**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**ý****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2005**

 

**OR**

 

**o********TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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**Commission File Number 1-13603**

 

**TE Products Pipeline Company,Limited Partnership**

(Exact name of Registrant as specified in itscharter)

 
| **Delaware**                             | ** ** | **76-0329620**                          |
|------------------------------------------|------------|-----------------------------------------|
| (State of Incorporation or Organization) |       | (I.R.S. Employer Identification Number) |

 

 

**2929 Allen Parkway**

**P.O. Box 2521**

**Houston, Texas 77252-2521**

(Address ofprincipal executive offices, including zip code)

 

**(713) 759-3636**

(Registrant’stelephone number, including area code)

 

**Securities registered pursuant to Section 12(b) ofthe Act:**

 
| **Title  of each class**                       |   | **Name  of each exchange on  which registered** |
|------------------------------------------------|--------|-------------------------------------------------|
| 6.45% Senior Notes, due  January 15, 2008 |   | New York Stock Exchange                         |
| 7.51% Senior Notes, due  January 15, 2028 |   | New York Stock Exchange                         |

 

Securities registered pursuant to Section 12(g) of theAct:  **None**

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes oNo ý

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes oNo ý

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding twelve months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ýNo o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  Largeaccelerated filer o  AcceleratedFiler o  Non-accelerated Filer ý

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o  No ý

 

| **Documents Incorporated by Reference**      | ** ** | **Form 10-K Parts** |
|----------------------------------------------|------------|---------------------|
| TEPPCO Partners, L.P.  Form 10-K             |       | III                 |
| For the fiscal year  ended December 31, 2005 |       |                |

 

 

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**TABLE OF CONTENTS**

 
|                 | Explanatory Note                                                                                |   |
|----------------------|-------------------------------------------------------------------------------------------------|--------|
|                 | Cautionary Note Regarding  Forward-Looking Statements                                           |   |
|                 |                                                                                            |   |
|                 | **PART I**                                                                                 |   |
|                 |                                                                                            |   |
| ITEMS  1 AND 2. | Business and Properties                                                                         |   |
| ITEM 1A.             | Risk Factors                                                                                    |   |
| ITEM 3.              | Legal Proceedings                                                                               |   |
| ITEM 4.              | Submission of Matters to a  Vote of Security Holders                                            |   |
|                 |                                                                                            |   |
|                 | **PART II**                                                                                |   |
|                 |                                                                                            |   |
| ITEM 5.              | Market for Registrant’s  Common Equity and Related Partnership Interest Matters            |   |
| ITEM 6.              | Selected Financial Data                                                                         |   |
| ITEM 7.              | Management’s Discussion and  Analysis of Financial Condition and Results of Operations     |   |
| ITEM 7A.             | Quantitative and Qualitative  Disclosures About Market Risks                                    |   |
| ITEM 8.              | Financial Statements and  Supplementary Data                                                    |   |
| ITEM 9.              | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure           |   |
| ITEM 9A.             | Controls and Procedures                                                                         |   |
| ITEM 9B.             | Other Information                                                                               |   |
|                 |                                                                                            |   |
|                 | **PART III**                                                                               |   |
|                 |                                                                                            |   |
| ITEM 10.             | Directors and Executive  Officers of the Registrant                                             |   |
| ITEM 11.             | Executive Compensation                                                                          |   |
| ITEM 12.             | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters |   |
| ITEM 13.             | Certain Relationships and  Related Transactions                                                 |   |
| ITEM 14.             | Principal Accounting Fees  and Services                                                         |   |
|                 |                                                                                            |   |
|                 | **PART IV**                                                                                |   |
|                 |                                                                                            |   |
| ITEM 15.             | Exhibits, Financial  Statement Schedules                                                        |   |

 

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****EXPLANATORY NOTE****

 

****This Form 10-K includes restated financial statementsand selected financial information for the fiscal years ended December 31,2004 and 2003, and restated quarterly financial information for the quarterlyperiods ended December 31, 2004 and for the first three quarters of 2005. Thisfiling also includes the initial issuance of our financial statements for theyear ended December 31, 2005, which have not previously been issued andare not restated. The restated financial statements for the fiscal year ended December 31,2002 are unaudited and, in the opinion of management, have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and reflect all adjustments which are, in the opinion of management,necessary for a fair presentation of results for those periods.****

 

Therestated financial statements include the effect of correcting the accountingfor our excess investment in Centennial Pipeline LLC from an intangible assetwith an indefinite life to an intangible asset with a definite life. Therestatement caused a $3.1 million and $3.3 million reduction to net income aspreviously reported for the fiscal years ended December 31, 2004 and 2003,respectively. As a result of the accounting correction, net income for thefiscal year ended December 31, 2005, includes a charge of $4.1 million, ofwhich $3.3 million relates to the first nine months of 2005. Additionally,partners’ capital at December 31, 2002, reflects a $2.4 million reductionrepresenting the cumulative effect of this correction for the fiscal year endedDecember 31, 2002.

 

Forfurther discussion of the effect of the restatement, see Note 19 in the Notesto the Consolidated Financial Statements.

 

Inaddition to the restatement reported in this Annual Report on Form 10-K,this restatement will also be reported in our Quarterly Reports on Form 10-Qfor the quarterly periods ended March 31, 2006, June 30, 2006, and September 30,2006. As we have included restated financial statements and related selectedfinancial information for (i) restated financial information for thequarterly periods ended March 31, 2005 and 2004, June 30, 2005 and2004, and September 30, 2005 and 2004, (ii) restated financialstatements for the fiscal years ended December 31, 2004 and 2003, and (iii) restatedselected financial information for the fiscal year ended December 31, 2002,we do not plan to file any other amendments to our previously filed AnnualReport on Form 10-K or Quarterly Reports on Form 10-Q, except asdescribed above.

 

****CAUTIONARY NOTEREGARDING FORWARD-LOOKING STATEMENTS****

 

*The matters discussed in this AnnualReport on Form 10-K (this “Report”) include “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. All statements that express belief,expectation, estimates or intentions, as well as those that are not statementsof historical facts are forward-looking statements. The words “proposed”, “anticipate”,“potential”, “may”, “will”, “could”, “should”, “expect”, “estimate”, “believe”,“intend”, “plan”, “seek” and similar expressions are intended to identifyforward-looking statements. Without limiting the broader description offorward-looking statements above, we specifically note that statements includedin this document that address activities, events or developments that we expector anticipate will or may occur in the future, including such things asestimated future capital expenditures (including the amount and naturethereof), business strategy and measures to implement strategy, competitivestrengths, goals, expansion and growth of our business and operations, plans,references to future success, references to intentions as to future matters andother such matters are forward-looking statements. These statements are basedon certain assumptions and analyses made by us in light of our experience andour perception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate under thecircumstances. While we believe our expectations reflected in theseforward-looking statements are reasonable, whether actual results anddevelopments will conform with our expectations and predictions is subjectto a number of risks and uncertainties, including general economic, market orbusiness conditions, the opportunities (or lack thereof) that may bepresented to and pursued by us, competitive actions by other pipelinecompanies, changes in laws or regulations and other factors, many of which arebeyond our control. For example, the demand for refined products is dependentupon the price, prevailing economic conditions and demographic changes in themarkets served, trucking and railroad freight, agricultural usage and militaryusage; the demand for propane is sensitive to the weather and prevailingeconomic conditions and the*

 

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*demandfor petrochemicals is dependent upon prices for products produced frompetrochemicals. We are also subject to regulatory factors such as the amountswe are allowed to charge our customers for the services we provide on ourregulated pipeline systems. Consequently, all of the forward-looking statementsmade in this document are qualified by these cautionary statements, and wecannot assure you that actual results or developments that we anticipate willbe realized or, even if substantially realized, will have the expectedconsequences to or effect on us or our business or operations. Also note thatwe provide a cautionary discussion of risks and uncertainties under thecaptions “Risk Factors”, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this Form 10-K.*

 

# ***Theforward-looking statements contained in this Report speak only as of the datehereof. Except as required by the federal and state securities laws, weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or any otherreason. All forward-looking statements attributable to TE Products PipelineCompany, Limited Partnership or any person acting on its behalf are expresslyqualified in their entirety by the cautionary statements contained or referredto in this Annual Report on Form 10-K and in our future periodic reportsfiled with the Securities and Exchange Commission. In light of these risks, uncertaintiesand assumptions, the forward-looking events discussed in this Report may notoccur.***

# ** **

# **Items 1 and 2. *Business and Properties***

# ** **

# **General**

# ** **

TE Products PipelineCompany, Limited Partnership (the “Partnership”), a Delaware limitedpartnership, was formed in March 1990. TEPPCO Partners, L.P. (the “ParentPartnership”) owns a 99.999% interest in us as the sole limited partner. TEPPCOGP, Inc. (“TEPPCO GP” or “General Partner”), a wholly owned subsidiary ofthe Parent Partnership, holds a 0.001% general partner interest in us. TexasEastern Products Pipeline Company, LLC (the “Company”), a Delaware limitedliability company, serves as the general partner of our Parent Partnership.

 

Through February 23,2005, the Company was an indirect wholly owned subsidiary of Duke Energy FieldServices, LLC (“DEFS”), a joint venture between Duke Energy Corporation (“DukeEnergy”) and ConocoPhillips. Duke Energy held an interest of approximately 70%in DEFS, and ConocoPhillips held the remaining interest of approximately 30%. OnFebruary 24, 2005, the Company was acquired by DFI GP Holdings L.P.(formerly Enterprise GP Holdings L.P.) (“DFI”), an affiliate of EPCO, Inc.(“EPCO”), a privately held company controlled by Dan L. Duncan, forapproximately $1.1 billion. As a result of the transaction, DFI owns andcontrols the 2% general partner interest in our Parent Partnership and has theright to receive the incentive distribution rights associated with the generalpartner interest.

 

TEPPCO GP, as our generalpartner, performs all of the management and operating functions required for usin accordance with the Agreement of Limited Partnership of TE Products PipelineCompany, Limited Partnership. We reimburse our General Partner and the Companyfor all reasonable direct and indirect expenses that they incur in managing us.

 

On May 9, 2005, weformed TEPPCO Interests, LLC (“TEPPCO Interests”), a Delaware limited liabilitycompany, of which we own 100% of the member interests. On July 15, 2005,TEPPCO Interests acquired from Texas Genco, LLC (i) 100% of its memberinterests in TG Pipeline GP, LLC, a Delaware limited liability company, whichis the owner of 100% of the general partner interests in TG Pipeline, L.P. (“PipelineLP”), a Texas limited partnership, and (ii) 100% of the membershipinterests in TG Pipeline LP, LLC, a Delaware limited liability company, whichis the owner of 100% of the limited partner interests in Pipeline LP (see Note5 in the Notes to the Consolidated Financial Statements).

 

On May 18, 2005, weformed TEPPCO Terminals, L.P. (“TEPPCO Terminals”), a Delaware limitedpartnership, and we own a 99.999% interest in TEPPCO Terminals as the solelimited partner. TEPPCO GP serves as the general partner and holds a 0.001%general partner interest in TEPPCO Terminals. On July 12, 2005, TEPPCOTerminals purchased a refined products terminal and two-bay truck loading rackin North Little Rock,

 

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Arkansas, for $6.9million from ExxonMobil Corporation (see Note 5 in the Notes to theConsolidated Financial Statements).

 

The following chartillustrates our organizational structure as of December 31, 2005:

 

 

As used in this Report, “we,”“us,” and “our” mean TE Products Pipeline Company, Limited Partnership and,where the context requires, include our consolidated subsidiaries.

 

We operate and report inone business segment: transportation and storage of refined products, liquefiedpetroleum gases (“LPGs”) and petrochemicals. Our interstate transportationoperations, including rates charged to customers, are subject to regulationsprescribed by the Federal Energy Regulatory Commission (“FERC”). We refer torefined products, LPGs and petrochemicals in this Report, collectively, as “petroleumproducts” or “products.”

 

# **BusinessStrategy**

# ** **

We are one of the largestpipeline common carriers of refined petroleum products and LPGs in the UnitedStates. Over the past few years, we have continued to pursue growthopportunities and acquisitions to expand our market share and deliveries intoexisting and new markets. Key elements to our strategy include the following:

 

•                  Expandingservice to the Midwest markets experiencing a supply shortfall.

•                  Pursuing growthof refined products market share by expanding deliveries to existing marketsand by developing new markets.

•                  Pursuing growthof LPGs market share through capacity expansions and improved operatingperformance.

•                  Improving andoptimizing refined products gathering infrastructure related to our 2005acquisition of assets from Texas Genco, LLC and integrating the assets fromacquisitions into our system.

•                  Pursuingacquisitions both adjacent to and outside of our system.

•                  Enhancingrefined products storage business.

•                  Operating in asafe, efficient and environmentally responsible manner.

 

We focus on internalgrowth prospects in order to increase the pipeline system and terminalthroughput, expand and upgrade existing assets and services and construct newpipelines, terminals and facilities and target accretive and complementaryacquisitions and expansion opportunities that provide attractive growthpotential. We routinely evaluate opportunities to acquire assets and businessesthat will complement existing operations with a view to increasing earnings andcash available for distribution. We may fund additional acquisitions withcash flow

 

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from operations,borrowings and capital contributions from our Parent Partnership, the issuanceof debt in the capital markets or any combination thereof.

# ** **

**RecentDevelopments since December 31, 2004**

 

****In April 2005,we completed construction on a refined products truck loading facility inBossier City, Louisiana. The facility includes six storage tanks and anautomated two-bay truck loading rack. The assets have added more than 20,000barrels per day of refined products delivery capacity to the NorthwestLouisiana and East Texas markets.****

 

On July 12, 2005, TEPPCOTerminals purchased a refined products terminal and truck loading rack in NorthLittle Rock, Arkansas, for $6.9 million from ExxonMobil Corporation. The assetsinclude three storage tanks and a two-bay truck loading rack. The terminalserves the central Arkansas refined products market and complements ourexisting infrastructure in North Little Rock, Arkansas.

 

On July 15, 2005, TEPPCOInterests acquired from Texas Genco, LLC (“Genco”) all of its interests incertain companies that own a 90-mile pipeline system and 5.5 million barrels ofstorage capacity for $62.1 million. The assets of the purchased companies willbe integrated into our origin infrastructure in Texas City and Baytown, Texas. ****As a result of this acquisition, we initiated theexpansion of refined products origin capabilities in the Houston and TexasCity, Texas, areas. Our existing Texas City origin facility and a 10-inchdiameter, 70,000 barrel per day pipeline system from Texas City to Baytown willbe replaced by an 18-inch diameter, 180,000 barrel per day pipeline. The 18-inchdiameter pipeline will provide additional receipt and delivery capabilitiesthrough the system at major exchange terminals in the Houston area.****Theintegration and other system enhancements should be in service by the fourthquarter of 2006, at an estimated cost of $45.0 million. The strategic locationof these assets, with refined products interconnections to major exchangeterminals in the Houston area, will provide significant long-term value to ourcustomers and our Texas Gulf Coast refining and logistics system.

 

## **Properties and Operations**

## ** **

We conduct businessthrough the following:

 

•                  TE Products;

 

•                  TEPPCOTerminals, L.P., which owns a refined products terminal and two-bay truckloading rack, and TG Pipeline, L.P., which owns a 90-mile pipeline and storagefacilities acquired from Genco;

 

•                  our 50% ownedequity investment in Centennial Pipeline LLC (“Centennial”); and

 

•                  our 50% ownedequity investment in Mont Belvieu Storage Partners, L.P. (“MB Storage”).

 

We own, operate or haveinvestments in properties located in 14 states. Our operations consist of interstatetransportation, storage and terminaling of petroleum products; short-haulshuttle transportation of LPGs at the Mont Belvieu, Texas, complex through MBStorage; intrastate transportation of petrochemicals and other ancillaryservices. Other activities are related to the intrastate transportation ofpetrochemicals under a throughput and deficiency contract.

 

As an interstate commoncarrier, we offer interstate transportation services, pursuant to tariffs filedwith the FERC, to any shipper of refined petroleum products and LPGs whorequests these services, provided that the conditions and specificationscontained in the applicable tariff are satisfied. In addition to services fortransportation of products, we also provide storage and other related servicesat key points along our pipeline systems. Substantially all of the refinedpetroleum products and LPGs transported and stored in our pipeline systems are

 

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owned by ourcustomers. The products are received from refineries, connecting pipelines andbulk and marine terminals located principally on the southern end of thepipeline system. The Gulf Coast region is a significant supply source for ourfacilities and is a major hub for petroleum refining. The products are storedand scheduled into the pipeline in accordance with customer nominations andshipped to delivery terminals for ultimate delivery to the final distributor(including gas stations and retail propane distribution centers) or to otherpipelines. The growth in refining capacity and increased product flowattributable to the Gulf Coast region has increased demand for transportation,storage and distribution facilities. Pipelines are generally the lowest costmethod for intermediate and long-haul overland transportation of petroleumproducts and LPGs.

 

The following table liststhe material properties and investments of and ownership percentages in ourassets as of December 31, 2005:

 
| ** **                                                           | ** ** | **Our  Ownership** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|
| Refined products  and LPGs pipelines and terminals                   |       | 100                | %          |
| Mont Belvieu,  Texas, to Port Arthur, Texas, petrochemical pipelines |       | 100                | %          |
| Centennial (1)                                                       |       | 50                 | %          |
| MB Storage (2)                                                       |       | 50                 | %          |

 

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(1)          Accountedfor as an equity investment. Effective February 10, 2003, we acquired anadditional 16.7% interest in Centennial, bringing our ownership percentage to50%.

 

(2)          Accountedfor as an equity investment. Effective January 1, 2003, we contributedsubstantially all of our Mont Belvieu LPG assets to MB Storage, a partnershipformed with Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”).

 

Refined products and LPGsdeliveries in MMBbls for the years ended December 31, 2005, 2004 and 2003,were as follows:

 
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|
| ** **                                | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Refined Products Mainline Transportation: |       |                              |       |   |   |   |   |
| Gasoline                                  |       | 92.4                              |       | 89.3 |   | 89.8 |   |
| Jet Fuels                                 |       | 25.4                              |       | 25.6 |   | 26.4 |   |
| Distillates (1)                           |       | 42.9                              |       | 37.5 |   | 37.9 |   |
| Subtotal                                  |       | 160.7                             |       | 152.4 |   | 154.1 |   |
| LPGs Mainline Transportation:             |       |                              |       |   |   |   |   |
| Propane                                   |       | 35.6                              |       | 34.3 |   | 34.5 |   |
| Butanes                                   |       | 9.4                               |       | 9.7 |   | 8.0 |   |
| Subtotal                                  |       | 45.0                              |       | 44.0 |   | 42.5 |   |
| Total Product Deliveries                  |       | 205.7                             |       | 196.4 |   | 196.6 |   |

 

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(1)          Primarily diesel fuel, heating oil and other middledistillates.

 

*Refined Products, LPGsand Petrochemical Pipeline Systems*

* *

We are one of the largestpipeline common carriers of refined petroleum products and LPGs in the UnitedStates. We own and operate an approximately 4,700-mile pipeline system(together with the receiving, storage and terminaling facilities mentionedbelow, the “Pipeline System”) extending from southeast Texas through thecentral and midwestern United States to the northeastern United States.

 

Excluding the storagefacilities of Centennial and MB Storage, the Pipeline System includes 33storage facilities with an aggregate storage capacity of 21 million barrels ofrefined petroleum products and 5 million barrels of LPGs, including storagecapacity leased to outside parties. The Pipeline System makes deliveries tocustomers at 62 locations including 19 truck racks, railcar facilities andmarine facilities that we own. Deliveries to other

 

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pipelines occur atvarious facilities owned by third parties or us. We also own one active marinereceiving terminal at Providence, Rhode Island. The Providence terminal is notphysically connected to the Pipeline System.

 

The Pipeline System iscomprised of a 20-inch diameter line extending in a generally northeasterlydirection from Baytown, Texas (located approximately 30 miles east of Houston),to a point in southwest Ohio near Lebanon and Todhunter, Ohio. The PipelineSystem continues eastward from Todhunter, Ohio, to Greensburg, Pennsylvania, atwhich point it branches into two segments, one ending in Selkirk, New York(near Albany), and the other ending at Marcus Hook, Pennsylvania (nearPhiladelphia). The Pipeline System east of Todhunter and ending in Selkirk isan 8-inch diameter line, and the line starting at Greensburg and ending atMarcus Hook varies in diameter from 6 inches to 8 inches. A second line, whichalso originates at Baytown, is 16 inches in diameter until it reaches Beaumont,Texas, at which point it reduces to a 14-inch diameter line. This second lineextends along the same path as the 20-inch diameter line to the Pipeline System’sterminal in El Dorado, Arkansas, before continuing as a 16-inch diameter lineto Seymour, Indiana.

 

The Pipeline System alsoincludes a 14-inch diameter line from Seymour to Chicago, Illinois, and a 10-inchdiameter line running from Lebanon to Lima, Ohio. This 10-inch diameterpipeline connects to the Buckeye Pipe Line Company system that serves, amongothers, markets in Michigan and eastern Ohio. The Pipeline System also has a 6-inchdiameter pipeline connection to the Greater Cincinnati/Northern KentuckyInternational Airport.

 

In addition, the PipelineSystem contains numerous lines, ranging in size from 6 inches to 20 inches indiameter, associated with the gathering and distribution system, extending fromBaytown to Beaumont; Texas City to Baytown; Pasadena, Texas, to Baytown andBaytown to Mont Belvieu and an 8-inch diameter pipeline connection to theGeorge Bush Intercontinental Airport terminal in Houston.

 

The Pipeline System alsohas smaller diameter lines that extend laterally from El Dorado to Helena,Arkansas, from Shreveport, Louisiana, to El Dorado and from McRae, Arkansas, toWest Memphis, Arkansas. The line from El Dorado to Helena has a 10-inchdiameter. The line from Shreveport to El Dorado varies in diameter from 8inches to 10 inches. The line from McRae to West Memphis has a 12-inchdiameter.

 

We also own threeparallel 12-inch diameter common carrier petrochemical pipelines between MontBelvieu and Port Arthur. Each of these pipelines is approximately 70 miles inlength. The pipelines transport ethylene, propylene, natural gasoline andnaphtha. We entered into a 20-year agreement in 2002 with a major petrochemicalproducer for guaranteed throughput commitments. During the years ended December 31,2005, 2004, and 2003, we recognized $12.1 million, $12.0 million and $11.9million, respectively, of revenue under the throughput and deficiency contract.

 

*CentennialPipeline Equity Investment*

* *

 We own a 50% ownership interest in Centennialand Marathon Petroleum Company LLC (“Marathon”) owns the remaining 50% interest.Centennial, which commenced operations in April 2002, owns an interstaterefined petroleum products pipeline extending from the upper Texas Gulf Coastto central Illinois. Centennial constructed a 74-mile, 24-inch diameterpipeline connecting our facility in Beaumont, Texas, with an existing 720-mile,26-inch diameter pipeline extending from Longville, Louisiana, to Bourbon,Illinois. The Centennial pipeline intersects our existing mainline pipelinenear Creal Springs, Illinois, where Centennial constructed a two million barrelrefined petroleum products storage terminal. Marathon operates the mainlineCentennial pipeline, and we operate the Beaumont origination point and theCreal Springs terminal.

 

Through December 31,2005, including the amount paid for the acquisition of an additional ownershipinterest in February 2003, we have invested $104.8 million in Centennial. Wehave not received any distributions from Centennial since its formation.

 

*Mont BelvieuStorage Equity Investment*

* *

On January 1,2003, we and Louis Dreyfus formed MB Storage, and we each own a 50% ownershipinterest in MB Storage. MB Storage owns storage capacity at the Mont Belvieufractionation and storage complex and a short-haul transportation shuttlesystem that ties Mont Belvieu, Texas, to the upper Texas Gulf Coast energy

 

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marketplace. The Mont Belvieufractionation and storage complex is the largest complex of its kind in theUnited States.  MB Storage is aservice-oriented, fee-based venture serving the fractionation, refining andpetrochemical industries with substantial capacity and flexibility for thetransportation, terminaling and storage of NGLs, LPGs and refined products. MBStorage receives revenue from the storage, receipt and delivery of product fromrefineries and fractionators to pipelines, refineries and petrochemicalfacilities on the upper Texas Gulf Coast. MB Storage has no commodity tradingactivity.  We operate the facilities forMB Storage.

 

MBStorage has approximately 36 million barrels of LPGs storage capacity andapproximately 7 million barrels of refined products storage capacity, includingstorage capacity leased to outside parties. MB Storage includes a short-haultransportation shuttle system, consisting of a complex system of pipelines andinterconnects, that ties Mont Belvieu to nearly all of the refinery andpetrochemical facilities on the upper Texas Gulf Coast. MB Storage alsoprovides truck and railcar loading capability and includes a 400-acre parcel ofproperty for future expansion. Total shuttle volumes for the three years ended December 31,2005, 2004 and 2003, were 37.7 million barrels, 39.3 million barrels and 33.1million barrels, respectively.

 

For the years ended December 31,2005, 2004 and 2003, our sharing ratio in the earnings of MB Storage was 64.2%,69.4% and 70.4%, respectively. During the years ended December 31, 2005,2004 and 2003, we received distributions of $12.4 million, $10.3 million and$5.3 million, respectively, from MB Storage. During the years ended December 31,2005, 2004 and 2003, we contributed $5.6 million, $21.4 million and $2.5million, respectively, to MB Storage. The 2005 contribution includes acombination of non-cash asset transfers of $1.4 million and cash contributionsof $4.2 million. The 2004 contribution includes $16.5 million for theacquisition of storage and pipeline assets in April 2004. The remainingcontributions have been for capital expenditures.

 

**Seasonality**

 

The mix of productsdelivered varies seasonally. Gasoline demand is generally stronger in thespring and summer months, and LPGs demand is generally stronger in the fall andwinter months, including the demand for normal butane which is used for theblending of gasoline. Weather and economic conditions in the geographic areasserved by our Pipeline System also affect the demand for, and the mix of, theproducts delivered. Because propane demand is generally sensitive to weather inthe winter months, year-to-year variations of propane deliveries have occurredand will likely continue to occur.

 

***Major Business Sector Markets***

* *

Our Pipeline Systemtransports refined petroleum products from the upper Texas Gulf Coast, easternTexas and southern Arkansas to the Central and Midwest regions of the UnitedStates with deliveries in Texas, Louisiana, Arkansas, Missouri, Illinois,Kentucky, Indiana and Ohio. At these points, refined petroleum products aredelivered to terminals owned by connecting pipelines, customer-owned terminalsand us.

 

Our Pipeline Systemtransports LPGs from the upper Texas Gulf Coast to the Central, Midwest andNortheast regions of the United States and is the only pipeline that transportsLPGs from the upper Texas Gulf Coast to the Northeast. The Pipeline System eastof Todhunter, Ohio, is devoted solely to the transportation of LPGs. OurPipeline System also transports normal butane and isobutane in the Midwest andNortheast for use in the production of motor gasoline.

 

Market prices for refinedpetroleum products affect the demand in the markets we serve. Therefore,quantities and mix of products transported may vary. Transportationtariffs of refined petroleum products vary among specific product types. Generally,higher market prices of gasoline has little impact on deliveries in theshort-term, but may have a more significant impact on us in the long-termdue to the cyclical nature of the refined products market. Increases in themarket price of jet fuel deliveries and the impact on airlines has resulted inthe use of more efficient airplanes and reductions in total capacity and thenumber of scheduled flights. High market price of propane could result in theuse of alternative fuel sources and tend to reduce the summer and early fallfill of consumer storage of propane. Distillate is more sensitive to short-termchanges in price as customers shift from the use of trucking for freighttransportation to railcars. As a result, market price volatility may affecttransportation volumes and revenues from period to period.

 

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Our ability to servepropane markets in the Northeast is enhanced by our marine import terminal atProvidence, Rhode Island. This facility includes a 400,000-barrel refrigeratedstorage tank along with ship unloading and truck loading facilities. We operatethe terminal and provide propane loading services to an affiliate of DEFS. Duringthe years ended December 31, 2005, 2004 and 2003, revenues of $4.3million, $4.3 million and $3.2 million, respectively, from an affiliate of DEFSwere recognized pursuant to this agreement.

 

Our major operationsconsist of the transportation, storage and terminaling of refined petroleumproducts and LPGs along our mainline system. Product deliveries, in millions ofbarrels (MMBbls) on a regional basis, for the years ended December 31,2005, 2004 and 2003, were as follows:

 
| ** **                                 | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Refined Products  Mainline Transportation: |       |                              |       |   |   |   |   |
| Central (1)                                |       | 73.3                              |       | 69.0 |   | 67.0 |   |
| Midwest (2)                                |       | 60.1                              |       | 53.5 |   | 57.7 |   |
| Ohio and Kentucky                          |       | 27.3                              |       | 29.9 |   | 29.4 |   |
| Subtotal                                   |       | 160.7                             |       | 152.4 |   | 154.1 |   |
| LPGs Mainline  Transportation:             |       |                              |       |   |   |   |   |
| Central, Midwest and Kentucky (1)(2)       |       | 26.3                              |       | 27.0 |   | 23.4 |   |
| Ohio and Northeast (3)                     |       | 18.7                              |       | 17.0 |   | 19.1 |   |
| Subtotal                                   |       | 45.0                              |       | 44.0 |   | 42.5 |   |
| Total Product Deliveries                   |       | 205.7                             |       | 196.4 |   | 196.6 |   |

 

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(1)                                  Arkansas, Louisiana, Missouriand Texas.

(2)                                  Illinois and Indiana.

(3)                                  New York and Pennsylvania.

 

***Customers***

* *

Our customers for thetransportation of refined petroleum products include major integrated oilcompanies, independent oil companies, the airline industry and wholesalers. Endmarkets for these deliveries are primarily retail service stations, truckstops, railroads, agricultural enterprises, refineries and military andcommercial jet fuel users. Propane customers include wholesalers and retailerswho, in turn, sell to commercial, industrial, agricultural and residentialheating customers, utilities who use propane as a back-up fuel source andpetrochemical companies who use propane as a process feedstock. Refineriesconstitute our major customers for butane and isobutane, which are used as ablend stock for gasolines and as a feed stock for alkylation units,respectively. We depend in large part on the level of demand for refinedpetroleum products and LPGs in the geographic locations that we serve and theability and willingness of customers having access to the Pipeline System tosupply this demand.

 

At December 31,2005, we had approximately 154 customers. During the year ended December 31,2005, total revenues (and percentage of total revenues) attributable to the top10 customers were $151.6 million (54%), of which Marathon accounted for approximately14% of total revenues. At December 31, 2004, we had approximately 138customers. During the year ended December 31, 2004, total revenues (andpercentage of total revenues) attributable to the top 10 customers were $151.7million (55%), of which Marathon accounted for approximately 17% of totalrevenues. During the year ended December 31, 2003, total revenues (and percentageof total revenues) attributable to the top 10 customers were $149.5 million(57%), of which Marathon accounted for approximately 18% of total revenues.

 

***Competition***

* *

The Pipeline Systemconducts operations without the benefit of exclusive franchises from governmententities. Interstate common carrier transportation services are providedthrough the system pursuant to tariffs filed with the FERC.

 

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The Pipeline System facescompetition from numerous sources. Because pipelines are generally the lowestcost method for intermediate and long-haul overland movement of refinedpetroleum products and LPGs, the Pipeline System’s most significant competitors(other than indigenous production in its markets) are pipelines in the areaswhere the Pipeline System delivers products. Competition among common carrierpipelines is based primarily on transportation charges, quality of customerservice and proximity to end users. We believe we are competitive with otherpipelines serving the same markets; however, comparison of different pipelinesis difficult due to varying product mix and operations.

 

Trucks, barges andrailroads competitively deliver products in some of the areas served by thePipeline System. Trucking costs, however, render that mode of transportationless competitive for longer hauls or larger volumes. Barge fees for thetransportation of refined products are generally lower than our tariffs. Weface competition from rail and pipeline movements of LPGs from Sarnia, Ontario,Canada, and waterborne imports into terminals located along the upper EastCoast.

 

# **Titleto Properties**

# ** **

We believe we havesatisfactory title to all of our assets. The properties are subject toliabilities in certain cases, such as contractual interests associated withacquisition of the properties, liens for taxes not yet due, easements,restrictions and other minor encumbrances. We believe none of these liabilitiesmaterially affect the value of our properties or our interest in the propertiesor will materially interfere with their use in the operation of our business.

 

# **CapitalExpenditures**

# ** **

Capital expenditures,excluding acquisitions, totaled $58.2 million for the year ended December 31,2005. Revenue generating projects include those projects which expand serviceinto new markets or expand capacity into current markets. Capital expendituresto sustain existing operations include projects required by regulatory agenciesor required life-cycle replacements. System upgrade projects improveoperational efficiencies or reduce cost. We capitalize interest costs incurredduring the period that construction is in progress. The following tableidentifies capital expenditures for the year ended December 31, 2005 (inmillions):

 
| Revenue generating              |   | $    | 22.5   |   |
|---------------------------------|--------|------|--------|--------|
| Sustaining  existing operations |   | 19.3 |   |
| System upgrades                 |   | 13.4 |   |
| Capitalized  interest           |   | 3.0  |   |
| Total                           |   | $    | 58.2   |   |

 

Revenue generatingcapital spending totaled $22.5 million and was used primarily for constructionof a new truck loading terminal in Bossier City, Louisiana, the expansion ofour pipeline system extending from Seymour to Indianapolis, Indiana, additionalpropane capacity in our Northeast market and the initial phase of integrationof assets we acquired from Genco. In order to sustain existing operations, wespent $19.3 million for various pipeline projects. An additional $13.4 millionwas spent on system upgrade projects.

 

Weestimate that capital expenditures, excluding acquisitions, for 2006 will beapproximately $105.4 million (including $3.4 million of capitalized interest).We expect to spend approximately $70.9 million for revenue generating projectsand facility improvements. We expect to spend approximately $16.4 million tosustain existing operations, including life-cycle replacements for equipment atvarious facilities and pipeline and tank replacements and $14.7 million forvarious system upgrade projects. During the remainder of 2006, we may berequired to contribute cash to Centennial to cover capital expenditures, acquisitionsor other operating needs and to MB Storage to cover significant capitalexpenditures or additional acquisitions. We continually review and evaluatepotential capital improvements and expansions that would be complementary toour present system. These expenditures can vary greatly depending on themagnitude of our transactions. We may finance capital expenditures throughinternally generated funds, debt or capital contributions from our ParentPartnership or any combination thereof.

 

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## ****Regulation****

## ** **

Our interstate commoncarrier pipeline operations are subject to rate regulation by the FERC underthe provisions of the Interstate Commerce Act, the Energy Policy Act of 1992 andrules and orders promulgated thereunder. FERC regulation requires thatinterstate petroleum products and crude oil pipeline rates be posted publiclyand that these rates be “just and reasonable” and nondiscriminatory.

 

Rates of interstatepetroleum products pipeline companies, like us, are currently regulated by theFERC primarily through an index methodology, which allows a pipeline to changeits rates based on the change from year to year in the Producer Price Index forfinished goods (“PPI Index”). Effective as of February 24, 2003, the FERCmodified the index from PPI minus 1% to PPI without any negative adjustment. Thatdecision was upheld by the United States Court of Appeals for the District ofColumbia Circuit on April 9, 2004.  The FERC’s next 5-year review of the index iscurrently underway. The Commission has proposed to continue use of theunadjusted PPI; in response, the Association of Oil Pipe Lines (“AOPL”)submitted comments supporting an index based on the PPI plus at least 1.3percent. Various parties have filed comments in support of both the FERC’s andAOPL’s proposals. A final decision by FERC, which will be effective as of July 1,2006, is pending.

 

As an alternative tousing the PPI Index, interstate petroleum products pipeline companies may electto support rate filings by using a cost-of-service methodology, competitivemarket showings (“Market-Based Rates”) or agreements with all of the pipeline’sshippers that the rate is acceptable.

 

We have beengranted permission by the FERC to utilize Market-Based Rates for all of ourrefined products movements other than the Little Rock, Arkansas, Arcadia andShreveport-Arcadia, Louisiana destination markets, which are currently subjectto the PPI Index. With respect to LPG movements, we use the PPI Index.

 

On March 26, 2004, adecision in *ARCO Products Co., et al. v. SFPP*,Docket OR96-2-000, was issued by the FERC, which made several significantdeterminations with respect to finding “changed circumstances” under the EnergyPolicy Act of 1992 (“EP Act”). The decision largely clarifies, but does notfully quantify, the standard required for a complainant to demonstrate that anoil pipeline’s rates are no longer subject to the rate protection of the EP Actby demonstrating that a substantial change in circumstances has occurred since1992 with respect to the basis of the rates being challenged. In the decision,the FERC found that a limited number of rate elements will significantly affectthe economic basis for a pipeline company’s rates. The elements identified inthe decision are volume changes, allowed total return and total cost-of-service(including major cost elements such as rate base, tax rates and tax allowances,among others). The FERC did reject, however, the use of changes in tax ratesand income tax allowances as stand-alone factors. Judicial review of thatdecision, which has been sought by a number of parties to the case, iscurrently pending before the U.S. Court of Appeals for the District of ColumbiaCircuit. We have not yet determined the impact, if any, that the decision, ifit is ultimately upheld, would have on our rates if they were reviewed underthe criteria of this decision.

 

On July 20, 2004,the District of Columbia Circuit issued an opinion in *BP WestCoast Products LLC v. FERC*. In reviewing a series of ordersinvolving SFPP, L.P., the court held among other things that the FERC had notadequately justified its policy of providing an oil pipeline limitedpartnership with an income tax allowance equal to the proportion of its incomeattributable to partnership interests owned by corporate partners. Under theFERC’s initial ruling, SFPP, L.P. was permitted an income tax allowance on itscost-of-service filing for the percentage of its net operating (pre-tax) incomeattributable to partnership units held by corporations, and was denied anincome tax allowance equal to the percentage attributable to partnership unitsheld by non-corporate partners. The court remanded the case back to the FERCfor further review. As a result of the court’s remand, on May 4, 2005, theFERC issued its Policy Statement on Income Tax Allowances, which permitsregulated partnerships, limited liability companies and other pass-throughentities an income tax allowance on their income attributable to any owner thathas an actual or potential income tax liability on that income, regardlesswhether the owner is an individual or corporation. If there is more than onelevel of pass-through entities, the regulated company income must be traced towhere the ultimate tax liability lies. The Policy Statement is to be applied inindividual cases, and the regulated entity bears the burden of proof toestablish the tax status of its owners. On December 16, 2005, the FERCissued the first of those decisions, in an order involving SFPP (the “SFPP Order”).The SFPP Order confirmed that a master limited partnership is entitled to a taxallowance with respect to partnership income for which there is an “actual orpotential income tax liability” and determined that a unitholder that is

 

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required to file aForm 1040 or Form 1120 tax return that includes partnership income orloss is presumed to have an actual or potential income tax liability sufficientto support a tax allowance on that partnership income. The FERC alsoestablished certain other presumptions, including that corporate unitholdersare presumed to be taxed at the maximum corporate tax rate of 35% whileindividual unitholders (and certain other types of unitholders taxed likeindividuals) are presumed to be taxed at a 28% tax rate. The SFPP Order remainssubject to further administrative proceedings (including compliance filings bySFPP and possible rehearing requests), as well as potential judicial review. Theultimate outcome of the FERC’s inquiry on income tax allowance should notaffect our current rates and rate structure because our rates are not based oncost-of-service methodology. However, the outcome of the income tax allowancewould become relevant to us should we (i) elect in the future to usecost-of-service to support our rates, or (ii) be required to use suchmethodology to defend our indexed rates.

 

## ****Environmental andSafety Matters****

## ** **

Our operations aresubject to federal, state and local laws and regulations governing the dischargeof materials into the environment and various safety matters. Failure to complywith these laws and regulations may result in the assessment ofadministrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to perform investigatoryand remedial activities. We believe our operations have been and are inmaterial compliance with applicable environmental and safety laws andregulations, and that compliance with existing environmental laws and regulationsare not expected to have a material adverse effect on our competitive position,financial positions, results of operations or cash flows. However, risks ofsignificant costs and liabilities are inherent in pipeline operations, and wecannot assure that significant costs and liabilities will not be incurred.Moreover, it is possible that other developments, such as increasingly strictenvironmental and safety laws and regulations and enforcement policiesthereunder, and claims for damages to property or persons resulting from ouroperations, could result in substantial costs and liabilities to us. At December 31,2005, we have an accrued liability of $1.2 million related to sites requiringenvironmental remediation activities.

 

*Water*

* *

The Federal WaterPollution Control Act of 1972, as renamed and amended as the Clean Water Act (“CWA”),and analogous state laws impose strict controls against the discharge of oiland its derivatives into navigable waters. The CWA provides penalties for anydischarges of petroleum products in reportable quantities and imposessubstantial potential liability for the costs of removing petroleum or otherhazardous substances. State laws for the control of water pollution alsoprovide varying civil and criminal penalties and liabilities in the case of arelease of petroleum or its derivatives in navigable waters or intogroundwater. Spill prevention control and countermeasure requirements offederal laws require appropriate containment berms and similar structures tohelp prevent a petroleum tank release from impacting navigable waters. TheEnvironmental Protection Agency (“EPA”) has adopted regulations that require usto have permits in order to discharge certain storm water run-off. Storm waterdischarge permits may also be required by certain states in which weoperate. These permits may require us to monitor and sample the stormwater run-off.

 

Contamination resultingfrom spills or releases of petroleum products is an inherent risk within thepetroleum pipeline industry. To the extent that groundwater contaminationrequiring remediation exists along our pipeline systems as a result of pastoperations, we believe any such contamination could be controlled or remediedwithout having a material adverse effect on our financial position, but suchcosts are site specific, and we cannot be assured that the effect will not bematerial in the aggregate.

 

The primary federal lawfor oil spill liability is the Oil Pollution Act of 1990 (“OPA”), whichaddresses three principal areas of oil pollution — prevention, containment andcleanup, and liability. OPA applies to vessels, offshore platforms and onshorefacilities, including terminals, pipelines and transfer facilities. In order tohandle, store or transport oil, shore facilities are required to file oil spillresponse plans with the United States Coast Guard, the United States Departmentof Transportation Office of Pipeline Safety (“OPS”) or the EPA, as appropriate.Numerous states have enacted laws similar to OPA. Under OPA and similar statelaws, responsible parties for a regulated facility from which oil is dischargedmay be liable for removal costs and natural resource damages.

 

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*Air Emissions*

* *

Our operations aresubject to the federal Clean Air Act (the “Clean Air Act”) and comparable statelaws. Amendments to the Clean Air Act, as well as recent or soon to be adoptedchanges to state implementation plans for controlling air emissions inregional, non-attainment areas, may require our operations to incur futurecapital expenditures in connection with the addition or modification ofexisting air emission control equipment and strategies. In addition, some ofour facilities are included within the categories of hazardous air pollutantsources, which are subject to increasing regulation under the Clean Air Act. TheClean Air Act requires federal operating permits for major sources of airemissions. Under this program, a federal operating permit (a “Title V” permit) may beissued. The permit acts as an umbrella that includes other federal, state andlocal preconstruction and/or operating permit provisions, emission standards,grandfathered rates and record keeping, reporting and monitoring requirementsin a single document. The federal operating permit is the tool that the publicand regulatory agencies use to review and enforce a site’s compliance with allaspects of clean air regulation at the federal, state and local level. We havecompleted applications for the facilities for which these regulations apply.

 

*Risk ManagementPlans*

* *

We are subject to the EPA’sRisk Management Plan (“RMP”) regulations at certain locations. This regulationis intended to work with the Occupational Safety and Health Act (“OSHA”)Process Safety Management regulation (see “Safety Matters” below) to minimizethe offsite consequences of catastrophic releases. The regulation required usto develop and implement a risk management program that includes a five-yearaccident history, an offsite consequence analysis process, a prevention programand an emergency response program. We are operating in compliance with our riskmanagement program.

 

*Solid Waste*

* *

We generate hazardous andnon-hazardous solid wastes that are subject to requirements of the federalResource Conservation and Recovery Act (“RCRA”) and comparable state statutes.We also utilize waste minimization and recycling processes to reduce thevolumes of our waste. Amendments to RCRA required the EPA to promulgateregulations banning the land disposal of all hazardous wastes unless the wastesmeet certain treatment standards or the land-disposal method meets certainwaste containment criteria.

 

*Superfund*

* *

The ComprehensiveEnvironmental Response, Compensation and Liability Act (“CERCLA”), also knownas “Superfund,” imposes liability, without regard to fault or the legality ofthe original act, on certain classes of persons who contributed to the releaseof a “hazardous substance” into the environment. These persons include theowner or operator of a facility where a release occurred and companies thatdisposed or arranged for the disposal of the hazardous substances found at afacility. Under CERCLA, these persons may be subject to joint and severalliability for the costs of cleaning up the hazardous substances that have beenreleased into the environment, for damages to natural resources and for thecosts of certain health studies. CERCLA also authorizes the EPA and, in someinstances, third parties to take actions in response to threats to the publichealth or the environment and to seek to recover the costs they incur from theresponsible classes of persons. It is not uncommon for neighboring landownersand other third parties to file claims for personal injury and property damageallegedly caused by hazardous substances or other pollutants released into theenvironment. In the course of our ordinary operations, our pipeline systemsgenerate wastes that may fall within CERCLA’s definition of a “hazardoussubstance.”  In the event a disposalfacility previously used by us requires clean up in the future, we may beresponsible under CERCLA for all or part of the costs required to clean upsites at which such wastes have been disposed.

 

*DOT*************Pipeline Compliance Matters****

## ** **

We are subject toregulation by the United States Department of Transportation (“DOT”) under theAccountable Pipeline and Safety Partnership Act of 1996, sometimes referred toas the Hazardous Liquid Pipeline Safety Act (“HLPSA”), and comparable statestatutes relating to the design, installation, testing, construction,operation, replacement and management of our pipeline facilities. The HLPSAcovers petroleum and petroleum products and requires any entity that owns oroperates pipeline facilities to comply with such regulations, to permit

 

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access to andcopying of records and to file certain reports and provide information asrequired by the Secretary of Transportation. We believe that we are in materialcompliance with these HLPSA regulations.

 

We are subject to the DOTregulation requiring qualification of pipeline personnel. The regulationrequires pipeline operators to develop and maintain a written qualificationprogram for individuals performing covered tasks on pipeline facilities. Theintent of this regulation is to ensure a qualified work force and to reduce theprobability and consequence of incidents caused by human error. The regulationestablishes qualification requirements for individuals performing covered tasks.We believe that we are in material compliance with these DOT regulations.

 

We are also subject tothe DOT Integrity Management regulations which specify how companies shouldassess, evaluate, validate and maintain the integrity of pipeline segmentsthat, in the event of a release, could impact High Consequence Areas (“HCA”). HCAare defined as populated areas, unusually sensitive environmental areas andcommercially navigable waterways. The regulation requires the development andimplementation of an Integrity Management Program (“IMP”) that utilizesinternal pipeline inspection, pressure testing, or other equally effectivemeans to assess the integrity of HCA pipeline segments. The regulation alsorequires periodic review of HCA pipeline segments to ensure adequatepreventative and mitigative measures exist and that companies take promptaction to address integrity issues raised by the assessment and analysis. Incompliance with these DOT regulations, we identified our HCA pipeline segmentsand have developed an IMP. We believe that we have substantially complied withour IMP and all assessment requirements imposed by the DOT regulations.

 

*****SafetyMatters*****

## ** **

We are also subject tothe requirements of the federal OSHA and comparable state statutes. We believewe are in material compliance with OSHA and state requirements, includinggeneral industry standards, record keeping requirements and monitoring ofoccupational exposures.

 

The OSHA hazardcommunication standard, the EPA community right-to-know regulations under TitleIII of the federal Superfund Amendment and Reauthorization Act and comparablestate statutes require us to organize and disclose information about thehazardous materials used in our operations. Certain parts of this informationmust be reported to employees, state and local governmental authorities andlocal citizens upon request. We are subject to OSHA Process Safety Management (“PSM”)regulations, which are designed to prevent or minimize the consequences ofcatastrophic releases of toxic, reactive, flammable or explosive chemicals. Theseregulations apply to any process which involves a chemical at or above thespecified thresholds or any process which involves certain flammable liquid orgas. We believe we are in material compliance with the OSHA regulations.

 

# **Employees**

# ** **

We do not have any employees. However, for organizational purposes,our General Partner has officers and directors, who are employees of EPCO. EPCOperforms all management, administrative and operating functions required for TEPPCOGP, our General Partner, and our General Partner reimburses EPCO for all directand indirect expenses that have been incurred in its management. As of December 31,2005, EPCO had 1,270 employees dedicated to managing and operating our ParentPartnership and its subsidiaries. None of these employees are represented bylabor unions, and our Parent Partnership’s relations with these employees aregood.

 

## ****AvailableInformation****

## ** **

We file annual, quarterlyand other reports and other information with the Securities and Exchange Commission(“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). You may readand copy any materials that we file with the SEC at the SEC’s Public Reference Room at450 Fifth Street, NW, Washington, DC 20549. You may obtain additionalinformation about the Public Reference Room by calling the SEC at 1-800-SEC-0330.In addition, the SEC maintains an Internet site (http://www.sec.gov) thatcontains reports, proxy and information statements and other informationregarding issuers that file electronically with the SEC, including us.

 

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We also make availablefree of charge on or through our Internet website (http://www.teppco.com) orthrough our Investor Relations Department (1-800-659-0059) our Annual Reportson Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-Kand other information statements and, if applicable, amendments to thosereports filed or furnished pursuant to Section 13(a) of the ExchangeAct as soon as reasonably practicable after we electronically file suchmaterial with, or furnish it to, the SEC.

 

***Item 1A.***Risk Factors

*** ***

Investors and potentialinvestors should carefully consider the following risk factors, in addition toother information in this Report. We are identifying these risk factors asimportant factors that could cause our actual results to differ materially fromthose contained in any written or oral forward-looking statements made by or onbehalf of us. We are relying upon the safe-harbor for forward-lookingstatements and any such statements made by or on behalf of us are qualified byreference to the following cautionary statements, as well as to those set forthelsewhere in this Report.

 

**RisksRelating to Our Business**

 

***Potentialfuture acquisitions and expansions may affect our business bysubstantially increasing the level of our indebtedness and contingentliabilities and increasing our risks of being unable to effectively integratethese new operations.***

 

As part ofour business strategy, we evaluate and acquire assets and businesses andundertake expansions that we believe complement our existing assets andbusinesses. Acquisitions and expansions may require substantial capital orthe incurrence of substantial indebtedness. Consummation of future acquisitionsand expansions may significantly change our capitalization and results ofoperations. Our growth may be limited if acquisitions or expansions arenot made on economically favorable terms.

 

Acquisitionsand business expansions involve numerous risks, including difficulties in theassimilation of the assets and operations of the acquired businesses,inefficiencies and difficulties that arise because of unfamiliarity with newassets, personnel and the businesses associated with them and new geographicareas and the diversion of management’s attention from other business concerns.Further, unexpected costs and challenges may arise whenever businesseswith different operations or management are combined, and we may experienceunanticipated delays in realizing the benefits of an acquisition. Following anacquisition, we may discover previously unknown liabilities associatedwith the acquired business for which we have no recourse under applicableindemnification provisions.

 

***Our debt instruments and those of our Parent Partnership may limitour ability to borrow additional funds and increase the costs of borrowing.***

 

We andour Parent Partnership are subject to restrictions that may limit ourability to structure or refinance existing or future debt and may preventus from entering into transactions. These restrictions include the maintenanceof financial ratios, as well as limits on our Parent Partnership’s and our abilityto incur additional indebtedness. These financial restrictions could result inhigher costs of borrowing. Additionally, rising short-term interest rates may alsoincrease our financing costs.

 

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***Ourinterstate tariff rates are subject to review and possible adjustment byfederal regulators, which could have a material adverse effect on our financialcondition and results of operations.***

 

TheFERC, pursuant to the Interstate Commerce Act, regulates the tariff rates forour interstate common carrier pipeline operations. To be lawful under that Act,interstate tariff rates must be just and reasonable and not undulydiscriminatory. Shippers may protest, and the FERC may investigate,the lawfulness of new or changed tariff rates. The FERC can suspend thosetariff rates for up to seven months. It can also require refunds of amountscollected under rates ultimately found unlawful. The FERC can also challengetariff rates that have become final and effective. Because of the complexity ofrate making, the lawfulness of any rate is never assured.

 

The FERCuses prescribed rate methodologies for approving regulated tariff rates fortransporting crude oil and refined products. These methodologies may limitour ability to set rates based on our actual costs or may delay the use ofrates reflecting increased costs. Changes in the FERC’s approved methodologyfor approving rates could adversely affect us. Adverse decisions by the FERC inapproving our regulated rates could adversely affect our cash flow. Additionalchallenges to our tariff rates could be filed with the FERC.

 

***Ourpartnership status may be a disadvantage to us in calculating our cost ofservice for rate-making purposes.***

 

In a1995 decision involving an unrelated oil pipeline limited partnership, the FERCpartially disallowed the inclusion of income taxes in that partnership’s costof service. In another FERC proceeding involving a different oil pipelinelimited partnership, the FERC held that the oil pipeline limited partnership may notclaim an income tax allowance for income attributable to non-corporate limitedpartners, both individuals and other entities. Because corporations aretaxpaying entities, income taxes are generally allowed to be included as acorporate cost-of-service. While we currently do not use the cost-of-servicemethodology to support our rates, these decisions might adversely affect usshould we elect in the future to use the cost-of-service methodology or shouldwe be required to use that methodology to defend our rates if challenged by ourcustomers. This could put us at a competitive disadvantage.

 

***Competitioncould adversely affect our operating results.***

 

Ourrefined products and LPG transportation business competes with other pipelinesin the areas where we deliver products. We also compete with trucks, barges andrailroads in some of the areas we serve. Competitive pressures may adverselyaffect our tariff rates or volumes shipped.

 

***Ourbusiness requires extensive credit risk management that may not beadequate to protect against customer nonpayment.***

 

Risks of nonpayment andnonperformance by customers are a major consideration in our businesses. Ourcredit procedures and policies may not be adequate to fully eliminatecustomer credit risk. We manage our exposure to credit risk through creditanalysis, credit approvals, credit limits and monitoring procedures. We utilizeletters of credit and guarantees for certain of our receivables. However, theseprocedures and policies do not fully eliminate customer credit risk. Duringeach of the years ended December 31, 2005 and 2004, we had no expenserelated to uncollectible receivables. During the year ended December 31,2003, we expensed less than $0.8 million of uncollectible receivables.

 

***Pipelinesare dependent on their interconnections with other pipelines to reach theirdestination markets.***

 

Decreased throughput oninterconnected pipelines due to testing, line repair and reduced pressurescould result in reduced throughput on our own pipeline systems. Such reducedthroughput may adversely impact our profitability.

 

***Reduceddemand could affect shipments on the pipelines.***

 

Ourpipeline business depends in large part on the demand for refinedpetroleum products and LPGs in the markets we serve. Reductions in that demandadversely affect our pipeline business.  Market demand varies based upon the differentend uses of the refined products we ship. We cannot predict the impact offuture fuel conservation measures, alternate fuel requirements, governmentregulation or technological advances in fuel

 

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economy andenergy-generation devices, all of which could reduce the demand for refinedpetroleum products and LPGs in the areas we serve. Demand for gasoline, whichhas in recent years accounted for approximately forty percent of our refinedproducts transportation revenues, depends upon price, prevailing economicconditions and demographic changes in the markets we serve. Weather conditions,government policy and crop prices affect the demand for refined products usedin agricultural operations. Demand for jet fuel, which has in recent yearsaccounted for approximately twenty percent of our refined products revenues,depends on prevailing economic conditions and military usage. Propanedeliveries are generally sensitive to the weather and meaningful year-to-yearvariances have occurred and will likely continue to occur.

 

***Ouroperations are subject to governmental laws and regulations relating to theprotection of the environment and safety which may expose us tosignificant costs and liabilities.***

 

Our current operations aswell as the construction of new facilities are subject to federal, state andlocal laws and regulations relating to protection of the environment andoccupational health and safety. There is inherent risk of the incurrence ofenvironmental costs and liabilities in our operations due to permitrequirements, our handling of the products we gather or transport, airemissions related to our operations, historical industry operations, wastedisposal practices and the construction of new facilities in environmentallyprotected areas, some of which may be material. We currently own or lease,and have owned or leased, many properties that have been used for many years toterminal or store petroleum products. Owners, tenants or users of theseproperties may have disposed of or released hydrocarbons or solid wasteson or under them. Additionally, some sites we operate are located near currentor former refining and terminaling operations. There is a risk thatcontamination has migrated from those sites to ours. In addition, thepossibility exists that stricter laws, regulations or enforcement policiescould significantly increase our compliance costs and the cost of anyremediation that may become necessary, some of which may be material.

 

Variousstate and federal governmental authorities including the U.S. EnvironmentalProtection Agency, the Department of Transportation and the Occupational Safetyand Health Administration have the power to enforce compliance with theseregulations and the permits issued under them, and violators are subject toadministrative, civil and criminal penalties, including civil fines,injunctions or both. Liability may be incurred without regard to faultunder CERCLA, RCRA, and analogous state laws for the remediation ofcontaminated areas. Private parties, including the owners of properties throughwhich our pipeline systems pass, may also have the right to pursue legalactions to enforce compliance as well as to seek damages for non-compliancewith environmental laws and regulations or for personal injury or propertydamage.

 

Ourinsurance may not cover all environmental risks and costs or may notprovide sufficient coverage in the event an environmental claim is made againstus. Our business may be adversely affected by increased costs due tostricter pollution control requirements or liabilities resulting fromnon-compliance with required operating or other regulatory permits. Newenvironmental regulations might adversely affect our products and activities, includingprocessing, storage, transportation and construction and maintenanceactivities, as well as waste management and air emissions. Federal and stateagencies also could impose additional safety requirements, any of which couldaffect our profitability.

 

Contaminationresulting from spills or releases of petroleum products is an inherent riskwithin the petroleum pipeline industry. To the extent that groundwatercontamination requiring remediation exists along our pipeline systems as aresult of past operations, we believe any such contamination could becontrolled or remedied without having a material adverse effect on ourfinancial position, but such costs are site specific, and we cannot be assuredthat the effect will not be material in the aggregate.

 

***Terroristattacks aimed at our facilities could adversely affect our business.***

 

On September 11,2001, the United States was the target of terrorist attacks of unprecedentedscale. Since the September 11th attacks, the United States government hasissued warnings that energy assets, specifically our nation’s pipelineinfrastructure, may be the future target of terrorist organizations. Thesedevelopments have subjected our operations to increased risks. Any futureterrorist attack on our facilities, those of our customers and, in some cases,those of other pipelines, could have a material adverse effect on our business.

 

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***Ourbusiness involves many hazards and operational risks, some of which may notbe covered by insurance.***

 

Ouroperations are subject to the many hazards inherent in the transportation ofrefined petroleum products, LPGs and petrochemicals and in the storage ofresidue gas, including ruptures, leaks and fires. These risks could result in substantiallosses due to personal injury or loss of life, severe damage to and destructionof property and equipment and pollution or other environmental damage and may resultin curtailment or suspension of our related operations. We are not fully insuredagainst all risks incident to our business. If a significant accident or eventoccurs that is not fully insured, it could adversely affect our financialposition or results of operations.

 

***We depend on the leadership andinvolvement of our General Partner’s key personnel for the success of ourbusiness.***

 

We depend on the leadership and involvementof key personnel of our General Partner to identify and develop businessopportunities and make strategic decisions. A search is currently beingconducted for a permanent chief executive officer. Our General Partner’s chieffinancial officer was appointed in January 2006, and its general counselwas appointed effective March 1, 2006, each having twenty plus years ofrelevant experience. However, while retention plans are in place for certain seniorexecutives, any future unplanned departures could have a material adverseeffect on our business, financial conditions and results of operations. Legacysenior executives have compensation agreements in place; however, newleadership appointments are not party to any compensation agreements.

 

**RisksRelating to Our Partnership Structure**

 

***Our tax treatment depends on our status asa partnership for federal income tax purposes and our exemption fromstate-level taxation by states.***

 

If we were treated as a corporation, cashdistributions to our Parent Partnership would be reduced substantially. One ofthe primary benefits of investing in us is dependent on the treatment of ourentity as a partnership for federal income tax purposes.  Currently, to maintain our partnership statusunder the “Qualifying Income Exception”, we must derive 90% of annual grossincome from certain activities.  We may notbe able to meet this requirement despite our best efforts. Additionally, thelegal requirements for partnership status may change and we may notbe able to meet the new standard.

 

Several states are considering subjectingpartnerships to tax at the entity level. If a state imposed tax on us at theentity level, the cash available for distributions would be reduced.

 

***TheCompany and its affiliates may have conflicts with our partnership.***

 

Thedirectors and officers of the Company and its affiliates (including EPCO and otheraffiliates of EPCO) have duties to manage our Parent Partnership and itssubsidiaries in a manner that is beneficial to its member. At the same time,the Company has duties to manage our Parent Partnership and its subsidiaries ina manner that is beneficial to us. Therefore, the Company’s duties to us may conflictwith the duties of its officers and directors to its member. Provisions of our ParentPartnership’s partnership agreement, the partnership agreements for each of itsoperating partnerships and/or the administrative services agreement provide fora standard of care that may allow the Company to approve actions in thecontext of possible conflicts, which under state law a corporation would berequired to analyze with greater scrutiny. Possible conflicts may include,among others, the following:

 

•                  decisions of the Company regardingthe amount and timing of cash expenditures, borrowings and issuances of other ParentPartnership debt or equity securities can affect the amount of distributionpayments we make to the Parent Partnership and the amount of incentive compensationpayments the Parent Partnership makes to the Company;

•                  decisions of the Company regardingour acquisitions or expansions, which may provide benefits to the Companyand its affiliates;

•                  under our partnership agreement wereimburse the General Partner for the costs of managing and operating us; 

 

17

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•      under our Parent Partnership’s partnershipagreement, it is not a breach of the Company’s fiduciary duties for affiliatesof the Company to engage in activities that compete with us;

•      the directors and officers of the Companyare allowed to resolve conflicts of interest involving us and EPCO and itsaffiliates;

•      the directors and officers of the Companyare allowed to take into account the interests of parties other than us, suchas EPCO and its affiliates, in resolving conflicts of interest;

•      any resolution of a conflict of interestby the directors and officers of the Company not made in bad faith and that isfair and reasonable to us shall be binding on us and shall not be a breach ofour partnership agreement;

•      we do not have any employees and we relysolely on employees of EPCO;

•      our partnership agreement does notrestrict the Company from causing us to pay it or its affiliates for anyservices rendered to us or entering into additional contractual arrangementswith any of these entities on our behalf; and

•      the directors and officers of the Companyand EPCO control the enforcement of obligations owed to us by the Company, EPCOand its affiliates.

 

In addition, the Parent Partnership’s partnershipagreements grant broad rights of indemnification to the Company and itsdirectors, officers, employees and affiliates for acts taken in good faith in amanner believed to be in or not opposed to our best interests.  We have significant business relationshipswith entities controlled by Dan L. Duncan, including EPCO and itsaffiliates.  For detailed information onthese relationships and related transactions with these entities, see Item 13included within this Report.

 

***IfEPCO or other entities that own or control the Company are presented withcertain business opportunities, Enterprise Products Partners L.P. will have thefirst right to pursue such opportunities.***

 

Our Parent Partnership’s previousrelationship with DEFS and Duke Energy from time to time resulted in businessopportunities for our Parent Partnership and for us. We do not know whethersimilar opportunities will be available from EPCO or its affiliates. EPCO, EnterpriseProducts Partners L.P. (“Enterprise”), DFI and certain affiliated entities(collectively, the “Group”), the Company and certain affiliated entities,including us, are parties to an administrative services agreement thatprovides, among other things, that neither the Group, on one hand, nor ourGeneral Partner or the Company, on the other hand, have any obligation topresent business opportunities to the other.

 

***Tothe extent that the Company shares executive offices or other personnel withEPCO and its affiliates, there may be conflicts in the allocation of theirtime and compensation costs between our business and the business of EPCO andits other affiliates.***

 

Our General Partnermanages our operations and activities. We and our Parent Partnership haveentered into an administrative services agreement with EPCO and its affiliatesto provide all administrative, operational and other services, includingemployee support, for us and the Company. Some of the EPCO employees providingthese services to us may also have duties and responsibilities related toEPCO and its affiliates, including Enterprise. The services performed by theseshared personnel will generally be limited to non-commercial functions,including but not limited to human resources, information technology, financialand accounting services and legal services. EPCO may encounter conflictsof interest in allocating the available time and employee costs of sharedpersonnel between our Parent Partnership, us and other EPCO affiliates.

 

Our Parent Partnership does not have an independentcompensation committee and its independent directors do not deliberate, decideor approve recommendations related to the compensation of its executiveofficers or other key employees.  Thedetermination of executive officer and key employee compensation could involveconflicts of interest resulting in economically unfavorable arrangements forour Parent Partnership and us.

 

***Item 3.***           Legal Proceedings

*** ***

In the fall of 1999 andon December 1, 2000, the Company and the Parent Partnership were named asdefendants in two separate lawsuits in Jackson County Circuit Court, JacksonCounty, Indiana, styled *Ryan E. McCleery andMarcia S. McCleery, et al. v. Texas Eastern Corporation, et al.*(includingthe Company and the Parent Partnership) and*Gilbert Richards and JeanRichards v. Texas Eastern Corporation, et al.*(including the Companyand the Parent Partnership). In both cases, the plaintiffs contend, among otherthings, that we and other defendants stored and disposed of toxic and hazardoussubstances and hazardous wastes in a manner that caused the materials to bereleased into the air, soil and water. They further contend that the releasecaused damages to the plaintiffs. In their complaints, the plaintiffs allegestrict liability for both personal injury and property damage together withgross negligence, continuing nuisance, trespass, criminal mischief and loss ofconsortium. The plaintiffs are seeking compensatory, punitive and trebledamages. On January 27, 2005, we entered into Release and SettlementAgreements with the McCleery plaintiffs and the Richards plaintiffs dismissingall of these plaintiffs’ claims on terms that did not have a material adverseeffect on our financial position, results of operations or cash flows.  Although we did not settle with all plaintiffsand we therefore remain named parties in the *Ryan E.McCleery and Marcia S. McCleery, et al. v. Texas Eastern Corporation, et al*.action, a co-defendant has agreed to indemnify us for all remaining claimsasserted against us. Consequently, we do not believe that the outcome of

 

18

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these remainingclaims will have a material adverse effect on our financial position, resultsof operations or cash flows.

 

On December 21,2001, we were named as a defendant in a lawsuit in the 10th Judicial District,Natchitoches Parish, Louisiana, styled *Rebecca L. Grisham et al.v. TE Products Pipeline Company, Limited Partnership*. In this case,the plaintiffs contend that our pipeline, which crosses the plaintiffs’property, leaked toxic products onto their property and, consequently causeddamages to them. We have filed an answer to the plaintiffs’ petition denyingthe allegations, and we are defending ourselves vigorously against the lawsuit.The plaintiffs have not stipulated the amount of damages they are seeking inthe suit; however, this case is covered by insurance. We do not believe thatthe outcome of this lawsuit will have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

In May 2003, theCompany was named as a defendant in a lawsuit styled *John R.James, et al. v. J Graves Insulation Company, et al.* as filed in thefirst Judicial District Court, Caddo Parish, Louisiana. There are numerousplaintiffs identified in the action that are alleged to have suffered damagesas a result of alleged exposure to asbestos-containing products and materials. Accordingto the petition and as a result of a preliminary investigation, the Companybelieves that the only claim asserted against it results from one individualfor the period from July 1971 through June 1972, who is alleged tohave worked on a facility owned by the Company’s predecessor. This periodrepresents a small portion of the total alleged exposure period from January 1964through December 2001 for this individual. The individual’s claims involvenumerous employers and alleged job sites. The Company has been unable toconfirm involvement by the Company or its predecessors with the allegedlocation, and it is uncertain at this time whether this case is covered byinsurance. Discovery is planned, and the Company intends to defend itselfvigorously against this lawsuit. The plaintiffs have not stipulated the amountof damages that they are seeking in this suit. We are obligated to reimbursethe Company for any costs it incurs related to this lawsuit. We cannot estimatethe loss, if any, associated with this pending lawsuit. We do not believe thatthe outcome of this lawsuit will have a material adverse effect on our financialposition, results of operations or cash flows.

 

In 1991, the Company andthe Parent Partnership were named as a defendant in a matter styled *Jimmy R. Green, et al. v. Cities Service Refinery, et al.*asfiled in the 26th Judicial District Court of Bossier Parish,Louisiana. The plaintiffs in this matter reside or formerly resided on landthat was once the site of a refinery owned by one of our co-defendants. Theformer refinery is located near our Bossier City facility. Plaintiffs haveclaimed personal injuries and property damage arising from allegedcontamination of the refinery property. The plaintiffs have recently pursuedcertification as a class and have significantly increased their demand toapproximately $175.0 million. This revised demand includes amounts forenvironmental restoration not previously claimed by the plaintiffs. We, theCompany and the Parent Partnership have never owned any interest in therefinery property made the basis of this action, and we do not believe that wecontributed to any alleged contamination of this property. While we cannotpredict the ultimate outcome, we do not believe that the outcome of thislawsuit will have a material adverse effect on our financial position, resultsof operations or cash flows.

 

In 1994, the LouisianaDepartment of Environmental Quality (“LDEQ”) issued a compliance order forenvironmental contamination at our Arcadia, Louisiana, facility. In 1999, ourArcadia facility and adjacent terminals were directed by the RemediationServices Division of the LDEQ to pursue remediation of this contamination. Effectivein March 2004, we executed an access agreement with an adjacent industriallandowner who is located upgradient of the Arcadia facility. This agreementenables the landowner to proceed with remediation activities at our Arcadiafacility for which it has accepted shared responsibility. At December 31,2005, we have an accrued liability of $0.2 million for remediation costs at ourArcadia facility. We do not expect that the completion of the remediationprogram proposed to the LDEQ will have a future material adverse effect on ourfinancial position, results of operations or cash flows.

 

OnJuly 27, 2004, we received notice from the United States Department ofJustice (“DOJ”) of its intent to seek a civil penalty against us related to ourNovember 21, 2001, release of approximately 2,575 barrels of jet fuel fromour 14-inch diameter pipeline located in Orange County, Texas. The DOJ, at therequest of the EPA, is seeking a civil penalty against us for allegedviolations of the CWA arising out of this release. We are in discussions withthe DOJ regarding this matter and have responded to its request for additionalinformation. The maximum statutory penalty proposed by the DOJ for this allegedviolation of the CWA is $2.1 million. We do not expect a civil penalty to havea material adverse effect on our financial position, results of operations orcash flows.

 

19

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On February 24,2005, the Company was acquired from DEFS by DFI. The Company owns a 2% generalpartner interest in our Parent Partnership and is the general partner of ourParent Partnership. On March 11, 2005, the Bureau of Competition of theFederal Trade Commission (“FTC”) delivered written notice to DFI’s legaladvisor that it was conducting a non-public investigation to determine whetherDFI’s acquisition of the Company may substantially lessen competition. TheCompany is cooperating fully with this investigation.

 

On September 18, 2005, a propane release and fireoccurred at our Todhunter facility, near Middletown, Ohio. The incidentresulted in the death of one of our employees. There were no other injuries. Onor about February 22, 2006, we received verbal notification from a representativeof the Occupational Safety and Health Administration that they intend to serveus with a citation arising out of this incident. At this time, we have notreceived any citation, and we cannot predict with certainty the amount of anyfine or penalty associated with any such citation; however, we do not expectany fine or penalty to have a material adverse effect on our financialposition, results of operations or cash flows.

 

In addition to theproceedings discussed above, we have been, in the ordinary course of business,a defendant in various lawsuits and a party to various other legal proceedings,some of which are covered in whole or in part by insurance. We believethat the outcome of these lawsuits and other proceedings will not individuallyor in the aggregate have a future material adverse effect on our consolidatedfinancial position, results of operations or cash flows.

 

***Item 4.***           Submission of Matters to a Vote of SecurityHolders

*** ***

None.

 

# **PART II**

# ** **

***Item 5.***           Market for Registrant’s Common Equity and RelatedPartnership Interest Matters

*** ***

TEPPCO Partners, L.P.owns a 99.999% interest as the sole limited partner interest and TEPPCO GP, Inc.owns a 0.001% general partner interest in us. There is no established publictrading market for our ownership interests.

 

We make periodicdistributions of our available cash to our partners pursuant to the terms ofour limited partnership agreement. Available cash consists generally of allcash receipts less cash disbursements and cash reserves necessary for workingcapital, anticipated capital expenditures and contingencies we deem appropriateand necessary.

 

We are a limitedpartnership, and we are not subject to federal income tax. Instead, thepartners are required to report their allocable share of our income, gain,loss, deduction and credit, regardless of whether we make distributions.

 

20

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***Item 6.***           Selected Financial Data

*** ***

The following tables setforth, for the periods and at the dates indicated, our selected consolidatedfinancial and operating data. The selected financial data as of December 31,2005, 2004 and 2003 and for the years ended December 31, 2005, 2004 and2003, is derived from audited consolidated financial statements, which areincluded elsewhere in this Report. The selected financial data for the yearended December 31, 2002, is derived from unaudited consolidated financialstatements and, in the opinion of management, has been prepared in accordancewith accounting principles generally accepted in the United States of Americaand reflects all adjustments which are, in the opinion of management, necessaryfor a fair presentation of results for these periods. With the exception of December 31,2005, the financial information shown below has been restated to reflect arestatement adjustment for an accounting correction (see also “Explanatory Note”in this Form 10-K and Note 19 in the Notes to the Consolidated FinancialStatements). The financial data should be read in conjunction with our auditedconsolidated financial statements included in the Index to ConsolidatedFinancial Statements on page F-1 of this Report. See also Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.
| ** **                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                              | ** ** | ** **                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **(in thousands)**                | ** ** |
| **Income Statement Data: (1)**          |       |                              |       |   |   |   |   |   |   |   |   |
| Operating revenues:                     |       |                              |       |   |   |   |   |   |   |   |   |
| Transportation – Refined Products  |       | $                                 | 144,552    |   | $ | 148,166 |   | $ | 138,926 |   | $ | 123,476 |   | $ | 139,315 |   |
| Transportation – LPGs              |       | 96,297                            |       | 87,050 |   | 91,787 |   | 74,577 |   | 77,823 |   |
| Mont Belvieu operations                 |       | —                            |       | — |   | — |   | 15,238 |   | 14,116 |   |
| Other revenues                          |       | 41,780                            |       | 39,542 |   | 31,254 |   | 30,247 |   | 32,979 |   |
| Total operating revenues                |       | 282,629                           |       | 274,758 |   | 261,967 |   | 243,538 |   | 264,233 |   |
| Operating expenses                      |       | 159,059                           |       | 164,994 |   | 150,341 |   | 130,324 |   | 119,856 |   |
| Depreciation and amortization           |       | 38,323                            |       | 42,207 |   | 31,066 |   | 30,116 |   | 26,699 |   |
| Gains on sales of assets                |       | (139                              | )          | (526 | ) | — |   | — |   | — |   |
| Operating income                        |       | 85,386                            |       | 68,083 |   | 80,560 |   | 83,098 |   | 117,678 |   |
| Interest expense – net             |       | (30,958                           | )          | (28,843 | ) | (27,219 | ) | (22,742 | ) | (27,044 | ) |
| Equity losses                           |       | (2,984                            | )          | (6,544 | ) | (7,384 | ) | (9,250 | ) | (1,149 | ) |
| Other income – net                 |       | 755                               |       | 787 |   | 226 |   | 832 |   | 1,537 |   |
| Income before discontinued operations   |       | 52,199                            |       | 33,483 |   | 46,183 |   | 51,938 |   | 91,022 |   |
| Income from discontinued operations (2) |       | —                            |       | — |   | — |   | 912 |   | 1,674 |   |
| Net income (as restated) (3)            |       | $                                 | 52,199     |   | $ | 33,483 |   | $ | 46,183 |   | $ | 52,850 |   | $ | 92,696 |   |

 
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  Sheet Data: (1)**               |       |                  |       |   |   |   |   |   |   |   |   |
| Property, plant and equipment – net   |       | $                     | 808,761    |   | $ | 722,334 |   | $ | 682,385 |   | $ | 722,848 |   | $ | 697,178 |   |
| Total assets                               |       | 1,042,542             |       | 945,193 |   | 894,915 |   | 878,666 |   | 879,834 |   |
| Long-term debt (net of current maturities) |       | 595,954               |       | 695,003 |   | 603,478 |   | 557,521 |   | 420,594 |   |
| Total debt                                 |       | 595,954               |       | 695,003 |   | 603,478 |   | 557,521 |   | 493,084 |   |
| Partners’ capital                     |       | 367,680               |       | 132,617 |   | 217,055 |   | 240,304 |   | 270,112 |   |
|                                            |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                          | ** ** | ** **                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | ** **                        | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flow Data: (1)**                             |       |                              |       |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities           |       | $                                 | 42,841     |   | $ | 132,894 |   | $ | 96,088 |   | $ | 107,600 |   | $ | 123,070 |   |
| Capital expenditures to sustain existing operations |       | (19,261                           | )          | (29,372 | ) | (18,169 | ) | (13,592 | ) | (12,724 | ) |
| Distributions paid                                  |       | (111,930                          | )          | (117,967 | ) | (106,465 | ) | (94,921 | ) | (80,914 | ) |
|                                                     |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                  Amounts have been reclassified to reflectTEPPCO Colorado as discontinued operations.

 

(2)                  Discontinued operations relates to thesale of TEPPCO Colorado in May 2002.

 

(3)                  See Note 19 in the Notes to the ConsolidatedFinancial Statements for the effect of the restatement adjustment on net incomefor the years ended December 31, 2004 and 2003. The restatement adjustmentdecreased net income for the year ended December 31, 2002, by $2.4million.

 

***Item 7.***           Management’s Discussion and Analysis of FinancialCondition and Results of Operations

*** ***

The following informationshould be read in conjunction with our consolidated financial statements andour accompanying notes listed in the Index to Consolidated Financial Statementson page F-1 of this Report. Our discussion and analysis includes thefollowing:

 

•                  Overview ofBusiness.

 

•      Restatement of Consolidated FinancialStatements – Discusses the restatement adjustment.

 

•                  CriticalAccounting Policies and Estimates – Presents accounting policies that are amongthe most critical to the portrayal of our financial condition and results ofoperations.

 

•                  Results ofOperations – Discusses material period-to-period variances in the consolidatedstatements of income.

 

•                  FinancialCondition and Liquidity – Analyzes cash flows and financial position.

 

•                  OtherConsiderations – Addresses available sources of liquidity, trends, future plansand contingencies that are reasonably likely to materially affect futureliquidity or earnings.

 

This discussion containsforward-looking statements based on current expectations that are subject torisks and uncertainties, such as statements of our plans, objectives,expectations and intentions. When used in this discussion, the words “proposed,”“anticipate,” “potential,” “may,” “will,” “could,” “should,” “expect,”estimate,” “believe,” “intend,” “plan,” “seek” and similar expressions areintended to identify forward-looking statements. Our actual results and thetiming of events could differ materially from those anticipated or implied bythe forward-looking statements discussed here as a result of various factors,including, among others, those set forth under the “Cautionary Note RegardingForward-Looking Statements” and “Risk Factors” herein. You should not placeundue reliance on these forward-looking statements, which speak only as of thedate of this Report. Except as required by law, we undertake no obligation topublicly update or revise any of the forward-looking statements in thisdiscussion after the date of this Report.

 

## ****Overview ofBusiness****

## ** **

We are one of the largestpipeline common carriers of refined petroleum products and LPGs in the UnitedStates. Over the past few years, we have continued to pursue growthopportunities and acquisitions to expand our market share and deliveries intoexisting and new markets. The key elements of our strategy are to focus oninternal

 

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growth prospectsin order to increase the pipeline system and terminal throughput, to expand andupgrade existing assets and services and construct new pipelines, terminals andfacilities, to target accretive and complementary acquisitions and expansionopportunities that provide attractive growth potential and to operate in asafe, efficient and environmentally responsible manner.

 

Certain factors are keyto our operations. These include the safe, reliable and efficient operation ofthe pipelines and facilities that we own or operate while meeting increasedregulations that govern the operation of our assets and the costs associatedwith such regulations. We are also focused on our continued growth throughexpansion of the assets that we own and through the acquisition of assets thatcomplement our current operations.

 

We operate and report inone business segment:  transportation andstorage of refined products, LPGs and petrochemicals. We own, operate or haveinvestments in properties located in 14 states, and our revenues are earnedfrom transportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sale of product inventory and other ancillaryservices. Our two largest operating expense items are labor and electric power.We generally realize higher revenues during the first and fourth quarters ofeach year since our operations are somewhat seasonal. Refined products volumes aregenerally higher during the second and third quarters because of greater demandfor gasolines during the spring and summer driving seasons. LPGs volumes aregenerally higher from November through March due to higher demand inthe Northeast for propane, a major fuel for residential heating. Our resultsalso include our equity investments in Centennial and MB Storage (see Note 6 inthe Notes to the Consolidated Financial Statements).

 

Wecontinued building a base for long-term growth by enhancing existing systemsand pursuing new business opportunities. We increased throughput on our pipeline systems, constructed new pipelines and expandedand upgraded our existing infrastructure. In 2005, our majoraccomplishments included:

 

•                  Opening arefined products truck loading terminal in Bossier City, Louisiana, to providethe ****Northwest Louisiana**** and EastTexas markets with access to 20,000 additional barrels per day of deliverycapacity of Gulf Coast sourced gasoline and diesel fuel.

•                  Expanding ourGulf Coast refined products infrastructure, which included the acquisition of a90-mile pipeline and 5.5 million barrels of storage in the Houston, Texas,area.

•                  Continuing theexpansion of our Northeast LPGs pipeline system.

•                  Acquiring arefined products terminal and truck rack in North Little Rock, Arkansas, tocomplement our existing infrastructure.

 

In 2006, we remain confident that our businessstrategy will provide continued growth in earnings and cash distributions. Thisgrowth potential is based on:

 

•                  Growth resultingfrom both our expanding gathering system capacity and the continued capacity ofCentennial, additional acquisitions and the growing demand for Gulf Coastsourced product. Centennial continues to provide us with additional systemcapacity to move additional refined products to the Chicago, Illinois, marketareas.

•                  Substantiallycompleting an expansion project to increase delivery capacity of gasoline anddiesel fuel to the Indianapolis, Indiana, and Chicago market areas.

 

Consistent with our business strategy, we continuouslyevaluate possible acquisitions of assets that would complement our currentoperations, including assets which, if acquired, would have a material effecton our financial position, results of operations or cash flows.

 

**Restatement of ConsolidatedFinancial Statements**

 

We arerestating our previously reported consolidated financial statements for thefiscal years ended December 31, 2003 and 2004. For the impact of therestated consolidated financial results for the quarterly periods during theyears ended December 31, 2005 and 2004, see Note 19 in the Notes to theConsolidated Financial Statements. We have determined that our method ofaccounting for the $33.4 million excess investment in Centennial, previouslydescribed as an intangible asset with an indefinite life, was incorrect. Throughour

 

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accounting for thisexcess investment in Centennial as an intangible asset with an indefinite life,we have been testing the amount for impairment on an annual basis as opposed toamortizing it over a determinable life. We determined that it would be moreappropriate to account for this excess investment as an intangible asset with adeterminable life. As a result, we made a non-cash adjustment that reduced thenet value of the excess investment in Centennial, and increased amortizationexpense allocated to our equity earnings. The effect of this restatement causeda $3.1 million and $3.3 million reduction to net income as previously reportedfor the fiscal years ended December 31, 2004 and 2003, respectively. As aresult of the accounting correction, net income for the fiscal year ended December 31,2005, includes a charge of $4.1 million, of which $3.3 million relates to thefirst nine months. Additionally, partners’ capital at December 31, 2002,reflects a $2.4 million reduction representing the cumulative effect of thiscorrection for the fiscal year ended December 31, 2002.

 

Whilewe believe the impact of this non-cash adjustment is not material to anypreviously issued financial statements, we determined that the cumulativeadjustment for this non-cash item was too material to record in the fourthquarter of 2005, and therefore it was most appropriate to restate prior periods’results. This non-cash adjustment had no effect on our operating income,compensation expense, debt balances or ability to meet all requirements relatedto our debt facilities. The restatement had no impact on total cash flows fromoperating activities, investing activities or financing activities. All amountsin the accompanying consolidated financial statements have been adjusted forthis restatement.

 

We will continue toamortize the $30.0 million excess investment in Centennial related to acontract using units-of-production methodology over a 10-year life. Theremaining $3.4 million related to a pipeline will continue to be amortized on astraight-line basis over 35 years.

 

# **CriticalAccounting Policies and Estimates**

# ** **

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities as wellas the disclosure of contingent assets and liabilities at the date of thefinancial statements. Such estimates and assumptions also affect the reportedamounts of revenues and expenses during the reporting period. Changes in theseestimates could materially affect our financial position, results of operationsor cash flows. Although we believe that these estimates are reasonable, actualresults could differ from these estimates. Significant accounting policies thatwe employ are presented in the notes to the consolidated financial statements(see Note 2 in the Notes to the Consolidated Financial Statements).

 

Critical accountingpolicies are those that are most important to the portrayal of our financialposition and results of operations. These policies require management’s mostdifficult, subjective or complex judgments, often employing the use ofestimates and assumptions about the effect of matters that are inherentlyuncertain. Our critical accounting policies pertain to revenue and expenseaccruals, environmental costs, property, plant and equipment and intangibleassets.

 

*Revenue andExpense Accruals*

* *

We routinely makeaccruals based on estimates for both revenues and expenses due to the timing ofcompiling billing information, receiving certain third party information andreconciling our records with those of third parties. The delayed informationfrom third parties includes, among other things, actual volumes of productstransported, adjustments to inventory and invoices for other operating expenses.We make accruals to reflect estimates for these items based on our internalrecords and information from third parties. Most of the estimated accruals arereversed in the following month when actual information is received from thirdparties and our internal records have been reconciled.

 

The most difficultaccruals to estimate are power costs and property taxes. Power cost accrualsgenerally involve a two to three month estimate, and the amount variesprimarily for actual power usage. Power costs are dependent upon the actualvolumes transported through our pipeline systems and the various power ratescharged by numerous power companies along the pipeline system. Peak demandrates, which are difficult to predict, drive the variability of the power costs.For the year ended December 31, 2005, approximately 14% of our power costsare recorded using estimates. A variance of 10% in our aggregate estimate forpower costs would have an approximate

 

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$0.5 millionimpact on annual earnings. Property tax accruals involve significant tax rateestimates among numerous jurisdictions. Actual property taxes are often notknown until the tax bill is settled in subsequent periods, and the tax amountcan vary for tax rate changes and changes in tax methods or elections. Avariance of 10% in our aggregate estimate for property taxes could have up toan approximate $0.8 million impact on annual earnings. Variances from estimatesare reflected in the period actual results become known, typically in the monthfollowing the estimate. Each of these accruals requires management’s subjectivejudgments, requiring estimates regarding the effects of items that areinherently uncertain.

 

*EnvironmentalCosts*

* *

At December 31,2005, we have accrued a liability of $1.2 million for our estimate of thefuture payments we expect to pay for environmental costs to remediate existingconditions attributable to past operations. Environmental costs include initialsite surveys and environmental studies of potentially contaminated sites, costsfor remediation and restoration of sites determined to be contaminated andongoing monitoring costs, as well as damages and other costs, when estimable. Wemonitor the balance of accrued undiscounted environmental liabilities on aregular basis. We record liabilities for environmental costs at a specific sitewhen our liability for such costs is probable and a reasonable estimate of theassociated costs can be made. Adjustments to initial estimates are recorded,from time to time, to reflect changing circumstances and estimates based uponadditional information developed in subsequent periods. Estimates of ourultimate liabilities associated with environmental costs are particularlydifficult to make with certainty due to the number of variables involved,including the early stage of investigation at certain sites, the lengthy timeframes required to complete remediation alternatives available and the evolvingnature of environmental laws and regulations. A variance of 10% in ouraggregate estimate for environmental costs would have an approximate $0.1million impact on annual earnings. For information concerning environmentalregulation and environmental costs and contingencies, see Items 1 and 2.Business and Properties – Environmental and Safety Matters.

 

*Property, Plantand Equipment*

* *

We regularly reviewlong-lived assets for impairment in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets.*Long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Such eventsor changes include, among other factors: operating losses, unused capacity; market value declines; technologicaldevelopments resulting in obsolescence; changes in demand for products in amarket area; changes in competition and competitive practices; and changes ingovernmental regulations or actions. Recoverability of the carrying amount ofassets to be held and used is measured by a comparison of the carrying amountof the asset to estimated future undiscounted net cash flows expected to begenerated by the asset. Estimates of future undiscounted net cash flows includeanticipated future revenues, expected future operating costs and otherestimates. Such estimates of future undiscounted net cash flows are highlysubjective and are based on numerous assumptions about future operations andmarket conditions. If such assets are considered to be impaired, the impairmentto be recognized is measured by the amount by which the carrying amount of theassets exceeds the estimated fair value of the assets. Assets to be disposed ofare reported at the lower of the carrying amount or estimated fair value lesscosts to sell.

 

*Intangible*Assets

 

Certain assumptions andestimates are employed in determining the estimated fair value of assetsacquired including other intangible assets. In addition, we assess therecoverability of these intangibles by determining whether the amortization ofthese intangibles over their remaining useful lives can be recovered throughundiscounted estimated future net cash flows of the acquired operations. Theamount of impairment, if any, is measured by the amount by which the carryingamounts exceed the projected discounted estimated future operating cash flows.

 

At December 31,2005, we have $20.5 million of excess investment, net of accumulated amortization,in our equity investment in Centennial, which is being amortized over periodsranging from 10 to 35 years (see Note 3 in the Notes to the ConsolidatedFinancial Statements). The value assigned to our excess investment inCentennial was created upon its formation. Approximately $30.0 million isrelated to a contract and is being amortized on a

 

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unit-of-productionbasis based upon the volumes transported under the contract compared to theguaranteed total throughput of the contract over a 10-year life. The remaining$3.4 million is related to a pipeline and is being amortized on a straight-linebasis over the life of the pipeline, which is 35 years. A variance of 10% inour amortization expense allocated to equity earnings could have up to anapproximate $0.4 million impact on annual earnings.

 

# **Resultsof Operations**

# ** **

The following tablepresents volumes delivered in barrels and average tariff per barrel for theyears ended December 31, 2005, 2004 and 2003 (in thousands, except tariffinformation):

 
| ** **                       | ** ** | **Years Ended December 31,** | ** ** | **Percentage Increase (Decrease)** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2005**                          | ** ** | **2004**                           | ** ** | **2003** | ** ** | **2005-2004** | ** ** | **2004-2003** | ** ** |
|                             |       |                              |       |                               |       |   |   |   |   |   |   |
| Volumes Delivered:               |       |                              |       |                               |       |   |   |   |   |   |   |
| Refined products                 |       | 160,667                           |       | 152,437                            |       | 154,061 |   | 5 | % | (1 | )% |
| LPGs                             |       | 45,061                            |       | 43,982                             |       | 42,543 |   | 3 | % | 3 | % |
| Total                            |       | 205,728                           |       | 196,419                            |       | 196,604 |   | 5 | % | — |   |
|                             |       |                              |       |                               |       |   |   |   |   |   |   |
| Average Tariff per Barrel:       |       |                              |       |                               |       |   |   |   |   |   |   |
| Refined products (1)             |       | $                                 | 0.90       |                               | $          | 0.97 |   | $ | 0.90 |   | (7 | )% | 8 | % |
| LPGs                             |       | 2.14                              |       | 1.98                               |       | 2.16 |   | 8 | % | (8 | )% |
| Average system tariff per barrel |       | $                                 | 1.17       |                               | $          | 1.20 |   | $ | 1.17 |   | (3 | )% | 3 | % |

 

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(1)          The 2004 period includes $4.1 million of deferredrevenue related to the expiration of two customer transportation agreements,which increased the refined products average tariff for the year ended December 31,2004, by $0.02 per barrel, or 2%.

 

We are dependent in large part on the demand forrefined products and LPGs in the markets we serve. Reductions in that demandadversely affect our pipeline business. Market demand varies based upon thedifferent end uses of the refined products we ship. Demand for gasoline, whichin recent years has accounted for approximately forty percent of our refinedproducts transportation revenues, depends upon price, prevailing economicconditions and demographic changes in the markets we serve. Demand fordistillates is affected by truck and railroad freight, the price of natural gasused by utilities, which use distillates as a substitute for natural gas whenthe price of natural gas is high, and usage for agricultural operations, whichis affected by weather conditions, government policy and crop prices. Demandfor jet fuel, which in recent years has accounted for approximately twentypercent of our refined products revenues, depends on prevailing economicconditions and military usage. Propane deliveries are generally sensitive tothe weather and meaningful year-to-year variances have occurred in the past andwill likely continue to occur in the future.

 

*Year Ended December 31, 2005Compared with Year Ended December 31, 2004*

 

Revenues from refined productstransportation decreased $3.6 million for the year ended December 31,2005, compared with the year ended December 31, 2004. Revenues fromrefined products transportation decreased primarily due to the recognition of$4.1 million of deferred revenue in 2004 related to the expiration of twocustomer transportation agreements. Under some of our transportation agreementswith customers, the contracts specify minimum payments for transportation services.If the transportation services paid for are not used, the unused transportationservice is recorded as deferred revenue. The contracts generally specify asubsequent period of time in which the customer can transport excess productsto recover the amount recorded as deferred revenue. During the third quarter of2004, the time limit under two transportation agreements expired without thecustomers recovering the unused transportation services. As a result, werecognized the deferred revenue as refined products revenue in that period.

 

Additionally, refined productsrevenues decreased due to reduced deliveries of product as a result ofHurricanes Katrina and Rita in August and September 2005, asdiscussed below. These decreases in revenues from

 

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refined products transportation resulting from thehurricanes were partially offset by an overall increase in the refined productsvolumes delivered primarily due to deliveries of products moved on Centennial. Volumeincreases were due to increased demand and market share for products suppliedfrom the U.S. Gulf Coast into Midwest markets. The refined products averagerate per barrel decreased from the prior year period primarily due to theimpact of greater growth in the volume of products delivered under a Centennialtariff compared with the growth in deliveries under a TEPPCO tariff, whichresulted in an increased proportion of lower tariff barrels transported on oursystem. In February 2003, we entered into a lease agreement withCentennial that increased our flexibility to deliver refined products to ourmarket areas. Volumes transported on Centennial increased due to increaseddemand and market share for products supplied from the U.S. Gulf Coast intoMidwest markets. Centennial has provided our system with additional pipelinecapacity for products originating in the U.S. Gulf Coast area. Prior to theconstruction of Centennial, deliveries on our pipeline system were limited byour pipeline capacity, and transportation services for our customers wereallocated in accordance with a proration policy. With this incremental pipelinecapacity, our previously constrained system has expanded deliveries in marketsboth south and north of Creal Springs, Illinois.

 

Revenuesfrom LPGs transportation increased $9.3 million for the year ended December 31,2005, compared with the year ended December 31, 2004, due to higherdeliveries of propane in the upper Midwest and Northeast market areas due tosystem expansion projects completed in 2004 and colder winter weather in March andDecember 2005. Prior year LPG transportation revenues were negativelyimpacted by a price spike in the Mont Belvieu propane price in late February 2004,which resulted in TEPPCO sourced propane being less competitive than propanefrom other source points. The LPGs average rate per barrel increased from theprior period primarily as a result of a combination of decreased short-hauldeliveries and increased long-haul propane deliveries during 2005, and anincrease in tariff rates which went into effect in July 2005. Theseincreases were partially offset by reduced propane revenues resulting fromdecreased propane deliveries due to a propane release and fire at a dehydrationunit in September 2005 at our Todhunter storage facility, near Middletown,Ohio. As a result of the propane release and fire, our LPG loading facilitiesat Todhunter were shut down for approximately three weeks.

 

Revenuesfrom refined products and LPGs were also impacted by Hurricanes Katrina andRita, which affected the U.S. Gulf Coast in August and September 2005,respectively. Hurricane Katrina disrupted refineries and other pipeline systemsin the central U.S. Gulf Coast, which provided us with additional deliveries atShreveport and Arcadia, Louisiana, as shippers used alternative sources tosupply product to areas where normal distribution patterns were disrupted. HurricaneKatrina also resulted in higher prices of refined products and LPGs, which hada negative impact on the current demand for the products. Hurricane Ritadisrupted production at western U.S. Gulf Coast refineries, many of whichdirectly supply us with product. Hurricane Rita also disrupted power to ourBeaumont terminal, which resulted in the mainline being shut down for four daysand Centennial being shut down for ten days. Our 230,000 barrel per daycapacity, 20-inch diameter mainline system, which primarily delivers LPGs andgasoline from the Texas Gulf Coast to the Midwest, was pumping from MB Storage’sfacility at approximately 60% of normal operating capacity until mid-October. Our110,000 barrel per day capacity, 14-inch and 16-inch diameter pipelines, whichprimarily deliver distillates and gasoline from the Texas Gulf Coast to theMidwest, were pumping at approximately 75% of normal operating capacity fromour Baytown, Texas, terminal until mid-October. We installed generators at ourBeaumont, Texas, facility, which enabled receipt and delivery of refinedproducts out of tankage at the terminal. Commercial power was restored to theBeaumont terminal and the Newton, Texas, pump station in mid-October andfull operations were resumed. Centennial resumed operating at its normalcapacity on October 1, 2005.

 

Otheroperating revenues increased $2.2 million for the year ended December 31,2005, compared with the year ended December 31, 2004, primarily due tohigher refined products tender deduction, additive and loading fees, partiallyoffset by lower propane inventory fees in 2005. Lower volumes of productinventory sales in the 2005 period were partially offset by increased salesmargin on the product inventory sales.

 

Costs andexpenses decreased $9.4 million for the year ended December 31, 2005,compared with the year ended December 31, 2004, due to decreased operating,general and administrative expenses and decreased depreciation and amortizationexpense, partially offset by increased taxes – other than income taxes,increased operating fuel and power and lower gains on the sales of assets inthe 2005 period. Operating, general and administrative expenses decreased $8.9million primarily due to the following:

 

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•                  a $15.1million decrease in pipeline inspection and repair costs associated with ourintegrity management program as we neared completion of the first cycle of ourintegrity management program,

•                  a $2.6million decrease in postretirement benefit accruals related to plan amendments(see Note 17 in the Notes to the Consolidated Financial Statements),

•                  a $2.1million decrease in products losses,

•                  a $2.0million decrease in legal expenses related to a legal settlement in 2004 (seeNote 18 in the Notes to the Consolidated Financial Statements) and

•                  a $1.1million decrease in consulting services primarily related to acquisitionrelated activities in the 2004 period.

 

These decreases to costs and expenseswere partially offset by the following:

 

•                  a $3.4million increase in labor and benefits expenses primarily associated withvesting provisions in certain of our Parent Partnership’s compensation plans asa result of changes in ownership of the Company, higher labor expensesassociated with an increase in the number of employees between years and higherincentive compensation expense as a result of improved operating performance,

•                  a $3.2million increase in pipeline operating and maintenance expense,

•                  a $1.8million increase attributable to regulatory penalties for past incidents,

•                  a $1.6million increase in insurance expense,

•                  a $1.5million increase related to transition costs due to the changes in ownership ofthe Company,

•                  a $0.6million increase in rental expense on a lease agreement from the Centennialpipeline capacity lease agreement and

•                  anincrease in other miscellaneous general and administrative supplies expensesduring the year, including a $0.4 million increase in environmental assessmentand remediation expenses, a $0.4 million increase in labor and benefits expenserelated to the Parent Partnership retirement plan settlements with DEFS andhurricane related expenses.

 

Depreciation expense decreased $3.9million primarily due to a $4.4 million non-cash impairment charge in the thirdquarter of 2004, partially offset by a $0.8 million write-off of assets relatedto the propane release and fire at a storage facility in Ohio (see Note 10 inthe Notes to the Consolidated Financial Statements), assets placed into serviceand assets retired to depreciation expense in the 2005 period. Taxes – otherthan income taxes increased $2.2 million primarily due to asset acquisitionsand a higher tax base in the 2005 period. Operating fuel and power expenseincreased $0.8 million primarily as a result of increased volumes and higherpower rates during the 2005 period. During the year ended December 31,2004, we recognized net gains of $0.5 million from the sales of various assets.

 

Netlosses from equity investments decreased $3.6 million for the year ended December 31,2005, compared with the year ended December 31, 2004, as shown below (inthousands):

 
| ** **          | ** ** | **Years Ended  December 31,** | ** ** | **Increase** | ** ** |
|---------------------|------------|------------------------------------|------------|--------------|------------|
| ** **          | ** ** | **2005**                           | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** |
| ** **          | ** ** | **(as restated)**                  | ** ** |
|                |       |                               |       |         |       |   |   |
| Centennial          |       | $                                  | (10,727    | )            | $          | (14,379 | ) | $ | 3,652 |   |
| MB Storage          |       | 7,715                              |       | 7,874        |       | (159 | ) |
| Other               |       | 28                                 |       | (39          | )          | 67 |   |
| Total equity losses |       | $                                  | (2,984     | )            | $          | (6,544 | ) | $ | 3,560 |   |

 

Equitylosses in Centennial decreased $3.7 million for the year ended December 31,2005, compared with the year ended December 31, 2004, primarily due tohigher transportation revenues and volumes.

 

Equityearnings in MB Storage decreased $0.2 million for the year ended December 31,2005, compared with the year ended December 31, 2004, primarily due toincreased depreciation and amortization expense and higher general andadministrative expenses, partially offset by higher rental and storage revenuesand volumes. MB

 

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Storage was impacted by HurricaneRita, which reduced revenues and increased operating expenses. Additionally, inApril 2004, MB Storage acquired storage and pipeline assets and contractsfor approximately $35.0 million, of which we contributed $16.5 million. Increasesin storage revenue, shuttle revenue, rental revenue and depreciation and amortizationexpense for year ended December 31, 2005, compared with the year ended December 31,2004, are primarily related to the acquired storage assets and contracts.

 

For theyear ended December 31, 2005, we received the first $1.7 million perquarter (or $6.78 million on an annual basis) of MB Storage’s income beforedepreciation expense, as defined in the operating agreement. For the year endedDecember 31, 2004, we received the first $1.8 million per quarter (or$7.15 million on an annual basis) of MB Storage’s income before depreciationexpense. Our share of MB Storage’s earnings is adjusted annually by thepartners of MB Storage. Any amount of MB Storage’s annual income beforedepreciation expense in excess of $6.78 million for 2005 and $7.15 million for2004 is allocated evenly between us and Louis Dreyfus. Depreciation expense onassets each party originally contributed to MB Storage is allocated between usand Louis Dreyfus based on the net book value of the assets contributed. Depreciationexpense on assets constructed or acquired by MB Storage subsequent to formationis allocated evenly between us and Louis Dreyfus. For the years ended December 31,2005, 2004 and 2003, our sharing ratio in the earnings of MB Storage wasapproximately 64.2%, 69.4% and 70.4%, respectively.

 

Interestexpense increased $3.4 million for the year ended December 31, 2005,compared with the year ended December 31, 2004, primarily due to higheroutstanding borrowings and higher short term floating interest rates on ournote payable with our Parent Partnership. Capitalized interest increased $1.3million for the year ended December 31, 2005, compared with the year endedDecember 31, 2004, as a result of increased balances of constructionwork-in-progress.

 

*YearEnded December 31, 2004 Compared with Year Ended December 31, 2003*

 

Revenuesfrom refined products transportation increased $9.2 million for the year ended December 31,2004, compared with the year ended December 31, 2003. Refined productstransportation revenues increased primarily due to higher market-based tariffrates which went into effect in July 2003 and May 2004 and a shift inthe distribution of product moved by us to favor longer haul, higher tariffmovements. These changes resulted in a 5% increase in the refined productsaverage rate per barrel from the prior year and offset the effect of a 1%decrease in refined products delivery volumes. In February 2003, weentered into a lease agreement with Centennial that increased our flexibilityto deliver refined products to our market areas. Volumes transported onCentennial increased due to increased demand and market share for productssupplied from the U.S. Gulf Coast into Midwest markets. Refined productstransportation revenues also increased due to the recognition of $4.1 millionof deferred revenue in the 2004 period related to the expiration of twocustomer transportation agreements.

 

Revenuesfrom LPGs transportation decreased $4.7 million for the year ended December 31,2004, compared with the year ended December 31, 2003, due to lowerdeliveries of propane in the upper Midwest and Northeast market areasattributable to warmer weather during the first and fourth quarters of 2004. Additionally,in late February 2004, the Mont Belvieu propane price spiked, which resultedin TEPPCO sourced propane being less competitive than propane from other sourcepoints. Also contributing to the decrease were less favorable pricedifferentials between Mont Belvieu and other supply centers during the secondand third quarters of 2004. High propane prices in 2004 also reduced the summerand early fall fill of consumer storage of propane during 2004. These decreaseswere partially offset by increased deliveries of isobutane to Chicago arearefineries and increased short-haul propane deliveries to U.S. Gulf Coastpetrochemical customers. The LPGs average rate per barrel decreased 8% from theprior year period primarily as a result of increased short-haul deliveriesduring 2004.

 

Otheroperating revenues increased $8.3 million for the year ended December 31,2004, compared with the year ended December 31, 2003, primarily due tohigher propane inventory fees, higher margins on product inventory sales,higher revenue from our Providence, Rhode Island import facility and higherrefined products tender deduction, loading and custody transfer revenues.

 

Costs andexpenses increased $25.3 million for the year ended December 31, 2004,compared with the year ended December 31, 2003, due to increasedoperating, general and administrative expenses, increased depreciation andamortization expense and increased operating fuel and power, partially offsetby net gains on the sales of assets.

 

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Operating, general and administrativeexpenses increased primarily due to a $6.2 million increase in pipelineinspection and repair costs associated with our integrity management program, a$2.0 million increase in legal accruals related to the settlement of a lawsuit(see Note 18 in the Notes to the Consolidated Financial Statements), a $1.5 million increase in rental expense from theCentennial pipeline capacity lease agreement that we entered into in February 2003,a $1.3 million increase in consulting and contract services related tocompliance with the Sarbanes-Oxley Act of 2002 and a $1.1 million increase incosts related to unsuccessful acquisition evaluations. These increases werepartially offset by $0.8 million of lower expenses in the 2004 periodassociated with the write-off of receivables related to customer bankruptciesand non-payments in 2003. Depreciation expense increased from the prior yearperiod because of a $4.4 million charge resulting from the impairment of marineassets in the Beaumont area (see Note 10 in the Notes to theConsolidated Financial Statements). In addition,we wrote off approximately $2.1 million in assets taken out of service duringthe period to depreciation expense. Depreciation expense also increasedapproximately $5.0 million as a result of assets placed in service during 2003and 2004, partially offset by an increase in the estimated remaining life of a section ofour pipeline system in the Northeast, resulting from pipeline capitalimprovements made as part of our integrity management program. Operatingfuel and power expense increased primarily as a result of higher power ratesduring the 2004 period. In addition, we recognized net gains of $0.5 millionduring 2004 from the sales of various assets.

 

Net losses from equity investments decreased $0.8million for the year ended December 31, 2004, compared with the year endedDecember 31, 2003, as shown below (in thousands):

 
| ** **          | ** ** | **Years Ended  December 31,** | ** ** | ** **        | ** ** |
|---------------------|------------|------------------------------------|------------|-------------------|------------|
| ** **          | ** ** | **2004**                           | ** ** | **2003**          | ** ** | **Increase** | ** ** |
| ** **          | ** ** | **(as restated)**                  | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
|                |       |                               |       |              |       |   |   |
| Centennial          |       | $                                  | (14,379    | )                 | $          | (14,671 | ) | $ | 292 |   |
| MB Storage          |       | 7,874                              |       | 7,354             |       | 520 |   |
| Other               |       | (39                                | )          | (67               | )          | 28 |   |
| Total equity losses |       | $                                  | (6,544     | )                 | $          | (7,384 | ) | $ | 840 |   |

 

Equitylosses in Centennial decreased $0.3 million for the year ended December 31,2004, compared with the year ended December 31, 2003, primarily due toincreased transportation revenues and volumes and lower operating expenses. During2003, we acquired an additional 16.7% interest in Centennial on February 10,2003, bringing our ownership interest to 50%. Included in the equity loss forthe year ended December 31, 2004, is $1.2 million of equity incomerelating to the settlement of certain transmix matters recognized in previousperiods.

 

Equityearnings in MB Storage increased $0.5 million for the year ended December 31,2004, compared with the year ended December 31, 2003. In April 2004,MB Storage acquired storage and pipeline assets and contracts for approximately$35.0 million, of which we contributed $16.5 million. The increase in equityearnings is due to increased storage revenue, shuttle revenue and rentalrevenue primarily from the acquired contracts and lower pipeline rehabilitationexpenses on the MB Storage system, partially offset by increased amortizationand depreciation expense on storage assets and contracts acquired.

 

Interestexpense increased $1.0 million for the year ended December 31, 2004,compared with the year ended December 31, 2003, primarily due to higheroutstanding debt balances under the Note Payable with our Parent Partnership. Interestcapitalized decreased $0.6 million for the year ended December 31, 2004,compared with the year ended December 31, 2003, as a result of lowerconstruction work-in-progress balances in 2004.

 

*Other income – net increased $0.6million for the year ended December 31, 2004, compared with the year endedDecember 31, 2003, primarily due to higher interest income earned on cashinvestments and higher interest income earned on a capital lease.*

* *

# **FinancialCondition and Liquidity**

 

Cash generated fromoperations and from our Parent Partnership’s credit facilities and debt andequity offerings are our primary sources of liquidity. At December 31,2005 and 2004, we had working capital deficits of $4.5 million and $61.9million, respectively. Working capital deficits can occur primarily due to thetiming of

 

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operating cashreceipts from customers, payments of cash distributions and the payment ofnormal operating expenses and capital expenditures. We are a wholly ownedsubsidiary of the Parent Partnership. We expect that our Parent Partnershipwill make capital contributions, loans or otherwise provide liquidity to us asneeded, but the Parent Partnership has no contractual obligation to do so. Weanticipate that the Parent Partnership will provide the necessary liquidity toprotect its investment in us. At December 31, 2005, our Parent Partnershiphad approximately $274.6 million in available borrowing capacity under itsrevolving credit facility (applying the most restrictive financial covenants)to cover any working capital needs, and expects that cash flows from operatingactivities, the sale of additional debt or equity offerings will providenecessary liquidity to us. For further discussion regarding our ParentPartnership’s sources of liquidity, please see Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations – FinancialCondition and Liquidity in our Parent Partnership’s Annual Report on Form 10-Kfor the Year Ended December 31, 2005. Cash flows for the years ended December 31,2005, 2004 and 2003, were as follows (in millions):

 
| ** **                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                   | ** ** | ** **                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Cash provided by  (used in): |       |                              |       |   |   |   |   |
| Operating activities         |       | $                                 | 42.8       |   | $ | 132.9 |   | $ | 96.1 |   |
| Investing activities         |       | (131.4                            | )          | (105.5 | ) | (84.2 | ) |
| Financing activities         |       | 88.6                              |       | (27.6 | ) | (12.2 | ) |
|                              |            |                                   |            |  |  |  |  |  |  |  |

 

*OperatingActivities*

 

Net cash from operatingactivities for the years ended December 31, 2005, 2004 and 2003, werecomprised of the following (in millions):

 
| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | ** **                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| ** **                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                 | 52.2       |   | $ | 33.5 |   | $ | 46.2 |   |
| Depreciation and amortization                        |       | 38.3                              |       | 42.2 |   | 31.1 |   |
| Losses in equity investments                         |       | 3.0                               |       | 6.5 |   | 7.4 |   |
| Distributions from equity investments                |       | 12.4                              |       | 10.3 |   | 5.3 |   |
| Gains on sales of assets                             |       | (0.1                              | )          | (0.5 | ) | — |   |
| Non-cash portion of interest expense                 |       | 0.5                               |       | 0.1 |   | 0.1 |   |
| Cash provided by (used in) working capital and other |       | (63.5                             | )          | 40.8 |   | 6.0 |   |
| Net cash from operating  activities                  |       | $                                 | 42.8       |   | $ | 132.9 |   | $ | 96.1 |   |

 

For a discussion ofchanges in net income, depreciation and amortization and equity earnings, see “Resultsof Operations.”  Cash provided byoperating activities decreased for the year ended December 31, 2005,compared with the year ended December 31, 2004, primarily due to thetiming of cash disbursements and cash receipts for working capital components,partially offset by higher net income. Cash provided by operating activitiesincreased for the year ended December 31, 2004, compared with the yearended December 31, 2003, primarily due to the timing of cash disbursementsand cash receipts for working capital components, higher depreciation andamortization expense in the 2004 period and an increase of $5.0 million indistributions received from our equity investment in MB Storage during the yearended December 31, 2004, partially offset by lower net income.

 

Net cash from operatingactivities for the years ended December 31, 2005, 2004 and 2003, includedinterest payments, net of amounts capitalized, of $30.1 million, $27.3 millionand $30.3 million, respectively. Excluding the effects of hedging activitiesand interest capitalized, during the year ended December 31, 2006, weexpect interest payments on our Senior Notes to be approximately $27.4 million.We expect to pay our interest payments with cash flows from operatingactivities.

 

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*InvestingActivities*

 

Cash flows used ininvesting activities totaled $131.4 million for the year ended December 31,2005, and were comprised of $69.0 million for the acquisition of assets, $58.2million of capital expenditures and $4.2 million of cash contributions to MBStorage for capital expenditures. Cash flows used in investing activitiestotaled $105.5 million for the year ended December 31, 2004, and werecomprised of $81.3 million of capital expenditures, $1.5 million of cashcontributions to Centennial to cover operating needs and capital expenditures,$21.4 million of cash contributions to MB Storage, of which $16.5 million wasused to acquire storage assets, and $1.9 million for the acquisition of assetsduring the year ended December 31, 2004, partially offset by $0.6 millionin net cash proceeds from the sales of various assets. Cash flows used in investingactivities totaled $84.2 million for the year ended December 31, 2003, andwere comprised of $58.4 million of capital expenditures, $20.0 million for ouracquisition of an additional 16.7% interest in Centennial, $4.0 million of cashcontributions to Centennial to cover operating needs and capital expendituresand $2.5 million of cash contributions to MB Storage for capital expenditures. Theseuses of cash were partially offset by $0.7 million received on matured cashinvestments.

 

*FinancingActivities*

 

Cash flows provided byfinancing activities totaled $88.6 million for the year ended December 31,2005, and were comprised of $294.8 million of equity contributions receivedfrom our Parent Partnership and $169.7 million of proceeds from our term loan,partially offset by $264.0 million of repayments on our term loan and $111.9million of distributions paid to our Parent Partnership. Cash flows used infinancing activities totaled $27.6 million for the year ended December 31,2004, and were comprised of $118.0 million of distributions paid to our ParentPartnership and $36.0 million of repayments on our term loan, partially offsetby $126.4 million of proceeds from our term loan. Cash flows used in financingactivities totaled $12.2 million for the year ended December 31, 2003, andwere comprised of $106.5 million of distributions paid to our ParentPartnership and $53.6 million of repayments on our term loan, partially offsetby $110.9 million of proceeds from our term loan and $37.0 million of equity contributionsreceived from our Parent Partnership.

 

During the years ended December 31,2005, 2004 and 2003, we paid cash distributions to our Parent Partnershiptotaling $111.9 million, $118.0 million and $106.5 million, respectively. On February 7,2006, we paid a cash distribution to our Parent Partnership of $16.7 millionfor the quarter ended December 31, 2005.

 

**Other Considerations**

 

*UniversalShelf*

 

Our Parent Partnershiphas filed with the SEC a universal shelf registration statement that, subjectto agreement on terms at the time of use and appropriate supplementation,allows it to issue, in one or more offerings, up to an aggregate of $2.0billion of equity securities, debt securities or a combination thereof. In May 2005,our Parent Partnership issued $279.2 million of equity securities. At December 31,2005, our Parent Partnership had $1.7 billion remaining under this shelfregistration, subject to customary marketing terms and conditions.

 

*CreditFacilities*

 

We currently utilize debtfinancing available from our Parent Partnership through intercompany notes. Theterms of the intercompany notes generally match the principal and interestpayment dates under the Parent Partnership’s credit agreement and senior notes.The interest rates charged by the Parent Partnership include the statedinterest rate of the Parent Partnership, plus a premium to cover debt issuancecosts. The interest rate is also decreased or increased to cover gains andlosses, respectively, on any interest rate swaps that the Parent Partnership may havein place on its credit agreement and senior notes. The Parent Partnership’srevolving credit facility is described below.

 

Our Parent Partnershiphas in place an unsecured revolving credit facility for up to $700.0 million (“RevolvingCredit Facility”), which may be increased up to a maximum of $850.0million upon our Parent Partnership’s request, subject to lender approval andthe satisfaction of certain other conditions. The Revolving Credit Facilityexpires on December 13, 2010. Interest is payable at an applicable marginabove either the lender’s base rate or LIBOR. At December 31, 2005, $405.9million was outstanding under the facility, and our Parent Partnership had$274.6 million of availability under the most restrictive financial covenant. Restrictivecovenants in

 

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the creditagreement limit the Parent Partnership’s and its subsidiaries’ ability to,among other things, incur additional indebtedness, and make certain distributions,and complete mergers, acquisitions and sales of assets. In addition, the creditagreement requires our Parent Partnership to maintain certain financial ratios,which our Parent Partnership was in compliance with at December 31, 2005.

 

At December 31, 2005and 2004, we had intercompany notes payable to our Parent Partnership of $206.9million and $301.7 million, respectively, which represented borrowings underthe Parent Partnership’s Revolving Credit Facility, 7.625% Senior Notes and6.125% Senior Notes. The weighted average interest rate on the note payable tothe Parent Partnership at December 31, 2005, was 4.15%. At December 30,2005, accrued interest includes $3.5 million due to our Parent Partnership. Forthe year ended December 31, 2005 and 2004, interest costs incurred on thenote payable to our Parent Partnership totaled $11.9 million and $12.5 million,respectively.

 

*2006Capital Expenditures*

 

Weestimate that capital expenditures, excluding acquisitions, for 2006 will beapproximately $105.4 million (including $3.4 million of capitalized interest).We expect to spend approximately $70.9 million for revenue generating projectsand facility improvements. We expect to spend approximately $16.4 million tosustain existing operations, including life-cycle replacements for equipment atvarious facilities and pipeline and tank replacements and $14.7 million forvarious system upgrade projects. During the remainder of 2006, we may berequired to contribute cash to Centennial to cover capital expenditures,acquisitions or other operating needs and to MB Storage to cover significantcapital expenditures or additional acquisitions. We continually review andevaluate potential capital improvements and expansions that would becomplementary to our present system. These expenditures can vary greatlydepending on the magnitude of our transactions. We may finance capitalexpenditures through internally generated funds, debt or capital contributionsfrom our Parent Partnership or any combination thereof.

 

*LiquidityOutlook*

 

Webelieve that we will continue to have adequate liquidity to fund futurerecurring operating and investing activities. Our primary cash requirementsconsist of normal operating expenses, capital expenditures to sustain existingoperations and revenue generating expenditures, interest payments on our SeniorNotes, interest payments on intercompany notes payable to our ParentPartnership and distributions to our Parent Partnership. Our cash requirementsfor 2006, such as operating expenses, capital expenditures to sustain existingoperations and quarterly distributions to our Parent Partnership, are expectedto be funded through operating cash flows. Long-term cash requirements forexpansion projects, acquisitions and repayment of intercompany notes areexpected to be funded by several sources, including cash flows from operatingactivities, borrowings under our Parent Partnership’s credit facilities andpossibly the issuance by our Parent Partnership of additional equity and debtsecurities. The timing of any debt or offerings by our Parent Partnership willdepend on various factors, including prevailing market conditions, interestrates and our Parent Partnership’s financial condition and credit rating at thetime.

 

*Off-BalanceSheet Arrangements*

### * *

We do not rely onoff-balance sheet borrowings to fund our acquisitions. We have no off-balancesheet commitments for indebtedness other than the limited guaranty ofCentennial debt and the limited guarantee of Centennial catastrophic events asdiscussed below. In addition, we have entered into various leases coveringassets utilized in several areas of our operations.

 

We are contingentlyliable as guarantor for $500.0 million principal amount of 7.625% Senior Notesdue 2012 issued in February 2002 and for $200.0 million principal amountof 6.125% Senior Notes due 2013 issued in January 2003 by our ParentPartnership.

 

Centennial entered intocredit facilities totaling $150.0 million, and as of December 31, 2005,$150.0 million was outstanding under those credit facilities. We and Marathonhave each guaranteed one-half of the repayment of Centennial’s outstanding debtbalance (plus interest) under a long-term credit agreement, which expires in2024, and a short-term credit agreement, which expires in 2007. The guaranteesarose in order for Centennial to obtain adequate financing, and the proceeds ofthe credit agreements were used to fund construction and conversion costs ofits pipeline system. Prior to the expiration of the long-term credit agreement,we could be

 

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relinquished fromresponsibility under the guarantee should Centennial meet certain financialtests. If Centennial defaults on its outstanding balance, the estimated maximumpotential amount of future payments for Marathon and us is $75.0 million eachat December 31, 2005.

 

We, Marathon andCentennial have entered into a limited cash call agreement, which allows eachmember to contribute cash in lieu of Centennial procuring separate insurance inthe event of a third-party liability arising from a catastrophic event. Thereis an indefinite term for the agreement and each member is to contribute cashin proportion to its ownership interest, up to a maximum of $50.0 million each.As a result of the catastrophic event guarantee, we have recorded a $4.6million obligation, which represents the present value of the estimated amountthat we would have to pay under the guarantee. If a catastrophic event were tooccur and we were required to contribute cash to Centennial, contributionsexceeding our deductible might be covered by our insurance.

 

*ContractualObligations*

 

The following tablesummarizes our debt repayment obligations and material contractual commitmentsas of December 31, 2005 (in millions):

 
| ** **                                  | ** ** | **Amount of Commitment Expiration  Per Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                       | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5  Years** | ** ** |
|                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Note payable,  Parent Partnership           |       | $                                               | 206.9      |   | $ | — |   | $ | — |   | $ | 206.9 |   | $ | — |   |
| 6.45% Senior  Notes due 2008 (1)            |       | 180.0                                           |       | — |   | 180.0 |   | — |   | — |   |
| 7.51% Senior  Notes due 2028 (1)            |       | 210.0                                           |       | — |   | — |   | — |   | 210.0 |   |
| Interest  payments (2)                      |       | 464.0                                           |       | 40.2 |   | 74.7 |   | 57.1 |   | 292.0 |   |
| Debt and interest subtotal                  |       | 1,060.9                                         |       | 40.2 |   | 254.7 |   | 264.0 |   | 502.0 |   |
|                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Operating leases  (3)                       |       | 62.6                                            |       | 13.0 |   | 19.8 |   | 10.4 |   | 19.4 |   |
| Capital  expenditure obligations (4)        |       | 0.4                                             |       | 0.4 |   | — |   | — |   | — |   |
| Other  liabilities and deferred credits (5) |       | 1.4                                             |       | — |   | 1.3 |   | 0.1 |   | — |   |
|                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Total                                       |       | $                                               | 1,125.3    |   | $ | 53.6 |   | $ | 275.8 |   | $ | 274.5 |   | $ | 521.4 |   |

 

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(1)          We entered into an interest rate swap agreement to hedge our exposure tochanges in the fair value of our 7.51% Senior Notes due 2028. At December 31,2005, the 7.51% Senior Notes include an adjustment to decrease the fair valueof the debt by $0.9 million related to this interest rate swap agreement. At December 31,2005, our 6.45% Senior Notes include less than $0.1 million of unamortized debtdiscount. The fair value adjustment and unamortized debt discount are excludedfrom this table.

 

(2)          Includes interest payments due on our Senior Notes and interest paymentsand commitment fees due on our Note Payable to our Parent Partnership. Theinterest amount calculated on the Note Payable to our Parent Partnership isbased on the assumption that the amount outstanding and the interest ratecharged both remain at their current levels.

 

(3)          Includes a pipeline capacity lease with Centennial. In January 2003,we entered into a pipeline capacity lease agreement with Centennial for aperiod of five years that contains a minimum throughput requirement. For theyear ended December 31, 2005, we exceeded the minimum throughputrequirements on the lease agreement.

 

(4)          Includes accruals for costs incurred but not yet paid relating tocapital projects.

 

(5)          Excludes approximately $8.5 million of long-term deferred revenuepayments, which are being transferred to income over the term of the respectiverevenue contracts and $4.6 million related to our estimated amount ofobligation under a catastrophic event guarantee for Centennial. The amount ofcommitment by year is our best estimate of projected payments of theselong-term liabilities.

 

Weexpect to repay the long-term, senior unsecured obligations and note payable toour Parent Partnership through the issuance of additional long-term senior unsecureddebt at the time the 2008 and 2028 debts mature, with

 

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proceeds from thedispositions of assets, cash flows from operations, and contributions from ourParent Partnership or any combination of the above items.

 

Our Parent Partnership’ssenior unsecured debt is rated BBB- by Standard and Poors (“S&P”) and Baa3by Moody’s Investors Service (“Moody’s”). S&P assigned this rating on June 14,2005, following its review of the ownership structure, corporate governanceissues, and proposed funding after the acquisition of the Company by DFI. Bothratings are with a stable outlook. A rating reflects only the view of a ratingagency and is not a recommendation to buy, sell or hold any indebtedness. Anyrating can be revised upward or downward or withdrawn at any time by a ratingagency if it determines that the circumstances warrant such a change. Oursenior unsecured debt is also rated BBB- by S&P and Baa3 by Moody’s. Bothratings are with a stable outlook.

 

# **RecentAccounting Pronouncements**

 

See discussion of newaccounting pronouncements in Note 2 in the Notes to the Consolidated FinancialStatements.

 

# **Item 7A. *Quantitativeand Qualitative Disclosures About Market Risks***

 

*CommodityRisk*

 

We may be exposed tomarket risk through changes in commodity prices and interest rates. We do nothave foreign exchange risks. Our Risk Management Committee has establishedpolicies to monitor and control these market risks. The Risk ManagementCommittee is comprised, in part, of senior executives of the Company.

 

*InterestRate Risk*

 

The following tablesummarizes the estimated fair values of the Senior Notes as of December 31,2005 and 2004 (in millions):

 
| ** **                                 | ** ** | ** ** | ** ** | **Fair Value**        | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **Face**   | ** ** | **December 31,** | ** ** |
| ** **                                 | ** ** | **Value**  | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                       |       |       |       |                  |       |   |   |
| 6.45% Senior  Notes, due January 2008 |       | $          | 180.0      |                  | $          | 183.7 |   | $ | 187.1 |   |
| 7.51% Senior  Notes, due January 2028 |       | 210.0      |       | 224.1                 |       | 225.6 |   |
|                                            |            |            |            |                       |            |  |  |  |  |  |

 

We have utilized andexpect to continue to utilize interest rate swap agreements to hedge a portionof our fair value risks. Interest rate swap agreements are used to manage thefixed and floating interest rate mix of our debt portfolio and overall cost ofborrowing. The interest rate swap related to our fair value risk is intended toreduce our exposure to changes in the fair value of our fixed rate Senior Notes.Interest rate swap agreements involve the periodic exchange of payments withoutthe exchange of the notional amount upon which the payments are based. Therelated amount payable to or receivable from counterparties is included as anadjustment to accrued interest.

 

In October 2001, weentered into an interest rate swap agreement to hedge our exposure to changesin the fair value of our fixed rate 7.51% Senior Notes due 2028. We designatedthis swap agreement as a fair value hedge. The swap agreement has a notionalamount of $210.0 million and matures in January 2028 to match theprincipal and maturity of our Senior Notes. Under the swap agreement, we pay afloating rate of interest based on a three-month U.S. Dollar LIBOR rate, plus aspread, and receive a fixed rate of interest of 7.51%. During the years ended December 31,2005, 2004 and 2003, we recognized reductions in interest expense of $5.6million, $9.6 million and $10.0 million, respectively, related to the differencebetween the fixed rate and the floating rate of interest on the interest rateswap. During the years ended December 31, 2005, 2004 and 2003, we measuredthe hedge effectiveness of this interest rate swap and noted that no gain orloss from ineffectiveness was required to be recognized. The fair value of thisinterest rate swap was a loss of approximately $0.9 million at December 31,2005, and a gain of approximately $3.4 million at December 31, 2004.Utilizing the balance of our 7.51% Senior Notes outstanding at December 31,2005, and including the effects of hedging activities, assuming market interestrates increase 100 basis points, the potential annual increase in interestexpense is $2.1 million.

 

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At December 31, 2005and 2004, we had intercompany notes payable to our Parent Partnership of $206.9million and $301.7 million, respectively, which represented borrowings underthe Parent Partnership’s Revolving Credit Facility, 7.625% Senior Notes and6.125% Senior Notes. The weighted average interest rate on the note payable tothe Parent Partnership at December 31, 2005, was 4.15%. At December 31,2005, accrued interest includes $3.5 million due to our Parent Partnership. Forthe year ended December 31, 2005 and 2004, interest costs incurred on thenote payable to our Parent Partnership totaled $11.9 million and $12.5 million,respectively.

 

**Item 8*. Financialstatements and supplementary data***

 

Our consolidatedfinancial statements, together with the independent registered publicaccounting firm’s report of KPMG LLP, begin on page F-1 of this Report.

 

**Item 9. *Changes inand disagreements with accountants on accounting and financial disclosure***

 

None.

 

**Item 9A. *Controls andprocedures***

 

As of the end of theperiod covered by this report, our management carried out an evaluation, withthe participation of our acting principal executive officer (the “CEO”) and ourprincipal financial officer (the “CFO”), of the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15 of the Securities ExchangeAct of 1934. Based on those evaluations, as of December 31, 2005, the actingCEO and CFO concluded:

 

(i)             that our disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including the actingCEO and CFO, as appropriate to allow timely decisions regarding requireddisclosure; and

 

(ii)          that our disclosurecontrols and procedures are effective.

 

*Changesin Internal Control over Financial Reporting*

 

There has been no changein our internal control over financial reporting during the fourth quarter of2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Item 9B.*Other information***

 

None.

 

**PART III**

 

**Item 10. *Directorsand executive officers of the registrant***

 

We do not have officersor directors, as is commonly the case with publicly traded partnerships. Ouroperations and activities are managed by our General Partner, a wholly ownedsubsidiary of our Parent Partnership. All officers and directors of the GeneralPartner are appointed annually by the board of directors of the Company. During2005, the directors of the General Partner, TEPPCO GP, were Barry R. Pearl,Charles H. Leonard and James C. Ruth, until Mr. Leonard’s retirementeffective July 8, 2005

 

36

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and Mr. Pearl’sretirement effective December 30, 2005. Mr. Ruth retired effective February 28,2006. On February 7, 2006, the General Partner appointed William G. Maniasand Patricia A. Totten to the board of directors. The Executive Officers of theGeneral Partner are also Executive Officers of the Company. Informationconcerning the Executive Officers of the General Partner and the Company iscontained in Item 10 of the Parent Partnership’s Annual Report on Form 10-Kfor the Year Ended December 31, 2005 (the “Parent Partnership Form 10-K”),and is incorporated by reference in this Report.

 

**Item 11. *Executivecompensation***

 

We do not have anyofficers or directors, and the General Partner manages and operates ourbusiness. The Executive Officers of the General Partner are employees of EPCO. Certainemployees of EPCO may devote all or a portion of their time to us, and wereimburse EPCO for the services of these persons. The information contained inItem 11 of the Parent Partnership Form 10-K is incorporated by referencein this Report.

 

**Item 12. *Securityownership of certain beneficial owners and management and related stockholdermatters***

 

The Parent Partnershipowns a 99.999% interest as the sole limited partner interest and the GeneralPartner owns a 0.001% general partner interest in us. Information identifyingsecurity ownership of the Parent Partnership is contained in Item 12 of theParent Partnership Form 10-K and is incorporated by reference in thisReport.

 

Neither the GeneralPartner, the Parent Partnership nor us has any equity compensation plan underwhich equity securities of any of such entities are authorized for issuance.

 

**Item 13. *Certainrelationships and related transactions***

 

## **Parent Partnership**

 

The Partnership does nothave any employees. We are managed by the TEPPCO GP, a wholly owned subsidiaryof our Parent Partnership. Our Parent Partnership is managed by the Company,which prior to February 23, 2005, was an indirect wholly owned subsidiaryof DEFS. According to the Partnership Agreement, the General Partner and theCompany are entitled to reimbursement of all direct and indirect expensesrelated to our business activities. As a result of the change in ownership ofthe Company on February 24, 2005, all of our management, administrativeand operating functions are performed by employees of EPCO, pursuant to anadministrative services agreement. TEPPCO GP reimburses EPCO for the costs ofits employees who perform operating functions for us and for costs relatedto its other management and administrative employees (see Note 1 in the Notesto the Consolidated Financial Statements).

 

Our Parent Partnership allocatesoperating, general and administrative expenses to us for legal, insurance,financial, communication and other administrative services based upon theestimated level of effort devoted to our various operations. In addition, wemake cash payments on behalf of the Parent Partnership for various expenses. AtDecember 31, 2005 and 2004, we had a net payable of $18.5 million and$63.0 million, respectively, to the Parent Partnership related to theseaffiliated activities.

 

## **EPCO and Affiliates**

 

We transport LPGs on ourpipeline system for affiliates of EPCO. From February 24, 2005 through December 31,2005, we recognized revenues from affiliates of EPCO for LPG transportation andother operating revenues of $4.6 million.

 

From February 24,2005 through December 31, 2005, we incurred direct expenses of $30.8million which were charged to us by EPCO. Substantially all of these costs wererelated to payroll and payroll related expenses.

 

37

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From February 24,2005 through December 31, 2005, expenses for administrative services andoverhead allocated to us by the Company (including EPCO and its affiliates)were $0.3 million.

 

From February 24,2005 through December 31, 2005, the majority of our insurance coverage, includingproperty, liability, business interruption, auto and directors and officers’liability insurance was obtained by our Parent Partnership through EPCO. From February 24,2005 through December 31, 2005, we incurred insurance expense related topremiums charged by EPCO of $4.0 million. At December 31, 2005, we hadinsurance reimbursement receivables due from EPCO of $1.3 million.

 

## **Duke Energy, DEFS andAffiliates**

 

Effective May 2001,we entered into an agreement with an affiliate of DEFS to commit to it soleutilization of our Providence terminal. We operate the terminal and providepropane loading services to an affiliate of DEFS. Through February 23,2005, and for the years ended December 31, 2004 and 2003, revenues from anaffiliate of DEFS of $1.1 million, $4.3 million and $3.2 million, respectively,were recognized pursuant to this agreement.

 

We transport LPGs on ourpipeline system for DEFS and its affiliates. Through February 23, 2005,and for the years ended December 31, 2004 and 2003, we recognized revenuesfrom DEFS and its affiliates for LPG transportation of $0.7 million, $2.6million and $2.8 million, respectively.

 

Through February 23,2005, and for the years ended December 31, 2004 and 2003, we incurreddirect expenses of $7.5 million, $45.5 million and $48.1 million, respectively,which were charged to us by DEFS. Substantially all of these costs were relatedto payroll and payroll related expenses. Through February 23, 2005, andfor the years ended December 31, 2004 and 2003, expenses foradministrative services and overhead allocated to us by the Company (includingDuke Energy and its affiliates) were $0.3 million, $1.0 million and $1.0million, respectively.

 

At December 31,2004, we had a receivable from DEFS of $1.1 million related to revenuesrecognized from DEFS. At December 31, 2004, we had a payable to DEFS of$0.7 million related to administrative services provided by DEFS.

 

Through February 23,2005, our Parent Partnership contracted with Bison Insurance Company Limited (“Bison”),a wholly owned subsidiary of Duke Energy, for a majority of our insurancecoverage, including property, liability, auto and directors and officers’liability insurance. Through February 23, 2005 and for the years ended December 31,2004 and 2003, we incurred insurance expense related to premiums paid to Bisonof $0.5 million, $2.8 million and $2.6 million, respectively. At December 31,2004, we had insurance reimbursement receivables due from Bison of $4.5million.

 

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**Item 14. *Principalaccounting fees and services***

 

Our Parent Partnership’saudit engagement with KPMG includes the fees for the professional servicesrendered to us by KPMG as we do not have a separate audit engagement with KPMG.We are allocated a portion of the audit services expense (see Note 2 in theNotes to the Consolidated Financial Statements).

 

The following tabledescribes fees for professional services rendered by KPMG, our ParentPartnership’s principal accountant, for the audit of the financial statementsof all of the Parent Partnership’s entities for the years ended December 31,2005 and 2004, and for fees billed for other services rendered by KPMG duringthose periods (in thousands): 

 
| ** **             | ** ** | **Years Ended December 31,** | ** ** |
|------------------------|------------|-----------------------------------|------------|
| **Type of Fee**        | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Audit Fees (1)         |       | $                                 | 1,773      |   | $ | 2,079 |   |
| Audit Related Fees (2) |       | 26                                |       | 21 |   |
| Tax Fees (3)           |       | —                            |       | 88 |   |
| All Other Fees         |       | —                            |       | — |   |
| Total                  |       | $                                 | 1,799      |   | $ | 2,188 |   |

 

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(1)          Audit fees include fees for the audits of the consolidated financialstatements as well as for the Parent Partnership’s audit of internal controlover financial reporting.

 

(2)          Audit relatedfees consisted principally of fees for audits of financial statements forcertain employee benefit plans and certain internal control documentationassistance.

 

(3)          Tax feesconsisted of fees for sales and use tax consultation and tax complianceservices.

 

## **Procedures For AuditCommittee Pre-Approval of Audit and Permissible Non-Audit Services ofIndependent Auditor**

 

Pursuant to its charter,the Audit and Conflicts Committee of the Parent Partnership is responsible forreviewing and approving, in advance, any audit and any permissible non-auditengagement or relationship between the Parent Partnership and its independentauditors. KPMG’s engagement and all related fees to conduct our audit werepre-approved by the Parent Partnership’s Audit and Conflicts Committee on April 25,2005. Additionally, all permissible non-audit engagements with KPMG and theParent Partnership have been reviewed and approved by the Parent Partnership’sAudit and Conflicts Committee, pursuant to pre-approval policies and proceduresestablished by the Parent Partnership’s Audit and Conflicts Committee.

 

**PART IV**

 

**Item 15. *Exhibits,financial statement schedules***

 

(a)          Thefollowing documents are filed as a part of this Report:

 

(1)                                  FinancialStatements: See Index to Consolidated Financial Statements on page F-1 ofthis Report for financial statements filed as part of this Report.

 

(2)                                  FinancialStatement Schedules: None.

 

(3)                                  Exhibits.

 

39

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1                 |       | Second Amended and Restated  Agreement of Limited Partnership of TE Products Pipeline Company, Limited  Partnership, effective September 21, 2001 (Filed as Exhibit 3.8 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter  ended September 30, 2001, and incorporated herein by reference).                                                                                                                                                                                                                                                                                              |
| 4.1                 |       | Form of Indenture between TE  Products Pipeline Company, Limited Partnership and The Bank of New York, as Trustee,  dated as of January 27, 1998 (Filed as Exhibit 4.3 to TE Products  Pipeline Company, Limited Partnership’s Registration Statement on Form S-3  (Commission File No. 333-38473) and incorporated herein by reference).                                                                                                                                                                                                                                                                              |
| 4.2                 |       | Form of Indenture between TEPPCO Partners,  L.P., as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,  L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company, as  subsidiary guarantors, and First Union National Bank, NA, as trustee, dated  as of February 20, 2002 (Filed as Exhibit 99.2 to Form 8-K of  TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as of February 20,  2002 and incorporated herein by reference).                                                                                                                                               |
| 4.3                 |       | First Supplemental Indenture between TEPPCO  Partners, L.P., as issuer, TE Products Pipeline Company, Limited Partnership,  TCTM, L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company,  as subsidiary guarantors, and First Union National Bank, NA, as trustee,  dated as of February 20, 2002 (Filed as Exhibit 99.3 to Form 8-K  of TEPPCO Partners, L.P (Commission File No. 1-10403) dated as of February 20,  2002 and incorporated herein by reference).                                                                                                                                          |
| 4.4                 |       | Second Supplemental Indenture, dated  as of June 27, 2002, among TEPPCO Partners, L.P., as issuer, TE Products  Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream  Companies, L.P., and Jonah Gas Gathering Company, as Initial Subsidiary  Guarantors, and Val Verde Gas Gathering Company, L.P., as New Subsidiary  Guarantor, and Wachovia Bank, National Association, formerly known as First  Union National Bank, as trustee (Filed as Exhibit 4.6 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter  ended June 30, 2002 and incorporated herein by reference). |
| 4.5                 |       | Third Supplemental Indenture among TEPPCO Partners,  L.P. as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,  L.P., TEPPCO Midstream Companies, L.P., Jonah Gas Gathering Company and Val  Verde Gas Gathering Company, L.P. as Subsidiary Guarantors, and Wachovia  Bank, National Association, as trustee, dated as of January 30, 2003 (Filed as Exhibit 4.7  to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the year ended December 31, 2002, and incorporated herein by  reference).                                                                                        |
| 10.1+               |       | Duke Energy Corporation Executive  Savings Plan (Filed as Exhibit 10.7 to Form 10-K of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the year ended December 31,  1999 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2+               |       | Duke Energy Corporation Executive  Cash Balance Plan (Filed as Exhibit 10.8 to Form 10-K of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the year ended December 31,  1999 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.3+               |       | Duke Energy Corporation Retirement  Benefit Equalization Plan (Filed as Exhibit 10.9 to Form 10-K of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31,  1999 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4+               |       | Texas Eastern Products Pipeline  Company 1994 Long Term Incentive Plan executed on March 8, 1994 (Filed  as Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the quarter ended March 31, 1994 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                  |
| 10.5+               |       | Texas Eastern Products Pipeline  Company 1994 Long Term Incentive Plan, Amendment 1, effective January 16,  1995 (Filed as Exhibit 10.12 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended June 30, 1999  and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                   |

 

40

----

 
| 10.6+  |   | Form of Employment Agreement  between the Company and Thomas R. Harper, Charles H. Leonard, James C. Ruth,  John N. Goodpasture, Leonard W. Mallett, Stephen W. Russell, C. Bruce  Shaffer, and Barbara A. Carroll (Filed as Exhibit 10.20 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 1998 and incorporated herein by reference).                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7   |   | Services and Transportation Agreement between TE  Products Pipeline Company, Limited Partnership and Fina Oil and Chemical  Company, BASF Corporation and BASF Fina Petrochemical Limited Partnership,  dated February 9, 1999 (Filed as Exhibit 10.22 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter  ended March 31, 1999 and incorporated herein by reference).                          |
| 10.8   |   | Call Option Agreement, dated February 9,  1999 (Filed as Exhibit 10.23 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended March 31, 1999  and incorporated herein by reference).                                                                                                                                                                                                          |
| 10.9+  |   | Texas Eastern Products Pipeline  Company Non-employee Directors Unit Accumulation Plan, effective April 1,  1999 (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended September 30,  1999 and incorporated herein by reference).                                                                                                                                    |
| 10.10+ |   | Texas Eastern Products Pipeline  Company Non-employee Directors Deferred Compensation Plan, effective November 1,  1999 (Filed as Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended September 30,  1999 and incorporated herein by reference).                                                                                                                             |
| 10.11+ |   | Texas Eastern Products Pipeline  Company Phantom Unit Retention Plan, effective August 25, 1999 (Filed as  Exhibit 10.32 to Form 10-Q of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the quarter ended September 30, 1999 and  incorporated herein by reference).                                                                                                                                                    |
| 10.12+ |   | Texas Eastern Products Pipeline  Company, LLC 2000 Long Term Incentive Plan, Amendment and Restatement,  effective January 1, 2000 (Filed as Exhibit 10.28 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2000 and incorporated herein by reference).                                                                                                                      |
| 10.13+ |   | TEPPCO Supplemental Benefit Plan,  effective April 1, 2000 (Filed as Exhibit 10.29 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2000 and incorporated herein by reference).                                                                                                                                                                                              |
| 10.14+ |   | Employment Agreement with Barry R.  Pearl (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended March 31, 2001 and  incorporated herein by reference).                                                                                                                                                                                                                    |
| 10.15  |   | Contribution, Assignment and  Amendment Agreement among TEPPCO Partners, L.P., TE Products Pipeline  Company, Limited Partnership, TCTM, L.P., Texas Eastern Products Pipeline  Company, LLC, and TEPPCO GP, Inc., dated July 26, 2001 (Filed as Exhibit 3.6  to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the quarter ended June 30, 2001 and incorporated herein by  reference).               |
| 10.16  |   | Certificate of Formation of TEPPCO  Colorado, LLC (Filed as Exhibit 3.2 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31,  1998 and incorporated herein by reference).                                                                                                                                                                                                              |
| 10.17  |   | Amended and Restated Credit  Agreement among TEPPCO Partners, L.P. as Borrower, SunTrust Bank, as Administrative  Agent and LC Issuing Bank and Certain Lenders, as Lenders dated as of March 28,  2002 ($500,000,000 Revolving Facility) (Filed as Exhibit 10.45 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the three  months ended March 31, 2002 and incorporated herein by reference).          |
| 10.18  |   | Amendment, dated as of June 27,  2002 to the Amended and Restated Credit Agreement among TEPPCO Partners,  L.P., as Borrower, SunTrust Bank, as Administrative Agent, and Certain  Lenders, dated as of March 28, 2002 ($500,000,000 Revolving Credit  Facility) (Filed as Exhibit 99.3 to Form 8-K of TEPPCO Partners,  L.P. (Commission File No. 1-10403) dated as of July 2, 2002 and  incorporated herein by reference). |

 

41

----

 
| 10.19+ |   | Texas Eastern Products Pipeline  Company, LLC 2002 Phantom Unit Retention Plan, effective June 1, 2002  (Filed as Exhibit 10.49 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended June 30, 2002,  and incorporated herein by reference).                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20+ |   | Amended and Restated TEPPCO Supplemental Benefit  Plan, effective November 1, 2002 (Filed as Exhibit 10.44 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2002, and incorporated herein by reference).                                                                                                                                                         |
| 10.21+ |   | Texas Eastern Products Pipeline Company, LLC 2000  Long Term Incentive Plan, Second Amendment and Restatement, effective January 1,  2003 (Filed as Exhibit 10.45 to Form 10-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the year ended December 31, 2002,  and incorporated herein by reference).                                                                                                  |
| 10.22+ |   | Amended and Restated Texas Eastern Products Pipeline  Company, LLC Management Incentive Compensation Plan, effective January 1,  2003 (Filed as Exhibit 10.46 to Form 10-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the year ended December 31, 2002,  and incorporated herein by reference).                                                                                                      |
| 10.23+ |   | Amended and Restated TEPPCO Retirement Cash Balance  Plan, effective January 1, 2002 (Filed as Exhibit 10.47 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2002, and incorporated herein by reference).                                                                                                                                                       |
| 10.24  |   | Formation Agreement between Panhandle Eastern Pipe  Line Company and Marathon Ashland Petroleum LLC and TE Products Pipeline  Company, Limited Partnership, dated as of August 10, 2000 (Filed as Exhibit 10.48  to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the year ended December 31, 2002, and incorporated herein by  reference).                                                   |
| 10.25  |   | Amended and Restated Limited Liability Company  Agreement of Centennial Pipeline LLC dated as of August 10, 2000 (Filed  as Exhibit 10.49 to Form 10-K of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the year ended December 31, 2002, and incorporated  herein by reference).                                                                                                                          |
| 10.26  |   | Guaranty Agreement, dated as of September 27,  2002, between TE Products Pipeline Company, Limited Partnership and Marathon  Ashland Petroleum LLC for Note Agreements of Centennial Pipeline LLC (Filed  as Exhibit 10.50 to Form 10-K of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the year ended December 31, 2002, and  incorporated herein by reference).                                         |
| 10.27  |   | LLC Membership Interest Purchase Agreement By and  Between CMS Panhandle Holdings, LLC, As Seller and Marathon Ashland Petroleum  LLC and TE Products Pipeline Company, Limited Partnership, Severally as  Buyers, dated February 10, 2003 (Filed as Exhibit 10.51 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2002, and incorporated herein by reference). |
| 10.28  |   | Joint Development Agreement between TE Products  Pipeline Company, Limited Partnership and Louis Dreyfus Plastics Corporation  dated February 10, 2000 (Filed as Exhibit 10.52 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter  ended March 31, 2003, and incorporated herein by reference).                                                                                     |
| 10.29  |   | Credit Agreement among TEPPCO Partners, L.P. as  Borrower, SunTrust Bank as Administrative Agent and LC Issuing Bank and The  Lenders Party Hereto, as Lenders, dated as of June 27, 2003  ($550,000,000 Revolving Facility) (Filed as Exhibit 10.52 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter  ended June 30, 2003, and incorporated herein by reference).                |
| 10.30  |   | Agreement of Limited Partnership of Mont Belvieu  Storage Partners, L.P. dated effective January 21, 2003. (Filed as Exhibit 10.53  to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the quarter ended September 30, 2003, and incorporated herein by  reference).                                                                                                                            |
| 10.31  |   | Letter of Agreement Clarifying Rights and  Obligations of the Parties Under the Mont Belvieu Storage Partners, L.P.,  Partnership Agreement and the Mont Belvieu Venture, LLC, LLC Agreement, dated  October 25, 2003 (Filed as Exhibit 10.54 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter  ended September 30, 2003, and incorporated herein by reference).                  |

 

42

----

 
| 10.32  |   | Amended and Restated Credit Agreement  among TEPPCO Partners, L.P., as Borrower, SunTrust Bank, as Administrative  Agent and LC Issuing Bank and The Lenders Party Hereto, as Lenders dated as  of October 21, 2004 ($600,000,000 Revolving Facility) (Filed as Exhibit 99.1  to Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)  dated as of October 21, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33+ |   | Texas Eastern Products Pipeline  Company Amended and Restated Non-employee Directors Deferred Compensation  Plan, effective April 1, 2002 (Filed as Exhibit 10.42 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as of December 31,  2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.34+ |   | Texas Eastern Products Pipeline  Company Second Amended and Restated Non-employee Directors Unit Accumulation  Plan, effective January 1, 2004 (Filed as Exhibit 10.41 to From  10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as of December 31,  2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.35  |   | First Amendment to Amended and Restated  Credit Agreement, dated as of February 23, 2005, by and among TEPPCO  Partners, L.P., the Borrower, several banks and other financial institutions,  the Lenders, SunTrust Bank, as the Administrative Agent for the Lenders,  Wachovia Bank, National Association, as Syndication Agent, and BNP Paribas,  JPMorgan Chase Bank, N.A. and KeyBank, N.A. as Co-Documentation Agents (Filed  as Exhibit 99.1 to Form 8-K of TEPPCO Partners, L.P. (Commission  File No. 1-10403) dated as of February 24, 2005 and incorporated herein  by reference).                                                                                                                            |
| 10.36+ |   | Supplemental Agreement to Employment  Agreement between the Company and Barry R. Pearl dated as of February 23,  2005 (Filed as Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended March 31, 2005  and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.37+ |   | Supplemental Agreement to Employment  and Non-Compete Agreement between the Company and J. Michael Cockrell dated  as of February 23, 2005 (Filed as Exhibit 10.2 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter  ended March 31, 2005 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.38+ |   | Supplemental Form Agreement to Form of  Employment Agreement between the Company and John N. Goodpasture, Stephen W.  Russell, C. Bruce Shaffer and Barbara A. Carroll dated as of February 23,  2005 (Filed as Exhibit 10.3 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended March 31, 2005  and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                 |
| 10.39+ |   | Supplemental Form Agreement to Form of  Employment and Agreement between the Company and Thomas R. Harper, Charles H.  Leonard, James C. Ruth and Leonard W. Mallett dated as of February 23,  2005 (Filed as Exhibit 10.4 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended March 31, 2005  and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                   |
| 10.40+ |   | Amendments to the TEPPCO Retirement  Cash Balance Plan and the TEPPCO Supplemental Benefit Plan dated as of May 27,  2005 (Filed as Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended June 30, 2005  and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.41+ |   | Agreement and Release between  Charles H. Leonard and Texas Eastern Products Pipeline Company, LLC dated as  of July 11, 2005 (Filed as Exhibit 10.2 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended June 30,  2005 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.42  |   | Third Amended and Restated  Administrative Services Agreement by and among EPCO, Inc., Enterprise  Products Partners L.P., Enterprise Products Operating L.P., Enterprise  Products GP, LLC and Enterprise Products OLPGP, Inc., Enterprise GP  Holdings L.P., EPE Holdings, LLC, TEPPCO Partners, L.P., Texas Eastern  Products Pipeline Company, LLC, TE Products Pipeline Company, Limited  Partnership, TEPPCO Midstream Companies, L.P., TCTM, L.P. and TEPPCO GP, Inc.  dated August 15, 2005, but effective as of February 24, 2005 (Filed  as Exhibit 99.1 to Form 8-K of TEPPCO Partners, L.P. (Commission  File No. 1-10403) dated August 19, 2005 and incorporated herein by  reference). |

 

43

----

 
| 10.43  |   | Second Amendment to Amended and  Restated Credit Agreement, dated as of December 13, 2005, by and among  TEPPCO Partners, L.P., the Borrower, several banks and other financial  institutions, the Lenders, SunTrust Bank, as the Administrative Agent for the  Lenders, Wachovia Bank, National Association, as Syndication Agent, and BNP  Paribas, JPMorgan Chase Bank, N.A. and KeyBank, N.A., as Co-Documentation  Agents (Filed as Exhibit 99.1 to Form 8-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) dated as of December 13, 2005 and  incorporated herein by reference). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.44+ |   | Agreement and Release between Barry  R. Pearl and Texas Eastern Products Pipeline Company, LLC dated as of December 30,  2005 (Filed as Exhibit 10.52 to Form 10-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the year ended December 31, 2005  and incorporated herein by reference).                                                                                                                                                                                                                                                                                         |
| 10.45+ |   | Agreement and Release between James  C. Ruth and Texas Eastern Products Pipeline Company, LLC dated as of January 25,  2006 (Filed as Exhibit 10.53 to Form 10-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the year ended December 31, 2005  and incorporated herein by reference).                                                                                                                                                                                                                                                                                           |
| 10.46  |   | Waiver of Provisions of the Conflicts  Policies and Procedures of the third Amended and Restated Administrative  Services Agreement (Filed as Exhibit 10.56 to Form 10-K of TEPPCO Partners,  L.P. (Commission File No. 1-10403) for the year ended December 31, 2005 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                            |
| 23*    |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1*  |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2*  |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32.1** |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32.2** |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

----

*  Filed herewith.

**  Furnished herewith pursuant to Item601(b)-(32) of Regulation S-K.

+  A management contract or compensation plan orarrangement.

 

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                     | By:                                                      | /s/   LEE W.  MARSHALL, SR. |   |   |
|--------------------------|----------------------------------------------------------|--------------------------------------------|--------|--------|
| Date: March 1, 2006 | Lee W. Marshall, Sr.,                               |                                       |
|                     | Acting Chief Executive  Officer                          |                                       |
|                     | of TEPPCO GP, Inc.,  General Partner                |                                       |
|                     |                                                     |                                       |
|                     | By:                                                      | /s/   WILLIAM  G. MANIAS         |   |   |
| Date: March 1, 2006 | William G. Manias,                                       |                                       |
|                     | Director and Vice President  and Chief Financial Officer |
|                     | of TEPPCO GP, Inc.,  General Partner                |                                       |
|                          |                                                          |                                            |        |        |  |

 

44

----

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.
| **Signature**                        | ** ** | **Title**                                    | ** ** | **Date**      | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|---------------|------------|
|                                 |       |                                         |       |          |       |
| /s/   LEE W. MARSHALL, SR. |       | Acting Chief Executive  Officer              |       | March 1, 2006 |       |
| Lee W. Marshall, Sr.                 |       | of TEPPCO GP, Inc.                           |       |          |       |
|                                 |       |                                         |       |          |       |
| /s/   WILLIAM G. MANIAS    |       | Vice President, Chief  Financial Officer and |       | March 1, 2006 |       |
| William G. Manias                    |       | Director of TEPPCO GP,  Inc.                 |       |          |       |
|                                 |       |                                         |       |          |       |
| /s/   PATRICIA A. TOTTEN   |       | Director of TEPPCO GP,  Inc.                 |       | March 1, 2006 |       |
| Particia A. Totten                   |       |                                         |       |          |       |

 

45

----

 

**CONSOLIDATED FINANCIAL STATEMENTS**

**OF TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Consolidated Financial  Statements:                                                                                                       |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                      |   |
| Report of Independent  Registered Public Accounting Firm                                                                                  |   |
|                                                                                                                                      |   |
| Consolidated Balance Sheets as of December 31,  2005 and 2004 (as restated)                                                          |   |
|                                                                                                                                      |   |
| Consolidated Statements of  Income for the years ended December 31, 2005, 2004 (as restated) and  2003 (as restated)                 |   |
|                                                                                                                                      |   |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2005, 2004 (as restated) and  2003 (as restated)             |   |
|                                                                                                                                      |   |
| Consolidated Statements of  Partners’ Capital for the years ended December 31, 2005, 2004 (as  restated) and 2003 (as restated) |   |
|                                                                                                                                      |   |
| Notes to Consolidated  Financial Statements                                                                                               |   |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Partners of

TE Products Pipeline Company, LimitedPartnership:

 

We have audited theaccompanying consolidated balance sheets of TE Products Pipeline Company,Limited Partnership as of December 31, 2005 and 2004, and the relatedconsolidated statements of income, cash flows and partners’ capital for each ofthe years in the three-year period ended December 31, 2005. Theseconsolidated financial statements are the responsibility of the Partnership’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of TE Products Pipeline Company,Limited Partnership as of December 31, 2005 and 2004, and the results ofits operations and its cash flows for each of the years in the three-yearperiod ended December 31, 2005, in conformity with U.S. generally acceptedaccounting principles.

 

As discussed in Note 19to the consolidated financial statements, TE Products Pipeline Company, LimitedPartnership has restated its consolidated balance sheet as of December 31,2004, and the related statements of income, partners’ capital and cash flowsfor the years ended December 31, 2004 and 2003.

 

 
|                   | KPMG LLP |
|------------------------|----------|
|                   |
|                   |
| Houston, Texas         |
| February 28, 2006 |

 

F-2

----

 

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                                                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                                                                          | ** ** | ** **            | ** ** | **(as restated)** | ** ** |
| **ASSETS**                                                                                                          | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                     |       |                  |       |   |   |
| Cash and cash equivalents                                                                                           |       | $                     | —     |   | $ | — |   |
| Accounts receivable, trade (net of allowance for  doubtful accounts of $45 and $56)                                 |       | 26,338                |       | 21,090 |   |
| Accounts receivable, related parties                                                                                |       | 2,182                 |       | 2,379 |   |
| Inventories                                                                                                         |       | 16,449                |       | 10,093 |   |
| Other                                                                                                               |       | 14,911                |       | 12,143 |   |
| Total current assets                                                                                                |       | 59,880                |       | 45,705 |   |
| Property, plant and equipment, at cost (net of  accumulated depreciation and amortization of $340,562 and $311,197) |       | 808,761               |       | 722,334 |   |
| Equity investments                                                                                                  |       | 157,335               |       | 160,998 |   |
| Other assets                                                                                                        |       | 16,566                |       | 16,156 |   |
| Total assets                                                                                                        |       | $                     | 1,042,542  |   | $ | 945,193 |   |
|                                                                                                                |       |                  |       |   |   |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                          |       |                  |       |   |   |
| ** **                                                                                                          |       |                  |       |   |   |
| Current  liabilities:                                                                                               |       |                  |       |   |   |
| Accounts payable and accrued liabilities                                                                            |       | $                     | 13,540     |   | $ | 10,211 |   |
| Accounts payable, related parties                                                                                   |       | 19,973                |       | 65,375 |   |
| Accrued interest                                                                                                    |       | 16,151                |       | 17,063 |   |
| Other accrued taxes                                                                                                 |       | 7,524                 |       | 5,605 |   |
| Other                                                                                                               |       | 7,220                 |       | 9,339 |   |
| Total current liabilities                                                                                           |       | 64,408                |       | 107,593 |   |
| Senior Notes                                                                                                        |       | 389,048               |       | 393,317 |   |
| Note payable,  Parent Partnership                                                                                   |       | 206,906               |       | 301,686 |   |
| Other  liabilities and deferred credits                                                                             |       | 14,500                |       | 9,980 |   |
| Commitments and  contingencies                                                                                      |       |                  |       |   |   |
| Partners’  capital:                                                                                            |       |                  |       |   |   |
| General partner’s interest                                                                                     |       | 4                     |       | 2 |   |
| Limited partner’s interest                                                                                     |       | 367,676               |       | 132,615 |   |
| Total partners’ capital                                                                                        |       | 367,680               |       | 132,617 |   |
| Total liabilities and partners’ capital                                                                        |       | $                     | 1,042,542  |   | $ | 945,193 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

F-3

----

 

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(in thousands**)

 
| ** **                             | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                             | ** ** | ** **                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Operating  revenues:                   |       |                              |       |   |   |   |   |
| Transportation – Refined products |       | $                                 | 144,552    |   | $ | 148,166 |   | $ | 138,926 |   |
| Transportation – LPGs             |       | 96,297                            |       | 87,050 |   | 91,787 |   |
| Other                                  |       | 41,780                            |       | 39,542 |   | 31,254 |   |
| Total operating revenues               |       | 282,629                           |       | 274,758 |   | 261,967 |   |
|                                   |       |                              |       |   |   |   |   |
| Costs and  expenses:                   |       |                              |       |   |   |   |   |
| Operating, general and administrative  |       | 115,626                           |       | 124,496 |   | 112,683 |   |
| Operating fuel and power               |       | 32,346                            |       | 31,588 |   | 28,792 |   |
| Depreciation and amortization          |       | 38,323                            |       | 42,207 |   | 31,066 |   |
| Taxes – other than income taxes   |       | 11,087                            |       | 8,910 |   | 8,866 |   |
| Gains on sales of assets               |       | (139                              | )          | (526 | ) | — |   |
| Total costs and expenses               |       | 197,243                           |       | 206,675 |   | 181,407 |   |
|                                   |       |                              |       |   |   |   |   |
| Operating income                       |       | 85,386                            |       | 68,083 |   | 80,560 |   |
|                                   |       |                              |       |   |   |   |   |
| Interest expense  – net           |       | (30,958                           | )          | (28,843 | ) | (27,219 | ) |
| Equity losses                          |       | (2,984                            | )          | (6,544 | ) | (7,384 | ) |
| Other income –  net               |       | 755                               |       | 787 |   | 226 |   |
|                                   |       |                              |       |   |   |   |   |
| Net income                             |       | $                                 | 52,199     |   | $ | 33,483 |   | $ | 46,183 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

F-4

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                     | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | ** **                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                         |       |                              |       |   |   |   |   |
| Net income                                                                     |       | $                                 | 52,199     |   | $ | 33,483 |   | $ | 46,183 |   |
| Adjustments to reconcile net income to cash provided  by operating activities: |       |                              |       |   |   |   |   |
| Depreciation and amortization                                                  |       | 38,323                            |       | 42,207 |   | 31,066 |   |
| Losses in equity investments, net of distributions                             |       | 15,415                            |       | 16,857 |   | 12,647 |   |
| Non-cash portion of interest expense                                           |       | 513                               |       | 30 |   | 31 |   |
| Gains on sales of assets                                                       |       | (139                              | )          | (526 | ) | — |   |
| (Increase) decrease in accounts receivable                                     |       | (5,248                            | )          | 4,287 |   | (1,334 | ) |
| (Increase) decrease in accounts receivable, related  parties                   |       | 197                               |       | (2,225 | ) | 3,002 |   |
| Decrease (increase) in inventories                                             |       | (6,296                            | )          | 1,093 |   | 552 |   |
| (Increase) decrease in other current assets                                    |       | (2,768                            | )          | (1,913 | ) | 959 |   |
| (Decrease) increase in accounts payable and accrued  expenses                  |       | 4,375                             |       | (5,014 | ) | (9,689 | ) |
| (Increase) decrease in accounts payable, related  parties                      |       | (882                              | )          | (1,013 | ) | 2,278 |   |
| Other                                                                          |       | (52,846                           | )          | 45,628 |   | 10,393 |   |
| Net cash provided by operating activities                                      |       | 42,843                            |       | 132,894 |   | 96,088 |   |
|                                                                           |       |                              |       |   |   |   |   |
| Cash flows from  investing activities:                                         |       |                              |       |   |   |   |   |
| Proceeds from cash investments                                                 |       | —                            |       | — |   | 750 |   |
| Proceeds from sales of assets                                                  |       | —                            |       | 594 |   | — |   |
| Purchase of assets                                                             |       | (68,969                           | )          | (1,962 | ) | — |   |
| Investment in Centennial Pipeline LLC                                          |       | —                            |       | (1,500 | ) | (4,000 | ) |
| Purchase of additional interest in Centennial  Pipeline LLC                    |       | —                            |       | — |   | (20,000 | ) |
| Investment in Mont Belvieu Storage Partners, L.P.                              |       | (4,233                            | )          | (21,358 | ) | (2,533 | ) |
| Capital expenditures                                                           |       | (58,235                           | )          | (81,261 | ) | (58,391 | ) |
| Net cash used in investing activities                                          |       | (131,437                          | )          | (105,487 | ) | (84,174 | ) |
|                                                                           |       |                              |       |   |   |   |   |
| Cash flows from  financing activities:                                         |       |                              |       |   |   |   |   |
| Proceeds from note payable, Parent Partnership                                 |       | 169,708                           |       | 126,383 |   | 110,859 |   |
| Repayment of note payable, Parent Partnership                                  |       | (263,978                          | )          | (36,011 | ) | (53,638 | ) |
| Equity contribution – Parent Partnership                                  |       | 294,794                           |       | — |   | 37,033 |   |
| Distributions paid                                                             |       | (111,930                          | )          | (117,967 | ) | (106,465 | ) |
| Net cash provided by (used in) financing activities                            |       | 88,594                            |       | (27,595 | ) | (12,211 | ) |
|                                                                           |       |                              |       |   |   |   |   |
| Net decrease in  cash and cash equivalents                                     |       | —                            |       | (188 | ) | (297 | ) |
|                                                                           |       |                              |       |   |   |   |   |
| Cash and cash  equivalents at beginning of period                              |       | —                            |       | 188 |   | 485 |   |
| Cash and cash  equivalents at end of period                                    |       | $                                 | —     |   | $ | — |   | $ | 188 |   |
|                                                                           |       |                              |       |   |   |   |   |
| **Non-cash  investing activities:**                                            |       |                              |       |   |   |   |   |
| Net assets transferred to Mont Belvieu Storage  Partners, L.P.                 |       | $                                 | 1,429      |   | $ | — |   | $ | 61,042 |   |
|                                                                           |       |                              |       |   |   |   |   |
| **Supplemental  disclosure of cash flows:**                                    |       |                              |       |   |   |   |   |
| Cash paid for interest (net of amounts capitalized)                            |       | $                                 | 30,128     |   | $ | 27,338 |   | $ | 30,286 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

F-5

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL**

**(in thousands)**

 
| ** **                                                      | ** ** | **General  Partner’s  Interest** | ** ** | **Limited  Partner’s  Interest** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|-----------|------------|
|                                                            |       |                                  |       |                                  |       |      |       |
| Partners’  capital at December 31, 2002 (as restated) |       | $                                     | 2          |                                  | $          | 240,302   |       | $ | 240,304 |   |
| 2003 net income allocation                                      |       | 1                                     |       | 46,182                                |       | 46,183    |       |
| 2003 cash distributions                                         |       | (1                                    | )          | (106,464                              | )          | (106,465  | )          |
| Capital contributions                                           |       | —                                |       | 34,988                                |       | 34,988    |       |
| Option exercises                                                |       | —                                |       | 2,045                                 |       | 2,045     |       |
|                                                            |       |                                  |       |                                  |       |      |       |
| Partners’  capital at December 31, 2003 (as restated) |       | 2                                     |       | 217,053                               |       | 217,055   |       |
| 2004 net income allocation                                      |       | 1                                     |       | 33,482                                |       | 33,483    |       |
| 2004 cash distributions                                         |       | (1                                    | )          | (117,966                              | )          | (117,967  | )          |
| Other                                                           |       | —                                |       | 46                                    |       | 46        |       |
|                                                            |       |                                  |       |                                  |       |      |       |
| Partners’  capital at December 31, 2004 (as restated) |       | 2                                     |       | 132,615                               |       | 132,617   |       |
| 2005 net income allocation                                      |       | 1                                     |       | 52,198                                |       | 52,199    |       |
| 2005 cash distributions                                         |       | (1                                    | )          | (111,929                              | )          | (111,930  | )          |
| Capital contributions                                           |       | 2                                     |       | 294,792                               |       | 294,794   |       |
|                                                            |       |                                  |       |                                  |       |      |       |
| Partners’  capital at December 31, 2005               |       | $                                     | 4          |                                  | $          | 367,676   |       | $ | 367,680 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

F-6

----

 

**TEPRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.**                    PARTNERSHIP ORGANIZATION

 

TE Products PipelineCompany, Limited Partnership (the “Partnership”), a Delaware limitedpartnership, was formed in March 1990. TEPPCO Partners, L.P. (the “ParentPartnership”) owns a 99.999% interest in us as the sole limited partner. TEPPCOGP, Inc. (“TEPPCO GP” or “General Partner”), a wholly owned subsidiary ofthe Parent Partnership, holds a 0.001% general partner interest in us. TexasEastern Products Pipeline Company, LLC (the “Company”), a Delaware limited liabilitycompany, serves as the general partner of our Parent Partnership.

 

On July 26, 2001,the Company restructured its general partner ownership of us to cause us to bewholly owned by the Parent Partnership. TEPPCO GP succeeded the Company as ourgeneral partner. All of our remaining partner interests not already owned bythe Parent Partnership were transferred to the Parent Partnership. In exchangefor this contribution, the Company’s interest as general partner of the ParentPartnership was increased to 2%. The increased percentage is the economicequivalent of the aggregate interest that the Company had prior to therestructuring through its combined interests in the Parent Partnership and us. Asa result, the Parent Partnership holds a 99.999% limited partner interest in usand TEPPCO GP holds a 0.001% general partner interest. This reorganization wasundertaken to simplify our required financial reporting when we issueguarantees of our Parent Partnership’s debt.

 

Through February 23,2005, the Company was an indirect wholly owned subsidiary of Duke Energy FieldServices, LLC (“DEFS”), a joint venture between Duke Energy Corporation (“DukeEnergy”) and ConocoPhillips. Duke Energy held an interest of approximately 70%in DEFS, and ConocoPhillips held the remaining interest of approximately 30%. OnFebruary 24, 2005, the Company was acquired by DFI GP Holdings L.P.(formerly Enterprise GP Holdings L.P.) (“DFI”), an affiliate of EPCO, Inc.(“EPCO”), a privately held company controlled by Dan L. Duncan, forapproximately $1.1 billion. As a result of the transaction, DFI owns andcontrols the 2% general partner interest in our Parent Partnership and has theright to receive the incentive distribution rights associated with the generalpartner interest.

 

TEPPCO GP, as our generalpartner, performs all of the management and operating functions required for usin accordance with the Agreement of Limited Partnership of TE Products PipelineCompany, Limited Partnership. We reimburse our General Partner and the Companyfor all reasonable direct and indirect expenses that they incur in managing us.

 

On May 9, 2005, weformed TEPPCO Interests, LLC (“TEPPCO Interests”), a Delaware limited liabilitycompany, of which we own 100% of the member interests. On July 15, 2005,TEPPCO Interests acquired from Texas Genco, LLC (i) 100% of its memberinterests in TG Pipeline GP, LLC, a Delaware limited liability company, whichis the owner of 100% of the general partner interests in TG Pipeline, L.P. (“PipelineLP”), a Texas limited partnership, and (ii) 100% of the membershipinterests in TG Pipeline LP, LLC, a Delaware limited liability company, whichis the owner of 100% of the limited partner interests in Pipeline LP (see Note5).

 

On May 18, 2005, we formed TEPPCO Terminals, L.P.(“TEPPCO Terminals”), a Delaware limited partnership, and we own a 99.999%interest in TEPPCO Terminals as the sole limited partner. TEPPCO GP serves asthe general partner and holds a 0.001% general partner interest in TEPPCOTerminals. On July 12, 2005, TEPPCO Terminals purchased a refined productsterminal and two-bay truck loading rack in North Little Rock, Arkansas, for $6.9million from Exxon Mobil Corporation (see Note 5).

 

F-7

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The following chart illustrates our organizationalstructure as of December 31, 2005:

 

 

As used in this Report, “we,”“us,” and “our” mean TE Products Pipeline Company, Limited Partnership and,where the context requires, include our consolidated subsidiaries.

 

At December 31,2005 and 2004, we had working capital deficits of $4.5 million and $61.9million, respectively. Our primary sources of liquidity are cash generated fromoperations and from our Parent Partnership’s credit facilities and debt andequity offerings. Working capital deficits occur primarily from the timing ofoperating cash receipts from customers, payment of cash distributions and thepayment of normal operating expenses and capital expenditures. Our ParentPartnership has historically made capital contributions, loans or otherwiseprovided liquidity to us as needed, but the Parent Partnership has nocontractual obligation to do so. At December 31, 2005, our ParentPartnership had $274.6 million in available borrowing capacity under itsrevolving credit facility (applying the most restrictive financial covenants) andagreed to cover any of our working capital needs, if required.

 

Werestated our consolidated financial statements and related financialinformation for the years ended December 31, 2004 and 2003, for anaccounting correction. In addition, the restatement adjustment impactedquarterly periods within the fiscal years ended December 31, 2005, 2004and 2003. See Note 19 for a discussion of the restatement adjustment and theimpact on previously issued financial statements.

 

**NOTE 2.**                    SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

We adhere to thefollowing significant accounting policies in the preparation of our consolidatedfinancial statements.

 

## **Basis of Presentation andPrinciples of Consolidation**

 

Throughout theconsolidated financial statements and accompanying notes, all referencedamounts related to prior periods reflect the balances and amounts on a restatedbasis. The financial statements include our accounts

 

F-8

----

 

on a consolidatedbasis. We have eliminated all significant intercompany items in consolidation. Wehave reclassified certain amounts from prior periods to conform to the currentpresentation.

 

## **Use of Estimates**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States requires our management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. Although we believe these estimates are reasonable, actualresults could differ from those estimates.

 

## **Business Segments**

 

We operate and report inone business segment: transportation and storage of refined products, liquefiedpetroleum gases (“LPGs”) and petrochemicals. Our interstate transportationoperations, including rates charged to customers, are subject to regulationsprescribed by the Federal Energy Regulatory Commission (“FERC”). We refer torefined products, LPGs and petrochemicals in this Report, collectively, as “petroleumproducts” or “products.”

 

## **Revenue Recognition**

 

Our revenues are earnedfrom transportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sale of product inventory and other ancillaryservices. Transportation revenues are recognized as products are delivered tocustomers. Storage revenues are recognized upon receipt of products intostorage and upon performance of storage services. Terminaling revenues arerecognized as products are out-loaded. Revenues from the sale of productinventory are recognized when the products are sold.

 

## **Cash and Cash Equivalents**

 

Cash equivalents aredefined as all highly marketable securities with maturities of three months orless when purchased. The carrying value of cash and cash equivalentsapproximates fair value because of the short-term nature of these investments.

 

**Allowancefor Doubtful Accounts**

 

We establish provisionsfor losses on accounts receivable if we determine that we will not collect allor part of the outstanding balance. Collectibility is reviewed regularlyand an allowance is established or adjusted, as necessary, using the specificidentification method. The following table presents the activity of ourallowance for doubtful accounts for the years ended December 31, 2005, 2004and 2003 (in thousands):

 
| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Balance at beginning  of period |       | $                                 | 56         |   | $ | 374 |   | $ | 287 |   |
| Charges to costs  and expenses  |       | —                            |       | — |   | 788 |   |
| Deductions and  other           |       | (11                               | )          | (318 | ) | (701 | ) |
| Balance at end of period        |       | $                                 | 45         |   | $ | 56 |   | $ | 374 |   |

 

## **Inventories**

 

Inventories consistprimarily of petroleum products which are valued at the lower of cost (weightedaverage cost method) or market. We acquire and dispose of various productsunder exchange agreements. Receivables and

 

F-9

----

 

payables arisingfrom these transactions are usually satisfied with products rather than cash.The net balances of exchange receivables and payables are valued at weightedaverage cost and included in inventories. Inventories of materials andsupplies, used for ongoing replacements and expansions, are carried at thelower of fair value or cost.

 

## **Property, Plant andEquipment**

 

We record property, plantand equipment at its acquisition cost. Additions to property, plant andequipment, including major replacements or betterments, are recorded at cost. Wecharge replacements and renewals of minor items of property that do notmaterially increase values or extend useful lives to maintenance expense. Depreciationexpense is computed on the straight-line method using rates based upon expecteduseful lives of various classes of assets (ranging from 2% to 20% per annum).

 

We evaluate impairment oflong-lived assets in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*. Long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverabilityof the carrying amount of assets to be held and used is measured by acomparison of the carrying amount of the asset to future net cash flowsexpected to be generated by the asset. If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.

 

## **Asset RetirementObligations**

 

In June 2001,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, *Accounting for Asset Retirement Obligations*. SFAS 143requires us to record the fair value of an asset retirement obligation as aliability in the period in which we incur a legal obligation for the retirementof tangible long-lived assets. A corresponding asset is also recorded anddepreciated over the life of the asset. After the initial measurement of theasset retirement obligation, the liability will be adjusted at the end of eachreporting period to reflect changes in the estimated future cash flowsunderlying the obligation. Determination of any amounts recognized uponadoption is based upon numerous estimates and assumptions, including futureretirement costs, future inflation rates and the credit-adjusted risk-freeinterest rates.

 

Ourassets consist primarily of an interstate trunk pipeline system and a series ofstorage facilities that originate along the upper Texas Gulf Coast and extendthrough the Midwest and northeastern United States. We transport refinedproducts, LPGs and petrochemicals through the pipeline system. These productsare primarily received in the south end of the system and stored and/ortransported to various points along the system per customer nominations.

 

We havecompleted our assessment of SFAS 143, and we have determined that we areobligated by contractual or regulatory requirements to remove certainfacilities or perform other remediation upon retirement of our assets. However,we are not able to reasonably determine the fair value of the asset retirementobligations for our trunk, interstate and gathering pipelines and our surfacefacilities, since future dismantlement and removal dates are indeterminate.

 

We will record such assetretirement obligations in the period in which more information becomesavailable for us to reasonably estimate the settlement dates of the retirementobligations. The adoption of SFAS 143 did not have an effect on our financialposition, results of operations or cash flows.

 

F-10

----

 

## **Capitalization ofInterest**

 

We capitalize interest onborrowed funds related to capital projects only for periods that activities arein progress to bring these projects to their intended use. The weighted averagerate used to capitalize interest on borrowed funds was 5.5%, 5.12% and 5.69%for the years ended December 31, 2005, 2004 and 2003, respectively. Duringthe years ended December 31, 2005, 2004 and 2003, the amount of interestcapitalized was $3.0 million, $1.7 million and $2.3 million, respectively.

 

**IntangibleAssets**

 

Intangible assets on theconsolidated balance sheets consist primarily of transportation agreements withcustomers and are being amortized using a straight line method over the term ofthe related agreement (approximately 20 years). Included in equity investmentson the consolidated balance sheets is excess investment in Centennial PipelineLLC (“Centennial”). In connection with the formation of Centennial, we recordedexcess investment, the majority of which is amortized on a unit-of-productionbasis over a period of 10 years.

 

## **EnvironmentalExpenditures**

 

We accrue forenvironmental costs that relate to existing conditions caused by pastoperations. Environmental costs include initial site surveys and environmentalstudies of potentially contaminated sites, costs for remediation andrestoration of sites determined to be contaminated and ongoing monitoringcosts, as well as damages and other costs, when estimable. We monitor thebalance of accrued undiscounted environmental liabilities on a regular basis. Werecord liabilities for environmental costs at a specific site when ourliability for such costs is probable and a reasonable estimate of theassociated costs can be made. Adjustments to initial estimates are recorded,from time to time, to reflect changing circumstances and estimates based uponadditional information developed in subsequent periods. Estimates of ourultimate liabilities associated with environmental costs are particularlydifficult to make with certainty due to the number of variables involved, includingthe early stage of investigation at certain sites, the lengthy time framesrequired to complete remediation alternatives available and the evolving natureof environmental laws and regulations.

 

The following tablepresents the activity of our environmental reserve for the years ended December 31,2005, 2004 and 2003 (in thousands):

 
| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                            |       |                              |       |   |   |   |   |
| Balance at  beginning of period |       | $                                 | 1,428      |   | $ | 1,693 |   | $ | 2,051 |   |
| Charges to  expense             |       | 1,860                             |       | 745 |   | 1,490 |   |
| Deductions and  other           |       | (2,123                            | )          | (1,010 | ) | (1,848 | ) |
| Balance at end of period        |       | $                                 | 1,165      |   | $ | 1,428 |   | $ | 1,693 |   |

 

## **Operating, General andAdministrative Expenses**

 

TheParent Partnership allocates operating, general and administrative expenses tous for legal, insurance, financial, communication and other administrativeservices based upon the estimated level of effort devoted to our variousoperations. We believe that the method for allocating corporate operating,general and administrative expenses is reasonable. Total operating, general andadministrative expenses reflected in the accompanying consolidated financialstatements are representative of the total operating, general andadministrative costs we would have incurred as a separate entity.

 

F-11

----

 

## **Income Taxes**

 

We are a limitedpartnership. As such, we are not a taxable entity for federal and state incometax purposes and do not directly pay federal and state income tax. Our taxableincome or loss, which may vary substantially from the net income or netloss we report in our consolidated statements of income, is includable in thefederal and state income tax returns of each unitholder. Accordingly, norecognition has been given to federal and state income taxes for our operations.The aggregate difference in the basis of our net assets for financial and taxreporting purposes cannot be readily determined as we do not have access toinformation about each unitholders’ tax attributes in the Partnership.

 

## **Comprehensive Income**

 

SFAS No. 130, *Reporting Comprehensive Income* requires certain items suchas foreign currency translation adjustments, minimum pension liabilityadjustments and unrealized gains and losses on certain investments to bereported in a financial statement. For the years ended December 31, 2005,2004, and 2003, our comprehensive income equaled our reported net income.

 

## **Use of Derivatives**

 

We account for derivativefinancial instruments in accordance with SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities,*andSFAS No. 138, *Accounting for CertainDerivative Instruments and Certain Hedging Activities, an amendment of FASBStatement No. 133.*These statements establish accounting andreporting standards requiring that derivative instruments (including certainderivative instruments embedded in other contracts) be recorded on the balancesheet at fair value as either assets or liabilities. The accounting for changesin the fair value of a derivative instrument depends on the intended use of thederivative and the resulting designation, which is established at the inceptionof a derivative.

 

Our derivative instrumentconsists of an interest rate swap.  Forall hedging relationships, we formally document at inception the hedgingrelationship and its risk-management objective and strategy for undertaking thehedge, the hedging instrument, the item, the nature of the risk being hedged,how the hedging instrument’s effectiveness in offsetting the hedged risk willbe assessed and a description of the method of measuring ineffectiveness. Thisprocess includes linking all derivatives that are designated as fair value orcash flow to specific assets and liabilities on the balance sheet or tospecific firm commitments or forecasted transactions. We also formally assess,both at the hedge’s inception and on an ongoing basis, whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in fair values or cash flows of hedged items. If it is determined that aderivative is not highly effective as a hedge or that it has ceased to be ahighly effective hedge, we discontinue hedge accounting prospectively.

 

For derivativeinstruments designated as fair value hedges, gains and losses on the derivativeinstrument are offset against related results on the hedged item in thestatement of income. Changes in the fair value of a derivative that is highlyeffective and that is designated and qualifies as a fair value hedge, alongwith the loss or gain on the hedged asset or liability or unrecognized firmcommitment of the hedged item that is attributable to the hedged risk, arerecorded in earnings. Changes in the fair value of a derivative that is highlyeffective and that is designated and

 

F-12

----

 

qualifies as acash flow hedge are recorded in other comprehensive income to the extent thatthe derivative is effective as a hedge, until earnings are affected by thevariability in cash flows of the designated hedged item. Hedge effectiveness ismeasured at least quarterly based on the relative cumulative changes in fairvalue between the derivative contract and the hedged item over time. Theineffective portion of the change in fair value of a derivative instrument thatqualifies as either a fair value hedge or a cash flow hedge is reportedimmediately in earnings.

 

According to SFAS 133, asamended, we are required to discontinue hedge accounting prospectively when itis determined that the derivative is no longer effective in offsetting changesin the fair value or cash flows of the hedged item, the derivative expires oris sold, terminated, or exercised, the derivative is de-designated as a hedginginstrument, because it is unlikely that a forecasted transaction will occur, a hedgedfirm commitment no longer meets the definition of a firm commitment, ormanagement determines that designation of the derivative as a hedginginstrument is no longer appropriate.

 

When hedge accounting isdiscontinued because it is determined that the derivative no longer qualifiesas an effective fair value hedge, we continue to carry the derivative on thebalance sheet at its fair value and no longer adjust the hedged asset orliability for changes in fair value. The adjustment of the carrying amount ofthe hedged asset or liability is accounted for in the same manner as othercomponents of the carrying amount of that asset or liability. When hedgeaccounting is discontinued because the hedged item no longer meets thedefinition of a firm commitment, we continue to carry the derivative on thebalance sheet at its fair value, remove any asset or liability that wasrecorded pursuant to recognition of the firm commitment from the balance sheet,and recognize any gain or loss in earnings. When hedge accounting isdiscontinued because it is probable that a forecasted transaction will notoccur, we continue to carry the derivative on the balance sheet at its fairvalue with subsequent changes in fair value included in earnings, and gains andlosses that were accumulated in other comprehensive income are recognizedimmediately in earnings. In all other situations in which hedge accounting isdiscontinued, we continue to carry the derivative at its fair value on thebalance sheet and recognize any subsequent changes in its fair value in earnings.

 

**FairValue of Financial Instruments**

 

The carrying amount ofcash and cash equivalents, accounts receivable, inventories, other currentassets, accounts payable and accrued liabilities, other current liabilities andderivatives approximates their fair value due to their short-term nature. Thefair values of these financial instruments are represented in our consolidatedbalance sheets.

 

**UnitOption Plan**

 

Our Parent Partnershiphas not granted options for any periods presented. For options outstandingunder the 1994 Long Term Incentive Plan (see Note 15), the Parent Partnership followedthe intrinsic value method of accounting for recognizing stock-basedcompensation expense. Under this method, the Parent Partnership records nocompensation expense for unit options granted when the exercise price of theoptions granted is equal to, or greater than, the market price of our ParentPartnership’s Limited Partner Units on the date of the grant. During the yearended December 31, 2003, all remaining outstanding unit options wereexercised.

 

In December 2002,SFAS No. 148, *Accounting for Stock-BasedCompensation – Transition and Disclosure* was issued. SFAS 148 amendsSFAS No. 123, *Accounting for Stock-BasedCompensation*, and provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS 148 amends the disclosure requirementsof SFAS 123 to require prominent disclosure in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. Certain ofthe disclosure modifications are required for fiscal years ending after December 15,2002, and are included in Note 15.

 

F-13

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Assuming the ParentPartnership had used the fair value method of accounting for its unit optionplan, pro forma net income would equal reported net income for the years ended December 31,2005, 2004 and 2003. The adoption of SFAS 148 did not have an effect on ourfinancial position, results of operations or cash flows.

 

## **New AccountingPronouncements**

 

**In December 2004,the FASB issued SFAS No. 123(R), *Share-BasedPayment*. SFAS 123(R) requires compensation costs related toshare-based payment transactions to be recognized in the financial statements. Withlimited exceptions, the amount of the compensation cost is to be measured basedon the grant-date fair value of the equity or liability instruments issued. Inaddition, liability awards are to be re-measured each reporting period. Compensationcost will be recognized over the period that an employee provides service inexchange for the award. SFAS 123(R) is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*,as amended by SFAS No. 148,*Accountingfor Stock-Based Compensation – Transition and Disclosure* andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*. SFAS123(R) is effective for public companies as of the first interim or annualreporting period of the first fiscal year beginning after June 15, 2005. TheSecurities and Exchange Commission amended the implementation date of SFAS123(R) to begin with the first interim or annual reporting period of thecompany’s first fiscal year beginning on or after June 15, 1005. As such,we will adopt SFAS 123(R) in the first quarter of 2006. Companies are permittedto adopt SFAS 123(R) prior to the extended date. All public companies thatadopted the fair-value-based method of accounting must use the modifiedprospective transition method and may elect to use the modifiedretrospective transition method. We do not believe that the adoption of SFAS123(R) will have a material effect on our financial position, results ofoperations or cash flows.**

 

**In November 2004,the Emerging Issues Task Force (“EITF”) reached consensus in EITF 03-13, *Applying the Conditions in Paragraph 42 of FASB Statement No. 144,Accounting for Impairment orDisposal of Long-Lived Assets, in Determining Whether to ReportDiscontinued Operations*, to clarify whether a component of an enterprisethat is either disposed of or classified as held for sale qualifies for incomestatement presentation as discontinued operations. The FASB ratified theconsensus on November 30, 2004. The consensus is to be appliedprospectively with regard to a component of an enterprise that is eitherdisposed of or classified as held for sale in reporting periods beginning afterDecember 15, 2004. The consensus may be applied retrospectively forpreviously reported operating results related to disposal transactionsinitiated within an enterprise’s reporting period that included the date thatthis consensus was ratified. The adoption of EITF 03-13 did not have an effecton our financial position, results of operations or cash flows.**

 

**In March 2005,the FASB issued FASB Interpretation No. 47, *Accounting for Conditional Asset Retirement Obligations, aninterpretation of FASB Statement No. 143* (“FIN 47”). FIN 47clarifies that the term, conditional asset retirement obligation as used inSFAS No. 143, *Accounting for AssetRetirement Obligations*, refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional upon a future event that may or may not be within thecontrol of the entity. Even though uncertainty about the timing and/or methodof settlement exists and may be conditional upon a future event, theobligation to perform the asset retirement activity is unconditional. Accordingly,an entity is required to recognize a liability for the fair value of aconditional asset retirement obligation if the fair value of the liability canbe reasonably estimated. Uncertainty about the timing and/or method ofsettlement of a conditional asset retirement obligation should be factored intothe measurement of the liability when sufficient information exists. The fairvalue of a liability for the conditional asset retirement obligation should berecognized when incurred generally upon acquisition, construction, ordevelopment or through the normal operation of the asset. SFAS 143 acknowledgesthat in some cases, sufficient information may not be available toreasonably estimate the fair value of an asset retirement obligation. FIN 47also clarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN 47 is effectiveno later than the end of reporting periods ending after December 15, 2005,and early adoption of FIN 47 is encouraged. We adopted FIN 47 in the fourthquarter of 2005. The adoption of FIN 47 did not have a material effect on ourfinancial position, results of operations or cash flows.**

 

F-14

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In June 2005, the EITF reached consensus in EITF 04-5, *Determining Whether a General Partner, or the GeneralPartners as a Group, Controls a Limited Partnership or Similar Entity When theLimited Partners Have Certain Rights*, to provide guidance on how generalpartners in a limited partnership should determine whether they control alimited partnership and therefore should consolidate it. The EITF agreed thatthe presumption of general partner control would be overcome only when thelimited partners have either of two types of rights. The first type, referredto as kick-out rights, is the right to dissolve or liquidate the partnership orotherwise remove the general partner without cause. The second type, referredto as participating rights, is the right to effectively participate insignificant decisions made in the ordinary course of the partnership’sbusiness. The kick-out rights and the participating rights must be substantivein order to overcome the presumption of general partner control. The consensusis effective for general partners of all new limited partnerships formed andfor existing limited partnerships for which the partnership agreements aremodified subsequent to the date of FASB ratification (June 29, 2005). Forexisting limited partnerships that have not been modified, the guidance in EITF04-5 is effective no later than the beginning of the first reporting period infiscal years beginning after December 15, 2005. We do not believe that theadoption of EITF 04-5 will have a material effect on our financial position,results of operations or cash flows.

 

In December 2004, the FASB issued SFAS No. 153, *Exchanges of Nonmonetary Assets, an amendment of APB Opinion 29*. SFAS 153 amends APB Opinion No. 29,*Accounting for Nonmonetary Exchanges,*toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS 153 is effective fornonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. We adopted SFAS 153 during the second quarter of 2005. The adoption ofSFAS 153 did not have a material effect on our financial position, results ofoperations or cash flows.

 

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*. SFAS154 establishes new standards on accounting for changes in accountingprinciples. All such changes must be accounted for by retrospective applicationto the financial statements of prior periods unless it is impracticable to doso. SFAS 154 completely replaces APB Opinion No. 20, *Accounting Changes,*and SFAS No. 3, *Reporting Accounting Changes in Interim Periods*.However, it carries forward the guidance in those pronouncements with respectto accounting for changes in estimates, changes in the reporting entity, andthe correction of errors. SFAS 154 is effective for accounting changes anderror corrections made in fiscal years beginning after December 15, 2005,with early adoption permitted for changes and corrections made in yearsbeginning after June 1, 2005. The application of SFAS 154 does not affectthe transition provisions of any existing pronouncements, including those thatare in the transition phase as of the effective date of SFAS 154. We do notbelieve that the adoption of SFAS 154 will have a material effect on ourfinancial position, results of operations or cash flows.

 

**In September 2005,the EITF reached consensus in EITF 04-13, *Accounting for Purchasesand Sales of Inventory with the Same Counterparty*, to define when apurchase and a sale of inventory with the same party that operates in the sameline of business should be considered a single nonmonetary transaction subjectto APB Opinion No. 29, *Accounting for NonmonetaryTransactions*. Two or more inventory transactions with the same partyshould be combined if they are entered into in contemplation of one another. Theconsensus also requires entities to account for exchanges of inventory in thesame line of business at fair value or recorded amounts based on inventoryclassification. The guidance in EITF 04-13 is effective for new inventoryarrangements entered into in reporting periods beginning after March 15,2006. We are currently evaluating what impact EITF 04-13 will have on ourfinancial statements, but at this time we do not believe that the adoption ofEITF 04-13 will have a material effect on our financial position, results ofoperations or cash flows.**

** **

**F-15**

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** **

**NOTE 3.**                       INTANGIBLE ASSETS

** **

**We account for ourintangible assets under SFAS No. 142, *Goodwill and OtherIntangible Assets*,**which wasissued by the FASB in July 2001. SFAS 142 prohibits amortization ofgoodwill and intangible assets with indefinite useful lives, but insteadrequires testing for impairment at least annually. SFAS 142 requires thatintangible assets with finite useful lives be amortized over their respectiveestimated useful lives. If an intangible asset has a finite useful life, butthe precise length of that life is not known, that intangible asset shall beamortized over the best estimate of its useful life. At a minimum, we willassess the useful lives and residual values of all intangible assets on anannual basis to determine if adjustments are required.**

** **

Thefollowing table reflects the components of amortized intangible assets,included in other assets on the consolidated balance sheets, and excessinvestment included in equity investments, at December 31, 2005 and 2004(in thousands):

 
| ** **                 | ** ** | **December 31, 2005** | ** ** | **December 31, 2004**    | ** ** |
|----------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible  assets:        |       |                       |       |                          |       |   |   |   |   |
| Transportation  agreements |       | $                          | 1,328      |                          | $          | (326 | ) | $ | 1,328 |   | $ | (260 | ) |
|                       |       |                       |       |                          |       |   |   |   |   |
| Excess  investment:        |       |                       |       |                          |       |   |   |   |   |
| Centennial  Pipeline LLC   |       | $                          | 33,400     |                          | $          | (12,947 | ) | $ | 33,400 |   | $ | (8,875 | ) |

 

The valueassigned to our excess investment in Centennial was created upon its formation.Approximately $30.0 million is related to a contract and is being amortized ona unit-of-production basis based upon the volumes transported under thecontract compared to the guaranteed total throughput of the contract over a 10-yearlife. The remaining $3.4 million is related to a pipeline and is beingamortized on a straight-line basis over the life of the pipeline, which is 35years.

 

Amortization expense onintangible assets was $0.1 million for each of the years ended December 31,2005, 2004 and 2003. Amortization expense on our excess investment included inequity earnings was $4.1 million, $3.1 million and $3.3 million for the yearsended December 31, 2005, 2004 and 2003, respectively.

 

Thefollowing table sets forth the estimated amortization expense of intangibleassets and the estimated amortization expense allocated to equity earnings forthe years ending December 31 (in thousands):

 
| ** ** | ** ** | **Intangible Assets** | ** ** | **Excess Investments** | ** ** |
|------------|------------|-----------------------|------------|------------------------|------------|
| 2006       |       | $                     | 66         |                   | $          | 3,999 |   |
| 2007       |       | 66                    |       | 4,422                  |       |
| 2008       |       | 66                    |       | 4,747                  |       |
| 2009       |       | 66                    |       | 6,187                  |       |
| 2010       |       | 66                    |       | 6,351                  |       |
|            |            |                       |            |                        |            |  |  |

** **

**NOTE 4.**                       INTEREST RATE SWAP

** **

In October 2001, weentered into an interest rate swap agreement to hedge our exposure to changesin the fair value of its fixed rate 7.51% Senior Notes due 2028. We designatedthis swap agreement as a fair value hedge. The swap agreement has a notionalamount of $210.0 million and matures in January 2028 to match theprincipal and maturity of our Senior Notes. Under the swap agreement, we pay afloating rate of interest based on a three-month U.S. Dollar LIBOR rate, plus aspread, and receive a fixed rate of interest of 7.51%. During the years ended December 31,2005, 2004 and 2003, we recognized reductions in interest expense of $5.6million, $9.6 million and

 

F-16

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$10.0 million,respectively, related to the difference between the fixed rate and the floatingrate of interest on the interest rate swap. During the years ended December 31,2005, 2004 and 2003, we measured the hedge effectiveness of this interest rateswap and noted that no gain or loss from ineffectiveness was required to berecognized. The fair value of this interest rate swap was a loss ofapproximately $0.9 million at December 31, 2005, and a gain ofapproximately $3.4 million at December 31, 2004.

 

**NOTE 5.**                       ACQUISITIONS

** **

**RefinedProducts Terminal and Truck Rack**

 

On July 12, 2005,TEPPCO Terminals purchased a refined products terminal and truck loading rackin North Little Rock, Arkansas, for $6.9 million from ExxonMobil Corporation. Theassets include three storage tanks and a two-bay truck loading rack. We fundedthe purchase through borrowings under our Parent Partnership’s revolving creditfacility. We allocated the purchase price to property, plant and equipment andinventory, and we accounted for the acquisition of these assets under thepurchase method of accounting. The terminal serves the central Arkansas refinedproducts market and complements our existing infrastructure in North LittleRock, Arkansas.

 

**GencoAssets**

 

On July 15, 2005,TEPPCO Interests acquired from Texas Genco, LLC (“Genco”) all of its interestsin certain companies that own a 90-mile pipeline system and 5.5 million barrelsof storage capacity for $62.1 million. We funded the purchase throughborrowings under our Parent Partnership’s revolving credit facility. Weallocated the purchase price to property, plant and equipment, and we accountedfor the acquisition of these assets under the purchase method of accounting. Theassets of the purchased companies will be integrated into our origininfrastructure in Texas City and Baytown, Texas. As a result of thisacquisition, we initiated the expansion of refined products origin capabilitiesin the Houston and Texas City, Texas, areas. The integration and other systemenhancements should be in service by the fourth quarter of 2006, at anestimated cost of $45.0 million. The strategic location of these assets, withrefined products interconnections to major exchange terminals in the Houstonarea, will provide significant long-term value to our customers and our TexasGulf Coast refining and logistics system.

 

**NOTE 6.**                       EQUITY INVESTMENTS

** **

In August 2000,we entered into agreements with Panhandle Eastern Pipeline Company (“PEPL”), aformer subsidiary of CMS Energy Corporation, and Marathon Petroleum Company LLC(“Marathon”) to form Centennial. Centennial owns an interstate refinedpetroleum products pipeline extending from the upper Texas Gulf Coast to centralIllinois. Through February 9, 2003, each participant owned a one-thirdinterest in Centennial. On February 10, 2003, we and Marathon eachacquired an additional 16.7% interest in Centennial from PEPL for $20.0 millioneach, increasing our ownership percentages in Centennial to 50% each. Duringthe year ended December 31, 2005, we did not make any additionalinvestments in Centennial. We invested an additional $1.5 million and $24.0million, respectively, in Centennial, in 2004 and 2003, which is included inthe equity investment balance at December 31, 2005. The 2003 amountincludes the $20.0 million paid for the acquisition of the additional ownershipinterest in Centennial. We have not received any distributions from Centennialsince its formation.

 

On January 1, 2003,we and Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”) formed Mont BelvieuStorage Partners, L.P. (“MB Storage”). We and Louis Dreyfus each own a 50%ownership interest in MB Storage. MB Storage owns storage capacity at the MontBelvieu fractionation and storage complex and a short-haul transportationshuttle system that ties Mont Belvieu, Texas, to the upper Texas Gulf Coastenergy marketplace. MB Storage is a service-oriented, fee-based venture servingthe fractionation, refining and petrochemical industries with

 

F-17

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substantialcapacity and flexibility for the transportation, terminaling and storage ofNGLs, LPGs and refined products. MB Storage has no commodity trading activity. Weoperate the facilities for MB Storage. Effective January 1, 2003, wecontributed property and equipment with a net book value of $67.1 million to MBStorage. Additionally, as of the contribution date, Louis Dreyfus had invested$6.1 million for expansion projects for MB Storage that we were required toreimburse if the original joint development and marketing agreement wasterminated by either party. This deferred liability was also contributed andcredited to the capital account of Louis Dreyfus in MB Storage.

 

For the year ended December 31,2005, we received the first $1.7 million per quarter (or $6.78 million on anannual basis) of MB Storage’s income before depreciation expense, as defined inthe operating agreement. For the year ended December 31, 2004, we receivedthe first $1.8 million per quarter (or $7.15 million on an annual basis) of MBStorage’s income before depreciation expense. Our share of MB Storage’searnings is adjusted annually by the partners of MB Storage. Any amount of MBStorage’s annual income before depreciation expense in excess of $6.78 millionfor 2005 and $7.15 million for 2004 was allocated evenly between us and LouisDreyfus. Depreciation expense on assets each party originally contributed to MBStorage is allocated between us and Louis Dreyfus based on the net book valueof the assets contributed. Depreciation expense on assets constructed oracquired by MB Storage subsequent to formation is allocated evenly between usand Louis Dreyfus. For the years ended December 31, 2005, 2004 and 2003,our sharing ratio in the earnings of MB Storage was approximately 64.2%, 69.4%and 70.4%, respectively. During the years ended December 31, 2005, 2004and 2003, we received distributions of $12.4 million, $10.3 million and $5.3million, respectively, from MB Storage. During the years ended December 31,2005, 2004 and 2003, we contributed $5.6 million, $21.4 million and $2.5million, respectively, to MB Storage. The 2005 contribution includes acombination of non-cash asset transfer of $1.4 million and cash contributionsof $4.2 million. The contribution for 2004 includes $16.5 million for theacquisition of storage and pipeline assets in April 2004. The remainingcontributions have been for capital expenditures.

 

We use the equity methodof accounting to account for our investments in Centennial and MB Storage. Summarizedcombined financial information for Centennial and MB Storage for the yearsended December 31, 2005 and 2004, is presented below (in thousands):

 
| ** ** | ** ** | **Years Ended  December 31,** | ** ** |
|------------|------------|------------------------------------|------------|
| ** ** | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Revenues   |       | $                                  | 74,003     |   | $ | 60,717 |   |
| Net Income |       | 10,213                             |       | (273 | ) |
|            |            |                                    |            |  |  |  |  |

 

Summarized combinedbalance sheet information for Centennial and MB Storage as of December 31,2005 and 2004, is presented below (in thousands):

 
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Current  assets         |       | $                     | 36,647     |   | $ | 39,228 |   |
| Noncurrent  assets      |       | 369,679               |       | 377,924 |   |
| Current  liabilities    |       | 33,621                |       | 36,015 |   |
| Long-term  debt         |       | 140,000               |       | 140,000 |   |
| Noncurrent  liabilities |       | 13,522                |       | 20,383 |   |
| Partners’  capital |       | 219,183               |       | 220,754 |   |
|                         |            |                       |            |  |  |  |  |

** **

**F-18**

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** **

**NOTE 7.**                       RELATED PARTY TRANSACTIONS

** **

## **Parent Partnership**

## ** **

The Partnership does nothave any employees. We are managed by the TEPPCO GP, a wholly owned subsidiaryof our Parent Partnership. Our Parent Partnership is managed by the Company,which for all periods prior to February 23, 2005, was an indirect whollyowned subsidiary of DEFS. According to the Partnership Agreement, the GeneralPartner and the Company are entitled to reimbursement of all direct andindirect expenses related to our business activities. As a result of the changein ownership of the Company on February 24, 2005, all of our management,administrative and operating functions are performed by employees of EPCO,pursuant to an administrative services agreement. TEPPCO GP reimburses EPCO forthe costs of its employees who perform operating functions for us and forcosts related to its other management and administrative employees (see Note1).

 

Our Parent Partnershipallocates operating, general and administrative expenses to us for legal,insurance, financial, communication and other administrative services basedupon the estimated level of effort devoted to our various operations. Inaddition, we make cash payments on behalf of the Parent Partnership for variousexpenses. At December 31, 2005 and 2004, we had a net payable of $18.5million and $63.0 million, respectively, to the Parent Partnership related tothese affiliated activities.

 

## **EPCO and Affiliates**

## ** **

We transport LPGs on ourpipeline system for affiliates of EPCO. From February 24, 2005 through December 31,2005, we recognized revenues from affiliates of EPCO for LPG transportation andother operating revenues of $4.6 million.

 

  From February 24, 2005 through December 31,2005, we incurred direct expenses of $30.8 million which were charged to us byEPCO. Substantially all of these costs were related to payroll and payrollrelated expenses. From February 24, 2005 through December 31, 2005,expenses for administrative services and overhead allocated to us by theCompany (including EPCO and its affiliates) were $0.3 million.

 

From February 24,2005 through December 31, 2005, the majority of our insurance coverage,including property, liability, business interruption, auto and directors andofficers’ liability insurance was obtained by our Parent Partnership throughEPCO. From February 24, 2005 through December 31, 2005, we incurredinsurance expense related to premiums charged by EPCO of $4.0 million. At December 31,2005, we had insurance reimbursement receivables due from EPCO of $1.3 million.

 

## **Duke Energy, DEFS andAffiliates**

## ** **

Effective May 2001,we entered into an agreement with an affiliate of DEFS to commit to it soleutilization of our Providence, Rhode Island, terminal. We operate the terminal andprovide propane loading services to an affiliate of DEFS. Through February 23,2005, and for the years ended December 31, 2004 and 2003, revenues from anaffiliate of DEFS of $1.1 million, $4.3 million and $3.2 million, respectively,were recognized pursuant to this agreement.

 

We transport LPGs on ourpipeline system for DEFS and its affiliates. Through February 23, 2005,and for the years ended December 31, 2004 and 2003, we recognized revenuesfrom DEFS and its affiliates for LPG transportation of $0.7 million, $2.6million and $2.8 million, respectively.

 

Through February 23,2005, and for the years ended December 31, 2004 and 2003, we incurreddirect expenses of $7.5 million, $45.5 million and $48.1 million, respectively,which were charged to us by DEFS.

 

F-19

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Substantially allof these costs were related to payroll and payroll related expenses. Through February 23,2005, and for the years ended December 31, 2004 and 2003, expenses foradministrative services and overhead allocated to us by the Company (includingDuke Energy and its affiliates) were $0.3 million, $1.0 million and $1.0million, respectively.

 

At December 31,2004, we had a receivable from DEFS of $1.1 million related to revenues recognizedfrom DEFS. At December 31, 2004, we had a payable to DEFS of $0.7 millionrelated to administrative services provided by DEFS.

 

Through February 23,2005, our Parent Partnership contracted with Bison Insurance Company Limited (“Bison”),a wholly owned subsidiary of Duke Energy, for a majority of our insurancecoverage, including property, liability, auto and directors and officers’liability insurance. Through February 23, 2005, and for the years ended December 31,2004 and 2003, we incurred insurance expense related to premiums paid to Bisonof $0.5 million, $2.8 million and $2.6 million, respectively. At December 31,2004, we had insurance reimbursement receivables due from Bison of $4.5million.

 

## **Centennial**

## ** **

We own a 50% ownershipinterest in Centennial (see Note 6). We have entered into a managementagreement with Centennial to operate Centennial’s terminal at Creal Springs,Illinois, and pipeline connection in Beaumont, Texas. For each of the yearsended December 31, 2005, 2004 and 2003, we recognized management fees of$0.2 million from Centennial, and actual operating expenses billed toCentennial were $3.7 million, $6.9 million and $4.4 million, respectively.

 

We also have a jointtariff with Centennial to deliver products at our locations using Centennial’spipeline as part of the delivery route to connecting carriers. As thedelivering pipeline, we invoice the shippers for the entire delivery rate,record only the net rate attributable to us as transportation revenues andrecord a liability for the amounts due to Centennial for its share of thetariff. At December 31, 2005 and 2004, we had net payable balances of $1.4million and $1.7 million, respectively, to Centennial for its share of thejoint tariff deliveries and other operational related charges, partially offsetby the reimbursement due to us for construction services provided toCentennial.

 

In January 2003, weentered into a pipeline capacity lease agreement with Centennial for a periodof five years that contains a minimum throughput requirement. For the yearsended December 31, 2005, 2004 and 2003, we incurred $5.9 million, $5.3million and $3.8 million, respectively, of rental charges related to the leaseof pipeline capacity on Centennial.

 

## **MB Storage**

## ** **

Effective January 1,2003, we entered into agreements with Louis Dreyfus to form MB Storage(see Note 6). We operate the facilities for MB Storage. We and MB Storage haveentered into a pipeline capacity lease agreement, and for each of the yearsended December 31, 2005, 2004 and 2003, we recognized $0.1 million inrental revenue related to this lease agreement. During the years ended December 31,2005, 2004 and 2003, we also billed MB Storage $3.6 million, $3.2 million and$2.5 million, respectively, for direct payroll and payroll related expenses foroperating MB Storage. At December 31, 2005 and 2004, we had net receivablebalances from MB Storage of $0.9 million and $1.3 million for operating costs,including payroll and related expenses for operating MB Storage.

 

F-20

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**NOTE 8.**                       OTHER CURRENT ASSETS

** **

The major components ofother current assets for the years ended December 31, 2005 and 2004, wereas follows (in thousands):

 
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Insurance receivable                        |       | $                     | 5,915      |   | $ | 4,531 |   |
| Reimbursable receivables                    |       | 5,510                 |       | 2,780 |   |
| Interest receivable from interest rate swap |       | 1,999                 |       | 4,027 |   |
| Prepaid insurance and other                 |       | 230                   |       | 299 |   |
| Other                                       |       | 1,257                 |       | 506 |   |
| Total                                       |       | $                     | 14,911     |   | $ | 12,143 |   |

 

**NOTE 9.**                       INVENTORIES

** **

Inventories are valued atthe lower of cost (based on weighted average cost method) or market. The costsof inventories did not exceed market values at December 31, 2005 and 2004.The major components of inventories were as follows (in thousands):

 
| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Refined products       |       | $                     | 4,461      |   | $ | 5,665 |   |
| LPGs                   |       | 7,403                 |       | — |   |
| Materials and supplies |       | 4,585                 |       | 4,428 |   |
| Total                  |       | $                     | 16,449     |   | $ | 10,093 |   |

 

**NOTE 10.**                PROPERTY, PLANT AND EQUIPMENT

** **

Major categories ofproperty, plant and equipment for the years ended December 31, 2005 and2004, were as follows (in thousands):

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Land and  right of way                          |       | $                     | 44,850     |   | $ | 36,228 |   |
| Line pipe  and fittings                         |       | 676,920               |       | 631,099 |   |
| Storage  tanks                                  |       | 120,831               |       | 95,765 |   |
| Buildings  and improvements                     |       | 45,691                |       | 36,045 |   |
| Machinery and  equipment                        |       | 183,461               |       | 191,561 |   |
| Construction  work in progress                  |       | 77,570                |       | 42,833 |   |
| Total  property, plant and equipment            |       | 1,149,323             |       | 1,033,531 |   |
| Less  accumulated depreciation and amortization |       | 340,562               |       | 311,197 |   |
| Net  property, plant and equipment              |       | $                     | 808,761    |   | $ | 722,334 |   |

 

Depreciation expense,including impairment charges, on property, plant and equipment was $38.3million, $42.1 million and $31.0 million for the years ended December 31,2005, 2004 and 2003, respectively. During the fourth quarter of 2004, we wroteoff approximately $2.1 million in assets taken out of service to depreciationexpense.

 

In September 2005,our Todhunter facility, near Middletown, Ohio, experienced a propane releaseand fire at a dehydration unit within the storage facility. The dehydrationunit was destroyed due to the propane release and

 

F-21

----

 

fire, and as aresult, we wrote off the remaining book value of the asset of $0.8 million todepreciation and amortization expense during the third quarter of 2005.

 

Weevaluate impairment of long-lived assets in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.During the third quarter of 2004, we completed an evaluation of our marineterminal facility in the Beaumont, Texas, area. The facility consists primarilyof a barge dock, a ship dock, four storage tanks and various segments ofconnecting pipelines. The evaluation indicated that the docks and other assetsat the facility needed extensive work to continue to be commerciallyoperational. As a result, we performed an impairment test on the entire marinefacility and recorded a $4.4 million non-cash impairment charge, included indepreciation and amortization expense in our consolidated statements of income,for the excess carrying value over the estimated fair value of the facility.

 

**NOTE 11.**                OTHER CURRENT LIABILITIES

** **

The major components ofother current liabilities for the years ended December 31, 2005 and 2004,were as follows (in thousands):

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Inventory payables                   |       | $                     | 338        |   | $ | 391 |   |
| Current portion of deferred revenue  |       | 1,177                 |       | 1,359 |   |
| McCleery litigation accrual          |       | —                |       | 2,000 |   |
| Capital expenditure accruals         |       | 398                   |       | 1,568 |   |
| Retainage                            |       | 626                   |       | 1,812 |   |
| Accruals for regulatory penalties    |       | 1,750                 |       | — |   |
| Current portion of FIN 45 obligation |       | 500                   |       | — |   |
| Other                                |       | 2,431                 |       | 2,209 |   |
| Total                                |       | $                     | 7,220      |   | $ | 9,339 |   |

** **

**NOTE 12.**                DEBT

** **

## **Senior Notes**

## ** **

On January 27, 1998,we completed the issuance of $180.0 million principal amount of 6.45% SeniorNotes due 2008, and $210.0 million principal amount of 7.51% Senior Notes due2028 (collectively the “Senior Notes”). The 6.45% Senior Notes were issued at adiscount of $0.3 million and are being accreted to their face value over theterm of the notes. The 6.45% Senior Notes due 2008 are not subject toredemption prior to January 15, 2008. The 7.51% Senior Notes due 2028,issued at par, may be redeemed at any time after January 15, 2008, atour option, in whole or in part, at our election at the following redemptionprices (expressed in percentages of the principal amount) if redeemed duringthe twelve months beginning January 15 of the years indicated:

 

| **Year** | ** ** | **Redemption   Price** | ** ** |
|----------|------------|------------------------|------------|
|     |       |                   |       |
| 2008     |       | 103.755                | %          |
| 2009     |       | 103.380                | %          |
| 2010     |       | 103.004                | %          |
| 2011     |       | 102.629                | %          |
| 2012     |       | 102.253                | %          |
| 2013     |       | 101.878                | %          |
| 2014     |       | 101.502                | %          |
| 2015     |       | 101.127                | %          |
| 2016     |       | 100.751                | %          |
| 2017     |       | 100.376                | %          |

 

## **and thereafter at 100% of the principal amount, together ineach case with accrued interest at the redemption date.**

## ** **

F-22

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The Senior Notes do not have sinking fundrequirements. Interest on the Senior Notes is payable semiannually in arrearson January 15 and July 15 of each year. The Senior Notes areunsecured obligations and rank pari passu with all other unsecured andunsubordinated indebtedness. The indenture governing the Senior Notes containscovenants including but not limited to, covenants limiting the creation ofliens securing indebtedness and sale and leaseback transactions. However, the indenturedoes not limit our ability to incur additional indebtedness. As of December 31,2005, we were in compliance with the covenants of the Senior Notes.

 

We have entered into aninterest rate swap agreement to hedge our exposure to changes in the fair valueon a portion of the Senior Notes discussed above (see Note 4). The Senior Notesinclude the fair value of our interest rate swap, which was a loss of $0.9million at December 31, 2005 and a gain of $3.4 million at December 31,2004.

 

The following tablesummarizes the estimated fair values of the Senior Notes as of December 31,2005 and 2004 (in millions):

 
| ** **                                | ** ** | ** ** | ** ** | **Fair Value**        | ** ** |
|-------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                | ** ** | **Face**   | ** ** | **December 31,** | ** ** |
| ** **                                | ** ** | **Value**  | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                      |       |       |       |                  |       |   |   |
| 6.45% Senior Notes, due January 2008 |       | $          | 180.0      |                  | $          | 183.7 |   | $ | 187.1 |   |
| 7.51% Senior Notes, due January 2028 |       | 210.0      |       | 224.1                 |       | 225.6 |   |
|                                           |            |            |            |                       |            |  |  |  |  |  |

 

**OtherLong Term Debt and Credit Facilities**

** **

We currently utilize debtfinancing available from our Parent Partnership through intercompany notes. Theterms of the intercompany notes generally match the principal and interestpayment dates under the Parent Partnership’s credit agreement and senior notes.The interest rates charged by the Parent Partnership include the statedinterest rate of the Parent Partnership, plus a premium to cover debt issuancecosts. The interest rate is also decreased or increased to cover gains andlosses, respectively, on any interest rate swaps that the Parent Partnership may havein place on its credit agreement and senior notes. The Parent Partnership’ssenior notes and revolving credit facility are described below.

 

On February 20,2002, our Parent Partnership issued $500.0 million principal amount of 7.625%Senior Notes due 2012. The 7.625% Senior Notes were issued at a discount of$2.2 million and are being accreted to their face value over the term of thenotes. The 7.625% Senior Notes may be redeemed at any time at our ParentPartnership’s option with the payment of accrued interest and a make-wholepremium determined by discounting remaining interest and principal paymentsusing a discount rate equal to the rate of the United States Treasurysecurities of comparable remaining maturity plus 35 basis points. The indenturegoverning the 7.625% Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit ourParent Partnership’s ability to incur additional indebtedness.

 

On January 30, 2003,our Parent Partnership issued $200.0 million principal amount of 6.125% SeniorNotes due 2013. The 6.125% Senior Notes were issued at a discount of $1.4million and are being accreted to their face value over the term of the notes.  The 6.125% Senior Notes may be redeemedat any time at our Parent Partnership’s option with the payment of accruedinterest and a make-whole premium determined by discounting remaining interestand principal payments using a discount rate equal to the rate of the UnitedStates Treasury securities of comparable remaining maturity plus 35 basispoints. The indenture governing the 6.125% Senior Notes contains covenantsincluding, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale and leaseback transactions. However, theindenture does not limit the Parent Partnership’s ability to incur additionalindebtedness.

 

On June 27, 2003,our Parent Partnership entered into a $550.0 million unsecured revolving creditfacility with a three-year term, including the issuance of letters of credit ofup to $20.0 million (“Revolving Credit

 

F-23

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Facility”). Theinterest rate is based, at our Parent Partnership’ option, on either the lender’sbase rate plus a spread, or LIBOR plus a spread in effect at the time of theborrowings. The credit agreement for the Revolving Credit Facility containscertain restrictive financial covenant ratios. Restrictive covenants in theRevolving Credit Facility limit the Parent Partnership’s and its subsidiaries’ability to, among other things, incur additional indebtedness, makedistributions in excess of Available Cash and complete mergers, acquisitionsand sales of assets. On October 21, 2004, our Parent Partnership amendedthe Revolving Credit Facility to (i) increase the facility size to $600.0million, (ii) extend the term to October 21, 2009, (iii) removecertain restrictive covenants, (iv) increase the available amount for theissuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing. On February 23,2005, our Parent Partnership again amended its Revolving Credit Facility toremove the requirement that DEFS must at all times own, directly or indirectly,100% of the Company, to allow for its acquisition by DFI (see Note 1). Duringthe second quarter of 2005, the Parent Partnership used a portion of theproceeds from an equity offering in May 2005 to repay a portion of theRevolving Credit Facility. On December 13, 2005, the Parent Partnershipamended its Revolving Credit Facility as follows:

 

•                  Total bankcommitments increased from $600.0 million to $700.0 million. The amendment alsoprovided that the commitments under the credit facility may be increasedup to a maximum of $850.0 million upon our Parent Partnership’s request,subject to lender approval and the satisfaction of certain other conditions.

•                  The facility feeand the borrowing rate currently in effect were reduced by 0.275%.

•                  The maturitydate of the credit facility was extended from October 21, 2009, to December 13,2010. Also under the terms of the amendment, the Parent Partnership may requestup to two, one-year extensions of the maturity date. These extensions, ifrequested, will become effective subject to lender approval and satisfaction ofcertain other conditions.

•                  The amendmentalso removed the $100.0 million limit on the total amount of standby letters ofcredit that can be outstanding under the credit facility.

 

At December 31,2005, $405.9 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 4.9%. At December 31, 2005, our ParentPartnership was in compliance with the covenants of this credit agreement.

 

At December 31, 2005and 2004, we had intercompany notes payable to our Parent Partnership of $206.9million and $301.7 million, respectively, which represented borrowings underthe Parent Partnership’s Revolving Credit Facility, 7.625% Senior Notes and6.125% Senior Notes. The weighted average interest rate on the note payable tothe Parent Partnership at December 31, 2005, was 4.15%. At December 31,2005, accrued interest includes $3.5 million due to our Parent Partnership. Forthe year ended December 31, 2005 and 2004, interest costs incurred on thenote payable to our Parent Partnership totaled $11.9 million and $12.5 million,respectively.

 

**NOTE 13.**                CONCENTRATIONS OF CREDIT RISK

** **

Our primary market areasare located in the Northeast, Midwest and Southwest regions of the UnitedStates. We have a concentration of trade receivable balances due from majorintegrated oil companies, independent oil companies and other pipelines andwholesalers. These concentrations of customers may affect our overallcredit risk in that the customers may be similarly affected by changes ineconomic, regulatory or other factors. We thoroughly analyze our customers’historical and future credit positions prior to extending credit. We manage ourexposure to credit risk through credit analysis, credit approvals, creditlimits and monitoring procedures, and for certain transactions may utilizeletters of credit, prepayments and guarantees.

 

For the years ended December 31,2005, 2004 and 2003, we had one customer, Marathon Petroleum Company LLC, whichaccounted for 14%, 17% and 18%, respectively, of our total revenues. No othercustomer

 

F-24

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accounted for 10%or more of our total consolidated revenues for the years ended December 31,2005, 2004 or 2003.

 

The carrying amount ofcash and cash equivalents, accounts receivable, inventories, other currentassets, accounts payable and accrued liabilities, other current liabilities,derivative and notes payable approximates their fair value due to theirshort-term nature.

 

**NOTE 14.**                QUARTERLY DISTRIBUTIONS OFAVAILABLE CASH

** **

We make quarterly cashdistributions of all of our Available Cash, generally defined as consolidatedcash receipts less consolidated cash disbursements and cash reservesestablished by the General Partner in its sole discretion. We pay distributionsof 99.999% to the Parent Partnership and 0.001% to the General Partner.

 

For the years ended December 31,2005, 2004 and 2003, cash distributions paid to our Parent Partnership totaled$111.9 million, $118.0 million and $106.5 million, respectively. On February 7,2006, we paid a cash distribution to our Parent Partnership of $16.7 millionfor the quarter ended December 31, 2005.

 

**NOTE 15.**                UNIT-BASED COMPENSATION

** **

## **1994 Long Term IncentivePlan**

## ** **

During 1994, the Companyadopted the Texas Eastern Products Pipeline Company 1994 Long Term IncentivePlan (“1994 LTIP”). The 1994 LTIP provides certain key employees with anincentive award whereby a participant is granted an option to purchase LimitedPartner Units of the Parent Partnership (“Parent LPUs”). These same employeesare also granted a stipulated number of Performance Units, the cash value ofwhich may be used to pay for the exercise of the respective Parent LPUoptions awarded. Under the provisions of the 1994 LTIP, no more than onemillion options and two million Performance Units may be granted.

 

When our ParentPartnership’s calendar year earnings per unit (exclusive of certain specialitems) exceeds a stated threshold, each participant receives a credit to theirrespective Performance Unit account equal to the earnings per unit excessmultiplied by the number of Performance Units awarded. The balance in thePerformance Unit account may be used to offset the cost of exercisingParent LPU options granted in connection with the Performance Units or may bewithdrawn two years after the underlying options expire, usually 10 years fromthe date of grant. Any unused balance previously credited is forfeited upontermination. The Parent Partnership accrues compensation expense for theperformance units awarded annually based upon the terms of the plan discussedabove. We are allocated a portion of the compensation expense (see Note 2).

 

Under the agreement forsuch Parent LPU options, the options become exercisable in equal installmentsover periods of one, two, and three years from the date of the grant. At December 31,2005, all options have been fully exercised. The Performance Unit account has aminimal liability balance which may be withdrawn by the participants afterDecember 31, 2006.

 

F-25

----

 

A summary of Parent LPU options granted underthe terms of the 1994 LTIP is presented below:

 
| ** **                             | ** ** | **Options   Outstanding** | ** ** | **Options   Exercisable** | ** ** | **Exercise   Range** | ** ** |
|----------------------------------------|------------|---------------------------|------------|---------------------------|------------|----------------------|------------|
| Parent LPU Options:                    |       |                      |       |                      |       |                 |       |
| Outstanding  at December 31, 2002 |       | 90,091                    |       | 90,091                    |       | $13.81 -  $25.69     |       |
| Exercised                              |       | (90,091                   | )          | (90,091                   | )          | $13.81 -  $25.69     |       |
| Outstanding  at December 31, 2003 |       | —                    |       | —                    |       |                 |       |

 

Our Parent Partnershiphas not granted options for any periods presented. During the year ended December 31,2003, all remaining outstanding Parent LPU options were exercised. For optionspreviously outstanding, our Parent Partnership followed the intrinsic valuemethod for recognizing stock-based compensation expense. The exercise price ofall options awarded under the 1994 LTIP equaled the market price of the ParentLPUs on the date of grant. Accordingly, the Parent Partnership recognized nocompensation expense at the date of grant. Had compensation expense beendetermined consistent with SFAS No. 123, *Accountingfor Stock-Based Compensation*, no compensation expense would havebeen recognized for the years ended December 31, 2005, 2004 and 2003.

 

## **1999 and 2002 PhantomUnit Plans**

## ** **

Effective September 1,1999, the Company adopted the Texas Eastern Products Pipeline Company, LLC 1999Phantom Unit Retention Plan (“1999 PURP”). Effective June 1, 2002, theCompany adopted the Texas Eastern Products Pipeline Company, LLC 2002 PhantomUnit Retention Plan (“2002 PURP”). The 1999 PURP and the 2002 PURP provide keyemployees with incentive awards whereby a participant is granted phantom units.These phantom units are automatically redeemed for cash based on the vestedportion of the fair market value of the phantom units at stated redemptiondates. The fair market value of each phantom unit is equal to the closing priceof a Parent LPU as reported on the New York Stock Exchange on the redemptiondate.

 

Under the agreement forthe phantom units, each participant will vest 10% of the number of phantomunits initially granted under his or her award at the end of each of the firstfour years and will vest the final 60% at the end of the fifth year. Eachparticipant is required to redeem their phantom units as they vest.  They are also entitled to quarterly cashdistributions equal to the product of the number of phantom units outstandingfor the participant and the amount of the cash distribution that the ParentPartnership paid per unit to Parent LPU unitholders. The Parent Partnershipaccrues compensation expense annually based upon the terms of the 1999 PURP and2002 PURP discussed above. We are allocated a portion of the compensationexpense (see Note 2). At December 31, 2004, we had an accrued liabilitybalance of $0.8 million for our share of compensation related to the 1999 PURPand 2002 PURP. Due to a change of ownership of the Parent Partnership’s GeneralPartner on February 24, 2005 (see Note 1), all outstanding units underboth the 1999 PURP and the 2002 PURP fully vested and were redeemed byparticipants. As such, there were no outstanding units at December 31,2005 under either the 1999 PURP or the 2002 PURP.

 

## **2000 Long Term IncentivePlan**

## ** **

Effective January 1,2000, the Company established the Texas Eastern Products Pipeline Company, LLC2000 Long Term Incentive Plan (“2000 LTIP”) to provide key employees incentivesto achieve improvements in our financial performance. Generally, upon the closeof a three-year performance period, if the participant is then still anemployee of the Company, the participant will receive a cash payment in an amountequal to (1) the applicable performance percentage specified in the awardmultiplied by (2) the number of phantom units granted under the awardmultiplied by (3) the average of the closing prices of a Parent LPU overthe ten consecutive trading days immediately preceding the last day of theperformance period. Generally, a participant’s performance percentage is basedupon the improvement of our Parent Partnership’s Economic Value Added (asdefined below) during a three-year performance period over the Economic ValueAdded during the three-year period immediately preceding the

 

F-26

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performance period.If a participant incurs a separation from service during the performance perioddue to death, disability or retirement (as such terms are defined in the 2000LTIP), the participant will be entitled to receive a cash payment in an amountequal to the amount computed as described above multiplied by a fraction, thenumerator of which is the number of days that have elapsed during theperformance period prior to the participant’s separation from service and thedenominator of which is the number of days in the performance period. Due to achange of ownership of the Parent Partnership’s General Partner on February 24,2005, all outstanding units under the 2000 LTIP for plan years 2003 and 2004were fully vested and redeemed by participants. As such, there were nooutstanding units at December 31, 2005, for awards granted for the planyears ended December 31, 2004 and 2003. At December 31, 2005, phantomunits outstanding for awards granted for the plan year ended December 31,2005, were 23,400.

 

Economic Value Addedmeans our Parent Partnership average annual EBITDA for the performance periodminus the product of our Parent Partnership’s average asset base and cost ofcapital for the performance period. For purposes of the 2000 LTIP for planyears 2000 through 2002, EBITDA means our Parent Partnership earnings beforenet interest expense, depreciation and amortization and proportional interestin EBITDA of its joint ventures as presented in its consolidated financialstatements prepared in accordance with generally accepted accountingprinciples, except that at his discretion the Chief Executive Officer (“CEO”) may excludegains or losses from extraordinary, unusual or non-recurring items. For theyears ended December 31, 2005, 2004 and 2003, EBITDA means, in addition tothe above, earnings before other income – net. Average asset base means thequarterly average, during the performance period, of our gross value ofproperty, plant and equipment, *plus* productsand crude oil operating oil supply and the gross value of intangibles andequity investments. The Parent Partnership’s cost of capital is approved by itsCEO at the date of award grant.

 

In addition to thepayment described above, during the performance period, the Company will pay tothe participant the amount of cash distributions that the Parent Partnershipwould have paid to its unitholders had the participant been the owner of thenumber of Parent LPUs equal to the number of phantom units granted to theparticipant under this award. The Parent Partnership accrues compensationexpense annually based upon the terms of the 2000 LTIP discussed above. We areallocated a portion of the compensation expense (see Note 2). At December 31,2005 and 2004, we had an accrued liability balance of $0.3 million and $0.9million, respectively, for our share of compensation related to the 2000 LTIP.

 

**NOTE 16.**                OPERATING LEASES

** **

We use leased assets inseveral areas of our operations. Total rental expense for the years ended December 31,2005, 2004 and 2003, was $14.7 million, $13.8 million and $12.3 million,respectively. The following table sets forth our minimum rental payments underour various operating leases for the years ending December 31 (inthousands):

 
| 2006       |   | $      | 13,013 |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 12,416 |   |
| 2008       |   | 7,421  |   |
| 2009       |   | 5,254  |   |
| 2010       |   | 5,133  |   |
| Thereafter |   | 19,386 |   |
|       |   | $      | 62,623 |   |

** **

F-27

----

 

**NOTE 17.**                EMPLOYEE BENEFITS

** **

**Retirement Plans**

 

The Parent Partnershipadopted the TEPPCO Retirement Cash Balance Plan (“TEPPCO RCBP”), which was anon-contributory, trustee-administered pension plan. In addition, the TEPPCOSupplemental Benefit Plan (“TEPPCO SBP”) was a non-contributory, nonqualified,defined benefit retirement plan, in which certain executive officersparticipated. The TEPPCO SBP was established to restore benefit reductionscaused by the maximum benefit limitations that apply to qualified plans. Thebenefit formula for all eligible employees was a cash balance formula. Under acash balance formula, a plan participant accumulated a retirement benefit basedupon pay credits and current interest credits. The pay credits are based on aparticipant’s salary, age and service. The Parent Partnership used a December 31measurement date for these plans.

 

On May 27, 2005, theTEPPCO RCBP and the TEPPCO SBP were amended. Effective May 31, 2005,participation in the TEPPCO RCBP was frozen, and no new participants wereeligible to be covered by the plan after that date. Effective December 31,2005, all plan benefits accrued were frozen, participants will not receiveadditional pay credits after that date, and all plan participants were 100%vested regardless of their years of service. The TEPPCO RCBP plan wasterminated effective December 31, 2005, subject to IRS approval of plantermination, and plan participants will have the option to receive theirbenefits either through a lump sum payment in 2006 or through an annuity. Forthose plan participants who elect to receive an annuity, our Parent Partnershipwill purchase an annuity contract from an insurance company in which the planparticipant will own the annuity, absolving our Parent Partnership of any futureobligation to the participant. Participants in the TEPPCO SBP received paycredits through November 30, 2005, and received lump sum benefit paymentsin December 2005. Both the RCBP and SBP benefit payments are discussedbelow.

 

In June 2005, theParent Partnership recorded a curtailment charge of $0.1 million in accordancewith SFAS No. 88, *Employers’ Accounting forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits*, as a result of the TEPPCO RCBP and TEPPCO SBP amendments.A portion of the charge was allocated to us. As of May 31, 2005, thefollowing assumptions were changed for purposes of determining the net periodicbenefit costs for the remainder of 2005: the discount rate, the long-term rateof return on plan assets, and the assumed mortality table. The discount ratewas decreased from 5.75% to 5.00% to reflect rates of returns on bondscurrently available to settle the liability.  The expected long-term rate of return on planassets was changed from 8% to 2% due to the movement of plan funds from equityinvestments into short-term money market funds. The mortality table was changedto reflect overall improvements in mortality experienced by the generalpopulation. The curtailment charge arose due to the accelerated recognition ofthe unrecognized prior service costs. The Parent Partnership recordedadditional settlement charges of approximately $0.2 million in the fourthquarter of 2005 relating to the TEPPCO SBP. The Parent Partnership expects torecord additional settlement charges of approximately $4.0 million in 2006relating to the TEPPCO RCBP for any existing unrecognized losses upon the plantermination and final distribution of the assets to the plan participants. Weexpect to be allocated a share of these charges.

 

F-28

----

 

The components of netpension benefits costs allocated to us for the TEPPCO RCBP and the TEPPCO SBPfor the years ended December 31, 2005, 2004 and 2003, were as follows (inthousands):

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost  benefit earned during the year   |       | $                                | 2,817      |   | $ | 2,384 |   | $ | 2,160 |   |
| Interest  cost on projected benefit obligation |       | 629                              |       | 491 |   | 347 |   |
| Expected  return on plan assets                |       | (467                             | )          | (621 | ) | (432 | ) |
| Amortization  of prior service cost            |       | 5                                |       | 7 |   | 7 |   |
| Recognized  net actuarial loss                 |       | 86                               |       | 40 |   | 18 |   |
| SFAS 88  curtailment charge                    |       | 39                               |       | — |   | — |   |
| SFAS 88  settlement charge                     |       | 160                              |       | — |   | — |   |
| Net pension  benefits costs                    |       | $                                | 3,269      |   | $ | 2,301 |   | $ | 2,100 |   |

 

**Other Postretirement Benefits**

 

The Parent Partnershipprovided certain health care and life insurance benefits for retired employeeson a contributory and non-contributory basis (“TEPPCO OPB”). Employees becameeligible for these benefits if they met certain age and service requirements atretirement, as defined in the plans. The Parent Partnership provided a fixeddollar contribution, which did not increase from year to year, towards retiredemployee medical costs. The retiree paid all health care cost increases due tomedical inflation. The Parent Partnership used a December 31 measurementdate for this plan.

 

In May 2005,benefits provided to employees under the TEPPCO OPB were changed. Employeeseligible for these benefits received them through December 31, 2005,however, effective December 31, 2005, these benefits were terminated. As aresult of this change in benefits and in accordance with SFAS 106, *Employers’ Accounting for Postretirement Benefits Other Than Pensions*,the Parent Partnership recorded a curtailment credit of approximately $1.7million in its accumulated postretirement obligation, which reduced the ParentPartnership’s accumulated postretirement obligation to the total of theexpected remaining 2005 payments under the TEPPCO OPB. The current employeesparticipating in this plan were transferred to DEFS, who will continue toprovide postretirement benefits to these retirees. Our Parent Partnershiprecorded a one-time settlement to DEFS in the third quarter of 2005 of $0.4million for the remaining postretirement benefits. A portion of these chargeswas allocated to us.

 

The components of netpostretirement benefits cost allocated to us for the TEPPCO OPB for the yearsended December 31, 2005, 2004 and 2003, were as follows (in thousands):

 
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost  benefit earned during the year                    |       | $                                | 49         |   | $ | 102 |   | $ | 91 |   |
| Interest  cost on accumulated postretirement benefit obligation |       | 57                               |       | 129 |   | 117 |   |
| Amortization  of prior service cost                             |       | 47                               |       | 112 |   | 112 |   |
| Recognized  net actuarial loss                                  |       | 3                                |       | 1 |   | — |   |
| Curtailment  charge                                             |       | (1,318                           | )          | — |   | — |   |
| Settlement  charge                                              |       | (3                               | )          | — |   | — |   |
| Net  postretirement benefits costs                              |       | $                                | (1,165     | ) | $ | 344 |   | $ | 320 |   |

 

Effective June 1, 2005, the payroll functionsperformed by DEFS for the Company were transferred from DEFS to EPCO. For thoseemployees who were receiving certain other postretirement benefits at the timeof the acquisition of the Company by DFI, DEFS will continue to provide thesebenefits to those employees. Effective June 1, 2005, EPCO began providingcertain other postretirement benefits to those employees who became eligiblefor the benefits after June 1, 2005, and will charge those benefit relatedcosts to our Parent Partnership. As a result

 

F-29

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of these changes, the Parent Partnership recorded a $1.2 millionreduction in its other postretirement obligation in June 2005. A portionof the reduction was allocated to us.

 

The Parent Partnershipemployed a building block approach in determining the long-term rate of returnfor plan assets. Historical markets were studied and long-term historicalrelationships between equities and fixed-income were preserved consistent withwidely accepted capital market principle that assets with higher volatilitygenerate a greater return over the long run. Current market factors such asinflation and interest rates were evaluated before long-term capital marketassumptions were determined. The long-term portfolio return was established viaa building block approach with proper consideration of diversification andrebalancing. Peer data and historical returns were reviewed to check forreasonability and appropriateness.

 

The weighted averageassumptions used to determine benefit obligations for the retirement plans andother postretirement benefit plans at December 31, 2005 and 2004, were asfollows:

 
| ** **                      | ** ** | **Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|---------------------------------|------------|----------------------|------------|------------------------------------|------------|
| ** **                      | ** ** | **2005**             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                            |       |                 |       |                               |       |   |   |   |   |
| Discount rate                   |       | 4.59                 | %          | 5.75                               | %          | 5.75 | % | 5.75 | % |
| Increase in compensation levels |       | —               |       | 5.00                               | %          | — |   | — |   |

 

The weighted averageassumptions used to determine net periodic benefit cost for the retirementplans and other postretirement benefit plans for the years ended December 31,2005 and 2004, were as follows:

 
| ** **                                            | ** ** | **Pension Benefits** | ** ** | **Other Postretirement Benefits** | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **2005**             | ** ** | **2004**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                  |       |                 |       |                              |       |   |   |   |   |
| Discount rate (1)                                     |       | 5.75%/5.00%          |       | 6.25                              | %          | 5.75%/5.00% |   | 6.25 | % |
| Increase in compensation levels                       |       | 5.00%                |       | 5.00                              | %          | — |   | — |   |
| Expected long-term rate of return on plan  assets (2) |       | 8.00%/2.00%          |       | 8.00                              | %          | — |   | — |   |

 

----

(1)          Expense was remeasured on May 31, 2005, as a result of TEPPCO RCBPand TEPPCO SBP amendments. The discount rate was decreased from 5.75% to 5%effective June 1, 2005, to reflect rates of returns on bonds currentlyavailable to settle the liability.

 

(2)          As a result of TEPPCO RCBP and TEPPCO SBP amendments, the expectedreturn on assets was changed from 8% to 2% due to the movement of plan fundsfrom equity investments into short-term money market funds, effective June 1,2005.

 

F-30

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The following table setsforth the Parent Partnership’s pension and other postretirement benefitschanges in benefit obligation, fair value of plan assets and funded status asof December 31, 2005 and 2004 (in thousands):

 
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2005**             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                            |       |                 |       |                               |       |   |   |   |   |
| **Change  in benefit obligation**               |       |                 |       |                               |       |   |   |   |   |
| Benefit  obligation at beginning of year        |       | $                    | 10,803     |                               | $          | 7,704 |   | $ | 2,466 |   | $ | 2,088 |   |
| Transfers to  Parent Partnership subsidiary (1) |       | —               |       | 17                                 |       | — |   | 4 |   |
| Service cost                                    |       | 2,817                |       | 2,384                              |       | 49 |   | 102 |   |
| Interest  cost                                  |       | 629                  |       | 491                                |       | 57 |   | 129 |   |
| Actuarial  loss                                 |       | 1,672                |       | 360                                |       | 371 |   | 166 |   |
| Retiree  contributions                          |       | —               |       | —                             |       | 56 |   | 52 |   |
| Benefits  paid                                  |       | (657                 | )          | (153                               | )          | (71 | ) | (75 | ) |
| Impact of  curtailment                          |       | (628                 | )          | —                             |       | (2,928 | ) | — |   |
| Benefit  obligation at end of year              |       | $                    | 14,636     |                               | $          | 10,803 |   | $ | — |   | $ | 2,466 |   |
|                                            |       |                 |       |                               |       |   |   |   |   |
| **Change  in plan assets**                      |       |                 |       |                               |       |   |   |   |   |
| Fair value  of plan assets at beginning of year |       | $                    | 10,415     |                               | $          | 7,673 |   | $ | — |   | $ | — |   |
| Transfer to  Parent Partnership subsidiary (1)  |       | —               |       | 30                                 |       | — |   | — |   |
| Actual  return on plan assets                   |       | 41                   |       | 565                                |       | — |   | — |   |
| Retiree  contributions                          |       | —               |       | —                             |       | 56 |   | 52 |   |
| Employer  contributions                         |       | 5,863                |       | 2,300                              |       | 15 |   | 23 |   |
| Benefits  paid                                  |       | (657                 | )          | (153                               | )          | (71 | ) | (75 | ) |
| Fair value  of plan assets at end of year       |       | $                    | 15,662     |                               | $          | 10,415 |   | $ | — |   | $ | — |   |
|                                            |       |                 |       |                               |       |   |   |   |   |
| **Reconciliation  of funded status**            |       |                 |       |                               |       |   |   |   |   |
| Funded  status                                  |       | $                    | 1,026      |                               | $          | (388 | ) | $ | — |   | $ | (2,466 | ) |
| Unrecognized  prior service cost                |       | —               |       | (100                               | )     | — |   | 889 |   |
| Unrecognized  actuarial loss                    |       | 2,514                |       | 1,197                              |       | — |   | 398 |   |
| Net amount  recognized                          |       | $                    | 3,540      |                               | $          | 709 |   | $ | — |   | $ | (1,179 | ) |

 

----

(1)  Indicatestransfer of employees from us to another subsidiary of the Parent Partnership.

 

## **We estimate the following benefitpayments, which reflect expected future service, as appropriate, will be paid(in thousands):**

 
| ** ** | ** ** | **Pension Benefits** | ** ** | **Other Postretirement Benefits** | ** ** |
|------------|------------|----------------------|------------|-----------------------------------|------------|
|       |       |                 |       |                              |       |
| 2006       |       | $                    | 14,801     |                              | $          | — |   |
|            |            |                      |            |                                   |            |  |  |

## ** **

## **Plan Assets**

## ** **

Our Parent Partnershipemployed a total return investment approach whereby a mix of equities and fixedincome investments were used to maximize the long-term return of plan assetsfor a prudent level of risk. Risk tolerance was established through carefulconsideration of plan liabilities, plan funded status and corporate financialcondition. The investment portfolio contained a diversified blend of equity andfixed-income investments. Furthermore, equity investments were diversifiedacross U.S. and non-U.S. stocks, both growth and value equity style, and small,mid and large capitalizations. Investment risk and return parameters werereviewed and evaluated

 

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periodically toensure compliance with stated investment objectives and guidelines. Thiscomprehensive review incorporated investment portfolio performance, annualliability measurements and periodic asset/liability studies.

 

The following table sets forth the weightedaverage asset allocations for the retirement plans and other postretirementbenefit plans as of December 31, 2005 and 2004, by asset category (inthousands):

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| **Asset Category**             | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                           |       |                  |       |   |   |
| Equity  securities             |       | —                |       | 63 | % |
| Debt  securities               |       | —                |       | 35 | % |
| Other (money  market and cash) |       | 100                   | %          | 2 | % |
| Total                          |       | 100                   | %          | 100 | % |

 

The Parent Partnershipdoes not expect to make further contributions to its retirement plans and otherpostretirement benefit plans in 2006.

 

**OtherPlans**

 

DEFS also sponsored anemployee savings plan, which covered substantially all employees. Effective February 24,2005, in conjunction with the change in ownership of the Company, our ParentPartnership’s participation in this plan ended. Plan contributions on behalf ofthe Company of $0.9 million, $3.5 million and $3.2 million were recognized forthe period January 1, 2005 through February 23, 2005, and during theyears ended December 31, 2004 and 2003, respectively.

 

**NOTE 18.**                COMMITMENTS AND CONTINGENCIES

** **

**Litigation**

** **

In the fall of 1999 andon December 1, 2000, the Company and the Partnership were named asdefendants in two separate lawsuits in Jackson County Circuit Court, JacksonCounty, Indiana, styled *Ryan E. McCleery andMarcia S. McCleery, et al. v. Texas Eastern Corporation, et al.*(includingthe Company and Partnership) and*Gilbert Richards and JeanRichards v. Texas Eastern Corporation, et al.*(including the Companyand Partnership). In both cases, the plaintiffs contend, among other things,that we and other defendants stored and disposed of toxic and hazardoussubstances and hazardous wastes in a manner that caused the materials to bereleased into the air, soil and water. They further contend that the releasecaused damages to the plaintiffs. In their complaints, the plaintiffs allegestrict liability for both personal injury and property damage together withgross negligence, continuing nuisance, trespass, criminal mischief and loss ofconsortium. The plaintiffs are seeking compensatory, punitive and trebledamages. On January 27, 2005, we entered into Release and SettlementAgreements with the McCleery plaintiffs and the Richards plaintiffs dismissingall of these plaintiffs’ claims on terms that did not have a material adverseeffect on our financial position, results of operations or cash flows.  Although we did not settle with all plaintiffsand we therefore remain named parties in the *Ryan E.McCleery and Marcia S. McCleery, et al. v. Texas Eastern Corporation, et al*.action, a co-defendant has agreed to indemnify us for all remaining claimsasserted against us. Consequently, we do not believe that the outcome of theseremaining claims will have a material adverse effect on our financial position,results of operations or cash flows.

 

On December 21,2001, we were named as a defendant in a lawsuit in the 10th Judicial District,Natchitoches Parish, Louisiana, styled *Rebecca L. Grisham et al.v. TE Products Pipeline Company, Limited Partnership*. In this case,the plaintiffs contend that our pipeline, which crosses the plaintiffs’property, leaked toxic

 

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products ontotheir property and, consequently caused damages to them. We have filed ananswer to the plaintiffs’ petition denying the allegations, and we aredefending ourselves vigorously against the lawsuit. The plaintiffs have notstipulated the amount of damages they are seeking in the suit; however, this caseis covered by insurance. We do not believe that the outcome of this lawsuitwill have a material adverse effect on our financial position, results ofoperations or cash flows.

 

On April 2, 2003,Centennial was served with a petition in a matter styled *Adams, etal. v. Centennial Pipeline Company LLC, et al*.  This matter involves approximately 2,000plaintiffs who allege that over 200 defendants, including Centennial,generated, transported, and/or disposed of hazardous and toxic waste at twosites in Bayou Sorrell, Louisiana, an underground injection well and alandfill.  The plaintiffs allege personalinjuries, allergies, birth defects, cancer and death.  The underground injection well has been inoperation since May 1976.  Basedupon current information, Centennial appears to be a *de minimis*contributor, having used the disposal site during the two month time period of December 2001to January 2002.  Marathon has beenhandling this matter for Centennial under its operating agreement withCentennial.  We have a 50% ownershipinterest in Centennial.  On November 30,2004, the court approved a class settlement. The time period for parties to appeal this settlement expired in March 2005,and the class settlement became final. The terms of the settlement did not have a material adverse effect onour financial position, results of operations or cash flows.

 

In May 2003, theCompany was named as a defendant in a lawsuit styled *John R.James, et al. v. J Graves Insulation Company, et al.* as filed in thefirst Judicial District Court, Caddo Parish, Louisiana. There are numerousplaintiffs identified in the action that are alleged to have suffered damagesas a result of alleged exposure to asbestos-containing products and materials. Accordingto the petition and as a result of a preliminary investigation, the Companybelieves that the only claim asserted against it results from one individualfor the period from July 1971 through June 1972, who is alleged tohave worked on a facility owned by the Company’s predecessor. This periodrepresents a small portion of the total alleged exposure period from January 1964through December 2001 for this individual. The individual’s claims involvenumerous employers and alleged job sites. The Company has been unable toconfirm involvement by the Company or its predecessors with the allegedlocation, and it is uncertain at this time whether this case is covered byinsurance. Discovery is planned, and the Company intends to defend itselfvigorously against this lawsuit. The plaintiffs have not stipulated the amountof damages that they are seeking in this suit. We are obligated to reimbursethe Company for any costs it incurs related to this lawsuit. We cannot estimatethe loss, if any, associated with this pending lawsuit. We do not believe thatthe outcome of this lawsuit will have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

In 1991, the Company andthe Parent Partnership were named as a defendant in a matter styled *Jimmy R. Green, et al. v. Cities Service Refinery, et al.*asfiled in the 26th Judicial District Court of Bossier Parish,Louisiana. The plaintiffs in this matter reside or formerly resided on landthat was once the site of a refinery owned by one of our co-defendants. The formerrefinery is located near our Bossier City facility. Plaintiffs have claimedpersonal injuries and property damage arising from alleged contamination of therefinery property. The plaintiffs have recently pursued certification as a class andhave significantly increased their demand to approximately $175.0 million. Thisrevised demand includes amounts for environmental restoration not previouslyclaimed by the plaintiffs. We, the Company and the Parent Partnership havenever owned any interest in the refinery property made the basis of thisaction, and we do not believe that we contributed to any alleged contaminationof this property. While we cannot predict the ultimate outcome, we do notbelieve that the outcome of this lawsuit will have a material adverse effect onour financial position, results of operations or cash flows.

 

In addition to thelitigation discussed above, we have been, in the ordinary course of business, adefendant in various lawsuits and a party to various other legal proceedings,some of which are covered in whole or in part by insurance. We believethat the outcome of these lawsuits and other proceedings will not individuallyor in the aggregate have a future material adverse effect on our consolidatedfinancial position, results of operations or cash flows.

 

**RegulatoryMatters**

 

Our operations aresubject to federal, state and local laws and regulations governing thedischarge of materials into the environment and various safety matters. Failureto comply with these laws and regulations may result in the assessment ofadministrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to perform investigatoryand remedial activities. We believe our operations have been and are inmaterial compliance with applicable environmental and safety laws andregulations, and that compliance with existing environmental laws andregulations are not expected to have a material adverse effect on ourcompetitive position, financial positions, results of operations or cash flows.However, risks of significant costs and liabilities are inherent in pipelineoperations, and we cannot assure that significant costs and liabilities willnot be incurred. Moreover, it is possible that other developments, such asincreasingly strict environmental and safety laws and regulations andenforcement policies thereunder, and claims for damages to property or personsresulting from our operations, could result in substantial costs andliabilities to us. At December

 

F-33

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31, 2005 and 2004,we have an accrued liability of $1.2 million and $1.4 million, respectively,related to sites requiring environmental remediation activities.

 

On March 26, 2004, adecision in *ARCO Products Co., et al. v. SFPP*,Docket OR96-2-000, was issued by the FERC, which made several significantdeterminations with respect to finding “changed circumstances” under the EnergyPolicy Act of 1992 (“EP Act”). The decision largely clarifies, but does notfully quantify, the standard required for a complainant to demonstrate that anoil pipeline’s rates are no longer subject to the rate protection of the EP Actby demonstrating that a substantial change in circumstances has occurred since1992 with respect to the basis of the rates being challenged. In the decision,the FERC found that a limited number of rate elements will significantly affectthe economic basis for a pipeline company’s rates. The elements identified inthe decision are volume changes, allowed total return and total cost-of-service(including major cost elements such as rate base, tax rates and tax allowances,among others). The FERC did reject, however, the use of changes in tax ratesand income tax allowances as stand-alone factors. Judicial review of thatdecision, which has been sought by a number of parties to the case, iscurrently pending before the U.S. Court of Appeals for the District of ColumbiaCircuit. We have not yet determined the impact, if any, that the decision, ifit is ultimately upheld, would have on our rates if they were reviewed underthe criteria of this decision.

 

On July 20, 2004,the District of Columbia Circuit issued an opinion in *BP WestCoast Products LLC v. FERC*. In reviewing a series of ordersinvolving SFPP, L.P., the court held among other things that the FERC had notadequately justified its policy of providing an oil pipeline limitedpartnership with an income tax allowance equal to the proportion of its incomeattributable to partnership interests owned by corporate partners. Under theFERC’s initial ruling, SFPP, L.P. was permitted an income tax allowance on itscost-of-service filing for the percentage of its net operating (pre-tax) incomeattributable to partnership units held by corporations, and was denied anincome tax allowance equal to the percentage attributable to partnership unitsheld by non-corporate partners. The court remanded the case back to the FERCfor further review. As a result of the court’s remand, on May 4, 2005, theFERC issued its Policy Statement on Income Tax Allowances, which permitsregulated partnerships, limited liability companies and other pass-throughentities an income tax allowance on their income attributable to any owner thathas an actual or potential income tax liability on that income, regardlesswhether the owner is an individual or corporation. If there is more than onelevel of pass-through entities, the regulated company income must be traced towhere the ultimate tax liability lies. The Policy Statement is to be applied inindividual cases, and the regulated entity bears the burden of proof toestablish the tax status of its owners. On December 16, 2005, the FERCissued the first of those decisions, in an order involving SFPP (the “SFPPOrder”). The SFPP Order confirmed that an MLP is entitled to a tax allowancewith respect to partnership income for which there is an “actual or potentialincome tax liability” and determined that a unitholder that is required to filea Form 1040 or Form 1120 tax return that includes partnership incomeor loss is presumed to have an actual or potential income tax liabilitysufficient to support a tax allowance on that partnership income. The FERC alsoestablished certain other presumptions, including that corporate unitholdersare presumed to be taxed at the maximum corporate tax rate of 35% whileindividual unitholders (and certain other types of unitholders taxed likeindividuals) are presumed to be taxed at a 28% tax rate. The SFPP Order remainssubject to further administrative proceedings (including compliance filings bySFPP and possible rehearing requests), as well as potential judicial review. Theultimate outcome of the FERC’s inquiry on income tax allowance should notaffect our current rates and rate structure because our rates are not based oncost-of-service methodology. However, the outcome of the income tax allowancewould become relevant to us should we (i) elect in the future to usecost-of-service to support our rates, or (ii) be required to use suchmethodology to defend our indexed rates.

 

In 1994, the LouisianaDepartment of Environmental Quality (“LDEQ”) issued a compliance order forenvironmental contamination at our Arcadia, Louisiana, facility. In 1999, ourArcadia facility and adjacent terminals were directed by the RemediationServices Division of the LDEQ to pursue remediation of this contamination. EffectiveMarch 2004, we executed an access agreement with an adjacent industriallandowner who is located upgradient of the Arcadia facility. This agreementenables the landowner to proceed with remediation activities at our Arcadiafacility for which it has accepted shared responsibility. At December 31,2005, we have an

 

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accrued liabilityof $0.2 million for remediation costs at our Arcadia facility. We do not expectthat the completion of the remediation program proposed to the LDEQ will have afuture material adverse effect on our financial position, results of operationsor cash flows.

 

OnMarch 17, 2003, we experienced a release of 511 barrels of jet fuel from astorage tank at our Blue Island terminal located in Cook County, Illinois. As aresult of the release, we have entered into an Agreed Order with the State ofIllinois, which required us to conduct an environmental investigation. At thistime, we have complied with the terms of the Agreed Order, and the results ofthe environmental investigation indicated there were no soil or groundwaterimpacts from the release. On August 30, 2005, a final settlement wasreached with the State of Illinois. The settlement included the paymentof a civil penalty of $0.1 million and the requirement that we make certainmodifications to the equipment of the facility, none of which are expected tohave a material adverse effect on our financial position, results of operationsor cash flows.

 

OnJuly 22, 2004, we experienced a release of approximately 12 barrels of jetfuel from a sump at our Lebanon, Ohio, terminal. The released jet fuel wascontained within a storm water retention pond located on the terminal property.Six migratory waterfowl were affected by the jet fuel and were subsequentlyeuthanized by or at the request of the United States Fish and Wildlife Service(“USFWS”). On October 1, 2004, the USFWS served us with a Notice ofViolation, alleging that we violated 16 USC 703 of the Migratory Bird TreatyAct for the “take[ing] of migratory birds by illegal methods.”  On February 7, 2005, we entered into aMemorandum of Understanding with the USFWS, settling all aspects of this matter.The terms of this settlement did not have a material effect on our financialposition, results of operations or cash flows.

 

OnJuly 27, 2004, we received notice from the United States Department ofJustice (“DOJ”) of its intent to seek a civil penalty against us related to ourNovember 21, 2001, release of approximately 2,575 barrels of jet fuel fromour 14-inch diameter pipeline located in Orange County, Texas. The DOJ, at therequest of the Environmental Protection Agency, is seeking a civil penaltyagainst us for alleged violations of the Clean Water Act (“CWA”) arising out ofthis release. We are in discussions with the DOJ regarding this matter and haveresponded to its request for additional information. The maximum statutorypenalty proposed by the DOJ for this alleged violation of the CWA is $2.1million. We do not expect any civil penalty to have a material adverse effecton our financial position, results of operations or cash flows.

 

On September 18, 2005, a propane releaseand fire occurred at our Todhunter facility, near Middletown, Ohio.  The incident resulted in the death of one ofour employees. There were no other injuries. On or about February 22,2006, we received verbal notification from a representative of the OccupationalSafety and Health Administration that they intend to serve us with a citationarising out of this incident.  At thistime, we have not received any citation, and we cannot predict with certaintythe amount of any fine or penalty associated with any such citation; however,we do not expect any fine or penalty to have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

Rates of interstatepetroleum products and crude oil pipeline companies, like us, are currentlyregulated by the FERC primarily through an index methodology, which allows apipeline to change its rates based on the change from year to year in theProducer Price Index for finished goods (“PPI Index”). Effective as of February 24,2003, FERC Order on Remand modified the PPI Index from PPI – 1% to PPI. On April 22,2003, several shippers filed a petition in the United States Court of Appealsfor the District of Columbia Circuit (the “Court”), *Flying J.Inc,. Lion Oil Company, Sinclair Oil Corporation and Tesoro Refining andMarketing Company vs. Federal Energy Regulatory Commission*; Docket No. 03-1107,seeking a review of whether the FERC’s adoption of the PPI Index was reasonableand supported by the evidence. On April 9, 2004, the Court handed down adecision denying the shippers’ petition for review, stating the shippers failedto establish that any of the FERC’s methodological choices (or combination ofchoices) were both erroneous and harmful.

 

As an alternative tousing the PPI Index, interstate petroleum products and crude oil pipelinecompanies may elect to support rate filings by using a cost-of-servicemethodology, competitive market showings (“Market-

 

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Based Rates”) oragreements between shippers and petroleum products and crude oil pipelinecompanies that the rate is acceptable.

 

**Other**

 

Centennial entered intocredit facilities totaling $150.0 million, and as of December 31, 2005,$150.0 million was outstanding under those credit facilities. We and Marathonhave each guaranteed one-half of the repayment of Centennial’s outstanding debtbalance (plus interest) under a long-term credit agreement, which expires in2024, and a short-term credit agreement, which expires in 2007. The guaranteesarose in order for Centennial to obtain adequate financing, and the proceeds ofthe credit agreements were used to fund construction and conversion costs ofits pipeline system. Prior to the expiration of the long-term credit agreement,we could be relinquished from responsibility under the guarantee shouldCentennial meet certain financial tests. If Centennial defaults on itsoutstanding balance, the estimated maximum potential amount of future paymentsfor us and Marathon is $75.0 million each at December 31, 2005.

 

We, Marathon andCentennial have entered into a limited cash call agreement, which allows eachmember to contribute cash in lieu of Centennial procuring separate insurance inthe event of a third-party liability arising from a catastrophic event. Thereis an indefinite term for the agreement and each member is to contribute cashin proportion to its ownership interest, up to a maximum of $50.0 million each.As a result of the catastrophic event guarantee, we have recorded a $4.6million obligation, which represents the present value of the estimated amountthat we would have to pay under the guarantee. If a catastrophic event were tooccur and we were required to contribute cash to Centennial, contributionsexceeding our deductible might be covered by our insurance.

 

On February 24,2005, the Company was acquired from DEFS by DFI. The Company owns a 2% generalpartner interest in our Parent Partnership and is the general partner of ourParent Partnership. On March 11, 2005, the Bureau of Competition of theFederal Trade Commission (“FTC”) delivered written notice to DFI’s legaladvisor that it was conducting a non-public investigation to determine whetherDFI’s acquisition of the General Partner may substantially lessencompetition. The Company is cooperating fully with this investigation.

 

Substantially all of thepetroleum products that we transport and store are owned by our customers. At December 31,2005, we had approximately 22.5 million barrels of products in our custody thatwas owned by customers. We are obligated for the transportation, storage anddelivery of such products on behalf of our customers. We maintain insuranceadequate to cover product losses through circumstances beyond our control.

 

Our Parent Partnershipcarries insurance coverage consistent with the exposures associated with thenature and scope of its operations. Its current insurance coverage includes (1) commercialgeneral liability insurance for liabilities to third parties for bodily injuryand property damage resulting from its operations; (2) workers’compensation coverage to required statutory limits; (3) automobileliability insurance for all owned, non-owned and hired vehicles coveringliabilities to third parties for bodily injury and property damage, and (4) propertyinsurance covering the replacement value of all real and personal propertydamage, including damages arising from earthquake, flood damage and businessinterruption/extra expense. For select assets, the Parent Partnership alsocarries pollution liability insurance that provides coverage for historical andgradual pollution events. All coverages are subject to certain deductibles,limits or sub-limits and policy terms and conditions. We are allocated aportion of the insurance premiums.

 

Our Parent Partnershipalso maintains excess liability insurance coverage above the establishedprimary limits for commercial general liability and automobile liabilityinsurance. Limits, terms, conditions and deductibles are commensurate with thenature and scope of its operations. The cost of its general insurance coverageshas increased over the past year reflecting the changing conditions of theinsurance markets. These insurance policies, except for the pollution liabilitypolicies, are through EPCO (see Note 7).

 

F-36

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**NOTE 19.**                RESTATEMENT OF CONSOLIDATEDFINANCIAL STATEMENTS

** **

We are restating our previously reportedconsolidated financial statements for the fiscal years ended December 31,2003 and 2004. For the impact of the restated consolidated financial resultsfor the quarterly periods during the years ended December 31, 2005 and2004, see Note 20. We have determined that our method of accounting for the$33.4 million excess investment in Centennial, previously described as anintangible asset with an indefinite life was incorrect. Through our accountingfor this excess investment in Centennial as an intangible asset with anindefinite life, we have been testing the amount for impairment on an annualbasis as opposed to amortizing it over a determinable life. We determined thatit would be more appropriate to account for this excess investment as anintangible asset with a determinable life. As a result, we made non-cashadjustments that reduced the net value of the excess investments in Centennial,and increased amortization expense allocated to our equity earnings. The effectof this restatement caused a $3.1 million and $3.3 million reduction to netincome as previously reported for the fiscal years ended December 31, 2004and 2003, respectively. As a result of the accounting correction, net incomefor the fiscal year ended December 31, 2005, includes a charge of $4.1million, of which $3.3 million relates to the first nine months. Additionally,partners’ capital at December 31, 2002, reflects a $2.4 million reductionrepresenting the cumulative effect of this correction for the fiscal year endedDecember 31, 2002.

 

While we believe the impacts of thesenon-cash adjustments are not material to any previously issued financialstatements, we determined that the cumulative adjustment for these non-cashitems was too material to record in the fourth quarter of 2005, and thereforeit was most appropriate to restate prior periods’ results. These non-cashadjustments had no effect on our operating income, compensation expense, debtbalances or ability to meet all requirements related to our debt facilities. Therestatement had no impact on total cash flows from operating activities,investing activities or financing activities. All amounts in the accompanyingconsolidated financial statements have been adjusted for this restatement.

 

We will continue to amortize the $30.0million excess investment in Centennial related to a contract usingunits-of-production methodology over a 10-year life. The remaining $3.4 millionrelated to a pipeline will continue to be amortized on a straight-line basisover 35 years.

 

The following tables summarize the impact ofthe restatement adjustment on previously reported balance sheet amounts for theyear ended December 31, 2004, and income statement amounts and cash flowamounts for the years ended December 31, 2004 and 2003 (in thousands):

 

**BalanceSheet Amounts;**

 

 
| ** **                                    | ** ** | **December 31, 2004**  | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                                    | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity  investments                           |       | $                           | 169,873    |   | $ | (8,875 | ) | $ | 160,998 |   |
| Total assets                                  |       | $                           | 954,068    |   | $ | (8,875 | ) | $ | 945,193 |   |
|                                          |       |                        |       |   |   |   |   |
| Capital:                                      |       |                        |       |   |   |   |   |
| General  partner’s interest              |       | $                           | 2          |   | $ | — |   | $ | 2 |   |
| Limited  partners’ interest              |       | 141,490                     |       | (8,875 | ) | 132,615 |   |
| Total partners’  capital                 |       | 141,492                     |       | (8,875 | ) | 132,617 |   |
| Total  liabilities and partners’ capital |       | $                           | 954,068    |   | $ | (8,875 | ) | $ | 945,193 |   |

 

F-37

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**IncomeStatement Amounts:**

 
| ** **                                         | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                         | ** ** | **2004**                          | ** ** | **2003** | ** ** |
|                                               |       |                              |       |   |   |
| Equity  losses as previously reported              |       | $                                 | (3,402     | ) | $ | (4,086 | ) |
| Adjustment  for amortization of excess investments |       | (3,142                            | )          | (3,298 | ) |
| Equity  losses as restated                         |       | $                                 | (6,544     | ) | $ | (7,384 | ) |
|                                               |       |                              |       |   |   |
| Net income  as previously reported                 |       | $                                 | 36,625     |   | $ | 49,481 |   |
| Adjustment  for amortization of excess investments |       | (3,142                            | )          | (3,298 | ) |
| Net income  as restated                            |       | $                                 | 33,483     |   | $ | 46,183 |   |

 

**Cash FlowAmounts;**

 
| ** **                                          | ** ** | **Year Ended December 31,  2004** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **As Previously Reported**             | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                                          | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from operating activities:               |       |                                   |       |   |   |   |   |
| Net income                                          |       | $                                      | 36,625     |   | $ | (3,142 | ) | $ | 33,483 |   |
| Losses in  equity investments, net of distributions |       | 13,715                                 |       | 3,142 |   | 16,857 |   |
|                                                     |            |                                        |            |  |  |  |  |  |  |  |

 
| ** **                                          | ** ** | **Year Ended December 31,  2003** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **As Previously Reported**             | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                                          | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:              |       |                                   |       |   |   |   |   |
| Net income                                          |       | $                                      | 49,481     |   | $ | (3,298 | ) | $ | 46,183 |   |
| Losses in  equity investments, net of distributions |       | 9,349                                  |       | 3,298 |   | 12,647 |   |
|                                                     |            |                                        |            |  |  |  |  |  |  |  |

 

**NOTE 20.**                QUARTERLY FINANCIALINFORMATION (UNAUDITED) 

 
| ** **                         | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| ** **                         | ** ** | **(as restated)**  | ** ** | **(as restated)**   | ** ** | **(as restated)**  | ** ** | **(as restated)**   | ** ** |
| ** **                         | ** ** | **(in thousands)** | ** ** |
| **2005  (1)**                      | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Operating  revenues                |       | $                  | 77,016     |                | $          | 62,521             |       | $                   | 64,866     |   | $ | 78,226 |   |
| Operating  income                  |       | 30,768             |       | 14,483              |       | 13,815             |       | 26,320              |       |
|                               |       |               |       |                |       |               |       |                |       |
| Net income  as previously reported |       | 22,116             |       | 7,902               |       | 7,359              |       | 18,114              |       |
| Restatement  adjustment            |       | (979               | )          | (1,138              | )          | (1,175             | )          | —              |       |
| Net income  as restated            |       | $                  | 21,137     |                | $          | 6,764              |       | $                   | 6,184      |   | $ | 18,114 |   |
|                               |       |               |       |                |       |               |       |                |       |
| **2004  (1)**                      |       |               |       |                |       |               |       |                |       |
| Operating  revenues                |       | $                  | 73,662     |                | $          | 61,217             |       | $                   | 67,365     |   | $ | 72,514 |   |
| Operating  income                  |       | 25,084             |       | 13,821              |       | 11,796             |       | 17,382              |       |
|                               |       |               |       |                |       |               |       |                |       |
| Net income  as previously reported |       | 17,209             |       | 6,904               |       | 4,698              |       | 7,814               |       |
| Restatement  adjustment            |       | (540               | )          | (956                | )          | (912               | )          | (734                | )          |
| Net income  as restated            |       | $                  | 16,669     |                | $          | 5,948              |       | $                   | 3,786      |   | $ | 7,080 |   |

 

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(1)  Thequarterly financial information for 2004 and the first three quarters of 2005reflect the impact of the restatement.

 

F-38

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