**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

**x**                              QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**For the quarterly period ended March 31,2006**

**OR**

**o**                                 TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**Forthe transition period from              *** * to              * *

**CommissionFile Number 1-313345**

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**PACIFIC ENERGY PARTNERS, L.P.**

(Exact name of registrantas specified in its charter)

| **DELAWARE**                       |   | **68-0490580**       |
|------------------------------------|--------|----------------------|
| (State or other  jurisdiction      |   | (I.R.S. Employer     |
| of incorporation  or organization) |   | Identification  No.) |

 

**5900 Cherry AvenueLong Beach, CA 90805-4408**

(Address of principalexecutive offices)

**(562) 728-2800**

(Registrant’s telephonenumber, including area code)

**None**

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

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No  ̈

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

| Large accelerated  filer   o | Accelerated  filer   x | Non-accelerated  filer   o |
|----------------------------------------|----------------------------------|--------------------------------------|

 

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

Indicate the numberof shares outstanding of each of the issuer’s classes of common stock, as ofthe latest practicable date.

| Class              | ** ** | ** ** | ** ** | **Outstanding at April 30, 2006** | ** ** |
|--------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Common Units       |       |       | 31,457,782 |                                                  |       |
| Subordinated Units |       |       | 7,848,750  |                                                  |       |

 

 

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**PACIFIC ENERGYPARTNERS, L.P.**

**FORM 10-Q**

**TABLEOF CONTENTS**
|                                        | ** ** |                                                                                                                                      | ** ** | **Page** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I. FINANCIAL INFORMATION** |       |                                                                                                                                 |       |     |
| Item 1.                           |       | Financial  Statements                                                                                                                |       |     | 1 |   |
|                                   |       | Condensed  Consolidated Balance Sheets (Unaudited)—As of March 31, 2006 and December 31,  2005                        |       |     | 1 |   |
|                                   |       | Condensed  Consolidated Statements of Income (Unaudited)—For the Three Months Ended  March 31, 2006 and 2005               |       |     | 2 |   |
|                                   |       | Condensed  Consolidated Statement of Partners’ Capital (Unaudited)—For the Three Months  Ended March 31, 2006         |       |     | 3 |   |
|                                   |       | Condensed  Consolidated Statements of Comprehensive Income (Unaudited)—For the Three  Months Ended March 31, 2006 and 2005 |       |     | 4 |   |
|                                   |       | Condensed  Consolidated Statements of Cash Flows (Unaudited)—For the Three Months Ended  March 31, 2006 and 2005           |       |     | 5 |   |
|                                   |       | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                                    |       |     | 6 |   |
| Item 2.                           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                     |       |     | 19 |   |
| Item 3.                           |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                          |       |     | 34 |   |
| Item 4.                           |       | Controls  and Procedures                                                                                                             |       |     | 36 |   |
| **PART II. OTHER INFORMATION**    |       |                                                                                                                                 |       |     |
| Item 1.                           |       | Legal  Proceedings                                                                                                                   |       |     | 37 |   |
| Item 1A.                          |       | Risk Factors                                                                                                                         |       |     | 37 |   |
| Item 6.                           |       | Exhibits                                                                                                                             |       |     | 38 |   |

 

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**PART I.FINANCIAL INFORMATION**

**ITEM1.**                FinancialStatements

**PACIFIC ENERGY PARTNERS, L.P.CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)**

| ** **                                                                                                                         | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                                                                                         | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                                                                                                                         |       |                    |       |                  |       |   |   |
| Current assets:                                                                                                                    |       |                    |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                          |       | $                       | 11,944     |                  |       | $ | 18,064 |   |   |
| Crude oil sales  receivable                                                                                                        |       | 108,331                 |       |                  | 95,952     |   |   |
| Transportation and  storage accounts receivable                                                                                    |       | 25,910                  |       |                  | 30,100     |   |   |
| Canadian goods and  services tax receivable                                                                                        |       | 6,478                   |       |                  | 8,738      |   |   |
| Insurance proceeds  receivable                                                                                                     |       | 7,440                   |       |                  | 9,052      |   |   |
| Due from related parties                                                                                                           |       | 229                     |       |                  | —     |   |   |
| Crude oil and refined  products inventory                                                                                          |       | 36,391                  |       |                  | 20,192     |   |   |
| Prepaid expenses                                                                                                                   |       | 5,672                   |       |                  | 7,489      |   |   |
| Other                                                                                                                              |       | 3,791                   |       |                  | 2,528      |   |   |
| Total current assets                                                                                                               |       | 206,186                 |       |                  | 192,115    |   |   |
| Property and  equipment, net                                                                                                       |       | 1,205,642               |       |                  | 1,185,534  |   |   |
| Intangible assets,  net                                                                                                            |       | 68,426                  |       |                  | 69,180     |   |   |
| Investment in  Frontier                                                                                                            |       | 8,089                   |       |                  | 8,156      |   |   |
| Other assets, net                                                                                                                  |       | 17,907                  |       |                  | 21,467     |   |   |
|                                                                                                                               |       | $                       | 1,506,250  |                  |       | $ | 1,476,452 |   |   |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                                         |       |                    |       |                  |       |   |   |
| Current liabilities:                                                                                                               |       |                    |       |                  |       |   |   |
| Accounts payable and  accrued liabilities                                                                                          |       | $                       | 33,425     |                  |       | $ | 43,859 |   |   |
| Accrued crude oil  purchases                                                                                                       |       | 113,182                 |       |                  | 96,651     |   |   |
| Line 63 oil release  reserve                                                                                                       |       | 2,787                   |       |                  | 4,448      |   |   |
| Accrued interest                                                                                                                   |       | 6,553                   |       |                  | 4,929      |   |   |
| Other                                                                                                                              |       | 5,050                   |       |                  | 6,300      |   |   |
| Total current liabilities                                                                                                          |       | 160,997                 |       |                  | 156,187    |   |   |
| Senior notes and  credit facilities, net                                                                                           |       | 600,985                 |       |                  | 565,632    |   |   |
| Deferred income  taxes                                                                                                             |       | 35,631                  |       |                  | 35,771     |   |   |
| Environmental  liabilities                                                                                                         |       | 16,671                  |       |                  | 16,617     |   |   |
| Other liabilities                                                                                                                  |       | 3,762                   |       |                  | 4,006      |   |   |
| Total liabilities                                                                                                                  |       | 818,046                 |       |                  | 778,213    |   |   |
| Commitments and contingencies (note 4)                                                                                             |       |                    |       |                  |       |   |   |
| Partners’ capital:                                                                                                            |       |                    |       |                  |       |   |   |
| Common unitholders  (31,457,782 and 31,448,931 units outstanding at March 31, 2006 and  December 31, 2005, respectively) |       | 636,710                 |       |                  | 644,589    |   |   |
| Subordinated unitholders  (7,848,750 units outstanding at March 31, 2006 and December 31,  2005)                         |       | 22,725                  |       |                  | 24,758     |   |   |
| General Partner interest                                                                                                           |       | 12,326                  |       |                  | 12,535     |   |   |
| Undistributed employee  long-term incentive compensation                                                                           |       | 41                      |       |                  | —     |   |   |
| Accumulated other  comprehensive income                                                                                            |       | 16,402                  |       |                  | 16,357     |   |   |
| Net partners’ capital                                                                                                         |       | 688,204                 |       |                  | 698,239    |   |   |
|                                                                                                                               |       | $                       | 1,506,250  |                  |       | $ | 1,476,452 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

1

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**PACIFIC ENERGY PARTNERS, L.P.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)**

| ** **                                                                                                                                                  | ** ** | **Three Months Ended March 31,**                                                                 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
| ** **                                                                                                                                                  | ** ** | **(in thousands, except per unit  amounts)**                                                     | ** ** |
| Revenues:                                                                                                                                                   |       |                                                                                                                 |       |   |   |   |   |   |   |
| Pipeline transportation revenue                                                                                                                             |       |                                                                                                                 | $          | 33,857 |   |   |   | $ | 28,037 |   |   |
| Storage and terminaling revenue                                                                                                                             |       |                                                                                                                 | 20,086     |   |   |   | 10,322 |   |   |
| Pipeline buy/sell transportation revenue                                                                                                                    |       |                                                                                                                 | 9,699      |   |   |   | 9,106 |   |   |
| Crude oil sales, net of purchases of $256,319 and  $114,391 for the three months ended March 31, 2006 and 2005                                    |       |                                                                                                                 | 6,809      |   |   |   | 1,782 |   |   |
|                                                                                                                                                        |       |                                                                                                                 | 70,451     |   |   |   | 49,247 |   |   |
| Costs and  Expenses:                                                                                                                                        |       |                                                                                                                 |       |   |   |   |   |   |   |
| Operating (which excludes $586 of compensation  expense for 2005 reported in accelerated long-term incentive plan  compensation expense)               |       |                                                                                                                 | 33,419     |   |   |   | 21,754 |   |   |
| General and administrative (which  excludes $2,529 of compensation expense for 2005 reported in accelerated  long-term incentive plan compensation expense) |       |                                                                                                                 | 6,873      |   |   |   | 5,172 |   |   |
| Accelerated long-term incentive plan compensation  expense                                                                                                  |       |                                                                                                                 | —     |   |   |   | 3,115 |   |   |
| Line 63 oil release costs                                                                                                                                   |       |                                                                                                                 | —     |   |   |   | 2,000 |   |   |
| Transaction costs                                                                                                                                           |       |                                                                                                                 | —     |   |   |   | 1,807 |   |   |
| Depreciation and amortization                                                                                                                               |       |                                                                                                                 | 10,002     |   |   |   | 6,529 |   |   |
|                                                                                                                                                        |       |                                                                                                                 | 50,294     |   |   |   | 40,377 |   |   |
| Share of net  income of Frontier                                                                                                                            |       |                                                                                                                 | 398        |   |   |   | 357 |   |   |
| Operating income                                                                                                                                            |       |                                                                                                                 | 20,555     |   |   |   | 9,227 |   |   |
| Interest expense                                                                                                                                            |       |                                                                                                                 | (9,088     | ) |   |   | (5,598 | ) |   |
| Interest and  other income                                                                                                                                  |       |                                                                                                                 | 443        |   |   |   | 353 |   |   |
| Income before  income taxes                                                                                                                                 |       |                                                                                                                 | 11,910     |   |   |   | 3,982 |   |   |
| Income tax (expense)  benefit:                                                                                                                              |       |                                                                                                                 |       |   |   |   |   |   |   |
| Current                                                                                                                                                     |       |                                                                                                                 | (394       | ) |   |   | (732 | ) |   |
| Deferred                                                                                                                                                    |       |                                                                                                                 | 98         |   |   |   | 171 |   |   |
|                                                                                                                                                        |       |                                                                                                                 | (296       | ) |   |   | (561 | ) |   |
| Net income                                                                                                                                                  |       |                                                                                                                 | $          | 11,614 |   |   |   | $ | 3,421 |   |   |
| Net income (loss)  for the general partner interest                                                                                                         |       |                                                                                                                 | $          | (19 | ) |   |   | $ | (1,702 | ) |   |
| Net income for  the limited partner interests                                                                                                               |       |                                                                                                                 | $          | 11,633 |   |   |   | $ | 5,123 |   |   |
| Basic and diluted net income per limited partner  unit                                                                                                      |       |                                                                                                                 | $          | 0.30 |   |   |   | $ | 0.17 |   |   |
| Weighted average  limited partner units outstanding:                                                                                                        |       |                                                                                                                 |       |   |   |   |   |   |   |
| Basic                                                                                                                                                       |       |                                                                                                                 | 39,301     |   |   |   | 29,655 |   |   |
| Diluted                                                                                                                                                     |       |                                                                                                                 | 39,313     |   |   |   | 29,720 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

2

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**PACIFIC ENERGY PARTNERS, L.P.CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL(Unaudited)**

| ** **                                                                     | ** ** | **Limited Partner Units** | ** ** | **Limited Partner Amounts** | ** ** | **General  Partner** | ** ** | **Undistributed  Employee  Long-Term  Incentive** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|----------------------|------------|---------------------------------------------------|------------|---------------------------------------|------------|------------------|------------|
| ** **                                                                     | ** ** | **Common**                          | ** ** | **Subordinated**                      | ** ** | **Common**           | ** ** | **Subordinated**                                  | ** ** | **Interest**                          | ** ** | **Compensation** | ** ** | **Income** | ** ** | **Total** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**             | ** ** |
| Balance,  December 31,  2005                                              |       |                                | 31,449     |                                  |       |                 | 7,849      |                                              |       |                                  | $          | 644,589          |       |   |   | $ | 24,758 |   |   |   | $ | 12,535 |   |   |   | $ | — |   |   |   | $ | 16,357 |   |   | $ | 698,239 |   |
| Net income                                                                     |       |                                | —     |                                  |       |                 | —     |                                              |       |                                  | 9,310      |             |       |   | 2,323 |   |   |   | (19 | ) |   |   | — |   |   |   | — |   |   | 11,614 |   |
| Distribution to  partners                                                      |       |                                | —     |                                  |       |                 | —     |                                              |       |                                  | (17,454    | )                |       |   | (4,356 | ) |   |   | (706 | ) |   |   | — |   |   |   | — |   |   | (22,516 | ) |
| Employee  compensation under LB Pacific, LP option plan                   |       |                                | —     |                                  |       |                 | —     |                                              |       |                                  | —     |             |       |   | — |   |   |   | 511 |   |   |   | — |   |   |   | — |   |   | 511 |   |
| Employee  compensation under long-term incentive plan                     |       |                                | —     |                                  |       |                 | —     |                                              |       |                                  | —     |             |       |   | — |   |   |   | — |   |   |   | 356 |   |   |   | — |   |   | 356 |   |
| Issuance of common  units pursuant to long-term incentive plan       |       |                                | 9          |                                  |       |                 | —     |                                              |       |                                  | 265        |             |       |   | — |   |   |   | 5 |   |   |   | (315 | ) |   |   | — |   |   | (45 | ) |
| Foreign currency  translation adjustment                                       |       |                                | —     |                                  |       |                 | —     |                                              |       |                                  | —     |             |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (269 | ) |   | (269 | ) |
| Change in fair  value of crude oil and foreign currency hedging contracts |       |                                | —     |                                  |       |                 | —     |                                              |       |                                  | —     |             |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 314 |   |   | 314 |   |
| Balance, March 31,  2006                                                  |       |                                | 31,458     |                                  |       |                 | 7,849      |                                              |       |                                  | $          | 636,710          |       |   |   | $ | 22,725 |   |   |   | $ | 12,326 |   |   |   | $ | 41 |   |   |   | $ | 16,402 |   |   | $ | 688,204 |   |

 

See accompanying notes to condensed consolidated financial statements.

3

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**PACIFIC ENERGY PARTNERS, L.P.CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)**

| ** **                                                    | ** ** | **Three Months Ended March 31,**                                                     | ** **    |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|---------------|
| ** **                                                    | ** ** | **        2006        ** | ** **    | **        2005        ** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                                                                                  | ** **    |
| Net income                                                    |       |                                                                                                     | $ 11,614 |   |   |   | $ 3,421 |   |   |
| Change in fair  value of crude oil hedging derivatives        |       |                                                                                                     | 260           |   |   |   | (1,132 | ) |   |
| Change in fair  value of foreign currency hedging derivatives |       |                                                                                                     | 54            |   |   |   | — |   |   |
| Change in foreign  currency translation adjustment            |       |                                                                                                     | (269          | ) |   |   | (537 | ) |   |
| Comprehensive income                                          |       |                                                                                                     | $ 11,659 |   |   |   | $ 1,752 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

4

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**PACIFIC ENERGY PARTNERS, L.P.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

| ** **                                                                          | ** ** | **Three Months Ended March 31,**                                                     | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| ** **                                                                          | ** ** | **(in thousands)**                                                                                  | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                |       |                                                                                                     |       |   |   |   |   |   |   |
| Net income                                                                          |       |                                                                                                     | $          | 11,614 |   |   |   | $ | 3,421 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating  activities: |       |                                                                                                     |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                      |       |                                                                                                     | 10,002     |   |   |   | 6,529 |   |   |
| Amortization of  debt issue costs                                                   |       |                                                                                                     | 606        |   |   |   | 459 |   |   |
| Non-cash  portion of employee compensation under long-term  incentive plan          |       |                                                                                                     | 356        |   |   |   | 2,886 |   |   |
| Non-cash employee  compensation under the LB Pacific, LP  option plan          |       |                                                                                                     | 511        |   |   |   | — |   |   |
| Deferred tax  expense (benefit)                                                     |       |                                                                                                     | (98        | ) |   |   | (171 | ) |   |
| Share of net  income of Frontier                                                    |       |                                                                                                     | (398       | ) |   |   | (357 | ) |   |
| Distributions from  Frontier, net                                                   |       |                                                                                                     | 422        |   |   |   | — |   |   |
| Net changes in operating  assets and liabilities:                                   |       |                                                                                                     |       |   |   |   |   |   |   |
| Crude oil sales  receivable                                                         |       |                                                                                                     | (12,305    | ) |   |   | (23,327 | ) |   |
| Transportation and  storage accounts receivable                                     |       |                                                                                                     | 4,195      |   |   |   | (1,832 | ) |   |
| Insurance proceeds  receivable                                                      |       |                                                                                                     | 1,612      |   |   |   | (11,496 | ) |   |
| Crude oil and  refined products inventory                                           |       |                                                                                                     | (16,241    | ) |   |   | (17,246 | ) |   |
| Other current  assets and liabilities                                               |       |                                                                                                     | 1,562      |   |   |   | (1,754 | ) |   |
| Accounts payable  and other accrued liabilities                                     |       |                                                                                                     | (7,754     | ) |   |   | 7,375 |   |   |
| Accrued crude oil  purchases                                                        |       |                                                                                                     | 16,489     |   |   |   | 38,176 |   |   |
| Line 63 oil  release reserve                                                        |       |                                                                                                     | (1,661     | ) |   |   | 13,496 |   |   |
| Other non-current  assets and liabilities                                           |       |                                                                                                     | (2,897     | ) |   |   | (301 | ) |   |
| NET CASH PROVIDED BY  OPERATING ACTIVITIES                                          |       |                                                                                                     | 6,015      |   |   |   | 15,858 |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                |       |                                                                                                     |       |   |   |   |   |   |   |
| Acquisitions                                                                        |       |                                                                                                     | (2,361     | ) |   |   | — |   |   |
| Additions to  property and equipment                                                |       |                                                                                                     | (24,158    | ) |   |   | (4,389 | ) |   |
| Other                                                                               |       |                                                                                                     | 110        |   |   |   | 129 |   |   |
| NET CASH USED IN  INVESTING ACTIVITIES                                              |       |                                                                                                     | (26,409    | ) |   |   | (4,260 | ) |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                |       |                                                                                                     |       |   |   |   |   |   |   |
| Capital  contributions from the general partner                                     |       |                                                                                                     | —     |   |   |   | 2,438 |   |   |
| Proceeds from  credit facilities                                                    |       |                                                                                                     | 74,417     |   |   |   | 26,833 |   |   |
| Repayment of  credit facilities                                                     |       |                                                                                                     | (37,366    | ) |   |   | (25,854 | ) |   |
| Deferred financing  costs                                                           |       |                                                                                                     | —     |   |   |   | (600 | ) |   |
| Distributions to  partners                                                          |       |                                                                                                     | (22,516    | ) |   |   | (15,114 | ) |   |
| Related parties                                                                     |       |                                                                                                     | (229       | ) |   |   | (661 | ) |   |
| NET CASH PROVIDED BY  (USED IN) FINANCING ACTIVITIES                                |       |                                                                                                     | 14,306     |   |   |   | (12,958 | ) |   |
| Effect of exchange  rates on cash                                                   |       |                                                                                                     | (32        | ) |   |   | 74 |   |   |
| NET DECREASE IN CASH AND  CASH EQUIVALENTS                                          |       |                                                                                                     | (6,120     | ) |   |   | (1,286 | ) |   |
| CASH AND CASH  EQUIVALENTS, beginning of reporting period                           |       |                                                                                                     | 18,064     |   |   |   | 23,383 |   |   |
| CASH AND CASH EQUIVALENTS, end of reporting period                                  |       |                                                                                                     | $          | 11,944 |   |   |   | $ | 22,097 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

5

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**PACIFIC ENERGY PARTNERS, L.P.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2006(Unaudited)**

**1.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**Basis ofPresentation**

Pacific Energy Partners, L.P. and its subsidiaries(collectively the “Partnership”) are engaged principally in the business ofgathering, transporting, storing and distributing crude oil, refined productsand other related products. The Partnership generates revenue primarily bytransporting such commodities on its pipelines, by leasing storage capacity inits storage tanks, and by providing other terminaling services. The Partnershipalso buys and sells crude oil, activities that are generally complementary toits other crude oil operations. The Partnership conducts its business throughtwo business units, the West Coast Business Unit, which includes activities inCalifornia and the Philadelphia, Pennsylvania area, and the Rocky MountainBusiness Unit, which includes activities in five Rocky Mountain states andAlberta, Canada.

The Partnership is managed by its general partner,Pacific Energy GP, LP, a Delaware limited partnership, which is managed byits general partner, Pacific Energy Management LLC (“PEM”), a Delaware limitedliability company. Thus, the officers and Board of Directors of PEM manage thebusiness affairs of Pacific Energy GP, LP and the Partnership. References tothe “General Partner” refer to Pacific Energy GP, LP and/or PEM, as the contextindicates.

The unaudited condensed consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialreporting and with Securities and Exchange Commission (“SEC”) regulations.Accordingly, these statements have been condensed and do not include all of theinformation and footnotes required for complete financial statements. Thesestatements involve the use of estimates and judgments where appropriate. In theopinion of management, all adjustments, consisting of normal recurring accrualsconsidered necessary for a fair presentation, have been included. The resultsof operations for the three months ended March 31, 2006 are notnecessarily indicative of the results of operations for the full year. Allsignificant intercompany balances and transactions have been eliminated duringthe consolidation process.

The condensed consolidated financial statementsinclude the ownership and results of operations of the assets acquired fromValero, L.P., since the acquisition of these assets on September 30, 2005.The assets acquired from Valero, L.P. have been integrated into our West Coastand Rocky Mountain Business Units as the Pacific Atlantic Terminals and theRocky Mountain Products Pipeline.

These financial statementsshould be read in conjunction with the Partnership’s audited consolidatedfinancial statements and notes thereto included in the Partnership’s annualreport on Form 10-K for the year ended December 31, 2005. Certain prior year balances in the accompanyingcondensed consolidated financial statements have been reclassified to conformto the current year presentation.

**New AccountingPronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(revised December 2004), *Share-BasedPayment (SFAS 123R)*. This Statement is a revision of SFAS No. 123.SFAS 123R establishes standards for the accounting for transactions inwhich an entity exchanges its equity instruments for goods or services.SFAS 123R is effective for the Partnership as of the beginning of thefirst interim period or annual reporting period that 

6

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begins after June 15,2005. The adoption of SFAS 123R on January 1, 2006 did not have amaterial impact on the Partnership’s consolidated financial statements. SeeNotes 3 and 5 to the condensed consolidated financial statements for moredetails on share-based compensation.

In September 2005,the Emerging Issues Task Force (“EITF”) issued Issue No. 04-13 (“EITF 04-13”),*Accounting for Purchases and Sales ofInventory with the Same Counterparty*. The issues addressed by theEITF are (i) the circumstances under which two or more exchangetransactions involving inventory with the same counterparty should be viewed asa single exchange transaction for the purposes of evaluating the effect of APB No. 29;and (ii) whether there are circumstances under which nonmonetary exchangesof inventory within the same line of business should be recognized at fairvalue. EITF 04-13 is effective for new arrangements entered into in thereporting periods beginning after March 15, 2006, and to all inventorytransactions that are completed after December 15, 2006, for arrangementsentered into prior to March 15, 2006. The adoption of EITF 04-13 didnot have a material impact on the Partnership’s consolidated financialstatements.

**2.   NET INCOMEPER LIMITED PARTNER UNIT**

Basic net income per limited partner unit isdetermined by dividing net income, after adding back costs allocated to theGeneral Partner and deducting the amounts allocated to the General Partnerinterest (including incentive distribution payments in excess of its 2%ownership interest), by the weighted average number of outstanding limitedpartner units.

Diluted net income per limited partner unit iscalculated in the same manner as basic net income per limited partner unitabove, except that the weighted average number of outstanding limited partnerunits is increased to include the dilutive effect of outstanding options andrestricted units by application of the treasury stock method.

Net income is allocated to the Partnership’s GeneralPartner and limited partners based on their respective interest in thePartnership. The Partnership’s General Partner is also directly charged withspecific costs that it has individually assumed and for which the limitedpartners are not responsible.

7

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Setforth below is the computation of net income allocated to limited partners andnet income per basic and diluted limited partner unit. The table also shows thereconciliation of basic average limited partner units to diluted weightedaverage limited partner units.

| ** **                                             | ** ** | **Three Months Ended March 31,**                                                                 | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                                                                                              | ** ** |
| **Numerator:**                                         | ** ** |                                                                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income allocated to  limited partners:             |       |                                                                                                                 |       |   |   |   |   |   |   |
| Net income                                             |       |                                                                                                                 | $          | 11,614 |   |   |   | $ | 3,421 |   |   |
| Costs allocated to the  general partner(1):            |       |                                                                                                                 |       |   |   |   |   |   |   |
| LB Pacific, LP Option Plan cost                        |       |                                                                                                                 | 511        |   |   |   | — |   |   |
| Senior Notes consent solicitation and other costs      |       |                                                                                                                 | —     |   |   |   | 893 |   |   |
| Severance and other costs                              |       |                                                                                                                 | —     |   |   |   | 914 |   |   |
| Total costs allocated to the general partner           |       |                                                                                                                 | 511        |   |   |   | 1,807 |   |   |
| Income before  costs allocated to the general partner  |       |                                                                                                                 | 12,125     |   |   |   | 5,228 |   |   |
| Less: general partner incentive distributions          |       |                                                                                                                 | (255       | ) |   |   | — |   |   |
|                                                   |       |                                                                                                                 | 11,870     |   |   |   | 5,228 |   |   |
| General partner  2% ownership                          |       |                                                                                                                 | (237       | ) |   |   | (105 | ) |   |
| Net income for  the limited partners                   |       |                                                                                                                 | $          | 11,633 |   |   |   | $ | 5,123 |   |   |
| **Denominator:**                                       | ** ** |                                                                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Basic weighted  average limited partner units          |       |                                                                                                                 | 39,301     |   |   |   | 29,655 |   |   |
| Effect of  restricted units                            |       |                                                                                                                 | 12         |   |   |   | 47 |   |   |
| Effect of options                                      |       |                                                                                                                 | —     |   |   |   | 18 |   |   |
| Diluted weighted  average limited partner units        |       |                                                                                                                 | 39,313     |   |   |   | 29,720 |   |   |
| Basic and diluted  net income per limited partner unit |       |                                                                                                                 | $          | 0.30 |   |   |   | $ | 0.17 |   |   |

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(1)          See“Note 3—Related Party Transactions” for a description of costs reimbursed bythe General Partner.

**3.   RELATEDPARTY TRANSACTIONS**

The Partnership’s GeneralPartner does not receive any management fee or other compensation in connectionwith its management of the Partnership’s business, but is entitled toreimbursement for all direct and indirect expenses incurred on the Partnership’sbehalf.

**Cost Reimbursements**

***Payroll expenses:***   ThePartnership’s General Partner employs all U.S.-based employees. All employeeexpenses incurred by the General Partner on behalf of the Partnership arecharged back to the Partnership.

***LB Pacific, LPOption Plan:*****  **LBPacific, LP (“LBP”), the owner of the Partnership’s General Partner, hasadopted an option plan for certain officers, directors, employees, advisors,and consultants of PEM, LBP, and their affiliates. Under the plan, participantsmay be granted options to acquire partnership interests in LBP. The Partnershipis not obligated to pay any amounts to LBP for the benefits granted or paid toits executives and key employees under the Plan, although generally acceptedaccounting principles require that the Partnership record an expense in itsfinancial statements for the plan benefits to employees providing services tothe Partnership, with a corresponding increase in the general partner’s capitalaccount.

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The option plan is administered by the board ofdirectors of LB Pacific GP, LLC. The terms, conditions, performance goals,restrictions, limitations, forfeiture, vesting or exercise schedule, and otherprovisions of grants under the plan, as well as eligibility to participate aredetermined by the board of directors of LB Pacific GP, LLC, the general partnerof LBP. The board of directors of LB Pacific GP, LLC may determine to grantoptions under the plan to participants containing such terms as the board of LBPacific GP, LLC shall determine. Options will have an exercise price that maynot be less than the fair market value of the units on the date of grant. Ingeneral, options granted will become exercisable over a period determined bythe board of directors of LB Pacific GP, LLC. In addition, the board ofdirectors of LB Pacific GP, LLC may determine whether any unit options maybecome exercisable upon a change in control of LB Pacific GP, LLC, LB Pacific,LP, or our General Partner.

The board of directors of LB Pacific GP, LLC mayterminate or amend the unit option plan at any time with respect to units forwhich a grant has not yet been made. However, no change may be made that wouldmaterially impair the rights of a participant with respect to an outstandinggrant without the consent of the participant.

Information concerning the plan and grants is sharedby LB Pacific, LP with the General Partner’s Compensation Committee and Boardof Directors, and considered in determining the appropriate level of long termcompensation paid by the Partnership.

In January 2006,LBP granted options representing a maximum 24% interest in LBP, which optionsvest in 10 years (except in limited circumstances such as a change in control),to certain officers and key employees of PEM and the Partnership. The grants,qualified as equity-classified awards, had a grant date fair value of $8.6million. The fair value of the options was determined using valuationtechniques that included the discounted present value of estimated future cashflows for LBP and fundamental analysis. It was measured using the Black-Scholesoption pricing model with the following assumptions:

| Expected  volatility      |   | 21.86 | %      |
|---------------------------|--------|-------|--------|
| Expected dividend  yield  |   | 0     | %      |
| Expected term (in  years) |   | 10    |   |
| Risk-free rate            |   | 4.37  | %      |

 

For the three months ended March 31, 2006, thePartnership recognized $0.5 million in compensation expense relating to the LBPoptions and recorded a capital contribution from the General Partner for thesame amount. At March 31, 2006, there was $8.1 million of totalunrecognized compensation cost related to nonvested options granted under theplan; that cost is expected to be recognized over the remaining period of 9.75years. At March 31, 2006, all granted LBP options remained outstanding.

***LB Pacific, LP and Anschutz:***   Priorto March 3, 2005, the General Partner was owned by The AnschutzCorporation (“Anschutz”). On March 3, 2005, Anschutz sold its interest inthe Partnership, including its interest in the General Partner, to LBP. Inconnection with the sale of Anschutz’s interest in the Partnership to LBP, LBPand Anschutz reimbursed the Partnership for certain costs incurred inconnection with the acquisition. The Partnership was reimbursed $1.2 millionfor costs incurred in connection with the consent solicitation, $0.3 million oflegal and other costs and $0.9 million relating to severance costs, for a totalof $2.4 million. Of the $1.2 million incurred for the consent solicitation,$0.6 million was capitalized as deferred financing costs and $0.6 millionwas expensed.

**Other Related PartyTransactions**

***Revenue fromRelated Parties:***   One of the Partnership’ssubsidiaries, Rocky Mountain Pipeline System LLC (“RMPS”) serves as thecontract operator for certain gas producing properties owned by a subsidiary ofAnschutz in Wyoming and Utah, in exchange for which RMPS is reimbursed itsdirect costs of operation 

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and is paid an annual feeof $0.3 million as compensation for the time spent by RMPS management andfor other overhead services related to their activities.

RMPS receives an operating fee and management fee fromFrontier Pipeline Company (“Frontier”) in connection with time spent by RMPSmanagement and for other services related to Frontier’s activities. RMPSreceived $0.2 million for each of the three month periods ended March 31,2006 and 2005. The Partnership owns a 22.22% partnership interest in Frontier.

***Expenses Paid toRelated Parties:*****  **UntilDecember 31, 2005, the Partnership utilized the financial accountingsystem owned and provided by Anschutz under a shared services arrangement for afee of $0.1 million per year and Anschutz charged the Partnership for anyout-of-pocket costs it incurred. The fixed annual fee included all license,maintenance and employee costs associated with the Partnership’s use of thefinancial accounting system.

In January 2003, thePartnership began leasing approximately 4,700 square feet of office space froman affiliate of Anschutz, for a term of five years at an annual cost of$0.1 million per year. The lease was terminated in February 2006.

**4.   CONTINGENCIES**

**Line 63 Oil Release**

On March 23, 2005, a release of approximately3,400 barrels of crude oil occurred on Line 63 when it was severed as a resultof a landslide caused by heavy rainfall in the Pyramid Lake area of Los AngelesCounty. Over the period March 2005 through anticipated completion in June 2007,the Partnership expects to incur an estimated total of $25.7 million for oilcontainment and clean-up of the impacted areas, future monitoring costs,potential third-party claims and penalties, and other costs, excluding pipelinerepair costs. As of March 31, 2006, the Partnership had incurredapproximately $21.4 million of the total expected remediation costs related tothe oil release for work performed through that date. The Partnership estimatesthat $2.8 million of the remaining remediation costs will be incurred for theremainder of 2006 and $0.7 million (included in “Other liabilities” in theaccompanying balance sheet) will be incurred in 2007.

The Partnership has a pollution liability insurancepolicy with a $2.0 million per-occurrence deductible that covers containmentand clean-up costs, third-party claims and penalties. The insurance carrierhas, subject to the terms of the insurance policy, acknowledged coverage of theincident and is processing and paying invoices related to the clean-up. ThePartnership believes that, subject to the $2.0 million deductible, it will beentitled to recover substantially all of its clean-up costs and any third-partyclaims associated with the release. As of March 31, 2006, the Partnership hasrecovered $15.6 million from insurance and recorded receivables of $8.1 millionfor future insurance recoveries it deems probable, of which $0.7 million isconsidered long-term and is included in “Other assets, net” in the accompanyingconsolidated balance sheet.

On or about March 17, 2006, Pacific PipelineSystem LLC (“PPS”), a subsidiary of the Partnership, was served with a fourcount misdemeanor action by the state of California, which alleges that PPS violatedvarious state statutes by depositing oil or substances harmful to wildlife intothe environment and by the willful and intentional discharge of pollution intostate waters. The Partnership estimates that the maximum fine and penaltiesthat could be assessed for these actions is approximately $0.9 million inthe aggregate. The Partnership believes, however, that certain of the allegedviolations are without merit and intends to defend against them, and thatmitigating factors should otherwise reduce the amounts of any potential finesor penalties that might be assessed. At this time, the Partnership cannotreasonably determine the outcome of these allegations. The estimated range ofpossible fines or penalties including amounts not covered by insurance is from$0 to $0.9 million.

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The foregoing estimatesare based on facts known at the time of estimation and the Partnership’sassessment of the ultimate outcome. Among the many uncertainties that impactthe estimates are the necessary regulatory approvals for, and potentialmodification of, remediation plans, the ongoing assessment of the impact ofsoil and water contamination, changes in costs associated with environmentalremediation services and equipment, and the possibility of third-party legalclaims giving rise to additional expenses. Therefore, no assurance can be madethat costs incurred in excess of this provision, if any, would not have amaterial adverse effect on the Partnership’s financial condition, results ofoperations, or cash flows, though the Partnership believes that most, if notall, of any such excess cost, to the extent attributable to clean-up andthird-party claims, would be recoverable through insurance. In March 2006, A.M.Best Company, an insurance company rating agency, announced it had downgradedthe financial strength rating assigned to the Partnership’s insurance carrier,Quanta Specialty Lines Company, including its parent and affiliates. Thedowngrade was from an “A” to a “B++, under review with negative implications.”Based on management’s analysis of Quanta’s financial condition, the Partnershipbelieves that Quanta will continue to meet its obligations relating to the Line63 oil release, although there can be no assurance that this will be the case. Asnew information becomes available in future periods, the Partnership may changeits provision and recovery estimates.

**Litigation**

In August, 2005, Rangeland Pipeline Company (“RPC”), awholly-owned subsidiary of the Partnership, learned that a Statement ofClaim was filed by Desiree Meier and Robert Meier in the Alberta Court of Queen’sBench, Judicial District of Red Deer, naming RPC as defendant, and allegingpersonal injury and property damage caused by an alleged release of petroleumsubstances onto plaintiff’s land by a prior owner and operator of the pipelinethat is currently owned and operated by the Partnership. The claim seeksCdn$1 million (approximately U.S.$0.9 million at March 31, 2006)in general damages, Cdn$2 million (approximately U.S.$1.7 million at March 31,2006) in special damages, and, in addition, unspecified amounts for punitive,exemplary and aggravated damages, costs and interest. The Statement of Claimhas not been served on RPC, so RPC has not been required to file an answer. RPCbelieves the claim is without merit, and intends to vigorously defend againstit. RPC also believes that certain of the claims, if successfully proven by theplaintiffs, would be liabilities retained by the pipeline’s prior owner underthe terms of the agreement whereby the Partnership acquired the pipeline inquestion.

In connection with the acquisition of assets fromValero, L.P. in September 2005, the Partnership assumed responsibility forthe defense of a lawsuit filed in 2003 against Support Terminals Services, Inc.,(“ST Services”) by ExxonMobil Corporation (“ExxonMobil”) in New Jersey statecourt. The Partnership has also assumed any liability that might be imposed onST Services as a result of the suit. In the suit, ExxonMobil seeksreimbursement of approximately $400,000 for remediation costs it has incurred,from GATX Corporation, Kinder Morgan Liquid Terminals, the successor ininterest to GATX Terminals Corporation, and ST Services. ExxonMobil also seeksa ruling imposing liability for any future remediation and related liabilitieson the same defendants. These costs are associated with the Paulsboro, NewJersey terminal that was acquired by the Partnership on September 30,2005. ExxonMobil claims that the costs and future remediation requirements arerelated to releases at the site subsequent to its sale of the terminal to GATXin 1990 and that, therefore, any remaining remediation requirements are theresponsibility of GATX Corporation, Kinder Morgan and ST Services. ThePartnership believes the claims against ST Services are without merit, andintend to vigorously defend against them.

The Partnership isinvolved in various other regulatory disputes, litigation and claims arising outof its operations in the normal course of business. The Partnership is notcurrently a party to any legal or regulatory proceedings the resolution ofwhich could be expected to have a material adverse effect on its business,financial condition, liquidity or results of operations.

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**5.   RESTRICTEDUNITS**

A restricted unit is a “phantom” unit. A phantom unitentitles the grantee to receive a common unit upon the vesting of the phantomunit**.**The Partnership intends theissuance of the restricted units under the plan to serve as a means of incentivecompensation for performance and not primarily as an opportunity to participatein the equity appreciation of the common units. Therefore, plan participantswill not pay any consideration for the common units they receive, and thePartnership will receive no remuneration for such units.

In January 2006,the General Partner awarded 46,815 restricted units to key employees that vestover a three-year period, beginning on March 1, 2006, and that are alsosubject to meeting annual financial performance objectives and to outsidedirectors that vest over a three-year period beginning March 1, 2006. Thefinancial measure used is the Partnership’s distributable cash flow per unit,as determined by the Compensation Committee, for the calendar year precedingeach of the three annual vesting dates. The number of units to be delivered inany year, if any, will be based on accomplishment of performance targets forthe previous calendar year, subject to the Compensation Committee’s authorityto subsequently adjust performance targets as it may deem appropriate, in itsdiscretion. Restricted unit activity during the three months ended March 31,2006 is as follow:

| ** **                           | ** ** | **Number of  Units** | ** ** | **Weighted  Average Grant  Date Fair Value** | ** ** |
|--------------------------------------|------------|---------------------------|------------|-------------------------------------------------------------|------------|
| ** **                           | ** ** | ** **                | ** ** | **(in thousands)**                                          | ** ** |
| Outstanding at  January 1, 2006 |       |                      | —     |                                                        |       |   | $ | — |   |   |
| Changes during  the year:            |       |                      |       |                                                        |       |   |   |   |   |
| Granted                              |       |                      | 46,815     |                                                        |       |   | 1,410 |   |   |
| Vested                               |       |                      | (10,439    | )                                                           |       |   | (314 | ) |   |
| Forfeited                            |       |                      | (5,166     | )                                                           |       |   | (156 | ) |   |
| Outstanding at  March 31, 2006  |       |                      | 31,210     |                                                        |       |   | $ | 940 |   |   |

 

Compensation expense recognizedfor granted performance restricted units is based on grant date fair value ofthe common units to be awarded to the grantee upon vesting of the phantom unit,adjusted for the expected target performance level for each year. For the threemonths ended March 31, 2006, the Partnership incurred $0.4 million incompensation expense for restricted units it deemed probable of achieving theperformance criteria, including the amount for the first vesting of theseawards which occurred on March 1, 2006.

**6.   SEGMENT INFORMATION**

The Partnership’s businessand operations are organized into two business segments: the West CoastBusiness Unit and the Rocky Mountain Business Unit. The West Coast BusinessUnit includes: (i) Pacific Pipeline System LLC, owner of Line 2000 andLine 63, (ii) Pacific Marketing and Transportation LLC (West Coast BusinessUnit), owner of the PMT gathering system and marketer of crude oil, (iii) PacificTerminals LLC, owner of the Pacific Terminals storage and distribution system,and (iv) Pacific Atlantic Terminals LLC, owner of the San Francisco andPhiladelphia area terminals, which were acquired on September 30, 2005.The Rocky Mountain Business Unit includes: (i) Rocky Mountain PipelineSystem LLC, owner of the Partnership’s interest in various pipelines that makeup the Western Corridor and Salt Lake City Core systems and the Rocky MountainProducts Pipeline, which was acquired on September 30, 2005, (ii) RanchPipeline LLC, the owner of a 22.22% partnership interest in Frontier PipelineCompany, (iii) PEG Canada, L.P. and its Canadian subsidiaries, which ownand operate the Rangeland system, and (iv) Pacific Marketing andTransportation LLC (Rocky Mountain Business Unit), a marketer of crude oil. 

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General and administrative costs, which consist ofexecutive management, accounting and finance, human resources, informationtechnology, investor relations, legal, and business development, are notallocated to the individual business units. Information regarding these twobusiness units is summarized below:

| ** **                                  | ** ** | **West Coast  Business Unit** | ** ** | **Rocky  Mountain  Business Unit** | ** ** | **Intersegment and  Intrasegment  Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | **(in thousands)**                 | ** ** |
| **Three months ended  March 31, 2006** |       |                                    |       |                                    |       |                                                  |       |      |       |   |   |   |   |   |   |
| Revenues:                                   |       |                                    |       |                                    |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation revenue             |       |                                    | $          | 17,163                                  |       |                                                  |       | $         | 18,868     |   |   |   | $ | (2,174 | ) |   | $ | 33,857 |   |
| Storage and terminaling revenue             |       |                                    | 20,086     |                                    |       |                                                  | —     |      |       |   | — |   |   | 20,086 |   |
| Pipeline buy/sell transportation revenue(1) |       |                                    | —     |                                    |       |                                                  | 9,699      |      |       |   | — |   |   | 9,699 |   |
| Crude oil sales, net of purchases(2)        |       |                                    | 7,311      |                                    |       |                                                  | (360       | )         |       |   | (142 | ) |   | 6,809 |   |
| Net revenue                                 |       |                                    | 44,560     |                                    |       |                                                  | 28,207     |      |       |   |   |   |   | 70,451 |   |
| Expenses:                                   |       |                                    |       |                                    |       |                                                  |       |      |       |   |   |   |   |   |   |
| Operating                                   |       |                                    | 21,432     |                                    |       |                                                  | 14,303     |      |       |   | (2,316 | ) |   | 33,419 |   |
| Depreciation and amortization               |       |                                    | 5,499      |                                    |       |                                                  | 4,503      |      |       |   |   |   |   | 10,002 |   |
| Total expenses                              |       |                                    | 26,931     |                                    |       |                                                  | 18,806     |      |       |   |   |   |   | 43,421 |   |
| Share of net  income of Frontier            |       |                                    | —     |                                    |       |                                                  | 398        |      |       |   |   |   |   | 398 |   |
| Operating income  from segments(3)          |       |                                    | $          | 17,629                                  |       |                                                  |       | $         | 9,799      |   |   |   |   |   |   | $ | 27,428 |   |
| Business unit  assets(4)                    |       |                                    | $          | 884,143                                 |       |                                                  |       | $         | 571,391    |   |   |   |   |   |   | $ | 1,455,534 |   |
| Capital  expenditures(5)                    |       |                                    | $          | 11,610                                  |       |                                                  |       | $         | 5,816      |   |   |   |   |   |   | $ | 17,426 |   |
| **Three  months ended March 31, 2005** |       |                                    |       |                                    |       |                                                  |       |      |       |   |   |   | ** ** | ** ** | ** ** |
| Revenues:                                   |       |                                    |       |                                    |       |                                                  |       |      |       |   |   |   | ** ** | ** ** | ** ** |
| Pipeline transportation revenue             |       |                                    | $          | 17,443                                  |       |                                                  |       | $         | 12,456     |   |   |   | $ | (1,862 | ) |   | $ | 28,037 |   |
| Storage and terminaling revenue             |       |                                    | 10,472     |                                    |       |                                                  | —     |      |       |   | (150 | ) |   | 10,322 |   |
| Pipeline buy/sell transportation revenue(1) |       |                                    | —     |                                    |       |                                                  | 9,106      |      |       |   |   |   |   | 9,106 |   |
| Crude oil sales, net of purchases(2)        |       |                                    | 1,812      |                                    |       |                                                  | —     |      |       |   | (30 | ) |   | 1,782 |   |
| Net revenue                                 |       |                                    | 29,727     |                                    |       |                                                  | 21,562     |      |       |   |   |   |   | 49,247 |   |
| Expenses:                                   |       |                                    |       |                                    |       |                                                  |       |      |       |   |   |   | ** ** | ** ** | ** ** |
| Operating                                   |       |                                    | 14,507     |                                    |       |                                                  | 9,289      |      |       |   | (2,042 | ) |   | 21,754 |   |
| Line 63 oil release costs(6)                |       |                                    | 2,000      |                                    |       |                                                  | —     |      |       |   |   |   |   | 2,000 |   |
| Depreciation and amortization               |       |                                    | 3,477      |                                    |       |                                                  | 3,052      |      |       |   |   |   |   | 6,529 |   |
| Total expenses                              |       |                                    | 19,984     |                                    |       |                                                  | 12,341     |      |       |   |   |   |   | 30,283 |   |
| Share of net  income of Frontier            |       |                                    | —     |                                    |       |                                                  | 357        |      |       |   |   |   |   | 357 |   |
| Operating income  from segments(3)          |       |                                    | $          | 9,743                                   |       |                                                  |       | $         | 9,578      |   |   |   |   |   |   | $ | 19,321 |   |
| Business unit  assets(4)                    |       |                                    | $          | 538,568                                 |       |                                                  |       | $         | 350,600    |   |   |   |   |   |   | $ | 889,168 |   |
| Capital expenditures(5)                     |       |                                    | $          | 750                                     |       |                                                  |       | $         | 2,932      |   |   |   |   |   |   | $ | 3,682 |   |

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(1)          Pipeline buy/selltransportation revenue reflects net revenues of approximately $2.5 million onbuy/sell transactions with different parties of $48.3 million. The remainingamount reflects net revenues on buy/sell transactions with the same party.

(2)          The above amounts arenet of purchases of $256.3 million and $114.3 million for 2006 and 2005,respectively.

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(3)          Thefollowing is a reconciliation of operating income as stated above to netincome:

| ** **                                                        | ** ** | **Three Months Ended March 31,**                                                     | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                                                                                  | ** ** |
| **Income Statement Reconciliation**                               |       |                                                                                                     |       |   |   |   |   |   |   |
| Operating income from  above:                                     |       |                                                                                                     |       |   |   |   |   |   |   |
| West Coast Business Unit                                          |       |                                                                                                     | $          | 17,629 |   |   |   | $ | 9,743 |   |   |
| Rocky Mountain Business Unit                                      |       |                                                                                                     | 9,799      |   |   |   | 9,578 |   |   |
| Operating income  before general and administrative expense       |       |                                                                                                     | 27,428     |   |   |   | 19,321 |   |   |
| Less: General and  administrative expense                         |       |                                                                                                     | (6,873     | ) |   |   | (5,172 | ) |   |
| Less: Accelerated  long-term incentive plan compensation  expense |       |                                                                                                     | —     |   |   |   | (3,115 | ) |   |
| Less: Transaction  costs                                          |       |                                                                                                     | —     |   |   |   | (1,807 | ) |   |
| Operating income                                                  |       |                                                                                                     | 20,555     |   |   |   | 9,227 |   |   |
| Interest expense                                                  |       |                                                                                                     | (9,088     | ) |   |   | (5,598 | ) |   |
| Other income                                                      |       |                                                                                                     | 443        |   |   |   | 353 |   |   |
| Income tax expense                                                |       |                                                                                                     | (296       | ) |   |   | (561 | ) |   |
| Net income                                                        |       |                                                                                                     | $          | 11,614 |   |   |   | $ | 3,421 |   |   |

 

(4)          Business unit assets donot include assets related to the Partnership’s parent level activity. As of March 31,2006 and 2005, parent level related assets were $50.7 million and $30.9 millionrespectively.

(5)          Segment capitalexpenditures do not include parent level capital expenditures. Parent levelcapital expenditures were $6.7 million and $0.7 million for the three monthsended March 31, 2006 and 2005, respectively.

(6)          OnMarch 23, 2005, a release of approximately 3,400 barrels of crude oiloccurred on PPS’s Line 63 as a result of a landslide caused by heavy rainfallin northern Los Angeles County. As a result of the release, the Partnershiprecorded $2.0 million net oil release costs in the first quarter of 2005,consisting of what it now estimates to be $25.7 million of accrued costsrelating to the release, net of insurance recoveries of $15.6 million to March 31,2006 and accrued insurance receipts of $8.1 million.

**7.   SUBSEQUENTEVENT**

On April 21, 2006,the Partnership declared a cash distribution of $0.5675 per limited partnerunit, payable on May 12, 2006, to unitholders of record as of May 1,2006.

**8.**   SUPPLEMENTALCONDENSED CONSOLIDATING FINANCIAL INFORMATION

Certain of the Partnership’s 100% owned subsidiarieshave issued full, unconditional, and joint and several guarantees of the 71¤8%senior notes due 2014 and the 61¤4%senior notes due 2015 (the “Senior Notes”). Given that certain, but not allsubsidiaries of the Partnership are guarantors of its Senior Notes, thePartnership is required to present the following supplemental condensedconsolidating financial information. For purposes of the following footnote,the Partnership is referred to as “Parent”, while the “Guarantor Subsidiaries”are Rocky Mountain Pipeline System LLC, Pacific Marketing and TransportationLLC, Pacific Atlantic Terminals LLC, Ranch Pipeline LLC, PEG Canada GP LLC, PEG Canada,L.P. and Pacific Energy Group LLC, and “Non-Guarantor Subsidiaries” are PacificPipeline System LLC, Pacific Terminals LLC, Rangeland Pipeline Company,Rangeland Marketing Company, Rangeland Northern Pipeline Company, RangelandPipeline Partnership and Aurora Pipeline Company, Ltd.

14

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Thefollowing supplemental condensed consolidating financial information reflectsthe Parent’s separate accounts, the combined accounts of the GuarantorSubsidiaries, the combined accounts of the Parent’s Non-Guarantor Subsidiaries,the combined consolidating adjustments and eliminations and the Parent’sconsolidated accounts for the dates and periods indicated. For purposes of thefollowing condensed consolidating information, the Parent’s investments in itssubsidiaries and the Guarantor Subsidiaries’ investments in their subsidiariesare accounted for under the equity method of accounting:

| ** **                                    | ** ** | **Balance Sheet  March 31, 2006** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **Parent**                                       | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                          | ** ** |
| Assets:                                       |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                |       | $                                                | 104,875    |   | $ | 157,298 |   |   | $ | 66,849 |   |   | $ | (122,836 | ) | $ | 206,186 |   |
| Property and equipment                        |       | —                                           |       | 597,088 |   |   | 608,554 |   |   | — |   | 1,205,642 |   |
| Equity investments                            |       | 449,804                                          |       | 212,513 |   |   | — |   |   | (654,228 | ) | 8,089 |   |
| Intercompany notes  receivable                |       | 662,763                                          |       | 340,838 |   |   | — |   |   | (1,003,601 | ) | — |   |
| Intangible assets                             |       | —                                           |       | 30,819 |   |   | 37,607 |   |   | — |   | 68,426 |   |
| Other assets                                  |       | 11,304                                           |       | (244 | ) |   | 6,847 |   |   | — |   | 17,907 |   |
| Total assets                                  |       | $                                                | 1,228,746  |   | $ | 1,338,312 |   |   | $ | 719,857 |   |   | $ | (1,780,665 | ) | $ | 1,506,250 |   |
| Liabilities and partners’ capital:       |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                           |       | $                                                | 5,273      |   | $ | 215,309 |   |   | $ | 63,251 |   |   | $ | (122,836 | ) | $ | 160,997 |   |
| Long-term debt                                |       | 535,269                                          |       | — |   |   | 65,716 |   |   | — |   | 600,985 |   |
| Deferred income taxes                         |       | —                                           |       | 597 |   |   | 35,034 |   |   | — |   | 35,631 |   |
| Intercompany notes  payable                   |       | —                                           |       | 662,763 |   |   | 340,838 |   |   | (1,003,601 | ) | — |   |
| Other liabilities                             |       | —                                           |       | 9,839 |   |   | 10,594 |   |   | — |   | 20,433 |   |
| Total partners’ capital                  |       | 688,204                                          |       | 449,804 |   |   | 204,424 |   |   | (654,228 | ) | 688,204 |   |
| Total liabilities and partners’  capital |       | $                                                | 1,228,746  |   | $ | 1,338,312 |   |   | $ | 719,857 |   |   | $ | (1,780,665 | ) | $ | 1,506,250 |   |

 

| ** **                                    | ** ** | **Balance Sheet  December 31, 2005** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **Parent**                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                             | ** ** |
| Assets:                                       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                |       | $                                                   | 104,989    |   | $ | 139,457 |   |   | $ | 81,846 |   |   | $ | (134,177 | ) | $ | 192,115 |   |
| Property and equipment                        |       | —                                              |       | 583,330 |   |   | 602,204 |   |   | — |   | 1,185,534 |   |
| Equity investments                            |       | 429,802                                             |       | 197,239 |   |   | — |   |   | (618,885 | ) | 8,156 |   |
| Intercompany notes  receivable                |       | 661,313                                             |       | 340,905 |   |   | — |   |   | (1,002,218 | ) | — |   |
| Intangible assets                             |       | —                                              |       | 31,220 |   |   | 37,960 |   |   | — |   | 69,180 |   |
| Other assets                                  |       | 13,426                                              |       | — |   |   | 8,041 |   |   | — |   | 21,467 |   |
| Total assets                                  |       | $                                                   | 1,209,530  |   | $ | 1,292,151 |   |   | $ | 730,051 |   |   | $ | (1,755,280 | ) | $ | 1,476,452 |   |
| Liabilities and  partners’ capital:      |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                           |       | $                                                   | 5,389      |   | $ | 191,516 |   |   | $ | 93,459 |   |   | $ | (134,177 | ) | $ | 156,187 |   |
| Long-term debt                                |       | 505,902                                             |       | — |   |   | 59,730 |   |   | — |   | 565,632 |   |
| Deferred income taxes                         |       | —                                              |       | 582 |   |   | 35,189 |   |   | — |   | 35,771 |   |
| Intercompany notes  payable                   |       | —                                              |       | 661,313 |   |   | 340,905 |   |   | (1,002,218 | ) | — |   |
| Other liabilities                             |       | —                                              |       | 8,938 |   |   | 11,685 |   |   | — |   | 20,623 |   |
| Total partners’ capital                  |       | 698,239                                             |       | 429,802 |   |   | 189,083 |   |   | (618,885 | ) | 698,239 |   |
| Total liabilities and partners’  capital |       | $                                                   | 1,209,530  |   | $ | 1,292,151 |   |   | $ | 730,051 |   |   | $ | (1,755,280 | ) | $ | 1,476,452 |   |

 

15

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| ** **                                                 | ** ** | **Statement of Income  Three Months Ended March 31, 2006** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Parent**                                                                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**                                                                       | ** ** |
| Net operating  revenues                                    |       | $                                                                                             | —     |   |   | $ | 35,219 |   |   |   | $ | 37,547 |   |   |   | $ | (2,315 | ) |   | $ | 70,451 |   |
| Operating  expenses                                        |       | —                                                                                        |       |   | (19,088 | ) |   |   | (16,646 | ) |   |   | 2,315 |   |   | (33,419 | ) |
| General and  administrative expense(1)                     |       | —                                                                                        |       |   | (6,210 | ) |   |   | (663 | ) |   |   | — |   |   | (6,873 | ) |
| Accelerated  long-term incentive plan compensation expense |       | —                                                                                        |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Line 63 oil  release costs                                 |       | —                                                                                        |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Transaction costs                                          |       | —                                                                                        |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Depreciation and  amortization expense                     |       | —                                                                                        |       |   | (4,928 | ) |   |   | (5,074 | ) |   |   | — |   |   | (10,002 | ) |
| Share of net  income of Frontier                           |       | —                                                                                        |       |   | 398 |   |   |   | — |   |   |   | — |   |   | 398 |   |
| Operating income                                           |       | —                                                                                        |       |   | 5,391 |   |   |   | 15,164 |   |   |   | — |   |   | 20,555 |   |
| Interest expense                                           |       | (8,108                                                                                        | )          |   | (81 | ) |   |   | (899 | ) |   |   | — |   |   | (9,088 | ) |
| Intercompany  interest income (expense)                    |       | —                                                                                        |       |   | 7,169 |   |   |   | (7,169 | ) |   |   | — |   |   | — |   |
| Equity earnings                                            |       | 19,942                                                                                        |       |   | 7,404 |   |   |   | — |   |   |   | (27,346 | ) |   | — |   |
| Other income                                               |       | (220                                                                                          | )          |   | 337 |   |   |   | 326 |   |   |   | — |   |   | 443 |   |
| Income tax  benefit (expense)                              |       | —                                                                                        |       |   | (278 | ) |   |   | (18 | ) |   |   | — |   |   | (296 | ) |
| Net income                                                 |       | $                                                                                             | 11,614     |   |   | $ | 19,942 |   |   |   | $ | 7,404 |   |   |   | $ | (27,346 | ) |   | $ | 11,614 |   |

 

| ** **                                                 | ** ** | **Statement of Income  Three Months Ended March 31, 2005** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Parent**                                                                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**                                                                       | ** ** |
| Net operating  revenues                                    |       | $                                                                                             | —     |   |   | $ | 14,268 |   |   |   | $ | 37,021 |   |   |   | $ | (2,042 | ) |   | $ | 49,247 |   |
| Operating  expenses                                        |       | —                                                                                        |       |   | (9,968 | ) |   |   | (13,828 | ) |   |   | 2,042 |   |   | (21,754 | ) |
| General and  administrative expense(1)                     |       | —                                                                                        |       |   | (4,618 | ) |   |   | (554 | ) |   |   | — |   |   | (5,172 | ) |
| Accelerated  long-term incentive plan compensation expense |       | —                                                                                        |       |   | (2,684 | ) |   |   | (431 | ) |   |   | — |   |   | (3,115 | ) |
| Line 63 oil  release costs                                 |       | —                                                                                        |       |   | — |   |   |   | (2,000 | ) |   |   | — |   |   | (2,000 | ) |
| Transaction costs                                          |       | (893                                                                                          | )          |   | (914 | ) |   |   | — |   |   |   | — |   |   | (1,807 | ) |
| Depreciation and  amortization expense                     |       | —                                                                                        |       |   | (1,624 | ) |   |   | (4,905 | ) |   |   | — |   |   | (6,529 | ) |
| Share of net  income of Frontier                           |       | —                                                                                        |       |   | 357 |   |   |   | — |   |   |   | — |   |   | 357 |   |
| Operating income                                           |       | (893                                                                                          | )          |   | (5,183 | ) |   |   | 15,303 |   |   |   | — |   |   | 9,227 |   |
| Interest expense                                           |       | (4,078                                                                                        | )          |   | (679 | ) |   |   | (841 | ) |   |   | — |   |   | (5,598 | ) |
| Intercompany  interest income (expense)                    |       | —                                                                                        |       |   | 6,271 |   |   |   | (6,271 | ) |   |   | — |   |   | — |   |
| Equity earnings                                            |       | 8,384                                                                                         |       |   | 7,990 |   |   |   | — |   |   |   | (16,374 | ) |   | — |   |
| Other income                                               |       | 8                                                                                             |       |   | 166 |   |   |   | 179 |   |   |   | — |   |   | 353 |   |
| Income tax  benefit (expense)                              |       | —                                                                                        |       |   | (181 | ) |   |   | (380 | ) |   |   | — |   |   | (561 | ) |
| Net income                                                 |       | $                                                                                             | 3,421      |   |   | $ | 8,384 |   |   |   | $ | 7,990 |   |   |   | $ | (16,374 | ) |   | $ | 3,421 |   |

----

(1)          Generaland administrative expense is not currently allocated between Guarantor andNon-Guarantor Subsidiaries for financial reporting purposes.

16

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| ** **                                                                              | ** ** | **Statement of Cash Flows  Three Months Ended March 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **Parent**                                                                                             | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**                                                                                | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                  |       |                                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                              |       | $                                                                                                      | 11,614     |   |   | $ | 19,942 |   |   |   | $ | 7,404 |   |   |   | $ | (27,346 | ) |   | $ | 11,614 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity earnings                                                                         |       | (19,942                                                                                                | )          |   | (7,404 | ) |   |   | — |   |   |   | 27,346 |   |   | — |   |
| Distributions from subsidiaries                                                         |       | 22,516                                                                                                 |       |   | 11,732 |   |   |   | — |   |   |   | (34,248 | ) |   | — |   |
| Depreciation, amortization and  other                                                   |       | 1,024                                                                                                  |       |   | 5,330 |   |   |   | 5,047 |   |   |   | — |   |   | 11,401 |   |
| Net changes in  operating assets and liabilities                                        |       | (188                                                                                                   | )          |   | (7,838 | ) |   |   | (7,126 | ) |   |   | (1,848 | ) |   | (17,000 | ) |
| NET CASH PROVIDED  BY OPERATING ACTIVITIES                                              |       | 15,024                                                                                                 |       |   | 21,762 |   |   |   | 5,325 |   |   |   | (36,096 | ) |   | 6,015 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                   |       |                                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisitions                                                                            |       | —                                                                                                 |       |   | (2,361 | ) |   |   | — |   |   |   | — |   |   | (2,361 | ) |
| Additions to property, equipment and other                                         |       | (72                                                                                                    | )          |   | (15,889 | ) |   |   | (8,087 | ) |   |   | — |   |   | (24,048 | ) |
| Intercompany                                                                            |       | (31,000                                                                                                | )          |   | — |   |   |   | — |   |   |   | 31,000 |   |   | — |   |
| NET CASH USED IN  INVESTING ACTIVITIES                                                  |       | (31,072                                                                                                | )          |   | (18,250 | ) |   |   | (8,087 | ) |   |   | 31,000 |   |   | (26,409 | ) |
| NET CASH PROVIDED  BY (USED IN) FINANCING ACTIVITIES                               |       | 17,006                                                                                                 |       |   | (13,620 | ) |   |   | 5,824 |   |   |   | 5,096 |   |   | 14,306 |   |
| Effect of translation adjustment                                                        |       | —                                                                                                 |       |   | — |   |   |   | (32 | ) |   |   | — |   |   | (32 | ) |
| NET INCREASE  (DECREASE) IN CASH AND CASH  EQUIVALENTS                                  |       | 958                                                                                                    |       |   | (10,108 | ) |   |   | 3,030 |   |   |   | — |   |   | (6,120 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of reporting period                               |       | 4,192                                                                                                  |       |   | 12,484 |   |   |   | 1,388 |   |   |   | — |   |   | 18,064 |   |
| CASH AND CASH  EQUIVALENTS, end of reporting period                                     |       | $                                                                                                      | 5,150      |   |   | $ | 2,376 |   |   |   | $ | 4,418 |   |   |   | $ | — |   |   | $ | 11,944 |   |
|                                                                                         |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

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| ** **                                                                                    | ** ** | **Statement of Cash Flows  Three Months Ended March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **Parent**                                                                                             | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                                                    | ** ** | **(in thousands)**                                                                                | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                        |       |                                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                    |       | $                                                                                                      | 3,421      |   |   | $ | 8,384 |   |   |   | $ | 7,990 |   |   |   | $ | (16,374 | ) |   | $ | 3,421 |   |
| Adjustments to  reconcile net income to net cash provided by operating  activities: |       |                                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity earnings                                                                               |       | (8,384                                                                                                 | )          |   | (7,990 | ) |   |   | — |   |   |   | 16,374 |   |   | — |   |
| Distributions from subsidiaries                                                               |       | 15,114                                                                                                 |       |   | 12,673 |   |   |   | — |   |   |   | (27,787 | ) |   | — |   |
| Depreciation, amortization and other                                                          |       | 157                                                                                                    |       |   | 4,325 |   |   |   | 4,864 |   |   |   | — |   |   | 9,346 |   |
| Net changes in  operating assets and liabilities                                              |       | 3,915                                                                                                  |       |   | 1,840 |   |   |   | 74 |   |   |   | (2,738 | ) |   | 3,091 |   |
| NET CASH PROVIDED  BY OPERATING ACTIVITIES                                                    |       | 14,223                                                                                                 |       |   | 19,232 |   |   |   | 12,928 |   |   |   | (30,525 | ) |   | 15,858 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                         |       |                                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additions to property, equipment and other                                                    |       | —                                                                                                 |       |   | (1,091 | ) |   |   | (3,169 | ) |   |   | — |   |   | (4,260 | ) |
| Intercompany                                                                                  |       | (914                                                                                                   | )          |   | — |   |   |   | — |   |   |   | 914 |   |   | — |   |
| NET CASH USED IN  INVESTING ACTIVITIES                                                        |       | (914                                                                                                   | )          |   | (1,091 | ) |   |   | (3,169 | ) |   |   | 914 |   |   | (4,260 | ) |
| NET CASH PROVIDED  BY (USED IN) FINANCING ACTIVITIES                                     |       | (14,894                                                                                                | )          |   | (18,276 | ) |   |   | (7,984 | ) |   |   | 28,196 |   |   | (12,958 | ) |
| Effect of translation adjustment                                                              |       | —                                                                                                 |       |   | — |   |   |   | 74 |   |   |   | — |   |   | 74 |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                               |       | (1,585                                                                                                 | )          |   | (1,476 | ) |   |   | 1,775 |   |   |   | — |   |   | (1,286 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of reporting period                                     |       | 2,713                                                                                                  |       |   | 17,523 |   |   |   | 3,147 |   |   |   | — |   |   | 23,383 |   |
| CASH AND CASH  EQUIVALENTS, end of reporting period                                      |       | $                                                                                                      | 1,128      |   |   | $ | 16,047 |   |   |   | $ | 4,922 |   |   |   | $ | — |   |   | $ | 22,097 |   |

 

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

References in thisquarterly report on Form 10-Q to “Pacific Energy Partners,” “Partnership,”“we,” “ours,” “us” or like terms refer to Pacific Energy Partners, L.P. and itssubsidiaries.

**Forward-LookingStatements**

The information in this quarterly report on Form 10-Qcontains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, and Section 21E of the Securities ExchangeAct of 1934. These forward-looking statements are identified as anystatements that do not relate strictly to historical or current facts,including statements that use terms such as “anticipate,” “assume,” “believe,” “estimate,”“expect,” “forecast,” “intend,” “plan,” “position,” “predict,” “project,” or “strategy”or the negative connotation or other variations of such terms or other similarterminology. In particular, statements express or implied, regarding our futureresults of operations or our ability to generate sales, income or cash flow orto make distributions to unitholders are forward-looking statements.Forward-looking statements are not guarantees of performance. Suchstatements are based on management’s current plans, expectations, estimates,assumptions and beliefs concerning future events impacting us and thereforeinvolve risks and uncertainties. Future actions, conditions or events andfuture results of operations may differ materially from those expressed inthese forward-looking statements. Many of the factors that will determinethese results are beyond our ability to control or predict.

We caution you that theforward-looking statements in this quarterly report on Form 10-Qare subject to all of the risks and uncertainties, many of which are beyond ourcontrol, incident to gathering, transporting, storing, and distributing crudeoil, refined products and other related products and buying and selling crudeoil. For a more detailed description of these and other factors that may affectthe forward-looking statements, please read “Risk Factors” contained inour annual report on Form 10-K for the year ended December 31,2005, as well as other filings with the SEC. The risk factors could cause ouractual results to differ materially from those contained in any forward-lookingstatement. You should not put undue reliance on these forward-lookingstatements. We disclaim any obligation to announce publicly the result of anyrevision to any of the forward-looking statements to reflect futureevents or developments.

**Introduction**

The following discussion of the financial conditionand results of operations of Pacific Energy Partners, L.P. should be readtogether with the condensed consolidated financial statements and the notesthereto set forth elsewhere in this report. The discussion set forth in thissection pertains to our unaudited condensed consolidated balance sheets,statements of income, statements of cash flows and statement of partners’capital.

This report on Form 10-Qshould be read in conjunction with our annual report on Form 10-Kfor the year ended December 31, 2005.

**Overview**

We are a publicly traded partnership engagedprincipally in the business of gathering, transporting, storing, anddistributing crude oil, refined products and other related products. Wegenerate revenue primarily by transporting such commodities on our pipelines,by leasing capacity in our storage tanks, and by providing other terminalingservices. We also buy and sell crude oil, activities that are generallycomplementary to our other crude oil operations. We conduct our businessthrough two business units, the West Coast Business Unit, which includesactivities in California and the Philadelphia, Pennsylvania area, and the RockyMountain Business Unit, which includes activities in five Rocky Mountain statesand Alberta, Canada.

19

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We are managed by our general partner, Pacific EnergyGP, LP, which is in turn managed by its general partner, Pacific EnergyManagement LLC (“PEM”), a Delaware limited liability company. Thus, theofficers and Board of Directors of PEM manage the business affairs of PacificEnergy GP, LP and the Partnership. References to our “General Partner” refer toPacific Energy GP, LP and/or PEM, as the context indicates.

Our West Coast Business Unit consists of (i) theLine 2000 crude oil pipeline, (ii) the Line 63 crude oil pipeline system, (iii) thePacific Terminals storage and distribution system, (v) the PacificMarketing and Transportation (“PMT”) gathering system and crude oil marketingactivities, and (iv) the Pacific Atlantic terminals, which were acquiredon September 30, 2005. Line 2000 and Line 63 are the only common carrierpipelines delivering crude oil produced in the San Joaquin Valley and the twoprimary California Outer Continental Shelf producing fields, Point Arguello andSanta Ynez, to the Los Angeles Basin and Bakersfield. The Pacific Terminalsstorage and distribution system is a crude oil and dark products storage andpipeline distribution system servicing the Los Angeles Basin, and the PMTgathering system is a proprietary gathering operation in the San JoaquinValley. The Pacific Atlantic terminals include the Martinez and Richmondterminals in the San Francisco, California area and the Paulsboro, New Jerseyand Philadelphia area terminals. These terminals are refined product (and, inthe case of Martinez, crude oil) storage and terminaling facilities. Additionally,we are currently seeking permits for the development of a deepwater petroleumimport terminal at Pier 400 in the Port of Los Angeles, which we expect tobegin constructing in the first quarter of 2007 (see “Liquidity and CapitalResources—Capital Requirements, Pier 400” for further discussion).

Our Rocky MountainBusiness Unit consists of (i) the Rangeland system, (ii) certainundivided interests in the Western Corridor system, (iii) the Salt LakeCity Core system, (iv) our interest in Frontier Pipeline Company, and (v) theRocky Mountain Products Pipeline, which was acquired on September 30,2005. Our Rocky Mountain crude oil pipeline systems transport crude oilproduced in Canada and the U.S. Rocky Mountain region to refineries inMontana, Wyoming, Colorado and Utah. Deliveries are also made to the refiningand marketing center of Edmonton, Alberta through our Rangeland system.Deliveries of crude oil are made to refineries directly through our pipelinesor indirectly through connections with third-party pipelines. The RockyMountain Products Pipeline supplies refined products to the South Dakota,Wyoming and Colorado markets.

**Recent BusinessDevelopments**

The Rocky Mountain business unit accomplished severalpositive initiatives in the first quarter of 2006. The construction of theinitiating facility for synthetic crude oil in Edmonton, Alberta was completedin March 2006, and initial movements of synthetic crude oil beganimmediately thereafter. This connection provides direct access to syntheticcrude oil in Edmonton for delivery through our pipeline systems to U.S. RockyMountain refineries. In addition, to facilitate the movement and maintain thequality of of synthetic crude oil, three 120,000 barrel tanks were constructedat storage facilities along the pipeline system.

The Rocky Mountain Business Unit proceeded with itsplans to construct a Salt Lake City core expansion project that will expand itscrude oil pipeline system from the terminus of Frontier Pipeline near Evanston,Wyoming to the Salt Lake City, Utah refining complex. The new 16-inchpipeline, which will be 91 miles in length, will be able to transport multiplegrades of crude oil in segregated batches and will provide 95,000 barrels perday of capacity to meet increased crude oil demand in Salt Lake City. Theproject will be constructed in two phases, the first phase estimated to becompleted in the fourth quarter of 2006, the second phase by October 2007.The total cost for both phases of the project is expected to be approximately$77 million and is supported by firm, 10-year transportation agreements thathave been executed with four Salt Lake City refiners.

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In addition, one of our subsidiaries, Rocky MountainPipeline System LLC (“RMPS”), signed a transportation agreement with FrontierOil and Refining Company pursuant to which RMPS will construct a 24-inchcrude oil pipeline, approximately 10 miles in length, from Guernsey, Wyoming toRMPS’s Fort Laramie, Wyoming tank farm and a 16-inch crude oil pipeline,approximately 85 miles in length, from Fort Laramie to Frontier Oil’s Cheyennerefinery, in exchange for Frontier Oil’s ten-year firm commitment to ship35,000 barrels per day and lease approximately 300,000 barrels of storagecapacity at Fort Laramie. The total project cost is estimated to be $59 million.Construction will begin in the second quarter of 2006 and is expected to becompleted in the second quarter of 2007. Initial capacity will be 55,000barrels per day, which can be expanded to a capacity of 90,000 barrels per day.

In our West Coast businessunit, we are currently constructing 450,000 barrels of storage capacity at ourMartinez terminal in the San Francisco area, which is expected to be completedin the third quarter of 2006. At our Philadelphia area terminals, we arecompleting an ethanol expansion project which will enable us to increase ourethanol storage, handling and blending capabilities. At Pacific Terminals, weare refurbishing 600,000 barrels of black oil storage as well as makinginfrastructure changes to increase pumping capacity and improve operatingefficiencies. These projects are expected to be completed in the second half of2006.

**BusinessFundamentals**

***Pipeline Transportation***

We generate pipeline transportation revenue bycharging tariff rates for transporting crude oil and refined products on ourcommon carrier pipelines. The fundamental items impacting our pipelinetransportation revenue are the volume of crude oil and refined products, orthroughput, we transport on our pipelines, and our tariff rates. Throughput onour pipelines fluctuates based on the volume of crude oil and refined productsavailable for transportation on our pipelines, the demand for such products,refinery downtime, the availability of alternate sources of crude oil for therefineries we serve and the availability of refined products from othersources.

Our shippers determine the amount of crude oil andrefined products we transport on our pipelines, but we can influence thesevolumes through the level and type of service we provide and the rates wecharge. Our rates need to be competitive to transportation alternatives, whichare mostly other pipelines.

The tariff rates we charge on Line 2000 and the Line63 system are regulated by the California Public Utilities Commission (“CPUC”).Tariffs on Line 2000 are established based on market considerations, subject tocertain contractual limitations. Tariffs on Line 63, which are cost-of-servicebased tariffs, are based upon the costs to operate and maintain the pipeline,as well as charges for the depreciation of the capital investment in thepipeline and the authorized rate of return. The tariff rates charged on ourU.S. Rocky Mountain crude oil pipelines are regulated by either theFederal Energy Regulatory Commission (“FERC”) or the Wyoming Public ServiceCommission (“Wyoming PSC”), generally under a cost-of-service approach. TheFERC, Wyoming PSC, and the Colorado Public Utilities Commission each regulatevarious tariffs on the Rocky Mountain Products Pipeline, which include bothcost and market based rates.

Although the tariff rates we charge on the system areregulated, competitive forces may also limit the amount of our filed rates. TheFERC tariff rates are generally adjusted, effective July 1 of each year,by the amount of change in the Producer Price Index for Finished Goods, plus1.3%.

Following arerecent tariff rate increases on our pipelines:

·       OnMay 1, 2006, we increased the tariff rates on our Line 2000 byapproximately 7.1%.

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·       EffectiveAugust 1, 2005, we implemented a temporary surcharge of $0.10 per barrelon our Line 63 long-haul tariff rates to recover costs relating to the Line 63oil release together with other costs incurred or to be incurred as a result ofrain-related earth movement and stream erosion.

·       OnJuly 1, 2005, we increased the FERC tariff rates on our U.S. RockyMountain crude oil pipelines by 3.6% based on the FERC index adjustment.

·       OnMay 1, 2005 we increased the tariff rates on our Line 2000 byapproximately 4.8%.

These tariff rate increases on our West Coastpipelines partially mitigate the impact of declining throughput.

The availability of crude oil for transportation onour pipelines is dependent, in part, on the amount of drilling and enhancedrecovery activity in the production fields we serve in our West Coastoperations and in parts of our Rocky Mountain operations. With the passage oftime, production of crude oil in an individual well naturally declines. Althoughthis decline can, in the short term, be offset in whole or in part, byadditional drilling or the implementation of recovery enhancement measures, inthe San Joaquin Valley and in the California Outer Continental Shelf, totalproduction is generally declining.

In the Rocky Mountains, our pipelines are connected toU.S. and Canadian sources of crude oil. Our Rangeland system in Alberta givesus greater access to significant supplies of Canadian crude oil, includingsynthetic crude oil, which we believe will replace any long term U.S. RockyMountain production declines and meet growing demand in the U.S. Rocky Mountainregion. Our initiating pump station in Edmonton, as well as a connection to athird-party pipeline providing access to synthetic crude oil, wascompleted in March 2006. It appears in recent months that production inthe U.S. Rocky Mountains may be increasing with the increased amount of naturalgas related drilling, which results in increased volumes of crude oil andcondensate. We believe, however, that the longer term production of crude oilin the U.S. Rocky Mountains will resume its historical decline.

The Rocky MountainProducts Pipeline acquired in 2005 is a common carrier petroleum productspipeline and terminals network. The system generates revenues throughtransportation tariffs for volumes of petroleum products it ships. Thesetariffs vary depending upon where the product originates and where ultimatedelivery occurs. The products terminals on the pipeline system also earnrevenues by providing additional services.

***Storage and Terminaling***

We provide storage and terminaling services torefineries in the Los Angeles Basin and San Francisco areas in California andin the Philadelphia, Pennsylvania area. The fundamental items impacting ourstorage and terminaling revenue are the amount of storage capacity we haveunder lease, the lease rates for that capacity and the length of each lease.

Demand for crude oil storage capacity tends to be morestable over time and leases for crude oil storage capacity are usually longterm (more than one year). Demand for storage capacity for other dark productsis less stable than for crude oil storage and varies depending on, among otherthings, refinery production runs and maintenance activities. Leases for otherdark products storage capacity are usually short term (less that one year). Oneof our business goals is to convert a number of dark products tanks to moreflexible crude oil service (which can also continue to accommodate other darkproducts); and we have recently completed one such tank conversion. While PT’srates are subject to regulation by the CPUC, the CPUC has allowed PT toestablish rates based on market conditions through negotiated contracts.

The Martinez, Richmond, Paulsboro and Philadelphiaterminals that we purchased in September 2005 are refined product (and, inthe case of Martinez, crude oil) storage and terminaling facilities thatgenerate 

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revenues primarily fromfees that we charge customers for storage, throughput and other services.Demand for refined products storage capacity, mostly at the Philadelphia areaterminals, depends on connections with refineries and petroleum products pipelinesowned and operated by third parties.

Demand for refined products storage at our SanFrancisco area terminals tends to be stable over time as most of their leasecontracts are evergreen contracts for a year or more. Additionally, the SanFrancisco area terminals are not overly reliant on local area refineryproduction to satisfy their supply of refined products. The San Francisco areaterminals receive a significant amount of their supplies from imported refinedproducts and crude oil into the San Francisco harbor. One of our goals is toincrease the storage capacity of our Martinez terminal. We have begunconstruction of 450,000 barrels of storage, which we expect to place in servicein the third quarter of 2006.

The throughput servicebusiness of our Philadelphia area terminals, which receive products from localrefineries, the U.S. Gulf Coast and New York Harbor is dependent on the demandfor gasoline and other products in the Philadelphia market. In addition, ourPhiladelphia area terminals provide storage services for local refineries andother marketers.

***Pipeline Buy/Sell Transportation***

Throughput on our Rangeland system varies with many ofthe same factors described in “Pipeline Transportation” above.

We are making significant changes to the revenue-generatingcapability of the Rangeland system by (i) combining and fully integratingall of our Canadian and U.S. Rocky Mountain pipeline assets under commonmanagement, (ii) establishing connections with other pipelines, therebyexpanding the throughput of the Rangeland system, and (iii) constructing apump station and receiving terminal in Edmonton, Alberta, which began operatingin March 2006. The volume of throughput originating at our Edmonton,Alberta initiation station will vary with our success in attracting newsupplies of synthetic crude oil to our system.

The Rangeland system operates as a proprietary systemand, therefore, we take title to the crude oil that is gathered andtransported. Pursuant to a transportation service agreement between two of oursubsidiaries, Rangeland Marketing Company (“RMC”) and Rangeland PipelinePartnership, RMC controls the entire capacity of Rangeland pipeline. Customerswho wish to transport product on Rangeland pipeline must either: (i) sellproduct to RMC at an inlet point and repurchase such product at agreed upondelivery points for the price paid at the inlet to the pipeline plus anestablished location differential; or (ii) sell product to RMC at theinlet to the pipeline without repurchasing product from RMC.

Virtually all of the pipelines that comprise theRangeland system are subject to the jurisdiction of the Alberta Energy andUtilities Board (“EUB”). A short segment of the Rangeland system that connectsto the Western Corridor system at the U.S.-Canadian border is subject tothe jurisdiction of the Canadian National Energy Board (“NEB”). Neither the EUBnor the NEB will generally review rates set by a crude oil pipeline operatorunless it receives a complaint relating to transportation rates.

Effective December 1,2005, we increased the location differentials on the Rangeland pipeline by anaverage of 6.9%.

***Gathering Activities and Marketing Business***

Through our PMT subsidiary, we purchase, gather, andresell crude oil, principally in California’s San Joaquin Valley and in theRocky Mountain area in the vicinity of our pipelines. In the third quarter of2005, we began selectively purchasing and reselling crude oil in other areas aswell, although this is not a primary focus.

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In California, our PMT gathering system is aproprietary intrastate operation that is not regulated by the CPUC or the FERC.It is complementary to our pipeline transportation business. The Californiagathering network effectively extends our pipeline network to capture suppliesof crude oil bound for transportation to Los Angeles that might not otherwisebe shipped through our pipelines. In the U.S. and Canadian Rocky Mountain area,PMT facilitates transportation on our Canadian and U.S. Rocky Mountainpipelines by purchasing crude oil from Canada for resale in Rocky Mountainmarketplaces.

The contribution of ourPMT gathering operations is, for several reasons, a variable part of ourincome. First, it varies with the price differential between the cost of thevarying grades of crude oil that PMT buys for use in its gathering operations,and the price of the crude oil it sells. Costs and sales prices are generallyimpacted by crude oil prices, as well as by local supply and demand forces,including regulations affecting refined product specifications. Second, itvaries with the price differential between crude oil purchased on one pricebasis and sold on another price basis. Third, it varies with the volumesgathered. Finally, it varies with the effectiveness of our hedging program. Weseek to control these variations through our risk management policy, whichprovides specific guidelines for our crude oil marketing and hedging activitiesand requires oversight by our senior management.

***Acquisitions and New Projects***

We intend to continue topursue acquisitions and new projects for development of additional midstreamassets, including pipeline, storage and terminal facilities. In 2006, we have a$150 million expansion capital spending forecast as detailed in “Liquidityand Capital Resources—Capital Requirements” below. We also intend to expand,principally by acquisition, into the natural gas storage and transportationbusinesses. We expect the acquisitions and new projects will be accretive toour cash flow and complement our existing business. We expect to fundacquisitions and new projects with a combination of debt and additionalPartnership units, including common units. We expect to maintain a debt tototal capitalization ratio of approximately 50 percent over time.

***Operating Expenses***

Many of our operating expenses, including the cost offield and support personnel, maintenance, control systems, telecommunications,rights-of-way and insurance, are relatively fixed and vary little with changesin throughput. Certain of our costs, however, do vary with throughput, the mostmaterial being the cost of power used to operate pump stations along ourpipelines or to operate our terminals. Major maintenance costs can varydepending on a particular asset’s age and also with regulatory requirements,such as mandatory inspections at defined intervals. Unanticipated costs caninclude the costs of cleanup of any oil or product release, to the extent theyare not covered by insurance, and repairs caused by severe weather as weexperienced in California and Alberta, Canada in 2005.

We do not have anyemployees, except in Canada. Our General Partner provides employees to conductour U.S. operations. We and our General Partner collectively employapproximately 440 individuals who directly support our operations. We consideremployee relations to be good. None of these employees are subject to acollective bargaining agreement, except for eight employees at our Paulsboro,New Jersey, terminal, who are members of USW District 10-286 (SteelWorkers), with whom we have a collective bargaining agreement that will end on October 1,2009. Our General Partner does not conduct any business other than with respectto the Partnership. All expenses incurred by our General Partner are charged tous.

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***Impact of Foreign Exchange Rates***

Assets and liabilities ofour Canadian subsidiaries are translated to U.S. dollars using the applicableexchange rate as of the end of each reporting period. Revenues, expenses andcash flow are translated using the average exchange rate during the reportingperiod. The reported cash flow of our Canadian operations is based on the U.S.dollar equivalent of such amounts measured in Canadian dollars. The results ofour Canadian operations and distributions from our Canadian subsidiaries to thePartnership may vary in U.S. dollar terms based on fluctuations in currencyexchange rates irrespective of our Canadian subsidiaries’ underlying operatingresults. In addition, the amount of monies we repatriate from Canada will varywith fluctuations in currency exchange rates and may impact the cash availablefor distribution to our unitholders. We have entered into certain foreignexchange contracts to mitigate currency exchange risks (see “Item 3—Quantitativeand Qualitative Disclosures about Market Risk”).

**Critical AccountingPolicies and Estimates**

Our consolidatedfinancial statements are prepared in conformity with accounting principlesgenerally accepted in the United States, which require management to makeestimates and assumptions that affect the reported amounts of the assets andliabilities and disclosures of contingent assets and liabilities as of the dateof the balance sheet, as well as the reported amounts of revenue and expensesduring the reporting period. We routinely make estimates and judgments aboutthe carrying value of our assets and liabilities that are not readily apparentfrom other sources. Such estimates and judgments are evaluated and modified asnecessary on an ongoing basis. We believe that of our significant accountingpolicies (see “Note 2, Significant Accounting Policies,” to ourconsolidated financial statements in our annual report on Form 10-Kfor the year ended December 31, 2005) and estimates, the following mayinvolve a higher degree of judgment and complexity:

·       Weroutinely apply the provisions of purchase accounting when recording ouracquisitions. Application of purchase accounting requires that we estimate thefair value of the individual assets acquired and liabilities assumed (includingenvironmental remediation liabilities). Additionally, we must determine whetheran acquisition is to be treated as a purchase of a business or a set of netassets because excess purchase price is only allocated to goodwill in abusiness combination. Determination of the fair value of the assets involves anumber of judgments and estimates. In our major acquisitions to date, we haveengaged an outside valuation firm to provide us with an appraisal report, whichwe utilized in determining the purchase price allocation. The allocation of thepurchase price to different asset classes impacts the depreciation andamortization expense we subsequently record. The principal assets we haveacquired to date are property, pipelines, storage tanks and equipment, as wellas intangible assets such as customer relationships and contractual rights.

·       Wedepreciate and amortize the components of our property and equipment andintangible assets on a straight-line basis over the estimated useful lives ofthe assets. The estimates of the assets’ useful lives require our judgment andour knowledge of the assets being depreciated and amortized. When necessary,the assets’ useful lives are revised and the impact on depreciation andamortization is adjusted on a prospective basis.

·       Weaccrue an estimate of the undiscounted costs of environmental remediation forwork at identified sites where an assessment has indicated it is probable thatcleanup costs are or will be required and may be reasonably estimated. Inmaking these estimates, we consider information that is currently available,existing technology, enacted laws and regulations, and our estimates of thetiming of the required remedial actions. We may use outside environmentalconsultants to assist us in making these estimates. We also are required toestimate the amount of any probable recoveries, including insurance recoveries.In addition, generally accepted accounting principles require us to 

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establish liabilities forthe costs of asset retirement obligations when a legal or contractualobligation exists to dispose of or restore an asset upon its retirement and thetiming and cost of such work is reasonably estimable. We will record suchliabilities only when such timing and costs are reasonably determinable.

·       Fromtime to time, a shipper or group of shippers or regulatory body may initiateregulatory proceedings or other actions challenging the tariffs we charge orhave charged. In such cases, we assess the proceeding on an ongoing basis as toits likely outcome in order to determine whether to accrue for a futureexpense. We use outside regulatory lawyers and financial experts to assist usin these assessments.

·       Our inventory of crude oilfor our PMT gathering operations and marketing business, our Canadianoperations, any inventory earned through our tariffs for the transportation ofcrude oil in our common carrier pipelines and any inventory of refined productsat our terminals is carried in our accounts at the lower of cost or marketvalue, unless it is hedged, in which case it is carried at market. On anyhedged portion, we are exposed to the potential that our hedges may not beperfectly effective. On any unhedged portion, we are exposed to the potentialfor a write-down to market value. To the extent we owe our customers crude oilor refined products, we are exposed to the potential of additional costs in theevent market prices increase.

**Results ofOperations**

Internally, in our analysis of operating results, weconsider the impact of unusual items that we believe affect comparabilitybetween periods. We also believe that providing a discussion and analysis ofour results that is comparable year over year provides a more accurate andthorough analysis of our results of operations. We have provided areconciliation of net income to the results of our operations, excluding thoseunusual items, in our analyses below. Following is a description of each of theunusual items that impacted the results of our operations.

*Line63 Oil Release.**  *On March 23,2005, a release of approximately 3,400 barrels of crude oil occurred on PPS’sLine 63 as a result of a landslide caused by heavy rainfall in northern LosAngeles County. As a result of the release, we recorded $2.0 million netoil release costs in the first quarter of 2005, consisting of what we nowestimate to be $25.7 million of total costs relating to the release, netof insurance recoveries of $15.6 million to date and accrued futureinsurance recoveries of $8.1 million at March 31, 2006.

*Acceleratedlong-term incentive plan compensation expense.**  *On March 3, 2005, in connection with the changein control of our General Partner, all restricted units then outstanding underthe Long-term Incentive Plan immediately vested. As a result, we recorded $3.1million compensation expense in the first quarter of 2005.

*Transaction costs.**  *Pursuant to an Ancillary Agreement entered into inconnection with the sale of The Anschutz Corporation’s (the owner of ourgeneral partner before March 3, 2005) interest in us, LB Pacific, LP andThe Anschutz Corporation reimbursed us $2.4 million for the cost incurredin connection with a consent solicitation prepared and delivered to the holdersof our 71¤8% senior notes to approvecertain amendments to the governing indenture and for severance and other costsincurred in connection with the sale of our General Partner. In accordance withgenerally accepted accounting principles, we recorded $0.6 million ascapitalized deferred financing costs and $1.8 million as an expense, bothin the first quarter of 2005. The reimbursements were recorded as a capitalcontribution to the Partnership by our General Partner.

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***Three Months Ended March 31,2006 Compared to Three Months Ended March 31, 2005***

***Summary***

Net income for the threemonths ended March 31, 2006 was $11.6 million, or $0.30 per dilutedlimited partner unit, compared to $3.4 million, or $0.17 per diluted limitedpartner unit, for the three months ended March 31, 2005.

Net income for the threemonths ended March 31, 2006 reflects the benefit of the operations of theRocky Mountain Products Pipeline and the San Francisco and Philadelphia areaterminals, which were acquired on September 30, 2005.

Followingis a reconciliation of net income to the results of our operations, excludingunusual items mentioned above:

| ** **                                      | ** **                                                 | **Three Months Ended March 31,**                                                     | ** ** | ** **                                                                                               | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                      | ** **                                                 | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                      | ** **                                                 | **(In thousands)**                                                                                  | ** ** |
| Net income                                      |                                                       |                                                                                                     | $          | 11,614                                                                                                   |       |       |       | $ | 3,421 |   |   | $ | 8,193 |   |   | 239 | % |   |
| Add:                                            | Line 63 oil  release costs                                 |                                                                                                     |       | —                                                                                                   |       |       |       | 2,000 |   |   | 2,000 |   |   | — |   |   |
|                                            | Accelerated  long-term incentive plan compensation expense |                                                                                                     |       | —                                                                                                   |       |       |       | 3,115 |   |   | 3,115 |   |   | — |   |   |
|                                            | Transaction costs                                          |                                                                                                     |       | —                                                                                                   |       |       |       | 1,807 |   |   | 1,807 |   |   | — |   |   |
|                                            |                                                       |                                                                                                     | $          | 11,614                                                                                                   |       |       |       | $ | 10,343 |   |   | $ | 1,271 |   |   | 12 | % |   |
| Diluted weighted  average limited partner units |                                                       |                                                                                                     | 39,313     |                                                                                                     |       |       | 29,720     |   |   | 9,593 |   |   | 32 | % |   |

 

The improvement in theresults of operations, excluding the effect of the unusual items mentionedabove, reflects the benefit of (i) the operations of the San Francisco andPhiladelphia area terminals and the Rocky Mountain Products Pipeline acquiredin September 2005; and (ii) increased margins in our gathering andmarketing business. These increases were partially offset by significantimpacts to the Rocky Mountain Business Unit caused by substantial downtime at aRocky Mountain refinery, lower tank utilization at Pacific Terminals, increasedgeneral and administrative costs, and higher interest expense primarily due tohigher debt levels. There were 39.3 million weighted average limited partnerunits outstanding in the three months ended March 31, 2006, approximately32% more limited partner units than the 29.7 million weighted average unitsoutstanding in the three months ended March 31, 2005, due to the sale ofadditional common units to partially fund the acquisition of the San Franciscoand Philadelphia area terminals and the Rocky Mountain Products Pipeline.

***Segment Information***

Thefollowing is a discussion of segment operating income, which does not includegeneral and administrative expenses, accelerated long-term incentivecompensation plan expense and transaction costs, as these items are notallocated to the West Coast and Rocky Mountain business units. The followingalso excludes a discussion of the Line 63 oil release discussed above.

| ** **                     | ** ** | **Three Months Ended March 31,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **West Coast**            | ** ** | ** **                                           | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **(In thousands)**                              | ** ** |
| Operating income               |       |                                                 | $          | 17,629                                                                                                   |       |                                                                                                     |       | $ | 9,743 |   |   | $ | 7,886 |   |   | 81 | % |   |
| Add: Line 63 oil  release cost |       |                                                 | —     |                                                                                                     |       |                                                                                                     | 2,000      |   |   | 2,000 |   |   | — |   |   |
|                           |       |                                                 | $          | 17,629                                                                                                   |       |                                                                                                     |       | $ | 11,743 |   |   | $ | 5,886 |   |   | 50 | % |   |
| Operating data:                |       |                                                 |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Pipeline  throughput (bpd)     |       |                                                 | 118.6      |                                                                                                     |       |                                                                                                     | 138.5      |   |   | (19.9 | ) |   | (14 | )% |   |
|                                |            |                                                      |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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WestCoast operating income was higher in 2006 due to the result of operations ofthe San Francisco and Philadelphia area terminals, which were acquired in September 2005,and higher margins in our gathering and marketing business, which were belowaverage in 2005. Margins were below average in 2005 in our gathering andmarketing business due to pricing pressures from steeply discounted crude oilimports, the interruption of a scheduled sale due to the Line 63 crude oilrelease, and an unfavorable purchase contract which expired on March 31,2005. In addition, crude oil contracts acquired on July 1, 2005 benefitedour gathering and marketing business in the first quarter of 2006. Partiallyoffsetting these increases were lower tank utilization in our PT storage anddistribution operations, which was 8% lower than in the first quarter of 2005when a record utilization of 94% was achieved. The prior year utilization wasthe result of extensive refinery maintenance and resultant demand for black oilstorage in the first quarter of 2005. Although West Coast pipeline volumes wereapproximately 14% lower than in 2005, this decline was largely offset by tariffincreases on Line 2000 and Line 63 and increased deliveries to Bakersfield. Reducedvolumes on our West Coast pipelines were caused by lower San Joaquin Valley andOuter Continental Shelf production, third-party production problems and higherthan normal San Francisco area refinery turnarounds in the first quarter of2005. We benefited from those turnarounds in 2005 because they increasedvolumes transported by us south to Los Angeles area refineries.

| ** **                        | ** ** | **Three Months Ended March 31,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Rocky Mountains**          | ** ** | ** **                                           | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                        | ** ** | **(In thousands)**                              | ** ** |
| Operating income                  |       |                                                 | $          | 9,799                                                                                                    |       |                                                                                                     |       | $ | 9,578 |   |   |   | $ | 221 |   |   |   | 2 | % |   |
| Operating data (bpd):             |       |                                                 |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Rangeland  pipeline system:       |       |                                                 |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Sundre—North                 |       |                                                 | 24.7       |                                                                                                     |       |                                                                                                     | 21.4       |   |   |   | 3.3 |   |   |   | 15 |   |   |
| Sundre—South                 |       |                                                 | 40.7       |                                                                                                     |       |                                                                                                     | 48.2       |   |   |   | (7.5 | ) |   |   | (16 | ) |   |
| Western Corridor system           |       |                                                 | 24.4       |                                                                                                     |       |                                                                                                     | 22.5       |   |   |   | 1.9 |   |   |   | 8 |   |   |
| Salt Lake City Core system        |       |                                                 | 123.8      |                                                                                                     |       |                                                                                                     | 108.7      |   |   |   | 15.1 |   |   |   | 14 |   |   |
| Frontier pipeline                 |       |                                                 | 48.2       |                                                                                                     |       |                                                                                                     | 38.3       |   |   |   | 9.9 |   |   |   | 26 |   |   |
| Rocky Mountain  Products Pipeline |       |                                                 | 61.5       |                                                                                                     |       |                                                                                                     | —     |   |   |   | 61.5 |   |   |   | — |   |   |
|                                   |            |                                                      |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the three months endedMarch 31, 2006, operating income was $9.8 million compared to $9.6 millionfor the three months ended March 31, 2005. Extensive downtime in the firstquarter of 2006 at a major Rocky Mountain refinery had a significant impact onincome in the Rocky Mountain business unit. Lower volumes moved south on theRangeland system and lower volumes were experienced on the Rocky MountainsProduct Pipeline. In addition, the refinery’s downtime negatively impactedpricing of our crude oil inventory at the end of the quarter. Offsetting thesedecreases were the results of operations of the Rocky Mountain ProductsPipeline acquired in September 2005 and increased volumes on the WesternCorridor and Salt Lake City Core crude oil pipelines.

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***Statement of Income—Discussionand Analysis***

| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Revenues**                              | ** ** | ** **                                           | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(In thousands)**                              | ** ** |
| Pipeline  transportation revenue          |       |                                                 | $          | 33,857                                                                                                   |       |                                                                                                     |       | $ | 28,037 |   |   | $ | 5,820 |   |   | 21 | % |   |
| Storage and  terminaling revenue          |       |                                                 | 20,086     |                                                                                                     |       |                                                                                                     | 10,322     |   |   | 9,764 |   |   | 95 |   |   |
| Pipeline buy/sell  transportation revenue |       |                                                 | 9,699      |                                                                                                     |       |                                                                                                     | 9,106      |   |   | 593 |   |   | 7 |   |   |
| Crude oil sales, net of  purchases:       |       |                                                 |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Crude oil sales                           |       |                                                 | 263,128    |                                                                                                     |       |                                                                                                     | 116,173    |   |   | 146,955 |   |   | 126 |   |   |
| Crude oil purchases                       |       |                                                 | (256,319   | )                                                                                                        |       |                                                                                                     | (114,391   | ) |   | 141,928 |   |   | 124 |   |   |
| Crude oil sales, net of purchases         |       |                                                 | 6,809      |                                                                                                     |       |                                                                                                     | 1,782      |   |   | 5,027 |   |   | 282 |   |   |
| Net revenue                               |       |                                                 | $          | 70,451                                                                                                   |       |                                                                                                     |       | $ | 49,247 |   |   | $ | 21,204 |   |   | 43 | % |   |
|                                           |            |                                                      |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Increased pipeline transportationrevenues were realized by our U.S. Rocky Mountain crude oil pipelinesbecause of higher volumes, and increased trucking revenue resulted from thepurchase of a crude oil trucking business for $2.4 million in January 2006.Additionally, pipeline transportation revenues in 2006 include revenues for ourRocky Mountain Products Pipeline, which was acquired in September 2005. Theimpact of lower pipeline transportation volumes in our West Coast business unitwas largely offset by higher tariffs.

Storage and terminaling revenues increased in 2006primarily because of the acquisition of the San Francisco and Philadelphia areaterminals in September 2005. This increase was partially offset by adecline in tank utilization on our Pacific Terminals storage and distributionsystem.

Crudeoil sales net of purchases increased because of the purchase of crude oilcontacts in July 2005 and higher margins. Margins were below average in2005 in our gathering and marketing business for reasons described above. Highercrude oil prices increased gross sales and purchases.

| ** **                                                 | ** ** | **Three Months Ended March 31,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Expenses**                                               | ** ** | ** **                                           | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**                              | ** ** |
| Operating  expenses                                        |       |                                                 | $          | 33,419                                                                                                   |       |                                                                                                     |       | $ | 21,754 |   |   | $ | 11,665 |   |   | 54 | % |   |
| General and  administrative expense                        |       |                                                 | 6,873      |                                                                                                     |       |                                                                                                     | 5,172      |   |   | 1,701 |   |   | 33 |   |   |
| Accelerated  long-term incentive plan compensation expense |       |                                                 | —     |                                                                                                     |       |                                                                                                     | 3,115      |   |   | 3,115 |   |   | — |   |   |
| Line 63 oil  release costs                                 |       |                                                 | —     |                                                                                                     |       |                                                                                                     | 2,000      |   |   | 2,000 |   |   | — |   |   |
| Transaction costs                                          |       |                                                 | —     |                                                                                                     |       |                                                                                                     | 1,807      |   |   | 1,807 |   |   | — |   |   |
| Depreciation and  amortization                             |       |                                                 | 10,002     |                                                                                                     |       |                                                                                                     | 6,529      |   |   | 3,473 |   |   | 53 |   |   |
|                                                       |       |                                                 | $          | 50,294                                                                                                   |       |                                                                                                     |       | $ | 40,377 |   |   | $ | 9,917 |   |   | 25 | % |   |
|                                                            |            |                                                      |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Accelerated long-term incentive plan compensationexpense, Line 63 oil release costs and transaction costs are discussed above.

The increase in operating expense was relatedprimarily to the acquisition of the Rocky Mountain Products Pipeline and SanFrancisco and Philadelphia area terminals in September 2005. Operatingexpenses were also higher as a result of higher power costs.

The increase in general and administrative expense wasprimarily associated with the support of newly acquired assets, professionalfees and costs of a new LB Pacific, LP option plan, which are required bygenerally accepted accounting principles to be recorded as our expense even thoughthe plan is funded by LB Pacific, LP and not by us. Additionally, general andadministrative expenses, which include audit and 

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Schedule K-1 costs,were higher in the first quarter of 2006 than they are expected to be in theremaining quarters of 2006.

Theincrease in depreciation and amortization includes $3.2 million fordepreciation on the Rocky Mountain Products Pipeline and the San Francisco andPhiladelphia area terminals.

| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Other Income and Expense** | ** ** | ** **                                           | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                              | ** ** |
| Share of net  income of Frontier            |       |                                                 | $          | 398                                                                                                      |       |                                                                                                     |       | $ | 357 |   |   | $ | 41 |   |   | 11 | % |   |
| Interest expense                            |       |                                                 | 9,088      |                                                                                                     |       |                                                                                                     | 5,598      |   |   | 3,490 |   |   | 62 |   |   |
| Other income                                |       |                                                 | 443        |                                                                                                     |       |                                                                                                     | 353        |   |   | 90 |   |   | 25 |   |   |
| Income tax  expense                         |       |                                                 | 296        |                                                                                                     |       |                                                                                                     | 561        |   |   | (265 | ) |   | (47 | ) |   |
|                                             |            |                                                      |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in our share of Frontier’s net income wasmainly attributable to increased pipeline volumes in 2006. In 2005, pipelinevolumes were lower as a result of a shortage of synthetic crude supply causedby a fire at a Suncor Energy, Inc. facility in December 2004.

The increase in interest expense was primarily due toborrowings incurred to partially fund the acquisition of the Rocky MountainProducts Pipeline and the San Francisco and Philadelphia area terminals. Ourweighted average borrowings during the three months ended March 31, 2006were $579 million, compared to $358 million in the correspondingperiod in 2005. Floating interest rates were higher in 2006, at a weightedaverage interest rate of 6.9% for the period ended March 31, 2006,compared to a weighted average interest rate of 6.3% for the correspondingperiod in 2005. Offsetting the effect of the increase in interest rates wasincreased capitalized interest, $0.8 million and $0.1 million for the threemonths ended March 31, 2006 and 2005, respectively

Other income of $0.4 million for the period ended March 31,2006 was consistent with the corresponding period in 2005.

Income tax expense is afunction of the income of our Canadian subsidiaries, which are taxable entitiesin Canada. In addition, certain kinds of repatriation of funds into the U.S.are subject to Canadian withholding tax. Our Canadian subsidiaries’ income waslower in 2006 compared to 2005 due to lower crude oil volumes moving south tothe U.S. Rocky Mountains.

**Liquidity andCapital Resources**

We believe that cash generated from operations,together with our cash balance and our unutilized borrowing capacity, will besufficient to meet our planned distributions, our working capital requirementsand anticipated sustaining capital expenditures in the next three years.

We intend to finance our future acquisitions anddevelopment projects, including our Pier 400 project, with issuances of debtand equity securities. We expect to maintain a debt to total capitalizationratio of approximately 50% over time.

On December 23, 2005, we and certain of oursubsidiaries filed a universal shelf registration statement on Form S-3with the SEC to register the issuance and sale, from time to time and in suchamounts as is determined by market conditions and our needs, of up to$1.0 billion of common units of the Partnership and debt securities ofboth the Partnership and certain subsidiaries. This shelf registrationstatement will allow us to finance new acquisitions and new projects such asour Pier 400 Project.

We received permission from the CPUC to dismantlecertain idle PT assets and sell the underlying land, which has an estimatedvalue of approximately $10 million. We expect to sell these variousparcels of land in 2006.

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Our ability to satisfy our debt service obligations,fund planned capital expenditures, make acquisitions, develop projects and paydistributions to our unitholders will depend upon our future operatingperformance. Our operating performance is primarily dependent on the volume ofcrude oil and refined products transported through our pipelines and the volumeleased in our storage tanks, as described in “Overview” above. Our operatingperformance is also affected by prevailing economic conditions in the crude oiland refined products industries and financial, business and other factors, someof which are beyond our control, which could significantly impact futureresults.

***Operating,Investing and Financing Activities***

| ** **                                           | ** ** | **Three Months Ended March 31,**                                                     | ** ** | ** **                                                                                               | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                                                                                  | ** ** |
| Net cash provided  by operating activities           |       |                                                                                                     | $          | 6,015                                                                                                    |       |   |   | $ | 15,858 |   |   | $ | (9,843 | ) |
| Net cash used in  investing activities               |       |                                                                                                     | (26,409    | )                                                                                                        |       |   | (4,260 | ) |   | (22,149 | ) |
| Net cash provided by  (used in) financing activities |       |                                                                                                     | 14,306     |                                                                                                     |       |   | (12,958 | ) |   | 27,264 |   |
|                                                      |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |

 

***Net cash provided by operating activities***

Net cash from operatingactivities in 2006 was positively impacted by an increase in net income due to theoperations of the Rocky Mountain Products Pipeline and the San Francisco andPhiladelphia area terminals, which were acquired on September 30, 2005,and increased margins in our gathering and marketing business. Offsetting theseincreases were (i) significant impacts to the Rocky Mountain Business Unitcaused by substantial downtime at a Rocky Mountain refinery, (ii) lowertank utilization at Pacific Terminals, (iii) increased general andadministrative costs and higher interest expense due to higher debt levels andinterest rates. Cash flow provided by operating activities was reduced by adecrease in accounts payable and other accrued liabilities and an increase in thestorage of crude oil because of contango market conditions (when oil prices forfuture deliveries are higher than for current deliveries). In a contango marketwe store crude oil purchased at lower prices in the current month for deliveryat higher prices in future months, and protect such margin through hedging. Assuch, cash provided by operating activities was adversely affected by thechange in the crude oil purchases liability net of crude oil receivablesreflecting the timing of the inventory build-up.

***Net cash used in investing activities***

Capital expenditures of$24.2 million for the three months ended March 31, 2006 include $13.6million for expansion projects (see “Capital Requirements” below for a list ofour forecasted expansion projects in 2006), $6.6 million for the development ofthe Pier 400 project, $0.8 million related to sustaining capital projects and$3.2 million of transition projects related to the Edmonton initiation stationas well as the Rocky Mountain Products Pipeline and the San Francisco andPhiladelphia area terminals. Capital expenditures for the three months ended March 31,2005 were $4.4 million, of which $0.2 million related to sustaining capitalprojects, $2.3 million related to transition projects, $1.2 million related toexpansion and $0.7 million was for the development of the Pier 400Project.

***Net cash provided by and used in financing activities***

Net cash provided byfinancing activities for the three months ended March 31, 2006 includesnet borrowings of $37.1 million under our senior secured credit facility, whichwas used primarily to fund our expansion capital projects (see “CapitalRequirements” below for a list of our forecasted expansion projects in 2006). Wealso distributed $22.5 million to our limited partners and General Partnerduring the three months ended March 31, 2006. Cash distributions of $15.1 million were paid during the period ended March 31,2005.

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***Capital Requirements***

Generally, ourtransportation and storage operations require investment to upgrade or enhanceexisting operations and to meet environmental and operational regulations. Ourcapital requirements consist primarily of:

·       sustainingcapital expenditures to replace partially or fully depreciated assets in orderto maintain the existing operating capacity or efficiency of our assets andextend their useful lives;

·       transitionalcapital expenditures to integrate acquired assets into our existing operations;and

·       expansioncapital expenditures to expand or increase the efficiency of the existingoperating capacity of our assets, whether through construction or acquisition,such as placing new storage tanks in service to increase our storagecapabilities and revenue, or adding new pump stations or pipeline connectionsto increase our transportation throughput and revenue.

Weexpect to invest approximately $166 million in total capital expendituresin 2006, with approximately $150 million of that total on expansionprojects. Our estimated 2006 expansion capital spending includes the followingnotable projects.

| **2006 Forecast Expansion Capital Expenditures**                                                                         | ** ** | ** **             | ** ** | **Estimated to be  incurred in 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(in millions)** | ** ** |
| Phase I of Salt  Lake City expansion, and beginning of phase II                                                                              |       |                   | $          | 44                                                        |       |   |
| 2006 portion of  the construction of a new pipeline to Cheyenne, Wyoming                                                                     |       |                   | 31         |                                                      |       |
| Capital projects  associated with the new refined products assets                                                                            |       |                   | 23         |                                                      |       |
| Completion of  permitting process, engineering and other project development cost for the  Pier 400 project                                  |       |                   | 21         |                                                      |       |
| Reactivation of  storage tanks and infrastructure enhancements at PT                                                                         |       |                   | 11         |                                                      |       |
| Completion of  storage tanks for the Rangeland System and Western Corridor pipeline to  facilitate the transportation of synthetic crude oil |       |                   | 4          |                                                      |       |
| Other                                                                                                                                        |       |                   | 16         |                                                      |       |
| Total                                                                                                                                        |       |                   | $          | 150                                                       |       |   |

 

In addition to theexpansion projects above, we expect to incur $7 million for transitionalcapital expenditures and $9 million for sustaining capital expendituresduring 2006.

***Pier 400***

We continue our efforts to develop a deepwaterpetroleum import terminal at Pier 400 and Terminal Island in the Port of LosAngeles (“POLA”) to handle marine receipts of crude oil and refineryfeedstocks. As currently envisioned, the project would include a deep waterberth, high capacity transfer infrastructure and storage tanks, with a pipelinedistribution system that will connect to various customers, some directly, andsome through our Pacific Terminals storage and distribution system. We wouldconstruct the storage tanks and transfer infrastructure, including a largediameter pipeline system for receiving bulk petroleum liquids from marinevessels. If successful, this project will allow us to increase ourparticipation in the Los Angeles basin marine import business, which is growingas a result of a decline in both California production and imports from Alaska.

We have entered into agreements with ConocoPhillipsand two subsidiaries of Valero Energy Corporation that provide long termcustomer commitments to off-load a total of 140,000 bpd of crude oil at thePier 400 dock. The ConocoPhillips and Valero agreements are subject tosatisfaction of various conditions, such as the achievement of various progressmilestones, financing, continued economic 

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viability, and completionof other ancillary agreements related to the project. We are negotiatingsimilar long term off-loading agreements with other potential customers.

We recently completed an updated cost estimate for theproject. We are estimating that Pier 400 will cost approximately$315 million, which is subject to change depending on various factors,including: (i) the final scope of the project and the requirements imposedthrough the permitting process; and (ii) changes in construction costs.This cost estimate now assumes the construction of 4.0 million barrels ofstorage, up from 3.0 million barrels previously estimated. As a result, thecapital cost estimate has increased together with a commensurate increase inexpected revenues. We are in the process of securing the environmental andother permits that will be required for the Pier 400 Project from a variety ofgovernmental agencies, including the Board of Harbor Commissioners, the SouthCoast Air Quality Management District, various agencies of the City of LosAngeles, the Los Angeles City Council and the U.S. Army Corps of Engineers. Weexpect to have the necessary permits in the first quarter of 2007.

Final construction of the Pier 400 Project is subjectto the completion of a land lease agreement with the POLA, receipt ofenvironmental and other approvals, securing additional customer commitments,updating engineering and project cost estimates, ongoing feasibilityevaluation, and financing. We expect construction of the Pier 400 terminal tobe completed and the facility to be placed in service in the first half of2008.

We have capitalized$24.9 million on the Pier 400 project through March 31, 2006,including $6.6 million for the three months ended March 31, 2006. Weanticipate funding the remaining permitting and pre-construction costs in 2006from our revolving credit facility. Construction of the Pier 400 terminal isexpected to be financed through a combination of debt and proceeds from theissuance of additional partnership units, including common units.

***Debt Obligations***

Ourdebt obligations consist of:

| ** **                                                                                                                                                                                   | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                   | ** ** | **(in thousands)** | ** ** |
| $400 million senior  secured credit facility, bearing interest at 5.3% on March 31, 2006, due  September 30, 2010                                                                  |       | $                       | 177,691    |                  |       | $ | 140,751 |   |   |
| 71¤8% senior  notes, due June 2014, net of unamortized discount of $3,800 and $3,882  and including fair value (decreases) increases of $(1,163) and $567,  respectively |       | 245,037                 |       |                  | 246,684    |   |   |
| 61¤4% senior notes, due September 2015, net of  unamortized discount of $768 and $782, respectively                                                                                |       | 174,232                 |       |                  | 174,218    |   |   |
| Future payment  for MAPL assets, net of unamortized discount of $259 and $309, respectively                                                                                             |       | 4,025                   |       |                  | 3,979      |   |   |
| Total long-term debt                                                                                                                                                                         |       | $                       | 600,985    |                  |       | $ | 565,632 |   |   |

 

As of March 31, 2006,$113 million of undrawn credit was available under the senior secured revolvingcredit facility. With the consent of the administrative agent under the revolvingcredit facility, we can increase credit availability up to an additional $84million, based upon pro-forma EBITDA from future acquisitions.

**Off-Balance SheetArrangements**

As of March 31, 2006,we had standby letters of credit outstanding of $25.1 million for securingcrude oil purchases and the MAPL note, both of which are reflected asliabilities on the balance sheet.

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**AccountingPronouncements**

In December 2005, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(revised December 2005), *Share-Based Payment (SFAS123R)*. This Statement is a revision of SFAS No. 123. SFAS 123Restablishes standards for the accounting for transactions in which an entityexchanges its equity instruments for goods or services. SFAS 123R is effectivefor the Partnership as of the beginning of the first annual reporting periodthat begins after June 15, 2006. The adoption of SFAS 123R on January 1,2006 did not have a material impact on our consolidated financial statements.

In September 2005,the Emerging Issues Task Force (“EITF”) issued Issue No. 04-13 (“EITF 04-13”),*Accounting for Purchases and Sales ofInventory with the Same Counterparty*. The issues addressed by theEITF are (i) the circumstances under which two or more exchangetransactions involving inventory with the same counterparty should be viewed asa single exchange transaction for the purposes of evaluating the effect of APB No. 29;and (ii) whether there are circumstances under which nonmonetary exchangesof inventory within the same line of business should be recognized at fairvalue. EITF 04-13 is effective for new arrangements entered into in thereporting periods beginning after March 15, 2006, and to all inventorytransactions that are completed after December 15, 2006, for arrangementsentered into prior to March 15, 2006. The adoption of EITF 04-13 didnot have a material impact on our consolidated financial statements.

**ITEM 3.**                Quantitativeand Qualitative Disclosures About Market Risk

Market risk is the risk ofloss arising from adverse changes in market rates and prices. The principalmarket risks to which we are exposed are commodity price risk, interest raterisk and currency exchange risk. We use derivative financial instruments toreduce our exposure to adverse fluctuations in commodity prices, interest ratesand foreign exchange rates. We formally designate and document the financialinstruments as a hedge of a specific underlying exposure, as well as the riskmanagement objectives and strategies for undertaking the hedge transactions. Weformally assesses, both at the inception and at least quarterly thereafter,whether the financial instruments that are used in hedging transactions areeffective at offsetting changes in either the fair value or cash flows of therelated underlying exposure. All of our derivatives are commonly usedover-the-counter instruments with liquid markets or are traded on the New YorkMercantile Exchange. We do not enter into derivative financial instruments fortrading or speculative purposes.

**Commodity PriceRisk Hedging**

We may use derivatives, principally futures andoptions, to hedge our exposure to market price volatility related to ourinventory or future sales of crude oil. Derivatives used to hedge market price volatilityrelated to inventory are generally designated as fair value hedges, andderivatives related to the future sales of crude oil are generally classifiedas cash flow hedges. The values of derivative instruments are included in “Otherassets” or in “Other current liabilities” in the accompanying consolidatedbalance sheets.

Changes in the fair valueof our derivative instruments related to crude oil inventory are recognized innet income. For the three months ended March 31, 2006 and 2005, “crude oilsales, net of purchases” were net of $1.9 million and $1.0 million inlosses, respectively, reflecting changes in the fair value of derivativeinstruments held as hedges related to crude oil marketing activities. Losses onderivatives were generally offset by gains in physical crude oil inventorypositions. Changes in the fair value of our derivative instruments related tothe future sale of crude oil are deferred and reflected in “accumulated othercomprehensive income,” a component of partners’ capital in the balance sheet,until the related revenue is reflected in the consolidated statements ofincome. As of March 31, 2006, no amount relating to the 

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changein the fair value of highly effective derivative instruments was included in “accumulatedother comprehensive income”.

**Interest Rate RiskHedging**

In connection with the issuance of our 71¤8%senior notes due 2014, we entered into interest rate swap agreements with anaggregate notional principal amount of $80.0 million to receive interestat a fixed rate of 71¤8%and to pay interest at an average variable rate of six month LIBOR plus 1.6681%(set in advance or in arrears depending on the swap transaction). The interestrate swaps mature June 15, 2014 and are callable at the same dates andterms as the 71¤8%senior notes. We designated these swaps as a hedge of the change in the seniornotes fair value attributable to changes in the six month LIBOR interest rate.Changes in fair values of the interest rate swaps are recorded into earningseach period. Similarly, changes in the fair value of the underlying$80.0 million of senior notes, which are expected to be offsetting tochanges in the fair value of the interest swaps, are recorded into earningseach period. At March 31, 2006, we recorded a decrease of $1.2 millionin the fair value of interest rate swaps. For the three months ended March 31,2006, we recognized reductions in interest expense of $0.1 million relatedto the difference between the fixed rate and the floating rate of interest onthe interest rate swaps. For the three months ended March 31, 2006, we hadan immaterial amount of ineffectiveness relating to these interest rate swaps.

We are subject to risksresulting from interest rate fluctuations as the interest cost on our creditfacilities and the $80 million interest swap on the senior notes are basedon variable rates. If our interest rates were to increase 1.0% for theremainder of 2006 as compared to the rate at December 31, 2005, ourinterest expense for the remainder of 2006 would increase $1.9 millionbased on our outstanding debt balances at March 31, 2006.

**Currency ExchangeRate Risk Hedging**

The purpose of our foreign currency hedging activitiesis to reduce the risk that our cash inflows resulting from interest paymentsfrom our Canadian subsidiaries on intercompany debt will be adversely affectedby changes in the U.S./Canadian exchange rate.

Weentered into forward exchange contracts to hedge receipt of forecasted interestpayments denominated in Canadian dollars. The effective portion of the changein fair value of this contract, which has been designated as a cash flow hedge,is reported in “accumulated other comprehensive income” in the accompanyingbalance sheet and will be reclassified into earnings in “Other income” in thesame period during which the hedged transaction affects earnings. Theineffective portion, if any, of the change in fair value of this instrumentwill be immediately recognized in earnings. These foreign exchange contracts asof March 31, 2006 are as follows:

| ** ** | ** ** | **Canadian dollars** | ** ** | **US dollars** | ** ** | **Average Exchange Rate** | ** ** |
|------------|------------|---------------------------|------------|---------------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **(in thousands)**   | ** ** | ** **          | ** ** |
| 2006       |       |                      | $          | 5,500               |       |                                |       | $ | 4,673 |   |   | Cdn$1.18 to U.S. $1.00 |   |
| 2007       |       |                      | 6,600      |                |       |                                | 5,662      |   |   | Cdn$1.17 to U.S. $1.00 |   |
| 2008       |       |                      | 3,193      |                |       |                                | 2,754      |   |   | Cdn$1.16 to U.S. $1.00 |   |

 

**Credit Risks**

By using derivative financial instruments to hedgeexposures related to changes in commodity prices, interest rates and currencyexchange rates, we expose ourselves to market risk and credit risk. Market riskis the risk of loss arising from the adverse effect on the value of a financialinstrument that results from changes in commodity prices, interest rates orcurrency exchange rates. The market risk associated with 

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price volatility ismanaged by established parameters that limit the types and degree of marketrisk that may be undertaken.

Credit risk is the risk ofloss arising from the failure of the derivative agreement counterparty toperform under the terms of the derivative agreement. When the fair value of aderivative agreement is positive, the counterparty is liable to us, whichcreates credit risk for us. When the fair value of a derivative agreement isnegative, we are liable to the counterparty and, therefore, it creates creditrisk for the counterparty. The counterparties we transact with are large, well knowncompanies in the industry or large creditworthy financial institutions. Assuch, we believe our exposure to counterparty credit risk is low. Nonetheless,there can be no assurance as to the performance of a counterparty.

**ITEM 4.**                Controlsand Procedures

***Disclosure Controls and Procedures***

We have established disclosure controls and proceduresto ensure that material information relating to us, including our consolidatedsubsidiaries, is made known to the officers who certify our financial reportsand to other members of our senior management and our Board of Directors. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

Based on their evaluationas of March 31, 2006, our principal executive officer and principalfinancial officer have concluded that, as of the end of the period covered bythis report, our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”) are effective to ensure that the information required to be disclosed byus in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

***Internal Control Over Financial Reporting***

***Our management, including the ChiefExecutive Officer and Chief Financial Officer, have evaluated our internalcontrol over financial reporting as of March 31, 2006, and have concluded thatthere has not been any change during our most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.***

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**PART II. OTHERINFORMATION**

**ITEM 1.**                LegalProceedings

See discussion of legal proceedings in “Note 4—Contingencies”in the accompanying condensed consolidated financial statements.

On or about March 17, 2006, one of thePartnership’s subsidiaries, Pacific Pipeline System LLC (“PPS”). was servedwith a four count misdemeanor action, entitled “*The Peopleof the State of California v. Pacific Pipeline System, LLC”*, LosAngeles Superior Court Case No. 6NW01020, which alleges the violation byPPS of two strict liability statutes under the California Fish and Game Codefor the unlawful deposit of oil or substances harmful to wildlife into theenvironment, and violations of two sections of the California Water Code forthe willful and intentional discharge of pollution into state waters. Thesealleged violations relate to the release of crude oil from PPS’s Line 63 intoPyramid Lake (see “Note 4—Contingencies” in the accompanying condensedconsolidated financial statements). The fines that can be assessed against PPSfor the violations of the strict liability statutes are based, in largemeasure, on the volume of unrecovered crude oil that was released into theenvironment, and, therefore, the maximum fine that can be assessed is estimatedto be approximately $870,000, in the aggregate. This amount is subject todownwards adjustment as additional information becomes known with respect toactual volumes of recovered crude oil, and the State of California has thediscretion to further reduce the fine after considering mitigating factors suchas the fact that the release was not caused by any wrongful conduct of PPS. Becauseof the uncertainty associated with these factors, the final amount of the finethat will be assessed for the strict liability offenses cannot be ascertained.

The penalties that couldbe assessed for the alleged California Water Code violations are also notreadily quantifiable, but we believe the penalties would not exceed $50,000, inthe aggregate. We believe, however, that the allegations of Water Codeviolations are without merit and intend to vigorously defend against them.

**ITEM 1A.**        RiskFactors

There has been no materialchange in risk factors as previously disclosed in our annual report on Form 10-Kfor the year ended December 31, 2005.

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**ITEM 6.**                Exhibits

The following documentsare filed as exhibits to this quarterly filing:
| Exhibit Number            | ** ** | ** **                                                                                                                                                                                                                                                    | ** ** | **Description** |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| * Exhibit 31.1       |       | Certification of  Principal Executive Officer of Pacific Energy Management LLC, General Partner  of Pacific Energy GP, LP, General Partner of Pacific Energy Partners, L.P.,  as required by Rule 13a-14(a) of the Securities Exchange Act  of 1934 |
| * Exhibit 31.2       |       | Certification of  Principal Financial Officer of Pacific Energy Management LLC, General Partner  of Pacific Energy GP, LP, General Partner of Pacific Energy Partners, L.P.,  as required by Rule 13a-14(a) of the Securities Exchange Act  of 1934 |
| † Exhibit 32.1  |       | Certification of Chief  Executive Officer of Pacific Energy Management LLC, General Partner of  Pacific Energy GP, LP, General Partner of Pacific Energy Partners, L.P.,  pursuant to 18 U.S.C. §1350                                                    |
| †  Exhibit 32.2 |       | Certification of Chief  Financial Officer of Pacific Energy Management LLC, General Partner of  Pacific Energy GP, LP, General Partner of Pacific Energy Partners, L.P.,  pursuant to 18 U.S.C. §1350                                                    |

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*                    Filedherewith.

†                    Not consideredto be “filed” for purposes of Section 18 of the Securities Exchange Act of1934 or otherwise subject to the liabilities of that section.

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**SIGNATURES**

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

|            | **PACIFIC ENERGY PARTNERS,  L.P.** |
|------------|------------------------------------|
| ** ** | **By:**                            | **PACIFIC ENERGY GP, LP, its general partner** |
| ** ** | **By:**                            | **PACIFIC ENERGY MANAGEMENT LLC,  its general partner** |
|       |                               | By: | /S/ IRVIN TOOLE, JR. |
|       |                               |   | Irvin  Toole, Jr. |
|       |                               |   | *President,  Chief Executive Officer and Director  (Principal Executive Officer)  May 10, 2006* |
|       |                               | By: | /S/ GERALD A. TYWONIUK |
|       |                               |   | Gerald A.  Tywoniuk |
|       |                               |   | *Senior  Vice President and Chief Financial Officer  (Principal Financial Officer)  May 10, 2006* |

 

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**EXHIBITINDEX**
| Exhibit Number           | ** ** | ** **                                                                                                                                                                                                                                                    | ** ** | **Description** |
|--------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| * Exhibit 31.1      |       | Certification of  Principal Executive Officer of Pacific Energy Management LLC, General Partner  of Pacific Energy GP, LP, General Partner of Pacific Energy Partners, L.P.,  as required by Rule 13a-14(a) of the Securities Exchange Act  of 1934 |
| * Exhibit 31.2      |       | Certification of  Principal Financial Officer of Pacific Energy Management LLC, General Partner  of Pacific Energy GP, LP, General Partner of Pacific Energy Partners, L.P.,  as required by Rule 13a-14(a) of the Securities Exchange Act  of 1934 |
| † Exhibit 32.1 |       | Certification of Chief  Executive Officer of Pacific Energy Management LLC, General Partner of  Pacific Energy GP, LP, General Partner of Pacific Energy Partners, L.P.,  pursuant to 18 U.S.C. §1350                                                    |
| † Exhibit 32.2 |       | Certification of Chief Financial Officer of Pacific  Energy Management LLC, General Partner of Pacific Energy GP, LP, General  Partner of Pacific Energy Partners, L.P., pursuant to 18 U.S.C. §1350                                                     |

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*                    Filedherewith.

†                    Not consideredto be “filed” for purposes of Section 18 of the Securities Exchange Act of1934 or otherwise subject to the liabilities of that section.

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