The following discussion should be read in conjunction with our consolidated financial statements and our accompanying notes thereto included in Item 8 of this Report.

Business Overview

We own and operate one of the largest independent refined petroleum products pipeline systems in the United States in terms of volumes delivered, miles of pipeline, and active product terminals. In addition, we operate and/or maintain third-party pipelines under agreements with major oil and gas, petrochemical and chemical companies, and perform certain engineering and construction management services for third parties. We also own and operate a natural gas storage facility in Northern California, and are a wholesale distributor of refined petroleum products in the United States in areas also served by our pipelines and terminals. Our flagship marine terminal in The Bahamas, BORCO, is one of the largest marine crude oil and petroleum products storage facilities in the world, serving the international markets as a global logistics hub.

We operate and report in five business segments: (i) Pipelines & Terminals;
(ii) International Operations; (iii) Natural Gas Storage; (iv) Energy Services; and (v) Development & Logistics. See Note 24 in the Notes to Consolidated Financial Statements for a more detailed discussion of our business segments.

Our primary business objective is to provide stable and sustainable cash distributions to our LP Unitholders, while maintaining a relatively low investment risk profile. The key elements of our strategy are to: (i) maximize utilization of our assets at the lowest cost per unit; (ii) maintain stable long-term customer relationships; (iii) operate in a safe and environmentally responsible manner; (iv) optimize, expand and diversify our portfolio of energy assets; and (v) maintain a solid, conservative financial position and our investment-grade credit rating.

Overview of Operating Results

Net income attributable to our unitholders was $226.4 million for the year ended December 31, 2012, which was an increase of $117.9 million, or 109% from $108.5 million for the corresponding period in 2011. Operating income was $339.2 million for the year ended December 31, 2012, which is an increase of $150.5 million, or 80% from $188.7 million for the corresponding period in 2011.

Revenues for our Pipelines & Terminals segment grew significantly in 2012, primarily from the impact of recent acquisitions, including the assets acquired from BP and ExxonMobil in mid-2011 and the Perth Amboy Facility acquired in the second half of 2012. Pipeline transportation volumes on assets owned prior to the 2011 and 2012 acquisitions (which we refer to as our "legacy assets") declined marginally year-over-year driven by a decline in distillate volumes, primarily due to a warmer than usual winter in early 2012 resulting in lower heating oil movements. Throughput volumes for 2012 at terminals owned prior to the 2011 acquisitions (which we refer to as our "legacy terminals") increased over 2011 as our Chicago Complex benefited from record output at Midwest refineries and as recent growth capital projects became operational, including the transformation of our Albany terminal to add the ability to provide crude oil service. In addition, we purchased an additional 20% interest in WesPac Memphis from Kealine LLC. In January 2013, we ceased operations on a portion of Buckeye's NORCO pipeline system, consisting of approximately 169 miles of refined petroleum products pipelines and related assets in Indiana and Illinois. We recorded a non-cash impairment charge in the fourth quarter of 2012 of $60.0 million, which included $12.1 million of estimated costs associated with the removal and decommissioning of the pipeline.

Our International Operations segment benefited from the incremental contribution from the 1.9 million barrels of expansion capacity at BORCO that was completed in the second half of 2012. In addition to the storage revenue contribution from the expansion capacity, higher ancillary revenues, including berthing and heating revenues, were generated due to increased customer utilization of our facilities. Segment revenue also increased as a result of the launch of our fuel oil marketing business at the Yabucoa marine terminal, which is a low-margin business. We supply fuel oil under back-to-back arrangements that are intended to eliminate commodity and basis risks. In 2011,

the International Operations segment was adversely impacted by lower than expected berthing revenue due to reductions in availability of fuel oil blending components as a result of operational issues at a refinery in the U.S. Virgin Islands ("Caribbean refinery") and lower vessel traffic as inventory optimization opportunities were limited by market conditions. These market conditions continued into 2012, resulting in weakness in demand for product storage in early 2012.

In 2012, our Natural Gas Storage segment improved over 2011 results, but unfavorable market conditions, including low natural gas prices, compressed seasonal spreads and low volatility, continued to negatively impact the segment's performance.

The Energy Services segment continued to be negatively impacted by extreme price volatility and basis risk, combined with market backwardation, in the markets it serves. We saw the benefits of the execution of our risk mitigation strategy, particularly in the second half of 2012, which included focusing on fewer, more strategic locations in which to transact business, better managing our inventories and reducing the cost structure of the business. Sales volumes declined as we executed this risk mitigation strategy. Our marketing operations remain a catalyst for incremental utilization of our Pipelines & Terminals assets as the contribution from Energy Services has been greater than its standalone reported results.

The liquefied petroleum gas ("LPG") storage caverns acquired in 2011 were a key contributor to growth for our Development & Logistics segment. In addition, we benefited from improved margins and new contract operations opportunities for our third-party engineering and operations business.

See the "Results of Operations" section below for further discussion and analysis of our operating segments.

Results of Operations

Consolidated Summary

Our summary operating results were as follows for the periods indicated (in
thousands, except per unit amounts):



                                                          Year Ended December 31,
                                                 2012              2011              2010
Revenue                                       $ 4,357,242       $ 4,759,610       $ 3,151,268
Costs and expenses                              4,018,034         4,570,928         2,872,686

Operating income                                  339,208           188,682           278,582
Earnings from equity investments                    6,100            10,434            11,363
Gain on sale of equity investment                      -             34,727                -
Interest and debt expense                        (114,980 )        (119,561 )         (89,169 )
Other income (expense)                               (452 )             190              (687 )

Income before taxes                               229,876           114,472           200,089
Income tax benefit                                   (675 )            (192 )            (919 )

Net income                                        230,551           114,664           201,008
Less: Net income attributable to
noncontrolling interests                           (4,134 )          (6,163 )        (157,928 )

Net income attributable to Buckeye
Partners, L.P. (1)                            $   226,417       $   108,501       $    43,080

Earnings per unit-diluted (2)                 $      2.32       $      1.20       $      1.65

(1) Prior to the Merger, BGH's noncontrolling interests primarily related to equity interests of Buckeye that were not owned by BGH. In connection with the Merger, total Buckeye capital substantially increased with the elimination of such non-controlling interest.

(2) Pursuant to the Merger, BGH's unitholders received a total of approximately 20.0 million of Buckeye's LP Units in exchange for all outstanding BGH common units and management units. As a result, the number of Buckeye's LP Units outstanding increased from 51.6 million to 71.4 million. However, for historical reporting purposes, the impact of this change was accounted for as a reverse split of BGH's units of 0.705 to 1.0, together with the addition of Buckeye's existing LP Units.

Non-GAAP Financial Measures

Adjusted EBITDA is the primary measure used by our senior management, including our Chief Executive Officer, to: (i) evaluate our consolidated operating performance and the operating performance of our business segments;
(ii) allocate resources and capital to business segments; (iii) evaluate the viability of proposed projects; and (iv) determine overall rates of return on alternative investment opportunities. Distributable cash flow is another measure used by our senior management to provide a clearer picture of cash available for distribution to its unitholders. Adjusted EBITDA and distributable cash flow eliminate (i) non-cash expenses, including but not limited to, depreciation and amortization expense resulting from the significant capital investments we make in our businesses and from intangible assets recognized in business combinations; (ii) charges for obligations expected to be settled with the issuance of equity instruments; and (iii) items that are not indicative of our core operating performance results and business outlook.

We believe that investors benefit from having access to the same financial measures that we use and that these measures are useful to investors because they aid in comparing our operating performance with that of other companies with similar operations. The Adjusted EBITDA and distributable cash flow data presented by us may not be comparable to similarly titled measures at other companies because these items may be defined differently by other companies.

The following table presents Adjusted EBITDA by segment and on a consolidated basis, distributable cash flow and a reconciliation of net income, which is the most comparable financial measure under generally accepted accounting principles ("GAAP"), to Adjusted EBITDA and distributable cash flow for the periods indicated (in thousands):

                                                                                               Year Ended December 31,
                                                                                     2012                2011                2010
Adjusted EBITDA:
Pipelines & Terminals                                                             $  409,055          $  361,018          $  346,447
International Operations                                                             132,104             112,996              (4,655 )
Natural Gas Storage                                                                    6,118               4,204              29,794
Energy Services                                                                          524               1,797               5,861
Development & Logistics                                                               11,722               7,932               5,193

Total Adjusted EBITDA                                                             $  559,523          $  487,947          $  382,640

Reconciliation of Net Income to Adjusted EBITDA and
Distributable Cash Flow:
Net income                                                                        $  230,551          $  114,664          $  201,008
Less: Net income attributable to non-controlling interests                            (4,134 )            (6,163 )          (157,928 )

Net income attributable to Buckeye Partners, L.P.                                    226,417             108,501              43,080
Add: Interest and debt expense                                                       114,980             119,561              89,169
Income tax expense                                                                      (675 )              (192 )              (919 )
Depreciation and amortization                                                        146,424             119,534              59,590
Non-cash deferred lease expense                                                        3,901               4,122               4,235
Non-cash unit-based compensation expense                                              19,520               9,150               8,960
Asset impairment expense                                                              59,950                  -                   -
Goodwill impairment expense                                                               -              169,560                  -
Equity plan modification expense                                                          -                   -               21,058
Net income attributable to non-controlling interests affected by Merger (1)               -                   -              157,467
Less: Amortization of unfavorable storage contracts (2)                              (10,994 )            (7,562 )                -
Gain on sale of equity investment                                                         -              (34,727 )                -

Adjusted EBITDA                                                                      559,523             487,947             382,640

Less: Interest and debt expense, excluding amortization of deferred
financing costs and debt discounts                                                  (111,511 )          (111,941 )           (84,758 )
Income tax expense, excluding non-cash taxes                                          (1,095 )                (6 )                -
Maintenance capital expenditures                                                     (54,425 )           (57,467 )           (31,244 )

Distributable cash flow                                                           $  392,492          $  318,533          $  266,638

(1) Amounts represent portions of BGH's non-controlling interests related to Buckeye that were eliminated as a result of the Merger. Amounts are excluded for the portion of 2010 prior to the Merger for comparability purposes.

(2) Represents the amortization of the negative fair values allocated to certain unfavorable storage contracts acquired in connection with the BORCO acquisition.

The following table presents product volumes transported and average daily throughput for the Pipelines & Terminals segment and total volumes sold for the Energy Services segment for the periods indicated:

                                                           Year Ended December 31,
                                                      2012          2011          2010
Pipelines & Terminals (average bpd in thousands):
Pipelines:
Gasoline                                                701.9         668.1         653.5
Jet fuel                                                339.2         340.6         338.5
Middle distillates (1)                                  322.3         327.2         303.4
Other products (2)                                       22.2          22.2          21.0

Total pipelines throughput                            1,385.6       1,358.1       1,316.4

Terminals:
Products throughput (3)                                 897.3         730.9         562.5

Energy Services (in millions of gallons):
Sales volumes                                         1,106.3       1,337.8       1,139.1

(1) Includes diesel fuel, heating oil and kerosene.

(2) Includes liquefied petroleum gas.

(3) Amounts for 2012 and 2011 include throughput volumes at terminals acquired from BP and ExxonMobil Corporation on June 1, 2011 and July 19, 2011, respectively.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Consolidated

Adjusted EBITDA was $559.5 million for the year ended December 31, 2012, which is an increase of $71.6 million, or 14.7%, from $487.9 million for the corresponding period in 2011. The increase in Adjusted EBITDA was primarily related to positive contribution as a result of a full period of operating activities for 2011 acquisitions, the benefit of contributions from growth capital spending and higher blending capabilities, particularly butane blending, in the Pipelines & Terminals segment, as well as increased storage capacity and customer utilization of our BORCO facility in the International Operations segment.

Revenue was $4,357.2 million for the year ended December 31, 2012, which is a decrease of $402.4 million, or 8.5%, from $4,759.6 million for the corresponding period in 2011. The decrease in revenue was primarily related to a net decrease in revenue in the Energy Services segment, which was partially offset by the revenue generated due to a full period of operations for the 2011 acquisitions and the Perth Amboy Facility acquisition in 2012 in the Pipelines & Terminals segment, as well as increased storage revenue as a result of 1.9 million barrels of incremental storage capacity brought online and new service offerings providing fuel oil supply and distribution services in the International Operations segment.

Operating income was $339.2 million for the year ended December 31, 2012, which is an increase of $150.5 million, or 80.0%, from $188.7 million the corresponding period in 2011. The increase in operating income was primarily related to a non-cash goodwill impairment charge in the Natural Gas Storage segment in 2011 and positive contribution as a result of a full period of operating activities for 2011 acquisitions in the Pipelines & Terminals segment. These increases were partially offset by a non-cash asset impairment charge in 2012 and an increase in depreciation and amortization due to the assets acquired in 2011 in the Pipelines & Terminals segment and the upgrades and expansions of the jetty structure in the International Operations segment.

Distributable cash flow was $392.5 million for the year ended December 31, 2012, which is an increase of $74.0 million, or 23.2%, from $318.5 million for the corresponding period in 2011. The increase in distributable cash flow was primarily related to an increase of $71.6 million in Adjusted EBITDA as described above.

Adjusted EBITDA by Segment

Pipelines & Terminals. Adjusted EBITDA from the Pipelines & Terminals segment was $409.1 million for the year ended December 31, 2012, which was an increase of $48.1 million, or 13.3%, from $361.0 million for the corresponding period in 2011. The positive factors impacting Adjusted EBITDA were related to a $44.2 million increase in revenue due to a full period of operations for the assets acquired in 2011 and the Perth Amboy Facility acquired in 2012, a $31.7 million increase in revenue due to higher average pipeline tariff rates, resulting from tariff increases and long-haul shipments, and terminalling contract rate escalations on our legacy assets, $11.1 million of favorable settlement experience, a $7.9 million increase in revenue due to higher blending capabilities in the Northeast, particularly butane blending, and a $1.6 million increase in revenue due to higher terminalling volumes. The favorable settlement experience primarily related to the successful resolution of a $10.6 million product settlement allocation matter related to certain pipeline transportation-related services provided by Buckeye over a period of several years, of which $7.8 million related to services rendered in prior years but, for accounting purposes, was not recognized in revenue until the current period.

The negative factors impacting Adjusted EBITDA were a $17.1 million increase in operating expenses related to a full period of operations of the assets acquired in 2011 and the Perth Amboy Facility acquired in 2012, which included acquisition and transition expenses, a $9.5 million increase in operating expenses, which included integrity program expenditures, payroll costs, operating power and utilities, insurance and environmental remediation expenses, a $8.5 million decrease in other revenue, resulting from a decrease in terminalling storage contracts primarily due to market backwardation of refined petroleum products, a $4.3 million decrease in earnings from equity investments primarily due to higher environmental remediation costs at West Shore and the sale of our interest in West Texas LPG Pipeline Limited Partnership in 2011, $3.8 million in fees related to the FERC proceedings, $1.5 million of fees related to the temporary suspension of ethanol offloading capabilities at our Albany facility and a $3.7 million increase in expenses related to the relocation of certain operations and administrative support functions to our Houston, Texas headquarters.

Overall pipeline and terminalling volumes increased by 2.0% and 22.8%, respectively, primarily as a result of the assets acquired in 2011. Legacy pipeline volumes declined marginally as a result of seasonal fluctuations in heating oil, a temporary shut-down of one of our pipelines for emergency maintenance, and business interruptions caused by Hurricane Sandy, offset by higher demand for gasoline. Legacy terminalling volumes increased by 1.6% due to higher demand for gasoline and distillates, new customer contracts and service offerings at select locations, including crude oil services and the benefit of contributions from growth capital spending.

International Operations. Adjusted EBITDA from the International Operations segment was $132.1 million for the year ended December 31, 2012, which was an increase of $19.1 million, or 16.9%, from $113.0 million for the corresponding period in 2011. The positive factors impacting Adjusted EBITDA were primarily related to a $46.0 million increase in revenue related to new service offerings providing fuel oil supply and distribution services in the Caribbean, a $7.9 million decrease in acquisition and transition expenses, a $6.0 million increase in storage revenue as a result of 1.9 million barrels of incremental storage capacity brought online, a $5.0 million increase in ancillary revenues, including berthing, which represents ships that utilize the jetties, and heating services due to increased customer utilization of our facilities and $1.7 million decrease in income allocated to non-controlling interests related to the remaining 20% ownership interest in BORCO not acquired by us until February 16, 2011.

The increase in revenue was partially offset by a $45.5 million increase in cost of product sales related to new service offerings providing fuel oil supply and distribution services in the Caribbean and $2.0 million increase in operating expenses primarily as a result of increased customer utilization of our facilities.

Natural Gas Storage. Adjusted EBITDA from the Natural Gas Storage segment was $6.1 million for the year ended December 31, 2012, which was an increase of $1.9 million, or 45.5%, from $4.2 million for the corresponding period in 2011. The increase in Adjusted EBITDA was primarily the result of an $18.1 million increase in fees for hub service activities due to improved seasonal spreads and a $1.0 million decrease in operating expenses, which primarily related to a decline in the number of well workovers performed during 2012 as compared to the 2011 period. The increase in Adjusted EBITDA was partially offset by a $12.8 million decrease in lease revenue due to lower firm storage rates and a $4.4 million increase in costs of natural gas storage services, which includes hub services fees paid to customers for hub service activities. Lease revenue and hub services revenue are affected by

the difference in natural gas commodity prices for the periods in which natural gas is injected and withdrawn from the storage facility (i.e., time spread).

Energy Services. Adjusted EBITDA from the Energy Services segment was $0.5 million for the year ended December 31, 2012, which was a decrease of $1.3 million, or 70.8%, from $1.8 million for the corresponding period in 2011. In early 2012, we developed and executed a strategy to mitigate basis risk, which included the reduction of refined petroleum product inventories in the Midwest. As a result, losses generated from the execution of our strategy contributed to the decrease in Adjusted EBITDA. During the period, we continued to aggressively manage our inventory levels and reduce our exposure to market backwardation, despite sustained adverse market conditions. In addition, we had a $2.2 million decrease in biodiesel tax credits, which are recorded as a reduction of cost of sales. In early 2013, legislative changes resulted in retroactive recognition of biodiesel tax credits for year 2012.

The decrease in Adjusted EBITDA was primarily related to a $595.7 million net decrease in revenue, which included a $673.0 million decrease due to 17.3% of lower sales volumes, offset by a $77.3 million increase as a result of approximately $0.07 per gallon increase in refined petroleum product sales price (average sales prices per gallon were $2.98 and $2.91 for the 2012 and 2011 periods, respectively).

The decrease in revenue was partially offset by a $592.0 million net decrease in cost of product sales, which included a $670.0 million decrease due to 17.3% of lower sales volumes, offset by $78.0 million increase as a result of approximately $0.07 per gallon increase in refined petroleum product cost price (average cost prices per gallon were $2.96 and $2.89 for the 2012 and 2011 periods, respectively) and a $2.4 million decrease in operating expenses primarily related to overhead costs.

Development & Logistics. Adjusted EBITDA from the Development & Logistics segment was $11.7 million for the year ended December 31, 2012, which was an increase of $3.8 million, or 47.8%, from $7.9 million for the corresponding period in 2011. The increase in Adjusted EBITDA was primarily due to a $4.5 million increase in revenue related to the LPG storage caverns acquired in November 2011, a $2.6 million increase in third-party engineering and operations revenue as a result of new contracts and higher fees, partially offset by a $1.9 million increase in operating expenses, which primarily related to overhead costs, a $0.8 million increase in third-party engineering and operations expense and a $0.6 million increase in operating expenses for the LPG storage caverns.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Consolidated

Adjusted EBITDA was $487.9 million for the year ended December 31, 2011, which is an increase of $105.3 million, or 27.5%, from $382.6 million for the corresponding period in 2010. The increase in Adjusted EBITDA was primarily related to positive contribution as a result of the 2011 acquisitions in the Pipelines & Terminals segment and International Operations segment's acquisition of the BORCO facility in 2011 and a full year of operations for the Yabucoa terminal, which was acquired in December 2010. These increases were partially . . .