired a refined petroleum products terminaland related assets (including certain railroad offloading facilities) locatedin Taylor, Michigan for $20 million.  OnJanuary 1, 2006, Buckeye acquired a refined petroleum products terminal locatedin Niles, Michigan, with aggregate storage capacity of 630,000 barrels fromaffiliates of Shell for $13.0 million. On January 31, 2006, Buckeye acquired a natural gas liquids pipeline(the “NGL Pipeline”) with aggregate mileage of approximately 350 miles from BPPipelines (North America) Inc. for approximately $87.0 million, which includesa deposit of $7.7 million paid in December 2005.  The NGL Pipeline extends generally fromWattenberg, Colorado to Bushton, Kansas. The acquired assets have been included in Buckeye’s operations fromtheir dates of acquisition.  The assetacquisitions completed in 2005 and 2006 added $4.4 million of revenue in thethree months ended September 30, 2006 and $18.3 million of revenue in the ninemonths ended September 30, 2006.

The following discussion provides an analysis of theresults for each of Buckeye’s operating segments, an overview of its liquidityand capital resources and other items related to the Partnership, Buckeye andServices Company.  The followingdiscussion and analysis should be read in conjunction with (i) the accompanyinginterim condensed consolidated financial statements and related notes and (ii)the Partnership’s consolidated financial statements, related notes andmanagement’s discussion and analysis of financial condition and results ofoperations for the year ended December 31, 2005 included in the Partnership’sregistration statement on Form S-1, as amended (Registration No.333-133433) and as filed with the Securities and Exchange Commission on July25,  2006.

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Buckeye’s business comprises three operating segments:Pipeline Operations, Terminalling and Storage and Other Operations.  The business of each operating segment is:

*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. As of September 30, 2006, this segment owned and operated approximately5,350 miles of pipeline in the following states: California, Colorado,Connecticut, Florida, Illinois, Indiana, Kansas, Massachusetts, Michigan,Missouri, New Jersey, Nevada, New York, Ohio, Pennsylvania and Tennessee.  This segment also includes the operations ofthe NGL Pipeline.

*Terminalling andStorage*

The Terminalling and Storage segment provides bulkstorage and terminal throughput services. This segment owns and operates 45 active terminals with the capacity tostore an aggregate of approximately 17.6 million barrels of refined petroleumproducts.  The terminals are located inIllinois, Indiana, Massachusetts, Michigan, Missouri, New York, Ohio andPennsylvania.

*Other Operations*

The Other Operations segment consists primarily ofBuckeye’s contract operation and maintenance of third-party pipelines, whichare owned primarily by major petrochemical companies and are located inTexas.  This segment also performspipeline construction management services, typically for cost plus a fixed fee,for these same customers.  The OtherOperations segment also includes Buckeye’s ownership and operation of interestsin two petrochemical pipelines.

*Results ofOperations*

Summary operating results for the Partnership were asfollows:
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                        | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**          | ** ** | **(In thousands)**         | ** ** |
| Revenue                                                           |       | $                                | 116,519    |                            | $          | 102,366 |   | $ | 333,759 |   | $ | 300,171 |   |
| Costs and  expenses                                               |       | 76,183                           |       | 62,670                          |       | 212,585 |   | 185,674 |   |
| Operating income                                                  |       | 40,336                           |       | 39,696                          |       | 121,174 |   | 114,497 |   |
| Other income  (expenses)                                          |       | (14,623                          | )          | (13,710                         | )          | (45,941 | ) | (40,414 | ) |
| Income before  equity income and non-controlling interest expense |       | 25,713                           |       | 25,986                          |       | 75,233 |   | 74,083 |   |
| Equity income                                                     |       | 1,803                            |       | 1,213                           |       | 4,598 |   | 3,678 |   |
| Non-controlling  interest expense                                 |       | (26,012                          | )          | (24,728                         | )          | (74,101 | ) | (72,143 | ) |
| Net income                                                        |       | $                                | 1,504      |                            | $          | 2,471 |   | $ | 5,730 |   | $ | 5,618 |   |

 

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Revenues and operating income by operating segment forthe three months ended September 30, 2006 and 2005 were as follows:
|                          | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(In thousands)**                              | ** ** |
| Revenues:                |       |                                                 |       |   |   |
| Pipeline Operations      |       | $                                                    | 91,188     |   | $ | 79,563 |   |
| Terminalling and Storage |       | 18,661                                               |       | 15,774 |   |
| Other Operations         |       | 6,670                                                |       | 7,029 |   |
| Total                    |       | $                                                    | 116,519    |   | $ | 102,366 |   |
|                     |       |                                                 |       |   |   |
| Operating  income:       |       |                                                 |       |   |   |
| Pipeline Operations      |       | $                                                    | 35,440     |   | $ | 32,780 |   |
| Terminalling and Storage |       | 3,325                                                |       | 4,828 |   |
| Other Operations         |       | 1,571                                                |       | 2,088 |   |
| Total                    |       | $                                                    | 40,336     |   | $ | 39,696 |   |

 

*Third Quarter*

Total revenues for the quarter ended September 30,2006 were $116.5 million, $14.1 million or 13.8% greater than revenue of $102.4million in 2005.

*PipelineOperations:*

Revenue from Pipeline Operations was $91.2 million forthe quarter ended September 30, 2006 compared to $79.6 million for the quarterended September 30, 2005. The net increase in revenue from Pipeline Operationsof $11.6 million was primarily the result of:

·                  BuckeyeNGL revenue of $3.2 million (Buckeye NGL’s assets were acquired on January 31,2006);

·                  a4.3%, or $1.9 million, increase in gasoline transportation revenue, even thoughgasoline volumes delivered declined by 1.1%;

·                  a14.5%, or $1.9 million, increase in jet fuel transportation revenue on an 8.8%increase in jet fuel volumes delivered;

·                  an8.6%, or $1.5 million increase in distillate transportation revenue, eventhough distillate volumes delivered declined by 3.5%;

·                  anincrease in liquefied petroleum gas (“LPG”) and other product transportationrevenue of $0.6 million as a result of higher tariffs and an increase involumes delivered;

·                  a$1.0 million increase in incidental revenue and rental revenue primarily fromincreased revenues under a product supply arrangement in connection with WesPacPipeLines - Reno, LLC (“WesPac-Reno”) ;

·                  a$1.1 million increase in other revenues principally resulting from  a pipeline and terminal project serving theMemphis International Airport (the “Memphis Terminal”), which was commissionedearlier in 2006;

23

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·                  a$0.4 million increase in operating services revenue due to an increase inreimbursable maintenance and inspection activities under an operating servicescontract; and

·                  a$1.5 million decrease in transportation settlement revenue, representingprimarily the settlement of overages and shortages on product deliveries.

Product deliveries for each of the quarters endedSeptember 30, 2006 and 2005 were as follows:
|             | ** ** | **Barrels Per Day**                            | ** ** |
|-------------|------------|----------------------------------------------------------|------------|
| ** **  | ** ** | **Three Months Ended September 30,** | ** ** |
| **Product** | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| Gasoline    |       | 742,700                                                  |       | 750,700 |   |
| Distillate  |       | 295,700                                                  |       | 306,400 |   |
| Jet Fuel    |       | 361,500                                                  |       | 332,400 |   |
| LPGs        |       | 27,200                                                   |       | 17,800 |   |
| NGLs        |       | 21,300                                                   |       | — |   |
| Other       |       | 8,700                                                    |       | 4,200 |   |
| Total       |       | 1,457,100                                                |       | 1,411,500 |   |

 

In the second andthird quarters of 2006, certain of Buckeye’s Operating Subsidiaries filedpipeline tariffs related to its interstate common carrier pipelines reflectingincreased rates on average of approximately 6.1%.  These tariff rate increases are expected togenerate approximately $17 million in additional revenue on an annualbasis.  Buckeye also filed with theFederal Energy Regulatory Commission, effective June 1, 2006, a tariff ratesurcharge to recover anticipated capital and operating costs associated withthe pipeline transportation of ultra low sulfur diesel fuel.  The tariff rate surcharge is expected togenerate approximately $3 million in additional revenue on an annualbasis.  The tariff rate surcharge isdesigned to permit Buckeye to recover, over time, its capital investment (and areasonable rate of return thereon) and its operating costs related toinfrastructure improvements in connection with the transportation of ultra lowsulfur diesel fuel.

*Terminalling andStorage:*

Terminalling and Storage revenues of $18.7 million forthe quarter ended September 30, 2006 increased by $2.9 million from thecomparable quarter in 2005.

Recent terminal acquisitions increased Terminallingand Storage revenues by $1.1 million for the quarter ended September 30, 2006compared to the comparable period in 2005. The increase is related to periods during which the acquired terminalswere owned compared to the comparable period in 2005 during which the acquiredterminals were not owned.

Terminalling and Storage revenues at terminals thatwere owned by Buckeye during the third quarter of 2005 through the thirdquarter of 2006 were $17.6 million for the quarter ended September 30, 2006, anincrease of $1.8 million from the third quarter of 2005, which is principallyrelated to an increase in terminal throughput volumes.

Average daily throughput for the refined productsterminals for quarters ended September 30 was as follows:
|                                    | ** ** | **Quarter Ended September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| Refined products  throughput (bpd) |       | 498,900                                        |       | 438,800 |   |

 

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*Other Operations:*

Revenue from other operations of $6.7 million for thequarter ended September 30, 2006 decreased by $0.4 million from the comparableperiod in 2005.

*OperatingExpenses:*

Costs and expenses for the three months endedSeptember 30, 2006 and 2005 were as follows:

|                                | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Payroll and  payroll benefits  |       | $                                | 24,779     |   | $ | 21,085 |   |
| Depreciation and  amortization |       | 10,323                           |       | 8,249 |   |
| Operating power                |       | 7,605                            |       | 7,423 |   |
| Outside services               |       | 10,148                           |       | 6,499 |   |
| Property and  other taxes      |       | 5,169                            |       | 4,112 |   |
| Construction  management       |       | 1,909                            |       | 2,140 |   |
| All other                      |       | 16,250                           |       | 13,162 |   |
| Total                          |       | $                                | 76,183     |   | $ | 62,670 |   |

 

Payroll and payroll benefits were $24.8 million in thethird quarter of 2006, an increase of $3.7 million compared to the thirdquarter of 2005.  The Partnershipincurred $3.3 million in payroll and payroll benefits related to its ManagementUnits.  Buckeye experienced an increaseof $0.4 million in payroll and payroll benefit expenses due to additionalemployees hired as a result of acquisitions that occurred during the previoustwelve months.  Increases in salaries andwages of $1.8 million resulted from an increase in the number of employees andovertime pay due to Buckeye’s expanded operations and higher wage rates.  Buckeye also capitalized less payroll andpayroll benefits in the third quarter of 2006 which resulted in an increase inpayroll and payroll benefits expense of $0.5 million over the third quarter of2005.  These increases were partially offsetby a reduction in ESOP related costs of $0.4 million.  Payroll and payroll benefits expense in thethird quarter of 2006, was also reduced by $0.9 million compared to the thirdquarter of 2005 as a result of a reversal in the third quarter of 2006 of approximately$0.3 million of Buckeye’s annual accrual for Services Company’s incentivecompensation plan for employees.  Buckeyealso experienced a decrease in payroll benefits of $0.1 million during thethird quarter of 2006.  Payroll andpayroll benefits expenses were also reduced by $0.7 million in unit-basedcompensation expense in the three months ended September 30, 2006 compared tothe three months ended September 30, 2005, which was due to the adoptionof  Financial Accounting Standards No.123R (revised 2004), “Share Based Payment” (“FASB No. 123R”) effective January1, 2006.

Depreciation and amortization expense was $10.3million in the third quarter of 2006, an increase of $2.1 million from thethird quarter of 2005.  Depreciationrelated to recent acquisitions was $0.9 million.  Buckeye incurred depreciation expense of $0.2million related to the Memphis Terminal which commenced operations earlier in2006.  The remaining increase resultedfrom assets placed into service during 2006.

Operating power costs were $7.6 million in the three monthsended September 30, 2006, an increase of $0.2 million from the same period in2005.  Operating power consists primarilyof electricity required to operate pumping facilities.

Outside services costs increased $3.6 million from$6.5 million in the third quarter of 2005 to $10.1 million in the third quarterof 2006.  Outside services costs relatedto acquisitions that occurred during the previous twelve months added $0.3million of outside services costs. Buckeye incurred an additional $0.1 million for pipeline inspection andmaintenance costs related to an operating service contract.  The remainder of the increase is due toadditional pipeline and tank inspections and maintenance work that occurredduring the third quarter of 2006. Outside services costs consist principally of third-party contractservices for maintenance activities.

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Property and other taxes increased by $1.1 millionfrom $4.1 million in the third quarter of 2005 to $5.2 million for the sameperiod in 2006.  An increase of $0.5million of property and other taxes was related to recent acquisitions.  The remaining increase is a result of higherreal property assessments over the same period in 2005.

Construction management costs were $1.9 million in thethird quarter of 2006, which was consistent with costs incurred in the thirdquarter of 2005.

All other costs were $16.3 million in the three monthsended September 30, 2006, an increase of $3.1 million compared to $13.2 millionin the same period in 2005.  ThePartnership incurred an increase in professional fees of $0.2 million which wasprimarily due to the Partnership’s IPO. The increase also reflects $0.5 million of costs associated with fuelpurchases by WesPac – Reno related to a product-supply arrangement; such costshave corresponding revenue included in Buckeye’s incidental revenue.  Other costs related to recent acquisitionswere $0.3 million.  Buckeye had anincrease in other expenses of $0.2 million which was related to the Memphis Terminalwhich commenced operations earlier in 2006. Buckeye experienced an increase in casualty losses of $0.6 million inthe third quarter of 2006, which loss related primarily to emergency responseand environmental remediation expenditures in connection with a petroleumproducts release at a Buckeye terminal located in Harristown, Illinois. Theremainder of the increase is due to increases in various costs resulting fromBuckeye’s expanded operations.

Costs and expenses by segment for the quarters endedSeptember 30, 2006 and 2005 were as follows:

|                           | ** ** | **Costs and Expenses by Segment** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                               | ** ** |
| Pipeline  Operations      |       | $                                                     | 55,749     |   | $ | 46,783 |   |
| Terminalling and  Storage |       | 15,335                                                |       | 10,946 |   |
| Other Operations          |       | 5,099                                                 |       | 4,941 |   |
| Total                     |       | $                                                     | 76,183     |   | $ | 62,670 |   |

 

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Other income (expenses) for the three months endedSeptember 30, 2006 and 2005 was as follows:

|                            | ** ** | **Other Income (Expenses)** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(In thousands)**               | ** ** |
| Investment  income         |       | $                                     | 317        |   | $ | 482 |   |
| Interest and  debt expense |       | (14,940                               | )          | (14,192 | ) |
| Total                      |       | $                                     | (14,623    | ) | $ | (13,710 | ) |
|                       |       |                                  |       |   |   |
| Equity income              |       | $                                     | 1,803      |   | $ | 1,213 |   |

 

Other income (expense) was a net expense of $14.6million in the third quarter of 2006, compared to a net expense of $13.7million during the same period in 2005. Investment income for the three months ended September 30, 2006 wasconsistent with investment income generated during the three months endedSeptember 30, 2005.

Interest expense was $14.9 million in the three monthsended September 30, 2006, an increase of $0.7 million from $14.2 million in thethree months ended September 30, 2005. The increase is due to higher average balances outstanding under, andhigher interest rates on, Buckeye’s 5-year revolving credit facility.  Also recorded in the third quarter of 2006 aspart of the IPO and repayment of the Term Loan was a reduction in interestexpense of $1.9 million related to the liquidation of two interest rate swapsand an interest rate cap, as well as a charge of $1.6 million related to thewrite-off of previously deferred financing costs (See Note 4 to the condensedconsolidated financial statements for a further discussion).

Equity income increased by $0.6 million in the thirdquarter of 2006 compared to the third quarter in 2005.  The increase is principally a result of equityincome earned from Buckeye’s approximate 40% interest in Muskegon Pipeline LLCwhich was acquired in December 2005.

*Nine Months*

Revenues and operating income by segment for the ninemonths ended September 30, 2006 and 2005 were as follows:

|                          | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(In thousands)**                             | ** ** |
| Revenues:                |       |                                                |       |   |   |
| Pipeline Operations      |       | $                                                   | 259,592    |   | $ | 226,938 |   |
| Terminalling and Storage |       | 55,271                                              |       | 47,921 |   |
| Other Operations         |       | 18,896                                              |       | 25,312 |   |
| Total                    |       | $                                                   | 333,759    |   | $ | 300,171 |   |
|                     |       |                                                |       |   |   |
| Operating  income:       |       |                                                |       |   |   |
| Pipeline Operations      |       | $                                                   | 101,106    |   | $ | 91,195 |   |
| Terminalling and Storage |       | 15,803                                              |       | 17,866 |   |
| Other Operations         |       | 4,265                                               |       | 5,436 |   |
| Total                    |       | $                                                   | 121,174    |   | $ | 114,497 |   |

 

Total revenue for the nine months ended September 30,2006 was $333.8 million, $33.6 million, or 11.2%, greater than revenue of$300.2 million for the same period in 2005.

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*PipelineOperations:*

Revenue from Pipeline Operations was $259.6 millionfor the nine months ended September 30, 2006 compared to $226.9 million for thenine months ended September 30, 2005. The net increase of $32.7 million inPipeline Operations revenue was primarily the result of:

·                  BPLTransportation revenue increase of $6.9 million (BPL Transportation’s assetswere acquired on May 5, 2005);

·                  Buckeye NGLrevenue of $7.8 million (Buckeye NGL’s assets were acquired on January 31,2006);

·                  a 0.7% increase,or $0.8 million, net of BPL Transportation, in gasoline transportation revenue,even though gasoline volumes delivered declined by 2.4%;

·                  a 12.2%increase, or $4.5 million, net of BPL Transportation, in jet fueltransportation revenue on a 7.1% increase in jet fuel volumes delivered;

·                  a 6.4% increase,or $3.3 million, net of BPL Transportation, in distillate transportationrevenue on comparable distillate volumes delivered;

·                  an increase inLPG transportation revenue of $1.1 million as a result of higher tariffs and anincrease in volumes delivered;

·                  a $3.4 millionincrease in incidental revenue primarily from increased revenues under aproduct supply arrangement in connection with WesPac–Reno;

·                  a $4.7 millionincrease in other revenues principally resulting from the Memphis terminal;

·                  a $1.8 millionincrease in operating services revenue due to an increase in reimbursablemaintenance and inspection activities under an operating services contract;

·                  a $1.6 millionincrease in miscellaneous rental revenue; and

·                  a decrease intransportation settlement revenue, representing the settlement of overages andshortages on product deliveries, of $4.6 million.

Product deliveries for the nine months ended September30, 2006 and 2005, including Buckeye NGL and BPL Transportation productdeliveries were as follows:

|             | ** ** | **Barrels Per Day**                           | ** ** |
|-------------|------------|---------------------------------------------------------|------------|
| ** **  | ** ** | **Nine Months Ended September 30,** | ** ** |
| **Product** | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Gasoline    |       | 722,900                                                 |       | 717,200 |   |
| Distillate  |       | 314,600                                                 |       | 312,100 |   |
| Jet Fuel    |       | 351,200                                                 |       | 320,700 |   |
| LPG’s  |       | 24,900                                                  |       | 17,900 |   |
| NGL’s  |       | 19,000                                                  |       | — |   |
| Other       |       | 9,900                                                   |       | 5,600 |   |
| Total       |       | 1,442,500                                               |       | 1,373,500 |   |

 

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*Terminalling andStorage:*

Terminalling and Storage revenues of $55.3 million forthe nine months ended September 30, 2006 increased by $7.4 million from thecomparable period in 2005.

Recent terminal acquisitions increased Terminallingand Storage revenues by $5.3 million for the nine months ended September 30,2006 compared to the comparable period in 2005. The increase is related toperiods which the acquired terminals were owned compared to the comparableperiod in 2005 during which the acquired terminals were not owned.

Terminalling and Storage revenues at existingterminals owned by Buckeye were $50.0 million for the nine months endedSeptember 30, 2006, an increase of $2.1 million from the first nine months of2005.

Average daily throughput for the refined productsterminals for the nine months ended September 30, 2006 and 2005 was as follows:

|                                    | ** ** | **Nine Months ended September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Refined products  throughput (bpd) |       | 490,800                                                 |       | 420,000 |   |

 

*Other Operations:*

Other Operations revenues of $18.9 million for thenine months ended September 30, 2006 declined by $6.4 million from thecomparable period in 2005 primarily as a result of the absence of a largeconstruction project which provided approximately $7.5 million of revenue inthe first nine months of 2005.

*OperatingExpenses:*

Costs and expenses for the nine month periods endedSeptember 30, 2006 and 2005 were as follows:

|                                | ** ** | Costs and Expenses | ** ** |
|--------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(In thousands)**      | ** ** |
| Payroll and  payroll benefits  |       | $                            | 67,288     |   | $ | 63,115 |   |
| Depreciation and  amortization |       | 29,445                       |       | 23,747 |   |
| Operating power                |       | 21,742                       |       | 19,461 |   |
| Outside services               |       | 22,383                       |       | 15,962 |   |
| Property and  other taxes      |       | 14,368                       |       | 12,312 |   |
| Construction  management       |       | 3,895                        |       | 7,496 |   |
| All other                      |       | 53,464                       |       | 43,581 |   |
| Total                          |       | $                            | 212,585    |   | $ | 185,674 |   |

 

Payroll and payroll benefits were $67.3 million in thefirst nine months of 2006, an increase of $4.2 million compared to the thirdquarter of 2005.  The Partnershipincurred $3.3 million in payroll and payroll benefits related to its ManagementUnits.  Buckeye experienced an increaseof $1.9 million in payroll and payroll benefit expenses due to additionalemployees hired as a result of acquisitions that occurred during the previoustwelve months.  Increases in salaries andwages of $4.3 million resulted from an increase in the number of employees andovertime pay due to Buckeye’s expanded operations and higher wage rates.  Buckeye experienced an increase in payrollbenefits of $0.3 million in the first nine months of 2006.  These increases were offset by an increase incapitalized payroll and payroll benefits in the first nine months of 2006,which resulted in a decrease in payroll and payroll benefits expense of $0.9million over the same period in 2005. There also was a reduction in ESOP related costs of $0.8 million.  Payroll and benefits expense was also reducedby $1.0 million in the nine months ended September 

29

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30, 2006 compared to thesame period in 2005 as a result of lower incentive compensation accruals.  In the first nine months of 2006, Buckeyeaccrued approximately $0.7 million in annual incentive compensation foremployees, compared to approximately $1.7 million in the same period of2005.  Buckeye also experienced adecrease in severance pay of $0.6 million. Payroll and payroll benefits expenses were also reduced by $2.6 millionin unit-based compensation expense in the nine months ended September 30, 2006compared to the nine months ended September 30, 2005, which was due to theadoption of FASB No. 123R effective January 1, 2006.

Depreciation and amortization expense was $29.4million for the nine months ended September 30, 2006, an increase of $5.7million from the comparable period of 2005. Depreciation related to recent acquisitions was $2.8 million.  Buckeye incurred depreciation expense of $0.4million related to the Memphis Terminal which commenced operations earlier in2006.  The remaining increase resultedfrom assets placed into service during the nine months ended September 30,2006.

Operating power costs of $21.7 million in the firstnine months of 2006 were $2.3 million higher than the same period in 2005.Recent acquisitions added $1.8 million to operating power expense. Theremainder of the increase is due to additional pipeline volumes in Buckeye’spipeline operations.  Operating powerconsists primarily of electricity required to operate pumping facilities.

Outside services costs were $22.4 million in the firstnine months of 2006, or $6.4 million greater than the same period in 2005.Outside services costs related to recent acquisitions were $0.7 million.  Buckeye incurred an additional $1.0 millionfor pipeline inspection and maintenance costs related to an operating servicecontract.  Buckeye also incurredadditional expense of $0.3 million for public awareness programs.  The remainder of the increase is due toadditional pipeline and tank inspections and maintenance work that occurredduring the first nine months of 2006.

Property and other taxes increased by $2.1 millionfrom $12.3 million in the first nine months of 2005 to $14.4 million for thesame period in 2006.  Of this increase,$1.4 million related to recent acquisitions. This increase was offset by a reimbursement of $0.9 million in 2006 forcertain property taxes under an operating service agreement.  The remainder of the increase is due tohigher real property assessments over the same period in 2005.

Construction management costs were $3.9 million in thenine months ended September 30, 2006, which is a decrease of $3.6 million fromthe same period in 2005.  The decrease isa result of the absence of a significant construction contract that wascompleted in 2005.

All other costs were $53.5 million, an increase of$9.9 million, in the first nine months of 2006 compared to the first ninemonths of 2005.  The Partnership incurredan increase in professional fees of $2.7 million which was primarily due to thePartnership’s IPO.  The increase alsoreflects $3.1 million of costs associated with fuel purchases by WesPac – Renorelated to a product-supply arrangement; such costs have corresponding revenueincluded in Buckeye’s incidental revenue. Other costs related to recent acquisitions were $1.6 million.  Buckeye had an increase in other expenses of$0.8 million which was related to the Memphis Terminal which commencedoperations earlier in 2006.  Theseincreases were partially offset by a decrease in casualty losses of $1.1million.  The remainder of the increasesrelated to various pipeline operating costs resulting from Buckeye’s expandedoperations.

Costs and expenses by segment for the nine monthsended September 30, 2006 and 2005 were as follows:

|                           | ** ** | **Costs and Expenses by Segment** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                               | ** ** |
| Pipeline  Operations      |       | $                                                     | 158,486    |   | $ | 135,743 |   |
| Terminalling and  Storage |       | 39,468                                                |       | 30,055 |   |
| Other Operations          |       | 14,631                                                |       | 19,876 |   |
| Total                     |       | $                                                     | 212,585    |   | $ | 185,674 |   |

 

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Other income (expenses) for the nine month periodsended September 30, 2006 and 2005 was as follows:

|                            | ** ** | **Other Income (Expenses)** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(In thousands)**               | ** ** |
| Investment income          |       | $                                     | 939        |   | $ | 830 |   |
| Interest and  debt expense |       | (46,880                               | )          | (41,244 | ) |
| Total                      |       | $                                     | (45,941    | ) | $ | (40,414 | ) |
|                       |       |                                  |       |   |   |
| Equity income              |       | $                                     | 4,598      |   | $ | 3,678 |   |

 

Other income (expense) was a net expense of $45.9million during the nine months ended September 30, 2006, compared to a netexpense of $40.4 million during the same period in 2005.  Investment income for the nine months endedSeptember 30, 2006 was consistent with investment income generated during thenine months ended September 30, 2005.

Interest expense was $46.9 million in the nine monthsended September 30, 2006, an increase of $5.7 million from $41.2 million in thenine months ended September 30, 2005. Buckeye incurred approximately $3.2 million in interest related to the5.125% Notes due 2017, which were issued in June 2005.  The balance of the increase in interestexpense resulted from higher average balances outstanding and interest rates onBuckeye’s 5-year revolving credit facility. Also recorded in the nine months ended September 30, 2006 as part of theIPO and repayment of the Term Loan was a reduction in interest expense of $1.9million related to the liquidation of two interest rate swaps and an interestrate cap, as well as a charge of $1.6 million related to the write-off ofpreviously deferred financing costs (See Note 4 to the condensed consolidatedfinancial statements for a further discussion).

 Equity incomeincreased by $0.9 million from the nine months ended September 30, 2005 to $4.6million for the nine months ended September 30, 2006.  The increase is a result of equity incomeearned from Buckeye’s approximate 40% interest in Muskegon Pipeline LLC whichwas acquired in December 2005.

LIQUIDITY AND CAPITAL RESOURCES

Until the Partnership’s IPO on August 9, 2006, thePartnership’s only capital requirement, apart from Buckeye’s capitalrequirements, was its debt service under its Term Loan.  Concurrent with the Partnership’s IPO, theTerm Loan was repaid in full.  Buckeye’scapital requirements consist of maintenance and capital expenditures, expendituresfor acquisitions and Buckeye’s debt service requirements.

As noted in “Overview” above, the Partnership’s onlycash-generating asset is its ownership interest in Buckeye GP, which owns (i)general partner units, or GP Units, in Buckeye, (ii) incentive distributionrights in Buckeye, (iii) 80,000 limited partnership units, or LP Units, inBuckeye and (iv) an approximate one percent general partner interest in each ofBuckeye’s subsidiary operating partnerships. The Partnership’s cash flow is, therefore, directly dependent upon theability of Buckeye and its operating subsidiaries to make cash distributions toBuckeye’s partners. The actual amount of cash that Buckeye will have availablefor distribution depends primarily on Buckeye’s ability to generate cash beyondits working capital requirements. Buckeye’s primary future sources of liquidity are operating cash flow,proceeds from borrowings under Buckeye’s revolving credit facility and proceedsfrom the issuance of Buckeye’s LP units.

As a result of the IPO, the Partnership anticipatesthat its principal use of cash will be the payment of its operating expensesand distributions to its unitholders.

The Partnership generally makes quarterly cashdistributions of substantially all of its available cash, generally defined asconsolidated cash receipts less consolidated cash expenditures and suchretentions for working capital, anticipated cash expenditures and contingenciesas MainLine Management deems appropriate. On October 26, 2006, MainLine Management declared a cash distribution of$0.125 per unit (after the proration described below) payable on November 30,2006 to Unitholders of record on November 6, 2006. As described in theprospectus contained in the Partnership’s registration statement on Form S-1,as amended (Registration No. 333-133433), that was filed with the Securitiesand Exchange Commission on July 25, 2006, the initial quarterly distributionresulted from the Partnership’s proration of its available cash from the thirdquarter based upon the portion of the third quarter beginning on the closingdate of the Partnership’s IPO, which was August 9, 2006, to the end of thequarter on September 30, 2006.  The totalcash distribution to Unitholders with respect to the distribution of $0.125 perunit will amount to approximately $3,537,500. As further described in the prospectus contained in the registrationstatement, the Partnership will use its available cash remaining after paymentof the distribution to make distributions to its pre-IPO equity owners, and topay cash bonuses of up to $2.0 million to officers of MainLine Management andto certain employees of Services Company. Included in these bonuses will be aone-time cash bonus of up to $700,000 payable to William H. Shea, Jr., aone-time cash bonus of up to $650,000 payable to Stephen C. Muther and aone-time cash bonus of up to $650,000 payable to Robert B. Wallace.

 

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*Debt*

*The Partnership*

On August 9, 2006, the Partnership entered into afive-year $10 million revolving credit facility with SunTrust Bank, as bothadministrative agent and lender (the “Credit Agreement”).  The credit facility may be used for workingcapital and other partnership purposes. The Partnership has pledged all of thelimited liability company interests in Buckeye GP LLC to SunTrust Bank assecurity for its obligations under the Credit Agreement.

The Credit Agreement permits the Partnership to prepayall loans under the credit facility at any time without premium or penalty(other than customary LIBOR breakage costs). Borrowings under the Credit Agreement bear interest under one of tworate options, selected by the Partnership, equal to either:

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

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

The Partnership’s ability to borrow amounts under theCredit Agreement is subject to satisfaction of certain customary conditionsprecedent to revolving loans and compliance with terms and conditions includedin the Credit Agreement.

The Credit Agreement defines “Restricted Subsidiaries”as certain of the Partnership’s wholly owned subsidiaries.

The Credit Agreement requires the Partnership tomaintain leverage and funded debt coverage ratios. The leverage ratio covenantrequires the Partnership to maintain, as of the last day of each fiscalquarter, a ratio of the total funded indebtedness of the Partnership and itsRestricted Subsidiaries, measured as of the last day of each fiscal quarter, tothe aggregate dividends and distributions received by the Partnership and itsRestricted Subsidiaries from Buckeye, plus all other cash received by the Partnershipand the Restricted Subsidiaries, measured for the preceding twelve months, lessexpenses, of not more than 2.50 to 1.00. The funded debt coverage ratiocovenant requires the Partnership to maintain, as of the last day of eachfiscal quarter, a ratio of total consolidated funded debt of the Partnershipand all of its subsidiaries to the consolidated EBITDA, as defined in theCredit Agreement, of the Partnership and all of its subsidiaries, measured forthe preceding twelve months, of not more than 5.25 to 1.00, subject to aprovision for increases to 5.75 to 1.00 in connection with future acquisitions.

The Credit Agreement prohibits the Partnership fromdeclaring dividends or distributions if any default or event of default, asdefined in the Credit Agreement, has occurred or would result from such adeclaration. In addition, the Credit Agreement contains covenants andprovisions requiring the Partnership to adhere to certain covenants andlimiting the ability of the Partnership and its Restricted Subsidiaries to,among other things:

·                  incuror guarantee indebtedness;

·                  makecertain negative pledges and grant certain liens;

·                  makecertain loans, acquisitions and investments;

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

·                  enterinto a merger, consolidation or sale of assets.

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If an event of default exists under the CreditAgreement, the lender will be able to terminate the Credit Agreement andaccelerate the maturity of all outstanding loans, as well as exercise otherrights and remedies.  The following aresome of the events which would constitute an event of default under the CreditAgreement:

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

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

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

·                  defaultby the Partnership or any Restricted Subsidiary on the payment of any otherindebtedness in excess of $5.0 million or default by Buckeye or any of itssubsidiaries on the payment of any indebtedness in excess of $25.0 million, orany default in the performance of any obligation or condition with respect tosuch indebtedness beyond the applicable grace period if the effect of thedefault is to permit or cause the acceleration of the indebtedness;

·                  bankruptcyor insolvency events involving the Partnership;

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

·                  achange in control of the Partnership (as such term is defined in the CreditAgreement);

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

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

*MainLine L.P.*

Prior to August 9, 2006, MainLine was party to aSenior Secured Credit Facility (“Term Loan”) with a consortium of financialinstitutions arranged by Goldman Sachs Credit Partners under which MainLine had$169.0 million outstanding.  Borrowingsunder the Term Loan bore interest under one of two variable rate optionsselected by MainLine.

The Term Loan had replaced MainLine’s $100,000,000Senior Secured Credit Facility (the “Prior Term Loan”). In accordance withrequirements under the Prior Term Loan, MainLine had purchased an interest ratecap from Goldman Sachs Capital Markets, L.P. on a notional amount of $50million for $375,000.  In accordance withrequirements under the Term Loan, MainLine had entered into two interest rateswap agreements with Goldman Sachs Capital Markets L.P.

All amounts outstanding under the Term Loan of $169.0million were repaid with proceeds of the Partnership’s IPO, together with cashon hand, on August 9, 2006.  Inconnection with the repayment of the loan in the third quarter of 2006, thePartnership expensed $1.6 million of previously deferred financing costs, andrecorded a reduction to interest and debt expense of $1.9 million as a resultof liquidating the interest rate cap and the two interest rate swaps.

*Services Company*

Services Company’s debt consists of 3.60% SeniorSecured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by the ESOPto a third-party lender. The 3.60% ESOP Notes were issued May 4, 2004.  The 3.60% ESOP Notes are collateralized byServices Company’s common stock and are guaranteed by Services 

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Company. In addition,Buckeye has committed that, in the event that the value of Buckeye’s LP unitsowned by Services Company falls below 125% of the balance payable under the3.60% ESOP Notes, Buckeye will fund an escrow account with sufficient assets tobring the value of the total collateral (the value of Buckeye’s LP units ownedby Services Company and the escrow account) up to the 125% minimum. Amountsdeposited in the escrow account are returned to Buckeye when the value ofBuckeye’s LP units owned by Services Company’s returns to an amount whichexceeds the 125% minimum. At September 30, 2006, the value of Buckeye’s LPunits owned by Services Company exceeded the 125% requirement.

*Buckeye*

Buckeye has a $400 million 5-year revolving creditfacility (“Buckeye’s Credit Facility”) with a syndicate of banks led bySunTrust Bank. Buckeye’s Credit Facility contains a one-time expansion featureto $550 million subject to certain conditions. Borrowings under Buckeye’sCredit Facility are guaranteed by certain of Buckeye’s subsidiaries. Buckeye’sCredit Facility matures on August 6, 2009. The weighted average interest rateon amounts outstanding under Buckeye’s Credit Facility at September 30, 2006was 5.9%.

Borrowings under Buckeye’s Credit Facility bearinterest under one of two rate options, selected by Buckeye, equal to either(i) the greater of (a) the federal funds rate plus one half of one percent and(b) SunTrust Bank’s prime rate or (ii) LIBOR plus an applicable margin. Theapplicable margin is determined based on ratings assigned by Standard &Poor’s and Moody’s Investor Services for Buckeye’s senior unsecured non-creditenhanced long-term debt. The applicable margin will increase during any periodin which Buckeye’s Funded Debt Ratio (described below) exceeds 5.25 to 1.0. AtSeptember 30, 2006 and December 31, 2005, Buckeye had $132.0 million and $50million outstanding under Buckeye’s Credit Facility, respectively, and hadcommitted $1.7 million and $1.3 million in support of letters of credit,respectively.

Buckeye’s Credit Facility contains covenants andprovisions that:

·                  RestrictBuckeye and certain of its subsidiaries’ ability to incur additionalindebtedness based on certain ratios described below;

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

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

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

Buckeye’s Credit Facility requires that Buckeye andcertain of its subsidiaries maintain a maximum “Funded Debt Ratio” and aminimum “Fixed Charge Coverage Ratio,” both of which are calculated using “AdjustedEBITDA.”  Prior to the restructuringof  Buckeye GP on August 9, 2006, Buckeye’sCredit Facility defined Adjusted EBITDA as earnings before interest, taxes,depreciation, depletion, amortization and incentive compensation payments toBuckeye GP, for the four preceding fiscal quarters. Incentive compensationpayments were historically included in this definition because Buckeyeaccounted for them as an expense. Because Buckeye will no longer account forincentive compensation as an expense, it amended its Credit Facility effectiveas of the restructuring to define Adjusted EBITDA as earnings before interest,taxes, depreciation, depletion and amortization, for the four preceding fiscalquarters. Accordingly, calculations of Buckeye’s Funded Debt Ratio and FixedCharge Coverage Ratio that include incentive compensation payments that areaccounted for as an expense (i.e., those that became payable prior to August 9,2006) were made using the prior definition of Adjusted EBITDA, and calculationsof such ratios beginning in the fourth quarter of 2006 will be made using thecurrent definition.

The Funded Debt Ratio equals the ratio of thelong-term debt of Buckeye and certain of its subsidiaries (including thecurrent portion, if any) to Adjusted EBITDA for the four preceding 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.  AtSeptember 30, 2006, Buckeye’s Funded Debt Ratio was 4.50 to 1.00.

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The Fixed Charge Coverage Ratio is defined as theratio of Adjusted EBITDA for the four preceding fiscal quarters to the sum ofpayments for interest and principal on debt plus certain capital expendituresrequired for the ongoing maintenance and operation of Buckeye’s assets.  Buckeye is required to maintain a FixedCharge Coverage Ratio of greater than 1.25 to 1.00 as of the end of any fiscalquarter. As of September 30, 2006, Buckeye’s Fixed Charge Coverage Ratio was2.65 to 1.00.

At September 30, 2006, Buckeye had total fixed debtobligations at face value of $850 million, consisting of $125 million of the5.125% Notes, $275 million of the 5.30% Notes, $300 million of the 4.625% Notesand $150 million of the 6.750% Notes. See Note 4 to the condensed consolidated financial statements for a moredetailed discussion.

*Covenants.* The Partnership andits subsidiaries, Services Company, and Buckeye and its Operating Subsidiarieswere in compliance with the various covenants of the debt agreements atSeptember 30, 2006.

*Derivative Instruments.* AtSeptember 30, 2006, the Partnership had no trading derivative instrumentsoutstanding.  In December 2004, Buckeyeterminated an interest rate swap agreement associated with the 4.625% Notes dueJune 15, 2013 and received proceeds of $2.0 million. In accordance with FASBStatement No. 133— “Accounting for Derivative Instruments and HedgingActivities,” Buckeye has deferred the $2.0 million gain as an adjustment to thefair value of the hedged portion of its debt and is amortizing the gain as areduction of interest expense over the remaining term of the hedged debt.Interest expense was reduced by $59 thousand during each of the three monthsended September 30, 2006 and 2005 and $176 thousand during each of the ninemonths ended September 30, 2006 and 2005, related to the amortization of thegain on the interest rate swap.

*Cash Flows fromOperations*

The components of cash flows from operations for thenine months ended September 30, 2006 and 2005 were as follows:
|                                             | ** ** | **Cash Flows from Operations** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                       | ** ** |
| Net income                                  |       | $                                             | 5,730      |   | $ | 5,618 |   |
| Value of ESOP  shares released              |       | 3,047                                         |       | 3,895 |   |
| Depreciation and  amortization              |       | 29,445                                        |       | 23,747 |   |
| Non-controlling  interests                  |       | 74,101                                        |       | 72,143 |   |
| Changes in  current assets and liabilities. |       | (5,940                                        | )          | 618 |   |
| Changes in other  assets and liabilities    |       | 3,721                                         |       | 1,595 |   |
| Other                                       |       | 3,520                                         |       | 1,416 |   |
| Total                                       |       | $                                             | 113,624    |   | $ | 109,032 |   |

 

Cash flows from operations were $113.6 million for thefirst nine months of 2006, an increase of $4.6 million over the first ninemonths of 2005.  Net income was $5.7million for the first nine months of 2006 and $5.6 million for the same periodof 2005.  Depreciation and amortizationwas $29.4 million for 2006 compared to $23.7 million during the same period in2005.  The increase principally resultedfrom recent acquisitions and an increase in assets placed into service duringthe first nine months of 2006.  Cash usedfor working capital was $5.9 million compared to cash provided by workingcapital of $0.6 million in 2005.

During the nine months ended September 30, 2006, cashused for working capital resulted from increases in trade receivables of $1.8million, construction and pipeline relocation receivables of $1.2 million andprepaid and other current assets of $11.3 million and a decrease in accountspayable of $1.5 million.  The decreasesin cash were partially offset by an increase in accrued and other currentliabilities of $10.3 million.  Theincrease in trade receivables is partly due to activity at Buckeye NGL whichcommenced operations in January 2006. The increase in construction and pipeline relocations receivables is dueto an increase in relocation project activity. Prepaid and other current assets increased due to an increase ininsurance receivables and an increase in a receivable for activity 

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on a 29-mile ammoniapipeline acquired in November 2005.  Thedecrease in accounts payable resulted from the timing of invoice payments atyear end of 2005.  The increase inaccrued and other current liabilities is due to activity on the 29-mile ammoniapipeline as well as an increase in amounts accrued by Buckeye for environmentalliabilities.

In the first nine months of 2005, cash provided byworking capital resulted principally from reductions in construction andpipeline relocation receivables of $1.7 million and prepaid and other currentassets of $5.1 million, which were offset by a decrease in accounts payable of$6.7 million.  The reduction inconstruction and pipeline relocation receivables resulted from the timing ofconstruction projects at year end 2004 compared to the third quarter of2005.  The reduction in prepaid and othercurrent assets resulted principally from the collection of insurancereceivables and amortization of prepaid insurance in the first nine months of2005.  The decrease in accounts payableresulted principally from the timing of invoice payments at year-end 2004.

*Cash Flows fromInvesting Activities*

Net cash used in investing activities for the ninemonths ended September 30, 2006 and 2005 are as follows:
|                               | ** ** | **Investing Activities**                                         | ** ** |
|-------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                    | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
| ** **                    | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(In thousands)**                                               | ** ** |
| Capital  expenditures         |       | $                                                                     | (62,324    | ) | $ | (51,906 | ) |
| Investments and  acquisitions |       | (93,330                                                               | )          | (178,813 | ) |
| Other                         |       | 5,247                                                                 |       | (3,054 | ) |
| Total                         |       | $                                                                     | (150,407   | ) | $ | (233,773 | ) |

 

In the nine months ended September 30, 2006, Buckeyeexpended $93.3 million related to acquisitions, including $79.3 million relatedto Buckeye NGL, $12.5 million related to the acquisition of a Niles, Michiganterminal and approximately $1 million for miscellaneous assetacquisitions.  In the nine months endedSeptember 30, 2005, Buckeye spent approximately $178.8 million related toacquisitions, of which $176.3 million related to the acquisition of theNortheast Pipelines and Terminals and the remainder related to the purchase ofthe remaining 25% interest in WesPac — Reno from Kealine LLC for $2.5 million.

Capital expenditures are summarized below:
|                                  | ** ** | **Capital Expenditures**                                         | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                       | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
| ** **                       | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                               | ** ** |
| Sustaining  capital expenditures |       | $                                                                     | 17,735     |   | $ | 9,733 |   |
| Expansion and  cost reduction    |       | 44,589                                                                |       | 42,173 |   |
| Total                            |       | $                                                                     | 62,324     |   | $ | 51,906 |   |

 

The Partnership incurred $17.7 million of sustainingcapital expenditures and $44.6 million of expansion and cost reductionexpenditures in the first nine months of 2006. Expansion projects at Buckeye in 2006 include the completion of anapproximate 11-mile pipeline and related terminal facilities to serve theMemphis International Airport, the addition of pipelines, tankage and equipmentto meet new handling requirements for ultra-low sulfur diesel, and a capacityexpansion in Illinois to handle additional LPG volumes.  Other expansion projects underway in 2006include various ethanol-blending and butane-blending projects at pipelinestations and terminals owned by Buckeye, and an expansion of the recentlycompleted pipeline and terminal infrastructure at the Memphis InternationalAirport to accommodate a new generation of cargo planes for Federal Express Corporation.  The 

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Memphis InternationalAirport project is owned by WesPac Pipelines — Memphis LLC, a 75%-ownedsubsidiary of Buckeye.

Buckeye incurred $9.7 million of sustaining capitalexpenditures and $42.2 million of expansion and cost reduction expenditures inthe first nine months of 2005.  Expansionprojects at Buckeye in 2005 included a capacity expansion project related tothe Laurel pipeline across Pennsylvania, and the construction of the pipelineand terminal facilities to serve the Memphis International Airport.

Buckeye estimates its sustaining capital expenditureswill be approximately $25 million to $30 million for all of 2006.

*Cash Flows fromFinancing Activities*

As described above, the Partnership raisedapproximately $168.5 million, net of underwriters’ discount and expenses, inthe IPO.  The Partnership used theproceeds from the offering plus available cash from operations and theliquidation of MainLine’s interest expense reserve account and its threederivative instruments, to repay principal and accrued interest on the TermLoan, as well as make a distribution of $7.7 million to the Partnership’spre-IPO equity owners.

Total distributions by the Partnership, all of whichwere paid to the pre-IPO equity owners, were $14.3 million, including the $7.7million described above.

On March 7, 2006, Buckeye issued 1.5 million LP Unitsin an underwritten public offering at $44.22 per LP Unit. Proceeds from theoffering, after underwriter’s discount of $1.45 per LP Unit and offeringexpenses were approximately $64.1 million, and were used to reduce amountsoutstanding under Buckeye’s Credit Facility.

Payments on the ESOP Notes were $4.5 million for thenine months ended September 30, 2006. Buckeye borrowed $147 million under its Credit Facility and repaid $65million, principally from the proceeds of the LP Unit offering during the firsthalf of the year.

Distributions to non-controlling interests, consistingprimarily of Buckeye’s distributions to holders of its LP Units, were $83.6million in the first nine months of 2006 compared to $71.7 million in the firstnine months of 2005.  The increaseresulted principally from additional LP Units outstanding as a result ofBuckeye’s issuance of 2.5 million LP Units in May 2005, the issuance of 1.5million LP Units in March 2006 and increases in the per-unit distributionamount.

OTHER MATTERS

Accounting Pronouncements

See Note 12 to the Partnership’s unaudited condensedconsolidated financial statements for a description of certain new accountingpronouncements issued in the three months ended September 30, 2006.

Forward Looking Statements

Some of the information in this report may containforward-looking statements.  Allstatements other than statements of historic fact are forward-lookingstatements. These statements can be identified by the use of forward-lookingterminology including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,”“continue” or other similar words although some forward-looking statements areexpressed differently.  These statementsdiscuss plans, strategies, events or developments that the Partnership expectsor anticipates will or may occur in the future. Specific factors could cause the Partnership’s actual results to differmaterially from those contained in any forward-looking statement.  These factors include, but are not limitedto:

·                  thePartnership’s ability to pay distributions to its Unitholders;

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·                  thePartnership’s expected receipt of distributions and incentive distributionsfrom Buckeye;

·                  anticipatedtrends in Buckeye’s business;

·                  pricetrends and overall demand for petroleum products in the United States ingeneral and in Buckeye’s service areas in particular (economic activity,weather, alternative energy sources, conservation and technological advancesmay affect price trends and demands);

·                  changes,if any, in laws and regulations, including, among others, safety, tax andaccounting matters or Federal Energy Regulatory Commission regulation of  Buckeye’s tariff rates;

·                  liabilityfor environmental claims;

·                  securityissues affecting Buckeye’s assets, including, among others, potential damage toits assets caused by acts of war or terrorism;

·                  unanticipatedcapital expenditures and operating expenses to repair or replace Buckeye’sassets;

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

·                  Buckeye’sability to successfully identify and complete strategic acquisitions and makecost saving changes in operations;

·                  expansionin the operations of  Buckeye’scompetitors;

·                  Buckeye’sability to integrate any acquired operations into its existing operations;

·                  shut-downsor cutbacks at major refineries that use Buckeye’s services;

·                  deteriorationin Buckeye’s labor relations;

·                  changesin real property tax assessments;

·                  disruptionsto the air travel system;

·                  interestrate fluctuations and other capital market conditions;

·                  thePartnership’s future results of operations;

·                  thePartnership’s liquidity and ability to finance its activities;

·                  marketconditions in Buckeye’s industry;

·                  conflictsof interest among Buckeye, its general partner, the Partnership and its generalpartner;

·                  thetreatment of Buckeye or the Partnership as a corporation for federal income taxpurposes or if the Partnership or Buckeye become subject to entity-leveltaxation for state tax purposes; and

·                  theimpact of governmental legislation and regulation on the Partnership andBuckeye.

A forward-looking statement may include a statement ofthe assumptions or bases underlying the forward-looking statement. ThePartnership believes that it has chosen these assumptions or bases in goodfaith and that they are reasonable. However, you are cautioned that assumedfacts or bases almost always vary from actual results, and the differencesbetween assumed facts or bases and actual results can be material, depending onthe circumstances. 

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When consideringforward-looking statements, you should keep in mind the risk factors and othercautionary statements in this report and in the Partnership’s registrationstatement on Form S-1, as amended (Registration No. 333-133433) as filed withthe Securities and Exchange Commission, including those described in the “RiskFactors” section of the registration statement. The Partnership will not update these statements unless the securitieslaws require it to do so.

Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk

*Market Risk –Trading Instruments*

Currently the Partnership does not engage in hedgingactivity with respect to trading instruments.

*Market Risk –Other than Trading Instruments*

The Partnership and Buckeye are exposed to riskresulting from changes in interest rates. Neither company has material commodity or foreign exchange risk.  Buckeye is exposed to fair value risk withrespect to the fixed portion of its financing arrangements (the 5.125% Notes,the 5.300% Notes, the 4.625% Notes and the 6.75% Notes), and Buckeye and thePartnership are exposed to cash flow risk with respect to their variable rateobligations (the Credit Agreement and Buckeye’s Credit Facility).  Fair value risk represents the risk that thevalue of the fixed portion of a company’s financing arrangements will rise orfall depending on changes in interest rates. Cash flow risk represents the risk that interest costs related to theCredit Agreement and Buckeye’s Credit Facility will rise or fall depending onchanges in interest rates.

At September 30, 2006, Buckeye had total fixed debtobligations at face value of $850 million, consisting of $125 million of the5.125% Notes, $275 million of the 5.30% Notes, $300 million of the 4.625% Notesand $150 million of the 6.750% Notes. Services Company had fixed debtobligations of approximately $28.8 million at September 30, 2006 of its 3.60%ESOP Notes.  The fair value of theseobligations at September 30, 2006 was approximately $845 million. A 1% decreasein rates for obligations of similar maturities would increase the fair value ofthese obligations by $66 million.  ThePartnership did not have any balances outstanding under its Credit Agreement.Buckeye’s variable debt obligation under Buckeye’s Credit Facility was $132million. Based on the balances outstanding at September 30, 2006, a 1% increaseor decrease in interest rates would increase or decrease consolidated annualinterest expense by $1.3 million.

In accordance with requirements under the Prior TermLoan, MainLine had purchased an interest rate cap from Goldman Sachs CapitalMarkets, L.P. on a notional amount of $50 million for $375,000.  In accordance with requirements under theTerm Loan, MainLine had also entered into two interest rate swap agreementswith Goldman Sachs Capital Markets L.P. MainLine designated these transactions as hedges of its cash flow riskassociated with the Term Loan.  Inconnection with the Partnership’s IPO and the repayment of the $169.0 millionTerm Loan, the Partnership liquidated its interest rate cap and the twointerest rate swaps which reduced interest and debt expense by $1.9 million inthe third quarter of 2006.

In December 2004, Buckeye terminated an interest rateswap agreement associated with the 4.625% Notes due June 15, 2013 and receivedproceeds of $2.0 million. In accordance with FASB Statement No. 133—”Accountingfor Derivative Instruments and Hedging Activities”, Buckeye has deferred the$2.0 million gain as an adjustment to the fair value of the hedged portion ofits debt and is amortizing the gain as a reduction of interest expense over theremaining term of the hedged debt. Interest expense was reduced by $59 thousandduring each of the three months ended September 30, 2006 and 2005 and $176thousand during each of the nine months ended September 30, 2006 and 2005,related to the amortization of the gain on the interest rate swap

Item 4.  Controls and Procedures

(a)           Evaluationof Disclosure Controls and Procedures.

The management of the Partnership, with theparticipation of its Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of its disclosure controls and procedures for thePartnership as of the 

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end of the period coveredby this report.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Partnership’s disclosure controls and procedures as of the end of theperiod covered by this report are functioning effectively to provide reasonableassurance that the information required to be disclosed by the Partnership inreports filed under the Securities Exchange Act of 1934 is (i) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (ii) accumulated and communicated to management, includingthe Chief Executive Officer and Chief Financial Officer, as appropriate toallow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that theobjectives of the controls system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within a company have been detected.

(b)           Changein Internal Control over Financial Reporting

No change in the Partnership’s internal control overfinancial reporting occurred during the Partnership’s most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the Partnership’s internal control over financial reporting.

Part II - OTHERINFORMATION

*Item1.  Legal Proceedings*

Buckeye has received penalty assessments from theInternal Revenue Service (“IRS”) in the aggregate amount of $4.3 million basedon a failure to file excise tax information returns relating to its terminaloperations from January 2005 through February 2006.  Buckeye filed the information returns withthe IRS on May 10, 2006.  The Partnershipbelieves Buckeye had reasonable cause for the failure to file the informationreturns on a timely basis, and Buckeye intends to seek the elimination of theasserted penalties.  The assertedpenalties are for the failure to file information returns rather than anyfailure to pay taxes due as no taxes were owed by Buckeye in connection withsuch information returns.  The timing oroutcome of this claim, and the total costs to be incurred by Buckeye inconnection therewith, cannot be reasonably estimated at this time.

*Item1A.  Risk Factors*

Please carefully read the Risk Factors set forth inthe Partnership’s Registration Statement on Form S-1, as amended (RegistrationNo. 333-133433) as filed with the Securities and Exchange Commission, whichRisk Factors are hereby incorporated by reference into this report.

*Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds*

On August 2, 2006, the registration statement on FormS-1 (SEC File No. 333-133433) as amended, that the Partnership filed with theSEC relating to its IPO became effective. The managing underwriters wereGoldman, Sachs & Co., Citigroup Global Markets Inc., Merrill Lynch, Pierce,Fenner & Smith Incorporated and UBS Securities LLC. Under the registrationstatement, the Partnership was offering up to 14.1 million common units with anaggregate price of up to $340,515,000. The closing date of the IPO was August 9, 2006, and on that date thePartnership sold 10.5 million common units at $17.00 per common unit, or $178.5million in the aggregate. The Partnership used the proceeds from the offeringto:

·                  paythe underwriting discount ($9.1 million);

·                  repaya portion of the MainLine term loan ($164.2 million);

·                  replenishworking capital ($0.5 million); and

·                  paya distribution to the pre-IPO equity owners of MainLine ($4.6 million, whichconstituted a direct or indirect payment to directors and officers of MainLineManagement LLC, the general partner of the Partnership, or their associates orholders of 10 percent or more of classes of the Partnership’s equitysecurities).

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From the effective date of the registration statementto September 30, 2006, the amount of expenses incurred for the Partnership’saccount in connection with the issuance and distribution of the common unitsfor underwriting discounts and commissions, finders’ fees and expenses paid toor for underwriters is $9.1 million as specified in the first bullet pointabove, plus a reasonable estimate of $0.8 million for other expenses resultingin estimated total expenses of $9.9 million.

*Item6.  Exhibits*

(a)           Exhibits
| 3.1*   |   | First Amended and Restated Agreement of Limited  Partnership of Buckeye GP Holdings L.P.                                                                                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                          |
| 10.1*  |   | Amended & Restated Contribution, Conveyance and  Assumption Agreement, dated as of August 9, 2006, among the limited partners  of MainLine L.P., MainLine L.P., Buckeye GP LLC, Buckeye GP Holdings L.P.,  MainLine Management LLC, and MainLine GP, Inc. |
|   |   |                                                                                                                                                                                                                                                          |
| 10.2*  |   | Amended and Restated Agreement of Limited  Partnership of Buckeye Partners, L.P., dated as of August 9, 2006                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                          |
| 10.3*  |   | Fifth Amended and Restated Incentive Compensation  Agreement, dated as of August 9, 2006                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                          |
| 10.4*  |   | Amended and Restated Agreement of Limited  Partnership of Buckeye Pipe Line Company, L.P., as amended and restated as of  August 9, 2006                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                          |
| 10.5*  |   | Amended and Restated Management Agreement of Buckeye  Pipe Line Company, L.P., as amended and restated as of August 9, 2006                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                          |
| 10.6*  |   | Fourth Amended and Restated Exchange Agreement,  dated as of August 9, 2006                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                          |
| 10.7*  |   | Amended and Restated Executive Employment Agreement,  dated as of August 9, 2006                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                          |
| 10.8*  |   | Credit Agreement, dated August 9, 2006, among  Buckeye GP Holdings L.P., as borrower, SunTrust Bank, as administrative  agent, and the lenders signatory thereto                                                                                              |
|   |   |                                                                                                                                                                                                                                                          |
| 10.9   |   | Supplement to Pledge Agreement - Additional Pledgor,  dated as of September 15, 2006, among Buckeye GP Holdings L.P., as borrower,  SunTrust Bank, as administrative agent, and the lenders signatory thereto                                                 |
|   |   |                                                                                                                                                                                                                                                          |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14 (a) under the Securities Exchange Act of 1934                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                          |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                          |
| 32.1   |   | Certification of Chief Executive Officer, Pursuant  to 18 U.S.C. Section 1350                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                          |
| 32.2   |   | Certification of Chief Financial Officer, Pursuant  to 18 U.S.C. Section 1350                                                                                                                                                                                 |

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*                    Incorporatedby reference to the like-numbered Exhibit of the Buckeye GP Holdings L.P.Current Report on Form 8-K, filed with the Commission on August 14, 2006

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SIGNATURE

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                          | BUCKEYE GP HOLDINGS L.P. |
|--------------------------|--------------------------|
|                     |                     |   | (Registrant) |
|                     |                     |   |   |
|                     | By:                      |   | MainLine Management LLC |
|      |                     |   | as General  Partner |
|                     |                     |   |   |
| Date: November 6,  2006  | By:                      |   | ROBERT B. WALLACE |   |
|                     |                     |   | Robert B. Wallace |
|                     |                     |   | Senior Vice President, Finance |
|                     |                     |   | and Chief Financial Officer |
| * *                 | * *                 | * * | *(Principal Accounting and* |
| * *                 | * *                 | * * | *Financial Officer)* |

 

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