**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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** **

**FORM 10-K**

 

**ý****  ****ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2004**

 

**OR**

 

**o****  ****TRANSITION REPORTPURSUANT 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 its charter)

** **
| **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)

 

Securitiesregistered pursuant to Section 12(b) of the 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 the Act:  **None**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the precedingtwelve months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes ýNo o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained 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 check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes oNo ý

 

Documents Incorporated byReference:  **None**

 

 

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**TABLE OF CONTENTS**

 
|       | **PART I**                                                                                       |   |
|------------|--------------------------------------------------------------------------------------------------|--------|
| ITEMS 1.   | Business and  Properties                                                                         |   |
| AND 2.     |                                                                                             |   |
| 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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****FORWARD-LOOKINGSTATEMENTS****

 

# ***The mattersdiscussed in this Report include “forward-looking statements” within themeaning of various provisions of the Securities Act of 1933 and the SecuritiesExchange Act of 1934.  All statements,other than statements of historical facts, included in this document thataddress activities, events or developments that we expect or anticipate will ormay occur in the future, including such things as estimated future capitalexpenditures (including the amount and nature thereof), business strategy andmeasures to implement strategy, competitive strengths, goals, expansion andgrowth of our business and operations, plans, references to future success,references to intentions as to future matters and other such matters areforward-looking statements.  Thesestatements are based on certain assumptions and analyses made by us in light ofour experience and our perception of historical trends, current conditions andexpected future developments as well as other factors we believe areappropriate under the circumstances. However, whether actual results and developments will conform with ourexpectations and predictions is subject to a number of risks and uncertainties,including general economic, market or business conditions, the opportunities(or lack thereof) that may be presented to and pursued by us, competitiveactions by other pipeline companies, changes in laws or regulations and otherfactors, many of which are beyond our control. Consequently, all of the forward-looking statements made in thisdocument are qualified by these cautionary statements, and we cannot assure youthat actual results or developments that we anticipate will be realized or,even if substantially realized, will have the expected consequences to oreffect on us or our business or operations.***

# ** **

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

# ** **

# **General**

# ** **

TE Products Pipeline Company, Limited Partnership (the“Partnership”), a Delaware limited partnership, was formed in March 1990.  TEPPCO Partners, L.P. (the “ParentPartnership”) owns a 99.999% interest in us as the sole limited partner.  TEPPCO GP, Inc. (“TEPPCO GP” or “GeneralPartner”), a subsidiary of the Parent Partnership, holds a 0.001% GeneralPartner interest in us.  Texas EasternProducts Pipeline Company, LLC (the “Company”), a Delaware limited liabilitycompany, serves as the general partner of our Parent Partnership.  The Company is an indirect wholly ownedsubsidiary of Duke Energy Field Services, LLC (“DEFS”), a joint venture betweenDuke Energy Corporation (“Duke Energy”) and ConocoPhillips.  Duke Energy holds an interest ofapproximately 70% in DEFS, and ConocoPhillips holds the remaining interest ofapproximately 30%.  TEPPCO GP, as 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 (the “Partnership Agreement”).  We reimburse our General Partner and theCompany for all reasonable direct and indirect expenses that they incur inmanaging us.

 

As used in this Report, “we,” “us,” and “our” means TEProducts Pipeline Company, Limited Partnership.

 

We operate and report in one business segment:transportation and storage of refined products, liquefied petroleum gases (“LPGs”)and petrochemicals.  Our interstatetransportation operations, including rates charged to customers, are subject toregulations prescribed by the Federal Energy Regulatory Commission (“FERC”).  We refer to refined products, LPGs andpetrochemicals in this Report, collectively, as “petroleum products” or “products.”

 

Effective January 1, 2002, our Parent Partnershiprealigned its business segments to reflect its entry into the natural gasgathering business and the expanded scope of its natural gas liquids (“NGLs”)operations.  As part of this realignment,on May 31, 2002, we transferred our investment in TEPPCO Colorado, LLC (“TEPPCOColorado”), which fractionates NGLs, to TEPPCO Midstream Companies, L.P. (“TEPPCOMidstream”) for the book value of TEPPCO Colorado’s net assets, which was $4.1million.  In connection with thetransfer, we received $4.1 million in cash from TEPPCO Midstream.  As a result of the transfer, the results ofoperations of TEPPCO Colorado for the periods presented are reflected asdiscontinued operations (see Note 18. Discontinued Operations).  We havereclassified prior periods presented to reflect the current presentation.

 

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Our strategy is to expand and improve service in ourcurrent markets, maintain the integrity of our pipeline systems and pursuegrowth initiatives that are balanced between internal projects andacquisitions. We intend to leverage the advantages inherent in our pipelinesystems to maintain our status as a preferred provider in our market areas. Wealso intend to grow by acquiring assets, from both third parties andaffiliates, which complement existing businesses or by establishing new corebusinesses.  We routinely evaluate opportunitiesto acquire assets and businesses that will complement existing operations witha view to increasing earnings and cash available for distribution.  We may fund additional acquisitions with cashflow from operations, borrowings and capital contributions from our ParentPartnership, the issuance of debt in the capital markets or any combinationthereof.

 

# **Operations**

# ** **

We own, operate or have investments in propertieslocated in 14 states.  We also conductbusiness through our 50% owned equity investments in Centennial Pipeline LLC (“Centennial”)and Mont Belvieu Storage Partners, L.P. (“MB Storage”).  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.

 

As an interstate common carrier, our pipeline offersinterstate transportation services, pursuant to tariffs filed with the FERC, toany shipper of refined petroleum products and LPGs who requests these services,provided that the products tendered for transportation satisfy the conditionsand specifications contained in the applicable tariff.  In addition to the revenues received by ourpipeline system from our interstate tariffs, we also provide storage and otherrelated services at key points along our pipeline systems.  Substantially all of the petroleum productstransported and stored in our pipeline systems are owned by our customers.  Petroleum products are received at terminalslocated principally on the southern end of the pipeline system, stored,scheduled into the pipeline in accordance with customer nominations and shippedto delivery terminals for ultimate delivery to the final distributor (includinggas stations and retail propane distribution centers) or to otherpipelines.  Pipelines are generally thelowest cost method for intermediate and long-haul overland transportation ofpetroleum products.  Our pipeline systemis the only pipeline that transports LPGs from the upper Texas Gulf Coast tothe Northeast.

 

We depend in large part on the level of demand forrefined petroleum products and LPGs in the geographic locations that we serveand the ability and willingness of customers having access to the pipelinesystem to supply this demand.  We cannotpredict the impact of future fuel conservation measures, alternate fuelrequirements, governmental regulation or technological advances in fuel economyand energy-generation devices, all of which could reduce the demand for refinedpetroleum products and LPGs in the areas we serve.

 

The following table lists the material properties andinvestments of and ownership percentages in our assets as of December 31, 2004:

 
| ** **                                                           | ** ** | **Our  Ownership** | ** ** |
|----------------------------------------------------------------------|------------|--------------------|------------|
| Refined products and LPGs pipelines                                  |       | 100                | %          |
| Mont Belvieu, Texas, to Port Arthur, Texas,  petrochemical pipelines |       | 100                | %          |
| Centennial Pipeline LLC (1)                                          |       | 50                 | %          |
| Mont Belvieu Storage Partners, L.P. (2)                              |       | 50                 | %          |

 

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(1)          Accounted for as an equityinvestment.  Effective February 10, 2003,we acquired an additional 16.7% interest in Centennial, bringing our ownershippercentage to 50%.

 

(2)          Accounted for as an equityinvestment.  Effective January 1, 2003,we contributed substantially all of our Mont Belvieu LPG assets to MB Storage,a partnership formed with Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”).

 

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# **Centennial Pipeline EquityInvestment**

# ** **

In August 2000, we entered intoagreements with Panhandle Eastern Pipeline Company (“PEPL”), a formersubsidiary of CMS Energy Corporation, and Marathon Ashland Petroleum LLC (“Marathon”)to form Centennial.  Each participantoriginally owned a one-third interest in Centennial.   Centennial, which commenced operations inApril 2002, owns an interstate refined petroleum products pipeline extendingfrom the upper Texas Gulf Coast to central Illinois.  Centennial constructed a 74-mile, 24-inchdiameter pipeline connecting our facility in Beaumont, Texas, with an existing720-mile, 26-inch diameter pipeline extending from Longville, Louisiana, toBourbon, Illinois. The Centennial pipeline intersects our existing mainlinepipeline near Creal Springs, Illinois, where Centennial constructed a twomillion barrel refined petroleum products storage terminal.  Marathon operates the mainline Centennialpipeline, and we operate the Beaumont origination point and the Creal Springsterminal.

 

Our interest in Centennial is notsubject to any encumbrances from mortgages or other secured debt.  Centennial has unsecured debt, one third ofwhich, up to $50.0 million in principal, was originally guaranteed by eachowner, including us.  On February 10,2003, we and Marathon each acquired an additional 16.7% interest in Centennialfrom PEPL for $20.0 million each, increasing our percentage ownerships inCentennial to 50% each.  We and Marathonhave each guaranteed one-half of Centennial’s debt, up to a maximum of $75.0million each.  Through December 31, 2004,including the amount paid for the acquisition of the additional ownershipinterest in February 2003, we have invested $104.8 million in Centennial. Wehave not received any distributions from Centennial since its formation.

 

# **Mont Belvieu Storage EquityInvestment**

# ** **

On January 1, 2003, we and Louis Dreyfus formed MBStorage, and we each own a 50% ownership interest in MB Storage.  The purpose of MB Storage is to expandservices to the upper Texas Gulf Coast energy marketplace by increasingpipeline throughput and the mix of products handled through the existing systemand establishing new receipt and delivery connections.  MB Storage is a service-oriented, fee-basedventure with no commodity trading activity. We operate 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 thecontribution date, Louis Dreyfus had invested $6.1 million for expansionprojects for MB Storage that we were required to reimburse if the originaljoint development and marketing agreement was terminated by either party.  This deferred liability was also contributedand credited to the capital account of Louis Dreyfus in MB Storage.

 

Our interest in MB Storage is notsubject to any encumbrances from mortgages or other secured debt.  We receive the first $1.8 million per quarter(or $7.15 million on an annual basis) of MB Storage’s income beforedepreciation expense, as defined in the operating agreement.  Any amount of MB Storage’s annual incomebefore depreciation expense in excess of $7.15 million is allocated evenlybetween Louis Dreyfus and us. Depreciation expense on assets each originally contributed to MB Storageis allocated between Louis Dreyfus and us based upon the net book value of theassets contributed.  Depreciation expenseon assets constructed or acquired by MB Storage subsequent to formation isallocated evenly between Louis Dreyfus and us. For the years ended December 31, 2004 and 2003, our sharing ratio in theearnings of MB Storage was approximately 69.4% and 70.4%, respectively.  For the years ended December 31, 2004 and2003, excluding the contribution of property and equipment upon formation ofthe partnership, we have contributed $21.4 million and $2.5 million,respectively, to MB Storage. The 2004 amount includes a contribution of $16.5million for the acquisition of storage and pipeline assets in April 2004. Theremaining contributions have been for capital expenditures in bothperiods.  During the years ended December31, 2004 and 2003, we received distributions of $10.3 million and $5.3 million,respectively, from MB Storage.

 

MB Storage’s asset base in the Mont Belvieufractionation and storage complex, which is the largest complex of its kind inthe United States, serving the fractionation, refining and petrochemicalindustries, provides substantial capacity and flexibility for thetransportation, terminaling and storage of NGLs, LPGs and refinedproducts.  MB Storage receives revenuefrom the shuttling of product from refineries and fractionators to pipelines,refineries and petrochemical facilities on the upper Texas Gulf Coast.

 

On April 1, 2004, MB Storage acquired storage andpipeline assets at Mont Belvieu from ConocoPhillips for approximately $34.0million.  The acquisition included threesalt dome storage wells with a total storage capacity of 5.6 million barrels,various pipeline assets and a 200-acre parcel of property for futureexpansion.  The acquisition

 

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also included 2.6 million barrels of brine storage capacity.  The acquisition supports MB Storage’sstrategy of increasing the productivity of the Mont Belvieu assets by expandingits product and service base to include the storage and transportation ofethane and the storage of ethylene.

 

Including the capacity acquired from ConocoPhillips, MB Storage has approximately 36 million barrels of LPGsstorage capacity and approximately 7 million barrels of refined productsstorage capacity, including storage capacity leased to outside parties, at theMont Belvieu fractionation and storage complex. MB Storage includes a short-haul transportation shuttle system,consisting of a complex system of pipelines and interconnects, that ties MontBelvieu to virtually every refinery and petrochemical facility on the upperTexas Gulf Coast.  MB Storage alsoprovides truck and rail car loading capability. Total shuttle volumes for the three years ended December 31, 2004, 2003and 2002, were 39.3 million barrels, 33.1 million barrels and 28.9 millionbarrels, respectively.

 

# **Refined Products, LPGs andPetrochemical Pipeline Systems**

# ** **

We are one of the largest pipeline common carriers ofrefined petroleum products and LPGs in the United States. We own and operate anapproximately 4,500-mile pipeline system (together with the receiving, storageand terminaling facilities mentioned below, the “Pipeline System”) extendingfrom southeast Texas through the central and midwestern United States to thenortheastern United States. Our Pipeline System includes delivery terminals foroutloading product to other pipelines, tank trucks, rail cars or barges, andsubstantial storage facilities at numerous locations.  We also own one active marine receivingterminal at Providence, Rhode Island. The Providence terminal is not physicallyconnected to our Pipeline System.  OurPipeline System also includes three parallel 12-inch diameter petrochemicalpipelines between Mont Belvieu and Port Arthur, each approximately 70 miles inlength.

 

All properties comprising our Pipeline System arewholly owned by us and none are mortgaged or encumbered to secure fundeddebt.  We have guaranteed up to $75.0million of Centennial’s unsecured debt (see Centennial Pipeline EquityInvestment**above) and have also guaranteed theunsecured debt of our Parent Partnership (see Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Financial Condition andLiquidity).

 

Products are transported in liquid form from the upperTexas Gulf Coast through two parallel underground pipelines that extend to Seymour,Indiana.  From Seymour, segments of thePipeline System extend to the Chicago, Illinois; Lima, Ohio; Selkirk, New York;and Philadelphia, Pennsylvania, areas. Our Pipeline System east of Todhunter,Ohio, is dedicated solely to LPGs transportation and storage services,primarily for propane.

 

Excluding the storage facilities of Centennial and MBStorage, our Pipeline System includes 27 storage facilities with an aggregatestorage capacity of 16 million barrels of refined petroleum products and 6 millionbarrels of LPGs including storage capacity leased to outside parties.  Our Pipeline System makes deliveries tocustomers at 56 locations including 19 truck racks, rail car facilities andmarine facilities that we own. Deliveries to other pipelines occur at various facilities owned by thirdparties or us.

 

Our Pipeline System is comprised of a 20-inch diameterline extending in a generally northeasterly direction from Baytown, Texas(located approximately 30 miles east of Houston), to a point in southwest Ohionear Lebanon and Todhunter.  A secondline, which also originates at Baytown, is 16 inches in diameter until itreaches Beaumont, at which point it reduces to a 14-inch diameter line.  This second line extends along the same pathas the 20-inch diameter line to our Pipeline System’s terminal in El Dorado,Arkansas, before continuing as a 16-inch diameter line to Seymour.  Our Pipeline System also has smaller diameterlines that extend laterally from El Dorado to Helena, Arkansas, from Shreveport,Louisiana, to El Dorado and from McRae, Arkansas, to West Memphis,Arkansas.  The line from El Dorado toHelena has a 10-inch diameter.  The linefrom Shreveport to El Dorado varies in diameter from 8 inches to 10inches.  The line from McRae to WestMemphis has a 12-inch diameter.  OurPipeline System also includes a 14-inch diameter line from Seymour to Chicago,Illinois, and a 10-inch diameter line running from Lebanon to Lima, Ohio.  This 10-inch diameter pipeline connects tothe Buckeye Pipe Line Company system that serves, among others, markets inMichigan and eastern Ohio.  Our PipelineSystem also has a 6-inch diameter pipeline connection to the GreaterCincinnati/Northern Kentucky International Airport and an 8-inch diameterpipeline connection to the George Bush Intercontinental Airport inHouston.  In addition, our PipelineSystem contains numerous lines, ranging in size from 6 inches to 20 inches indiameter, associated with the

 

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gathering and distributionsystem, extending from Baytown to Beaumont; Texas City to Baytown; Pasadena,Texas to Baytown and Baytown to Mont Belvieu.

 

Our Pipeline System continues eastward from Todhunter,Ohio, to Greensburg, Pennsylvania, at which point it branches into twosegments, one ending in Selkirk, New York (near Albany), and the other endingat Marcus Hook, Pennsylvania (near Philadelphia).  Our Pipeline System east of Todhunter andending in Selkirk is an 8-inch diameter line, and the line starting atGreensburg and ending at Marcus Hook varies in diameter from 6 inches to 8inches.

 

****In 2003, we increased the deliverycapability between Todhunter, Ohio, and Coshocton, Ohio, by 8,000 to 10,000barrels per day and increased storage and improved loading capability atOneonta, New York.  In 2004, we alsocompleted a Phase II project to further extend beyond Coshocton our deliverycapacity of LPGs to the Northeast by 8,000 to 10,000 barrels per day.  The Phase II expansion included theconstruction of three pump stations between Coshocton and Greensburg,Pennsylvania, and two stations from Greensburg to Watkins Glen, New York.  Additional work on the pipeline segmentbetween Greensburg and Philadelphia, Pennsylvania, to increase delivery ratesto the Philadelphia area has been completed. Improvements were also completed during the fourth quarter of 2004 atour Dubois, Pennsylvania, terminal, and additional improvements are expected tobe completed during the first quarter of 2005 at our Eagle, Pennsylvania,terminal****.

 

We also own three 12-inch diameter common carrierpetrochemical pipelines between Mont Belvieu and Port Arthur.  Each of these pipelines is approximately 70miles in length.  The pipelines transportethylene, propylene and natural gasoline. We entered into a 20-year agreement in 2002 with a major petrochemicalproducer for guaranteed throughput commitments. During the years ended December 31, 2004, 2003, and 2002, we recognized$12.0 million, $11.9 million and $11.9 million, respectively, of revenue underthe throughput and deficiency contract.

 

We believe that our Pipeline System is in compliancewith applicable federal, state and local laws and regulations and acceptedindustry standards and practices. We perform regular maintenance on all thefacilities of our Pipeline System and have an ongoing process of inspecting ourPipeline System and making repairs and replacements when necessary orappropriate. In addition, we conduct periodic air patrols of our PipelineSystem to monitor pipeline integrity and third-party right of wayencroachments.

 

# **Major Business Sector Markets**

# ** **

Our major operations are the transportation, storageand terminaling of refined petroleum products and LPGs along our mainlinesystem.  Product deliveries, in millionsof barrels (MMBbls) on a regional basis, for the years ended December 31, 2004,2003 and 2002, were as follows:

 
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Refined Products Mainline Transportation: |       |                         |       |   |   |   |   |
| Central (1)                               |       | 69.0                         |       | 67.0 |   | 62.9 |   |
| Midwest (2)                               |       | 53.5                         |       | 57.7 |   | 49.6 |   |
| Ohio and Kentucky                         |       | 29.9                         |       | 29.4 |   | 25.7 |   |
| Subtotal                                  |       | 152.4                        |       | 154.1 |   | 138.2 |   |
| LPGs Mainline Transportation:             |       |                         |       |   |   |   |   |
| Central, Midwest and Kentucky (1)(2)      |       | 27.0                         |       | 23.4 |   | 25.4 |   |
| Ohio and Northeast (3)                    |       | 17.0                         |       | 19.1 |   | 15.1 |   |
| Subtotal                                  |       | 44.0                         |       | 42.5 |   | 40.5 |   |
| Total Product Deliveries                  |       | 196.4                        |       | 196.6 |   | 178.7 |   |

 

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(1)                                  Arkansas,Louisiana, Missouri and Texas.

 

(2)                                  Illinois andIndiana.

 

(3)                                  New York andPennsylvania.

 

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The mix of products delivered varies seasonally.  Gasoline demand is generally stronger in thespring and summer months and LPGs demand is generally stronger in the fall andwinter months. Weather and economic conditions in the geographic areas served byour Pipeline System also affect the demand for, and the mix of, the productsdelivered.

 

Refined products and LPGs deliveries in MMBbls for theyears ended December 31, 2004, 2003 and 2002, were as follows:

 
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Refined Products Mainline Transportation: |       |                         |       |   |   |   |   |
| Gasoline                                  |       | 89.3                         |       | 89.8 |   | 81.9 |   |
| Jet Fuels                                 |       | 25.6                         |       | 26.4 |   | 25.3 |   |
| Distillates (1)                           |       | 37.5                         |       | 37.9 |   | 31.0 |   |
| Subtotal                                  |       | 152.4                        |       | 154.1 |   | 138.2 |   |
| LPGs Mainline Transportation:             |       |                         |       |   |   |   |   |
| Propane                                   |       | 34.3                         |       | 34.5 |   | 32.9 |   |
| Butanes                                   |       | 9.7                          |       | 8.0 |   | 7.6 |   |
| Subtotal                                  |       | 44.0                         |       | 42.5 |   | 40.5 |   |
| Total Product Deliveries                  |       | 196.4                        |       | 196.6 |   | 178.7 |   |

 

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

 

### *Refined Products Mainline Transportation*

### * *

Our Pipeline System transports refined petroleumproducts from the upper Texas Gulf Coast, eastern Texas and southern Arkansasto the Central and Midwest regions of the United States with deliveries inTexas, Louisiana, Arkansas, Missouri, Illinois, Kentucky, Indiana and Ohio. Atthese points, refined petroleum products are delivered to terminals that weown, connecting pipelines and customer-owned terminals.

 

The volume of refined petroleum products transportedby our Pipeline System is directly affected by the demand for refined productsin the geographic regions that our system serves. This market demand variesbased upon the different end uses to which the refined products deliveries areapplied. Demand for gasoline, which accounted for approximately 59% of thevolume of refined products transported through the Pipeline System during 2004,depends upon price, prevailing economic conditions and demographic changes inthe markets that 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.  Demand for jet fuel depends upon prevailingeconomic conditions and military usage.

 

Market prices for refined petroleum products affectthe demand in the markets we serve. Therefore, quantities and mix of products transported may vary.  Transportation tariffs of refined petroleumproducts vary among specific product types. As a result, market price volatility may affect transportation volumesand revenues from period to period.

 

### *LPGs Mainline Transportation*

### * *

Our Pipeline System transports LPGs from the upperTexas Gulf Coast to the Central, Midwest and Northeast regions of the UnitedStates. The Pipeline System east of Todhunter, Ohio, is devoted solely to thetransportation of LPGs.  Because propanedemand is generally sensitive to weather in the winter months, year-to-yearvariations of propane deliveries have occurred and will likely continue tooccur.  Our Pipeline System alsotransports normal butane and isobutane in the Midwest and Northeast for use inthe production of motor gasoline.

 

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Our ability to serve propane markets in the Northeastis enhanced by our marine import terminal at Providence. This facility includesa 400,000-barrel refrigerated storage tank along with ship unloading and truckloading facilities.  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 provide propane loading services to anaffiliate of DEFS.  The agreement wasrenegotiated in May 2004.  During theyears ended December 31, 2004, 2003, and 2002, revenues of $4.3 million, $3.2million and $2.3 million, respectively, from an affiliate of DEFS wererecognized pursuant to this agreement.

 

### *Other Operating Revenues*

### * *

We also earn revenue from terminaling activities andother ancillary services associated with the transportation and storage ofrefined petroleum products and LPGs. From time to time, we sell excess product inventory.  Other operating revenues include revenuesrelated to the intrastate transportation of petrochemicals under a throughputand deficiency contract.

 

# **Customers**

# ** **

Our customers for the transportation of refinedpetroleum products include major integrated oil companies, independent oilcompanies, the airline industry and wholesalers.  End markets for these deliveries areprimarily retail service stations, truck stops, railroads, agriculturalenterprises, refineries and military and commercial jet fuel users.

 

Propane customers include wholesalers and retailerswho, in turn, sell to commercial, industrial, agricultural and residentialheating customers, as well as utilities who use propane as a back-up fuelsource. Refineries constitute our major customers for butane and isobutane,which are used as a blend stock for gasolines and as a feed stock for alkylationunits, respectively.

 

At December 31, 2004, we had approximately 138customers.  During the year endedDecember 31, 2004, total revenues (and percentage of total revenues)attributable to the top 10 customers were $151.7 million (55%), of which MarathonAshland Petroleum LLC accounted for approximately 17% of total revenues.  During the year ended December 31, 2003,total revenues (and percentage of total revenues) attributable to the top 10customers were $149.5 million (57%), of which Marathon Ashland Petroleum LLCaccounted for approximately 18% of total revenues.  During the year ended December 31, 2002,total revenues (and percentage of total revenues) attributable to the top 10customers were $101.6 million (51%). During the year ended December 31, 2002, no single customer accountedfor 10% or more of our total revenues.

 

# **Credit Policies and Procedures**

# ** **

We manage our exposure to credit risk through creditanalysis, credit approvals, credit limits and monitoring procedures.  We utilize letters of credit and guaranteesfor certain of our receivables.  However,these procedures and policies do not fully eliminate customer credit risk.  During the years ended December 31, 2004, weexpensed a minimal amount of uncollectible receivables.  During the years ended December 31, 2003 and2002, a few small to medium-sized customers filed for bankruptcy protection,and as a result, we expensed approximately $0.8 million and $0.7 million,respectively, of uncollectible receivables related to customer bankruptcies orother non-payments.

 

# **Competition**

# ** **

Our Pipeline System conducts operations without thebenefit of exclusive franchises from government entities.  Interstate common carrier transportationservices are provided through the system pursuant to tariffs filed with theFERC.

 

Because pipelines are generally the lowest cost methodfor intermediate and long-haul overland movement of refined petroleum productsand LPGs, our Pipeline System’s most significant competitors (other thanindigenous production in our markets) are pipelines in the areas where thePipeline System delivers products. Competition

 

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among common carrierpipelines is based primarily on transportation charges, quality of customerservice and proximity to end users.  Webelieve our Pipeline System is competitive with other pipelines serving thesame markets; however, comparison of different pipelines is difficult due tovarying product mix and operations.

 

Trucks, barges and railroads competitively deliverproducts in some of the areas served by our Pipeline System. Trucking costs,however, render that mode of transportation less competitive for longer haulsor larger volumes. Barge fees for the transportation of refined products aregenerally lower than our tariffs.  Weface competition from rail movements of LPGs from Sarnia, Ontario, Canada, andwaterborne imports into New Hampshire.

 

# **Title to Properties**

# ** **

We believe we have satisfactory title to all of ourassets. The properties are subject to liabilities in certain cases, such ascustomary interests generally contracted in connection with acquisition of theproperties, liens for taxes not yet due, easements, restrictions and otherminor encumbrances.  We believe none ofthese liabilities materially affect the value of our properties or our interestin the properties or will materially interfere with their use in the operationof our business.

 

# **Capital Expenditures**

# ** **

Capital expenditures, excluding acquisitions, totaled$81.3 million for the year ended December 31, 2004.  Revenue generating projects include thoseprojects which expand service into new markets or expand capacity into currentmarkets.  Capital expenditures to sustainexisting operations include projects required by regulatory agencies orrequired life-cycle replacements. System upgrade projects improve operationalefficiencies or reduce cost.  Wecapitalize interest costs incurred during the period that construction is inprogress.  The following table identifiescapital expenditures for the year ended December 31, 2004 (in millions):

 

| Revenue generating             |   | $    | 40.8   |   |
|--------------------------------|--------|------|--------|--------|
| Sustaining existing operations |   | 29.4 |   |
| System upgrades                |   | 9.4  |   |
| Capitalized interest           |   | 1.7  |   |
| Total                          |   | $    | 81.3   |   |

 

Revenue generating capital spending totaled $40.8million and was used primarily for the expansion of our pipelines extendingfrom Seymour to Indianapolis, Indiana, further expansions of our Northeastpipeline system and construction of a new truck loading terminal in BossierCity, Louisiana.  In order to sustainexisting operations, we spent $29.4 million for various pipeline projects.  An additional $9.4 million was spent onsystem upgrade projects.

 

We estimate that capital expenditures, excludingacquisitions, for 2005 will be approximately $59.6 million (which includes $2.3million of capitalized interest). We expect to spend approximately $22.7million for revenue generating projects and facility improvements.  We expect to spend approximately $20.0million to sustain existing operations, including life-cycle replacements forequipment at various facilities and pipeline and tank replacements and $14.6million for various system upgrade projects. We continually review and evaluate potential capital improvements andexpansions that would be complementary to our present system.  These expenditures can vary greatly dependingon the magnitude of our transactions.  Wemay finance capital expenditures through internally generated funds, debt or capitalcontributions from our Parent Partnership or any combination thereof.

 

****Regulation****

 

Our interstate common carrier pipeline operations aresubject to rate regulation by the FERC under the provisions of the InterstateCommerce Act, the Energy Policy Act of 1992 and rules and orders promulgatedthereunder.  FERC regulation requiresthat interstate petroleum products and crude oil pipeline rates be postedpublicly and that these rates be “just and reasonable” and nondiscriminatory.

 

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Rates of interstate petroleum products pipeline companies,like us, are currently regulated by the FERC primarily through an indexmethodology, which allows a pipeline to change its rates based on the changefrom year to year in the Producer Price Index for finished goods (“PPI Index”).  Effective as of February 24, 2003, FERC Orderon Remand modified the PPI Index from PPI – 1% to PPI.  On April 22, 2003, several shippers filed apetition in the United States Court of Appeals for the District of ColumbiaCircuit (the “Court”), *Flying J. Inc., Lion OilCompany, Sinclair Oil Corporation and Tesoro Refining and Marketing Company vs.Federal Energy Regulatory**Commission*,Docket No. 03-1107, seeking a review of whether the FERC’s adoption of the PPIIndex was reasonable and 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 FERC’s methodological choices (or combination ofchoices) was both erroneous and harmful.

 

As an alternative to using the PPI Index, interstatepetroleum products pipeline companies may elect to support rate filings byusing a cost-of-service methodology, competitive market showings (“Market-BasedRates”) or agreements between shippers and petroleum products pipeline companiesthat the rate is acceptable.

 

We have been granted permission by theFERC to utilize Market-Based Rates for all of our refined products movementsother than the Little Rock, Arkansas, Arcadia and Shreveport-Arcadia, Louisianadestination markets, which are currently subject to the PPI Index.  With respect to LPG movements, we use the PPIIndex.

 

On March 26, 2004, an initial decision in *ARCO Products Co., et al. v. SFPP*, Docket OR96-2-000, et al.was issued by the FERC, which made several significant determinations withrespect to finding “changed circumstances” under the Energy Policy Act of 1992(“EP Act”).  The decision largelyclarifies, but does not fully quantify, the standard required for a complainantto demonstrate that an oil pipeline’s rates are no longer subject to the rateprotection of the EP Act by demonstrating that a substantial change incircumstances has occurred since 1992 with respect to the basis of the ratesbeing challenged.  In the decision, theFERC found that a limited number of rate elements will significantly affect theeconomic basis for a pipeline company’s rates. The elements identified in the decision are volume changes, allowedtotal return and total cost-of-service (including major cost elements of ratebase such as tax rates and tax allowances, among others).  The FERC did reject, however, the use ofchanges in tax rate and income tax allowances as standalone factors.  It appears likely that the decision will beappealed.  We have not yet determined theimpact, if any, that the decision, if it is ultimately upheld, would have onour rates if they were reviewed under the criteria of this decision.

 

On July 20, 2004, the Court of Appeals for theDistrict of Columbia Circuit issued an opinion in *BP WestCoast Producers LLC v. FERC*. In reviewing a series of orders involving SFPP, L.P. the court heldamong other things that the FERC had not adequately justified its policy ofproviding an oil pipeline limited partnership with an income tax allowanceequal to the proportion of its limited partnership interests owned by corporatepartners.  Under the FERC’s initialruling, SFPP, L.P. was permitted an income tax allowance on its cost-of-servicefiling for 42.7% of the net operating (pre-tax) income expected from operationsand was denied an income tax allowance equal to 57.3% of its limitedpartnership interests that were held by non-corporate partners.  The court remanded the case back to the FERCfor further review.  As a result of thecourt’s remand, the FERC on December 2, 2004, issued a Request for Commentsseeking comments on whether the court’s ruling applies only to the specificfacts of the SFPP, L.P. proceeding or also extends to other capital structuresinvolving partnerships and other forms of ownership.  The ultimate outcome of the FERC’s inquiry onincome tax allowance should not affect our current rates and rate structurebecause our rates are not based on cost-of-service methodology.  However, the outcome of the income taxallowance would 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 Matters****

 

Our operations are subject to federal, state and locallaws and regulations governing the discharge of materials into theenvironment.  Failure to comply withthese laws and regulations may result in the assessment of administrative,civil and criminal penalties, imposition of injunctions delaying or prohibitingcertain activities and the need to perform investigatory and remedialactivities.  Although we believe ouroperations are in material compliance with applicable environmental laws andregulations, risks of significant costs and liabilities are inherent inpipeline operations, and we cannot assure you that significant costs andliabilities will not be incurred. Moreover,

 

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it is possible that otherdevelopments, such as increasingly strict environmental laws and regulationsand enforcement policies thereunder, and claims for damages to property orpersons resulting from our operations, could result in substantial costs andliabilities to us.  We believe thatchanges in environmental laws and regulations will not have a material adverseeffect on our financial position, results of operations or cash flows in thenear term.

 

*Water*

* *

The Federal Water Pollution Control Act of 1972, asrenamed and amended as the Clean Water Act (“CWA”), and analogous state lawsimpose strict controls against the discharge of oil and its derivatives intonavigable waters.  The CWA providespenalties for any discharges of petroleum products in reportable quantities andimposes substantial potential liability for the costs of removing petroleum orother hazardous 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.

 

Contamination resulting from spills or releases ofpetroleum products is an inherent risk within the petroleum pipelineindustry.  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 assure youthat the effect will not be material in the aggregate.

 

The primary federal law for oil spill liability is theOil Pollution Act of 1990 (“OPA”), which addresses three principal areas of oilpollution – prevention, containment and cleanup, and liability. OPA applies tovessels, offshore platforms and onshore facilities, including terminals,pipelines and transfer facilities.  Inorder to handle, store or transport oil, shore facilities are required to fileoil spill response plans with the appropriate federal agency being either theUnited States Coast Guard, the United States Department of TransportationOffice of Pipeline Safety (“OPS”) or the Environmental Protection Agency (“EPA”).Numerous states have enacted laws similar to OPA.  Under OPA and similar state laws, responsibleparties for a regulated facility from which oil is discharged may be liable forremoval costs and natural resource damages.

 

The EPA has adopted regulations that require us tohave 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 tomonitor and sample the storm water run-off.

 

*Air Emissions*

* *

Our operations are subject to the federal Clean AirAct (the “Clean Air Act”) and comparable state laws.  Amendments to the Clean Air Act, as well asrecent or soon to be adopted changes to state implementation plans forcontrolling air emissions in regional, non-attainment areas, may require ouroperations to incur future capital expenditures in connection with the additionor modification of existing air emission control equipment and strategies.  In addition, some of our facilities areincluded within the categories of hazardous air pollutant sources, which aresubject to increasing regulation under the Clean Air Act.  The Clean Air Act requires federal operatingpermits for major sources of air emissions. Under this program, a federaloperating permit (a “Title V” permit) may be issued. The permit acts as anumbrella that includes other federal, state and local preconstruction and/oroperating permit provisions, emission standards, grandfathered rates and recordkeeping, reporting and monitoring requirements in a single document. Thefederal operating permit is the tool that the public and regulatory agenciesuse to review and enforce a site’s compliance with all aspects of clean airregulation at the federal, state and local level. We have completedapplications for the facilities for which these regulations apply.

 

*Risk Management Plans*

* *

We are subject to the EPA’s Risk Management Plan (“RMP”)regulations at certain locations.  Thisregulation is 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 requires a regulated source,in excess of threshold quantities, to develop and implement a risk

 

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management program thatincludes a five-year accident history, an offsite consequence analysis, aprevention program and an emergency response program. We believe the operating expenses of the RMP regulations will not have amaterial adverse effect on our financial position, results of operations orcash flows.

 

*Solid Waste*

* *

We generate hazardous and non-hazardous solid wastesthat are subject to requirements of the federal Resource Conservation andRecovery Act (“RCRA”) and comparable state statutes. We also utilize wasteminimization and recycling processes to reduce the volumes of our waste.  Amendments to RCRA required the EPA topromulgate regulations banning the land disposal of all hazardous wastes unlessthe wastes meet certain treatment standards or the land-disposal method meetscertain waste containment criteria. From time to time, the EPA considers theadoption of stricter disposal standards for non-hazardous wastes, includingcrude oil and gas wastes.  The adoptionof such stricter standards for non-hazardous wastes, or any futurere-designation of non-hazardous wastes as hazardous wastes will likely increaseour operating expenses as well as for the industry in general.

 

*Superfund*

* *

The Comprehensive Environmental Response, Compensationand Liability Act (“CERCLA”), also known as “Superfund,” imposes liability,without regard to fault or the legality of the original act, on certain classesof persons who contributed to the release of a “hazardous substance” into theenvironment. These persons include the owner or operator of a facility where arelease occurred and companies that disposed or arranged for the disposal ofthe hazardous substances found at a facility. Under CERCLA, these persons maybe subject to joint and several liability for the costs of cleaning up thehazardous substances that have been released into the environment, for damagesto natural resources and for the costs 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 the responsibleclasses of persons.  It is not uncommonfor neighboring landowners and other third parties to file claims for personalinjury and property damage allegedly caused by hazardous substances or otherpollutants released into the environment. In the course of our ordinary operations, our pipeline systems generatewastes that may fall within CERCLA’s definition of a “hazardous substance.” Inthe event a disposal facility previously used by us requires clean up in thefuture, we may be responsible under CERCLA for all or part of the costs requiredto clean up sites at which such wastes have been disposed.

 

*Other Environmental Proceedings*

* *

In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana, facility.  In1999, our Arcadia facility and adjacent terminals were directed by theRemediation Services Division of the LDEQ to pursue remediation of thiscontamination.  At December 31, 2004, wehave an accrued liability of $0.2 million for remediation costs at our Arcadiafacility.  Effective in March 2004, weexecuted an access agreement with an adjacent industrial landowner who islocated upgradient of the Arcadia facility. This agreement enables the landowner to proceed with remediationactivities at our Arcadia facility for which is has accepted sharedresponsibility.  We do not expect thatthe completion of the remediation program proposed to the LDEQ will have afuture material adverse effect on our financial position, results of operationsor cash flows.

 

On March 17, 2003, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois.  As a result of the release, we have enteredinto an Agreed Order with the State of Illinois, which required us to conductan 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.  We are in theprocess of negotiating a final settlement with the State of Illinois, and wedo not expect that compliance with the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal.  Thereleased jet fuel was contained within a storm water retention pond located onthe terminal property.  Six migratorywaterfowl were affected by the jet fuel and were subsequently euthanized by orat the request of the United States Fish and Wildlife Service (“USFWS”).  On October 1, 2004, the USFWS served us

 

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witha Notice of Violation, alleging that we violated 16 USC 703 of the MigratoryBird Treaty Act 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 thismatter.  The terms of this settlement didnot have a material adverse effect on our financial position, results ofoperations or cash flows.

 

On July 27, 2004, wereceived notice from the United States Department of Justice (“DOJ”) of itsintent to seek a civil penalty against us related to our November 21, 2001,release of approximately 2,575 barrels of jet fuel from our 14-inch diameterpipeline located in Orange County, Texas. The DOJ, at the request of the EPA, is seeking a civil penalty againstus for alleged violations of the CWA arising out of this release.  The maximum statutory penalty calculated forthis alleged violation of the CWA is $2.8 million.  We are in discussions with the DOJ regardingthis matter and have responded to its request for additional information.  We do not expect a civil penalty, if any, tohave a material adverse effect on our financial position, results of operationsor cash flows.

 

At December 31, 2004, we have an accrued liability of$1.4 million related to sites requiring environmental remediationactivities.  We do not expect that thecompletion of remediation programs associated with these activities will have afuture material adverse effect on our financial position, results of operationsor cash flows.

 

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

 

We are subject to regulation by the United StatesDepartment of Transportation (“DOT”) under the Accountable Pipeline and SafetyPartnership Act of 1996, sometimes referred to as the Hazardous Liquid PipelineSafety Act (“HLPSA”), and comparable state statutes relating to the design,installation, testing, construction, operation, replacement and management ofour pipeline facilities. The HLPSA covers petroleum and petroleum products andrequires any entity that owns or operates pipeline facilities to comply withsuch regulations, to permit access to and copying of records and to filecertain reports and provide information as required by the Secretary ofTransportation.  The HLPSA wasreauthorized in 2002.  We believe that weare in material compliance with these HLPSA regulations.

 

We are subject to the DOT regulation requiringqualification of pipeline personnel.  Theregulation requires pipeline operators to develop and maintain a writtenqualification program for individuals performing covered tasks on pipelinefacilities.  The intent of thisregulation is to ensure a qualified work force and to reduce the probabilityand consequence of incidents caused by human error.  The regulation establishes qualificationrequirements for individuals performing covered tasks.  A written qualification program was completedin April 2001, and our employees performing a covered task were qualified bythe October 2002 deadline.  We believe thatwe are in material compliance with these DOT regulations.

 

We are also subject to the DOT Integrity Managementregulations which specify how companies with greater than 500 miles of pipelineshould assess, evaluate, validate and maintain the integrity of pipelinesegments that, in the event of a release, could impact High Consequence Areas (“HCA”).  HCA are defined as populated areas, unusuallysensitive environmental areas and commercially navigable waterways.  The regulation requires the development andimplementation of an Integrity Management Program (“IMP”) that utilizes internalpipeline inspection, pressure testing, or other equally effective means toassess the integrity of HCA pipeline segments. The regulation also requires periodic review of HCA pipeline segments toensure adequate preventative and mitigative measures exist and that companiestake prompt action to address integrity issues raised by the assessment andanalysis.  In compliance with these DOTregulations, we identified our HCA pipeline segments and developed an IMP by theMarch 31, 2002 deadline. The regulations require that initial HCA baselineintegrity assessments must be conducted within seven years, with all subsequentassessments conducted on a five-year cycle. Additionally, 50% of all HCA pipeline miles must be assessed bySeptember 30, 2004.  We exceeded thisrequirement by the imposed deadline.  In2003 and 2004, we continued with the baseline evaluation efforts initiated in2002 and completed the assessment of approximately 1,300 and 1,360 miles,respectively, of our pipeline system.  Inaccordance with our IMP program, we perform the appropriate repairs followingeach assessment.

 

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****Safety Matters****

 

We are also subject to the requirements of the federalOSHA and comparable state statutes. We believe we are in material compliancewith OSHA and state requirements, including general industry standards, recordkeeping requirements and monitoring of occupational exposures.

 

The OSHA hazard communication standard, the EPAcommunity right-to-know regulations under Title III of the federal SuperfundAmendment and Reauthorization Act and comparable state statutes require us toorganize and disclose information about the hazardous materials used in ouroperations.  Certain parts of thisinformation must be reported to employees, state and local governmentalauthorities and local citizens upon request. We are subject to OSHA Process Safety Management (“PSM”) regulations,which are designed to prevent or minimize the consequences of catastrophicreleases of toxic, reactive, flammable or explosive chemicals.  These regulations apply to any process whichinvolves a chemical at or above the specified thresholds or any process whichinvolves a flammable liquid or gas, as defined in the regulations, storedon-site in one location, in a quantity of 10,000 pounds or more.  We utilize certain covered processes andmaintain storage of LPGs in pressurized tanks, caverns and wells, in excess of10,000 pounds at various locations. Flammable liquids stored in atmospheric tanks below their normal boilingpoint without benefit of chilling or refrigeration are exempt.  We believe we are in material compliance withthe OSHA regulations.

 

In general, we expect to increase our expendituresduring the next decade to comply with stricter industry and regulatory safetystandards such as those described above. While such expenditures cannot be accurately estimated at this time, wedo not believe that they will have a future material adverse effect on ourfinancial position, results of operations or cash flows.

 

# **Employees**

# ** **

We do not have any employees, officers or directors.The General Partner is responsible for our management.  The Company is responsible for the managementof our Parent Partnership.  As ofDecember 31, 2004, the Company had 1,104 employees.  None of the employees of the Company wererepresented by labor unions, and the Company considers its employee relationsto be good.

 

****Available Information****

 

We file annual, quarterly and other reports and otherinformation with the Securities and Exchange Commission (“SEC”) under theSecurities Exchange Act of 1934 (the “Exchange Act”).  You may read and copy any materials that wefile with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW,Washington, DC 20549.  You may obtainadditional information about the Public Reference Room by calling the SEC at1-800-SEC-0330.  In addition, the SECmaintains an Internet site (http://www.sec.gov) that contains reports, proxyand information statements and other information regarding issuers that fileelectronically with the SEC, including us.

 

We also make available free of charge on or throughour Internet website (http://www.teppco.com) or through our Investor RelationsDepartment (1-800-659-0059) our Annual Reports on Form 10-K, Quarterly Reportson Form 10-Q, Current Reports on Form 8-K and other information statements and,if applicable, amendments to those reports filed or furnished pursuant toSection 13(a) of the Exchange Act as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the SEC.

 

***Item 3***.           Legal Proceedings

*** ***

In the fall of 1999 and on December 1, 2000, theCompany and the Parent Partnership were named as defendants in two separatelawsuits in Jackson County Circuit Court, Jackson County, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al.*(including the Company and the ParentPartnership) and*Gilbert Richards and Jean Richards v. TexasEastern Corporation, et al.*(including the Company and the ParentPartnership).* *Inboth cases, the plaintiffs contend, among other things, that we and otherdefendants stored and disposed of toxic and hazardous substances and hazardouswastes in a manner that caused the

 

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materials to be releasedinto the air, soil and water.  Theyfurther contend that the release caused 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 enteredinto Release and Settlement Agreements with the McCleery plaintiffs and theRichards plaintiffs dismissing all of these plaintiffs’ claims.  The settlement terms include a $2.0 millionpayment to the plaintiffs, which has been accrued for in our consolidatedfinancial statements.  The terms of thesettlements did not have a material adverse effect on our financial position,results of operations or cash flows.

 

Although we did not settle with all plaintiffs and wetherefore remain named parties in the *Ryan E. McCleery andMarcia 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 donot believe that the outcome of these remaining claims will have a materialadverse effect on our financial position, results of operations or cash flows.

 

On December 21, 2001, we were named as a defendant ina lawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana, styled*Rebecca L. Grisham et al. v.  TE Products Pipeline Company, LimitedPartnership*.  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 answerto the plaintiffs’ petition denying the allegations, and we are defendingourselves vigorously against the lawsuit. The plaintiffs have not stipulated the amount of damages they areseeking in the suit; however, this case is 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.

 

In May 2003, the Company was named as a defendant in alawsuit styled *John R. James, et al. v. J Graves InsulationCompany, et al.* as filed in the first Judicial District Court, CaddoParish, Louisiana.  There are numerousplaintiffs identified in the action that are alleged to have suffered damagesas the result of alleged exposure to asbestos-containing products andmaterials.  According to the petition andas a result of a preliminary investigation, the Company believes that the onlyclaim asserted against it results from one individual for the period from July1971 through June 1972, who is alleged to have worked on a facility owned bythe Company’s predecessor.  This periodrepresents a small portion of the total alleged exposure period from January1964 through December 2001 for this individual. The individual’s claims involve numerous employers and alleged jobsites.  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 theCompany intends to defend itself vigorously against this lawsuit.  The plaintiffs have not stipulated the amountof damages that they are seeking in this suit. We are obligated to reimburse the Company for any costs it incursrelated to this lawsuit.  We cannotestimate the loss, if any, associated with this pending lawsuit.  We do not believe that the outcome of thislawsuit will have a material adverse effect on our financial position, resultsof operations or cash flows.

 

On April 2, 2003, Centennial was served with apetition in a matter styled *Adams, et al. v. CentennialPipeline Company LLC, et al*. This matter involves approximately 2,000 plaintiffs who allege that over200 defendants, including Centennial, generated, transported, and/or disposedof hazardous and toxic waste at two sites in Bayou Sorrell, Louisiana, anunderground injection well and a landfill. The plaintiffs allege personal injuries, allergies, birth defects,cancer and death.  The undergroundinjection well has been in operation since May 1976.  Based upon current information, Centennialappears to be a *de minimis* contributor, havingused the disposal site during the two month time period of December 2001 toJanuary 2002.  Marathon has been handlingthis matter for Centennial under its operating agreement with Centennial.  We have a 50% ownership interest inCentennial. On November 30, 2004, the court approved a class settlement.  The time period for parties to appeal thissettlement has not expired, however, and the settlement will not be final untilit does so. If the approved class settlement becomes final, the terms of thesettlement will not have a material adverse effect on our financial position,results of operations or cash flows.

 

On December 16, 2003, Centennial, the Company, theParent Partnership and other Parent Partnership entities were named asdefendants in a lawsuit in the 128th District Court of Orange County, Texas,styled *Elwood Karr et al. v. Centennial Pipeline, LLC etal*.  In this case, theplaintiffs contend that our pipeline leaked toxic substances on their property,causing them property damage.  On October29, 2004, the parties entered into a

 

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Settlement Agreement,dismissing all claims.  The terms of thesettlement did not have a material adverse effect on our financial position,results of operations or cash flows.

 

On February 4, 2005, we received a letter notifying usof a claim for approximately $1.45 million in damages allegedly due to ashipper being delivered off-specification gasoline during November 2004.  We are contesting liability for this matter,and to the extent there may be liability, we would seek reimbursement from thethird party refiner who supplied the gasoline into our pipeline system.  We do not believe that the outcome of thismatter will have a future material adverse effect on our consolidated financialposition, results of operations or cash flows.

 

In addition to the litigation discussed above, we havebeen, in the ordinary course of business, a defendant in various lawsuits and aparty to various other legal proceedings, some of which are covered in whole orin part by insurance.  We believe thatthe outcome of these lawsuits and other proceedings will not individually or inthe 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 thesole limited partner interest and TEPPCO GP, Inc. owns a 0.001% general partnerinterest in us.  There is no establishedpublic trading market for our ownership interests.

 

We make periodic distributions of our available cashto our partners. Available cash consists generally of all cash receipts lesscash disbursements and cash reserves necessary for working capital, anticipatedcapital expenditures and contingencies we deem appropriate and necessary.

 

We are a limited partnership, and we are not subjectto 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.

 

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

*** ***

The following tables set forth, for the periods and atthe dates indicated, our selected consolidated financial and operatingdata.  The financial data was derivedfrom our consolidated financial statements and should be read in conjunctionwith our audited consolidated financial statements included in the Index toConsolidated Financial Statements on page F-1 of this Report. See also Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

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| ** **                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                              | ** ** | **(in thousands)**           | ** ** |
| **Income Statement Data: (1)**          |       |                         |       |   |   |   |   |   |   |   |   |
| Operating revenues:                     |       |                         |       |   |   |   |   |   |   |   |   |
| Transportation – refined products  |       | $                            | 148,166    |   | $ | 138,926 |   | $ | 123,476 |   | $ | 139,315 |   | $ | 119,331 |   |
| Transportation – LPGs              |       | 87,050                       |       | 91,787 |   | 74,577 |   | 77,823 |   | 73,896 |   |
| Mont Belvieu operations                 |       | —                       |       | — |   | 15,238 |   | 14,116 |   | 13,334 |   |
| Other                                   |       | 39,542                       |       | 31,254 |   | 30,247 |   | 32,979 |   | 22,673 |   |
| Total operating revenues                |       | 274,758                      |       | 261,967 |   | 243,538 |   | 264,233 |   | 229,234 |   |
| Operating expenses                      |       | 164,994                      |       | 150,341 |   | 130,324 |   | 119,856 |   | 118,065 |   |
| Depreciation and amortization           |       | 42,207                       |       | 31,066 |   | 30,116 |   | 26,699 |   | 25,728 |   |
| Gains on sales of assets                |       | (526                         | )          | — |   | — |   | — |   | — |   |
| Operating income                        |       | 68,083                       |       | 80,560 |   | 83,098 |   | 117,678 |   | 85,441 |   |
| Interest expense – net             |       | (28,843                      | )          | (27,219 | ) | (22,742 | ) | (27,044 | ) | (27,529 | ) |
| Equity losses                           |       | (3,402                       | )          | (4,086 | ) | (6,815 | ) | (1,149 | ) | — |   |
| Other income – net                 |       | 787                          |       | 226 |   | 832 |   | 1,537 |   | 1,651 |   |
| Income before discontinued operations   |       | 36,625                       |       | 49,481 |   | 54,373 |   | 91,022 |   | 59,563 |   |
| Income from discontinued operations (2) |       | —                       |       | — |   | 912 |   | 1,674 |   | 1,751 |   |
| Net income                              |       | $                            | 36,625     |   | $ | 49,481 |   | $ | 55,285 |   | $ | 92,696 |   | $ | 61,314 |   |

 
| ** **                                 | ** ** | **December 31,**   | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| **Balance Sheet Data: (1)**                |       |               |       |   |   |   |   |   |   |   |   |
| Property, plant and equipment – net   |       | $                  | 722,334    |   | $ | 682,385 |   | $ | 722,848 |   | $ | 697,178 |   | $ | 640,656 |   |
| Total assets                               |       | 955,144            |       | 900,648 |   | 881,101 |   | 879,834 |   | 755,507 |   |
| Long-term debt (net of current maturities) |       | 695,003            |       | 603,478 |   | 557,521 |   | 420,594 |   | 437,820 |   |
| Total debt                                 |       | 695,003            |       | 603,478 |   | 557,521 |   | 493,084 |   | 437,820 |   |
| Partners’ capital                     |       | 141,492            |       | 222,788 |   | 242,739 |   | 270,112 |   | 234,915 |   |
|                                            |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                          | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                          | ** ** | **(in thousands)**           | ** ** |
| **Cash Flow Data: (1)**                             |       |                         |       |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities           |       | $                            | 132,894    |   | $ | 96,088 |   | $ | 107,600 |   | $ | 123,070 |   | $ | 87,456 |   |
| Capital expenditures to sustain existing operations |       | (29,372                      | )          | (18,169 | ) | (13,592 | ) | (12,724 | ) | (15,402 | ) |
| Distributions paid                                  |       | (117,967                     | )          | (106,465 | ) | (94,921 | ) | (80,914 | ) | (70,767 | ) |
|                                                     |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)               Amounts have beenreclassified to reflect TEPPCO Colorado as discontinued operations.

 

(2)               Discontinued operationsrelates to the sale of TEPPCO Colorado in May 2002.

 

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

*** ***

The following information is intended to provideinvestors with an increased understanding of our 2004, 2003 and 2002consolidated financial statements and our accompanying notes listed in theIndex to Consolidated Financial Statements on page F-1 of this Report.  Our discussion and analysis includes thefollowing:

 

•                  Overviewof Business and 2004 Results.

 

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

 

•                  Resultsof Operations – Discusses material period-to-period variances in theconsolidated statements of income.

 

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

 

16

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•                  OtherConsiderations – Addresses trends, future plans and contingencies that arereasonably likely to materially affect future liquidity or earnings.

 

## ****Overview of Business and2004 Results****

## ** **

TE Products Pipeline Company, Limited Partnership, aDelaware limited partnership, was formed in March 1990.  TEPPCO Partners, L.P. owns a 99.999% interestin us as the sole limited partner. TEPPCO GP, a subsidiary of the Parent Partnership, holds a 0.001%General Partner interest in us.  TexasEastern Products Pipeline Company, LLC, a Delaware limited liability company,serves as the general partner of our Parent Partnership.  The Company is an indirect wholly ownedsubsidiary of Duke Energy Field Services, LLC, a joint venture betweenDuke Energy and ConocoPhillips.  DukeEnergy holds an interest of approximately 70% in DEFS, and ConocoPhillips holdsthe remaining interest of approximately 30%. TEPPCO GP, as general partner, performs all of our management andoperating functions required according to the Agreement of Limited Partnershipof TE Products Pipeline Company, Limited Partnership.  We reimburse our General Partner and theCompany for all reasonable direct and indirect expenses that they incur inmanaging us.

 

We are one of three operating subsidiaries of ourParent Partnership.  Our ParentPartnership is managed by its general partner, the Company, which hasapproximately 1,000 employees dedicated to the operations and management of theoperating subsidiaries.  Our ParentPartnership allocates operating, general and administrative expenses to us forlegal, insurance, financial, communication and other administrative servicesbased upon the estimated level of effort devoted to our variousoperations.  We believe that the methodfor allocating corporate operating, general and administrative expenses to usis reasonable.

 

We operate and report in one business segment:  transportation and storage of refinedproducts, LPGs and petrochemicals.  Weown, operate or have investments in properties located in 14 states, and ourrevenues are earned from transportation and storage of refined products andLPGs, intrastate transportation of petrochemicals, sale of product inventoryand other ancillary services.  Our twolargest operating expense items are labor and electric power.  We generally realize higher revenues duringthe first and fourth quarters of each year since our operations are somewhatseasonal.  Refined products volumes are generallyhigher during the second and third quarters because of greater demand forgasolines during the spring and summer driving seasons. LPGs volumes aregenerally higher from November through March due to higher demand in theNortheast for propane, a major fuel for residential heating.  Our results also include our equityinvestments in Centennial and MB Storage (see Note 5. Equity Investments).

 

We are subject to economic and other factors thataffect our industry.  The demand forrefined products is dependent upon the price, prevailing economic conditionsand demographic changes in the markets served, trucking and railroad freight,agricultural usage and military usage; the demand for propane is sensitive tothe weather and prevailing economic conditions; and the demand forpetrochemicals is dependent upon prices for products produced frompetrochemicals.  We are also subject toregulatory factors which have an effect on the amounts we are allowed to chargeour customers for the services we provide on our regulated pipeline systems.

 

Certain factors are inherent in our business asdiscussed in this Report.  These includethe safe, reliable and efficient operation of the pipelines and facilities thatwe own or operate while meeting increased regulations that govern the operationof our assets and the costs associated with such regulations.  We are also focused on our continued growththrough expansion of the assets that we own and through the acquisition ofassets that complement our current operations.

 

Our net income for the year ended December 31, 2004,was $36.6 million, compared with $49.5 million for the year ended December 31,2003. We had increased revenues from our refined products business, and werecognized $4.1 million of deferred revenue, despite the impact of challengingmarket conditions for both our refined products and LPG movements.  We have continued to utilize Centennial’scapacity in a manner that has provided additional delivery capability for ourcustomers. Centennial has provided additional capacity through our leaseagreement, enabling us to transport additional refined product volumes in2004.  During the third quarter of 2004,Centennial was able to transport jet fuel for the first time.  These increases were partially offset by higherpipeline integrity expenses of $6.2 million and an asset impairment charge of$4.4 million related to a marine facility in Beaumont, Texas.

 

17

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Our costs were higher than expected, largely as aresult of pipeline integrity expenses. The goal of our on-going pipelineintegrity program has always been to maintain the long-term reliability andsafety of our pipeline systems, while minimizing the impact to ourcustomers.  Our operating costs were alsoimpacted by increased consulting and contract services of $1.3 million relatedto compliance with the Sarbanes-Oxley Act of 2002.  During the year, we spent $40.8 million onrevenue generating capital projects, which we believe will provide earnings,cash flow and growth opportunities. We funded these projects by cash generatedfrom operations and from our Parent Partnership’s credit facilities.

 

We continued building a base for long-term growth by enhancing existingsystems and pursuing new business opportunities. We increased throughput on our pipeline systems, constructednew pipelines and expanded and upgraded our existing infrastructure. Amongthe highlights of 2004:

 

•                 Duringthe fourth quarter of 2004, we completed a Phase II project to further extendbeyond Coshocton, Ohio, our delivery capacity of LPGs to the Northeast by 8,000to 10,000 barrels per day.  The Phase IIexpansion included the construction of three pump stations between Coshoctonand Greensburg, Pennsylvania, and two stations from Greensburg to Watkins Glen,New York.  Additional work on thepipeline segment between Greensburg and Philadelphia, Pennsylvania, to increasedelivery rates to the Philadelphia area has been completed.  Improvements were also completed during thefourth quarter of 2004 at our Dubois, Pennsylvania, terminal, and additionalimprovements are expected to be completed during the first quarter of 2005 atour Eagle, Pennsylvania, terminal.

•                 MBStorage acquired salt dome storage and LPGs pipeline assets in Mont Belvieu,Texas, that will enable future expansion and provide a broader platform forgrowth.

•                 Weare in the process of constructing a new refined products truck loadingterminal in Bossier City, Louisiana, to provide the Shreveport, Louisiana, andEast Texas markets with access to Gulf Coast sourced gasoline and diesel fuel.The terminal is scheduled to be complete in the first quarter of 2005.

•                 Webegan an expansion project to increase delivery capacity of gasoline and dieselfuel to the Indianapolis, Indiana, and Chicago, Illinois market areas.

 

We remain confident that our current strategy and focus will providecontinued growth in earnings and cash distributions. With respect to 2005,these opportunities include continued growth of our business, resulting fromour recent expansion and grass roots facility investments and growing demandfor Gulf Coast sourced products.

 

# **Critical Accounting Policies andEstimates**

# ** **

The preparation of financial statements in accordancewith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities as well as the disclosure of contingent assets andliabilities at the date of the financial statements.  Such estimates and assumptions also affectthe reported amounts of revenues and expenses during the reporting period.  Changes in these estimates could materiallyaffect our financial position, results of operations or cash flows.  Although we believe that these estimates arereasonable, actual results could differ from these estimates.  Significant accounting policies that weemploy are presented in the notes to the consolidated financial statements (seeNote 2.  Summary of SignificantAccounting Policies).

 

Critical accounting policies are those that are mostimportant to the portrayal of our financial position and results ofoperations.  These policies requiremanagement’s most difficult, subjective or complex judgments, often employingthe use of estimates about the effect of matters that are inherentlyuncertain.  Our most critical accountingpolicies pertain to revenue and expense accruals, environmental costs andproperty, plant and equipment.

 

*Revenue and Expense Accruals*

* *

We routinely make accruals based on estimates for bothrevenues and expenses due to the timing of compiling billing information,receiving certain third party information and reconciling our records withthose of third parties.  The delayedinformation from third parties includes, among other things, actual volumes ofproducts transported, adjustments to inventory and invoices for other operatingexpenses.  We make accruals to reflectestimates for these items based on our internal records and informationreceived from third parties.  Most of the

 

18

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estimated accruals arereversed in the following month when actual information is received from thirdparties and our internal records have been reconciled.

 

The most difficult accruals to estimate are powercosts and property taxes.  Power costaccruals generally 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 demand rates, which are difficult topredict, drive the variability of the power costs.  For the year ended December 31, 2004,approximately 13% of our power costs are recorded using estimates.  A variance of 10% in our aggregate estimatefor power costs would have an approximate $0.4 million impact on annualearnings.  Property tax accruals involvesignificant tax rate estimates among numerous jurisdictions.  Actual property taxes are often not knownuntil the tax bill is settled in subsequent periods, and the tax amount canvary for tax rate changes and changes in tax methods or elections.  A variance of 10% in our aggregate estimatefor property taxes could have up to an approximate $0.6 million impact onannual earnings.  Variances fromestimates are reflected in the period actual results become known, typically inthe month following the estimate. Each of these accruals requires management’ssubjective judgments, requiring estimates regarding the effects of items thatare inherently uncertain.

 

*Environmental Costs*

* *

At December 31, 2004, we have accrued a liability of$1.4 million for our estimate of the future payments we expect to pay forenvironmental costs to remediate existing conditions attributable to pastoperations.  Environmental costs includeinitial site surveys and environmental studies of potentially contaminatedsites, costs for remediation and restoration of sites determined to becontaminated and ongoing monitoring costs, as well as damages and other costs,when estimable.  We monitor the balanceof accrued undiscounted environmental liabilities on a regular basis.  We record liabilities for environmental costsat a specific site when our liability for such costs is probable and areasonable estimate of the associated costs can be made.  Adjustments to initial estimates arerecorded, from time to time, to reflect changing circumstances and estimatesbased upon additional information developed in subsequent periods.  Estimates of our ultimate liabilitiesassociated with environmental costs are particularly difficult to make withcertainty due to the number of variables involved, including the early stage ofinvestigation at certain sites, the lengthy time frames required to completeremediation alternatives available and the evolving nature of environmentallaws and regulations. A variance of 10% in our aggregate estimate forenvironmental costs would have an approximate $0.1 million impact on annualearnings.  For information concerningenvironmental regulation and environmental costs and contingencies, see Items 1and 2. Business and Properties – Environmental Matters.

 

*Property, Plant and Equipment*

* *

We regularly review long-lived assets for impairmentin accordance with Statement of Financial Accounting Standards (“SFAS”) No.144, *Accounting for the Impairment or Disposal ofLong-Lived Assets. *Long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  Recoverability of the carrying amount ofassets to be held and used is measured by a comparison of the carrying amountof the asset to future net cash flows expected to be generated by theasset.  Estimates of future net cashflows include anticipated future revenues, expected future operating costs andother estimates.  If such assets areconsidered to be impaired, the impairment to be recognized is measured by theamount by which the carrying amount of the assets exceeds the fair value of theassets.  Assets to be disposed of arereported at the lower of the carrying amount or fair value less costs to sell.

 

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# **Results of Operations**

# ** **

The following table presents volumes delivered inbarrels and average tariff per barrel for the years ended December 31, 2004,2003 and 2002 (in thousands, except tariff information):

 
| ** **                       | ** ** | **Years Ended December 31,** | ** ** | **Percentage   Increase (Decrease)** | ** ** |
|----------------------------------|------------|------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2004**                     | ** ** | **2003**                             | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Volumes Delivered:               |       |                         |       |                                 |       |   |   |   |   |   |   |
| Refined products                 |       | 152,437                      |       | 154,061                              |       | 138,164 |   | (1 | )% |   | 12 | % |   |
| LPGs                             |       | 43,982                       |       | 42,543                               |       | 40,490 |   | 3 | % |   | 5 | % |   |
| Total                            |       | 196,419                      |       | 196,604                              |       | 178,654 |   | — |   |   | 10 | % |   |
|                             |       |                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Average Tariff per Barrel:       |       |                         |       |                                 |       |   |   |   |   |   |   |   |   |
| Refined products                 |       | $                            | 0.97       |                                 | $          | 0.90 |   | $ | 0.89 |   | 8 | % |   | 1 | % |   |
| LPGs                             |       | 1.98                         |       | 2.16                                 |       | 1.84 |   | (8 | )% |   | 17 | % |   |
| Average system tariff per barrel |       | $                            | 1.20       |                                 | $          | 1.17 |   | $ | 1.11 |   | 3 | % |   | 5 | % |   |

 

We are dependent in large part on the demand for refined petroleumproducts in the markets served by our pipelines.  Reductions in that demand adversely affectour pipeline business.  Market demandvaries based upon the different end uses of the refined products we ship.  Demand for gasoline, which in recent yearshas accounted for approximately one-half of our refined products transportationrevenues, depends upon price, prevailing economic conditions and demographicchanges in the markets we serve.  Demandfor distillates is affected by truck and railroad freight, the price of naturalgas used by utilities, which use distillates as a substitute for natural gaswhen the price of natural gas is high, and usage for agricultural operations,which is affected by weather conditions, government policy and cropprices.  Demand for jet fuel, which inrecent years has accounted for approximately one-quarter of our refinedproducts revenues, depends on prevailing economic conditions and militaryusage.  Propane deliveries are generallysensitive to the weather and meaningful year-to-year variances have occurred inthe past and will likely continue to occur in the future.

 

*Year Ended December 31, 2004 Compared withYear Ended December 31, 2003*

 

Revenues from refined products transportation increased $9.2 millionfor the year ended December 31, 2004, compared with the year ended December 31,2003.  Refined products transportationrevenues increased primarily due to higher market-based tariff rates which wentinto effect in July 2003 and May 2004 and a shift in the distribution of productmoved by us to favor longer haul, higher tariff movements.  These changes resulted in a 5% increase inthe refined products average rate per barrel from the prior year and offset theeffect of a 1% decrease in refined products delivery volumes.  In February 2003, we entered into a lease agreementwith Centennial that increased our flexibility to deliver refined products toour market areas.  Volumes transported onCentennial increased due to increased demand and market share for productssupplied from the U.S. Gulf Coast into Midwest markets.  Centennial has provided our system withadditional pipeline capacity for products originating in the U.S. Gulf Coastarea.  Prior to the construction ofCentennial, deliveries on our pipeline system were limited by our pipelinecapacity, and transportation services for our customers were allocated inaccordance with a proration policy.  Withthis incremental pipeline capacity, our previously constrained system hasexpanded deliveries in markets both south and north of Creal Springs.

 

Refined products transportation revenues also increased due to therecognition of $4.1 million of deferred revenue related to the expiration oftwo customer transportation agreements. Under some of our transportation agreements with customers, thecontracts specify minimum payments for transportation services.  If the transportation services paid for arenot used, the unused transportation service is recorded as deferredrevenue.  The contracts generally specifya subsequent period of time in which the customer can transport excess productsto recover the amount recorded as deferred revenue.  During the third quarter of 2004, the timelimit under two transportation agreements expired without the customersrecovering the unused transportation services. As a result, we recognized the deferred revenue as refined productsrevenue in the current period.  Thisadditional revenue increased the refined products average tariff for the yearended December 31, 2004, by $0.02 per barrel, or 2%.

 

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Revenues fromLPGs transportation decreased $4.7 million for the year ended December 31,2004, compared with the year ended December 31, 2003, due to lower deliveriesof propane in the upper Midwest and Northeast market areas attributable to warmerweather during the first and fourth quarters of 2004.  Additionally, in late February 2004, the MontBelvieu propane price spiked, which resulted in TEPPCO sourced propane beingless competitive than propane from other source points.  Also contributing to the decrease were lessfavorable price differentials between Mont Belvieu and other supply centersduring the second and third quarters of 2004. High propane prices in 2004 alsoreduced the summer and early fall fill of consumer storage of propane during2004.  These decreases were partiallyoffset by increased deliveries of isobutane to Chicago area refineries andincreased short-haul propane deliveries to U.S. Gulf Coast petrochemicalcustomers.  The LPGs average rate perbarrel decreased 8% from the prior year period primarily as a result ofincreased short-haul deliveries during 2004.

 

Other operating revenues increased $8.3 million for theyear ended December 31, 2004, compared with the year ended December 31, 2003,primarily due to higher propane inventory fees, higher margins on productinventory sales, higher revenue from our Providence, Rhode Island importfacility and higher refined products tender deduction, loading and custodytransfer revenues.

 

Costs and expenses increased $25.3million for the year ended December 31, 2004, compared with the year endedDecember 31, 2003, due to increased operating, general and administrativeexpenses, increased depreciation and amortization expense and increasedoperating fuel and power, partially offset by net gains on the sales ofassets.  Operating, general andadministrative expenses increased primarily due to a $6.2 million increase inpipeline inspection and repair costs associated with our integrity managementprogram, a $2.0 million increase in legal accruals related to the settlement ofa lawsuit (see Note 17.  Commitments andContingencies), a $1.5 million increase in rental expense from the Centennialpipeline capacity lease agreement that we entered into in February 2003, a $1.3million increase in consulting and contract services related to compliance withthe Sarbanes-Oxley Act of 2002 and a $1.1 million increase in costs related tounsuccessful acquisition evaluations. These increases were partially offset by $0.8 million of lower expensesin the 2004 period associated with the write-off of receivables related tocustomer bankruptcies and non-payments in 2003. Depreciation expense increased from the prior year period because of a$4.4 million charge resulting from the impairment of marine assets in theBeaumont area (see Note 9.  Property,Plant and Equipment).  In addition, wewrote off approximately $2.1 million in assets taken out of service during theperiod to depreciation expense. Depreciation expense also increased approximately $5.0 million as aresult of assets placed in service during 2003 and 2004, partially offset by anincrease in the estimated remaining life of a section of our pipeline system inthe Northeast, resulting from pipeline capital improvements made as part of ourintegrity management program.  Operatingfuel and power expense increased primarily as a result of higher power ratesduring the 2004 period.  In addition, werecognized net gains of $0.5 million during 2004 from the sales of variousassets.

 

Interestexpense increased $1.0 million for the year ended December 31, 2004, comparedwith the year ended December 31, 2003, primarily due to higher outstanding debtbalances under the Note Payable with our Parent Partnership.  Interest capitalized decreased $0.6 millionfor the year ended December 31, 2004, compared with the year ended December 31,2003, as a result of lower construction work-in-progress balances in 2004.

 

Net losses from equity investmentsdecreased $0.7 million for the year ended December 31, 2004, compared with theyear ended December 31, 2003, as shown below (in thousands):

 

| ** **          | ** ** | **Years Ended**  | ** ** | ** **   | ** ** |
|---------------------|------------|------------------|------------|--------------|------------|
| ** **          | ** ** | **December 31,** | ** ** | **Increase** | ** ** |
| ** **          | ** ** | **2004**         | ** ** | **2003**     | ** ** | **(Decrease)** | ** ** |
| ** **          | ** ** | ** **       | ** ** | ** **   | ** ** | ** ** | ** ** |
| Centennial          |       | $                | (11,237    | )            | $          | (11,373 | ) | $ | 136 |   |
| MB Storage          |       | 7,874            |       | 7,354        |       | 520 |   |
| Other               |       | (39              | )          | (67          | )          | 28 |   |
| Total equity losses |       | $                | (3,402     | )            | $          | (4,086 | ) | $ | 684 |   |

 

Equity losses in Centennial for theyear ended December 31, 2004, compared with the year ended December 31, 2003,decreased $0.1 million, primarily due to increased transportation revenues andvolumes and lower operating expenses. During 2003, we acquired an additional16.7% interest in Centennial on February 10,

 

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2003, bringing our ownership interest to 50%.  Included in the equity loss for the yearended December 31, 2004, is $1.2 million of equity income relating to thesettlement of certain transmix matters recognized in previous periods.

 

Equity earnings from our 50% ownershipinterest 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 storageand pipeline assets and contracts for approximately $34.0 million, of which wecontributed $16.5 million.  The increasein equity earnings is due to increased storage revenue, shuttle revenue andrental revenue primarily from the acquired contracts and lower pipelinerehabilitation expenses on the MB Storage system, partially offset by increasedamortization and depreciation expense on storage assets and contracts acquired.

 

*Other income – net increased $0.6 million forthe year ended December 31, 2004, compared with the year ended December 31,2003, primarily due to higher interest income earned on cash investments andhigher interest income earned on a capital lease.*

* *

*Year Ended December 31, 2003 Compared withYear Ended December 31, 2002*

 

Revenues from refined productstransportation increased $15.5 million for the year ended December 31, 2003,compared with the year ended December 31, 2002, due to an overall increase of12% in the refined products volumes delivered. This increase in volumes delivered was primarily due to deliveries ofproducts received into our pipeline from Centennial at Creal Springs, Illinois.  Centennial, which began operations in April2002, has provided our system with additional pipeline capacity for productsoriginating in the U.S. Gulf Coast area. In February 2003,we entered into a lease agreement with Centennial that increased our capacityto deliver refined products to our market areas.  Prior tothe lease agreement with Centennial, deliveries on our pipeline system werebased upon a proration policy, which limited customer transportation.  During 2003, with the expanded capacitythrough our lease agreement with Centennial, our pipeline system was notprorated during portions of 2003 and was better able to serve markets whichincreased transportation on our system.  In addition, in December 2002, we raised theoperating pressure of our Chicago lateral pipeline which resulted in anincrease in capacity for deliveries into the Indianapolis and Chicago markets.  With thisincremental pipeline capacity, our previously constrained system has expandeddeliveries in markets both south and north of Creal Springs.  Volume increases were due to increased demandand market share for products supplied from the U.S. Gulf Coast into Midwestmarkets.  The refined products averagerate per barrel increased 1% from the prior year period primarily due highermarket-based tariff rates which went into effect in July 2003, partially offsetby the impact of the Midwest origin point for barrels received from Centennial,which resulted in an increase in short-haul barrels transported on our system.

 

Revenues from LPGs transportationincreased $17.2 million for the year ended December 31, 2003, compared with theyear ended December 31, 2002, primarily due to increased deliveries of propanein the upper Midwest and Northeast market areas attributable to colder thannormal weather during the first quarter of 2003 and due to low inventories atcompeting supply locations during the second and third quarters of 2003.  The U.S. Gulf Coast had higher propaneinventory during 2003 as compared to the previous year because of higher thannormal foreign propane imports at Mont Belvieu, which resulted in a lowerpropane price in this market area.  Thislower price contributed to increased transportation deliveries to themid-continent market areas.  Additionalpipeline capacity for expanded propane movements was available due to a shiftof refined product volumes to Centennial. Butane deliveries also increased due to the increased demand byrefineries for normal butane for use in gasoline blending and increasedisobutane deliveries to Chicago area refineries.  The LPGs average rate per barrel increased17% from the prior year period as a result of an increased percentage oflong-haul deliveries during the year ended December 31, 2003, and an increasein LPG tariff rates, which went into effect in July 2003.

 

Effective January 1, 2003, our 50%ownership interest in MB Storage is accounted for as an equity investment.  Revenues and expenses related to Mont Belvieuoperations are now recorded within equity earnings.  See discussion regarding changes in equityearnings/losses below.

 

Other operating revenues increased$1.0 million for the year ended December 31, 2003, compared with the year endedDecember 31, 2002, primarily due to higher propane deliveries at ourProvidence, Rhode Island import facility and higher refined product loadingfees, partially offset by lower revenues from product location exchanges whichare used to position product in the Midwest market area and lower volume ofproduct inventory sales.

 

22

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Costs and expenses increased $21.0million for the year ended December 31, 2003, compared with the year endedDecember 31, 2002, due to increased operating, general and administrativeexpenses and increased depreciation and amortization expense, partially offsetby decreased taxes – other than income taxes and decreased operating fuel andpower.  Operating, general andadministrative expenses increased primarily due to higher pipeline maintenanceexpenses, due in part to pipeline rehabilitation expenses associated with ourintegrity management program, increased consulting and contract services,increased labor costs primarily due to an increase in the number of employeesbetween years, increased insurance expense, expense from the Centennialpipeline capacity lease agreement that we entered into in 2003 and thewrite-off of receivables of $0.8 million related to customer bankruptcies orother customer non-payments. Depreciation and amortization expense increased from the prior yearperiod because of assets placed in service during the year.  In addition, we wrote off assets taken out ofservice during the period to depreciation expense, which also increaseddepreciation expense.  These increases indepreciation expense were partially offset by lower depreciation expense fromassets retired during the year, which reduced the asset base, and due to thetransfer of assets to MB Storage.  Taxes– other than income taxes decreased as a result of actual property taxes beinglower than previously estimated and due to the transfer of assets to MBStorage.  Operating fuel and powerexpense decreased as a result of lower power costs due to a slight decrease inthe price of natural gas, partially offset by increased mainline throughput.

 

Interest expense increased $3.6 million for the yearended December 31, 2003, compared with the year ended December 31, 2002, as aresult of higher outstanding debt balances under the note payable with ourParent Partnership, and an increased percentage of fixed-rate debt in 2003 bythe Parent Partnership.  Interestcapitalized decreased $0.9 million for the year ended December 31, 2003,compared with the year ended December 31, 2002, as a result of decreasedconstruction work-in-progress balances.

 

Net losses from equity investmentsdecreased $2.7 million for the year ended December 31, 2003, compared with theyear ended December 31, 2002, as shown below (in thousands):

 

| ** **          | ** ** | **Years Ended   December 31,** | ** ** | **Increase** | ** ** |
|---------------------|------------|--------------------------------|------------|--------------|------------|
| ** **          | ** ** | **2003**                       | ** ** | **2002**     | ** ** | **(Decrease)** | ** ** |
| Centennial          |       | $                              | (11,373    | )            | $          | (6,716 | ) | $ | (4,657 | ) |
| MB Storage          |       | 7,354                          |       | —       |       | 7,354 |   |
| Other               |       | (67                            | )          | (99          | )          | 32 |   |
| Total equity losses |       | $                              | (4,086     | )            | $          | (6,815 | ) | $ | 2,729 |   |

 

Other income – net increased $0.6million for the year ended December 31, 2003, compared with the year endedDecember 31, 2002, primarily due to lower interest income earned on cashinvestments.

 

*Discontinued Operations*

 

Effective January 1, 2002, our Parent Partnershiprealigned its business segments to reflect its entry into the natural gasgathering business and the expanded scope of its NGLs operations.  As part of this realignment, on May 31, 2002,we entered into an Assignment and Assumption Agreement with TEPPCO Midstream totransfer our investment in TEPPCO Colorado, which fractionates NGLs, to TEPPCOMidstream at the book value of TEPPCO Colorado’s net assets (see Note 18.Discontinued Operations).  SFAS 144**requires that long-lived assets to be disposed of should berecorded at the lower of their carrying amount or fair value less costs tosell.  As a result, in the quarter endedJune 30, 2002, we compared the fair value of TEPPCO Colorado to its carryingvalue and noted no indication of impairment.

 

23

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As a result of thetransfer, our financial position and results of operations have beenreclassified to reflect revenue, expenses, assets and liabilities of TEPPCOColorado as discontinued operations.  Acondensed statement of income is shown below for TEPPCO Colorado for the yearended December 31, 2002 (in thousands):

 

| Revenues                               |   | $      | 3,115  |   |
|----------------------------------------|--------|--------|--------|--------|
| Operating,  general and administrative |   | 369    |   |
| Depreciation  and amortization         |   | 840    |   |
| Operating  income                      |   | 1,906  |   |
|                                   |   |   |   |
| Interest  expense                      |   | (1,015 | )      |
| Other income  – net               |   | 21     |   |
| Net income                             |   | $      | 912    |   |

 

The following tablepresents volumes fractionated and average rate per barrel for TEPPCO Coloradofor the year ended December 31, 2002:

 

| Fractionation  – NGLs: |   |   |   |
|-----------------------------|--------|--------|--------|
| Thousand  barrels           |   | 2,043  |   |
| Average rate  per barrel    |   | $      | 1.827  |   |
|                             |        |        |        |  |

 

# **FinancialCondition and Liquidity**

# ** **

Cash flows for the yearsended December 31, 2004, 2003 and 2002, were as follows (in millions):

 
| ** **                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash  provided by (used in): |       |                              |       |   |   |   |   |
| Operating  activities        |       | $                                 | 132.9      |   | $ | 96.1 |   | $ | 107.6 |   |
| Investing  activities        |       | (105.5                            | )          | (84.2 | ) | (64.3 | ) |
| Financing activities         |       | (27.6                             | )          | (12.2 | ) | (46.5 | ) |
|                              |            |                                   |            |  |  |  |  |  |  |  |

 

*OperatingActivities*

 

Net cash from operatingactivities for the years ended December 31, 2004, 2003 and 2002, werecomprised of the following (in millions):

 
| ** **                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income                                    |       | $                                 | 36.6       |   | $ | 49.5 |   | $ | 54.4 |   |
| Depreciation  and amortization                |       | 42.2                              |       | 31.1 |   | 30.1 |   |
| Losses in  equity investments                 |       | 3.4                               |       | 4.1 |   | 6.8 |   |
| Distributions  from equity investments        |       | 10.3                              |       | 5.3 |   | — |   |
| Gains on  sales of assets                     |       | (0.5                              | )          | — |   | — |   |
| Non-cash  portion of interest expense         |       | 0.1                               |       | 0.1 |   | 0.1 |   |
| Cash  provided by working capital and other   |       | 40.8                              |       | 6.0 |   | 15.0 |   |
| Net cash  provided by continuing operations   |       | 132.9                             |       | 96.1 |   | 106.4 |   |
| Net cash  provided by discontinued operations |       | —                            |       | — |   | 1.2 |   |
| Net cash from operating activities            |       | $                                 | 132.9      |   | $ | 96.1 |   | $ | 107.6 |   |

 

24

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For a discussion ofchanges in net income, depreciation and amortization and equity earnings, seeItem 7.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations.  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.  Cash provided by operating activitiesdecreased for the year ended December 31, 2003, compared with the yearended December 31, 2002, primarily due to the timing of cash disbursementsand cash receipts for working capital components and lower net income,partially offset by an increase of $5.3 million in distributions received fromour equity investment in MB Storage during the year ended December 31,2003, and lower losses in equity investments.

 

We believe that we willcontinue to have adequate liquidity to fund future recurring operating andinvesting activities.  Our primary cashrequirements consist of normal operating expenses, capital expenditures to sustainexisting operations and revenue generating expenditures, interest payments onour Senior Notes and on borrowings under our Parent Partnership’s creditfacilities and distributions to our Parent Partnership.  Short-term cash requirements, such asoperating expenses, quarterly distributions to our Parent Partnership and aportion of capital expenditures are expected to be funded through operatingcash flows.  Borrowings under our Parent Partnership’s credit facilitiesand the issuance by our Parent Partnership of additional equity and debtsecurities are expected to be used for our remaining cash requirements.  The timing of any debt or offerings by ourParent Partnership will depend on various factors, including prevailing marketconditions, interest rates and our Parent Partnership’s financial condition andcredit rating at the time.

 

At December 31, 2004and 2003, we had working capital deficits of $61.9 million and $12.3 million,respectively.  Cash generated fromoperations and from our Parent Partnership’s credit facilities and debt andequity offerings are our primary sources of liquidity. Working capital deficitscan occur primarily due to the timing of operating cash receipts fromcustomers, payments of cash distribution and the payment of normal operatingexpenses and capital expenditures.  Weare a wholly owned subsidiary of the Parent Partnership.  We expect that our Parent Partnership willmake capital contributions, loans or otherwise provide liquidity to us asneeded, but the Parent Partnership has no contractual obligation to do so.  We anticipate that the Parent Partnershipwill provide the necessary liquidity to protect its investment in us.  At December 31, 2004, our ParentPartnership had approximately $132.0 million in available borrowing capacityunder its revolving credit facility to cover any working capital needs, andexpects that cash flows from operating activities, the sale of additional debtor equity offerings will provide necessary liquidity to us.  For further discussion regarding our ParentPartnership’s sources of liquidity, please see Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Financial Condition andLiquidity in our Parent Partnership’s Annual Report on Form 10-K for the YearEnded December 31, 2004.

 

Net cash from operatingactivities for the years ended December 31, 2004, 2003 and 2002, includedinterest payments, net of amounts capitalized, of $27.3 million, $30.3 millionand $25.0 million, respectively. Excluding the effects of hedging activities and interest capitalized,during the year ended December 31, 2005, we expect interest payments onour Senior Notes to be approximately $27.4 million.  We expect to pay our interest payments withcash flows from operating activities.

 

*InvestingActivities*

 

Cash flows used ininvesting activities totaled $105.5 million for the year ended December 31,2004, and were comprised of $81.3 million of capital expenditures, $1.5 millionof cash contributions to Centennial, $21.4 million of cash contributions to MBStorage and $1.9 million for the acquisition of assets acquired during the yearended December 31, 2004, partially offset by $0.6 million in net cashproceeds from the sales of various assets. Cash flows used in investing activities totaled $84.2 million for theyear ended December 31, 2003, and were comprised of $58.4 million ofcapital expenditures, $20.0 million for our acquisition of an additional 16.7%interest in Centennial, $4.0 million of cash contributions to Centennial and$2.5 million of cash contributions to MB Storage.  These uses of cash were partially offset by$0.7 million received on matured cash investments.  Cash flows used in investing activitiestotaled $64.3 million for the year ended December 31, 2002, and werecomprised of $60.9 million of capital expenditures and $10.9 million of cashcontributions to Centennial, partially offset by $3.4

 

25

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million of cashproceeds from the sale of assets and $4.1 million of cash proceeds from thesale of TEPPCO Colorado.

 

*FinancingActivities*

 

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 financing activitiestotaled $12.2 million for the year ended December 31, 2003, and werecomprised of $106.5 million of distributions paid to our Parent Partnership and$53.6 million of repayments on our term loan, partially offset by $110.9million of proceeds from our term loan and $37.0 million of equitycontributions received from our Parent Partnership.  Cash flows used in financing activitiestotaled $46.5 million for the year ended December 31, 2002, and werecomprised of $94.9 million of distributions paid to our Parent Partnership and$150.0 million of repayments on our term loan, partially offset by $186.1million of proceeds from our term loan and $12.3 million of equitycontributions received from our Parent Partnership.

 

**Centennial entered into credit facilities totaling $150.0million, and as of December 31, 2004, $150.0 million was outstanding underthose credit facilities.  The proceedswere used to fund construction and conversion costs of its pipelinesystem.  We and Marathon have eachguaranteed one-half of Centennial’s debt, up to a maximum of $75.0 millioneach.**

** **

*ParentPartnership 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 agreements.  The interest rates charged by the ParentPartnership include the stated interest rate of the Parent Partnership, plus apremium to cover debt issuance costs. The interest rate is also decreased or increased to cover gains andlosses, respectively, on any interest rate swaps that the Parent Partnershipmay have in place on its respective credit agreements.  These credit facilities of the ParentPartnership are described below.

 

On April 6, 2001,our Parent Partnership entered into a $500.0 million revolving credit facilityincluding the issuance of letters of credit of up to $20.0 million (“Three YearFacility”).  The interest rate was based,at our Parent Partnership’s option, on either the lender’s base rate plus aspread, or LIBOR plus a spread in effect at the time of the borrowings.  The credit agreement for the Three YearFacility contained certain restrictive financial covenant ratios.  During the first quarter of 2003, our ParentPartnership repaid $182.0 million of the outstanding balance of the Three YearFacility with proceeds from the issuance of its 6.125% Senior Notes on January 30,2003.  On June 27, 2003, our ParentPartnership repaid the outstanding balance under the Three Year Facility withborrowings under a new credit facility and canceled the Three Year Facility.

 

On June 27, 2003,our Parent Partnership entered into a $550.0 million revolving credit facilitywith a three year term, including the issuance of letters of credit of up to$20.0 million (“Revolving Credit Facility”). The interest rate is based, at our Parent Partnership’s option, oneither the lender’s base rate plus a spread, or LIBOR plus a spread in effectat the time of the borrowings.  Thecredit agreement for the Revolving Credit Facility contains certain restrictivefinancial covenant ratios.  Our ParentPartnership borrowed $263.0 million under the Revolving Credit Facility andrepaid the outstanding balance of the Three Year Facility.  On October 21, 2004, our ParentPartnership amended the Revolving Credit Facility to (i) increase the facilitysize to $600.0 million, (ii) extend the term to October 21, 2009, (iii)remove certain restrictive covenants, (iv) increase the available amount forthe issuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing.  On December 31, 2004, $353.0 million wasoutstanding under the Revolving Credit Facility at a weighted average interestrate of 3.0%.

 

On January 30, 2003,our Parent Partnership issued $200.0 million principal amount of 6.125% SeniorNotes due 2013.  The 6.125% Senior Noteswere issued at a discount of $1.4 million and are being accreted to their facevalue over the term of the notes.  TheParent Partnership used $182.0 million of the proceeds from the offering toreduce the outstanding principal on the Three Year Facility to $250.0million.  The balance of the net proceedsreceived was used for general Parent Partnership purposes.  The Senior Notes may be redeemed at any timeat our

 

26

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Parent Partnership’soption with the payment of accrued interest and a make-whole premium determinedby discounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing the 6.125% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale and leaseback transactions.  However, the indenture does not limit theParent Partnership’s ability to incur additional indebtedness.

 

At December 31, 2004and 2003, we had intercompany notes payable to our Parent Partnership of $301.7million and $211.3 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, 2004, was 4.9%.  At December 31, 2004, accrued interestincludes $4.5 million due to our Parent Partnership.  For the years ended December 31, 2004and 2003, interest costs incurred on the note payable to our Parent Partnershiptotaled $12.5 million and $11.1 million, respectively.

 

*CashDistributions*

###  

For the years ended December 31,2004, 2003 and 2002, cash distributions paid to our Parent Partnership totaled$118.0 million, $106.5 million and $94.9 million, respectively.  On February 7, 2005, we paid a cashdistribution to our Parent Partnership of $29.7 million for the quarter ended December 31,2004.

 

*FutureCapital Needs and Commitments*

###  

We estimate that capitalexpenditures, excluding acquisitions, for 2005 will be approximately $59.6million (which includes $2.3 million of capitalized interest). We expect tospend approximately $22.7 million for revenue generating projects and facilityimprovements.  We expect to spendapproximately $20.0 million to sustain existing operations, includinglife-cycle replacements for equipment at various facilities and pipeline andtank replacements and $14.6 million for various system upgrade projects.  We continually review and evaluate potentialcapital improvements and expansions that would be complementary to our presentsystem.  These expenditures can varygreatly depending on the magnitude of our transactions.  We may finance capital expenditures throughinternally generated funds, debt or capital contributions from our ParentPartnership or any combination thereof.

 

Our debt repaymentobligations consist of payments for principal and interest on (i) our $180.0million 6.45% Senior Notes due January 15, 2008, (ii) $301.7 millionprincipal amount due to the Parent Partnership related to our share of theParent Partnership’s Revolving Credit Facility due in October 2009, 7.625%Senior Notes due in February 2012 and 6.125% Senior Notes due in February 2013,and (iii) our $210.0 million 7.51% Senior Notes due January 15, 2028.

 

We are also contingentlyliable as guarantor for the lesser of one-half or $75.0 million principal amount(plus interest) of the borrowings of Centennial.  In January 2003, we entered into apipeline capacity lease agreement with Centennial for a period of five yearsthat contains a minimum throughput requirement. During the year ended December 31, 2004, we exceeded the minimumthroughput requirements on the lease agreements.  On February 10, 2003, we acquired anadditional 16.7% interest in Centennial, bringing our ownership percentage to50%.  We are also contingently liable asguarantor for $500.0 million principal amount of 7.625% Senior Notes due 2012issued in February 2002 and for $200.0 million principal amount of 6.125%Senior Notes due 2013 issued in January 2003 by our Parent Partnership.

 

During the years ended December 31,2004, 2003 and 2002, we contributed $1.5 million, $4.0 million and $10.9million, respectively, to Centennial to cover operating needs and capitalexpenditures.  During the years ended December 31,2004 and 2003, we contributed $21.4 million to MB Storage, of which $16.5 millionwas used for its acquisition of storage and pipeline assets in April 2004,and $2.5 million, respectively, for capital expenditures.  During 2005, we may be required to contributecash to Centennial to cover capital expenditures, acquisitions or other operatingneeds and to MB Storage to cover significant capital expenditures or additionalacquisitions.

 

27

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*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 of theCentennial debt, the Parent Partnership debt and leases covering assetsutilized in several areas of our operations.

 

*ContractualObligations*

###  

The following tablesummarizes our debt repayment obligations and material contractual commitmentsas of December 31, 2004 (in millions):

 
| ** **                                  | ** ** | **Amount of Commitment Expiration  Per Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                       | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Note payable,  Parent Partnership           |       | $                                               | 301.7      |   | $ | — |   | $ | — |   | $ | 301.7 |   | $ | — |   |
| 6.45% Senior  Notes due 2008 (1)            |       | 180.0                                           |       | — |   | — |   | 180.0 |   | — |   |
| 7.51% Senior  Notes due 2028 (1)            |       | 210.0                                           |       | — |   | — |   | — |   | 210.0 |   |
| Debt  subtotal                              |       | 691.7                                           |       | — |   | — |   | 481.7 |   | 210.0 |   |
|                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Operating  leases                           |       | 59.6                                            |       | 12.1 |   | 21.2 |   | 9.9 |   | 16.4 |   |
| Capital  expenditure obligations (2)        |       | 1.6                                             |       | 1.6 |   | — |   | — |   | — |   |
| Other  liabilities and deferred credits (3) |       | 0.7                                             |       | — |   | 0.6 |   | 0.1 |   | — |   |
| Total                                       |       | $                                               | 753.6      |   | $ | 13.7 |   | $ | 21.8 |   | $ | 491.7 |   | $ | 226.4 |   |

###  

----

(1)          We entered into an interestrate swap agreement to hedge our exposure to changes in the fair value of our7.51% Senior Notes due 2028.  At December 31,2004, the 7.51% Senior Notes include an adjustment to increase the fair valueof the debt by $3.4 million related to this interest rate swap agreement.  At December 31, 2004, our 6.45% SeniorNotes include $0.1 million of unamortized debt discounts.  The fair value adjustments, the deferred gainadjustment and the unamortized debt discounts are excluded from this table.

 

(2)          Includes accruals for costsincurred but not yet paid relating to capital projects.

 

(3)          Excludes approximately $9.3million of long-term deferred revenue payments, which are being transferred toincome over the term of the respective revenue contracts.  The amount of commitment by year is our bestestimate of projected payments of these long-term liabilities.

 

We expect to repay the long-term, seniorunsecured obligations and note payable to our Parent Partnership through theissuance of additional long-term senior unsecured debt at the time the 2008 and2028 debts mature, with proceeds from the dispositions of assets, cash flowsfrom operations, contributions from our Parent Partnership or any combinationof the above items.

 

*Sourcesof Future Capital*

###  

We expect that our cashflow from operating activities will be adequate to fund cash distributions andcapital additions necessary to sustain existing operations.  However, expansionary capital projects andacquisitions may require additional capital contributions from our ParentPartnership.  The Parent Partnership hasfunded its capital commitments from operating cash flow, borrowings under bankcredit facilities, the issuance of long term debt in capital markets and thepublic offering of Limited Partner Units. We expect future capital needs would be similarly funded.

 

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.  At December 31, 2004, our ParentPartnership has $2.0 billion available under this shelf registration, subjectto customary marketing terms and conditions.

 

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Our Parent Partnership’ssenior unsecured debt is rated BBB by Standard and Poors (“S&P”) and Baa3by Moody’s Investors Service (“Moody’s”). Our senior unsecured debt is also rated BBB by S&P and Baa3 by Moody’s.  Both ratings are stable.  A rating reflects only the view of a ratingagency and is not a recommendation to buy, sell or hold any indebtedness.  Any rating can be revised upward or downwardor withdrawn at any time by a rating agency if it determines that thecircumstances warrant such a change.

 

# **OtherConsiderations**

# ** **

*Credit Risks*

 

Risks of non-payment andnonperformance by customers are a major consideration in our business.  Our credit procedures and policies do notfully eliminate customer credit risk. During the year ended December 31, 2004, we expensed a minimalamount of uncollectible receivables. During the years ended December 31,2003, and 2002, a few small to medium-sized customers filed for bankruptcyprotection, and as a result, we expensed approximately $0.8 million and $0.7million, respectively, of uncollectible receivables due to customerbankruptcies and other customer non-payments.

 

*Terrorist Threats*

 

On September 11,2001, the United States was the target of terrorist attacks of unprecedentedscale.  Since the September 11attacks, the United States government has issued warnings that energy assets,specifically the nation’s pipeline infrastructure, could be a future target ofterrorist organizations.  Thesedevelopments have subjected our operations to increased risks.  Any terrorist attack on our facilities,customers’ facilities and, in some cases, those of other pipelines, could havea material adverse effect on our business. We have increased security initiatives and are working with variousgovernmental agencies to minimize risks associated with additional terroristattacks.

 

*Environmental*

 

Our operations aresubject to federal, state and local laws and regulations governing thedischarge of materials into the environment. Failure to comply with these lawsand regulations may result in the assessment of administrative, civil andcriminal penalties, imposition of injunctions delaying or prohibiting certainactivities and the need to perform investigatory and remedial activities.  Although we believe our operations are inmaterial compliance with applicable environmental laws and regulations, risksof significant costs and liabilities are inherent in pipeline operations, andwe cannot assure you that significant costs and liabilities will not beincurred.  Moreover, it is possible thatother developments, such as increasingly strict environmental laws andregulations and enforcement policies thereunder, and claims for damages toproperty or persons resulting from our operations, could result in substantialcosts and liabilities to us.  We believethat changes in environmental laws and regulations will not have a materialadverse effect on our financial position, results of operations or cash flowsin the near term.

 

In 1994, the LDEQ issueda compliance order for environmental contamination at our Arcadia, Louisiana,facility.  In 1999, our Arcadia facilityand adjacent terminals were directed by the Remediation Services Division ofthe LDEQ to pursue remediation of this contamination.  At December 31, 2004, we have an accruedliability of $0.2 million for remediation costs at our Arcadia facility.  Effective in March 2004, we executed anaccess agreement with an adjacent industrial landowner who is locatedupgradient of the Arcadia facility.  Thisagreement enables the landowner to proceed with remediation activities at ourArcadia facility for which it has accepted shared responsibility.  We do not expect that the completion of theremediation program proposed to the LDEQ will have a future material adverseeffect on our financial position, results of operations or 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 a result of the release, we have enteredinto an Agreed Order with the State of Illinois, which required us to conductan 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.  We are in theprocess of negotiating a final settlement with the State of Illinois, and wedo not expect that compliance with the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

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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 was contained within astorm water retention pond located on the terminal property.  Six migratory waterfowl were affected by thejet fuel and were subsequently euthanized by or at the request of theUSFWS.  On October 1, 2004, theUSFWS served us with a Notice of Violation, alleging that we violated 16 USC703 of the Migratory Bird Treaty Act for the “take[ing] of migratory birds byillegal methods.”  On February 7,2005, we entered into a Memorandum of Understanding with the USFWS, settlingall aspects of this matter. The terms of settlement did not have a materialadverse effect on our financial position, results of operations or cash flows.

 

*On July 27, 2004, we received notice from the United States DOJ ofits intent to seek a civil penalty against us related to our November 21,2001, release of approximately 2,575 barrels of jet fuel from our 14-inchdiameter pipeline located in Orange County, Texas.  The DOJ, at the request of the EPA, is seekinga civil penalty against us for alleged violations of the CWA arising out ofthis release.  The maximum statutorypenalty calculated for this alleged violation of the CWA is $2.8 million.  We are in discussions with the DOJ regardingthis matter and have responded to its request for additional information.  We do not expect a civil penalty, if any, tohave a material adverse effect on our financial position, results of operationsor cash flows.*

 

At December 31,2004, we have an accrued liability of $1.4 million related to various sitesrequiring environmental remediation activities. We do not expect that the completion of remediation programs associatedwith these activities will have a future material adverse effect on ourfinancial position, results of operations or cash flows.

 

*RecentAccounting Pronouncements*

 

**See discussion ofnew accounting pronouncements in Note 2. Summary of Significant Accounting Policies - New AccountingPronouncements in the accompanying consolidated financial statements.**

** **

*DisclosuresAbout Effects of Transactions with Related Parties*

 

We have no employees andare managed by TEPPCO GP, a wholly owned subsidiary of our ParentPartnership.  The Parent Partnership ismanaged by the Company, which is an indirect wholly owned subsidiary ofDEFS.  Duke Energy holds an interest ofapproximately 70% in DEFS, and ConocoPhillips holds the remaining interest ofapproximately 30%.  See Item 10.Directors and Executive Officers of the Registrant and Item 13. CertainRelationships and Related Transactions for discussion regarding transactionsbetween us, our Parent Partnership, DEFS, Duke Energy and ConocoPhillips.

 

*SubsequentEvent*

 

On February 24,2005, Texas Eastern Products Pipeline Company, LLC, the General Partner of ourParent Partnership, was acquired by EPCO, Inc. (“EPCO”), a privately heldcompany controlled by Dan L. Duncan.  Theacquisition was valued at $1.1 billion. Additionally, in a separate transaction, EPCO and its affiliates haveagreed to purchase 2.5 million of our Parent Partnership’s Limited PartnerUnits, valued at approximately $100.0 million, from Duke Energy.  EPCO and its affiliates own the generalpartner of Enterprise Products Partners L.P. (“Enterprise”) and approximately145 million Enterprise common units.  Enterpriseis one of the largest publicly traded master limited partnerships.  The general partners of both our ParentPartnership and Enterprise will continue to operate independently and willmaintain separate boards of directors, management teams and offices.

 

# **Item**7A.*Quantitative and Qualitative Disclosures AboutMarket Risks*

# ** **

We may be exposed tomarket risk through changes in commodity prices and interest rates.  We do not have 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.

 

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We have utilized andexpect to continue to utilize interest rate swap agreements to hedge a portionof our fair value risks.  Interest rateswap agreements are used to manage the fixed interest rate mix of our debt portfolioand overall cost of borrowing.  Theinterest rate swap related to our fair value risk is intended to reduce ourexposure to changes in the fair value of our fixed rate Senior Notes.  The interest rate swap agreement involves theperiodic exchange of payments without the exchange of the notional amount uponwhich the payments are based. The related amount payable to or receivable fromcounterparties is included as an adjustment to accrued interest.

 

At December 31,2004, we had outstanding $180.0 million principal amount of 6.45% Senior Notesdue 2008 and $210.0 million principal amount of 7.51% Senior Notes due2028.  At December 31, 2004, theestimated fair values of the 6.45% Senior Notes and 7.51% Senior Notes wereapproximately $187.1 million and $225.6 million, respectively.

 

**In October 2001, we entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our fixed rate7.51% Senior Notes due 2028. We designated this swap agreement as a fair valuehedge.  The swap agreement has a notionalamount of $210.0 million and matures in January 2028 to match theprincipal and maturity of the Senior Notes. Under the swap agreement, we pay a floating rate of interest based on athree-month U.S. Dollar LIBOR rate, plus a spread, and receive a fixed rate ofinterest of 7.51%.  During the yearsended December 31, 2004, 2003 and 2002, we recognized reductions ininterest expense of $9.6 million, $10.0 million and $8.6 million, respectively,related to the difference between the fixed rate and the floating rate ofinterest on the interest rate swap. During the quarter ended December 31, 2004, we measured the hedgeeffectiveness of this interest rate swap and noted that no gain or loss fromineffectiveness was required to be recognized. The fair value of this interest rate swap was a gain of approximately$3.4 million at December 31, 2004, and a gain of approximately $2.3million at December 31, 2003. Utilizing the balance of our 7.51% Senior Notes outstanding at December 31,2004, and including the effects of hedging activities, assuming market interestrates increase 100 basis points, the potential annual increase in interestexpense is $2.1 million.**

** **

As of December 31,2004 and 2003, we had intercompany notes payable to our Parent Partnership of$301.7 million and $211.3 million, respectively, which represented borrowingsunder the Parent Partnership’s Revolving Credit Facility, 7.625% Senior Notesand 6.125% Senior Notes.  The weightedaverage interest rate on the note payable to the Parent Partnership at December 31,2004, was 4.9%.  At December 31,2004, accrued interest includes $4.5 million due to our ParentPartnership.  For the years ended December 31,2004 and 2003, interest costs incurred on the note payable to our ParentPartnership totaled $12.5 million and $11.1 million, respectively.

 

***Item 8***.           Financial Statements and Supplementary Data

*** ***

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

 

***Item 9***.           Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure

*** ***

None.

 

***Item 9A***.Controls and Procedures

*** ***

Theprincipal executive officer and principal financial officer of our GeneralPartner, after evaluating the effectiveness of our disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31,2004, have concluded that, as of such date, our disclosure controls andprocedures are adequate and effective to ensure that material informationrelating to us and our consolidated subsidiaries would be made known to them byothers within those entities.

 

31

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*Changesin Internal Control over Financial Reporting*

 

There hasbeen no change in our internal control over financial reporting during thefourth quarter of 2004 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.  As a result, no corrective actions were requiredor undertaken.

 

***Item 9B***. Other Information

*** ***

None.

 

**PART III**

** **

***Item 10***.    Directors and Executive Officers of the Registrant

*** ***

We do not have employees,officers or directors, as is commonly the case with publicly tradedpartnerships.  Our operations and activitiesare managed by the General Partner, an indirect wholly owned subsidiary of ourParent Partnership.  All officers anddirectors of the General Partner are appointed annually by the ParentPartnership by action of the board of directors of the Company.  The directors of the General Partner, TEPPCOGP, are Barry R. Pearl, James C. Ruth and Charles H. Leonard.  The Executive Officers of the General Partnerare also Executive Officers of the Company. Information concerning the Executive Officers of the General Partner andthe Company is contained in Item 10 of the Parent Partnership’s Annual Reporton Form 10-K for the Year Ended December 31, 2004 (the “Parent PartnershipForm 10-K”), and is incorporated by reference in this Report.

 

***Item 11***.    Executive Compensation

*** ***

We do not have anyemployees, officers or directors, and the General Partner manages and operatesour business. The Executive Officers of the General Partner are employees ofthe Company.  Certain employees of the Companymay devote all or a portion of their time to us, and we reimburse the Companyfor the services of these persons. The information contained in Item 11 of theParent Partnership Form 10-K is incorporated by reference in this Report.

 

***Item 12***.    Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters

*** ***

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 identifying security ownership ofthe Parent Partnership is contained in Item 12 of the Parent Partnership Form10-K and is incorporated by reference in this Report.

 

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***.    Certain Relationships and Related Transactions

*** ***

# **OurManagement**

# ** **

We have no employees, andwe are managed by TEPPCO GP, a wholly owned subsidiary of our ParentPartnership.  The Parent Partnership ismanaged by the Company, which is an indirect wholly owned subsidiary ofDEFS.  Duke Energy holds an interest ofapproximately 70% in DEFS, and ConocoPhillips holds the remaining interest ofapproximately 30%.  According to thePartnership Agreement, the General Partner and the Company are entitled toreimbursement of all direct and indirect expenses related to our businessactivities.

 

32

----

 

For the years ended December 31,2004, 2003 and 2002, we incurred direct expenses of $45.5 million, $48.1million and $46.6 million, respectively, which were charged to us by DEFS.  Substantially all of these costs were relatedto payroll and payroll related expenses. For the years ended December 31, 2004, 2003 and 2002, expenses foradministrative services and overhead allocated to us by the Company (includingDuke Energy and its affiliates) were $0.4 million, $1.0 million and $0.8million, respectively.

 

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.  In addition, we make cash payments on behalfof the Parent Partnership for various expenses. At December 31, 2004 and 2003, we had net payables of $63.0 millionand $8.9 million, respectively, to the Parent Partnership related to theseaffiliated activities.

 

# **Transactionswith DEFS**

# ** **

Effective with thepurchase of the fractionation facilities on March 31, 1998, TEPPCOColorado and DEFS entered into a 20-year Fractionation Agreement, under whichTEPPCO Colorado received a variable fee for all fractionated volumes deliveredto DEFS.  Revenues recognized from thefractionation facilities totaled $3.1 million for the year ended December 31,2002.  TEPPCO Colorado and DEFS alsoentered into an Operation and Maintenance Agreement, whereby DEFS operated andmaintained the fractionation facilities for TEPPCO Colorado.  For these services, TEPPCO Colorado paid DEFSa set volumetric rate for all fractionated volumes delivered to DEFS.  Expenses related to the Operation andMaintenance Agreement totaled $0.4 million for the year ended December 31,2002.  On May 31, 2002, TEPPCO Coloradowas transferred to TEPPCO Midstream.

 

Effective May 2001, weentered into an agreement with an affiliate of DEFS to commit to it soleutilization of our Providence terminal. We operate the terminal and provide propane loading services to anaffiliate of DEFS.  The agreement wasrenegotiated in May 2004.  During theyears ended December 31, 2004, 2003 and 2002, revenues of $4.3 million,$3.2 million and $2.3 million, respectively, from an affiliate of DEFS wererecognized pursuant to this agreement.

 

At December 31, 2004and 2003, we had receivables from DEFS of $1.1 million and $0.2 million,respectively, related to revenues recognized from DEFS.  At December 31, 2004 and 2003, we hadpayables to DEFS of $0.7 million and $0.8 million, respectively, related toadministrative services provided by DEFS.

 

 The Parent Partnership contracts with BisonInsurance Company Limited (“Bison”), a wholly owned subsidiary of Duke Energy,for a majority of our insurance coverage, including property, liability, autoand directors and officers insurance coverage. For the years ended December 31, 2004, 2003 and 2002, we incurredinsurance expense related to premiums paid to Bison of $2.8 million, $2.6million and $1.9 million, respectively. At December 31, 2004 and 2003, we had insurance reimbursementreceivables due from Bison of $4.5 million and $4.2 million, respectively.

 

# **Interestsof Duke Energy in the Parent Partnership**

# ** **

In connection with theformation of our Parent Partnership, the Company received 2,500,000 DeferredParticipation Interests (“DPIs”). Effective April 1, 1994, the DPIs beganparticipating in distributions of cash and allocations of profit and loss in amanner identical to the Parent Partnership’s Limited Partner Units and aretreated as Limited Partner Units.  TheseLimited Partner Units were assigned to Duke Energy when ownership of theCompany was transferred from Duke Energy to DEFS in 2000.  Pursuant to our Parent Partnership’sPartnership Agreement, the Parent Partnership has registered the resale by DukeEnergy of these Limited Partner Units with the SEC.  As of December 31, 2004, none of theLimited Partner Units had been sold by Duke Energy.

 

On February 24,2005, the General Partner of our Parent Partnership was acquired by EPCO, aprivately held company controlled by Dan L. Duncan.  Additionally, in a separate transaction, EPCOand its affiliates have agreed to purchase the 2.5 million Units from DukeEnergy, valued at approximately $100.0 million (see Note 20.  Subsequent Event).

 

33

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***Item 14***.    Principal Accounting Fees and Services

*** ***

Our Parent Partnership’saudit engagement with KPMG includes the fees for the professional auditservices rendered to us by KPMG as we do not have a separate audit engagementwith KPMG.  We are allocated a portion ofthe audit services expense (see Note 2. Summary of Significant AccountingPolicies).

 

The following tabledescribes fees for professional audit 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 31,2004 and 2003, and for fees billed for other services rendered by KPMG duringthose periods (in thousands): 

 
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| **Type of Fee**         | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| Audit Fees  (1)         |       | $                                 | 2,079      |   | $ | 953 |   |
| Audit  Related Fees (2) |       | 21                                |       | 58 |   |
| Tax Fees (3)            |       | 88                                |       | 183 |   |
| All Other  Fees (4)     |       | —                            |       | 656 |   |
| Total                   |       | $                                 | 2,188      |   | $ | 1,850 |   |

 

----

(1)          Audit fees include fees forthe audits of the consolidated financial statements as well as for the ParentPartnership’s audit of internal control over financial reporting.

 

(2)          Audit related fees consisted principally offees for audits of financial statements for certain employee benefit plans andcertain internal control documentation assistance.

 

(3)          Tax fees consisted of fees for sales and usetax consultation and tax compliance services.

 

(4)          All Other Fees include the aggregate fees ourParent Partnership paid during the year ended December 31, 2003, for productsand services provided by KPMG, other than the services reported above.  The majority of the other fees are fees in2003 for litigation support services related to the Parent Partnership’s legalproceedings.

 

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

## ** **

Pursuant to its charter,the Audit Committee of the Parent Partnership’s Board of Directors isresponsible for reviewing and approving, in advance, any audit and anypermissible non-audit engagement or relationship between the Parent Partnershipand its independent auditors.  KPMG’sengagement to conduct our audit was approved by the Parent Partnership’s AuditCommittee on April 26, 2004. Additionally, all permissible non-auditengagements with KPMG and the Parent Partnership have been reviewed andapproved by the Parent Partnership’s Audit Committee, pursuant to pre-approvalpolicies and procedures established by the Parent Partnership’s AuditCommittee.

 

**PART IV**

** **

***Item 15***. Exhibits, Financial Statement Schedules

*** ***

(a)          The followingdocuments are filed as a part of this Report:

 

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

 

(2)                                  FinancialStatement Schedules: None.

 

(3)                                  Exhibits.

 

34

----

 

 
| **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).                                                                                                                                                                                                                                                                                                                                   |

 

35

----

 
| 10.6+  |   | 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).                                                                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7+  |   | 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).                                                                                                                            |
| 10.8+  |   | 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).                                                                                                                                                    |
| 10.9+  |   | 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).                                          |
| 10.10+ |   | 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).                                                                                                                                                                                                                   |
| 10.11  |   | 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).                         |
| 10.12  |   | 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).                                                                                                                                                                                                         |
| 10.13+ |   | 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).                                                                                                                     |
| 10.14+ |   | 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).                                                                                                                                                                                             |
| 10.15  |   | 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). |

 

36

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| 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 13, 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).                 |

 

37

----

 
| 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 10.41 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 10.42 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).                                                                                                      |
| 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.                                                                                                                                                                                                                                                                                                                        |

 

----

* Filedherewith.

**Furnished herewith pursuant to Item 601(b)-(32) of Regulation S-K.

+ A management contract or compensation planor arrangement.

 

**SIGNATURES**

 

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

 
|                       | TE  Products Pipeline Company, Limited Partnership |                        |
|----------------------------|----------------------------------------------------|-----------------------------|
|                       | (Registrant)                                       |
|                       | (A Delaware Limited Partnership)                   |
|                       |                                               |
|                       | By:                                                | TEPPCO  GP, Inc.,           |
|                       |                                               | as  General Partner         |
|                       |                                               |
|                       | By:                                                | /s/  BARRY R. PEARL         |   |
|                       |                                               | Barry R. Pearl,             |
|                       |                                               | President,  Chief Executive |
|                       |                                               | Officer and Director        |
|                       |                                               |                        |
|                       | By:                                                | /s/  CHARLES H. LEONARD     |   |
|                       | Charles H. Leonard,                                |                        |
|                       | Senior Vice President,  Chief Financial            |                        |
|                       | Officer and Director                               |                        |
|                       |                                               |                        |
| Dated:  March 2, 2005 |                                               |                        |
|                            |                                                    |                             |  |  |  |  |  |

 

38

----

 

**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, 2004 and 2003                                                  |   |
|                                                                                                               |   |
| Consolidated Statements of Income for the  years ended December 31, 2004, 2003 and 2002                       |   |
|                                                                                                               |   |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2004, 2003 and 2002                   |   |
|                                                                                                               |   |
| Consolidated Statements of Partners’  Capital for the years ended December 31, 2004,  2003 and 2002 |   |
|                                                                                                               |   |
| Notes to Consolidated Financial Statements                                                                         |   |

 

F-1

----

 

**REPORT OF INDEPENDENT**REGISTERED PUBLIC ACCOUNTING FIRM

** **

To the Partners of

TE Products Pipeline Company, Limited Partnership:

 

We have audited theaccompanying consolidated balance sheets of TE Products Pipeline Company,Limited Partnership as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, cash flows and partners’ capital for each ofthe years in the three-year period ended December 31, 2004. 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, 2004 and 2003, and the results ofits operations and its cash flows for each of the years in the three-yearperiod ended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.

 

 

KPMG LLP

 

Houston, Texas

February 24, 2005

 

F-2

----

 

**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
|                                                                                                                 |   | **December 31,** |    |
|----------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                                                 |   | **2004**              |    | **2003** |   |
| **ASSETS**                                                                                                           |   |                  |    |   |   |
| Current  assets:                                                                                                     |   |                  |    |   |   |
| Cash and  cash equivalents                                                                                           |   | $                     | —  |   | $ | 188 |   |
| Accounts  receivable, trade (net of allowance for doubtful accounts of $56 and $374)                                 |   | 21,090                |    | 25,377 |   |
| Accounts  receivable, related parties                                                                                |   | 3,455                 |    | 154 |   |
| Inventories                                                                                                          |   | 10,093                |    | 11,186 |   |
| Other                                                                                                                |   | 12,143                |    | 10,230 |   |
| Total  current assets                                                                                                |   | 46,781                |    | 47,135 |   |
| Property,  plant and equipment, at cost (net of accumulated depreciation and  amortization of $311,197 and $279,395) |   | 722,334               |    | 682,385 |   |
| Equity  investments                                                                                                  |   | 169,873               |    | 155,861 |   |
| Other assets                                                                                                         |   | 16,156                |    | 15,267 |   |
| Total assets                                                                                                         |   | $                     | 955,144 |   | $ | 900,648 |   |
|                                                                                                                 |   |                  |    |   |   |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                                                                          |   |                  |    |   |   |
| ** **                                                                                                           |   |                  |    |   |   |
| Current  liabilities:                                                                                                |   |                  |    |   |   |
| Accounts  payable and accrued liabilities                                                                            |   | $                     | 10,211  |   | $ | 9,710 |   |
| Accounts  payable, related parties                                                                                   |   | 66,451                |    | 12,277 |   |
| Accrued  interest                                                                                                    |   | 17,063                |    | 15,877 |   |
| Other accrued  taxes                                                                                                 |   | 5,605                 |    | 5,732 |   |
| Other                                                                                                                |   | 9,339                 |    | 15,791 |   |
| Total  current liabilities                                                                                           |   | 108,669               |    | 59,387 |   |
| Senior Notes                                                                                                         |   | 393,317               |    | 392,164 |   |
| Note  payable, Parent Partnership                                                                                    |   | 301,686               |    | 211,314 |   |
| Other  liabilities and deferred credits                                                                              |   | 9,980                 |    | 14,995 |   |
| Commitments  and contingencies                                                                                       |   |                  |    |   |   |
| Partners’  capital:                                                                                             |   |                  |    |   |   |
| General  partner’s interest                                                                                     |   | 2                     |    | 2 |   |
| Limited  partner’s interest                                                                                     |   | 141,490               |    | 222,786 |   |
| Total  partners’ capital                                                                                        |   | 141,492               |    | 222,788 |   |
| Total  liabilities and partners’ capital                                                                        |   | $                     | 955,144 |   | $ | 900,648 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

F-3

----

 

**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(in thousands**)

 
| ** **                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating  revenues:                    |       |                              |       |   |   |   |   |
| Transportation  – Refined products |       | $                                 | 148,166    |   | $ | 138,926 |   | $ | 123,476 |   |
| Transportation  – LPGs             |       | 87,050                            |       | 91,787 |   | 74,577 |   |
| Mont Belvieu  operations                |       | —                            |       | — |   | 15,238 |   |
| Other                                   |       | 39,542                            |       | 31,254 |   | 30,247 |   |
| Total  operating revenues               |       | 274,758                           |       | 261,967 |   | 243,538 |   |
|                                    |       |                              |       |   |   |   |   |
| Costs and  expenses:                    |       |                              |       |   |   |   |   |
| Operating,  general and administrative  |       | 124,496                           |       | 112,683 |   | 90,034 |   |
| Operating  fuel and power               |       | 31,588                            |       | 28,792 |   | 28,998 |   |
| Depreciation  and amortization          |       | 42,207                            |       | 31,066 |   | 30,116 |   |
| Taxes –  other than income taxes   |       | 8,910                             |       | 8,866 |   | 11,292 |   |
| Gains on  sales of assets               |       | (526                              | )          | — |   | — |   |
| Total costs  and expenses               |       | 206,675                           |       | 181,407 |   | 160,440 |   |
|                                    |       |                              |       |   |   |   |   |
| Operating  income                       |       | 68,083                            |       | 80,560 |   | 83,098 |   |
|                                    |       |                              |       |   |   |   |   |
| Interest  expense – net            |       | (28,843                           | )          | (27,219 | ) | (22,742 | ) |
| Equity  losses                          |       | (3,402                            | )          | (4,086 | ) | (6,815 | ) |
| Other income  – net                |       | 787                               |       | 226 |   | 832 |   |
| Income  before discontinued operations  |       | 36,625                            |       | 49,481 |   | 54,373 |   |
|                                    |       |                              |       |   |   |   |   |
| Income from  discontinued operations    |       | —                            |       | — |   | 912 |   |
| Net income                              |       | $                                 | 36,625     |   | $ | 49,481 |   | $ | 55,285 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

F-4

----

 

**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                                                 | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                 | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows  from operating activities:                                                                     |       |                              |       |   |   |   |   |
| Net income  from continuing operations                                                                     |       | $                                 | 36,625     |   | $ | 49,481 |   | $ | 54,373 |   |
| Adjustments  to reconcile net income from continuing operations to cash provided by  operating activities: |       |                              |       |   |   |   |   |
| Depreciation  and amortization                                                                             |       | 42,207                            |       | 31,066 |   | 30,116 |   |
| Losses in  equity investments, net of distributions                                                        |       | 13,715                            |       | 9,349 |   | 6,815 |   |
| Non-cash  portion of interest expense                                                                      |       | 30                                |       | 31 |   | 31 |   |
| Gains on  sales of assets                                                                                  |       | (526                              | )          | — |   | — |   |
| Decrease  (increase) in accounts receivable                                                                |       | 4,287                             |       | (1,334 | ) | (3,402 | ) |
| Decrease  (increase) in inventories                                                                        |       | 1,093                             |       | 552 |   | (3,182 | ) |
| (Increase)  decrease in other current assets                                                               |       | (1,913                            | )          | 959 |   | (369 | ) |
| (Decrease)  increase in accounts payable and accrued expenses                                              |       | (5,013                            | )          | (9,689 | ) | 7,265 |   |
| Other                                                                                                      |       | 42,389                            |       | 15,673 |   | 14,775 |   |
| Net cash  provided by continuing operations                                                                |       | 132,894                           |       | 96,088 |   | 106,422 |   |
| Net cash  provided by discontinued operations                                                              |       | —                            |       | — |   | 1,178 |   |
| Net cash  provided by operating activities                                                                 |       | 132,894                           |       | 96,088 |   | 107,600 |   |
|                                                                                                       |       |                              |       |   |   |   |   |
| Cash flows  from investing activities:                                                                     |       |                              |       |   |   |   |   |
| Proceeds  from cash investments                                                                            |       | —                            |       | 750 |   | — |   |
| Proceeds  from sales of assets                                                                             |       | 594                               |       | — |   | 3,380 |   |
| Proceeds  from sale of TEPPCO Colorado, LLC                                                                |       | —                            |       | — |   | 4,096 |   |
| Purchase of  assets                                                                                        |       | (1,962                            | )          | — |   | — |   |
| Investment  in Centennial Pipeline LLC                                                                     |       | (1,500                            | )          | (4,000 | ) | (10,882 | ) |
| Acquisition  of additional interest in Centennial Pipeline LLC                                             |       | —                            |       | (20,000 | ) | — |   |
| Investment  in Mont Belvieu Storage Partners, L.P.                                                         |       | (21,358                           | )          | (2,533 | ) | — |   |
| Capital  expenditures                                                                                      |       | (81,261                           | )          | (58,391 | ) | (60,898 | ) |
| Net cash  used in investing activities                                                                     |       | (105,487                          | )          | (84,174 | ) | (64,304 | ) |
|                                                                                                       |       |                              |       |   |   |   |   |
| Cash flows  from financing activities:                                                                     |       |                              |       |   |   |   |   |
| Proceeds  from note payable, Parent Partnership                                                            |       | 126,383                           |       | 110,859 |   | 186,099 |   |
| Repayment of  note payable, Parent Partnership                                                             |       | (36,011                           | )          | (53,638 | ) | (149,906 | ) |
| Equity  contribution – Parent Partnership                                                             |       | —                            |       | 37,033 |   | 12,263 |   |
| Distributions  paid                                                                                        |       | (117,967                          | )          | (106,465 | ) | (94,921 | ) |
| Net cash  used in financing activities                                                                     |       | (27,595                           | )          | (12,211 | ) | (46,465 | ) |
|                                                                                                       |       |                              |       |   |   |   |   |
| Net decrease  in cash and cash equivalents                                                                 |       | (188                              | )          | (297 | ) | (3,169 | ) |
|                                                                                                       |       |                              |       |   |   |   |   |
| Cash and  cash equivalents at beginning of period                                                          |       | 188                               |       | 485 |   | 3,654 |   |
| Cash and  cash equivalents at end of period                                                                |       | $                                 | —     |   | $ | 188 |   | $ | 485 |   |
|                                                                                                       |       |                              |       |   |   |   |   |
| **Non-cash  investing activities:**                                                                        |       |                              |       |   |   |   |   |
| Net assets  transferred to Mont Belvieu Storage Partners, L.P.                                             |       | $                                 | —     |   | $ | 61,042 |   | $ | — |   |
|                                                                                                       |       |                              |       |   |   |   |   |
| **Supplemental  disclosure of cash flows:**                                                                |       |                              |       |   |   |   |   |
| Cash paid  for interest (net of amounts capitalized)                                                       |       | $                                 | 27,338     |   | $ | 30,286 |   | $ | 24,975 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

F-5

----

 

**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

 

**CONSOLIDATEDSTATEMENTS OF PARTNERS’ CAPITAL**

**(in thousands)**

 
| ** **                                        | ** ** | **General  Partner’s  Interest** | ** ** | **Limited  Partner’s  Interest** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|-----------|------------|
| Partners’  capital at December 31, 2001 |       | $                                     | 3          |                                  | $          | 270,109   |       | $ | 270,112 |   |
| 2002 net  income allocation                       |       | 1                                     |       | 55,284                                |       | 55,285    |       |
| 2002 cash  distributions                          |       | (2                                    | )          | (94,919                               | )          | (94,921   | )          |
| Capital  contributions                            |       | —                                |       | 9,816                                 |       | 9,816     |       |
| Option  exercises                                 |       | —                                |       | 2,447                                 |       | 2,447     |       |
| Partners’  capital at December 31, 2002 |       | 2                                     |       | 242,737                               |       | 242,739   |       |
| 2003 net  income allocation                       |       | 1                                     |       | 49,480                                |       | 49,481    |       |
| 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 |       | 2                                     |       | 222,786                               |       | 222,788   |       |
| 2004 net  income allocation                       |       | 1                                     |       | 36,624                                |       | 36,625    |       |
| 2004 cash  distributions                          |       | (1                                    | )          | (117,966                              | )          | (117,967  | )          |
| Other                                             |       | —                                |       | 46                                    |       | 46        |       |
| Partners’  capital at December 31, 2004 |       | $                                     | 2          |                                  | $          | 141,490   |       | $ | 141,492 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

F-6

----

 

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

** **

**NOTES TO CONSOLIDATED 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 “Parent Partnership”) owns a 99.999% interestin us as the sole limited partner. TEPPCO GP, Inc. (“TEPPCO GP” or “General Partner”), a subsidiary of theParent Partnership, holds a 0.001% General Partner interest in us.  Texas Eastern Products Pipeline Company, LLC(the “Company”), a Delaware limited liability company, serves as the generalpartner of our Parent Partnership.  TheCompany is an indirect wholly owned subsidiary of Duke Energy Field Services,LLC (“DEFS”), a joint venture between Duke Energy Corporation (“Duke Energy”)and ConocoPhillips.  Duke Energy holds aninterest of approximately 70% in DEFS, and ConocoPhillips holds the remaininginterest of approximately 30%.  TEPPCOGP, as general partner, performs all of the management and operating functionsrequired for us according to the Agreement of Limited Partnership of TEProducts Pipeline Company, Limited Partnership (the “Partnership Agreement”).  We reimburse our General Partner and theCompany for all reasonable direct and indirect expenses that they incur inmanaging us.

 

As used in this Report, “we,”“us,”  and “our” means TE ProductsPipeline Company, Limited 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 exchange for this contribution, theCompany’s interest as general partner of the Parent Partnership was increasedto 2%.  The increased percentage is theeconomic equivalent of the aggregate interest that the Company had prior to therestructuring through its combined interests in the Parent Partnership andus.  As a result, the Parent Partnershipholds a 99.999% limited partner interest in us and TEPPCO GP holds a 0.001%general partner interest. This reorganization was undertaken to simplify ourrequired financial reporting when we issue guarantees of our Parent Partnership’sdebt.

 

At December 31, 2004and 2003, we had working capital deficits of $61.9 million and $12.3 million,respectively.  Cash generated fromoperations and from our Parent Partnership’s credit facilities and debt andequity offerings are our primary sources of liquidity.  Working capital deficits can occur primarilydue to the timing of operating cash receipts from customers, payment of cashdistributions and the payment of normal operating expenses and capitalexpenditures.  Our Parent Partnership hashistorically made capital contributions, loans or otherwise provided liquidityto us as needed, but the Parent Partnership has no contractual obligation to doso.  At December 31, 2004, ourParent Partnership had approximately $132.0 million in available borrowingcapacity under its revolving credit facility and has agreed to cover anyworking capital needs, if required.

 

***NOTE 2.***                                                 SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

*** ***

We adhere to thefollowing significant accounting policies in the preparation of ourconsolidated financial statements.

 

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

## ** **

The financial statementsinclude our accounts and the accounts of TEPPCO Colorado, LLC (“TEPPCO Colorado”)on a consolidated basis until its sale in May 2002.  All amounts relating to TEPPCO Colorado havebeen reclassified to reflect TEPPCO Colorado as discontinued operations for allperiods presented (see Note 18. Discontinued Operations).  We haveeliminated all significant intercompany items in consolidation.  We have reclassified certain amounts fromprior periods to conform with the current presentation.

 

F-7

----

 

## **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 transportation operations, including rates charged tocustomers, are subject to regulations prescribed by the Federal EnergyRegulatory Commission (“FERC”).  We referto refined products, LPGs and petrochemicals in this Report, collectively, as “petroleumproducts” or “products.”

 

Effective January 1,2002, our Parent Partnership realigned its business segments to reflect itsentry into the natural gas gathering business and the expanded scope of itsnatural gas liquids (“NGLs”) operations. As part of this realignment, on May 31, 2002, we transferred ourinvestment in TEPPCO Colorado, which fractionates NGLs, to TEPPCO MidstreamCompanies, L.P. (“TEPPCO Midstream”).  Asa result of the transfer, the results of operations of TEPPCO Colorado for theperiods presented are reflected as discontinued operations (see Note 18.Discontinued Operations).  We havereclassified prior periods presented to reflect the current presentation.

 

## **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 recognizedas products are delivered to customers. Storage revenues are recognized uponreceipt of products into storage and upon performance of storage services.Terminaling revenues are recognized as products are out-loaded. Revenues fromthe sale of product inventory 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 valueof cash and cash equivalents approximates fair value because of the short-termnature 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 regularly and an allowance is established oradjusted, as necessary, using the specific identification method.  The following table presents the activity ofour allowance for doubtful accounts for the years ended December 31, 2004,2003 and 2002 (in thousands):

 
| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance at  beginning of period |       | $                                 | 374        |   | $ | 287 |   | $ | — |   |
| Charges to  costs and expenses  |       | (10                               | )          | 788 |   | 287 |   |
| Deductions  and other           |       | (308                              | )          | (701 | ) | — |   |
| Balance at  end of period       |       | $                                 | 56         |   | $ | 374 |   | $ | 287 |   |

 

F-8

----

 

## **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 payables arising from thesetransactions are usually satisfied with products rather than cash. The netbalances of exchange receivables and payables are valued at weighted averagecost and included in inventories. Inventories of materials and supplies, used for ongoing replacements andexpansions, are carried at the lower of fair value or cost.

 

## **Property, Plant andEquipment**

## ** **

We record property, plantand equipment at its acquisition cost. Additions to property, plant and equipment, including major replacementsor 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.  Depreciation expense is computed on thestraight-line method using rates based upon expected useful lives of variousclasses 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 are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of the carrying amount of assets to be held and used ismeasured by a comparison of the carrying amount of the asset to future net cashflows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell.

 

## **Asset RetirementObligations**

## ** **

InJune 2001, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 143, *Accounting for Asset Retirement Obligations*.  SFAS 143 requires us to record the fair valueof an asset retirement obligation as a liability in the period in which weincur a legal obligation for the retirement of tangible long-lived assets.  A corresponding asset is also recorded anddepreciated over the life of the asset. After the initial measurement of the asset retirement obligation, theliability will be adjusted at the end of each reporting period to reflectchanges in the estimated future cash flows underlying 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.

 

Our assets consistprimarily of an interstate trunk pipeline system and a series of storagefacilities that originate along the upper Texas Gulf Coast and extend throughthe Midwest and northeastern United States. We transport refined products, LPGs and petrochemicals through thepipeline system.  These products areprimarily received in the south end of the system and stored and/or transportedto various points along the system per customer nominations.

 

We have completed ourassessment of SFAS 143, and we have determined that we are obligated bycontractual or regulatory requirements to remove certain facilities or performother remediation upon retirement of our assets.  However, we are not able to reasonablydetermine the fair value of the asset retirement obligations for our trunk andinterstate pipelines and our surface facilities, since future dismantlement andremoval dates are indeterminate.  It isimpossible to predict when demand for transportation of the related productswill cease.  Our right-of-way agreementsallow us to maintain the right-of-way rather than remove the pipe.  In addition, we can evaluate our trunkpipelines for alternative uses, which can be and have been found.

 

F-9

----

 

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 143did not have an effect on our financial position, results of operations or cashflows.

 

## **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 5.12%, 5.69% and 5.47%for the years ended December 31, 2004, 2003 and 2002, respectively.  During the years ended December 31,2004, 2003 and 2002, the amount of interest capitalized was $1.7 million, $2.3million and $3.3 million, respectively.

 

**IntangibleAssets**

 

Intangible assets at December 31,2004, consist of transportation agreements with customers and are beingamortized using a straight line method over the term of the related agreement(approximately 20 years).

 

## **EnvironmentalExpenditures**

## ** **

We accrue forenvironmental costs that relate to existing conditions caused by pastoperations.  Environmental costs includeinitial site surveys and environmental studies of potentially contaminatedsites, costs for remediation and restoration of sites determined to becontaminated and ongoing monitoring costs, as well as damages and other costs,when estimable.  We monitor the balanceof accrued undiscounted environmental liabilities on a regular basis.  We record liabilities for environmental costsat a specific site when our liability for such costs is probable and areasonable estimate of the associated costs can be made.  Adjustments to initial estimates arerecorded, from time to time, to reflect changing circumstances and estimatesbased upon additional information developed in subsequent periods.  Estimates of our ultimate liabilitiesassociated with environmental costs are particularly difficult to make withcertainty due to the number of variables involved, including the early stage ofinvestigation at certain sites, the lengthy time frames required to completeremediation alternatives available and the evolving nature of environmentallaws and regulations.

 

The following tablepresents the activity of our environmental reserve for the years ended December 31,2004, 2003 and 2002 (in thousands):

 
| ** **                      | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance at  beginning of period |       | $                                 | 1,693      |   | $ | 2,051 |   | $ | 1,222 |   |
| Charges to  expense             |       | 745                               |       | 1,490 |   | 2,901 |   |
| Deductions  and other           |       | (1,010                            | )          | (1,848 | ) | (2,072 | ) |
| Balance at  end of period       |       | $                                 | 1,428      |   | $ | 1,693 |   | $ | 2,051 |   |

 

## **Operating, General andAdministrative Expenses**

## ** **

The Parent Partnership allocates operating,general and administrative expenses to us for legal, insurance, financial,communication and other administrative services based upon the estimated levelof effort devoted to our various operations. We believe that the method for allocating corporate operating, generaland administrative expenses is reasonable. Total operating, general and administrative expenses reflected in theaccompanying consolidated financial statements are representative of the totaloperating, general and administrative costs we would have incurred as aseparate entity.

 

F-10

----

## ** **

## **Income Taxes**

## ** **

We are a limited partnership.  As such, we are not a taxable entity forfederal and state income tax purposes and do not directly pay federal and stateincome tax.  Our taxable income or loss,which may vary substantially from the net income or net loss we report in ourconsolidated statements of income, is includable in the federal and stateincome tax returns of each unitholder. Accordingly, no recognition has been given to federal and state income taxesfor our operations.  The aggregate differencein the basis of our net assets for financial and tax reporting purposes cannotbe readily determined as we do not have access to information about eachunitholders’ tax attributes in the Partnership.

 

## **Comprehensive Income**

## ** **

SFAS No. 130, *Reporting ComprehensiveIncome* requires certain items such as foreign currency translationadjustments, minimum pension liability adjustments and unrealized gains andlosses on certain investments to be reported in a financial statement.  For the years ended December 31, 2004, 2003,and 2002, our comprehensive income equaled our reported net income.

 

## **Use of Derivatives**

## ** **

We account for derivative financial instruments inaccordance with SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities,*and SFAS No. 138, *Accounting for Certain Derivative Instruments and Certain HedgingActivities, an amendment of FASB Statement No. 133. *These statements establishaccounting and reporting standards requiring that derivative instruments(including certain derivative instruments embedded in other contracts) berecorded on the balance sheet at fair value as either assets orliabilities.  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 instrument consists of an interest rateswap.  For all hedging relationships, weformally document at inception the hedging relationship and its risk-managementobjective and strategy for undertaking the hedge, the hedging instrument, theitem, the nature of the risk being hedged, how the hedging instrument’seffectiveness in offsetting the hedged risk will be assessed and a descriptionof the method of measuring ineffectiveness. This process includes linking all derivatives that are designated asfair value or cash flow to specific assets and liabilities on the balance sheetor to specific firm commitments or forecasted transactions.  We also formally assess, both at the hedge’sinception and on an ongoing basis, whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in fair valuesor cash flows of hedged items.  If it isdetermined that a derivative is not highly effective as a hedge or that it hasceased to be a highly effective hedge, we discontinue hedge accountingprospectively.

 

For derivative instruments designated as fair valuehedges, gains and losses on the derivative instrument are offset againstrelated results on the hedged item in the statement of income.  Changes in the fair value of a derivativethat is highly effective and that is designated and qualifies as a fair valuehedge along with the loss or gain on the hedged asset or liability orunrecognized firm commitment of the hedged item that is attributable to thehedged risk, are recorded in earnings. Changes in the fair value of a derivative that is highly effective andthat is designated and qualifies as a cash flow hedge are recorded in othercomprehensive income to the extent that the derivative is effective as a hedge,until earnings are affected by the variability in cash flows of the designatedhedged item. Hedge effectiveness is measured at least quarterly based on therelative cumulative changes in fair value between the derivative contract andthe 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.

 

F-11

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According to SFAS 133, as amended, we are required todiscontinue hedge accounting prospectively when it is determined that thederivative is no longer effective in offsetting changes in the fair value orcash flows of the hedged item, the derivative expires or is sold, terminated,or exercised, the derivative is de-designated as a hedging instrument, becauseit is unlikely that a forecasted transaction will occur, a hedged firmcommitment no longer meets the definition of a firm commitment, or managementdetermines that designation of the derivative as a hedging instrument is nolonger appropriate.

 

When hedge accounting is discontinued because it isdetermined that the derivative no longer qualifies as an effective fair valuehedge, we continue to carry the derivative on the balance sheet at its fairvalue and no longer adjust the hedged asset or liability for changes in fairvalue.  The adjustment of the carryingamount of the hedged asset or liability is accounted for in the same manner asother components of the carrying amount of that asset or liability.  When hedge accounting is discontinued becausethe hedged item no longer meets the definition of a firm commitment, wecontinue to carry the derivative on the balance sheet at its fair value, removeany asset or liability that was recorded pursuant to recognition of the firmcommitment from the balance sheet, and recognize any gain or loss inearnings.  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 othersituations in which hedge accounting is discontinued, we continue to carry thederivative at its fair value on the balance sheet and recognize any subsequentchanges in its fair value in earnings.

 

**FairValue of Financial Instruments**

 

The carrying amount of cash and cash equivalents,accounts receivable, inventories, other current assets, accounts payable andaccrued liabilities, other current liabilities and derivatives approximatestheir fair value due to their short-term nature.  The fair values of these financialinstruments are represented in our consolidated balance sheets.

 

**UnitOption Plan**

 

Our Parent Partnership has not granted options for anyperiods presented.  For options outstandingunder the 1994 Long Term Incentive Plan (see Note 14.  Unit-Based Compensation), the ParentPartnership followed the intrinsic value method of accounting for recognizingstock-based compensation expense.  Underthis method, the Parent Partnership records no compensation expense for unitoptions granted when the exercise price of the options granted is equal to, orgreater than, the market price of our Parent Partnership’s Limited PartnerUnits on the date of the grant.  Duringthe year ended December 31, 2003, all remaining outstanding unit options wereexercised.

 

In December 2002, SFAS No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure* wasissued.  SFAS 148 amends SFAS No. 123, *Accounting for Stock-Based Compensation*, and providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, SFAS 148 amends the disclosurerequirements of SFAS 123 to require prominent disclosure in both annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reportedresults.  Certain of the disclosuremodifications are required for fiscal years ending after December 15, 2002, andare included in Note 14.  Unit-BasedCompensation.

 

Assuming the Parent Partnership had used the fairvalue method of accounting for its unit option plan, pro forma net income forthe year ended December 31, 2002, would be lower than reported net income by animmaterial amount.  Pro forma net incomewould equal reported net income for the years ended December 31, 2004 and2003.  The adoption of SFAS 148 did nothave an effect on our financial position, results of operations or cash flows.

 

F-12

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## **New Accounting Pronouncements**

## ** **

**In December 2003,the FASB revised FASB Interpretation No. 46, *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51* (“FIN46”).  FIN 46, issued by the FASB inJanuary 2003, requires certain variable interest entities to be consolidated bythe primary beneficiary of the entity if the equity investors in the entity donot have the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties.  The revised statement, FASB InterpretationNo. 46(R), *Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51* (“FIN 46(R)”), clarifies some of therequirements of FIN 46, eases some implementation problems that companiesexperienced implementing FIN 46, adds new scope exceptions and makes theprobability more likely for many companies that potential variable interestentities will be identified and consolidated. We adopted the new requirements detailed in FIN 46(R) as of March 31,2004.  In connection with our adoption ofFIN 46(R), we evaluated our investments in Centennial Pipeline LLC and Mont BelvieuStorage Partners, L.P. and determined that these entities are not materiallyaffected by our adoption of FIN 46(R), and thus we have accounted for them asequity method investments (see Note 5. Equity Investments).  Our adoption of FIN 46(R) did not have aneffect on our financial position, results of operations or cash flows.**

** **

**On December 8,2003, President Bush signed into law a bill that expands Medicare, primarilyadding a prescription drug benefit for Medicare-eligible retirees starting in2006.  We anticipate that the benefits wepay after 2006 could be lower as a result of the new Medicare provisions;however, at this time the retiree medical obligations and costs reported do notreflect any changes as a result of this legislation.  Deferring the recognition of the new Medicareprovisions’ impact was permitted by FASB Staff Position (“FSP”) Nos. 106-1 and106-2, *Accounting and Disclosure Requirements Related tothe Medicare Prescription Drug, Improvement and Modernization Act of 2003*,due to open questions about some of the new Medicare provisions and a lack ofauthoritative accounting guidance about certain matters.  The final accounting guidance could requirechanges to previously reported information. We adopted the provisions of these FSPs in the quarter ended September30, 2004.  This regulation did not have amaterial adverse effect on our financial position, results of operations orcash flows.**

** **

**In December 2003, the FASB issued a revision SFAS No. 132, *Employers’ Disclosures about Pensions and OtherPost-Retirement Benefits*. This revision required that companies provide more details about theirplan assets, benefit obligations, cash flows, benefit costs and other relevantinformation.  A description of investmentpolicies and strategies and target allocation percentages, or target ranges,for these asset categories also is required in financial statements.  Cash flows will include projections of futurebenefit payments and an estimate of contributions to be made in the next yearto fund pension and other postretirement benefit plans.  In addition to expanded annual disclosures,the FASB is requiring companies to report the various elements of pension andother postretirement benefit costs on a quarterly basis.  The guidance is effective for fiscal yearsending after December 15, 2003, and for quarters beginning after December 15,2003.  We adopted the provisions of therevised SFAS 132 effective December 31, 2003, and certain provisions regardingdisclosure of information about estimated future benefit payments in the firstquarter of 2004.**

** **

**In April 2004, the Emerging Issues Task Force (“EITF”) reachedconsensus in EITF 03-06, *ParticipatingSecurities and the Two-Class Method under FASB Statement No. 128*, toclarify what is meant by a participating security as described in SFAS No. 128,*Earnings Per Share. *The consensus also providesguidance on applying the two-class method for computing earnings pershare.  The two-class method is anearnings allocation formula for computing earnings per share and is therequired method prescribed by SFAS 128 for companies with participatingsecurities or more than one class of common stock.  The consensus primarily affects companiesthat issue securities that are entitled to participate in dividends with commonshares and would cause affected companies to report lower earnings per shareamounts.  The consensus is to be appliedretroactively for periods beginning after March 31, 2004.  The adoption of EITF 03-06 did not have aneffect on our financial position, results of operations or cash flows.**

** **

**F-13**

----

** **

**In July 2004, the EITF reachedconsensus in EITF 02-14, *Whether an InvestorShould Apply the Equity Method of Accounting to Investments Other Than CommonStock*, to clarify whether Accounting Principles Board (“APB”)Opinion No. 18, *The Equity Method ofAccounting for Investments in Common Stock* applies to joint ventureswith ownership not represented by common stock. APB Opinion No. 18 scopes out investments with ownership not representedby common stock.  EITF 02-14 clarifiesthat joint ventures with ownership represented by in-substance common stock, asdefined by EITF 02-14, are subject to the requirements of APB Opinion No.18.  We do not have common stock ownershipin our  joint ventures, CentennialPipeline LLC and Mont Belvieu Storage Partners, L.P.  We have assessed the impact of EITF 02-14 onthese joint ventures and have determined that we have in-substance common stockownership for these ventures.  However,similar to other companies with ownership structures in joint ventures notrepresented by common stock, we have historically accounted for these jointventures under the guidance of APB Opinion No. 18 due to a lack of otherauthoritative guidance.  The consensusesin this EITF should be applied in reporting periods beginning after September15, 2004.  The adoption of EITF 02-14 didnot have an effect on our financial position, results of operations or cashflows.**

** **

**In December 2004, the FASB issuedSFAS No. 123(R), *Share-Based Payment*.  SFAS 123(R) requires compensation costsrelated to share-based payment transactions to be recognized in the financialstatements.  With limited exceptions, theamount of the compensation cost is to be measured based on the grant-date fairvalue of the equity or liability instruments issued.  In addition, liability awards are to bere-measured each reporting period. Compensation cost will be recognized over the period that an employeeprovides service in exchange for the award. SFAS 123(R) is a revision of SFAS123, *Accounting for Stock-Based Compensation*,as amended by SFAS No. 148,*Accounting forStock-Based Compensation – Transition and Disclosure* and supersedesAPB Opinion No. 25, *Accounting for StockIssued to Employees*.  SFAS123(R) is effective for public companies as of the beginning of the firstinterim or annual reporting period that begins after June 15, 2005.  All public companies that adopted thefair-value-based method of accounting must use the modified prospectivetransition method and may elect to use the modified retrospective transitionmethod.  We do not believe that theadoption of SFAS 123(R) will have a material effect on our financial position,results of operations, or cash flows.**

** **

***NOTE 3.***                                                 INTANGIBLE ASSETS

*** ***

**We account for our intangibleassets under SFAS No. 142, *Goodwill and OtherIntangible Assets*which was issued by the FASB in July 2001.  SFAS 142 prohibits amortization of goodwilland intangible assets with indefinite useful lives, but instead requirestesting for impairment at least annually. SFAS 142 requires that intangibleassets with finite useful lives be amortized over their respective estimateduseful lives.  If an intangible asset hasa finite useful life, but the precise length of that life is not known, thatintangible asset shall be amortized over the best estimate of its usefullife.  At a minimum, we will assess theuseful lives and residual values of all intangible assets on an annual basis todetermine if adjustments are required.**

** **

The following table reflects the components ofamortized intangible assets, included in other assets on the consolidatedbalance sheets at December 31, 2004 and 2003 (in thousands):

 
| ** **                          | ** ** | **December 31, 2004**      | ** ** | **December 31, 2003**         | ** ** |
|-------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible  assets being amortized: |       |                       |       |                          |       |   |   |   |   |
| Transportation  agreements          |       | $                          | 1,328      |                          | $          | (260 | ) | $ | 1,328 |   | $ | (194 | ) |
|                                     |            |                            |            |                               |            |  |  |  |  |  |  |  |  |

 

At December 31, 2004, we have $33.4million of excess investment in our equity investment in Centennial PipelineLLC, which was created upon formation of the company.  The excess investment is included in ourequity investments account at December 31, 2004.  This excess investment is accounted for as anintangible asset with an indefinite life. We assess the intangible asset for impairment on an annual basis.

 

F-14

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Amortization expense on intangible assets was $0.1million for each of the years ended December 31, 2004, 2003 and 2002.

 

Estimated amortization expense on intangible assetswill be $0.1 million for each of the years ending December 31, 2005 through2009.

 

***NOTE 4.***                                                 INTEREST RATE SWAP

*** ***

In October 2001, we entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our fixed rate7.51% Senior Notes due 2028. We designated this swap agreement as a fair valuehedge.  The swap agreement has a notionalamount of $210.0 million and matures in January 2028 to match the principal andmaturity of the 7.51% Senior Notes. Under the swap agreement, we pay a floating rate of interest based on athree-month U.S. Dollar LIBOR rate, plus a spread, and receive a fixed rate ofinterest of 7.51%. During the years ended December 31, 2004, 2003, and 2002, werecognized reductions in interest expense of $9.6 million, $10.0 million and$8.6 million, respectively, related to the difference between the fixed rateand the floating rate of interest on the interest rate swap.  During the quarter ended December 31, 2004,we measured the hedge effectiveness of this interest rate swap and noted thatno gain or loss from ineffectiveness was required to be recognized.  The fair value of this interest rate swap wasa gain of approximately $3.4 million at December 31, 2004, and a gain ofapproximately $2.3 million at December 31, 2003.

 

***NOTE 5.***                                                 EQUITY INVESTMENTS

*** ***

In August 2000, we entered into agreements withPanhandle Eastern Pipeline Company (“PEPL”), a former subsidiary of CMS EnergyCorporation, and Marathon Ashland Petroleum LLC (“Marathon”) to form CentennialPipeline LLC (“Centennial”).  Centennialowns an interstate refined petroleum products pipeline extending from the upperTexas Gulf Coast to central Illinois. Through February 9, 2003, each participant owned a one-third interest inCentennial.  On February 10, 2003, we andMarathon each acquired an additional interest in Centennial from PEPL for $20.0million each, increasing our ownership percentages in Centennial to 50%each.  During the years ended December31, 2004 and 2003, we invested $1.5 million and $24.0 million, respectively, inCentennial, which is included in the equity investment balance at December 31,2004.  The 2003 amount includes the $20.0million paid for the acquisition of the additional ownership interest inCentennial. We have not received any distributions from Centennial since itsformation.

 

On January 1, 2003, we and Louis Dreyfus EnergyServices, L.P. (“Louis Dreyfus”) formed Mont Belvieu Storage Partners, L.P. (“MBStorage”).  We and Louis Dreyfus each owna 50% ownership interest in MB Storage. The purpose of MB Storage is to expand services to the upper Texas GulfCoast energy marketplace by increasing pipeline throughput and the mix of productshandled through the existing system and establishing new receipt and deliveryconnections.  MB Storage is aservice-oriented, fee-based venture with no commodity trading activity.  We operate the facilities for MB Storage.  Effective January 1, 2003, we contributedproperty and equipment with a net book value of $67.1 million to MBStorage.  Additionally, as of thecontribution date, Louis Dreyfus had invested $6.1 million for expansionprojects for MB Storage that we were required to reimburse if the originaljoint development and marketing agreement was terminated by either party.  This deferred liability was also contributedand credited to the capital account of Louis Dreyfus in MB Storage.

 

We receive the first $1.8 million per quarter (or$7.15 million on an annual basis) of MB Storage’s income before depreciationexpense, as defined in the operating agreement. Any amount of MB Storage’s annual income before depreciation expense inexcess of $7.15 million is allocated evenly between Louis Dreyfus and us.Depreciation expense on assets each originally contributed to MB Storage isallocated between Louis Dreyfus and us based on the net book value of theassets contributed.   Depreciationexpense on assets constructed or acquired by

 

F-15

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MB Storage subsequent toformation is allocated evenly between Louis Dreyfus and us. For the years endedDecember 31, 2004 and 2003, our sharing ratio in the earnings of MB Storage wasapproximately 69.4% and 70.4%, respectively. For the years ended December 31,2004 and 2003, excluding the contribution of property and equipment uponformation of the partnership, we contributed $21.4 million and $2.5 million,respectively, to MB Storage.  The 2004amount includes a contribution of $16.5 million for the acquisition of storageand pipeline assets in April 2004.  Theremaining contributions have been for capital expenditures in bothperiods.  During the years ended December31, 2004 and 2003, we received distributions of $10.3 million and $5.3 million,respectively, from MB Storage.

 

We use the equity method of accounting to account forour investments in Centennial and MB Storage. Summarized combined financial information for Centennial and MB Storagefor the years ended December 31, 2004 and 2003, is presented below (inthousands): 

 

| ** ** | ** ** | **Years Ended  December 31,** | ** ** |
|------------|------------|-------------------------------|------------|
| ** ** | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Revenues   |       | $                             | 60,717     |   | $ | 54,035 |   |
| Net loss   |       | (273                          | )          | (5,111 | ) |
|            |            |                               |            |  |  |  |  |

 

Summarized combined balance sheet information forCentennial and MB Storage as of December 31, 2004 and 2003, is presented below (inthousands):

 

| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------|------------|
| ** **              | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Current assets          |       | $                | 39,228     |   | $ | 26,771 |   |
| Noncurrent  assets      |       | 377,924          |       | 351,241 |   |
| Current  liabilities    |       | 36,015           |       | 35,032 |   |
| Long-term debt          |       | 140,000          |       | 140,000 |   |
| Noncurrent  liabilities |       | 20,383           |       | 13,182 |   |
| Partners’  capital |       | 220,754          |       | 189,798 |   |
|                         |            |                  |            |  |  |  |  |

** **

***NOTE 6.***                                                 RELATED PARTY TRANSACTIONS

*** ***

## **Parent Partnership, Duke Energy, DEFS and Affiliates**

## ** **

We have no employees, and we are managed by TEPPCO GP,a wholly owned subsidiary of our Parent Partnership.  The Parent Partnership is managed by theCompany, which is an indirect wholly owned subsidiary of DEFS.  Duke Energy holds an interest ofapproximately 70% in DEFS, and ConocoPhillips holds the remaining interest ofapproximately 30%.  According to thePartnership Agreement, the General Partner and the Company are entitled toreimbursement of all direct and indirect expenses related to our businessactivities.

 

For the years ended December 31, 2004, 2003 and 2002,we incurred direct expenses of $45.5 million, $48.1 million and $46.6 million,respectively, which were charged to us by DEFS. Substantially all of thesecosts were related to payroll and payroll related expenses.  For the years ended December 31, 2004, 2003and 2002, expenses for administrative services and overhead allocated to us bythe Company (including Duke Energy and its affiliates) were $1.0 million, $1.0million and $0.8 million, respectively.

 

F-16

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Our Parent Partnership allocates operating, generaland administrative expenses to us for legal, insurance, financial,communication and other administrative services based upon the estimated levelof effort devoted to our various operations. In addition, we make cash payments on behalf of the Parent Partnershipfor various expenses.  At December 31,2004 and 2003, we had net payables of $63.0 million and $8.9 million,respectively, to the Parent Partnership related to these affiliated activities.

 

Effective with the purchase of the fractionationfacilities on March 31, 1998, TEPPCO Colorado and DEFS entered into a 20-yearFractionation Agreement, under which TEPPCO Colorado received a variable feefor all fractionated volumes delivered to DEFS. Revenues recognized from the fractionation facilities totaled $3.1million for the year ended December 31, 2002. TEPPCO Colorado and DEFS also entered into an Operation and MaintenanceAgreement, whereby DEFS operated and maintained the fractionation facilitiesfor TEPPCO Colorado.  For these services,TEPPCO Colorado paid DEFS a set volumetric rate for all fractionated volumesdelivered to DEFS.  Expenses related tothe Operation and Maintenance Agreement totaled $0.4 million for the year endedDecember 31, 2002.  On May 31, 2002,TEPPCO Colorado was transferred to TEPPCO Midstream.

 

Effective May 2001, we entered into an agreement withan affiliate of DEFS to commit to it sole utilization of our Providenceterminal.  We operate the terminal andprovide propane loading services to an affiliate of DEFS.  The agreement was renegotiated in May2004.  During the years ended December31, 2004, 2003 and 2002, revenues of $4.3 million, $3.2 million and $2.3million, respectively, from an affiliate of DEFS were recognized pursuant tothis agreement.

 

At December 31, 2004 and 2003, we had receivables fromDEFS of $1.1 million and $0.2 million, respectively, related to revenuesrecognized from DEFS.  At December 31,2004 and 2003, we had payables to DEFS of $0.7 million and $0.8 million,respectively, related to administrative services provided by DEFS.

 

The Parent Partnership contracts with Bison InsuranceCompany Limited (“Bison”), a wholly owned subsidiary of Duke Energy, for amajority of our insurance coverage, including property, liability, auto anddirectors and officers insurance coverage. For the years ended December 31, 2004, 2003 and 2002, we incurredinsurance expense related to premiums paid to Bison of $2.8 million, $2.6million and $1.9 million, respectively. At December 31, 2004 and 2003, we had insurance reimbursement receivablesdue from Bison of $4.5 million and $4.2 million, respectively.

 

At December 31, 2003, we had a loan of propaneoutstanding to DEFS with a total value of $1.4 million.  We earned a nominal rental fee of $0.1million on this transaction.  This propanewas returned to us in February 2004. We regularly loan inventory for a fee tothird parties and affiliates as part of our inventory management practice.

 

## **Centennial**

## ** **

In August 2000, we entered into agreements with PEPLand Marathon to form Centennial (see Note 5. Equity Investments).  At December31, 2004, we had a 50% ownership interest in Centennial.  We have entered into a management agreementwith Centennial to operate Centennial’s terminal at Creal Springs, Illinois,and pipeline connection in Beaumont, Texas. For each of the years ended December 31, 2004, 2003 and 2002, werecognized management fees of $0.2 million from Centennial, and actualoperating expenses billed to Centennial were $6.9 million, $4.4 million and$4.0 million, respectively.

 

We also have a joint tariff with Centennial to deliverproducts at our locations using Centennial’s pipeline as part of the deliveryroute to connecting carriers. As the delivering pipeline, we invoice theshippers for the entire delivery rate, record only the net rate attributable tous as transportation revenues and record a liability for the amounts due toCentennial for its share of the tariff. At December 31, 2004 and 2003, we had payable balances of $2.8 millionand $2.3 million, respectively, to Centennial for its share of the joint tariffdeliveries and other

 

F-17

----

 

operational relatedcharges.  In addition, we perform ongoingconstruction services for Centennial and bill Centennial for labor and othercosts to perform the construction.  AtDecember 31, 2004 and 2003, we had receivable balances of $1.1 million and $1.3million, respectively, due from Centennial for reimbursement of constructionservices provided to Centennial.

 

In January 2003, we entered into a pipeline capacitylease agreement with Centennial for a period of five years that contains aminimum throughput requirement.  For theyears ended December 31, 2004 and 2003, we incurred $5.3 million and $3.8 million,respectively, of rental charges related to the lease of pipeline capacity onCentennial.

 

## **MB Storage**

## ** **

Effective January 1, 2003, we entered into agreementswith Louis Dreyfus to form MB Storage (see Note 5.  Equity Investments).  We operate the facilities for MB Storage.  We and MB Storage have entered into apipeline capacity lease agreement, and for each of the years ended December 31,2004 and 2003, we recognized $0.1 million in rental revenue related to thislease agreement.  During the years endedDecember 31, 2004 and 2003, we also billed MB Storage $3.2 million and $2.5million, respectively, for direct payroll and payroll related expenses foroperating MB Storage.  At December 31,2004, we had a net receivable balance from MB Storage of $1.3 million foroperating costs, including payroll and related expenses for operating MBStorage.  At December 31, 2003, we had anet payable balance to MB Storage of $0.2 million for advances MB Storage paidto us for operating costs.

 

***NOTE 7.***                                                 OTHER CURRENT ASSETS

*** ***

The major components of other current assets for theyears ended December 31, 2004 and 2003, were as follows (in thousands):

 
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Insurance  receivable                        |       | $                | 4,531      |   | $ | 1,933 |   |
| Interest  receivable from interest rate swap |       | 4,027            |       | 4,680 |   |
| Reimbursable  receivables                    |       | 2,780            |       | 1,378 |   |
| Prepaid  insurance and other                 |       | 299              |       | 1,449 |   |
| Other                                        |       | 506              |       | 790 |   |
| Total                                        |       | $                | 12,143     |   | $ | 10,230 |   |

 

***NOTE 8***.                                                 INVENTORIES

*** ***

Inventories are valued at the lower of cost (based onweighted average cost method) or market. The costs of inventories did not exceed market values at December 31,2004 and 2003. The major components of inventories were as follows (inthousands):

 
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------|------------|
| ** **              | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Refined products        |       | $                | 5,665      |   | $ | 6,632 |   |
| LPGs                    |       | —           |       | 517 |   |
| Materials and  supplies |       | 4,428            |       | 4,037 |   |
| Total                   |       | $                | 10,093     |   | $ | 11,186 |   |

 

F-18

----

 

***NOTE 9.***                                                 PROPERTY, PLANT AND EQUIPMENT

*** ***

Major categories of property, plant and equipment forthe years ended December 31, 2004 and 2003, were as follows (in thousands):

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Land and right  of way                          |       | $                | 36,228     |   | $ | 34,203 |   |
| Line pipe and  fittings                         |       | 631,099          |       | 575,656 |   |
| Storage tanks                                   |       | 95,765           |       | 96,036 |   |
| Buildings and  improvements                     |       | 36,045           |       | 30,055 |   |
| Machinery and  equipment                        |       | 191,561          |       | 161,613 |   |
| Construction  work in progress                  |       | 42,833           |       | 64,217 |   |
| Total property,  plant and equipment            |       | 1,033,531        |       | $ | 961,780 |   |
| Less accumulated  depreciation and amortization |       | 311,197          |       | 279,395 |   |
| Net property,  plant and equipment              |       | $                | 722,334    |   | $ | 682,385 |   |

 

Depreciation expense on property, plant and equipmentwas $42.1 million, $31.0 million and $30.1 million for the years ended December31, 2004, 2003 and 2002, respectively. During the fourth quarter of 2004, we wrote off approximately $2.1million in assets taken out of service to depreciation expense.

 

We evaluate impairment of long-livedassets in accordance with SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  During the third quarter of 2004, wecompleted an evaluation of our marine terminal facility in the Beaumont, Texas,area.  The facility consists primarily ofa barge dock, a ship dock, four storage tanks and various segments ofconnecting pipelines.  The evaluationindicated that the docks and other assets at the facility needed extensive workto continue to be commercially operational. 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 fair value of the facility.

 

***NOTE 10***.                                          OTHER CURRENT LIABILITIES

*** ***

The major components of other current liabilities forthe years ended December 31, 2004 and 2003, were as follows (in thousands):

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------|------------|
| ** **                           | ** ** | **2004**         | ** ** | **2003** | ** ** |
| ** **                           | ** ** | ** **       | ** ** | ** ** | ** ** |
| Compensation  accruals (1)           |       | $                | —     |   | $ | 8,168 |   |
| Inventory  payables                  |       | 391              |       | 417 |   |
| Current portion  of deferred revenue |       | 1,359            |       | 1,013 |   |
| McCleery  litigation accrual         |       | 2,000            |       | — |   |
| Capital  expenditure accruals        |       | 1,568            |       | 2,633 |   |
| Retainage                            |       | 1,812            |       | 631 |   |
| Other                                |       | 2,209            |       | 2,929 |   |
| Total                                |       | $                | 9,339      |   | $ | 15,791 |   |

 

----

(1)  Compensation accruals are now accounted forat the Parent Partnership level.

 

F-19

----

 

***NOTE 11***.                                          DEBT

*** ***

## **Senior Notes**

## ** **

On January 27, 1998, we completed the issuance of$180.0 million principal amount of 6.45% Senior Notes due 2008, and $210.0million principal amount of 7.51% Senior Notes due 2028 (collectively the “SeniorNotes”).  The 6.45% Senior Notes wereissued at a discount of $0.3 million and are being accreted to their face valueover the term of the notes.  The 6.45%Senior Notes due 2008 are not subject to redemption 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, at ouroption in whole or in part, at a premium.

 

The Senior Notes do not have sinking fundrequirements.  Interest on the SeniorNotes is payable semiannually in arrears on January 15 and July 15 of eachyear.  The Senior Notes are unsecuredobligations and rank on a parity with all of our other unsecured andunsubordinated indebtedness.  Theindenture governing the 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 our ability to incur additionalindebtedness.  As of December 31, 2004,we were in compliance with the covenants of the Senior Notes.

 

We have entered into an interest rate swap agreementto hedge our exposure to changes in the fair value on a portion of the SeniorNotes discussed above.  At December 31,2004 and 2003, the Senior Notes include the fair value of our interest rateswap of $3.4 million and $2.3 million, respectively (see Note 4.  Interest Rate Swap).

 

The following table summarizes the estimated fairvalues of the Senior Notes as of December 31, 2004 and 2003 (in millions):

 

| ** **                            | ** ** | ** ** | ** ** | **Fair Value**   | ** ** |
|---------------------------------------|------------|------------|------------|------------------|------------|
| ** **                            | ** ** | **Face**   | ** ** | **December 31,** | ** ** |
| ** **                            | ** ** | **Value**  | ** ** | **2004**         | ** ** | **2003** | ** ** |
| 6.45% Senior  Notes, due January 2008 |       | $          | 180.0      |             | $          | 187.1 |   | $ | 190.1 |   |
| 7.51% Senior  Notes, due January 2028 |       | 210.0      |       | 225.6            |       | 222.4 |   |
|                                       |            |            |            |                  |            |  |  |  |  |  |

 

## **Other Long Term Debt and Credit Facilities**

## ** **

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s credit agreements.  Theinterest rates charged by the Parent Partnership include the stated interestrate of the Parent Partnership, plus a premium to cover debt issuancecosts.  The interest rate is alsodecreased or increased to cover gains and losses, respectively, on any interestrate swaps that the Parent Partnership may have in place on its respectivecredit agreements.  These creditfacilities of the Parent Partnership are described below.

 

On April 6, 2001, our Parent Partnership entered intoa $500.0 million revolving credit facility including the issuance of letters ofcredit of up to $20.0 million (“Three Year Facility”).  The interest rate was based, at our ParentPartnership’s option, on either the lender’s base rate plus a spread, or LIBORplus a spread in effect at the time of the borrowings.  The credit agreement for the Three YearFacility contained certain restrictive financial covenant ratios.  During the first quarter of 2003, our ParentPartnership repaid $182.0 million of the outstanding balance of the Three YearFacility with proceeds from the issuance of its 6.125% Senior Notes on January30, 2003.  On June 27, 2003, our ParentPartnership repaid the outstanding balance under the Three Year Facility withborrowings under a new credit facility and canceled the Three Year Facility.

 

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 adiscount of $2.2 million and are being accreted to their

 

F-20

----

 

face value over the termof the notes.  The Parent Partnershipused the proceeds from the offering to reduce a portion of the outstandingbalances of its credit facilities.  TheSenior Notes may be redeemed at any time at our Parent Partnership’s optionwith the payment of accrued interest and a make-whole premium determined bydiscounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing these 7.625% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale 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% Senior Notes due 2013.  The 6.125% Senior Notes were issued at adiscount of $1.4 million and are being accreted to their face value over theterm of the notes.  The Parent Partnershipused $182.0 million of the proceeds from the offering to reduce the outstandingprincipal on the Three Year Facility to $250.0 million.  The balance of the net proceeds received wasused for general Parent Partnership purposes. The Senior Notes may be redeemed at any time at our Parent Partnership’soption with the payment of accrued interest and a make-whole premium determinedby discounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing the 6.125% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of liens securingindebtedness and sale and leaseback transactions.  However, the indenture does not limit theParent Partnership’s ability to incur additional indebtedness.

 

On June 27, 2003, our Parent Partnership entered intoa $550.0 million revolving credit facility with a three year term, including theissuance of letters of credit of up to $20.0 million (“Revolving CreditFacility”).  The interest rate is based,at our Parent Partnership’s option, on either the lender’s base rate plus aspread, or LIBOR plus a spread in effect at the time of the borrowings.  The credit agreement for the Revolving CreditFacility contains certain restrictive financial covenant ratios.  Our Parent Partnership borrowed $263.0million under the Revolving Credit Facility and repaid the outstanding balanceof the Three Year Facility.  On October21, 2004, our Parent Partnership amended the Revolving Credit Facility to (i)increase the facility size to $600.0 million, (ii) extend the term to October21, 2009, (iii) remove certain restrictive covenants, (iv) increase the availableamount for the issuance of letters of credit up to $100.0 million and (v)decrease the LIBOR rate spread charged at the time of each borrowing.  On December 31, 2004, $353.0 million wasoutstanding under the Revolving Credit Facility at a weighted average interestrate of 3.0%.

 

As of December 31, 2004 and 2003, we had intercompanynotes payable to our Parent Partnership of $301.7 million and $211.3 million,respectively, which represented borrowings under the Parent Partnership’sRevolving Credit Facility, 7.625% Senior Notes and 6.125% Senior Notes. Theweighted average interest rate on the note payable to the Parent Partnership atDecember 31, 2004, was 4.9%.  At December31, 2004, accrued interest includes $4.5 million due to our Parent Partnership.  For the years ended December 31, 2004 and2003, interest costs incurred on the note payable to our Parent Partnershiptotaled $12.5 million and  $11.1 million,respectively.

 

***NOTE 12.***                                          CONCENTRATIONS OF CREDIT RISK

*** ***

Our primary market areas are located in the Northeast,Midwest and Southwest regions of the United States.  We have a concentration of trade receivablebalances due from major integrated oil companies, independent oil companies andother pipelines and wholesalers. These concentrations of customers may affectour overall credit risk in that the customers may be similarly affected bychanges in economic, regulatory or other factors.  We thoroughly analyze our customers’historical and future credit positions prior to extending credit.  We manage our exposure to credit risk throughcredit analysis, credit approvals, credit limits and monitoring procedures, andfor certain transactions may utilize letters of credit, prepayments andguarantees.

 

F-21

----

 

For the years ended December 31, 2004 and 2003, we hadone customer, Marathon Ashland Petroleum LLC, which accounted for 17% and 18%,respectively, of our total revenues.  Noother customer accounted for 10% or more of our total consolidated revenues forthe years ended December 31, 2004, 2003 or 2002.

 

The carrying amount of cash and cash equivalents,accounts receivable, inventories, other current assets, accounts payable andaccrued liabilities, other current liabilities, derivative and notes payableapproximates their fair value due to their short-term nature.

 

***NOTE 13.***                                          QUARTERLY DISTRIBUTIONS OFAVAILABLE CASH

*** ***

We make quarterly cash distributions of all of ourAvailable Cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion.  We paydistributions of 99.999% to the Parent Partnership and 0.001% to the GeneralPartner.

 

For the years ended December 31, 2004, 2003 and 2002,cash distributions paid to our Parent Partnership totaled $118.0 million,$106.5 million and $94.9 million, respectively. On February 7, 2005, we paid a cash distribution to our ParentPartnership of $29.7 million for the quarter ended December 31, 2004.

 

***NOTE 14.***                                          UNIT-BASED Compensation

*** ***

## **1994 Long Term Incentive Plan**

## ** **

During 1994, the Company adopted the Texas EasternProducts Pipeline Company 1994 Long Term Incentive Plan (“1994 LTIP”). The 1994LTIP provides certain key employees with an incentive award whereby aparticipant is granted an option to purchase Limited Partner Units of theParent Partnership (“Parent LPUs”). These same employees are also granted a stipulated number of PerformanceUnits, the cash value of which may be used to pay for the exercise of therespective Parent LPU options awarded. Under the provisions of the 1994 LTIP, no more than one million optionsand two million Performance Units may be granted.

 

When our Parent Partnership’s calendar year earningsper unit (exclusive of certain special items) exceeds a stated threshold, eachparticipant receives a credit to their respective Performance Unit accountequal to the earnings per unit excess multiplied by the number of PerformanceUnits awarded.  The balance in the PerformanceUnit account may be used to offset the cost of exercising Parent LPU optionsgranted in connection with the Performance Units or may be withdrawn two yearsafter the underlying options expire, usually 10 years from the date ofgrant.  Any unused balance previouslycredited is forfeited upon termination. The Parent Partnership accrues compensation expense for the performanceunits awarded annually based upon the terms of the plan discussed above. We areallocated a portion of the compensation expense (see Note 2. Summary ofSignificant Accounting Policies).

 

Under the agreement for such Parent LPU options, theoptions become exercisable in equal installments over periods of one, two, andthree years from the date of the grant. At December 31, 2004,  all optionshave been fully exercised. The Performance Unit account has a minimal liabilitybalance which may be withdrawn by the participants after December 31, 2006.

 

F-22

----

 

A summary of Parent LPUoptions granted under the terms of the 1994 LTIP is presented below:

 
| ** **                        | ** ** | **Options   Outstanding** | ** ** | **Options   Exercisable** | ** ** | **Exercise   Range** | ** ** |
|-----------------------------------|------------|---------------------------|------------|---------------------------|------------|----------------------|------------|
| Parent LPU  Options:              |       |                      |       |                      |       |                 |       |
| Outstanding at  December 31, 2001 |       | 189,688                   |       | 143,822                   |       | $13.81 - $25.69      |       |
| Became  exercisable               |       | —                    |       | 45,866                    |       | $25.25               |       |
| Exercised                         |       | (99,597                   | )          | (99,597                   | )          | $13.81 - $25.69      |       |
| 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 Partnership has not granted options for anyperiods presented.  During the year endedDecember 31, 2003, all remaining outstanding Parent LPU options wereexercised.  For options previouslyoutstanding, our Parent Partnership followed the intrinsic value method forrecognizing stock-based compensation expense. The exercise price of all options awarded under the 1994 LTIP equaledthe market price of the Parent LPUs on the date of grant.  Accordingly, the Parent Partnership recognizedno compensation expense at the date of grant. Had compensation expense been determined consistent with SFAS No. 123, *Accounting for Stock-Based Compensation*, compensationexpense related to option grants would have been immaterial for the year endedDecember 31, 2002, and no compensation expense would have been recognized forthe years ended December 31, 2004 and 2003.

 

## **1999 and 2002 Phantom Unit Plans**

## ** **

Effective September 1, 1999, the Company adopted theTexas Eastern Products Pipeline Company, LLC 1999 Phantom Unit Retention Plan (“1999PURP”).  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 phantomunits.  These phantom units areautomatically redeemed for cash based on the vested portion of the fair marketvalue of the phantom units at stated redemption dates.  The fair market value of each phantom unit isequal to the closing price of a Parent LPU as reported on the New York StockExchange on the redemption date.

 

Under the agreement for the phantom units, eachparticipant will vest 10% of the number of phantom units initially grantedunder his or her award at the end of each of the first four years and will vestthe final 60% at the end of the fifth year. Each participant is required to redeem their phantom units as theyvest.   They are also entitled toquarterly cash distributions equal to the product of the number of phantomunits outstanding for the participant and the amount of the cash distributionthat the Parent Partnership paid per unit to Parent LPU unitholders.  A total of 1,800 phantom units granted underthe 1999 PURP remain outstanding at December 31, 2004.  A total of 57,600 phantom units granted underthe 2002 PURP remain outstanding at December 31, 2004.  The Parent Partnership accrues compensationexpense annually based upon the terms of the 1999 PURP and 2002 PURP discussedabove.  We are allocated a portion of thecompensation expense (see Note 2.  Summaryof Significant Accounting Policies). At December 31, 2004 and 2003, we had anaccrued liability balance of $0.8 million and $1.6 million, respectively, forour share of compensation related to the 1999 PURP and 2002 PURP.

 

## **2000 Long Term Incentive Plan**

## ** **

Effective January 1, 2000, the Company established theTexas Eastern Products Pipeline Company, LLC 2000 Long Term Incentive Plan (“2000LTIP”) to provide key employees incentives to achieve improvements in ourfinancial performance.  Generally, uponthe close of a three-year performance period, if the participant is then stillan employee of the Company, the participant will receive a cash payment in anamount equal to (1) the applicable performance percentage specified in theaward multiplied by (2) the number of phantom units granted under the awardmultiplied by (3) the average of the closing prices of a Parent LPU over theten consecutive trading days

 

F-23

----

 

immediately preceding thelast day of the performance period. Generally, a participant’s performance percentage is based upon theimprovement of our Parent Partnership’s Economic Value Added (as defined below)during a three-year performance period over the Economic Value Added during thethree-year period immediately preceding the performance period.  If a participant incurs a separation fromservice during the performance period due to death, disability or retirement(as such terms are defined in the 2000 LTIP), the participant will be entitledto receive a cash payment in an amount equal to the amount computed asdescribed above multiplied by a fraction, the numerator of which is the numberof days that have elapsed during the performance period prior to theparticipant’s separation from service and the denominator of which is thenumber of days in the performance period. At December 31, 2004, phantom units outstanding were 23,600, 30,600 and21,200 for awards granted for the years ended December 31, 2004, 2003 and 2002,respectively.

 

Economic Value Added means our Parent Partnershipaverage annual EBITDA for the performance period minus the product of ourParent Partnership’s average asset base and cost of capital for the performanceperiod.  For purposes of the 2000 LTIPfor plan years 2000 through 2002, EBITDA means our Parent Partnership earningsbefore net interest expense, depreciation and amortization and  proportional interest in EBITDA of its jointventures as presented in its consolidated financial statements prepared inaccordance with generally accepted accounting principles, except that in itsdiscretion the Compensation Committee of the Company may exclude gains orlosses from extraordinary, unusual or non-recurring items.  For the years ended December 31, 2004 and2003, EBITDA means, in addition to the 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 ParentPartnership’s cost of capital is approved by the Compensation Committee at thedate of award grant.

 

In addition to the payment described above, during theperformance period, the Company will pay to the participant the amount of cashdistributions that the Parent Partnership would have paid to its unitholdershad the participant been the owner of the number of Parent LPUs equal to thenumber of phantom units granted to the participant under this award. The ParentPartnership accrues compensation expense annually based upon the terms of the2000 LTIP discussed above.  We areallocated a portion of the compensation expense (see Note 2.  Summary of Significant Accounting Policies).At December 31, 2004 and 2003, we had an accrued liability balance of $0.9million and $1.2 million, respectively, for our share of compensation relatedto the 2000 LTIP.

 

***NOTE 15.***                                          OPERATING LEASES

*** ***

We use leased assets in several areas of ouroperations. Total rental expense for the years ended December 31, 2004, 2003and 2002, was $13.8 million, $12.3 million and $8.5 million, respectively.  The following table sets forth our minimumrental payments under our various operating leases for the years endingDecember 31 (in thousands):

 

| 2005       |   | $      | 12,121 |   |
|------------|--------|--------|--------|--------|
| 2006       |   | 11,018 |   |
| 2007       |   | 10,210 |   |
| 2008       |   | 5,716  |   |
| 2009       |   | 4,187  |   |
| Thereafter |   | 16,341 |   |
|       |   | $      | 59,593 |   |

*** ***

F-24

----

 

***NOTE 16.***                                          Employee Benefits

*** ***

**Retirement Plans**

 

The Parent Partnership has adopted the TEPPCORetirement Cash Balance Plan (“TEPPCO RCBP”), which is a non-contributory,trustee-administered pension plan.  Inaddition, certain executive officers participate in the TEPPCO SupplementalBenefit Plan (“TEPPCO SBP”), which is a non-contributory, nonqualified, definedbenefit retirement plan.  The TEPPCO SBPwas established to restore benefit reductions caused by the maximum benefitlimitations that apply to qualified plans. The benefit formula for all eligible employees is a cash balance formula.  Under a cash balance formula, a planparticipant accumulates a retirement benefit based upon pay credits and currentinterest credits.  The pay credits arebased on a participant’s salary, age and service. The Parent Partnership uses aDecember 31 measurement date for these plans.

 

The components of net pension benefits costs allocatedto us for the TEPPCO RCBP and the TEPPCO SBP for the years ended December 31,2004, 2003 and 2002, were as follows (in thousands):

 
| ** **                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost benefit  earned during the year   |       | $        | 2,384      |     | $          | 2,160    |       | $ | 1,957 |   |
| Interest cost on  projected benefit obligation |       | 491      |       | 347      |       | 221      |       |
| Expected return  on plan assets                |       | (621     | )          | (432     | )          | (291     | )          |
| Amortization of  prior service cost            |       | 7        |       | 7        |       | 7        |       |
| Recognized net  actuarial loss                 |       | 40       |       | 18       |       | 7        |       |
| Net pension  benefits costs                    |       | $        | 2,301      |     | $          | 2,100    |       | $ | 1,901 |   |

 

**Other Postretirement Benefits**

 

Effective January 1, 2001, the Parent Partnershipprovides employees with certain health care and life insurance benefits forretired employees on a contributory and non-contributory basis (“TEPPCO OPB”).  Employees become eligible for these benefitsif they meet certain age and service requirements at retirement, as defined inthe plans.  The Parent Partnershipprovides a fixed dollar contribution, which does not increase from year toyear, towards retired employee medical costs. The retiree pays all health care cost increases due to medicalinflation.  The Parent Partnership uses aDecember 31 measurement date for this plan.

 

The components of net postretirement benefits costallocated to us for the TEPPCO OPB for the years ended December 31, 2004, 2003and 2002, were as follows (in thousands):                                          

 
| ** **                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost  benefit earned during the year                    |       | $        | 102        |     | $          | 91       |       | $ | 75 |   |
| Interest cost on  accumulated postretirement benefit obligation |       | 129      |       | 117      |       | 101      |       |
| Amortization of  prior service cost                             |       | 112      |       | 112      |       | 112      |       |
| Recognized net  actuarial loss                                  |       | 1        |       | —   |       | —   |       |
| Net  postretirement benefits costs                              |       | $        | 344        |     | $          | 320      |       | $ | 288 |   |

 

The Parent Partnership employs a building blockapproach in determining the long-term rate of return for plan assets.  Historical markets are studied and long-termhistorical relationships between equities and fixed-income are preserved consistentwith widely accepted capital market principle that assets with highervolatility generate a greater return over the long run.  Current market factors such as inflation andinterest rates are evaluated before long-term capital market assumptions are determined.  The long-term portfolio return is establishedvia a building block approach with proper consideration of diversification andrebalancing.  Peer data and historicalreturns are reviewed to check for reasonability and appropriateness.

 

F-25

----

 

The weighted average assumptions used to determinebenefit obligations for the retirement plans and other postretirement benefitplans at December 31, 2004 and 2003, were as follows:

 
| ** **                       | ** ** | **Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|----------------------------------|------------|----------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2004**             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                    |       | 5.75                 | %          | 6.25                               | %          | 5.75 | % | 6.25 | % |
| Increase in  compensation levels |       | 5.00                 | %          | 5.00                               | %          | — |   | — |   |

 

The weighted average assumptions used to determine netperiodic benefit cost for the retirement plans and other postretirement benefitplans for the years ended December 31, 2004 and 2003, were as follows:

 
| ** **                                        | ** ** | **Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **2004**             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                                     |       | 6.25                 | %          | 6.75                               | %          | 6.25 | % | 6.75 | % |
| Increase in  compensation levels                  |       | 5.00                 | %          | 5.00                               | %          | — |   | — |   |
| Expected long-term  rate of return on plan assets |       | 8.00                 | %          | 8.00                               | %          | — |   | — |   |

 

The following table sets forth the Parent Partnership’spension and other postretirement benefits changes in benefit obligation, fairvalue of plan assets and funded status as of December 31, 2004 and 2003 (inthousands):

 
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Postretirement  Benefits** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2004**             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Change  in benefit obligation**               |       |                 |       |                               |       |   |   |   |   |
| Benefit  obligation at beginning of year        |       | $                    | 7,704      |                               | $          | 5,231 |   | $ | 2,088 |   | $ | 1,691 |   |
| Transfers to  Parent Partnership subsidiary (1) |       | 17                   |       | —                             |       | 4 |   | — |   |
| Service cost                                    |       | 2,384                |       | 2,160                              |       | 102 |   | 91 |   |
| Interest cost                                   |       | 491                  |       | 347                                |       | 129 |   | 117 |   |
| Actuarial  (gain)/loss                          |       | 360                  |       | 186                                |       | 166 |   | 204 |   |
| Retiree  contributions                          |       | —               |       | —                             |       | 52 |   | 47 |   |
| Benefits paid                                   |       | (153                 | )          | (220                               | )          | (75 | ) | (62 | ) |
| Benefit  obligation at end of year              |       | $                    | 10,803     |                               | $          | 7,704 |   | $ | 2,466 |   | $ | 2,088 |   |
|                                            |       |                 |       |                               |       |   |   |   |   |
| **Change  in plan assets**                      |       |                 |       |                               |       |   |   |   |   |
| Fair value of  plan assets at beginning of year |       | $                    | 7,673      |                               | $          | 4,867 |   | $ | — |   | $ | — |   |
| Transfer to  Parent Partnership subsidiary (1)  |       | 30                   |       | —                             |       | — |   | — |   |
| Actual return on  plan assets                   |       | 565                  |       | 459                                |       | — |   | — |   |
| Retiree  contributions                          |       | —               |       | —                             |       | 52 |   | 47 |   |
| Employer  contributions                         |       | 2,300                |       | 2,567                              |       | 23 |   | 15 |   |
| Benefits paid                                   |       | (153                 | )          | (220                               | )          | (75 | ) | (62 | ) |
| Fair value of  plan assets at end of year       |       | $                    | 10,415     |                               | $          | 7,673 |   | $ | — |   | $ | — |   |
|                                            |       |                 |       |                               |       |   |   |   |   |
| **Reconciliation  of funded status**            |       |                 |       |                               |       |   |   |   |   |
| Funded status                                   |       | $                    | (388       | )                                  | $          | (30 | ) | $ | (2,466 | ) | $ | (2,088 | ) |
| Unrecognized  prior service cost                |       | 33                   |       | 40                                 |       | 889 |   | 1,001 |   |
| Unrecognized  actuarial loss                    |       | 1,301                |       | 924                                |       | 398 |   | 233 |   |
| Net amount  recognized                          |       | $                    | 946        |                               | $          | 934 |   | $ | (1,179 | ) | $ | (854 | ) |

 

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

 

F-26

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## **Plan Assets**

## ** **

Our Parent Partnership employs a total returninvestment approach whereby a mix of equities and fixed income investments areused to maximize the long-term return of plan assets for a prudent level ofrisk.  Risk tolerance is establishedthrough careful consideration of plan liabilities, plan funded status andcorporate financial condition.  Theinvestment portfolio contains a diversified blend of equity and fixed-incomeinvestments.  Furthermore, equityinvestments are diversified across U.S. and non-U.S. stocks, both growth andvalue equity style, and small, mid and large capitalizations.  Investment risk and return parameters arereviewed and evaluated periodically to ensure compliance with stated investmentobjectives and guidelines.  Thiscomprehensive review incorporates investment portfolio performance, annualliability measurements and periodic asset/liability studies.

 

The following table setsforth the weighted average asset allocations for the retirement plans and otherpostretirement benefit plans as of December 31, 2004 and 2003, by assetcategory (in thousands):

 

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------|------------|
| **Asset Category**             | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Equity  securities             |       | 63               | %          | 47 | % |
| Debt securities                |       | 35               | %          | 30 | % |
| Other (money  market and cash) |       | 2                | %          | 23 | % |
| Total                          |       | 100              | %          | 100 | % |

 

The Parent Partnership expects to contribute approximately$3.5 million to the retirement plans and other postretirement benefit plans in2005.  We expect to be allocated a shareof these contributions (see Note 2. Summary of Significant Accounting Policies).

 

**Other Plans**

 

DEFS also sponsors an employee savings plan, whichcovers substantially all employees. Plan contributions on behalf of the Companyof $3.5 million, $3.2 million and $2.8 million were recognized during the yearsended December 31, 2004, 2003 and 2002, respectively.

 

***NOTE 17.***                                          COMMITMENTS AND CONTINGENCIES

*** ***

In the fall of 1999 and on December 1, 2000, theCompany and the Parent Partnership were named as defendants in two separatelawsuits in Jackson County Circuit Court, Jackson County, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al.*(including the Company and the ParentPartnership) and*Gilbert Richards and Jean Richards v. TexasEastern Corporation, et al.*(including the Company and the ParentPartnership).* *Inboth cases, the plaintiffs contend, among other things, that we and otherdefendants stored and disposed of toxic and hazardous substances and hazardouswastes in a manner that caused the materials to be released into the air, soiland water.  They further contend that therelease caused damages to the plaintiffs. In their complaints, the plaintiffs allege strict liability for bothpersonal injury and property damage together with gross negligence, continuingnuisance, trespass, criminal mischief and loss of consortium. The plaintiffsare seeking compensatory, punitive and treble damages.  On January 27, 2005, we entered into Releaseand Settlement Agreements with the McCleery plaintiffs and the Richardsplaintiffs dismissing all of these plaintiffs’ claims.  The settlement terms include a $2.0 millionpayment to the plaintiffs, which has been accrued for in our consolidatedfinancial statements.  The terms of thesettlements did not have a material adverse effect on our financial position,results of operations or cash flows.

 

F-27

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Although we did not settle with all plaintiffs and wetherefore remain named parties in the *Ryan E. McCleery andMarcia 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 donot believe that the outcome of these remaining claims will have a materialadverse effect on our financial position, results of operations or cash flows.

 

On December 21, 2001, we were named as a defendant ina lawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana, styled*Rebecca L. Grisham et al. v.  TE Products Pipeline Company, LimitedPartnership*.  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 answerto the plaintiffs’ petition denying the allegations, and we are defendingourselves vigorously against the lawsuit. The plaintiffs have not stipulated the amount of damages they areseeking in the suit; however, this case is covered by insurance.  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 May 2003, the Company was named as a defendant in alawsuit styled *John R. James, et al. v. J Graves InsulationCompany, et al.* as filed in the first Judicial District Court, CaddoParish, Louisiana.  There are numerousplaintiffs identified in the action that are alleged to have suffered damagesas the result of alleged exposure to asbestos-containing products andmaterials.  According to the petition andas a result of a preliminary investigation, the Company believes that the onlyclaim asserted against it results from one individual for the period from July1971 through June 1972, who is alleged to have worked on a facility owned bythe Company’s predecessor.  This periodrepresents a small portion of the total alleged exposure period from January1964 through December 2001 for this individual. The individual’s claims involve numerous employers and alleged jobsites.  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.  Theplaintiffs have not stipulated the amount of damages that they are seeking inthis suit.  We are obligated to reimbursethe Company for any costs it incurs related to this lawsuit.  We cannot estimate the loss, if any,associated with this pending lawsuit.  Wedo not believe that the outcome of this lawsuit will have a material adverseeffect on our financial position, results of operations or cash flows.

 

On April 2, 2003, Centennial was served with apetition in a matter styled *Adams, et al. 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.  Based uponcurrent information, Centennial appears to be a *de minimis*contributor, having used the disposal site during the two month time period ofDecember 2001 to January 2002.  Marathonhas been handling this matter for Centennial under its operating agreement withCentennial.  We have a 50% ownershipinterest in Centennial. On November 30, 2004, the court approved a classsettlement.  The time period for partiesto appeal this settlement has not expired, however, and the settlement will notbe final until it does so.  If theapproved class settlement becomes final, the terms of the settlement will nothave a material adverse effect on our financial position, results of operationsor cash flows.

 

On December 16, 2003, Centennial, the Company, theParent Partnership and other Parent Partnership entities were named asdefendants in a lawsuit in the 128th District Court of Orange County, Texas,styled *Elwood Karr et al. v. Centennial Pipeline, LLC etal*.  In this case, theplaintiffs contend that our pipeline leaked toxic substances on their property,causing them property damage.  On October29, 2004, the parties entered into a Settlement Agreement, dismissing allclaims.  The terms of the settlement didnot have a material adverse effect on our financial position, results ofoperations or cash flows.

 

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On February 4, 2005, we received a letter notifying usof a claim for approximately $1.45 million in damages allegedly due to ashipper being delivered off-specification gasoline during November 2004.  We are contesting liability for this matter,and to the extent there may be liability, we would seek reimbursement from thethird party refiner who supplied the gasoline into our pipeline system.  We do not believe that the outcome of thismatter will have a future material adverse effect on our consolidated financialposition, results of operations or cash flows.

 

In addition to the litigation discussed above, we havebeen, in the ordinary course of business, a defendant in various lawsuits and aparty to various other legal proceedings, some of which are covered in whole orin part by insurance. We believe that the outcome of these lawsuits and otherproceedings will not individually or in the aggregate have a future materialadverse effect on our consolidated financial position, results of operations orcash flows.

 

Our operations are subject to federal, state and locallaws and regulations governing the discharge of materials into the environment.Failure to comply with these laws and regulations may result in the assessmentof administrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to performinvestigatory and remedial activities. Although we believe our operations are in material compliance withapplicable environmental laws and regulations, risks of significant costs andliabilities are inherent in pipeline operations, and we cannot assure you thatsignificant costs and liabilities will not be incurred. Moreover, it ispossible that other developments, such as increasingly strict environmentallaws and regulations and enforcement policies thereunder, and claims fordamages to property or persons resulting from our operations, could result insubstantial costs and liabilities to us. We believe that changes in environmental laws and regulations will nothave a material adverse effect on our financial position, results of operationsor cash flows in the near term.

 

On March 26, 2004, an initial decision in *ARCO Products Co., et al. v. SFPP*, Docket OR96-2-000, et al.was issued by the FERC, which made several significant determinations withrespect to finding “changed circumstances” under the Energy Policy Act of 1992(“EP Act”).  The decision largelyclarifies, but does not fully quantify, the standard required for a complainantto demonstrate that an oil pipeline’s rates are no longer subject to the rateprotection of the EP Act by demonstrating that a substantial change incircumstances has occurred since 1992 with respect to the basis of the ratesbeing challenged.  In the decision, theFERC found that a limited number of rate elements will significantly affect theeconomic basis for a pipeline company’s rates. The elements identified in the decision are volume changes, allowedtotal return and total cost-of-service (including major cost elements of ratebase such as tax rates and tax allowances, among others).  The FERC did reject, however, the use ofchanges in tax rate and income tax allowances as standalone factors.  It appears likely that the decision will beappealed.  We have not yet determined theimpact, if any, that the decision, if it is ultimately upheld, would have onour rates if they were reviewed under the criteria of this decision.

 

On July 20, 2004, the Court of Appeals for theDistrict of Columbia Circuit issued an opinion in *BP WestCoast Producers LLC v. FERC*. In reviewing a series of orders involving SFPP, L.P. the court heldamong other things that the FERC had not adequately justified its policy ofproviding an oil pipeline limited partnership with an income tax allowanceequal to the proportion of its limited partnership interests owned by corporatepartners.  Under the FERC’s initialruling, SFPP, L.P. was permitted an income tax allowance on its cost-of-servicefiling for 42.7% of the net operating (pre-tax) income expected from operationsand was denied an income tax allowance equal to 57.3% of its limitedpartnership interests that were held by non-corporate partners.  The court remanded the case back to the FERCfor further review.  As a result of thecourt’s remand, the FERC on December 2, 2004, issued a Request for Commentsseeking comments on whether the court’s ruling applies only to the specificfacts of the SFPP, L.P. proceeding or also extends to other capital structuresinvolving partnerships and other forms of ownership.  The ultimate outcome of the FERC’s inquiry onincome tax allowance should not affect our current rates and rate structurebecause our rates are not based on cost-of-service methodology.  However, the outcome of the income taxallowance would 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.

 

F-29

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In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana, facility.  In1999, our Arcadia facility and adjacent terminals were directed by theRemediation Services Division of the LDEQ to pursue remediation of thiscontamination.  At December 31, 2004, wehave an accrued liability of $0.2 million for remediation costs at our Arcadiafacility.  Effective in March 2004, weexecuted an access agreement with an adjacent industrial landowner who islocated upgradient of the Arcadia facility. This agreement enables the landowner to proceed with remediationactivities at our Arcadia facility for which it has accepted sharedresponsibility.  We do not expect thatthe completion of the remediation program proposed to the LDEQ will have afuture material adverse effect on our financial position, results of operationsor cash flows.

 

On March 17, 2003, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois.  As a result of the release, we have enteredinto an Agreed Order with the State of Illinois which required us to conduct anenvironmental 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.  We are in theprocess of negotiating a final settlement with the State of Illinois, and wedo not expect that compliance with the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal.  Thereleased jet fuel was contained within a storm water retention pond located onthe terminal property.  Six migratorywaterfowl were affected by the jet fuel and were subsequently euthanized by orat the request of the United States Fish and Wildlife Service (“USFWS”).  On October 1, 2004, the USFWS served us witha Notice of Violation, alleging that we violated 16 USC 703 of the MigratoryBird Treaty Act 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 thismatter.  The terms of this settlement didnot have a material adverse effect on our financial position, results ofoperations or cash flows.

 

On July 27, 2004, wereceived notice from the United States Department of Justice (“DOJ”) of itsintent to seek a civil penalty against us related to our November 21, 2001,release of approximately 2,575 barrels of jet fuel from our 14-inch diameterpipeline located in Orange County, Texas. The DOJ, at the request of the Environmental Protection Agency, isseeking a civil penalty against us for alleged violations of the Clean WaterAct (“CWA”) arising out of this release. The maximum statutory penalty calculated for this alleged violation ofthe CWA is $2.8 million.  We are indiscussions with the DOJ regarding this matter and have responded to itsrequest for additional information.  Wedo not expect a civil penalty, if any, to have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

At December 31, 2004, we have an accrued liability of$1.4 million related to various sites requiring environmental remediationactivities.  We do not expect that thecompletion of remediation programs associated these activities will have afuture material adverse effect on our financial position, results of operationsor cash flows.

 

Centennial entered into credit facilities totaling$150.0 million, and as of December 31, 2004, $150.0 million was outstandingunder those credit facilities.  Theproceeds were used to fund construction and conversion costs of its pipelinesystem.  We and Marathon have eachguaranteed one-half of Centennial’s debt, up to a maximum amount of $75.0million each.

 

Rates of interstate petroleum products pipelinecompanies, like us, are currently regulated by the FERC primarily through anindex methodology, which allows a pipeline to change its rates based on thechange from year to year in the Producer Price Index for finished goods (“PPIIndex”).  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 apetition in the United States Court of Appeals for the District of ColumbiaCircuit (the “Court”), *Flying J. Inc., Lion Oil*

 

F-30

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*Company, Sinclair Oil Corporationand Tesoro Refining and Marketing Company vs. Federal Energy RegulatoryCommission*, Docket No. 03-1107, seeking a review of whetherthe FERC’s adoption of the PPI Index was reasonable and supported by theevidence. On April 9, 2004, the Court handed down a decision denying theshippers’ petition for review, stating the shippers failed to establish thatany of the FERC’s methodological choices (or combination of choices) were botherroneous and harmful.

 

As an alternative to using the PPI Index, interstatepetroleum products pipeline companies may elect to support rate filings byusing a cost-of-service methodology, competitive market showings (“Market-BasedRates”) or agreements between shippers and petroleum products pipelinecompanies that the rate is acceptable.

 

Substantially all of the petroleum products that wetransport and store are owned by our customers. At December 31, 2004, we had approximately 20.8 million barrels ofproducts in our custody that was owned by customers.  We are obligated for the transportation,storage and delivery of such products on behalf of our customers.  Our Parent Partnership maintains insuranceadequate to cover product losses through circumstances beyond our control.

 

Our Parent Partnership carries insurance coverageconsistent with companies engaged in similar operations with similar typeproperties. The Parent Partnership allocates insurance expense to us, and webelieve that the total insurance expense allocated to us is representative ofthe insurance costs we would have incurred as a separate entity.  Our insurance coverage includes (1)commercial general public liability insurance for liabilities to third partiesfor bodily injury and property damage resulting from our operations; (2)workers’ compensation liability coverage to required statutory limits;  (3) automobile liability insurance for allowned, non-owned and hired vehicles covering liabilities to third parties forbodily injury and property damage, and (4) property insurance covering thereplacement value of all real and personal property damage, including damagesarising from earthquake, flood damage and business interruption/extraexpense.  For select assets, our ParentPartnership also carries pollution liability insurance that provides coveragefor historical and gradual pollution events. All coverages are subject to certain deductibles, terms and conditionscommon for companies with similar types of operations.

 

Our Parent Partnership also maintains excess liabilityinsurance coverage above the established primary limits for commercial generalliability and automobile liability insurance. Limits, terms, conditions and deductibles are comparable to thosecarried by other energy companies of similar size.  The cost of our general insurance coveragescontinued to fluctuate over the past year reflecting the changing conditions ofthe insurance markets.  These insurancepolicies, except for the pollution liability policies, are with Bison InsuranceCompany Limited, an insurance company that is wholly owned by Duke Energy (seeNote 6.  Related Party Transactions).

 

***NOTE 18.***                                          Discontinued Operations

*** ***

Effective January 1, 2002, our Parent Partnershiprealigned its business segments to reflect its entry into the natural gasgathering business and the expanded scope of its NGLs operations.  As part of this realignment, on May 31, 2002,we entered into an Assignment and Assumption Agreement with TEPPCO Midstream totransfer our investment in TEPPCO Colorado to TEPPCO Midstream at the bookvalue of TEPPCO Colorado’s net assets. SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*requires that long-livedassets to be disposed of should be recorded at the lower of their carrying amountor fair value less costs to sell.  As aresult, in the quarter ended June 30, 2002, we compared the fair value ofTEPPCO Colorado to its carrying value and noted no indication of impairment.

 

The transfer of TEPPCO Colorado to TEPPCO Midstreamwas recorded at the book value of TEPPCO Colorado’s net assets, which was $4.1million.  In connection with thetransfer, we received $4.1 million in cash from TEPPCO Midstream.  TEPPCO Midstream assumed the outstanding debtof TEPPCO Colorado of $32.0 million as part of the transaction.  As a result of the transfer, our financialposition and results of operations have

 

F-31

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been reclassified toreflect revenue, expenses, assets and liabilities of TEPPCO Colorado asdiscontinued operations for the periods presented.

 

A condensed statement of income is shown below forTEPPCO Colorado for the year ended December 31, 2002 (in thousands): 

 

| Revenues                               |   | $      | 3,115  |   |
|----------------------------------------|--------|--------|--------|--------|
| Operating,  general and administrative |   | 369    |   |
| Depreciation and  amortization         |   | 840    |   |
| Operating income                       |   | 1,906  |   |
| Interest expense                       |   | (1,015 | )      |
| Other income –  net               |   | 21     |   |
| Net income                             |   | $      | 912    |   |

 

***NOTE 19.***                                          QUARTERLY FINANCIAL INFORMATION(UNAUDITED)

** **
| ** **          | ** ** | **First**          | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|---------------------|------------|--------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **          | ** ** | **Quarter**        | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **          | ** ** | **(in thousands)** | ** ** |
| **2004**            |       |               |       |        |       |        |       |        |       |
| Operating  revenues |       | $                  | 73,662     |        | $          | 61,217      |       | $           | 67,365     |   | $ | 72,514 |   |
| Operating income    |       | 25,084             |       | 13,821      |       | 11,796      |       | 17,382      |       |
| Net income          |       | 17,209             |       | 6,904       |       | 4,698       |       | 7,814       |       |
|                |       |               |       |        |       |        |       |        |       |
| **2003**            |       |               |       |        |       |        |       |        |       |
| Operating  revenues |       | $                  | 66,969     |        | $          | 58,805      |       | $           | 63,741     |   | $ | 72,452 |   |
| Operating income    |       | 28,634             |       | 15,899      |       | 16,625      |       | 19,402      |       |
| Net income          |       | 20,567             |       | 8,773       |       | 8,796       |       | 11,345      |       |

 

***NOTE 20.***                                          SUBSEQUENT EVENT

*** ***

On February 24, 2005, Texas Eastern Products PipelineCompany, LLC, the General Partner of our Parent Partnership, was acquired byEPCO, Inc. (“EPCO”), a privately held company controlled by Dan L. Duncan.  The acquisition was valued at $1.1billion.  Additionally, in a separatetransaction, EPCO and its affiliates have agreed to purchase 2.5 million of ourParent Partnership’s Limited Partner Units, valued at approximately $100.0million, from Duke Energy.  EPCO and itsaffiliates own the general partner of Enterprise Products Partners L.P. (“Enterprise”)and approximately 145 million Enterprise common units.  Enterprise is one of the largest publiclytraded master limited partnerships.  Thegeneral partners of both our Parent Partnership and Enterprise will continue tooperate independently and will maintain separate boards of directors,management teams and offices.

 

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