**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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

**Forthe quarterly period ended June 30, 2006**

**OR**

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

**Forthe transition period from                     to                     **

**CommissionFile Number 1-31345**

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**PACIFICENERGY 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)

**None**

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

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Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

Large acceleratedfiler   o                    Acceleratedfiler   x                    Non-acceleratedfiler   o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  Nox

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

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

 

 

 

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**PACIFIC ENERGYPARTNERS, L.P.**

**FORM 10-Q**

**TABLEOF CONTENTS**

|              | ** ** | ** **                                                                                                                                  | ** ** | **Page** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **   |       | **PART I. FINANCIAL INFORMATION**                                                                                                      |       |     |
| Item 1. |       | Financial  Statements                                                                                                                       |       | 1        |   |
|         |       | Condensed  Consolidated Balance Sheets (Unaudited)—As of June 30, 2006 and  December 31, 2005                                |       | 1        |   |
|         |       | Condensed  Consolidated Statements of Income (Unaudited)—For the Three and  Six Months Ended June 30, 2006 and 2005               |       | 2        |   |
|         |       | Condensed  Consolidated Statement of Partners’ Capital (Unaudited)—For the Six Months  Ended June 30, 2006                   |       | 3        |   |
|         |       | Condensed  Consolidated Statements of Comprehensive Income (Unaudited)—For the Three and  Six Months Ended June 30, 2006 and 2005 |       | 4        |   |
|         |       | Condensed  Consolidated Statements of Cash Flows (Unaudited)—For the Six Months Ended  June 30, 2006 and 2005                     |       | 5        |   |
|         |       | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                                           |       | 6        |   |
| Item 2. |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                 |       | 26       |   |
| Item 3. |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                 |       | 46       |   |
| Item 4. |       | Controls  and Procedures                                                                                                                    |       | 48       |   |
| ** **   |       | **PART II. OTHER INFORMATION**                                                                                                         |       |     |   |
| Item 1. |       | Legal  Proceedings                                                                                                                          |       | 50       |   |
| Item 1A.     |       | Risk Factors                                                                                                                                |       | 51       |   |
| Item 6. |       | Exhibits                                                                                                                                    |       | 52       |   |

 

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**PART I.   FINANCIALINFORMATION**

**ITEM1.**             Financial Statements

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

| ** **                                                                                                                        | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                                                                                        | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                                                                                                                        |       |                    |       |                  |       |   |   |
| Current assets:                                                                                                                   |       |                    |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                         |       | $                       | 22,823     |                  |       | $ | 18,064 |   |   |
| Crude oil sales receivable                                                                                                        |       | 149,674                 |       |                  | 95,952     |   |   |
| Transportation and storage accounts receivable                                                                                    |       | 27,479                  |       |                  | 30,100     |   |   |
| Canadian goods and services tax receivable                                                                                        |       | 5,338                   |       |                  | 8,738      |   |   |
| Insurance proceeds receivable                                                                                                     |       | 5,800                   |       |                  | 9,052      |   |   |
| Due from related parties                                                                                                          |       | 141                     |       |                  | —     |   |   |
| Crude oil and refined products inventory                                                                                          |       | 36,193                  |       |                  | 20,192     |   |   |
| Prepaid expenses                                                                                                                  |       | 3,717                   |       |                  | 7,489      |   |   |
| Other                                                                                                                             |       | 3,524                   |       |                  | 2,528      |   |   |
| Total current assets                                                                                                              |       | 254,689                 |       |                  | 192,115    |   |   |
| Property and equipment, net                                                                                                       |       | 1,237,794               |       |                  | 1,185,534  |   |   |
| Intangible assets, net                                                                                                            |       | 69,354                  |       |                  | 69,180     |   |   |
| Investment in Frontier                                                                                                            |       | 8,322                   |       |                  | 8,156      |   |   |
| Other assets, net                                                                                                                 |       | 17,791                  |       |                  | 21,467     |   |   |
|                                                                                                                              |       | $                       | 1,587,950  |                  |       | $ | 1,476,452 |   |   |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                                                                                       |       |                    |       |                  |       |   |   |
| Current liabilities:                                                                                                              |       |                    |       |                  |       |   |   |
| Accounts payable and accrued liabilities                                                                                          |       | $                       | 37,838     |                  |       | $ | 42,409 |   |   |
| Accrued crude oil purchases                                                                                                       |       | 145,041                 |       |                  | 96,651     |   |   |
| Line 63 oil release reserve                                                                                                       |       | 4,480                   |       |                  | 5,898      |   |   |
| Accrued interest                                                                                                                  |       | 5,320                   |       |                  | 4,929      |   |   |
| Other                                                                                                                             |       | 12,459                  |       |                  | 6,300      |   |   |
| Total current liabilities                                                                                                         |       | 205,138                 |       |                  | 156,187    |   |   |
| Senior notes and credit facilities, net                                                                                           |       | 635,368                 |       |                  | 565,632    |   |   |
| Deferred income taxes                                                                                                             |       | 32,833                  |       |                  | 35,771     |   |   |
| Environmental liabilities                                                                                                         |       | 16,572                  |       |                  | 16,617     |   |   |
| Other liabilities                                                                                                                 |       | 6,006                   |       |                  | 4,006      |   |   |
| Total liabilities                                                                                                                 |       | 895,917                 |       |                  | 778,213    |   |   |
| Commitments and  contingencies (note 6)                                                                                           |       |                    |       |                  |       |   |   |
| Partners’ capital:                                                                                                           |       |                    |       |                  |       |   |   |
| Common unitholders (31,457,782 and 31,448,931 units  outstanding at  June 30, 2006 and December 31, 2005, respectively) |       | 635,706                 |       |                  | 644,589    |   |   |
| Subordinated unitholders (7,848,750 units outstanding  at June 30, 2006 and December 31, 2005)                          |       | 22,474                  |       |                  | 24,758     |   |   |
| General Partner interest                                                                                                          |       | 12,295                  |       |                  | 12,535     |   |   |
| Undistributed employee long-term incentive  compensation                                                                          |       | 231                     |       |                  | —     |   |   |
| Accumulated other comprehensive income                                                                                            |       | 21,327                  |       |                  | 16,357     |   |   |
| Net partners’ capital                                                                                                        |       | 692,033                 |       |                  | 698,239    |   |   |
|                                                                                                                              |       | $                       | 1,587,950  |                  |       | $ | 1,476,452 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

1

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

| ** **                                                                                                                                                                                                              | ** ** | **Three Months Ended June 30,**                  | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                                                                                              | ** ** | **2006**                                                             | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                                                              | ** ** | **(in thousands, except per unit amounts)** | ** ** |
| Revenues:                                                                                                                                                                                                               |       |                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Pipeline transportation revenue                                                                                                                                                                                         |       |                                                                 | $          | 34,800                                            |       |   |   | $ | 27,747 |   |   |   | $ | 68,657 |   |   |   | $ | 55,784 |   |   |
| Storage and terminaling revenue                                                                                                                                                                                         |       |                                                                 | 21,867     |                                              |       |   | 10,870 |   |   |   | 41,953 |   |   |   | 21,192 |   |   |
| Pipeline buy/sell transportation revenue                                                                                                                                                                                |       |                                                                 | 11,427     |                                              |       |   | 8,116 |   |   |   | 21,126 |   |   |   | 17,222 |   |   |
| Crude oil sales, net of purchases of $353,590 and  $122,442 for the three months ended June 30, 2006 and 2005 and  $609,909 and $236,833 for the six months ended  June 30, 2006 and 2005 |       |                                                                 | 10,720     |                                              |       |   | 6,042 |   |   |   | 17,529 |   |   |   | 7,824 |   |   |
|                                                                                                                                                                                                                    |       |                                                                 | 78,814     |                                              |       |   | 52,775 |   |   |   | 149,265 |   |   |   | 102,022 |   |   |
| Cost and Expenses:                                                                                                                                                                                                      |       |                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating (which excludes $586 of compensation  expense for the six months ended June 30, 2005 reported in accelerated  long-term incentive plan compensation expense)                                             |       |                                                                 | 31,655     |                                              |       |   | 25,292 |   |   |   | 65,074 |   |   |   | 47,046 |   |   |
| General and administrative (which excludes $2,529 of compensation  expense for the six months ended June 30, 2005 reported in  accelerated long-term incentive plan compensation expense)      |       |                                                                 | 5,714      |                                              |       |   | 3,700 |   |   |   | 12,587 |   |   |   | 8,872 |   |   |
| Depreciation and amortization                                                                                                                                                                                           |       |                                                                 | 10,292     |                                              |       |   | 6,606 |   |   |   | 20,294 |   |   |   | 13,135 |   |   |
| Merger costs (note 2)                                                                                                                                                                                                   |       |                                                                 | 3,417      |                                              |       |   | — |   |   |   | 3,417 |   |   |   | — |   |   |
| Accelerated long-term incentive plan compensation  expense (note 7)                                                                                                                                                |       |                                                                 | —     |                                              |       |   | — |   |   |   | — |   |   |   | 3,115 |   |   |
| Line 63 oil release costs (note 6)                                                                                                                                                                                      |       |                                                                 | —     |                                              |       |   | — |   |   |   | — |   |   |   | 2,000 |   |   |
| Reimbursed general partner transaction costs  (note 5)                                                                                                                                                             |       |                                                                 | —     |                                              |       |   | — |   |   |   | — |   |   |   | 1,807 |   |   |
|                                                                                                                                                                                                                    |       |                                                                 | 51,078     |                                              |       |   | 35,598 |   |   |   | 101,372 |   |   |   | 75,975 |   |   |
| Share of net  income of Frontier                                                                                                                                                                                        |       |                                                                 | 475        |                                              |       |   | 490 |   |   |   | 873 |   |   |   | 847 |   |   |
| Operating income                                                                                                                                                                                                        |       |                                                                 | 28,211     |                                              |       |   | 17,667 |   |   |   | 48,766 |   |   |   | 26,894 |   |   |
| Interest expense                                                                                                                                                                                                        |       |                                                                 | (10,088    | )                                                 |       |   | (5,844 | ) |   |   | (19,176 | ) |   |   | (11,442 | ) |   |
| Interest and other  income                                                                                                                                                                                              |       |                                                                 | 292        |                                              |       |   | 540 |   |   |   | 735 |   |   |   | 893 |   |   |
| Income before  income taxes                                                                                                                                                                                             |       |                                                                 | 18,415     |                                              |       |   | 12,363 |   |   |   | 30,325 |   |   |   | 16,345 |   |   |
| Income tax  (expense) benefit:                                                                                                                                                                                          |       |                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                                                                                                                                                                                 |       |                                                                 | (1,409     | )                                                 |       |   | 245 |   |   |   | (1,803 | ) |   |   | (487 | ) |   |
| Deferred (note 3)                                                                                                                                                                                                       |       |                                                                 | 4,437      |                                              |       |   | (388 | ) |   |   | 4,535 |   |   |   | (217 | ) |   |
|                                                                                                                                                                                                                    |       |                                                                 | 3,028      |                                              |       |   | (143 | ) |   |   | 2,732 |   |   |   | (704 | ) |   |
| Net income                                                                                                                                                                                                              |       |                                                                 | $          | 21,443                                            |       |   |   | $ | 12,220 |   |   |   | $ | 33,057 |   |   |   | $ | 15,641 |   |   |
| Net income (loss) for the general partner interest                                                                                                                                                                      |       |                                                                 | $          | 392                                               |       |   |   | $ | 244 |   |   |   | $ | 373 |   |   |   | $ | (1,458 | ) |   |
| Net income for the limited partner interests                                                                                                                                                                            |       |                                                                 | $          | 21,051                                            |       |   |   | $ | 11,976 |   |   |   | $ | 32,684 |   |   |   | $ | 17,099 |   |   |
| Basic and diluted net income per limited partner unit                                                                                                                                                                   |       |                                                                 | $          | 0.54                                              |       |   |   | $ | 0.40 |   |   |   | $ | 0.83 |   |   |   | $ | 0.58 |   |   |
| Weighted average limited partner units outstanding:                                                                                                                                                                     |       |                                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                                                                                                   |       |                                                                 | 39,307     |                                              |       |   | 29,723 |   |   |   | 39,304 |   |   |   | 29,689 |   |   |
| Diluted                                                                                                                                                                                                                 |       |                                                                 | 39,314     |                                              |       |   | 29,742 |   |   |   | 39,322 |   |   |   | 29,708 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

2

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

| ** **                                                                     | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **  | ** ** | **Undistributed** | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|-------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                     | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **  | ** ** | **Employee**      | ** ** | **Accumulated**   | ** ** | ** **       | ** ** |
| ** **                                                                     | ** ** | ** **                          | ** ** | ** **                            | ** ** | **General** | ** ** | **Long-Term**     | ** ** | **Other**         | ** ** | ** **       | ** ** |
| ** **                                                                     | ** ** | **Limited Partner Units** | ** ** | **Limited Partner Amounts** | ** ** | **Partner** | ** ** | **Incentive**     | ** ** | **Comprehensive** | ** ** | ** **       | ** ** |
| ** **                                                                     | ** ** | **Common**                          | ** ** | **Subordinated**                      | ** ** | **Common**  | ** ** | **Subordinated**  | ** ** | **Interest**      | ** ** | **Compensation** | ** ** | **Income** | ** ** | **Total** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**             | ** ** |
| Balance, December 31, 2005                                                |       |                                | 31,449     |                                  |       |        | 7,849      |              |       |              | $          | 644,589          |       |   |   | $ | 24,758 |   |   |   | $ | 12,535 |   |   |   | $ | — |   |   |   | $ | 16,357 |   |   | $ | 698,239 |   |
| Net income                                                                     |       |                                | —     |                                  |       |        | —     |              |       |              | 26,158     |             |       |   | 6,526 |   |   |   | 373 |   |   |   | — |   |   |   | — |   |   | 33,057 |   |
| Distribution to partners                                                       |       |                                | —     |                                  |       |        | —     |              |       |              | (35,306    | )                |       |   | (8,810 | ) |   |   | (1,498 | ) |   |   | — |   |   |   | — |   |   | (45,614 | ) |
| Employee compensation under LB Pacific, LP option  plan                        |       |                                | —     |                                  |       |        | —     |              |       |              | —     |             |       |   | — |   |   |   | 880 |   |   |   | — |   |   |   | — |   |   | 880 |   |
| Employee compensation under long-term incentive plan                      |       |                                | —     |                                  |       |        | —     |              |       |              | —     |             |       |   | — |   |   |   | — |   |   |   | 546 |   |   |   | — |   |   | 546 |   |
| Issuance of common units pursuant to long-term  incentive plan                 |       |                                | 9          |                                  |       |        | —     |              |       |              | 265        |             |       |   | — |   |   |   | 5 |   |   |   | (315 | ) |   |   | — |   |   | (45 | ) |
| Foreign currency translation adjustment                                        |       |                                | —     |                                  |       |        | —     |              |       |              | —     |             |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,144 |   |   | 5,144 |   |
| Change in fair value of crude oil and foreign  currency hedging contracts |       |                                | —     |                                  |       |        | —     |              |       |              | —     |             |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (174 | ) |   | (174 | ) |
| Balance,  June 30, 2006                                                   |       |                                | 31,458     |                                  |       |        | 7,849      |              |       |              | $          | 635,706          |       |   |   | $ | 22,474 |   |   |   | $ | 12,295 |   |   |   | $ | 231 |   |   |   | $ | 21,327 |   |   | $ | 692,033 |   |

 

See accompanying notes to condensed consolidated financial statements.

3

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

| ** **                                                    | ** ** | **Three Months Ended June 30,**                                                      | ** ** | **Six Months Ended June 30,**                                                        | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                                                                                  | ** ** |
| Net income                                                    |       |                                                                                                     | $          | 21,443                                                                                                   |       |   |   | $ | 12,220 |   |   |   | $ | 33,057 |   |   |   | $ | 15,641 |   |   |
| Change in fair  value of crude oil and hedging derivatives    |       |                                                                                                     | —     |                                                                                                     |       |   | 327 |   |   |   | 260 |   |   |   | (806 | ) |   |
| Change in fair  value of foreign currency hedging derivatives |       |                                                                                                     | (488       | )                                                                                                        |       |   | — |   |   |   | (434 | ) |   |   | — |   |   |
| Change in foreign  currency translation adjustment            |       |                                                                                                     | 5,413      |                                                                                                     |       |   | (1,765 | ) |   |   | 5,144 |   |   |   | (2,301 | ) |   |
| Comprehensive income                                          |       |                                                                                                     | $          | 26,368                                                                                                   |       |   |   | $ | 10,782 |   |   |   | $ | 38,027 |   |   |   | $ | 12,534 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

4

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

| ** **                                                                         | ** ** | **Six Months Ended June 30,**                                            | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                                                                      | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |       |                                                                                         |       |   |   |   |   |   |   |
| Net income                                                                         |       |                                                                                         | $          | 33,057 |   |   |   | $ | 15,641 |   |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                                                         |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                     |       |                                                                                         | 20,294     |   |   |   | 13,135 |   |   |
| Amortization of debt  issue costs                                                  |       |                                                                                         | 1,222      |   |   |   | 937 |   |   |
| Non-cash of  employee compensation under long-term incentive plan                  |       |                                                                                         | 546        |   |   |   | 2,886 |   |   |
| Non-cash employee  compensation under the LB Pacific, LP Option Plan               |       |                                                                                         | 880        |   |   |   | — |   |   |
| Deferred tax expense  (benefit)                                                    |       |                                                                                         | (4,535     | ) |   |   | 217 |   |   |
| Share of net income of  Frontier                                                   |       |                                                                                         | (873       | ) |   |   | (847 | ) |   |
| Other adjustments                                                                  |       |                                                                                         | (1,649     | ) |   |   | 98 |   |   |
| Distributions from  Frontier, net                                                  |       |                                                                                         | 622        |   |   |   | 650 |   |   |
| Net changes in operating assets and liabilities:                                   |       |                                                                                         |       |   |   |   |   |   |   |
| Crude oil sales  receivable                                                        |       |                                                                                         | (52,795    | ) |   |   | (8,819 | ) |   |
| Transportation and  storage accounts receivable                                    |       |                                                                                         | 2,723      |   |   |   | 1,699 |   |   |
| Insurance proceeds receivable                                                      |       |                                                                                         | 5,476      |   |   |   | (6,705 | ) |   |
| Crude oil and refined  products inventory                                          |       |                                                                                         | (15,693    | ) |   |   | 963 |   |   |
| Other current assets and  liabilities                                              |       |                                                                                         | 11,752     |   |   |   | 1,079 |   |   |
| Accounts payable and  other accrued liabilities                                    |       |                                                                                         | (3,034     | ) |   |   | 9,638 |   |   |
| Accrued crude oil  purchases                                                       |       |                                                                                         | 47,204     |   |   |   | 11,113 |   |   |
| Line 63 oil release  reserve                                                       |       |                                                                                         | (3,643     | ) |   |   | 4,981 |   |   |
| Other non-current assets  and liabilities                                          |       |                                                                                         | 534        |   |   |   | (522 | ) |   |
| NET CASH PROVIDED BY  OPERATING ACTIVITIES                                         |       |                                                                                         | 42,088     |   |   |   | 46,144 |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                               |       |                                                                                         |       |   |   |   |   |   |   |
| Acquisitions                                                                       |       |                                                                                         | (2,365     | ) |   |   | — |   |   |
| Additions to property  and equipment                                               |       |                                                                                         | (42,524    | ) |   |   | (9,877 | ) |   |
| Additions to pipeline  linefill and minimum tank inventory                         |       |                                                                                         | (16,419    | ) |   |   | — |   |   |
| Other                                                                              |       |                                                                                         | 168        |   |   |   | (98 | ) |   |
| NET CASH USED IN  INVESTING ACTIVITIES                                             |       |                                                                                         | (61,140    | ) |   |   | (9,975 | ) |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |                                                                                         |       |   |   |   |   |   |   |
| Capital contributions  from the general partner                                    |       |                                                                                         | —     |   |   |   | 2,438 |   |   |
| Proceeds from credit  facilities                                                   |       |                                                                                         | 130,409    |   |   |   | 66,283 |   |   |
| Repayment of credit  facilities                                                    |       |                                                                                         | (60,950    | ) |   |   | (64,326 | ) |   |
| Deferred financing costs                                                           |       |                                                                                         | —     |   |   |   | (600 | ) |   |
| Distributions to  partners                                                         |       |                                                                                         | (45,614    | ) |   |   | (30,658 | ) |   |
| Related parties                                                                    |       |                                                                                         | (141       | ) |   |   | (686 | ) |   |
| NET CASH PROVIDED BY  (USED IN) FINANCING ACTIVITIES                               |       |                                                                                         | 23,704     |   |   |   | (27,549 | ) |   |
| Effect of exchange rates  on cash                                                  |       |                                                                                         | 107        |   |   |   | 74 |   |   |
| NET INCREASE IN CASH AND  CASH EQUIVALENTS                                         |       |                                                                                         | 4,759      |   |   |   | 8,694 |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of reporting period                          |       |                                                                                         | 18,064     |   |   |   | 23,383 |   |   |
| CASH AND CASH EQUIVALENTS, end of reporting period                                 |       |                                                                                         | $          | 22,823 |   |   |   | $ | 32,077 |   |   |

 

See accompanying notes to condensed consolidated financial statements.

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**PACIFIC ENERGY PARTNERS, L.P.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJune 30, 2006(Unaudited)**

**1.**   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

**Basis ofPresentation**

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

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

The unaudited condensed consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialreporting and with Securities and Exchange Commission (“SEC”) regulations.Accordingly, these statements have been condensed and do not include all of theinformation and footnotes required for complete financial statements. Thesestatements involve the use of estimates and judgments where appropriate. In theopinion of management, all adjustments, consisting of normal recurring accrualsconsidered necessary for a fair presentation, have been included. The resultsof operations for the six months ended June 30, 2006 are not necessarilyindicative of the results of operations for the full year. All significantintercompany balances and transactions have been eliminated during theconsolidation process.

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

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

**New AccountingPronouncements**

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

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effective for thePartnership as of the beginning of the first interim period or annual reportingperiod that begins after June 15, 2005. The adoption of SFAS 123R on January 1,2006 did not have a material impact on the Partnership’s consolidated financialstatements. See Notes 4 and 7 to the condensed consolidated financialstatements for more details on share-based compensation.

In September 2005, the Emerging Issues Task Force(“EITF”) issued Issue No. 04-13 (“EITF 04-13”), *Accounting for Purchases and Sales of Inventory withthe Same Counterparty*. The issues addressed by the EITF are (i) thecircumstances under which two or more exchange transactions involving inventorywith the same counterparty should be viewed as a single exchange transactionfor the purposes of evaluating the effect of APB No. 29; and (ii) whetherthere are circumstances under which nonmonetary exchanges of inventory withinthe same line of business should be recognized at fair value. EITF 04-13is effective for new arrangements entered into in the reporting periodsbeginning after March 15, 2006, and to all inventory transactions that arecompleted after December 15, 2006, for arrangements entered into prior to March 15,2006. The adoption of EITF 04-13 did not have a material impact on thePartnership’s consolidated financial statements.

In June 2006, the FASB issuedFASB Interpretation No. 48 (“FIN 48”), *Accounting for Uncertaintyin Income Taxes*. This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.This Interpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. FIN 48 will apply to the Partnership’s Canadian subsidiaries, whichare taxable entities in Canada. The Partnership is in the process ofdetermining the impact of FIN 48 on its financial statements, but does notexpect it to have a material impact. FIN 48 is effective for the Partnership asof the beginning of the first fiscal year beginning on January 1, 2007.

InJune 2006, the EITF issued Issue No. 06-3 (“EITF 06-3), *How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation)*.The issues addressed by the EITF are (i) whether the scope of this Issue shouldinclude (a) all nondiscretionary amounts assessed by governmental authorities,(b) all nondiscretionary amounts assessed by governmental authorities inconnection with a transaction with a customer, or (c) only sales, use, andvalue added taxes, and (ii) how taxes assessed by a governmental authoritywithin the scope of this issue should be presented in the income statement(that is, gross versus net presentation). EITF 06-3 is effective for interimand annual financial periods beginning after December 15, 2006. The Partnershipis in the process of determining the impact of EITF 06-3 on its financialstatements, but does not expect it to have a material impact.

**2.   PROPOSEDMERGER WITH PLAINS ALL AMERICAN PIPELINE, L.P.**

On June 12, 2006, the Partnership announced thatit had entered into an Agreement and Plan of Merger with Plains All AmericanPipeline, L.P. (“PAA”), Plains AAP, L.P., a Delaware limited partnership,Plains All American GP LLC (“PAA GP LLC”), PEM, and Pacific Energy GP, LP,pursuant to which the Partnership will be merged with and into PAA. In themerger, each common unitholder of the Partnership, except LB Pacific, LP (“LBPacific”), the owner of the Partnership’s General Partner, will receive 0.77common units of PAA for each common unit of the Partnership that the unitholderowns. In addition, pursuant to a purchase agreement between LB Pacific and PAA,PAA will acquire from LB Pacific the general partner interest and incentivedistribution rights of the Partnership as well as 2,616,250 common units and7,848,750 subordinated units for total consideration of $700 million in cash. Themerger agreement was unanimously approved by the Board of Directors of PEM, aswell as by the PAA GP LLC board of directors.

If the proposed transaction is ultimately consummated,the general partner and limited partner interests in the Partnership will beextinguished and the Partnership will cease to exist as a separate legal 

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entity. The Partnership’soperating subsidiaries will be directly or indirectly owned by PAA. PAA’smanagement team and board of directors will continue in their current roles andmanage the combined company. The merger is expected to close in the fourthquarter of 2006.

Each of thePartnership and PAA made customary representations, warranties and covenants inthe merger agreement, including covenants restricting the Partnership’s abilityto initiate or continue any discussions with any other person with respect to abusiness combination while the merger is pending or to engage in any of thosediscussions unless the failure to do so would be reasonably likely toconstitute a violation of fiduciary duties. The merger agreement may beterminated by the Partnership and/or PAA in specified circumstances, andprovides that upon termination of the merger agreement in circumstancesinvolving a competing proposal to acquire the Partnership or PAA, the partiesare required to pay one another termination fees of up to $40 million. Themerger is subject to the satisfaction or waiver of certain conditions,including, among others:

·       theadoption and approval of the merger agreement and the merger by the affirmativevote of the holders of at least a majority of the Partnership’s outstandingcommon units (excluding common units held by LB Pacific) and at least amajority of the Partnership’s outstanding subordinated units, each voting as aseparate class;

·       theadoption and approval of the merger agreement and the merger by the affirmativevote of the holders of at least a majority of PAA’s outstanding common units,and the approval of the issuance of PAA common units pursuant to the mergeragreement by the affirmative vote of the holders of at least a majority of PAA’soutstanding common units;

·       receiptof required regulatory approvals, including pursuant to the Hart-Scott-RodinoAntitrust Improvements Act of 1976 and approvals of Canadian governmentalauthorities, the Federal Communications Commission, the Public UtilitiesCommission of the state of California and the Public Service Commission of thestate of Wyoming (see “Note 9—Subsequent Events”);

·       thecontinued effectiveness of PAA’s registration statement on Form S-4to register the PAA common units to be issued in the merger, and the approvalfor listing on the New York Stock Exchange of such PAA common units;

·       theabsence of any decree, order, injunction or law that prohibits the merger ormakes the merger unlawful; and

·       theconsummation of the transactions contemplated by the purchase agreement betweenPAA and LB Pacific.

Each of PAA and LB Pacific made customaryrepresentations, warranties and covenants in the purchase agreement. Thepurchase agreement may be terminated by LB Pacific or PAA upon or after terminationof the merger agreement, and may be terminated at any time by the mutualwritten agreement of LB Pacific and PAA. In addition, the purchase agreement issubject to customary closing conditions, including satisfaction of allconditions specified in the merger agreement.

During the three and sixmonths ended June 30, 2006, the Partnership incurred approximately $3.4million in costs directly relating to the merger for investment banking fees,legal fees, and other transaction costs. Approximately $0.7 million ofinvestment banking fees were payable to affiliates of Lehman Brothers Inc., anindirect partial owner of the General Partner (see “Note 5—Related Party Transactions”). These costs are included inthe condensed consolidated statements of income under the caption “Merger costs”.

**3.   INCOMETAXES**

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 its 

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unitholders. However, thePartnership’s Canadian subsidiaries are taxable entities in Canada and aresubject to Canadian federal and provincial income taxes. In addition,inter-company interest payments and repatriation of funds through dividendpayments are subject to withholding tax.

Income taxes for the Partnership’s Canadiansubsidiaries are accounted for under the asset and liability method. Under thismethod, deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases, and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect of a change in tax rates on deferred taxassets and liabilities is recognized in operations in the period that includesthe enactment date. The Partnership intends to repatriate its Canadiansubsidiaries’ earnings in the future and accordingly has recorded a provisionfor Canadian withholding taxes.

During the quarter ended June 30,2006, the Canadian and Alberta governments enacted legislation which willreduce federal and provincial income taxes. The Partnership adjusted the futureincome tax rates used in the estimates of deferred tax assets and liabilitiesand recognized a $4.6 million deferred tax benefit during the three and sixmonths ended June 30, 2006.

**4.**   NETINCOME PER LIMITED PARTNER UNIT

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

Basic net income per limited partner unit isdetermined by dividing net income, after adding back costs and deducting certainamounts allocated to the General Partner (including incentive distributionpayments in excess of its 2% ownership interest), by the weighted averagenumber of outstanding limited partner units.

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

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

| ** **                                             | ** ** | **Three Months Ended June 30,**                                                                  | ** ** | **Six Months Ended June 30,**                                                                    | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **      2006      ** | ** ** | **      2005       ** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                                                                                              | ** ** |
| **Numerator:**                                         |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income allocated to  limited partners:             |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                             |       |                                                                                                                 | $          | 21,443                                                                                                               |       |   |   | $ | 12,220 |   |   |   | $ | 33,057 |   |   |   | $ | 15,641 |   |   |
| Costs allocated to the  general partner(1):            |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| LBP Option Plan cost                                   |       |                                                                                                                 | 369        |                                                                                                                 |       |   | — |   |   |   | 880 |   |   |   | — |   |   |
| Senior Notes consent solicitation and other costs      |       |                                                                                                                 | —     |                                                                                                                 |       |   | — |   |   |   | — |   |   |   | 893 |   |   |
| Severance and other costs                              |       |                                                                                                                 | —     |                                                                                                                 |       |   | — |   |   |   | — |   |   |   | 914 |   |   |
| Total costs allocated to the general partner           |       |                                                                                                                 | 369        |                                                                                                                 |       |   | — |   |   |   | 880 |   |   |   | 1,807 |   |   |
| Income before  costs allocated to the general partner  |       |                                                                                                                 | 21,812     |                                                                                                                 |       |   | 12,220 |   |   |   | 33,937 |   |   |   | 17,448 |   |   |
| Less: general partner incentive distributions          |       |                                                                                                                 | (331       | )                                                                                                                    |       |   | — |   |   |   | (586 | ) |   |   | — |   |   |
|                                                   |       |                                                                                                                 | 21,481     |                                                                                                                 |       |   | 12,220 |   |   |   | 33,351 |   |   |   | 17,448 |   |   |
| Less: General  partner 2% ownership                    |       |                                                                                                                 | (430       | )                                                                                                                    |       |   | (244 | ) |   |   | (667 | ) |   |   | (349 | ) |   |
| Net income for  the limited partners                   |       |                                                                                                                 | $          | 21,051                                                                                                               |       |   |   | $ | 11,976 |   |   |   | $ | 32,684 |   |   |   | $ | 17,099 |   |   |
| **Denominator:**                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic weighted  average limited partner units          |       |                                                                                                                 | 39,307     |                                                                                                                 |       |   | 29,723 |   |   |   | 39,304 |   |   |   | 29,689 |   |   |
| Effect of  restricted units                            |       |                                                                                                                 | 7          |                                                                                                                 |       |   | — |   |   |   | 18 |   |   |   | — |   |   |
| Effect of options                                      |       |                                                                                                                 | —     |                                                                                                                 |       |   | 19 |   |   |   | — |   |   |   | 19 |   |   |
| Diluted weighted average  limited partner units        |       |                                                                                                                 | 39,314     |                                                                                                                 |       |   | 29,742 |   |   |   | 39,322 |   |   |   | 29,708 |   |   |
| Basic and diluted net  income per limited partner unit |       |                                                                                                                 | $          | 0.54                                                                                                                 |       |   |   | $ | 0.40 |   |   |   | $ | 0.83 |   |   |   | $ | 0.58 |   |   |

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  (1) See “Note 5—Related PartyTransactions” for a description of transaction costs reimbursed by the GeneralPartner.

**5.   RELATEDPARTY TRANSACTIONS**

**Cost Reimbursements**

***Managing GeneralPartner:***   The Partnership’s General Partneremploys all U.S.-based employees. All employee expenses incurred by theGeneral Partner on behalf of the Partnership are charged back to thePartnership.

***LB Pacific, LPOption Plan:*****  **LBPacific, LP (“LBP”), the owner of the Partnership’s General Partner, hasadopted an option plan for certain officers, directors, employees, advisors,and consultants of PEM, LBP, and their affiliates. Under the plan,participants may be granted options to acquire partnership interests in LBP.The Partnership is not obligated to pay any amounts to LBP for the benefitsgranted or paid to any participants under the plan, although generally acceptedaccounting principles require that the Partnership record an expense in itsfinancial statements for benefits granted to employees of PEM or thePartnership who provide services to the Partnership, with a correspondingincrease in the General Partner’s capital account.

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The option plan is administered by the board ofdirectors of LB Pacific GP, LLC, the general partner of LBP. The terms,conditions, performance goals, restrictions, limitations, forfeiture, vestingor exercise schedule, and other provisions of grants under the plan, as well aseligibility to participate are determined by the board of directors of LBPacific GP, LLC. The board of directors of LB Pacific GP, LLC may determine togrant options under the plan to participants containing such terms as the boardof LB Pacific GP, LLC shall determine. Options will have an exercise price thatmay not be less than the fair market value of the units on the date of grant.

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

Information concerning the plan and grants is sharedby LB Pacific, LP with the General Partner’s Compensation Committee and Boardof Directors, and considered in determining the long term incentivecompensation paid by the Partnership to participants in the plan.

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

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

 

For the three and six months ended June 30, 2006,the Partnership recognized $0.4 million and $0.9 million in compensationexpense relating to the LBP options and recorded a capital contribution from theGeneral Partner for the same amounts. At June 30, 2006, all granted LBPoptions remained outstanding. At June 30, 2006, there was $7.7 million oftotal unrecognized compensation cost related to nonvested options granted underthe plan which cost was expected to be recognized over the remaining period of9.5 years. Upon the close of the proposed merger with PAA, the optionswill become immediately exercisable. Total unrecognized compensation expense onthe closing date will be immediately recognized in the income statement.

***LB Pacific, LP andAnschutz:***   Prior to March 3, 2005, theGeneral Partner was owned by The Anschutz Corporation (“Anschutz”). On March 3,2005, Anschutz sold its interest in the Partnership, including its interest inthe General Partner, to LBP. In connection with the sale of Anschutz’s interestin the Partnership to LBP, LBP and Anschutz reimbursed the Partnership forcertain costs incurred in connection with the acquisition. The Partnership wasreimbursed $1.2 million for costs incurred in connection with the consentsolicitation, $0.3 million of legal and other costs, and $0.9 million relatingto severance costs, for a total of $2.4 million. Of the $2.4 million totalincurred, $1.8 million was expensed, as shown on the income statement as “reimbursedgeneral partner transaction costs”, and $0.6 million of the consentsolicitation costs were capitalized as deferred financing costs.

***Special Agreement:***   OnMarch 3, 2005, Douglas L. Polson, previously the Chairman of the Board ofDirectors entered into a Special Agreement and a Consulting Agreement with PEM.In accordance with the Special Agreement, Mr. Polson resigned as Chairmanof the Board of Directors effective March 3, 

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2005. Mr. Polsonwas paid approximately $0.9 million, representing accrued salary through March 3,2005, accrued but unused vacation and payment in satisfaction of otherobligations under his employment agreement. The latter portion of this paymentwas recorded as an expense in “Reimbursed general partner transaction costs” inthe accompanying condensed consolidated income statements. LBP reimbursed thisamount, which was recorded as a partner’s capital contribution. Pursuant to theConsulting Agreement, Mr. Polson agreed to perform advisory services toPEM from time to time as mutually agreed between Mr. Polson and the ChiefExecutive Officer of PEM. In consideration for Mr. Polson’s services underthe Consulting Agreement, which had a one-year term, Mr. Polson received amonthly consulting fee of $12,500 and reimbursement of all reasonable businessexpenses incurred or paid by Mr. Polson in the course of performing hisduties thereunder.

**Lehman Brothers, Inc.**

Lehman Brothers, Inc.is deemed to be an affiliate of the Partnership’s General Partner through a 59%ownership interest in LBP, which is controlled by Lehman Brothers HoldingsInc., the parent entity of Lehman Brothers, Inc. Lehman Brothers, Inc.acted as financial advisor to LBP and the Partnership in connection with theproposed merger and the transactions related to the merger (see Note 2—ProposedMerger With Plains All American, L.P.). Lehman Brothers, Inc. delivered anopinion to the Board of Directors to the effect that, as of the date of itsopinion and based on and subject to various assumptions made, the aggregateconsideration to be offered to all of the holders of the partnership interestsin the Partnership in the proposed transaction is fair to such holders. Theagreement with Lehman Brothers, Inc. was reviewedand approved by the Conflicts Committee of the Board of Directors and the feescharged were customary for the type of services provided. For the three and sixmonths ended June 30, 2006, the Partnership incurred $0.7 million in feeswith Lehman Brothers, Inc. The Partnership has agreed to pay LehmanBrothers, Inc. an additional $7.7 million success fee contingent on thesuccessful consummation of the merger.

**Other Related PartyTransactions**

RMPS receives an operatingfee and management fee from Frontier Pipeline Company (“Frontier”) inconnection with time spent by RMPS management and for other services related toFrontier’s activities. RMPS received $0.2 million for each of the three monthsended June 30, 2006 and 2005 and $0.4 million for each of the six monthsended June 30, 2006 and 2005, respectively. The Partnership owns a 22.22%partnership interest in Frontier.

**6.   CONTINGENCIES**

**Line 63 Oil Release**

On March 23, 2005, a release of approximately3,400 barrels of crude oil occurred on Line 63 when it was severed as a resultof a landslide caused by heavy rainfall in the Pyramid Lake area of Los AngelesCounty. Over the period March 2005 through anticipated completion in June 2007,the Partnership expects to incur an estimated total of $25.5 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, 2006, the Partnership had incurredapproximately $21.1 million of the total expected remediation costs related tothe oil release for work performed through that date. The Partnership estimatesthat the $4.4 million of remaining remediation cost will be incurred before June 2007.

The Partnership has a pollution liability insurancepolicy with a $2.0 million per-occurrence deductible that covers containmentand clean-up costs, third-party claims and certain penalties. The insurancecarrier has, subject to the terms of the insurance policy, acknowledgedcoverage of the incident and is processing and paying invoices related to theclean-up. The Partnership believes that, subject to the $2.0 million 

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deductible, it will beentitled to recover substantially all of its clean-up costs and any third-partyclaims associated with the release. As of June 30, 2006, the Partnershiphas recovered $17.7 million frominsurance and recorded receivables of $5.8 millionfor future insurance recoveries it deems probable.

On or about March 17, 2006, Pacific PipelineSystem LLC (“PPS”), a subsidiary of the Partnership, was served with a fourcount misdemeanor action by the state of California, which alleges that PPS violatedvarious state statutes by depositing oil or substances harmful to wildlife intothe environment and by the willful and intentional discharge of pollution intostate waters. The Partnership estimates that the maximum fine and penaltiesthat could be assessed for these actions is approximately $0.9 million inthe aggregate. The Partnership believes, however, that certain of the allegedviolations are without merit and intends to defend against them, and thatmitigating factors should otherwise reduce the amounts of any potential finesor penalties that might be assessed. At this time, the Partnership cannotreasonably determine the outcome of these allegations. The estimated range ofpossible fines or penalties including amounts not covered by insurance isbetween $0 and $0.9 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 plans, the ongoing assessment of the impact ofsoil and water contamination, changes in costs associated with environmentalremediation services and equipment, and the possibility of third-party legal claimsgiving rise to additional expenses. Therefore, no assurance can be made thatcosts incurred in excess of this provision, if any, would not have a materialadverse effect on the Partnership’s financial condition, results of operations,or cash flows, though the Partnership believes that most, if not all, of anysuch excess cost, to the extent attributable to clean-up and third-partyclaims, would be recoverable through insurance. In March 2006, A.M.Best Company, an insurance company rating agency, announced it had downgradedthe financial strength rating assigned to the Partnership’s insurance carrier,Quanta Specialty Lines Company, including its parent and affiliates. Thedowngrade was from an “A” to a “B++, under review with negative implications.” Duringthe second quarter of 2006, Quanta announced that their Board of Directorsdecided to cease underwriting or seeking new business and to place most of itsremaining specialty insurance and reinsurance lines into orderly run-off. On June 7,2006 A. M. Best further downgraded Quanta from B++ to B. Subsequent to thisdowngrading, Quanta was removed from A. M. Best’s interactive rating process,at Quanta’s request. Based on management’s further analysis of Quanta’sfinancial condition, the Partnership believes that Quanta will continue to meetits obligations relating to the Line 63 oil release, although there can be noassurance that this will be the case. As new information becomes available infuture periods, the Partnership may change its provision and recoveryestimates.

**ProductContamination**

In June 2006,approximately 44,000 barrels of a customer’s product at our Martinez terminalwas contaminated. The Partnership has insurance coverage for the damage or lossof its customers’ products while in its care, custody and control at certain ofits terminals subject to a $0.1 million per-occurrence deductible. ThePartnership recognized a loss of $0.2 million to cover the insurance deductibleand other associated costs. At this time, the Partnership believes all otherestimated net costs related to the contamination of the property will becovered under the insurance policy, and has accrued for the insurancedeductible and other costs of $0.2 million, which is included in “Other currentliabilities” in the accompanying condensed consolidated balance sheet. Theestimated range of total net costs is from $0.2 million to $0.8 million.

**Litigation**

On June 15, 2006, a lawsuit was filed in theSuperior court of California, County of Los Angeles, entitled Kosseff v. PacificEnergy, et al, case no. BC 3544016. The plaintiff alleges that he is aunitholder of 

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Partnership and seeks torepresent a class comprising all of the Partnership’s unitholders. Thecomplaint names as defendants the Partnership and certain of the officers anddirectors of Pacific’s general partner, and asserts claims of self-dealing andbreach of fiduciary duty in connection with the pending merger with PAA andrelated transactions. Among other allegations, the plaintiff alleges that (1) theproposed transaction was the product of a flawed process that would result inthe sale of the Partnership at an unfairly low price, (2) subsequentquarterly financial results for the Partnership would have had a materialpositive impact on the Partnership’s common unit price had the proposedtransaction not been announced, and thus the premium being offered to thePartnership’s unitholders was manufactured by the defendants based on thetiming of the announcement of the proposed transaction, (3) because ofvarious conflicts of interest, the defendants have acted to better their owninterests at the expense of the Partnership’s public unitholders, (4) thedefendants favored the proposed transaction in order to secure acceleratedvesting of equity compensation under change in control provisions in contractsthey have with the Partnership, and (5) the defendants were assured thatLehman Brothers Inc. “would rubber-stamp the transaction as fair and, for thatreason Lehman [Brothers Inc.] was hand-picked by the defendants to issue theso-called ‘fairness opinion’.” The plaintiff seeks injunctive relief againstcompleting the merger or, if the merger is completed, rescission of the merger,other equitable relief, and recovery of the plaintiff’s costs and attorneys’fees. The Partnership believes that the lawsuit is without merit and intends todefend against it vigorously. There can be no assurance that additional claimsmay not be made or filed, the substance of which may be similar to theallegations described above or that otherwise might arise from, or inconnection with, the merger agreement and the transaction it contemplates.

In August, 2005, Rangeland Pipeline Company (“RPC”), awholly-owned subsidiary of the Partnership, learned that a Statement ofClaim was filed by Desiree Meier and Robert Meier in the Alberta Court of Queen’sBench, Judicial District of Red Deer, naming RPC as defendant, and allegingpersonal injury and property damage caused by an alleged release of petroleumsubstances onto plaintiff’s land by a prior owner and operator of the pipelinethat is currently owned and operated by the Partnership. The claim seeksCdn$1 million (approximately U.S.$0.9 million at June 30, 2006)in general damages, Cdn$2 million (approximately U.S.$1.8 million at June 30,2006) in special damages, and, in addition, unspecified amounts for punitive,exemplary and aggravated damages, costs and interest. RPC believes the claim iswithout merit, and intends to vigorously defend against it. RPC also believesthat certain of the claims, if successfully proven by the plaintiffs, would beliabilities retained by the pipeline’s prior owner under the terms of theagreement whereby the Partnership acquired the pipeline in question.

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

In 2001, Big West Oil Company and Chevron ProductsCompany (the “Complainants”) filed complaints against Frontier Pipeline Company(“Frontier”) with the Federal Energy Regulatory Commission (“FERC”) challengingrates contained in joint tariffs in which Frontier was a participating carrierand rates contained in local tariffs filed by Frontier. On February 18,2004, the FERC found against 

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Frontier on certain of theComplainants’ claims and ordered Frontier to pay reparations to Complainants inthe aggregate amount of approximately $4.2 million, plus interest, whichFrontier paid in August 2004. On October 5, 2004, Frontier filed apetition for review of the FERC’s reparations orders in the U.S. Court ofAppeals for the D.C. Circuit, and on May 26, 2006 the Court of Appealsheld that the FERC’s reparation ruling was inconsistent with applicable law,and thus vacated the FERC’s order and remanded the matter back to the FERC forfurther consideration consistent with the Court of Appeals’ decision. On July 25,2006, Frontier filed a motion asking the FERC to dismiss the reparationscomplaints of the Complainants on the grounds that their complaints fail tostate claims that can be sustained consistent with the ruling of the Court ofAppeals. Frontier’s motion also asked the FERC to order the refund by theComplainants of the reparations previously paid by Frontier, plus interest. TheComplainants have not yet responded to Frontier’s motion and no action on themotion has been taken by the FERC. If Frontier prevails on its motion or in anyremand proceeding conducted by the FERC, it would be entitled to repayment inthe amount of $5.4 million, plus interest thereon from August 23, 2004. The Partnership owns 22.22% of Frontier. Althoughthe Partnership believes Frontier’s motion to dismiss the complaints, as wellas the defenses it would assert in a remand proceeding before the FERC, aremeritorious, the Partnership cannot predict the outcome of any such actions,and has not recorded any amount for this contingency.

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

**7.**   RESTRICTEDUNITS

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

In January 2006and May 2006, the General Partner awarded 89,110 restricted units to key employees and outside directorsthat vest over a three-year period, beginning on March 1, 2006 and March 1,2007, respectively. The number of units to be delivered to key employees in anyyear, if any, will be based on accomplishment of performance targets (measuredby distributable cash flow) for the previous calendar year, subject to theCompensation Committee’s authority to subsequently adjust performance targetsas it may deem appropriate, in its discretion. Restricted unit activity duringthe six months ended June 30, 2006 is as follows:

| ** **                           | ** ** | **Number of  Units** | ** ** | **Weighted  Average Grant  Date Fair Value** | ** ** |
|--------------------------------------|------------|---------------------------|------------|-------------------------------------------------------------|------------|
| Outstanding at  January 1, 2006 |       |                      | —     |                                                        |       |   | $ | — |   |   |
| Changes during  the year:            |       |                      |       |                                                        |       |   |   |   |   |
| Granted                              |       |                      | 89,110     |                                                        |       |   | 2,759 |   |   |
| Vested                               |       |                      | (10,439    | )                                                           |       |   | (314 | ) |   |
| Forfeited                            |       |                      | (5,430     | )                                                           |       |   | (164 | ) |   |
| Outstanding at  June 30, 2006   |       |                      | 73,241     |                                                        |       |   | $ | 2,281 |   |   |

 

Compensation expense recognized for outstandingrestricted units is based on grant date fair value of the common units to beawarded to the grantee upon vesting of the phantom unit, adjusted for theexpected target performance level for each year. For the three and six monthsended June 30, 2006, the 

15

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Partnership incurred $0.2 million and $0.5 million, respectively, in compensation expense for restrictedunits it deemed probable of achieving the performance criteria, including theamount for the first vesting of these awards which occurred on March 1,2006.

The outstanding unit grants include change of controlprovisions that require immediate vesting of units in the event of a change incontrol of the Partnership or its General Partner. Upon the close of theproposed merger with PAA, all outstanding restricted units will immediatelyvest pursuant to the terms of the grants, and any remaining unamortizedcompensation expense will be immediately recognized.

On March 3, 2005, inconnection with LBP’s acquisition of the Partnership’s General Partner, allrestricted units then outstanding under the Partnership’s Long-Term IncentivePlan immediately vested pursuant to the terms of the grants. The Partnershipissued 99,583 common units and recognized a compensation expense of $3.1million, which is included in “Accelerated long-term incentive plancompensation expense” in the accompanying condensed consolidated statements ofincome. Of the total $3.1 million, the compensation expense categorization was$0.6 million for operating personnel and $2.5 million for general andadministrative personnel.

**8.   SEGMENTINFORMATION**

The Partnership’s business and operations areorganized into two business segments: the West Coast Business Unit and theRocky 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 Transportation LLC (West Coast Business Unit operations),owner of the PMT gathering system and marketer of crude oil, (iii) PacificTerminals LLC, owner of the Pacific Terminals storage and distribution system,and (iv) Pacific Atlantic Terminals LLC, owner of the San Francisco andPhiladelphia area terminals, which were acquired on September 30, 2005.The Rocky Mountain Business Unit includes: (i) Rocky Mountain PipelineSystem LLC, owner of the Partnership’s interest in various pipelines that makeup the Western Corridor and Salt Lake City Core systems, and the Rocky MountainProducts Pipeline, which was acquired on September 30, 2005,(ii) Ranch Pipeline LLC, the owner of a 22.22% partnership interest inFrontier Pipeline Company, (iii) PEG Canada, L.P. and its Canadiansubsidiaries, which own and operate the Rangeland system, and (iv) PacificMarketing and Transportation LLC (Rocky Mountain Business Unit operations), amarketer of crude oil.

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Generaland administrative costs, which consist of executive management, accounting andfinance, human resources, information technology, investor relations, legal,and business development, are not allocated to the individual business units.Information regarding these two business units is summarized below:

| ** **                                  | ** ** | **West Coast  Business Unit** | ** ** | **Rocky Mountain  Business Unit** | ** ** | **Intersegment and  Intrasegment  Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | **(in thousands)**                 | ** ** |
| **Three months ended  June 30, 2006**  |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Revenues:                                   |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation revenue             |       |                                    | $          | 16,696                                      |       |                                                  |       | $         | 20,422     |   |   |   | $ | (2,318 | ) |   | $ | 34,800 |   |
| Storage and terminaling revenue             |       |                                    | 21,867     |                                        |       |                                                  | —     |      |       |   |   |   |   | 21,867 |   |
| Pipeline buy/sell transportation revenue(1) |       |                                    | —     |                                        |       |                                                  | 11,427     |      |       |   |   |   |   | 11,427 |   |
| Crude oil sales, net of purchases(2)        |       |                                    | 9,195      |                                        |       |                                                  | 1,648      |      |       |   | (123 | ) |   | 10,720 |   |
| Net revenue                                 |       |                                    | 47,758     |                                        |       |                                                  | 33,497     |      |       |   |   |   |   | 78,814 |   |
| Expenses:                                   |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Operating                                   |       |                                    | 20,263     |                                        |       |                                                  | 13,833     |      |       |   | (2,441 | ) |   | 31,655 |   |
| Depreciation and amortization               |       |                                    | 5,507      |                                        |       |                                                  | 4,785      |      |       |   |   |   |   | 10,292 |   |
| Total expenses                              |       |                                    | 25,770     |                                        |       |                                                  | 18,618     |      |       |   |   |   |   | 41,947 |   |
| Share of net  income of Frontier            |       |                                    | —     |                                        |       |                                                  | 475        |      |       |   |   |   |   | 475 |   |
| Operating income  from segments(3)          |       |                                    | $          | 21,988                                      |       |                                                  |       | $         | 15,354     |   |   |   |   |   |   | $ | 37,342 |   |
| Total business  unit assets(4)              |       |                                    | $          | 20,546                                      |       |                                                  |       | $         | 55,884     |   |   |   |   |   |   | $ | 76,430 |   |
| Capital  expenditures(5)                    |       |                                    | $          | 10,017                                      |       |                                                  |       | $         | 5,869      |   |   |   |   |   |   | $ | 15,886 |   |
| **Three  months ended June 30, 2005**  |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Revenues:                                   |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation revenue             |       |                                    | $          | 15,194                                      |       |                                                  |       | $         | 14,006     |   |   |   | $ | (1,453 | ) |   | $ | 27,747 |   |
| Storage and terminaling 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(3)          |       |                                    | $          | 12,405                                      |       |                                                  |       | $         | 8,962      |   |   |   |   |   |   | $ | 21,367 |   |
| Total business  unit assets(4)              |       |                                    | $          | 501,990                                     |       |                                                  |       | $         | 342,420    |   |   |   |   |   |   | $ | 844,410 |   |
| Capital expenditures(5)                     |       |                                    | $          | 934                                         |       |                                                  |       | $         | 2,535      |   |   |   |   |   |   | $ | 3,469 |   |

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| ** **                                  | ** ** | **West Coast  Business Unit** | ** ** | **Rocky Mountain  Business Unit** | ** ** | **Intersegment and  Intrasegment  Eliminations** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| ** **                                  | ** ** | **(in thousands)**                 | ** ** |
| **Six months ended June 30,  2006**    |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Revenues:                                   |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation revenue             |       |                                    | $          | 33,859                                      |       |                                                  |       | $         | 39,290     |   |   |   | $ | (4,492 | ) |   | $ | 68,657 |   |
| Storage and terminaling revenue             |       |                                    | 41,953     |                                        |       |                                                  | —     |      |       |   |   |   |   | 41,953 |   |
| Pipeline buy/sell transportation revenue(1) |       |                                    | —     |                                        |       |                                                  | 21,126     |      |       |   |   |   |   | 21,126 |   |
| Crude oil sales, net of purchases(2)        |       |                                    | 16,506     |                                        |       |                                                  | 1,288      |      |       |   | (265 | ) |   | 17,529 |   |
| Net revenue                                 |       |                                    | 92,318     |                                        |       |                                                  | 61,704     |      |       |   |   |   |   | 149,265 |   |
| Expenses:                                   |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Operating                                   |       |                                    | 41,695     |                                        |       |                                                  | 28,136     |      |       |   | (4,757 | ) |   | 65,074 |   |
| Depreciation and amortization               |       |                                    | 11,006     |                                        |       |                                                  | 9,288      |      |       |   |   |   |   | 20,294 |   |
| Total expenses                              |       |                                    | 52,701     |                                        |       |                                                  | 37,424     |      |       |   |   |   |   | 85,368 |   |
| Share of net  income of Frontier            |       |                                    | —     |                                        |       |                                                  | 873        |      |       |   |   |   |   | 873 |   |
| Operating income  from segments(3)          |       |                                    | $          | 39,617                                      |       |                                                  |       | $         | 25,153     |   |   |   |   |   |   | $ | 64,770 |   |
| Total business  unit assets(4)              |       |                                    | $          | 904,689                                     |       |                                                  |       | $         | 627,275    |   |   |   |   |   |   | $ | 1,531,964 |   |
| Capital  expenditures(5)                    |       |                                    | $          | 21,627                                      |       |                                                  |       | $         | 11,685     |   |   |   |   |   |   | $ | 33,312 |   |
| **Six  months ended June 30, 2005**    |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Revenues:                                   |       |                                    |       |                                        |       |                                                  |       |      |       |   |   |   |   |   |   |
| Pipeline transportation revenue             |       |                                    | $          | 32,638                                      |       |                                                  |       | $         | 26,461     |   |   |   | $ | (3,315 | ) |   | $ | 55,784 |   |
| Storage and terminaling 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(6)                |       |                                    | 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(3)          |       |                                    | $          | 22,149                                      |       |                                                  |       | $         | 18,539     |   |   |   |   |   |   | $ | 40,688 |   |
| Total business  unit assets(4)              |       |                                    | $          | 501,990                                     |       |                                                  |       | $         | 342,420    |   |   |   |   |   |   | $ | 844,410 |   |
| Capital expenditures(5)                     |       |                                    | $          | 1,684                                       |       |                                                  |       | $         | 5,467      |   |   |   |   |   |   | $ | 7,151 |   |

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       (1) Pipeline buy/sell transportation revenue reflects net revenues ofapproximately $4.3 million on buy/sell transactions with different parties of$112.8 million for the three months ended June 30, 2006 and net revenuesof approximately $6.8 million on buy/sell transactions with different partiesof $161.1 million for the six months ended June 30, 2006. The remainingamount reflects net revenues on buy/sell transactions with the same party.

       (2) The above amounts are net of purchases of $353.6 million and $122.4million for the three months ended June 30, 2006 and 2005 and $609.9million and $236.8 million for the six months ended June 30, 2006 and2005, respectively.

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       (3) The following is a reconciliation of operating income as stated aboveto net income:

| ** **                                                       | ** ** | **Three Months Ended June 30,**                                                      | ** ** | **Six Months Ended June 30,**                                                        | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| ** **                                                       | ** ** | **(in thousands)**                                                                                  | ** ** |
| **Income Statement Reconciliation**                              | ** ** |                                                                                                     | ** ** | ** **                                                                                               |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Operating income from above:                                     |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| West Coast Business Unit                                         |       |                                                                                                     | $          | 21,988                                                                                                   |       |   |   | $ | 12,405 |   |   |   | $ | 39,617 |   |   |   | $ | 22,149 |   |   |
| Rocky Mountain Business Unit                                     |       |                                                                                                     | 15,354     |                                                                                                     |       |   | 8,962 |   |   |   | 25,153 |   |   |   | 18,539 |   |   |
| Operating income from segments                                   |       |                                                                                                     | 37,342     |                                                                                                     |       |   | 21,367 |   |   |   | 64,770 |   |   |   | 40,688 |   |   |
| Less: General and  administrative expense                        |       |                                                                                                     | (5,714     | )                                                                                                        |       |   | (3,700 | ) |   |   | (12,587 | ) |   |   | (8,872 | ) |   |
| Less: Merger  costs                                              |       |                                                                                                     | (3,417     | )                                                                                                        |       |   | — |   |   |   | (3,417 | ) |   |   | — |   |   |
| Less: Accelerated  long-term incentive plan compensation expense |       |                                                                                                     | —     |                                                                                                     |       |   | — |   |   |   | — |   |   |   | (3,115 | ) |   |
| Less: Reimbursed  general partner transaction costs              |       |                                                                                                     | —     |                                                                                                     |       |   | — |   |   |   | — |   |   |   | (1,807 | ) |   |
| Operating income                                                 |       |                                                                                                     | 28,211     |                                                                                                     |       |   | 17,667 |   |   |   | 48,766 |   |   |   | 26,894 |   |   |
| Interest expense                                                 |       |                                                                                                     | (10,088    | )                                                                                                        |       |   | (5,844 | ) |   |   | (19,176 | ) |   |   | (11,442 | ) |   |
| Other income                                                     |       |                                                                                                     | 292        |                                                                                                     |       |   | 540 |   |   |   | 735 |   |   |   | 893 |   |   |
| Income tax  benefit (expense)                                    |       |                                                                                                     | 3,028      |                                                                                                     |       |   | (143 | ) |   |   | 2,732 |   |   |   | (704 | ) |   |
| Net income                                                       |       |                                                                                                     | $          | 21,443                                                                                                   |       |   |   | $ | 12,220 |   |   |   | $ | 33,057 |   |   |   | $ | 15,641 |   |   |

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       (4) Business unit assets do not include assets related to thePartnership’s parent level activities. As of June 30, 2006 and 2005,parent level related assets were $56.0 and $39.9 respectively.

       (5) Segment capital expenditures do not include parent level capitalexpenditures. Parent level capital expenditures were $2.5 million and $2.0million for the three months ended June 30, 2006 and 2005 and $9.2 millionand $2.7 million for the six months ended June 30, 2006 and 2005,respectively.

       (6) On March 23, 2005, a release ofapproximately 3,400 barrels of crude oil occurred on PPS’s Line 63 as a resultof a landslide caused by heavy rainfall in northern Los Angeles County. As aresult of the release, the Partnership recorded $2.0 million net oilrelease costs in the first quarter of 2005, consisting of what it now estimatesto be $25.5 million of accrued costs relating to the release, net ofinsurance recovery of $17.7 million to June 30, 2006 and accruedinsurance receipts of $5.8 million.

**9.**   SUBSEQUENTEVENTS

On July 17, 2006, the Partnership declared a cashdistribution of $0.5675 per limited partner unit, payable on August 14,2006, to unitholders of record as of August 1, 2006.

On August 1, 2006,the Partnership and PAA announced that the waiting period under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, for theproposed merger expired on July 31, 2006. In addition, PAA has received a“no issues” letter from the Canadian Competitive Bureau and notice that theaccompanying waiting period under the Competition Act has expired. Theseexpirations satisfy certain of the closing conditions contained in the mergeragreement (see “Note 2—Proposed Merger With Plains All American Pipeline,L.P.”).

**10.   SUPPLEMENTALCONDENSED CONSOLIDATING FINANCIAL INFORMATION**

Certain of the Partnership’s 100% owned subsidiarieshave issued full, unconditional, and joint and several guarantees of the 71¤8%senior notes due 2014 and the 61¤4%senior notes due 2015 (the “Senior Notes”). Given that certain, but not allsubsidiaries of the Partnership are guarantors of its Senior Notes, thePartnership is required to present the following supplemental condensedconsolidating financial 

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information. For purposesof the following footnote, the Partnership is referred to as “Parent”, whilethe “Guarantor Subsidiaries” are Rocky Mountain Pipeline System LLC, PacificMarketing and Transportation LLC, Pacific Atlantic Terminals LLC, RanchPipeline LLC, PEG Canada GP LLC, PEG Canada, L.P. and Pacific Energy GroupLLC, and “Non-Guarantor Subsidiaries” are Pacific Pipeline System LLC, PacificTerminals LLC, Rangeland Pipeline Company, Rangeland Marketing Company,Rangeland Northern Pipeline Company, Rangeland Pipeline Partnership and AuroraPipeline Company, Ltd.

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, 2006** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **Parent**                                      | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                         | ** ** |
| Assets:                                        |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                                 |       | $                                               | 101,891    |   | $ | 209,268 |   |   | $ | 89,380 |   |   | $ | (145,850 | ) | $ | 254,689 |   |
| Property and equipment                         |       | —                                          |       | 611,503 |   |   | 626,291 |   |   | — |   | 1,237,794 |   |
| Equity investments                             |       | 485,158                                         |       | 219,253 |   |   | — |   |   | (696,089 | ) | 8,322 |   |
| Intercompany notes receivable                  |       | 661,763                                         |       | 343,849 |   |   | — |   |   | (1,005,612 | ) | — |   |
| Intangible assets                              |       | —                                          |       | 30,365 |   |   | 38,989 |   |   | — |   | 69,354 |   |
| Other assets                                   |       | 12,048                                          |       | (244 | ) |   | 5,987 |   |   | — |   | 17,791 |   |
| Total assets                                   |       | $                                               | 1,260,860  |   | $ | 1,413,994 |   |   | $ | 760,647 |   |   | $ | (1,847,551 | ) | $ | 1,587,950 |   |
| Liabilities and  partners’ capital:       |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                            |       | $                                               | 4,295      |   | $ | 255,930 |   |   | $ | 90,763 |   |   | $ | (145,850 | ) | $ | 205,138 |   |
| Long-term debt                                 |       | 562,044                                         |       | — |   |   | 73,324 |   |   | — |   | 635,368 |   |
| Deferred income taxes                          |       | —                                          |       | 1,267 |   |   | 31,566 |   |   | — |   | 32,833 |   |
| Intercompany notes payable                     |       | —                                          |       | 661,763 |   |   | 343,849 |   |   | (1,005,612 | ) | — |   |
| Other liabilities                              |       | 2,488                                           |       | 9,876 |   |   | 10,214 |   |   | — |   | 22,578 |   |
| Total partners’ capital                   |       | 692,033                                         |       | 485,158 |   |   | 210,931 |   |   | (696,089 | ) | 692,033 |   |
| Total liabilities  and partners’  capital |       | $                                               | 1,260,860  |   | $ | 1,413,994 |   |   | $ | 760,647 |   |   | $ | (1,847,551 | ) | $ | 1,587,950 |   |

 

20

----

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

 

|  

** **                      | ** ** | **Statement of Income  Three Months Ended June 30, 2006** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Parent**                                                                                   | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(in thousands)**                                                                      | ** ** |
| Net operating  revenues                 |       | $                                                                                            | —     |   |   | $ | 41,311 |   |   |   | $ | 39,945 |   |   |   | $ | (2,442 | ) |   | $ | 78,814 |   |
| Operating  expenses                     |       | —                                                                                       |       |   | (19,794 | ) |   |   | (14,303 | ) |   |   | 2,442 |   |   | (31,655 | ) |
| General and  administrative expense(1)  |       | (1                                                                                           | )          |   | (5,163 | ) |   |   | (550 | ) |   |   | — |   |   | (5,714 | ) |
| Merger costs                            |       | —                                                                                       |       |   | (3,417 | ) |   |   | — |   |   |   | — |   |   | (3,417 | ) |
| Depreciation and  amortization expense  |       | —                                                                                       |       |   | (5,141 | ) |   |   | (5,151 | ) |   |   | — |   |   | (10,292 | ) |
| Share of net  income of Frontier        |       | —                                                                                       |       |   | 475 |   |   |   | — |   |   |   | — |   |   | 475 |   |
| Operating income                        |       | (1                                                                                           | )          |   | 8,271 |   |   |   | 19,941 |   |   |   | — |   |   | 28,211 |   |
| Interest expense                        |       | (8,894                                                                                       | )          |   | (60 | ) |   |   | (1,134 | ) |   |   | — |   |   | (10,088 | ) |
| Intercompany  interest income (expense) |       | —                                                                                       |       |   | 7,352 |   |   |   | (7,352 | ) |   |   | — |   |   | — |   |
| Equity earnings                         |       | 30,420                                                                                       |       |   | 15,700 |   |   |   | — |   |   |   | (46,120 | ) |   | — |   |
| Other income                            |       | (82                                                                                          | )          |   | 254 |   |   |   | 120 |   |   |   | — |   |   | 292 |   |
| Income tax  (expense) benefit           |       | —                                                                                       |       |   | (1,097 | ) |   |   | 4,125 |   |   |   | — |   |   | 3,028 |   |
| Net income                              |       | $                                                                                            | 21,443     |   |   | $ | 30,420 |   |   |   | $ | 15,700 |   |   |   | $ | (46,120 | ) |   | $ | 21,443 |   |

----

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

21

----

 

| ** **                              | ** ** | **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.

| ** **                                                 | ** ** | **Statement of Income  Six Months Ended June 30, 2006** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Parent**                                                                                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**                                                                    | ** ** |
| Net operating  revenues                                    |       | $                                                                                          | —     |   |   | $ | 76,530 |   |   |   | $ | 77,492 |   |   |   | $ | (4,757 | ) |   | $ | 149,265 |   |
| Operating  expenses                                        |       | —                                                                                     |       |   | (38,882 | ) |   |   | (30,949 | ) |   |   | 4,757 |   |   | (65,074 | ) |
| General and  administrative expense(1)                     |       | (1                                                                                         | )          |   | (11,373 | ) |   |   | (1,213 | ) |   |   | — |   |   | (12,587 | ) |
| Merger costs                                               |       | —                                                                                     |       |   | (3,417 | ) |   |   | — |   |   |   | — |   |   | (3,417 | ) |
| Accelerated  long-term incentive plan compensation expense |       | —                                                                                     |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Line 63 oil  release costs                                 |       | —                                                                                     |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Reimbursed  general partner transaction costs         |       | —                                                                                     |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Depreciation and  amortization expense                     |       | —                                                                                     |       |   | (10,069 | ) |   |   | (10,225 | ) |   |   | — |   |   | (20,294 | ) |
| Share of net  income of Frontier                           |       | —                                                                                     |       |   | 873 |   |   |   | — |   |   |   | — |   |   | 873 |   |
| Operating income                                           |       | (1                                                                                         | )          |   | 13,662 |   |   |   | 35,105 |   |   |   | — |   |   | 48,766 |   |
| Interest expense                                           |       | (17,002                                                                                    | )          |   | (141 | ) |   |   | (2,033 | ) |   |   | — |   |   | (19,176 | ) |
| Intercompany  interest income (expense)                    |       | —                                                                                     |       |   | 14,521 |   |   |   | (14,521 | ) |   |   | — |   |   | — |   |
| Equity earnings                                            |       | 50,362                                                                                     |       |   | 22,941 |   |   |   | — |   |   |   | (73,303 | ) |   | — |   |
| Other income                                               |       | (302                                                                                       | )          |   | 591 |   |   |   | 446 |   |   |   | — |   |   | 735 |   |
| Income tax  benefit (expense)                              |       | —                                                                                     |       |   | (1,212 | ) |   |   | 3,944 |   |   |   | — |   |   | 2,732 |   |
| Net income                                                 |       | $                                                                                          | 33,057     |   |   | $ | 50,362 |   |   |   | $ | 22,941 |   |   |   | $ | (73,303 | ) |   | $ | 33,057 |   |

----

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

22

----

 

| ** **                                                 | ** ** | **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 | ) |
| General and  administrative expense(1)                     |       | —                                                                                     |       |   | (7,835 | ) |   |   | (1,037 | ) |   |   | — |   |   | (8,872 | ) |
| Accelerated  long-term incentive plan compensation expense |       | —                                                                                     |       |   | (2,675 | ) |   |   | (440 | ) |   |   | — |   |   | (3,115 | ) |
| Line 63 oil  release costs                                 |       | —                                                                                     |       |   | — |   |   |   | (2,000 | ) |   |   | — |   |   | (2,000 | ) |
| Reimbursed  general partner 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  benefit (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.

23

----

 

| ** **                                                                         | ** ** | **Statement of Cash Flows  Six Months Ended June 30, 2006** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **Parent**                                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Total** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                                                                             | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                         |       | $                                                                                                   | 33,057     |   |   | $ | 50,362 |   |   |   | $ | 22,941 |   |   |   | $ | (73,303 | ) |   | $ | 33,057 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity earnings                                                                    |       | (50,362                                                                                             | )          |   | (22,941 | ) |   |   | — |   |   |   | 73,303 |   |   | — |   |
| Distributions from subsidiaries                                                    |       | 45,614                                                                                              |       |   | 31,523 |   |   |   | — |   |   |   | (77,137 | ) |   | — |   |
| Depreciation, amortization and other                                               |       | 1,912                                                                                               |       |   | 11,100 |   |   |   | 3,495 |   |   |   | — |   |   | 16,507 |   |
| Net changes in  operating assets and liabilities                                   |       | (1,031                                                                                              | )          |   | (20,899 | ) |   |   | 13,207 |   |   |   | 1,247 |   |   | (7,476 | ) |
| NET CASH PROVIDED  BY OPERATING ACTIVITIES                                         |       | 29,190                                                                                              |       |   | 49,145 |   |   |   | 39,643 |   |   |   | (75,890 | ) |   | 42,088 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                              |       |                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisitions                                                                       |       | —                                                                                              |       |   | (2,365 | ) |   |   | — |   |   |   | — |   |   | (2,365 | ) |
| Additions to property, equipment and other                                         |       | (24                                                                                                 | )          |   | (26,856 | ) |   |   | (15,476 | ) |   |   | — |   |   | (42,356 | ) |
| Additions to pipeline linefill and minimum tank inventory                     |       | —                                                                                              |       |   | (8,128 | ) |   |   | (8,291 | ) |   |   | — |   |   | (16,419 | ) |
| Intercompany                                                                       |       | (59,000                                                                                             | )          |   | — |   |   |   | — |   |   |   | 59,000 |   |   | — |   |
| NET CASH USED IN  INVESTING ACTIVITIES                                             |       | (59,024                                                                                             | )          |   | (37,349 | ) |   |   | (23,767 | ) |   |   | 59,000 |   |   | (61,140 | ) |
| NET CASH PROVIDED  BY (USED IN) FINANCING ACTIVITIES                          |       | 28,489                                                                                              |       |   | (8,985 | ) |   |   | (12,690 | ) |   |   | 16,890 |   |   | 23,704 |   |
| Effect of translation adjustment                                                   |       | —                                                                                              |       |   | — |   |   |   | 107 |   |   |   | — |   |   | 107 |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH  EQUIVALENTS                             |       | (1,345                                                                                              | )          |   | 2,811 |   |   |   | 3,293 |   |   |   | — |   |   | 4,759 |   |
| CASH AND CASH  EQUIVALENTS, beginning of reporting period                          |       | 4,192                                                                                               |       |   | 12,484 |   |   |   | 1,388 |   |   |   | — |   |   | 18,064 |   |
| CASH AND CASH  EQUIVALENTS, end of reporting period                                |       | $                                                                                                   | 2,847      |   |   | $ | 15,295 |   |   |   | $ | 4,681 |   |   |   | $ | — |   |   | $ | 22,823 |   |

 

24

----

 

| ** **                                                                         | ** ** | **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                                                                                                 |       |   | 6,519 |   |   |   | 10,224 |   |   |   | — |   |   | 17,076 |   |
| Net changes in  operating assets and liabilities                                   |       | (49                                                                                                 | )          |   | 6,616 |   |   |   | 10,047 |   |   |   | (3,187 | ) |   | 13,427 |   |
| NET CASH PROVIDED  BY OPERATING ACTIVITIES                                         |       | 21,771                                                                                              |       |   | 47,155 |   |   |   | 33,847 |   |   |   | (56,629 | ) |   | 46,144 |   |
| 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                                                                                             | )          |   | (40,109 | ) |   |   | (20,014 | ) |   |   | 55,641 |   |   | (27,549 | ) |
| Effect of translation adjustment                                                   |       | —                                                                                              |       |   | — |   |   |   |   |   |   |   | 74 |   |   | 74 |   |
| 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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**ITEM 2.**                Management’sDiscussion and Analysis of Financial Condition and Results of Operations

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

**Forward-LookingStatements**

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

We caution you that theforward-looking statements in this quarterly report on Form 10-Qare subject to all of the risks and uncertainties, many of which are beyond ourcontrol, incident to gathering, transporting, storing, and distributing crudeoil and other related products and buying, gathering, blending and sellingcrude oil or related to our pending merger with Plains All American Pipeline,L.P. For a more detailed description of these and other factors that may affectthe forward-looking statements, please read “Item 1A—Risk Factors”contained elsewhere in this report and in our annual report on Form 10-Kfor the year ended December 31, 2005, Plains All American Pipeline, L.P.joint proxy statement/prospectus on Form S-4 filed with the SEC on July 11,2006 relating to the merger, as well as our other filings with the SEC. Therisk factors could cause our actual results to differ materially from thosecontained in any forward-looking statement. You should not put unduereliance on these forward-looking statements. We disclaim any obligationto announce publicly the result of any revision to any of the forward-lookingstatements to reflect future events or developments.

**Introduction**

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

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

**Overview**

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

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and the Rocky MountainBusiness Unit, which includes activities in five Rocky Mountain states andAlberta, Canada.

We are managed by our general partner, Pacific EnergyGP, LP, which is in turn managed by its general partner, Pacific EnergyManagement LLC (“PEM”). Thus, the officers and Board of Directors of PEM managethe business affairs of Pacific Energy GP, LP and the Partnership. Referencesto our “General Partner” refer to Pacific Energy GP, LP and/or PEM, as thecontext indicates.

Our West Coast Business Unit consists of (i) theLine 2000 crude oil pipeline, (ii) the Line 63 crude oil pipeline system, (iii) thePacific Terminals storage and distribution system, (v) the PacificMarketing and Transportation (“PMT”) gathering system and crude oil marketingactivities, and (iv) the Pacific Atlantic terminals, which were acquiredon September 30, 2005. Line 2000 and Line 63 are the only common carrierpipelines delivering crude oil produced in the San Joaquin Valley, inCalifornia, and the two primary California Outer Continental Shelf producingfields, Point Arguello and Santa Ynez, to the Los Angeles Basin andBakersfield. The Pacific Terminals storage and distribution system is a crudeoil and dark products storage and pipeline distribution system located in theLos Angeles Basin, and the PMT gathering system is a proprietary gatheringoperation in the San Joaquin Valley. The Pacific Atlantic terminals consist ofthe Martinez and Richmond terminals in the San Francisco, California area andthe Paulsboro, New Jersey and Philadelphia area terminals. These terminals arerefined product (and, in the case of Martinez, crude oil) storage andterminaling facilities. Additionally, we are currently seeking permits for thedevelopment of a deepwater petroleum import terminal at Pier 400 in the Port ofLos Angeles, which we expect to begin constructing in mid 2007 (see “Liquidityand Capital Resources—Capital Requirements, Pier 400” for further discussion).

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

**Proposed MergerWith Plains All American Pipeline, L.P.**

On June 12, 2006, we announced that we hadentered into an agreement with Plains All American Pipeline, L.P. (“PAA”),Plains AAP, L.P., a Delaware limited partnership, Plains All American GP LLC (“PAAGP LLC”), PEM, and Pacific Energy GP, LP, pursuant to which we will be mergedwith and into PAA. In the merger, each of our common unitholders, except LBPacific, LP (“LB Pacific”), the owner of our General Partner, will receive 0.77common units of PAA for each Pacific Energy Partners common unit that theunitholder owns. In addition, pursuant to a purchase agreement between LBPacific and PAA, PAA will acquire from LB Pacific the general partner interestand incentive distribution rights of the Partnership as well as 2,616,250common units and 7,848,750 subordinated units of Pacific Energy Partners fortotal consideration of $700 million in cash. The merger agreement wasunanimously approved by the Board of Directors of PEM, as well as by the PAA GPLLC board of directors.

If the proposed transaction is ultimately consummated,the general partner and limited partner interests in us will be extinguishedand we will cease to exist as a separate legal entity. Our operatingsubsidiaries will be directly or indirectly owned by PAA. PAA’s management teamand board of directors will continue in their current roles and manage thecombined company. The merger is expected to close in the fourth quarter of2006.

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Each of us and PAAmade customary representations, warranties and covenants in the merger agreement,including covenants restricting our ability to initiate or continue anydiscussions with any other person with respect to a business combination whilethe merger is pending or to engage in any of those discussions unless thefailure to do so would be reasonably likely to constitute a violation offiduciary duties. The merger agreement may be terminated by us and/or PAA inspecified circumstances, and provides that upon termination of the mergeragreement in circumstances involving a competing proposal to acquire us or PAA,the parties are required to pay one another termination fees of up to $40million. The merger is subject to the satisfaction or waiver of certainconditions, including, among others:

·       theadoption and approval of the merger agreement and the merger by the affirmativevote of the holders of at least a majority of our outstanding common units(excluding common units held by LB Pacific) and at least a majority of ouroutstanding subordinated units, each voting as a separate class;

·       theadoption and approval of the merger agreement and the merger by the affirmativevote of the holders of at least a majority of PAA’s outstanding common units,and the approval of the issuance of PAA common units pursuant to the mergeragreement by the affirmative vote of the holders of at least a majority of PAA’soutstanding common units;

·       receiptof required regulatory approvals, including pursuant to the Hart-Scott-RodinoAntitrust Improvements Act of 1976 (which waiting period expired on July 31,2006, satisfying one of the closing conditions) and approvals of Canadiangovernmental authorities (of which one governmental authority provided a “noissues” letter and the waiting period has expired), the Federal CommunicationsCommission, the Public Utilities Commission of the state of California and thePublic Service Commission of the state of Wyoming;

·       thecontinued effectiveness of PAA’s registration statement on Form S-4to register the PAA common units to be issued in the merger, and the approval forlisting on the New York Stock Exchange of such PAA common units;

·       theabsence of any decree, order, injunction or law that prohibits the merger ormakes the merger unlawful; and

·       theconsummation of the transactions contemplated by the purchase agreement betweenPAA and LB Pacific.

Each of PAA and LB Pacific made customaryrepresentations, warranties and covenants in the purchase agreement. Thepurchase agreement may be terminated by LB Pacific or PAA upon or aftertermination of the merger agreement, and may be terminated at any time by themutual written agreement of LB Pacific and PAA. In addition, the purchaseagreement is subject to customary closing conditions, including satisfaction ofall conditions specified in the merger agreement.

See “Item 1A—Risk Factors”of this Quarterly Report for a discussion of some of the risks related to themerger and the related transactions.

**Recent BusinessDevelopments**

The Rocky Mountain business unit accomplished severalpositive initiatives in the first half of 2006. The construction of theinitiating facility for synthetic crude oil in Edmonton, Alberta was completedin March 2006, and initial movements of synthetic crude oil beganimmediately thereafter. This connection provides direct access to syntheticcrude oil in Edmonton for delivery through our pipeline systems toU.S. Rocky Mountain refineries. In addition, to facilitate the movementand maintain the quality of synthetic crude oil, three 120,000 barrel tankswere constructed at storage facilities along our pipeline system.

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Our subsidiary, Rocky Mountain Pipeline System LLC (“RMPS”),is proceeding with plans to expand its crude oil pipeline system from theterminus of Frontier Pipeline near Evanston, Wyoming to the Salt Lake City,Utah refining complex. A new 16-inch pipeline, which will be 91 miles inlength, will be able to transport multiple grades of crude oil in segregatedbatches and will provide 95,000 barrels per day of capacity to meet increasedcrude oil demand in Salt Lake City. The project will be constructed in twophases, the first phase estimated to be completed in December 2006, thesecond phase in the fourth quarter of 2007. The total cost for both phases ofthe project is expected to be approximately $77 million and is supported by10-yeartransportation agreements that have been executed with four Salt Lake Cityrefiners.

In addition, RMPS signed a transportation agreementwith Frontier Oil and Refining Company pursuant to which RMPS will construct a24-inch crude oil pipeline, approximately 10 miles in length, fromGuernsey, Wyoming to RMPS’s Fort Laramie, Wyoming tank farm and a 16-inchcrude oil pipeline, approximately 85 miles in length, from Fort Laramie toFrontier Oil’s Cheyenne refinery, in exchange for Frontier Oil’s ten-year firmcommitment to ship 35,000 barrels per day on the new pipeline and leaseapproximately 300,000 barrels of storage capacity at Fort Laramie. The totalproject cost is estimated to be $59 million. The project began in the secondquarter of 2006 and is expected to be completed in the second quarter of 2007.Initial capacity will be 55,000 barrels per day, which can be expanded to acapacity of 90,000 barrels per day.

In our West Coast businessunit, we are currently constructing 450,000 barrels of storage capacity at ourMartinez terminal in the San Francisco area, which is expected to be completedin the third quarter of 2006. At our Philadelphia area terminals, we arecompleting an ethanol expansion project that will enable us to increase ourethanol handling and blending capabilities and increase our marine receiptcapabilities. At Pacific Terminals, we are refurbishing 600,000 barrels ofblack oil storage as well as making infrastructure changes to increase pumpingcapacity and improve operating efficiencies. The storage tanks are expected tobe completed in the second half of 2006. The infrastructure changes will becompeted in 2007.

**Expected Conversionof Subordinated Units**

In August 2006, weexpect that 2,616,250 of the Partnership’s subordinated units will convert tocommon units pursuant to the terms of the Partnership’s partnership agreement.

**BusinessFundamentals**

***Pipeline Transportation***

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

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

The tariff rates we charge on Line 2000 and the Line63 system are regulated by the California Public Utilities Commission (“CPUC”).Tariffs on Line 2000 are established based on market considerations, subject tocertain contractual limitations. Tariffs on Line 63, which are cost-of-servicebased tariffs, are 

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based upon the costs tooperate and maintain the pipeline, as well as charges for the depreciation ofthe capital investment in the pipeline and the authorized rate of return. Thetariff rates charged on our U.S. Rocky Mountain crude oil pipelines areregulated by either the Federal Energy Regulatory Commission (“FERC”) or theWyoming Public Service Commission (“Wyoming PSC”), generally under acost-of-service approach. The FERC, Wyoming PSC, and the Colorado PublicUtilities Commission each regulate various tariffs on the Rocky MountainProducts Pipeline, which include both cost and market based rates.

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

Following arerecent tariff rate increases on our pipelines:

·       OnJuly 1, 2006, we increased the FERC tariff rates on our U.S. RockyMountain crude oil pipeline by 6.1% based on the FERC index adjustment.

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

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

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

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

Tariff rate increases on our West Coast pipelinespartially mitigate the impact of declining throughput on these 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.Although this decline can, in the short term, be offset in whole or in part, byadditional drilling or the implementation of recovery enhancement measures, inthe San Joaquin Valley and in the California Outer Continental Shelf, totalproduction is generally declining.

In the Rocky Mountains, our pipelines are connected toU.S. and Canadian sources of crude oil. Our Rangeland system in Alberta givesus greater access to significant supplies of Canadian crude oil, includingsynthetic crude oil, which we believe will replace any long term U.S. RockyMountain production declines and meet growing demand in the U.S. Rocky Mountainregion. It appears in recent months that production in the U.S. Rocky Mountainsmay be increasing with the increased amount of natural gas related drilling,which results in increased volumes of crude oil and condensate. We believe,however, that the longer term production of crude oil in the U.S. RockyMountains will resume its historical decline.

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

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***Storage and Terminaling***

We provide storage and terminaling services to refineriesin the Los Angeles Basin and San Francisco areas in California and in thePhiladelphia, Pennsylvania area. The fundamental items impacting our storageand terminaling revenue are the amount of storage capacity we have under lease,the lease rates for that capacity and the length of each lease.

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

The Martinez, Richmond, Paulsboro and Philadelphiaterminals that we purchased in September 2005 are refined product (and, inthe case of Martinez, crude oil) storage and terminaling facilities thatgenerate revenues primarily from fees that we charge customers for storage,throughput and other services. Demand for refined products storage capacity,mostly at the Philadelphia area terminals, depends on connections withrefineries and petroleum products pipelines owned and operated by thirdparties.

Demand for refined products storage at our SanFrancisco area terminals tends to be stable over time as most of our leasecontracts are evergreen contracts for a year or more. Additionally, the SanFrancisco area terminals are not overly reliant on local area refineryproduction to satisfy the supply of refined products. The San Francisco areaterminals receive a significant volume of imported refined products and crudeoil into the San Francisco harbor. One of our goals is to increase the storagecapacity of our Martinez terminal. We are currently constructing 450,000barrels of storage, which we expect to place in service in the third quarter of2006.

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

***Pipeline Buy/Sell Transportation***

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

We have made significant changes to the revenue-generatingcapability of the Rangeland system, which we acquired in mid-2004, by (i) combiningand fully integrating all of our Canadian and U.S. Rocky Mountain pipelineassets under common management, (ii) establishing connections with otherpipelines, thereby expanding the throughput of the Rangeland system, and (iii) constructinga pump station and receiving terminal in Edmonton, Alberta, which beganoperating in March 2006. The volume of throughput originating at ourEdmonton, Alberta initiation station will vary with our success in attractingnew supplies of synthetic crude oil to our system.

The Rangeland system operates as a proprietary systemand, therefore, we take title to the crude oil that is gathered and transported.Pursuant to a transportation service agreement between two of our subsidiaries,Rangeland Marketing Company (“RMC”) and Rangeland Pipeline Partnership, RMCcontrols the entire capacity of Rangeland pipeline. Customers who wish totransport product on Rangeland pipeline must either: (i) sell product toRMC at an inlet point and repurchase such product at 

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agreed upon deliverypoints for the price paid at the inlet to the pipeline plus an establishedlocation differential; or (ii) sell product to RMC at the inlet to thepipeline without repurchasing product from RMC.

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

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

***Gathering Activities and Marketing Business***

Through our PMT subsidiary, we purchase, gather, andresell crude oil, principally in California’s San Joaquin Valley and, to amuch lesser extent, in the Rocky Mountain area in the vicinity of ourpipelines. In the third quarter of 2005, we began selectively purchasing andreselling crude oil in other areas as well, although this is not a primaryfocus.

In California, our PMT gathering system is aproprietary intrastate operation that is not regulated by the CPUC or the FERC.It is complementary to our pipeline transportation business. The gathering systemeffectively extends our pipeline network to capture supplies of crude oil boundfor transportation to Los Angeles that might not otherwise be shippedthrough our pipelines. In the U.S. and Canadian Rocky Mountain area, PMTfacilitates transportation on our Canadian and U.S. Rocky Mountain pipelines bypurchasing crude oil from Canada for resale in the Rocky Mountain marketplace.

The contribution of ourPMT subsidiary is, for several reasons, a variable part of our income. First,it varies with the price differential between the cost of the varying grades ofcrude oil that PMT buys for use in its gathering operations, and the price ofthe crude oil it sells. Costs and sales prices are generally impacted by crudeoil prices, as well as by local supply and demand forces, including regulationsaffecting refined product specifications. Second, it varies with the pricedifferential between crude oil purchased on one price basis and sold on anotherprice basis. Third, it varies with the volumes gathered or purchased for sale.Finally, it varies with the effectiveness of our hedging program. We seek tocontrol these variations through our risk management policy, which providesspecific guidelines for our crude oil marketing and hedging activities andrequires oversight by our senior management.

***Operating Expenses***

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

We do not have anyemployees, except in Canada. Our General Partner provides employees to conductour U.S. operations. We and our General Partner collectively employ approximately440 individuals who directly support our operations. We consider employeerelations to be good. None of these employees are subject to a collectivebargaining agreement, except for eight employees at our Paulsboro, New Jersey,terminal, who are members of USW District 10-286 (Steel Workers), withwhom we have a 

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collectivebargaining agreement that will end on October 1, 2009. Our General Partnerdoes not conduct any business other than with respect to the Partnership. Allexpenses incurred by our General Partner are charged to us.

***Impact of Foreign Exchange Rates***

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

**Critical AccountingPolicies and Estimates**

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

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

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

·       Weaccrue an estimate of the undiscounted costs of environmental remediation forwork at identified sites where an assessment has indicated it is probable thatcleanup costs are or will be required and may be reasonably estimated. In makingthese estimates, we consider information that 

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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 a legal orcontractual obligation exists to dispose of or restore an asset upon itsretirement and the timing and cost of such work is reasonably estimable. Wewill record such liabilities only when such timing and costs are reasonablydeterminable.

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

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

**Results ofOperations**

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

*Mergercosts.**  *On June 12,2006, we announced that we had entered into a merger agreement with *Plains* All AmericanPipeline, L.P., pursuant to which we will be merged into PAA. For the three andsix months ended June 30, 2006, we incurred $3.4 million in investmentbanking fees, legal fees and other transaction costs directly related to themerger.

*Taxrate adjustments to net deferred tax liabilities.**  *During the quarter ended June 30, 2006, theCanadian and Alberta governments enacted legislation that will reduce federaland provincial income taxes. We adjusted our estimate of future income taxrates in our estimates of deferred tax assets and liabilities and recognized a$4.6 million deferred tax benefit during the three months ended June 30,2006.

*Line63 oil release.**  *On March 23,2005, a release of approximately 3,400 barrels of crude oil occurred on PPS’sLine 63 as a result of a landslide caused by heavy rainfall in northern LosAngeles County. As a result of the release, we recorded $2.0 million netoil release costs in the first quarter of 2005, consisting of what we nowestimate to be $25.5 million of total costs relating to the release, net ofinsurance recoveries of $17.7 million to date and accrued future insurancerecoveries of $5.8 million at June 30, 2006.

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

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*Reimbursed general partnertransaction costs.**  *Pursuantto an agreement entered into in connection with the sale of The AnschutzCorporation’s (the owner of our General Partner before March 3, 2005)interest in us, LB Pacific, LP and The Anschutz Corporation reimbursed us$2.4 million for the cost incurred in connection with a consentsolicitation prepared and delivered to the holders of our 71¤8% senior notesto approve certain amendments to the governing indenture and for severance andother costs incurred in connection with the sale of our General Partner. Inaccordance with generally accepted accounting principles, we recorded$0.6 million as capitalized deferred financing costs and $1.8 millionas an expense, both in the first quarter of 2005. The reimbursements wererecorded as a capital contribution to the Partnership by our General Partner.

***Three Months Ended June 30, 2006 Compared toThree Months Ended June 30, 2005***

***Summary***

Net income for the three months ended June 30,2006 was $21.4 million, or $0.54 per diluted limited partner unit, compared to$12.2 million, or $0.40 per diluted limited partner unit, for the three monthsended June 30, 2005.

Net income for the three months ended June 30,2006 includes a full quarter of operations of the Pacific Atlantic terminalsand the Rocky Mountain Products Pipeline, which were acquired on September 30,2005

Following is areconciliation of net income to the results of our operations, excluding theunusual items mentioned above:

| ** **                                             | ** ** | **Three Months Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                             | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                             | ** ** | ** ** | ** ** |
| Net income                                             |       |                                                | $          | 21,443     |       |       |       | $ | 12,220 |   |   | $ | 9,223 |   |   | 75 | % |   |
| Add: Merger costs                                      |       |                                                | 3,417      |       |       |       | —     |   |   | 3,417 |   |   | — |   |   |
| Less: Tax rate  adjustments to deferred tax  liability |       |                                                | (4,560     | )          |       |       | —     |   |   | (4,560 | ) |   | — |   |   |
|                                                   |       |                                                | $          | 20,300     |       |       |       | $ | 12,220 |   |   | $ | 8,080 |   |   | 66 | % |   |
| Diluted weighted  average limited partner units        |       |                                                | 39,314     |       |       |       | 29,742     |   |   | 9,572 |   |   | 32 | % |   |

 

The improvement in the results of operations,excluding the effect of the unusual items mentioned above, reflects the benefitof (i) the operations of Pacific Atlantic terminals and the Rocky MountainProducts Pipeline acquired on September 30, 2005, (ii) increased margins in ourgathering and marketing business, (iii) higher operating income on our WestCoast pipelines due to increased deliveries to Bakersfield, Californiarefineries and lower repair and maintenance costs, and (iv) higher revenues on theRangeland pipeline system because of favorable margins and higher volumes.These increases were partially offset by higher interest expense primarily dueto higher debt levels, and increased general and administrative costs. Therewere 39.3 million weighted average limited partner units outstanding in thethree months ended June 30, 2006, approximately 32% more limited partner unitsthan the 29.7 million weighted average units outstanding in the three monthsended June 30, 2005. The higher debt levels and increased number of unitsreflect the funding of the acquisition of the Pacific Atlantic terminals andthe Rocky Mountain Products Pipeline.

35

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***Segment Information***

Thefollowing is a discussion of segment operating income, which does not includegeneral and administrative expenses, merger costs, accelerated long-termincentive compensation plan expense and reimbursed general partner transactioncosts, as these items are not allocated to the West Coast and Rocky Mountainbusiness units.

| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **West Coast**        | ** ** | ** **                                          | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                 | ** ** | **(In thousands)**                             | ** ** | ** **                                                                                               | ** ** |
| Operating income           |       |                                                | $          | 21,988                                                                                                   |       |                                                                                                     |       | $ | 12,405 |   |   | $ | 9,583 |   |   | 77 | % |   |
| Operating data:            |       |                                                |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Pipeline  throughput (bpd) |       |                                                | 108.2      |                                                                                                     |       |                                                                                                     | 120.0      |   |   | (11.8 | ) |   | (10 | )% |   |
|                            |            |                                                     |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

West Coast operating income was higher in 2006 due to (i) theresult of operations of the Pacific Atlantic terminals, which were acquired in September 2005,(ii) higher pipeline transportation income, and (iii) higher marginsin our gathering and marketing business. Although West Coast pipeline volumeswere approximately 10% lower than in 2005, this decline was more than offset bytariff increases on Line 2000 and Line 63, the absence of $1.4 million ofrain related pipeline repair expenses incurred in the second quarter of 2005,and a substantial increase in deliveries to Bakersfield area refineries. Reducedvolumes on our West Coast pipelines were caused by the natural productiondecline of San Joaquin Valley crude and Outer Continental Shelf crude oil and ashift of light crude being transported north to the San Francisco Bay area,which had previously been transported south on our pipelines to the Los Angelesarea.

Crudeoil marketing income was significantly higher in the second quarter of 2006than the corresponding period in 2005. Favorable margins, crude oil contractsacquired on July 1, 2005, and increased crude oil volumes in the 2006quarter contributed to the improvement.

| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Rocky Mountains**          | ** ** | ** **                                          | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                        | ** ** | **(In thousands)**                             | ** ** | ** **                                                                                               | ** ** |
| Operating income                  |       |                                                | $          | 15,354                                                                                                   |       |                                                                                                     |       | $ | 8,962 |   |   | $ | 6,392 |   |   | 71 | % |   |
| Operating data  (bpd):            |       |                                                |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Rangeland pipeline system:        |       |                                                |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Sundre—North                 |       |                                                | 21.5       |                                                                                                     |       |                                                                                                     | 23.1       |   |   | (1.6 | ) |   | (7 | )% |   |
| Sundre—South                 |       |                                                | 44.2       |                                                                                                     |       |                                                                                                     | 39.7       |   |   | 4.5 |   |   | 11 |   |   |
| Western Corridor system           |       |                                                | 27.9       |                                                                                                     |       |                                                                                                     | 22.2       |   |   | 5.7 |   |   | 26 |   |   |
| Salt Lake City Core system        |       |                                                | 125.2      |                                                                                                     |       |                                                                                                     | 124.4      |   |   | 0.8 |   |   | 1 |   |   |
| Frontier pipeline                 |       |                                                | 45.2       |                                                                                                     |       |                                                                                                     | 51.3       |   |   | (6.1 | ) |   | (12 | ) |   |
| Rocky Mountain  Products Pipeline |       |                                                | 60.1       |                                                                                                     |       |                                                                                                     | —     |   |   | 60.1 |   |   | — |   |   |
|                                   |            |                                                     |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the three months ended June 30, 2006,operating income was $15.4 million, compared to $9.0 million for the threemonths ended June 30, 2005. The increase was primarily due to increasedvolumes on the Rangeland Pipeline, Western Corridor and Salt Lake City Coresystems, income contribution from the Rocky Mountain Products Pipeline, whichwas acquired on September 30, 2005, and favorable crude oil marketingmargins.

In March 2006, wecompleted the construction of our Edmonton, Alberta initiating terminal, whichprovides direct access to synthetic crude oil for delivery through our pipelinesystems to U.S. Rocky Mountain refineries. During the second quarter of 2006,construction was also completed on additional tankage along this corridor tofacilitate the movement of the synthetic crude oil. The transportation ofsynthetic crude oil was significantly lower than expected in the second quarterof 2006 due to maintenance 

36

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shutdownsat two major synthetic crude oil facilities in Alberta. However, with thesefacilities now ramping up to full capacity, synthetic crude oil movements inthe third quarter of 2006 are expected to increase.

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

| ** **                                | ** ** | **Three months ended June 30,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Revenues**                              | ** ** | ** **                                          | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(In thousands)**                             | ** ** | ** **                                                                                               | ** ** |
| Pipeline  transportation revenue          |       |                                                | $          | 34,800                                                                                                   |       |                                                                                                     |       | $ | 27,747 |   |   | $ | 7,053 |   |   | 25 | % |   |
| Storage and  terminaling revenue          |       |                                                | 21,867     |                                                                                                     |       |                                                                                                     | 10,870     |   |   | 10,997 |   |   | 101 |   |   |
| Pipeline buy/sell  transportation revenue |       |                                                | 11,427     |                                                                                                     |       |                                                                                                     | 8,116      |   |   | 3,311 |   |   | 41 |   |   |
| Crude oil sales,  net of purchases:       |       |                                                |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Crude oil sales                           |       |                                                | 364,310    |                                                                                                     |       |                                                                                                     | 128,484    |   |   | 235,826 |   |   | 184 |   |   |
| Crude oil purchases                       |       |                                                | (353,590   | )                                                                                                        |       |                                                                                                     | (122,442   | ) |   | 231,148 |   |   | 189 |   |   |
| Crude oil sales, net of purchases         |       |                                                | 10,720     |                                                                                                     |       |                                                                                                     | 6,042      |   |   | 4,678 |   |   | 77 |   |   |
| Net revenue                               |       |                                                | $          | 78,814                                                                                                   |       |                                                                                                     |       | $ | 52,775 |   |   | $ | 26,039 |   |   | 49 | % |   |
|                                           |            |                                                     |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We experienced higher pipeline transportation revenueson most of our pipelines. Pipeline transportation revenues in 2006 includerevenues from our Rocky Mountain Products Pipeline, which was acquired in September 2005,and trucking revenues from the purchase of a crude oil trucking business in January 2006.In our West Coast business unit, the impact of lower long-haul pipelinetransportation volumes was offset by higher tariff rates and increaseddeliveries to Bakersfield area refineries.

Storage and terminaling revenue increased in 2006primarily because of the acquisition of the Pacific Atlantic terminals in September 2005.

Pipeline buy/sell transportation revenues increaseddue to favorable marketing margins and because we began transporting syntheticcrude oil from Edmonton to the U.S. Rocky Mountain region after the completionof our initiating facility in Edmonton, Alberta in March 2006.

Crudeoil sales net of purchases increased because of the purchase of crude oilcontracts that commenced in July 2005, and higher overall margins. Highercrude oil prices increased gross sales and purchases.

| ** **                          | ** ** | **Three Months ended June  30,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Expenses**                        | ** ** | ** **                                                | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                          | ** ** | **(In thousands)**                                   | ** ** | ** **                                                                                               | ** ** |
| Operating  expenses                 |       |                                                      | $          | 31,655                                                                                                   |       |                                                                                                     |       | $ | 25,292 |   |   | $ | 6,363 |   |   | 25 | % |   |
| General and  administrative expense |       |                                                      | 5,714      |                                                                                                     |       |                                                                                                     | 3,700      |   |   | 2,014 |   |   | 54 |   |   |
| Depreciation and  amortization      |       |                                                      | 10,292     |                                                                                                     |       |                                                                                                     | 6,606      |   |   | 3,686 |   |   | 56 |   |   |
| Merger costs                        |       |                                                      | 3,417      |                                                                                                     |       |                                                                                                     | —     |   |   | 3,417 |   |   | — |   |   |
|                                |       |                                                      | $          | 51,078                                                                                                   |       |                                                                                                     |       | $ | 35,598 |   |   | $ | 15,480 |   |   | 43 | % |   |
|                                     |            |                                                           |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Merger costs are discussed above.

The increase in operating expenses was relatedprimarily to the incremental operations of the Pacific Atlantic terminals andthe Rocky Mountain Products Pipeline, which were acquired in September 2005.Operating expenses were also higher as a result of higher power costs.

The increase in general and administrative expense wasprimarily associated with the support of newly acquired assets, professionalfees and $0.4 million of costs for the LB Pacific, LP option plan, which we arerequired by generally accepted accounting principles to record as our expenseeven though the plan is funded by LB Pacific, LP and not by the Partnership.

37

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Theincrease in depreciation and amortization includes $3.2 million fordepreciation on the Rocky Mountain Products Pipeline and the Pacific Atlanticterminals acquired in September 2005.

| ** **                                  | ** ** | **Three Months ended June 30,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Other Income and Expense** | ** ** | ** **                                          | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                             | ** ** | ** **                                                                                               | ** ** |
| Share of net  income of Frontier            |       |                                                | $          | 475                                                                                                      |       |                                                                                                     |       | $ | 490 |   |   | $ | (15 | ) | (3 | )% |
| Interest expense                            |       |                                                | $          | 10,088                                                                                                   |       |                                                                                                     |       | $ | 5,844 |   |   | $ | 4,244 |   | 73 |   |
| Other income                                |       |                                                | $          | 292                                                                                                      |       |                                                                                                     |       | $ | 540 |   |   | $ | (248 | ) | (46 | ) |
| Income tax  expense (benefit)               |       |                                                | $          | (3,028                                                                                                   | )          |                                                                                                     |       | $ | 143 |   |   | $ | (3,171 | ) | (2,217 | ) |
|                                             |            |                                                     |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

Our share of Frontier’s net income was unchanged asthe impact of  lower pipeline volumes in2006 was offset by reduced expenses.

The increase in interest expense was due to additionalborrowings incurred to partially fund the acquisition of the Pacific Atlanticterminals and the Rocky Mountain Products Pipeline, and higher interest rates. Ourweighted average borrowings during the three months ended June 30, 2006were $622 million compared to $366 million in the correspondingperiod in 2005. Floating interest rates were higher in 2006. Our weighted averageinterest rate was 7.0% for the period ended June 30, 2006, compared to aweighted average interest rate of 6.4% for the corresponding period in 2005. Capitalizedinterest was $0.9 million and $0.2 million for the three months ended June 30,2006 and 2005, respectively.

Other income of $0.3 million for the period ended June 30,2006 was $0.2 million lower than the corresponding period in 2005.

Income tax expense is afunction of the income of our Canadian subsidiaries, which are taxable entitiesin Canada. In addition, certain kinds of repatriation of funds into the U.S.are subject to Canadian withholding tax. During the quarter ended June 30,2006, the Canadian and Alberta governments enacted legislation that will reducefederal and provincial income taxes. We adjusted our estimate of future incometax rates in our estimates of deferred tax assets and liabilities andrecognized $4.6 million of net deferred tax benefit in earnings during thethree months ended June 30, 2006. This adjustment in deferred taxes waspartially offset by higher current income tax expense as a result of higherincome from our Canadian subsidiaries.

***Six Months Ended June 30, 2006 Compared to SixMonths Ended June 30, 2005***

***Summary***

Net income for the six months ended June 30, 2006was $33.1 million, or $0.83 per diluted limited partner unit, compared to $15.6million, or $0.58 per diluted limited partner unit, for the six months ended June 30,2005.

Net income for the six months ended June 30, 2006includes six months of operations of the Pacific Atlantic terminals and theRocky Mountain Products Pipeline, which were acquired on September 30,2005.

38

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

| ** **                                                        | ** ** | **Six Months Ended June 30,**                                            | ** ** | ** **                                                                                   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                        | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**                                                                      | ** ** | ** **                                                                                   | ** ** |
| Net income                                                        |       |                                                                                         | $          | 33,057                                                                                       |       |       |       | $ | 15,641 |   |   | $ | 17,416 |   |   | 111 | % |   |
| Add: Merger costs                                                 |       |                                                                                         | 3,417      |                                                                                         |       |       | —     |   |   | 3,417 |   |   | — |   |   |
|   Line 63 oil release costs                             |       |                                                                                         | —     |                                                                                         |       |       | 2,000      |   |   | (2,000 | ) |   | — |   |   |
|   Accelerated long-term incentive compensation  expense |       |                                                                                         | —     |                                                                                         |       |       | 3,115      |   |   | (3,115 | ) |   | — |   |   |
|   Reimbursed general partner transaction costs          |       |                                                                                         | —     |                                                                                         |       |       | 1,807      |   |   | (1,807 | ) |   | — |   |   |
| Less: Tax rate  adjustments to deferred tax liability             |       |                                                                                         | (4,560     | )                                                                                            |       |       | —     |   |   | (4,560 | ) |   | — |   |   |
|                                                              |       |                                                                                         | $          | 31,914                                                                                       |       |       |       | $ | 22,563 |   |   | $ | 9,351 |   |   | 41 | % |   |
| Diluted weighted  average limited partner units                   |       |                                                                                         | 39,322     |                                                                                         |       |       | 29,708     |   |   | 9,614 |   |   | 32 | % |   |

 

The improvement in theresults of operations, excluding the effect of the unusual items mentionedabove, reflects the benefit of (i) the operations of the Pacific Atlanticterminals and the Rocky Mountain Products Pipeline acquired in September 2005;(ii) increased margins in our gathering and marketing business, (iii) higherrevenues on the Rangeland Pipeline system because of higher volumes movingsouth from Alberta, Canada to the U.S. border and higher margins, and (iv) higherpipeline transportation income in our West Coast business unit due to increasedBakersfield refinery deliveries and lower repair and maintenance costs. Theseincreases were partially offset by higher interest expense primarily due tohigher debt levels and increased general and administrative costs. There were39.3 million weighted average limited partner units outstanding in the sixmonths ended June 30, 2006, approximately 32% more limited partner unitsthan the 29.7 million weighted average units outstanding in the six monthsended June 30, 2005, due to the sale of additional common units topartially fund the acquisition of the Pacific Atlantic terminals and the RockyMountain Products Pipeline.

***Segment Information***

Thefollowing is a discussion of segment operating income. Segment operating incomedoes not include general and administrative expenses, merger costs, acceleratedlong-term incentive compensation plan expense and reimbursed general partnertransaction costs, as these items are not allocated to the West Coast and RockyMountain business units.

| ** **                     | ** ** | **Six Months Ended June 30,** | ** ** | ** **                                                                                                           | ** ** | ** **                                                                                                           | ** ** |
|--------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| **West Coast**            | ** ** | ** **                                        | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **(In thousands)**                           | ** ** | ** **                                                                                                           | ** ** |
| Operating income               |       |                                              | $          | 39,617                                                                                                               |       |                                                                                                                 |       | $ | 22,149 |   |   | $ | 17,468 |   |   | 79 | % |   |
| Add: Line 63 oil  release cost |       |                                              | —     |                                                                                                                 |       |                                                                                                                 | 2,000      |   |   | (2,000 | ) |   | — |   |   |
|                           |       |                                              | $          | 39,617                                                                                                               |       |                                                                                                                 |       | $ | 24,149 |   |   | $ | 15,468 |   |   | 64 | % |   |
| Operating data:                |       |                                              |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |   |   |
| Pipeline  throughput (bpd)     |       |                                              | 113.4      |                                                                                                                 |       |                                                                                                                 | 129.2      |   |   | (15.8 | ) |   | (12 | )% |   |
|                                |            |                                                   |            |                                                                                                                      |            |                                                                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

WestCoast operating income was higher in 2006 due to (i) the result ofoperations of the Pacific Atlantic terminals, which were acquired in September 2005,(ii) higher pipeline and transportation income due to higher tariff ratesand increased deliveries to the Bakersfield area refineries, and lower repairand maintenance costs, and (iii) higher margins in our gathering andmarketing business, which were above average in 2006 and below average in 2005.Margins were below average in 2005 in our gathering and marketing business dueto pricing pressures from steeply discounted crude oil imports, and anunfavorable 

39

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purchase contract that expired on March 31, 2005.In addition, crude oil contracts acquired on July 1, 2005 benefited ourgathering and marketing business in the first half of 2006. Partiallyoffsetting these increases were lower tank utilization in our PT storage anddistribution operations, which was lower than in the first half of 2005. Thehigh utilization in 2005 was the result of extensive refinery maintenance andresultant demand for black oil storage in the first half of 2005. Although WestCoast long haul pipeline volumes were approximately 12% lower than in 2005,this decline was offset by tariff increases on Line 2000 and Line 63, andincreased deliveries to the Bakersfield area. Reduced volumes on our West Coastpipelines were caused by lower San Joaquin Valley and Outer Continental Shelfproduction, third-party production problems, a shift of light crude beingtransported north to the San Francisco Bay area, which had previously beentransported south on our pipelines to the Los Angeles area, and San Franciscoarea refinery turnarounds in the first half of 2005. We benefited from thoseturnarounds in 2005 because they increased volumes transported by us south toLos Angeles area refineries. In addition, in 2005 we incurred $1.4 million ofrain related repairs.

| ** **                        | ** ** | **Six Months ended June 30,** | ** ** | ** **                                                                                               | ** ** | ** **                                                                                               | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Rocky Mountains**          | ** ** | ** **                                        | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                        | ** ** | **(In thousands)**                           | ** ** | ** **                                                                                               | ** ** |
| Operating income                  |       |                                              | $          | 25,153                                                                                                   |       |                                                                                                     |       | $ | 18,539 |   |   | $ | 6,614 |   |   | 36 | % |   |
| Operating data  (bpd):            |       |                                              |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Rangeland pipeline system:        |       |                                              |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Sundre—North                 |       |                                              | 23.1       |                                                                                                     |       |                                                                                                     | 22.2       |   |   | 0.9 |   |   | 4 | % |   |
| Sundre—South                 |       |                                              | 42.5       |                                                                                                     |       |                                                                                                     | 43.9       |   |   | (1.4 | ) |   | (3 | ) |   |
| Western Corridor system           |       |                                              | 26.2       |                                                                                                     |       |                                                                                                     | 22.4       |   |   | 3.8 |   |   | 17 |   |   |
| Salt Lake City Core system        |       |                                              | 124.5      |                                                                                                     |       |                                                                                                     | 116.7      |   |   | 7.8 |   |   | 7 |   |   |
| Frontier pipeline                 |       |                                              | 46.7       |                                                                                                     |       |                                                                                                     | 44.8       |   |   | 1.9 |   |   | 4 |   |   |
| Rocky Mountain  Products Pipeline |       |                                              | 60.8       |                                                                                                     |       |                                                                                                     | —     |   |   | 60.8 |   |   | — |   |   |
|                                   |            |                                                   |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the six months ended June 30,2006, operating income was $25.2 million compared to $18.5 million for thesix months ended June 30, 2005. The increase included the results ofoperations of the Rocky Mountain Products Pipeline, which was acquired in September 2006.We increased location differentials and experienced increased marketing marginson our Rangeland pipelines and higher volumes and tariffs on our U.S. RockyMountain pipelines.

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

| ** **                                | ** ** | **Six months ended June 30,** | ** ** | ** **                                                                                   | ** ** | ** **                                                                                   | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **Revenues**                              | ** ** | ** **                                        | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                | ** ** | **(In thousands)**                           | ** ** | ** **                                                                                   | ** ** |
| Pipeline  transportation revenue          |       |                                              | $          | 68,657                                                                                       |       |                                                                                         |       | $ | 55,784 |   |   | $ | 12,873 |   |   | 23 | % |   |
| Storage and  terminaling revenue          |       |                                              | 41,953     |                                                                                         |       |                                                                                         | 21,192     |   |   | 20,761 |   |   | 98 |   |   |
| Pipeline buy/sell  transportation revenue |       |                                              | 21,126     |                                                                                         |       |                                                                                         | 17,222     |   |   | 3,904 |   |   | 23 |   |   |
| Crude oil sales,  net of purchases:       |       |                                              |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Crude oil sales                           |       |                                              | 627,438    |                                                                                         |       |                                                                                         | 244,657    |   |   | 382,781 |   |   | 156 |   |   |
| Crude oil purchases                       |       |                                              | (609,909   | )                                                                                            |       |                                                                                         | (236,833   | ) |   | (373,076 | ) |   | 158 |   |   |
| Crude oil sales, net of purchases         |       |                                              | 17,529     |                                                                                         |       |                                                                                         | 7,824      |   |   | 9,705 |   |   | 124 |   |   |
| Net revenue                               |       |                                              | $          | 149,265                                                                                      |       |                                                                                         |       | $ | 102,022 |   |   | $ | 47,243 |   |   | 46 | % |   |
|                                           |            |                                                   |            |                                                                                              |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

40

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We experienced higher pipeline transportation revenueson most of our pipelines. Pipeline transportation revenues in 2006 includerevenues from our Rocky Mountain Products Pipeline, which was acquired inSeptember 2005. In the Rocky Mountains, we experienced higher volumes andtariffs and increased trucking revenues from the purchase of a crude oiltrucking business in January 2006. In our West Coast business unit, theimpact of lower long haul pipeline transportation volumes was offset by highertariffs and increased deliveries to Bakersfield area refineries.

Storage and terminaling revenues increased in 2006primarily because of the acquisition of the Pacific Atlantic terminals inSeptember 2005. This increase was partially offset by a decline in tankutilization on our Pacific Terminals storage and distribution system.

Pipeline buy/sell transportation revenues increasedbecause of increased location differentials and marketing margins.

Crudeoil sales net of purchases increased because of the purchase of crude oilcontracts in July 2005 and higher margins. Margins were above average in2006 and below average in 2005 in our gathering and marketing business forreasons described above. Higher crude oil prices increased gross sales andpurchases.

| ** **                                                 | ** ** | **Six Months ended June 30,** | ** ** | ** **                                                                       | ** ** | ** **                                                                       | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Expenses**                                               | ** ** | ** **                                        | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**                           | ** ** | ** **                                                                       | ** ** |
| Operating  expenses                                        |       |                                              | $          | 65,074                                                                           |       |                                                                             |       | $ | 47,046 |   |   | $ | 18,028 |   |   | 38 | % |   |
| General and  administrative expense                        |       |                                              | 12,587     |                                                                             |       |                                                                             | 8,872      |   |   | 3,715 |   |   | 42 |   |   |
| Depreciation and  amortization                             |       |                                              | 20,294     |                                                                             |       |                                                                             | 13,135     |   |   | 7,159 |   |   | 55 |   |   |
| Merger costs                                               |       |                                              | 3,417      |                                                                             |       |                                                                             | —     |   |   | 3,417 |   |   | — |   |   |
| Accelerated  long-term incentive plan compensation expense |       |                                              | —     |                                                                             |       |                                                                             | 3,115      |   |   | (3,115 | ) |   | — |   |   |
| Line 63 oil  release costs                                 |       |                                              | —     |                                                                             |       |                                                                             | 2,000      |   |   | (2,000 | ) |   | — |   |   |
| Reimbursed general  partner transaction costs              |       |                                              | —     |                                                                             |       |                                                                             | 1,807      |   |   | (1,807 | ) |   | — |   |   |
|                                                       |       |                                              | $          | 101,372                                                                          |       |                                                                             |       | $ | 75,975 |   |   | $ | 25,397 |   |   | 33 | % |   |
|                                                            |            |                                                   |            |                                                                                  |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Merger costs, acceleratedlong-term incentive plan compensation expense, Line 63 oil release costs andreimbursed general partner transaction costs are discussed above.

The increase in operatingexpense was related primarily to the acquisition of the Rocky Mountain ProductsPipeline and the Pacific Atlantic terminals in September 2005. Operatingexpenses were also higher as a result of higher power costs.

The increase in generaland administrative expense was primarily associated with the support of newlyacquired assets, professional fees, and $0.9 million in costs for a new LBPacific, LP option plan, which are required by generally accepted accounting principlesto be recorded as our expense even though the plan is funded by LB Pacific, LPand not by the limited Partnership.

Theincrease in depreciation and amortization includes $6.4 million fordepreciation on the Pacific Atlantic terminals and the Rocky Mountain ProductsPipeline.

| ** **                                  | ** ** | **Six Months ended June 30,** | ** ** | ** **                                                                       | ** ** | ** **                                                                       | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Other Income and Expense** | ** ** | ** **                                        | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** | **Change** | ** ** | **Percent** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                           | ** ** | ** **                                                                       | ** ** |
| Share of net income of  Frontier            |       |                                              | $          | 873                                                                              |       |                                                                             |       | $ | 847 |   |   | $ | 26 |   |   | 3 | % |   |
| Interest expense                            |       |                                              | $          | 19,176                                                                           |       |                                                                             |       | $ | 11,442 |   |   | $ | 7,734 |   |   | 68 |   |   |
| Other income                                |       |                                              | $          | 735                                                                              |       |                                                                             |       | $ | 893 |   |   | $ | (158 | ) |   | (18 | ) |   |
| Income tax  expense (benefit)               |       |                                              | $          | (2,732                                                                           | )          |                                                                             |       | $ | 704 |   |   | $ | (3,436 | ) |   | (488 | ) |   |
|                                             |            |                                                   |            |                                                                                  |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The increase in our share of Frontier’s net income wasmainly attributable to increased pipeline volumes in the six months ended June 30,2006, partially offset by increased operating expenses.

The increase in interest expense was primarily due toborrowings incurred to partially fund the acquisition of the Rocky MountainProducts Pipeline and the Pacific Atlantic terminals. Our weighted averageborrowings during the six months ended June 30, 2006 were$600 million, compared to $362 million in the corresponding period in2005. In addition, floating interest rates were higher in 2006. We realized a weightedaverage interest rate of 6.9% for the six months ended June 30, 2006,compared to a weighted average interest rate of 6.3% for the correspondingperiod in 2005. Capitalized interest was $1.7 million and $0.3 million for thesix months ended June 30, 2006 and 2005, respectively.

Other income of $0.7 million for the period ended June 30,2006 was $0.2 million lower than the corresponding period in 2005.

Income tax expense is afunction of the income of our Canadian subsidiaries, which are taxable entitiesin Canada. In addition, certain kinds of repatriation of funds into the U.S.are subject to Canadian withholding tax. During the six months ended June 30,2006, the Canadian and Alberta governments enacted legislation that will reducefederal and provincial income taxes. We adjusted our estimate of future incometax rates in our estimates of deferred tax assets and liabilities andrecognized a $4.6 million deferred tax benefit during the six months ended June 30,2006. This adjustment in deferred taxes was partially offset by higher currentincome tax expense as a result of greater income from our Canadiansubsidiaries.

**Liquidity andCapital Resources**

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

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

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

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

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

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The mergeragreement contains covenants which limit us in the conduct of our business,including but not limited to the following:

·       Weare limited to an aggregate of $150 million from the issuance of equitysecurities pending completion of the merger.

·       Ourquarterly distributions are limited to $0.5675 per unit.

·       We are limited on the sizeof any potential acquisition and new project development.

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

| ** **                                           | ** ** | **Six Months Ended June 30,**                                            | ** ** | ** **                                                                                   | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                                                                      | ** ** |
| Net cash provided  by operating activities           |       |                                                                                         | $          | 42,088                                                                                       |       |   |   | $ | 46,144 |   |   | $ | (4,056 | ) |
| Net cash used in  investing activities               |       |                                                                                         | (61,140    | )                                                                                            |       |   | (9,975 | ) |   | (51,165 | ) |
| Net cash provided by  (used in) financing activities |       |                                                                                         | 23,704     |                                                                                         |       |   | (27,549 | ) |   | 51,253 |   |
|                                                      |            |                                                                                              |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |

 

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

Net cash from operatingactivities in 2006 was positively impacted by an increase in net income due tothe operations of the Rocky Mountain Products Pipeline and the Pacific Atlanticterminals, which were acquired on September 30, 2005, higher pipelinetransportation revenue, and increased margins in our gathering and marketingbusiness. Offsetting these increases were a $4.6 million non-cash tax rateadjustment for deferred taxes and an increase in the quantity of crude oilstored for our own account because of contango market conditions (when oilprices for future deliveries are higher than for current deliveries). In acontango market we store crude oil purchased at lower prices in the currentmonth for delivery at higher prices in future months, and protect such marginthrough hedging. As such, cash provided by operating activities was adverselyaffected by the change in inventory and in crude oil sales receivable net ofcrude oil purchase liability reflecting the timing of the inventory build-up.

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

We had capital expenditures of $42.5 million for thesix months ended June 30, 2006, which include (i) $26.0 million forexpansion projects (see “Capital Requirements” below for a list of our projectsand forecasted expansion expenditures  in2006), (ii) $9.0 million for the development of the Pier 400 project, (iii) $2.6million related to sustaining capital projects and (iv) $4.9 million oftransition projects related to the Edmonton initiation station as well astransition of the Rocky Mountain Products Pipeline and the PacificAtlantic  terminals to our operations. Additionally,we paid $18.1 million for pipeline linefill in connection with the start-up ofour Edmonton initiation station and $2.3 million for a trucking business in theU.S. Rocky Mountains.

Capital expenditures forthe six months ended June 30, 2005 were $9.9 million, of which $0.8million related to sustaining capital projects, $3.2 million related totransition projects, $3.7 million related to expansion and $2.2 million was forthe development of the Pier 400 Project.

***Net cash provided by (used in) financing activities***

Net cash provided by financing activities for the sixmonths ended June 30, 2006 includes net borrowings of $69.5 million underour senior secured credit facility,which was used primarily to fund our expansion capital projects and pipelinelinefill as describe above. We also distributed $45.6 million to our limitedpartners and General Partner during the six months ended June 30, 2006.

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Cash provided by financingactivities for the six months ended June 30, 2005 include distributions of$30.7 million that were made to the limited partners and the General Partner.Additionally, our General Partner contributed $2.4 million to reimburse us forcertain costs incurred in connection with the sale of the The AnschutzCorporation’s interest in us. We also received $2.0 million in net proceedsfrom our credit facilities in the six months ended June 30, 2005.

***Capital Requirements***

Generally, ouroperations require investment to upgrade or enhance existing operations and tomeet environmental and operational regulations. Our capital requirementsconsist primarily of:

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

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

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

Weexpect to invest approximately $162 million in total capital expendituresin 2006, with approximately $148 million of that total on expansionprojects. Our estimated 2006 expansion capital spending includes the followingnotable projects.

| **2006 Forecast Expansion Capital Expenditures**                                                                              | ** ** | ** **             | ** ** | **Estimated to be  incurred in 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **(in millions)** | ** ** |
| Phase I of Salt  Lake City expansion, and beginning of phase II                                                                                   |       |                   | $          | 44                                                        |       |   |
| 2006 portion of  the construction of a new pipeline to Cheyenne, Wyoming                                                                          |       |                   | 31         |                                                      |       |
| Capital projects  associated with the new refined products assets                                                                                 |       |                   | 25         |                                                      |       |
| Completion of  permitting process, engineering and other project development cost for the  Pier 400 project                                       |       |                   | 19         |                                                      |       |
| Reactivation of  storage tanks and infrastructure enhancements at PT                                                                              |       |                   | 13         |                                                      |       |
| Completion of  storage tanks for the Rangeland System and Western Corridor pipeline to facilitate  the transportation of synthetic crude oil |       |                   | 6          |                                                      |       |
| Other                                                                                                                                             |       |                   | 10         |                                                      |       |
| Total                                                                                                                                             |       |                   | $          | 148                                                       |       |   |

 

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

***Pier 400***

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

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

In the first quarter of 2006, we completed an updatedcost estimate for the project. We are estimating that Pier 400 will costapproximately $315 million, which is subject to change depending onvarious factors, including: (i) the final scope of the project and therequirements imposed through the permitting process; and (ii) changes inconstruction costs. This cost estimate now assumes the construction of4.0 million barrels of storage. We are in the process of securing theenvironmental and other permits that will be required for the Pier 400 Projectfrom a variety of governmental agencies, including the Board of HarborCommissioners, the South Coast Air Quality Management District, variousagencies of the City of Los Angeles, the Los Angeles City Council and the U.S.Army Corps of Engineers. Due to the complexity of the environmental reviewprocess, we now expect to have the necessary permits in mid 2007.

Final construction of the Pier 400 Project is subjectto the completion of a land lease agreement with the POLA, receipt ofenvironmental and other approvals, securing additional customer commitments,updating engineering and project cost estimates, ongoing feasibilityevaluation, and financing. We now expect construction of the Pier 400 terminalto be completed and the facility to be placed in service in the first quarterof 2009.

We have capitalized $27.3million on the Pier 400 project through June 30, 2006, including $9.0million for the six months ended June 30, 2006. We anticipate funding theremaining permitting and pre-construction costs in 2006 from our revolvingcredit facility. Construction of the Pier 400 terminal is expected to befinanced through a combination of debt and proceeds from the issuance ofadditional partnership units, including common units.

***Debt Obligations***

Ourdebt obligations include:

| ** **                                                                                                                                                                         | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                         | ** ** | **(in thousands)** | ** ** |
| $400 million  senior secured credit facility, bearing interest at 5.8% on June 30, 2006,  due September 30, 2010                                                         |       | $                       | 213,058    |                  |       | $ | 140,751 |   |   |
| 71¤8% senior  notes, due June 2014, net of unamortized discount of $3,715 and $3,882  and including fair value (decreases) increases of $(2,488) and $567,  respectively |       | 243,796                 |       |                  | 246,684    |   |   |
| 61¤4% senior notes, due September 2015,  net of unamortized discount of $753 and $782, respectively                                                                      |       | 174,248                 |       |                  | 174,218    |   |   |
| Future payment  for MAPL assets, net of unamortized discount of $218 and $309,  respectively                                                                                  |       | 4,266                   |       |                  | 3,979      |   |   |
| Total long-term debt                                                                                                                                                               |       | $                       | 635,368    |                  |       | $ | 565,632 |   |   |

 

As of June 30, 2006,$86 million of undrawn credit was available under the senior secured revolvingcredit facility. With the consent of the administrative agent under therevolving credit facility, we can increase credit availability up to anadditional $75 million, based upon pro-forma EBITDA from future acquisitions.

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**Off-Balance SheetArrangements**

As of June 30, 2006,we had standby letters of credit outstanding of $25.8 million for securingcrude oil purchases and the MAPL note, both of which are reflected asliabilities on the balance sheet.

**AccountingPronouncements**

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

In September 2005, the Emerging Issues Task Force(“EITF”) issued Issue No. 04-13 (“EITF 04-13”), *Accounting for Purchases and Sales of Inventory withthe Same Counterparty*. The issues addressed by the EITF are (i) thecircumstances under which two or more exchange transactions involving inventorywith the same counterparty should be viewed as a single exchange transactionfor the purposes of evaluating the effect of APB No. 29; and (ii) whetherthere are circumstances under which nonmonetary exchanges of inventory withinthe same line of business should be recognized at fair value. EITF 04-13is effective for new arrangements entered into in the reporting periodsbeginning after March 15, 2006, and to all inventory transactions that arecompleted after December 15, 2006, for arrangements entered into prior to March 15,2006. The adoption of EITF 04-13 did not have a material impact on ourconsolidated financial statements.

In June 2006, the FASBissued FASB Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*. This Interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 will apply to the Partnership’sCanadian subsidiaries, which are taxable entities in Canada, but not to thePartnership. The Partnership is in theprocess of determining the impact of FIN 48 on its financial statements, butdoes not expect it to have a material impact on its financial statements. FIN48 is effective for the Partnership as of the beginning of the first fiscalyear beginning after January 1, 2007.

In June 2006,the EITF issued Issue No. 06-3 (“EITF 06-3), *How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation).* The issues addressed by the EITF are (i) Whetherthe scope of this Issue should include (a) all nondiscretionary amountsassessed by governmental authorities, (b) all nondiscretionary amountsassessed by governmental authorities in connection with a transaction with acustomer, or (c) only sales, use, and value added taxes and (ii) Howtaxes assessed by a governmental authority within the scope of this Issue(Issue 1) should be presented in the income statement (that is, gross versusnet presentation). EITF 06-3 is effective for interim and annualfinancial periods beginning after December 15, 2006. The Partnership is inthe process of determining the impact of EITF 06-3 on its financialstatements, but does not expect it to have a material impact on its financialstatements.

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

Market risk is the risk ofloss arising from adverse changes in market rates and prices. The principalmarket risks to which we are exposed are commodity price risk, interest raterisk and currency exchange risk. We use derivative financial instruments toreduce our exposure to adverse fluctuations in commodity prices, interest ratesand foreign exchange rates. We formally designate and document the financial 

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instrumentsas a hedge of a specific underlying exposure, as well as the risk managementobjectives and strategies for undertaking the hedge transactions. We formallyassesses, both at the inception and at least quarterly thereafter, whether thefinancial instruments that are used in hedging transactions are effective at offsettingchanges in either the fair value or cash flows of the related underlyingexposure. All of our derivatives are commonly used over-the-counter instrumentswith liquid markets or are traded on the New York Mercantile Exchange. Wedo not enter into derivative financial instruments for trading or speculativepurposes.

**Commodity PriceRisk Hedging**

We may use derivatives, principally futures andoptions, to hedge our exposure to market price volatility related to ourinventory or future sales of crude oil. Derivatives used to hedge market pricevolatility related to inventory are generally designated as fair value hedges,and derivatives related to the future sales of crude oil are generallyclassified as cash flow hedges. The values of derivative instruments areincluded in “Other assets” or in “Other current liabilities” in theaccompanying consolidated balance sheets.

Changes in the fair valueof our derivative instruments related to crude oil inventory are recognized innet income. For the six months ended June 30, 2006 and 2005, “crude oilsales, net of purchases” were net of $3.2 million and $0.5 million in losses,respectively, reflecting changes in the fair value of derivative instrumentsheld as hedges related to crude oil marketing activities. Losses on derivativeswere generally offset by gains in physical crude oil inventory positions.Changes in the fair value of our derivative instruments related to the futuresale of crude oil are deferred and reflected in “accumulated othercomprehensive income,” a component of partners’ capital in the balance sheet,until the related revenue is reflected in the consolidated statements ofincome. As of June 30, 2006, no amount relating to the change in the fairvalue of highly effective derivative instruments was included in “accumulatedother comprehensive income,” as there were no such hedges.

**Interest Rate RiskHedging**

In connection with the issuance of our 71¤8%senior notes due 2014, we entered into interest rate swap agreements with anaggregate notional principal amount of $80.0 million to receive interestat a fixed rate of 71¤8%and to pay interest at an average variable rate of six month LIBOR plus 1.6681%(set in advance or in arrears depending on the swap transaction). The interestrate swaps mature June 15, 2014 and are callable at the same dates andterms as the 71¤8%senior notes. We designated these swaps as a hedge of the change in the seniornotes fair value attributable to changes in the six month LIBOR interest rate.Changes in fair values of the interest rate swaps are recorded into earningseach period. Similarly, changes in the fair value of the underlying$80.0 million of senior notes, which are expected to be offsetting tochanges in the fair value of the interest swaps, are recorded into earningseach period. At June 30, 2006, we recorded a decrease of $2.5 million inthe fair value of interest rate swaps. For the six months ended June 30,2006, we recognized reductions in interest expense of $0.1 million related tothe difference between the fixed rate and the floating rate of interest on theinterest rate swaps. For the six months ended June 30, 2006 and 2005, wehad an immaterial amount of ineffectiveness relating to these interest rate swaps.

We are subject to risksresulting from interest rate fluctuations as the interest cost on our creditfacilities and the $80 million interest swap on the senior notes are basedon variable rates. If our interest rates were to increase 1.0% for theremainder of 2006 as compared to the rate at December 31, 2005, ourinterest expense for the remainder of 2006 would increase $2.2 million based onour outstanding debt balances at June 30, 2006.

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**Currency ExchangeRate Risk Hedging**

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

Weentered into forward exchange contracts to hedge receipt of forecasted interestpayments denominated in Canadian dollars. The effective portion of the changein fair value of this contract, which has been designated as a cash flow hedge,is reported in “accumulated other comprehensive income” in the accompanyingbalance sheet and will be reclassified into earnings in “Other income” in thesame period during which the hedged transaction affects earnings. Theineffective portion, if any, of the change in fair value of this instrumentwill be immediately recognized in earnings. These foreign exchange contracts asof June 30, 2006 are as follows:

| ** ** | ** ** | **Canadian dollars** | ** ** | **US dollars** | ** ** | **Average Exchange Rate** | ** ** |
|------------|------------|---------------------------|------------|---------------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **(in thousands)**   | ** ** | ** **          | ** ** |
| 2006       |       |                      | $          | 3,700               |       |                                |       | $ | 3,156 |   |   | Cdn$1.18 to U.S. $1.00 |   |
| 2007       |       |                      | 6,600      |                |       |                                | 5,662      |   |   | Cdn$1.17 to U.S. $1.00 |   |
| 2008       |       |                      | 3,193      |                |       |                                | 2,754      |   |   | Cdn$1.16 to U.S. $1.00 |   |

 

**Credit Risks**

By using derivative financial instruments to hedgeexposures related to changes in commodity prices, interest rates and currencyexchange rates, we expose ourselves to market risk and credit risk. Market riskis the risk of loss arising from the adverse effect on the value of a financialinstrument that results from changes in commodity prices, interest rates orcurrency exchange rates. The market risk associated with price volatility ismanaged by established parameters that limit the types and degree of marketrisk that may be undertaken.

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

**ITEM 4.**                Controlsand Procedures

***Disclosure Controls and Procedures***

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

Based on their evaluationas of June 30, 2006, our principal executive officer and principalfinancial officer have concluded that, as of the end of the period covered bythis report, our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”) are effective to ensure that the information required to be disclosed byus in the reports 

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we fileor 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***

Our management, including the Chief Executive Officerand Chief Financial Officer, have evaluated our internal control over financialreporting as of June 30, 2006, and have concluded that there has not beenany change during our most recent fiscal quarter that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

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***PART II. OTHER INFORMATION***

**ITEM 1.**                LegalProceedings

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

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

The penalties that could be assessed for the allegedCalifornia Water Code violations are also not readily quantifiable, but webelieve the penalties would not exceed $50,000, in the aggregate. We believe,however, that the allegations of Water Code violations are without merit andintend to vigorously defend against them.

On June 15, 2006, alawsuit was filed in the Superior court of California, County of Los Angeles,entitled Kosseff v. Pacific Energy, et al., case no. BC 3544016. The plaintiffalleges that he is a unitholder of the Partnership and seeks to represent aclass comprising all of the Partnership’s unitholders. The complaint names asdefendants the Partnership and certain of the officers and directors of thePartnership’s general partner, and asserts claims of self-dealing and breach offiduciary duty in connection with the pending merger with PAA and relatedtransactions. Among other allegations, the plaintiff alleges that (1) theproposed transaction was the product of a flawed process that would result inthe sale of the Partnership at an unfairly low price, (2) subsequentquarterly financial results for the Partnership would have had a materialpositive impact on the Partnership’s common unit price had the proposedtransaction not been announced, and thus the premium being offered to thePartnership’s unitholders was manufactured by the defendants based on thetiming of the announcement of the proposed transaction, (3) because ofvarious conflicts of interest, the defendants have acted to better their owninterests at the expense of the Partnership’s public unitholders, (4) thedefendants favored the proposed transaction in order to secure acceleratedvesting of equity compensation under change in control provisions in contractsthey have with the Partnership, and (5) the defendants were assured thatLehman Brothers Inc. “would rubber-stamp the transaction as fair and, for thatreason Lehman [Brothers Inc.] was hand-picked by the defendants to issue theso-called ‘fairness opinion’.”  Theplaintiff seeks injunctive relief against completing the merger or, if themerger is completed, rescission of the merger, other equitable relief, andrecovery of the plaintiff’s costs and attorneys’ fees. The Partnership believesthat the lawsuit is without merit and intends to defend against it vigorously. Therecan be no assurance that additional claims may not be made or filed, thesubstance of which may be similar to the allegations described above or thatotherwise might arise from, or in connection with, the merger agreement and thetransaction it contemplates.

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**ITEM 1A.**        RiskFactors

The risk factors included in our annual report on Form 10-Kfor the year ended December 31, 2005 have not materially changed with theexception of the addition of risk factors related to the proposed merger withPAA. Some of the risks which may be relevant to us include:

***Business Uncertaintiesand Contractual Restrictions While Merger is Pending******—Uncertainty***aboutthe effect of the merger on employees, suppliers, partners, regulators andcustomers may have an adverse effect on us. These uncertainties may impair ourability to attract, retain and motivate key personnel until the merger isconsummated, and could cause suppliers, customers and others that deal with usto defer purchases or other decisions concerning us, or seek to change existingbusiness relationships with us. Employee retention may be particularlychallenging while the merger is pending, as employees may experienceuncertainty about their future roles with PAA. In addition, the mergeragreement restricts us from making certain acquisitions and taking otherspecified actions without PAA’s approval. These restrictions could prevent usfrom pursuing attractive business opportunities that may arise prior to the completionof the merger.

***Failure to Complete Merger Could Negatively ImpactStock Price, Future Business and Financial Results******—Although***wehave agreed that our board of directors will, subject to fiduciary exceptions,recommend that its stockholders approve and adopt the merger agreement, thereis no assurance that the merger agreement and the merger will be approved, andthere is no assurance that the other conditions to the completion of the mergerwill be satisfied. If the merger is not completed, we will be subject toseveral risks, including the following:

·       wemay be required to pay PAA a termination fee of $40 million in the aggregate ifthe merger agreement is terminated under certain circumstances and we enterinto or complete an alternative transaction;

·       thecurrent market price of our common units may reflect a market assumption thatthe merger will occur, and a failure to complete the merger could result in anegative perception by the stock market of us generally and a resulting declinein the market price of our common units;

·       certaincosts relating to the merger (such as legal, accounting and financial advisoryfees) are payable by us whether or not the merger is completed;

·       theremay be substantial disruption to our business and a distraction of itsmanagement and employees from day-to-day operations, because matters related tothe merger (including integration planning) may require substantial commitmentsof time and resources, which could otherwise have been devoted to otheropportunities that could have been beneficial to us;

·       ourbusiness could be adversely affected if we are unable to retain key employeesor attract qualified replacements; and

·       wewould continue to face the risks that we currently face as an independentcompany.

There are substantialrisks and uncertainties relating to the pending merger between the Partnershipand PAA and the combined company following the merger. PAA filed a joint proxystatement/prospectus on Form S-4 on July 11, 2006 relating tothe merger which includes a discussion of these risks. Upon being declaredeffective by the Securities and Exchange Commission, a definitive joint proxystatement/prospectus will be sent to security holders of the Partnership andPAA seeking their approval of the merger and related transactions. Investorsand security holders are urged to carefully read the joint proxystatement/prospectus because it contains important information, includingdetailed risk factors, regarding the Partnership, PAA and the merger. Investorsand security holders may obtain a free copy of the definitive joint proxystatement/prospectus, when it becomes available, and other documents containinginformation about the Partnership and PAA, without charge, at the SEC’s website at 

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www.sec.gov.Copies of the definitive joint proxy statement/prospectus, when it becomesavailable, and the SEC filings that are incorporated by reference in the jointproxy statement/prospectus may also be obtained free of charge by directing arequest to the Partnership or PAA. The Partnership urges unit holders andpotential purchasers of its common units to review these materials.

**ITEM 6.**                Exhibits

Thefollowing documents are filed as exhibits to this quarterly filing:
| Exhibit  Number | ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                | **Description** |
|----------------------|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
|                 | Exhibit 2.1  |       | Agreement and Plan of  Merger dated as of June 12, 2006 by and among Plains All American  Pipeline, L.P., Plains AAP, L.P., Plains All American GP LLC, Pacific Energy  Partners, L.P., Pacific Energy Management LLC and Pacific Energy GP, LP.  (incorporated by reference to Exhibit 2.1 to the Partnership’s current  report on Form 8-K filed June 13, 2006)                |
|                 | Exhibit 2.2  |       | First Amendment to  Agreement and Plan of Merger, dated July 19, 2006, by and among Pacific  Energy Partners, L.P., Plains All American Pipeline, L.P., Pacific Energy GP,  LP, Pacific Energy Management LLC, Plains AAP, L.P. and Plains All American  GP LLC. (incorporated by reference to Exhibit 2.1 to the Partnership’s  current report on Form 8-K filed July 20, 2006) |
|                 | Exhibit 2.3  |       | Purchase Agreement dated  as of June 12, 2006 by and between Plains All American Pipeline, L.P.  and LB Pacific, LP. (incorporated by reference to Exhibit 2.2 to the  Partnership’s current report on Form 8-K filed June 13, 2006)                                                                                                                                             |
|                 | Exhibit 10.1 |       | Executive compensation  package approved on May 2, 2006 (incorporated by reference to  Exhibit 10.1 to the Partnership’s current report on Form 8-K  filed May 8, 2006)                                                                                                                                                                                                          |
| *                    | Exhibit 10.2 |       | Amended annual incentive  compensation plan and severance plan                                                                                                                                                                                                                                                                                                                                            |
| *                    | 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 considered to be “filed” for purposesof Section 18 of the Securities Exchange Act of 1934 or otherwise subjectto 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 7, 2006* |
|       | By:                               | /s/ GERALD A. TYWONIUK |
|       |                              | Gerald A. Tywoniuk*Senior Vice President and Chief Financial Officer (Principal Financial  Officer)  August 7, 2006* |

 

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**EXHIBITINDEX**
| Exhibit Number | ** **        | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                | **Description** |
|---------------------|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
|                | Exhibit 2.1  |       | Agreement and Plan of  Merger dated as of June 12, 2006 by and among Plains All American  Pipeline, L.P., Plains AAP, L.P., Plains All American GP LLC, Pacific Energy  Partners, L.P., Pacific Energy Management LLC and Pacific Energy GP, LP.  (incorporated by reference to Exhibit 2.1 to the Partnership’s current  report on Form 8-K filed June 13, 2006)                |
|                | Exhibit 2.2  |       | First Amendment  to Agreement and Plan of Merger, dated July 19, 2006, by and among  Pacific Energy Partners, L.P., Plains All American Pipeline, L.P., Pacific  Energy GP, LP, Pacific Energy Management LLC, Plains AAP, L.P. and Plains All  American GP LLC. (incorporated by reference to Exhibit 2.1 to the  Partnership’s current report on Form 8-K filed July 20, 2006) |
|                | Exhibit 2.3  |       | Purchase  Agreement dated as of June 12, 2006 by and between Plains All American  Pipeline, L.P. and LB Pacific, LP. (incorporated by reference to  Exhibit 2.2 to the Partnership’s current report on Form 8-K  filed June 13, 2006)                                                                                                                                            |
|                | Exhibit 10.1 |       | Executive  compensation package approved on May 2, 2006 (incorporated by reference  to Exhibit 10.1 to the Partnership’s current report on Form 8-K  filed May 8, 2006)                                                                                                                                                                                                          |
| *                   | Exhibit 10.2 |       | Amended annual  incentive compensation plan and severance plan                                                                                                                                                                                                                                                                                                                                            |
| *                   | 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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