Anschutz's Pacific Energy Has Shown Strong Yields Early On

Staff Reporter

It's easy to forget that Philip Anschutz, the Denver billionaire known for his involvement with Staples Center, Regal Entertainment Group and Qwest Communications, made his first fortune in the oil and gas business.

Yet over the past 20 years, Anschutz has collected a handful of crude oil pipeline assets in the West Coast and Rocky Mountains, and has even built several pipelines including a 130-mile line stretching from the San Joaquin Valley to Los Angeles-area refineries.

Last year, Anschutz placed those assets in a limited partnership, Pacific Energy Partners LP, and took it public. Since then, the Long Beach-based company has been throwing off strong yields for investors looking for fixed-income alternatives.

Pacific Energy, with 3,000 miles of pipelines and 4.6 million barrels of storage capacity, is structured in a similar way to real estate investment trusts. Like REITs, master limited partnerships must distribute most of their earnings to unit holders, after paying out a portion to the general partner that operate them. Some of the distributions are tax-deferred.

Pacific Energy went public a year ago at $19.50 a unit, reducing the size of the offering on a wretched trading day when other IPOs had to drop out of the market. Since then, the partnership units have risen 33.3 percent to a close of $25.90 each on July 14. Factoring in cash distributions, the return totals 41.5 percent.

For the first quarter ended March 31, Pacific Energy's net income fell to $6.1 million, or 29 cents a unit, from $9.2 million (44 cents) in the like year-earlier period. (The year-ago numbers are pro forma to factor in the July 2002 initial public offering.) Revenue rose 17 percent, to $31 million.

Pacific Energy Chief Executive Irvin Toole Jr. said the cost of going public cut into the company's after-tax income and caused general administrative costs to more than double.

Smith Barney analyst David LaBonte said in a recent report that Pacific Energy's first quarter results were better than he expected, primarily because of higher pipeline volumes in the West Coast operations.

He expects units to trade with a 7.5 percent yield going forward, maintaining an annual cash distribution of $1.85 a unit.

However, critics of Pacific Energy complain that master limited partnerships have built-in provisions that reward the general partner which is 60 percent owned by Anschutz to raise cash distributions by growing for growth's sake.

Built into the partnership agreement are incentive rights that increase the share of distributions paid to the general partner as distributions rise, from an initial 2 percent to 50 percent. As the general partner's share of distributions rises, the limited partners the public unit holders see their share dwindle proportionally.

For Pacific Energy's general partner, the 50 percent payout kicks in once the company pays over 70 cents per unit in any given quarter. The company is currently paying out 46.25 cents, the minimum necessary for the general partner to receive its 2 percent cut.

Terminal plans

The company has angered homeowners in San Pedro over a proposal to build a crude oil terminal at the port. The proposed area, Pier 400, is in the same spot where residents say port officials promised to relocate hazardous materials that have been in the area for years.

"Nobody wants to talk about these liquid bulk facilities, which are highly flammable and explosive," said Noel Park, president of the San Pedro Peninsula Homeowners Coalition, a group of more than a dozen neighborhood associations.

The plan for a terminal has been in the works since the mid-1980s, and more actively since 2000, said Teresa Adams Lopez, a spokeswoman for the Port of Los Angeles.

In light of the opposition, it is not clear how long building such a terminal would take.

Meantime, Pacific Energy has been focusing on acquisitions.

Earlier this month, the company got approval from the California Public Utilities Commission to buy Southern California Edison's network of black oil refineries and storage tanks in the L.A. Basin for about $158 million, plus certain costs up to $10 million. The purchase, expected to close by mid-August, will be funded from the company's $200 million revolving credit facility.

The tank assets will enlarge Pacific Energy's customer base by giving it access to global importers. The tanks will be leased out to oil companies at prices that range from $45,000 to several hundred thousand dollars a month.

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