** **

**UNITEDSTATES**

**SECURITIESAND 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 the  quarterly period ended September 30, 2007** |
|                                                   |                                                                                          |   |
| **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 ofregistrant as specified in its charter)

 

| **Delaware**                              |   | **11-3776228**                    |
|-------------------------------------------|--------|-----------------------------------|
| (State or other  jurisdiction of          |   | (IRS  EmployerIdentification No.) |
| incorporation or  organization)           |   |                              |
|                                      |   |                              |
| **Five  TEK Park**                        |   | **18031**                         |
| **9999  Hamilton Blvd.**                  |   | (Zip Code)                        |
| **Breinigsville,  Pennsylvania**          |   |                              |
| (Address of principal  executive offices) |   |                              |
|                                      |   |                              |

 

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

 

**Not Applicable**

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

 

                Indicate by check mark whetherthe registrant:  (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  x    No o

 

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

 

Large AcceleratedFiler o   Accelerated Filer o  Non-Accelerated Filer x

 

                Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes o   No x

 

            As of October 26, 2007, there were27,769,647 Common Units and 530,353 Management Units outstanding.

 

 

 

 

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BUCKEYE GPHOLDINGS L.P.

INDEX

 

 
| PART I- FINANCIAL  INFORMATION |                                                                                                                 |
|--------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                 |   |
| Item 1.                        | Condensed  Consolidated Financial Statements (Unaudited)                                                             |   |
|                           |                                                                                                                 |   |
|                           | Condensed  Consolidated Statements of Income (Loss) for the three and nine months ended  September 30, 2007 and 2006 |   |
|                           |                                                                                                                 |   |
|                           | Condensed  Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006                                |   |
|                           |                                                                                                                 |   |
|                           | Condensed  Consolidated Statements of Cash Flows for the nine months

ended  September 30, 2007 and 2006             |   |
|                           |                                                                                                                 |   |
|                           | Condensed  Consolidated Statement of Changes in Partners’ Capital for the nine months  ended September 30, 2007 |   |
|                           |                                                                                                                 |   |
|                           | Notes to  Condensed Consolidated Financial Statements                                                                |   |
|                           |                                                                                                                 |   |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and                                                |   |
|                           |  Results of Operations                                                                                          |   |
|                           |                                                                                                                 |   |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk                                                          |   |
|                           |                                                                                                                 |   |
| Item 4.                        | Controls and  Procedures                                                                                             |   |
|                           |                                                                                                                 |   |
| PART  II- OTHER INFORMATION    |                                                                                                                 |
| Item 1.                        | Legal Proceedings                                                                                                    |   |
|                           |                                                                                                                 |   |
| Item 1A.                       | Risk Factors                                                                                                         |   |
|                           |                                                                                                                 |   |
| Item 6.                        | Exhibits                                                                                                             |   |
|                           |                                                                                                                 |   |
|                           |                                                                                                                 |   |

 

 

----

 

PART I - FINANCIAL INFORMATION

 

Item1. Condensed Consolidated Financial Statements

 

 

**Buckeye GP Holdings L.P.**

**CondensedConsolidated Statements of Income (Loss)**

**(In thousands, except per unitamounts)**

**(Unaudited)**

 

 
| ** **                                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                      | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                      | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                                                    | ** ** | $                                     | 125,653    |                                 | $          | 116,519 |   | $ | 375,548 |   | $ | 333,759 |   |
| **Costs and expenses:**                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Operating expenses                                                              |       | 61,883                                |       | 55,451                               |       | 185,791 |   | 160,282 |   |
| Depreciation and  amortization                                                  |       | 10,411                                |       | 10,323                               |       | 30,119 |   | 29,445 |   |
| General and administrative                                                      |       | 7,137                                 |       | 10,409                               |       | 20,568 |   | 22,858 |   |
| Total costs and expenses                                                        |       | 79,431                                |       | 76,183                               |       | 236,478 |   | 212,585 |   |
|                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Operating income                                                                |       | 46,222                                |       | 40,336                               |       | 139,070 |   | 121,174 |   |
|                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| **Other income (expense):**                                                     |       |                                  |       |                                 |       |   |   |   |   |
| Investment income                                                               |       | 426                                   |       | 317                                  |       | 1,060 |   | 939 |   |
| Interest and debt expense                                                       |       | (12,711                               | )          | (14,940                              | )          | (39,691 | ) | (46,880 | ) |
|                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Total other income  (expenses)                                                  |       | (12,285                               | )          | (14,623                              | )          | (38,631 | ) | (45,941 | ) |
|                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Income before equity income and  non-controlling interest expense               |       | 33,937                                |       | 25,713                               |       | 100,439 |   | 75,233 |   |
|                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Equity income                                                                   |       | 2,222                                 |       | 1,803                                |       | 6,266 |   | 4,598 |   |
| Non-controlling interest  expense                                               |       | (31,081                               | )          | (26,012                              | )          | (91,557 | ) | (74,101 | ) |
|                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                                                      |       | $                                     | 5,078      |                                 |       | 1,504 |   | $ | 15,148 |   |   | 5,730 |   |
| Less: Net income prior to initial public offering offering on August  9, 2006   |       |                                  |       | 1,909                                |       |   |   | 6,135 |   |
|                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Net (loss) subsequent to initial public offering on offering on  August 9, 2006 |       |                                  |       |                                 |       |   |   |   |   |
|                                                                            |       |                                  | $          | (405                                 | )          |   |   | $ | (405 | )  |
| **Net income (loss) per  partnership unit:**                                    |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                           |       | $                                     | 0.18       |                                 | $          | (0.01 | ) | $ | 0.54 |   | $ | (0.01 | ) |
| Diluted                                                                         |       | $                                     | 0.18       |                                 | $          | (0.01 | ) | $ | 0.54 |   | $ | (0.01 | ) |
|                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average number of  units outstanding:                                  |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                           |       | 28,300                                |       | 27,891                               |       | 28,089 |   | 27,891 |   |
| Diluted                                                                         |       | 28,300                                |       | 27,891                               |       | 28,300 |   | 27,891 |   |
|                                                                                 |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to condensed consolidated financial statements.

 

1

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**Buckeye GP Holdings L.P.**

**CondensedConsolidated Balance Sheets**

**(In thousands)**

**(Unaudited)**

 

 
| ** **                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| **Assets:**                                      | ** ** | ** **        | ** ** | ** **       | ** ** |
| Current assets:                                  |       |              |       |             |       |
| Cash and cash equivalents                        |       | $                 | 34,377     |             | $          | 20,220 |   |
| Trade receivables                                |       | 45,802            |       | 51,030           |       |
| Construction and pipeline relocation receivables |       | 10,358            |       | 12,189           |       |
| Inventories                                      |       | 13,878            |       | 14,286           |       |
| Prepaid and other current assets                 |       | 31,001            |       | 34,175           |       |
| Total current assets                             |       | 135,416           |       | 131,900          |       |
|                                             |       |              |       |             |       |
| Property, plant and equipment, net               |       | 1,800,092         |       | 1,738,199        |       |
|                                             |       |              |       |             |       |
| Goodwill                                         |       | 234,603           |       | 234,603          |       |
| Other non-current assets                         |       | 108,975           |       | 107,883          |       |
| Total assets                                     |       | $                 | 2,279,086  |             | $          | 2,212,585 |   |
|                                             |       |              |       |             |       |
| **Liabilities and partners’ capital:**      | ** ** | ** **        | ** ** | ** **       | ** ** |
| Current liabilities:                             |       |              |       |             |       |
| Current portion of long-term debt                |       | $                 | 6,198      |             | $          | 6,037 |   |
| Accounts payable                                 |       | 15,456            |       | 26,650           |       |
| Accrued and other current liabilities            |       | 70,701            |       | 69,774           |       |
| Total current liabilities                        |       | 92,355            |       | 102,461          |       |
|                                             |       |              |       |             |       |
| Long-term debt                                   |       | 895,353           |       | 1,014,412        |       |
| Other non-current liabilities                    |       | 80,249            |       | 82,570           |       |
| Non-controlling interest                         |       | 973,588           |       | 772,525          |       |
| Total liabilities                                |       | 2,041,545         |       | 1,971,968        |       |
|                                             |       |              |       |             |       |
| Commitments and contingent liabilities           |       | —            |       | —           |       |
|                                             |       |              |       |             |       |
| **Partners’ capital:**                      | ** ** | ** **        | ** ** | ** **       | ** ** |
| General Partner- Common Units                    |       | 7                 |       | 7                |       |
| Limited Partners- Common Units                   |       | 232,354           |       | 232,202          |       |
| Management Units                                 |       | 3,156             |       | 6,926            |       |
| Equity gains on issuance of                      |       |              |       |             |       |
| Buckeye Partners, L.P. limited partnership units |       | 2,024             |       | 1,482            |       |
| Total partners’ capital                     |       | 237,541           |       | 240,617          |       |
| Total liabilities and partners’ capital     |       | $                 | 2,279,086  |             | $          | 2,212,585 |   |

 

See Notes to condensed consolidated financial statements.

 

2

----

 

**Buckeye GP Holdings L.P.**

**CondensedConsolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                       | ** ** | **Nine Months Ended**   | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|
|                                                                             | ** ** | **September 30,**  | ** ** |
| **Cash flows from operating activities:**                                        | ** ** | **2007**                | ** ** | **2006** | ** ** |
| Net income                                                                       | ** ** | $                       | 15,148     |   | $ | 5,730 | ** ** |
| Adjustments to reconcile net income to net cash provided by operating  activity: |       |                    |       |   |   |
| Non-cash charge for Management Unit expense                                      |       | 1,468                   |       | 3,326 |   |
| Value of ESOP shares released                                                    |       | 3,436                   |       | 3,047 |   |
| Depreciation and amortization                                                    |       | 30,119                  |       | 29,445 |   |
| Non-controlling interest                                                         |       | 91,557                  |       | 74,101 |   |
| Equity earnings from equity investments of Buckeye Partners, L.P.                |       | (6,266                  | )          | (4,598 | ) |
| Distributions from equity investments of Buckeye Partners, L.P.                  |       | 5,717                   |       | 4,460 |   |
| Amortization of debt discount                                                    |       | 38                      |       | 38 |   |
| Amortization of option grants                                                    |       | 303                     |       | 294 |   |
| Change in assets and liabilities, net of amounts related to  acquisitions:       |       |                    |       |   |   |
| Trade receivables                                                                |       | 5,228                   |       | (1,826 | ) |
| Construction and pipeline relocation receivables                                 |       | 1,831                   |       | (1,225 | ) |
| Inventories                                                                      |       | 408                     |       | (317 | ) |
| Prepaid and other current assets                                                 |       | 3,174                   |       | (11,323 | ) |
| Accounts payables                                                                |       | (11,194                 | )          | (1,540 | ) |
| Accrued and other current liabilities                                            |       | (1,557                  | )          | 10,291 |   |
| Other non-current assets                                                         |       | 1,625                   |       | 1,857 |   |
| Other non-current liabilities                                                    |       | (5,216                  | )          | 1,864 |   |
| Total adjustments from operating activities                                      |       | 120,671                 |       | 107,894 |   |
| Net cash provided by operating activities                                        |       | 135,819                 |       | 113,624 |   |
|                                                                             |       |                    |       |   |   |
| **Cash flows from investing activities:**                                        |       |                    |       |   |   |
| Capital expenditures                                                             |       | (51,712                 | )          | (62,324 | ) |
| Acquisitions and equity investments                                              |       | (40,447                 | )          | (93,330 | ) |
| Net (expenditures for) proceeds from disposal of property, plant and  equipment  |       | (352                    | )          | 130 |   |
| Deposit to restricted proceeds from cash                                         |       | —                  |       | 5,117 |   |
| Net cash (used in) investing activities                                          |       | (92,511                 | )          | (150,407 | ) |
|                                                                             |       |                    |       |   |   |
| **Cash flows from financing activities:**                                        |       |                    |       |   |   |
| Debt issuance costs                                                              |       | (178                    | )          | — |   |
| Net proceeds from issuance of Limited Partner-Common units                       |       | —                  |       | 168,509 |   |
| Net proceeds from issuance of Buckeye Partners, L.P. limited  partnership units  |       | 201,895                 |       | 64,092 |   |
| Proceeds from exercise of Buckeye Partner, L.P. units options                    |       | 2,124                   |       | 559 |   |
| Distributions to non-controlling partners of Buckeye Partners, L.P.              |       | (93,823                 | )          | (83,634 | ) |
| Proceeds from issuance of long-term debt                                         |       | 137,500                 |       | 147,000 |   |
| Payment of long-term debt                                                        |       | (256,435                | )          | (242,737 | ) |
| Distributions to Limited Partners                                                |       | (20,234                 | )          | (14,335 | ) |
| Net cash (used in) provided by financing activities                              |       | (29,151                 | )          | 39,454 |   |
|                                                                             |       |                    |       |   |   |
| Net increase in cash and cash equivalents                                        |       | 14,157                  |       | 2,671 |   |
| Cash and cash equivalents —Beginning of year                                |       | 20,220                  |       | 28,984 |   |
| Cash and cash equivalents—End of period                                     |       | $                       | 34,377     |   | $ | 31,655 |   |
| ***Supplemental cash flow information:***                                        |       |                    |       |   |   |
|  Cash paid during the period for interest (net of amount  capitalized)      |       | $                       | 43,159     |   | $ | 49,818 |   |
|  Capitalized interest                                                       |       | $                       | 1,159      |   | $ | 1,271 |   |
|  Cash paid during the period for income tax                                 |       | $                       | 920        |   | $ | 12 |   |
|  Fair value hedge accounting                                                |       | $                       | (2,261)    |   | $ | (176) |   |
|                                                                                  |            |                         |            |  |  |  |  |  |  |  |  |

 

See Notes to condensed consolidated financial statements.

 

 

3

----

 

**Buckeye GP Holdings L.P.**

**CondensedConsolidated Statement of Partners’ Capital**

**(In thousands)**

**(Unaudited)**

 

 
|                                                                      | ** ** | **General  Partner Common  Units** | ** ** | **Limited  Partners  Common  Units** | ** ** | **Management  Units** | ** ** | **Equity   Gains on Issuance of Buckeye LP Units** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|----------------------------------------------------|------------|-----------|------------|
| Partners’ capital- January 1, 2007                                   |       | $                                  | 7          |                                 | $          | 232,202               |       | $                                                  | 6,926      |      | $          | 1,482 |   | $ | 240,617 |   |
| Net income                                                                |       | —                             |       | 15,148                               |       | —                |       | —                                             |       | 15,148    |       |
| Comprehensive income                                                      |       | —                             |       | 15,148                               |       | —                |       | —                                             |       | 15,148    |       |
| Distributions                                                             |       | —                             |       | (20,234                              | )          | —                |       | —                                             |       | (20,234   | )          |
| Recognition of value of Management Units                                  |       | —                             |       | —                               |       | 1,179                 |       | —                                             |       | 1,179     |       |
| Conversion of Management Units                                            |       | —                             |       | 4,949                                |       | (4,949                | )          | —                                             |       | —    |       |
| Contribution from unit based compensation charges                         |       | —                             |       | 289                                  |       | —                |       | —                                             |       | 289       |       |
| Equity gains on issuance Buckeye Partners, L.P limited partnership  units |       | —                             |       | —                               |       | —                |       | 542                                                |       | 542       |       |
|                                                                      |       |                               |       |                                 |       |                  |       |                                               |       |      |       |
| Partners’ capital- September 30, 2007                                |       | $                                  | 7          |                                 | $          | 232,354               |       | $                                                  | 3,156      |      | $          | 2,024 |   | $ | 237,541 |   |

 

 

See Notes to condensed consolidated financial statements.

 

4

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** **

**BUCKEYE GP HOLDINGS L.P.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

 

1.     BASIS OF PRESENTATION

 

Buckeye GPHoldings L.P. (“BGH”) is a publicly traded (NYSE symbol: BGH) master limitedpartnership organized on June 15, 2006 under the laws of the state ofDelaware.  BGH owns 100% of Buckeye GPLLC (“Buckeye GP”), which is the general partner of Buckeye Partners, L.P. (the“Partnership” or “Buckeye”).  Buckeye isalso a publicly traded (NYSE symbol: BPL) master limited partnership which wasorganized in 1986 under the laws of the state of Delaware.  As discussed below in Note 2, effective June25, 2007, BGH’s limited partnership units are owned approximately 62% by BGH GPHoldings, LLC (“BGH GP”), approximately 1% by certain members of Buckeye GP’ssenior management and approximately 37% by the public.  MainLine Management LLC, a Delaware limitedliability company (“MainLine Management”), is the general partner of BGH, andis wholly owned by BGH GP.

BGH’s only business is the ownership of Buckeye GP.  Buckeye GP’s only business is the managementof the Partnership and its subsidiaries. At September 30, 2007, Buckeye GP owned an approximate 0.6% generalpartner interest in the Partnership. Buckeye GP also owns 100% of and controlsMainLine GP, Inc. which, together with Buckeye GP, owns 100% of and controlsMainLine L.P. (“MainLine” or the “Operating Subsidiary GP”). The OperatingSubsidiary GP is the general partner of, and owns an approximate 1% interestin, certain of the Partnership’s operating subsidiaries.

BGH was formed on June 15, 2006 in order to facilitate thereorganization of MainLine and its affiliates and to effect an initial publicoffering (the “IPO”) of BGH’s common units. The reorganization and IPO occurred on August 9, 2006 and, prior to suchdate, BGH had no activity.  Prior to thereorganization, MainLine owned and controlled Buckeye GP.  On August 9, 2006, BGH sold 10.5 millioncommon units in an underwritten IPO, the net proceeds of which wereapproximately $168.3 million.  BGH usedthe net proceeds from the IPO, along with cash on hand, to repay all of thethen-outstanding indebtedness of MainLine and to make distributions to itspre-IPO equity owners.  The BGH commonunits sold in the IPO represent approximately 37% of the outstanding equity ofBGH, which includes common units (“Common Units”) and management units(“Management Units”).

Coincident with the IPO, the equity interests of MainLine wereexchanged for the equity interests of BGH. Accordingly, the financial information for BGH included in this reportincludes the financial information of MainLine as the predecessor of BGH.  See Note 10 for a further discussion.

In connection with the closing of the IPO, on August 9, 2006 BGH andBuckeye GP restructured the ownership of Buckeye GP.  MainLine Sub LLC (“MainLine Sub”), which wasthen a wholly-owned subsidiary of BGH and the owner of Buckeye GP, assigned allof its rights under the Fourth Amended and Restated Incentive CompensationAgreement, dated as of December 15, 2004, between MainLine Sub and Buckeye toBuckeye GP.  Thereafter, Buckeye andBuckeye GP amended and restated that agreement by entering into the FifthAmended and Restated Incentive Compensation Agreement, dated as of August 9,2006 (the “Incentive Compensation Agreement”). Also on August 9, 2006, Buckeye GP entered into the Amended and RestatedAgreement of Limited Partnership of Buckeye Partners, L.P. (the “PartnershipAgreement”).  The amendments to theIncentive Compensation Agreement and the Limited Partnership Agreement reflectthe assignment of the Incentive Compensation Agreement to Buckeye GP andrecharacterize the payments that Buckeye GP receives under the IncentiveCompensation Agreement and the Limited Partnership Agreement as distributionsin respect of its general partner interest rather than compensationpayments.  On August 18, 2006, MainLineSub was merged with and into BGH.

Commencingin the fourth quarter of 2006, these amendments resulted in changes in themethod used to allocate the Partnership’s income between Buckeye GP and thePartnership’s limited partners.

 

Allof the employees who provide services to BGH, the Partnership and thePartnership’s subsidiaries are employed by Buckeye Pipe Line Services Company(“Services Company”). Pursuant to a services agreement, Services Company isreimbursed by BGH or the Partnership’s subsidiaries for the cost of theemployees who provide those services. BGH is responsible for the total compensation, including benefits, paidto the four highest salaried officers performing duties for

 

5

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Buckeye GP with respect tothe functions of operations, finance, legal, marketing, business development,treasury, or performing the function of president of Buckeye GP, whichprincipally correspond to BGH’s named executive officers.   The Partnership is generally responsible forall other employee costs.  ServicesCompany is owned by an employee stock ownership plan (the “ESOP”). ServicesCompany owned approximately 5.1% of the publicly traded limited partner unitsof the Partnership at September 30, 2007.

 

AtSeptember 30, 2007, BGH had no operating assets other than its general partnerownership interest in Buckeye and Buckeye’s operating subsidiaries.  Buckeye owns and operates one of the largestindependent refined petroleum products pipeline systems in the United States interms of volumes delivered, with approximately 5,400 miles of pipeline, serving16 states, and operates an approximate 2,700 miles of pipeline, serving twostates, under agreements with major oil and chemical companies. The Partnershipalso owns and operates 51 refined petroleum products terminals with aggregatestorage capacity of approximately 20 million barrels in Illinois, Indiana,Massachusetts, Michigan, Missouri, New York, Ohio, Pennsylvania and Wisconsin.

 

Buckeye conducts all of itsoperations through subsidiary entities. These operating subsidiaries are Buckeye Pipe Line Company, L.P.(“Buckeye Pipe Line”), Laurel Pipe Line Company, L.P. (“Laurel”), EvergladesPipe 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(“Buckeye NGL”).  Each of these entitiesis hereinafter referred to as an “Operating Subsidiary” and they arecollectively referred to as the “Operating Subsidiaries.”

 

The Partnership’s Operating Subsidiaries conduct business in threereportable operating segments:  PipelineOperations, Terminalling and Storage, and Other Operations.  See Note 13 for a more detaileddiscussion.  BGH also has certainconsolidating level assets, which consist principally of goodwill associatedwith the purchase of Buckeye’s general partnership interest.

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

BGH has determined that Services Company is a variableinterest entity under the provisions of FASB Interpretation No. 46R —Consolidation of Variable Interest Entities (“FIN No. 46R”). Usingcriteria established in FIN No. 46R, BGH has determined that Buckeye GP isthe primary beneficiary of Services Company, although 100% of the equityinterest of Services Company is owned by the ESOP. Accordingly, as required byFIN No. 46R, Services Company has been consolidated in the financialstatements of BGH.

 

BGH’scondensed consolidated balance sheet includes a non-controlling interestliability that reflects the portion of the Partnership owned by its partnersother than BGH and Services Company. Similarly, BGH’s condensed consolidated income statements includenon-controlling interest expense that reflects the portion of the earnings dueto the Partnership’s partners other than BGH and Services Company.

 

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

 

6

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Theeffect of this change was to reduce BGH’s net income for the three and ninemonths ended September 30, 2007 by approximately $1.8 million and $4.7 million,respectively, of which $0.2 million and $1.2 million for the three and ninemonths ended September 30, 2007, respectively, represents the absence of incomerelated to the senior administrative charge in 2007 compared to 2006.  The remaining $1.6 million and $3.6 millionfor the three and nine months ended September 30, 2007 represents thedifference between income recognition for incentive compensation under BGH’snew characterization of incentive distributions compared to the amount thatwould have been recognized had the Incentive Compensation Agreement andPartnership Agreement not been amended.

 

Inthe opinion of management, the condensed consolidated financial statements ofBGH, which are unaudited except that the balance sheet as of December 31, 2006,which is derived from audited financial state­ments, include all adjustmentsnecessary to present fairly BGH’s financial position as of September 30, 2007,along with the results of operations for the three and nine months endedSeptember 30, 2007 and 2006 and cash flows for the nine months ended September30, 2007 and 2006.  The results ofoperations for the three and nine months ended September 30, 2007 are notnecessarily indicative of the results to be expected for the full year endingDecember 31, 2007.

 

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

 

2. SIGNIFICANT EVENTS

On April 3, 2007,Carlyle/Riverstone BPL Holdings II, L.P. (“Carlyle/Riverstone”), certainmembers of senior management of Buckeye GP and other limited partners(collectively, the “Sellers”) entered into a Purchase Agreement (the “PurchaseAgreement”) with BGH GP.  BGH GP is a limitedliability company owned by affiliates of ArcLight Capital Partners, LLC(“ArcLight”), Kelso & Company (“Kelso”) and Lehman Brothers Holdings Inc.(“Lehman Brothers”).  The PurchaseAgreement provided for the sale by the Sellers to BGH GP of their 61.9% limitedpartner interest in BGH and Carlyle/Riverstone’s ownership interest in MainLineManagement LLC (“MainLine Management”), which is the general partner of BGH.

On June 25, 2007, thePurchase Agreement was amended to provide that the members of management whowere parties to the Purchase Agreement would retain a portion of their limitedpartner interest in BGH. Also on June 25, 2007, the sale transactionclosed.  Total consideration paid was$411.6 million.  The transactionconstituted a change of control of BGH and, indirectly, Buckeye.

Effective as of October25, 2007, the Board of Directors of MainLine Management elected Mr. Stephen C.Muther as President of MainLine Management, in place of Mr. Forrest E. Wylie,who will remain Chairman of the Board of Directors and Chief Executive Officerof MainLine Management.  Mr. Muther wasalso elected by the Board of Directors of Buckeye GP to serve as President ofBuckeye GP, in place of  Mr. Wylie, whowill remain Chairman of the Board of Directors and Chief Executive Officer ofBuckeye GP.

 

3. CONTINGENCIES

 

Claimsand Proceedings

 

ThePartnership and the Operating Subsidiaries in the ordinary course of businessare involved in various claims and legal proceedings, some of which are coveredby insurance. The Partnership is generally unable to predict the timing oroutcome of these claims and proceedings. Based upon its evaluation of existingclaims and proceedings and the probability of losses relating to suchcontingencies, the Partnership has accrued certain amounts relating to suchclaims and proceedings, none of which are considered material.

 

Inthe third quarter of 2006, the Partnership received penalty assessments fromthe IRS in the aggregate amount of $4.3 million based on a failure to timelyfile excise tax information returns relating to its terminal operations fromJanuary

 

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2005 through February 2006.The Partnership filed the information returns with the IRS on May 10, 2006. InJanuary 2007, the Partnership agreed to pay the IRS approximately $0.6 millionto settle and resolve the penalty assessment. The negotiated penalty assessment was recorded as an expense in theconsolidated financial statements in the fourth quarter of 2006.  In September 2007, the Partnership and theIRS entered into a formal agreement settling and resolving the penaltyassessment and, pursuant to that agreement, the Partnership paid the IRSapproximately $0.6 million.

 

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

 

Environmental Contingencies

 

Inaccordance with its accounting policy, the Partnership recorded operatingexpenses of $2.2 million and $1.5 million for the three months ended September30, 2007 and 2006, respectively, and $6.2 million and $5.4 million for the ninemonths ended September 30, 2007 and 2006, respectively, related toenvironmental contingencies unrelated to claims and proceedings.

 

4.  ACQUISITIONS AND EQUITY INVESTMENTS

 

Theacquisitions discussed below were accounted for as acquisitions of assetsrather than the acquisitions of businesses, as defined in Statement ofFinancial Accounting Standards No. 141 — “Business Combinations.”

 

On January 16, 2007, Buckeye acquired two refinedpetroleum products terminals located in Flint and Woodhaven, Michigan forapproximately $22.2 million, including a deposit of $1.0 million that was paidin 2006. The fair value allocation of the acquired assets is as follows (inthousands):

 
| Land                                         |   | $      | 8,663  |   |
|----------------------------------------------|--------|--------|--------|--------|
| Buildings                                    |   | 3,481  |   |
| Machinery, equipment, and office furnishings |   | 10,024 |   |
|                                         |   | $      | 22,168 |   |

 

 

On February 27, 2007, Buckeye acquired a refinedpetroleum products terminal in Marcy, New York for approximately $2.3 million.The fair value allocation of the acquired assets is as follows (in thousands):

 
| Land                                         |   | $     | 505    |   |
|----------------------------------------------|--------|-------|--------|--------|
| Buildings                                    |   | 192   |   |
| Machinery, equipment, and office furnishings |   | 1,566 |   |
|                                         |   | $     | 2,263  |   |

 

 

On March 15, 2007, Buckeye completed the acquisitionof two refined petroleum products terminals located in Green Bay and Madison,Wisconsin and the purchase of a fifty percent interest in a third terminallocated in Milwaukee, Wisconsin for approximately $15.2 million.  On a preliminary basis, Buckeye has allocatedthe cost of the acquisition to the various tangible assets acquired whichprincipally consist of property, plant and equipment.

 

In the first quarter of 2007, Buckeye invested $0.9million in West Texas LPG Pipe Line Limited Partnership to be used for capitalexpenditures.  In the third quarter of2007, Buckeye invested approximately $0.8 million 

 

 

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inconnection with the pending acquisition of the membership interests in Lodi GasStorage, L.L.C. (“Lodi Gas” and such acquisition being the “Lodi Acquisition”)(see Note 15).

 

5.DEBT AND CREDIT FACILITIES

 

Debt consists of the following:

 
| ** **                                                        | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                                        | ** ** | **(In thousands)** | ** ** |
| *BGH:*                                                            | ** ** | ** **              | ** ** | ** **            | ** ** |
| Revolving Line  of Credit                                         |       | $                       | 600        |                  | $          | — |   |
| *Services  Company:*                                              |       |                    |       |                  |       |
| 3.60% ESOP Notes  due March 28, 2011                              |       | 22,383                  |       | 27,184                |       |
| Retirement  premium                                               |       | (596                    | )          | (862                  | )          |
| *The  Partnership:*                                               |       |                    |       |                  |       |
| 4.625% Notes due  July 15, 2013                                   |       | 300,000                 |       | 300,000               |       |
| 6.750% Notes due  August 15, 2033                                 |       | 150,000                 |       | 150,000               |       |
| 5.300% Notes due  October 15, 2014                                |       | 275,000                 |       | 275,000               |       |
| 5.125% Notes due  July 1, 2017                                    |       | 125,000                 |       | 125,000               |       |
| Borrowings under  Revolving Credit Facility                       |       | 30,000                  |       | 145,000               |       |
| Total debt                                                        |       | $                       | 902,387    |                  | $          | 1,021,322 |   |
| Other, including  unamortized discounts and fair value hedges (1) |       | (836                    | )          | (873                  | )          |
|                                                              |       |                    |       |                  |       |
| Subtotal long-  term debt                                         |       | 901,551                 |       | 1,020,449             |       |
| Less: current  maturities                                         |       | (6,198                  | )          | (6,037                | )          |
|                                                              |       |                    |       |                  |       |
| Total long-term  debt                                             |       | $                       | 895,353    |                  | $          | 1,014,412 |   |

 

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(1)The September 30, 2007 and December 31, 2006 amounts include $1.4 million and$1.5 million, respectively, related to an adjustment to fair value associatedwith a hedge of fair value and ($2.2) million and ($2.4) million, respectively,in unamortized discounts.

 

The fair value of theconsolidated debt was estimated to be $876.0 million and $990.0 million atSeptember 30, 2007 and December 31, 2006, respectively. The value of theconsolidated debt was calculated using interest rates currently available toBGH, the Partnership and Services Company for issuance of debt with similarterms and remaining maturities and approximate market values on the respectivedates.

 

*BGH*

 

On August 9, 2006, BGHentered into a five-year, $10.0 million revolving credit facility with SunTrustBank, as both**administrativeagent and lender (the “BGH Credit Agreement”). The credit facility may be usedfor working capital and other partnership purposes. BGH has pledged all of thelimited liability company interests in Buckeye GP as security for itsobligations under the BGH Credit Agreement.

 

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

 

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

 

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•                  LIBOR, plus a margin which can range from0.40% to 1.40%, based on the ratings assigned by Standard & Poor’s RatingServices and Moody’s Investor Services to the senior unsecured non-creditenhanced long-term debt of the Partnership.

 

The weighted averageinterest rate on amounts outstanding under the BGH Credit Agreement atSeptember 30, 2007 was 5.9%.

 

BGH’s ability to borrowamounts under the BGH Credit Agreement is subject to satisfaction of certain customaryconditions precedent to revolving loans and compliance with terms andconditions included in the BGH Credit Agreement. The BGH Credit Agreementrequires BGH to maintain leverage and funded debt coverage ratios. The leverageratio covenant requires BGH to maintain, as of the last day of each fiscalquarter, a ratio of the total funded indebtedness of BGH and its RestrictedSubsidiaries, measured as of the last day of each fiscal quarter, to theaggregate dividends and distributions received by BGH and its RestrictedSubsidiaries from the Partnership, plus all other cash received by BGH and theRestricted Subsidiaries, measured for the preceding twelve months, lessexpenses, of not more than 2.50 to 1.00. The BGH Credit Agreement defines “RestrictedSubsidiaries” as certain of BGH’s wholly owned subsidiaries. The funded debtcoverage ratio covenant requires BGH to maintain, as of the last day of eachfiscal quarter, a ratio of total consolidated funded debt of BGH and all of itssubsidiaries to the consolidated EBITDA, as defined in the BGH CreditAgreement, of BGH 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. At September30, 2007, BGH’s funded debt coverage ratio was 3.78 to 1.00.

 

The BGH Credit Agreementprohibits BGH from declaring dividends or distributions if any default or eventof default, as defined in the BGH Credit Agreement, has occurred or wouldresult from such a declaration. In addition, the BGH Credit Agreement containscovenants and provisions requiring BGH to adhere to certain covenants andlimiting the ability of BGH and its Restricted Subsidiaries to, among otherthings:

 

•                  incur or guarantee indebtedness;

 

•                  make certain negative pledges and grantcertain liens;

 

•                  make certain loans, acquisitions andinvestments;

 

•                  make any material changes to the nature ofBGH or its Restricted Subsidiaries’ business; or

 

•                  enter into a merger, consolidation or saleof assets.

 

If an event of defaultexists under the BGH Credit Agreement, the lender will be able to terminate theBGH Credit Agreement and accelerate the maturity of all outstanding loans, aswell as exercise other rights and remedies. The following are some of theevents which would constitute an event of default under the BGH CreditAgreement:

 

•                  failure to pay any principal, interest,fees, expenses or other amounts when due;

 

•                  failure of any representation or warranty tobe true and correct in any material respect;

 

•                  failure to perform or otherwise comply withthe covenants in the BGH Credit Agreement or other loan documents, subject tocertain grace periods;

 

•                  default by BGH or any Restricted Subsidiaryon the payment of any other indebtedness in excess of $5.0 million or defaultby the Partnership 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 involvingBGH;

 

10

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•                  the entry against BGH of a judgment inexcess of specified amounts, or otherwise having a material adverse effect,that is not stayed, discharged or deferred within specified periods;

 

•                  the invalidity or unenforceability of anymaterial provision in the BGH Credit Agreement or related documents; and

 

•                  the occurrence of certain events withrespect to employee benefit plans subject to ERISA.

 

In addition, the BGH CreditAgreement provides for a “change of control” event of default that is triggeredif (i) MainLine Management ceases to be the sole general partner of BGH, (ii)BGH GP ceases to own and control 100% of MainLine Management, (iii) (A)Arclight, Kelso, Lehman Brothers, and each of their respective affiliates,individually or collectively, cease to own and control at least 35% of theoutstanding equity interests of BGH GP, and (B) any person, entity or groupowns and controls a larger percentage of the outstanding equity interests ofBGH GP, than is collectively owned by Arclight, Kelso, Lehman Brothers, andtheir affiliates.

 

*Services Company*

 

Services Company’s 3.60%Senior Secured Notes (the “3.60% ESOP Notes”), due March 28, 2011, are payableby the ESOP to a third-party lender. The 3.60% ESOP Notes were issued on May 4,2004. The 3.60% ESOP Notes are collateralized by Services Company’s commonstock and are guaranteed by Services Company. In addition, the Partnership hascommitted that, in the event that the value of the Partnership’s LP Units ownedby Services Company falls below 125% of the balance payable under the 3.60% ESOPNotes, the Partnership will fund an escrow account with sufficient assets tobring the value of the total collateral (the value of the Partnership’s LPUnits owned by Services Company and the escrow account) up to the 125% minimum.Amounts deposited in the escrow account are returned to the Partnership whenthe value of the Partnership’s LP Units owned by Services Company’s returns toan amount that exceeds the 125% minimum. At September 30, 2007, the value ofthe Partnership’s LP Units owned by Services Company exceeded the 125%requirement.

 

*The Partnership*

 

As noted above, thePartnership has four series of publicly issued notes payable with an aggregateprincipal balance of approximately $850.0 million and with interest ratesranging from 4.625% to 6.750%. The Partnership makes quarterly interestpayments on each note with the principal balances outstanding under eachrespective series to be paid on or before the due dates as shown above.

 

On November 13, 2006, thePartnership entered into a $400.0 million, 5-year revolving credit facility(the “Credit Facility”) with a syndicate of lenders. On August 24, 2007, thePartnership and the lenders amended the Credit Facility. The most significantamendments to the Credit Facility were as follows:

 

•                  Theprincipal amount of the facility was increased from $400.0 million to $600.0million, and an expansion feature was added to enable the Partnership to,subject to certain conditions and upon the further approval of each lender,increase the Credit Facility to $800.0 million;

 

•                  Thetermination date of the Credit Facility was extended to August 24, 2012, whichdate may be extended by the Partnership for two additional one year periods,subject to certain conditions and the approval of certain lenders as set forthin the Credit Facility;

 

•                  Thefunded debt ratio covenant was increased to 5.0 to 1.0 (as more fully describedbelow);

 

•                  Therequirement of a guarantee by Laurel of outstanding indebtedness under theCredit Facility was eliminated;

 

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•                  Certainsubsidiaries designated by the Partnership as restricted subsidiaries were nolonger required to guarantee the indebtedness outstanding under the CreditFacility; and

 

•                  Inconnection with the anticipated closing of the Lodi Acquisition (see Note 15),certain secured indebtedness incurred by Lodi Gas and its subsidiaries will bepermitted to remain outstanding for 15 business days following the closing ofthe Lodi Acquisition.

 

Borrowings under the CreditFacility bear interest under one of two rate options, selected by thePartnership, equal to either (i) the greater of (a) the federal funds rate plus0.5% and (b) SunTrust Bank’s prime rate plus an applicable margin, or (ii)LIBOR plus an applicable margin. The applicable margin is determined based onthe current utilization level of the Credit Facility and on ratings assigned byStandard & Poor’s and Moody’s Investor Services for the Partnership’ssenior unsecured non-credit enhanced long-term debt. The Partnership also hadcommitted $1.6 million and $2.1 million of the Credit Facility to supportoutstanding letters of credit at September 30, 2007 and December 31, 2006,respectively. The weighted averageinterest rate on amounts outstanding under the Credit Facility at September 30,2007 was 5.4%.

 

The Credit Facilitycontains covenants and provisions that:

 

•                  Restrict the Partnership and certain of itssubsidiaries’ ability to incur additional indebtedness based on a Funded DebtRatio described below;

 

•                  Prohibit the Partnership and certain of itssubsidiaries from creating or incurring certain liens on their property;

 

•                  Prohibit the Partnership and certain of itssubsidiaries from disposing of property material to their operations; and

 

•                  Limit consolidations, mergers and assettransfers by the Partnership and certain of its subsidiaries.

 

The Credit Facilityrequires that the Partnership and certain of its subsidiaries maintain amaximum “Funded Debt Ratio” which is calculated using “EBITDA,” which isdefined in the Credit Facility for periods prior to the fourth quarter of 2006as consolidated net income before interest, taxes, depreciation, depletion,amortization and incentive compensation payments to Buckeye GP, and for periodscommencing after October 1, 2006 as consolidated net income before interest,taxes, depreciation, depletion and amortization.

 

The Partnership’s FundedDebt Ratio equals the ratio of total consolidated funded debt of thePartnership and certain of its subsidiaries to consolidated EBITDA measured forthe preceding twelve months. As of the last day of any fiscal quarter, theFunded Debt Ratio may not exceed 5.00 to 1.00, subject to a provision forincreases to 5.50 to 1.00 in connection with certain future acquisitions. AtSeptember 30, 2007, the Partnership’s Funded Debt Ratio was 3.62 to 1.00.

 

In addition, the CreditFacility provides for a “change of control” event of default that is triggeredif (i) BGH GP ceases to own and control 100% of MainLine Management, (ii) (A)Arclight, Kelso, Lehman Brothers and each of their respective affiliates,individually or collectively, cease to own and control at least 35% of theoutstanding equity interests of BGH GP, and (B) any person, entity or groupowns and controls a larger percentage of the outstanding equity interests ofBGH GP, than is collectively owned by Arclight, Kelso, Lehman Brothers, andtheir affiliates,  (iii)BGH ceases to own 100% of Buckeye GP or (iv) Buckeye GP ceases to be the solegeneral partner of Buckeye.

 

At September 30, 2007, thePartnership was in compliance with all of the covenants under the CreditFacility.

 

In December 2004, thePartnership terminated an interest rate swap agreement associated with the4.625% Notes and received proceeds of $2.0 million. In accordance with FASBStatement No. 133 – “Accounting for Derivative Instruments and HedgingActivities”, the Partnership has deferred the $2.0 million gain as anadjustment to the fair value of the hedged portion of the Partnership’s debtand is amortizing the gain as a reduction of interest expense over theremaining term of the hedged debt. Accordingly, interest expense was reduced by$59 thousand in the three months ended September 30, 2007 and 2006, and $176thousand in the nine months ended September 30, 2007 and 2006.

 

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In August 2007, thePartnership entered into a forward-starting interest rate swap agreement with afinancial institution for a $75.0 million notional amount in order to hedge thevariability of future interest rates associated with a portion of ananticipated issuance of debt to finance a portion of the Lodi Acquisition (seeNote 15). The debt is expected to be issued on or before March 31, 2008. Underthe interest rate swap agreement, the Partnership will receive a payment if theinterest rate on the notional amount exceeds 5.594% and will make a payment ifthe interest rate on the notional amount is below 5.594%. At September 30,2007, the Partnership determined the interest rate swap agreement to be aneffective cash flow hedge and recorded the change in the fair value of theagreement of $2.1 million. Similarly, on October 23, 2007, the Partnershipentered into another forward-starting interest rate swap agreement with thesame financial institution for a notional amount of $50.0 million and aninterest rate of 5.115%. Other than the notional amount and the interest rate,the more recent agreement has the same terms as the agreement executed inAugust 2007. The transaction executed on October 23, 2007 had no impact on theenclosed financial statements.

 

6.PREPAID AND OTHER CURRENT ASSETS

 

Prepaid and other currentassets consist of the following:

 
| ** **             | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Prepaid  insurance     |       | $                       | 2,147      |                  | $          | 7,728 |   |
| Insurance  receivables |       | 9,528                   |       | 12,093                |       |
| Ammonia  receivable    |       | 6,698                   |       | 6,284                 |       |
| Other                  |       | 12,628                  |       | 8,070                 |       |
| Total                  |       | $                       | 31,001     |                  | $          | 34,175 |   |

 

7. ACCRUED AND OTHERCURRENT LIABILITIES

 

Accrued and other current liabilities consist of thefollowing:

 
| ** **                          | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Taxes - other  than income          |       | $                       | 8,368      |                  | $          | 5,858 |   |
| Accrued employee  benefit liability |       | 2,340                   |       | 2,340                 |       |
| Environmental  liabilities          |       | 11,565                  |       | 12,498                |       |
| Interest                            |       | 12,539                  |       | 16,961                |       |
| Retainage                           |       | 1,865                   |       | 940                   |       |
| Payable for  ammonia purchase       |       | 9,351                   |       | 6,072                 |       |
| Compensation and  vacation          |       | 10,042                  |       | 8,606                 |       |
| Other                               |       | 14,631                  |       | 16,499                |       |
| Total                               |       | $                       | 70,701     |                  | $          | 69,774 |   |

 

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8. EARNINGS PER UNIT

 

The following table is a reconciliation of theweighted average number of units used in the basic and diluted earnings perunit calculations:

 
| ** **                                        | ** ** | **Three Months**   | ** ** | **Nine Months**   | ** ** | **August 9, 2006** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **Ended**               | ** ** | **Ended**              | ** ** | **to**                       | ** ** |
| ** **                                        | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** | **September 30,**       | ** ** |
| ** **                                        | ** ** | **2007**                | ** ** | **2007**               | ** ** | **2006**                     | ** ** |
| ** **                                        | ** ** | **(In thousands)** | ** ** |
| Basic:                                            |       |                    |       |                   |       |                         |       |
| Average common  units oustanding                  |       | 27,770                  |       | 27,308                 |       | 26,938                       |       |
| Average  management units oustanding              |       | 530                     |       | 781                    |       | 953                          |       |
|                                              |       |                    |       |                   |       |                         |       |
| Average units  for basic                          |       | 28,300                  |       | 28,089                 |       | 27,891                       |       |
|                                              |       |                    |       |                   |       |                         |       |
| Diluted:                                          |       |                    |       |                   |       |                         |       |
| Units used for  basic calculation                 |       | 28,300                  |       | 28,089                 |       | 27,891                       |       |
| **Dilutive  effect of additional management units |       | —                  |       | 211                    |       | —                       |       |
|                                              |       |                    |       |                   |       |                         |       |
| Average units  for diluted                        |       | 28,300                  |       | 28,300                 |       | 27,891                       |       |

 

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** Forthe period ended September 30, 2006, 409,000 of non-vested management unitswere excluded from the per unit loss calculation because their effect wouldhave been anti-dilutive.

 

9.CASH DISTRIBUTIONS

 

BGH generally makes quarterly cash distributions ofsubstantially all of its available cash, generally defined as consolidated cashreceipts less consolidated cash expenditures and such retentions for workingcapital, anticipated cash expenditures and contingencies as MainLine Managementdeems appropriate.

 

On October 25, 2007, MainLine Management declared aquarterly cash distribution of $0.265 per unit payable on November 30, 2007, tounitholders of record on November 5, 2007. The total cash distribution to BGHunitholders will amount to approximately $7.5 million.

 

10. UNIT-BASED COMPENSATION

 

*BGH GP Compensation Plan*

 

BGH GP maintains an equity incentive plan for certainmembers of senior management of BGH GP and BGH. This equity incentive planincludes both time-based and performance-based participation in the equity ofBGH GP (but not in BGH). BGH determined that, under the requirements ofStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”),  BGH is required to reflect, as a compensationcharge and corresponding contribution to common unitholders’ equity, the fairvalue of this compensation measured under the provisions of SFAS No. 123R. BGHGP determined the estimated fair value of such compensation at the respectivegrant dates was $0.3 million, and has recorded such amount as compensationexpense and a capital contribution in the third quarter of 2007. BGH is not aparty to this plan and has no liabilities with respect to it.

 

14

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*Unit Option and Distribution Equivalent Plan*

 

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

 

EffectiveJanuary 1, 2006, the Partnership adopted the fair value measurement andrecognition provisions of SFAS No. 123R, using the modified prospective basistransition method. Under this method, unit-based compensation expenserecognized in the first quarter of 2006 includes: (a) compensation expensefor all grants made prior to, but not yet vested as of, January 1, 2006, basedon the grant date fair value estimated in accordance with the originalprovisions of SFAS No. 123, and (b) compensation expense for all grantsmade on or after January 1 to June 30, 2006, based on the grant date fair valueestimated using the Black-Scholes option pricing model. The Partnershiprecognizes compensation expense for awards granted on or after January 1, 2006,on a straight-line basis over the requisite service period.

 

For the retirement eligibility provisions of the Option Plan, thePartnership follows the non-substantive vesting method and recognizescompensation expense immediately for options granted to retirement-eligibleemployees, or over the period from the grant date to the date retirementeligibility is achieved. Unit-based compensation expense recognized in thecondensed consolidated statements of income for the nine months ended September30, 2007 is based upon options ultimately expected to vest. In accordance withSFAS No. 123R, forfeitures have been estimated at the time of grant and will berevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures were estimated based upon historical experience.

 

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

 

*Unit Compensation Plan*

 

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

 

Coincident with the IPO, the equity interests ofMainLine were exchanged for the equity interests of BGH. The total 145,950,000of A Units of MainLine were exchanged for 16,438,000 Common Units of BGH. The16,216,668 B Units of MainLine were exchanged for 1,362,000 Management Units ofBGH. The Management Units are exchangeable for Common Units on a one for onebasis at the option of the holder. The vesting schedule of the Management Unitsof BGH varied from that of MainLine’s B Units for which they were exchanged. Seventypercent, or 953,400 Management Units, were vested immediately on the IPO date. Theremaining 30% or 408,600 of the Management Units were scheduled to vest over athree year period with 136,200 of the Units vesting on May 4, of each 2007,2008 and 2009. As disclosed in Note 2, the sale of the majority interest in BGHconstituted a change of control of BGH that triggered the immediate vesting andexpense recognition of the remaining unamortized value of the Management Units.Also, coincident with the aforementioned sale, approximately 61% or 831,647 ofthe Management Units were exchanged for Common Units.

 

Under the provisions of SFAS No. 123R, BGH recognizeddeferred compensation for the Management Units (i) for which vesting wasaccelerated compared to the B Units for which they were exchanged, and (ii)that were now deemed probable of vesting compared to BGH’s previous estimates. BGHdetermined that these criteria applied to 272,400 Management Units, the fairvalue of which was $4.6 million at August 9, 2006.

 

Of the total deferred compensation for the ManagementUnits of $4.6 million, BGH expensed approximately $3.5 million in the periodfrom August 9 (the IPO date) through December 31, 2006 (with an offsettingincrease in partners’ capital). The balance of $1.1 million was expensed in thesecond quarter of 2007. There are no additional Management Units available forgrant in connection with BGH’s Unit Compensation Plan.

 

15

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11.RELATED PARTY TRANSACTIONS

 

Lehman Brothers and its affiliates have provided,directly or indirectly, investment and commercial banking or financial advisoryservices to the Partnership, for which they received customary fees andcommissions. An affiliate of Lehman Brothers is a lender under the CreditFacility and receives its respective share of any repayment by the Partnershipof amounts outstanding under the Credit Facility. Also, an affiliate of LehmanBrothers owns an interest in BGH GP, which indirectly controls the Partnershipthrough an ownership interest in Buckeye GP. Finally, Lehman Brothers is actingas the Partnership’s exclusive financial advisor in connection with the LodiAcquisition (see Note 15).

 

Services Company and the Partnership are consideredrelated parties with respect to BGH. As discussed in Note 1, the condensedconsolidated financial statements for BGH include the accounts of ServicesCompany and the Partnership on a consolidated basis, and all intercompanytransactions have been eliminated.

 

12.           PENSIONS AND OTHER POSTRETIREMENTBENEFITS

 

Services Companysponsors a retirement income guarantee plan (a defined benefit plan) (“RIGP”)which generally guarantees employees hired before January 1, 1986 a retirementbenefit at least equal to the benefit they would have received under apreviously terminated defined benefit plan. Services Company’s policy is tofund amounts necessary to at least meet the minimum funding requirements ofERISA.

 

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

 

In December 2006, BGH adopted Statement of FinancialAccounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158requires companies to recognize a net liability or asset and an offsettingadjustment to accumulated other comprehensive income in connection withreporting on the funded status of defined benefit pension and otherpostretirement benefit plans. The SFAS 158 adjustments are reclassified tonon-controlling interest in BGH’s September 30, 2007 and December 31, 2006condensed consolidated financial statements.

 

In December 2006, Services Company amended the RetireeMedical Plan to freeze amounts payable to Medicare-eligible beneficiaries at$2,500 per year commencing in 2008. This change had the effect of reducing thepostretirement benefit obligation at December 31, 2006 by approximately $20.4million and reducing the Retiree Medical Plan expense for the three months andnine months ended September 30, 2007 by approximately $0.9 million and $2.8million, respectively.

 

For the three months ended September 30, 2007 and2006, the components of the net periodic benefit cost recognized by thePartnership for Services Company’s RIGP and Retiree Medical Plan were asfollows:

 
| ** **                                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | ** **                                               | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
| ** **                                                        | ** ** | **RIGP**                                                 | ** ** | **Plan** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**                                  | ** ** |
| Components of net periodic benefit cost: | ** ** | ** **                                               | ** ** |
| Service cost                                                      |       | $                                                        | 111        |   | $ | 231 |   | $ | 302 |   | $ | 193 |   |
| Interest cost                                                     |       | 345                                                      |       | 250 |   | 505 |   | 709 |   |
| Expected return  on plan assets                                   |       | (238                                                     | )          | (211 | ) | — |   | — |   |
| Amortization of  prior service benefit                            |       | (113                                                     | )          | (113 | ) | (859 | ) | (208 | ) |
| Amortization of  unrecognized losses                              |       | 112                                                      |       | 152 |   | 309 |   | 469 |   |
| Net periodic  benefit costs                                       |       | $                                                        | 217        |   | $ | 309 |   | $ | 257 |   | $ | 1,163 |   |

 

16

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For the nine months ended September 30, 2007 and 2006,the components of the net periodic benefit cost recognized by the Partnershipfor Services Company’s RIGP and Retiree Medical Plan were as follows:

 
| ** **                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | ** **                                              | ** ** | ** ** | ** ** | **Retiree Medical** | ** ** |
| ** **                                                        | ** ** | **RIGP**                                                | ** ** | **Plan** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**                                 | ** ** |
| Components of net periodic benefit cost: | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                      |       | $                                                       | 606        |   | $ | 692 |   | $ | 501 |   | $ | 643 |   |
| Interest cost                                                     |       | 850                                                     |       | 750 |   | 1,521 |   | 2,159 |   |
| Expected return  on plan assets                                   |       | (648                                                    | )          | (634 | ) | — |   | — |   |
| Amortization of  prior service benefit                            |       | (340                                                    | )          | (340 | ) | (2,578 | ) | (458 | ) |
| Amortization of  unrecognized losses                              |       | 399                                                     |       | 458 |   | 1,072 |   | 1,019 |   |
| Net periodic  benefit costs                                       |       | $                                                       | 867        |   | $ | 926 |   | $ | 516 |   | $ | 3,363 |   |

 

In August 2007, the Partnership made a voluntarycontribution of $1.8 million to the RIGP, even though a minimum funding contributionis not required to be made during 2007.

 

13. SEGMENT INFORMATION

 

All of Buckeye’s operations are conducted throughBuckeye and its operating subsidiaries. Based on the financial informationprovided to senior management, BGH has determined that Buckeye’s operations areappropriately presented in three reportable operating segments: PipelineOperations, Terminalling and Storage and Other Operations. BGH also has certainconsolidated-level assets, principally consisting of goodwill, which are notallocable to the individual reporting segments because they are not used by thechief operating decision maker to make decisions or to allocate resources.However, BGH does have another $11.4 million of goodwill included in itsTerminalling and Storage Segment. BGH’s reportable operating segments consistof the following:

 

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. This segment owns and operatesapproximately 5,400 miles of pipeline systems in California, Colorado,Connecticut, Florida, Illinois, Indiana, Kansas, Massachusetts, Michigan,Missouri, Nevada, New Jersey, New York, Ohio, Pennsylvania and Tennessee.

 

Terminalling and Storage:

 

The Terminalling and Storage segment provides bulkstorage and terminal throughput services. This segment owns and operates 51terminals that have the capacity to store an aggregate of approximately 20million barrels of refined petroleum products. The terminals are located inIllinois, Indiana, Massachusetts, Michigan, Missouri, New York, Ohio,Pennsylvania, and Wisconsin.

 

Other Operations:

 

The Other Operations segment consists primarily of thePartnership’s contract operation of third-party pipelines, which are ownedprimarily by major oil and chemical companies and are located in Texas andLouisiana. This segment also performs pipeline construction managementservices, typically for cost plus a fixed fee, for these same customers. TheOther Operations segment also includes the Partnership’s ownership andoperation of an ammonia pipeline acquired in November 2005 and its majorityownership of the Sabina Pipeline in Texas.

 

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

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                      | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **(In thousands)**          | ** ** | **(In thousands)**         | ** ** |
| Revenue:                        |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 92,067     |                            | $          | 91,188 |   | $ | 278,244 |   | $ | 259,592 |   |
| Terminalling and  Storage       |       | 24,843                           |       | 18,661                          |       | 72,379 |   | 55,271 |   |
| Other Operations                |       | 8,743                            |       | 6,670                           |       | 24,925 |   | 18,896 |   |
| Total                           |       | $                                | 125,653    |                            | $          | 116,519 |   | $ | 375,548 |   | $ | 333,759 |   |
|                            |       |                             |       |                            |       |   |   |   |   |
| Operating  income:              |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 34,451     |                            | $          | 35,440 |   | $ | 105,364 |   | $ | 101,106 |   |
| Terminalling and  Storage       |       | 9,513                            |       | 3,325                           |       | 27,273 |   | 15,803 |   |
| Other Operations                |       | 2,258                            |       | 1,571                           |       | 6,433 |   | 4,265 |   |
| Total                           |       | $                                | 46,222     |                            | $          | 40,336 |   | $ | 139,070 |   | $ | 121,174 |   |
|                            |       |                             |       |                            |       |   |   |   |   |
| Depreciation and  amortization: |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations            |       | $                                | 9,412      |                            | $          | 8,365 |   | $ | 25,619 |   | $ | 24,454 |   |
| Terminalling and  Storage       |       | 824                              |       | 1,528                           |       | 3,563 |   | 3,774 |   |
| Other Operations                |       | 175                              |       | 430                             |       | 937 |   | 1,217 |   |
| Total                           |       | $                                | 10,411     |                            | $          | 10,323 |   | $ | 30,119 |   | $ | 29,445 |   |

 

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| ** **                | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(In thousands)**         | ** ** |
| Capital  expenditures:    |       |                            |       |   |   |
| Pipeline  Operations      |       | $                               | 36,933     |   | $ | 48,425 |   |
| Terminalling and  Storage |       | 12,053                          |       | 11,038 |   |
| Other Operations          |       | 2,726                           |       | 2,755 |   |
| Consolidating-  level     |       | —                          |       | 106 |   |
| Total                     |       | $                               | 51,712     |   | $ | 62,324 |   |
|                      |       |                            |       |   |   |
| Acquisitions:             |       |                            |       |   |   |
| Pipeline  Operations      |       | $                               | 860        |   | $ | 79,826 |   |
| Terminalling and  Storage |       | 39,587                          |       | 13,504 |   |
| Total                     |       | $                               | 40,447     |   | $ | 93,330 |   |

 
| ** **                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                | ** ** | **(In thousands)**     | ** ** |
| Assets*:                  |       |                   |       |                  |       |
| Pipeline  Operations      |       | $                      | 1,616,206  |                  | $          | 1,608,243 |   |
| Terminalling and  Storage |       | 371,508                |       | 318,917               |       |
| Other Operations          |       | 71,302                 |       | 68,310                |       |
| Consolidating-  level     |       | 220,070                |       | 217,115               |       |
| Total                     |       | $                      | 2,279,086  |                  | $          | 2,212,585 |   |

 

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

 

14.RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2006, theFinancial Accounting Standards Board (“FASB”) adopted FASB InterpretationNo. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”).FIN 48 sets forth a recognition threshold and measurement attribute forfinancial statement recognition of positions taken or expected to be taken inincome tax returns. Only tax positions meeting a “more-likely-than-not”threshold of being sustained should be recognized under FIN 48.FIN 48 also provides guidance on derecognizing, classification of interestand penalties and accounting and disclosures for annual and interim financialstatements. FIN 48 is effective for fiscal years beginning after December 15,2006. The cumulative effect of the changes arising from the initial applicationof FIN 48 is required to be reported as an adjustment to the openingbalance of retained earnings in the period of adoption. The adoption of FIN 48had no material impact on the financial statements of BGH.

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). Thisstatement clarifies the definition of fair value, establishes a framework formeasuring fair value, and expands the disclosures on fair value measurements.SFAS No. 157 is effective for fiscal years beginning afterNovember 15, 2007 and interim periods within that year. BGH is stilldetermining the impact, if any, of the adoption of SFAS No. 157 on itsfinancial statements.

 

 

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InFebruary 2007, the FASB issued Statement of Financial Accounting Standards No.159 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value that currently arenot required to be measured at fair value. SFAS No. 159 is effective no laterthan fiscal years beginning after November 15, 2007. BGH does not believe that the adoption of SFASNo. 159 will have a material impact on its financial statements.

 

InSeptember 2007, the Emerging Issues Task Force (“EITF”) of the FASB reached atentative conclusion on Issue No. 07-4, “Application of the Two-Class Methodunder FASB Statement No. 128, Earnings per Share, to Master LimitedPartnerships” (“Issue No. 07-4”). This tentative conclusion reached by the EITFaffects how a master limited partnership (“MLP”) allocates income between itsgeneral partner, which typically holds incentive distribution rights (“IDRs”)along with the general partner interest, and the limited partners. It is notuncommon for MLPs to experience timing differences between the recognition ofincome and partnership distributions. The amount of incentive distribution istypically calculated based on the amount of distributions paid to the MLP’spartners. The issue is whether current period earnings of an MLP should beallocated to the holders of IDRs as well as the holders of the general andlimited partnership interests when applying the two-class method under FASBStatement No. 128 – “Earnings per Share.”

 

Thetentative conclusion reached by the EITF in Issue No. 07-4 is that when currentperiod earnings are in excess of cash distributions, the undistributed earningsshould be allocated to the holders of the general partner interest and theholders of IDRs on one hand, and the holders of the limited partner interest onthe other hand, as if the undistributed earnings were available in cash.Conversely, when cash distributions are in excess of earnings, net incomeallocable to the holders of the limited partner interest would be reduced bythe actual distributions to the holders of the general partner interest and theholders of IDRs. The remaining net income would be allocated to the holders ofthe limited partner interest based on their respective sharing of income asspecified in the partnership agreement.

 

Issue No. 07-4 will beeffective for fiscal years beginning after December 15, 2007 and interimperiods within those fiscal years. The accounting treatment shall be effectivefor all financial statements presented. BGH is considering the impact of theadoption of Issue 07-4 on BGH’s financial statements.

 

15.LODI TRANSACTION

 

OnJuly 24, 2007, the Partnership announced that it had entered into a definitiveagreement to acquire the membership interests in Lodi Gas from an affiliate ofArcLight. Lodi Gas owns and operates a natural gas storage facility near Lodi,California and an expansion facility, known as Kirby Hills, locatedapproximately 45 miles west of the Lodi facility. The combined Lodi and KirbyHills facilities provide approximately 22 billion cubic feet (“Bcf”) of workinggas capacity and are connected to Pacific Gas and Electric’s intrastate gaspipelines that service natural gas demand in the San Francisco and Sacramentoareas. Lodi Gas also has an application pending with the California PublicUtilities Commission (the “CPUC”) to permit an expansion of the Kirby Hillsfacility, which will provide an estimated additional 12 Bcf of working gascapacity following estimated capital expenditures in 2008 of approximately$40.0 million.

 

Thepurchase price for Lodi Gas is approximately $440.0 million, of whichapproximately $428.0 million will be paid at closing and approximately $12.0 million will be paid upon approval ofthe Kirby Hills facility expansion by the CPUC. The transaction is subject tocustomary closing conditions including approval of the Partnership’s purchaseby the CPUC. The Partnership anticipates closing the transaction in the fourthquarter of 2007 or the first quarter of 2008.

 

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

 

RESULTS OF OPERATIONS

 

*Overview*

 

The following discussionprovides an analysis of the financial condition and results of operations forBuckeye GP Holdings L.P. (“BGH”) and each of BGH’s operating segments,including an overview of its liquidity and capital resources and other relatedmatters. The following discussion and analysis should be read in conjunctionwith the accompanying condensed consolidated financial statements and relatednotes included in this report and BGH’s Annual Report on Form 10-K for the yearended December 31, 2006.

 

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

 

•                    the incentivedistribution rights in Buckeye;

 

•                    the generalpartner interests in Buckeye (representing 243,914 general partner units (the “GPUnits”), or an approximate 0.6% interest in Buckeye);

 

•                    80,000 Buckeyelimited partner units (the “LP Units”); and

 

•                    the indirectownership of the general partner interests in certain of Buckeye’s operatingsubsidiaries (representing an approximate 1% interest in each of such operatingsubsidiaries ).

 

BGH’s earnings and cashflows are, therefore, directly dependent upon the ability of Buckeye and itsoperating subsidiaries to make cash distributions to Buckeye’s partners. Theactual amount of cash that Buckeye will have available for distribution willdepend primarily on Buckeye’s ability to generate earnings and cash flowsbeyond its working capital requirements.

 

The following tablesummarizes BGH’s cash received in the three and nine months ended September 30,2007 and 2006 as a result of its partnership interests in Buckeye:

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                        | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**          | ** ** | **(In thousands)**         | ** ** |
| Incentive  distributions from Buckeye                                                             |       | $                                | 7,558      |                            | $          | 6,381 |   | $ | 21,699 |   | $ | 18,277 |   |
| Distributions  from the ownership of 243,914 of                                                   |       |                             |       |                            |       |   |   |   |   |
| Buckeye’s GP  Units                                                                          |       | 198                              |       | 186                             |       | 585 |   | 549 |   |
| Distributions  from the ownership of 80,000 of                                                    |       |                             |       |                            |       |   |   |   |   |
| Buckeye’s LP  Units                                                                          |       | 65                               |       | 61                              |       | 192 |   | 180 |   |
| Distributions  from the indirect 1% ownership in certain of Buckeye’s operating subsidiaries |       |                             |       |                            |       |   |   |   |   |
|                                                                                              | 356        |                             | 343        |                            | 974        |   | 971 |   |
|                                                                                              |       | $                                | 8,177      |                            | $          | 6,971 |   | $ | 23,450 |   | $ | 19,977 |   |

 

*Buckeye GP Holdings L.P.*

 

BGH is a Delaware limitedpartnership formed on June 15, 2006 in order to facilitate the reorganizationof MainLine L.P. (“MainLine”) and its affiliates and to effect an initialpublic offering (“IPO”) of the Common Units of BGH. The reorganization and IPOoccurred on August 9, 2006.

 

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As discussed below under *Significant Events,*effective June 25, 2007*, *BGH’s limitedpartnership units are owned approximately 62% by BGH GP Holdings, LLC (“BGH GP”),approximately 1% by certain members of Buckeye GP’s senior management andapproximately 37% by the public. Prior to the IPO, BGH had no activity andMainLine owned and controlled Buckeye GP.

 

Coincident with the IPO,the equity interests of MainLine were exchanged for the equity interests of BGH.Accordingly, the financial information for BGH prior to the IPO date of August9, 2006 included in this report includes the financial information of MainLine.

 

In connection with theIPO, BGH and Buckeye GP restructured the ownership of Buckeye GP. MainLine SubLLC (“MainLine Sub”), which was then a wholly-owned subsidiary of BGH and theowner of Buckeye GP, assigned all of its rights under the Fourth Amended andRestated Incentive Compensation Agreement, dated as of December 15, 2004,between MainLine Sub and Buckeye to Buckeye GP. Thereafter, Buckeye and BuckeyeGP amended and restated that agreement by entering into the Fifth Amended andRestated Incentive Compensation Agreement, dated as of August 9, 2006 (the “IncentiveCompensation Agreement”). On August 9, 2006, Buckeye GP also entered into theAmended and Restated Agreement of Limited Partnership of Buckeye Partners, L.P.(the “Partnership Agreement”). The amendments to the Incentive CompensationAgreement and the Partnership Agreement reflect the assignment of the IncentiveCompensation Agreement to Buckeye GP and re-characterize the payments BuckeyeGP receives under the Incentive Compensation Agreement as distributions inrespect of its general partner interest rather than compensation payments. OnAugust 18, 2006, MainLine Sub was merged with and into BGH. These changesresulted in changes in the method used to allocate Buckeye’s income betweenBuckeye GP and Buckeye’s limited partners.

 

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

 

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

 

The effect of this changewas to reduce BGH’s net income for the three and nine months ended September30, 2007 by approximately $1.8 million and $4.7 million, respectively, of which$0.2 million and $1.2 million for the three and nine months ended September 30,2007, respectively, represents the absence of income related to the senioradministrative charge in 2007 compared to 2006. The remaining $1.6 million and$3.6 million for the three and nine months ended September 30, 2007 representsthe difference between income recognition for incentive compensation under BGH’snew methodology compared to the amount that would have been recognized had theIncentive Compensation Agreement and Partnership Agreement not been amended.

 

*Significant Events*

 

On April 3, 2007,Carlyle/Riverstone BPL Holdings II, L.P. (“Carlyle/Riverstone”), certainmembers of senior management of Buckeye GP and other limited partners (collectively,the “Sellers”) entered into a Purchase Agreement (the “Purchase Agreement”)with BGH GP. BGH GP is a limited liability company owned by affiliates ofArcLight Capital Partners, LLC (“ArcLight”), Kelso & Company (“Kelso”) andLehman Brothers Holdings Inc. (“Lehman Brothers”). The Purchase Agreementprovided for the sale by the Sellers to BGH GP of their 61.9% limited partnerinterest in BGH and Carlyle/Riverstone’s ownership interest in MainLineManagement, which is the general partner of BGH.

 

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On June 25, 2007, thePurchase Agreement was amended to provide that the members of management whowere parties to the Purchase Agreement would retain a portion of their limitedpartner interest in BGH. Also on June 25, 2007, the sale transaction closed. Totalconsideration paid was $411.6 million. The transaction constituted a change ofcontrol of BGH and, indirectly, Buckeye.

 

OnJuly 24, 2007, the Partnership announced that it had entered into a definitiveagreement to acquire the membership interests in Lodi Gas, L.L.C. (“Lodi Gas”)from an affiliate of ArcLight (the “Lodi Acquisition”). Lodi Gas owns andoperates a natural gas storage facility near Lodi, California and an expansionfacility, known as Kirby Hills, located approximately 45 miles west of the Lodifacility. The combined Lodi and Kirby Hills facilities provide approximately 22billion cubic feet (“Bcf”) of working gas capacity and are connected to PacificGas and Electric’s intrastate gas pipelines that service natural gas demand inthe San Francisco and Sacramento areas. Lodi Gas also has an applicationpending with the California Public Utilities Commission (the “CPUC”) to permitan expansion of the Kirby Hills facility, which will provide an estimatedadditional 12 Bcf of working gas capacity following estimated capitalexpenditures in 2008 of approximately $40.0 million.

 

Thepurchase price for Lodi Gas is approximately $440.0 million, of whichapproximately $428.0 million will be paid at closing and approximately $12.0million will be paid upon approval of the Kirby Hills facility expansion by theCPUC. The transaction is subject to customary closing conditions includingapproval of the Partnership’s purchase by the CPUC. The Partnership anticipatesclosing the transaction in the fourth quarter of 2007 or the first quarter of2008.

 

Effective as of October25, 2007, the Board of Directors of MainLine Management elected Mr. Stephen C.Muther as President of MainLine *Management*, inplace of Mr. Forrest E. Wylie, who will remain Chairman of the Board ofDirectors and Chief Executive Officer of MainLine Management. Mr. Muther wasalso elected by the Board of Directors of Buckeye GP to serve as President ofBuckeye GP, in place of  Mr. Wylie, whowill remain Chairman of the Board of Directors and Chief Executive Officer ofBuckeye GP.

 

*Results of Operations*

 

The results of operationsdiscussed below principally reflect the activities of Buckeye. Since theaccompanying condensed consolidated financial statements of BGH include theconsolidated results of Buckeye, BGH’s consolidated statements aresubstantially similar to Buckeye’s except as noted below:

 

•                  Interest of non-controlling partners inBuckeye — BGH’s condensed consolidated balance sheet includes a non-controllinginterest liability that reflects the proportion of Buckeye owned by itspartners other than BGH. Similarly, the ownership interests in Buckeye held byits partners other than BGH are reflected in BGH’s condensed consolidated incomestatement as non-controlling interest expense. These non-controlling interestliabilities and expenses are not reflected in Buckeye’s condensed consolidatedfinancial statements.

 

•                  BGH’s capital structure—In addition toincorporating the assets and liabilities of Buckeye, BGH’s condensedconsolidated balance sheet includes BGH’s own indebtedness and related debtplacement costs, and the partners’ capital on BGH’s balance sheet representsBGH’s partners’ capital as opposed to the capital reflected in Buckeye’sbalance sheet, which reflects the ownership interest of all its partners,including its owners other than BGH. Consequently, BGH’s income statementreflects additional interest expense, interest income and debt amortizationexpense that is not reflected in Buckeye’s financial statements.

 

•                  Inclusion of Buckeye Pipe Line ServicesCompany—The financial statements of Buckeye Pipe Line Services Company (“ServicesCompany”), which employs the employees who manage and operate the assets ofBuckeye, are consolidated into BGH’s financial statements. The financialstatements of Buckeye do not include the financial statements of ServicesCompany.

 

•                  BGH’s G&A expenses—BGH incurs general andadministrative expenses that are independent from Buckeye’s operations and arenot reflected in Buckeye’s condensed consolidated financial statements.

 

23

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

 

*Buckeye Partners, L.P.*

* *

Buckeye’s principal lineof business is the transportation, terminalling and storage of petroleumproducts in the United States for major integrated oil companies, large refinedpetroleum product marketing companies and major end users of petroleum productson a fee basis through facilities owned and operated by Buckeye. Buckeye alsooperates pipelines owned by third parties under contracts with major oil andchemical companies, and performs certain construction activities, generally forthe owners of those third-party pipelines.

 

Buckeye’s directsubsidiaries are Buckeye Pipe Line Company, L.P. (“Buckeye Pipe Line”), LaurelPipe Line Company, L.P. (“Laurel”), Everglades Pipe Line Company, L.P. (“Everglades”),Buckeye Pipe Line Holdings, L.P. (“BPH”), Wood River Pipe Lines LLC (“WoodRiver”), Buckeye Pipe Line Transportation LLC (“BPL Transportation”) andBuckeye NGL Pipe Lines LLC (“Buckeye NGL”). Each of these entities is referredto as an “Operating Subsidiary” and they are collectively referred to as the “OperatingSubsidiaries.” Buckeye owns an approximately 99% interest in each OperatingSubsidiary except that it owns a 100% interest in each of Wood River, BPLTransportation and Buckeye NGL.

 

*Operating Segments*

 

As fully described inNote 13 to the accompanying condensed consolidated financial statements, BGHhas determined that its operations are appropriately presented in threeoperating segments, which are the same as Buckeye’s operating segments:Pipeline Operations, Terminalling and Storage and Other Operations.

 

*Results of Operations*

 

Summary operating resultsfor BGH were as follows:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                        | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(In thousands)**          | ** ** | **(In thousands)**         | ** ** |
| Revenue                           |       | $                                | 125,653    |                            | $          | 116,519 |   | $ | 375,548 |   | $ | 333,759 |   |
| Costs and  expenses               |       | 79,431                           |       | 76,183                          |       | 236,478 |   | 212,585 |   |
|                              |       |                             |       |                            |       |   |   |   |   |
| Operating income                  |       | 46,222                           |       | 40,336                          |       | 139,070 |   | 121,174 |   |
| Other income  (expenses)          |       | (12,285                          | )          | (14,623                         | )          | (38,631 | ) | (45,941 | ) |
| Income before  equity income and  |       |                             |       |                            |       |   |   |   |   |
| non- controlling  interest        |       | 33,937                           |       | 25,713                          |       | 100,439 |   | 75,233 |   |
| Equity income                     |       | 2,222                            |       | 1,803                           |       | 6,266 |   | 4,598 |   |
| Non-controlling  interest expense |       | (31,081                          | )          | (26,012                         | )          | (91,557 | ) | (74,101 | ) |
|                              |       |                             |       |                            |       |   |   |   |   |
| Net income                        |       | $                                | 5,078      |                            | $          | 1,504 |   | $ | 15,148 |   | $ | 5,730 |   |

 

24

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Revenues and operatingincome by operating segment were as follows:

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                           | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                           | ** ** | **(In thousands)**          | ** ** | **(In thousands)**         | ** ** |
| Revenue:                                                             |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 92,067     |                            | $          | 91,188 |   | $ | 278,244 |   | $ | 259,592 |   |
| Terminalling and  Storage                                            |       | 24,843                           |       | 18,661                          |       | 72,379 |   | 55,271 |   |
| Other Operations                                                     |       | 8,743                            |       | 6,670                           |       | 24,925 |   | 18,896 |   |
| Total                                                                |       | $                                | 125,653    |                            | $          | 116,519 |   | $ | 375,548 |   | $ | 333,759 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Operating income:                                                    |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 34,451     |                            | $          | 35,440 |   | $ | 105,364 |   | $ | 101,106 |   |
| Terminalling and  Storage                                            |       | 9,513                            |       | 3,325                           |       | 27,273 |   | 15,803 |   |
| Other Operations                                                     |       | 2,258                            |       | 1,571                           |       | 6,433 |   | 4,265 |   |
| Total                                                                |       | $                                | 46,222     |                            | $          | 40,336 |   | $ | 139,070 |   | $ | 121,174 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Total costs and  expenses (including depreciation and amortization): |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 57,616     |                            | $          | 55,749 |   | $ | 172,880 |   | $ | 158,486 |   |
| Terminalling and  Storage                                            |       | 15,330                           |       | 15,335                          |       | 45,106 |   | 39,468 |   |
| Other Operations                                                     |       | 6,485                            |       | 5,099                           |       | 18,492 |   | 14,631 |   |
| Total                                                                |       | $                                | 79,431     |                            | $          | 76,183 |   | $ | 236,478 |   | $ | 212,585 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Depreciation and  amortization:                                      |       |                             |       |                            |       |   |   |   |   |
| Pipeline  Operations                                                 |       | $                                | 9,412      |                            | $          | 8,365 |   | $ | 25,619 |   | $ | 24,454 |   |
| Terminalling and  Storage                                            |       | 824                              |       | 1,528                           |       | 3,563 |   | 3,774 |   |
| Other Operations                                                     |       | 175                              |       | 430                             |       | 937 |   | 1,217 |   |
|  Total                                                          |       | $                                | 10,411     |                            | $          | 10,323 |   | $ | 30,119 |   | $ | 29,445 |   |

 

ThirdQuarter of 2007 compared to Third Quarter of 2006

 

Totalrevenues for the quarter ended September 30, 2007 were $125.7 million, $9.2million or 7.9% greater than revenue of $116.5 million for the same period in2006. This improvement in revenue in the third quarter of 2007 resultedprimarily from increased revenues in the Terminalling and Storage segment asdiscussed below.

 

Pipeline Operations:

 

Revenue from Pipeline Operationswas $92.1 million in the third quarter of 2007 compared to $91.2 million in thethird quarter of 2006. The revenue increase in Pipeline Operations revenue inthe third quarter of 2007 of $0.9 million or 1.0% was primarily the result of:

 

•                    An approximate$3.3 million increase in base transportation revenue caused primarily by anindexed-based tariff increase of approximately 6.1% implemented on July 1, 2007and a market-based tariff increase of approximately 4.5% implemented on May 1,2007. Product volumes (as shown below) declined by 2.2% in the third quarter of2007 as compared to the third quarter of 2006;

 

•                    An approximate$1.7 million reduction in revenue representing the settlement of overages andshortages on product deliveries; and

 

•                    An approximate$0.7 million reduction in construction management revenue due to the reducedactivity associated with a construction contract performed by WesPac Pipelines– Memphis LLC (“WesPac Memphis”) for a third party.

 

25

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The Partnership hasexperienced shortages on its pipeline product deliveries during 2007 and thelatter part of 2006 in excess of historical variances. Partnership personnelare actively investigating measurement equipment issues that may be the causeof the increased shortages.

 

Product deliveries forthe third quarter ended September 30, 2007 and 2006 were as follows:

 
| ** **  | ** ** | **Average Barrels Per Day**               | ** ** |
|-------------|------------|----------------------------------------------------------|------------|
| ** **  | ** ** | **Three Months Ended September 30,** | ** ** |
| **Product** | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
| Gasoline    |       | 730,100                                                  |       | 742,700 |   |
| Distillate  |       | 274,000                                                  |       | 295,700 |   |
| Jet Fuel    |       | 376,100                                                  |       | 361,500 |   |
| LPG’s  |       | 18,600                                                   |       | 27,200 |   |
| NGL’s  |       | 21,100                                                   |       | 21,300 |   |
| Other       |       | 5,700                                                    |       | 8,700 |   |
| Total       |       | 1,425,600                                                |       | 1,457,100 |   |

 

In the third quarter of2007, certain of the Partnership’s Operating Subsidiaries filed pipelinetariffs reflecting increased rates on average of approximately 4.5%. Tariffrate increases were not filed in connection with certain of the Partnership’spipelines regulated by state regulatory agencies which represent approximately8% of the Partnership’s pipeline volumes. These tariff rate increases areexpected to generate approximately $14.7 million in additional revenue on anannual basis.

 

Terminalling and Storage:

 

Revenue from theTerminalling and Storage segment was $24.8 million in the third quarter of 2007compared to $18.7 million in the third quarter of 2006. The revenue increase inthe third quarter of 2007 compared to the third quarter of 2006 of $6.1 millionor 32.6% was primarily the result of:

 

•       An approximate $4.8 million increase in base revenue primarilyrelated to increases in throughput volumes and charges for product additives inthe third quarter of 2007 compared to the third quarter of 2006; and

 

•      Incremental revenue of $1.6 million due tothe acquisition of six terminals in 2007, as more fully described in Note 4 tothe accompanying condensed consolidated financial statements.

 

Averagedaily throughput for the refined products terminals for the quarters endedSeptember 30, 2007 and 2006 were as follows:

 
| ** **                         | ** ** | **Average Barrels Per Day**               | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                         | ** ** | **Three Months Ended September 30,** | ** ** |
| ** **                         | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
|                               |       |                                                     |       |   |   |
| Refined products  throughput (bpd) |       | 575,100                                                  |       | 498,900 |   |

 

OtherOperations:

 

Revenue from the OtherOperations segment was $8.7 million in the third quarter of 2007 compared to$6.7 million in the third quarter of 2006. The revenue increase in the thirdquarter of 2007 of $2.0 million or 29.9% was primarily the result of:

 

26

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•      Anincrease of $1.3 million in pipeline maintenance and operating revenue relatedto additional operating contracts signed in the latter part of 2006; and

 

•      Anincrease of $0.8 million in construction management revenue related to theadditional contracts noted above.

 

*Operating Expenses:*

* *

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

 
| ** **                     | ** ** | **Costs and Expenses** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(In thousands)**          | ** ** |
| Payroll and  payroll benefit   |       | $                                | 24,334     |   | $ | 24,779 |   |
| Depreciation and  amortization |       | 10,411                           |       | 10,323 |   |
| Operating power                |       | 7,744                            |       | 7,605 |   |
| Outside services               |       | 10,658                           |       | 10,148 |   |
| Property and  other taxes      |       | 5,448                            |       | 5,169 |   |
| Construction  management       |       | 1,609                            |       | 1,909 |   |
| All other                      |       | 19,227                           |       | 16,250 |   |
| Total                          |       | $                                | 79,431     |   | $ | 76,183 |   |

 

Payroll and payrollbenefit expense was $24.3 million in the third quarter of 2007, a decrease of$0.5 million compared to the third quarter of 2006. Increases in salaries andwages of $1.5 million in the third quarter of 2007 resulted from an increase inthe number of employees and overtime pay due to the Partnership’s expandedoperations and higher wage rates. In the third quarter of 2007, the Partnershipexperienced also an increase of $1.0 million in employee incentive compensationexpense. In the third quarter of 2006, the Partnership reversed $0.9 millionrelated to employee incentive compensation expense. Payroll benefits increasedby $0.4 million due to higher medical costs, increases in wages and increasedemployee headcount of which, approximately $0.3 million is related to recentacquisitions. In addition, BGH’s payroll expense also increased by $0.3 milliondue to non-cash unit based compensation expense related to BGH GP’scompensation plan. This increase was offset by a decrease of $0.9 million inpayroll benefits due to lower employee benefits costs resulting from anamendment to Services Company’s postretirement health care and life insurancebenefits plan. In the third quarter of 2006, BGH expensed $3.3 million inpayroll and payroll benefits related to its Management Units, which did notrecur in the third quarter of 2007.

 

Depreciation and amortization expense was $10.4million in the third quarter of 2007, which was consistent with depreciationand amortization expense in the third quarter of 2006.

 

Operating power costswere $7.7 million in the three months ended September 30, 2007, which wasconsistent with operating power costs in the three months ended September 30,2006. The Partnership experienced an increase in power rates and power supplyadditive expense, which was offset by a decrease in operating power usage dueto a decrease in pipeline volumes in the third quarter of 2007. Operating powerconsists primarily of electricity required to operate pipeline pumpingfacilities.

 

Outside services costsincreased $0.6 million from $10.1 million in the third quarter of 2006 to $10.7million in the third quarter of 2007. A majority of this increase is due to anannual senior administrative charge that is paid by Buckeye to affiliates ofits general partner for certain management functions supplied by those affiliates.Prior to BGH’s IPO, this senior administrative charge was recognized as incomeby BGH. In connection with the IPO, Buckeye pays the senior administrativecharge directly to BGH’s general partner, MainLine Management, which resultedin an increase in outside service costs during the third quarter of 2007. Thelevel of maintenance activity in the third quarter of 2007 was similar to thelevel of activity in the third quarter of 2006. Outside services costs consistprincipally of third-party contract services for pipeline and terminalmaintenance activities.

 

27

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Property and other taxeswere $5.4 million in the third quarter of 2007, an increase of $0.2 millioncompared to the third quarter of 2006. Property and other taxes related torecent acquisitions resulted in an increase of $0.1 million. The remainingincrease was caused primarily by higher real property tax assessments inseveral states.

 

Construction managementcosts were $1.6 million in the third quarter of 2007, which is consistent withconstruction activity in the third quarter of 2006.

 

All other costs were$19.2 million in the three months ended September 30, 2007, an increase of $2.9million compared to $16.3 million in the same period in 2006. Insurance costsincreased by $1.0 million over the third quarter of 2006, which is primarilydue to an increase in insurance premiums. Supply expenses increased by $0.5million which is primarily a result of an increase of terminal additives usedin terminal activity. Non-recurring professional fees in the three months endedSeptember 30, 2006 include approximately $0.2 million of legal, accounting andtax fees related to planning for BGH’s IPO in 2006. The remainder of theincreases related to various other pipeline operating costs.

 

Costs and expensesattributable to Buckeye, Services Company and BGH were as follows:

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** |
| ** **                                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(In thousands)**          | ** ** |
| Total cost and expenses:              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Attributable to  Buckeye                             |       | $                                | 78,122     |   | $ | 70,473 |   |
| Elimination of  Buckeye deferred charge              |       | (1,174                           | )          | (1,174 | ) |
| Elimination of  Buckeye senior administrative charge |       | —                           |       | (204 | ) |
| Net effect of  ESOP charges                          |       | 1,063                            |       | 2,657 |   |
| Attributable to  BGH                                 |       | 1,420                            |       | 4,431 |   |
| Total                                                |       | $                                | 79,431     |   | $ | 76,183 |   |
|                                                      |            |                                  |            |  |  |  |  |  |

 

Amounts attributable toBGH consist of the following:

 
| ** **            | ** ** | **Three Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|
| ** **            | ** ** | **September 30,**           | ** ** |
| ** **            | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **            | ** ** | **(In thousands)**          | ** ** |
| Attributable to  BGH: |       |                             |       |   |   |
| Payroll and  benefits |       | $                                | 852        |   | $ | 3,829 |   |
| Professional  fees    |       | 217                              |       | 461 |   |
| Other                 |       | 351                              |       | 141 |   |
| Total                 |       | $                                | 1,420      |   | $ | 4,431 |   |

 

Payroll and payrollbenefits costs include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye as well as allocations ofthe cost of Buckeye personnel performing administrative services directly forBGH. In the third quarter of 2007, BGH expensed $0.3 million due to non-cashunit based compensation expense related to BGH GP’s compensation plan. In thethird quarter of 2006, BGH expensed $3.3 million in payroll and payrollbenefits related to its Management Units which did not recur in the thirdquarter of 2007. Non-recurring professional fees in the three months endedSeptember 30, 2006 include approximately $0.2 million of legal, accounting andtax fees related to planning for BGH’s IPO in 2006. Other costs include certainstate franchise taxes, insurance costs, depreciation and miscellaneous otherexpenses.

 

28

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Other income (expenses) for thethree months ended September 30, 2007 and 2006 were as follows:

 
| ** **                | ** ** | **Other Income (Expenses)** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(In thousands)**               | ** ** |
| Investment income         |       | $                                     | 426        |   | $ | 317 |   |
| Interest and debt expense |       | (12,711                               | )          | (14,940 | ) |
| Total                     |       | $                                     | (12,285    | ) | $ | (14,623 | ) |
|                      |       |                                  |       |   |   |
| Equity income             |       | $                                     | 2,222      |   | $ | 1,803 |   |

 

Otherincome (expenses) was a net expense of $12.3 million in the third quarter of2007, compared to a net expense of $14.6 million during the third quarter of2006. Investment income for the three months ended September 30, 2007 wasconsistent with investment income generated during the three months endedSeptember 30, 2006.

 

Interestand debt expense was $12.7 million in the three months ended September 30,2007, a decrease of $2.2 million from the three months ended September 30, 2006.The decrease is due to the absence of $1.4 million of interest expenseassociated with BGH’s prior term loan which was extinguished in conjunctionwith the IPO. The remainder of the decrease is due to a decrease in amountsoutstanding under the Partnership’s revolving credit facility during the threemonths ended September 30, 2007 compared to the three months ended September30, 2006.

 

Equityincome increased by $0.4 million in the third quarter of 2007 compared to thethird quarter of 2006. The increase is primarily due to an increase in equityincome earned from the Partnership’s approximate 40% interest in MuskegonPipeline LLC (“Muskegon”) and 20% interest in West Texas LPG Pipeline LimitedPartnership (“WTP”).

 

NineMonths of 2007 compared to Nine Months of 2006

 

Totalrevenue for the nine months ended September 30, 2007 was $375.5 million, $41.7million or 12.5% greater than revenue of $333.8 million for the same period in2006. This improvement was driven by increased revenues in all segments asdiscussed below.

 

Pipeline Operations:

 

Revenue from PipelineOperations was $278.2 million for the nine months ended September 30, 2007compared to $259.6 million for the nine months ended September 30, 2006. Therevenue increase in Pipeline Operations revenue in the first nine months of2007 of $18.6 million or 7.2% was primarily the result of:

 

•                  Anapproximate $17.0 million increase in base transportation revenue causedprimarily by an indexed-based tariff increase of approximately 6.1% implementedon July 1, 2007 and a market-based tariff increase of 4.5% implemented on May1, 2007;

 

•                  Incremental revenue of $1.8 million in 2007compared to 2006 resulting from the commissioning of the terminal and pipelineat the Memphis International Airport by WesPac Memphis in April 2006;

 

•                  Recognitionand collection of $1.8 million in revenue in the first quarter of 2007 from theresolution of a product measurement issue with a customer;

 

•                  An approximate $1.4 million increase inconstruction management revenue due to a construction contract performed byWesPac Memphis to construct a pipeline connection for a third party;

 

29

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•                  Incremental revenue of $1.2 million in the firstnine months of 2007 related to nine months of revenue from Buckeye NGL in 2007as compared to eight months of revenue in 2006 as Buckeye NGL was acquired bythe Partnership on January 31, 2006; and

 

•                  Anapproximate $4.7 million reduction in revenue representing the settlement ofoverages and shortages on product deliveries.

 

ThePartnership has experienced shortages on its pipeline product deliveries during2007 and the latter part of 2006 in excess of historical variances. Partnershippersonnel are actively investigating measurement equipment issues that may bethe cause of the increased shortages.

 

Productdeliveries for the nine months ended September 30, 2007 and 2006 were asfollows:

 
| ** **  | ** ** | **Average Barrels Per Day**              | ** ** |
|-------------|------------|---------------------------------------------------------|------------|
| ** **  | ** ** | **Nine Months Ended September 30,** | ** ** |
| **Product** | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Gasoline    |       | 720,200                                                 |       | 722,900 |   |
| Distillate  |       | 309,700                                                 |       | 314,600 |   |
| Jet Fuel    |       | 364,000                                                 |       | 351,200 |   |
| LPG's       |       | 20,300                                                  |       | 24,900 |   |
| NGL's       |       | 20,200                                                  |       | 19,000 |   |
| Other       |       | 6,800                                                   |       | 9,900 |   |
| Total       |       | 1,441,200                                               |       | 1,442,500 |   |

 

Terminalling and Storage:

 

Revenue from Terminalling andStorage was $72.4 million for the nine months ended September 30, 2007 comparedto $55.3 million for the nine months ended September 30, 2006. The net increasein Terminalling and Storage revenue in the first nine months of 2007 of $17.1million or 30.9% was primarily the result of:

 

•                  Anapproximate $9.9 million increase in base revenue primarily related toincreases in throughput volumes and charges for product additives in the firstnine months of 2007 compared to the first nine months of 2006;

 

•                  Additionalrevenue of $4.1 million in the first nine months of 2007 compared to the firstnine months of 2006 primarily due to the acquisition of six terminals in 2007,as more fully described in Note 4 to the accompanying condensed consolidatedfinancial statements; and

 

•                  Additional revenue of $1.5 million in the firstnine months of 2007 compared to the first nine months of 2006 due to thecommencement of certain butane blending agreements in the latter part of 2006.

 

30

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Average daily throughput for the refined productsterminals for the nine months ended September 30, 2007 and 2006 was as follows:

 
| ** **                        | ** ** | **Average Barrels Per Day**              | ** ** |
|-----------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                        | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|                              |       |                                                    |       |   |   |
| Refined products throughput (bpd) |       | 565,100                                                 |       | 490,800 |   |

 

Other Operations:

 

Revenuefrom Other Operations was $24.9 million in the first nine months of 2007compared to $18.9 million in the first nine months of 2006. The increase inOther Operations revenue in the first nine months of 2007 of $6.0 million or31.7% was primarily the result of:

 

•                  An increase of $3.5million in pipeline maintenance and operating revenue related to additionaloperating contracts signed in the latter part of 2006;

 

•                  An increase of $1.9million in construction management revenue primarily related to the additionalcontracts noted above; and

 

•                  An increase of $0.4million in incidental revenue due to the sale of miscellaneous equipment in thesecond quarter of 2007.

 

OperatingExpenses:

 

Costsand expenses for the nine month period ended September 30, 2007 and 2006 wereas follows:

 
| ** **                    | ** ** | **Costs and Expenses** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(In thousands)**          | ** ** |
| Payroll and payroll benefit   |       | $                                | 72,329     |   | $ | 67,288 |   |
| Depreciation and amortization |       | 30,119                           |       | 29,445 |   |
| Operating power               |       | 23,157                           |       | 21,742 |   |
| Outside services              |       | 27,389                           |       | 22,383 |   |
| Property and other taxes      |       | 16,893                           |       | 14,368 |   |
| Construction management       |       | 6,313                            |       | 3,895 |   |
| All other                     |       | 60,278                           |       | 53,464 |   |
| Total                         |       | $                                | 236,478    |   | $ | 212,585 |   |

 

Payrolland payroll benefits were $72.3 million for the nine months ended September 30,2007 an increase of $5.0 million compared to the same period in 2006. Increasesin salaries and wages of $4.8 million resulted from an increase in the numberof employees and overtime pay due to the Partnership’s expanded operations andhigher wage rates. Payroll benefits increased by $1.3 million due to highermedical costs, increases in wages and increased employee headcount. Payroll andpayroll benefits also increased due to a decrease in capitalized payroll of$1.2 million. In 2007, the Partnership experienced an increase of $1.0 millionin employee compensation expense. In the third quarter of 2006, the Partnershipreversed $0.9 million of employee incentive compensation expense. BGH’s payrollexpense increased by $1.0 million due to an increase in non-cash unit basedcompensation expense as a result of the vesting of management units inconnection with the sale as discussed previously. In addition, BGH’s payrollexpense also increased by $0.3 million due to non-cash unit based compensationexpense related to BGH GP’s compensation plan. Approximately $0.8 million ofpayroll and payroll benefit expense is related to recent acquisitions. Thisincrease was offset by a decrease of $2.9 million

 

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in payroll benefits due to lower employeebenefits costs resulting from an amendment to Services Company’s postretirementhealth care and life insurance benefits plan. In the first nine months of 2006,BGH expensed $3.3 million related to its Management Units, which did not recurin 2007.

 

Depreciationand amortization expense was $30.1 million for the first nine months endedSeptember 30, 2007, an increase of $0.7 million from the nine months endedSeptember 30, 2006, which is primarily due to recent acquisitions and firstquarter 2007 depreciation expense related to the commissioning of the terminaland pipeline at the Memphis International Airport by WesPac Memphis in April2006.

 

Operatingpower costs of $23.2 million in the first nine months of 2007 were $1.4 millionhigher than the same period in 2006. Recent acquisitions and first quarteroperations at WesPac Memphis caused $0.2 million of the increase. The remainderof the increase is primarily due to power rate increases and higher powersupply additive expense offset by a slight reduction in pipeline volumes. Operatingpower consists primarily of electricity required to operate pipeline pumpingfacilities.

 

Outsideservices costs were $27.4 million in the first nine months of 2007, or $5.0million greater than the same period in 2006. Approximately $0.3 million of theincrease is related to maintenance on natural gas engines that were purchasedin 2006 and $0.3 million related to an increase in activity on an operation andmaintenance contract. Approximately $0.3 million of the increase is related tocorporate development initiatives and an additional $1.2 million of thisincrease is due to an annual senior administrative charge that is paid byBuckeye to affiliates of its general partner for certain management functionssupplied by those affiliates.  Prior to BGH’s IPO, this senioradministrative charge was recognized as income by BGH.  In connection withthe IPO, Buckeye pays the senior administrative charge directly to BGH’sgeneral partner, MainLine Management, which resulted in an increase in outsideservice costs during the first nine months of 2007. The remainder of theincrease is due to additional pipeline and tank inspections and maintenance workthat occurred during the first nine months of 2007.

 

Propertyand other taxes increased by $2.5 million from $14.4 million in the first ninemonths of 2007 to $16.9 million for the same period in 2006. Approximately $0.4million of the increase is related to recent acquisitions. The remainder of theincrease is due to higher real property assessments over the same period in2006.

 

Constructionmanagement costs were $6.3 million in the first nine months of 2007, which isan increase of $2.4 million from the same period in 2006. The increase isprimarily due to a construction contract entered into by WesPac Memphis toconstruct a pipeline connection for a third party.

 

Allother costs were $60.3 million, an increase of $6.8 million in the first ninemonths of 2007 compared to the first nine months of 2006. Insurance expensesincreased by $2.6 million over the comparable period of 2006 due to an increasein insurance premiums. Supply expenses increased by $2.8 million which isprimarily due to an increase in terminal additives and expenses for technicalservices. Other costs related to recent acquisitions were $1.1 million. Theincrease reflects $0.6 million of costs associated with fuel purchases byWesPac Pipelines –Reno LLC related to a product-supply arrangement. Theseincreases were offset by a decrease in casualty losses of $0.6 million. Non-recurringprofessional fees in the nine months ended September 30, 2006 includedapproximately $2.4 million of legal, accounting and tax fees related toplanning for BGH’s IPO in 2006. The remainder of the increases related tovarious other pipeline operating costs resulting from Buckeye’s expandedoperations.

 

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

 
| ** **                                          | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **September 30,**          | ** ** |
| ** **                                          | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                                | ** ** | **(In thousands)**         | ** ** |
| Total cost and expenses:             | ** ** | ** **                      | ** ** |
| Attributable to Buckeye                             |       | $                               | 231,487    |   | $ | 204,168 |   |
| Elimination of Buckeye deferred charge              |       | (3,523                          | )          | (3,523 | ) |
| Elimination of Buckeye senior administrative charge |       | —                          |       | (1,154 | ) |
| Net effect of ESOP charges                          |       | 3,863                           |       | 4,703 |   |
| Attributable to BGH                                 |       | 4,651                           |       | 8,391 |   |
| Total                                               |       | $                               | 236,478    |   | $ | 212,585 |   |

 

Amountsattributable to BGH consist of the following:

 
| ** **                     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **September 30,**          | ** ** |
| ** **                     | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                     | ** ** | **(In thousands)**         | ** ** |
| Attributable to BGH: | ** ** | ** **                      | ** ** |
| Payroll and benefits           |       | $                               | 3,003      |   | $ | 4,825 |   |
| Professional fees              |       | 654                             |       | 3,103 |   |
| Other                          |       | 994                             |       | 463 |   |
| Total                          |       | $                               | 4,651      |   | $ | 8,391 |   |

 

Payrolland benefits costs include salaries and benefits for the four highest paidexecutives performing services on behalf of Buckeye as well as allocations ofthe cost of Buckeye personnel performing administrative services directly forBGH. For the nine months ended September 30, 2007, BGH incurred $1.0 million ofnon-cash unit based compensation expense from the vesting of management unitsas result of the sale of the controlling interest in BGH. In addition, BGH’spayroll expense also increased by $0.3 million due to non-cash unit basedcompensation expense related to BGH GP’s compensation plan. In the first ninemonths of 2006, BGH expensed $3.3 million related to its Management Units whichdid not recur in the first nine months ended September 30, 2007. Non-recurringprofessional fees in the nine months ended September 30, 2006 includeapproximately $2.4 million of legal, accounting and tax fees related toplanning for BGH’s IPO in 2006. Other costs include certain state franchisetaxes, insurance costs, depreciation and miscellaneous other expenses.

 

Otherincome (expense) for the nine month periods ended September 30, 2007 and 2006was as follows:

 
| ** **                | ** ** | **Other Income (Expenses)** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(In thousands)**               | ** ** |
| Investment income         |       | $                                     | 1,060      |   | $ | 939 |   |
| Interest and debt expense |       | (39,691                               | )          | (46,880 | ) |
| Total                     |       | $                                     | (38,631    | ) | $ | (45,941 | ) |
|                      |       |                                  |       |   |   |
| Equity income             |       | $                                     | 6,266      |   | $ | 4,598 |   |

 

Otherincome (expense) was a net expense of $38.6 million during the nine monthsended September 30, 2007, compared to a net expense of $45.9 million during thesame period in 2006. Investment income for the nine months ended September 30,2007 was consistent with investment income generated during the nine monthsended September 30, 2006.

 

Interestexpense was $39.7 million in the nine months ended September 30, 2007, adecrease of $7.2 million. The decrease is primarily due to the absence of $7.5million of interest expense associated with BGH’s prior term loan which wasextinguished in conjunction with the IPO.

 

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Equityincome increased by $1.7 million from the nine months ended September 30, 2006to $6.3 million for the nine months ended September 30, 2007. The increase isprimarily due to an increase in equity income earned from the Partnership’sapproximate 40% interest in Muskegon and 20% interest in WTP.

 

LIQUIDITY AND CAPITAL RESOURCES

 

UntilBGH’s IPO on August 9, 2006, BGH’s only capital requirement, apart from Buckeye’scapital requirements, was its debt service under its term loan. Concurrent withBGH’s IPO, the term loan was repaid in full. Buckeye’s capital requirementsconsist of maintenance and capital expenditures, expenditures for acquisitionsand debt service requirements.

 

Asnoted in “Overview” above, BGH’s only cash-generating asset is its ownershipinterest in Buckeye GP. BGH’s cash flow is, therefore, directly dependent uponthe ability of Buckeye and its Operating Subsidiaries to make cashdistributions to Buckeye’s partners. The actual amount of cash that Buckeyewill have available for distribution depends primarily on Buckeye’s ability togenerate cash beyond its working capital requirements. Buckeye’s primary futuresources of liquidity are operating cash flow, proceeds from borrowings underBuckeye’s revolving credit facility and proceeds from the issuance of BuckeyeLP Units.

 

BGH’sprincipal use of cash is the payment of its operating expenses anddistributions to its unitholders. BGH generally makes quarterly cashdistributions of substantially all of its available cash, generally defined asconsolidated cash receipts less consolidated cash expenditures and suchretentions for working capital, anticipated cash expenditures and contingenciesas MainLine Management deems appropriate. In 2007 BGH paid cash distributionsof $0.225 per unit on February 28, 2007, $0.24 per unit per unit on May 31,2007, and $0.25 per unit on August 31, 2007. Total cash distributed to BGHunitholders in the first nine months of 2007 was approximately $20.2 million.On October 25, 2007 MainLine Management declared a distribution of $0.265 perunit to be paid on November 30, 2007 to unitholders of record as of November 5,2007. This distribution is expected to be approximately $7.5 million.

 

***Debt***

* *

*BGH*

* *

On August 9, 2006, BGH enteredinto a five-year, $10.0 million revolving credit facility with SunTrust Bank,as both administrative agent and lender (the “BGH Credit Agreement”). See Note5 to BGH’s condensed consolidated financial statements for a description of theterms of the BGH Credit Agreement. During the nine months ended September 30,2007, BGH borrowed $2.5 million and repaid $1.9 million under the BGH CreditAgreement.

 

Inaddition, the BGH Credit Agreement provides for a “change of control” event ofdefault that is triggered if (i) MainLine Management ceases to be the solegeneral partner of BGH, (ii) BGH GP ceases to own and control 100% of MainLineManagement, (iii) (A) Arclight,Kelso, Lehman Brothers, and each of their respective affiliates, individuallyor collectively, cease to own and control at least 35% of the outstandingequity interests of BGH GP and (B) any person, entity or group owns andcontrols a larger percentage of the outstanding equity interests of BGH GP thanis collectively owned by Arclight, Kelso, Lehman Brothers, and their affiliates.

 

*Services Company*

 

ServicesCompany had total debt outstanding of $21.8 million and $26.3 million atSeptember 30, 2007 and December 31, 2006 respectively, consisting of 3.60%Senior Secured Notes (the “3.60% ESOP Notes”) due March 28, 2011 payable by theESOP to a third-party lender. See Note 5 to BGH’s condensed consolidatedfinancial statements for a description of the terms of the 3.60% ESOP Notes.

 

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*Buckeye*

* *

*At September30, 2007, Buckeye had $880.0 million in aggregate outstanding long-term debt,consisting of $125.0 million of the 5.125% Notes due 2017, $275.0 million ofthe 5.300% Notes due 2014, $300.0 million of the 4 5/8% Notes due 2013, $150.0million of the 6 3/4% Notes due 2033 and $30.0 million outstanding under acredit facility.*

* *

OnNovember 13, 2006, the Partnership entered into a $400.0 million, 5-yearrevolving credit facility (the “Credit Facility”) with a syndicate of lenders. OnAugust 24, 2007, the Partnership and the lenders amended the Credit Facility.The most significant amendments to the Credit Facility were as follows:

 

•                  The principal amount of the facility wasincreased from $400.0 million to $600.0 million, and an expansion feature wasadded to enable the Partnership to, subject to certain conditions and upon thefurther approval of each lender, increase the Credit Facility to $800.0million;

 

•                  The termination date of the Credit Facility wasextended to August 24, 2012, which date may be extended by the Partnership fortwo additional one year periods, subject to certain conditions and the approvalof certain lenders as set forth in the Credit Facility;

 

•                  The funded debt ratio covenant was increased to5.0 to 1.0 (as more fully described below);

 

•                  The requirement of a guarantee by Laurel ofoutstanding indebtedness under the Credit Facility was eliminated;

 

•                  Certain subsidiaries designated by thePartnership as restricted subsidiaries were no longer required to guarantee theindebtedness outstanding under the Credit Facility; and

 

•                  In connection with the anticipated closing ofthe Lodi Acquisition (see Note 15 to BGH’s condensed consolidated financialstatements), certain secured indebtedness incurred by Lodi Gas and itssubsidiaries will be permitted to remain outstanding for 15 business daysfollowing the closing of the Lodi Acquisition.

 

Inaddition, the Credit Facility provides for a “change of control” event ofdefault that is triggered if (i) BGH GP ceases to own and control 100% ofMainLine Management, (ii) (A)Arclight, Kelso, Lehman Brothers and each of their respective affiliates,individually or collectively, cease to own and control at least 35% of theoutstanding equity interests of BGH GP, and (B) any person, entity or groupowns and controls a larger percentage of the outstanding equity interests ofBGH GP, than is collectively owned by Arclight, Kelso, Lehman Brothers, andtheir affiliates, (iii) BGH ceases toown 100% of Buckeye GP or (iv) Buckeye GP ceases to be the sole general partnerof Buckeye.

 

AtSeptember 30, 2007, the Partnership was in compliance with all of the covenantsunder the Credit Facility.

 

See Note 5 to BGH’s condensedconsolidated financial statements for more information about the terms of theCredit Facility.

 

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*CashFlows from Operations*

* *

Thecomponents of cash flows from operations for the nine months ended September30, 2007 and 2006 were as follows:

 
| ** **                                        | ** ** | **Cash Flow from Operations** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                      | ** ** |
| Net income                                        |       | $                                            | 15,148     |   | $ | 5,730 |   |
| Value of ESOP shares released                     |       | 3,436                                        |       | 3,047 |   |
| Depreciation and amortization                     |       | 30,119                                       |       | 29,445 |   |
| Non-controlling interest                          |       | 91,557                                       |       | 74,101 |   |
| Changes in current assets and current liabilities |       | (2,110                                       | )          | (5,940 | ) |
| Changes in other assets and liabilities           |       | (3,591                                       | )          | 3,721 |   |
| Other                                             |       | 1,260                                        |       | 3,520 |   |
| Total                                             |       | $                                            | 135,819    |   | $ | 113,624 |   |

 

Cashflows from operations were $135.8 million for the first nine months of 2007compared to $113.6 million for the first nine months of 2006, an increase of $22.2million. The primary driver of this increase is the improvement in Buckeye’snet income for the period in 2007 compared to 2006, as well as favorablefluctuations in working capital. Cash used in working capital was $2.1 millionin the first nine months of 2007 compared to cash used for working capital of$5.9 million in the first nine months of 2006.

 

Inthe first nine months of 2007, cash used for working capital resulted primarilyfrom a reduction in accounts payable of $11.2 million which was offset byreductions in trade and construction and pipeline relocation receivables of$7.1 million and a reduction in prepaid and other current assets of $3.2million. The decrease in accounts payable resulted from timing of invoicepayments at year end of 2006. The reduction in trade receivables is due toimprovement in timing of collections. The reduction in prepaid and othercurrent assets is a result of decreases in insurance receivables and prepaidinsurance which were partially offset by increases in prepaid taxes and excisetax receivables.

 

Duringthe nine months ended September 30, 2006, cash used for working capitalresulted from increases in trade receivables of $1.8 million, construction andpipeline relocation receivables of $1.2 million, inventories of $0.3 millionand prepaid and other current assets of $11.4 million and a decrease inaccounts payable of $1.5 million. These decreases were partially offset by anincrease in accrued and other current liabilities of $10.3 million. Theincrease in trade receivables is partly due to activity at Buckeye NGL whichcommenced operations in January 2006. The increase in construction and pipelinerelocations receivables is due to an increase in relocation project activity. Prepaidand other current assets increased due to an increase in insurance receivablesand an increase in a receivable for activity on a 29-mile ammonia pipelineacquired in November 2005. The decrease in accounts payable resulted from thetiming of invoice payments at year end of 2005. The increase in accrued andother current liabilities is due to activity on the 29-mile ammonia pipeline.

 

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*Cash Flowsfrom Investing Activities*

 

Netcash used in investing activities for the nine months ended September 30, 2007and 2006 are as follows:

 
| ** **                          | ** ** | **Investing Activities**                                             | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **For the Nine Months Ended September 30,** | ** ** |
| ** **                          | ** ** | **2007**                                                                  | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(In thousands)**                                                   | ** ** |
| Capital expenditures                |       | $                                                                         | (51,712    | ) | $ | (62,324 | ) |
| Acquisitions and equity investments |       | (40,447                                                                   | )          | (93,330 | ) |
| Other                               |       | (352                                                                      | )          | 5,247 |   |
| Total                               |       | $                                                                         | (92,511    | ) | $ | (150,407 | ) |

 

Inthe nine months ended September 30, 2007, Buckeye expended $39.6 millionprimarily for the acquisition of six terminals and related assets and $0.9million for an additional investment in WTP. See Note 4 to BGH’s condensedconsolidated financial statements for a further discussion.

 

Inthe nine months ended September 30, 2006, the Partnership expended $93.3million related to acquisitions, including $79.3 million related to BuckeyeNGL, $12.5 million related to the acquisition of the Niles, Michigan terminaland approximately $1.0 million for miscellaneous asset acquisitions.

 

Capitalexpenditures are summarized below:

 
| ** **                      | ** ** | **Capital Expenditures**                                             | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **For the Nine Months Ended September 30,** | ** ** |
| ** **                      | ** ** | **2007**                                                                  | ** ** | **2006** | ** ** |
| ** **                      | ** ** | **(In thousands)**                                                   | ** ** |
| Sustaining capital expenditures |       | $                                                                         | (23,983    | ) | $ | (17,735 | ) |
| Expansion and cost reduction    |       | (27,729                                                                   | )          | (44,589 | ) |
| Total                           |       | $                                                                         | (51,712    | ) | $ | (62,324 | ) |

 

Buckeyeincurred $24.0 million and $17.7 million of sustaining capital expenditures and$27.9 million and $44.6 million of expansion and cost reduction expenditures inthe first nine months of 2007 and 2006, respectively. Expansion and costreduction projects in 2007 include a capacity expansion project in Illinois tohandle additional LPG volumes as well as ongoing capacity improvements byWesPac Memphis. Expansion and cost reduction projects in 2006 include thecompletion of the base operations of WesPac Memphis, the capacity expansionproject in Illinois, and the addition of pipelines, tankage, and equipment tomeet handling requirements for ultra-low sulfur diesel. Other expansionprojects that began in the third quarter of 2006 include variousethanol-blending and butane-blending projects at pipeline stations andterminals owned by the Partnership and capacity improvements implemented byWesPac Memphis.

 

BGHestimates sustaining capital expenditures will be approximately $32.0 millionand that expansion and cost reduction capital expenditures will beapproximately $36.0 million for all of 2007.

 

*CashFlows from Financing Activities*

* *

Duringthe first nine months of 2007, BGH borrowed $2.5 million and repaid $1.9million under the BGH Credit Agreement. BGH’s distributions to its unitholderstotaled $20.2 million in the first nine months of 2007.

 

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OnAugust 8, 2007, Buckeye issued 2.5 million LP Units in an underwritten publicoffering at $47.95 per LP Unit. Total proceeds from the offering, afterunderwriter’s discount of $0.70 per LP Unit and offering expenses, wereapproximately $119.7 million, and were used to reduce amounts outstanding underthe Partnership’s Credit Facility.

 

OnMarch 5, 2007, Buckeye issued 1.5 million LP Units in an underwritten publicoffering at $48.25 per LP Unit. On March 14, 2007, the underwriters exercised aportion of their over allotment option and, accordingly, the Partnership issuedan additional 208,600 LP Units at $48.25 per LP Unit. Total proceeds from theoffering, including the over allotment option and after underwriter’s discountof $0.75 per LP and offering expenses, were approximately $82.2 million, andwere used to reduce amounts outstanding under the Partnership’s CreditFacility.

 

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

 

Duringthe first nine months of 2007 and 2006, the Partnership borrowed $135.0 millionand $147.0 million under its Credit Facility, respectively, and repaid $250.0million and $65.0 million, respectively Payments on the 3.60% ESOP Notes were$4.5 million for the nine months ended September 30, 2007 and 2006.

 

Distributionsto non-controlling interests, consisting primarily of Buckeye’s distributionsto holders of its LP Units, were $93.8 million in the first nine months of 2007compared to $83.6 million in the first nine months of 2006. The increase indistributions resulted from additional LP Units being outstanding because ofthe Partnership’s issuances of 1.7 million LP Units in March 2007 and theissuance of 1.5 million LP Units in March 2006. The increased distributions in2007 compared to 2006 were also caused by a higher cash distribution rate of$0.8125 per LP unit in the third quarter of 2007 compared to $0.7625 per LPunit in the third quarter of 2006.

 

# OTHER MATTERS

 

# AccountingPronouncements

 

SeeNote 14 to BGH’s condensed consolidated financial statements for a descriptionof certain accounting pronouncements.

 

# ForwardLooking Statements

 

Theinformation contained above in this Management’s Discussion and Analysis andelsewhere in this Form 10-Q includes “forward-looking statements,” within themeaning of the Private Securities Litigation Reform Act of 1995. Suchstatements use forward-looking words such as “anticipate,” “continue,” “estimate,”“expect,” “may,” “believe,” “will,” or other similar words, although someforward-looking statements are expressed differently. These statements discussfuture expectations and contain projections. Specific factors that could causeactual results to differ from those in the forward-looking statements include,but are not limited to: (1) BGH’s ability to pay distributions to itsunitholders; (2) BGH’s expected receipt of distributions and incentivedistributions from Buckeye; (3) anticipated trends in Buckeye’s business; (4)price trends and overall demand for petroleum products in the United States ingeneral and in Buckeye’s service areas in particular (which may be affected byeconomic activity, weather, alternative energy sources, conservation andtechnological advances); (5) changes, if any, in laws and regulations,including, among others, safety, tax and accounting matters or Federal EnergyRegulatory Commission or applicable state regulation of Buckeye’s tariff rates;(6) liability for environmental claims; (7) security issues affecting Buckeye’sassets, including, among others, potential damage to its assets caused by actsof war or terrorism; (8) construction costs, unanticipated capital expendituresand operating expenses to expend, repair or replace Buckeye’s assets; (9)availability and cost of insurance on Buckeye’s assets and operations; (10)Buckeye’s ability to successfully identify and complete strategic acquisitionsand make cost saving changes in operations; (11) expansion in the operations ofBuckeye’s competitors; (12) Buckeye’s ability to integrate any acquiredoperations into its existing operations; (13) shut-downs or cutbacks at majorrefineries that use Buckeye’s services; (14) deterioration in Buckeye’s laborrelations; (15) changes in real property tax assessments; (16) disruptions tothe air travel system; (17) interest rate fluctuations and other capital marketconditions; (18) BGH’s future results of operations; (19) BGH’s liquidity andability to finance its activities; (20) market conditions in Buckeye’sindustry; (21) conflicts of interest between Buckeye, its general partner andBGH; (22) the treatment of Buckeye or BGH as a corporation for federal income

 

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tax purposes or if BGH or Buckeye become subjectto entity-level taxation for state tax purposes; and (23) the impact ofgovernmental legislation and regulation on BGH and Buckeye.

 

Thesefactors are not necessarily all of the important factors that could causeactual results to differ materially from those expressed in any of ourforward-looking statements. Other unknown or unpredictable factors could alsohave material adverse effects on future results. Although the expectations inthe forward-looking statements are based on our current beliefs andexpectations, we do not assume responsibility for the accuracy and completenessof such statements. When considering forward-looking statements, you shouldkeep in mind the risk factors and other cautionary statements in BGH’s AnnualReport on Form 10-K for 2006 and in Item 1A in this document, including thosedescribed in the “Risk Factors” section of that report. Further, we undertakeno obligation to update publicly any forward-looking statement whether as aresult of new information or future events.

 

# Item3. Quantitative and Qualitative Disclosures About Market Risk

 

*Market Risk – Trading Instruments*

 

Currently, neither BGH nor Buckeye has any derivativeinstruments and do not currently engage in hedging activity with respect totrading instruments.

 

*Market Risk – Other than Trading Instruments*

 

Buckeye isexposed to risk resulting from changes in interest rates. Buckeye does not havematerial commodity or foreign exchange risk. Buckeye is exposed to fairvalue risk with respect to the fixed portion of its financing arrangements (the5.125% Notes, the 5.30% Notes, the 4.625% Notes and the 6.750% Notes) and tocash flow risk with respect to its variable rate obligations (the CreditFacility). Fair value risk represents the risk that the value of the fixedportion of Buckeye’s financing arrangements will rise or fall depending onchanges in interest rates. Cash flow risk represents the risk that interestcosts related to the Credit Facility will rise or fall depending on changes ininterest rates.

 

AtSeptember 30, 2007, Buckeye had total fixed-rate debt obligations having a facevalue of $850 million, consisting of $125 million of the 5.125% Notes,$275 million of the 5.30% Notes, $300 million of the 4.625% Notes and$150 million of the 6.750% Notes. At September 30, 2007, Services Companyhad fixed debt obligations of approximately $22.4 million of its 3.60% ESOPNotes. The aggregate fair value of these fixed obligations at September 30,2007 was approximately $845.0 million. A 1% decrease in rates for obligationsof similar maturities would have increased the aggregate fair value of theseobligations by $59.5 million at September 30, 2007. Buckeye’s variable debtobligation under the Credit Facility was $30 million at September 30, 2007.Based on the balances outstanding at September 30, 2007, a 1% increase ordecrease in interest rates would increase or decrease consolidated annualinterest expense by $0.3 million.

 

In December 2004, the Partnership terminated aninterest rate swap agreement associated with the 4.625% Notes and receivedproceeds of $2.0 million. In accordance with FASB Statement No. 133 – “Accountingfor Derivative Instruments and Hedging Activities”, the Partnership hasdeferred the $2.0 million gain as an adjustment to the fair value of the hedgedportion of the Partnership’s debt and is amortizing the gain as a reduction ofinterest expense over the remaining term of the hedged debt. Accordingly,interest expense was reduced by $59 thousand for the three months endedSeptember 30, 2007 and 2006, respectively, and $176 thousand for the ninemonths ended September 30, 2007 and 2006.

 

In August 2007, the Partnership entered into aforward-starting interest rate swap agreement with a financial institution fora $75.0 million notional amount in order to hedge the variability of futureinterest rates associated with a portion of an anticipated issuance of debt tofinance a portion of the Lodi Acquisition (see Note 15 to BGH’s condensed consolidatedfinancial statements). The debt is expected to be issued on or before March 31,2008. Under the interest rate swap agreement, the Partnership will receive apayment if the interest rate on the notional amount exceeds 5.594% and willmake a payment if the interest rate on the notional amount is below 5.594%. AtSeptember 30, 2007, the Partnership determined the interest rate swap agreementto be an effective cash flow hedge and recorded the change in the fair value ofthe agreement of $2.1 million. Similarly, on October 23, 2007, the Partnershipentered into another forward-starting interest rate swap agreement with thesame financial institution for a notional amount of $50.0 million and aninterest rate of 5.115%. Other than the notional amount

 

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and the interestrate, the more recent agreement has the same terms as the agreement executed inAugust 2007. The transaction executed on October 23, 2007 had no impact on thefinancial statements.

 

Item 4. Controls and Procedures 

 

(a)       Evaluation of Disclosure Controls andProcedures.

 

The management of MainLine Management with theparticipation of its Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of its disclosure controls and procedures for BGHas of the end of the period covered by this report. Based on that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that MainLineManagement’s disclosure controls and procedures for BGH as of the end of theperiod covered by this report are functioning effectively to provide reasonableassurance that the information required to be disclosed by MainLine Managementin reports filed on behalf of BGH under the Securities Exchange Act of 1934 is(i) recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and (ii) accumulated and communicated tomanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding disclosure. A controlssystem cannot provide absolute assurance, however, that the objectives of thecontrols system are met, and no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within acompany have been detected.

 

(b)       Changes in Internal Control over FinancialReporting

 

No change in MainLine Management’s internal controlover financial reporting for BGH occurred during BGH’s most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, MainLine Management’s internal control over financial reporting forBGH.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Inthe third quarter of 2006, the Partnership received penalty assessments fromthe IRS in the aggregate amount of $4.3 million based on a failure to timelyfile excise tax information returns relating to its terminal operations fromJanuary 2005 through February 2006. The Partnership filed the informationreturns with the IRS on May 10, 2006. In January 2007, the Partnership agreedto pay the IRS approximately $0.6 million to settle and resolve the penaltyassessment. The negotiated penalty assessment was recorded as an expense in theconsolidated financial statements in the fourth quarter of 2006. In September2007, the Partnership and the IRS entered into a formal agreement settling andresolving the penalty assessment and, pursuant to that agreement, thePartnership paid the IRS approximately $0.6 million.

 

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

 

Item 1A. Risk Factors

 

The reader should carefullyconsider, in connection with the other information in this report, the factorsdiscussed in Part I, “Item 1A: Risk Factors” of BGH’s 2006 Annual Report onForm 10-K. These factors could cause our actual results to differ materiallyfrom those stated in forward-looking statements contained in this document andelsewhere. In addition to the factors included in the Form 10-K, the readershould also consider the following risk factors:

 

***Buckeye’s pending******acquisition of the Lodi natural gas storage facilities may not be consummated. Ifconsummated, Buckeye may not realize the expected benefits from thetransaction.***

 

Thepurchase and sale agreement for the Lodi natural gas storage facilitiescontains conditions that, if not satisfied or waived, could result in theacquisition not occurring. Among other customary closing conditions,consummation of the acquisition is conditioned on the approval of the CaliforniaPublic Utilities Commission for the change in control of the Lodi facilities.Additionally, the purchase and sale agreement provides both parties with theright to terminate the agreement prior to consummation under certain limitedcircumstances, including the right for Buckeye to terminate the agreement ifany event occurs that would have a material adverse effect on the assets,business, properties, financial condition or results of operations of Lodi.

 

IfBuckeye does not consummate the acquisition of Lodi, Buckeye will not realizeany of the anticipated benefits of owning and operating the assets. If Buckeyedoes consummate the Lodi acquisition, Buckeye’s estimates regarding earnings,operating cash flow and capital expenditures resulting from the transaction mayprove to be incorrect. Additionally, Buckeye may encounter difficulties in theassimilation of a new business, and Buckeye may experience unanticipatedinefficiencies or costs. The facilities may also be subject to operationalhazards and unforeseen interruptions such as natural disasters, adverseweather, accidents, fires, explosions, hazardous materials releases and otherevents beyond Buckeye’s control, for which Buckeye may not be adequatelyinsured. Furthermore, a decline or interruption in natural gas transportationon Pacific Gas and Electric’s intrastate gas pipelines on which the Lodifacilities rely could have a material adverse effect on Buckeye’s utilizedcapacity. As a result of any of the foregoing factors, our revenues and, therefore,our ability to pay cash distributions on our units, could be adverselyaffected.

 

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***The tax treatment of our structure issubject to potential legislative, judicial or administrative changes and differinginterpretations, possibly on a retroactive basis.***

 

The U.S. federal income taxtreatment of our common unitholders depends in some instances on determinationsof fact and interpretations of complex provisions of U.S. federal income taxlaw. You should be aware that the U.S. federal income tax rules are constantlyunder review by persons involved in the legislative process, the U.S. InternalRevenue Service, or “IRS,” and the U.S. Treasury Department, frequentlyresulting in revised interpretations of established concepts, statutorychanges, revisions to Treasury Regulations and other modifications andinterpretations. The present U.S. federal income tax treatment of an investmentin our common units may be modified by administrative, legislative or judicialinterpretation at any time. Any modification to the U.S. federal income taxlaws and interpretations thereof may or may not be applied retroactively andcould make it more difficult or impossible to meet the exception for us to betreated as a partnership for U.S. federal income tax purposes that is nottaxable as a corporation (referred to as the “Qualifying Income Exception”),affect or cause us to change the character or treatment of portions of ourincome and adversely affect an investment in our common units. For example, inresponse to certain recent developments, members of Congress are consideringsubstantive changes to the definition of qualifying income under InternalRevenue Code section 7704(d). It is possible that these efforts could result inchanges to the existing U.S. federal tax laws that affect publicly tradedpartnerships, including us. We are unable to predict whether any of thesechanges, or other proposals, will ultimately be enacted. Any such changes couldnegatively impact the value of an investment in our common units.

 

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Item 6. Exhibits

 

(a)           Exhibits

 

10.1Second Amendment to Credit Agreement, dated August 24, 2007 among BuckeyePartners, L.P., as borrower, SunTrust Bank, as administrative agent, and thelenders signatory thereto.

 

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

 

31.2Certification of Acting Chief Financial Officer pursuant to Rule 13a-14(a) underthe Securities Exchange Act of 1934.

 

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

 

32.2Certification of Acting Chief Financial Officer, Pursuant to 18 U.S.C. Section1350.

 

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SIGNATURE

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                    | BUCKEYE  GP HOLDINGS L.P. |                            |
|-------------------------|---------------------------|---------------------------------|
|                    |                      | (Registrant)                    |   |
|                    |                      |                            |   |
|                    | By:                       | MainLine  Management LLC        |   |
|                    |                      | as  General Partner             |   |
|                    |                      |                            |   |
|                    |                      |                            |   |
| Date:  October 29, 2007 | By:                       | VANCE  E. POWERS                |   |   |
|                    |                      |                            |   |
|                    |                      | Vance  E. Powers                |   |
|                    |                      | Acting  Chief Financial Officer |   |
|                         |                           |                                 |  |  |

 

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