**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-Q**

 

**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterlyperiod ended June 30, 2005**

 

**OR**

 

**o****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission File No. 1-10403**

 

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**TEPPCO Partners,L.P.**

(Exact name of Registrant asspecified in its charter)

 
| **Delaware**            | ** ** | **76-0291058**         |
|-------------------------|------------|------------------------|
| (State of Incorporation |       | (I.R.S. Employer       |
| or Organization)        |       | Identification Number) |

 

**2929 AllenParkway**

**P.O. Box2521**

**Houston, Texas77252-2521**

(Address of principal executiveoffices, including zip code)

 

**(713) 759-3636**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  ý  No o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes  ý  No o

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.  Limited Partner Unitsoutstanding as of August 1, 2005:   69,963,554

 

 

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**TEPPCO PARTNERS, L.P.**

 

**TABLE OF CONTENTS**

 
| **PART I.  FINANCIAL INFORMATION**                                                                                        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                     | ** ** |
| **Item 1.  Financial Statements**                                                                                              | ** ** |
| **Consolidated Balance Sheets as of June 30, 2005  (unaudited) and December 31, 2004**                               | ** ** |
| ** **                                                                                                                     | ** ** |
| **Consolidated Statements of Income for the three months  and six months ended June 30, 2005 and  2004 (unaudited)** | ** ** |
| ** **                                                                                                                     | ** ** |
| **Consolidated  Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (unaudited)**               | ** ** |
| ** **                                                                                                                     | ** ** |
| **Consolidated  Statement of Partners’ Capital for the six months ended June 30, 2005  (unaudited)**                 | ** ** |
| ** **                                                                                                                     | ** ** |
| **Notes to the  Consolidated Financial Statements (unaudited)**                                                                | ** ** |
| ** **                                                                                                                     | ** ** |
| **Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations**                       | ** ** |
| ** **                                                                                                                     | ** ** |
| **Forward-Looking Statements**                                                                                                 | ** ** |
| ** **                                                                                                                     | ** ** |
| **Item  3. Quantitative and Qualitative Disclosures About Market Risk**                                                        | ** ** |
| ** **                                                                                                                     | ** ** |
| **Item 4. Controls and  Procedures**                                                                                           | ** ** |
| ** **                                                                                                                     | ** ** |
| **PART II. OTHER  INFORMATION**                                                                                           | ** ** |
| ** **                                                                                                                     | ** ** |
| **Item 1. Legal Proceedings**                                                                                                  | ** ** |
| ** **                                                                                                                     | ** ** |
| **Item 6. Exhibits**                                                                                                           | ** ** |
| ** **                                                                                                                     | ** ** |
| **Signatures**                                                                                                                 | ** ** |

 

i

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**PART I. FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 

**TEPPCO PARTNERS, L.P.**

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                          | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                                                                                          | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                     |       |              |       |                  |       |
| Cash and cash equivalents                                                                                           |       | $                 | 1,494      |                  | $          | 16,422 |   |
| Accounts receivable, trade (net of allowance for  doubtful accounts of $182 and $112)                               |       | 686,677           |       | 553,628               |       |
| Accounts receivable, related parties                                                                                |       | 4,440             |       | 12,921                |       |
| Inventories                                                                                                         |       | 98,487            |       | 19,521                |       |
| Other                                                                                                               |       | 57,504            |       | 42,138                |       |
| Total current assets                                                                                                |       | 848,602           |       | 644,630               |       |
| Property, plant and equipment, at cost (net of  accumulated depreciation and amortization of $442,282 and $407,670) |       | 1,789,866         |       | 1,703,702             |       |
| Equity investments                                                                                                  |       | 373,047           |       | 373,652               |       |
| Intangible assets                                                                                                   |       | 393,271           |       | 407,358               |       |
| Goodwill                                                                                                            |       | 16,944            |       | 16,944                |       |
| Other assets                                                                                                        |       | 58,746            |       | 51,419                |       |
| Total assets                                                                                                        |       | $                 | 3,480,476  |                  | $          | 3,197,705 |   |
|                                                                                                                |       |              |       |                  |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                          |       |              |       |                  |       |
| ** **                                                                                                          |       |              |       |                  |       |
| Current liabilities:                                                                                                |       |              |       |                  |       |
| Accounts payable and accrued liabilities                                                                            |       | $                 | 685,563    |                  | $          | 564,464 |   |
| Accounts payable, related parties                                                                                   |       | 6,458             |       | 25,730                |       |
| Accrued interest                                                                                                    |       | 32,506            |       | 32,292                |       |
| Other accrued taxes                                                                                                 |       | 13,407            |       | 13,309                |       |
| Other                                                                                                               |       | 48,641            |       | 46,593                |       |
| Total current liabilities                                                                                           |       | 786,575           |       | 682,388               |       |
| Senior Notes                                                                                                        |       | 1,129,394         |       | 1,127,226             |       |
| Other long-term debt                                                                                                |       | 278,000           |       | 353,000               |       |
| Other liabilities and deferred credits                                                                              |       | 12,729            |       | 13,643                |       |
| Commitments and contingencies                                                                                       |       |              |       |                  |       |
| Partners’ capital:                                                                                             |       |              |       |                  |       |
| General partner’s interest                                                                                     |       | (40,272           | )          | (33,006               | )          |
| Limited partners’ interests                                                                                    |       | 1,314,050         |       | 1,054,454             |       |
| Total partners’ capital                                                                                        |       | 1,273,778         |       | 1,021,448             |       |
| Total liabilities and partners’ capital                                                                        |       | $                 | 3,480,476  |                  | $          | 3,197,705 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

1

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**TEPPCO PARTNERS, L.P.**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

**(in thousands, except per Unit amounts)**

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                             | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating revenues:                                    |       |                   |       |                 |       |   |   |   |   |
| Sales of petroleum products                            |       | $                      | 1,963,617  |                 | $          | 1,232,807 |   | $ | 3,350,826 |   | $ | 2,414,920 |   |
| Transportation – Refined products                 |       | 37,834                 |       | 38,937               |       | 72,799 |   | 69,908 |   |
| Transportation – LPGs                             |       | 14,470                 |       | 13,721               |       | 46,701 |   | 42,501 |   |
| Transportation – Crude oil                        |       | 9,042                  |       | 9,213                |       | 18,214 |   | 18,876 |   |
| Transportation – NGLs                             |       | 11,387                 |       | 10,578               |       | 21,606 |   | 20,592 |   |
| Gathering – Natural gas                           |       | 36,956                 |       | 34,427               |       | 73,516 |   | 68,929 |   |
| Other                                                  |       | 17,074                 |       | 14,881               |       | 33,323 |   | 36,899 |   |
| Total operating revenues                               |       | 2,090,380              |       | 1,354,564            |       | 3,616,985 |   | 2,672,625 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Costs and expenses:                                    |       |                   |       |                 |       |   |   |   |   |
| Purchases of petroleum products                        |       | 1,943,696              |       | 1,217,312            |       | 3,316,156 |   | 2,384,653 |   |
| Operating, general and administrative                  |       | 49,979                 |       | 52,640               |       | 99,997 |   | 104,443 |   |
| Operating fuel and power                               |       | 11,546                 |       | 11,035               |       | 22,616 |   | 22,995 |   |
| Depreciation and amortization                          |       | 26,292                 |       | 26,411               |       | 52,055 |   | 54,231 |   |
| Taxes – other than income taxes                   |       | 4,272                  |       | 4,831                |       | 9,708 |   | 10,125 |   |
| Gains on sales of assets                               |       | (68                    | )          | (66                  | )          | (566 | ) | (124 | ) |
| Total costs and expenses                               |       | 2,035,717              |       | 1,312,163            |       | 3,499,966 |   | 2,576,323 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Operating income                                       |       | 54,663                 |       | 42,401               |       | 117,019 |   | 96,302 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Interest expense – net                            |       | (21,627                | )          | (16,464              | )          | (40,914 | ) | (36,059 | ) |
| Equity earnings                                        |       | 9,062                  |       | 11,582               |       | 14,308 |   | 17,233 |   |
| Other income – net                                |       | 135                    |       | 240                  |       | 401 |   | 716 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Net income                                             |       | $                      | 42,233     |                 | $          | 37,759 |   | $ | 90,814 |   | $ | 78,192 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Net Income Allocation:                                 |       |                   |       |                 |       |   |   |   |   |
| Limited Partner Unitholders                            |       | $                      | 29,671     |                 | $          | 26,867 |   | $ | 64,237 |   | $ | 55,636 |   |
| General Partner                                        |       | 12,562                 |       | 10,892               |       | 26,577 |   | 22,556 |   |
| Total net income allocated                             |       | $                      | 42,233     |                 | $          | 37,759 |   | $ | 90,814 |   | $ | 78,192 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Basic and diluted net income per Limited Partner  Unit |       | $                      | 0.45       |                 | $          | 0.43 |   | $ | 0.99 |   | $ | 0.88 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted average Limited Partner Units outstanding     |       | 66,559                 |       | 62,999               |       | 64,789 |   | 62,999 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

2

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**TEPPCO PARTNERS, L.P.**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                     | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                     | ** ** | **June 30,**    | ** ** |
| ** **                                                                     | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                          |       |                 |       |   |   |
| Net income                                                                     |       | $                    | 90,814     |   | $ | 78,192 |   |
| Adjustments to reconcile net income to cash provided  by operating activities: |       |                 |       |   |   |
| Depreciation and amortization                                                  |       | 52,055               |       | 54,231 |   |
| Earnings in equity investments, net of distributions                           |       | 4,739                |       | 3,617 |   |
| Gains on sales of assets                                                       |       | (566                 | )          | (124 | ) |
| Non-cash portion of interest expense                                           |       | 810                  |       | (219 | ) |
| Increase in accounts receivable                                                |       | (133,049             | )          | (93,044 | ) |
| Increase in inventories                                                        |       | (70,587              | )          | (213 | ) |
| (Increase) decrease in other current assets                                    |       | (15,265              | )          | 3,244 |   |
| Increase in accounts payable and accrued expenses                              |       | 120,182              |       | 93,583 |   |
| Other                                                                          |       | (24,533              | )          | (7,219 | ) |
| Net cash provided by operating activities                                      |       | 24,600               |       | 132,048 |   |
|                                                                           |       |                 |       |   |   |
| Cash flows from investing activities:                                          |       |                 |       |   |   |
| Proceeds from the sales of assets                                              |       | 510                  |       | 141 |   |
| Purchase of assets                                                             |       | (42,482              | )          | (2,962 | ) |
| Investment in Centennial Pipeline LLC                                          |       | —               |       | (1,500 | ) |
| Investment in Mont Belvieu Storage Partners, L.P.                              |       | (1,109               | )          | (17,211 | ) |
| Capital expenditures                                                           |       | (82,963              | )          | (60,390 | ) |
| Net cash used in investing activities                                          |       | (126,044             | )          | (81,922 | ) |
|                                                                           |       |                 |       |   |   |
| Cash flows from financing activities:                                          |       |                 |       |   |   |
| Proceeds from revolving credit facility                                        |       | 299,307              |       | 149,800 |   |
| Repayments on revolving credit facility                                        |       | (374,307             | )          | (99,800 | ) |
| Issuance of Limited Partner Units, net                                         |       | 278,832              |       | — |   |
| Distributions paid                                                             |       | (117,316             | )          | (115,741 | ) |
| Net cash provided by (used in) financing activities                            |       | 86,516               |       | (65,741 | ) |
|                                                                           |       |                 |       |   |   |
| Net decrease in cash and cash equivalents                                      |       | (14,928              | )          | (15,615 | ) |
|                                                                           |       |                 |       |   |   |
| Cash and cash equivalents at beginning of period                               |       | 16,422               |       | 29,469 |   |
| Cash and cash equivalents at end of period                                     |       | $                    | 1,494      |   | $ | 13,854 |   |
|                                                                           |       |                 |       |   |   |
| **Supplemental disclosure of cash flows:**                                     |       |                 |       |   |   |
| Cash paid for interest (net of amounts capitalized)                            |       | $                    | 41,067     |   | $ | 41,208 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

3

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**TEPPCO PARTNERS, L.P.**

 

**CONSOLIDATED STATEMENT OFPARTNERS’ CAPITAL**

**(Unaudited)**

**(in thousands, except Unit amounts)**

 
| ** **                                       | ** ** | **Outstanding** | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                                       | ** ** | **Limited**     | ** ** | **General**        | ** ** | **Limited**        | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Partner**     | ** ** | **Partner’s** | ** ** | **Partners’** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Units**       | ** ** | **Interest**       | ** ** | **Interests**      | ** ** | **Total**  | ** ** |
|                                             |       |            |       |               |       |               |       |       |       |
| Partners’ capital at December 31, 2004 |       | 62,998,554      |       | $                  | (33,006    | )                  | $          | 1,054,454  |       | $ | 1,021,448 |   |
| Issuance of Limited Partner Units, net           |       | 6,965,000       |       | —             |       | 278,832            |       | 278,832    |       |
| Net income allocation                            |       | —          |       | 26,577             |       | 64,237             |       | 90,814     |       |
| Cash distributions                               |       | —          |       | (33,843            | )          | (83,473            | )          | (117,316   | )          |
|                                             |       |            |       |               |       |               |       |       |       |
| Partners’ capital at June 30, 2005     |       | 69,963,554      |       | $                  | (40,272    | )                  | $          | 1,314,050  |       | $ | 1,273,778 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

4

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**TEPPCO PARTNERS, L.P.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**NOTE 1.**  ORGANIZATION AND BASIS OFPRESENTATION

** **

TEPPCO Partners, L.P.(the “Partnership”), a Delaware limited partnership, is a master limitedpartnership formed in March 1990. We operate through TE Products Pipeline Company, Limited Partnership (“TEProducts”), TCTM, L.P. (“TCTM”) and TEPPCO Midstream Companies, L.P. (“TEPPCOMidstream”).  Collectively, TE Products,TCTM and TEPPCO Midstream are referred to as the “Operating Partnerships.”  TEPPCO GP, Inc. (“TEPPCO GP”), ourwholly owned subsidiary, is the general partner of our OperatingPartnerships.  We hold a 99.999% limitedpartner interest in the Operating Partnerships, and TEPPCO GP holds a 0.001%general partner interest.  Texas EasternProducts Pipeline Company, LLC (the “Company” or “General Partner”), a Delawarelimited liability company, serves as our general partner and owns a 2% general partnerinterest in us.  Through February 23,2005, the General Partner was an indirect wholly owned subsidiary of DukeEnergy Field Services, LLC (“DEFS”), a joint venture between Duke EnergyCorporation (“Duke Energy”) and ConocoPhillips. Through February 23, 2005, Duke Energy held an interest ofapproximately 70% in DEFS, and ConocoPhillips held the remaining interest ofapproximately 30%.  On February 24,2005, the General Partner was acquired by DFI GP Holdings L.P. (formerlyEnterprise GP Holdings L.P.) (“DFI”), an affiliate of EPCO, Inc. (“EPCO”),a privately held company controlled by Dan L. Duncan, for approximately $1.1billion.  As a result of the transaction,DFI owns and controls the 2% general partner interest in us and has the rightto receive the incentive distribution rights associated with the generalpartner interest.

 

EPCO performs allmanagement and operating functions required for us, except for some administrativeservices for certain of the TEPPCO Midstream assets that are currently performedby DEFS on our behalf.  We reimburse EPCOfor all reasonable direct and indirect expenses that have been incurred inmanaging us.  Under a transition servicesagreement entered into as part of the sale of the General Partner, DEFS will continueto provide some administrative services for certain of the TEPPCO Midstreamassets for us for a period of time until we assume these services on ourown.  In connection with us assuming theoperations of these TEPPCO Midstream assets from DEFS, certain DEFS employees becameemployees of EPCO effective June 1, 2005. As part of the transition services agreement, Duke Energy will continueto provide some administrative support services to us until we or EPCO assumethose activities.

 

In connection with ourformation in 1990, the Company received 2,500,000 Deferred ParticipationInterests (“DPIs”).  Effective April 1,1994, the DPIs began participating in distributions of cash and allocations ofprofit and loss in a manner identical to Limited Partner Units and are treatedas Limited Partner Units for purposes of this Report.  These Limited Partner Units were assigned toDuke Energy when ownership of the Company was transferred from Duke Energy toDEFS in 2000.  On February 24, 2005,DFI entered into an LP Unit Purchase and Sale Agreement with Duke Energy andpurchased these 2,500,000 DPIs for approximately $100.0 million.

 

As used in this Report, “we,”“us,” “our,” the “Partnership” and “TEPPCO” mean TEPPCO Partners, L.P. and,where the context requires, include our subsidiaries.

 

Theaccompanying unaudited consolidated financial statements reflect alladjustments that are, in the opinion of our management, of a normal andrecurring nature and necessary for a fair statement of our financial positionas of June 30, 2005, and the results of our operations and cash flows forthe periods presented.  The results ofoperations for the three months and six months ended June 30, 2005, arenot necessarily indicative of results of our operations for the full year2005.  You should read these interimfinancial statements in conjunction with our consolidated financial statementsand notes thereto presented in the TEPPCO Partners, L.P. Annual Report on Form 10-Kfor the year ended December 31, 2004. We have reclassified certain amounts from prior periods to conform tothe current presentation.

 

5

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Weoperate and report in three business segments: transportation and storage ofrefined products, liquefied petroleum gases (“LPGs”) and petrochemicals (“DownstreamSegment”); gathering, transportation, marketing and storage of crude oil anddistribution of lubrication oils and specialty chemicals (“Upstream Segment”);and gathering of natural gas, fractionation of natural gas liquids (“NGLs”) andtransportation of NGLs (“Midstream Segment”). Our reportable segments offer different products and services and aremanaged separately because each requires different business strategies.

 

Ourinterstate transportation operations, including rates charged to customers, aresubject to regulations prescribed by the Federal Energy Regulatory Commission (“FERC”).  We refer to refined products, LPGs,petrochemicals, crude oil, NGLs and natural gas in this Report, collectively,as “petroleum products” or “products.”

 

**Net Income PerUnit**

 

Basic netincome per Limited Partner Unit (“Unit” or “Units”) is computed by dividing ournet income, after deduction of the General Partner’s interest, by the weightedaverage number of Units outstanding (a total of 66.6 million and 64.8 millionUnits for the three months and six months ended June 30, 2005,respectively, and 63.0 million Units for the three months and six months ended June 30,2004).  The General Partner’s percentageinterest in our net income is based on its percentage of cash distributionsfrom Available Cash for each period (see Note 8. Partners’Capital and Distributions).  TheGeneral Partner was allocated $12.6 million (representing 29.74%) and $10.9million (representing 28.85%) of our net income for the three months ended June 30,2005 and 2004, respectively, and $26.6 million (representing 29.27%) and $22.6million (representing 28.85%) of our net income for the six months ended June 30,2005 and 2004, respectively.  The GeneralPartner’s percentage interest in our net income increases as cash distributionspaid per Unit increase, in accordance with our limited partnership agreement.

 

Dilutednet income per Unit equaled basic net income per Unit for each of the three-monthand six-month periods ended June 30, 2005 and 2004, as there were nodilutive instruments outstanding.

 

**NewAccounting Pronouncements**

** **

**In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), *Share-BasedPayment*.  SFAS 123(R) requirescompensation costs related to share-based payment transactions to be recognizedin the financial statements.  Withlimited exceptions, the amount of the compensation cost is to be measured basedon the grant-date fair value of the equity or liability instrumentsissued.  In addition, liability awardsare to be re-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 SFAS No. 123,*Accounting for Stock-Based Compensation*,as amended by SFAS No. 148,*Accountingfor Stock-Based Compensation – Transition and Disclosure* andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS 123(R) is effective for public companiesas of the first interim or annual reporting period of the first fiscal yearbeginning on or after June 15, 2005. As such, we will adopt SFAS 123(R) in the first quarter of 2006.  Companies are permitted to adopt SFAS 123(R)prior to the extended date.  All publiccompanies that adopted the fair-value-based method of accounting must use themodified prospective transition method and may elect to use the modifiedretrospective transition method.  We donot believe that the adoption of SFAS 123(R) will have a material effect on ourfinancial position, results of operations or cash flows.**

** **

**In November 2004,the Emerging Issues Task Force (“EITF”) reached consensus in EITF 03-13, *Applying the Conditions in Paragraph 42 of FASB Statement No. 144,Accounting for Impairment orDisposal of Long-Lived Assets, in Determining Whether to ReportDiscontinued Operations*, to clarify whether a component of an enterprisethat is either disposed of or classified as held for sale qualifies for incomestatement presentation as discontinued**

** **

**6**

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** **

**operations**. The FASB ratified the consensus on November 30, 2004.  The consensus is to be applied prospectivelywith regard to a component of an enterprise that is either disposed of orclassified as held for sale in reporting periods beginning after December 15,2004.  The consensus may be appliedretrospectively for previously reported operating results related to disposaltransactions initiated within an enterprise’s reporting period that includedthe date that this consensus was ratified. The adoption of EITF 03-13 did nothave an effect on our financial position, results of operations or cash flows.

** **

**In March 2005,the FASB issued FASB Interpretation No. 47, *Accounting for Conditional Asset Retirement Obligations, aninterpretation of FASB Statement No. 143* (“FIN 47”).  FIN 47 clarifies that the term, conditionalasset retirement obligation as used in SFAS No. 143, *Accounting forAsset Retirement Obligations*, refers to a legal obligation toperform an asset retirement activity in which the timing and/or method ofsettlement are conditional upon a future event that may or may not be withinthe control of the entity.  Even thoughuncertainty about the timing and/or method of settlement exists and may beconditional upon a future event, the obligation to perform the asset retirementactivity is unconditional.  Accordingly,an entity is required to recognize a liability for the fair value of aconditional asset retirement obligation if the fair value of the liability canbe reasonably estimated.  Uncertaintyabout the timing and/or method of settlement of a conditional asset retirementobligation should be factored into the measurement of the liability whensufficient information exists.  The fairvalue of a liability for the conditional asset retirement obligation should berecognized when incurred generally upon acquisition, construction, or developmentor through the normal operation of the asset. SFAS 143 acknowledges that in some cases, sufficient information may notbe available to reasonably estimate the fair value of an asset retirementobligation.  FIN 47 also clarifies whenan entity would have sufficient information to reasonably estimate the fairvalue of an asset retirement obligation. FIN 47 is effective no later than the end of reporting periods endingafter December 15, 2005.  As such,we will adopt FIN 47 in the fourth quarter of 2005.  Retrospective application for interimfinancial information is permitted but is not required.  Early adoption of FIN 47 is encouraged.  We do not believe that the adoption of FIN 47will have a material effect on our financial position, results of operations orcash flows.**

** **

In June 2005,the EITF reached consensus in EITF 04-5, *DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights*, to provide guidance on how general partners in a limitedpartnership should determine whether they control a limited partnership andtherefore should consolidate it.  TheEITF agreed that the presumption of general partner control would be overcomeonly when the limited partners have either of two types of rights. The first type, referred to as kick-out rights, is the right to dissolve orliquidate the partnership or otherwise remove the general partnerwithout cause.  The second type, referredto as participating rights, is the right to effectivelyparticipate in significant decisions made in the ordinary course of thepartnership’s business. The kick-out rights and the participating rights mustbe substantive in order to overcome the presumption of general partner control.The consensus is effective for general partners of all new limited partnershipsformed and for existing limited partnerships for which the partnershipagreements are modified subsequent to the date of FASB ratification (June 29,2005).  The guidance in this EITF iseffective for existing partnerships no later than the beginning of the firstreporting period in fiscal years beginning after December 15, 2005.  We are currently evaluating what impact this EITFwill have on our financial statements, but at this time, we do not believe thatthe adoption of this EITF will have a material effect on our financialposition, results of operations or cash flows.

 

**NOTE 2.**  GOODWILL AND OTHER INTANGIBLEASSETS

** **

**Goodwill**

 

Goodwill represents theexcess of purchase price over fair value of net assets acquired and ispresented on the consolidated balance sheets net of accumulatedamortization.  We account for goodwillunder SFAS No. 142,

 

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*Goodwill and Other Intangible Assets,*whichwas 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. We test goodwill and intangible assets for impairment annually at December 31.

 

To perform an impairmenttest of goodwill, we have identified our reporting units and have determinedthe carrying value of each reporting unit by assigning the assets andliabilities, including the existing goodwill and intangible assets, to those reportingunits.  We then determine the fair valueof each reporting unit and compare it to the carrying value of the reportingunit.  We will continue to compare thefair value of each reporting unit to its carrying value on an annual basis todetermine if an impairment loss has occurred. There have been no goodwill impairment lossesrecorded since the adoption of SFAS 142.

 

At June 30,2005, and December 31, 2004, we have $16.9 million of unamortized goodwilland $25.5 million of excess investment in our equity investment in Seaway CrudePipeline Company (equity method goodwill). The excess investment is included in our equity investments account at June 30,2005.  The following table presents thecarrying amount of goodwill and equity method goodwill at June 30, 2005,and December 31, 2004, by business segment (in thousands):

 
| ** **             | ** ** | **Downstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Upstream  Segment** | ** ** | **Segments  Total** | ** ** |
|------------------------|------------|-------------------------|------------|------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **             | ** ** | ** **              | ** ** | ** **             | ** ** | ** **            | ** ** | ** **          | ** ** |
| Goodwill               |       | $                       | —     |                   | $          | 2,777                 |       | $                   | 14,167     |   | $ | 16,944 |   |
| Equity method goodwill |       | —                  |       | —                 |       | 25,502                |       | 25,502              |       |
|                        |            |                         |            |                        |            |                       |            |                     |            |  |  |  |  |

 

**Other Intangible Assets**

 

Thefollowing table reflects the components of intangible assets being amortized atJune 30, 2005, and December 31, 2004 (in thousands):

 
| ** **                              | ** ** | **June 30, 2005**     | ** ** | **December 31, 2004**    | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible assets being amortized:      |       |                       |       |                          |       |   |   |   |   |
| Gathering and transportation agreements |       | $                          | 464,337    |                          | $          | (103,856 | ) | $ | 464,337 |   | $ | (91,262 | ) |
| Fractionation agreement                 |       | 38,000                     |       | (13,775                       | )          | 38,000 |   | (12,825 | ) |
| Other                                   |       | 11,520                     |       | (2,955                        | )          | 12,262 |   | (3,154 | ) |
| Total                                   |       | $                          | 513,857    |                          | $          | (120,586 | ) | $ | 514,599 |   | $ | (107,241 | ) |

 

SFAS 142requires that intangible assets with finite useful lives be amortized overtheir respective estimated useful lives. If an intangible asset has a finite useful life, but the precise lengthof that life is not known, that intangible asset shall be amortized over thebest estimate of its useful life.  At aminimum, we will assess the useful lives and residual values of all intangibleassets on an annual basis to determine if adjustments are required.  Amortization expense on intangible assets was$7.0 million and $8.3 million for the three months ended June 30, 2005 and2004, respectively, and $14.1 million and $16.5 million for the six months endedJune 30, 2005 and 2004, respectively.

 

The valueassigned to our intangible assets for natural gas gathering contracts isamortized on a unit-of-production basis, based upon the actual throughput ofthe system over the expected total throughput for the lives of thecontracts.  We update throughputestimates and evaluate the remaining expected useful lives of the contractassets on a quarterly basis based on the best available information.  During the fourth quarter of 2004 and thefirst and second quarters of 2005, certain limited production forecasts wereobtained from some of the producers on the

 

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Jonah Gas Gathering Company (“Jonah”)system related to future expansions of the system, and as a result, weincreased our best estimate of future throughput on the Jonah system.  Revisions to these estimates may occur asadditional production information is made available to us.

 

Theamortization of the contracts related to the Val Verde Gas Gathering Company (“ValVerde”) assets is also amortized on a unit-of-production basis.  During the fourth quarter of 2004, certainlimited production forecasts were obtained from some of the producers on theVal Verde system, and as a result, we increased our best estimate of futurethroughput on the Val Verde system.  Revisionsto these estimates may occur as additional production information is madeavailable to us.

 

Thevalues assigned to our fractionation agreement and other intangible assets aregenerally amortized on a straight-line basis. Our fractionation agreement with DEFS is being amortized over itscontract period of 20 years.  Theamortization periods for our other intangible assets, which include non-competeand other agreements, range from 3 years to 15 years.  The values assigned to our crude supply andtransportation intangible customer contracts are being amortized on aunit-of-production basis.

 

At June 30,2005, we have $33.4 million of excess investment in our equity investment inCentennial Pipeline LLC, which was created upon formation of the company.  The excess investment is included in ourequity investments account at June 30, 2005.  This excess investment is accounted for as anintangible asset with an indefinite life. We assess the intangible asset for impairment on an annual basis.

 

Thefollowing table sets forth the estimated amortization expense of intangibleassets for the years ending December 31 (in thousands):

 
| 2005 |   | $      | 28,417 |   |
|------|--------|--------|--------|--------|
| 2006 |   | 31,327 |   |
| 2007 |   | 33,066 |   |
| 2008 |   | 33,148 |   |
| 2009 |   | 31,115 |   |

 

**NOTE 3.** INTEREST RATE SWAPS

** **

In July 2000, weentered into an interest rate swap agreement to hedge our exposure to increasesin the benchmark interest rate underlying our variable rate revolving creditfacility.  This interest rate swapmatured in April 2004.  Wedesignated this swap agreement, which hedged exposure to variability inexpected future cash flows attributed to changes in interest rates, as a cashflow hedge.  The swap agreement was basedon a notional amount of $250.0 million. Under the swap agreement, we paid a fixed rate of interest of 6.955% andreceived a floating rate based on a three-month U.S. Dollar LIBOR rate.  Because this swap was designated as a cashflow hedge, the changes in fair value, to the extent the swap was effective, wererecognized in other comprehensive income until the hedged interest costs wererecognized in earnings.  From January 2004through April 2004, we recognized an increase in interest expense of $2.9million related to the difference between the fixed rate and the floating rateof interest on the interest rate swap.

 

In October 2001, TEProducts entered into an interest rate swap agreement to hedge its exposure tochanges in the fair value of its fixed rate 7.51% Senior Notes due 2028.  We designated this swap agreement as a fairvalue hedge.  The swap agreement has anotional amount of $210.0 million and matures in January 2028 to match theprincipal and maturity of the TE Products Senior Notes.  Under the swap agreement, TE Products pays afloating rate of interest based on a three-month U.S. Dollar LIBOR rate, plus aspread, and receives a fixed rate of interest of

 

9

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7.51%.  During the six months ended June 30,2005 and 2004, we recognized reductions in interest expense of $3.3 million and$5.1 million, respectively, related to the difference between the fixed rateand the floating rate of interest on the interest rate swap.  During the quarter ended June 30, 2005,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 $7.4 million and $3.4 million at June 30, 2005,and December 31, 2004, respectively.

 

**During 2002, we entered intointerest rate swap agreements, designated as fair value hedges, to hedge ourexposure to changes in the fair value of our fixed rate 7.625% Senior Notes due2012.  The swap agreements had a combinednotional amount of $500.0 million and matured in 2012 to match the principaland maturity of the Senior Notes.  Underthe swap agreements, we paid a floating rate of interest based on a U.S. DollarLIBOR rate, plus a spread, and received a fixed rate of interest of7.625%.  These swap agreements were laterterminated in 2002 resulting in gains of $44.9 million.  The gains realized from the swap terminationshave been deferred as adjustments to the carrying value of the Senior Notes andare being amortized using the effective interest method as reductions to futureinterest expense over the remaining term of the Senior Notes.  At June 30, 2005, the unamortized balanceof the deferred gains was $34.6 million. In the event of early extinguishment of the Senior Notes, any remainingunamortized gains would be recognized in the consolidated statement of incomeat the time of extinguishment.**

** **

**During May 2005, we executed atreasury rate lock agreement with a notional amount of $200.0 million to hedgeour exposure to increases in the treasury rate that was to be used to establishthe fixed interest rate for a debt offering that was proposed to occur in thesecond quarter of 2005.  During June 2005,the proposed debt offering was cancelled, and the treasury lock was terminatedwith a realized loss of $2.0 million. The realized loss was recorded as a component of interest expense in theconsolidated statements of income in June 2005.**

** **

**NOTE 4.**  ACQUISITIONS

** **

**MexiaPipeline**

 

On March 31, 2005,we purchased crude oil pipeline assets for $7.1 million from BP Pipelines(North America) Inc. (“BP”).  The assetsinclude approximately 158 miles of pipeline which extend from Mexia, Texas, tothe Houston, Texas, area and two stations in south Houston with connections toa BP pipeline that originates in south Houston. We funded the purchase through borrowings under our revolving creditfacility.  We allocated the purchaseprice to property, plant and equipment, and we accounted for the acquisition ofthese assets under the purchase method of accounting.  We will integrate these assets into our SouthTexas pipeline system, included in our Upstream Segment, which will allow us torealize synergies within our existing asset base and will provide future growthopportunities.

 

**Storageand Terminaling Assets**

 

On April 1, 2005, wepurchased crude oil storage and terminaling assets in Cushing, Oklahoma, fromKoch Supply & Trading, L.P. for $35.4 million.  The assets consist of eight storage tankswith 945,000 barrels of storage capacity, receipt and delivery manifolds,interconnections to several pipelines, crude oil inventory and approximately 70acres of land.  We funded the purchasethrough borrowings under our revolving credit facility.  We allocated the purchase price to property,plant and equipment and inventory, and we accounted for the acquisition ofthese assets under the purchase method of accounting.  The storage and terminaling assets willcomplement our existing infrastructure in Cushing and strengthen our gatheringand marketing business in our Upstream Segment.

 

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**NOTE 5.**  INVENTORIES

** **

Inventoriesare valued at the lower of cost (based on weighted average cost method) ormarket.  The costs of inventories did notexceed market values at June 30, 2005, and December 31, 2004.  The major components of inventories were asfollows (in thousands):

 
| ** **                               | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Crude oil (1)                            |       | $                       | 80,971     |                   | $          | 3,690 |   |
| Refined products                         |       | 1,440                   |       | 5,665                  |       |
| LPGs                                     |       | 5,048                   |       | —                 |       |
| Lubrication oils and specialty chemicals |       | 4,603                   |       | 4,002                  |       |
| Materials and supplies                   |       | 6,237                   |       | 6,135                  |       |
| Other                                    |       | 188                     |       | 29                     |       |
| Total                                    |       | $                       | 98,487     |                   | $          | 19,521 |   |

** **

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**(1) At June 30, 2005,substantially all of our crude oil inventory wassubject to forward sales contracts.**

** **

**NOTE 6.**  EQUITYINVESTMENTS

** **

Through one of ourindirect wholly owned subsidiaries, we own a 50% ownership interest in SeawayCrude Pipeline Company (“Seaway”).  Theremaining 50% interest is owned by ConocoPhillips.  Seaway owns a pipeline that carries mostlyimported crude oil from a marine terminal at Freeport, Texas, to Cushing,Oklahoma, and from a marine terminal at Texas City, Texas, to refineries in theTexas City and Houston, Texas, areas. The Seaway Crude Pipeline Company Partnership Agreement provides forvarying participation ratios throughout the life of the Seawaypartnership.  From June 2002 throughMay 2006, we receive 60% of revenue and expense of Seaway.  Thereafter, we will receive 40% of revenueand expense of Seaway.  During the sixmonths ended June 30, 2005 and 2004, we received distributions from Seawayof $11.7 million and $15.9 million, respectively.

 

TE Products owns a 50%ownership interest in Centennial Pipeline Company LLC (“Centennial”), andMarathon Ashland Petroleum LLC (“Marathon”) owns the remaining 50% interest.Centennial owns an interstate refined petroleum products pipeline extendingfrom the upper Texas Gulf Coast to central Illinois.  During the six months ended June 30,2005, TE Products has not invested any additional funds in Centennial. Duringthe six months ended June 30, 2004, TE Products invested an additional $1.5million in Centennial, which is included in the equity investment balance at June 30,2005.  TE Products has not received any distributions fromCentennial since its formation.

 

On January 1, 2003,TE Products and Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”) formedMont Belvieu Storage Partners, L.P. (“MB Storage”).  TE Products and Louis Dreyfus each own a 50%ownership interest in MB Storage.  MBStorage owns storage capacity at the Mont Belvieu fractionation and storagecomplex and a short haul transportation shuttle system that ties Mont Belvieu,Texas, to the upper Texas Gulf Coast energy marketplace.  MB Storage is a service-oriented, fee-basedventure serving the fractionation, refining and petrochemical industries withtransportation, terminaling and storage. MB Storage has no commodity trading activity.  TE Products operates the facilities for MBStorage.

 

For the year ended December 31,2005, TE Products will receive the first $1.7 million per quarter (or $6.78million on an annual basis) of MB Storage’s income before depreciation expense,as defined in the operating agreement. For the year ended December 31, 2004, TE Products received thefirst $1.8 million per quarter (or $7.15

 

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millionon an annual basis) of MB Storage’s income before depreciation expense.  TE Products’ share of MB Storage’s earningsis adjusted annually by the partners of MB Storage.  Any amount of MB Storage’s annual incomebefore depreciation expense in excess of $6.78 million for 2005 and $7.15million for 2004 is allocated evenly between TE Products and LouisDreyfus.  Depreciation expense on assetseach party originally contributed to MB Storage is allocated between TEProducts and Louis Dreyfus based on the net book value of the assetscontributed.  Depreciation expense onassets constructed or acquired by MB Storage subsequent to formation isallocated evenly between TE Products and Louis Dreyfus. For the six monthsended June 30, 2005 and 2004, TE Products’ sharing ratio in the earningsof MB Storage was approximately 62.6% and 70.2%, respectively.  During the six months ended June 30,2005, TE Products received distributions of $7.3 million from MB Storage and contributed$1.1 million to MB Storage.  During thesix months ended June 30, 2004, TE Products received distributions of $5.0million from MB Storage and contributed $17.2 million to MB Storage, of which$16.5 million was used to acquire storage assets in April 2004.

 

We use the equity methodof accounting to account for our investments in Seaway, Centennial and MBStorage.  Summarized combined financialinformation for Seaway, Centennial and MB Storage for the six months ended June 30,2005 and 2004, is presented below (in thousands):

 
| ** ** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Revenues   |       | $                                   | 81,046     |   | $ | 79,890 |   |
| Net income |       | 28,191                              |       | 33,524 |   |
|            |            |                                     |            |  |  |  |  |

 

Summarized combinedbalance sheet information for Seaway, Centennial and MB Storage as of June 30,2005, and December 31, 2004, is presented below (in thousands):

 
| ** **             | ** ** | **June 30,  2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------|------------|-------------------------|------------|----------------------------|------------|
| Current assets         |       | $                       | 68,180     |                       | $          | 59,314 |   |
| Noncurrent assets      |       | 625,532                 |       | 633,222                    |       |
| Current liabilities    |       | 40,483                  |       | 41,209                     |       |
| Long-term debt         |       | 140,000                 |       | 140,000                    |       |
| Noncurrent liabilities |       | 22,330                  |       | 20,440                     |       |
| Partners’ capital |       | 490,899                 |       | 490,887                    |       |
|                        |            |                         |            |                            |            |  |  |

** **

**NOTE 7.**  DEBT

** **

## **SeniorNotes**

## ** **

On January 27, 1998,TE Products completed the issuance of $180.0 million principal amount of 6.45%Senior Notes due 2008, and $210.0 million principal amount of 7.51% SeniorNotes due 2028 (collectively the “TE Products Senior Notes”).  The 6.45% TE Products 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% TEProducts Senior Notes due 2008 are not subject to redemption prior to January 15,2008.  The 7.51% TE Products Senior Notesdue 2028, issued at par, may be redeemed at any time after January 15,2008, at the option of TE Products, in whole or in part, at a premium.

 

The TE Products SeniorNotes do not have sinking fund requirements. Interest on the TE Products Senior Notes is payable semiannually inarrears on January 15 and July 15 of each year.  The TE Products Senior Notes are unsecuredobligations of TE Products and rank pari passu with all other unsecured andunsubordinated indebtedness

 

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ofTE Products.  The indenture governing theTE Products Senior Notes contains covenants, including, but not limited to,covenants limiting the creation of liens securing indebtedness and sale andleaseback transactions.  However, theindenture does not limit our ability to incur additional indebtedness.  As of June 30, 2005, TE Products was incompliance with the covenants of the TE Products Senior Notes.

 

On February 20,2002, we completed the issuance of $500.0 million principal amount of 7.625%Senior Notes due 2012.  The 7.625% SeniorNotes were issued at a discount of $2.2 million and are being accreted to theirface value over the term of the notes. The Senior Notes may be redeemed at any time at our option with thepayment of accrued interest and a make-whole premium determined by discountingremaining interest and principal payments using a discount rate equal to therate of the United States Treasury securities of comparable remaining maturityplus 35 basis points.  The indenturegoverning our 7.625% Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit our ability to incur additionalindebtedness.  As of June 30, 2005,we were in compliance with the covenants of these Senior Notes.

 

On January 30, 2003,we completed the issuance of $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.  TheSenior Notes may be redeemed at any time at our option with the payment ofaccrued interest and a make-whole premium determined by discounting remaininginterest and principal payments using a discount rate equal to the rate of theUnited States Treasury securities of comparable remaining maturity plus 35basis points.  The indenture governingour 6.125% Senior Notes contains covenants, including, but not limited to,covenants limiting the creation of liens securing indebtedness and sale andleaseback transactions.  However, the indenturedoes not limit our ability to incur additional indebtedness.  As of June 30, 2005, we were incompliance with the covenants of these Senior Notes.

 

The following tablesummarizes the estimated fair values of the Senior Notes as of June 30,2005, and December 31, 2004 (in millions):

 
| ** **                                            | ** ** | **Face  Value** | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------|------------|-----------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                  |       |            |       |                    |       |                        |       |
| 6.45% TE Products Senior Notes, due January 2008 |       | $               | 180.0      |                    | $          | 188.5                       |       | $ | 187.1 |   |
| 7.625% Senior Notes, due February 2012           |       | 500.0           |       | 570.4                   |       | 569.6                       |       |
| 6.125% Senior Notes, due February 2013           |       | 200.0           |       | 212.0                   |       | 210.2                       |       |
| 7.51% TE Products Senior Notes, due January 2028 |       | 210.0           |       | 224.1                   |       | 225.6                       |       |
|                                                       |            |                 |            |                         |            |                             |            |  |  |  |

 

We have entered intointerest rate swap agreements to hedge our exposure to changes in the fairvalue on a portion of the Senior Notes discussed above (see Note 3.  Interest Rate Swaps).

 

## **OtherLong Term Debt and Credit Facilities**

## ** **

On June 27, 2003, weentered into a $550.0 million revolving credit facility with a three-year term,including the issuance of letters of credit of up to $20.0 million (“RevolvingCredit Facility”).  The interest rate isbased, at our option, on either the lender’s base rateplus a spread, or LIBOR plus a spread in effect at the time of theborrowings.  The credit agreement for theRevolving Credit Facility contains certain restrictive financial covenantratios.  On October 21, 2004, weamended our Revolving Credit Facility to (i) increase the facility size to$600.0 million, (ii) extend the term to October 21, 2009, (iii) removecertain restrictive covenants, (iv) increase the available amount for theissuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing.  On February 23, 2005, we

 

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againamended our Revolving Credit Facility to remove the requirement that DEFS mustat all times own, directly or indirectly, 100% of our General Partner, to allowfor its acquisition by DFI (see Note 1. Organization andBasis of Presentation).  During thesecond quarter of 2005, we used a portion of the proceeds from equity offeringsin May 2005 and June 2005 to repay a portion of the Revolving CreditFacility (see Note 8.  Partners’Capital and Distributions).  At June 30,2005, $278.0 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 4.3%. At June 30, 2005, we were in compliance with the covenants of thiscredit agreement.

 

The following tablesummarizes the principal amounts outstanding under all of our credit facilitiesas of June 30, 2005, and December 31, 2004 (in thousands):

 
| ** **                                                         | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Credit Facilities:                                                 |       |                    |       |                        |       |
| Revolving Credit Facility, due October 2009                   |       | $                       | 278,000    |                        | $          | 353,000 |   |
| 6.45% TE Products Senior Notes, due January 2008              |       | 179,922                 |       | 179,906                     |       |
| 7.625% Senior Notes, due February 2012                        |       | 498,548                 |       | 498,438                     |       |
| 6.125% Senior Notes, due February 2013                        |       | 198,916                 |       | 198,845                     |       |
| 7.51% TE Products Senior Notes, due January 2028              |       | 210,000                 |       | 210,000                     |       |
| Total borrowings                                                   |       | 1,365,386               |       | 1,440,189                   |       |
| Adjustment to carrying value associated with hedges  of fair value |       | 42,008                  |       | 40,037                      |       |
|                                                               |       |                    |       |                        |       |
| Total Credit Facilities                                            |       | $                       | 1,407,394  |                        | $          | 1,480,226 |   |

 

**NOTE 8.****  PARTNERS’CAPITAL AND DISTRIBUTIONS**

 

**Equity Offering**

 

On May 5,2005, we sold in an underwritten public offering 6.1 million Units at $41.75per Unit.  The proceeds from theoffering, net of underwriting discount, totaled approximately $244.5 million.  On June 8, 2005, 865,000 Units were soldupon exercise of the underwriters’ over-allotment option granted in connectionwith the offering on May 5, 2005. Proceeds from the over-allotment sale, net of underwriting discount,totaled $34.7 million.  The proceeds wereused to reduce indebtedness under our Revolving Credit Facility, to fund revenuegenerating and system upgrade capital expenditures and for general partnershippurposes.

 

## **QuarterlyDistributions of Available Cash**

## ** **

We make quarterly cashdistributions of all of our Available Cash, generally defined as consolidatedcash receipts less consolidated cash disbursements and cash reservesestablished by the General Partner in its sole discretion.  Pursuant to the Partnership Agreement, theCompany receives incremental incentive cash distributions when cashdistributions exceed certain target thresholds as follows:

 
| ** **                                                                | ** ** | ** **      | ** ** | **General** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                                | ** ** | **Unitholders** | ** ** | **Partner** | ** ** |
| Quarterly Cash Distribution per Unit:                                     |       |            |       |        |       |
| Up to Minimum Quarterly Distribution ($0.275 per  Unit)                   |       | 98              | %          | 2           | %          |
| First Target – $0.276 per Unit up to $0.325 per Unit                 |       | 85              | %          | 15          | %          |
| Second Target – $0.326 per Unit up to $0.45 per Unit                 |       | 75              | %          | 25          | %          |
| Over Second Target – Cash distributions greater than  $0.45 per Unit |       | 50              | %          | 50          | %          |

 

The following tablereflects the allocation of total distributions paid during the six months endedJune 30, 2005 and 2004 (in thousands, except per Unit amounts):

 

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| ** **                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Limited Partner Units                  |       | $                                   | 83,473     |   | $ | 82,686 |   |
| General Partner Ownership Interest     |       | 1,703                               |       | 1,687 |   |
| General Partner Incentive              |       | 32,140                              |       | 31,368 |   |
| Total Cash Distributions Paid          |       | $                                   | 117,316    |   | $ | 115,741 |   |
| Total Cash Distributions Paid Per Unit |       | $                                   | 1.325      |   | $ | 1.3125 |   |

 

On August 5,2005, we will pay a cash distribution of $0.675 perUnit for the quarter ended June 30, 2005. The second quarter 2005 cash distribution will total $66.9 million.

 

**General Partner’s Interest**

 

As of June 30, 2005, and December 31,2004, we had deficit balances of $40.3 million and $33.0 million, respectively,in our General Partner’s equity account.  These negative balances do not representassets to us and do not represent obligations of the General Partner tocontribute cash or other property to us. The General Partner’s equity account generally consists of itscumulative share of our net income less cash distributions made to it pluscapital contributions that it has made to us (see our Consolidated Statement ofPartners’ Capital for a detail of the General Partner’s equity account).  For the six months ended June 30, 2005,the General Partner was allocated $26.6 million (representing 29.27%) of ournet income and received $33.8 million in cash distributions.

 

Capital Accounts, as definedunder our Partnership Agreement, are maintained for our General Partner and ourlimited partners.  The Capital Accountprovisions of our Partnership Agreement incorporate principles established forU.S. federal income tax purposes and are not comparable to the equity accountsreflected under accounting principles generally accepted in the United Statesin our financial statements.  Under ourPartnership Agreement, the General Partner is required to make additionalcapital contributions to us upon the issuance of any additional Units ifnecessary to maintain a Capital Account balance equal to 1.999999% of the totalCapital Accounts of all partners.  At June 30,2005, and December 31, 2004, the General Partner’s Capital Account balancesubstantially exceeded this requirement.

 

Net income is allocated betweenthe General Partner and the limited partners in the same proportion asaggregate cash distributions made to the General Partner and the limitedpartners during the period.  This isgenerally consistent with the manner of allocating net income under ourPartnership Agreement.  Net incomedetermined under our Partnership Agreement, however, incorporates principlesestablished for U.S. federal income tax purposes and is not comparable to netincome reflected under accounting principles generally accepted in the UnitedStates in our financial statements.

 

Cash distributions that we makeduring a period may exceed our net income for the period.  We make quarterly cash distributions of allof our Available Cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion.  Cashdistributions in excess of net income allocations and capital contributionsduring the year ended December 31, 2004, and the six months ended June 30,2005, resulted in deficits in the General Partner’s equity account at December 31,2004, and June 30, 2005.  Futurecash distributions that exceed net income will result in an increase in thedeficit balance in the General Partner’s equity account.

 

According to thePartnership Agreement, in the event of our dissolution, after satisfying ourliabilities, our remaining assets would be divided among our limited partnersand the General Partner generally in the same

 

15

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proportion as Available Cash but calculated on acumulative basis over the life of the Partnership.  If a deficit balance still remains in theGeneral Partner’s equity account after all allocations are made between thepartners, the General Partner would not be required to make whole any such deficit.

 

**NOTE 9.****EMPLOYEE BENEFIT PLANS**

 

## **RetirementPlans**

## ** **

The TEPPCO RetirementCash Balance Plan (“TEPPCO RCBP”) is a non-contributory, trustee-administeredpension plan.  In addition, the TEPPCOSupplemental Benefit Plan (“TEPPCO SBP”) is a non-contributory, nonqualified,defined benefit retirement plan, in which certain executive officersparticipate.  The TEPPCO SBP wasestablished to restore benefit reductions caused by the maximum benefitlimitations that apply to qualified plans. The benefit formula for all eligible employees is a cash balanceformula.  Under a cash balance formula, aplan participant accumulates a retirement benefit based upon pay credits andcurrent interest credits.  The paycredits are based on a participant’s salary, age and service.  We use a December 31 measurement datefor these plans.

 

On May 27, 2005, theTEPPCO RCBP and the TEPPCO SBP were amended. Effective May 31, 2005, participation in the TEPPCO RCBP was frozenand no new participants were eligible to be covered by the plan after thatdate.  Effective December 31, 2005,all plan benefits accrued will be frozen and participants will not receiveadditional pay credits after that date. In addition, all plan participants will be 100% vested regardless oftheir years of service.  Effective January 1,2006, the TEPPCO RCBP plan will be terminated and plan participants willreceive lump sum benefit payments in 2006. Participants in the TEPPCO SBP will receive pay credits through November 30,2005, and will receive lump sum benefit payments in December 2005.  Both lump sum benefit payments are discussedbelow.

 

In June 2005, werecorded a curtailment charge of $0.1 million in accordance with SFAS No. 88,*Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits*,as a result of the TEPPCO RCBP and TEPPCO SBP amendments.  As of May 31, 2005, the followingassumptions were changed for purposes of determining the net periodic benefitcosts for the remainder of 2005: the discount rate, the long-term rate ofreturn on plan assets, and the assumed mortality table.  The discount rate was decreased from 5.75% to5.00% to reflect rates of returns on bonds currently available to settle theliability.  The expected long-term rateof return on plan assets was changed from 8% to 2% due to the movement of planfunds from equity investments into short-term money market funds.  The mortality table was changed to reflectoverall improvements in mortality experienced by the general population.  The curtailment charge arose due to theaccelerated recognition of the unrecognized prior service costs.  We expect to record additional settlementcharges of approximately $0.2 million in the fourth quarter of 2005 relating tothe TEPPCO SBP and approximately $3.2 million in 2006 relating to the TEPPCORCBP for any existing unrecognized losses upon the plan termination and finaldistribution of the assets to the plan participants.

 

The components of netpension benefits costs for the TEPPCO RCBP and the TEPPCO SBP for the three monthsand six months ended June 30, 2005 and 2004, were as follows (inthousands):

 

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| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                    | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost benefit earned during the period |       | $                      | 1,069      |                 | $          | 913 |   | $ | 2,099 |   | $ | 1,826 |   |
| Interest cost on projected benefit obligation |       | 234                    |       | 180                  |       | 468 |   | 360 |   |
| Expected return on plan assets                |       | (223                   | )          | (220                 | )          | (520 | ) | (440 | ) |
| Amortization of prior service cost            |       | 1                      |       | 2                    |       | 3 |   | 4 |   |
| Recognized net actuarial loss                 |       | 30                     |       | 14                   |       | 56 |   | 28 |   |
| SFAS 88 curtailment charge                    |       | 50                     |       | —               |       | 50 |   | — |   |
| Net pension benefits costs                    |       | $                      | 1,161      |                 | $          | 889 |   | $ | 2,156 |   | $ | 1,778 |   |

## ** **

## **OtherPostretirement Benefits**

## ** **

We provide certain healthcare and life insurance benefits for retired employees on a contributory andnon-contributory basis (“TEPPCO OPB”). Employees become eligible for these benefits if they meet certain ageand service requirements at retirement, as defined in the plans.  We provide a fixed dollar contribution, whichdoes not increase from year to year, towards retired employee medicalcosts.  The retiree pays all health carecost increases due to medical inflation. We use a December 31 measurement date for this plan.

 

In May 2005,benefits provided to employees under the TEPPCO OPB were changed.  Employees eligible for these benefits willreceive them through December 31, 2005, however, effective January 1,2006, these benefits will be terminated. In June 2005, as a result of this change in benefits and inaccordance with SFAS No. 106, *Employers’ Accounting forPostretirement Benefits Other Than Pensions,* we recorded acurtailment credit of approximately $2.6 million in our accumulatedpostretirement obligation, partially offset by a curtailment charge ofapproximately $1.0 million related to the accelerated recognition of theunrecognized prior service costs.  Thenet effect of these curtailment adjustments was to reduce our accumulatedpostretirement obligation to the total of the expected remaining 2005 paymentsunder the TEPPCO OPB.

 

The components of netpostretirement benefits cost for the TEPPCO OPB for the three and six monthsended June 30, 2005 and 2004, were as follows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                      | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost benefit earned during the period                   |       | $                      | 32         |                 | $          | 41 |   | $ | 81 |   | $ | 82 |   |
| Interest cost on accumulated postretirement benefit  obligation |       | 28                     |       | 38                   |       | 69 |   | 76 |   |
| Amortization of prior service cost                              |       | 21                     |       | 32                   |       | 53 |   | 64 |   |
| Recognized net actuarial loss                                   |       | 2                      |       | —               |       | 4 |   | — |   |
| SFAS 106 curtailment credit                                     |       | (1,676                 | )          | —               |       | (1,676 | ) | — |   |
| Net postretirement benefits costs                               |       | $                      | (1,593     | )                    | $          | 111 |   | $ | (1,469 | ) | $ | 222 |   |

 

Effective June 1,2005, the payroll functions performed by DEFS for our General Partner weretransferred from DEFS to EPCO.  For thoseemployees who were receiving certain other postretirement benefits at the timeof the acquisition of our General Partner by DFI, DEFS will continue to providethese benefits to those employees.  EffectiveJune 1, 2005, EPCO began providing certain other postretirement benefitsto those employees who became eligible for the benefits after June 1,2005, and will charge those benefit related costs to us.  As a result of these changes, we recorded a $1.2million reduction in our other postretirement obligation in June 2005.

 

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## **Estimated Future BenefitContributions**

## ** **

We expect to contribute approximately $1.1 million toour retirement plans and other postretirement benefit plans in 2005.

 

**NOTE 10.****SEGMENT INFORMATION**

 

We have three reportingsegments:

 

•                  transportation and storage of refined products, LPGs andpetrochemicals, which operates as the Downstream Segment;

 

•                  gathering, transportation, marketing and storage of crudeoil and distribution of lubrication oils and specialty chemicals, whichoperates as the Upstream Segment; and

 

•                  gatheringof natural gas, fractionation of NGLs and transportation of NGLs, whichoperates as the Midstream Segment.

 

The amounts indicatedbelow as “Partnership and Other” relate primarily to intersegment eliminationsand assets that we hold that have not been allocated to any of our reportingsegments.

 

Our Downstream Segmentrevenues are earned from transportation and storage of refined products andLPGs, intrastate transportation of petrochemicals, sale of product inventoryand other ancillary services. The two largest operating expense items of theDownstream Segment 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 generally higher during the second andthird quarters because of greater demand for gasolines during the spring and summerdriving seasons. LPGs volumes are generally higher from November through March dueto higher demand in the Northeast for propane, a major fuel for residentialheating.  Our Downstream Segment alsoincludes the results of operations of the northern portion of the DeanPipeline, which transports refinery grade propylene from Mont Belvieu to PointComfort, Texas.  Our Downstream Segmentalso includes our equity investments in Centennial and MB Storage (see Note 6.  Equity Investments).

 

Our Upstream Segmentrevenues are earned from gathering, transportation, marketing and storage ofcrude oil and distribution of lubrication oils and specialty chemicals,principally in Oklahoma, Texas, New Mexico and the Rocky Mountain region.  Marketing operations consist primarily ofaggregating purchased crude oil along our pipeline systems, or from third partypipeline systems, and arranging the necessary transportation logistics for theultimate sale of the crude oil to local refineries, marketers or other endusers.  Our Upstream Segment alsoincludes our equity investment in Seaway (see Note 6. EquityInvestments).  Seaway consists oflarge diameter pipelines that transport crude oil from Seaway’s marineterminals on the U.S. Gulf Coast to Cushing, Oklahoma, a crude oil distributionpoint for the central United States, and to refineries in the Texas City andHouston areas.

 

 Our Midstream Segment revenues are earned fromthe fractionation of NGLs in Colorado, transportation of NGLs from twotrunkline NGL pipelines in South Texas, two NGL pipelines in East Texas and apipeline system (Chaparral) from West Texas and New Mexico to Mont Belvieu; thegathering of natural gas in the Green River Basin in southwestern Wyoming,through Jonah, and the gathering of coal bed methane (“CBM”) and conventionalnatural gas in the San Juan Basin in New Mexico and Colorado, through ValVerde.

 

The tablebelow includes financial information by reporting segment for the three months andsix months ended June 30, 2005 and 2004 (in thousands):

 

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| ** **                            | ** ** | **Three Months Ended June 30,  2005** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **Downstream  Segment**                    | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales of petroleum products           |       | $                                          | —     |   | $ | 1,961,302 |   | $ | 2,315 |   | $ | 1,963,617 |   | $ | — |   | $ | 1,963,617 |   |
| Operating revenues                    |       | 63,438                                     |       | 11,698 |   | 52,336 |   | 127,472 |   | (709 | ) | 126,763 |   |
| Purchases of petroleum products       |       | —                                     |       | 1,942,599 |   | 1,806 |   | 1,944,405 |   | (709 | ) | 1,943,696 |   |
| Operating expenses, including power   |       | 38,680                                     |       | 15,214 |   | 11,903 |   | 65,797 |   | — |   | 65,797 |   |
| Depreciation and amortization expense |       | 9,801                                      |       | 3,651 |   | 12,840 |   | 26,292 |   | — |   | 26,292 |   |
| Gains on sales of assets              |       | (15                                        | )          | (53 | ) | — |   | (68 | ) | — |   | (68 | ) |
| Operating income                      |       | 14,972                                     |       | 11,589 |   | 28,102 |   | 54,663 |   | — |   | 54,663 |   |
| Equity earnings                       |       | 892                                        |       | 8,170 |   | — |   | 9,062 |   | — |   | 9,062 |   |
| Other income, net                     |       | 121                                        |       | (46 | ) | 60 |   | 135 |   | — |   | 135 |   |
| Earnings before interest              |       | $                                          | 15,985     |   | $ | 19,713 |   | $ | 28,162 |   | $ | 63,860 |   | $ | — |   | $ | 63,860 |   |

 
| ** **                            | ** ** | **Three Months Ended June 30,  2004** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **Downstream  Segment**                    | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales of petroleum products           |       | $                                          | —     |   | $ | 1,231,019 |   | $ | 1,788 |   | $ | 1,232,807 |   | $ | — |   | $ | 1,232,807 |   |
| Operating revenues                    |       | 62,364                                     |       | 11,841 |   | 48,216 |   | 122,421 |   | (664 | ) | 121,757 |   |
| Purchases of petroleum products       |       | —                                     |       | 1,216,307 |   | 1,669 |   | 1,217,976 |   | (664 | ) | 1,217,312 |   |
| Operating expenses, including power   |       | 38,551                                     |       | 15,050 |   | 14,905 |   | 68,506 |   | — |   | 68,506 |   |
| Depreciation and amortization expense |       | 9,211                                      |       | 3,045 |   | 14,155 |   | 26,411 |   | — |   | 26,411 |   |
| Gains on sales of assets              |       | (17                                        | )          | (49 | ) | — |   | (66 | ) | — |   | (66 | ) |
| Operating income                      |       | 14,619                                     |       | 8,507 |   | 19,275 |   | 42,401 |   | — |   | 42,401 |   |
| Equity earnings (losses)              |       | (509                                       | )          | 12,091 |   | — |   | 11,582 |   | — |   | 11,582 |   |
| Other income, net                     |       | 173                                        |       | 51 |   | 16 |   | 240 |   | — |   | 240 |   |
| Earnings before interest              |       | $                                          | 14,283     |   | $ | 20,649 |   | $ | 19,291 |   | $ | 54,223 |   | $ | — |   | $ | 54,223 |   |

 

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| ** **                            | ** ** | **Six Months Ended June 30,  2005** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **Downstream  Segment**                  | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                            | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales of petroleum products           |       | $                                        | —     |   | $ | 3,346,369 |   | $ | 4,457 |   | $ | 3,350,826 |   | $ | — |   | $ | 3,350,826 |   |
| Operating revenues                    |       | 141,605                                  |       | 23,411 |   | 103,192 |   | 268,208 |   | (2,049 | ) | 266,159 |   |
| Purchases of petroleum products       |       | —                                   |       | 3,315,029 |   | 3,176 |   | 3,318,205 |   | (2,049 | ) | 3,316,156 |   |
| Operating expenses, including power   |       | 75,866                                   |       | 30,659 |   | 25,796 |   | 132,321 |   | — |   | 132,321 |   |
| Depreciation and amortization expense |       | 19,362                                   |       | 7,152 |   | 25,541 |   | 52,055 |   | — |   | 52,055 |   |
| Gains on sales of assets              |       | (107                                     | )          | (52 | ) | (407 | ) | (566 | ) | — |   | (566 | ) |
| Operating income                      |       | 46,484                                   |       | 16,992 |   | 53,543 |   | 117,019 |   | — |   | 117,019 |   |
| Equity earnings                       |       | 50                                       |       | 14,258 |   | — |   | 14,308 |   | — |   | 14,308 |   |
| Other income, net                     |       | 270                                      |       | 29 |   | 102 |   | 401 |   | — |   | 401 |   |
| Earnings before interest              |       | $                                        | 46,804     |   | $ | 31,279 |   | $ | 53,645 |   | $ | 131,728 |   | $ | — |   | $ | 131,728 |   |

 
| ** **                            | ** ** | **Six Months Ended June 30,  2004** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **Downstream  Segment**                  | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                            | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales of petroleum products           |       | $                                        | —     |   | $ | 2,411,786 |   | $ | 3,134 |   | $ | 2,414,920 |   | $ | — |   | $ | 2,414,920 |   |
| Operating revenues                    |       | 137,173                                  |       | 25,564 |   | 97,033 |   | 259,770 |   | (2,065 | ) | 257,705 |   |
| Purchases of petroleum products       |       | —                                   |       | 2,383,732 |   | 2,986 |   | 2,386,718 |   | (2,065 | ) | 2,384,653 |   |
| Operating expenses, including power   |       | 78,601                                   |       | 29,076 |   | 29,886 |   | 137,563 |   | — |   | 137,563 |   |
| Depreciation and amortization expense |       | 18,288                                   |       | 6,113 |   | 29,830 |   | 54,231 |   | — |   | 54,231 |   |
| Gains on sales of assets              |       | (17                                      | )          | (107 | ) | — |   | (124 | ) | — |   | (124 | ) |
| Operating income                      |       | 40,301                                   |       | 18,536 |   | 37,465 |   | 96,302 |   | — |   | 96,302 |   |
| Equity earnings (losses)              |       | (1,747                                   | )          | 18,980 |   | — |   | 17,233 |   | — |   | 17,233 |   |
| Other income, net                     |       | 445                                      |       | 197 |   | 74 |   | 716 |   | — |   | 716 |   |
| Earnings before interest              |       | $                                        | 38,999     |   | $ | 37,713 |   | $ | 37,539 |   | $ | 114,251 |   | $ | — |   | $ | 114,251 |   |

 

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The following table showstotal assets and capital expenditures for each segment as of and for theperiods ended June 30, 2005, and December 31, 2004 (in thousands):

 
| ** **              | ** ** | **Downstream Segment** | ** ** | **Upstream Segment** | ** ** | **Midstream Segment** | ** ** | **Segments  Total** | ** ** | **Partnership and Other** | ** ** | **Consolidated** | ** ** |
|-------------------------|------------|------------------------|------------|----------------------|------------|-----------------------|------------|---------------------|------------|---------------------------|------------|------------------|------------|
| ** **              | ** ** | ** **             | ** ** | ** **           | ** ** | ** **            | ** ** | ** **          | ** ** | ** **                | ** ** | ** **       | ** ** |
| June 30, 2005:     |       |                   |       |                 |       |                  |       |                |       |                      |       |             |       |
| Total assets            |       | $                      | 971,980    |                 | $          | 1,321,018             |       | $                   | 1,213,233  |                      | $          | 3,506,231        |       | $ | (25,755 | ) | $ | 3,480,476 |   |
| Capital expenditures    |       | 27,322                 |       | 19,746               |       | 35,383                |       | 82,451              |       | 512                       |       | 82,963           |       |
| ** **              | ** ** | ** **             | ** ** | ** **           | ** ** | ** **            | ** ** | ** **          | ** ** | ** **                | ** ** | ** **       | ** ** |
| December 31, 2004: |       |                   |       |                 |       |                  |       |                |       |                      |       |             |       |
| Total assets            |       | $                      | 968,993    |                 | $          | 1,070,477             |       | $                   | 1,184,184  |                      | $          | 3,223,654        |       | $ | (25,949 | ) | $ | 3,197,705 |   |
| Capital expenditures    |       | 80,930                 |       | 37,448               |       | 45,075                |       | 163,453             |       | 694                       |       | 164,147          |       |

 

Thefollowing table reconciles the segments’ total earnings before interest toconsolidated net income for the three months and six months ended June 30,2005 and 2004 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Earnings before interest    |       | $                                     | 63,860     |                                | $          | 54,223 |   | $ | 131,728 |   | $ | 114,251 |   |
| Interest expense – net |       | (21,627                               | )          | (16,464                             | )          | (40,914 | ) | (36,059 | ) |
| Net income                  |       | $                                     | 42,233     |                                | $          | 37,759 |   | $ | 90,814 |   | $ | 78,192 |   |

 

**NOTE 11.  COMMITMENTS AND CONTINGENCIES**

 

In the fall of 1999 and on December 1, 2000, the General Partnerand the Partnership were named as defendants in two separate lawsuits inJackson County Circuit Court, Jackson County, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al.*(including the General Partner and Partnership)and*Gilbert Richards and Jean Richards v. TexasEastern Corporation, et al.*(including the General Partner andPartnership).* *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 intoRelease and Settlement Agreements with the McCleery plaintiffs and the Richardsplaintiffs dismissing all of these plaintiffs’ claims.  The settlement terms included a $2.0 millionpayment to the plaintiffs, which was accrued at December 31, 2004.

 

Although we did not settle with all plaintiffs and we therefore remainnamed 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, TE Products was named as a defendant in alawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana, styled *Rebecca L. Grisham et al. v.  TEProducts Pipeline Company, Limited Partnership*.  In this case, the plaintiffs contend that ourpipeline, which crosses the plaintiffs’ property, leaked toxic products ontotheir property and, consequently caused damages to them.  We have filed an answer to the plaintiffs’

 

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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 General Partner 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 a result of alleged exposure to asbestos-containing products andmaterials.  According to the petition andas a result of a preliminary investigation, the General Partner believes thatthe only claim asserted against it results from one individual for the periodfrom July 1971 through June 1972, who is alleged to have worked on afacility owned by the General Partner’s predecessor.  This period represents a small portion of thetotal alleged exposure period from January 1964 through December 2001for this individual.  The individual’sclaims involve numerous employers and alleged job sites.  The General Partner has been unable toconfirm involvement by the General Partner or its predecessors with the allegedlocation, and it is uncertain at this time whether this case is covered byinsurance. Discovery is planned, and the General Partner intends to defenditself vigorously against this lawsuit. The plaintiffs have not stipulated the amount of damages that they areseeking in this suit.  We are obligatedto reimburse the General Partner for any costs it incurs related to thislawsuit.  We cannot estimate the loss, ifany, associated with this pending lawsuit. We do not believe that the outcome of this lawsuit will have a materialadverse effect on our financial position, results of operations or cash flows.

 

On April 2, 2003, Centennial was served with a petition in amatter styled *Adams, et al. v. Centennial Pipeline CompanyLLC, et al*.  This matterinvolves approximately 2,000 plaintiffs who allege that over 200 defendants,including Centennial, generated, transported, and/or disposed of hazardous andtoxic waste at two sites in Bayou Sorrell, Louisiana, an underground injectionwell and a landfill.  The plaintiffsallege personal injuries, allergies, birth defects, cancer and death.  The underground injection well has been inoperation since May 1976.  Basedupon current information, Centennial appears to be a *de minimis*contributor, having used the disposal site during the two month time period of December 2001to January 2002.  Marathon has beenhandling this matter for Centennial under its operating agreement withCentennial.  TE Products has a 50%ownership interest in Centennial.  On November 30,2004, the court approved a class settlement, which included an $80,000 paymentby Centennial.  The time period forparties to appeal this settlement expired in March 2005, and the classsettlement became final.  The terms ofthe settlement did not have a material adverse effect on our financialposition, results of operations or cash flows.

 

On February 4, 2005, we received a letter notifying us of a claimfor approximately $1.45 million in damages allegedly due to a shipper beingdelivered 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 financial position,results of operations or cash flows.

 

On February 7, 2005, we received a letter from BP Amoco’s counselplacing us on notice of a lawsuit filed by ConocoPhillips against BP AmocoSeaway Products Pipeline Company. Pursuant to provisions of the Amended and Restated Purchase Agreementdated May 10, 2000, between us and ARCO Pipe Line Company (BP Amoco), BPAmoco requested indemnity should BP Amoco have any liability toConocoPhillips.  The litigation arisesout of an income tax liability alleged by ConocoPhillips due to a partnershipmerger.  The plaintiff estimates theincome tax liability to be $3,964,788. We have requested information from BP Amoco that will allow us to assessliability, if any, that we may have in this matter.  We do not believe that the outcome of thislawsuit will have a future material adverse effect on our financial position,results of operations or cash flows.

 

22

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In addition to the litigation discussed above, we have been, in theordinary course of business, a defendant in various lawsuits and a party tovarious other legal proceedings, some of which are covered in whole or in partby 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 local laws andregulations governing the discharge of materials into the environment. Failureto comply with these laws and regulations may result in the assessment ofadministrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to 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 ProductsCo., et al. v. SFPP*, Docket OR96-2-000, et al. was issued by theFERC, which made several significant determinations with respect to finding “changedcircumstances” under the Energy Policy Act of 1992 (“EP Act”).  The decision largely clarifies, but does notfully quantify, the standard required for a complainant to demonstrate that anoil pipeline’s rates are no longer subject to the rate protection of the EP Actby demonstrating that a substantial change in circumstances has occurred since1992 with respect to the basis of the rates being challenged.  In the decision, the FERC found that alimited number of rate elements will significantly affect the economic basisfor a pipeline company’s rates.  Theelements identified in the decision are volume changes, allowed total returnand total cost-of-service (including major cost elements such as rate base, taxrates and tax allowances, among others). The FERC did reject, however, the use of changes in tax rates and incometax allowances as standalone factors. Judicial review of that decision, which has been sought by a number ofparties to the case, is currently pending before the U.S. Court of Appeals forthe District of Columbia Circuit.  Wehave not yet determined the impact, if any, that the decision, if it isultimately upheld, would have on our rates if they were reviewed under thecriteria of this decision.

 

On July 20, 2004, the District of Columbia Circuit issued anopinion in *BP West Coast Products LLC v. FERC*.  In reviewing a series of orders involvingSFPP, L.P., the court held among other things that the FERC had not adequatelyjustified its policy of providing an oil pipeline limited partnership with anincome tax allowance equal to the proportion of its income attributable topartnership interests owned by corporate partners.  Under the FERC’s initial ruling, SFPP, L.P.was permitted an income tax allowance on its cost-of-service filing for thepercentage of its net operating (pre-tax) income attributable to partnershipunits held by corporations, and was denied an income tax allowance equal to thepercentage attributable to partnership units held by non-corporatepartners.  The court remanded the caseback to the FERC for further review.  Asa result of the court’s remand, on December 2, 2004, the FERC issued aRequest for Comments seeking comments on whether the court’s ruling appliesonly to the specific facts of the SFPP, L.P. proceeding or also extends toother capital structures involving partnerships and other forms ofownership.  On May 4, 2005, the FERCissued its Policy Statement on Income Tax Allowances, which permits regulatedpartnerships, limited liability companies and other pass-through entities anincome tax allowance on their income attributable to any owner that has anactual or potential income tax liability on that income, regardless whether theowner is an individual or corporation. If there is more than one level of pass-through entities, the regulatedcompany income must be traced to where the ultimate tax liability lies.  The Policy Statement is to be applied inindividual cases, and the regulated entity bears the burden of proof toestablish the tax status of its owners. On June 1, 2005, the FERC issued an Order on Remand in the SFPP,L.P. proceedings holding the Policy Statement would apply in that case andrequesting briefs on whether additional evidence was necessary to applyit.  Briefs have

 

23

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been filed but the FERC has not yet acted onthem.  The ultimate outcome of the FERC’sinquiry on income tax allowance should not affect our current rates and ratestructure because 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 touse cost-of-service to support our rates, or (ii) be required to use suchmethodology to defend our indexed rates.

 

In 1994, the Louisiana Department of Environmental Quality (“LDEQ”)issued a compliance order for environmental contamination at our Arcadia,Louisiana facility.  In 1999, our Arcadiafacility and adjacent terminals were directed by the Remediation ServicesDivision of the LDEQ to pursue remediation of this contamination.  At June 30, 2005, we have an accruedliability of $0.2 million for remediation costs at our Arcadia facility.  Effective 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.

 

On March 17, 2003, we experienced arelease of 511 barrels of jet fuel from a storage tank at our Blue Islandterminal located in Cook County, Illinois. As a result of the release, we have entered into an Agreed Order withthe State of Illinois, which required us to conduct an environmentalinvestigation.  At this time, we havecomplied with the terms of the Agreed Order, and the results of theenvironmental investigation indicated there were no soil or groundwater impactsfrom the release.  We are in the processof negotiating a final settlement with the State of Illinois, and we donot 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, we experienced arelease of approximately 12 barrels of jet fuel from a sump at our Lebanon,Ohio, terminal.  The released jet fuelwas contained within a storm 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 the UnitedStates Fish and Wildlife Service (“USFWS”). On October 1, 2004, the USFWS served us with a Notice of Violation,alleging that we violated 16 USC 703 of the Migratory Bird Treaty Act for the “take[ing]of migratory birds by illegal methods.” On February 7, 2005, we entered into a Memorandum of Understanding(“MOU”) with the USFWS, and on June 23, 2005, we notified the USFWS thatwe had completed all requirements under the MOU, thus terminating the agreementand settling all aspects of this matter. The terms of this settlement did nothave a material effect on our financial position, results of operations or cashflows.

 

On July 27, 2004, we received noticefrom the United States Department of Justice (“DOJ”) of its intent to seek acivil penalty against us related to our November 21, 2001, release ofapproximately 2,575 barrels of jet fuel from our 14-inch diameter pipelinelocated in Orange County, Texas.  TheDOJ, at the request of the Environmental Protection Agency, is seeking a civilpenalty against us for alleged violations of the Clean Water Act (“CWA”)arising out of this release.  The maximumstatutory penalty calculated for this alleged violation of the CWA is $2.8million.  We are in discussions with theDOJ regarding this matter and have responded to its request for additionalinformation.  We do not expect a civilpenalty, if any, to have a material adverse effect on our financial position,results of operations or cash flows.

 

At June 30, 2005, we have an accrued liability of $4.1 millionrelated to various TCTM and TE Products sites requiring environmentalremediation activities.  We do not expectthat the completion of remediation programs associated with TCTM and TEProducts activities will have a future material adverse effect on our financialposition, results of operations or cash flows.

 

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Centennial entered into credit facilities totaling $150.0 million, andas of June 30, 2005, $150.0 million was outstanding under those creditfacilities.  The proceeds were used tofund construction and conversion costs of its pipeline system.  TE Products and Marathon have each guaranteedone-half of Centennial’s debt, up to a maximum amount of $75.0 million each.

 

On February 24, 2005, the General Partner was acquired from DEFSby DFI.  The General Partner owns a 2%general partner interest in us and is the general partner of the Partnership.  On March 11, 2005, the Bureau ofCompetition of the Federal Trade Commission (“FTC”) delivered written notice toDFI’s legal advisor that it was conducting a non-public investigation todetermine whether DFI’s acquisition of the General Partner may substantiallylessen competition.  The FTC hascontacted the General Partner requesting data. The General Partner intends to cooperate fully with any suchinvestigations and inquiries requested by the FTC or any other regulatoryauthorities.

 

**NOTE 12. 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.  As of and for the six months ended June 30,2004, the components of comprehensive income were due to the interest rate swaprelated to our variable rate revolving credit facility, which was designated asa cash flow hedge.  The interest rate swapmatured in April 2004.  While theinterest rate swap was in effect, changes in the fair value of the cash flowhedge, to the extent the hedge was effective, were recognized in othercomprehensive income until the hedge interest costs were recognized in netincome.  All other comprehensive incomewas recognized in net income during the six months ended June 30, 2004.

 

The table below reconciles reported net income to total comprehensiveincome for the three months and six months ended June 30, 2005 and 2004(in thousands):

 
| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                    |       | $                                     | 42,233     |                                | $          | 37,759 |   | $ | 90,814 |   | $ | 78,192 |   |
| Net income on cash flow hedge |       | —                                |       | 220                                 |       | — |   | 2,902 |   |
| Total comprehensive income    |       | $                                     | 42,233     |                                | $          | 37,979 |   | $ | 90,814 |   | $ | 81,094 |   |

 

Theaccumulated balance of other comprehensive loss related to our cash flow hedgeis as follows (in thousands):

 
| Balance at December 31, 2003       |   | $     | (2,902 | )      |
|-----------------------------------------|--------|-------|--------|--------|
| Transferred to earnings                 |   | 2,939 |   |
| Change in fair value of cash flow hedge |   | (37   | )      |
| Balance at December 31, 2004       |   | $     | — |   |

 

**NOTE 13. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION**

 

Our significant operating subsidiaries, TE Products Pipeline Company,Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P., Jonah GasGathering Company and Val Verde Gas Gathering Company, L.P., have issuedunconditional guarantees of our debt securities.  The guarantees are full, unconditional, andjoint and several.  TE Products PipelineCompany, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P.,

 

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Jonah Gas Gathering Company and Val Verde GasGathering Company, L.P. are collectively referred to as the “GuarantorSubsidiaries.”

 

The following supplemental condensed consolidating financialinformation reflects our separate accounts, the combined accounts of theGuarantor Subsidiaries, the combined accounts of our other non-guarantorsubsidiaries, the combined consolidating adjustments and eliminations and ourconsolidated accounts for the dates and periods indicated.  For purposes of the following consolidatinginformation, our investments in our subsidiaries and the Guarantor Subsidiaries’investments in their subsidiaries are accounted for under the equity method ofaccounting.                        

 

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| ** **                                   | ** ** | **June 30, 2005**     | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **TEPPCO  Partners, L.P.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                   | ** ** | **(in thousands)**         | ** ** |
| Assets                                       |       |                       |       |   |   |   |   |   |   |   |   |
| Current assets                               |       | $                          | 36,236     |   | $ | 70,843 |   | $ | 794,408 |   | $ | (52,885 | ) | $ | 848,602 |   |
| Property, plant and equipment – net     |       | —                     |       | 1,250,727 |   | 539,139 |   | — |   | 1,789,866 |   |
| Equity investments                           |       | 1,273,806                  |       | 478,751 |   | 206,639 |   | (1,586,149 | ) | 373,047 |   |
| Intercompany notes receivable                |       | 1,007,646                  |       | — |   | — |   | (1,007,646 | ) | — |   |
| Intangible assets                            |       | —                     |       | 360,049 |   | 33,222 |   | — |   | 393,271 |   |
| Other assets                                 |       | 5,487                      |       | 25,561 |   | 44,642 |   | — |   | 75,690 |   |
| Total assets                                 |       | $                          | 2,323,175  |   | $ | 2,185,931 |   | $ | 1,618,050 |   | $ | (2,646,680 | ) | $ | 3,480,476 |   |
| Liabilities and partners’ capital       |       |                       |       |   |   |   |   |   |   |   |   |
| Current liabilities                          |       | $                          | 37,913     |   | $ | 118,669 |   | $ | 682,878 |   | $ | (52,885 | ) | $ | 786,575 |   |
| Long-term debt                               |       | 1,010,024                  |       | 397,370 |   | — |   | — |   | 1,407,394 |   |
| Intercompany notes payable                   |       | —                     |       | 496,282 |   | 511,365 |   | (1,007,647 | ) | — |   |
| Other long term liabilities                  |       | 1,460                      |       | 9,759 |   | 1,510 |   | — |   | 12,729 |   |
| Total partners’ capital                 |       | 1,273,778                  |       | 1,163,851 |   | 422,297 |   | (1,586,148 | ) | 1,273,778 |   |
| Total liabilities and partners’ capital |       | $                          | 2,323,175  |   | $ | 2,185,931 |   | $ | 1,618,050 |   | $ | (2,646,680 | ) | $ | 3,480,476 |   |

 
| ** **                                   | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **TEPPCO  Partners, L.P.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor   Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                   | ** ** | **(in thousands)**         | ** ** |
| Assets                                       |       |                       |       |   |   |   |   |   |   |   |   |
| Current assets                               |       | $                          | 44,125     |   | $ | 87,068 |   | $ | 576,365 |   | $ | (62,928 | ) | $ | 644,630 |   |
| Property, plant and equipment – net     |       | —                     |       | 1,211,312 |   | 492,390 |   | — |   | 1,703,702 |   |
| Equity investments                           |       | 1,021,476                  |       | 430,688 |   | 203,796 |   | (1,282,308 | ) | 373,652 |   |
| Intercompany notes receivable                |       | 1,084,034                  |       | — |   | — |   | (1,084,034 | ) | — |   |
| Intangible assets                            |       | —                     |       | 372,621 |   | 34,737 |   | — |   | 407,358 |   |
| Other assets                                 |       | 5,980                      |       | 22,183 |   | 40,200 |   | — |   | 68,363 |   |
| Total assets                                 |       | $                          | 2,155,615  |   | $ | 2,123,872 |   | $ | 1,347,488 |   | $ | (2,429,270 | ) | $ | 3,197,705 |   |
| Liabilities and partners’ capital       |       |                       |       |   |   |   |   |   |   |   |   |
| Current liabilities                          |       | $                          | 45,255     |   | $ | 143,589 |   | $ | 556,474 |   | $ | (62,930 | ) | $ | 682,388 |   |
| Long-term debt                               |       | 1,086,909                  |       | 393,317 |   | — |   | — |   | 1,480,226 |   |
| Intercompany notes payable                   |       | —                     |       | 676,993 |   | 407,040 |   | (1,084,033 | ) | — |   |
| Other long term liabilities                  |       | 2,003                      |       | 9,980 |   | 1,660 |   | — |   | 13,643 |   |
| Total partners’ capital                 |       | 1,021,448                  |       | 899,993 |   | 382,314 |   | (1,282,307 | ) | 1,021,448 |   |
| Total liabilities and partners’ capital |       | $                          | 2,155,615  |   | $ | 2,123,872 |   | $ | 1,347,488 |   | $ | (2,429,270 | ) | $ | 3,197,705 |   |

 

27

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| ** **                  | ** ** | **Three Months Ended June 30,  2005** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **TEPPCO  Partners, L.P.**                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                  | ** ** | **(in thousands)**                         | ** ** |
| Operating revenues          |       | $                                          | —     |   | $ | 103,657 |   | $ | 1,987,432 |   | $ | (709 | ) | $ | 2,090,380 |   |
| Costs and expenses          |       | —                                     |       | 69,269 |   | 1,967,225 |   | (709 | ) | 2,035,785 |   |
| Gains on sales of assets    |       | —                                     |       | (15 | ) | (53 | ) | — |   | (68 | ) |
| Operating income            |       | —                                     |       | 34,403 |   | 20,260 |   | — |   | 54,663 |   |
| Interest expense – net |       | —                                     |       | (14,257 | ) | (7,370 | ) | — |   | (21,627 | ) |
| Equity earnings             |       | 42,233                                     |       | 21,925 |   | 8,170 |   | (63,266 | ) | 9,062 |   |
| Other income – net     |       | —                                     |       | 162 |   | (27 | ) | — |   | 135 |   |
| Net income                  |       | $                                          | 42,233     |   | $ | 42,233 |   | $ | 21,033 |   | $ | (63,266 | ) | $ | 42,233 |   |

 
| ** **                  | ** ** | **Three Months Ended June 30,  2004** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **TEPPCO  Partners, L.P.**                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                  | ** ** | **(in thousands)**                         | ** ** |
| Operating revenues          |       | $                                          | —     |   | $ | 98,813 |   | $ | 1,256,415 |   | $ | (664 | ) | $ | 1,354,564 |   |
| Costs and expenses          |       | —                                     |       | 71,431 |   | 1,241,462 |   | (664 | ) | 1,312,229 |   |
| Gains on sales of assets    |       | —                                     |       | (17 | ) | (49 | ) | — |   | (66 | ) |
| Operating income            |       | —                                     |       | 27,399 |   | 15,002 |   | — |   | 42,401 |   |
| Interest expense – net |       | —                                     |       | (11,219 | ) | (5,245 | ) | — |   | (16,464 | ) |
| Equity earnings             |       | 37,759                                     |       | 21,393 |   | 12,091 |   | (59,661 | ) | 11,582 |   |
| Other income – net     |       | —                                     |       | 186 |   | 54 |   | — |   | 240 |   |
| Net income                  |       | $                                          | 37,759     |   | $ | 37,759 |   | $ | 21,902 |   | $ | (59,661 | ) | $ | 37,759 |   |

 

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| ** **                  | ** ** | **Six Months Ended June 30,  2005** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | **TEPPCO  Partners, L.P.**               | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                  | ** ** | **(in thousands)**                       | ** ** |
| Operating revenues          |       | $                                        | —     |   | $ | 221,582 |   | $ | 3,397,452 |   | $ | (2,049 | ) | $ | 3,616,985 |   |
| Costs and expenses          |       | —                                   |       | 137,048 |   | 3,365,533 |   | (2,049 | ) | 3,500,532 |   |
| Gains on sales of assets    |       | —                                   |       | (514 | ) | (52 | ) | — |   | (566 | ) |
| Operating income            |       | —                                   |       | 85,048 |   | 31,971 |   | — |   | 117,019 |   |
| Interest expense – net |       | —                                   |       | (27,275 | ) | (13,639 | ) | — |   | (40,914 | ) |
| Equity earnings             |       | 90,814                                   |       | 32,696 |   | 14,258 |   | (123,460 | ) | 14,308 |   |
| Other income – net     |       | —                                   |       | 345 |   | 56 |   | — |   | 401 |   |
| Net income                  |       | $                                        | 90,814     |   | $ | 90,814 |   | $ | 32,646 |   | $ | (123,460 | ) | $ | 90,814 |   |

 
| ** **                  | ** ** | **Six Months Ended June 30,  2004** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | **TEPPCO  Partners, L.P.**               | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                  | ** ** | **(in thousands)**                       | ** ** |
| Operating revenues          |       | $                                        | —     |   | $ | 210,701 |   | $ | 2,463,989 |   | $ | (2,065 | ) | $ | 2,672,625 |   |
| Costs and expenses          |       | —                                   |       | 144,847 |   | 2,433,665 |   | (2,065 | ) | 2,576,447 |   |
| Gains on sales of assets    |       | —                                   |       | (17 | ) | (107 | ) | — |   | (124 | ) |
| Operating income            |       | —                                   |       | 65,871 |   | 30,431 |   | — |   | 96,302 |   |
| Interest expense – net |       | —                                   |       | (24,011 | ) | (12,048 | ) | — |   | (36,059 | ) |
| Equity earnings             |       | 78,192                                   |       | 35,840 |   | 18,980 |   | (115,779 | ) | 17,233 |   |
| Other income – net     |       | —                                   |       | 492 |   | 224 |   | — |   | 716 |   |
| Net income                  |       | $                                        | 78,192     |   | $ | 78,192 |   | $ | 37,587 |   | $ | (115,779 | ) | $ | 78,192 |   |

 

29

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| ** **                                                                                   | ** ** | **Six Months Ended June 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                   | ** ** | **TEPPCO  Partners, L.P.**               | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                       | ** ** |
| Cash flows from operating activities                                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Net income                                                                                   |       | $                                        | 90,814     |   | $ | 90,814 |   | $ | 32,646 |   | $ | (123,460 | ) | $ | 90,814 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                     |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                |       | —                                   |       | 39,820 |   | 12,235 |   | — |   | 52,055 |   |
| Earnings (losses) in equity investments, net of  distributions                               |       | 26,502                                   |       | (1,732 | ) | (2,511 | ) | (17,520 | ) | 4,739 |   |
| Gains on sales of assets                                                                     |       | —                                   |       | (514 | ) | (52 | ) | — |   | (566 | ) |
| Changes in assets and liabilities and other                                                  |       | 74,856                                   |       | (30,004 | ) | (91,052 | ) | (76,242 | ) | (122,442 | ) |
| Net cash provided by (used in) operating activities                                          |       | 192,172                                  |       | 98,384 |   | (48,734 | ) | (217,222 | ) | 24,600 |   |
|                                                                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Cash flows from investing activities                                                         |       | (278,832                                 | )          | (2,606 | ) | (62,094 | ) | 217,488 |   | (126,044 | ) |
| Cash flows from financing activities                                                         |       | 86,516                                   |       | (108,122 | ) | 108,244 |   | (122 | ) | 86,516 |   |
| Net decrease in cash and cash equivalents                                                    |       | (144                                     | )          | (12,344 | ) | (2,584 | ) | 144 |   | (14,928 | ) |
| Cash and cash equivalents at beginning of period                                             |       | 4,116                                    |       | 13,596 |   | 2,826 |   | (4,116 | ) | 16,422 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                        | 3,972      |   | $ | 1,252 |   | $ | 242 |   | $ | (3,972 | ) | $ | 1,494 |   |

 
| ** **                                                                                   | ** ** | **Six Months Ended June 30,  2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                   | ** ** | **TEPPCO  Partners, L.P.**               | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                       | ** ** |
| Cash flows from operating activities                                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Net income                                                                                   |       | $                                        | 78,192     |   | $ | 78,192 |   | $ | 37,587 |   | $ | (115,779 | ) | $ | 78,192 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                     |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                |       | —                                   |       | 43,066 |   | 11,165 |   | — |   | 54,231 |   |
| Earnings (losses) in equity investments, net of  distributions                               |       | (21,109                                  | )          | (7,543 | ) | (3,080 | ) | 35,349 |   | 3,617 |   |
| Gains on sales of assets                                                                     |       | —                                   |       | (17 | ) | (107 | ) | — |   | (124 | ) |
| Changes in assets and liabilities and other                                                  |       | (67,886                                  | )          | (1,978 | ) | 2,389 |   | 63,607 |   | (3,868 | ) |
| Net cash provided by (used in) operating activities                                          |       | (10,803                                  | )          | 111,720 |   | 47,954 |   | (16,823 | ) | 132,048 |   |
|                                                                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Cash flows from investing activities                                                         |       | 98                                       |       | (3,690 | ) | (21,069 | ) | (57,261 | ) | (81,922 | ) |
| Cash flows from financing activities                                                         |       | (7,083                                   | )          | (116,019 | ) | (31,612 | ) | 88,973 |   | (65,741 | ) |
| Net decrease in cash and cash equivalents                                                    |       | (17,788                                  | )          | (7,989 | ) | (4,727 | ) | 14,889 |   | (15,615 | ) |
| Cash and cash equivalents at beginning of period                                             |       | 19,744                                   |       | 19,243 |   | 5,670 |   | (15,188 | ) | 29,469 |   |
|                                                                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents at end of period                                                   |       | $                                        | 1,956      |   | $ | 11,254 |   | $ | 943 |   | $ | (299 | ) | $ | 13,854 |   |

 

30

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**NOTE 14. SUBSEQUENT EVENTS**

 

On July 12, 2005, we purchased a refined productsterminal and truck rack in North Little Rock, Arkansas for $6.8 million fromExxon Mobil Corporation.  The assetsinclude three storage tanks and a two-bay truck loading rack.  We funded the purchase through borrowingsunder our revolving credit facility.  Theterminal serves the central Arkansas refined products market and complementsour existing Downstream Segment infrastructure in North Little Rock, Arkansas.

 

We have initiated an expansion of our refined productsorigin capabilities in the Houston, Texas, and Texas City, Texas areas.  As part of that project, on July 15,2005, we acquired from Texas Genco LLC (“Genco”) all of its interests in certaincompanies that own a 90-mile pipeline system and 5.5 million barrels of storagecapacity for $70.6 million (including $8.6 million for the estimated value of inventory).  According to the terms of the purchase andsale agreement with Genco, we will sell the acquired inventory (anticipated tooccur in the third quarter of 2005) and use the proceeds from the sale tooffset the purchase price of the inventory, including costs incurred to consummatethe sale.  To the extent the proceedsfrom the inventory sale, including costs incurred to consummate the sale, aregreater than or less than the estimated amount previously paid to Genco, afinal settlement payment will occur between Genco and us, resulting in no gainor loss being recognized by us on the sale of the inventory.  We funded the purchase through borrowingsunder our revolving credit facility.  Theassets of the purchased companies will be integrated into our Downstream Segmentorigin infrastructure in Texas City and Baytown, Texas.  The integration and other system enhancementsshould be in service by the fourth quarter of 2006, at an estimated cost of $45.0million.  The strategic location of theseassets, with refined products interconnections to major exchange terminals inthe Houston area, will provide significant long-term value to our customers andthe Texas Gulf Coast refining and logistics system.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**General**

 

You should read the following review of our financial position andresults of operations in conjunction with our Consolidated Financial Statementsand the notes thereto.  Materialperiod-to-period variances in the consolidated statements of income are discussedunder “Results of Operations.”  The “FinancialCondition and Liquidity” section analyzes our cash flows and financialposition.  “Other Considerations”addresses trends, future plans and contingencies that are reasonably likely tomaterially affect our future liquidity or earnings.  The Consolidated Financial Statements shouldbe read in conjunction with the financial statements and related notes,together with our discussion and analysis of financial position and results ofoperations included in our Annual Report on Form 10-K for the year ended December 31,2004.

 

**Critical Accounting Policies and Estimates**

 

A summary of the significant accounting policies we have adopted andfollowed in the preparation of our consolidated financial statements isdetailed in our consolidated financial statements for the year ended December 31,2004, included in our Annual Report on Form 10-K. Certain of theseaccounting policies require the use of estimates.  The following estimates, in our opinion, aresubjective in nature, require the exercise of judgment and involve complexanalysis: revenue and expense accruals, including accruals for power costs,property taxes and crude oil margins; environmental costs; asset impairmentanalysis related to property, plant and equipment; and amortization expense andasset impairment analysis related to goodwill and other intangible assets.  These estimates are based on our knowledgeand understanding of current conditions and actions we may take in the future.  Changes in these estimates will occur as aresult of the passage of time and the occurrence of future events.  Subsequent changes in these estimates mayhave a significant impact on our financial condition and results of operations.

 

## ****ManagementOverview of the Three Months and Six Months Ended June 30, 2005****

## ** **

## ****We reported net income of $42.2 million, or$0.45 per Limited Partner Unit (“Unit” or “Units”), for the three months ended June 30,2005, compared with net income of $37.8 million, or $0.43 per Unit, for thethree months ended June 30, 2004. Net income was $90.8 million, or $0.99 per Unit, for the six monthsended June 30, 2005, compared with net income of $78.2 million, or $0.88per Unit, for the six months ended June 30, 2004.  The weighted average number of Unitsoutstanding was 66.6 million and 63.0 million for the three months ended June 30,2005 and 2004, respectively, and 64.8 million and 63.0 million for the sixmonths ended June 30, 2005 and 2004, respectively.****

## ** **

## ****Our Downstream Segment results for thethree months ended June 30, 2005, were impacted by increased LPGtransportation revenues and long-haul volumes delivered, increased refinedproducts tender deduction revenues and increased revenues from product locationexchanges.  These increases werepartially offset by decreased refined products transportation revenues,increased power costs, increased pipeline operating expenses and increasedrental expense from our Centennial Pipeline LLC (“Centennial”) capacity leaseagreement.  The results for the sixmonths ended June 30, 2005, were impacted by increased refined productsand LPG transportation revenues and volumes, partially offset by lower propaneinventory fee revenues, increased pipeline operating expenses, increased rentalexpense from our Centennial capacity lease agreement and increased environmentalassessment and remediation expenses. Additionally, pipeline integrity expenses decreased $1.4 million and$5.7 million for the three months and six months ended June 30, 2005,respectively, compared with the prior year periods.  We anticipate that our pipeline integrityexpenses for our Downstream Segment for 2005 will be approximately $15.2million lower than our 2004 expenses primarily due to the completion ofprojects.****

## ** **

## ****Our Upstream Segment results for the threemonths and six months ended June 30, 2005, were impacted by increasedmarketing volumes, gains related to marking crude oil grade and location swapcontracts to market and increased transportation revenues.  Increased pipeline operating costs werepartially offset by decreased****

## **** ****

## ****32****

## ****

## **** ****

## ****environmental assessment and remediationexpenses.  Equity earnings from SeawayCrude Pipeline Company (“Seaway”) decreased compared with the prior year periodprimarily due to lower transportation volumes, higher operating, general andadministrative expenses and a gain recognized on an inventory settlement in2004.  Pipeline integrity expenses decreased$0.3 million and $0.2 million for the three months and six months ended June 30,2005, respectively, compared with the prior year periods.  We anticipate that our 2005 pipelineintegrity expenses for our Upstream Segment will be approximately $1.9 millionhigher than our 2004 expenses as we continue to perform pipeline inspectionsand repairs under our integrity management program.****

## ** **

## ****Our Midstream Segment benefited fromincreased revenues and volumes on Jonah Gas Gathering Company (“Jonah”),resulting from our 2003 Phase III expansion and the installation of additionalcapacity during the fourth quarter of 2004. Revenues on Val Verde Gas Gathering Company (“Val Verde”) increased dueto new connections made to the system in May and December 2004,partially offsetting the impact of reduced revenues related to the naturaldecline of coal bed methane (“CBM”) production from existing wells.  Additionally, our operating and gassettlement expenses decreased compared with the prior year period.  Pipeline integrity expenses decreased $0.6million and $0.6 million for the three months and six months ended June 30,2005, respectively, compared with the prior year periods.  These increases to operating income werepartially offset by lower gathering rates on the new connections at Val Verde,on which the gathering rates are lower than existing average rates on thesystem.****

## ** **

We are subject to economic and other factors that affect ourindustry.  The demand for refinedproducts is dependent upon the price, prevailing economic conditions anddemographic 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; the demand for petrochemicalsis dependent upon prices for products produced from petrochemicals; the demandfor crude oil and petroleum products is dependent upon the price of crude oiland the products produced from the refining of crude oil; and the demand fornatural gas is dependent upon the price of natural gas and the locations inwhich natural gas is drilled.  We arealso subject to regulatory factors such as the amounts we are allowed to chargeour customers for the services we provide on our regulated pipeline systems.

 

Certain factorsare inherent in our business segments as discussed in this Report.  These include the safe, reliable andefficient operation of the pipelines and facilities that we own or operatewhile meeting increased regulations that govern the operation of our assets andthe costs associated with such regulations. We are also focused on our continued growth through expansion of the assetsthat we own and through the acquisition of assets that complement our currentoperations.

 

We remainconfident that our current strategy and focus will provide continued growth inearnings and cash distributions.  Thesegrowth opportunities include:

 

•                 Continued solidperformance in our Upstream Segment, as we build on our existing asset base andconcentrate on acquisitions in our core operating areas;

•                 Continueddevelopment of the Jonah system which serves the Jonah and Pinedale fields;

•                 Gathering ofvolumes from infill drilling of CBM by producers and new connections ofconventional gas in the San Juan Basin, where our Val Verde system is located;and

•                  Growth in ourDownstream Segment, resulting from our recent capacity expansion, grass rootsfacility investments, acquisitions and growing demand for Gulf Coast sourcedproducts.

 

On March 31, 2005, we purchased crude oil pipeline assets for $7.1million from BP Pipelines (North America) Inc. (“BP”).  The assets include approximately 158 miles ofpipeline which extend from Mexia, Texas, to the Houston, Texas, area and twostations in south Houston with connections to a BP pipeline that originates insouth Houston.  We will integrate theseassets into our South Texas pipeline system, included in our Upstream Segment,which will allow us to realize synergies within our existing asset base andwill provide future growth opportunities.

 

On April 1, 2005, we purchased crude oil storage and terminalingassets in Cushing, Oklahoma, from Koch Supply & Trading, L.P. for $35.4million.  The assets consist of eightstorage tanks with 945,000 barrels of storage

 

33

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capacity, receipt and delivery manifolds,interconnections to several pipelines, crude oil inventory and approximately 70acres of land.  The storage andterminaling assets will complement our existing infrastructure in Cushing andstrengthen our gathering and marketing business in our Upstream Segment.

 

On July 12, 2005, we purchased a refined products terminal andtruck rack in North Little Rock, Arkansas for $6.8 million from Exxon MobilCorporation.  The assets include threestorage tanks and a two-bay truck loading rack. The terminal serves the central Arkansas refined products market andcomplements our existing Downstream Segment infrastructure in North LittleRock, Arkansas.

 

We have initiated an expansion of our refined products origincapabilities in the Houston, Texas, and Texas City, Texas areas.  As part of that project, on July 15,2005, we acquired from Texas Genco LLC (“Genco”) all of its interests incertain companies that own a 90-mile pipeline system and 5.5 million barrels ofstorage capacity for $70.6 million (including $8.6 million for the estimatedvalue of inventory).  According to theterms of the purchase and sale agreement with Genco, we will sell the acquiredinventory (anticipated to occur in the third quarter of 2005) and use theproceeds from the sale to offset the purchase price of the inventory, includingcosts incurred to consummate the sale. To the extent the proceeds from the inventory sale, including costsincurred to consummate the sale, are greater than or less than the estimatedamount previously paid to Genco, a final settlement payment will occur betweenGenco and us, resulting in no gain or loss being recognized by us on the saleof the inventory.  The assets of thepurchased companies will be integrated into our Downstream Segment origininfrastructure in Texas City and Baytown, Texas.  The integration and other system enhancementsshould be in service by the fourth quarter of 2006, at an estimated cost of $45.0million.  The strategic location of theseassets, with refined products interconnections to major exchange terminals inthe Houston area, will provide significant long-term value to our customers andthe Texas Gulf Coast refining and logistics system.

 

Consistent with our business strategy, we continuously evaluatepossible acquisitions of assets that would complement our currentoperations.  Such acquisition effortsinvolve participation by us in processes that have been made public and involvea number of potential buyers, as well as situations in which we believe we arethe only party or one of a very limited number of potential buyers innegotiations with the potential seller. These acquisition efforts often involve assets which, if acquired, wouldhave a material effect on our financial position, results of operations or cashflows****.****

 

## ****OurBusiness****

## ** **

TEPPCO Partners, L.P. (the “Partnership”), a Delaware limitedpartnership, is a master limited partnership formed in March 1990.  We operate through TE Products PipelineCompany, Limited Partnership (“TE Products”), TCTM, L.P. (“TCTM”) and TEPPCOMidstream Companies, L.P. (“TEPPCO Midstream”). Collectively, TE Products, TCTM and TEPPCO Midstream are referred to asthe “Operating Partnerships.”  TEPPCO GP, Inc.(“TEPPCO GP”), our wholly owned subsidiary, is the general partner of ourOperating Partnerships.  We hold a99.999% limited partner interest in the Operating Partnerships, and TEPPCO GPholds a 0.001% general partner interest. Texas Eastern Products Pipeline Company, LLC (the “Company” or “GeneralPartner”), a Delaware limited liability company, serves as our general partnerand owns a 2% general partner interest in us. Through February 23, 2005, the General Partner was an indirectwholly owned subsidiary of Duke Energy Field Services, LLC (“DEFS”), a jointventure between Duke Energy Corporation (“Duke Energy”) andConocoPhillips.  Through February 23,2005, Duke Energy held an interest of approximately 70% in DEFS, andConocoPhillips held the remaining interest of approximately 30%.  On February 24, 2005, the GeneralPartner was acquired by DFI GP Holdings L.P. (formerly Enterprise GP HoldingsL.P.) (“DFI”), an affiliate of EPCO, Inc. (“EPCO”), a privately heldcompany controlled by Dan L. Duncan, for approximately $1.1 billion.  As a result of the transaction, DFI owns andcontrols the 2% general partner interest in us and has the right to receive theincentive distribution rights associated with the general partner interest.

 

EPCO performs all management and operating functions required for us,except for some administrative services for certain of the TEPPCO Midstreamassets that are currently performed by DEFS on our behalf.  We reimburse EPCO for all reasonable directand indirect expenses that have been incurred in managing us.  Under a

 

34

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transition services agreement entered into as part ofthe sale of the General Partner, DEFS will continue to provide someadministrative services for certain of the TEPPCO Midstream assets for us for aperiod of time until we assume these services on our own.  In connection with us assuming the operationsof these TEPPCO Midstream assets from DEFS, certain DEFS employees becameemployees of EPCO effective June 1, 2005. As part of the transition services agreement, Duke Energy will continueto provide some administrative support services to us until we or EPCO assumethose activities.

 

In connection with our formation in 1990, the Company received2,500,000 Deferred Participation Interests (“DPIs”).  Effective April 1, 1994, the DPIs beganparticipating in distributions of cash and allocations of profit and loss in amanner identical to Limited Partner Units and are treated as Limited PartnerUnits for purposes of this Report.  TheseLimited Partner Units were assigned to Duke Energy when ownership of theCompany was transferred from Duke Energy to DEFS in 2000.  On February 24, 2005, DFI entered intoan LP Unit Purchase and Sale Agreement with Duke Energy and purchased these2,500,000 DPIs for approximately $100.0 million.

 

We operate and report in three business segments:

 

•                  DownstreamSegment – transportation and storage of refined products, liquefied petroleumgases (“LPGs”) and petrochemicals;

 

•                  Upstream Segment– gathering, transportation, marketing and storage of crude oil anddistribution of lubrication oils and specialty chemicals; and

 

•                  MidstreamSegment – gathering of natural gas, transportation of natural gas liquids (“NGLs”)and fractionation of NGLs.

 

Our reportable segments offer different products and services and aremanaged separately because each requires different business strategies.  TEPPCO GP, our wholly owned subsidiary, actsas managing general partner of our Operating Partnerships, with a 0.001%general partner interest and manages our subsidiaries.

 

Our Downstream Segment revenues are earned from transportation andstorage of refined products and LPGs, intrastate transportation ofpetrochemicals, sale of product inventory and other ancillary services.  The two largest operating expense items ofthe Downstream Segment 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 aregenerally higher during the second and third quarters because of greater demandfor gasolines during the spring and summer driving seasons.  LPGs volumes are generally higher from November throughMarch due to higher demand in the Northeast for propane, a major fuel forresidential heating.  Our DownstreamSegment also includes the results of operations of the northern portion of theDean Pipeline, which transports refinery grade propylene from Mont Belvieu toPoint Comfort, Texas.  Our DownstreamSegment also includes our equity investments in Centennial and Mont BelvieuStorage Partners, L.P. (“MB Storage”) (see Note 6.  Equity Investments).

 

Our UpstreamSegment revenues are earned from gathering, transportation, marketing andstorage of crude oil and distribution of lubrication oils and specialtychemicals, principally in Oklahoma, Texas, New Mexico and the Rocky Mountainregion.  Marketing operations consistprimarily of aggregating purchased crude oil along our pipeline systems, orfrom third party pipeline systems, and arranging the necessary transportationlogistics for the ultimate sale of the crude oil to local refineries, marketersor other end users.  Our Upstream Segmentalso includes our equity investment in Seaway (see Note 6.  Equity Investments).  Seaway consists of large diameter pipelinesthat transport crude oil from Seaway’s marine terminals on the U.S. Gulf Coastto Cushing, Oklahoma, a crude oil distribution point for the central UnitedStates, and to refineries in the Texas City and Houston areas.

 

Our Midstream Segment revenues are earned from the fractionation ofNGLs in Colorado, transportation of NGLs from two trunkline NGL pipelines inSouth Texas, two NGL pipelines in East Texas and a pipeline system

 

35

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(Chaparral) from West Texas and New Mexico to MontBelvieu; the gathering of natural gas in the Green River Basin in southwesternWyoming, through Jonah, and the gathering of CBM and conventional natural gasin the San Juan Basin in New Mexico and Colorado, through Val Verde.

 

**Results of Operations**

 

Thefollowing table summarizes financial information by business segment for the threemonths and six months ended June 30, 2005 and 2004 (in thousands):

 
| ** **                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                     | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating revenues:            |       |                                  |       |                                |       |   |   |   |   |
| Downstream Segment             |       | $                                     | 63,438     |                                | $          | 62,364 |   | $ | 141,605 |   | $ | 137,173 |   |
| Upstream Segment               |       | 1,973,000                             |       | 1,242,860                           |       | 3,369,780 |   | 2,437,350 |   |
| Midstream Segment              |       | 54,651                                |       | 50,004                              |       | 107,649 |   | 100,167 |   |
| Intersegment eliminations      |       | (709                                  | )          | (664                                | )          | (2,049 | ) | (2,065 | ) |
| Total operating revenues       |       | 2,090,380                             |       | 1,354,564                           |       | 3,616,985 |   | 2,672,625 |   |
|                           |       |                                  |       |                                |       |   |   |   |   |
| Operating income:              |       |                                  |       |                                |       |   |   |   |   |
| Downstream Segment             |       | 14,972                                |       | 14,619                              |       | 46,484 |   | 40,301 |   |
| Upstream Segment               |       | 11,589                                |       | 8,507                               |       | 16,992 |   | 18,536 |   |
| Midstream Segment              |       | 28,102                                |       | 19,275                              |       | 53,543 |   | 37,465 |   |
| Total operating income         |       | 54,663                                |       | 42,401                              |       | 117,019 |   | 96,302 |   |
|                           |       |                                  |       |                                |       |   |   |   |   |
| Earnings before interest:      |       |                                  |       |                                |       |   |   |   |   |
| Downstream Segment             |       | 15,985                                |       | 14,283                              |       | 46,804 |   | 38,999 |   |
| Upstream Segment               |       | 19,713                                |       | 20,649                              |       | 31,279 |   | 37,713 |   |
| Midstream Segment              |       | 28,162                                |       | 19,291                              |       | 53,645 |   | 37,539 |   |
| Total earnings before interest |       | 63,860                                |       | 54,223                              |       | 131,728 |   | 114,251 |   |
|                           |       |                                  |       |                                |       |   |   |   |   |
| Interest expense               |       | (22,780                               | )          | (18,048                             | )          | (43,169 | ) | (38,507 | ) |
| Interest capitalized           |       | 1,153                                 |       | 1,584                               |       | 2,255 |   | 2,448 |   |
| Net income                     |       | $                                     | 42,233     |                                | $          | 37,759 |   | $ | 90,814 |   | $ | 78,192 |   |

 

The followingis a detailed analysis of the results of operations, including reasons forchanges in results, by each of our operating segments.

 

**Downstream Segment**

 

The following tableprovides financial information for the Downstream Segment for the three monthsand six months ended June 30, 2005 and 2004 (in thousands):

 

36

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| ** **                             | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** |
|----------------------------------------|------------|------------------------|------------|--------------|------------|----------------------|------------|--------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** | **Increase** | ** ** | **June 30,**    | ** ** | **Increase** | ** ** |
| ** **                             | ** ** | **2005**               | ** ** | **2004**     | ** ** | **(Decrease)**       | ** ** | **2005**     | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Transportation – Refined products |       | $                      | 37,834     |         | $          | 38,937               |       | $            | (1,103     | ) | $ | 72,799 |   | $ | 69,908 |   | $ | 2,891 |   |
| Transportation – LPGs             |       | 14,470                 |       | 13,721       |       | 749                  |       | 46,701       |       | 42,501 |   | 4,200 |   |
| Other                                  |       | 11,134                 |       | 9,706        |       | 1,428                |       | 22,105       |       | 24,764 |   | (2,659 | ) |
| Total operating revenues               |       | 63,438                 |       | 62,364       |       | 1,074                |       | 141,605      |       | 137,173 |   | 4,432 |   |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Operating, general and administrative  |       | 28,281                 |       | 28,864       |       | (583                 | )          | 54,896       |       | 58,019 |   | (3,123 | ) |
| Operating fuel and power               |       | 7,957                  |       | 7,193        |       | 764                  |       | 15,617       |       | 15,243 |   | 374 |   |
| Depreciation and amortization          |       | 9,801                  |       | 9,211        |       | 590                  |       | 19,362       |       | 18,288 |   | 1,074 |   |
| Taxes – other than income taxes   |       | 2,442                  |       | 2,494        |       | (52                  | )          | 5,353        |       | 5,339 |   | 14 |   |
| Gains on sales of assets               |       | (15                    | )          | (17          | )          | 2                    |       | (107         | )          | (17 | ) | (90 | ) |
| Total costs and expenses               |       | 48,466                 |       | 47,745       |       | 721                  |       | 95,121       |       | 96,872 |   | (1,751 | ) |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Operating income                       |       | 14,972                 |       | 14,619       |       | 353                  |       | 46,484       |       | 40,301 |   | 6,183 |   |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Equity earnings (losses)               |       | 892                    |       | (509         | )          | 1,401                |       | 50           |       | (1,747 | ) | 1,797 |   |
| Other income – net                |       | 121                    |       | 173          |       | (52                  | )          | 270          |       | 445 |   | (175 | ) |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Earnings before interest               |       | $                      | 15,985     |         | $          | 14,283               |       | $            | 1,702      |   | $ | 46,804 |   | $ | 38,999 |   | $ | 7,805 |   |

 

Thefollowing table presents volumes delivered in barrels and average tariff perbarrel for the three months and six months ended June 30, 2005 and 2004(in thousands, except tariff information):

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Six Months Ended** | ** ** | **Percentage** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------|------------|----------------------|------------|----------------|------------|
| ** **                       | ** ** | **June 30,**      | ** ** | **Increase**   | ** ** | **June 30,**    | ** ** | **Increase**   | ** ** |
| ** **                       | ** ** | **2005**               | ** ** | **2004**       | ** ** | **(Decrease)**       | ** ** | **2005**       | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| **Volumes Delivered:**           |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Refined products                 |       | 42,097                 |       | 41,936         |       | 1                    | %          | 80,692         |       | 74,458 |   | 8 | % |
| LPGs                             |       | 7,855                  |       | 8,794          |       | (11                  | )%         | 22,657         |       | 22,002 |   | 3 | % |
| Total                            |       | 49,952                 |       | 50,730         |       | (2                   | )%         | 103,349        |       | 96,460 |   | 7 | % |
|                             |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| **Average Tariff per Barrel:**   |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Refined products                 |       | $                      | 0.90       |           | $          | 0.93                 |       | (3             | )%         | $ | 0.90 |   | $ | 0.94 |   | (4 | )% |
| LPGs                             |       | 1.84                   |       | 1.56           |       | 18                   | %          | 2.06           |       | 1.93 |   | 7 | % |
| Average system tariff per barrel |       | $                      | 1.05       |           | $          | 1.04                 |       | 1              | %          | $ | 1.16 |   | $ | 1.17 |   | (1 | )% |

 

*Three Months EndedJune 30, 2005 Compared with Three Months Ended June 30, 2004*

 

Revenues from refined products transportation decreased $1.1million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004, primarily due to a decrease in distillatevolumes transported and a decrease in the refined products average rate perbarrel, partially offset by an overall increase in the refined products volumedelivered.  The decrease in distillatevolumes was a result of low distillate price differentials.  The decrease in the refined products averagerate per barrel from the prior year period was primarily due to the impact ofgreater growth in the volume of products delivered under a Centennial tariffcompared with the growth in deliveries under a TEPPCO tariff, which resulted inan increased proportion of lower tariff barrels transported on our system.  Prior tothe construction of Centennial, deliveries on our pipeline system were limitedby our pipeline capacity, and transportation services for our customers wereallocated in accordance with a proration policy.  With this incremental pipeline capacity, ourpreviously constrained system has expanded deliveries in markets both south andnorth of Creal Springs, Illinois.  In February 2003,we entered into a lease agreement with Centennial that increased ourflexibility to deliver refined products to our market areas.  Centennial has provided our system

 

37

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withadditional pipeline capacity for movement of products originating in the U.S.Gulf Coast area.  The overall increase in refined products volume wasprimarily due to increased demand and market share for products supplied fromthe U.S. Gulf Coast into Midwest markets.

 

Revenuesfrom LPGs transportation increased $0.7 million for the three months ended June 30,2005, compared with the three months ended June 30, 2004, due to higherdeliveries of propane in the upper Midwest and Northeast market areas.   The LPGs average rate per barrel increasedfrom the prior period primarily as a result of decreased short-haul deliveriesduring the three months ended June 30, 2005.

 

Otheroperating revenues increased $1.4 million for the three months ended June 30,2005, compared with the three months ended June 30, 2004, primarilydue to higher refined products additive and tender deduction revenue andincreased margins on product inventory sales.

 

Costs andexpenses increased $0.7 million for the three months ended June 30, 2005,compared with the three months ended June 30, 2004, due to increasedoperating fuel and power and increased depreciation and amortization expense,partially offset by decreased operating, general and administrative expensesand decreased taxes – other than income. Operating fuel and power increased $0.8 million primarily due toincreased mainline throughput and adjustments to power accruals.  Depreciation expense increased $0.6 millionprimarily due to assets placed into service in 2005.  Operating, general and administrativeexpenses decreased $0.6 million primarily due to a $1.4 million decrease inpipeline inspection and repair costs associated with our integrity managementprogram and a $0.4 million decrease in consulting services and supplies primarilyrelated to acquisition activities in 2004. These decreases were partially offset by a $0.7 million increase inpipeline operating and maintenance expenses, a $0.3 million increase inrental expense from the Centennial pipeline capacity lease agreement and a $0.2million increase in insurance expense. Increased labor and benefits expenses associated with vesting provisionsin certain of our compensation plans as a result of changes in control of ourGeneral Partner and higher incentive compensation expenses compared to theprior year period were offset by a $1.6 million decrease in postretirementbenefit accruals related to plan amendments (see Note 9. Employee BenefitPlans).

 

Net earningsfrom equity investments increased for the three months ended June 30,2005, compared with the three months ended June 30, 2004, as shown below(in thousands):

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** |
|--------------------------------|------------|------------------------|------------|--------------|------------|
| ** **                     | ** ** | **June 30,**      | ** ** | **Increase** | ** ** |
| ** **                     | ** ** | **2005**               | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** |
| ** **                     | ** ** | ** **             | ** ** | ** **   | ** ** | ** ** | ** ** |
| Centennial                     |       | $                      | (496       | )            | $          | (2,286 | ) | $ | 1,790 |   |
| MB Storage                     |       | 1,365                  |       | 1,785        |       | (420 | ) |
| Other                          |       | 23                     |       | (8           | )          | 31 |   |
| Total equity earnings (losses) |       | $                      | 892        |         | $          | (509 | ) | $ | 1,401 |   |

 

Equity losses inCentennial decreased $1.8 million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004, primarilydue to higher transportation revenues and volumes, partially offset by higher transmixrelated product replacement costs and product measurement losses during the2005 period.  Equity earnings in MBStorage decreased $0.4 million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004, primarilydue to higher pipeline rehabilitation expenses on the MB Storage system.

 

*Six Months Ended June 30,2005 Compared with Six Months Ended June 30, 2004*

 

Revenues from refined products transportation increased $2.9million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004, due to an overall increase in the refinedproducts volumes delivered. This increase was primarily due to deliveries ofproducts moved on Centennial.  Volumeincreases were due to increased demand and market share for products suppliedfrom the U.S. Gulf Coast into Midwest markets. The refined products averagerate per barrel decreased from the prior year period primarily due to theimpact of

 

38

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greatergrowth in the volume of products delivered under a Centennial tariff compared withthe growth in deliveries under a TEPPCO tariff, which resulted in an increasedproportion of lower tariff barrels transported on our system.

 

Revenuesfrom LPGs transportation increased $4.2 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, due to higherdeliveries of propane in the upper Midwest and Northeast market areas primarilyresulting from cold weather in March 2005. Prior year LPG transportation revenues were negatively impacted by aprice spike in the Mont Belvieu propane price in late February 2004, whichresulted in TEPPCO sourced propane being less competitive than propane fromother source points.

 

                                                Other operating revenues decreased $2.7 million for thesix months ended June 30, 2005, compared with the six months ended June 30,2004, primarily due to lower propane inventory fees in 2005 and lower volume ofproduct inventory sales, partially offset by higher refined products tenderdeduction and loading revenues.

 

Costs andexpenses decreased $1.8 million for the six months ended June 30, 2005,compared with the six months ended June 30, 2004, due to decreasedoperating, general and administrative expenses, partially offset by increaseddepreciation and amortization expense and increased operating fuel andpower.  Operating, general andadministrative expenses decreased $3.1 million primarily due to a $5.7 milliondecrease in pipeline inspection and repair costs associated with our integritymanagement program, a $1.6 million decrease in postretirement benefit accrualsrelated to plan amendments (see Note 9. Employee Benefit Plans) and a $0.3million decrease in consulting services primarily related to acquisition relatedactivities in 2004.  These decreases werepartially offset by a $2.4 million increase in labor and benefits expensesassociated with vesting provisions in certain of our compensation plans as aresult of changes in control of our General Partner and higher incentivecompensation expenses compared to the prior year period, a $1.0 millionincrease in rental expense from the Centennial pipeline capacity leaseagreement, a $0.6 million increase in environmental remediation and assessmentcosts and a $0.6 million increase in pipeline operating and maintenanceexpense.  Depreciation expense increased$1.1 million primarily due to assets placed into service and assets retired todepreciation expense in 2005.  Operatingfuel and power increased $0.4 million primarily due to increased mainlinethroughput and adjustments to power accruals.

 

Netearnings from equity investments increased for the six months ended June 30,2005, compared with the six months ended June 30, 2004, as shown below (inthousands):

 
| ** **                     | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** |
|--------------------------------|------------|----------------------|------------|--------------|------------|
| ** **                     | ** ** | **June 30,**    | ** ** | **Increase** | ** ** |
| ** **                     | ** ** | **2005**             | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** |
| ** **                     | ** ** | ** **           | ** ** | ** **   | ** ** | ** ** | ** ** |
| Centennial                     |       | $                    | (3,967     | )            | $          | (6,143 | ) | $ | 2,176 |   |
| MB Storage                     |       | 3,998                |       | 4,414        |       | (416 | ) |
| Other                          |       | 19                   |       | (18          | )          | 37 |   |
| Total equity earnings (losses) |       | $                    | 50         |         | $          | (1,747 | ) | $ | 1,797 |   |

 

Equity losses inCentennial decreased $2.2 million for the six months ended June 30, 2005, compared with the six months ended June 30,2004, primarily due to higher transportation revenues and volumes,partially offset by higher transmix related product replacement costs andproduct measurement losses during the 2005 period.  Equity earnings in MB Storage decreased $0.4million for the six months ended June 30,2005, compared with the six months ended June 30,2004, primarily due to increased depreciation and amortization expense,higher pipeline rehabilitation expenses and higher general and administrativeexpenses, partially offset by higher revenues andvolumes.  In April 2004, MB Storage acquired storage and pipeline assets andcontracts for approximately $34.0 million, of which TE Products contributed$16.5 million.  Increases in storagerevenue, shuttle revenue, rental revenue and depreciation and amortizationexpense for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004, are primarily related to the acquired storageassets and contracts.

 

Other income – netdecreased $0.2 million for the six months ended June 30, 2005, comparedwith the six months ended June 30, 2004, due to lower interest incomeearned on cash investments and other investing activities.

 

39

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**Upstream Segment**

 

The following tableprovides financial information for the Upstream Segment for the three monthsand six months ended June 30, 2005 and 2004 (in thousands):

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** |
|---------------------------------------|------------|------------------------|------------|--------------|------------|----------------------|------------|--------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **Increase** | ** ** | **June 30,**    | ** ** | **Increase** | ** ** |
| ** **                            | ** ** | **2005**               | ** ** | **2004**     | ** ** | **(Decrease)**       | ** ** | **2005**     | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
|                                  |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Sales of petroleum products           |       | $                      | 1,961,302  |         | $          | 1,231,019            |       | $            | 730,283    |   | $ | 3,346,369 |   | $ | 2,411,786 |   | $ | 934,583 |   |
| Transportation – Crude oil       |       | 9,042                  |       | 9,213        |       | (171                 | )          | 18,214       |       | 18,876 |   | (662 | ) |
| Other                                 |       | 2,656                  |       | 2,628        |       | 28                   |       | 5,197        |       | 6,688 |   | (1,491 | ) |
| Total operating revenues              |       | 1,973,000              |       | 1,242,860    |       | 730,140              |       | 3,369,780    |       | 2,437,350 |   | 932,430 |   |
|                                  |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Purchases of petroleum products       |       | 1,942,599              |       | 1,216,307    |       | 726,292              |       | 3,315,029    |       | 2,383,732 |   | 931,297 |   |
| Operating, general and administrative |       | 12,912                 |       | 12,682       |       | 230                  |       | 25,728       |       | 23,867 |   | 1,861 |   |
| Operating fuel and power              |       | 1,234                  |       | 1,393        |       | (159                 | )          | 2,462        |       | 3,133 |   | (671 | ) |
| Depreciation and amortization         |       | 3,651                  |       | 3,045        |       | 606                  |       | 7,152        |       | 6,113 |   | 1,039 |   |
| Taxes – other than income taxes  |       | 1,068                  |       | 975          |       | 93                   |       | 2,469        |       | 2,076 |   | 393 |   |
| Gains on sales of assets              |       | (53                    | )          | (49          | )          | (4                   | )          | (52          | )          | (107 | ) | 55 |   |
| Total costs and expenses              |       | 1,961,411              |       | 1,234,353    |       | 727,058              |       | 3,352,788    |       | 2,418,814 |   | 933,974 |   |
| Operating income                      |       | 11,589                 |       | 8,507        |       | 3,082                |       | 16,992       |       | 18,536 |   | (1,544 | ) |
| Equity earnings                       |       | 8,170                  |       | 12,091       |       | (3,921               | )          | 14,258       |       | 18,980 |   | (4,722 | ) |
| Other income – net               |       | (46                    | )          | 51           |       | (97                  | )          | 29           |       | 197 |   | (168 | ) |
| Earnings before interest              |       | $                      | 19,713     |         | $          | 20,649               |       | $            | (936       | ) | $ | 31,279 |   | $ | 37,713 |   | $ | (6,434 | ) |

 

Informationpresented in the following table includes the margin of the Upstream Segment,which may be viewed as a non-GAAP (Generally Accepted Accounting Principles)financial measure under the rules of the Securities and ExchangeCommission.  We calculate the margin ofthe Upstream Segment as revenues generated from the sale of crude oil andlubrication oil, and transportation of crude oil, less the costs of purchasesof crude oil and lubrication oil.  Webelieve that margin is a more meaningful measure of financial performance thansales and purchases of crude oil and lubrication oil due to the significantfluctuations in sales and purchases caused by variations in the level ofvolumes marketed and prices for products marketed.  Additionally, we use margin internally toevaluate the financial performance of the Upstream Segment as we believe marginis a better indicator of performance than operating income as operating,general and administrative expenses, operating fuel and power and depreciationexpense are not directly related to the margin activities.  Margin and volume information for the threemonths and six months ended June 30, 2005 and 2004 is presented below (inthousands, except per barrel and per gallon amounts):

 

40

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| ** **                              | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Six Months Ended** | ** ** | **Percentage** | ** ** |
|-----------------------------------------|------------|------------------------|------------|----------------|------------|----------------------|------------|----------------|------------|
| ** **                              | ** ** | **June 30,**      | ** ** | **Increase**   | ** ** | **June 30,**    | ** ** | **Increase**   | ** ** |
| ** **                              | ** ** | **2005**               | ** ** | **2004**       | ** ** | **(Decrease)**       | ** ** | **2005**       | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
|                                    |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Margins: (1)                            |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Crude oil  transportation               |       | $                      | 15,165     |           | $          | 13,279               |       | 14             | %          | $ | 29,356 |   | $ | 26,375 |   | 11 | % |
| Crude oil  marketing                    |       | 9,056                  |       | 6,901          |       | 31                   | %          | 12,532         |       | 12,593 |   | — |   |
| Crude oil  terminaling                  |       | 1,848                  |       | 2,241          |       | (18                  | )%         | 4,233          |       | 4,966 |   | (15 | )% |
| Lubrication oil  sales                  |       | 1,676                  |       | 1,504          |       | 11                   | %          | 3,433          |       | 2,996 |   | 15 | % |
| Total margin                            |       | $                      | 27,745     |           | $          | 23,925               |       | 16             | %          | $ | 49,554 |   | $ | 46,930 |   | 6 | % |
|                                    |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Total barrels:                          |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Crude oil  transportation               |       | 23,768                 |       | 24,686         |       | (4                   | )%         | 47,522         |       | 50,848 |   | (7 | )% |
| Crude oil  marketing                    |       | 48,864                 |       | 42,270         |       | 16                   | %          | 93,158         |       | 87,924 |   | 6 | % |
| Crude oil  terminaling                  |       | 21,287                 |       | 27,800         |       | (23                  | )%         | 48,406         |       | 60,888 |   | (20 | )% |
|                                    |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Lubrication oil  volume (total gallons) |       | 3,153                  |       | 2,949          |       | 7                    | %          | 7,325          |       | 6,419 |   | 14 | % |
|                                    |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Margin per  barrel:                     |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Crude oil  transportation               |       | $                      | 0.638      |           | $          | 0.538                |       | 19             | %          | $ | 0.618 |   | $ | 0.519 |   | 19 | % |
| Crude oil  marketing                    |       | 0.185                  |       | 0.163          |       | 14                   | %          | 0.135          |       | 0.143 |   | (6 | )% |
| Crude oil  terminaling                  |       | 0.087                  |       | 0.081          |       | 8                    | %          | 0.087          |       | 0.082 |   | 7 | % |
|                                    |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Lubrication oil  margin (per gallon)    |       | 0.532                  |       | 0.510          |       | 4                    | %          | 0.469          |       | 0.467 |   | — |   |

 

----

(1)                Margins in this table arepresented prior to the elimination of intercompany sales, revenues andpurchases between TEPPCO Crude Oil, L.P. and TEPPCO Crude Pipeline, L.P.

 

The following table reconciles theUpstream Segment margin to the consolidated statements of income using theinformation presented in the consolidated statements of income and thestatements of income in Note 10.  SegmentInformation (in thousands):

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                  | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales of  petroleum products                |       | $                      | 1,961,302  |                 | $          | 1,231,019 |   | $ | 3,346,369 |   | $ | 2,411,786 |   |
| Transportation –  Crude oil            |       | 9,042                  |       | 9,213                |       | 18,214 |   | 18,876 |   |
| Less:  Purchases of petroleum products |       | (1,942,599             | )          | (1,216,307           | )          | (3,315,029 | ) | (2,383,732 | ) |
| Total margin                                |       | 27,745                 |       | 23,925               |       | 49,554 |   | 46,930 |   |
| Other operating  revenues                   |       | 2,656                  |       | 2,628                |       | 5,197 |   | 6,688 |   |
| Net operating  revenues                     |       | 30,401                 |       | 26,553               |       | 54,751 |   | 53,618 |   |
| Operating,  general and administrative      |       | 12,912                 |       | 12,682               |       | 25,728 |   | 23,867 |   |
| Operating fuel  and power                   |       | 1,234                  |       | 1,393                |       | 2,462 |   | 3,133 |   |
| Depreciation and  amortization              |       | 3,651                  |       | 3,045                |       | 7,152 |   | 6,113 |   |
| Taxes – other  than income taxes       |       | 1,068                  |       | 975                  |       | 2,469 |   | 2,076 |   |
| Gains on sales  of assets                   |       | (53                    | )          | (49                  | )          | (52 | ) | (107 | ) |
| Operating income                            |       | $                      | 11,589     |                 | $          | 8,507 |   | $ | 16,992 |   | $ | 18,536 |   |
|                                             |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |

 

41

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*Three Months Ended June 30,2005 Compared with Three Months Ended June 30, 2004*

 

Our margin increased $3.8 million forthe three months ended June 30, 2005, compared with the three months endedJune 30, 2004.  Crude oil marketingmargin increased $2.1 million primarily due to an increase in volumes marketedand unrealized gains of $1.8 million related to marking crude oil grade andlocation swap contracts to current market value, partially offset by increasedtransportation costs.  Crude oiltransportation margin increased $1.9 million primarily due to increasedtransportation volumes and revenues on our South Texas system and higher revenueson our Basin system related to movements on higher tariff segments, partiallyoffset by decreases in transportation volumes on our Red River system and onlower tariff segments of our Basin system. Lubrication oil sales margin increased $0.2 million due to increasedsales of chemical volumes and the acquisition of a lubrication oil distributorin Casper, Wyoming, in August 2004. Crude oil terminaling margin decreased $0.4 million as a result of adecrease in pumpover volumes at Midland, Texas and Cushing, Oklahoma.

 

Costs and expenses, excluding expensesassociated with purchases of crude oil and lubrication oil, increased $0.7million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004, primarily due to increased depreciation andamortization expense, increased operating, general and administrative expensesand increased taxes – other than income taxes, partially offset by decreasedoperating fuel and power.  Depreciationand amortization expense increased $0.6 million as a result of assets placed inservice in 2004 and due to assets retired to depreciation expense during theperiod.  Operating, general andadministrative expenses increased $0.2 million from the prior year periodprimarily due to a $1.8 million increase in labor and benefits expense relatedto vesting provisions in certain of our compensation plans as a result ofchanges in control of our General Partner, an increase in the number ofemployees and higher incentive compensation expenses between periods, a $0.9million increase in supplies and pipeline operating and maintenance expense anda $0.4 million increase in insurance expense, partially offset by a $1.2million decrease in postretirement benefit accruals related to plan amendments(see Note 9. Employee Benefit Plans), a $1.1 million decrease in expense as aresult of measurement gains on the systems and higher crude oil prices and a$0.7 million decrease in environmental assessment and remediation costs.  Operating fuel and power decreased $0.2million primarily as a result of lower transportation volumes in 2005.

 

Equity earnings from our investment inSeaway decreased $3.9 million for the three months ended June 30, 2005,compared with the three months ended June 30, 2004, primarily due to decreased transportation volumesattributable to reduced operating pressures as a result of a pipeline releasein May 2005, decreased gains on inventory sales, higher operating, general and administrative expensesand higher depreciation expense in the second quarter of 2005.

 

After Seaway’s pipeline release in May 2005, themaximum operating pressure on the pipeline system was reduced by 20% as isstandard procedure until the cause of the failure is determined and anyrequired corrective measures implemented. A study of the failed pipe was performed by independent, metallurgicalexperts who determined that the pipe failed due to damage that occurred duringrail shipment associated with its installation thirty years ago.  The corrective actions include running a verysophisticated, high definition inspection tool through the pipe to determine ifthere are any other sections of pipe that have similar damage.   This approach is consistent with directivesfrom the United States Department of Transportation’s Office of Pipeline Safetyin past failures of this type.  We are inthe initial stages of evaluating 300 miles of Seaway's pipeline that havesimilar vintage pipe.  Because of thecomplexity of the inspection tool being used, we expect that it will takeseveral months to complete the analysis of the data, as well as complete anyadditional repairs that are identified from the analysis.  Based on these projections, we expect Seawayto be operating at reduced maximum pressures through the first quarter of2006.  At this time, we do not believethis will have a material adverse effect on our financial position, results ofoperations or cash flows.

 

*Six Months Ended June 30, 2005Compared with Six Months Ended June 30, 2004*

 

Our margin increased $2.6 million forthe six months ended June 30, 2005, compared with the six months ended June 30,2004. Crude oil transportation margin increased $3.0 million primarily due toincreased transportation volumes and revenues on our South Texas system andother gathering systems and higher revenues on our Basin and West Texas systemsrelated to movements on higher tariff segments, partially offset by decreasesin transportation volumes on our Red River system and on lower tariff segmentsof our Basin system.   Lubrication oilsales margin increased $0.4 million due to increased sales of chemical volumesand the acquisition of a lubrication oil distributor in Casper, Wyoming, in August 2004.  Crude oil terminaling margin decreased $0.7million as a result of a decrease in pumpover volumes at Midland, Texas andCushing, Oklahoma.  Crude oil marketingmargin decreased $0.1 million, primarily due to increased transportationexpenses, partially offset by an increase in volumes marketed and unrealizedgains of $0.8 million related to marking crude oil grade and location swapcontracts to current market value.

 

Other operating revenues decreased$1.5 million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004, primarily due to a $1.4 million favorablesettlement of inventory imbalances in the first quarter of 2004 and lowerrevenues from documentation and other services to support customers’ tradingactivity at Midland and Cushing in the first six months of 2005.

 

42

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Costs and expenses, excluding expensesassociated with purchases of crude oil and lubrication oil, increased $2.7million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004, due to increased operating, general and administrativeexpenses, increased depreciation and amortization expense and increased taxes –other than income taxes, partially offset by decreased operating fuel andpower.  Operating, general andadministrative expenses increased $1.9 million from the prior year period.  This increase was primarily due to a $2.7million increase in labor and benefits expense related to vesting provisions incertain of our compensation plans as a result of changes in control of ourGeneral Partner and an increase in the number of employees between periods, a $2.3million increase in supplies and pipeline operating and maintenance expense anda $0.4 million increase in insurance expense, partially offset by a $1.2million decrease in postretirement benefit accruals related to plan amendments(see Note 9. Employee Benefit Plans), a $1.2 million decrease inenvironmental and remediation costs and a $1.1 million decrease in expense as aresult of measurement gains on the systems and higher crude oil prices.  Depreciation and amortization expenseincreased $1.0 million as a result of assets placed in service in 2004, and dueto assets retired to depreciation expense during the period.  Taxes – other than income taxes increased$0.4 million due to increases in property tax accruals and a higher asset basein 2005.  Operating fuel and powerdecreased $0.7 million primarily as a result of lower transportation volumes in2005.

 

Equity earnings from our investment inSeaway decreased $4.7 million for the six months ended June 30, 2005, comparedwith the six months ended June 30, 2004, primarily due to decreased transportation volumes attributable to reducedoperating pressures as a result of a pipeline release in May 2005,decreased gains on inventory sales, higheroperating, general and administrative expenses,  higher depreciation expense  anda favorable settlement in the first quarter of 2004 with a former ownerof Seaway’s crude oil assets regarding inventory imbalances that were notacquired by us.

 

**Midstream Segment**

 

The following table provides financial information forthe Midstream Segment for the three months and six months ended June 30,2005 and 2004 (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** |
|----------------------------------------|------------|------------------------|------------|--------------|------------|----------------------|------------|--------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** | **Increase** | ** ** | **June 30,**    | ** ** | **Increase** | ** ** |
| ** **                             | ** ** | **2005**               | ** ** | **2004**     | ** ** | **(Decrease)**       | ** ** | **2005**     | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Sales of  petroleum products           |       | $                      | 2,315      |         | $          | 1,788                |       | $            | 527        |   | $ | 4,457 |   | $ | 3,134 |   | $ | 1,323 |   |
| Gathering –  Natural Gas          |       | 36,956                 |       | 34,427       |       | 2,529                |       | 73,516       |       | 68,929 |   | 4,587 |   |
| Transportation –  NGLs            |       | 11,387                 |       | 10,578       |       | 809                  |       | 21,606       |       | 20,592 |   | 1,014 |   |
| Other                                  |       | 3,993                  |       | 3,211        |       | 782                  |       | 8,070        |       | 7,512 |   | 558 |   |
| Total operating  revenues              |       | 54,651                 |       | 50,004       |       | 4,647                |       | 107,649      |       | 100,167 |   | 7,482 |   |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Purchases of  petroleum products       |       | 1,806                  |       | 1,669        |       | 137                  |       | 3,176        |       | 2,986 |   | 190 |   |
| Operating,  general and administrative |       | 8,786                  |       | 11,094       |       | (2,308               | )          | 19,373       |       | 22,557 |   | (3,184 | ) |
| Operating fuel  and power              |       | 2,355                  |       | 2,449        |       | (94                  | )          | 4,537        |       | 4,619 |   | (82 | ) |
| Depreciation and  amortization         |       | 12,840                 |       | 14,155       |       | (1,315               | )          | 25,541       |       | 29,830 |   | (4,289 | ) |
| Taxes – other  than income taxes  |       | 762                    |       | 1,362        |       | (600                 | )          | 1,886        |       | 2,710 |   | (824 | ) |
| Gains on sales  of assets              |       | —                 |       | —       |       | —               |       | (407         | )          | — |   | (407 | ) |
| Total costs and  expenses              |       | 26,549                 |       | 30,729       |       | (4,180               | )          | 54,106       |       | 62,702 |   | (8,596 | ) |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Operating income                       |       | 28,102                 |       | 19,275       |       | 8,827                |       | 53,543       |       | 37,465 |   | 16,078 |   |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Other income –  net               |       | 60                     |       | 16           |       | 44                   |       | 102          |       | 74 |   | 28 |   |
|                                   |       |                   |       |         |       |                 |       |         |       |   |   |   |   |
| Earnings before  interest              |       | $                      | 28,162     |         | $          | 19,291               |       | $            | 8,871      |   | $ | 53,645 |   | $ | 37,539 |   | $ | 16,106 |   |

 

43

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The following table presents volumeand average rate information for the three months and six months ended June 30,2005 and 2004:

 
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Six Months Ended** | ** ** | **Percentage** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|----------------|------------|----------------------|------------|----------------|------------|
| ** **                                                        | ** ** | **June 30,**      | ** ** | **Increase**   | ** ** | **June 30,**    | ** ** | **Increase**   | ** ** |
| ** **                                                        | ** ** | **2005**               | ** ** | **2004**       | ** ** | **(Decrease)**       | ** ** | **2005**       | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Gathering –  Natural Gas – Jonah:                       |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Million cubic  feet (“MMcf”)                            |       | 99,045                 |       | 83,469         |       | 19                   | %          | 196,395        |       | 167,397 |   | 17 | % |
| Billion British  thermal units (“MMmbtu”)               |       | 109,516                |       | 92,430         |       | 18                   | %          | 216,817        |       | 185,327 |   | 17 | % |
| Average fee per  Million British thermal unit (“MMBtu”) |       | $                      | 0.189      |           | $          | 0.197                |       | (4             | )%         | $ | 0.189 |   | $ | 0.198 |   | (4 | )% |
|                                                              |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Gathering –  Natural Gas – Val Verde:                   |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| MMcf                                                              |       | 44,565                 |       | 35,989         |       | 24                   | %          | 87,874         |       | 71,480 |   | 23 | % |
| MMmbtu                                                            |       | 39,457                 |       | 30,361         |       | 30                   | %          | 77,529         |       | 60,165 |   | 29 | % |
| Average fee per  MMBtu                                            |       | $                      | 0.411      |           | $          | 0.533                |       | (23            | )%         | $ | 0.420 |   | $ | 0.537 |   | (22 | )% |
|                                                              |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Transportation –  NGLs:                                      |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Thousand barrels                                                  |       | 15,540                 |       | 15,465         |       | —               |       | 29,376         |       | 30,145 |   | (3 | )% |
| Average rate per  barrel                                          |       | $                      | 0.733      |           | $          | 0.684                |       | 7              | %          | $ | 0.735 |   | $ | 0.683 |   | 8 | % |
|                                                              |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Fractionation –  NGLs:                                       |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Thousand barrels                                                  |       | 1,087                  |       | 956            |       | 12                   | %          | 2,226          |       | 2,070 |   | 7 | % |
| Average rate per  barrel                                          |       | $                      | 1.820      |           | $          | 1.867                |       | (3             | )%         | $ | 1.732 |   | $ | 1.771 |   | (2 | )% |
|                                                              |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Sales –  Condensate:                                         |       |                   |       |           |       |                 |       |           |       |   |   |   |   |
| Thousand barrels                                                  |       | 13.3                   |       | 17.9           |       | (25                  | )%         | 41.2           |       | 59.7 |   | (31 | )% |
| Average rate per  barrel                                          |       | $                      | 53.24      |           | $          | 37.17                |       | 43             | %          | $ | 49.77 |   | $ | 34.61 |   | 44 | % |

 

The following table reconciles theMidstream Segment margin to operating income in the consolidated statements ofincome using the information presented in the tables above, in the consolidatedstatements of income and in the statements of income in Note 10.  Segment Information (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                             | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales of  petroleum products           |       | $                      | 2,315      |                 | $          | 1,788 |   | $ | 4,457 |   | $ | 3,134 |   |
| Less: Purchases  of petroleum products |       | (1,806                 | )          | (1,669               | )          | (3,176 | ) | (2,986 | ) |
| Total margin                           |       | 509                    |       | 119                  |       | 1,281 |   | 148 |   |
| Gathering –  Natural Gas          |       | 36,956                 |       | 34,427               |       | 73,516 |   | 68,929 |   |
| Transportation –  NGLs            |       | 11,387                 |       | 10,578               |       | 21,606 |   | 20,592 |   |
| Other operating  revenues              |       | 3,993                  |       | 3,211                |       | 8,070 |   | 7,512 |   |
| Net operating  revenues                |       | 52,845                 |       | 48,335               |       | 104,473 |   | 97,181 |   |
| Operating,  general and administrative |       | 8,786                  |       | 11,094               |       | 19,373 |   | 22,557 |   |
| Operating fuel  and power              |       | 2,355                  |       | 2,449                |       | 4,537 |   | 4,619 |   |
| Depreciation and  amortization         |       | 12,840                 |       | 14,155               |       | 25,541 |   | 29,830 |   |
| Taxes – other than  income taxes  |       | 762                    |       | 1,362                |       | 1,886 |   | 2,710 |   |
| Gains on sales  of assets              |       | —                 |       | —               |       | (407 | ) | — |   |
| Operating income                       |       | $                      | 28,102     |                 | $          | 19,275 |   | $ | 53,543 |   | $ | 37,465 |   |
|                                        |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |

 

44

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*Three Months Ended June 30, 2005Compared with Three Months Ended June 30, 2004*

 

Revenues from the gathering of naturalgas increased $2.5 million for the three months ended June 30, 2005,compared with the three months ended June 30, 2004.  Natural gas gathering revenues from the Jonahsystem increased $2.5 million and volumes gathered increased 15.6 billion cubicfeet (“Bcf”) for the three months ended June 30, 2005, primarily due tothe expansion of the Jonah system in 2004. Installation of additional capacity of 100 million cubic feet per daywas completed during the fourth quarter of 2004. Jonah’s average natural gasgathering rate per MMcf decreased due to higher system wellhead pressures.Natural gas gathering revenues from the Val Verde system remained constant andvolumes gathered increased 8.6 Bcf for the three months ended June 30,2005, primarily due to increased volumes from two new connections made to theVal Verde system in May and December 2004, partially offset by thenatural decline of CBM production and slower than anticipated completion andconnection of infill wells.  Val Verde’saverage natural gas gathering rate per MMcf decreased due to contracts enteredinto relating to the new connections, which have lower rates than the existingVal Verde system’s average rates.

 

Margin (sales of petroleum productsless purchases of petroleum products) resulting from the processingarrangements at the Jonah Pioneer plant increased $0.4 million for the threemonths ended June 30, 2005, compared with the three months ended June 30,2004, primarily due to increased volumes and higher NGL prices.   Jonah’s Pioneer gas processing plant wascompleted during the first quarter of 2004, as a part of the Phase IIIexpansion to increase the processing capacity in southwestern Wyoming.  Pioneer’s processing agreements allow theproducers to elect annually whether to be charged under a fee-based arrangementor a fee plus keep-whole arrangement. Under the fee-based election, Jonah receives a fee for its processingservices.  Under the fee plus keep-wholeelection, Jonah receives a lower fee for its processing services, retains andsells the NGLs extracted during the process and delivers to producers theresidue gas equivalent in energy to the natural gas received from theproducers.  Jonah sells the NGLs it retainsand purchases gas to replace the equivalent energy removed in the liquids.  For the 2004 and 2005 periods, the producershave elected the fee plus keep-whole arrangement.

 

Revenues from the transportation ofNGLs increased $0.8 million for the three months ended June 30, 2005,compared with the three months ended June 30, 2004, primarily due toincreases in volumes transported on the Panola Pipeline, partially offset bydecreases in volumes transported on the Chaparral, Dean and WilcoxPipelines.  The increase in the NGLtransportation average rate per barrel resulted from higher average rates perbarrel on volumes transported on the Panola Pipeline.

 

Other operating revenues increased$0.8 million for the three months ended June 30, 2005, compared with thethree months ended June 30, 2004. Val Verde’s other operating revenues increased $0.5 million due torevenues generated as a result of contractual producer minimum fuel levelsexceeding actual operating fuel usage during the three months ended June 30,2005.  Val Verde retains a portion of itsproducers’ gas to compensate for fuel used in operations.  The actual usage of gas can differ from theamount contractually retained from producers. Value retained from producers or sales generated as a result ofefficient fuel usage is recognized as other operating revenues.  NGL fractionation revenues increased$0.2 million as a result of higher volumes.

 

Costs and expenses (excluding purchases of petroleumproducts) decreased $4.3 million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004, due todecreases in operating, general and administrative expenses, depreciation andamortization expense, taxes – other than income taxes and operating fuel andpower.  Operating, general andadministrative expenses decreased $2.3 million primarily due to a $1.7 milliondecrease in gas settlement expenses and a $1.6 million decrease in pipelineoperating and maintenance expenditures primarily on Val Verde, partially offsetby a $1.0 million increase in labor and benefitsexpense primarily associated with vesting provisions in certain of ourcompensation plans as a result of changes in control of our General Partner andcertain DEFS employees becoming employees of EPCO.  Amortization expense on the Jonah systemdecreased $0.9 million primarily due to revisions to the estimated life ofintangible assets under the units-of-production method, partially offset by a$0.3 million increase as a result of higher volumes in the 2005

 

45

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period.  During the fourthquarter of 2004 and the first and second quarters of 2005, updated productionforecasts were obtained from some of the producers on the Jonah system relatedto future expansions of the system, and as a result, we increased our bestestimate of future throughput on the Jonah system.  This increase in the estimate of futurethroughput extended the amortization period of Jonah’s natural gas gatheringcontracts (see Note 2.  Goodwill andOther Intangible Assets).  Amortizationexpense on the Val Verde system decreased $0.2 million primarily due to lowervolumes in the 2005 period on contracts included in the intangible assets,resulting from the natural decline in CBM production.  Depreciation expense decreased $0.2 millionprimarily due to a $1.0 million decrease on Jonah as a result of increases tothe estimated lives of Jonah’s assets, partially offset by a $0.6 millionincrease on Val Verde as a result of assets placed into service in 2004 and anincrease on Panola due to assets retired to depreciation expense.  Taxes – other than income taxes decreased$0.6 million due to actual property taxes being lower than previouslyestimated.

 

*Six Months Ended June 30, 2005Compared with Six Months Ended June 30, 2004*

 

Revenues from the gathering of naturalgas increased $4.6 million for the six months ended June 30, 2005,compared with the six months ended June 30, 2004.  Natural gas gathering revenues from the Jonahsystem increased $4.4 million and volumes gathered increased 29.0 Bcf for thesix months ended June 30, 2005, primarily due to the expansion of theJonah system in 2004.  Installation ofadditional capacity of 100 million cubic feet per day was completed during thefourth quarter of 2004.  Jonah’s averagenatural gas gathering rate per MMcf decreased due to higher system wellheadpressures. Natural gas gathering revenues from the Val Verde system increased$0.2 million and volumes gathered increased 16.4 Bcf for the six months ended June 30,2005, primarily due to increased volumes from two new connections made to theVal Verde system in May and December 2004, partially offset by thenatural decline of CBM production and slower than anticipated completion andconnection of infill wells.  Val Verde’saverage natural gas gathering rate per MMcf decreased due to contracts enteredinto relating to the new connections, which have lower rates than the existingVal Verde system’s average rates.

 

Margin (sales of petroleum productsless purchases of petroleum products) resulting from the processingarrangements at the Jonah Pioneer plant increased $1.1 million for the sixmonths ended June 30, 2005, compared with the six months ended June 30,2004, primarily due to increased volumes and higher NGL prices.

 

Revenues from the transportation ofNGLs increased $1.0 million for the six months ended June 30, 2005,compared with the six months ended June 30, 2004, primarily due toincreases in volumes transported on the Panola Pipeline, partially offset bydecreases in volumes transported on the Chaparral, Dean and Wilcox Pipelines.  The increase in the NGL transportationaverage rate per barrel resulted from higher average rates per barrel onvolumes transported on the Panola Pipeline.

 

Other operating revenues increased$0.6 million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004.  ValVerde’s other operating revenues increased $0.6 million due to revenuesgenerated as a result of contractual producer minimum fuel levels exceedingactual operating fuel usage during the six months ended June 30,2005.  NGL fractionation revenuesincreased $0.2 million as a result of higher volumes.  Jonah’s other operating revenues decreased$0.2 million primarily due to lower condensate sales.

 

Costs and expenses (excluding purchases of petroleumproducts) decreased $8.8 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, due to decreases indepreciation and amortization expense, operating, general and administrativeexpenses, taxes – other than income taxes and operating fuel and power,partially offset by a net gain recorded on the sale of an asset.  Amortization expense on the Jonah systemdecreased $1.7 million primarily due to revisions to the estimated life ofintangible assets under the units-of-production method, partially offset by a$0.6 million increase as a result of higher volumes in the 2005 period.  Amortization expense on the Val Verde systemdecreased $0.5 million primarily due to lower volumes in the 2005 period oncontracts included in the intangible assets, resulting from the natural declinein CBM production.  Depreciation expensedecreased $2.1 million primarily due to a $3.4 million decrease on Jonah as aresult of increases to the estimated lives of Jonah’s assets, partially offsetby a $1.2 million increase on Val Verde as a result of assets placed intoservice in 2004.  Operating, general andadministrative expenses decreased $3.2 million

 

46

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primarily due to a $3.5 million decrease in gas settlement expenses anda $1.1 million decrease in pipeline operating and maintenance expendituresprimarily on Val Verde, partially offset by a $1.2 million increase in labor and benefits expense primarilyassociated with vesting provisions in certain of our compensation plans as aresult of changes in control of our General Partner and certain DEFS employeesbecoming employees of EPCO.  Taxes– other than income taxes decreased $0.8 million due to actual property taxesbeing lower than previously estimated.  A net gain of $0.4 million wasrecognized on the sale of equipment in the current period.

 

**Interest Expense and Capitalized Interest**

 

*Three Months Ended June 30,2005 Compared with Three Months Ended June 30, 2004*

 

Interest expense increased $4.7million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004, primarily due to higher short term floatinginterest rates on our revolving credit facility, $2.0 million of expense relatedto the termination of a treasury lock (see Note 3.  Interest Rate Swaps) and higher outstandingdebt balances.

 

Capitalized interest decreased $0.4million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004, due to lower construction work-in-progressbalances in the 2005 period.

 

*Six Months Ended June 30, 2005Compared with Six Months Ended June 30, 2004*

 

Interest expense increased $4.7million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004, primarily due to higher short term floatinginterest rates on our revolving credit facility, $2.0 million of expenserelated to the termination of a treasury lock (see Note 3.  Interest Rate Swaps) and higher outstandingdebt balances.  These increases werepartially offset by an increased percentage of variable interest rate debtduring the six months ended June 30, 2005, that carried a lower rate ofinterest as compared with fixed interest rate debt.  The higher percentage of variable interestrate debt resulted from the expiration of an interest rate swap in April 2004(see Note 3. Interest Rate Swaps).

 

Capitalized interest decreased $0.2million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004, due to lower construction work-in-progressbalances in the 2005 period.

 

**FinancialCondition and Liquidity**

 

Cash generatedfrom operations, credit facilities and debt and equity offerings are ourprimary sources of liquidity.  At June 30,2005, we had a working capital surplus of $62.0 million, while at December 31,2004, we had a working capital deficit of $37.8 million.  At June 30, 2005, we had approximately $278.6million in available borrowing capacity under our revolving credit facility tocover any working capital needs.  Cashflows for the six months ended June 30, 2005 and 2004 were as follows (inmillions):

 
| ** **                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **June 30,**    | ** ** |
| ** **                   | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Cash provided by  (used in): |       |                 |       |   |   |
| Operating  activities        |       | $                    | 24.6       |   | $ | 132.0 |   |
| Investing  activities        |       | (126.0               | )          | (81.9 | ) |
| Financing  activities        |       | 86.5                 |       | (65.7 | ) |
|                              |            |                      |            |  |  |  |  |

 

*Operating Activities*

 

Net cash fromoperating activities for the six months ended June 30, 2005 and 2004, wascomprised of the following (in millions):

 

47

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| ** **                              | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **June 30,**    | ** ** |
| ** **                              | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Net income                              |       | $                    | 90.8       |   | $ | 78.2 |   |
| Depreciation and  amortization          |       | 52.1                 |       | 54.2 |   |
| Earnings in  equity investments         |       | (14.3                | )          | (17.2 | ) |
| Distributions  from equity investments  |       | 19.0                 |       | 20.8 |   |
| Gains on sales  of assets               |       | (0.6                 | )          | (0.1 | ) |
| Non-cash portion  of interest expense   |       | 0.8                  |       | (0.2 | ) |
| Cash used in  working capital and other |       | (123.2               | )          | (3.7 | ) |
|                                    |       |                 |       |   |   |
| Net cash from operating activities      |       | $                    | 24.6       |   | $ | 132.0 |   |

 

For a discussionof changes in earnings before interest, depreciation and amortization, equityearnings, gain on sales of assets by segment and consolidated interest expense– net, see Results of Operations for the Downstream Segment, Upstream Segmentand Midstream Segment in Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.  Cash provided byoperating activities decreased $107.4 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, primarily due tothe timing of cash disbursements and cash receipts for crude oil inventory andother working capital components and a decrease in distributions received fromour equity investments during the six months ended June 30, 2005,partially offset by higher net income and lower depreciation and amortizationexpense in the 2005 period.

 

 During the second quarter of 2005, we purchasedcrude oil and simultaneously entered into offsetting sales contracts forphysical delivery during the third quarter of 2005.  The purpose of these contracts was to lock ina margin on the crude oil while it is stored in our facilities.  These purchases had a negative impact on cashflows from operating activities when the invoices for the crude oil were paidduring the second quarter of 2005.  Weutilized borrowings under our revolving credit facility to fund a large portionof the crude oil purchases.  Theseborrowings on our revolving credit facility are shown as financing activitiesin the statement of cash flows. As such, until we deliver the crude oil andreceive payment from our customers, operating activities in the statement ofcash flows will be negatively impacted by this activity.

 

We believe that wewill continue to have adequate liquidity to fund future recurring operating andinvesting activities.  Our primary cashrequirements consist of normal operating expenses, capital expenditures tosustain existing operations and revenue generating expenditures, interestpayments on our Senior Notes and revolving credit facility, distributions toour General Partner and unitholders and acquisitions of new assets orbusinesses.  Short-term cashrequirements, such as operating expenses, capital expenditures to sustainexisting operations and quarterly distributions to our General Partner andunitholders, are expected to be funded through operating cash flows. Long-term cash requirements for expansion projects and acquisitions areexpected to be funded by several sources, including cash flows from operatingactivities, borrowings under credit facilities, and the issuance of additionalequity and debt securities.  Our abilityto complete future debt and equity offerings and the timing of any suchofferings will depend on various factors, including prevailing marketconditions, interest rates, our financial condition and our credit rating atthe time.

 

Net cash fromoperating activities for the six months ended June 30, 2005 and 2004,included interest payments, net of amounts capitalized, of $41.1 million and$41.2 million, respectively.  Excludingthe effects of hedging activities and interest capitalized during the yearended December 31, 2005, we expect interest payments on

 

48

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our fixed rate Senior Notes to be approximately $77.8 million.  We expect to pay our interest payments withcash flows from operating activities.

 

*InvestingActivities*

 

Cash flows used ininvesting activities totaled $126.0 million for the six months ended June 30,2005, and were comprised of $82.9 million of capital expenditures, $42.5million for the acquisition of crude oil assets and $1.1 million of cashcontributions for TE Products’ ownership interest in MB Storage, partiallyoffset by $0.5 million in net cash proceeds from an asset sale in our MidstreamSegment.  Cash flows used in investingactivities totaled $81.9 million for the six months ended June 30, 2004,and were comprised of $60.3 million of capital expenditures, $1.5 million ofcash contributions for TE Products’ ownership interest in Centennial, $17.2million of cash contributions for TE Products’ ownership interest in MB Storageand $3.0 million for the acquisition of assets, partially offset by $0.1million in net cash proceeds from asset sales in our Upstream and Downstream Segments.

 

*Financing Activities*

 

Cash flowsprovided by financing activities totaled $86.5 million for the six months endedJune 30, 2005, and were comprised of $278.8 million from the issuance of7.0 million Units in May and June 2005, partially offset by $117.3million of distributions paid to unitholders and $75.0 million in repayments,net of borrowings, on our revolving credit facility.  Cash flows used in financing activitiestotaled $65.7 million for the six months ended June 30, 2004, and werecomprised of $115.7 million of distributions paid to unitholders, partiallyoffset by $50.0 million in borrowings, net of repayments, from our revolvingcredit facility.

 

Centennial entered into credit facilities totaling $150.0million and, as of June 30, 2005, $150.0 million was outstanding underthose credit facilities.  The proceedswere used to fund construction and conversion costs of Centennial’s pipelinesystem.  TE Products and MarathonAshland Petroleum LLC (“Marathon”) haveeach guaranteed one-half of Centennial’s debt, up to a maximum of $75.0 millioneach.

 

***Universal Shelf***

** **

**We have filed with the Securities and Exchange Commission auniversal shelf registration statement that, subject to agreement on terms atthe time of use and appropriate supplementation, allows us to issue, in one ormore offerings, up to an aggregate of $2.0 billion of equity securities, debtsecurities or a combination thereof.  Duringthe three months ended June 30, 2005, we issued $279.2 million of equitysecurities.  At June 30, 2005, wehad $1.7 billion remaining under this shelf registration, subject to customarymarketing terms and conditions.**

** **

*Credit Facilitiesand Interest Rate Swap Agreements*

 

On June 27, 2003, we entered into a $550.0million 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 option, on either the lender’s base rate plus a spread, or LIBOR plus aspread in effect at the time of the borrowings. The credit agreement for the Revolving Credit Facility contains certainrestrictive financial covenant ratios. On October 21, 2004, we amended our Revolving Credit Facility to (i) increasethe facility size to $600.0 million, (ii) extend the term to October 21,2009, (iii) remove certain restrictive covenants, (iv) increase theavailable amount for the issuance of letters of credit up to $100.0 million and(v) decrease the LIBOR rate spread charged at the time of eachborrowing.  On February 23, 2005, weagain amended our Revolving Credit Facility to remove the requirement that DEFSmust at all times own, directly or indirectly, 100% of our General Partner, toallow for its acquisition by DFI.  Duringthe second quarter of 2005, we used a portion of the proceeds from equityofferings in

 

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May 2005 and June 2005 to repay a portion of the Revolving CreditFacility (see Note 8.  Partners’ Capitaland Distributions).  At June 30,2005, $278.0 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 4.3%. At June 30, 2005, we were in compliance with the covenants of thiscredit agreement.

 

We have entered into interest rateswap agreements to hedge our exposure to cash flows and fair valuechanges.  These agreements are more fullydescribed in Item 3.  Quantitative andQualitative Disclosures About Market Risk.

 

The following table summarizes ourcredit facilities as of June 30, 2005 (in millions):

 

| ** **                     | ** ** | **As of June 30, 2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | ** **                   | ** ** | **Available** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Outstanding**              | ** ** | **Borrowing** | ** ** | **Maturity** | ** ** |
| **Description:**               | ** ** | **Principal**                | ** ** | **Capacity** | ** ** | **Date** | ** ** |
| Revolving Credit  Facility (1) |       | $                            | 278.0      |   | $ | 322.0 |   | October 2009 |   |
| 6.45% Senior  Notes (2)        |       | 180.0                        |       | — |   | January 2008 |   |
| 7.625% Senior  Notes (2)       |       | 500.0                        |       | — |   | February 2012 |   |
| 6.125% Senior  Notes (2)       |       | 200.0                        |       | — |   | February 2013 |   |
| 7.51% Senior  Notes (2)        |       | 210.0                        |       | — |   | January 2028 |   |
| Total                          |       | $                            | 1,368.0    |   | $ | 322.0 |   |   |   |

 

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(1)          Our Revolving Credit Facility contains restrictivecovenants that require us to maintain certain financial ratios.  Under the most restrictive financialcovenant, approximately $278.6 million was available to be borrowed for workingcapital needs at June 30, 2005. Certain of these restrictive covenants are adjusted in the event of anacquisition by us, which would permit additional borrowings under the facility.

 

(2)          Our TE Products subsidiary entered into an interest rateswap agreement to hedge its exposure to changes in the fair value of its 7.51%Senior Notes due 2028.  At June 30,2005, the 7.51% Senior Notes include an adjustment to increase the fair valueof the debt by $7.4 million related to this interest rate swap agreement.  We also entered into interest rate swapagreements to hedge our exposure to changes in the fair value of our 7.625%Senior Notes due 2012.  At June 30,2005, the 7.625% Senior Notes include a deferred gain, net of amortization,from previous interest rate swap terminations of $34.6 million.  At June 30, 2005, our 6.45% SeniorNotes, our 7.625% Senior Notes and our 6.125% Senior Notes include $2.6 millionof unamortized debt discounts.  The fairvalue adjustments, the deferred gain adjustment and the unamortized debtdiscounts are excluded from this table.

 

### ***Distributions and Issuance of Additional LimitedPartner Units***

 

We paid cashdistributions of $117.3 million ($1.325 per Unit) and $115.7 million ($1.3125per Unit) during the six months ended June 30, 2005 and 2004,respectively.  Additionally, we declareda cash distribution of $0.675 per Unit for the quarter ended June 30,2005. We will pay the distribution of $66.9 million on August 5, 2005, tounitholders of record on July 29, 2005.

 

On May 5, 2005, we sold in anunderwritten public offering 6.1 million Units at $41.75 per Unit.  The proceeds from the offering, net ofunderwriting discount, totaled approximately $244.5 million.  On June 8, 2005, 865,000 Units were soldupon exercise of the underwriters’ over-allotment option granted in connectionwith the offering on May 5, 2005. Proceeds from the over-allotment sale, net of underwriting discount,totaled $34.7 million.  The proceeds wereused to reduce indebtedness under our Revolving Credit Facility, to fund revenuegenerating and system upgrade capital expenditures and for general partnershippurposes.

 

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*General Partner Interest*

 

As of June 30,2005, and December 31, 2004, we had deficit balances of $40.3 million and$33.0 million, respectively, in our General Partner’s equity account. Thesenegative balances do not represent assets to us and do not representobligations of the General Partner to contribute cash or other property to us.The General Partner’s equity account generally consists of its cumulative shareof our net income less cash distributions made to it plus capital contributionsthat it has made to us (see our Consolidated Statement of Partners’ Capital fora detail of the General Partner’s equity account).  For the six months ended June 30, 2005,the General Partner was allocated $26.6 million (representing 29.27%) of ournet income and received $33.8 million in cash distributions.

 

Capital Accounts, as definedunder our Partnership Agreement, are maintained for our General Partner and ourlimited partners.  The Capital Accountprovisions of our Partnership Agreement incorporate principles established forU.S. federal income tax purposes and are not comparable to the equity accountsreflected under accounting principles generally accepted in the United Statesin our financial statements.  Under ourPartnership Agreement, the General Partner is required to make additionalcapital contributions to us upon the issuance of any additional Units ifnecessary to maintain a Capital Account balance equal to 1.999999% of the totalCapital Accounts of all partners.  At June 30,2005, and December 31, 2004, the General Partner’s Capital Account balancesubstantially exceeded this requirement.

 

Net income is allocated betweenthe General Partner and the limited partners in the same proportion asaggregate cash distributions made to the General Partner and the limitedpartners during the period.  This isgenerally consistent with the manner of allocating net income under ourPartnership Agreement.  Net incomedetermined under our Partnership Agreement, however, incorporates principlesestablished for U.S. federal income tax purposes and is not comparable to netincome reflected under accounting principles generally accepted in the UnitedStates in our financial statements.

 

Cash distributions that we makeduring a period may exceed our net income for the period.  We make quarterly cash distributions of allof our Available Cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion.  Cashdistributions in excess of net income allocations and capital contributionsduring the year ended December 31, 2004, and the six months ended June 30,2005, resulted in deficits in the General Partner’s equity account at December 31,2004, and June 30, 2005.  Futurecash distributions that exceed net income will result in an increase in thedeficit balance in the General Partner’s equity account.

 

According to the Partnership Agreement, in the eventof our dissolution, after satisfying our liabilities, our remaining assetswould be divided among our limited partners and the General Partner generallyin the same proportion as Available Cash but calculated on a cumulative basisover the life of the Partnership.  If adeficit balance still remains in the General Partner’s equity account after allallocations are made between the partners, the General Partner would not berequired to make whole any such deficit.

 

*Future Capital Needs andCommitments*

 

We estimate thatcapital expenditures, excluding acquisitions, for 2005 will be approximately $283.0million (which includes $7.0 million of capitalized interest).  We expect to spend approximately $209.8million for revenue generating projects and facility improvements.  Capital spending on revenue generatingprojects and facility improvements will include approximately $43.8 million forthe expansion of our Downstream Segment facilities.  We expect to spend $25.7 million to expandour Upstream Segment pipelines and facilities in West Texas and Oklahoma andapproximately $140.3 million to expand our Midstream Segment assets, withfurther expansions on our Jonah system. We expect to spend approximately $41.0 million to sustain existingoperations, including life-cycle replacements for equipment at variousfacilities and pipeline and tank replacements among all of our businesssegments.  We expect to spendapproximately $25.2 million to improve operational efficiencies and reducecosts among all of our business segments. We continually review and evaluate potential capital improvements andexpansions that would be complementary to our present business operations.  These expenditures can vary greatly

 

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depending on the magnitude of our transactions.  We may finance capital expenditures throughinternally generated funds, debt or the issuance of additional equity.

 

Our debt repaymentobligations consist of payments for principal and interest on (i) the TEProducts $180.0 million 6.45% Senior Notes due January 15, 2008, (ii) outstandingprincipal amounts under the Revolving Credit Facility due in October 2009($278.0 million outstanding at June 30, 2005), (iii) our $500.0million 7.625% Senior Notes due February 15, 2012, (iv) our $200.0million 6.125% Senior Notes due February 1, 2013, and (v) the TEProducts $210.0 million 7.51% Senior Notes due January 15, 2028.

 

TE Products iscontingently liable as guarantor for the lesser of one-half or $75.0 millionprincipal amount (plus interest) of the borrowings of Centennial.  In January 2003, TE Products enteredinto a pipeline capacity lease agreement with Centennial for a period of fiveyears that contains a minimum throughput requirement.  For the year ended December 31, 2004, TEProducts exceeded the minimum throughput requirements on the lease agreement.

 

During the sixmonths ended June 30, 2005, TE Products contributed $1.1 million to MBStorage.  No amounts were contributed toCentennial during the six months ended June 30, 2005.  During the six months ended June 30,2004, TE Products contributed $1.5 million to Centennial to cover operatingneeds and capital expenditures and $17.2 million to MB Storage, of which $16.5million was used to acquire storage assets in April 2004.  During the remainder of 2005, TE Products maybe required to contribute cash to Centennial to cover capital expenditures,acquisitions or other operating needs and to MB Storage to cover significantcapital expenditures or additional acquisitions.

 

*Off-Balance Sheet Arrangements*

 

We do not rely onoff-balance sheet borrowings to fund our acquisitions.  We have no off-balance sheet commitments forindebtedness other than the limited guaranty of Centennial debt and leasescovering assets utilized in several areas of our operations.

 

*Contractual Obligations*

 

The followingtable summarizes our debt repayment obligations and material contractualcommitments as of June 30, 2005 (in millions):

 
| ** **                                  | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                      | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** |
|                                        |       |                                           |       |   |   |   |   |   |   |   |   |
| Revolving Credit  Facility                  |       | $                                              | 278.0      |   | $ | — |   | $ | 278.0 |   | $ | — |   | $ | — |   |
| 6.45% Senior  Notes due 2008 (1) (2)   |       | 180.0                                          |       | — |   | — |   | 180.0 |   | — |   |
| 7.625% Senior  Notes due 2012 (2)           |       | 210.0                                          |       | — |   | — |   | — |   | 210.0 |   |
| 6.125% Senior  Notes due 2013 (2)           |       | 500.0                                          |       | — |   | — |   | — |   | 500.0 |   |
| 7.51% Senior  Notes due 2028 (1) (2)   |       | 200.0                                          |       | — |   | — |   | — |   | 200.0 |   |
| Debt subtotal                               |       | 1,368.0                                        |       | — |   | 278.0 |   | 180.0 |   | 910.0 |   |
|                                        |       |                                           |       |   |   |   |   |   |   |   |   |
| Operating leases                            |       | 78.1                                           |       | 19.0 |   | 30.0 |   | 12.8 |   | 16.3 |   |
| Capital  expenditure obligations (3)        |       | 17.2                                           |       | 17.2 |   | — |   | — |   | — |   |
| Other  liabilities and deferred credits (4) |       | 3.6                                            |       | — |   | 2.9 |   | 0.7 |   | — |   |
|                                        |       |                                           |       |   |   |   |   |   |   |   |   |
| Total                                       |       | $                                              | 1,466.9    |   | $ | 36.2 |   | $ | 310.9 |   | $ | 193.5 |   | $ | 926.3 |   |

 

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(1)          Obligations of TE Products.

 

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(2)          Our TE Products subsidiary entered into an interest rateswap agreement to hedge its exposure to changes in the fair value of its 7.51%Senior Notes due 2028.  At June 30,2005, the 7.51% Senior Notes include an adjustment to increase the fair valueof the debt by $7.4 million related to this interest rate swap agreement.  We also entered into interest rate swapagreements to hedge our exposure to changes in the fair value of our 7.625%Senior Notes due 2012.  At June 30,2005, the 7.625% Senior Notes include a deferred gain, net of amortization,from previous interest rate swap terminations of $34.6 million.  At June 30, 2005, our 6.45% SeniorNotes, our 7.625% Senior Notes and our 6.125% Senior Notes include $2.6 millionof unamortized debt discounts.  The fairvalue adjustments, the deferred gain adjustment and the unamortized debtdiscounts are excluded from this table.

 

(3)          Includes accruals for costs incurred but not yet paidrelating to capital projects.

 

(4)          Excludes approximately $9.1 million of long-term deferred revenuepayments, which are being transferred to income over the term of the respectiverevenue contracts.  The amount ofcommitment by year is our best estimate of projected payments of theselong-term liabilities.

 

We expect to repaythe long-term, senior unsecured obligations and bank debt through the issuanceof additional long-term senior unsecured debt at the time the 2008, 2012, 2013and 2028 debt matures, issuance of additional equity, with proceeds from dispositionsof assets, cash flow from operations or any combination of the above items.

 

In addition to theitems in the table above, we have entered into various operational commitmentsand agreements related to pipeline operations and to the marketing, transportation,terminaling and storage of crude oil. The majority of contractual commitments for the purchase of crude oilthat are made range in term from a thirty-day evergreen to three years.  A substantial portion of the contracts forthe purchase of crude oil that extend beyond thirty days include cancellationprovisions that allow us to cancel the contract with thirty days writtennotice.  During the six months ended June 30,2005, crude oil purchases averaged approximately $552.5 million per month.

 

### ***Sources of Future Capital***

### ** **

Historically, wehave funded our capital commitments from operating cash flow and borrowingsunder bank credit facilities or bridge loans. We repaid these loans in part by the issuance of long term debt incapital markets and the public offering of Units.  We expect future capital needs would besimilarly funded to the extent not otherwise available from cash flow fromoperations.

 

As of June 30,2005, we had $278.6 million in available borrowing capacity under the RevolvingCredit Facility, subject to compliance with prescribed financialcovenants.  We expect that cash flowsfrom operating activities will be adequate to fund cash distributions andcapital additions necessary to sustain existing operations.  However, future expansionary capital projectsand acquisitions will require funding through borrowings under our RevolvingCredit Facility or proceeds from the sale of additional debt or equityofferings, or any combination thereof.

 

Our senior unsecured debtis rated BBB- by Standard and Poors (“S&P”) and Baa3 by Moody’s InvestorsService (“Moody’s”).  S&P assignedthis rating on June 14, 2005, following its review of the ownershipstructure, corporate governance issues, and proposed funding after theacquisition of the General Partner by DFI. Both ratings are with a stable outlook. A rating reflects only the view of a rating agency and is not arecommendation 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.  Thesenior unsecured debt of our subsidiary, TE Products, is also rated BBB- byS&P and Baa3 by Moody’s.  Bothratings are with a stable outlook.

 

****OtherConsiderations****

** **

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

 

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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, theLouisiana Department of Environmental Quality (“LDEQ”) issued a complianceorder for environmental contamination at our Arcadia, Louisiana facility.  In 1999, our Arcadia facility and adjacentterminals were directed by the Remediation Services Division of the LDEQ topursue remediation of this contamination. At June 30, 2005, we have an accrued liability of $0.2 million forremediation costs at our Arcadia facility. Effective in March 2004, we executed an access agreement with anadjacent industrial landowner who is located upgradient of the Arcadiafacility.  This agreement enables thelandowner to proceed with remediation activities at our Arcadia facility forwhich it has accepted shared responsibility. We do not expect that the completion of the remediation program proposedto the LDEQ will have a future material adverse effect on our financialposition, results of operations or cash flows.

 

On March 17, 2003, we experienced a release of 511 barrels of jetfuel from a storage tank at our Blue Island terminal located in Cook County,Illinois.  As a result of the release, wehave entered into an Agreed Order with the State of Illinois, which required usto conduct an environmental investigation. At this time, we have complied with the terms of the Agreed Order, andthe results of the environmental investigation indicated there were no soil orgroundwater impacts from the release.  Weare in the process of negotiating a final settlement with the State ofIllinois, and we do not expect that compliance with the settlement willhave a future material adverse effect on our financial position, results ofoperations or cash flows.

 

On July 22, 2004, we experienced a release of approximately 12barrels of jet fuel 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 the UnitedStates Fish and Wildlife Service (“USFWS”). On October 1, 2004, the USFWS served us with a Notice of Violation,alleging that we violated 16 USC 703 of the Migratory Bird Treaty Act for the “take[ing]of migratory birds by illegal methods.” On February 7, 2005, we entered into a Memorandum of Understanding(“MOU”) with the USFWS, and on June 23, 2005, we notified the USFWS thatwe had completed all requirements under the MOU, thus terminating the agreementand settling all aspects of this matter. The terms of this settlement did nothave a material effect on our financial position, results of operations or cashflows.

 

On July 27, 2004, we received notice from the United StatesDepartment of Justice (“DOJ”) of its intent to seek a civil penalty against usrelated to our November 21, 2001, release of approximately 2,575 barrelsof jet fuel from our 14-inch diameter pipeline located in Orange County,Texas.  The DOJ, at the request of the EnvironmentalProtection Agency, is seeking acivil penalty against us for alleged violations of the Clean Water Act (“CWA”)arising out of this release.  The maximumstatutory penalty calculated for this alleged violation of the CWA is $2.8million.  We are in discussions with theDOJ regarding this matter and have responded to its request for additionalinformation.  We do not expect a civilpenalty, if any, to have a material adverse effect on our financial position,results of operations or cash flows.

 

At June 30,2005, we have an accrued liability of $4.1 million related to various TCTM andTE Products sites requiring environmental remediation activities.   We do not expect that the completion ofremediation programs associated with TCTM and TE Products activities will havea future material adverse effect on our financial position, results ofoperations or cash flows.

 

On February 24,2005, the General Partner was acquired from DEFS by DFI.  The General Partner owns a 2% general partnerinterest in us and is the general partner of the Partnership.  On March 11, 2005, the Bureau of

 

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Competition of the Federal Trade Commission (“FTC”) delivered writtennotice to DFI’s legal advisor that it was conducting a non-public investigationto determine whether DFI’s acquisition of the General Partner may substantiallylessen competition.  The FTC hascontacted the General Partner requesting data. The General Partner intends to cooperate fully with any suchinvestigations and inquiries requested by the FTC or any other regulatoryauthorities.

 

*RecentAccounting Pronouncements*

 

**See discussion of new accountingpronouncements in Note 1.  Organizationand Basis of Presentation - New Accounting Pronouncements in the accompanyingconsolidated financial statements.**

** **

*CorporateGovernance Guidelines*

* *

**Effective March 22, 2005, the General Partner’s LLCAgreement was amended to delete a provision requiring that members of ourGeneral Partner’s board of directors must retire at the first meeting of theboard of directors following attainment of the age of 70 years.  The agreement was amended to allow for theelection of the new members of the board of directors, one of whom is over theage of 70.  As a result of the amendment,there is now no retirement age for the members of the General Partner’s boardof directors.  O**ur Corporate Governance Guidelines,which were also amended to reflect this change, are available on our website atwww.teppco.com.

 

**On March 22,2005, the members of the board of directors of the General Partner, Jim W.Mogg, Mark A. Borer, Michael J. Bradley, Milton Carroll, Derrill Cody, John P.DesBarres, William H. Easter III and Paul F. Ferguson, Jr., each of whomhad been elected to the board of the General Partner by DEFS, resigned and newdirectors were elected.  The newlyelected directors are Ralph S. Cunningham, Lee W. Marshall, Sr., Murray H.Hutchison and Michael B. Bracy.  Barry R.Pearl will continue to serve the General Partner as chief executive officer,president and a director.  The newlyelected board is comprised of a majority of outside directors who areindependent under the criteria of the New York Stock Exchange and the U.S.Securities and Exchange Commission.**

 

*Retirementand Election of Officers*

* *

On July 12, 2005, we announced that Charles H.Leonard elected to retire effective July 8, 2005, as Senior Vice Presidentand Chief Financial Officer of our General Partner.  Tracy E. Ohmart, Controller of the GeneralPartner, became the acting Chief Financial Officer.

 

Mr. Ohmart, age 37, has served as Controller ofour General Partner since May 2002. Mr. Ohmart joined our General Partner in January 2001 and hasheld various positions within the Company until he became Assistant Controllerin May 2001.  Prior to hisemployment with our General Partner, Mr. Ohmart spent 12 years in variouspositions at ARCO Pipe Line Company, most recently serving as supervisor ofgeneral accounting and policy.

 

Mr. William Ordemann was elected Senior Vice Presidentof our General Partner effective July 25, 2005. Mr. Ordemann will be responsible for leading commercial developmentactivities for Jonah.  Mr. Ordemann alsoserves as Senior Vice President of Enterprise Products GP, LLC (“EnterpriseGP”), the general partner of Enterprise Products Partners L.P.  Prior to joining Enterprise GP, Mr. Ordemannserved as vice president of Tejas Natural Gas Liquids, LLC from February 1998to September 1999, and vice president of Shell Midstream Enterprises, LLC fromJanuary 1997 to February 1998.

 

Mr. Stephen O. McNair was elected Vice President ofour General Partner effective July 25, 2005. Mr. McNair will have leadership responsibility for our  Natural Gas Services organization, includingJonah operations and Val Verde activities. Mr. McNair joined our General Partner in June 2005.  He was previously Rockies Region vicepresident for DEFS.  He joined DEFS asgeneral manager of Operations, West Permian Region in 2000.  Prior to his employment with DEFS, Mr. McNairheld various engineering, commercial and operations management positions withConoco Inc. and GPM Gas Corporation.

 

**Forward-Looking Statements**

 

The matters discussed in this Reportinclude “forward-looking statements” within the meaning of various provisionsof the Securities Act of 1933 and the Securities Exchange Act of 1934.  All statements, other than statements ofhistorical facts, included in this document that address activities, events ordevelopments that we expect or anticipate will or may occur in the future,including such things as estimated future capital expenditures (including theamount and nature thereof), business strategy and measures to implementstrategy, competitive strengths, goals, expansion and growth of our businessand operations, plans, references to future success, references to intentionsas to future matters and other such matters are forward-lookingstatements.  These statements are basedon certain assumptions and analyses made by us in light of our experience andour perception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate under thecircumstances.  However, whether actualresults and developments will conform with our expectations and

 

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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. For additional discussion of such risks and uncertainties, see ourAnnual Report on Form 10-K for the year ended December 31, 2004, andother filings we have made with the Securities and Exchange Commission.

 

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

We may be exposedto market risk through changes in crude oil commodity prices and interestrates.  We do not have foreign exchangerisks.  Our Risk Management Committee hasestablished policies to monitor and control these market risks.  The Risk Management Committee is comprised,in part, of senior executives of the Company.

 

We seek tomaintain a position that is substantially balanced between crude oil purchasesand sales and future delivery obligations. On the majority of our crude oil derivative contracts, we take thenormal purchase and normal sale exclusion in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, and SFAS No. 138,*Accounting for Certain Derivative Instruments andCertain Hedging Activities, an amendment of FASB Statement No. 133*.  At June 30, 2005, we have $75.8 millionof crude oil inventory for which we have entered into forward crude sales contractsto mitigate the risk of price volatility.

 

Occasionally,customers require pricing terms which do not allow us to balance ourposition.  Additionally, certain pricingterms may expose us to movements in margin. On a small portion of our crude oil marketing business, we enter intoderivative contracts such as swaps and other business hedging devices for whichwe cannot take the normal purchase and normal sale exclusion and for which wedo not elect hedge accounting.  The termsof these contracts are less than one year. The purpose is to balance our position or lock in a margin and, as such,do not expose us to any additional significant market risk.  We mark these transactions to market and thechanges in the fair value are recognized in current earnings.  This results in some financial statementvariability during quarterly periods; however, any unrealized gains and lossesreflected in the financial statements related to marking these transactions tomarket are offset by realized gains and losses in different quarterly periodswhen the transactions are settled.

 

At June 30,2005, we had $278.0 million outstanding under our variable interest raterevolving credit facility.  The interestrate is based, at our option, on either the lender’s base rate plus a spread orLIBOR plus a spread in effect at the time of the borrowings and is adjustedmonthly, bimonthly, quarterly or semiannually. Utilizing the balances of our variable interest rate debt outstanding atJune 30, 2005, and assuming market interest rates increase 100 basispoints, the potential annual increase in interest expense would be $2.8million.

 

At June 30,2005, TE Products had outstanding $180.0 million principal amount of 6.45%Senior Notes due 2008 and $210.0 million principal amount of 7.51% Senior Notesdue 2028 (collectively, the “TE Products Senior Notes”).  At June 30, 2005, the estimated fairvalue of the TE Products Senior Notes was approximately $412.6 million.  At June 30, 2005, we had outstanding$500.0 million principal amount of 7.625% Senior Notes due 2012 and $200.0million principal amount of 6.125% Senior Notes due 2013.  At June 30, 2005, the estimated fairvalue of the $500.0 million 7.625% Senior Notes and the $200.0 million 6.125%Senior Notes was approximately $570.4 million and $212.0 million, respectively.

 

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We have utilizedand expect to continue to utilize interest rate swap agreements to hedge aportion of our cash flow and fair value risks. Interest rate swap agreements are used to manage the fixed and floatinginterest rate mix of our total debt portfolio and overall cost ofborrowing.  Interest rate swaps thatmanage our cash flow risk reduce our exposure to increases in the benchmarkinterest rates underlying variable rate debt. Interest rate swaps that manage our fair value risks are intended toreduce our exposure to changes in the fair value of the fixed rate debt.  Interest rate swap agreements involve theperiodic exchange of payments without the exchange of the notional amount uponwhich the payments are based.  Therelated amount payable to or receivable from counterparties is included as anadjustment to accrued interest.

 

In October 2001,TE Products entered into an interest rate swap agreement to hedge its exposureto changes in the fair value of its fixed rate 7.51% Senior Notes due 2028. Wedesignated this swap agreement as a fair value hedge.  The swap agreement has a notional amount of$210.0 million and matures in January 2028 to match the principal andmaturity of the TE Products Senior Notes. Under the swap agreement, TE Products pays a floating rate of interestbased on a three-month U.S. Dollar LIBOR rate, plus a spread, and receives afixed rate of interest of 7.51%.  Duringthe six months ended June 30, 2005, and 2004, we recognized reductions ininterest expense of $3.3 million and $5.1 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap.  During the quarter endedJune 30, 2005, we measured the hedge effectiveness of this interest rateswap and noted that no gain or loss from ineffectiveness was required to berecognized.  The fair value of thisinterest rate swap was a gain of approximately $7.4 million and $3.4 million atJune 30, 2005, and December 31, 2004, respectively.  Utilizing the balance of the 7.51% TEProducts Senior Notes outstanding at June 30, 2005 and including theeffects of hedging activities, assuming market interest rates increase 100basis points, the potential annual increase in interest expense is $2.1million.

 

In July 2000,we entered into an interest rate swap agreement to hedge our exposure toincreases in the benchmark interest rate underlying our variable rate revolvingcredit facility.  This interest rate swapmatured in April 2004.  Wedesignated this swap agreement, which hedged exposure to variability inexpected future cash flows attributed to changes in interest rates, as a cashflow hedge. The swap agreement was based on a notional amount of $250.0million.  Under the swap agreement, wepaid a fixed rate of interest of 6.955% and received a floating rate based on athree-month U.S. Dollar LIBOR rate. Because this swap was designated as a cash flow hedge, the changes infair value, to the extent the swap was effective, were recognized in othercomprehensive income until the hedged interest costs were recognized inearnings.  From January 2004 throughApril 2004, we recognized an increase in interest expense of $2.9 millionrelated to the difference between the fixed rate and the floating rate ofinterest on the interest rate swap.

 

During 2002, we entered into interest rate swapagreements, designated as fair value hedges, to hedge our exposure to changesin the fair value of our fixed rate 7.625% Senior Notes due 2012.  The swap agreements had a combined notionalamount of $500.0 million and matured in 2012 to match the principal andmaturity of the Senior Notes.  Under theswap agreements, we paid a floating rate of interest based on a U.S. DollarLIBOR rate, plus a spread, and received a fixed rate of interest of7.625%.  These swap agreements were laterterminated in 2002 resulting in gains of $44.9 million.  The gains realized from the swap terminationshave been deferred as adjustments to the carrying value of the Senior Notes andare being amortized using the effective interest method as reductions to futureinterest expense over the remaining term of the Senior Notes.  At June 30, 2005, the unamortized balanceof the deferred gains was $34.6 million. In the event of early extinguishment of the Senior Notes, any remainingunamortized gains would be recognized in the consolidated statement of incomeat the time of extinguishment.

 

During May 2005, we executed a treasury rate lockagreement with a notional amount of $200.0 million to hedge our exposure toincreases in the treasury rate that was to be used to establish the fixedinterest rate for a debt offering that was proposed to occur in the secondquarter of 2005.  During June 2005,the proposed debt offering was cancelled, and the  treasury lock was terminated with a realizedloss of $2.0 million.  The realized losswas recorded as a component of interest expense in the consolidated statementsof income.

 

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**Item 4.  Controls and Procedures**

 

The principal executive officer andprincipal financial officer of our General Partner, after evaluating theeffectiveness of our disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) as of June 30, 2005, haveconcluded that, as of such date, our disclosure controls and procedures areadequate and effective to ensure that material information relating to us andour consolidated subsidiaries would be made known to them by others withinthose entities.

 

*Changesin Internal Control over Financial Reporting*

 

**Through February 23, 2005, our General Partner was anindirect subsidiary of Duke Energy, and Duke Energy’s Audit Services Departmentprovided our internal audit functions. On February 24, 2005, the General Partner was acquired by DFI, anaffiliate of EPCO.** EPCO, using its own personnel and third partyproviders, will provide us with internal audit services.  EPCO expects the transition of internal auditfunctions to be completed in the third quarter of 2005.  This change is not expected to adverselyaffect our internal audit process or our internal control over financialreporting.

** **

There has been no significant changein our internal control over financial reporting during the second quarter of2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.  As a result, no corrective actions wererequired or undertaken.

 

**PART II.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

We have been, in the ordinary courseof business, a defendant in various lawsuits and a party to various other legalproceedings, some of which are covered in whole or in part by insurance.  We believe that the outcome of these lawsuitsand other proceedings will not individually or in the aggregate have a materialadverse effect on our consolidated financial position, results of operations orcash flows.  See discussion of legalproceedings in Note 11.  Commitments andContingencies in the accompanying consolidated financial statements.

 

**Item 6.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1                 |       | Certificate of Limited Partnership of TEPPCO Partners, L.P.  (Filed as Exhibit 3.2 to the Registration Statement of TEPPCO Partners,  L.P. (Commission File No. 33-32203) and incorporated herein by  reference).                                                                                                                                             |
| 3.2                 |       | Third Amended and Restated Agreement of Limited Partnership  of TEPPCO Partners, L.P., dated September 21, 2001 (Filed as  Exhibit 3.7 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 Certificate representing Limited Partner Units  (Filed as Exhibit 4.1 to the Registration Statement of TEPPCO Partners,  L.P. (Commission File No. 33-32203) and incorporated herein by  reference).                                                                                                                                             |
| 4.2                 |       | 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). |
| 4.3                 |       | Form of Certificate representing Class B Units  (Filed as Exhibit 4.3 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).                                                                                                                   |

 

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| 4.4    |   | 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).                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.5    |   | 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).                                                                                                                                         |
| 4.6    |   | 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). |
| 4.7    |   | 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*  |   | Amendments to the TEPPCO Retirement Cash Balance Plan and  the TEPPCO Supplemental Benefit Plan dated as of May 27, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2*  |   | Agreement and Release between Charles H. Leonard and Texas  Eastern Products Pipeline Company, LLC dated as of July 11, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 12.1*  |   | Statement of Computation of Ratio of Earnings to Fixed  Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

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* Filed herewith.

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

+ A management contract or compensation plan or arrangement.

 

59

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                  |                                | TEPPCO Partners, L.P.                 |   |   |
|-----------------------|-------------------------------------|---------------------------------------|--------|--------|
|                  | (Registrant)                        |                                  |
|                  | (A Delaware Limited Partnership)    |                                  |
|                  |                                |                                  |   |
|                  | By: Texas Eastern Products Pipeline |                                  |
|                  | Company, LLC, as General Partner    |                                  |
|                  |                                |                                  |   |
|                  | By:                                 | /s/ BARRY R. PEARL                    |   |
|                  |                                | Barry R. Pearl,                       |   |
|                  |                                | President and Chief Executive Officer |   |
|                  |                                |                                  |   |
|                  | By:                                 | /s/ TRACY E. OHMART                   |   |
|                  |                                | Tracy E. Ohmart,                      |   |
|                  |                                | Chief Financial Officer               |   |
|                  |                                |                                  |   |
| Date:  August 2, 2005 |                                |                                  |   |
|                       |                                     |                                       |        |        |  |

 

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