**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**
| **x** | ** ** | **Quarterly report pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
|-------|------------|----------------------------------------------------------------------------------------------|

 

**For thequarterly period ended June 30, 2006**

**or**
| **o** | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------|

 

**For thetransition period from                            to                           **

**Commissionfile number 001-32963**

**BUCKEYEGP HOLDINGS L.P.**

(Exact name of registrant as specified in its charter)

| **Delaware**                     |   | **11-3776228**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (IRS Employer        |
| incorporation or  organization)  |   | Identification  No.) |
|                             |   |                 |
| **5002  Buckeye Road**           |   | ** **           |
| **P. O.  Box 368**               |   | ** **           |
| **Emmaus,  PA**                  |   | **18049**            |
| (Address of  principal executive |   | (Zip Code)           |
| offices)                         |   |                 |

 

Registrant’stelephone number, including area code:    **484-232-4000**

**Not Applicable**

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes o    No x

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

Large AcceleratedFiler o    AcceleratedFiler o    Non-Accelerated Filer x

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

As of August 9, 2006, there were 26,938,000 Common Units and 1,362,000Management Units outstanding.

 

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PART I

FINANCIALINFORMATION
| Item 1.   |   | Financial  Statements (Unaudited)                                                                      |   |   |
|-----------|--------|--------------------------------------------------------------------------------------------------------|--------|--------|
|      |   |                                                                                                   |   |   |
|      |   | BUCKEYE GP HOLDINGS L.P.                                                                               |   |   |
|      |   | Balance Sheet as of June 30, 2006                                                                      |   |   |
|      |   |                                                                                                   |   |   |
|      |   | Notes  to Balance Sheet                                                                                |   |   |
|      |   |                                                                                                   |   |   |
|      |   | MAINLINE L.P.                                                                                          |   |   |
|      |   | Condensed Consolidated Statements of Income for the  three and six months ended June 30, 2006 and 2005 |   |   |
|      |   |                                                                                                   |   |   |
|      |   | Condensed Consolidated Balance Sheets June 30, 2006  and December 31, 2005                             |   |   |
|      |   |                                                                                                   |   |   |
|      |   | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2006 and 2005       |   |   |
|      |   |                                                                                                   |   |   |
|      |   | Consolidated Statement of Changes in Partners’ Equity  for the six months ended June 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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Part I. Financial Information

Item 1.  Financial Statements

BUCKEYE GPHOLDINGS L.P.

Balance SheetJune 30, 2006(Unaudited)
| Assets                         |   | $         | — |   |
|--------------------------------|--------|-----------|--------|--------|
|                           |   |      |   |
| Partners Equity:               |   |      |   |
| Limited  partners’ equity |   | $         | 999.90 |   |
| General  partner’s equity |   | .10       |   |
| Receivable from  partners      |   | (1,000.00 | )      |
|                           |   |      |   |
| Total partners’ equity    |   | $         | — |   |

 

See Notes to BalanceSheet.

1

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BUCKEYE GPHOLDINGS L.P.

NOTES TO BALANCE SHEET(UNAUDITED)

1.               ORGANIZATION ANDOPERATIONS

BuckeyeGP Holdings L.P. (“Buckeye GP Holdings”) is a Delaware limited partnershipformed on June 15, 2006 in order to facilitate the reorganization of MainLineL.P. and its affiliates.

Concurrent with BuckeyeGP Holdings’ formation, MainLine Management LLC, as general partner,contributed $0.10 and the limited partners of Mainline L.P. contributed $999.90to Buckeye GP Holdings.  The contributionreceivable was reflected as a reduction to equity in accordance with accountingprinciples generally accepted in the United States of America. Buckeye GPHoldings received payment on the contribution in August of 2006. Theaccompanying financial statement reflects the financial position of Buckeye GPHoldings immediately subsequent to its capitalization.

2.     SIGNIFICANT ACCOUNTING POLICIES

*Use of Estimates*

The preparation of Buckeye GP Holdings’ financialstatement in conformity with accounting principles generally accepted in theUnited States of America necessarily requires management to make estimates andassumptions. These estimates and assumptions, which may differ from actualresults, will affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatement.

3.     SUBSEQUENT EVENT

*Initial Public Offering*

On August 9, 2006, Buckeye GP Holdings sold 10.5million common units in an underwritten initial public offering (“IPO”), thenet proceeds of which were approximately $167.4 million.  Buckeye GP Holdings used the net proceedsfrom the IPO, along with cash on hand, to repay all outstanding indebtednessunder a Senior Secured Credit Facility with aconsortium of financial institutions arranged by Goldman Sachs Credit Partners(the “Term Loan”) and to make distributions to its pre-IPO equityowners.  The common units sold in the IPOrepresent approximately 37.1% of the outstanding equity of Buckeye GP Holdings,which includes common units and management units.

In connection with theconsummation of the IPO, the pre-IPO equity owners of MainLine L.P. (the “Company”)contributed all of their equity interests inthe Company to Buckeye GP Holdings. This contribution was accounted for as a transfer of assets betweenentities under common control in accordance with Statement of FinancialAccounting Standards No. 141, “Business Combinations”. The financial information for the Company is included in this report becauseit is the predecessor to Buckeye GP Holdings.

*$10 Million Credit Facilit**y***

On August 9, 2006, Buckeye GPHoldings entered into a five-year $10 million revolving credit facility withSunTrust Bank, as both administrative agent and lender (the “Credit Agreement”).  The credit facility may be used for workingcapital and other partnership purposes. Buckeye GP Holdings has pledged all of the limited liability companyinterests in Buckeye GP LLC to SunTrust Bank as security for its obligationsunder the Credit Agreement.

The Credit Agreement permits BuckeyeGP Holdings to prepay all loans under the credit facility at any time withoutpremium or penalty (other than customary LIBOR breakage costs).  Borrowings under the Credit Agreement bearinterest under one of two rate options, selected by Buckeye GP Holdings, equalto either:

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

2

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·                  LIBOR, plus a margin which can range from 0.40% to1.40%, based upon the ratings assigned by Standard & Poor’s Rating Servicesand Moody’s Investor Services to the senior unsecured non-credit enhancedlong-term debt of Buckeye Partners, L.P.

Buckeye GP Holdings’ ability toborrow amounts under the Credit Agreement is subject to satisfaction of certaincustomary conditions precedent to revolving loans and compliance with terms andconditions included in the Credit Agreement.

The Credit Agreement defines “RestrictedSubsidiaries” of Buckeye GP Holdings as Buckeye GP Holdings, and certain of itswholly owned subsidiaries.

The Credit Agreement requiresBuckeye GP Holdings to maintain leverage and funded debt coverage ratios. Theleverage ratio covenant requires Buckeye GP Holdings to maintain, as of thelast day of each fiscal quarter, a ratio of the total funded indebtedness ofBuckeye GP Holdings and its Restricted Subsidiaries, measured as of the lastday of each fiscal quarter, to the aggregate dividends and distributionsreceived by Buckeye GP Holdings and its Restricted Subsidiaries from Buckeye, plus all other cash received byBuckeye GP Holdings and the Restricted Subsidiaries, measured for the precedingtwelve months, less expenses, of not more than 2.50 to 1.00. The funded debt coverageratio covenant requires Buckeye GP Holdings to maintain, as of the last day ofeach fiscal quarter, a ratio of total consolidated funded debt of Buckeye GPHoldings and all of its subsidiaries to the consolidated EBITDA, as defined inthe Credit Agreement, of Buckeye GP Holdings and all of its subsidiaries,measured for the preceding twelve months, of not more than 5.25 to 1.00,subject to a provision for increases to 5.75 to 1.00 in connection with futureacquisitions.

The Credit Agreement prohibitsBuckeye GP Holdings from declaring dividends or distributions if any default orevent of default, as defined in the Credit Agreement, has occurred or wouldresult from such a declaration. In addition, the Credit Agreement containscovenants and provisions requiring Buckeye GP Holdings to adhere to certaincovenants and limiting the ability of Buckeye GP Holdings and its RestrictedSubsidiaries to, among other things:

·                  incur or guarantee indebtedness;

·                  make certain negative pledges and grant certain liens;

·                  make certain loans, acquisitions and investments;

·                  make any material changes to the nature of Buckeye GPHoldings’ or Restricted Subsidiaries’ business; or

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

If an event of default exists underthe Credit Agreement, the lender will be able to terminate the Credit Agreementand accelerate 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 pay any principal, interest, fees,expenses or other amounts when due;

·                  failure of any representation or warranty to be trueand correct in any material respect;

·                  failure to perform or otherwise comply with thecovenants in the Credit Agreement or other loan documents, subject to certaingrace periods;

·                  default by Buckeye GP Holdings or any RestrictedSubsidiary on the payment of any other indebtedness in excess of $5.0 millionor default by Buckeye or any of its subsidiaries on the payment of anyindebtedness in excess of $25.0 million, or any default in the performance ofany obligation or condition with respect to such indebtedness beyond theapplicable grace period if the effect of the default is to permit or cause theacceleration of the indebtedness;

·                  bankruptcy or insolvency events involving Buckeye GPHoldings;

3

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·                  the entry against Buckeye GP Holdings of a judgmentin excess of specified amounts, or otherwise having a material adverse effect,that is not stayed, discharged or deferred within specified periods;

·                  a change in control of Buckeye GP Holdings (as suchterm is defined in the Credit Agreement);

·                  the invalidity or unenforceability of any materialprovision in the Credit Agreement or related documents; and

·                  the occurrence of certain events with respect toemployee benefit plans subject to ERISA.

4

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MAINLINE L.P.

Condensed Consolidated Statements of Income(In thousands, except per Unit amounts)(Unaudited)
| **Three Months Ended  June 30,** | ** ** | ** ** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|
| **2006**                                        | ** ** | **2005**   | ** ** | ** **                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |       |       |                                          |       |   |   |   |   |
| $                                               | 111,495    |       | $          | 101,916                                       |       | Revenue |   | $ | 217,240 |   | $ | 197,805 |   |
|                                            |       |       |       |                                          |       |   |   |   |   |
|                                            |       |       |       | Costs and expenses:                           |       |   |   |   |   |
| 53,570                                          |       | 49,984     |       | Operating  expenses                           |       | 104,831 |   | 96,565 |   |
| 10,018                                          |       | 8,067      |       | Depreciation and  amortization                |       | 19,122 |   | 15,498 |   |
| 6,534                                           |       | 5,192      |       | General and  administrative expenses          |       | 12,449 |   | 10,941 |   |
| 70,122                                          |       | 63,243     |       | Total costs and  expenses                     |       | 136,402 |   | 123,004 |   |
|                                            |       |       |       |                                          |       |   |   |   |   |
| 41,373                                          |       | 38,673     |       | Operating income                              |       | 80,838 |   | 74,801 |   |
|                                            |       |       |       |                                          |       |   |   |   |   |
|                                            |       |       |       | Other income  (expenses):                     |       |   |   |   |   |
| 302                                             |       | 193        |       | Investment  income                            |       | 622 |   | 348 |   |
| (16,211                                         | )          | (13,955    | )          | Interest and  debt expense                    |       | (31,940 | ) | (27,052 | ) |
| (15,909                                         | )          | (13,762    | )          | Total other  income (expenses)                |       | (31,318 | ) | (26,704 | ) |
|                                            |       |       |       |                                          |       |   |   |   |   |
|                                            |       |       |       | Income before equity  income and              |       |   |   |   |   |
| 25,464                                          |       | 24,911     |       | Non-controlling  interest                     |       | 49,520 |   | 48,097 |   |
| 1,415                                           |       | 1,225      |       | Equity income                                 |       | 2,795 |   | 2,465 |   |
| (24,892                                         | )          | (24,217    | )          | Non-controlling  interest expense             |       | (48,089 | ) | (47,415 | ) |
|                                            |       |       |       |                                          |       |   |   |   |   |
| $                                               | 1,987      |       | 1,919      |                                          | Net income |   | $ | 4,226 |   | $ | 3,147 |   |
|                                            |       |       |       |                                          |       |   |   |   |   |
| 145,950                                         |       | 145,950    |       | Units outstanding –  basic and diluted   |       | 145,950 |   | 145,950 |   |
|                                            |       |       |       |                                          |       |   |   |   |   |
| $                                               | 0.01       |       | $          | 0.01                                          |       | Earnings per unit –  basic and diluted |   | $ | 0.03 |   | $ | 0.02 |   |

 

See Notes tocondensed consolidated financial statements.

5

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MAINLINE L.P.

Condensed ConsolidatedBalance Sheets(In thousands)(Unaudited)
| ** **                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Assets                                                                        |       |              |       |                  |       |
| Current assets:                                                               |       |              |       |                  |       |
| Cash and cash equivalents                                                     |       | $                 | 26,695     |                  | $          | 28,984 |   |
| Trade receivables                                                             |       | 39,936            |       | 38,864                |       |
| Construction and pipeline relocation receivables                              |       | 12,992            |       | 10,571                |       |
| Inventories                                                                   |       | 13,416            |       | 12,997                |       |
| Prepaid and other current assets                                              |       | 24,743            |       | 12,325                |       |
| Total current assets                                                          |       | 117,782           |       | 103,741               |       |
|                                                                          |       |              |       |                  |       |
| Property, plant and equipment, net                                            |       | 1,713,522         |       | 1,587,741             |       |
| Restricted cash                                                               |       | 5,729             |       | 5,117                 |       |
| Goodwill                                                                      |       | 234,603           |       | 234,603               |       |
| Other non-current assets                                                      |       | 102,527           |       | 109,630               |       |
|                                                                          |       |              |       |                  |       |
| Total assets                                                                  |       | $                 | 2,174,163  |                  | $          | 2,040,832 |   |
|                                                                          |       |              |       |                  |       |
| Liabilities and  partners’ capital                                       |       |              |       |                  |       |
| Current liabilities:                                                          |       |              |       |                  |       |
| Current portion of long-term debt                                             |       | $                 | 7,883      |                  | $          | 7,811 |   |
| Accounts payable                                                              |       | 14,593            |       | 18,648                |       |
| Accrued and other current liabilities                                         |       | 63,946            |       | 48,824                |       |
| Total current liabilities                                                     |       | 86,422            |       | 75,283                |       |
|                                                                          |       |              |       |                  |       |
| Long-term debt                                                                |       | 1,151,593         |       | 1,096,849             |       |
| Other non-current liabilities                                                 |       | 78,912            |       | 76,536                |       |
| Non-controlling interest                                                      |       | 771,684           |       | 711,722               |       |
|                                                                          |       |              |       |                  |       |
| Total liabilities                                                             |       | 2,088,611         |       | 1,960,390             |       |
|                                                                          |       |              |       |                  |       |
| Commitments and contingent liabilities                                        |       | —            |       | —                |       |
|                                                                          |       |              |       |                  |       |
| Partners’ capital:                                                       |       |              |       |                  |       |
| General Partner                                                               |       | 7                 |       | 7                     |       |
| Limited Partners – A Units                                               |       | 78,358            |       | 74,132                |       |
| Limited Partners – B Units                                               |       | 3,473             |       | 3,473                 |       |
| Equity gains on issuance of Buckeye Partners, L.P.  limited partnership units |       | 1,482             |       | 1,316                 |       |
| Accumulated other comprehensive income                                        |       | 2,232             |       | 1,514                 |       |
| Total partners’ capital                                                  |       | 85,552            |       | 80,442                |       |
|                                                                          |       |              |       |                  |       |
| Total  liabilities and partners’ capital                                 |       | $                 | 2,174,163  |                  | $          | 2,040,832 |   |

 

See Notes tocondensed consolidated financial statements.

6

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MAINLINE L.P.

CondensedConsolidated Statements of Cash Flows(In thousands)(Unaudited)
| ** **                                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                 |       |                                          |       |   |   |
| Net income                                                                             |       | $                                             | 4,226      |   | $ | 3,147 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:     |       |                                          |       |   |   |
| Value of ESOP shares released                                                          |       | 2,073                                         |       | 2,546 |   |
| Depreciation and amortization                                                          |       | 19,122                                        |       | 15,498 |   |
| Amortization of deferred compensation                                                  |       | —                                        |       | 1,959 |   |
| Non-controlling interest                                                               |       | 48,089                                        |       | 47,415 |   |
| Equity earnings                                                                        |       | (2,795                                        | )          | (2,465 | ) |
| Distributions from equity investments                                                  |       | 3,167                                         |       | 1,649 |   |
| Amortization of debt discount                                                          |       | 25                                            |       | 15 |   |
| Amortization of option grants                                                          |       | 239                                           |       | — |   |
| Change in assets and liabilities, net of amounts  related to acquisitions:             |       |                                          |       |   |   |
| Trade receivables                                                                      |       | (1,072                                        | )          | (11,606 | ) |
| Construction and pipeline relocation receivables                                       |       | (2,421                                        | )          | (459 | ) |
| Inventories                                                                            |       | (419                                          | )          | (712 | ) |
| Prepaid and other current assets                                                       |       | (12,418                                       | )          | 2,524 |   |
| Accounts payable                                                                       |       | (4,055                                        | )          | (5,184 | ) |
| Accrued and other current liabilities                                                  |       | 14,734                                        |       | (1,521 | ) |
| Other non-current assets                                                               |       | (225                                          | )          | 2,190 |   |
| Other non-current liabilities                                                          |       | 2,476                                         |       | 2,126 |   |
| Total adjustments from operating activities                                            |       | 66,520                                        |       | 53,975 |   |
| Net cash provided by operating activities                                              |       | 70,746                                        |       | 57,122 |   |
|                                                                                   |       |                                          |       |   |   |
| Cash flows from  investing activities:                                                 |       |                                          |       |   |   |
| Capital expenditures                                                                   |       | (44,028                                       | )          | (36,586 | ) |
| Acquisitions                                                                           |       | (92,790                                       | )          | (178,854 | ) |
| Net (expenditures) proceeds from disposal of  property, plant and equipment            |       | (139                                          | )          | 69 |   |
| Restricted cash                                                                        |       | (612                                          | )          | (2,956 | ) |
| Net cash used in investing activities                                                  |       | (137,569                                      | )          | (218,327 | ) |
|                                                                                   |       |                                          |       |   |   |
| Cash flows from  financing activities:                                                 |       |                                          |       |   |   |
| Net proceeds from issuance of Buckeye Partners, L.P.  units                            |       | 64,105                                        |       | 156,103 |   |
| Debt issuance costs                                                                    |       | —                                        |       | (910 | ) |
| Proceeds from exercise of unit options                                                 |       | 486                                           |       | 1,154 |   |
| Proceeds from issuance of long-term debt                                               |       | 127,000                                       |       | 324,767 |   |
| Payment of long-term debt                                                              |       | (72,209                                       | )          | (274,614 | ) |
| Distributions to non-controlling partners of Buckeye  Partners, L.P.                   |       | (54,848                                       | )          | (46,048 | ) |
| Net cash provided by financing activities                                              |       | 64,534                                        |       | 160,452 |   |
| Net decrease in  cash and cash equivalents                                             |       | (2,289                                        | )          | (753 | ) |
| Cash and cash  equivalents at beginning of period                                      |       | 28,984                                        |       | 21,352 |   |
| Cash and cash  equivalents at end of period                                            |       | $                                             | 26,695     |   | $ | 20,599 |   |
| Supplemental  cash flow information:                                                   |       |                                          |       |   |   |
| Cash paid for  interest (net of amount capitalized)                                    |       | $                                             | 30,382     |   | $ | 28,525 |   |
| Capitalized  interest                                                                  |       | $                                             | 1,010      |   | $ | 1,166 |   |
| Cash paid for  income taxes                                                            |       | $                                             | 65         |   | $ | 585 |   |
|                                                                                   |       |                                          |       |   |   |
| Non-cash changes  in assets and liabilities:                                           |       |                                          |       |   |   |
| Fair value hedge accounting                                                            |       | $                                             | 599        |   | $ | 586 |   |
| Environmental obligations related to acquisition of  Northeast Pipelines and Terminals |       | $                                             | —     |   | $ | (2,332 | ) |

 

See Notes to condensedconsolidated financial statements.

7

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MAINLINE L.P.

Consolidated Statement of Changes in Partners’ Equity(In thousands)(Unaudited)
| ** **                                     | ** ** | **General  Partner** | ** ** | **Limited  Partners A  Units** | ** ** | **Limited  Partners B  Units** | ** ** | **Equity Gains on  Issuance of  Buckeye LP units** | ** ** | **Accumulated Other  Comprehensive  Income** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------|------------|
| Partners’  capital at December 31, 2005   |       | $                    | 7          |                                | $          | 74,132                              |       | $                                                                           | 3,473      |                                              | $          | 1,316     |       | $ | 1,514 |   | $ | 80,442 |   |
| Net income                                     |       | —               |       | 4,226                               |       | —                              |       | —                                                                      |       | —                                            |       | 4,226     |       |
| Change in fair  value of cash flow hedges, net |       | —               |       | —                              |       | —                              |       | —                                                                      |       | 718                                               |       | 718       |       |
| Comprehensive  income                          |       | —               |       | 4,226                               |       | —                              |       | —                                                                      |       | 718                                               |       | 4,944     |       |
| Equity gains on  issuance of Buckeye LP units  |       | —               |       | —                              |       | —                              |       | 166                                                                         |       | —                                            |       | 166       |       |
| Partners’ capital at June  30, 2006       |       | $                    | 7          |                                | $          | 78,358                              |       | $                                                                           | 3,473      |                                              | $          | 1,482     |       | $ | 2,232 |   | $ | 85,552 |   |

 

See Notes tocondensed consolidated financial statements.

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MAINLINE L.P.

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

1.               BASIS OFPRESENTATION

Inthe opinion of management, the accompanying condensed consolidated financialstatements of MainLine L.P. (the “Company”), which are unaudited except thatthe Balance Sheet as of December 31, 2005 is derived from audited financialstate­ments, include all adjustments necessary to present fairly the Company’sfinancial position as of June 30, 2006, along with the results of the Company’soperations for the three and six months ended June 30, 2006 and 2005 and itscash flows for the six months ended June 30, 2006 and 2005.  The results of operations for the three andsix months ended June 30, 2006 are not necessarily indicative of the results tobe expected for the full year ending December 31, 2006.

Pursuantto the rules and regulations of the Securities and Exchange Commis­sion, thecondensed consolidated financial statements do not include all of theinformation and notes normally included with financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America.  These condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements of the Company and the notes thereto for the year endedDecember 31, 2005 included in Buckeye GPHoldings’ registration statement on Form S-1, as amended (Registration No.333-133433) and as filed with the Securities and Exchange Commission on July25, 2006.

The Company is a limitedpartnership organized on February 24, 2004 under the laws of the state ofDelaware. As of June 30, 2006, MainLine Management LLC (“MainLine Management”)was the general partner of the Company and is currently the general partner ofBuckeye GP Holdings L.P. (“Buckeye GP Holdings”).  As of June 30, 2006, the Company owned 100%of Buckeye GP LLC (“Buckeye GP”). Buckeye GP 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.  As of June 30, 2006, theCompany was owned by affiliates of Carlyle/Riverstone Global Energy and PowerFund II, L.P. (“Carlyle/Riverstone”) and certain members of Buckeye GP’s seniormanagement. The Company’s primary business was the management of Buckeye. AtJune 30, 2006, the Company owned an approximate 2% overall general partnerinterest in Buckeye and its operating subsidiaries.

In connection with theinitial public offering (“IPO”) of common units of Buckeye GP Holdings onAugust 9, 2006, the pre-IPO owners’ of the Company contributed all of theirequity interests in the Company to Buckeye GP Holdings.  This contribution was accounted for as atransfer of assets between entities under common control in accordance withStatement of Financial Accounting Standards No. 141, “BusinessCombinations.”  The financial informationfor the Company is included in this report because it is the predecessor toBuckeye GP Holdings.

All of the employees whoprovide services to the Company and its subsidiaries and Buckeye and itssubsidiaries are paid and employed by Buckeye Pipe Line Services Company (“ServicesCompany”). Pursuant to a services agreement and an executive employmentagreement, Services Company is reimbursed by the Company or Buckeye’ssubsidiaries for the cost of these employees.The Company is responsible for the total compensation, including all benefits,paid for the four highest salaried officers performing duties for Buckeye GPwith respect to the functions of operations, finance, legal, marketing andbusiness development, treasury, or performing the function of president ofBuckeye 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 anemployee stock ownership plan (the “ESOP”). Services Company owns approximatelya 5.9% equity interest in Buckeye at June 30, 2006. The services agreementextends until all payments due under the ESOP’s 3.60% Senior Secured Notes aresatisfied, which is currently scheduled to occur in March 2011.

*Descriptionof the Business*

At June 30, 2006, theCompany had no operating assets other than its general partner ownershipinterest in Buckeye and its operating subsidiaries.  Because theCompany owned Buckeye GP, its ownership interest in Buckeye is reflected on aconsolidated basis, which means that the Company’s financial results arecombined with Buckeye’s financial results. The limited partner interests inBuckeye not owned by the Company or Services Company are reflected as “Non-controllinginterest expense”, in the enclosed condensed consolidated statements ofincome.  Buckeye’s principal lineof business is the transportation, terminalling and storage of petroleumproducts in the United States for major integrated oil companies, large refinedproduct marketing companies and major end users of petroleum products on a feebasis through facilities owned and operated by Buckeye. Buckeye also operatespipelines owned by third parties under contracts with major integrated oil andchemical companies, and performs certain construction activities, generally forthe owners of these third-party pipelines.

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As of June 30, 2006,Buckeye conducted all 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 Holdings,L.P. (“BPH”), Wood River Pipe Lines LLC (“Wood River”), Buckeye Pipe LineTransportation LLC (“BPL Transportation”) and Buckeye NGL Pipe Lines LLC (“BuckeyeNGL”).  Buckeye NGL commenced 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 as an “Operating Subsidiary” or collectively as the “OperatingSubsidiaries.” Buckeye owns an approximate 99% ownership interest in eachOperating Subsidiary except Wood River, BPL Transportation and Buckeye NGL, inwhich it owns a 100% interest.

Buckeye’s Operating Subsidiaries aggregate into threereportable operating segments:  PipelineOperations, Terminalling and Storage and Other Operations.  See Note 10 for a further discussion.

2.     CONTINGENCIES

*Claims and Proceedings*

Buckeye and its Operating Subsidiaries in the ordinarycourse of business are involved in various claims and legal proceedings, someof which are covered by insurance.  TheCompany is generally unable to predict the timing or outcome of these claimsand proceedings. Based upon its evaluation of existing claims and proceedingsand the probability of losses relating to such contingencies, Buckeye hasaccrued certain amounts relating to such claims and proceedings, none of whichare considered material.

*EnvironmentalContingencies*

In accordance with its accountingpolicy on environmental expenditures, Buckeye recorded operating expenses, netof insurance recoveries, of $2.2 million and $2.8 million for the three monthsended June 30, 2006 and 2005, respectively, and $3.9 million and $5.6 millionfor the six months ended June 30, 2006 and 2005, respectively, which wererelated to environmental expenditures unrelated to claims and proceedings.  Expenditures, both capital and operating,relating to environmental matters are expected to continue due to Buckeye’scommitment to maintaining high environmental standards and to increasinglystrict environmental laws and government enforcement policies.

3.     ACQUISITIONS

On January 1, 2006, Buckeyeacquired a refined petroleum products terminal located in Niles, Michigan fromaffiliates of Shell Oil Products, U.S. (“Shell”) for $13.0 million.  On January 31, 2006, Buckeye completed theacquisition of a natural gas liquids pipeline, which extends generally fromWattenberg, Colorado to Bushton, Kansas, from BP Pipelines (North America) Inc.for approximately $87.0 million, which includes a deposit of $7.7 million paidin December 2005.  Buckeye NGL acquiredthe natural gas liquids pipeline and Buckeye Terminals, LLC, a subsidiary ofBPH, acquired the refined petroleum products terminal.  Buckeye also completed certain miscellaneousasset acquisitions during the first six months of 2006 which approximated $1million.

In connection with each ofthese acquisitions, Buckeye determined that the transaction represented theacquisition of various assets, and not the acquisition of a business, as thatterm is defined in Statement of Financial Accounting Standards No. 141 – “BusinessCombinations”.  Accordingly, Buckeye hasallocated, on a preliminary basis, the cost of each acquisition to the varioustangible assets acquired, principally property, plant and equipment.  Buckeye is in the process of determining thefinal allocation.

In December 2005, Buckeyeacquired a refined petroleum products terminal and related assets (includingcertain railroad offloading facilities) located in Taylor, Michigan for $20million.  Buckeye allocated, on apreliminary 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:

|                                                                       | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                            | ** ** | **(In thousands)** | ** ** |
| MainLine L.P.:                                                        |       |                    |       |                  |       |
| Term Loan                                                             |       | $                       | 169,000    |                  | $          | 173,250 |   |
| Services  Company:                                                    |       |                    |       |                  |       |
| 3.60% ESOP Notes due March 28, 2011                                   |       | 30,437                  |       | 33,617                |       |
| Retirement premium                                                    |       | (1,063                  | )          | (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                            |       | 112,000                 |       | 50,000                |       |
| Total principal debt                                                  |       | 1,160,374               |       | 1,105,583             |       |
| Other, including  unamortized discounts and changes in fair value (1) |       | (898                    | )          | (923                  | )          |
| Subtotal  long-term debt                                              |       | 1,159,476               |       | 1,104,660             |       |
| Less current maturities of debt                                       |       | (7,883                  | )          | (7,811                | )          |
| Long-term debt                                                        |       | $                       | 1,151,593  |                  | $          | 1,096,849 |   |

 

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(1)                    The June 30,2006 amount includes $1,647,000 related to an adjustment to fair valueassociated with a hedge of fair value and $2,545,000 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 Company*

As of June 30, 2006, theCompany was party to a Senior Secured Credit Facility (“Term Loan”) with aconsortium of financial institutions arranged by Goldman Sachs Credit Partnersunder which the Company had $169.0 million outstanding.  Borrowings under the Term Loan bore interestunder one of two rate options selected by the Company equal to either (i) thegreater of (a) the federal funds rate plus one half of one percent and (b) theprime interest rate or (ii) the London Interbank Offered Rate (“LIBOR”) plus anapplicable margin. The applicable margin, which was 2.375% at June 30, 2006,was determined based upon an interest coverage ratio defined in the loanagreement.  At June 30, 2006 the interestrate under the Term Loan was approximately 7.81%.

The Term Loan alsocontained a requirement that the Company maintain an interest expense reserveaccount in the amount of the anticipated interest payments for the next twoquarterly periods, although failure to maintain such a balance was not an eventof default under the Term Loan. At June 30, 2006, the amount on deposit in theinterest expense reserve account was $5.7 million, compared to estimatedinterest in the next two quarters of $6.6 million.

All amounts outstanding under the Term Loan were repaid withthe proceeds of Buckeye GP Holdings’ initial public offering, together withcash on hand, on August 9, 2006. See Note 12 for a discussion of Buckeye GPHoldings’ current credit facility.

*Services Company*

Services Company’s debtconsists of 3.60% Senior Secured Notes (the “3.60% ESOP Notes”) due March 28,2011 payable by the ESOP to a third-party lender. The 3.60% ESOP Notes wereissued May 4, 2004.  The 3.60% ESOP Notesare collateralized by Services Company’s common stock and are guaranteed byServices Company. In addition, Buckeye has committed that, in the event thatthe value of Buckeye’s LP units owned by Services Company falls below 125% ofthe balance payable under the 3.60% ESOP Notes, Buckeye will fund an escrow accountwith sufficient assets to bring the value of the total collateral (the value Buckeye’sLP units owned by the Services Company and the escrow account) up to the 125%minimum.

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Amounts deposited in the escrow account are returnedto Buckeye when the value of Buckeye’s LP units owned by Services Company’s returnsto an amount which exceeds the 125% minimum. At June 30, 2006, the value ofBuckeye’s LP units owned by Services Company exceeded the 125% requirement.

*Buckeye*

Buckeye has a $400million 5-year revolving credit facility (“Buckeye’s Credit Facility”) with asyndicate of banks led by SunTrust Bank. Buckeye’s Credit Facility contains aone-time expansion feature to $550 million subject to certain conditions. Borrowingsunder Buckeye’s Credit Facility are guaranteed by certain of Buckeye’ssubsidiaries. Buckeye’s Credit Facility matures on August 6, 2009. The weightedaverage interest rate on amounts outstanding under Buckeye’s Credit Facility atJune 30, 2006 was 5.8%.

Borrowings under Buckeye’sCredit Facility bear interest under one of two rate options, selected byBuckeye, equal to either (i) the greater of (a) the federal funds rate plus onehalf of one percent and (b) SunTrust Bank’s prime rate or (ii) the LIBOR plusan applicable margin. The applicable margin is determined based upon ratingsassigned by Standard and Poors and Moody’s Investor Services for Buckeye’ssenior unsecured non-credit enhanced long-term debt. The applicable margin willincrease during any period in which Buckeye’s Funded Debt Ratio (describedbelow) exceeds 5.25 to 1.0. At June 30, 2006 and December 31, 2005, Buckeye had$112 million and $50 million outstanding under Buckeye’s Credit Facility,respectively, and had committed $1.7 million and $1.3 million in support ofletters of credit, respectively.

Buckeye’s Credit Facilitycontains covenants and provisions 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 Facilityrequires that Buckeye and certain of its subsidiaries maintain a maximum “FundedDebt Ratio” and a minimum “Fixed Charge Coverage Ratio”. The Funded Debt Ratioequals the ratio of the long-term debt of Buckeye and certain of itssubsidiaries (including the current portion, if any) to “Adjusted EBITDA”,which is defined in  Buckeye’s CreditFacility as earnings before interest, taxes, depreciation, depletion, amortizationand incentive compensation payments to Buckeye GP, for the four precedingfiscal quarters. As of the end of any fiscal quarter, the Funded Debt Ratio maynot exceed 4.75 to 1.00, subject to a provision for increases to 5.25 to 1.00in connection with future acquisitions. At June 30, 2006, Buckeye’s Funded DebtRatio was 4.48 to 1.00.

The Fixed Charge CoverageRatio is defined as the ratio of Adjusted EBITDA for the four preceding fiscalquarters to the sum of payments for interest and principal on debt plus certaincapital expenditures required for the ongoing maintenance and operation ofBuckeye’s assets.  Buckeye is required tomaintain a Fixed Charge Coverage Ratio of greater than 1.25 to 1.00 as of theend of any fiscal quarter. As of June 30, 2006, Buckeye’s Fixed Charge CoverageRatio was 2.70 to 1.00.

*Covenants.*The Company and its subsidiaries, Services Company, Buckeyeand its Operating Subsidiaries are in compliance with the various covenants ofthe debt agreements at June 30, 2006.

*DerivativeInstruments.*At June 30, 2006, the Company had threederivative instruments outstanding related to the Company’s Term Loan. The TermLoan replaced the Company’s $100,000,000 Senior Secured Credit Facility (the “PriorTerm Loan”) which was entered into on May 4, 2004. Proceeds from the Term Loanwere used to refund the amounts outstanding under the Prior Term Loan. Inaccordance with requirements under the Prior Term Loan, the Company purchasedan interest rate cap from Goldman Sachs Capital Markets, L.P. on a notionalamount of $50 million for $375,000. Under the interest rate cap, if thevariable interest rate the Company paid on the Prior Term Loan exceeded 5.0%,Goldman Sachs would pay the Company the difference between the variable rate ineffect on the $50 million notional amount and the capped rate. The Company didnot designate the interest rate cap as a cash flow hedge and, accordingly,changes in value of the cap have been reflected in income. The Company did notterminate the interest rate cap when the Prior Term Loan was repaid.

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In accordance withrequirements under the Term Loan, the Company entered into two interest rateswap agreements with Goldman Sachs Capital Markets L.P. The Company designatedthese transactions as hedges of the Company’s cash flow risk associated withthe Term Loan. The first agreement, which terminated on December 22, 2005, wasfor a notional amount of $172.8 million and called for the Company to receivefloating rate payments based on the notional amount times a rate equal tothree-month LIBOR in exchange for paying a fixed rate based on the notionalamount times 3.029%. The interest rate swap was effective December 22, 2004,and was terminated on December 22, 2005. The three-month LIBOR reset on datesthat coincided with the reset dates for the variable interest rate of the TermLoan. The second agreement is for a notional amount of $86 million and callsfor the Company to receive the floating rate payments based on the notionalamount times a rate equal to three-month LIBOR in exchange for paying a fixedrate based on the notional amount times 3.853%. The agreement became effectiveon December 22, 2005 and will terminate December 22, 2007. During 2005, theCompany entered into another interest rate swap agreement. This agreement isfor a notional amount of $12 million and calls for the Company to receive thefloating rate payments based on the notional amount times a rate equal tothree-month LIBOR in exchange for paying a fixed rate based on the notionalamount times 4.54%.

In connection withBuckeye GP Holdings’ initial public offering, the interest rate swaps notedabove were liquidated.  See Note 12 for afurther discussion.

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 June 30, 2006 and 2005 and $118 thousand during each of the six monthsended June 30, 2006 and 2005, related to the amortization of the gain on theinterest rate swap.

5.   ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and othercurrent liabilities consist of the following:

|                               | ** ** | **June 30,**  | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                    | ** ** | **(In thousands)** |       |
| Taxes—other than  income |       | $                  | 6,609      |                  | $          | 6,569 |   |
| Environmental  liabilities    |       | 9,522              |       | 6,996                 |       |
| Interest                      |       | 17,403             |       | 16,648                |       |
| Retainage                     |       | 707                |       | 639                   |       |
| Payable for  ammonia purchase |       | 7,151              |       | —                |       |
| Compensation and  vacation    |       | 7,610              |       | 8,751                 |       |
| Other                         |       | 14,944             |       | 9,221                 |       |
| Total                         |       | $                  | 63,946     |                  | $          | 48,824 |   |

 

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6.               EARNINGS PER UNIT

In connection with itsformation, the Company issued 14,595 general partner units (“GP Units”) and145,935,405 limited partner A Units (“A Units”) to Carlyle/Riverstone andcertain members of senior management of Buckeye GP for $1.00 per unit. TheCompany also issued 16,216,668 limited partner B Units (“B Units”) to certainmembers of senior management for no consideration.

Distributions are paid onthe B Units only after the holders of the A Units and GP Units have beendistributed sufficient cash to recover their entire investment along with acumulative annual return of 9% compounded from May 4, 2004 to the date ofpayment. Thus, the B Units are subordinate to the A Units and the GP Units.

The Company hasdetermined that, under EITF Issue No. 03-6, “Participating Securities and theTwo-Class Method under FASB Statement No. 128, Earnings per Share,” a two-classmethod of computing earnings per unit is required. According to the EITF IssueNo. 03-6, the Company’s A Units and GP Units are considered to be participatingsecurities requiring the use of the two-class method for the computation ofbasic and diluted earnings per unit. The two-class computation method for eachperiod reflects the cash distributions (or dividends) paid per unit for eachclass of stock, plus the amount of allocated undistributed earnings per unitcomputed using the participation percentage which reflects this change. The AUnits and GP Units are considered to be participating securities as they areentitled to receive a distribution yield in excess of the B Units.

As of June 30, 2006, theholders of the A Units and the GP Units had received neither the return oftheir initial investment nor the 9% cumulative return. As a result, basic anddiluted earnings per unit, and any distributions for the three and six monthsended June 30, 2006 and 2005 are based on 145,950,000 units consisting of145,935,405 of A Units and 14,595 of GP Units.

For the three and sixmonths ended June 30, 2006 and 2005, there were no other securities, other thanthe B Units, with a potentially dilutive effect on the Company’s earnings. As aresult, basic earnings per unit and diluted earnings per unit were equal.

7.               UNIT-BASED COMPENSATION

Prior to January 1, 2006,management accounted for its unit-based compensation plans using therecognition and measurement provisions of Accounting Principles Board OpinionNo. 25 (“APB No. 25”), and related interpretations, as permitted by Statementof Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS No. 123”), as amended by Statement of Financial AccountingStandards No. 148, “Accounting for Stock-Based Compensation—Transition andDisclosure” (“SFAS No. 148”). Effective January 1, 2006, the Company adoptedthe fair value measurement and recognition provisions of Statement of FinancialAccounting Standards 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”),for both of its unit option plans using the modified prospective basistransition method.

Management currentlyaccounts for two unit-based compensation plans.

*Option Plan*

Buckeye has a Unit Optionand Distribution Equivalent Plan (the “Option Plan”). This plan grants optionsto purchase limited partner units (“LP units”) at 100% of the market price ofthe LP units on the date of grant. Generally the options vest three years fromthe date of grant and expire ten years from date of grant. Buckeye recognizescompensation expense for awards granted on or after January 1, 2006 at thegrant-date fair value reduced by estimated forfeitures on a straight-line basisover the requisite service period. The impact of adopting the accountingprovisions of SFAS No. 123R for this plan is immaterial to the condensedconsolidated financial statements.

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*Unit Compensation Plan*

The Company has a UnitCompensation Plan utilizing the B units. On May 4, 2004, the Company issued16,216,668 B units to certain members of senior management for noconsideration. As discussed in Note 6, the B Units were, as of June, 2006,subordinate to the A Units. One half, or 8,108,334, of the B Units (“Time BasedB Units”) vest ratably over five years. The remaining, or 8,108,334, B units (“PerformanceBased B Units”) vest over five years only if certain performance targets basedon the incentive compensation received by the Company from Buckeye are met. Theperformance targets are based on annual periods ending on each of June 30, 2005to 2009. The performance targets are cumulative, in that shortfalls or excessin one period can be made up or carried over in subsequent periods.

The Company recorded nocompensation expense for Time Based B Units for the three and six monthsperiods ending June 30, 2006 and 2005. Although May 4, 2004 represented themeasurement date for the Time Based B Units (the date both the number of unitsavailable for purchase and the purchase price (zero) were known), there was anominal fair value for these units to charge to earnings. 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.

Prior to January 1, 2006,the Company recognized deferred compensation for the Performance Based B Unitswhen it was probable that the performance target specified in the Company’spartnership agreement would be met. Such deferred compensation was recordedover the respective service periods of the performance targets until December31, 2005. Compensation expense for the Performance Based B Units of $0.7million and $2.0 million was recorded in general and administrative expenses inthe condensed consolidated statements of income in the three and six monthsperiods ended June 30, 2005, respectively. Under the modified prospective transition method permitted by SFAS No.123R, compensation expense for the Performance Based B Units subsequent toJanuary 1, 2006 is measured based on the nominal fair value established at thegrant date. Accordingly, there was a nominal amount charged to earnings in thethree and six month periods ending June 30, 2006.

At June 30, 2006, therewere 16,216,668 of B Units outstanding, of which 2,837,917 Time Based B Unitswere vested and 1,621,667 of Performance Based B Units were vested. Theaggregate intrinsic value of vested B Units was approximately $4.6 million atJune 30, 2006. Intrinsic value is determined by calculating the differencebetween the fair value of the B Units on June 30, 2006 and the exercise price(which is zero), multiplied by the number of vested B Units. At June 30, 2006,there were no additional B Units available for grant in connection with theUnit Compensation Plan.****

In connection withBuckeye GP Holdings’ initial public offering, the Unit Compensation Plan haschanged. See Note 12 for a further discussion**.**

8.     PENSIONSAND OTHER POSTRETIREMENT BENEFITS

Services Companysponsors a retirement income guaranty plan (a defined benefit plan) whichgenerally 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 (“Pension Benefit”).  Services Company’s policy is to fund amountsnecessary to at least meet the minimum funding requirements under ERISA.

Services Companyalso provides postretirement health care and life insurance benefits to certainof its retirees (“Postretirement Benefit”). To be eligible for these benefits, an employee must have been hiredprior to January 1, 1991 with respect to health care benefits and January1, 2002 with respect to life insurance benefits, and the employee must satisfycertain service requirements.  ServicesCompany does not pre-fund this postretirement benefit obligation.

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For the threemonths ended June 30, 2006 and 2005, the components of the net periodic benefitcost recognized by the Company for Services Company’s retirement incomeguarantee plan and postretirement health care and life insurance plan were asfollows:
|                                         | ** ** | **Pension Benefits** | ** ** | **Postretirement  Benefits** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2006**                  | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**   | ** ** |
| Components of net periodic benefit cost |       |                      |       |                         |       |   |   |   |   |
| Service cost                            |       | $                         | 179        |                         | $          | 256 |   | $ | 225 |   | $ | 203 |   |
| Interest cost                           |       | 215                       |       | 262                          |       | 725 |   | 689 |   |
| Expected return on plan assets          |       | (211                      | )          | (194                         | )          | — |   | — |   |
| Amortization of prior service  benefit  |       | (115                      | )          | (119                         | )          | (125 | ) | (86 | ) |
| Amortization of unrecognized  losses    |       | 111                       |       | 211                          |       | 273 |   | 144 |   |
| Net periodic benefit cost               |       | $                         | 179        |                         | $          | 416 |   | $ | 1,098 |   | $ | 950 |   |

 

Inthe six months ended June 30, 2006 and 2005, the components of the net periodicbenefit cost recognized by the Company for Services Company’s retirement incomeguarantee plan and postretirement health care and life insurance plan were asfollows:
|                                         | ** ** | **Pension Benefits** | ** ** | **Postretirement  Benefits** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2006**                  | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(In thousands)**   | ** ** |
| Components of net periodic benefit cost |       |                      |       |                         |       |   |   |   |   |
| Service cost                            |       | $                         | 461        |                         | $          | 459 |   | $ | 450 |   | $ | 408 |   |
| Interest cost                           |       | 500                       |       | 470                          |       | 1,450 |   | 1,378 |   |
| Expected return on plan assets          |       | (423                      | )          | (348                         | )          | — |   | — |   |
| Amortization of prior service  benefit  |       | (227                      | )          | (213                         | )          | (250 | ) | (173 | ) |
| Amortization of unrecognized  losses    |       | 306                       |       | 378                          |       | 548 |   | 288 |   |
| Net periodic benefit cost               |       | $                         | 617        |                         | $          | 746 |   | $ | 2,l98 |   | $ | 1,901 |   |

 

The Companypreviously disclosed in its financial statements for the year ended December31, 2005 that a minimum funding contribution was not required to be made during2006.

9.               FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company uses the following methods and assumptionsin estimating fair value disclosures for financial instruments:

At June 30, 2006 andDecember 31, 2005, cash and cash equivalents, trade receivables, constructionand pipeline relocation receivables, prepaid and other current assets,restricted cash, and all current liabilities are reported in the CondensedConsolidated Balance Sheets at amounts which approximate fair value due to therelatively short period to maturity of these financial instruments.

The fair value of theCompany’s debt was estimated to be $1,097 million and $1,114 million at June30, 2006 and December 31, 2005 respectively. The value was calculated using interest rates currently available to theCompany for issuance of debt with similar terms and remaining maturities andapproximate market values on the respective dates.

During the first sixmonths of 2006, the Company had no ineffectiveness with respect to its cashflow hedges and, accordingly, no change in the fair value of the hedge has beenreflected in net income.  At June 30, 2006and December 31, 2005, the fair value of the interest rate swaps was anon-current asset of $2.2 million and $1.5 million,

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respectively.  The change in fair value has been reflectedas non-current assets in the Condensed Consolidated Balance Sheets, with thenet change reflected in other comprehensive income.

In connection withBuckeye GP Holdings’ initial public offering, the interest rate swaps notedabove were liquidated.  See Note 12 for afurther discussion.

Changes in the fair valueof the Company’s interest rate cap have been reflected in net income.  At June 30, 2006 and December 31, 2005, thevalue of the interest rate cap was $0.3 million and $0.1 million,respectively.  Interest expense wasreduced by $0.1 million and $0.2 million for the three and six months endedJune 30, 2006, respectively. Interest expense was increased by $0.1 million inboth the three and six month periods ended June 30, 2005 due to changes in thevalue of the interest rate cap.****

10.         SEGMENT INFORMATION

All of the Company’soperations are conducted through Buckeye and its Operating Subsidiaries. Based onthe financial information provided to senior management, Buckeye presents itsoperations in three reportable operating segments:  Pipeline Operations, Terminalling and Storageand Other Operations. The Company also has certain consolidated-level assets,principally consisting of goodwill, which are not allocable to the individualreporting segments because they are not used by the chief operating decisionmaker to make operating decisions or to allocate resources. However, Buckeyehas recorded approximately $11.4 million of goodwill in its Terminalling andStorage segment.  The Company’sreportable operating segments consist of the following:

*Pipeline Operations:*

The PipelineOperations segment receives petroleum products including gasoline, jet anddiesel fuel and other distillates from refineries, connecting pipelines, bulkand marine terminals and transports these products to other locations for atariff charge.  This segment owns andoperates approximately 5,350 miles of pipelines in the following states: California,Colorado, Connecticut, Florida, Illinois, Indiana, Kansas, Massachusetts,Michigan, Missouri, New Jersey, Nevada, New York, Ohio, Pennsylvania andTennessee.  This segment also includesthe operations of Buckeye NGL.

*Terminalling and Storage:*

The Terminallingand Storage segment provides bulk storage and terminal throughputservices.  This segment owns and operates45 terminals that have the capacity to store an aggregate of approximately 17.6million barrels of refined petroleum products. The terminals are located in Indiana, Illinois, Massachusetts, Michigan,Missouri, New York, Ohio and Pennsylvania.

*Other Operations:*

The OtherOperations segment consists primarily of Buckeye’s contract operation ofthird-party pipelines, which are owned primarily by major petrochemicalcompanies and are located in Texas.  Thissegment also performs pipeline construction management services, typically forcost plus a fixed fee, for these same customers.  The Other Operations segment also includesBuckeye’s ownership and operation of interests in two petrochemical pipelines.

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Financialinformation about each segment is presented below. Each segment uses the sameaccounting policies as those used in the preparation of the Company’s condensedconsolidated financial statements. All inter-segment revenues, operating incomeand assets have been eliminated.  Allperiods are presented on a consistent basis.

 
|                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(In thousands)**                         | ** ** | **(In thousands)**                       | ** ** |
|                     |       |                                            |       |                                          |       |   |   |   |   |
| Revenues:                |       |                                            |       |                                          |       |   |   |   |   |
| Pipeline Operations      |       | $                                               | 86,538     |                                          | $          | 74,102 |   | $ | 168,405 |   | $ | 147,374 |   |
| Terminalling and Storage |       | 18,441                                          |       | 15,008                                        |       | 36,609 |   | 32,147 |   |
| Other Operations         |       | 6,516                                           |       | 12,806                                        |       | 12,226 |   | 18,284 |   |
| Total                    |       | $                                               | 111,495    |                                          | $          | 101,916 |   | $ | 217,240 |   | $ | 197,805 |   |

 
| Operating income:        |   |   |   |   |   |   |   |   |   |
|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Pipeline Operations      |   | $      | 34,933 |   | $      | 30,594 |   | $      | 65,666 |   | $ | 58,414 |   |
| Terminalling and Storage |   | 4,965  |   | 5,289  |   | 12,477 |   | 13,038 |   |
| Other Operations         |   | 1,475  |   | 2,790  |   | 2,695  |   | 3,349  |   |
| Total                    |   | $      | 41,373 |   | $      | 38,673 |   | $      | 80,838 |   | $ | 74,801 |   |

 
| Depreciation and  amortization: |   |   |   |   |   |   |   |   |   |
|---------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Pipeline Operations             |   | $      | 8,478  |   | $      | 6,699  |   | $      | 16,089 |   | $ | 12,850 |   |
| Terminalling and Storage        |   | 1,142  |   | 1,041  |   | 2,246  |   | 1,995  |   |
| Other Operations                |   | 398    |   | 327    |   | 787    |   | 653    |   |
| Total                           |   | $      | 10,018 |   | $      | 8,067  |   | $      | 19,122 |   | $ | 15,498 |   |

 
|                          | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(In thousands)**                       | ** ** |
|                     |       |                                          |       |   |   |
| Capital  expenditures:   |       |                                          |       |   |   |
| Pipeline Operations      |       | $                                             | 31,332     |   | $ | 35,141 |   |
| Terminalling and Storage |       | 9,487                                         |       | 1,269 |   |
| Other Operations         |       | 3,124                                         |       | 176 |   |
| Consolidating-level      |       | 85                                            |       | — |   |
| Total                    |       | $                                             | 44,028     |   | $ | 36,586 |   |

 
| Acquisitions:            |   |   |   |   |   |
|--------------------------|--------|--------|--------|--------|--------|
| Pipeline Operations      |   | $      | 79,286 |   | $      | 153,633 |   |
| Terminalling and Storage |   | 13,504 |   | 25,221 |   |
| Total                    |   | $      | 92,790 |   | $      | 178,854 |   |

 

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** **
|                          | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **               | ** ** | **(In thousands)** | ** ** |
| *Assets:                 |       |                    |       |                  |       |
| Pipeline Operations      |       | $                       | 1,568,500  |                  | $          | 1,466,512 |   |
| Terminalling and Storage |       | 306,636                 |       | 288,972               |       |
| Other Operations         |       | 66,693                  |       | 61,383                |       |
| Consolidating-level      |       | 232,334                 |       | 223,965               |       |
| Total                    |       | $                       | 2,174,163  |                  | $          | 2,040,832 |   |

 

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

12.         SUBSEQUENT EVENTS

*Initial Public Offering*

On August 9, 2006,Buckeye GP Holdings sold 10.5 million common units in an underwritten initialpublic offering (“IPO”), the net proceeds of which were approximately $167.4million.  Buckeye GP Holdings used thenet proceeds from the IPO, along with cash on hand, to repay all outstandingindebtedness under the Company’s Term Loan and to make distributions to itspre-IPO equity owners.  The common unitssold in the IPO represent approximately 37.1% of the outstanding equity ofBuckeye GP Holdings, which includes common units and management units.

In connection with theconsummation of the IPO, the pre-IPO owners of the Company contributed all oftheir equity interests in the Company to Buckeye GP Holdings.  This contribution was accounted for as atransfer of assets between entities under common control in accordance withStatement of Financial Accounting Standards No. 141, “Business Combinations”. The financial information for the Company is includedin this report because it is the predecessor to Buckeye GP Holdings.

* $10Million Credit Facility*

On August 9, 2006, Buckeye GP Holdings entered into a five-year $10 millionrevolving credit facility with SunTrust Bank, as both administrative agent andlender (the “Credit Agreement”).  Thecredit facility may be used for working capital and other partnership purposes.Buckeye GP Holdings has pledged all of the limited liability company interestsin Buckeye GP LLC to SunTrust Bank as security for its obligations under theCredit Agreement.

The Credit Agreement permits BuckeyeGP Holdings to prepay all loans under the credit facility at any time withoutpremium or penalty (other than customary LIBOR breakage costs).  Borrowings under the Credit Agreement bearinterest under one of two rate options, selected by Buckeye GP Holdings, equalto either:

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

·                  LIBOR, plus a margin which can range from 0.40% to1.40%, based upon the ratings assigned by Standard & Poor’s Rating Servicesand Moody’s Investor Services to the senior unsecured non-credit enhancedlong-term debt of Buckeye.

Buckeye GP Holdings’ ability toborrow amounts under the Credit Agreement is subject to satisfaction of certaincustomary conditions precedent to revolving loans and compliance with terms andconditions included in the Credit Agreement.

The Credit Agreement defines “RestrictedSubsidiaries” of Buckeye GP Holdings as Buckeye GP Holdings, and certain of itswholly owned subsidiaries.

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The Credit Agreement requiresBuckeye GP Holdings to maintain leverage and funded debt coverage ratios. Theleverage ratio covenant requires Buckeye GP Holdings to maintain, as of thelast day of each fiscal quarter, a ratio of the total funded indebtedness ofBuckeye GP Holdings and its Restricted Subsidiaries, measured as of the lastday of each fiscal quarter, to the aggregate dividends and distributionsreceived by Buckeye GP Holdings and its Restricted Subsidiaries from Buckeye, plus all other cash received byBuckeye GP Holdings and the Restricted Subsidiaries, measured for the precedingtwelve months, less expenses, of not more than 2.50 to 1.00. The funded debtcoverage ratio covenant requires Buckeye GP Holdings to maintain, as of thelast day of each fiscal quarter, a ratio of total consolidated funded debt ofBuckeye GP Holdings and all of its subsidiaries to the consolidated EBITDA, asdefined in the Credit Agreement, of Buckeye GP Holdings and all of itssubsidiaries, measured for the preceding twelve months, of not more than 5.25to 1.00, subject to a provision for increases to 5.75 to 1.00 in connectionwith future acquisitions.

The Credit Agreement prohibitsBuckeye GP Holdings from declaring dividends or distributions if any default orevent of default, as defined in the Credit Agreement, has occurred or wouldresult from such a declaration. In addition, the Credit Agreement containscovenants and provisions requiring Buckeye GP Holdings to adhere to certaincovenants and limiting the ability of Buckeye GP Holdings and its RestrictedSubsidiaries to, among other things:

·                  incur or guarantee indebtedness;

·                  make certain negative pledges and grant certainliens;

·                  make certain loans, acquisitions and investments;

·                  make any material changes to the nature of Buckeye GPHoldings’ or Restricted Subsidiaries’ business; or

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

If an event of default exists underthe Credit Agreement, the lender will be able to terminate the Credit Agreementand accelerate 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 pay any principal, interest, fees,expenses or other amounts when due;

·                  failure of any representation or warranty to be trueand correct in any material respect;

·                  failure to perform or otherwise comply with thecovenants in the Credit Agreement or other loan documents, subject to certaingrace periods;

·                  default by Buckeye GP Holdings or any RestrictedSubsidiary on the payment of any other indebtedness in excess of $5.0 millionor default by Buckeye or any of its subsidiaries on the payment of anyindebtedness in excess of $25.0 million, or any default in the performance ofany obligation or condition with respect to such indebtedness beyond theapplicable grace period if the effect of the default is to permit or cause theacceleration of the indebtedness;

·                  bankruptcy or insolvency events involving Buckeye GPHoldings;

·                  the entry against Buckeye GP Holdings of a judgmentin excess of specified amounts, or otherwise having a material adverse effect,that is not stayed, discharged or deferred within specified periods;

·                  a change in control of Buckeye GP Holdings (as suchterm is defined in the Credit Agreement);

·                  the invalidity or unenforceability of any materialprovision in the Credit Agreement or related documents; and

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·                  the occurrence of certain events with respect toemployee benefit plans subject to ERISA.

*UnitCompensation Plan*

Coincidentwith the IPO, the equity interests of the Company and ownership of the Company’sgeneral partner, were exchanged for the equity interests of Buckeye GPHoldings.  The 149,950,000 A Units of theCompany were exchanged for 16,438,000 Common Units. The 16,216,668 B Units wereexchanged for 1,362,000 Management Units.  The 9% cumulative annual return on theCompany’s A Units and GP Units was eliminated as part of the exchange.  The Management Units are exchangeablefor Common Units on a 1 to 1 basis at the option of the holder.  The vesting schedule of the Management Unitsvaries from that of the Company’s B Units for which they were exchanged.  Management Units of 953,400 were vestedimmediately upon their exchange and the remaining 408,600 Management Units vestover a three year period with 136,200 Management Units becoming vested on eachMay 4, of 2007, 2008 and 2009.

As aresult of the exchange, Buckeye GP Holdings anticipates recording a one-timenon-cash charge of approximately $3.2 million (with an offsetting increase inequity) in the third quarter of 2006 related to the change in vesting of theManagement Units compared to the vesting of the Company’s B Units.  Buckeye GP Holdings also anticipates annualcharges of approximately $0.5 million per year during the three year vestingperiod.

*Term Loan*

Buckeye GPHoldings also anticipates recording a non-cash charge of approximately $1.5million in the third quarter of 2006 related to the write-off of deferredfinancing costs associated with the repayment of all amounts outstanding underthe Company’s Term Loan on August 9, 2006.

*Merger of MainLine Sub LLC*

On August 18, 2006, MainLine Sub LLC, a wholly owned subsidiary of theCompany and the parent company of Buckeye GP, was merged with and into theCompany.  The Company succeeded to all ofthe assets and liabilities of MainLine Sub LLC pursuant to the merger.

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

RESULTS OFOPERATIONS

*Overview*

As of June 30, 2006,MainLine L.P. (the “Company”) owned and controlled Buckeye GP LLC (“Buckeye GP”),which is the general partner of Buckeye Partners, L.P. (“Buckeye”), a publiclytraded Delaware master limited partnership. On August 9, 2006, the pre-IPO owners of the Company contributed all oftheir equity interests in the Company to Buckeye GP Holdings L.P. (“Buckeye GPHoldings”).  This contribution wasaccounted for as a transfer of assets between entities under common control inaccordance with Statement of Financial Accounting Standards No. 141, “BusinessCombinations”. The financial information forthe Company is included in this report because it is the predecessor to BuckeyeGP Holdings.

On August 9, 2006,Buckeye GP Holdings sold 10.5 million common units in an underwritten initialpublic offering (“IPO”), the net proceeds of which were approximately $167.4million.  Buckeye GP Holdings used thenet proceeds 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 Buckeye GP Holdings, whichincludes common units and management units.

Coincident withthe IPO, the equity interests of the Company and ownership of the Company’sgeneral partner, were exchanged for the equity interests of Buckeye GPHoldings.  The 149,950,000 A Units of theCompany were exchanged for 16,438,000 Common Units. The 16,216,668 B Units wereexchanged for 1,362,000 Management Units. The Management Units are exchangeablefor Common Units on a 1 to 1 basis at the option of the holder.  The vesting schedule of the Management Unitsvaries from that of the Company’s B Units for which they were exchanged.  Management Units of 953,400 were vestedimmediately upon their exchange, and the remaining 408,600 Management Unitsvest over a three year period with 136,200 Management Units becoming vestedeach May 4 of 2007, 2008 and 2009.

As a result of theexchange, Buckeye GP Holdings anticipates recording a one-time non-cash chargeof approximately $3.2 million (with an offsetting increase in equity) in thethird quarter of 2006 related to the change in vesting of the Management Unitscompared to the vesting of the Company’s B Units.  Buckeye GP Holdings also anticipates annualcharges of approximately $0.5 million per year during the three year vestingperiod.

Buckeye GPHoldings also anticipates recording a non-cash charge of approximately $1.5million in the third quarter of 2006 related to the write-off of deferredfinancing costs associated with the repayment of all amounts outstanding underthe Company’s Term Loan on August 9, 2006.

*Overview of Buckeye*

        Buckeyeis a master limited partnership which operates through subsidiary entities (the“Operating Subsidiaries”) in the transportation, terminalling and storage ofrefined petroleum products on a fee basis through facilities owned and operatedby Buckeye.  Buckeye also operates pipelinesowned by third parties under contracts with major integrated oil and chemicalcompanies, and performs certain construction activities, generally for theowners of these third-party pipelines.

In May 2005, Buckeye acquired a refined petroleum productspipeline system comprising approximately 478 miles of pipeline and four refinedproducts terminals with aggregate storage capacity of approximately 1.3 millionbarrels located in the northeastern United States from affiliates of ExxonMobilCorporation (the “Northeast Pipelines and Terminals”) for approximately $175.0million.  In December 2005, Buckeyeacquired a refined petroleum products terminal and related assets (includingcertain railroad offloading facilities) located in Taylor, Michigan for $20million.  On January 1, 2006, Buckeyeacquired a refined petroleum products terminal located in Niles, Michigan, withaggregate storage capacity of 630,000 barrels from affiliates of Shell for$13.0 million.  On January 31, 2006,Buckeye acquired a natural gas liquids pipeline (the “NGL Pipeline”) withaggregate mileage of 

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approximately350 miles from BP Pipelines (North America) Inc. for approximately $87.0million, which includes a 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 $6.1 million of revenue in thethree months ended June 30, 2006 and $13.9 million of revenue in the six monthsended June 30, 2006.

The following discussion provides an analysis of theresults for each of the Company’s operating segments, an overview of itsliquidity and capital resources and other items related to the Company, Buckeyeand Services Company.  The followingdiscussion and analysis should be read in conjunction with (i) the accompanyinginterim condensed consolidated financial statements and related notes and (ii)the Company’s consolidated financial statements, related notes and management’sdiscussion and analysis of financial condition and results of operations forthe year ended December 31, 2005 included inthe Buckeye GP Holdings registration statement on Form S-1, as amended (RegistrationNo. 333-133433) and as filed with the Securities and Exchange Commission onJuly 25,  2006.

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

*Pipeline Operations:*

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 June 30, 2006, this segment owned and operated approximately 5,350miles of pipeline systems 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 and Storage:*

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 inIndiana, Illinois, Massachusetts, Michigan, Missouri, New York, Ohio andPennsylvania.

*Other Operations:*

The Other Operations segment consists primarily ofBuckeye’s contract operation of third-party pipelines, which are ownedprimarily by major petrochemical companies and are located in Texas.  This segment also performs pipelineconstruction management services, typically for cost plus a fixed fee, forthese same customers.  The OtherOperations segment also includes Buckeye’s ownership and operation of interestsin two petrochemical pipelines.

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Resultsof Operations

Summary operating results for the Company were asfollows:

|                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(In thousands)**          | ** ** | **(In thousands)**        | ** ** |
|                                                      |       |                             |       |                           |       |   |   |   |   |
| Revenue                                                   |       | $                                | 111,495    |                           | $          | 101,916 |   | $ | 217,240 |   | $ | 197,805 |   |
| Costs and  expenses                                       |       | 70,122                           |       | 63,243                         |       | 136,402 |   | 123,004 |   |
| Operating income                                          |       | 41,373                           |       | 38,673                         |       | 80,838 |   | 74,801 |   |
| Other income  (expenses)                                  |       | (15,909                          | )          | (13,762                        | )          | (31,318 | ) | (26,704 | ) |
| Income before  equity income and non-controlling interest |       | 25,464                           |       | 24,911                         |       | 49,520 |   | 48,097 |   |
| Equity income                                             |       | 1,415                            |       | 1,225                          |       | 2,795 |   | 2,465 |   |
| Non-controlling  interest expense                         |       | (24,892                          | )          | (24,217                        | )          | (48,089 | ) | (47,415 | ) |
| Net income                                                |       | $                                | 1,987      |                           | $          | 1,919 |   | $ | 4,226 |   | $ | 3,147 |   |

 

Revenues and operating income by operating segment forthe three months ended June 30, 2006 and 2005 were as follows:

|                          | ** ** | **Three Months Ended  June 30,** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **               | ** ** | **(In thousands)**                         | ** ** |
| Revenues:                |       |                                            |       |   |   |
| Pipeline Operations      |       | $                                               | 86,538     |   | $ | 74,102 |   |
| Terminalling and Storage |       | 18,441                                          |       | 15,008 |   |
| Other Operations         |       | 6,516                                           |       | 12,806 |   |
| Total                    |       | $                                               | 111,495    |   | $ | 101,916 |   |
|                     |       |                                            |       |   |   |
|                     |       |                                            |       |   |   |
| Operating  income:       |       |                                            |       |   |   |
| Pipeline Operations      |       | $                                               | 34,933     |   | $ | 30,594 |   |
| Terminalling and Storage |       | 4,965                                           |       | 5,289 |   |
| Other Operations         |       | 1,475                                           |       | 2,790 |   |
| Total                    |       | $                                               | 41,373     |   | $ | 38,673 |   |

 

*Second Quarter*

Totalrevenuesfor the quarter ended June 30, 2006 were $111.5 million, $9.6 million or 9.4%greater than revenue of $101.9 million in 2005.

*PipelineOperations:*

Revenue fromPipeline Operations was $86.5 million for the quarter ended June 30, 2006compared to $74.1 million for the quarter ended June 30, 2005. The net increasein revenue from Pipeline Operations of $12.4 million was primarily the resultof:

·                  a $2.2 millionrevenue increase in Buckeye Pipe Line Transportation LLC (“BPL Transportation”),a Buckeye subsidiary that acquired the refined petroleum products pipelinesystem from ExxonMobil on  May 5, 2005;

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·                  a $2.8 millionrevenue increase in Buckeye NGL Pipe Lines LLC (“Buckeye NGL”), a Buckeyesubsidiary that acquired the NGL Pipeline on January 31, 2006;

·                  an increase inmarket-based interstate and certain intrastate tariff rates averagingapproximately 4.8% effective May 1, 2006, an increase in index-based interstatetariff rates of approximately 3.6% effective July 1, 2005, and an increase inmarket-based interstate and certain intrastate tariff rates averagingapproximately 4.3% effective May 1, 2005;

·                  a 0.1%, or $0.1million, decrease, net of BPL Transportation revenue, in gasolinetransportation revenue on a 2.6% decrease in gasoline volumes delivered;

·                  a 11.2%, or $1.4million, increase, net of BPL Transportation revenue, in jet fueltransportation revenue on a 7.0% increase in jet fuel volumes delivered;

·                  a 0.5%, or $0.1million increase, net of BPL Transportation revenue, in distillate transportationrevenue on a 3.2% decrease in distillate volumes delivered;

·                  an increase inliquefied petroleum gas (“LPG”) and other product transportation revenue of$0.5 million as a result of higher tariffs and an increase in volumesdelivered;

·                  a $1.4 millionincrease in incidental revenue primarily from increased revenues under aproduct supply arrangement in connection with WesPac Pipelines — Reno LLC (“WesPac— Reno”), an indirect subsidiary of Buckeye;

·                  a $2.0 millionincrease in other revenues principally resulting from a newly constructedterminal to serve Federal Express at the Memphis International Airport;

·                  a $0.8 millionincrease in operating services revenue due to an increase in reimbursablemaintenance and inspection activities under an operating services contract;

·                  a $0.3 millionincrease in miscellaneous rental revenue; and

·                  a $0.2 millionincrease in transportation settlement revenue, representing primarily the settlement of overages andshortages on product deliveries.

Product deliveries for each of the quarters ended June 30, 2006and 2005, including BPL Transportation product deliveries were as follows:

|             | ** ** | **Barrels per Day**                       | ** ** |
|-------------|------------|-----------------------------------------------------|------------|
| ** **  | ** ** | **Three Months Ended June 30,** | ** ** |
| **Product** | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Gasoline    |       | 734,200                                             |       | 736,500 |   |
| Distillate  |       | 281,700                                             |       | 288,700 |   |
| Jet Fuel    |       | 359,200                                             |       | 330,700 |   |
| LPG’s  |       | 33,800                                              |       | 24,000 |   |
| NGL’s  |       | 21,900                                              |       | — |   |
| Other       |       | 10,500                                              |       | 7,000 |   |
| Total       |       | 1,441,300                                           |       | 1,386,900 |   |

 

In the secondquarter of 2006, certain of Buckeye’s Operating Subsidiaries filed pipelinetariffs reflecting on average increased rates 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

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associated with thepipeline transportation of ultra low sulfur diesel fuel.  The tariff rate surcharge is expected togenerate approximately $3 million in additional revenue on an annual basis.  The tariff rate surcharge is designed topermit Buckeye to recover, over time, its capital investment (and a reasonablerate of return thereon) and its operating costs related to infrastructureimprovements in connection with the transportation of ultra low sulfur dieselfuel. Tariff rate increases were not filed in connection with certain ofBuckeye’s pipelines regulated by state regulatory agencies which represent lessthan 8% of Buckeye’s pipeline volumes.

*Terminalling and Storage:*

Terminalling and Storage revenues of $18.4 million forthe quarter ended June 30, 2006 increased by $3.4 million from the comparablequarter in 2005.

Recent terminal acquisitions increased Terminallingand Storage revenues by $1.9 million for the quarter ended June 30, 2006compared to the comparable period in 2005. The increase is related to periods which the acquired terminals wereowned compared to the comparable period in 2005 during which the acquiredterminals were not owned.

Terminalling and Storage revenues at existingterminals owned by Buckeye were $15.9 million for the quarter ended June 30,2006, an increase of $1.6 million from the second quarter of 2005, which isprincipally related to an increase in terminal throughput volumes.

Average daily throughputfor the refined products terminals for quarters ended June 30 was as follows:
|                                    | ** ** | **Quarter Ended June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| Refined products  throughput (bpd) |       | 514,700                                   |       | 433,200 |   |

 

*Other Operations:*

Revenue from otheroperations of $6.5 million for the quarter ended June 30, 2006 decreased by$6.3 million from the comparable period in 2005 primarily as a result of theabsence of a large construction contract which provided approximately $6.5million of revenue in the second quarter of 2005.

*Operating Expenses:*

Costs and expenses for the three months ended June 30,2006 and 2005 were as follows:
|                                | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Payroll and  payroll benefits  |       | $                                | 21,186     |   | $ | 20,703 |   |
| Depreciation and  amortization |       | 10,018                           |       | 8,067 |   |
| Operating power                |       | 7,047                            |       | 5,959 |   |
| Outside services               |       | 7,643                            |       | 5,264 |   |
| Property and  other taxes      |       | 4,093                            |       | 4,217 |   |
| Construction  management       |       | 1,424                            |       | 5,058 |   |
| All other                      |       | 18,711                           |       | 13,975 |   |
| Total                          |       | $                                | 70,122     |   | $ | 63,243 |   |

 

Payroll and payroll benefits were $21.2 million in thesecond quarter of 2006, an increase of $0.5 million compared to the secondquarter of 2005.  Of this increase,approximately $0.6 million is related to employees hired as a result ofacquisitions that occurred during the previous twelve months.  Increases in salaries and wages of $1.3million resulted from an increase in the number of employees and overtime paydue to Buckeye’s expanded operations and higher wage rates.  These increases were partially offset by anincrease in capitalized payroll of $0.7 

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millionresulting from increased charges to capital projects by internal personnel, aswell as, a reduction in unit-based compensation of $0.7 million.  The reduction in unit-based compensationresulted from the adoption of Statement of Financial Accounting Standards No.123R effective January 1, 2006.  (SeeNote 7 in the Company’s Condensed Consolidated Financial Statements for furtherdetails).

Depreciation and amortization expense was $10.0million in the second quarter of 2006, an increase of $1.9 million from thesecond quarter of 2005.  Depreciationrelated to recent acquisitions was $0.7 million.  The remaining increase resulted from Buckeyeplacing assets into service during 2006.

Operating power costs were $7.0 million in the threemonths ended June 30, 2006, an increase of $1.1 million from the same period in2005.  Of this increase, $0.6 million isrelated to recent acquisitions.  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 increased $2.4 million from$5.3 million in the second quarter of 2005 to $7.6 million in the secondquarter of 2006.  Outside services costsrelated to acquisitions that occurred during the previous twelve months added$0.2 million of outside services costs. Buckeye incurred an additional $0.7 million for pipeline inspection andmaintenance costs related to an operating service contract.  Buckeye also incurred additional expense of$0.3 million for public awareness programs. The remainder of the increase is due to additional pipeline and tankinspections and maintenance work that occurred during the second quarter of2006.  Outside services costs consistprincipally of third-party contract services for maintenance activities.

Property and other taxes decreased by $0.1 millionfrom $4.2 million in the second quarter of 2005 to $4.1 million for the sameperiod in 2006.  Buckeye was reimbursed$0.9 million in 2006 for certain property taxes under an operating serviceagreement.  This decrease was partiallyoffset by an increase of $0.3 million related to recent acquisitions and $0.5million related to higher real property assessments over the same period in2005.

Construction management costs were $1.4 million in thesecond quarter of 2006, which is a decrease of $3.6 million from the secondquarter of 2005.  The decrease isprincipally a result from the absence of a large construction project that wascompleted in the second quarter 2005.

All other costs were $18.7 million in the three monthsended June 30, 2006, an increase of $4.7 million compared to $14.0 million inthe same period in 2005.  The increasereflects $1.3 million of costs associated with fuel purchases by WesPac – Renorelated to a product-supply arrangement. Other costs related to recent acquisitions were $0.4 million.  The Company also experienced an increase inprofessional fees of $1.6 million in connection with Buckeye GP Holdings’initial public offering.  These increaseswere partially offset by a decrease in casualty losses of $0.7 million.  The remainder of the increase is due toincreases in various other costs resulting from Buckeye’s expanded operations.

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

|                           | ** ** | **Costs and Expenses by Segment** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                               | ** ** |
|                      |       |                                                  |       |   |   |
| Pipeline  Operations      |       | $                                                     | 51,605     |   | $ | 43,508 |   |
| Terminalling and  Storage |       | 13,476                                                |       | 9,719 |   |
| Other Operations          |       | 5,041                                                 |       | 10,016 |   |
| Total                     |       | $                                                     | 70,122     |   | $ | 63,243 |   |

 

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Other income (expense) for the three months ended June30, 2006 and 2005 was as follows:
|                            | ** ** | **Other Income**   | ** ** |
|----------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(In thousands)** | ** ** |
|                       |       |                    |       |   |   |
| Investment  income         |       | $                       | 302        |   | $ | 193 |   |
| Interest and  debt expense |       | (16,211                 | )          | (13,955 | ) |
| Total                      |       | $                       | (15,909    | ) | $ | (13,762 | ) |
|                       |       |                    |       |   |   |
| Equity income              |       | $                       | 1,415      |   | $ | 1,225 |   |

 

Other income (expense) was a net expense of $15.9million in the second quarter of 2006, compared to a net expense of $13.8million during the same period in 2005. Investment income for the three months ended June 30, 2006 wasconsistent with investment income generated during the three months ended June30, 2005.

Interest expense was $16.2 million in the three monthsended June 30, 2006, an increase of $2.2 million from $14.0 million in thethree months ended June 30, 2005. Buckeye incurred approximately $1.6 million in interest related to its5.125% Notes due 2017, which were issued in June 2005.  The remainder of the increase is due tohigher average balances outstanding and higher interest rates on Buckeye’s5-year revolving credit facility.

Equityincome in the second quarter of 2006 of $1.4 million was consistent with equityincome generated in the second quarter of 2005.

# *SixMonths*

Revenuesfor the six months ended June 30, 2006 and 2005 were as follows:
|                           | ** ** | **Revenues**            | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)** | ** ** |
|                      |       |                    |       |   |   |
| Pipeline  Operations      |       | $                       | 168,405    |   | $ | 147,374 |   |
| Terminalling and  Storage |       | 36,609                  |       | 32,147 |   |
| Other Operations          |       | 12,226                  |       | 18,284 |   |
| Total                     |       | $                       | 217,240    |   | $ | 197,805 |   |

 

Total revenue for the sixmonths ended June 30, 2006 was $217.2 million, $19.4 million, or 9.8%, greaterthan revenue of $197.8 million for the same period in 2005.

*Pipeline Operations:*

  Revenue from Pipeline Operations was $168.4million for the six months ended June 30, 2006 compared to $147.4 million forthe six months ended June 30, 2005. The net increase of $21.0 million inPipeline Operations revenue was primarily the result of:

·                  a $6.9 millionrevenue increase in BPL Transportation, a Buckeye subsidiary that acquired therefined petroleum products pipeline system from ExxonMobil on May 5, 2005;

·                  a $4.6 millionrevenue increase in Buckeye NGL, a Buckeye subsidiary that acquired the NGLPipeline on January 31, 2006;

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·                  anincrease in market-based interstate and certain intrastate tariff ratesaveraging approximately 4.8% effective May 1, 2006, an increase in index-basedinterstate tariff rates of approximately 3.6% effective July 1, 2005, and anincrease in market-based interstate and certain intrastate tariff ratesaveraging approximately 4.3% effective May 1, 2005;

·                  a 0.2% decrease, or $0.2 million, net of BPLTransportation, in gasoline transportation revenue on a 2.8% decrease ingasoline volumes delivered;

·                  a 11.0% increase, or $2.6 million, net ofBPL Transportation, in jet fuel transportation revenue on a 6.3% increase injet fuel volumes delivered;

·                  a 3.4% increase, or $1.2 million, net of BPLTransportation, in distillate transportation revenue on a 0.3% increase indistillate volumes delivered;

·                  an increase in LPG transportation revenue of$0.9 million as a result of higher tariffs and an increase in volumesdelivered;

·                  a $2.5 millionincrease in incidental revenue primarily from increased revenues under aproduct supply arrangement in connection with WesPac–Reno;

·                  a $2.7 millionincrease in other revenues principally resulting from a newly constructedterminal serving Federal Express at Memphis International Airport;

·                  a $1.1 millionincrease in operating services revenue due to an increase in reimbursablemaintenance and inspection activities under an operating services contract;

·                  a $1.2 millionincrease in miscellaneous rental revenue; and

·                  a decrease in transportation settlementrevenue, representing the settlement of overages and shortages on productdeliveries, of $3.3 million.

Product deliveries for the six months ended June 30, 2006 and 2005,including Buckeye NGL and BPL Transportation product deliveries were asfollows:
|             | ** ** | **Barrels per Day**                     | ** ** |
|-------------|------------|---------------------------------------------------|------------|
| ** **  | ** ** | **Six Months Ended June 30,** | ** ** |
| **Product** | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Gasoline    |       | 712,800                                           |       | 700,200 |   |
| Distillate  |       | 324,200                                           |       | 315,000 |   |
| Jet Fuel    |       | 345,900                                           |       | 314,700 |   |
| LPG’s  |       | 23,800                                            |       | 18,000 |   |
| NGL’s  |       | 17,800                                            |       | — |   |
| Other       |       | 10,500                                            |       | 6,300 |   |
| Total       |       | 1,435,000                                         |       | 1,354,200 |   |

 

*Terminalling and Storage:*

Terminalling and Storage revenues of $36.6 million for the six months ended June 30, 2006increased by $4.5 million from the comparable period in 2005.

Recent terminal acquisitions increased Terminallingand Storage revenues by $4.2 million for six months ended June 30, 2006compared to the comparable period in 2005. The increase is related to periodswhich the acquired terminals were owned compared to the comparable period in2005 during which the acquired terminals were not owned.

Terminalling and Storage revenues at existingterminals owned by Buckeye were $31.7 million for the six months ended June 30,2006, an increase of $0.3 million from the first six months of 2005.

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Average daily throughputfor the refined products terminals for six months ended June 30, 2006 and 2005was as follows:
|                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Refined products  throughput (bpd) |       | 484,200                                           |       | 408,000 |   |

 

*Other Operations:*

Other Operations revenuesof $12.2 million for the six months ended June 30, 2006 declined by $6.1million from the comparable period in 2005 primarily as a result of the absenceof a large construction project which provided approximately $6.8 million ofrevenue in the first six months of 2005.

*Operating Expenses:*

Costs and expenses for the six month periods endedJune 30, 2006 and 2005 were as follows:
|                                | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
|                           |       |                             |       |   |   |
| Payroll and  payroll benefits  |       | $                                | 42,510     |   | $ | 42,030 |   |
| Depreciation and  amortization |       | 19,122                           |       | 15,498 |   |
| Operating power                |       | 14,137                           |       | 12,038 |   |
| Outside services               |       | 12,235                           |       | 9,463 |   |
| Property and  other taxes      |       | 9,199                            |       | 8,200 |   |
| Construction  management       |       | 1,986                            |       | 5,356 |   |
| All other                      |       | 37,213                           |       | 30,419 |   |
| Total                          |       | $                                | 136,402    |   | $ | 123,004 |   |

 

Payroll and payroll benefits were $42.5 million forthe six months ended June 30, 2006 an increase of $0.5 million compared to thecomparable period in 2005.  Of thisincrease, approximately $1.5 million is related to employees added as a resultof recent acquisitions.  Increases insalaries and wages of $2.5 million resulted from an increase in the number ofemployees and overtime pay due to Buckeye’s expanded operations and higher wagerates.  Buckeye also experienced anincrease in benefit costs of $0.3 million. These increases were partially offset by an increase of capitalizedpayroll of $1.4 million resulting from increased charges to capital projects byinternal personnel and a decrease in severance pay.  Buckeye incurred expense of $0.6 million forseverance pay in 2005 which did not occur during 2006.  The Company also experienced a decrease inunit-based compensation expense of $2.0 million resulting from the adoption ofStatement of Financial Accounting Standards No. 123R effective January 1, 2006.  (See Note 7 in the Company’s condensedconsolidated financial statements for further details).

Depreciation and amortization expense was $19.1million for the six months ended June 30, 2006, an increase of $3.6 millionfrom the comparable period of 2005. Depreciation related to recent acquisitions was $1.9 million.  The remaining increase resulted from Buckeyeplacing assets into service during 2006.

Operating power costs of $14.1 million in the firstsix months of 2006 were $2.1 million higher than the same period in 2005.Recent acquisitions added $1.5 million. The remainder of the increase is due toadditional pipeline volumes in Buckeye’s pipeline operations.  Operating power consists primarily ofelectricity required to operate pumping facilities.

Outside services costs were $12.2 million in the firstsix months of 2006, or $2.8 million greater than the same period in 2005.Outside services costs related to recent acquisitions were $0.4 million.  Buckeye incurred an additional $0.9 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 

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increaseis due to additional pipeline and tank inspections and maintenance work thatoccurred during the first half of 2006.

Property and other taxes increased by $1.0 millionfrom $8.2 million in the second quarter of 2005 to $9.2 million for the sameperiod in 2006.  Of this increase, $0.9million 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 $2.0 million in thesix months ended June 30, 2006, which is a decrease of $3.4 million from thesame period in 2005.  The decrease is aresult of the absence of a significant construction contract that was completedin 2005.

All other costs were $37.2 million, an increase of$6.8 million, in the first six months of 2006 compared to the first six monthsof 2005. The increase reflects $2.6 million of costs associated with fuelpurchases by WesPac – Reno related to a product-supply arrangement.  Other costs related to recent acquisitionswere $1.3 million.  The Company alsoexperienced an increase in professional fees of $2.5 million which is primarilydue to the Buckeye GP Holdings initial public offering.  These increases were partially offset by adecrease in casualty losses of $1.7 million. The remainder of the increases related to various other pipelineoperating costs resulting from Buckeye’s expanded operations.

Costs and expenses by segment for the six months endedJune 30, 2006 and 2005 were as follows:
|                           | ** ** | **Costs and Expenses by Segment** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                               | ** ** |
|                      |       |                                                  |       |   |   |
| Pipeline  Operations      |       | $                                                     | 102,739    |   | $ | 88,960 |   |
| Terminalling and  Storage |       | 24,132                                                |       | 19,109 |   |
| Other Operations          |       | 9,531                                                 |       | 14,935 |   |
| Total                     |       | $                                                     | 136,402    |   | $ | 123,004 |   |

 

Other income (expense) for the six month periods endedJune 30, 2006 and 2005 was as follows:
|                            | ** ** | **Other Income (Expenses)** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(In thousands)**               | ** ** |
|                       |       |                                  |       |   |   |
| Investment  income         |       | $                                     | 622        |   | $ | 348 |   |
| Interest and  debt expense |       | (31,940                               | )          | (27,052 | ) |
| Total                      |       | $                                     | (31,318    | ) | $ | (26,704 | ) |
|                       |       |                                  |       |   |   |
| Equity income              |       | $                                     | 2,795      |   | $ | 2,465 |   |

 

Otherincome (expense) was a net expense of $31.3 million during the six months endedJune 30, 2006, compared to a net expense of $26.7 million during the sameperiod in 2005.  Investment income forthe six months ended June 30, 2006 was consistent with investment incomegenerated during the six months ended June 30, 2005.

Interest expense was $31.9 million in the six monthsended June 30, 2006, an increase of $4.9 million from $27.1 million in the sixmonths ended June 30, 2005.  Buckeyeincurred approximately $3.2 million in interest related to the 5.125% Notes due2017, which were issued in June 2005. The balance of the increase in interest expense resulted from higheraverage balances outstanding and interest rates on Buckeye’s 5-year revolvingcredit facility.

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Equity income increased by $0.3 million from the sixmonths ended June 30, 2005 to $2.8 million for the six months ended June 30,2006.  The increase is a result of equityincome earned from Buckeye’s approximate 40% interest in Muskegon Pipeline LLCwhich was acquired in December 2005.

LIQUIDITY ANDCAPITAL RESOURCES

Apart from Buckeye’scapital requirements, the Company’s only capital requirement is its debtservice which is described below. Buckeye’s capital requirements consist ofmaintenance and capital expenditures, expenditures for acquisitions and Buckeye’sdebt service requirements.

The Company’s onlycash-generating asset is its ownership interest in Buckeye’s general partner,which owns (i) general partner units, or GP Units in Buckeye, (ii) theincentive distribution rights in Buckeye, and (iii) an approximate one percentgeneral partner interest in each of Buckeye’s subsidiary operatingpartnerships.  The Company’s cash flowis, therefore, directly dependent upon the ability of Buckeye and its operatingsubsidiaries to make cash distributions to Buckeye’s partners. The actualamount of cash that Buckeye will have available for distribution will dependprimarily on its ability to generate cash beyond its working capitalrequirements. Buckeye’s primary future sources of liquidity are operating cashflow, proceeds from borrowings under its credit facility and proceeds from theissuance of LP units.

*Debt*

*The Company*

As of June 30, 2006, theCompany was party to a Senior Secured Credit Facility with a consortium offinancial institutions arranged by Goldman Sachs Credit Partners under whichthe Company had $169.0 million outstanding. Borrowings under the Term Loan bore interest under one of two rateoptions selected by the Company equal to either (i) the greater of (a) thefederal funds rate plus one half of one percent and (b) the prime interest rateor (ii) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin.The applicable margin, which was 2.375% at June 30, 2006, was determined basedupon an interest coverage ratio defined in the loan agreement.  At June 30, 2006, the interest rate under theTerm Loan was approximately 7.81%.

The Term Loan also containeda requirement that the Company maintain an interest expense reserve account inthe amount of the anticipated interest payments for the next two quarterlyperiods, although failure to maintain such a balance was not an event ofdefault under the Term Loan. At June 30, 2006, the amount on deposit in theinterest expense reserve account was $5.7 million, compared to estimatedinterest in the next two quarters of $6.6 million.

All amounts outstanding under the Term Loan were repaid withthe proceeds of the Buckeye GP Holdings initial public offering, together withcash on hand, on August 9, 2006.

On August 9, 2006, Buckeye GPHoldings entered into a five-year $10 million revolving credit facility withSunTrust Bank, as both administrative agent and lender (the “Credit Agreement”).  The credit facility may be used for workingcapital and other partnership purposes. Buckeye GP Holdings has pledged all of the limited liability companyinterests in Buckeye GP LLC to SunTrust Bank as security for its obligationsunder the Credit Agreement.

The Credit Agreement permits BuckeyeGP Holdings to prepay all loans under the credit facility at any time withoutpremium or penalty (other than customary LIBOR breakage costs).  Borrowings under the Credit Agreement bear interestunder one of two rate options, selected by Buckeye GP Holdings, equal toeither:

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

·                  LIBOR, plus a margin which can range from 0.40% to 1.40%,based upon the ratings assigned by Standard & Poor’s Rating Services andMoody’s Investor Services to the senior unsecured non-credit enhanced long-termdebt of Buckeye.

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Buckeye GP Holdings’ ability toborrow amounts under the Credit Agreement is subject to satisfaction of certaincustomary conditions precedent to revolving loans and compliance with terms andconditions included in the Credit Agreement.

The Credit Agreement defines “RestrictedSubsidiaries” of Buckeye GP Holdings as Buckeye GP Holdings, and certain of itswholly owned subsidiaries.

The Credit Agreement requiresBuckeye GP Holdings to maintain leverage and funded debt coverage ratios. Theleverage ratio covenant requires Buckeye GP Holdings to maintain, as of thelast day of each fiscal quarter, a ratio of the total funded indebtedness ofBuckeye GP Holdings and its Restricted Subsidiaries, measured as of the lastday of each fiscal quarter, to the aggregate dividends and distributionsreceived by Buckeye GP Holdings and its Restricted Subsidiaries from Buckeye,plus all other cash received by Buckeye GP Holdings and the RestrictedSubsidiaries, measured for the preceding twelve months, less expenses, of notmore than 2.50 to 1.00. The funded debt coverage ratio covenant requiresBuckeye GP Holdings to maintain, as of the last day of each fiscal quarter, aratio of total consolidated funded debt of Buckeye GP Holdings and all of itssubsidiaries to the consolidated EBITDA, as defined in the Credit Agreement, ofBuckeye GP Holdings and all of its subsidiaries, measured for the precedingtwelve months, of not more than 5.25 to 1.00, subject to a provision forincreases to 5.75 to 1.00 in connection with future acquisitions.

The Credit Agreement prohibitsBuckeye GP Holdings from declaring dividends or distributions if any default orevent of default, as defined in the Credit Agreement, has occurred or wouldresult from such a declaration. In addition, the Credit Agreement containscovenants and provisions requiring Buckeye GP Holdings to adhere to certaincovenants and limiting the ability of Buckeye GP Holdings and its RestrictedSubsidiaries to, among other things:

·                  incur or guarantee indebtedness;

·                  make certain negative pledges and grant certainliens;

·                  make certain loans, acquisitions and investments;

·                  make any material changes to the nature of Buckeye GPHoldings’ or Restricted Subsidiaries’ business; or

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

If an event of default exists underthe Credit Agreement, the lender will be able to terminate the Credit Agreementand accelerate 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 pay any principal, interest, fees,expenses or other amounts when due;

·                  failure of any representation or warranty to be trueand correct in any material respect;

·                  failure to perform or otherwise comply with thecovenants in the Credit Agreement or other loan documents, subject to certaingrace periods;

·                  default by Buckeye GP Holdings or any RestrictedSubsidiary on the payment of any other indebtedness in excess of $5.0 millionor default by Buckeye or any of its subsidiaries on the payment of anyindebtedness in excess of $25.0 million, or any default in the performance ofany obligation or condition with respect to such indebtedness beyond theapplicable grace period if the effect of the default is to permit or cause theacceleration of the indebtedness;

·                  bankruptcy or insolvency events involving Buckeye GPHoldings;

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·                  the entry against Buckeye GP Holdings of a judgmentin excess of specified amounts, or otherwise having a material adverse effect,that is not stayed, discharged or deferred within specified periods;

·                  a change in control of Buckeye GP Holdings (as suchterm is defined in the Credit Agreement);

·                  the invalidity or unenforceability of any materialprovision in the Credit Agreement or related documents; and

·                  the occurrence of certain events with respect toemployee benefit plans subject to ERISA.

*Services Company*

Services Company’s debtconsists of 3.60% Senior Secured Notes (the “3.60% ESOP Notes”) due March 28,2011 payable by the ESOP to a third-party lender. The 3.60% ESOP Notes wereissued May 4, 2004.  The 3.60% ESOP Notesare collateralized by Services Company’s common stock and are guaranteed byServices Company. In addition, Buckeye has committed that, in the event thatthe value of Buckeye’s LP units owned by Services Company falls below 125% ofthe balance payable under the 3.60% ESOP Notes, Buckeye will fund an escrowaccount with sufficient assets to bring the value of the total collateral (thevalue of Buckeye’s LP units owned by Services Company and the escrow account)up to the 125% minimum. Amounts deposited in the escrow account are returned toBuckeye when the value of Buckeye’s LP units owned by Services Company returnsto an amount which exceeds the 125% minimum. At June 30, 2006, the value ofBuckeye’s LP units owned by Services Company exceeded the 125% requirement.

*Buckeye*

Buckeye has a $400million 5-year revolving credit facility (“Buckeye’s Credit Facility”) with asyndicate of banks led by SunTrust Bank. Buckeye’s Credit Facility contains aone-time expansion feature to $550 million subject to certain conditions.Borrowings under Buckeye’s Credit Facility are guaranteed by certain of Buckeye’ssubsidiaries. Buckeye’s Credit Facility matures on August 6, 2009. The weightedaverage interest rate on amounts outstanding under Buckeye’s Credit Facility atJune 30, 2006 was 5.8%.

Borrowings under Buckeye’sCredit Facility bear interest under one of two rate options, selected byBuckeye, equal to either (i) the greater of (a) the federal funds rate plus onehalf of one percent and (b) SunTrust Bank’s prime rate or (ii) LIBOR plus anapplicable margin. The applicable margin is determined based upon ratingsassigned by Standard and Poors and Moody’s Investor Services for Buckeye’ssenior unsecured non-credit enhanced long-term debt. The applicable margin willincrease during any period in which Buckeye’s Funded Debt Ratio (describedbelow) exceeds 5.25 to 1.0. At June 30, 2006 and December 31, 2005, Buckeye had$112.0 million and $50 million outstanding under Buckeye’s Credit Facility,respectively, and had committed $1.7 million and $1.3 million in support ofletters of credit, respectively.

Buckeye’s Credit Facilitycontains covenants and provisions 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 ontheir property;

·                  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 Facilityrequires that Buckeye and certain of its subsidiaries maintain a maximum “FundedDebt Ratio” and a minimum “Fixed Charge Coverage Ratio”. The Funded Debt Ratioequals the ratio of the long-term debt of Buckeye and certain of itssubsidiaries (including the current portion, if any) to “Adjusted EBITDA”,which is defined in Buckeye’s Credit Facility as earnings before interest,taxes, depreciation, depletion,

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amortization and incentive compensation payments toBuckeye GP, for the four preceding fiscal quarters. 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 futureacquisitions.  At June 30, 2006, Buckeye’sFunded Debt Ratio was 4.48 to 1.00.

The Fixed Charge CoverageRatio is defined as the ratio of Adjusted EBITDA for the four preceding fiscalquarters to the sum of payments for interest and principal on debt plus certaincapital expenditures required for the ongoing maintenance and operation ofBuckeye’s assets.  Buckeye is required tomaintain a Fixed Charge Coverage Ratio of greater than 1.25 to 1.00 as of theend of any fiscal quarter. As of June 30, 2006, Buckeye’s Fixed Charge CoverageRatio was 2.70 to 1.00.

At June 30, 2006, Buckeyehad total fixed debt obligations at face value of $850 million, consisting of$125 million of the 5.125% Notes, $275 million of the 5.30% Notes, $300 millionof the 4.625% Notes and $150 million of the 6.750% Notes.  See Note 4 to the condensed consolidatedfinancial statements for a further discussion.

*Covenants.*The Company and its subsidiaries, Services Company, Buckeyeand its Operating Subsidiaries were in compliance with the various covenants ofthe debt agreements at June 30, 2006.

*DerivativeInstruments.*At June 30, 2006, the Company had threederivative instruments outstanding related to the Company’s Term Loan. The TermLoan replaced the Company’s $100,000,000 Senior Secured Credit Facility (the “PriorTerm Loan”) which was entered into on May 4, 2004. Proceeds from the Term Loanwere used to refund the amounts outstanding under the Prior Term Loan. Inaccordance with requirements under the Prior Term Loan, the Company purchasedan interest rate cap from Goldman Sachs Capital Markets, L.P. on a notionalamount of $50 million for $375,000. Under the interest rate cap, if thevariable interest rate the Company paid on the Prior Term Loan exceeded 5.0%,Goldman Sachs would pay the Company the difference between the variable rate ineffect on the $50 million notional amount and the capped rate. The Company didnot designate the interest rate cap as a cash flow hedge and, accordingly,changes in value of the cap have been reflected in income. The Company did notterminate the interest rate cap when the Prior Term Loan was repaid on December22, 2004.

In accordance withrequirements under the Term Loan, the Company entered into two interest rateswap agreements with Goldman Sachs Capital Markets L.P. The Company designatedthese transactions as hedges of the Company’s cash flow risk associated withthe Term Loan. The first agreement, which terminated on December 22, 2005, wasfor a notional amount of $172.8 million and called for the Company to receivefloating rate payments based on the notional amount times a rate equal tothree-month LIBOR in exchange for paying a fixed rate based on the notionalamount times 3.029%. The interest rate swap was effective December 22, 2004,the date of closing of the Term Loan and terminated on December 22, 2005. Thethree-month LIBOR reset on dates that coincided with the reset dates for thevariable interest rate of the Term Loan. The second agreement is for a notionalamount of $86 million and calls for the Company to receive the floating ratepayments based on the notional amount times a rate equal to three-month LIBORin exchange for paying a fixed rate based on the notional amount times 3.853%.The agreement became effective on December 22, 2005 and will terminate December22, 2007. During 2005, the Company entered into another interest rate swapagreement. This agreement is for a notional amount of $12 million and calls forthe Company to receive the floating rate payments based on the notional amounttimes a rate equal to three-month LIBOR in exchange for paying a fixed ratebased on the notional amount times 4.54%.

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*Cash Flows from Operations*

The components of cash flows from operations for thesix months ended June 30, 2006 and 2005 were as follows:
|                                            | ** ** | **Cash Flows from Operations** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                       | ** ** |
| Net income                                 |       | $                                             | 4,226      |   | $ | 3,147 |   |
| Value of ESOP  shares released             |       | 2,073                                         |       | 2,546 |   |
| Depreciation and  amortization             |       | 19,122                                        |       | 15,498 |   |
| Non-controlling  interests                 |       | 48,089                                        |       | 47,415 |   |
| Changes in  current assets and liabilities |       | (5,651                                        | )          | (16,958 | ) |
| Changes in other  assets and liabilities   |       | 2,251                                         |       | 4,316 |   |
| Other                                      |       | 636                                           |       | 1,158 |   |
| Total                                      |       | $                                             | 70,746     |   | $ | 57,122 |   |

 

Cash flows from operations were $70.7 million for thefirst six months of 2006, an increase of $13.6 million over the first sixmonths of 2005.  Net income was $4.2million for the first six months of 2006 and $3.1 million for the same periodof 2005, an increase of $1.1 million. Depreciation and amortization was $19.1 million for 2006 compared to$15.5 million during the same period in 2005. The increase principally resulted from recent acquisitions and anincrease in assets placed into service during the first six months of 2006.  Cash used by working capital was $5.7 millioncompared to cash used by working capital of $17.0 million in 2005.

During the six months ended June 30, 2006, cash usedfor working capital resulted from increases in trade receivables of $1.1million, construction and pipeline relocation receivables of $2.4 million andprepaid and other current assets of $12.4 million and a decrease in accountspayable of $4.1 million.  The decreasesin cash were partially offset by an increase in accrued and other current liabilitiesof $14.7 million.  The increase in tradereceivables is partly due to activity at Buckeye NGL which commenced operationsin January 2006.  The increase inconstruction and pipeline relocations receivables is due to an increase inrelocation project activity.  Prepaid andother current assets increased due to an increase in insurance receivables andan increase in a receivable for activity on a 29-mile ammonia pipeline acquiredin November 2005.  The decrease inaccounts payable resulted from the timing of invoice payments at year end of2005.  The increase in accrued and othercurrent liabilities is due to activity on the 29-mile ammonia pipeline as wellas an increase in amounts accrued by Buckeye for environmental liabilities.

In 2005, cash used for working capital resultedprincipally from reductions in accounts payable of $5.2 million and othercurrent liabilities of $1.5 million as well as an increase in trade receivablesand construction and pipeline relocation receivables of $11.6 million and $0.5million, respectively, partially offset by a reduction in prepaid and othercurrent assets of $2.5 million.  Thedecrease in accounts payable resulted principally from the timing of invoicepayments at year-end 2004 as well as lower maintenance and outside serviceactivities at the end of the second quarter compared to year-end.  A reduction in accrued and other currentliabilities resulted from a decline in interest payable and declines inaccruals for capital expenditures and other operating expenses.  The increase in trade receivables resultedprincipally from the timing of billings related to terminals operations.  The reduction in prepaid and other currentassets resulted principally from the collection of insurance receivables in thefirst half of the year.

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*Cash Flows from Investing Activities*

Net cash used in investing activities for the sixmonths ended June 30, 2006 and 2005 are as follows:
|                               | ** ** | **Investing Activities**                                       | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                    | ** ** | **For the Six Months Ended June 30,** | ** ** |
| ** **                    | ** ** | **2006**                                                            | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(In thousands)**                                             | ** ** |
| Capital  expenditures         |       | $                                                                   | (44,028    | ) | $ | (36,586 | ) |
| Investments and  acquisitions |       | (92,790                                                             | )          | (178,854 | ) |
| Other                         |       | (751                                                                | )          | (2,887 | ) |
| Total                         |       | $                                                                   | (137,569   | ) | $ | (218,327 | ) |

 

In the six months ended June 30, 2006, Buckeyeexpended $92.8 million related to acquisitions, including $79.l million relatedto Buckeye NGL, $12.5 million related to the acquisition of a Niles, Michiganterminal and approximately $1 million for miscellaneous assetacquisitions.  In the six months endedJune 30, 2005, Buckeye spent approximately $178.9 million related to acquisitions,of which $176.3 million related to the acquisition of the Northeast Pipelinesand Terminals and the remainder related to the purchase of the remaining 25%interest in WesPac Pipelines – Reno LLC, an indirect subsidiary of Buckeye,from Kealine Partners for $2.5 million.

Capital expenditures are summarized below:
|                                  | ** ** | **Capital Expenditures**                                       | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                       | ** ** | **For the Six Months Ended June 30,** | ** ** |
| ** **                       | ** ** | **2006**                                                            | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(In thousands)**                                             | ** ** |
| Sustaining  capital expenditures |       | $                                                                   | 11,325     |   | $ | 5,023 |   |
| Expansion and  cost reduction    |       | 32,703                                                              |       | 31,563 |   |
| Total                            |       | $                                                                   | 44,028     |   | $ | 36,586 |   |

 

The Company incurred $11.3 million of sustainingcapital expenditures and $32.7 million of expansion and cost reductionexpenditures in the first six 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 terminalsowned by Buckeye, and an expansion of the recently completed pipeline andterminal infrastructure at the Memphis International Airport to accommodate anew generation of cargo planes for Federal Express Corporation.  The Memphis International Airport project isowned by WesPac Pipelines – Memphis LLC, a 75%-owned subsidiary of Buckeye.

In the six months ended June 30, 2005, $5.0 millionrepresented sustaining capital expenditures and $31.6 million representedexpansion and cost reduction projects. Expansion and cost reduction projects in2005 included the completion of a pipeline capacity expansion project inPennsylvania and expenditures for the pipeline and terminal serving the MemphisInternational Airport.

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

*Cash Flows from Financing Activities*

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.

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During the first six months of 2006, the Companyrepaid approximately $4.3 million on its Term Loan.  Payments on the ESOP Notes were $3.2 millionfor the six months ended June 30, 2006. Buckeye borrowed $127 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 $57.9million in the first six months of 2006 compared to $49.5 million in the sixmonths of 2005.  The increase resultedprincipally from additional LP Units outstanding as a result of Buckeye’sissuance of 2.5 million LP Units in May 2005, the issuance of 1.5 million LPUnits in March 2006 and increases in the per-unit distribution amount.

OTHER MATTERS

Accounting Pronouncements

There were no new accounting pronouncements issued inthe three months ended June 30, 2006 that would have a material impact on thefinancial statements of the Company.

Forward LookingStatements

Some of the information in thisreport may contain forward-looking statements. All statements other thanstatements of historical fact are forward-looking statements. These statementscan be identified by the use of forward-looking terminology including “may,” “believe,”“will,” “expect,” “anticipate,” “estimate,” “continue” or other similar wordsalthough some forward-looking statements are expressed differently. Thesestatements discuss plans, strategies, events or developments that Buckeye GPHoldings expects or anticipates will or may occur in the future. Specificfactors could cause Buckeye GP Holdings’ actual results to differ materially from thosecontained in any forward-looking statement. These factors include, but are notlimited to:

·                  Buckeye GP Holdings’ ability to pay distributions toits unitholders;

·                  Buckeye GP Holdings’ expected receipt ofdistributions and incentive distributions from Buckeye;

·                  anticipated trends in Buckeye’s business;

·                  price trends and overall demand for petroleumproducts in the United States in general and in Buckeye’s service areas inparticular (economic activity, weather, alternative energy sources,conservation and technological advances may affect price trends and demands);

·                  changes, if any, in laws and regulations, including,among others, safety, tax and accounting matters or Federal Energy RegulatoryCommission regulation of  Buckeye’stariff rates;

·                  liability for environmental claims;

·                  security issues affecting Buckeye’s assets,including, among others, potential damage to its assets caused by acts of waror terrorism;

·                  unanticipated capital expenditures and operatingexpenses to repair or replace Buckeye’s assets;

·                  availability and cost of insurance on Buckeye’sassets and operations;

·                  Buckeye’s ability to successfully identify andcomplete strategic acquisitions and make cost saving changes in operations;

·                  expansion in the operations of  Buckeye’s competitors;

·                  Buckeye’s ability to integrate any acquiredoperations into its existing operations;

·                  shut-downs orcutbacks at major refineries that use Buckeye’s services;

·                  deterioration inBuckeye’s labor relations;

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·                  changes in realproperty tax assessments;

·                  disruptions to the air travel system;

·                  interest rate fluctuations and other capital marketconditions;

·                  Buckeye GP Holdings’ future results of operations;

·                  Buckeye GP Holdings’ liquidity and ability to financeits activities;

·                  market conditions in Buckeye’s industry;

·                  conflicts of interest between Buckeye, its generalpartner and Buckeye GP Holdings;

·                  the treatment of Buckeye or Buckeye GP Holdings as acorporation for federal income tax purposes or if Buckeye GP Holdings orBuckeye become subject to entity-level taxation for state tax purposes; and

·                  the impact of governmental legislation and regulationon Buckeye GP Holdings and Buckeye.

Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement. Buckeye GP Holdings believes that ithas chosen these assumptions or bases in good faith and that they arereasonable. However, you are cautioned that assumed facts or bases almostalways vary from actual results, and the differences between assumed facts orbases and actual results can be material, depending on the circumstances. Whenconsidering forward-looking statements, you should keep in mind the riskfactors and other cautionary statements in this report and in the Buckeye GPHoldings registration statement on Form S-1, as amended (Registration No.333-133433) as filed with the Securities and Exchange Commission, includingthose described in the “Risk Factors” section of the registration statement.Buckeye GP Holdings will not update these statements unless the securities lawsrequire it to do so.

# Item 3. Quantitative and Qualitative Disclosures aboutMarket Risk

###### *Market Risk — Trading Instruments*

Currently the Companydoes not engage in hedging activity with respect to trading instruments.

### *Market Risk– Other than Trading Instruments*

Buckeye and Buckeye GP Holdings are exposed to riskresulting from changes in interest rates. Neither company has significant 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 andBuckeye GP Holdings are exposed to, cash flow risk with respect to theirvariable rate obligations (Buckeye’s Credit Facility, Buckeye GP Holdings’Credit Agreement and, formerly the Company’s Term Loan).  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 toBuckeye’s Credit Facility, Buckeye GP Holdings Credit Agreement and, formerlythe Company’s Term Loan will rise or fall depending on changes in interestrates.

At June 30, 2006, Buckeyehad total fixed debt obligations at face value of $850 million, consisting of$125 million of the 5.125% Notes, $275 million of the 5.30% Notes, $300 millionof the 4.625% Notes and $150 million of the 6.750% Notes. Services Company hadfixed debt obligations of approximately $30.4 million at June 30, 2006 of its3.60% ESOP Notes.  The fair value ofthese obligations at June 30, 2006 was approximately $816 million. A 1%increase in rates for obligations of similar maturities would increase the fairvalue of these obligations by $62.6 million. The Company’s variable debt obligation under the Company’s Term Loan was$169 million. Buckeye’s variable debt obligation under Buckeye’s CreditFacility was $112 million. Based on the balances outstanding at June 30, 2006,a 1% increase or decrease in interest rates would increase or decreaseconsolidated annual interest expense by $2.8 million.

In accordance withrequirements under the Prior Term Loan, the Company purchased an interest ratecap from Goldman Sachs Capital Markets, L.P. on a notional amount of $50million for $375,000.  Under the interestrate cap, 

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if the variable interest rate the Company paid on thePrior Term Loan exceeded 5.0%, Goldman Sachs Capital Markets, L.P. would paythe Company the difference between the variable rate in effect on the $50million notional amount and the capped rate. The Company did not designate theinterest rate cap as a cash flow hedge and, accordingly, changes in value ofthe cap have been reflected in income. At June 30, 2006, the value of theinterest rate cap was $96,000.

In accordance withrequirements under the Term Loan, the Company entered into two interest rateswap agreements with Goldman Sachs Capital Markets L.P., one of which wasoutstanding as of June 30, 2006.  TheCompany designated these transactions as hedges of its cash flow riskassociated with the Term Loan. The currently effective agreement is for a notionalamount of $86 million and calls for the Company to receive floating ratepayments based on the notional amount times a rate equal to three-month LIBORin exchange for paying a fixed rate based on the notional amount times 3.853%.The agreement became effective on December 22, 2005 and will terminate December22, 2007. During 2005, the Company entered into another interest rate swapagreement. This agreement is for a notional amount of $12 million and calls forus to receive the floating rate payments based on the notional amount times arate equal to three-month LIBOR in exchange for paying a fixed rate based onthe notional amount times 4.54%.

In connection withBuckeye GP Holdings’ IPO, the two interest rate swaps noted above wereliquidated and the Company’s Term Loan was repaid.  See Note 12 for a further discussion.

The fair value of theinterest rate swap agreements was a non-current asset of $2.2 million and $1.5million at June 30, 2006 and December 31, 2005, respectively. Interest expensewas reduced by $0.2million for the six months ended June 30, 2006, as a resultof the interest rate swap agreements. A 1% increase or decrease in LIBOR wouldincrease or decrease annual interest expense by $1.0 million.

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 Hedging Activities”,Buckeye has deferred the $2.0 million gain as an adjustment to the fair valueof the hedged portion of its debt and is amortizing the gain as a reduction ofinterest expense over the remaining term of the hedged debt. Interest expensewas reduced by $59 thousand during each of the three months ended June 30, 2006and 2005 and $118 thousand during each of the six months ended June 30, 2006and 2005, related to the amortization of the gain on the interest rate swap

Item 4. Controls and Procedures

(a)             Evaluation of Disclosure Controls andProcedures.

The management of the Company, with the participationof its Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of its disclosure controls and procedures for the Company as ofthe end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures as of the end of the period covered by this report are functioningeffectively to provide reasonable assurance that the information required to bedisclosed by the Company in reports filed under the Securities Exchange Act of1934 is (i) recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms and (ii) accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regardingdisclosure.   A controls system cannotprovide absolute assurance, however, that the objectives of the controls systemare met, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within a company have beendetected.

(b)            Change in Internal Control over Financial Reporting

No change in the Company’s internalcontrol over financial reporting occurred during the Company’s most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

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Part II - OtherInformation

Item1.  Legal Proceedings

In late October 2005, Buckeyeexperienced a release of approximately 43,000 gallons of unleaded gasoline atits Macungie, Pennsylvania station and tank farm complex.  Buckeye has recovered a substantial portionof the released gasoline.  Buckeye isactively engaged in delineation of impacted soils and groundwater and hasinstituted product recovery through remediation systems.  As of June 30, 2006, Buckeye had expendedapproximately $4.1 million on external costs for emergency response andenvironmental remediation efforts. Buckeye expects that insurance reimbursements will cover expenses inconnection with environmental remediation costs in excess of $2.5 million.

Buckeye is working with the UnitedStates Environmental Protection Agency (“EPA”) and the Pennsylvania Departmentof Environmental Protection (“PA DEP”) in connection with the delineation ofthe contamination and the development of a long-term remediation plan for thesite.  In the first quarter of 2006,Buckeye entered into administrative consent orders with the EPA and the PADEP.  In connection with theadministrative consent order entered into with the PA DEP, Buckeye agreed(without admitting to any violations of law) to pay a civil penalty in connectionwith the release in the amount of $150,000. Buckeye is unable to estimate whether any additional penalties may beassessed by regulatory agencies in connection with the release.

Item 1A.  Risk Factors

Please carefully read the RiskFactors set forth in the Buckeye GP Holdings Registration Statement onForm S-1, as amended (Registration No. 333-133433) as filed with the Securitiesand Exchange Commission[], which RiskFactors are hereby incorporated by reference into this report.

Item 2. Unregistered Sales of Equity Securities and Use ofProceeds

On August 2, 2006,the registration statement on Form S-1 (SEC File No. 333-133433) as amended,that Buckeye GP Holdings filed with the SEC relating to its IPO becameeffective. The managing underwriters were Goldman, Sachs & Co., CitigroupGlobal Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated andUBS Securities LLC. Under the registration statement, Buckeye GP Holdings wasoffering up to 14.1 million common units with an aggregate price of up to$340,515,000.  The closing date of theIPO was August 9, 2006, and on that date Buckeye GP Holdings sold 10.5 millioncommon units at $17.00 per common unit, or $178.5 million in the aggregate.Buckeye GP Holdings used the proceeds from the offering to:

·                  paythe underwriting discount ($9.1 million);

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

·                  replenishworking capital ($0.5 million); and

·                  paya distribution to the pre-IPO owners of MainLine L.P. ($4.6 million, which constituteda direct or indirect payment to directors and officers of MainLine ManagementLLC, the general partner of Buckeye GP Holdings, or their associates or holdersof 10 percent or more of classes of the Company’s equity securities).

From the effectivedate of the registration statement to the date of this quarterly report on Form10-Q, the amount of expenses incurred for Buckeye GP Holdings’ account inconnection with the issuance and distribution of the common units forunderwriting discounts and commissions, finders’ fees and expenses paid to orfor underwriters is the amount specified in the first bullet point above, plus areasonable estimate of the amount of other expenses is $1.0 million forestimated total expenses of $10.1 million.

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Item6.  Exhibits

(a)                                  Exhibits

3.1*                          FirstAmended and Restated Agreement of Limited Partnership of Buckeye GP HoldingsL.P.

10.1*                    Amended& Restated Contribution, Conveyance and Assumption Agreement, dated as ofAugust 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 MainLineGP, Inc.

10.2*                    Amended andRestated Agreement of Limited Partnership of Buckeye Partners, L.P., dated asof August 9, 2006

10.3*                    FifthAmended and Restated Incentive Compensation Agreement, dated as of August 9,2006

10.4*                    Amended andRestated Agreement of Limited Partnership of Buckeye Pipe Line Company, L.P.,as amended and restated as of August 9, 2006

10.5*                    Amended andRestated Management Agreement of Buckeye Pipe Line Company, L.P., as amendedand restated as of August 9, 2006

10.6*                    FourthAmended and Restated Exchange Agreement, dated as of August 9, 2006

10.7*                    Amended andRestated Executive Employment Agreement, dated as of August 9, 2006

10.8*                    CreditAgreement, dated August 9, 2006, among Buckeye GP Holdings L.P., as borrower,SunTrust Bank, as administrative agent, and the lenders signatory thereto

31.1                           Certificationof Chief Executive Officer pursuant to Rule 13a-14 (a) under the SecuritiesExchange Act of 1934

31.2                           Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934

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

32.2                           Certificationof 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 therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                      | BUCKEYE GP HOLDINGS L.P. |
|---------------------------|--------------------------|
|                      | (Registrant)             |
|                      |                     |   |
|                      | By:                      | MainLine Management LLC |
|                      |                     | as General  Partner |
|                      |                     |   |
|                      |                     |   |
| Date: September  15, 2006 |                     | By: |   | /s/ ROBERT B. WALLACE |
|                      |                     | Robert B. Wallace |
|                      |                     | Senior Vice President, Finance |
|                      |                     | and Chief Financial Officer |
| * *                  |                     | *(Principal Accounting and* |
| * *                  |                     | *Financial Officer)* |

 

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