UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

OR

¨                                 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to              

Commission File Number 1-31345

PACIFIC ENERGY PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

5900 Cherry Avenue

Long Beach, CA 90805-4408

(Address of principal executive offices)

(562) 728-2800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x  No ¨

Indicated by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨  No x

There were 31,448,931 of the registrant’s Common Units and 7,848,750 of the registrant’s Subordinated Units outstanding at September 30, 2005.

PACIFIC ENERGY PARTNERS, L.P.

FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

ITEM 1.                Financial Statements

PACIFIC ENERGY PARTNERS, L.P. (Note 1)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

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PACIFIC ENERGY PARTNERS, L.P. (Note 1)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

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PACIFIC ENERGY PARTNERS, L.P. (Note 1)
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL
(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

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PACIFIC ENERGY PARTNERS, L.P. (Note 1)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

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PACIFIC ENERGY PARTNERS, L.P. (Note 1)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

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PACIFIC ENERGY PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Pacific Energy Partners, L.P. and its subsidiaries (the “Partnership”), was, during the period of this report, engaged principally in the business of gathering, transporting, storing and distributing crude oil and related products in California and the Rocky Mountain region, which includes Alberta, Canada. The Partnership generated revenue primarily by charging tariff rates for transporting crude oil and related products on its pipelines and by leasing storage capacity. The Partnership also buys and sells crude oil, activities that are complementary to the Partnership’s pipeline transportation business. During the period covered by this report, the Partnership operated primarily in California, Colorado, Montana, Wyoming and Utah in the United States, and in Alberta, Canada. On September 30, 2005, the Partnership, through two of its wholly owned subsidiaries, acquired certain refined products and crude oil terminal assets in the San Francisco, California and Philadelphia, Pennsylvania areas, and a refined products pipeline and terminal assets in the U.S. Rocky Mountains. See also “Note 2—Acquisitions”.

The Partnership conducts its business through two business segments: the West Coast Business Unit and the Rocky Mountain Business Unit.

The Partnership is managed by its general partner, Pacific Energy GP, LP, a Delaware limited partnership (the “General Partner”), which, prior to its conversion to a limited partnership on March 3, 2005, was Pacific Energy GP, Inc., a corporation owned 100% by a subsidiary of The Anschutz Corporation (“TAC”). On March 3, 2005, TAC sold all of its interest in Pacific Energy GP, Inc. to LB Pacific, LP (“LBP”), which was formed by the Lehman Brothers Merchant Banking Group (“LBMB”) in connection with the purchase (see “Note 4—Related Party Transactions”). Pacific Energy GP, LP is managed by its general partner, Pacific Energy Management LLC, a Delaware limited liability company, thus the officers and Board of Directors of PEM manages the business affairs of the Partnership and its General Partner.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with Securities and Exchange Commission (“SEC”) regulations. Accordingly, these statements have been condensed and do not include all of the information and footnotes required for complete financial statements. These statements involve the use of estimates and judgments where appropriate. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results of operations for the full year. All significant intercompany balances and transactions have been eliminated during the consolidation process.

The condensed consolidated financial statements include the ownership and results of operations of the Rangeland system, including the Mid-Alberta Pipeline (“MAPL”), since the acquisition of those assets on May 11, 2004 and June 30, 2004, respectively.

These financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements and notes thereto included in the Partnership’s annual report on Form 10-K for the

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year ended December 31, 2004. Certain prior year balances in the accompanying condensed consolidated financial statements have been reclassified to conform to the current year presentation.

Income Taxes

The Partnership and its U.S. and Canadian subsidiaries are not taxable entities in the U.S. and are not subject to U.S. federal or state income taxes, as the tax effect of operations is passed through to its unitholders. The Partnership’s Canadian subsidiaries are taxable entities in Canada and are subject to Canadian federal and provincial income taxes and other Canadian income taxes. In addition, monies repatriated by the Partnership from Canada into the U.S. may subject the Partnership to withholding taxes.

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. The Partnership intends to repatriate its Canadian subsidiaries’ earnings in the future and accordingly has recorded a provision for Canadian withholding taxes.

Net Income per Unit

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

Diluted net income per limited partner unit is calculated in the same manner as basic net income per limited partner unit above, except that the weighted average number of outstanding limited partner units is increased to include the dilutive effect of outstanding options and restricted units by application of the treasury stock method. Following is a reconciliation of the basic weighted average outstanding limited partner units to diluted weighted average limited partner units.

 

Allocation of Net Income

Net income is allocated to the Partnership’s general partner and limited partners based on their respective interest in the Partnership. The Partnership’s general partner is also directly charged with specific costs that it assumed in connection with its acquisition by LBP and for which neither the Partnership nor the limited partners are responsible (see “Note 8—Allocation of Net Income”).

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised December 2004), Share-Based Payment (“SFAS 123R”). This Statement is a revision of SFAS No. 123. SFAS 123R establishes standards for the accounting of

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transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123R is effective for the Partnership as of the beginning of the first annual reporting period that begins after June 15, 2005. The Partnership has not yet determined the impact of the adoption of SFAS 123R on the Partnership’s consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets (“SFAS 153”). SFAS 153 addresses the measurement of exchanges of certain nonmonetary assets (except for certain exchanges of products or property held for sale in the ordinary course of business). It amends APB Opinion No. 29, Accounting for Nonmonetary Exchanges, and requires that nonmonetary exchanges be accounted for at the fair value of the assets exchanged, with gains or losses being recognized, if the fair value is determinable within reasonable limits and the transaction has commercial substance. The Statement is effective for fiscal periods beginning after June 15, 2005. The Partnership does not expect the adoption of SFAS 153 to have a material impact on its financial statements.

On March 30, 2005 the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN 47”), to clarify the term conditional asset retirement obligation as that term is used in FASB Statement No. 143, Accounting for Asset Retirement Obligations. The Interpretation also clarifies when an entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for the Partnership no later than the end of fiscal years ending after December 15, 2005. The Partnership is in the process of determining the impact of FIN 47 on its financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (“SFAS 154”). SFAS 154 replaces APB No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Changes in Interim Financial Statements. The Statement changes the accounting for, and reporting of, a change in accounting principle. SFAS 154 requires retrospective application to prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. If required, the Partnership will apply the provisions of SFAS 154 in future periods.

In September 2005, the Emerging Issues Task Force (“EITF”) issued Issue No. 04-13 (“EITF 04-13”), Accounting for Purchases and Sales of Inventory with the Same Counterparty. The issues addressed by the EITF are (i) the circumstances under which two or more exchange transactions involving inventory with the same counterparty should be viewed as a single exchange transaction for the purposes of evaluating the effect of APB No. 29; and (ii) whether there are circumstances under which nonmonetary exchanges of inventory within the same line of business should be recognized at fair value. EITF 04-13 is effective for new arrangements entered into in the reporting periods beginning after March 15, 2006, and to all inventory transactions that are completed after December 15, 2006, for arrangements entered into prior to March 15, 2006. The Partnership is in the process of determining the impact of EITF 04-13 on its financial statements, but does not expect it to have a material impact on its financial statements.

2.   ACQUISITIONS

Acquisition Of Assets From Valero, L.P.

On September 30, 2005, the Partnership completed its purchase of certain terminal and pipeline assets (the “Valero Acquisition”) from various subsidiaries of Valero, L.P. (the “Sellers”) for an aggregate purchase price of $455.0 million, plus approximately $12.0 million for the assumption of certain legal, environmental and operating liabilities and $3.4 million for closing costs. Valero, L.P. was required to divest these assets pursuant to an order from the Federal Trade Commission in connection with its

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acquisition of the Kaneb group of companies. The purchased assets consist of (i) the Martinez terminal and Richmond terminal in the San Francisco, California area, (ii) the North Philadelphia and South Philadelphia terminals and the Paulsboro, New Jersey terminal in the Philadelphia, Pennsylvania area, and (iii) a 550-mile refined products pipeline with four terminals in the U.S. Rocky Mountains.

The Martinez and Richmond terminals currently have 4.1 million barrels of combined storage capacity. The terminals handle refined products, blend stocks and crude oil, and are connected to a network of owned and third-party pipelines that carry crude oil and light products to and from area refineries. These terminals also receive and deliver crude oil and light products by marine vessel or barge. The Richmond terminal has a rail spur for delivery and receipt of light products and a truck rack for product delivery.

The North Philadelphia, the South Philadelphia and the Paulsboro, New Jersey terminals handle refined products and have a combined storage capacity of 3.1 million barrels. The terminals receive product via connections to third party pipelines and have truck racks for deliveries. The North Philadelphia and Paulsboro terminals can also deliver and receive products by marine vessel or barge.

The 550-mile refined products pipeline system, known as the West Pipeline System, consists of 550 miles of pipeline extending from Casper, Wyoming east to Rapid City, South Dakota and south to Colorado Springs, Colorado. There are products terminals at Rapid City, South Dakota, Cheyenne, Wyoming and Denver and Colorado Springs, Colorado with a combined storage capacity of 1.7 million barrels. The West Pipeline System has various segments with different receipt and delivery points.

The majority of the West Pipeline System was constructed in 1948, with extensions to Rapid City, South Dakota and Fountain, Colorado, added in the 1960’s. The South Philadelphia Terminal was constructed in 1938, the Richmond and Paulsboro terminals were constructed in 1953, and the Martinez and North Philadelphia terminals were constructed in 1973. Additional tankage has been constructed and pipeline system and terminal improvements have occurred over the years since their initial startup.

The Partnership intends to fully integrate the operations, maintenance, marketing and business development of the West Pipeline System with its existing pipeline activities in the Rocky Mountain Business Unit. It intends to similarly integrate the San Francisco area terminals and Philadelphia area terminals with its existing pipeline and terminal activities in its West Coast Business Unit.

The Partnership did not acquire accounting software or hardware with the acquired assets. The Partnership intends to develop or acquire software associated with the complex task of volumetric and revenue accounting for the acquired assets, and will use its existing financial accounting software for other accounting functions. In addition, the Partnership is not acquiring the pipeline control center or the software and other operating systems required for the West Pipeline System, and will develop and install new operating systems that will be operated out of its Long Beach pipeline control center. The Seller has agreed to provide all of these accounting, control center and operating services to the Partnership on a transition basis.

The acquired assets comprise only a portion of the total pipeline and terminal assets owned and operated by the Sellers in North America. The Sellers have other substantial pipeline and terminal assets that the Partnership did not acquire that are, or have been, operated and managed by the Seller’s existing management team and operating and marketing staff. The acquired assets have not been operated historically as a separate division or subsidiary. The Sellers, and prior to its merger with Valero, L.P., Kaneb Pipeline Partners, L.P. (“Kaneb”), operated these assets as part of its more extensive transportation and terminalling and refined products operations. As a result, neither the Sellers nor Kaneb maintained complete and separate financial statements for these assets as an independent business unit. The Partnership intends to make significant changes to the assets in the future, which may result in significant operating differences and revenues generated. Additionally, differences in the Partnership’s operating and

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marketing approach may result in it obtaining different productivity levels, results of operations and revenues than those historically achieved by the Sellers and Kaneb.

Prior to closing the acquisition, the Partnership, pursuant to its agreement with the Sellers, made conditional offers of employment to the Sellers’ employees directly involved in the operation of the acquired assets. The Partnership hired 76 of these employees, including certain field level managerial and supervisory employees, operators, technicians, and engineers/project coordinators. The Partnership intends to hire additional accounting, environmental, engineering, pipeline controllers and technical staff to support the acquired assets.

The acquisition will be accounted for as an acquisition of assets, and not as an acquisition of a continuing business operation.

The Valero Acquisition was consummated effective at 11:59 p.m. on September 30, 2005 and no amount was earned and included in the statements of income for the three and nine months ended September 30, 2005. The Partnership has engaged an independent appraiser to complete an appraisal of the fair values of the acquired assets, and is completing its review and determination of the fair values of the assets acquired and liabilities assumed. Accordingly, the allocation of the purchase price is subject to revision. Based upon the preliminary estimates, the purchase price is being allocated to land and related improvements, depreciable pipelines and related equipment, storage tanks and related equipment, truck racks, rights of way, amortizable intangible assets and other properties. The Partnership anticipates depreciating the pipeline and tankage over forty years, other property and equipment over three to twenty years, and amortizable intangible assets over their estimated lives of up to 40 years. The Partnership is also completing its assessment of the $12.0 million of assumed liabilities, and accordingly its initial estimate is subject to revision, including the liability associated with one legal action pending against one of the Sellers that the Partnership agreed to assume (See “Note 10—Contingencies”).

The Valero Acquisition was funded through a combination of the proceeds from a private placement of 4.3 million common units, a public equity offering of 5.2 million common units, a private placement of $175 million of senior unsecured notes, and borrowings under the Partnership’s new revolving credit facility (See “Note 5—Long-term Debt” and “Note 6—Partner’s Capital” for further discussion on these financing arrangements).

Purchase Of Crude Oil and Contracts

On July 1, 2005, Pacific Marketing and Transportation LLC, a wholly owned subsidiary of the Partnership, purchased certain crude oil contracts and crude oil inventories for approximately $3.8 million plus contingent payments over the next three and one half years based on specified performance criteria.

3.   LINE 63 OIL RELEASE RESERVE

On March 23, 2005, a release of approximately 3,400 barrels of crude oil occurred on Line 63 when it was severed as a result of a landslide induced by heavy rainfall in the Pyramid Lake area of Los Angeles County. Over the period March 2005 through March 2006, the Partnership expects to incur an estimated total of $19.5 million for oil containment and clean-up of the impacted areas, future monitoring costs, potential third-party claims and penalties, and other costs, excluding pipeline repair costs. As of September 30, 2005, the Partnership had incurred approximately $14.1 million of the total expected costs related to the oil release for work performed through that date. Additionally, the Partnership expensed $0.7 million for the repair of Line 63 and expects to incur $1.7 million of Line 63 capital improvements of which $0.8 million has been incurred through September 30, 2005.

The Partnership has a pollution liability insurance policy with a $2.0 million deductible that covers containment and clean-up costs, third-party claims and penalties. The insurance carrier has, subject to the

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terms of the insurance policy, acknowledged coverage of the incident and is processing and paying invoices related to the clean-up. The Partnership believes that, subject to the $2.0 million deductible, it will be entitled to recover substantially all of its clean-up costs and any third-party claims associated with the release. The Partnership’s insurance coverage will not cover the cost to repair the pipeline. As of September 30, 2005, the Partnership has recovered $8.7 million from insurance and recorded a receivable of $8.8 million for insurance recoveries it deems probable.

The Partnership recorded $2.0 million in net costs in “Line 63 oil release costs” in the accompanying condensed consolidated financial statements for the nine months ended September 30, 2005. The $2.0 million net oil release costs consist of the $19.5 million of accrued costs relating to the release, net of insurance recovery of $8.7 million and accrued insurance receipts of $8.8 million.

The foregoing estimates are based on facts known at the time of estimation and the Partnership’s assessment of the ultimate outcome. Among the many uncertainties that impact the estimates are the necessary regulatory approvals for, and potential modification of, remediation plans, the ongoing assessment of the impact of soil and water contamination, changes in costs associated with environmental remediation services and equipment, and the possibility of third-party legal claims giving rise to additional expenses. Therefore, no assurance can be made that costs incurred in excess of this provision, if any, would not have a material adverse effect on the Partnership’s financial condition, results of operations, or cash flows, though the Partnership believes that most, if not all, of any such excess cost, to the extent attributable to clean-up and third-party claims, would be recoverable through insurance. As new information becomes available in future periods, the Partnership may change its provision and recovery estimates.

4.   RELATED PARTY TRANSACTIONS

Lehman Brothers, Inc.

In connection with the purchase and the associated financing of the Valero Acquisition including the private equity offering, public equity offering, debt offering and new credit facility, Lehman Brothers, Inc. and its affiliates provided advisory and underwriting services to the Partnership. Additionally, an affiliate of Lehman Brothers, Inc. is a participant in the syndicate that provided the Partnership’s new senior secured credit facility. These agreements with Lehman Brothers, Inc. were reviewed and approved by the Conflicts Committee of the Board of Directors and the fees charged were customary for the types of services provided. For the three and nine months ended September 30, 2005, the Partnership incurred $9.8 million in fees with Lehman Brothers, Inc. and its affiliates, a portion of which was paid to non-affiliated financial institutions in the syndication of the New Credit Facility and in the public offering of equity.

Sale of The Anschutz Corporation’s Interest in the Partnership

On March 3, 2005, TAC sold all of its interest in Pacific Energy GP, Inc. to LBP, which was formed by LBMB in connection with the purchase. The acquisition by LBP (the “LB Acquisition”) included the 100% ownership interest in Pacific Energy GP, Inc., which owned (i) the 2% general partner interest in the Partnership and the incentive distribution rights, and (ii) 10,465,000 subordinated units of the Partnership which represented a 34.6% limited partner interest in the Partnership. Immediately prior to the closing of the LB Acquisition, Pacific Energy GP, Inc. was converted to Pacific Energy GP, LLC, a Delaware limited liability company; and immediately after the closing of the LB Acquisition, Pacific Energy GP, LLC was converted to Pacific Energy GP, LP (the “General Partner”). Immediately following the consummation of the LB Acquisition, the General Partner distributed the 10,465,000 subordinated units of the Partnership to LBP.

In connection with the conversion of the Partnership’s General Partner to a limited partnership, the General Partner ceased to have a board of directors, and is now managed by its general partner, Pacific

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Energy Management LLC, a Delaware limited liability company (“PEM” or the “Managing General Partner”), which is 100% owned by LBP. PEM has a board of directors (the “Board of Directors” or “Board”) that manages the business and affairs of PEM and, thus, indirectly manages the business and affairs of the General Partner and the Partnership. All of the officers and employees of Pacific Energy GP, Inc. were transferred to fill the same positions with PEM, and the PEM Board established the same committees as had been maintained by Pacific Energy GP, Inc. prior to the LB Acquisition. PEM also adopted Pacific Energy GP, Inc.’s governance guidelines and its compensation structure and employee benefits plans and policies.

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

Cost Reimbursements

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

Special Agreement:   On March 3, 2005, Douglas L. Polson, previously the Chairman of the Board of Directors of Pacific Energy GP, Inc., entered into a Special Agreement and a Consulting Agreement with PEM. In accordance with the Special Agreement, Mr. Polson resigned as Chairman of the Board of Directors of Pacific Energy GP, Inc. effective March 3, 2005. Mr. Polson was paid approximately $0.9 million, representing accrued salary through March 3, 2005, accrued but unused vacation and payment in satisfaction of other obligations under his employment agreement. The severance portion of this payment was recorded as an expense in “Transaction costs” in the accompanying condensed consolidated income statements (see “Note 8—Allocation of Net Income”). LBP reimbursed this amount, which was recorded as a partner’s capital contribution. Pursuant to the Consulting Agreement, Mr. Polson has agreed to perform advisory services to PEM from time to time as shall be mutually agreed between Mr. Polson and the Chief Executive Officer of PEM. In consideration for Mr. Polson’s services under the Consulting Agreement, which has a one-year term, Mr. Polson will receive a monthly consulting fee of $12,500 and reimbursement of all reasonable business expenses incurred or paid by Mr. Polson in the course of performing his duties thereunder.

LBP and TAC:   LBP and TAC reimbursed the Partnership for certain other costs relating to the LB Acquisition. These included $1.2 million for the Consent Solicitation (as defined and further described in “Note 5—Long-Term Debt”, below) and $0.3 million for legal and other expenses (also see “Note 8—Allocation of Net Income”).

Other Related Party Transactions

Revenue from Related Parties:   Rocky Mountain Pipeline System LLC (“RMPS”), a subsidiary of the Partnership, receives an operating fee and a management fee from Frontier Pipeline Company (“Frontier”) in connection with time spent by RMPS management and for other services related to Frontier’s pipeline’s activities. The Partnership owns a 22.2% interest in Frontier, which is not consolidated in the Partnership’s financial statements. RMPS received $0.2 million and $0.3 million for each of the three months ended September 30, 2005 and 2004 and $0.6 million and $0.5 million for each of the nine months ended September 30, 2005 and 2004, respectively.

Due from (to) Related Parties:   Due from related parties, which includes payroll related items, consists of $0.6 million due from PEM and $0.5 million due to Pacific Energy GP, LP at September 30, 2005 and December 31, 2004, respectively.

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5.   LONG-TERM DEBT

The Partnership’s long-term debt obligations are shown below:

 

$400 million Senior Secured Credit Facility

On September 30, 2005, the Partnership entered into a new five-year $400 million senior secured revolving credit facility (the “New Credit Facility”) that replaced the Partnership’s previous U.S. and Canadian revolving credit facilities. The New Credit Facility is available for general Partnership purposes, in the U.S. and Canada, including working capital, letters of credit and distributions to unitholders (subject to certain limitations). The New Credit Facility matures on September 30, 2010, and the Partnership may prepay all loans under the New Credit Facility without premium or penalty. Obligations under the New Credit Facility are guaranteed by all of the subsidiaries of the Partnership except those for which regulatory approval is required and are secured by substantially all of the assets of the Partnership, excluding property held by the non-guaranteeing subsidiaries. The New Credit Facility is recourse to the Partnership and the guarantors, but non-recourse to the General Partner.

Subject to certain limited exceptions, indebtedness under the New Credit Facility bears interest (at the Partnership’s option) at either (i) the base rate, which is equal to the higher of the prime rate as announced by Bank of America, N.A. or the Federal Funds rate plus 0.50% (or in the case of borrowings under the Canadian sub-facility described below, Canadian US dollar base rate or Canadian prime rate) (each plus an applicable margin ranging from 0% to 0.75%) or (ii) the Eurodollar rate plus an applicable margin ranging from 0.75% to 2.00%. The applicable margins fluctuate based on the Partnership’s credit rating at any given time. In addition, the Partnership will incur a commitment fee which ranges from 0.1875% to 0.5000% per annum on the unused portion of the New Credit Facility.

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Included in the New Credit Facility is a Canadian sub-facility for Rangeland Pipeline Company (“RPC”), one of the Partnership’s Canadian subsidiaries. The Canadian sub-facility currently has a limit of U.S.$100 million, but can be adjusted from time to time by the Partnership. The Canadian sub-facility includes an option for RPC to receive loans in either U.S. dollars or Canadian dollars.

The New Credit Facility contains certain financial covenants and covenants limiting the ability of the Partnership to, among other things, incur or guarantee indebtedness, change ownership or structure, including mergers, consolidations, liquidations and dissolutions, sell or transfer assets and properties, and enter into a new line of business. At September 30, 2005, the Partnership was in compliance with all such covenants.

As of September 30, 2005, $114.2 million was outstanding under the New Credit Facility, including $19.2 million under the Canadian sub-facility, and there was $152.6 million of undrawn available credit.

The New Credit Facility was entered into with a syndicate of financial institutions, including an affiliate of Lehman Brothers, Inc., which is an affiliate of LBP (see “Note 4—Related Party Transactions”).

71¤8% Senior Notes, Due June 2014

On June 16, 2004, the Partnership and its 100% owned subsidiary, Pacific Energy Finance Corporation, completed the sale of $250 million of 71¤8% senior unsecured notes due June 15, 2014. The notes were sold in a private offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933 (the “Securities Act”) and to non-U.S. persons under Regulation S of the Securities Act. In October 2004, the notes were exchanged for new notes with materially identical terms that have been registered under the Securities Act but are not listed on any securities exchange. The notes were issued at a discount of $4.4 million, resulting in an effective interest rate of 7.375%. Interest payments are due on June 15 and December 15 of each year. At any time prior to June 15, 2007, the Partnership has the option to redeem up to 35% of the aggregate principal amount of notes at a redemption price of 107.125% of the principal amount with the net cash proceeds of one or more equity offerings. The Partnership has the option to redeem the notes, in whole or in part, at anytime on or after June 15, 2009 at the following redemption prices:

 

The notes are jointly and severally guaranteed by certain of the Partnership’s subsidiaries, including Pacific Energy Group LLC, Pacific Marketing and Transportation LLC, Pacific Atlantic Terminals LLC, Rocky Mountain Pipeline System LLC, Ranch Pipeline LLC, PEG Canada GP LLC and PEG Canada, L.P.

The indenture governing the notes contains certain covenants that, among other things, limit the Partnership’s ability and the ability of its restricted subsidiaries to incur or guarantee indebtedness or issue certain types of preferred equity securities; sell assets; pay distributions on, redeem or repurchase Partnership units; or consolidate, merge or transfer all or substantially all of its assets. At September 30, 2005, the Partnership was in compliance with all such covenants.

Under the Indenture governing the Partnership’s 71¤8% senior notes due 2014, the Partnership would have been required to make a “Change of Control Offer” to the holders of such notes if the LB Acquisition caused a rating decline by a credit rating agency. In order to avoid triggering the “Change of

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Control Offer” provision, the Partnership solicited the consent (the “Consent Solicitation”) of the holders of the 71¤8% notes to amend certain provisions of the Indenture, including an amendment to the definition of “Change of Control.” The Consent Solicitation was completed on February 10, 2005 with a majority of the holders of the senior notes consenting to the adoption of the proposed amendments, and as such, the proposed amendments were approved. Thereafter, a supplemental indenture that incorporated the proposed amendments was executed by the parties to the Indenture. Fees of $0.6 million paid to holders of the notes were capitalized and included in “Other assets” in the accompanying condensed consolidated balance sheet at September 30, 2005 and will be amortized over the remaining life of the 71¤8% notes. Other solicitation-related fees and expenses of approximately $0.6 million are included in “Transaction costs” in the accompanying condensed consolidated statements of income. LBP and TAC reimbursed the Partnership for the entire cost of the Consent Solicitation, which reimbursement is recorded as a partner’s capital contribution (see “Note 4—Related Party Transactions”).

61¤4% Senior Notes Due 2015

On September 23, 2005, the Partnership and its 100% owned subsidiary, Pacific Energy Finance Corporation, completed the sale of $175 million of 6¼% senior unsecured notes due September 15, 2015. The notes were sold in a private offering to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933. The notes were sold for 99.544% of face value resulting in an effective interest rate of 6.3125% to maturity. Interest payments are due on March 15 and September 15 of each year, beginning on March 15, 2006.

The notes are jointly and severally guaranteed by the same Partnership subsidiaries that guarantee the 71¤8% senior notes, due June 2014. At any time prior to September 15, 2008, the Partnership has the option to redeem up to 35% of the aggregate principal amount of notes at a redemption price of 106.25 % of the principal amount with the net cash proceeds of one or more equity offerings. At any time prior to September 15, 2010, the Partnership may redeem some or all of the notes at a price equal to 100% of the principal amount, plus a make-whole premium and accrued and unpaid interest, if any, to the date of redemption. The Partnership will also have the option to redeem the notes, in whole or in part, at any time on or after September 15, 2010 at the following redemption prices:

 

The indenture governing the notes contains certain covenants that, among other things, limit the Partnership’s ability and the ability of its restricted subsidiaries to incur or guarantee indebtedness or issue certain types of preferred equity securities; sell assets; pay distributions on, redeem or repurchase Partnership units; or consolidate, merge or transfer all or substantially all of its assets. At September 30, 2005, the Partnership was in compliance with all such covenants.

Net proceeds from the issuance of the notes were $171.0 million after deducting the $0.8 million discount and offering expenses of $3.2 million. The net proceeds were used to partially fund the Valero Acquisition.

Additionally, the Partnership entered into a registration rights agreement whereby the Partnership agreed, among other things, to file a registration statement with the SEC within 90 days after the issue date of the notes that will enable holders of the notes to exchange the privately placed notes for publicly registered notes with substantially identical terms, and to file a shelf registration statement for the resale of

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the notes in certain circumstances. If the Partnership does not comply with its obligations under the registration rights agreement, the interest rate of the notes will increase.

6.   PARTNERS’ CAPITAL

Public Equity Offering

On September 14, 2005, the Partnership sold 4,550,000 common units in an underwritten public offering at a price of $32.00 per unit. On September 16, 2005, the underwriters exercised their over-allotment option and purchased an additional 682,500 common units at the same price. Net proceeds from the offering and exercise of the underwriters option, including the General Partner’s contribution of $3.4 million, totaled approximately $163.4 million after deducting underwriting fees and offering expenses of $7.4 million. The Partnership used net proceeds from the equity offering to partially fund the Valero Acquisition.

Private Equity Placement

On September 30, 2005, the Partnership sold 4,300,000 common units pursuant to a Common Unit Purchase Agreement with certain institutional investors at a price of $30.75 per unit. The Partnership received net proceeds of $131.8 million from the sale of the common units together with the General Partner’s contribution of $2.7 million, which were used to partially fund the Valero Acquisition. The Partnership also entered into a Registration Rights Agreement with the institutional investors, whereby the Partnership agreed to file a shelf registration statement with the SEC for the resale from time to time of the privately placed common units, such filing to be made within 90 days after the closing, and for the Partnership thereafter to use commercially reasonable efforts to cause the shelf registration statement to become or be declared effective by the SEC within 180 days after the closing date.

Conversion of Subordinated Units

On August 12, 2005, 2,616,250 of the Partnership’s subordinated units were converted to common units pursuant to terms of the Partnership’s partnership agreement.

7.   VESTING OF UNIT GRANTS UNDER LONG-TERM INCENTIVE PLAN

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

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8.   ALLOCATION OF NET INCOME

The allocation of net income between the Partnership’s General Partner and limited partners is as follows.

 

LBP and TAC reimbursed the Partnership for certain costs incurred in connection with the LB Acquisition. The Partnership was reimbursed $1.2 million for costs incurred in connection with the Consent Solicitation, $0.3 million of legal and other costs and $0.9 million relating to severance costs (see “Note 4—Related Party Transactions”), for a total of $2.4 million. Of the $1.2 million incurred for the consent solicitation, $0.6 million was capitalized as deferred financing costs and $0.6 million was expensed in the three month period ended March 31, 2005.

9.   SEGMENT INFORMATION

The Partnership’s business and operations are organized into two business segments: the West Coast Business Unit and the Rocky Mountain Business Unit. The West Coast Business Unit includes: (i) Pacific Pipeline System LLC, owner of Line 2000 and Line 63, (ii) Pacific Marketing and Transportation LLC, owner of the PMT gathering system, (iii) Pacific Terminals LLC, owner of the Pacific Terminals storage and distribution system and (iv) Pacific Atlantic Terminals LLC, which was formed for the purpose of holding the California and East Coast terminal assets the Partnership acquired in the Valero Acquisition on September 30, 2005. The Rocky Mountain Business Unit includes: (i) Rocky Mountain Pipeline System LLC, owner of the Partnership’s interest in various pipelines that make up the Western Corridor and Salt Lake City Core systems and the West Pipeline System, which was acquired in the Valero Acquisition,

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(ii) Ranch Pipeline LLC, the owner of a 22.22% partnership interest in Frontier Pipeline Company, and (iii) PEG Canada, L.P. and its Canadian subsidiaries, which own and operate the Rangeland system (for the period since May 11, 2004). Balance sheet information noted below includes the assets acquired in the Valero Acquisition, which closed on September 30, 2005. There was no income contribution for the three or nine months ended September 30, 2005 from the Valero Acquisition. General and administrative costs, which consist of executive management, accounting and finance, 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:

 

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(1)          Includes the revenue of the Rangeland system, which was acquired on May 11, 2004 and June 30, 2004. Pipeline buy/sell transportation revenue reflects net revenues of approximately $2.5 million on gross revenues for buy/sell transactions of $77.5 million with different parties for the three months ended September 30, 2005 and net revenues of approximately $4.6 million on gross revenues for buy/sell transactions of $126.0 million for the nine months ended September 30, 2005. The remaining amount reflects net revenues on buy/sell transactions with the same party.

(2)          The above amounts are net of purchases of $188,901 and $103,192 for the three months ended September 30, 2005 and 2004 and $425,733 and $278,689 for the nine months ended September 30, 2005 and 2004, respectively.

(3)          See “Note 3—Line 63 Oil Release Reserve” for further information.

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(4)          The following is a reconciliation of operating income as stated above to net income:

 

(5)          Business unit assets do not include assets related to the Partnership’s parent level activities. As of September 30, 2005 and 2004, parent level related assets were $50,845 and $29,651 respectively.

(6)          Capital expenditures do not include the Pier 400 project and other parent-level related capital expenditures. Pier 400 project and other parent-level related capital expenditures were $2,878 and $808 for the three months ended September 30, 2005 and 2004 and $5,605 and $2,689 for the nine months ended September 30, 2005 and 2004, respectively.

10.   CONTINGENCIES

In August 2005, Rangeland Pipeline Company (“RPC”), a wholly-owned subsidiary of the Partnership, learned that a Statement of Claim was filed by Desiree Meier and Robert Meier in the Alberta Court of Queen’s Bench, Judicial District of Red Deer, naming RPC as defendant, and alleging personal injury and property damage caused by an alleged release of petroleum substances onto plaintiff’s land from a pipeline owned and operated by RPC. The claim seeks Cdn$1 million in general damages, Cdn$2 million in special damages, and, in addition, unspecified amounts for punitive, exemplary and aggravated damages, costs and interest. The Statement of Claim has not been served on RPC, so RPC has not been required to file an answer. RPC believes the claim is without merit, and intends to vigorously defend against it.

In connection with the Valero Acquisition, we have assumed defense of Support Terminals Services, Inc. (“ST Services”) in a lawsuit filed in New Jersey state court in 2003 by ExxonMobil Corporation (“ExxonMobil”). We have also assumed any liability that might be imposed on ST Services as a result of the suit. In the suit, ExxonMobil seeks $400,000 for remediation costs it has paid, from GATX Corporation, Kinder Morgan Liquid Terminals, the successor in interest to GATX Terminals Corporation, and ST Services. ExxonMobil also seeks a ruling imposing liability for any future remediation on the same defendants. These costs are associated with the Paulsboro, New Jersey terminal that was acquired by us. ExxonMobil claims that the costs are related to releases at the site subsequent to its sale of the terminal to GATX in 1990 and that any remaining remediation requirements are the responsibility of GATX Corporation, Kinder Morgan, and ST Services.

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