**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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FORM 10-Q

| **x** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30,2005**

**OR**

| ** ̈** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 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  of incorporation or organization) | (I.R.S. Employer  Identification No.) |

 

**5900 Cherry Avenue**

**Long Beach, CA 90805-4408**

(Address of principalexecutive offices)

**(562) 728-2800**

(Registrant’s telephonenumber, including area code)

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Indicate by check mark whetherthe 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 o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes x  No o

Therewere 19,258,330 of the registrant’s Common Units and 10,465,000 of the registrant’sSubordinated Units outstanding at June 30, 2005.

 

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

**FORM   10-Q**

**TABLE OF CONTENTS**
|              | ** ** | ** **                                                                                                                                 | ** ** | **Page** |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **   | ** ** | **PART I.  FINANCIAL INFORMATION**                                                                                                    |       |     |
| Item 1. |       | Financial Statements                                                                                                                       |       | 1        |
|         |       | Condensed Consolidated Balance Sheets (Unaudited)—As of June 30,  2005 and December 31, 2004                                |       | 1        |
|         |       | Condensed Consolidated Statements  of Income (Unaudited)—For the Three and Six Months Ended June 30, 2005  and 2004              |       | 2        |
|         |       | Condensed Consolidated Statement of Partners’ Capital (Unaudited)—For  the Six Months Ended June 30, 2005                   |       | 3        |
|         |       | Condensed Consolidated Statements of Comprehensive Income  (Unaudited)—For the Three and Six Months Ended June 30, 2005 and 2004 |       | 4        |
|         |       | Condensed Consolidated Statements of Cash Flows (Unaudited)—For the Six  Months Ended June 30, 2005 and 2004                     |       | 5        |
|         |       | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                           |       | 6        |
| Item 2. |       | Management’s Discussion and Analysis of Financial Condition and Results  of Operations                                                |       | 22       |
| Item 3. |       | Quantitative and Qualitative Disclosures About Market Risk                                                                                 |       | 41       |
| Item 4. |       | Controls and Procedures                                                                                                                    |       | 42       |
| ** **   | ** ** | **PART II.  OTHER INFORMATION**                                                                                                       |       |     |
| Item 1. |       | Legal Proceedings                                                                                                                          |       | 43       |
| Item 6. |       | Exhibits                                                                                                                                   |       | 43       |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM1. Financial Statements**

**PACIFICENERGY PARTNERS, L.P. (Note 1)CONDENSED CONSOLIDATED BALANCE SHEETS**(Unaudited)
| ** **                                                                                                                        | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2005**                | ** ** | **2004**              | ** ** |
| ** **                                                                                                                        | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                                                                                                                        |       |                    |       |                  |       |   |   |
| Current assets:                                                                                                                   |       |                    |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                        |       | $                       | 32,077     |                  |       | $ | 23,383 |   |   |
| Crude oil sales  receivable                                                                                                       |       | 37,428                  |       |                  | 28,609     |   |   |
| Transportation and  storage accounts receivable                                                                                   |       | 19,717                  |       |                  | 20,137     |   |   |
| Canadian goods and  services tax receivable                                                                                       |       | 6,170                   |       |                  | 7,632      |   |   |
| Insurance proceeds  receivable (note 2)                                                                                           |       | 6,705                   |       |                  | —     |   |   |
| Due from related  parties (note 3)                                                                                                |       | 153                     |       |                  | —     |   |   |
| Crude oil  inventory                                                                                                              |       | 7,989                   |       |                  | 9,174      |   |   |
| Prepaid expenses                                                                                                                  |       | 3,180                   |       |                  | 4,159      |   |   |
| Other                                                                                                                             |       | 2,292                   |       |                  | 2,451      |   |   |
| Total current  assets                                                                                                             |       | 115,711                 |       |                  | 95,545     |   |   |
| Property and  equipment, net                                                                                                      |       | 713,070                 |       |                  | 718,624    |   |   |
| Investment in  Frontier                                                                                                           |       | 7,998                   |       |                  | 7,886      |   |   |
| Other assets, net                                                                                                                 |       | 47,516                  |       |                  | 47,850     |   |   |
|                                                                                                                              |       | $                       | 884,295    |                  |       | $ | 869,905 |   |   |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                                        |       |                    |       |                  |       |   |   |
| Current liabilities:                                                                                                              |       |                    |       |                  |       |   |   |
| Accounts payable  and accrued liabilities                                                                                         |       | $                       | 24,024     |                  |       | $ | 14,872 |   |   |
| Accrued crude oil  purchases                                                                                                      |       | 38,362                  |       |                  | 27,231     |   |   |
| Line 63 oil  release reserve (note 2)                                                                                             |       | 4,981                   |       |                  | —     |   |   |
| Accrued interest                                                                                                                  |       | 1,285                   |       |                  | 1,124      |   |   |
| Due to related  parties (note 3)                                                                                             |       | —                  |       |                  | 533        |   |   |
| Derivatives  liability—current portion                                                                                       |       | 1,078                   |       |                  | 400        |   |   |
| Other                                                                                                                             |       | 5,715                   |       |                  | 3,885      |   |   |
| Total current  liabilities                                                                                                        |       | 75,445                  |       |                  | 48,045     |   |   |
| Senior notes and  credit facilities, net (note 4)                                                                                 |       | 359,209                 |       |                  | 357,163    |   |   |
| Deferred income  taxes                                                                                                            |       | 34,189                  |       |                  | 34,556     |   |   |
| Environmental  liabilities                                                                                                        |       | 6,980                   |       |                  | 7,269      |   |   |
| Other liabilities                                                                                                                 |       | 263                     |       |                  | 406        |   |   |
| Total liabilities                                                                                                                 |       | 476,086                 |       |                  | 447,439    |   |   |
| Commitments and contingencies (notes 2 and 8)                                                                                     |       |                    |       |                  |       |   |   |
| Partners’ capital:                                                                                                           |       |                    |       |                  |       |   |   |
| Common unitholders  (19,258,330 and 19,158,747 units outstanding at June 30, 2005 and  December 31, 2004, respectively) |       | 354,598                 |       |                  | 361,427    |   |   |
| Subordinated  unitholders (10,465,000 units outstanding at June 30, 2005 and  December 31, 2004)                        |       | 36,949                  |       |                  | 41,521     |   |   |
| General Partner  interest                                                                                                         |       | 6,647                   |       |                  | 6,280      |   |   |
| Undistributed  employee long-term incentive compensation (note 5)                                                                 |       | —                  |       |                  | 116        |   |   |
| Accumulated other  comprehensive income                                                                                           |       | 10,015                  |       |                  | 13,122     |   |   |
| Net partners’  capital                                                                                                       |       | 408,209                 |       |                  | 422,466    |   |   |
|                                                                                                                              |       | $                       | 884,295    |                  |       | $ | 869,905 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

1

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**PACIFICENERGY PARTNERS, L.P. (Note 1)CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)**
| ** **                                                                                                                                                                                         | ** ** | **Three Months  Ended June 30,**                      | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2005**                                                             | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **(in thousands, except per unit amounts)** | ** ** |
| Pipeline  transportation revenue                                                                                                                                                                   |       | $                                                                    | 27,747     |                                          | $          | 26,992 |   | $ | 55,784 |   | $ | 51,719 |   |
| Storage and  terminaling revenue                                                                                                                                                                   |       | 10,870                                                               |       | 9,259                                         |       | 21,192 |   | 19,382 |   |
| Pipeline buy/sell  transportation revenue                                                                                                                                                          |       | 8,116                                                                |       | 3,690                                         |       | 17,222 |   | 3,690 |   |
| Crude oil sales,  net of purchases of $122,442 and $94,382 for the three months ended  June 30, 2005 and 2004 and $236,833 and $175,497 for the six months  ended June 30, 2005 and 2004 |       | 6,042                                                                |       | 6,056                                         |       | 7,824 |   | 10,868 |   |
| Net revenue                                                                                                                                                                                        |       | 52,775                                                               |       | 45,997                                        |       | 102,022 |   | 85,659 |   |
| Expenses:                                                                                                                                                                                          |       |                                                                 |       |                                          |       |   |   |   |   |
| Operating                                                                                                                                                                                          |       | 25,292                                                               |       | 20,867                                        |       | 47,046 |   | 39,784 |   |
| Line 63 oil release costs (note 2)                                                                                                                                                                 |       | —                                                               |       | —                                        |       | 2,000 |   | — |   |
| General and administrative                                                                                                                                                                         |       | 3,700                                                                |       | 3,636                                         |       | 8,872 |   | 7,490 |   |
| Accelerated long-term incentive plan compensation  expense (note 5)                                                                                                                           |       | —                                                               |       | —                                        |       | 3,115 |   | — |   |
| Transaction costs (notes 3 and 6)                                                                                                                                                                  |       | —                                                               |       | —                                        |       | 1,807 |   | — |   |
| Depreciation and amortization                                                                                                                                                                      |       | 6,606                                                                |       | 5,713                                         |       | 13,135 |   | 10,955 |   |
|                                                                                                                                                                                               |       | 35,598                                                               |       | 30,216                                        |       | 75,975 |   | 58,229 |   |
| Share of net  income of Frontier                                                                                                                                                                   |       | 490                                                                  |       | 391                                           |       | 847 |   | 784 |   |
| Operating income                                                                                                                                                                                   |       | 17,667                                                               |       | 16,172                                        |       | 26,894 |   | 28,214 |   |
| Interest expense                                                                                                                                                                                   |       | (5,844                                                               | )          | (4,383                                        | )          | (11,442 | ) | (8,509 | ) |
| Write-off of  deferred financing cost and interest rate swap termination expense                                                                                                                   |       | —                                                               |       | (2,901                                        | )          | — |   | (2,901 | ) |
| Other income                                                                                                                                                                                       |       | 540                                                                  |       | 226                                           |       | 893 |   | 387 |   |
| Income before  income taxes                                                                                                                                                                        |       | 12,363                                                               |       | 9,114                                         |       | 16,345 |   | 17,191 |   |
| Income tax (expense)  recovery:                                                                                                                                                                    |       |                                                                 |       |                                          |       |   |   |   |   |
| Current                                                                                                                                                                                            |       | 245                                                                  |       | (32                                           | )          | (487 | ) | (32 | ) |
| Deferred                                                                                                                                                                                           |       | (388                                                                 | )          | 46                                            |       | (217 | ) | 46 |   |
|                                                                                                                                                                                               |       | (143                                                                 | )          | 14                                            |       | (704 | ) | 14 |   |
| Net income                                                                                                                                                                                         |       | $                                                                    | 12,220     |                                          | $          | 9,128 |   | $ | 15,641 |   | $ | 17,205 |   |
| Net income (loss)  for the general partner interest (note 6)                                                                                                                                       |       | $                                                                    | 244        |                                          | $          | 183 |   | $ | (1,458 | ) | $ | 344 |   |
| Net income for  the limited partner interests                                                                                                                                                      |       | $                                                                    | 11,976     |                                          | $          | 8,945 |   | $ | 17,099 |   | $ | 16,861 |   |
| Basic and diluted net income per limited partner  unit                                                                                                                                             |       | $                                                                    | 0.40       |                                          | $          | 0.30 |   | $ | 0.58 |   | $ | 0.62 |   |
| Weighted average  limited partner units outstanding:                                                                                                                                               |       |                                                                 |       |                                          |       |   |   |   |   |
| Basic                                                                                                                                                                                              |       | 29,723                                                               |       | 29,479                                        |       | 29,689 |   | 27,239 |   |
| Diluted                                                                                                                                                                                            |       | 29,742                                                               |       | 29,632                                        |       | 29,708 |   | 27,402 |   |

 

See accompanying notes to condensed consolidated financial statements.

2

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**PACIFIC ENERGYPARTNERS, L.P. (Note 1)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, 2004                                             |       |                                | 19,159     |                                  |       |                 | 10,465     |                                              |       | $                                     | 361,427    |             |       | $ | 41,521 |   |   | $ | 6,280 |   |   | $ | 116 |   |   |   | $ | 13,122 |   |   | $ | 422,466 |   |
| Net income (note  6)                                                         |       |                                | —     |                                  |       |                 | —     |                                              |       | 11,075                                |       |             | 6,024      |   |   | (1,458 | ) |   | — |   |   |   | — |   |   | 15,641 |   |
| Distribution to  partners                                                    |       |                                | —     |                                  |       |                 | —     |                                              |       | (19,449                               | )          |             | (10,596    | ) |   | (613 | ) |   | — |   |   |   | — |   |   | (30,658 | ) |
| General partner  contribution (note 6)                             |       |                                | —     |                                  |       |                 | —     |                                              |       | —                                |       |             | —     |   |   | 2,407 |   |   | — |   |   |   | — |   |   | 2,407 |   |
| Employee  compensation under long-term incentive plan                        |       |                                | —     |                                  |       |                 | —     |                                              |       | —                                |       |             | —     |   |   | — |   |   | 2,886 |   |   |   | — |   |   | 2,886 |   |
| Issuance of  common units pursuant to long-term incentive plan (note 5) |       |                                | 99         |                                  |       |                 | —     |                                              |       | 1,545                                 |       |             | —     |   |   | 31 |   |   | (3,002 | ) |   |   | — |   |   | (1,426 | ) |
| Foreign currency  translation adjustment                                     |       |                                | —     |                                  |       |                 | —     |                                              |       | —                                |       |             | —     |   |   | — |   |   | — |   |   |   | (2,301 | ) |   | (2,301 | ) |
| Change in fair  value of hedging derivatives                                 |       |                                | —     |                                  |       |                 | —     |                                              |       | —                                |       |             | —     |   |   | — |   |   | — |   |   |   | (806 | ) |   | (806 | ) |
| Balance,  June 30, 2005                                                 |       |                                | 19,258     |                                  |       |                 | 10,465     |                                              |       | $                                     | 354,598    |             |       | $ | 36,949 |   |   | $ | 6,647 |   |   | $ | — |   |   |   | $ | 10,015 |   |   | $ | 408,209 |   |

 

3

See accompanying notes to condensed consolidated financial statements.

 

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**PACIFICENERGY PARTNERS, L.P. (Note 1)CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)**
| ** **                                         | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(in thousands)**                         | ** ** |
| Net income                                         |       | $                                               | 12,220     |                                          | $          | 9,128 |   | $ | 15,641 |   | $ | 17,205 |   |
| Change in fair  value of hedging derivatives       |       | 327                                             |       | 9,140                                         |       | (806 | ) | 4,904 |   |
| Change in foreign  currency translation adjustment |       | (1,765                                          | )          | 2,429                                         |       | (2,301 | ) | 2,429 |   |
| Comprehensive income                               |       | $                                               | 10,782     |                                          | $          | 20,697 |   | $ | 12,534 |   | $ | 24,538 |   |

 

See accompanying notes to condensed consolidated financial statements.

4

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**PACIFICENERGY PARTNERS, L.P. (Note 1)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                       | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES                                              |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 15,641     |   | $ | 17,205 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                      |       | 13,135                                        |       | 10,955 |   |
| Amortization of debt issue costs and debt discount  accretion                      |       | 937                                           |       | 670 |   |
| Write-off of deferred financing costs                                              |       | —                                        |       | 2,321 |   |
| Non-cash portion of employee compensation under  long-term incentive plan          |       | 1,429                                         |       | 1,351 |   |
| Deferred tax expense (benefit)                                                     |       | 217                                           |       | (46 | ) |
| Share of net income of Frontier                                                    |       | (847                                          | )          | (784 | ) |
| Other non-cash adjustments                                                         |       | 98                                            |       | — |   |
| Distributions from Frontier, net                                                   |       | 650                                           |       | 668 |   |
|                                                                               |       | 31,260                                        |       | 32,340 |   |
| Net  changes in operating assets and liabilities:                                  |       |                                          |       |   |   |
| Crude oil sales receivable                                                         |       | (8,819                                        | )          | 4,270 |   |
| Transportation and storage accounts receivable                                     |       | 1,699                                         |       | (8,757 | ) |
| Insurance proceeds receivable                                                      |       | (6,705                                        | )          | — |   |
| Other current assets and liabilities                                               |       | 2,116                                         |       | 267 |   |
| Accounts payable and other accrued liabilities                                     |       | 11,095                                        |       | 3,677 |   |
| Accrued crude oil purchases                                                        |       | 11,113                                        |       | (2,271 | ) |
| Line 63 oil release reserve                                                        |       | 4,981                                         |       | — |   |
| Other non-current assets and liabilities                                           |       | (522                                          | )          | (261 | ) |
|                                                                               |       | 14,958                                        |       | (3,075 | ) |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 46,218                                        |       | 29,265 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                              |       |                                          |       |   |   |
| Acquisitions                                                                       |       | —                                        |       | (139,050 | ) |
| Additions to property and equipment                                                |       | (9,877                                        | )          | (7,896 | ) |
| Other                                                                              |       | (98                                           | )          | — |   |
| NET CASH USED IN INVESTING ACTIVITIES                                              |       | (9,975                                        | )          | (146,946 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                              |       |                                          |       |   |   |
| Issuance of common units, net of fees and offering  expenses                       |       | —                                        |       | 125,881 |   |
| Capital contributions from the general partner                                     |       | 2,438                                         |       | 2,690 |   |
| Net proceeds from senior notes offering                                            |       | —                                        |       | 241,086 |   |
| Repayment of term loan                                                             |       | —                                        |       | (225,000 | ) |
| Proceeds from credit facilities                                                    |       | 66,283                                        |       | 154,168 |   |
| Repayment of credit facilities                                                     |       | (64,326                                       | )          | (141,500 | ) |
| Deferred financing costs                                                           |       | (600                                          | )          | (1,008 | ) |
| Distributions to partners                                                          |       | (30,658                                       | )          | (27,081 | ) |
| Related parties                                                                    |       | (686                                          | )          | 607 |   |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                |       | (27,549                                       | )          | 129,843 |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 8,694                                         |       | 12,162 |   |
| CASH AND CASH EQUIVALENTS, beginning of reporting  period                          |       | 23,383                                        |       | 9,699 |   |
| CASH AND CASH  EQUIVALENTS, end of reporting period                                |       | $                                             | 32,077     |   | $ | 21,861 |   |

 

See accompanying notes to condensed consolidated financial statements.

5

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**PACIFIC ENERGYPARTNERS, L.P.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June 30, 2005**

**(Unaudited)**

**1.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

**Basis ofPresentation**

Pacific Energy Partners, L.P. and its subsidiaries(the “Partnership”) are engaged principally in the business of gathering,transporting, storing and distributing crude oil and related products inCalifornia and the Rocky Mountain region of the U.S. and Canada. ThePartnership generates revenue primarily by transporting crude oil on itspipelines and by leasing storage capacity. The Partnership also buys, blendsand sells crude oil, activities that are complementary to the Partnership’spipeline transportation business. The Partnership operates primarily inCalifornia, Colorado, Montana, Wyoming and Utah in the United States, and inAlberta, Canada and conducts its business through two regional businesssegments: the West Coast Business Unit and the Rocky Mountain Business Unit. Seealso “Note 9—Subsequent Events”.

The Partnership is managed by its general partner,Pacific Energy GP, LP, a Delaware limited partnership, which, prior to itsconversion to a limited partnership on March 3, 2005, was Pacific EnergyGP, Inc., a corporation owned 100% by a subsidiary of The AnschutzCorporation (“TAC”). On March 3, 2005, TAC sold all of its interest inPacific Energy GP, Inc. to LB Pacific, LP (“LBP”), which was formed by theLehman Brothers Merchant Banking Group (“LBMB”) in connection with the purchase(see “Note 3—Related Party Transactions”). Pacific Energy GP, LP ismanaged by its general partner, Pacific Energy Management LLC, a Delawarelimited liability company.

The unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial reporting and withSecurities and Exchange Commission (“SEC”) regulations. Accordingly, thesestatements have been condensed and do not include all of the information andfootnotes required for complete financial statements. These statements involvethe use of estimates and judgments where appropriate. In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals considerednecessary for a fair presentation, have been included. The results ofoperations for the three and six months ended June 30, 2005 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 Rangeland system,including the Mid-Alberta Pipeline (“MAPL”), since the acquisition of thoseassets on May 11, 2004 and June 30, 2004, respectively.

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, 2004. Certain prior year balances in the accompanyingcondensed consolidated financial statements have been reclassified to conformto the current year presentation.

**Income Taxes**

The Partnership and its U.S. and Canadian subsidiariesare not taxable entities in the U.S. and are not subject to U.S. federal orstate income taxes, as the tax effect of operations is passed through to itsunitholders. The Partnership’s Canadian subsidiaries are taxable entities inCanada and are subject to Canadian federal and provincial income taxes andother Canadian income taxes. In addition, monies repatriated from Canada intothe U.S. may be subject to withholding taxes.

6

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Income taxes are accountedfor under the asset and liability method. Under this method, deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases, and operatingloss and tax credit carryforwards. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in operations in the period that includes the enactmentdate. The Partnership intends to repatriate its Canadian subsidiaries’ earningsin the future and accordingly has recorded a provision for Canadian withholdingtaxes on any earnings to be repatriated from its Canadian subsidiaries.

**Net Income per Unit**

Basic net income per limited partner unit isdetermined by dividing net income after deducting the amount allocated to thegeneral partner interest, by the weighted average number of outstanding limitedpartner units.

Dilutednet income per limited partner unit is calculated in the same manner as basicnet income per limited partner unit above, except that the weighted averagenumber of outstanding limited partner units is increased to include thedilutive effect of outstanding options and restricted units by application ofthe treasury stock method. There were no outstanding restricted units as of June 30,2005 because of the accelerated vesting of units (see “Note 5—Vesting ofUnit Grants Under Long-Term Incentive Plan”). Following is a reconciliation ofthe basic weighted average outstanding limited partner units to dilutedweighted average limited partner units.
| ** **                                      | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                         | ** ** |
| Basic weighted  average limited partner units   |       | 29,723                                          |       | 29,479                                        |       | 29,689 |   | 27,239 |   |
| Effect of  restricted units                     |       | —                                          |       | 140                                           |       | — |   | 148 |   |
| Effect of options                               |       | 19                                              |       | 13                                            |       | 19 |   | 15 |   |
| Diluted weighted average  limited partner units |       | 29,742                                          |       | 29,632                                        |       | 29,708 |   | 27,402 |   |

 

**Allocation of NetIncome**

Net income is allocated tothe Partnership’s general partner and limited partners based on theirrespective interest in the Partnership. The Partnership’s general partner isalso directly charged with specific costs that it assumed in connection withits acquisition by LBP and for which the limited partners are not responsible(see “Note 6—Allocation of Net Income”).

**New AccountingPronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(revised December 2004), *Share-Based Payment*(SFAS123R). This Statement is a revision of SFAS No. 123. SFAS 123R establishesstandards for the accounting of transactions in which an entity exchanges itsequity instruments for goods or services. SFAS 123R is effective for thePartnership as of the beginning of the first annual reporting period thatbegins after June 15, 2005. The Partnership has not yet determined theimpact of the adoption of SFAS 123R on the Partnership’s consolidated financialstatements.

On March 30, 2005 theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations*(FIN 47), toclarify the term *conditional asset retirement obligation*as that term is used in FASB Statement No. 143, *Accountingfor Asset Retirement Obligations*. The Interpretation also 

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clarifieswhen an entity has sufficient information to reasonably estimate the fair valueof an asset retirement obligation. FIN 47 is effective for the Partnership nolater than the end of fiscal years ending after December 15, 2005. ThePartnership is in the process of determining the impact of FIN 47 on its financialstatements.

**2.**                 LINE63 OIL RELEASE RESERVE

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 induced by heavy rainfall in the Pyramid Lake area of LosAngeles County. Over the period March 2005 through March 2006, thePartnership expects to incur an estimated total of $15.0 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 June 30, 2005, the Partnership had incurredapproximately $11.5 million of the total expected costs related to the oilrelease for work performed through that date. Additionally, the Partnershipexpensed $0.6 million, all in the second quarter, for the repair of Line 63and expects to incur $1.2 million of Line 63 capital improvements infuture periods.

The Partnership has a pollution liability insurancepolicy with a $2.0 million deductible that covers containment and clean-upcosts, third-party claims and penalties. The insurance carrier has acknowledgedcoverage of the incident and is processing and paying invoices related to theclean-up. The Partnership believes that, subject to the $2.0 milliondeductible, it will be entitled to recover substantially all of its clean-upcosts and any third-party claims associated with the release. The Partnership’sinsurance coverage will not cover the cost to repair the pipeline. As of June 30,2005, the Partnership has recovered $6.3 million from insurance andrecorded a receivable of $6.7 million for insurance recoveries it deemsprobable.

The Partnership recorded $2.0 million in netcosts in “Line 63 oil release costs” in the accompanying condensed consolidatedfinancial statements for the six months ended June 30, 2005. The $2.0 millionnet oil release costs consist of the $15.0 million of accrued costsrelating to the release, net of insurance recovery of $6.3 million and accruedinsurance receipts of $6.7 million.

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 and repair plans, the ongoing assessment of theimpact of soil and water contamination, the uncertainty of the geologicalconditions that will be encountered during the permanent repairs of the pipeline,changes in costs associated with environmental remediation services andequipment, and the possibility of third-party legal claims giving rise toadditional expenses. Therefore, no assurance can be made that costs incurred inexcess of this provision, if any, would not have a material adverse effect onthe Partnership’s financial condition, results of operations, or cash flows,though the Partnership believes that most, if not all, of any such excess cost,to the extent attributable to clean-up and third-party claims, would berecoverable through insurance. As new information becomes available in futureperiods, the Partnership may change its provision and recovery estimates.

**3.**                 RELATEDPARTY TRANSACTIONS

**Sale of TheAnschutz Corporation’s Interest in the Partnership**

On March 3, 2005, TAC sold all of its interest inPacific Energy GP, Inc. to LBP, which was formed by LBMB in connectionwith the purchase. The acquisition by LBP (the “LB Acquisition”) included the100% ownership interest in Pacific Energy GP, Inc., which owned (i) the2% general partner interest in the Partnership and the incentive distributionrights, and (ii) 10,465,000 subordinated units of the Partnershiprepresenting a 34.6% limited partner interest in the Partnership. Immediatelyprior to the closing of the 

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LB Acquisition, PacificEnergy GP, Inc. was converted to Pacific Energy GP, LLC, a Delawarelimited liability company; and immediately after the closing of the LBAcquisition, Pacific Energy GP, LLC was converted to Pacific Energy GP, LP (the“General Partner”). Immediately following the consummation of the LBAcquisition, the General Partner distributed the 10,465,000 subordinated unitsof the Partnership to LBP.

In connection with the conversion of the Partnership’sGeneral Partner to a limited partnership, the General Partner ceased to have aboard of directors, and is now managed by its general partner, Pacific EnergyManagement LLC, a Delaware limited liability company (“PEM” or the “ManagingGeneral Partner”), which is 100% owned by LBP. PEM has a board of directors(the “Board of Directors” or “Board”) that manages the business and affairs ofPEM and, thus, indirectly manages the business and affairs of the GeneralPartner and the Partnership. All of the officers and employees of PacificEnergy GP, Inc. were transferred to fill the same positions with PEM, andthe PEM Board established the same committees as had been maintained by PacificEnergy GP, Inc. prior to the LB Acquisition. PEM also adopted PacificEnergy GP, Inc.’s governance guidelines and its compensation structure andemployee benefits plans and policies.

Additionally, on March 21,2005, an affiliate of First Reserve Corporation (“First Reserve”) acquired fromLBMB a 30% partnership interest in LBP. LBMB and its affiliates continue to owna 70% partnership interest in LBP.

**Cost Reimbursements**

***Managing General Partner:  ***ThePartnership’s Managing General Partner employs all U.S.-based employees. Allemployee expenses incurred by the Managing General Partner on behalf of thePartnership are charged back to the Partnership.

***Special Agreement:  ***OnMarch 3, 2005, Douglas L. Polson, previously the Chairman of the Board ofDirectors of Pacific Energy GP, Inc., entered into a Special Agreement anda Consulting Agreement with PEM. In accordance with the Special Agreement, Mr. Polsonresigned as Chairman of the Board of Directors of Pacific Energy GP, Inc.effective March 3, 2005. Mr. Polson was paid approximately $0.9 million,representing accrued but unused vacation, accrued salary through March 3,2005 and payment in satisfaction of other obligations under his employmentagreement. The severance portion of this payment of approximately $0.9 millionwas recorded as an expense in “Transaction costs” in the accompanying condensedconsolidated income statements (see “Note 6—Allocation of Net Income”).LBP reimbursed this amount, which was recorded as a partner’s capitalcontribution. Pursuant to the Consulting Agreement, Mr. Polson has agreedto perform advisory services to PEM from time to time as shall be mutuallyagreed between Mr. Polson and the Chief Executive Officer of PEM. In considerationfor Mr. Polson’s services under the Consulting Agreement, which has aone-year term, Mr. Polson will receive a monthly consulting fee of $12,500and reimbursement of all reasonable business expenses incurred or paid by Mr. Polsonin the course of performing his duties thereunder.

***LBP and TAC:  ***LBPand TAC reimbursed the Partnership for certain other costs relating to the LBAcquisition. These included $1.2 million for the Consent Solicitation (asdefined and further described in “Note 4—Long-Term Debt”, below) and $0.3 millionfor legal and other expenses (also see “Note 6—Allocation of Net Income”).

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**Other Related PartyTransactions**

***Lehman Brothers, Inc.:  ***LehmanBrothers, Inc., an affiliate of LBP, is acting as the exclusive financialadvisor in the pending acquisition of certain assets from Valero L.P. Additionally,Lehman Brothers has committed to provide the Partnership with 50% of the $700million financing commitment and will act as a lead underwriter in any debt orequity offering (see “Note9—Subsequent Events”). These agreements withLehman Brothers, Inc. were reviewed and approved by the ConflictsCommittee of the Board of Directors.

***Revenue from Related Parties:  ***RockyMountain Pipeline System LLC (“RMPS”), a subsidiary of the Partnership,receives an operating fee and a management fee from Frontier Pipeline Company (“Frontier”)in connection with time spent by RMPS management and for other services relatedto Frontier’s pipeline’s activities. RMPS received $0.2 million and $0.1million for each of the three months ended June 30, 2005 and 2004 and $0.4million and $0.3 million for each of the six months ended June 30, 2005and 2004, respectively.

***Due from (to) Related Parties:  ***Duefrom related parties, which includes payroll related items, consists of $0.2million due from PEM and $0.5 million due to Pacific Energy GP, Inc. at June 30,2005 and December 31, 2004, respectively.

**4. LONG-TERM DEBT**

ThePartnership’s long-term debt obligations are shown below:
| ** **                                                                                                                                                                               | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **(in thousands)** | ** ** |
| Senior secured  U.S. revolving credit facility, bearing interest at 4.6% on June 30,  2005, due July 2007                                                                      |       | $                       | 53,000     |                        |       | $ | 51,000 |   |   |
| Senior secured  Canadian revolving credit facility, bearing interest at 4.9% on June 30,  2005, due May 2007                                                                   |       | 53,035                  |       |                        | 54,005     |   |   |
| Senior Notes, net  of unamortized discount of $4,046 and $4,202 and including fair value  increases of $3,528 and $2,693, respectively, with a coupon of 71¤8%,  due June 2014 |       | 249,482                 |       |                        | 248,491    |   |   |
| Future payment  for MAPL assets, net of unamortized discount of $387 and $480, respectively,  due June 2007                                                                         |       | 3,692                   |       |                        | 3,667      |   |   |
| Long-term debt                                                                                                                                                                           |       | $                       | 359,209    |                        |       | $ | 357,163 |   |   |

 

Under the Indenture governing the Partnership’s 71¤8% Senior Notes due 2014 (the “Senior Notes”), thePartnership would have been required to make a “Change of Control Offer” to theholders of its Senior Notes if the LB Acquisition caused a rating decline by acredit rating agency. In order to avoid triggering the “Change of Control Offer”provision, the Partnership solicited the consent (the “Consent Solicitation”)of the holders of its Senior Notes to amend certain provisions of theIndenture, including an amendment to the definition of “Change of Control.”  The Consent Solicitation was completed on February 10,2005 with a majority of the holders of the Senior Notes consenting to theadoption of the proposed amendments, and as such, the proposed amendments wereapproved. Thereafter, a supplemental indenture that incorporated the proposedamendments was executed by the parties to the Indenture. Fees of $0.6 millionpaid to holders of the Senior Notes were capitalized and included in “Otherassets” in the accompanying condensed consolidated balance sheet at June 30,2005 and will be amortized over the remaining life of the Senior Notes. Othersolicitation—related fees and expenses of approximately $0.6 million areincluded in “Transaction costs” in the accompanying condensed consolidatedstatements of income. LBP and TAC reimbursed the Partnership for the costs ofthe Consent Solicitation, which are recorded as a partner’s capitalcontribution (see “Note 3—Related Party Transactions”).

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Additionally, the U.S. andCanadian revolving credit facilities also contained change of controlprovisions. The Partnership amended the U.S. and Canadian revolving creditfacilities to account for the change in control of its General Partner.

**5. VESTINGOF UNIT GRANTS UNDER LONG-TERM INCENTIVE PLAN**

On March 3, 2005, inconnection with the LB Acquisition and with the change in control of thePartnership’s General Partner, all restricted units outstanding under thePartnership’s Long-Term Incentive Plan immediately vested pursuant to the termsof the grants. The Partnership issued 99,583 common units and recognized acompensation expense of $3.1 million, which is included in “Acceleratedlong-term incentive plan compensation expense” in the accompanying condensedconsolidated statements of income.

**6. ALLOCATION OF NET INCOME**

Theallocation of net income between the Partnership’s General Partner and limitedpartners is as follows.
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(in thousands)**                         | ** ** |
| Net income                                                              |       | $                                               | 12,220     |                                          | $          | 9,128 |   | $ | 15,641 |   | $ | 17,205 |   |
| Transaction costs  reimbursed by general partner:                       |       |                                            |       |                                          |       |   |   |   |   |
| Senior Notes consent solicitation and other costs                       |       | —                                          |       | —                                        |       | 893 |   | — |   |
| Severance and other costs                                               |       | —                                          |       | —                                        |       | 914 |   | — |   |
| Total transaction costs reimbursed by general  partner                  |       | —                                          |       | —                                        |       | 1,807 |   | — |   |
| Income before  transaction costs reimbursed by general partner          |       | 12,220                                          |       | 9,128                                         |       | 17,448 |   | 17,205 |   |
| General partner’s  share of income                                 |       | 2                                               | %          | 2                                             | %          | 2 | % | 2 | % |
| General partner  allocated share of net income before transaction costs |       | 244                                             |       | 183                                           |       | 349 |   | 344 |   |
| Transaction costs  reimbursed by general partner                        |       | —                                          |       | —                                        |       | (1,807 | ) | — |   |
| Net income (loss)  allocated to general partner                         |       | $                                               | 244        |                                          | $          | 183 |   | $ | (1,458 | ) | $ | 344 |   |
| Income before transaction costs reimbursed by  general partner          |       | $                                               | 12,220     |                                          | $          | 9,128 |   | $ | 17,448 |   | $ | 17,205 |   |
| Limited partners  share of income                                       |       | 98                                              | %          | 98                                            | %          | 98 | % | 98 | % |
| Limited partners  share of net income                                   |       | $                                               | 11,976     |                                          | $          | 8,945 |   | $ | 17,099 |   | $ | 16,861 |   |
| Net income (loss) allocated to general partner                          |       | $                                               | 244        |                                          | $          | 183 |   | $ | (1,458 | ) | $ | 344 |   |
| Net income  allocated to limited partners                               |       | 11,976                                          |       | 8,945                                         |       | 17,099 |   | 16,861 |   |
| Net income                                                              |       | $                                               | 12,220     |                                          | $          | 9,128 |   | $ | 15,641 |   | $ | 17,205 |   |

 

LBP and TAC reimbursed thePartnership for certain costs incurred in connection with the LB Acquisition. ThePartnership was reimbursed $1.2 million for costs incurred in connection withthe Consent Solicitation, $0.3 million of legal and other costs and $0.9million relating to severance costs (see “Note 3—Related Party Transactions”),for a total of $2.4 million. Of the $1.2 million incurred for the consentsolicitation, $0.6 million was capitalized as deferred financing costs and $0.6million was expensed in the six months ended June 30, 2005.

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**7.  SEGMENTINFORMATION**

ThePartnership’s business and operations are organized into two regional businesssegments: the West Coast Business Unit and the Rocky Mountain Business Unit.The West Coast Business Unit includes: (i) Pacific Pipeline System LLC,owner of Line 2000 and Line 63, (ii) Pacific Marketing and TransportationLLC, owner of the PMT gathering and blending system, and (iii) PacificTerminals LLC, owner of the Pacific Terminals storage and distribution system.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, (ii) RanchPipeline LLC, the owner of a 22.22% partnership interest in Frontier PipelineCompany, and (iii) PEG Canada, L.P. and its Canadian subsidiaries, whichown and operate the Rangeland system (for the period since May 11, 2004).General and administrative costs, which consist of executive management,accounting and finance, human resources, information technology, investorrelations, legal, and business development, are not allocated to the individualbusiness units. Information regarding these two business units is summarizedbelow:
| ** **                                   | ** ** | **West Coast  Business Unit** | ** ** | **Rocky Mountain  Business Unit** | ** ** | **Intersegment and  Intrasegment  Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| ** **                                   | ** ** | **(in thousands)**                 | ** ** |
| **Three months ended June 30, 2005**    |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Business unit revenue:                       |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation  revenue             |       |                                    | $          | 15,194                                      |       |                                                  |       | $         | 14,006     |   |   |   | $ | (1,453 | ) |   | $ | 27,747 |   |
| Storage and distribution  revenue            |       |                                    | 10,870     |                                        |       |                                                  | —     |      |       |   |   |   |   | 10,870 |   |
| Pipeline buy/sell  transportation revenue(1) |       |                                    | —     |                                        |       |                                                  | 8,116      |      |       |   |   |   |   | 8,116 |   |
| Crude oil sales, net of  purchases(2)        |       |                                    | 5,866      |                                        |       |                                                  | 206        |      |       |   | (30 | ) |   | 6,042 |   |
| Net revenue                                  |       |                                    | 31,930     |                                        |       |                                                  | 22,328     |      |       |   |   |   |   | 52,775 |   |
| Expenses:                                    |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Operating                                    |       |                                    | 15,996     |                                        |       |                                                  | 10,779     |      |       |   | (1,483 | ) |   | 25,292 |   |
| Depreciation and  amortization               |       |                                    | 3,529      |                                        |       |                                                  | 3,077      |      |       |   |   |   |   | 6,606 |   |
| Total expenses                               |       |                                    | 19,525     |                                        |       |                                                  | 13,856     |      |       |   |   |   |   | 31,898 |   |
| Share of net income of  Frontier             |       |                                    | —     |                                        |       |                                                  | 490        |      |       |   |   |   |   | 490 |   |
| Operating income from  segments(4)           |       |                                    | $          | 12,405                                      |       |                                                  |       | $         | 8,962      |   |   |   |   |   |   | $ | 21,367 |   |
| Business unit assets(5)                      |       |                                    | $          | 501,990                                     |       |                                                  |       | $         | 342,420    |   |   |   |   |   |   | $ | 844,410 |   |
| Capital expenditures(6)                      |       |                                    | $          | 934                                         |       |                                                  |       | $         | 2,535      |   |   |   |   |   |   | $ | 3,469 |   |
| **Three months ended June 30, 2004**    |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Business unit revenue:                       |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation  revenue             |       |                                    | $          | 16,494                                      |       |                                                  |       | $         | 11,804     |   |   |   | $ | (1,306 | ) |   | $ | 26,992 |   |
| Storage and distribution  revenue            |       |                                    | 9,359      |                                        |       |                                                  | —     |      |       |   | (100 | ) |   | 9,259 |   |
| Pipeline buy/sell  transportation revenue(1) |       |                                    | —     |                                        |       |                                                  | 3,690      |      |       |   |   |   |   | 3,690 |   |
| Crude oil sales, net of  purchases(2)        |       |                                    | 6,056      |                                        |       |                                                  | —     |      |       |   |   |   |   | 6,056 |   |
| Net revenue                                  |       |                                    | 31,909     |                                        |       |                                                  | 15,494     |      |       |   |   |   |   | 45,997 |   |
| Expenses:                                    |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Operating                                    |       |                                    | 14,182     |                                        |       |                                                  | 8,091      |      |       |   | (1,406 | ) |   | 20,867 |   |
| Depreciation and  amortization               |       |                                    | 3,635      |                                        |       |                                                  | 2,078      |      |       |   |   |   |   | 5,713 |   |
| Total expenses                               |       |                                    | 17,817     |                                        |       |                                                  | 10,169     |      |       |   |   |   |   | 26,580 |   |
| Share of net income of  Frontier             |       |                                    | —     |                                        |       |                                                  | 391        |      |       |   |   |   |   | 391 |   |
| Operating income from  segments(4)           |       |                                    | $          | 14,092                                      |       |                                                  |       | $         | 5,716      |   |   |   |   |   |   | $ | 19,808 |   |
| Business unit assets(5)                      |       |                                    | $          | 501,424                                     |       |                                                  |       | $         | 317,209    |   |   |   |   |   |   | $ | 818,633 |   |
| Capital expenditures(6)                      |       |                                    | $          | 742                                         |       |                                                  |       | $         | 3,185      |   |   |   |   |   |   | $ | 3,927 |   |

 

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| ** **                                  | ** ** | **West Coast  Business Unit** | ** ** | **Rocky Mountain  Business Unit** | ** ** | **Intersegment and  Intrasegment  Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | **(in thousands)**                 | ** ** |
| **Six months ended June 30,  2005**    |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Business unit  revenue:                     |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation revenue             |       |                                    | $          | 32,638                                      |       |                                                  |       | $         | 26,461     |   |   |   | $ | (3,315 | ) |   | $ | 55,784 |   |
| Storage and distribution revenue            |       |                                    | 21,342     |                                        |       |                                                  | —     |      |       |   | (150 | ) |   | 21,192 |   |
| Pipeline buy/sell transportation revenue(1) |       |                                    | —     |                                        |       |                                                  | 17,222     |      |       |   |   |   |   | 17,222 |   |
| Crude oil sales, net of purchases(2)        |       |                                    | 7,678      |                                        |       |                                                  | 206        |      |       |   | (60 | ) |   | 7,824 |   |
| Net revenue                                 |       |                                    | 61,658     |                                        |       |                                                  | 43,889     |      |       |   |   |   |   | 102,022 |   |
| Expenses:                                   |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Operating                                   |       |                                    | 30,503     |                                        |       |                                                  | 20,068     |      |       |   | (3,525 | ) |   | 47,046 |   |
| Line 63 oil release costs(3)                |       |                                    | 2,000      |                                        |       |                                                  | —     |      |       |   |   |   |   | 2,000 |   |
| Depreciation and amortization               |       |                                    | 7,006      |                                        |       |                                                  | 6,129      |      |       |   |   |   |   | 13,135 |   |
| Total expenses                              |       |                                    | 39,509     |                                        |       |                                                  | 26,197     |      |       |   |   |   |   | 62,181 |   |
| Share of net  income of Frontier            |       |                                    | —     |                                        |       |                                                  | 847        |      |       |   |   |   |   | 847 |   |
| Operating income  from segments(4)          |       |                                    | $          | 22,149                                      |       |                                                  |       | $         | 18,539     |   |   |   |   |   |   | $ | 40,688 |   |
| Business unit  assets(5)                    |       |                                    | $          | 501,990                                     |       |                                                  |       | $         | 342,420    |   |   |   |   |   |   | $ | 844,410 |   |
| Capital  expenditures(6)                    |       |                                    | $          | 1,684                                       |       |                                                  |       | $         | 5,467      |   |   |   |   |   |   | $ | 7,151 |   |
| **Six  months ended June 30, 2004**    |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Business unit revenue:                      |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation revenue             |       |                                    | $          | 32,185                                      |       |                                                  |       | $         | 22,347     |   |   |   | $ | (2,813 | ) |   | $ | 51,719 |   |
| Storage and distribution revenue            |       |                                    | 19,582     |                                        |       |                                                  | —     |      |       |   | (200 | ) |   | 19,382 |   |
| Pipeline buy/sell transportation revenue(1) |       |                                    | —     |                                        |       |                                                  | 3,690      |      |       |   |   |   |   | 3,690 |   |
| Crude oil sales, net of purchases(2)        |       |                                    | 10,868     |                                        |       |                                                  | —     |      |       |   |   |   |   | 10,868 |   |
| Net revenue                                 |       |                                    | 62,635     |                                        |       |                                                  | 26,037     |      |       |   |   |   |   | 85,659 |   |
| Expenses:                                   |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Operating                                   |       |                                    | 28,888     |                                        |       |                                                  | 13,909     |      |       |   | (3,013 | ) |   | 39,784 |   |
| Depreciation and amortization               |       |                                    | 7,400      |                                        |       |                                                  | 3,555      |      |       |   |   |   |   | 10,955 |   |
| Total expenses                              |       |                                    | 36,288     |                                        |       |                                                  | 17,464     |      |       |   |   |   |   | 50,739 |   |
| Share of net  income of Frontier            |       |                                    | —     |                                        |       |                                                  | 784        |      |       |   |   |   |   | 784 |   |
| Operating income  from segments(4)          |       |                                    | $          | 26,347                                      |       |                                                  |       | $         | 9,357      |   |   |   |   |   |   | $ | 35,704 |   |
| Business unit  assets(5)                    |       |                                    | $          | 501,424                                     |       |                                                  |       | $         | 317,209    |   |   |   |   |   |   | $ | 818,633 |   |
| Capital expenditures(6)                     |       |                                    | $          | 1,539                                       |       |                                                  |       | $         | 4,476      |   |   |   |   |   |   | $ | 6,015 |   |

----

(1)          Includes the revenue ofthe Rangeland system, which was acquired on May 11, 2004 and June 30,2004. Pipeline buy/sell transportation revenue reflects net revenues ofapproximately $0.7 million on gross revenues for buy/sell transactions of $28.0million with different parties for the three months ended June 30, 2005and net revenues of approximately $2.1 million on gross revenues for buy/selltransactions of $48.5 million with different parties for the six months ended June 30,2005. The remaining amount reflects net revenues on buy/sell transactions withthe same party.

(2)          The above amounts arenet of purchases of $­­­122,442 and $94,382 for the three months ended June 30,2005 and 2004 and $236,833 and $175,497 for the six months ended June 30,2005 and 2004, respectively.

(3)          See “Note 2—Line 63 OilRelease Reserve” for further information.

13

----

(4)          Thefollowing is a reconciliation of operating income as stated above to netincome:
| ** **                                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(in thousands)**                         | ** ** |
| **Income  Statement Reconciliation**                                             |       |                                            |       |                                          |       |   |   |   |   |
| Operating income  from above:                                                    |       |                                            |       |                                          |       |   |   |   |   |
| West Coast Business Unit                                                         |       | $                                               | 12,405     |                                          | $          | 14,092 |   | $ | 22,149 |   | $ | 26,347 |   |
| Rocky Mountain Business Unit                                                     |       | 8,962                                           |       | 5,716                                         |       | 18,539 |   | 9,357 |   |
| Operating income  from segments                                                  |       | 21,367                                          |       | 19,808                                        |       | 40,688 |   | 35,704 |   |
| Less: General and  administrative expense                                        |       | (3,700                                          | )          | (3,636                                        | )          | (8,872 | ) | (7,490 | ) |
| Less: Accelerated  long-term incentive plan compensation expense                 |       | —                                          |       | —                                        |       | (3,115 | ) | — |   |
| Less: Transaction  costs                                                         |       | —                                          |       | —                                        |       | (1,807 | ) | — |   |
| Operating income                                                                 |       | 17,667                                          |       | 16,172                                        |       | 26,894 |   | 28,214 |   |
| Interest expense                                                                 |       | (5,844                                          | )          | (4,383                                        | )          | (11,442 | ) | (8,509 | ) |
| Write-off of deferred financing cost and interest  rate swap termination expense |       | —                                          |       | (2,901                                        | )          | — |   | (2,901 | ) |
| Other income                                                                     |       | 540                                             |       | 226                                           |       | 893 |   | 387 |   |
| Income tax benefit (expense)                                                     |       | (143                                            | )          | 14                                            |       | (704 | ) | 14 |   |
| Net income                                                                       |       | $                                               | 12,220     |                                          | $          | 9,128 |   | $ | 15,641 |   | $ | 17,205 |   |

 

(5)          Business unit assets donot include assets related to the Partnership’s parent level activities. As of June 30,2005 and 2004, parent level related assets were $39,885 and $32,879respectively.

(6)          Capitalexpenditures do not include the Pier 400 project and other parent-level relatedcapital expenditures. Pier 400 project and other parent-level related capitalexpenditures were $2.0 million and $1.6 million for the three months ended June 30,2005 and 2004 and $2.7 million and $1.9 million for the six months ended June 30,2005 and 2004, respectively.

**8.  CONTINGENCIES**

The Partnership isinvolved in various regulatory disputes, litigation and claims arising out ofits operations in the normal course of business (see also “Note 2—Line 63 OilRelease Reserve”). The Partnership is not currently a party to any legal orregulatory proceedings the resolution of which could be expected to have amaterial adverse effect on its business, financial condition, liquidity orresults of operations.

**9.  SUBSEQUENTEVENTS**

***Valero Acquisition***

On July 1, 2005, Pacific Energy Group LLC (“PEG”),a wholly owned subsidiary of the Partnership, entered into a Sale and PurchaseAgreement (the “Purchase Agreement”), with Support Terminals OperatingPartnership, L.P., Kaneb Pipe Line Operating Partnership, L.P. and ShoreTerminals LLC (the “Sellers”), pursuant to which PEG agreed to acquire certainterminal and pipeline assets from the Sellers for an aggregate purchase priceof $455.0 million. The assets being purchased consist of (i) the MartinezTerminal and Richmond Terminal in the San Francisco, California area, (ii) theNorth Philadelphia and South Philadelphia Terminals and the Paulsboro, NewJersey Terminal in the Philadelphia, Pennsylvania area, and (iii) a 550-milerefined products pipeline with four truck terminals and storage in the U.S.Rocky Mountains.

14

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The Martinez and Richmond Terminals have 4.1 millionbarrels of combined storage capacity and handle refined products, blend stocksand crude oil. The terminals are connected to pipelines and to area refineriesby pipelines and can also receive and deliver products by marine vessel orbarge. The terminals also have truck racks for products delivery and receipt. TheRichmond terminal has a rail spur for delivery and receipt of products.

The North Philadelphia Terminal, the SouthPhiladelphia Terminal and the Paulsboro, New Jersey Terminal handle refinedproducts and have a combined storage capacity of 3.2 million barrels. Theterminals are connected to pipelines and have truck racks for deliveries. TheNorth Philadelphia and Paulsboro terminals can also deliver and receiveproducts by marine vessel or barge.

The 550-mile pipeline system, known as the WestPipeline System, consists of 550 miles of refined products pipeline extendingfrom Casper, Wyoming east to Rapid City, South Dakota and south to ColoradoSprings, Colorado. In addition, there are four products terminals at RapidCity, South Dakota, Cheyenne, Wyoming and Denver and Colorado Springs, Coloradowith a combined storage capacity of 1.7 million barrels.

The Partnership expects to fund the acquisition on apermanent basis by issuing common units for approximately 60-65% of thepurchase price and debt securities for approximately 35-40% of theacquisition price. The purchase is subject to the receipt of regulatoryapprovals and is expected to close by October 1, 2005.

Also, in connection withthe purchase, the Partnership has received $700 million in financingcommitments from Bank of America, N.A. and Lehman Brothers, Inc. Thesecommitments include a new five-year $400 million secured revolving creditfacility, which would partly fund the acquisition as well as repay and replacethe Partnership’s existing U.S. and Canadian revolving credit facilities. Thesecommitments also include a $300 million, 364-day secured term creditfacility, which would only be used to fund the acquisition if permanentfinancing is not obtained by the acquisition closing date.

***Purchase Of Crude Oil and Contracts***

On July 1, 2005,Pacific Marketing and Transportation LLC, a wholly owned subsidiary of thePartnership purchased certain crude oil contracts and crude oil inventories forapproximately $2.2 million plus contingent payments over the next three and onehalf years based on specified performance criteria.

***Distribution***

On July 21, 2005, the Partnership declared a cashdistribution of $0.5125 per limited partner unit, payable on August 12,2005, to unitholders of record as of August 1, 2005.

15

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**10.**          SUPPLEMENTALCONDENSED CONSOLIDATING FINANCIAL INFORMATION

Given that certain, but not all subsidiaries of thePartnership are guarantors of its Senior Notes, the Partnership is required topresent the following supplemental condensed consolidating financialinformation. For purposes of the following footnote, the Partnership and itspredecessor are referred to as “Parent.” Rocky Mountain Pipeline System LLC,Pacific Marketing and Transportation LLC, Ranch Pipeline LLC, PEG Canada GPLLC, PEG Canada, L.P. and Pacific Energy Group LLC, the guarantors of theSenior Notes, are collectively referred to as the “Guarantor Subsidiaries,” andPacific Pipeline System LLC, Pacific Terminals LLC, Rangeland Pipeline Company,Rangeland Marketing Company, Rangeland Northern Pipeline Company, RangelandPipeline Partnership and Aurora Pipeline Company, Ltd. are referred to as “Non-GuarantorSubsidiaries.”

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  June 30, 2005** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **Parent**                                      | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                         | ** ** |
| Assets:                                       |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                                |       | $                                               | 11,264     |   |   | $ | 86,044 |   |   |   | $ | 58,494 |   |   | $ | (40,091 | ) | $ | 115,711 |   |
| Property and equipment                        |       | —                                          |       |   | 129,989 |   |   |   | 583,081 |   |   | — |   | 713,070 |   |
| Equity investments                            |       | 388,766                                         |       |   | 194,123 |   |   |   | — |   |   | (574,891 | ) | 7,998 |   |
| Intercompany notes receivable                 |       | 249,935                                         |       |   | 337,763 |   |   |   | — |   |   | (587,698 | ) | — |   |
| Other assets                                  |       | 8,481                                           |       |   | 1,733 |   |   |   | 37,302 |   |   | — |   | 47,516 |   |
| Total assets                                  |       | $                                               | 658,446    |   |   | $ | 749,652 |   |   |   | $ | 678,877 |   |   | $ | (1,202,680 | ) | $ | 884,295 |   |
| Liabilities and  partners’ capital:      |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                           |       | $                                               | 755        |   |   | $ | 57,199 |   |   |   | $ | 57,582 |   |   | $ | (40,091 | ) | $ | 75,445 |   |
| Long-term debt                                |       | 249,482                                         |       |   | 53,000 |   |   |   | 56,727 |   |   | — |   | 359,209 |   |
| Deferred income taxes                         |       | —                                          |       |   | 617 |   |   |   | 33,572 |   |   | — |   | 34,189 |   |
| Intercompany notes payable                    |       | —                                          |       |   | 249,935 |   |   |   | 337,763 |   |   | (587,698 | ) | — |   |
| Other liabilities                             |       | —                                          |       |   | 135 |   |   |   | 7,108 |   |   | — |   | 7,243 |   |
| Total partners’ capital                  |       | 408,209                                         |       |   | 388,766 |   |   |   | 186,125 |   |   | (574,891 | ) | 408,209 |   |
| Total liabilities  and partners’ capital |       | $                                               | 658,446    |   |   | $ | 749,652 |   |   |   | $ | 678,877 |   |   | $ | (1,202,680 | ) | $ | 884,295 |   |

 

16

----

 
| ** **                                    | ** ** | **Balance Sheet  December 31, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **Parent**                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                             | ** ** |
| Assets:                                       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                                |       | $                                                   | 14,869     |   |   | $ | 80,320 |   |   |   | $ | 41,948 |   |   | $ | (41,592 | ) | $ | 95,545 |   |
| Property and equipment                        |       | —                                              |       |   | 129,496 |   |   |   | 589,128 |   |   | — |   | 718,624 |   |
| Equity investments                            |       | 366,148                                             |       |   | 194,787 |   |   |   | — |   |   | (553,049 | ) | 7,886 |   |
| Intercompany notes receivable                 |       | 283,550                                             |       |   | 338,884 |   |   |   | — |   |   | (622,434 | ) | — |   |
| Other assets                                  |       | 7,223                                               |       |   | 1,993 |   |   |   | 38,634 |   |   | — |   | 47,850 |   |
| Total assets                                  |       | $                                                   | 671,790    |   |   | $ | 745,480 |   |   |   | $ | 669,710 |   |   | $ | (1,217,075 | ) | $ | 869,905 |   |
| Liabilities and partners’ capital:       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                           |       | $                                                   | 833        |   |   | $ | 44,177 |   |   |   | $ | 44,627 |   |   | $ | (41,592 | ) | $ | 48,045 |   |
| Long-term debt                                |       | 248,491                                             |       |   | 51,000 |   |   |   | 57,672 |   |   | — |   | 357,163 |   |
| Deferred income taxes                         |       | —                                              |       |   | 470 |   |   |   | 34,086 |   |   | — |   | 34,556 |   |
| Intercompany notes payable                    |       | —                                              |       |   | 283,550 |   |   |   | 338,884 |   |   | (622,434 | ) | — |   |
| Other liabilities                             |       | —                                              |       |   | 135 |   |   |   | 7,540 |   |   | — |   | 7,675 |   |
| Total partners’ capital                  |       | 422,466                                             |       |   | 366,148 |   |   |   | 186,901 |   |   | (553,049 | ) | 422,466 |   |
| Total liabilities  and partners’ capital |       | $                                                   | 671,790    |   |   | $ | 745,480 |   |   |   | $ | 669,710 |   |   | $ | (1,217,075 | ) | $ | 869,905 |   |

 
| ** **                              | ** ** | **Statement of Income  Three Months Ended June 30, 2005** | ** ** |                        |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-----------------------------|
| ** **                              | ** ** | **Parent**                                                                                   | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                                                      | ** ** |                        |
| Net operating  revenues                 |       | $                                                                                            | —     |                        |   | $ | 20,077 |   |   |   | $ | 34,181 |   |   |   | $ | (1,483 | ) |   | $ | 52,775 |   |   |
| Operating  expenses                     |       | —                                                                                       |       |                        | (10,322 | ) |   |   | (16,453 | ) |   |   | 1,483 |   |   | (25,292 | ) |   |
| General and administrative  expense(1)  |       | —                                                                                       |       |                        | (3,208 | ) |   |   | (492 | ) |   |   | — |   |   | (3,700 | ) |   |
| Depreciation and  amortization expense  |       | —                                                                                       |       |                        | (1,636 | ) |   |   | (4,970 | ) |   |   | — |   |   | (6,606 | ) |   |
| Share of net  income of Frontier        |       | —                                                                                       |       |                        | 490 |   |   |   | — |   |   |   | — |   |   | 490 |   |   |
| Operating income                        |       | —                                                                                       |       |                        | 5,401 |   |   |   | 12,266 |   |   |   | — |   |   | 17,667 |   |   |
| Interest expense                        |       | (4,217                                                                                       | )          |                        | (825 | ) |   |   | (802 | ) |   |   | — |   |   | (5,844 | ) |   |
| Intercompany  interest income (expense) |       | —                                                                                       |       |                        | 6,141 |   |   |   | (6,141 | ) |   |   | — |   |   | — |   |   |
| Equity earnings                         |       | 16,428                                                                                       |       |                        | 5,586 |   |   |   | — |   |   |   | (22,014 | ) |   | — |   |   |
| Other income                            |       | 9                                                                                            |       |                        | 434 |   |   |   | 97 |   |   |   | — |   |   | 540 |   |   |
| Income tax  (expense) benefit           |       | —                                                                                       |       |                        | (309 | ) |   |   | 166 |   |   |   | — |   |   | (143 | ) |   |
| Net income                              |       | $                                                                                            | 12,220     |                        |   | $ | 16,428 |   |   |   | $ | 5,586 |   |   |   | $ | (22,014 | ) |   | $ | 12,220 |   |   |
|                                         |            |                                                                                              |            |                             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

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

17

----

 
| ** **                               | ** ** | **Statement of Income  Three Months Ended June 30, 2004** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Parent**                                                                                   | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  adjustments** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **(in thousands)**                                                                      | ** ** |
| Net operating  revenues                  |       | $                                                                                            | —     |   |   | $ | 17,859 |   |   |   | $ | 29,544 |   |   |   | $ | (1,406 | ) |   | $ | 45,997 |   |
| Operating  expenses                      |       | —                                                                                       |       |   | (10,038 | ) |   |   | (12,235 | ) |   |   | 1,406 |   |   | (20,867 | ) |
| General and  administrative expense(1)   |       | —                                                                                       |       |   | (3,390 | ) |   |   | (246 | ) |   |   | — |   |   | (3,636 | ) |
| Depreciation and  amortization  expense  |       | —                                                                                       |       |   | (1,648 | ) |   |   | (4,065 | ) |   |   | — |   |   | (5,713 | ) |
| Share of net  income of Frontier         |       | —                                                                                       |       |   | 391 |   |   |   | — |   |   |   | — |   |   | 391 |   |
| Operating income                         |       | —                                                                                       |       |   | 3,174 |   |   |   | 12,998 |   |   |   | — |   |   | 16,172 |   |
| Interest expense                         |       | (754                                                                                         | )          |   | (3,294 | ) |   |   | (335 | ) |   |   | — |   |   | (4,383 | ) |
| Intercompany  interest  income (expense) |       | —                                                                                       |       |   | 4,871 |   |   |   | (4,871 | ) |   |   | — |   |   | — |   |
| Equity earnings                          |       | 9,878                                                                                        |       |   | 7,864 |   |   |   | — |   |   |   | (17,742 | ) |   | — |   |
| Other income  (expense)                  |       | 4                                                                                            |       |   | (2,737 | ) |   |   | 58 |   |   |   | — |   |   | (2,675 | ) |
| Income tax  benefit                      |       | —                                                                                       |       |   | — |   |   |   | 14 |   |   |   | — |   |   | 14 |   |
| Net income                               |       | $                                                                                            | 9,128      |   |   | $ | 9,878 |   |   |   | $ | 7,864 |   |   |   | $ | (17,742 | ) |   | $ | 9,128 |   |

----

(1)          Generaland administrative expense is not currently allocated between Guarantor andNon-Guarantor Subsidiaries for financial reporting purposes.
| ** **                                                 | ** ** | **Statement of Income  Six Months Ended June 30, 2005** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Parent**                                                                                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**                                                                    | ** ** |
| Net operating  revenues                                    |       | $                                                                                          | —     |   |   | $ | 34,345 |   |   |   | $ | 71,202 |   |   |   | $ | (3,525 | ) |   | $ | 102,022 |   |
| Operating  expenses                                        |       | —                                                                                     |       |   | (20,290 | ) |   |   | (30,281 | ) |   |   | 3,525 |   |   | (47,046 | ) |
| Line 63 oil  release costs                                 |       | —                                                                                     |       |   | — |   |   |   | (2,000 | ) |   |   | — |   |   | (2,000 | ) |
| General and  administrative expense(1)                     |       | —                                                                                     |       |   | (7,835 | ) |   |   | (1,037 | ) |   |   | — |   |   | (8,872 | ) |
| Accelerated  long-term incentive plan compensation expense |       | —                                                                                     |       |   | (2,675 | ) |   |   | (440 | ) |   |   | — |   |   | (3,115 | ) |
| Transaction costs                                          |       | (893                                                                                       | )          |   | (914 | ) |   |   | — |   |   |   | — |   |   | (1,807 | ) |
| Depreciation and  amortization  expense                    |       | —                                                                                     |       |   | (3,260 | ) |   |   | (9,875 | ) |   |   | — |   |   | (13,135 | ) |
| Share of net  income of Frontier                           |       | —                                                                                     |       |   | 847 |   |   |   | — |   |   |   | — |   |   | 847 |   |
| Operating income                                           |       | (893                                                                                       | )          |   | 218 |   |   |   | 27,569 |   |   |   | — |   |   | 26,894 |   |
| Interest expense                                           |       | (8,295                                                                                     | )          |   | (1,504 | ) |   |   | (1,643 | ) |   |   | — |   |   | (11,442 | ) |
| Intercompany  interest  income (expense)                   |       | —                                                                                     |       |   | 12,412 |   |   |   | (12,412 | ) |   |   | — |   |   | — |   |
| Equity earnings                                            |       | 24,812                                                                                     |       |   | 13,576 |   |   |   | — |   |   |   | (38,388 | ) |   | — |   |
| Other income                                               |       | 17                                                                                         |       |   | 600 |   |   |   | 276 |   |   |   | — |   |   | 893 |   |
| Income tax expense                                         |       | —                                                                                     |       |   | (490 | ) |   |   | (214 | ) |   |   | — |   |   | (704 | ) |
| Net income                                                 |       | $                                                                                          | 15,641     |   |   | $ | 24,812 |   |   |   | $ | 13,576 |   |   |   | $ | (38,388 | ) |   | $ | 15,641 |   |

----

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

 

18

----

| ** **                                   | ** ** | **Statement of Income  Six Months Ended June 30, 2004** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Parent**                                                                                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  adjustments** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                                                                    | ** ** |
| Net operating  revenues                      |       | $                                                                                          | —     |   |   | $ | 33,215 |   |   |   | $ | 55,457 |   |   |   | $ | (3,013 | ) |   | $ | 85,659 |   |
| Operating  expenses                          |       | —                                                                                     |       |   | (19,738 | ) |   |   | (23,059 | ) |   |   | 3,013 |   |   | (39,784 | ) |
| General and  administrative  expense(1)      |       | —                                                                                     |       |   | (7,218 | ) |   |   | (272 | ) |   |   | — |   |   | (7,490 | ) |
| Depreciation and  amortization expense  |       | —                                                                                     |       |   | (3,243 | ) |   |   | (7,712 | ) |   |   | — |   |   | (10,955 | ) |
| Share of net  income of Frontier             |       | —                                                                                     |       |   | 784 |   |   |   | — |   |   |   | — |   |   | 784 |   |
| Operating income                             |       | —                                                                                     |       |   | 3,800 |   |   |   | 24,414 |   |   |   | — |   |   | 28,214 |   |
| Interest expense                             |       | (754                                                                                       | )          |   | (7,420 | ) |   |   | (335 | ) |   |   | — |   |   | (8,509 | ) |
| Intercompany  interest income (expense)      |       | —                                                                                     |       |   | 8,618 |   |   |   | (8,618 | ) |   |   | — |   |   | — |   |
| Equity earnings                              |       | 17,954                                                                                     |       |   | 15,574 |   |   |   | — |   |   |   | (33,528 | ) |   | — |   |
| Other income  (expense)                      |       | 5                                                                                          |       |   | (2,618 | ) |   |   | 99 |   |   |   | — |   |   | (2,514 | ) |
| Income tax  benefit                          |       | —                                                                                     |       |   | — |   |   |   | 14 |   |   |   | — |   |   | 14 |   |
| Net income                                   |       | $                                                                                          | 17,205     |   |   | $ | 17,954 |   |   |   | $ | 15,574 |   |   |   | $ | (33,528 | ) |   | $ | 17,205 |   |

----

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

 
| ** **                                   | ** ** | **Statement of Comprehensive Income  Three Months Ended June 30, 2005** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Parent**                                                                                                      | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                                                                                         | ** ** |
| Net income                                   |       | $                                                                                                               | 12,220     |   |   | $ | 16,428 |   |   |   | $ | 5,586 |   |   |   | $ | (22,014 | ) |   | $ | 12,220 |   |
| Change in fair  value of hedging derivatives |       | 327                                                                                                             |       |   | 327 |   |   |   | — |   |   |   | (327 | ) |   | 327 |   |
| Foreign currency  translation adjustment     |       | (1,765                                                                                                          | )          |   | (1,765 | ) |   |   | (1,765 | ) |   |   | 3,530 |   |   | (1,765 | ) |
| Comprehensive income                         |       | $                                                                                                               | 10,782     |   |   | $ | 14,990 |   |   |   | $ | 3,821 |   |   |   | $ | (18,811 | ) |   | $ | 10,782 |   |

 
| ** **                                   | ** ** | **Statement of Comprehensive Income  Three Months Ended June 30, 2004** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Parent**                                                                                                      | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                                                                                         | ** ** |
| Net income                                   |       | $                                                                                                               | 9,128      |   |   | $ | 9,878 |   |   |   | $ | 7,864 |   |   |   | $ | (17,742 | ) |   | $ | 9,128 |   |
| Change in fair  value of hedging derivatives |       | 9,140                                                                                                           |       |   | 9,140 |   |   |   | — |   |   |   | (9,140 | ) |   | 9,140 |   |
| Foreign currency  translation adjustment     |       | 2,429                                                                                                           |       |   | 2,423 |   |   |   | 6 |   |   |   | (2,429 | ) |   | 2,429 |   |
| Comprehensive income                         |       | $                                                                                                               | 20,697     |   |   | $ | 21,441 |   |   |   | $ | 7,870 |   |   |   | $ | (29,311 | ) |   | $ | 20,697 |   |

 
| ** **                                   | ** ** | **Statement of Comprehensive Income  Six Months Ended June 30, 2005** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Parent**                                                                                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                                                                                       | ** ** |
| Net income                                   |       | $                                                                                                             | 15,641     |   |   | $ | 24,812 |   |   |   | $ | 13,576 |   |   |   | $ | (38,388 | ) |   | $ | 15,641 |   |
| Change in fair  value of hedging derivatives |       | (806                                                                                                          | )          |   | (806 | ) |   |   | — |   |   |   | 806 |   |   | (806 | ) |
| Foreign currency  translation adjustment     |       | (2,301                                                                                                        | )          |   | (2,301 | ) |   |   | (2,301 | ) |   |   | 4,602 |   |   | (2,301 | ) |
| Comprehensive income                         |       | $                                                                                                             | 12,534     |   |   | $ | 21,705 |   |   |   | $ | 11,275 |   |   |   | $ | (32,980 | ) |   | $ | 12,534 |   |

 

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| ** **                                   | ** ** | **Statement of Comprehensive Income  Six Months Ended June 30, 2004** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Parent**                                                                                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                                                                                       | ** ** |
| Net income                                   |       | $                                                                                                             | 17,205     |   |   | $ | 17,954 |   |   |   | $ | 15,574 |   |   |   | $ | (33,528 | ) |   | $ | 17,205 |   |
| Change in fair  value of hedging derivatives |       | 4,904                                                                                                         |       |   | 4,904 |   |   |   | — |   |   |   | (4,904 | ) |   | 4,904 |   |
| Foreign currency  translation adjustment     |       | 2,429                                                                                                         |       |   | 2,423 |   |   |   | 6 |   |   |   | (2,429 | ) |   | 2,429 |   |
| Comprehensive income                         |       | $                                                                                                             | 24,538     |   |   | $ | 25,281 |   |   |   | $ | 15,580 |   |   |   | $ | (40,861 | ) |   | $ | 24,538 |   |

 
| ** **                                                                         | ** ** | **Statement of Cash Flows  Six Months Ended June 30, 2005** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **Parent**                                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                                                                             | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                         |       | $                                                                                                   | 15,641     |   |   | $ | 24,812 |   |   |   | $ | 13,576 |   |   |   | $ | (38,388 | ) |   | $ | 15,641 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity earnings                                                                    |       | (24,812                                                                                             | )          |   | (13,576 | ) |   |   | — |   |   |   | 38,388 |   |   | — |   |
| Distributions from subsidiaries                                                    |       | 30,658                                                                                              |       |   | 22,784 |   |   |   | — |   |   |   | (53,442 | ) |   | — |   |
| Depreciation, amortization and other                                               |       | 333                                                                                                 |       |   | 5,062 |   |   |   | 10,224 |   |   |   | — |   |   | 15,619 |   |
| Net changes in operating assets and liabilities                                    |       | (49                                                                                                 | )          |   | 6,616 |   |   |   | 10,047 |   |   |   | (1,656 | ) |   | 14,958 |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 21,771                                                                                              |       |   | 45,698 |   |   |   | 33,847 |   |   |   | (55,098 | ) |   | 46,218 |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                              |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additions to property, equipment and other                                    |       | —                                                                                              |       |   | (3,752 | ) |   |   | (6,223 | ) |   |   | — |   |   | (9,975 | ) |
| Intercompany                                                                       |       | (914                                                                                                | )          |   | — |   |   |   | — |   |   |   | 914 |   |   | — |   |
| NET CASH USED IN INVESTING ACTIVITIES                                              |       | (914                                                                                                | )          |   | (3,752 | ) |   |   | (6,223 | ) |   |   | 914 |   |   | (9,975 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                |       | (23,067                                                                                             | )          |   | (38,652 | ) |   |   | (20,014 | ) |   |   | 54,184 |   |   | (27,549 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               |       | (2,210                                                                                              | )          |   | 3,294 |   |   |   | 7,610 |   |   |   | — |   |   | 8,694 |   |
| CASH AND CASH EQUIVALENTS, beginning of reporting  period                          |       | 2,713                                                                                               |       |   | 17,523 |   |   |   | 3,147 |   |   |   | — |   |   | 23,383 |   |
| CASH AND CASH EQUIVALENTS,  end of reporting period                                |       | $                                                                                                   | 503        |   |   | $ | 20,817 |   |   |   | $ | 10,757 |   |   |   | $ | — |   |   | $ | 32,077 |   |

 

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| ** **                                                                         | ** ** | **Statement of Cash Flows  Six Months Ended June 30, 2004** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **Parent**                                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                                                                             | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                         |       | $                                                                                                   | 17,205     |   |   | $ | 17,954 |   |   |   | $ | 15,574 |   |   |   | $ | (33,528 | ) |   | $ | 17,205 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity earnings                                                                    |       | (17,954                                                                                             | )          |   | (15,574 | ) |   |   | — |   |   |   | 33,528 |   |   | — |   |
| Distributions from subsidiaries                                                    |       | 27,081                                                                                              |       |   | 22,927 |   |   |   | — |   |   |   | (50,008 | ) |   | — |   |
| Depreciation, amortization and other                                               |       | 22                                                                                                  |       |   | 7,401 |   |   |   | 7,712 |   |   |   | — |   |   | 15,135 |   |
| Net changes in operating assets and liabilities                                    |       | 1,414                                                                                               |       |   | (8,619 | ) |   |   | (8,193 | ) |   |   | 12,323 |   |   | (3,075 | ) |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |       | 27,768                                                                                              |       |   | 24,089 |   |   |   | 15,093 |   |   |   | (37,685 | ) |   | 29,265 |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                              |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisitions                                                                       |       | —                                                                                              |       |   | — |   |   |   | (139,050 | ) |   |   | — |   |   | (139,050 | ) |
| Additions to property, equipment and other                                    |       | —                                                                                              |       |   | (5,751 | ) |   |   | (2,145 | ) |   |   | — |   |   | (7,896 | ) |
| Intercompany                                                                       |       | (369,657                                                                                            | )          |   | (91,155 | ) |   |   | — |   |   |   | 460,812 |   |   | — |   |
| NET CASH USED IN INVESTING ACTIVITIES                                              |       | (369,657                                                                                            | )          |   | (96,906 | ) |   |   | (141,195 | ) |   |   | 460,812 |   |   | (146,946 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                |       | 343,915                                                                                             |       |   | 81,184 |   |   |   | 127,871 |   |   |   | (423,127 | ) |   | 129,843 |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                          |       | 2,026                                                                                               |       |   | 8,367 |   |   |   | 1,769 |   |   |   | — |   |   | 12,162 |   |
| CASH AND CASH EQUIVALENTS, beginning of reporting  period                          |       | 746                                                                                                 |       |   | 8,603 |   |   |   | 350 |   |   |   | — |   |   | 9,699 |   |
| CASH AND CASH  EQUIVALENTS, end of reporting period                                |       | $                                                                                                   | 2,772      |   |   | $ | 16,970 |   |   |   | $ | 2,119 |   |   |   | $ | — |   |   | $ | 21,861 |   |

 

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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-Looking Statements**

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 and other related products and buying, gathering, blending and sellingcrude oil. For a more detailed description of these and other factors that mayaffect the forward-looking statements, please read “Risk Factors”contained in our annual report on Form 10-K for the year ended December 31,2004, 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, 2004.

**Overview**

We are a publicly tradedlimited partnership engaged principally in the business of gathering,transporting, storing and distributing crude oil and related products inCalifornia and the Rocky Mountain region of the U.S. and in Alberta, Canada. Weconduct our business through two regional business segments: the West CoastBusiness Unit and the Rocky Mountain Business Unit. We generate revenueprimarily by charging tariff rates for transporting crude oil on our pipelinesand by leasing storage capacity. We also buy, blend and sell crude oil,activities that are complementary to our pipeline transportation business.

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***Recent Developments***

***Valero Acquisition***

On July 1, 2005, we entered into a Sale andPurchase Agreement (the “Purchase Agreement”), with Support Terminals OperatingPartnership, L.P., Kaneb Pipe Line Operating Partnership, L.P. and ShoreTerminals LLC (the “Sellers”), pursuant to which we agreed to acquire certainterminal and pipeline assets from the Sellers for an aggregate purchase priceof $455.0 million. The assets being purchased consist of (i) the MartinezTerminal and Richmond Terminal in the San Francisco, California area, (ii) theNorth Philadelphia and South Philadelphia Terminals and the Paulsboro, NewJersey Terminal in the Philadelphia, Pennsylvania area, and (iii) a 550-milerefined products pipeline with four truck terminals and storage in the U.S.Rocky Mountains.

The Martinez and Richmond Terminals have 4.1 millionbarrels of combined storage capacity and handle refined products, refineryblend stocks and crude oil. The terminals are connected to pipelines and toarea refineries by pipelines and can also receive and deliver products bymarine vessel or barge. The terminals also have truck racks for productsdelivery and receipt. The Richmond terminal has a rail spur for delivery andreceipt of products.

The North Philadelphia Terminal, the SouthPhiladelphia Terminal and the Paulsboro, New Jersey Terminal handle refinedproducts and have a combined storage capacity of 3.2 million barrels. Theterminals are connected to pipelines and have truck racks for deliveries. TheNorth Philadelphia and Paulsboro terminals can also deliver and receiveproducts by marine vessel or barge.

The 550-mile pipeline system, known as the WestPipeline System, consists of 550 miles of refined products pipeline extendingfrom Casper, Wyoming east to Rapid City, South Dakota and south to ColoradoSprings, Colorado. In addition, there are four products terminals at RapidCity, South Dakota, Cheyenne, Wyoming and Denver and Colorado Springs, Coloradowith a combined storage capacity of 1.7 million barrels.

We expect to fund the acquisition on a permanent basisby issuing common units for approximately 60-65% of the price and debtsecurities for approximately 35-40% of the acquisition price. The purchaseis subject to the receipt of regulatory approvals and is expected to close by October 1,2005.

Also, in connection withthe purchase, we received $700 million in financing commitments from Bank ofAmerica, N.A. and Lehman Brothers, Inc. These commitments include a newfive-year $400 million secured revolving credit facility, which would partlyfund the acquisition as well as repay and replace our existing U.S. andCanadian revolving credit facilities. These commitments also include a $300million, 364-day secured term credit facility, which would only be usedto fund the acquisition if permanent financing is not obtained by theacquisition closing date.

***Purchase of Crude Oil and Contracts***

On July 1, 2005, wepurchased certain crude oil contracts and crude oil inventories forapproximately $2.2 million plus contingent payments over the next three and onehalf years based on specified performance criteria. The assets were purchasedby the Partnership’s Pacific Marketing and Transportation (“PMT”) subsidiary.

***Line 63 Crude 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 induced by heavy rainfall in the Pyramid Lake area of LosAngeles County. Over the period March 2005 through March 2006, weexpect to incur an estimated total of $15.0 million for oil containment andclean-up of the impacted areas, future monitoring costs, potential third-

23

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party claims andpenalties, and other costs, excluding pipeline repair costs. Through June 30,2005, we had incurred approximately $11.5 million of the total expected oilrelease costs for work performed through such date.

We have a pollution liability insurance policy with a$2.0 million deductible, and the insurance carrier has acknowledged coverage ofthe incident and is processing and paying invoices related to the clean-up. Althoughwe believe we are entitled, subject to the $2.0 million deductible, to recoversubstantially all of our clean-up costs and third-party claims associated withthe release, there is no absolute assurance that this will be the case. As of June 30,2005, we have recovered $6.3 million from insurance and accrued a receivable of$6.7 million for insurance receipts we deem probable. As new informationbecomes available in future periods, our initial estimates of costs andrecoveries may change.

We recorded $2.0 million in net costs in “Line 63 oilrelease costs” in the accompanying condensed consolidated statements of incomefor the six months ended June 30, 2005. The $2.0 million net oil releasecosts consist of $15.0 million of accrued costs relating to the release, net ofinsurance recovery of $6.3 and accrued insurance receipts of $6.7 million.

On April 18, 2005, we received the necessaryapprovals to begin the repair of Line 63, and Line 63 was returned tooperation. During the time the pipeline was out of service, we transferredsignificant volumes of light crude oil, on a temporary basis, from Line 63 toLine 2000, to mitigate the impact on customers and limit the potential loss ofrevenue. We also asked our customers to shift volumes of OCS crude oil fromLine 63 to Line 2000. We expect the permanent repair of Line 63 to be completein the third quarter of 2005. We expensed $0.6 million, all in the secondquarter, for the repair of Line 63 and expect to incur $1.2 million of Line 63capital improvements in future periods.

On July 21, 2005, theCalifornia Public Utilities Commission (“CPUC”) approved our request toimplement a temporary surcharge of $0.10 per barrel on our Line 63 long-haultariff rates to recover our costs relating to this release together with othercosts incurred or to be incurred as a result of problems caused by rain-inducedearth movement and stream erosion. The surcharge was effective on August 1,2005. We are required under the terms of the CPUC decision that approved thesurcharge to substantiate in subsequent filings with the CPUC the actual costsincurred by us as a result of the Line 63 damage and our entitlement to thesurcharge amounts received by us.

***Sale of The Anschutz Corporation’s Interest in thePartnership***

On March 3, 2005, The Anschutz Corporationcompleted the sale of its 36.6% interest in the Partnership to LB Pacific, LP (“LBP”),an entity formed by Lehman Brothers Merchant Banking Group (“LBMB”). Theacquisition by LBP (the “LB Acquisition”) included the purchase of  a 100% ownership interest in Pacific EnergyGP, Inc. (predecessor of Pacific Energy GP, LP), which owned (i) a 2%general partner interest in the Partnership and the incentive distributionrights, and (ii) 10,465,000 subordinated units of the Partnershiprepresenting a 34.6% limited partner interest. Immediately prior to the closingof the LB Acquisition, Pacific Energy GP, Inc. was converted to PacificEnergy GP, LLC, a Delaware limited liability company; and immediately after theclosing of the LB Acquisition, Pacific Energy GP, LLC was converted to PacificEnergy GP, LP, a Delaware limited partnership (together with its predecessors,the “General Partner”). The general partner of Pacific Energy GP, LP is PacificEnergy Management LLC, a Delaware limited liability company (“PEM” or the “ManagingGeneral Partner”), which is 100% owned by LBP. Immediately following theclosing of the LB Acquisition, our General Partner distributed the 10,465,000subordinated units of the Partnership to LBP.

In connection with the conversion of our GeneralPartner to a limited partnership, our General Partner ceased to have a board ofdirectors, and is now managed by PEM, its general partner. PEM has a board ofdirectors (the “Board of Directors” or “Board”) that manages the business andaffairs of PEM and, thus, indirectly manages the business and affairs of ourGeneral Partner and the Partnership. All of 

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the officers and employeesof our General Partner were transferred to the same positions with PEM, and theBoard established the same committees as had been maintained by our GeneralPartner prior to the LB Acquisition. PEM also adopted our General Partner’sgovernance guidelines and its compensation structure and employee benefit plansand policies.

Pursuant to an Ancillary Agreement, LBP and TheAnschutz Corporation reimbursed us $2.4 million, which represents the costincurred by us in connection with a consent solicitation prepared and deliveredto the holders of our 71/8% Senior Notes, due 2014(the “Senior Notes”) to approve certain amendments to the indenture governingthe Senior Notes, and for severance and other costs incurred in connection withthe sale of our General Partner. We were required by generally acceptedaccounting principles to record $0.6 million as capitalized deferred financingcosts and $1.8 million as an expense. The reimbursements were recorded as theGeneral Partner’s capital contribution.

On March 3, 2005, in connection with the changein control of our General Partner, all restricted units outstanding under theLong-Term Incentive Plan immediately vested pursuant to the terms of the grants.As a result, we issued 99,583 common units and recorded a compensation expenseof $3.1 million.

Because the LBAcquisition, together with other stock market activity, resulted in a change inownership of more than 50% of the Partnership within a one year period, federalincome tax laws require a modification to the Partnership’s 2005 taxableincome. The modification will result in a reduction in depreciation for 2005.The reduction in depreciation in 2005 will lead to additional depreciationbecoming available for recognition in future years. Prior to the acquisition ofassets from Valero L.P., we estimated that the amount of taxable income in 2005would be approximately 50% to 60% of the cash distributions made tounitholders. For the period 2006 through 2008, prior to the acquisition ofassets from Valero L.P., we estimated that taxable income would be less than20% of the cash distributions expected to be made to unitholders. We have notyet updated these estimates to account for the acquisition of assets fromValero L.P. The modification of taxable income will not have any impact on thePartnership’s consolidated financial statements.

***Business Fundamentals***

***Pipeline Transportation***

We generate pipeline transportation revenue bycharging tariff rates for transporting crude oil on our common carrierpipelines. The fundamental items impacting our pipeline transportation revenueare the volume of crude oil, or throughput, that we transport on our pipelines,and our tariff rates. Throughput on our pipelines fluctuates based on thevolume of crude oil available for transport on our pipelines, the demand forrefined products, refinery or pipeline downtime and the availability ofalternate sources of crude oil for the refineries we serve.

Our shippers determine the amount of crude oil wetransport on our pipelines, but we influence these volumes through the leveland type of service we provide and the rates we charge. Our rates need to becompetitive to transportation alternatives, which are mostly other pipelines.

The tariff rates we charge on Line 2000 and theLine 63 system are regulated by the CPUC. Tariffs on Line 2000 areestablished based on market considerations, subject to certain contractuallimitations. Tariffs on Line 63, which are cost-of-service based tariffs,are based upon the costs to operate and maintain the pipeline, as well ascharges for the depreciation of the capital investment in the pipeline and theauthorized rate of return. The tariff rates charged on our U.S. Rocky Mountainpipelines are regulated by either the Federal Energy Regulatory Commission (“FERC”)or the Wyoming Public Service Commission, generally under a cost-of-serviceapproach.

On July 1, 2005 we increased the tariff rates onour U.S. Rocky Mountain pipelines by 3.6% based on the FERC index adjustment. OnMay 1, 2005 we increased the tariff rates on our Line 2000 by 

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approximately 4.8%. EffectiveNovember 1, 2004, we increased the tariff rates on our Line 63 system by9.5%. This increase was the first for Line 63 since 2001. On May 1, 2004,we increased the tariff rates on Line 2000 by approximately 6%. This index isreviewed annually. These tariff rate increases partially mitigate the impact ofdeclining throughput on our West Coast pipelines.

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, whichcan in the short term, be offset in whole or in part, by additional drilling orthe implementation of recovery enhancement measures. In the San Joaquin Valleyand in the California Outer Continental Shelf (“OCS”), total production isgenerally declining.

In the Rocky Mountains,our pipelines are connected to Canadian sources of crude oil, and in 2004 wecompleted the acquisition of the Rangeland system, giving us greater access tosignificant supplies of Canadian crude oil, including synthetic crude oil,which we believe will replace any long term U.S. Rocky Mountain productiondeclines and meet growing demand in the U.S. Rocky Mountain region. It appearsin recent months that production in the U.S. Rocky Mountains may be increasingwith the increased amount of natural gas related drilling, which results inincreased volumes of crude oil and condensate. We believe, however, that thelonger term production of crude oil will resume its historical decline.

***Storage and Distribution***

We provide storage and distribution services torefineries in the Los Angeles Basin through our Pacific Terminals (“PT”)storage and distribution system. The fundamental items impacting our storageand distribution revenue are the amount of storage capacity we have underlease, the lease rates for that capacity and the length of each lease. Demandfor crude oil storage capacity tends to be more stable over time, and leasesfor crude oil storage capacity are usually long term (more than one year).Demand for storage capacity for other dark products is less stable, and variesdepending on, among other things, refinery production runs and maintenanceactivities. Leases for dark products storage capacity are usually short term(less that one year). One of our business goals is to convert a number of darkproducts tanks to more flexible crude oil service (which can also accommodateother dark products); we currently await permit approvals for one such tankconversion and plan to convert a second tank in 2006.

While PT’s rates areregulated by the CPUC, the CPUC has authorized PT to establish its rates basedon market conditions through negotiated contracts.

***Pipeline Buy/Sell Transportation***

Throughput on our Rangeland system, which was acquiredin the second quarter of 2004, varies with many of the same factors describedin “Pipeline Transportation” above. In addition, following completion of ourEdmonton initiation station, scheduled for completion in the fourth quarter of2005, throughput will vary with our success in attracting new supplies ofsynthetic crude oil to our system.

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 capacity of the Rangeland system, and (iii) constructinga pump station and receiving terminal in Edmonton, Alberta. The development ofthe new receiving terminal and pump station, which will provide access tosynthetic and other types of Canadian crude oil, continues to progress. Constructionof this facility, together with additional tanks along the pipeline corridor,is expected to be complete in the fourth quarter of 2005.

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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 EnergyUtilities 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 1,2004, we increased the location differentials on the Rangeland pipeline by anaverage of 10.8%.

***Gathering and Blending***

Through our PMT subsidiary, we purchase, gather, blendand resell crude oil in California’s San Joaquin Valley and in the RockyMountain area. In California, our PMT gathering and blending 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 for transportation on our trunk pipelines to Los Angeles thatmight not otherwise be shipped through our pipelines. In the U.S. and CanadianRocky Mountain area, PMT facilitates transportation on our Canadian and U.S.Rocky Mountain pipelines by purchasing crude oil from Canada and the U.S. RockyMountain region for resale in the PADD IV market place.

The contribution of ourPMT gathering and blending operations is, for several reasons, a variable partof our income. First, it varies with the price differential between the cost ofthe varying grades of crude oil that PMT buys for use in its blendingoperations, and the price of the blended crude oil it sells. Costs and salesprices are generally impacted by crude oil prices, as well as by local supplyand demand forces, including regulations affecting refined productspecifications. Second, it varies with the price differential between crude oilpurchased on one price basis and sold on a different price basis. Finally, itvaries with the volumes gathered and blended. We seek to control thesevariations through our risk management policy, which provides specificguidelines for our crude oil marketing and hedging activities and requiresoversight 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. We also intend toexpand, beyond our acquisition of assets from Valero L.P., principally byacquisition, into the refined product and natural gas storage andtransportation businesses. We expect the acquisitions and new projects to beaccretive to our cash flow and complement our existing businesses. We expect tofund acquisitions 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% over time.

***Operating Expenses***

A substantial portion of the operating expenses weincur, including the cost of field and support personnel, maintenance, controlsystems, telecommunications, rights-of-way and insurance, varies little 

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with changes inthroughput. Certain of our costs do, however, vary with throughput, the mostmaterial being the cost of power used to run pump stations along our pipelines.Major maintenance costs can also vary depending on a particular asset’s ageand/or regulatory requirements, such as mandatory inspections at definedintervals. Unanticipated costs can include the costs of cleanup of any releaseof oil to the extent not covered by insurance, and repairs caused by severeweather as we have experienced in California and Alberta, Canada this year.

We do not have anyemployees, except in Canada. Our Managing General Partner provides employees toconduct our U.S. operations. We and our Managing General Partner collectivelyemploy approximately 315 individuals who directly support our operations. Weconsider employee relations to be good. None of these employees are subject toa collective bargaining agreement. Our Managing General Partner does notconduct any business other than with respect to the Partnership. All expensesincurred by our Managing General Partner are charged to us. Please read “Note 3—Related Party Transactions”in the footnotes to the condensed consolidated financial statement.

***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 a reporting period. Revenues, expenses and cashflow 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 of ourCanadian 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.

**CriticalAccounting Policies 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 1, Significant Accounting Policies,” to ourconsolidated financial statements in our annual report on Form 10-K forthe year ended December 31, 2004) and estimates, the following may involvea 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.Additionally, we must determine whether an acquisition is considered to be abusiness or a set of net assets because excess purchase price can only beallocated to goodwill in a business combination. The valuation of the fairvalue of the assets involves a number of judgments and estimates. In our majoracquisitions to date, we have engaged an outside valuation firm to provide uswith an appraisal report, which we utilized in determining the purchase priceallocation. The allocation of the purchase price to different asset classesimpacts the depreciation expense we subsequently record. The principal assetswe have acquired to date are property, pipelines, storage tanks and equipment.

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·       Wedepreciate the components of our property and equipment on a straight-linebasis over the estimated useful lives of the assets. The estimates of theassets’ useful lives require our judgment and our knowledge of the assets beingdepreciated. When necessary, the assets’ useful lives are revised and theimpact on depreciation is treated 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 establishliabilities for the costs of asset retirement obligations when the retirementdate is determinable. We will record such liabilities only when such date isdeterminable.

·       Fromtime to time, a shipper or group of shippers may initiate a regulatoryproceeding or other action, challenging the tariffs we charge or have charged.In such cases, we assess the proceeding on an ongoing basis as to its likelyoutcome, in order to determine whether to accrue for a future expense. We useoutside regulatory lawyers and financial experts to assist us in theseassessments.

·       Our inventory of crude oilfor our PMT gathering and blending operations, our Canadian operations and any inventoryearned through our tariffs for the transportation of crude oil in our commoncarrier pipelines is carried on our books at the lower of cost or market value,unless it is hedged, in which case it is carried at market. On any unhedgedportion, we are exposed to the potential for a write-down to market value.

**Results of Operations**

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 discussion of each of theunusual items that impacted the results of our operations.

*Oil release on Line 63.  *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 induced by heavy rainfall in northern LosAngeles County. We were able to recover approximately 1,800 barrels of thereleased oil as part of the clean-up operations. As discussed in “RecentDevelopments” above, for the six months ended June 30, 2005, we accrued$15.0 million to remediate the area, together with related costs. The $2.0million net oil release costs recorded in the first quarter of 2005 consists ofthe $15.0 million of accrued costs relating to the release, net of insurancerecovery of $6.3 million and accrued insurance receipt of $6.7 million. Thediscussion in “Recent Developments” describes the nature of these estimates andthe potential for these estimates to increase or decrease in future periods.

*Accelerated long-term incentive plan compensationexpense.  *On March 3, 2005, in connection with thechange in control of our General Partner, all restricted units outstandingunder the Long-term Incentive Plan immediately vested. As a result, werecognized $3.1 million in compensation expense in the first quarter of 2005.

*Transaction costs.  *Pursuantto an Ancillary Agreement, LBP and The Anschutz Corporation reimbursed us $2.4million for the cost incurred in connection with a consent solicitationprepared and delivered to the holders of our Senior Notes to approve certainamendments to the indenture governing 

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the Senior Notes and forseverance and other costs incurred in connection with the sale of our GeneralPartner. We were required by generally accepted accounting principles to record$0.6 million as capitalized deferred financing costs and $1.8 million as anexpense, both in the first quarter of 2005. The reimbursements were recorded asa partner’s capital contribution.

*Write-off of deferred financingcost and interest rate swap termination expense.  *In thesecond quarter of 2004, we recorded an expense related to the unamortizedportion of deferred financing cost of $2.3 million for our term loan, which wasrepaid in 2004, and incurred $0.6 million of expense to terminate relatedinterest rate swaps.

***Three Months Ended June 30, 2005 Compared toThree Months Ended June 30, 2004***

***Summary***

Net income for the three months ended June 30,2005 was $12.2 million, or $0.40 per diluted limited partner unit, compared to$9.1 million, or $0.30 per diluted limited partner unit, for the three monthsended June 30, 2004.

Net income for the three months ended June 30,2005 includes a full quarter of operations of the Rangeland system compared to2004. The Rangeland system was acquired on May 11, 2004 and expanded bythe acquisition of the MAPL pipeline on June 30, 2004.

Followingis a reconciliation of net income to the results of our operations, excludingthe unusual items mentioned above:
| ** **                                                                            | ** ** | **Three Months  Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                            | ** ** | **2005**                                        | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                                                            | ** ** | **(In thousands)**                         | ** ** | ** ** | ** ** |
| Net income                                                                            |       | $                                               | 12,220     |       | $          | 9,128      |       | $ | 3,092 |   |   | 34 | % |   |
| Add: Write-off of  deferred financing cost and interest rate swap termination expense |       | —                                          |       | 2,901      |       | (2,901     | )          |   | — |   |   |
|                                                                                  |       | $                                               | 12,220     |       | $          | 12,029     |       | $ | 191 |   |   | 2 | % |   |
| Diluted weighted  average limited partner units                                       |       | 29,742                                          |       | 29,632     |       | 110        |       |   | 1 | % |   |

 

The results of operationsfor the three months end June 30, 2005, excluding the effect of theunusual items mentioned above, reflects the benefit of (i) increasedpipeline volumes in the Rocky Mountains, (ii) higher tank utilization andadditional storage capacity for Pacific Terminals (a 72,000 barrel idle tankwas put into service during the third quarter of 2004) and, (iii) thebenefit of a full quarter of operations for the Rangeland system, which wasacquired in May 2004. These increases were offset by lower pipelinevolumes on the West Coast and by $1.4 million of pipeline repair and maintenancecosts associated with earth movementand stream erosion due to heavy rainfall in Southern California during theearly part of 2005.

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***Segment Information***

Thefollowing is a discussion of segment operating income. Segment operating incomedoes not include general and administrative expenses, accelerated long-termincentive compensation plan expense and transaction costs as these items arenot allocated to the West Coast and Rocky Mountain business units.
| ** **                 | ** ** | **Three Months  Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|------------|------------|------------|------------|
| **West Coast**        | ** ** | ** **                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                 | ** ** | **(In thousands)**                         | ** ** | ** ** | ** ** |
| Operating income           |       | $                                               | 12,405     |       | $          | 14,092     |       | $ | (1,687 | ) |   | (12 | )% |   |
| Operating data:            |       |                                            |       |       |       |       |       |   |   |   |   |
| Pipeline  throughput (bpd) |       | 120.0                                           |       | 139.5      |       | (19.5      | )          |   | (14 | )% |   |
|                            |            |                                                 |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

Forthe three months ended June 30, 2005, operating income was $12.4 million,compared to $14.1 million for the three months ended June 30, 2004.  West Coast pipeline volumes for the threemonths ended June 30, 2005 were approximately 14% lower than the secondquarter of 2004 because in 2005 (i) one shipper began moving additionalvolumes north to San Francisco, reducing the supply of crude oil available tobe moved south to Los Angeles, (ii) refinery maintenance in the L.A. Basinresulted in lower volumes moving south to Los Angeles, (iii) there waslower OCS production due to maintenance activities, and (iv) because ofthe natural production decline of San Joaquin Valley crude and OCS crude oil. Inaddition, although we were able to shift significant volumes of crude oil fromLine 63 to Line 2000 during the period Line 63 was out of service because ofthe landslide and associated break in Line 63, some volumes were lost duringthis period as customers sought to ensure their supply. Line 63 was out ofservice from March 23, 2005 through April 25, 2005. These adverseconditions were partially offset by higher storage revenues on our PacificTerminals storage and distribution system resulting from increased tankutilization and additional tank storage capacity being made available.
| ** **                 | ** ** | **Three Months  Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|------------|------------|------------|------------|
| **Rocky Mountains**   | ** ** | ** **                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                 | ** ** | **(In thousands)**                         | ** ** | ** ** | ** ** |
| Operating income           |       | $                                               | 8,962      |       | $          | 5,716      |       | $ | 3,246 |   |   | 57 | % |   |
| Operating data  (bpd):     |       |                                            |       |       |       |       |       |   |   |   |   |
| Rangeland pipeline system: |       |                                            |       |       |       |       |       |   |   |   |   |
| Sundre—North          |       | 23.1                                            |       | 21.2       |       | 1.9        |       |   | 9 | % |   |
| Sundre—South          |       | 39.7                                            |       | 48.8       |       | (9.1       | )          |   | (19 | )% |   |
| Western Corridor system    |       | 22.2                                            |       | 19.8       |       | 2.4        |       |   | 12 | % |   |
| Salt Lake City Core system |       | 124.4                                           |       | 119.2      |       | 5.2        |       |   | 4 | % |   |
| Frontier pipeline          |       | 51.3                                            |       | 50.0       |       | 1.3        |       |   | 3 | % |   |
|                            |            |                                                 |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

For the three months ended June 30, 2005,operating income was $9.0 million, compared to $5.7 million for the threemonths ended June 30, 2004. The increase included a full quarter’s resultsof the Rangeland system, which was acquired on May 11, 2004 and expandedby the acquisition of the MAPL pipeline on June 30, 2004. In addition,increased market share for pipeline shipments of crude oil to Billings, Montanaand increased demand by the Salt Lake City, Utah refineries helped drive higherpipeline volumes on the U.S. Rocky Mountain systems. Frontier pipeline volumesincreased in the second quarter of 2005 over the same period in 2004, because aconnecting carrier increased downstream capacity beginning in June 2005.

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***Statement ofIncome—Discussion and Analysis***
| ** **                                | ** ** | **Three Months  Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(In thousands)**                    | ** ** | ** ** | ** ** |
| Pipeline  transportation revenue          |       | $                                          | 27,747     |       | $          | 26,992     |       | $ | 755 |   |   | 3 | % |   |
| Storage and  distribution revenue         |       | 10,870                                     |       | 9,259      |       | 1,611      |       |   | 17 | % |   |
| Pipeline buy/sell  transportation revenue |       | 8,116                                      |       | 3,690      |       | 4,426      |       |   | 120 | % |   |
| Crude oil sales, net of  purchases:       |       |                                       |       |       |       |       |       |   |   |   |   |
| Crude oil sales                           |       | 128,484                                    |       | 100,438    |       | 28,046     |       |   | 28 | % |   |
| Crude oil purchases                       |       | (122,442                                   | )          | (94,382    | )          | 28,060     |       |   | 30 | % |   |
| Crude oil sales, net of purchases         |       | 6,042                                      |       | 6,056      |       | (14        | )          |   | (1 | )% |   |
| Net revenue                               |       | $                                          | 52,775     |       | $          | 45,997     |       | $ | 6,778 |   |   | 15 | % |   |
|                                           |            |                                            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

Increased pipeline transportationrevenues were realized by our U.S. Rocky Mountain pipelines. Volumes onthe U.S. Rocky Mountain pipelines were higher due to increased demand byrefineries in Billings, Montana, Casper, Wyoming and Salt Lake City, Utah arearefineries. Our West Coast pipelines had lower revenues compared to the prioryear for several reasons, as noted above. The reduction in volumes on our WestCoast pipeline was partially offset by increased tariff rates that wereimplemented in the fourth quarter of 2004 on Line 63 and in the secondquarter of 2005 for Line 2000.

Storage and distribution revenueis higher than the prior year due to increased tank utilization and additionalstorage capacity being available (an idle 72,000 barrel tank was put back intoservice during the third quarter of 2004).

Pipeline buy/sell transportation revenues of $8.1 millionreflect a full quarter’s revenues of the Rangeland system compared to 2004,which included revenue of the Rangeland system from the date it was acquired onMay 11, 2004.

Netcrude oil sales for the three months ended June 30, 2005 were essentiallyunchanged compared to the three months period ended June 30, 2004. Weconsider this activity to be complementary to our pipeline transportationoperations.
| ** **                             | ** ** | **Three Months  Ended June  30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|------------|------------|------------|------------|
| **Expenses**                           | ** ** | ** **                                       | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                             | ** ** | **(In thousands)**                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  expenses                    |       | $                                                | 25,292     |       | $          | 20,867     |       | $ | 4,425 |   |   | 21 | % |   |
| General and  administrative expense    |       | 3,700                                            |       | 3,636      |       | 64         |       |   | 2 | % |   |
| Depreciation and  amortization expense |       | 6,606                                            |       | 5,713      |       | 893        |       |   | 16 | % |   |
|                                   |       | $                                                | 35,598     |       | $          | 30,216     |       | $ | 5,382 |   |   | 18 | % |   |
|                                        |            |                                                  |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

The increase in operating expense was related primarilyto the acquisition of the Rangeland system on May 11, 2004. Operatingexpenses in the West Coast were also higher as a result of $1.4 million ofunscheduled repairs and maintenance associated with earth movement and streamerosion problems caused by heavy rainfall in Southern California during theearly part of 2005.

General and administrative expense is consistent withthe comparative period in the prior year. Increases in general andadministrative expense associated with a full quarter’s operation of theRangeland system in the 2005 quarter and corporate development activities wereoffset by the absence of an expense for the long term incentive plan.

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Theincrease in depreciation and amortization includes $1.0 million for additionaldepreciation on the Rangeland system. These increases were partly offset bylower depreciation on other assets reflecting assets that have now been fullydepreciated.
| ** **                                                                       | ** ** | **Three Months  Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|
| **Other Income and Expense**                                      | ** ** | ** **                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                                                       | ** ** | **(In thousands)**                    | ** ** | ** ** | ** ** |
| Share of net  income of Frontier                                                 |       | $                                          | 490        |       | $          | 391        |       | $ | 99 |   |   | 25 | % |   |
| Interest expense                                                                 |       | $                                          | 5,844      |       | $          | 4,383      |       | $ | 1,461 |   |   | 33 | % |   |
| Write-off of  deferred financing cost and interest rate swap termination expense |       | $                                          | —     |       | $          | 2,901      |       | $ | 2,901 |   |   | — |   |   |
| Other income                                                                     |       | $                                          | 540        |       | $          | 226        |       | $ | 314 |   |   | 139 | % |   |
| Income tax expense  (benefit)                                                    |       | $                                          | 143        |       | $          | (14        | )          | $ | 157 |   |   | — |   |   |
|                                                                                  |            |                                            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

The increase in our share of Frontier’s net income wasmainly attributable to increased pipeline volumes as a result of an increase inpipeline capacity due to an agreement with a connecting carrier.

The increase in interest expense was due to additionalborrowings incurred to partially fund the acquisition of the Rangeland system. Ourweighted average borrowings during the three months ended June 30, 2005were $366 million compared to $273 million in the correspondingperiod in 2004. In addition, floating interest rates were higher in 2005, whichresulted in a weighted average interest rate of 6.4% for the three months endedJune 30, 2005 compared to a weighted average interest rate of 6.0% for thecorresponding period in 2004.

The write-off of deferred financing cost and interestrate swap termination expense are discussed in “Results of Operations” above.

Other income of $0.5 million for the period ended June 30,2005 was $0.3 million greater than the corresponding period in 2004 due toincreased interest income and other items.

The increase in income taxexpense for the three months ended June 30, 2005 relates to the income ofthe Rangeland system acquired in the middle of the second quarter of 2004. OurCanadian subsidiaries are taxable entities, and certain kinds of repatriationof funds into the U.S. are subject to Canadian withholding tax. Additionally,we recorded deferred tax liabilities in connection with the purchase of ourCanadian subsidiaries, which we recognize into earnings in the respectivefuture tax periods.

***Six Months Ended June 30, 2005 Compared to SixMonths Ended June 30, 2004***

***Summary***

Net income for the six months ended June 30, 2005was $15.6 million, or $0.58 per diluted limited partner unit, compared to$17.2 million, or $0.62 per diluted limited partner unit, for the six monthsended June 30, 2004.

Net income for the six months ended June 30, 2005includes six months of operations of the Rangeland system compared to 2004. TheRangeland system was acquired on May 11, 2004 and expanded by theacquisition of the MAPL pipeline on June 30, 2004.

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Followingis a reconciliation of net income to the results of our operations, excludingunusual items mentioned above:
| ** **                                                                       | ** ** | **Six Months  Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                       | ** ** | **2005**                                      | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                                                       | ** ** | **(In thousands)**                       | ** ** | ** ** | ** ** |
| Net income                                                                       |       | $                                             | 15,641     |       | $          | 17,205     |       | $ | (1,564 | ) |   | (9 | )% |   |
| Add:Line 63 oil  release costs                                                   |       | 2,000                                         |       | —     |       | 2,000      |       |   | — |   |   |
| Accelerated long-term incentive compensation expense                             |       | 3,115                                         |       | —     |       | 3,115      |       |   | — |   |   |
| Transaction costs                                                                |       | 1,807                                         |       | —     |       | 1,807      |       |   | — |   |   |
| Write-off of deferred financing cost and interest  rate swap termination expense |       | —                                        |       | 2,901      |       | (2,901     | )          |   | — |   |   |
|                                                                             |       | $                                             | 22,563     |       | $          | 20,106     |       | $ | 2,457 |   |   | 12 | % |   |
| Diluted weighted average  limited partner units                                  |       | 29,708                                        |       | 27,402     |       | 2,306      |       |   | 8 | % |   |

 

The improvement in theresults of operations, excluding the effect of the unusual items mentionedabove, reflects the benefit of (i) the operations of the Rangeland systemacquired in May 2004, (ii) higher pipeline transportation revenues onthe Rocky Mountain pipelines, and (iii) higher storage and terminalingrevenues on our Pacific Terminal systems. These increases were partially offsetby (i) significantly lower gathering and blending margins, which werebelow average in the six months ended June 30, 2005 and above average inthe six months ended June 30, 2004, and (ii) unscheduled repairs andmaintenance associated with earth movement and stream erosion problems causedby heavy rainfall in Southern California during the early part of 2005. Thelower margins on our West Coast gathering and blending activities were due tocompetitive pricing pressures as a result of cheaper foreign crude entering theWest Coast markets. We consider this gathering and blending activity to becomplementary to our pipeline transportation operations. There were 29.7 millionweighted average limited partner units outstanding in the six months ended June 30,2005, approximately 8% more limited partner units than the 27.4 millionweighted average units outstanding in the six months ended June 30, 2004,primarily due to the sale of additional common units to partially fund theacquisition of the Rangeland system, including the MAPL pipeline.

***Segment Information***

Thefollowing is a discussion of segment operating income. Segment operating incomedoes not include general and administrative expenses, accelerated long-termincentive compensation plan expense and transaction costs as these items arenot allocated to the West Coast and Rocky Mountain business units.
| ** **                     | ** ** | **Six Months  Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|-----------------------------------------------|------------|------------|------------|------------|------------|
| **West Coast**            | ** ** | ** **                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **(In thousands)**                       | ** ** | ** ** | ** ** |
| Operating income               |       | $                                             | 22,149     |       | $          | 26,347     |       | $ | (4,198 | ) |   | (16 | )% |   |
| Add: Line 63 oil  release cost |       | 2,000                                         |       | —     |       | 2,000      |       |   | — |   |   |
|                           |       | $                                             | 24,149     |       | $          | 26,347     |       | $ | (2,198 | ) |   | (8 | )% |   |
| Operating data:                |       |                                          |       |       |       |       |       |   |   |   |   |
| Pipeline  throughput (bpd)     |       | 129.2                                         |       | 136.6      |       | (7.4       | )          |   | (5 | )% |   |
|                                |            |                                               |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

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For the six months ended June 30,2005, operating income excluding the effect of the $2.0 million expensefor the Line 63 oil release was $24.1 million, compared to $26.3 millionfor the six months ended June 30, 2004.  West Coast pipeline volumes for the six monthsended June 30, 2005 were approximately 5% lower than the same period in2004. During the first half of 2005, volumes were impacted by Los Angeles arearefinery maintenance and lower San Joaquin Valley and OCS production, resultingin lower volumes moving south to Los Angeles. There were $2.0 million ofunscheduled repairs and maintenance associated with earth movement and streamerosion problems at various locations along both Line 63 and Line 2000,caused by heavy rainfall in Southern California. PMT gathering and blendingmargins were also lower in 2005 due to pricing pressures from discounted crudeoil imports and margins on one particular contract which expired on March 31,2005. We consider this gathering and blending activity to be complementary toour pipeline transportation operations. The revenue effect of lower volumes wasoffset by incremental revenue from increased tariffs on Line 63 beginning November 1,2004, and on Line 2000 beginning May 1, 2005. Additionally, storageand distribution revenues were higher during the six months ended June 2005,due to higher rates of tank utilization and 72,000 barrels of additional tankcapacity being made available as a result of an idle tank being put intoservice in the third quarter of 2004.

| ** **                  | ** ** | ** **              | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|-------------------------|-----------------------------------------------|------------|------------|------------|------------|------------|------------|
| **Rocky Mountains**    | ** ** | ** **              | ** **                                    | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                  | ** ** | **(In thousands)** | ** **                                    |
| Operating income            |       | $                       | 18,539                                        |       | $          | 9,357      |       | $          | 9,182      |   |   | 98 | % |   |
| Operating data (bpd):       |       |                    |                                          |       |       |       |       |       |       |   |   |
| Rangeland  pipeline system: |       |                    |                                          |       |       |       |       |       |       |   |   |
| Sundre—North           |       | 22.2                    |                                          | 21.2       |       | 1.0        |       |       | 5          | % |   |
| Sundre—South           |       | 43.9                    |                                          | 48.8       |       | (4.9       | )          |       | (10        | )% |   |
| Western Corridor system     |       | 22.4                    |                                          | 18.0       |       | 4.4        |       |       | 24         | % |   |
| Salt Lake City Core system  |       | 116.7                   |                                          | 113.0      |       | 3.7        |       |       | 3          | % |   |
| Frontier pipeline           |       | 44.8                    |                                          | 47.0       |       | (2.2       | )          |       | (5         | )% |   |
|                             |            |                         |                                               |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

For the six months ended June 30, 2005, operatingincome was $18.5 million, compared to $9.4 million for the six months ended June 30,2004.  The increase included the resultsof the Rangeland system, which was acquired on May 11, 2004. In addition,increased market share for pipeline shipments of crude oil to Billings,Montana, and increased demand by the Salt Lake City, Utah, refineries, helpeddrive higher pipeline volumes on the U.S. Rocky Mountain systems other thanFrontier pipeline. Frontier pipeline volumes in 2005 were affected by ashortage of synthetic crude oil supply caused by a fire at a Suncor Energy, Inc.facility in December 2004. Shippers have now replaced these volumes withother types of crude oil and volumes returned to normal levels in the secondquarter of this year.

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***Statement ofIncome—Discussion and Analysis***
| ** **                                | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|------------|------------|
| **Revenues**                              | ** ** | ** **                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(In thousands)**                       | ** ** |
| Pipeline  transportation revenue          |       | $                                             | 55,784     |       | $          | 51,719     |       | $ | 4,065 |   |   | 8 | % |   |
| Storage and  distribution revenue         |       | 21,192                                        |       | 19,382     |       | 1,810      |       |   | 9 | % |   |
| Pipeline buy/sell  transportation revenue |       | 17,222                                        |       | 3,690      |       | 13,532     |       |   | — |   |   |
| Crude oil sales, net of  purchases:       |       |                                          |       |       |       |       |       |   |   |   |   |
| Crude oil sales                           |       | 244,657                                       |       | 186,365    |       | 58,292     |       |   | 31 | % |   |
| Crude oil purchases                       |       | (236,833                                      | )          | (175,497   | )          | 61,336     |       |   | 35 | % |   |
| Crude oil sales, net of purchases         |       | 7,824                                         |       | 10,868     |       | (3,044     | )          |   | (28 | )% |   |
| Net revenue                               |       | $                                             | 102,022    |       | $          | 85,659     |       | $ | 16,363 |   |   | 19 | % |   |
|                                           |            |                                               |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

Increased pipeline transportationrevenues were realized by our U.S. Rocky Mountain pipelines. Volumes onthe U.S. Rocky Mountain pipelines were higher due to increased demand byrefineries in Billings, Montana, Casper, Wyoming and Salt Lake City, Utah arearefineries. The revenue effect of lower volumes on the West Coast pipelines wasoffset by higher tariffs.

Storage and distribution revenues were higher than thesame period in 2004 due to higher rates of tank utilization and increasedcapacity being made available as a result of a 72,000 barrel idle tank beingput into operation during the third quarter of 2004.

Theincrease in pipeline buy/sell transportation revenues of $13.5 million reflectsa full six months of operations of the Rangeland system, which was acquired on May 11,2004.

The decrease in net crudeoil sales for the six months ended June 30, 2005 was primarily the resultof lower margin blending activities in our West Coast operations, particularlydue to competitive pricing pressures from cheaper foreign crude entering theWest Coast markets. Additionally, margins on one particular contract declinedas the difference between purchases made on a WTI price basis deviated fromhistorical norms over the period from September 2004 through March 2005.This contract expired on March 31, 2005. Higher oil prices increased grosssales and purchases values. We consider this gathering and blending activity tobe complementary to our pipeline transportation operations.

| ** **                                                 | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|------------|------------|
| **Expenses**                                               | ** ** | ** **                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**                       | ** ** |
| Operating  expenses                                        |       | $                                             | 47,046     |       | $          | 39,784     |       | $ | 7,262 |   |   | 18 | % |   |
| Line 63 oil  release costs                                 |       | 2,000                                         |       | —     |       | 2,000      |       |   | — |   |   |
| General and  administrative expense                        |       | 8,872                                         |       | 7,490      |       | 1,382      |       |   | 18 | % |   |
| Transaction costs                                          |       | 1,807                                         |       | —     |       | 1,807      |       |   | — |   |   |
| Accelerated  long-term incentive plan compensation expense |       | 3,115                                         |       | —     |       | 3,115      |       |   | — |   |   |
| Depreciation and  amortization expense                     |       | 13,135                                        |       | 10,955     |       | 2,180      |       |   | 20 | % |   |
|                                                       |       | $                                             | 75,975     |       | $          | 58,229     |       | $ | 17,746 |   |   | 30 | % |   |
|                                                            |            |                                               |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in operating expense was relatedprimarily to the acquisition of the Rangeland system on May 11, 2004. Operatingexpenses in the West Coast were also higher as a result of $2.0 million ofunscheduled repairs and maintenance and expenses on Line 2000 and Line 63resulting from earth movements and creek washouts caused by recent heavy rains.

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The Line 63 oil release costs are discussed in “RecentDevelopments” above.

The increase in general and administrative expense wasassociated with the integration and operation of the Rangeland acquisition andcertain expensed costs for the Pier 400 project (see “Capital Requirements”below for a discussion of the Pier 400 Project). These items were notapplicable in the corresponding period of 2004. In addition, we incurred morecosts for acquisition evaluations in 2005. These increases were partly offsetby reduced cost for the Long Term Incentive Plan included in general andadministrative expense.

Transaction costs are discussed in “RecentDevelopments” above.

On March 3, 2005, in connection with the changein control of the General Partner, all restricted units outstanding under theLong-term Incentive Plan immediately vested. For the six months ended June 30,2005, we recognized $3.1 million in compensation expense as a result.

Theincrease in depreciation and amortization includes $2.5 million fordepreciation on the Rangeland system. These increases were partly offset bylower depreciation on other assets reflecting assets that have now been fullydepreciated.

| ** **                                                                       | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|------------|------------|
| **Other Income and Expense**                                      | ** ** | ** **                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                                                       | ** ** | **(In thousands)**                       | ** ** |
| Share of net  income of Frontier                                                 |       | $                                             | 847        |       | $          | 784        |       | $ | 63 |   |   | 8 | % |   |
| Interest expense                                                                 |       | $                                             | 11,442     |       | $          | 8,509      |       | $ | 2,933 |   |   | 34 | % |   |
| Write-off of  deferred financing cost and interest rate swap termination expense |       | $                                             | —     |       | $          | 2,901      |       | $ | 2,901 |   |   | — |   |   |
| Other income                                                                     |       | $                                             | 893        |       | $          | 387        |       | $ | 506 |   |   | 131 | % |   |
| Income tax expense  (benefit)                                                    |       | $                                             | 704        |       | $          | (14        | )          | $ | 718 |   |   | — |   |   |
|                                                                                  |            |                                               |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The increase in our share of Frontier’s net income wasmainly attributable to increased pipeline volumes in the second quarter as aresult of a connecting carrier increasing its capacity.

The increase in interest expense was due to borrowingsincurred to partially fund the acquisition of the Rangeland system. Ourweighted average borrowings during the six months ended June 30, 2005were $362 million compared to $289 million in the correspondingperiod in 2004. In addition, floating interest rates were higher in 2005, whichresulted in a weighted average interest rate of 6.3% for the period ended June 30,2005 compared to a weighted average interest rate of 5.7% for the correspondingperiod in 2004.

Other income of $0.9 million for the period ended June 30,2005 was $0.5 million greater than the corresponding period in 2004 due toincreased interest income and other items.

The increase in income tax expense for the six monthsended June 30, 2005 relates to the income of the Rangeland system acquiredon May 11, 2004. Our Canadian subsidiaries are taxable entities andcertain kinds of repatriation of funds into the U.S. are subject to Canadianwithholding tax. Additionally, we recorded deferred tax liabilities inconnection with the purchase of our Canadian subsidiaries, which we recognizeinto earnings in the respective future tax periods.

**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 requirements,our remaining costs for the Line 63 oil release remediation and related costs,and our anticipated sustaining capital expenditures in the next three years.

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In connection with the acquisition of certain assetsfrom Valero, L.P., we plan to issue $275—$300 million of additional commonunits, issue $150 million of additional senior unsecured notes and replace ourrevolving credit facilities, which would otherwise mature in mid-2007. See “Note9—Subsequent Events” to the accompanying condensed consolidated financialstatements.

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

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 transported through our pipelines and the capacity leased in ourstorage tanks as described in “Overview” above. Our operating performance isalso affected by prevailing economic conditions in the crude oil industry andfinancial, business and other factors, some of which are beyond our control,which could significantly impact future results.

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

| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2005**                                          | ** ** | **2004**   | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                           | ** ** |
| ** **                                           | ** ** | **(unaudited)**                                   | ** ** |
| Net cash provided  by operating activities           |       | $                                                 | 46,218     |       | $          | 29,265 |   | $ | 16,953 |   |
| Net cash used in  investing activities               |       | (9,975                                            | )          | (146,946   | )          | 136,971 |   |
| Net cash provided by  (used in) financing activities |       | (27,549                                           | )          | 129,843    |       | (157,392 | ) |
|                                                      |            |                                                   |            |            |            |  |  |  |  |  |

 

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

The increase in the net cash from operating activitiesof $17.0 million, or 58%, was primarily the result of a decrease in cashused for working capital.

Net cash from operating activities for the six monthsended June 30, 2005 was increased by approximately $15.0 million byworking capital changes. Increases in accounts payable and other accruedliabilities and accrued crude oil purchases more than offset an increase incrude oil sales receivables, transportation and storage receivables, and insuranceproceeds receivable.

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

Capital expenditures were $9.9 million in the firsthalf of 2005, of which $0.8 million related to sustaining capital projects,$3.2 million related to transition projects, $3.7 million related to expansionand $2.2 million was for our continued development of the Pier 400 Project. Theamount of cash used in investing activities in 2004 relates primarily to ouracquisition and development activities. The 2004 period includes $139.1 millionrelated to the acquisition of the Rangeland system, including the MAPL pipeline.Capital expenditures for the six months ended June 30, 2004 were $7.9million of which $0.7 million related to sustaining capital projects,$0.8 million related to the transition of the Pacific Terminals storageand distribution system, $4.6 million related to expansion and $1.8million was for development of the Pier 400 Project.

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***Net cash providedby and used in financing activities***

Cash provided by financingactivities for the six months ended June 30, 2005 include distributions of$30.7 million which were made to the limited partners and the General Partner. Additionally,TAC and LBP contributed $2.4 million to reimburse us for certain costs incurredin connection with the LB Acquisition. We also received $2.0 million in netproceeds from our credit facilities in the six months ended June 30, 2005.The amount of cash provided by financing activities in 2004 of $129.8 millionincludes (i) net proceeds of $128.6 million from our equity offeringscompleted in March and April, 2004, which were used principally to partlyfund our acquisition of the Rangeland system, (ii) $241.1 million netproceeds from the offering of our Senior Notes, which were used in part torepay our $225 million term loan, (iii) net proceeds of $12.7 millionunder our revolving credit facilities, and (iv) $27.1 million indistributions to the limited and general partner interests.

***Capital Requirements***

Generally, ourcrude oil transportation and storage operations require investment to upgradeor enhance existing operations and to meet environmental and operationalregulations. Our capital 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, and adding new pump stations or pipeline connectionsto increase our transportation throughput and revenue.

We have forecasted totalcapital expenditures for our existing operations of $57 million for 2005,including $10 million for the Pier 400 Project, $32 million forexpansion projects, $10 million relating to the transition of the Rangelandsystem, $2 million for other transition capital projects, and$3 million for sustaining capital projects.

***Pier 400***

We continue with our efforts to develop a deepwaterpetroleum import terminal at Pier 400 and Terminal Island in the Port ofLos Angeles (“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 willconstruct the transfer infrastructure, including a large diameter pipelinesystem for receiving bulk petroleum liquids from marine vessels, and thestorage tanks. If successful, this project will allow us to participate in theLos Angeles basin marine import business, which is growing as a result of adecline in both California production and imports from Alaska.

We initiated the environmental review and permittingfor the Pier 400 project in June 2004 and expect to have the permitsnecessary for construction to begin in the second quarter of 2006. We enteredinto a project development agreement with two subsidiaries of Valero EnergyCorporation that defines the facilities that we are to construct in the POLA. Weand Valero Energy Corporation have also signed a terminaling services agreementwith a 30-year, 50,000 bpd volume commitment from Valero Energy Corporation tosupport the terminal. These agreements are subject to the satisfaction ofvarious conditions, including the execution of additional project relatedagreements and the achievement of 

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certain projectmilestones, some of which have not been satisfied. We are negotiating theseadditional agreements and an extension of the project milestones with Valero,and we expect to reach an agreement.

Final construction of the Pier 400 Project is subjectto the completion of a land lease agreement with the POLA, receipt ofenvironmental and other approval, securing additional customer commitments,updating engineering and project cost estimates, ongoing feasibilityevaluation, and financing. A final decision to proceed is expected to be madein the first quarter of 2006. We expect construction of the Pier 400terminal to be completed and placed in service in late 2007.

We have capitalized approximately$12.7 million on the Pier 400 project through June 30, 2005, including$2.2 million for the six months ended June 30, 2005. These expendituresinclude $6.3 million for emission reduction credits, an asset that isre-saleable if the project does not proceed. We anticipate fundingpre-construction costs through early-2006 from our revolving credit facility. Constructionof the Pier 400 terminal is expected to be financed through a combinationof debt and proceeds from the issuance of additional partnership units,including common units.

***Debt Obligations***

At June 30, 2005, our debt obligations include: (i) $53.0 millionon our senior secured U.S. revolving credit facility, (ii) Cdn$65.0 million(U.S.$53.0 million) on our senior secured Canadian revolving creditfacility, (iii) $249.5 million on our Senior Notes, and (iv) Cdn$4.5 million(U.S.$3.7 million) payable to the seller of the MAPL assets. For furtherdiscussion of these debt obligations see “Note 4—Long-term Debt” to theaccompanying condensed consolidated financial statements.

As of June 30, 2005,$80 million of undrawn credit was available under the senior secured U.S.revolving credit facility and  Cdn$14 millionof undrawn credit was available under the senior secured Canadian revolving creditfacility. With the consent of the administrative agent under the U.S. revolvingcredit facility, we can increase credit availability under the U.S. creditfacility by up to an additional $67 million, based upon pro-forma EBITDA fromfuture acquisitions.

**Off-Balance Sheet Arrangements**

We have no off-balancesheet arrangements.

**Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(revised December 2004), *Share-Based Payment*(SFAS123R). This Statement is a revision of SFAS No. 123. SFAS 123R establishesstandards for the accounting for transactions in which an entity exchanges itsequity instruments for goods or services. SFAS 123R is effective for the Partnershipas of the beginning of the first annual reporting period that begins after June 15,2005. The Partnership has not yet determined the impact of the adoption of SFAS123R on the Partnership’s consolidated financial statements.

On March 30, 2005 theFASB issued FASB Interpretation No. 47, **Accounting for Conditional AssetRetirement Obligations****(FIN 47)**,to clarify the term **conditional asset retirement obligation**as that term is used in FASB Statement No. 143, **Accounting forAsset Retirement Obligations**. The Interpretation alsoclarifies when an entity has sufficient information to reasonably estimate thefair value of an asset retirement obligation. FIN 47 is effective for thePartnership no later than the end of fiscal years ending after December 15,2005. The Partnership is in the process of determining the impact of FIN 47 onits consolidated financial statements.

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

Market risk is the risk of loss arising from adversechanges in market rates and prices. The principal market risks to which we areexposed are interest rate risk and crude oil price risk. Debt we incur underour credit facilities bears variable interest at the applicable base or primerate, a rate based on LIBOR or a rate based on Canadian Bankers’ Acceptances.We have used and will continue to use from time to time derivative instrumentsto hedge our exposure to variable interest rates. In addition, we have enteredinto swap agreements to convert a portion of our fixed rate Senior Notes intofloating rate debt based on LIBOR.

We use, on a limited basis, certain derivativeinstruments (principally futures and options) to hedge our exposure to marketprice volatility related to our inventory or future sales of crude oil. We donot enter into speculative derivative activities of any kind. The fair marketvalues of derivative instruments are included in “Other Assets, net” in theaccompanying consolidated balance sheets. In our gathering and blendingoperations we purchase crude oil for subsequent blending, transportation andresale primarily in the Los Angeles Basin. Changes in the fair value of ourderivative instruments related to the fair value hedge of crude oil inventoryare recognized in net income. For the six months ended June 30, 2005 and2004, “crude oil sales, net of purchases” were net of $0.5 million inlosses in each period, reflecting changes in the fair value of derivativeinstruments in our gathering and blending operations. Losses on derivativeswere generally offset by gains in physical crude oil inventory positions. Inaddition, changes in the fair value of our derivative instruments related tothe forecasted sale of crude oil, which qualify as cash flow hedges foraccounting purposes, are deferred and reflected in “accumulated othercomprehensive income,” a component of partners’ capital, until the relatedrevenue is recognized in the consolidated statements of income. We expect toreclassify a net amount of $1.0 million of existing gains and losses intoearnings over the next 12 months. For existing hedges, the maximum length oftime over which we are hedging our exposure to future cash flows for forecastedtransactions is six months. As of June 30, 2005, $1.0 millionrelating to the changes in the fair value of derivative instruments wasincluded in “accumulated other comprehensive income.”

In connection with the issuance of the Senior Notes,we entered into interest rate swap agreements with an aggregate notionalprincipal amount of $80.0 million to receive interest at a fixed rate of 71/8% andto 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 on June 15, 2014 and are callable at the same dates andterms as the Senior Notes. We designated these swaps as a hedge of the changein the Senior Notes fair value attributable to changes in the six month LIBORinterest rate. Changes in fair values of the interest rate swaps are recordedinto earnings each period. Similarly, changes in the fair value of theunderlying $80.0 million of Senior Notes, which are expected to beoffsetting to changes in the fair value of the interest swaps, are recordedinto earnings each period. At June 30, 2005 we recorded an increase of$3.5 million in the fair value of interest rate swaps with an equal offsettingentry to the $80.0 million of Senior Notes. As of June 30, 2005, weassessed the hedge effectiveness of this interest rate swap and noted that nogain or loss from measuring ineffectiveness was required to be recognized.

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 based onvariable rates. If the LIBOR or Canadian Bankers’ Acceptance discount rateswere to increase 1.0% for the remainder of 2005 as compared to the rate at December 31,2004, our interest expense for the remainder of 2005 would increase $0.9million based on our outstanding debt at June 30, 2005.

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**Fair Value of Financial Instruments**

Thecarrying amount and fair values of financial instruments are as follows:
| ** **                      | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **Carrying**                | ** ** | **Fair**                        | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                      | ** ** | **Value**                   | ** ** | **Value**                       | ** ** | **Value** | ** ** | **Value** | ** ** |
| ** **                      | ** ** | **(in thousands)**     | ** ** |
| Crude oil hedging  futures      |       | $                           | 1,078      |                            | $          | 1,078 |   | $ | 400 |   | $ | 400 |   |
| Fair value  interest rate swaps |       | 3,528                       |       | 3,528                           |       | 2,693 |   | 2,693 |   |
| Long-term debt                  |       | 359,209                     |       | 369,630                         |       | 357,163 |   | 373,265 |   |
|                                 |            |                             |            |                                 |            |  |  |  |  |  |  |  |  |

 

As of June 30, 2005 and December 31, 2004,the carrying amounts of items comprising current assets and current liabilitiesapproximate fair value due to the short-term maturities of these instruments.The carrying amounts of the revolving credit facilities approximate fair valueprimarily because the interest rates fluctuate with prevailing market rates. Theinterest rate on the Senior Notes is fixed and the fair value is determinedfrom a broker’s price quote at June 30, 2005 and December 31, 2004.

The carrying amount ofderivative financial instruments represents the fair value as these instrumentsare recorded on the balance sheet at their fair value under SFAS 133. Ourfair values of crude oil hedging futures are based on****Reutersquoted market prices on the NYMEX. Interest rate swaps’ fair values are basedon the prevailing market price at which the positions could be liquidated.

**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 June 30, 2005, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934 (the “Exchange Act”) are effective toensure that the information required to be disclosed by us in the reports wefile or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms.

***Internal Control Over Financial Reporting***

There has not been any change in our internal controlover financial reporting that occurred during our quarterly period ended June 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II. OTHER INFORMATION**

**ITEM 1.**                LegalProceedings

See discussion of legalproceedings in “Note 8—Contingencies” in the accompanying condensedconsolidated financial statements.

**ITEM 6.**                Exhibits

Thefollowing documents are filed asexhibits to this quarterly filing:
| Exhibit  Number     | ** ** | **Description**                                                                                                                                                                                                                                               |
|--------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * Exhibit 10.1      |       | Sale and Purchase  Agreement dated July 1, 2005, by and among Support Terminals Operating  Partnership, L.P., Kaneb Pipe Line Operating Partnership, L.P., Shore  Terminals LLC and Pacific Energy Group LLC.                                            |
| * 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 registrant 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)  August 2, 2005*                          |
|   | By:    |   | /s/ GERALD A. TYWONIUK                                                                                                                                |
|   |   |   | Gerald A.  Tywoniuk*Senior Vice President, Chief Financial  Officer and Treasurer  (Principal Financial and Accounting Officer)  August 2, 2005* |

 

 

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**EXHIBIT INDEX**
| Exhibit Number      | ** ** | **Description**                                                                                                                                                                                                                                               |
|--------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * Exhibit 10.1      |       | Sale and Purchase  Agreement dated July 1, 2005, by and among Support Terminals Operating  Partnership, L.P., Kaneb Pipe Line Operating Partnership, L.P., Shore  Terminals LLC and Pacific Energy Group LLC.                                            |
| * 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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