I believe that line does nothing.
For what it's worth, this is the previous line, in which $1 is set:
$pee = preg_replace('!<p>([^<]+)\s*?(</(?:div|address|form)[^>]*>)!', "<p>$1</p>$2", $pee);
However, I don't think that's worth anything. In my testing, $1 does not maintain a value from one preg_replace to the next, even if the next doesn't set its own value for $1. Remember that PHP variable names cannot begin with a number (see: http://php.net/language.variables ), so $1 is not a PHP variable. It only means something within a single preg_replace, and in this case the rules of preg_replace suggest it doesn't mean anything.
That said, autop being such a widely-used function makes me doubt my own conclusion that this line is doing nothing. So I look forward to someone correcting me.