**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 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 as specified in its charter)**

 

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

 

**2929 Allen Parkway**

**P.O. Box 2521**

**Houston, Texas 77252-2521**

(Address ofprincipal executive offices, including zip code)

 

**(713) 759-3636**

(Registrant’stelephone number, including area code)

 

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

Yes  ý  No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes  ý  No  o

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicable date.  Limited Partner Units outstanding as ofAugust 2, 2004:   62,998,554.

 

 

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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, 2004 (unaudited) and December 31, 2003**                                    | **1**  |
|                                                                                                                      |   |
| **Consolidated  Statements of Income for the three months and six months ended June 30, 2004  and 2003 (unaudited)** | **2**  |
|                                                                                                                      |   |
| **Consolidated  Statements of Cash Flows for the six months ended June 30, 2004  and 2003 (unaudited)**              | **3**  |
|                                                                                                                      |   |
| **Consolidated  Statement of Partners’ Capital for the six months ended June 30, 2004  (unaudited)**                 | **4**  |
|                                                                                                                      |   |
| **Notes  to the Consolidated Financial Statements (unaudited)**                                                           | **5**  |
|                                                                                                                      |   |
| **Item  2.  Management’s Discussion and Analysis  of Financial Condition and Results of Operations**            | **30** |
|                                                                                                                      |   |
| **Forward-Looking  Statements**                                                                                           | **51** |
|                                                                                                                      |   |
| **Item  3.  Quantitative and Qualitative  Disclosures About Market Risk**                                            | **52** |
|                                                                                                                      |   |
| **Item  4.  Controls and Procedures**                                                                                | **53** |
|                                                                                                                      |   |
| **PART II.  OTHER INFORMATION**                                                                                      |   |
|                                                                                                                      |   |
| **Item  1.  Legal Proceedings**                                                                                      | **53** |
|                                                                                                                      |   |
| **Item  6.  Exhibits and Reports on Form 8-K**                                                                       | **54** |
|                                                                                                                      |   |
| **Signatures**                                                                                                            | **59** |

 

i

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**PARTI. FINANCIAL INFORMATION**

 

**Item1. Financial Statements**

 

**TEPPCO PARTNERS,  L.P.**

 

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands)**

 
|                                                                                                                |   | **June 30,  2004** |      | **December  31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
|                                                                                                                |   | **(Unaudited)**    |      |                    |   |
| **ASSETS**                                                                                                          |   |               |      |                    |   |
| Current assets:                                                                                                     |   |               |      |                    |   |
| Cash and cash equivalents                                                                                           |   | $                  | 13,854    |                    | $      | 29,469 |   |
| Accounts receivable, trade (net of  allowance for doubtful accounts of   $443 and $4,700)                      |   | 464,982            |      | 371,938                 |   |
| Accounts receivable, related parties                                                                                |   | 10,367             |      | 3,143                   |   |
| Inventories                                                                                                         |   | 16,273             |      | 16,060                  |   |
| Other                                                                                                               |   | 28,964             |      | 32,208                  |   |
| Total current assets                                                                                                |   | 534,440            |      | 452,818                 |   |
| Property, plant and equipment, at cost (net  of accumulated depreciation and amortization of $380,801 and $345,357) |   | 1,636,748          |      | 1,619,163               |   |
| Equity investments                                                                                                  |   | 383,756            |      | 365,286                 |   |
| Intangible assets                                                                                                   |   | 422,974            |      | 438,565                 |   |
| Goodwill                                                                                                            |   | 16,944             |      | 16,944                  |   |
| Other assets                                                                                                        |   | 50,416             |      | 48,216                  |   |
| Total assets                                                                                                        |   | $                  | 3,045,278 |                    | $      | 2,940,992 |   |
|                                                                                                                |   |               |      |                    |   |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                          |   |               |      |                    |   |
|                                                                                                                |   |               |      |                    |   |
| Current liabilities:                                                                                                |   |               |      |                    |   |
| Accounts payable and accrued liabilities                                                                            |   | $                  | 471,337   |                    | $      | 359,660 |   |
| Accounts payable, related parties                                                                                   |   | 12,324             |      | 16,269                  |   |
| Accrued interest                                                                                                    |   | 32,014             |      | 35,111                  |   |
| Other accrued taxes                                                                                                 |   | 11,468             |      | 9,941                   |   |
| Other                                                                                                               |   | 41,017             |      | 54,610                  |   |
| Total current liabilities                                                                                           |   | 568,160            |      | 475,591                 |   |
| Senior Notes                                                                                                        |   | 1,122,723          |      | 1,129,650               |   |
| Other long-term debt                                                                                                |   | 260,000            |      | 210,000                 |   |
| Other liabilities and deferred credits                                                                              |   | 19,820             |      | 16,430                  |   |
| Commitments and contingencies                                                                                       |   |               |      |                    |   |
| Partners’ capital:                                                                                             |   |               |      |                    |   |
| Accumulated other comprehensive loss                                                                                |   | —             |      | (2,902                  | )      |
| General partner’s interest                                                                                     |   | (17,680            | )         | (7,181                  | )      |
| Limited partners’ interests                                                                                    |   | 1,092,255          |      | 1,119,404               |   |
| Total partners’ capital                                                                                        |   | 1,074,575          |      | 1,109,321               |   |
| Total liabilities and partners’ capital                                                                        |   | $                  | 3,045,278 |                    | $      | 2,940,992 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

1

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**TEPPCO PARTNERS, L.P.**

** **

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

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

 
|                                                                    |   | **Three  Months Ended  June 30,** |      | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------|-----------|---------------------------------|--------|
|                                                                    |   | **2004**                          |      | **2003**                        |   | **2004** |   | **2003** |   |
| Operating revenues:                                                     |   |                              |      |                            |   |   |   |   |   |
| Sales of petroleum products                                             |   | $                                 | 1,232,807 |                            | $      | 927,232 |   | $ | 2,414,920 |   | $ | 1,903,192 |   |
| Transportation – Refined products                                  |   | 38,937                            |      | 37,802                          |   | 69,908 |   | 64,696 |   |
| Transportation – LPGs                                              |   | 13,721                            |      | 13,357                          |   | 42,501 |   | 44,178 |   |
| Transportation – Crude oil                                         |   | 9,213                             |      | 7,059                           |   | 18,876 |   | 13,964 |   |
| Transportation –  NGLs                                        |   | 10,578                            |      | 9,440                           |   | 20,592 |   | 19,339 |   |
| Gathering – Natural gas                                            |   | 34,427                            |      | 32,264                          |   | 68,929 |   | 66,546 |   |
| Other                                                                   |   | 14,881                            |      | 13,646                          |   | 36,899 |   | 28,124 |   |
| Total operating revenues                                                |   | 1,354,564                         |      | 1,040,800                       |   | 2,672,625 |   | 2,140,039 |   |
|                                                                    |   |                              |      |                            |   |   |   |   |   |
| Costs and expenses:                                                     |   |                              |      |                            |   |   |   |   |   |
| Purchases of petroleum products                                         |   | 1,217,312                         |      | 912,344                         |   | 2,384,653 |   | 1,875,188 |   |
| Operating, general and administrative                                   |   | 53,225                            |      | 46,390                          |   | 105,638 |   | 89,025 |   |
| Operating fuel and power                                                |   | 10,384                            |      | 9,970                           |   | 21,676 |   | 20,147 |   |
| Depreciation and amortization                                           |   | 26,411                            |      | 23,487                          |   | 54,231 |   | 50,800 |   |
| Taxes – other than income taxes                                    |   | 4,831                             |      | 4,571                           |   | 10,125 |   | 9,499 |   |
| Gain on sale of assets                                                  |   | —                            |      | (3,948                          | )      | — |   | (3,948 | ) |
| Total costs and expenses                                                |   | 1,312,163                         |      | 992,814                         |   | 2,576,323 |   | 2,040,711 |   |
|                                                                    |   |                              |      |                            |   |   |   |   |   |
| Operating income                                                        |   | 42,401                            |      | 47,986                          |   | 96,302 |   | 99,328 |   |
|                                                                    |   |                              |      |                            |   |   |   |   |   |
| Interest expense – net                                             |   | (16,464                           | )         | (22,550                         | )      | (36,059 | ) | (43,861 | ) |
| Equity earnings                                                         |   | 11,582                            |      | 8,250                           |   | 17,233 |   | 11,960 |   |
| Other income – net                                                 |   | 240                               |      | 258                             |   | 716 |   | 442 |   |
|                                                                    |   |                              |      |                            |   |   |   |   |   |
| Net income                                                              |   | $                                 | 37,759    |                            | $      | 33,944 |   | $ | 78,192 |   | $ | 67,869 |   |
|                                                                    |   |                              |      |                            |   |   |   |   |   |
| Net Income Allocation:                                                  |   |                              |      |                            |   |   |   |   |   |
| Limited Partner Unitholders                                             |   | $                                 | 26,867    |                            | $      | 24,654 |   | $ | 55,636 |   | $ | 47,741 |   |
| Class B Unitholder                                                      |   | —                            |      | 126                             |   | — |   | 1,806 |   |
| General Partner                                                         |   | 10,892                            |      | 9,164                           |   | 22,556 |   | 18,322 |   |
| Total net income allocated                                              |   | $                                 | 37,759    |                            | $      | 33,944 |   | $ | 78,192 |   | $ | 67,869 |   |
|                                                                    |   |                              |      |                            |   |   |   |   |   |
| Basic and diluted net income per Limited  Partner and Class B Unit |   | $                                 | 0.43      |                            | $      | 0.43 |   | $ | 0.88 |   | $ | 0.86 |   |
|                                                                    |   |                              |      |                            |   |   |   |   |   |
| Weighted average Limited Partner and Class  B Units outstanding         |   | 62,999                            |      | 57,749                          |   | 62,999 |   | 57,739 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

2

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**TEPPCO PARTNERS, L.P.**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
|                                                                           |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                           |   | **2004**                        |   | **2003** |   |
| Cash flows from operating activities:                                          |   |                            |   |   |   |
| Net income                                                                     |   | $                               | 78,192 |   | $ | 67,869 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |   |                            |   |   |   |
| Depreciation and amortization                                                  |   | 54,231                          |   | 50,800 |   |
| Earnings in equity investments, net of  distributions                          |   | 3,617                           |   | (1,220 | ) |
| Gain on sale of assets                                                         |   | —                          |   | (3,948 | ) |
| Non-cash portion of interest expense                                           |   | (219                            | )      | 3,075 |   |
| Increase in accounts receivable                                                |   | (93,044                         | )      | (68,092 | ) |
| Increase in inventories                                                        |   | (213                            | )      | (3,059 | ) |
| Decrease in other current assets                                               |   | 3,244                           |   | 2,948 |   |
| Increase in accounts payable and accrued  expenses                             |   | 93,583                          |   | 80,174 |   |
| Other                                                                          |   | (7,219                          | )      | 3,994 |   |
| Net cash provided by operating activities                                      |   | 132,172                         |   | 132,541 |   |
|                                                                           |   |                            |   |   |   |
| Cash flows from investing activities:                                          |   |                            |   |   |   |
| Proceeds from the sale of assets                                               |   | —                          |   | 8,531 |   |
| Acquisition of assets                                                          |   | (2,962                          | )      | (5,459 | ) |
| Acquisition of additional interest in  Centennial Pipeline LLC                 |   | —                          |   | (20,000 | ) |
| Investment in Centennial Pipeline LLC                                          |   | (1,500                          | )      | (1,000 | ) |
| Investment in Mont Belvieu Storage  Partners, L.P.                             |   | (17,211                         | )      | — |   |
| Capital expenditures, net                                                      |   | (60,373                         | )      | (45,919 | ) |
| Net cash used in investing activities                                          |   | (82,046                         | )      | (63,847 | ) |
|                                                                           |   |                            |   |   |   |
| Cash flows from financing activities:                                          |   |                            |   |   |   |
| Proceeds from revolving credit facility                                        |   | 149,800                         |   | 335,000 |   |
| Repayments on revolving credit facility                                        |   | (99,800                         | )      | (504,000 | ) |
| Issuance of Senior Notes                                                       |   | —                          |   | 198,570 |   |
| Debt issuance costs                                                            |   | —                          |   | (3,079 | ) |
| Issuance of Limited Partner Units, net                                         |   | —                          |   | 114,457 |   |
| Repurchase and retirement of Class B Units                                     |   | —                          |   | (113,814 | ) |
| General Partner’s contribution                                            |   | —                          |   | 2 |   |
| Distributions paid                                                             |   | (115,741                        | )      | (95,974 | ) |
| Net cash used in financing activities                                          |   | (65,741                         | )      | (68,838 | ) |
|                                                                           |   |                            |   |   |   |
| Net decrease in cash and cash equivalents                                      |   | (15,615                         | )      | (144 | ) |
|                                                                           |   |                            |   |   |   |
| Cash and cash equivalents at beginning of  period                              |   | 29,469                          |   | 30,968 |   |
| Cash and cash equivalents at end of period                                     |   | $                               | 13,854 |   | $ | 30,824 |   |
|                                                                           |   |                            |   |   |   |
| **Non-cash investing activities:**                                             |   |                            |   |   |   |
| Net assets transferred to Mont Belvieu  Storage Partners, L.P.                 |   | $                               | — |   | $ | 61,042 |   |
|                                                                           |   |                            |   |   |   |
| **Supplemental disclosure of cash flows:**                                     |   |                            |   |   |   |
| Cash paid for interest (net of amounts  capitalized)                           |   | $                               | 41,208 |   | $ | 39,567 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

3

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**TEPPCO PARTNERS, L.P.**

** **

**CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL**

**(Unaudited)**

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

 
|                                                  |   | **Outstanding  Limited  Partner  Units** |   | **General  Partner’s  Interest** |    | **Limited  Partners’  Interests** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|-------------------------------------------------------|--------|------------------------------------------|--------|---------------------------------------|---------|----------------------------------------|--------|---------------------------------------------|--------|-----------|--------|
| Partners’ capital at December 31, 2003           |   | 62,998,554                               |   | $                                     | (7,181  | )                                      | $      | 1,119,404                                   |   | $         | (2,902 | ) | $ | 1,109,321 |   |
| Adjustment to issuance of Limited Partner  Units, net |   | —                                   |   | —                                |    | (99                                    | )      | —                                      |   | (99       | )      |
| Net income on cash flow hedges                        |   | —                                   |   | —                                |    | —                                 |   | 2,902                                       |   | 2,902     |   |
| Net income allocation                                 |   | —                                   |   | 22,556                                |    | 55,636                                 |   | —                                      |   | 78,192    |   |
| Cash distributions                                    |   | —                                   |   | (33,055                               | )       | (82,686                                | )      | —                                      |   | (115,741  | )      |
|                                                  |   |                                     |   |                                  |    |                                   |   |                                        |   |      |   |
| Partners’ capital at June 30, 2004               |   | 62,998,554                               |   | $                                     | (17,680 | )                                      | $      | 1,092,255                                   |   | $         | — |   | $ | 1,074,575 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

4

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**TEPPCO PARTNERS, L.P.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION**

 

TEPPCO Partners, L.P.(the “Partnership”), a Delaware limited partnership, is a master limitedpartnership formed in March 1990.  Weoperate 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.”  Texas Eastern Products Pipeline Company, LLC(the “Company” or “General Partner”), a Delaware limited liability company,serves as our general partner and owns a 2% general partner interest inus.  The General Partner is a whollyowned subsidiary of Duke Energy Field Services, LLC (“DEFS”), a joint venturebetween Duke Energy Corporation (“Duke Energy”) and ConocoPhillips.  Duke Energy holds an interest ofapproximately 70% in DEFS, and ConocoPhillips holds the remaining interest ofapproximately 30%.  The Company, asgeneral partner, performs all management and operating functions required forus, except for the management and operations of certain of our TEPPCO Midstreamassets that are managed by DEFS on our behalf. We reimburse the General Partner for all reasonable direct and indirectexpenses incurred in managing us.

 

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

 

The accompanying unaudited consolidated financial statements reflectall adjustments 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, 2004, and the results of our operations and cash flows for theperiods presented.  The results ofoperations for the three months and six months ended June 30, 2004, are notnecessarily indicative of results of our operations for the full year2004.  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 Form10-K for the year ended December 31, 2003. We have reclassified certain amounts from prior periods to conform withthe current presentation.

 

We operate and report in three business segments: transportation andstorage of refined products,  liquefiedpetroleum gases (“LPGs”) and petrochemicals (“Downstream Segment”); gathering,transportation, marketing and storage of crude oil and distribution oflubrication oils and specialty chemicals (“Upstream Segment”); and gathering ofnatural gas, fractionation of natural gas liquids (“NGLs”) and transportationof NGLs (“Midstream Segment”).  Ourreportable segments offer different products and services and are managedseparately because each requires a different business strategy.

 

Our interstate transportation operations, including rates charged tocustomers, are subject to regulations prescribed by the Federal EnergyRegulatory Commission (“FERC”).  Werefer to refined products, LPGs, petrochemicals, crude oil, NGLs and naturalgas in this Report, collectively, as “petroleum products” or “products.”

 

**Net Income Per Unit**

 

Basic net income per Limited Partner and Class B Unit (collectively,“Unit” or “Units”) is computed by dividing our net income, after deduction ofthe General Partner’s interest, by the weighted average number of Unitsoutstanding (a total of 63.0 million for the three months and six months endedJune 30, 2004 and 57.7 million Units for the three months and six months endedJune 30, 2003).  The General Partner’spercentage interest in our net income is based on its percentage of cashdistributions from Available Cash for each period (see Note 8. Partners’Capital and Distributions).  The GeneralPartner was allocated $22.6 million (representing 28.85%) and $18.3 million(representing 26.99%) of our net income for the six months ended June 30, 2004and 2003, respectively, and $10.9 million (representing 28.85%) and $9.2million (representing 26.99%) of our net income for the three months

 

5

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ended June 30,2004 and 2003, respectively.  TheGeneral Partner’s percentage interest in our net income increases as cashdistributions paid per Unit increase, in accordance with our limitedpartnership agreement.

 

Diluted net income per Unit is similar to the computation of basic netincome per Unit above, except that the denominator is increased to include thedilutive effect of outstanding Unit options by application of the treasurystock method.  For the three months andsix months ended June 30, 2003, the denominator was increased by 25,115 Unitsand 23,414 Units, respectively.  For thethree months and six months ended June 30, 2004, diluted net income per Unitequaled basic net income per Unit as the denominator was not changed since allremaining outstanding Unit options were exercised during the third quarter of2003.

 

**New Accounting Pronouncements**

 

**In December 2003, the Financial Accounting Standards Board(“FASB”) revised FASB Interpretation No. 46, *Consolidation of Variable InterestEntities, an interpretation of ARB No. 51* (“FIN 46”).  FIN 46, issued by the FASB in January 2003,requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  The revised statement, FASB Interpretation No. 46(R), *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51* (“FIN46(R)”), clarifies some of the requirements of FIN 46, eases someimplementation problems that companies experienced implementing FIN 46, addsnew scope exceptions and makes the probability more likely for many companiesthat potential variable interest entities will be identified andconsolidated.  We adopted the newrequirements detailed in FIN 46(R) as of March 31, 2004.  In connection with our adoption of FIN46(R), we evaluated our investments in Centennial Pipeline LLC, Seaway CrudePipeline Company and Mont Belvieu Storage Partners, L.P. and determined thatthese entities are not materially affected by our adoption of FIN 46(R), andthus we have accounted for them as equity method investments (see Note 6.Equity Investments).  Our adoption ofFIN 46(R) did not have an effect on our financial position, results ofoperations or cash flows.**

 

**On December 8, 2003, President Bush signed into a law a billthat expands Medicare, primarily adding a prescription drug benefit forMedicare-eligible retirees starting in 2006. We anticipate that the benefits we pay after 2006 could be lower as aresult of the new Medicare provisions; however, at this time the retireemedical obligations and costs reported do not reflect any changes as a resultof this legislation.  Deferring therecognition of the new Medicare provisions’ impact was permitted by FASB StaffPosition (“FSP”) Nos. 106-1 and 106-2, *Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003*,due to open questions about some of the new Medicare provisions and a lack ofauthoritative accounting guidance about certain matters.  The final accounting guidance could requirechanges to previously reported information. We will adopt the provisions of these FSPs in the quarter endedSeptember 30, 2004; however, we do not believe that this regulation will have amaterial adverse effect on our financial position, results of operations orcash flows.**

 

**In December 2003, the FASB issueda revision to Statement of Financial Accounting Standards (“SFAS”) No. 132, *Employers’ Disclosures about Pensions and OtherPost-Retirement Benefits*. This revision required that companies provide more details about theirplan assets, benefit obligations, cash flows, benefit costs and other relevantinformation.  A description ofinvestment policies and strategies and target allocation percentages, or targetranges, for these asset categories also is required in financialstatements.  Cash flows will includeprojections of future benefit payments and an estimate of contributions to bemade in the next year to fund pension and other postretirement benefitplans.  In addition to expanded annualdisclosures, the FASB is requiring companies to report the various elements ofpension and other postretirement benefit costs on a quarterly basis.  The guidance is effective for fiscal years endingafter December 15, 2003, and for quarters beginning after December 15,2003.  We adopted the provisions of therevised SFAS 132 effective December 31, 2003, and certain provisions regardingdisclosure of information about estimated future benefit payments in the firstquarter of 2004.**

 

6

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**In April 2004, the EmergingIssues Task Force (“EITF”) reached consensus in EITF 03-06, *Participating Securities and the Two-Class Methodunder FASB Statement No. 128*, to clarify what is meant by aparticipating security as described in SFAS No. 128, *Earnings Per Share. *Theconsensus also provides guidance on applying the two-class method for computingearnings per share.  The two-classmethod is an earnings allocation formula for computing earnings per share andis the required method prescribed by SFAS 128 for companies with participatingsecurities or more than one class of common stock.  The consensus primarily affects companies that issue securitiesthat are entitled to participate in dividends with common shares and wouldcause affected companies to report lower earnings per share amounts.  The consensus is to be applied retroactivelyfor periods beginning after March 31, 2004. The adoption of EITF 03-06 did not have an effect on our financialposition, results of operations or cash flows.**

 

**NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS**

 

**Goodwill**

 

Goodwill represents the excess of purchase price over fair value of netassets acquired and is presented on the consolidated balance sheets net ofaccumulated amortization.  We accountfor goodwill under SFAS No. 142, *Goodwill and Other Intangible Assets*,**whichwas issued by the FASB in July 2001. SFAS 142 prohibits amortization of goodwill and intangible assets withindefinite useful lives, and instead requires testing for impairment at leastannually.

 

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 thosereporting units.  We then determine thefair value of each reporting unit and compare it to the carrying value of thereporting unit.  We will continue tocompare the fair value of each reporting unit to its carrying value on anannual basis to determine if an impairment loss has occurred.

 

At June 30, 2004, we had $16.9 million of unamortized goodwill and$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 atJune 30, 2004.  The following tablepresents the carrying amount of goodwill and equity method goodwill at June 30,2004, 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              |   |
|                        |        |                         |        |                        |        |                       |        |                     |        |  |  |  |  |

 

7

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**Other Intangible Assets**

 

The following table reflects the components of amortized intangibleassets at June 30, 2004, and December 31, 2003 (in thousands):

 
|                                    |   | **June 30,  2004**          |    | **December  31, 2003**        |   |
|-----------------------------------------|--------|-----------------------------|---------|-------------------------------|--------|
|                                    |   | **Gross  Carrying  Amount** |    | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Amortized intangible assets:            |   |                        |    |                          |   |   |   |   |   |
| Gathering and transportation agreements |   | $                           | 464,337 |                          | $      | (77,198 | ) | $ | 464,337 |   | $ | (62,436 | ) |
| Fractionation agreement                 |   | 38,000                      |    | (11,875                       | )      | 38,000 |   | (10,925 | ) |
| Other                                   |   | 12,162                      |    | (2,452                        | )      | 11,270 |   | (1,681 | ) |
| Total                                   |   | $                           | 514,499 |                          | $      | (91,525 | ) | $ | 513,607 |   | $ | (75,042 | ) |

 

SFAS 142 requires that intangible assets with finite useful lives beamortized over their respective estimated useful lives.  If an intangible asset has a finite usefullife, but the precise length of that life is not known, that intangible assetshall be amortized over the best estimate of its useful life.  At a minimum, we will assess the usefullives and residual values of all intangible assets on an annual basis todetermine if adjustments are required.

 

The value assigned to our intangible assets for natural gas gatheringcontracts is amortized on a unit-of-production basis, based upon the actualthroughput of the system over the expected total throughput for the lives ofthe contracts.  We update throughputestimates and evaluate the remaining expected useful life of the contractassets on a quarterly basis based on the best available information. Due toexpansions on the gathering systems at Jonah Gas Gathering Company (“Jonah”)and because of certain limited production forecasts obtained from producers onthe Jonah system related to the expansions, in the second quarter of 2003 weincreased our best estimate of future throughput on the Jonah system.  This increase in the estimate of futurethroughput extended the amortization period of Jonah’s natural gas gatheringcontracts by an estimated 9 years, increasing from approximately 16 years to 25years.  The amortization of thecontracts related to the Val Verde Gas Gathering Company (“Val Verde”) assets,also amortized on a unit-of-production basis, is expected to averageapproximately 20 years.  Revisions tothese estimates may occur as additional production information is madeavailable to us.

 

The values assigned to our fractionation agreement and other intangibleassets are generally amortized on a straight-line basis.  Our fractionation agreement with DEFS isbeing amortized over its contract period of 20 years.  The amortization periods for our other intangible assets, whichinclude non-compete and other agreements, range from 3 years to 15 years.

 

Amortization expense on intangible assets was $8.3 million for each ofthe three month periods ended June 30, 2004 and 2003, and $16.5 million and$19.7 million for the six months ended June 30, 2004 and 2003, respectively.

 

At June 30, 2004, we had $33.4 million of excess investment in ourequity investment in Centennial Pipeline LLC, which was created upon formationof the company (see Note 6.  EquityInvestments).  The excess investment isincluded in our equity investments account at June 30, 2004.  This excess investment is accounted for asan intangible asset with an indefinite life. We will assess the intangible asset for impairment on an annual basis.

 

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The following table sets forth the estimated amortization expense ofintangible assets for the years ending December 31 (in thousands):

 
| 2004 |   | $      | 35,760 |   |
|------|--------|--------|--------|--------|
| 2005 |   | 36,692 |   |
| 2006 |   | 38,171 |   |
| 2007 |   | 35,286 |   |
| 2008 |   | 32,962 |   |

 

**NOTE 3. INTEREST RATE SWAPS**

 

We entered into an interestrate swap agreement to hedge our exposure to increases in the benchmarkinterest rate underlying our variable rate revolving credit facility. Thisinterest rate swap matured on April 6, 2004.  We designated this swap agreement, which hedged exposure to variabilityin expected future cash flows attributed to changes in interest rates, as acash flow 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 other comprehensiveincome until the hedged interest costs were recognized in earnings.  On June 27, 2003, we repaid the amountsoutstanding under our revolving credit facility with borrowings under a newthree year revolving credit facility and canceled the old facility (see Note7.  Debt).  We redesignated this interest rate swap as a hedge of ourexposure to increases in the benchmark interest rate underlying the newvariable rate revolving credit facility. During the six months ended June 30, 2004 and 2003, we recognizedincreases in interest expense of $2.9 million and $7.0 million, respectively,related to the difference between the fixed rate and the floating rate ofinterest on the interest rate swap.

 

During 2003, wedetermined that we would repay a portion of the amount outstanding under therevolving credit facility with proceeds from our Unit offering in August 2003(see Note 8.  Partners’ Capital andDistributions) resulting in a reduction of probable future interest paymentsunder the credit facility.  We reducedthe outstanding balance of the revolving credit facility at December 31, 2003,to $210.0 million.  During the yearended December 31, 2003, we recognized a loss of $1.0 million for the portionof the discontinued hedge.  The totalfair value of the interest rate swap was a loss of approximately $3.9 millionat December 31, 2003.  The remaining$2.9 million of other comprehensive income was transferred to earnings duringthe period from January 1, 2004, through the maturity of the interest rate swapon April 6, 2004.

 

On October 4, 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. Wedesignated this swap agreement as a fair value hedge.  The swap agreement has a notional amount of $210.0 million andmatures in January 2028 to match the principal and maturity of the TE ProductsSenior Notes.  Under the swap agreement,TE Products pays a floating rate of interest based on a three-month U.S. DollarLIBOR rate, plus a spread, and receives a fixed rate of interest of 7.51%.During the six months ended June 30, 2004 and 2003, we recognized reductions ininterest expense of $5.1 million and $4.9 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap.  During the quarterended June 30, 2004, we measured the hedge effectiveness of this interest rateswap and noted that no gain or loss from ineffectiveness was required to be recognized.  The fair value of this interest rate swapwas a loss of approximately $2.9 million at June 30, 2004, and a gain ofapproximately $2.3 million at December 31, 2003.

 

**On February 20, 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 and**

 

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**maturityof the Senior Notes.  Under the swapagreements, we paid a floating rate of interest based on a U.S. Dollar LIBORrate, plus a spread, and received a fixed rate of interest of 7.625%.  On July 16, 2002, the swap agreements wereterminated resulting in a gain of approximately $18.0 million.  Concurrent with the swap terminations, weentered into new interest rate swap agreements, with identical terms as theprevious swap agreements; however, the floating rate of interest was based upona spread of an additional 50 basis points. In December 2002, the swap agreements entered into on July 16, 2002,were terminated, resulting in a gain of approximately $26.9 million.  The gains realized from the July 2002 andDecember 2002 swap terminations have been deferred as adjustments to thecarrying value of the Senior Notes and are being amortized using the effectiveinterest method as reductions to future interest expense over the remainingterm of the Senior Notes.  At June 30,2004, the unamortized balance of the deferred gains was $38.6 million.  In the event of early extinguishment of theSenior Notes, any remaining unamortized gains would be recognized in theconsolidated statement of income at the time of extinguishment.**

 

**NOTE 4. ACQUISITIONS AND DISPOSITIONS**

 

**Rancho Pipeline**

 

In connection with our acquisition of crude oil assets in 2000, weacquired an approximate 23.5% undivided joint interest in the Rancho Pipeline,which was a crude oil pipeline system from West Texas to Houston, Texas.  In March 2003, the Rancho Pipeline ceasedoperations, and segments of the pipeline were sold to certain of the ownerswhich previously held undivided interests in the pipeline.  We acquired 241 miles of the pipeline inexchange for cash of $5.5 million and our interests in other portions of theRancho Pipeline.  We sold 183 miles ofthe segment we acquired to other entities for cash and assets valued atapproximately $8.5 million.  We recordeda net gain of $3.9 million on the transactions in the second quarter of 2003,which is included in the gain on sale of assets in our consolidated statementsof income.

 

**Genesis Pipeline**

 

On November 1, 2003, we completed the purchase of crude supply andtransportation assets along the upper Texas Gulf Coast for $21.0 million fromGenesis Crude Oil, L.P. and Genesis Pipeline Texas, L.P. (“Genesis”).  The transaction was funded with proceedsfrom our August 2003 equity offering (see Note 8.  Partners’ Capital and Distributions).  We allocated the purchase price, net of liabilities assumed, primarilyto property, plant and equipment and intangible assets.  The assets acquired included approximately150 miles of small diameter trunk lines, 26,000 barrels per day of throughputand 12,000 barrels per day of lease marketing and supply business.  We are integrating these assets into ourSouth Texas pipeline system which will allow us to consolidate gathering andmarketing assets in key operating areas in a cost effective manner and willprovide future growth opportunities. Accordingly, the results of the acquisition are included in theconsolidated financial statements from November 1, 2003.

 

The following table allocates the estimated fair value of the Genesisassets acquired on November 1, 2003 (in thousands):

 
| Property, plant and equipment |   | $      | 12,811 |   |
|-------------------------------|--------|--------|--------|--------|
| Intangible assets             |   | 8,742  |   |
| Other                         |   | 144    |   |
| Total assets                  |   | 21,697 |   |
|                          |   |   |   |
| Total liabilities assumed     |   | (687   | )      |
| Net assets acquired           |   | $      | 21,010 |   |

 

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**NOTE 5. INVENTORIES**

 

Inventories are valued at the lower of cost (based on weighted averagecost method) or market.  The costs ofinventories did not exceed market values at June 30, 2004, and December 31,2003.  The major components ofinventories were as follows (in thousands):

 
|                                     |   | **June 30,  2004** |   | **December 31,  2003** |   |
|------------------------------------------|--------|--------------------|--------|------------------------|--------|
| Crude oil                                |   | $                  | 2,434  |                   | $      | 1,303 |   |
| Refined products                         |   | 995                |   | 6,632                  |   |
| LPGs                                     |   | 4,203              |   | 517                    |   |
| Lubrication oils and specialty chemicals |   | 3,372              |   | 3,080                  |   |
| Materials and supplies                   |   | 5,113              |   | 4,528                  |   |
| Other                                    |   | 156                |   | —                 |   |
| Total                                    |   | $                  | 16,273 |                   | $      | 16,060 |   |

 

**NOTE 6.  EQUITY INVESTMENTS**

 

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 mostly imported crude oilfrom a marine terminal at Freeport, Texas, to Cushing, Oklahoma, and from amarine terminal at Texas City, Texas, to refineries in the Texas City andHouston, Texas, areas.  The Seaway CrudePipeline Company Partnership Agreement provides for varying participationratios throughout the life of the Seaway partnership. 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, 2004 and 2003, we received distributions from Seaway of$15.9 million and $10.7 million, respectively.

 

In August 2000, TEProducts entered into agreements with Panhandle Eastern Pipeline Company(“PEPL”), a former subsidiary of CMS Energy Corporation, and Marathon AshlandPetroleum LLC (“Marathon”) to form Centennial Pipeline LLC (“Centennial”).  Centennial owns an interstate refinedpetroleum products pipeline extending from the upper Texas Gulf Coast to centralIllinois.  Through February 9, 2003,each participant owned a one-third interest in Centennial.  On February 10, 2003, TE Products andMarathon each acquired an additional 16.7% interest in Centennial from PEPL for$20.0 million each, increasing their ownership percentages in Centennial to 50%each.  During the six months ended June30, 2004, TE Products invested $1.5 million in Centennial, which is included inthe equity investment balance at June 30, 2004.

 

On January 1, 2003, TEProducts and Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”) formed MontBelvieu Storage Partners, L.P. (“MB Storage”). TE Products and Louis Dreyfus each own a 50% ownership interest in MBStorage.  The purpose of MB Storage isto expand services to the upper Texas Gulf Coast energy marketplace byincreasing pipeline throughput and the mix of products handled through theexisting system and establishing new receipt and delivery connections.  MB Storage is a service-oriented, fee-basedventure with no commodity trading activity. TE Products operates the facilities for MB Storage.  Effective January 1, 2003, TE Productscontributed property and equipment with a net book value of $67.1 million to MBStorage.  Additionally, as of the contributiondate, Louis Dreyfus had invested $6.1 million for expansion projects for MBStorage that TE Products was required to reimburse if the original jointdevelopment and marketing agreement was terminated by either party.  This deferred liability was also contributedand credited to the capital account of Louis Dreyfus in MB Storage.

 

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TE Products receives thefirst $1.8 million per quarter (or $7.15 million on an annual basis) of MBStorage’s income before depreciation expense less mandatory capitalexpenditures, as defined in the operating agreement.  Any amount of MB Storage’s annual income before depreciationexpense less mandatory capital expenditures in excess of $7.15 million isallocated evenly between TE Products and Louis Dreyfus.  Depreciation expense on assets each originallycontributed to MB Storage is allocated between TE Products and Louis Dreyfusbased on the net book value of the assets contributed.  Depreciation expense on assets constructedor acquired by MB Storage subsequent to formation is allocated evenly betweenTE Products and Louis Dreyfus. For the six months ended June 30, 2004, TEProducts’ sharing ratio in the earnings of MB Storage was approximately70.2%.  During the six months ended June30, 2004, TE Products contributed $17.2 million to MB Storage, of which $16.5million was used to acquire storage assets in April 2004.  During the six months ended June 30, 2004,TE Products received distributions of $5.0 million from MB Storage.

 

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 June30, 2004 and 2003, is presented below (in thousands):

 
|       |   | **Six Months  Ended  June 30,** |   |
|------------|--------|---------------------------------|--------|
|       |   | **2004**                        |   | **2003** |   |
| Revenues   |   | $                               | 79,890 |   | $ | 59,759 |   |
| Net income |   | 33,524                          |   | 18,301 |   |
|            |        |                                 |        |  |  |  |  |

 

Summarized combinedbalance sheet information for Seaway, Centennial and MB Storage as of June 30,2004, and December 31, 2003, is presented below (in thousands):

 
|                   |   | **June 30,  2004** |   | **December  31,  2003** |   |
|------------------------|--------|--------------------|--------|-------------------------|--------|
| Current assets         |   | $                  | 71,149 |                    | $      | 56,243 |   |
| Noncurrent assets      |   | 636,924            |   | 609,215                 |   |
| Current liabilities    |   | 48,348             |   | 43,177                  |   |
| Long-term debt         |   | 140,000            |   | 140,000                 |   |
| Noncurrent liabilities |   | 13,309             |   | 13,182                  |   |
| Partners’ capital |   | 506,416            |   | 469,099                 |   |
|                        |        |                    |        |                         |        |  |  |

 

**Our investments in Seaway and Centennial include excess netinvestment amounts of $25.5 million and $33.4 million, respectively.  Excess investment is the amount by which ourinvestment balance exceeds our proportionate share of the net assets of theinvestment.**

 

**NOTE 7.  DEBT**

 

## **Short Term Credit Facilities**

 

On April 6, 2001, we entered into a 364-day, $200.0 million revolvingcredit agreement (“Short-term Revolver”). The interest rate was based, at our option, on either the lender’s baserate plus a spread, or LIBOR plus a spread in effect at the time of theborrowings. The credit agreement contained certain restrictive financialcovenant ratios.  On March 28, 2002, theShort-term Revolver was extended for an additional period of 364 days, endingin March 2003.  The Short-term Revolverexpired on March 27, 2003.

 

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## **Senior Notes**

 

On January 27, 1998, TEProducts 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% Senior Notesdue 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%TE Products Senior Notes due 2008 are not subject to redemption prior toJanuary 15, 2008.  The 7.51% TE ProductsSenior Notes due 2028, issued at par, may be redeemed at any time after January15, 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 unsecured obligations of TEProducts and rank on a parity with all other unsecured and unsubordinatedindebtedness of TE Products.  Theindenture governing the TE Products Senior Notes contains covenants, including,but not limited to, covenants limiting the creation of liens securingindebtedness and sale and leaseback transactions.  However, the indenture does not limit our ability to incuradditional indebtedness.  As of June 30,2004, TE Products was in compliance with the covenants of the TE ProductsSenior Notes.

 

On February 20, 2002, wecompleted the issuance of $500.0 million principal amount of 7.625% SeniorNotes due 2012.  The 7.625% Senior Noteswere issued at a discount of $2.2 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 7.625% 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, 2004, we were in compliancewith the covenants of these Senior Notes.

 

On January 30, 2003, wecompleted 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.  We used$182.0 million of the proceeds from the offering to reduce the outstanding principalon our $500.0 million revolving credit facility to $250.0 million.  The balance of the net proceeds received wasused for general partnership purposes. 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 6.125% 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, 2004, wewere in compliance with the covenants of these Senior Notes.

 

The following tablesummarizes the estimated fair values of the Senior Notes as of June 30, 2004,and December 31, 2003 (in millions):

 
|                                              |   | **Face  Value** |   | **June 30,  2004** |   | **December  31,  2003** |   |
|---------------------------------------------------|--------|-----------------|--------|--------------------|--------|-------------------------|--------|
| 6.45% TE Products Senior Notes, due January  2008 |   | $               | 180.0  |               | $      | 185.5                   |   | $ | 192.7 |   |
| 7.625% Senior Notes, due February 2012            |   | 500.0           |   | 542.7              |   | 559.0                   |   |
| 6.125% Senior Notes, due February 2013            |   | 200.0           |   | 197.4              |   | 199.8                   |   |
| 7.51% TE Products Senior Notes, due January  2028 |   | 210.0           |   | 211.7              |   | 217.4                   |   |
|                                                   |        |                 |        |                    |        |                         |        |  |  |  |

 

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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).

 

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

 

On April 6, 2001, weentered into a $500.0 million revolving credit facility including the issuanceof letters of credit of up to $20.0 million (“Three Year Facility”).  The interest rate was based, at our option,on either the lender’s base rate plus a spread, or LIBOR plus a spread ineffect at the time of the borrowings. The credit agreement for the Three Year Facility contained certainrestrictive financial covenant ratios.  During the first quarter of 2003, we repaid $182.0 million of theoutstanding balance of the Three Year Facility with proceeds from the issuanceof our 6.125% Senior Notes on January 30, 2003.  On June 27, 2003, we repaid the outstanding balance under theThree Year Facility with borrowings under a new credit facility, and canceledthe Three Year Facility.

 

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 rate plus a spread, or LIBORplus a spread in effect at the time of the borrowings.  The credit agreement for the RevolvingCredit Facility contains certain restrictive financial covenant ratios.  We borrowed $263.0 million under theRevolving Credit Facility and repaid the outstanding balance of the Three YearFacility.  On June 30, 2004, $260.0million was outstanding under the Revolving Credit Facility at a weightedaverage interest rate of 2.2%.  At June30, 2004, we were in compliance with the covenants of this credit agreement.

 

We entered into aninterest rate swap agreement to hedge our exposure to increases in interestrates on a portion of the credit facilities discussed above, which matured onApril 6, 2004 (see Note 3.  InterestRate Swaps).

 

The following tablesummarizes the principal amounts outstanding under our credit facilities as ofJune 30, 2004, and December 31, 2003 (in thousands):

 
|                                                                     |   | **June 30,  2004** |      | **December  31,  2003** |   |
|--------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
|                                                                     |   |               |      |                    |   |
| Credit Facilities:                                                       |   |               |      |                    |   |
| Revolving Credit Facility, due June 2006                                 |   | $                  | 260,000   |                    | $      | 210,000 |   |
| 6.45% TE Products Senior Notes, due January  2008                        |   | 179,891            |      | 179,876                 |   |
| 7.625% Senior Notes, due February 2012                                   |   | 498,327            |      | 498,216                 |   |
| 6.125% Senior Notes, due February 2013                                   |   | 198,773            |      | 198,702                 |   |
| 7.51% TE Products Senior Notes, due January  2028                        |   | 210,000            |      | 210,000                 |   |
| Total borrowings                                                         |   | 1,346,991          |      | 1,296,794               |   |
| Adjustment to carrying value associated  with hedges of  fair value |   | 35,732             |      | 42,856                  |   |
| Total Credit Facilities                                                  |   | $                  | 1,382,723 |                    | $      | 1,339,650 |   |

 

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

 

**Equity Offerings**

 

On April 2, 2003, we sold in an underwritten public offering 3.9million Units at $30.35 per Unit.  Theproceeds from the offering, net of underwriting discount, totaled approximately$114.5 million, of which

 

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approximately$113.8 million was used to repurchase and retire all of the 3.9 millionpreviously outstanding Class B Units held by Duke Energy Transport and TradingCompany, LLC.  We received approximately$0.7 million in proceeds from the offering in excess of the amount needed torepurchase and retire the Class B Units.

 

On August 7, 2003, we sold in an underwritten public offering 5.0million Units at $34.68 per Unit.  Theproceeds from the offering, net of underwriting discount, totaled approximately$166.0 million.  On August 19, 2003,162,900 Units were sold upon exercise of the underwriters’ over-allotmentoption granted in connection with the offering on August 7, 2003.  Proceeds from the over-allotment sale, netof underwriting discount, totaled $5.4 million.  Approximately $53.0 million of the proceeds was used to repayindebtedness under our revolving credit facility and $21.0 million was used tofund the acquisition of the Genesis assets (see Note 4.  Acquisitions and Dispositions).  The remaining amount was used primarily tofund revenue generating and system upgrade capital expenditures and for generalpartnership purposes.

 

## **Quarterly Distributions of Available Cash**

 

We make quarterly cashdistributions of all of our Available Cash, generally defined as consolidatedcash receipts less consolidated cash disbursements and cash reserves establishedby the General Partner in its sole discretion. Pursuant to the Partnership Agreement, the Company receives incrementalincentive cash distributions when cash distributions exceed certain targetthresholds as follows:

 
|                                                                 |   | **Unitholders** |   | **General  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, 2004 and 2003 (in thousands, except per Unit amounts):

 
|                                            |   | **Six Months  Ended  June 30,** |    |
|-------------------------------------------------|--------|---------------------------------|---------|
|                                            |   | **2004**                        |    | **2003** |   |
| Limited Partner Units                           |   | $                               | 82,686  |   | $ | 68,382 |   |
| General Partner Ownership Interest              |   | 1,687                           |    | 1,444 |   |
| General Partner Incentive                       |   | 31,368                          |    | 23,801 |   |
| Total Partners’ Capital Cash Distributions |   | 115,741                         |    | 93,627 |   |
| Class B Units                                   |   | —                          |    | 2,347 |   |
| Total Cash Distributions Paid                   |   | $                               | 115,741 |   | $ | 95,974 |   |
| Total Cash Distributions Paid Per Unit          |   | $                               | 1.3125  |   | $ | 1.225 |   |

 

On August 6, 2004, we will pay a cash distribution of $0.6625 per Unitfor the quarter ended June 30, 2004. The second quarter 2004 cash distribution will total $58.7 million.

 

**General Partner’s Interest**

 

As of June 30,2004, and December 31, 2003, we had a deficit balance of $17.7 million and $7.2million, respectively, in our General Partner’s equity account. This negativebalance does not represent an asset to us and

 

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does not represent anobligation 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 the General Partner pluscapital contributions that it has made to us. For the six months ended June 30, 2004, the General Partner wasallocated $22.6 million (representing 28.85%) of our net income and received$33.1 million in cash distributions.

 

Capital Accounts,as defined under our Partnership Agreement, are maintained for our GeneralPartner and our limited partners.  TheCapital Account provisions of our Partnership Agreement incorporate principlesestablished for U.S. federal income tax purposes and are not comparable to theequity accounts reflected under accounting principles generally accepted in theUnited States in our financial statements. Under our Partnership Agreement, the General Partner is only required tomake additional capital contributions to us upon the issuance of any additionalUnits if necessary to maintain a Capital Account balance equal to 1.999999% ofthe total Capital Accounts of all partners. At June 30, 2004, and December 31, 2003, the General Partner’s CapitalAccount balance substantially exceeded this requirement.

 

Net income isallocated between the General Partner and the limited partners in the sameproportion as aggregate cash distributions made to the General Partner and thelimited partners during the period. This is generally consistent with the manner of allocating net incomeunder our Partnership Agreement.  Netincome determined under our Partnership Agreement, however, incorporatesprinciples established for U.S. federal income tax purposes and is notcomparable to net income reflected under accounting principles generallyaccepted in the United States in our financial statements.

 

Cash distributionsthat we make during 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, 2003, and the six months ended June 30,2004, resulted in a deficit in the General Partner’s equity account at June 30,2004, and December 31, 2003.  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 event of ourdissolution, after satisfying our liabilities, our remaining assets would bedivided among our limited partners and the General Partner generally in thesame proportion as Available Cash but calculated on a cumulative basis over thelife of the Partnership. After all allocations are made between the partners,if a deficit balance still remains in the General Partner’s equity account, theGeneral Partner would not be required to make whole any such deficit.

 

**NOTE 9. EMPLOYEE BENEFIT PLANS**

 

## **Retirement Plans**

 

We have adopted theTEPPCO Retirement Cash Balance Plan (“TEPPCO RCBP”), which is anon-contributory, trustee-administered pension plan.  In addition, certain executive officers participate in the TEPPCOSupplemental Benefit Plan (“TEPPCO SBP”), which is a non-contributory,nonqualified, defined benefit retirement plan. The TEPPCO SBP was established to restore benefit reductions caused bythe maximum benefit limitations that apply to qualified plans.  The benefit formula for all eligibleemployees is a cash balance formula. Under a cash balance formula, a plan participant accumulates aretirement benefit based upon pay credits and current interest credits.  The pay credits are based on a participant’ssalary, age and service.  We use aDecember 31 measurement date for these plans.

 

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The components of netpension benefits costs for the TEPPCO RCBP and the TEPPCO SBP for the threemonths and six months ended June 30, 2004 and 2003, were as follows (inthousands):

 
|                                           |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                           |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
| Service cost benefit earned during the  period |   | $                                 | 936    |                            | $      | 795 |   | $ | 1,872 |   | $ | 1,590 |   |
| Interest cost on projected benefit  obligation |   | 176                               |   | 126                             |   | 352 |   | 252 |   |
| Expected return on plan assets                 |   | (224                              | )      | (151                            | )      | (448 | ) | (302 | ) |
| Amortization of prior service cost             |   | 2                                 |   | 2                               |   | 4 |   | 4 |   |
| Recognized net actuarial loss                  |   | 4                                 |   | 6                               |   | 8 |   | 12 |   |
| Net pension benefits costs                     |   | $                                 | 894    |                            | $      | 778 |   | $ | 1,788 |   | $ | 1,556 |   |

 

## **Other Postretirement Benefits**

 

Effective January 1,2001, we provide certain health care and life insurance benefits for retiredemployees on a contributory and non-contributory basis (“TEPPCO OPB”).  Employees become eligible for these benefitsif they meet certain age and service requirements at retirement, as defined inthe plans.  We provide a fixed dollarcontribution, which does not increase from year to year, towards retiredemployee medical costs.  The retireepays all health care cost increases due to medical inflation.  We use a December 31 measurement date forthis plan.

 

The components of netpostretirement benefits costs for the TEPPCO OPB for the three months and sixmonths ended June 30, 2004 and 2003, were as follows (in thousands):

 
|                                                                  |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                  |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
| Service cost benefit earned during the  period                        |   | $                                 | 44     |                            | $      | 34 |   | $ | 88 |   | $ | 68 |   |
| Interest cost on accumulated  postretirement  benefit obligation |   | 39                                |   | 34                              |   | 78 |   | 68 |   |
| Amortization of prior service cost                                    |   | 32                                |   | 32                              |   | 64 |   | 64 |   |
| Net postretirement benefits costs                                     |   | $                                 | 115    |                            | $      | 100 |   | $ | 230 |   | $ | 200 |   |

 

## **Estimated Future Benefit Contributions**

 

We expect to contributeapproximately $3.0 million to our retirement plans and other postretirementbenefit plans in 2004.

 

**NOTE 10. SEGMENT INFORMATION**

 

We have three reportingsegments:

 

•                  transportation and storage of refinedproducts, LPGs and petrochemicals, which operates as the Downstream Segment;

 

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•                  gathering, transportation, marketingand storage of crude oil and distribution of lubrication oils and specialtychemicals, which operates as the Upstream Segment; and

 

•                  gathering of natural gas,fractionation of NGLs and transportation of NGLs, which operates as theMidstream 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, sales 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 during the first and fourth quartersof each year as our operations are somewhat seasonal. Refined products volumesare generally higher during the second and third quarters because of greaterdemand for gasolines during the spring and summer driving seasons. LPGs volumesare generally higher from November through March due to higher demand in theNortheast for propane, a major fuel for residential heating.  Our Downstream Segment also includes theresults of operations of the northern portion of the Dean Pipeline, whichtransports refinery grade propylene (“RGP”) from Mont Belvieu to Point Comfort,Texas.  Our Downstream Segment alsoincludes 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 along thirdparty pipeline systems, and arranging the necessary transportation logisticsfor the ultimate sale of the crude oil to local refineries, marketers or otherend users.  Our Upstream Segment alsoincludes our equity investment in Seaway. Seaway consists of large diameter pipelines that transport crude oilfrom Seaway’s marine terminals on the U.S. Gulf Coast to Cushing, Oklahoma, acrude oil distribution point for the central United States, and to refineries inthe 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 (“Chaparral”)from West Texas and New Mexico to Mont Belvieu; the gathering of natural gas inthe Green River Basin in southwestern Wyoming, through Jonah; and the gatheringof coal bed methane (“CBM”) in the San Juan Basin in New Mexico and Colorado,through Val Verde.  DEFS manages andoperates the Val Verde, Jonah and Chaparral assets for us under contractualagreements.

 

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The following tables include financial information by reporting segmentfor the three months and six months ended June 30, 2004 and 2003 (inthousands):

 
|                                  |   | **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   |   | 38,534                                |   | 15,001 |   | 14,905 |   | 68,440 |   | — |   | 68,440 |   |
| Depreciation and amortization expense |   | 9,211                                 |   | 3,045 |   | 14,155 |   | 26,411 |   | — |   | 26,411 |   |
| 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 |   |
|                                       |        |                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                  |   | **Three  Months Ended June 30, 2003** |   |
|---------------------------------------|--------|---------------------------------------|--------|
|                                  |   | **Downstream  Segment**               |   | **Upstream  Segment** |   | **Midstream  Segment** |   | **Segments  Total** |   | **Partnership  and Other** |   | **Consolidated** |   |
|                                  |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Sales of petroleum products           |   | $                                     | — |   | $ | 927,232 |   | $ | — |   | $ | 927,232 |   | $ | — |   | $ | 927,232 |   |
| Operating revenues                    |   | 60,058                                |   | 9,466 |   | 44,462 |   | 113,986 |   | (418 | ) | 113,568 |   |
| Purchases of petroleum products       |   | —                                |   | 912,762 |   | — |   | 912,762 |   | (418 | ) | 912,344 |   |
| Operating expenses, including power   |   | 36,268                                |   | 13,755 |   | 10,908 |   | 60,931 |   | — |   | 60,931 |   |
| Depreciation and amortization expense |   | 7,067                                 |   | 2,466 |   | 13,954 |   | 23,487 |   | — |   | 23,487 |   |
| Gain on sale of assets                |   | —                                |   | (3,948 | ) | — |   | (3,948 | ) | — |   | (3,948 | )  |
| Operating income                      |   | 16,723                                |   | 11,663 |   | 19,600 |   | 47,986 |   | — |   | 47,986 |   |
| Equity earnings                       |   | 64                                    |   | 8,186 |   | — |   | 8,250 |   | — |   | 8,250 |   |
| Other income, net                     |   | 55                                    |   | 213 |   | 27 |   | 295 |   | (37 | ) | 258 |   |
| Earnings before interest              |   | $                                     | 16,842 |   | $ | 20,062 |   | $ | 19,627 |   | $ | 56,531 |   | $ | (37 | ) | $ | 56,494 |   |
|                                       |        |                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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|                                  |   | **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   |   | 78,584                              |   | 28,969 |   | 29,886 |   | 137,439 |   | — |   | 137,439 |   |
| Depreciation and amortization expense |   | 18,288                              |   | 6,113 |   | 29,830 |   | 54,231 |   | — |   | 54,231 |   |
| 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 |   |
|                                       |        |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                  |   | **Six Months  Ended June 30, 2003** |   |
|---------------------------------------|--------|-------------------------------------|--------|
|                                  |   | **Downstream  Segment**             |   | **Upstream  Segment** |   | **Midstream  Segment** |   | **Segments  Total** |   | **Partnership  and Other** |   | **Consolidated** |   |
|                                  |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Sales of petroleum products           |   | $                                   | — |   | $ | 1,903,192 |   | $ | — |   | $ | 1,903,192 |   | $ | — |   | $ | 1,903,192 |   |
| Operating revenues                    |   | 128,023                             |   | 18,886 |   | 91,366 |   | 238,275 |   | (1,428 | ) | 236,847 |   |
| Purchases of petroleum products       |   | —                              |   | 1,876,616 |   | — |   | 1,876,616 |   | (1,428 | ) | 1,875,188 |   |
| Operating expenses, including power   |   | 67,817                              |   | 28,592 |   | 22,262 |   | 118,671 |   | — |   | 118,671 |   |
| Depreciation and amortization expense |   | 14,214                              |   | 5,531 |   | 31,055 |   | 50,800 |   | — |   | 50,800 |   |
| Gain on sale of assets                |   | —                              |   | (3,948 | ) | — |   | (3,948 | ) | — |   | (3,948 | )  |
| Operating income                      |   | 45,992                              |   | 15,287 |   | 38,049 |   | 99,328 |   | — |   | 99,328 |   |
| Equity earnings (losses)              |   | (1,195                              | )      | 13,155 |   | — |   | 11,960 |   | — |   | 11,960 |   |
| Other income, net                     |   | 49                                  |   | 402 |   | 64 |   | 515 |   | (73 | ) | 442 |   |
| Earnings before interest              |   | $                                   | 44,846 |   | $ | 28,844 |   | $ | 38,113 |   | $ | 111,803 |   | $ | (73 | ) | $ | 111,730 |   |
|                                       |        |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The following table shows total assets, capital expenditures andsignificant non-cash investing activities for each of our reporting segments asof June 30, 2004, and December 31, 2003 (in thousands):

 
|                          |   | **Downstream  Segment** |    | **Upstream  Segment** |   | **Midstream  Segment** |   | **Segments  Total** |      | **Partnership  and Other** |   | **Consolidated** |   |
|-------------------------------|--------|-------------------------|---------|-----------------------|--------|------------------------|--------|---------------------|-----------|----------------------------|--------|------------------|--------|
|                          |   |                    |    |                  |   |                   |   |                |      |                       |   |             |   |
| June 30, 2004:                |   |                    |    |                  |   |                   |   |                |      |                       |   |             |   |
| Total assets                  |   | $                       | 930,663 |                  | $      | 957,456                |   | $                   | 1,164,418 |                       | $      | 3,052,537        |   | $ | (7,259 | ) | $ | 3,045,278 |   |
| Capital expenditures          |   | 24,277                  |    | 19,500                |   | 16,300                 |   | 60,077              |      | 296                        |   | 60,373           |   |
|                          |   |                    |    |                  |   |                   |   |                |      |                       |   |             |   |
| December 31, 2003:            |   |                    |    |                  |   |                   |   |                |      |                       |   |             |   |
| Total assets                  |   | $                       | 916,917 |                  | $      | 834,502                |   | $                   | 1,194,844 |                       | $      | 2,946,263        |   | $ | (5,271 | ) | $ | 2,940,992 |   |
| Capital expenditures          |   | 59,061                  |    | 13,427                |   | 67,882                 |   | 140,370             |      | 147                        |   | 140,517          |   |
| Non-cash investing activities |   | 61,042                  |    | —                |   | —                 |   | 61,042              |      | —                     |   | 61,042           |   |

 

The following table reconciles the segments’ total earnings beforeinterest to consolidated net income for the three months and six months endedJune 30, 2004 and 2003 (in thousands):

 
|                        |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                        |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
| Earnings before interest    |   | $                                 | 54,223 |                            | $      | 56,494 |   | $ | 114,251 |   | $ | 111,730 |   |
| Interest expense – net |   | (16,464                           | )      | (22,550                         | )      | (36,059 | ) | (43,861 | ) |
| Net income                  |   | $                                 | 37,759 |                            | $      | 33,944 |   | $ | 78,192 |   | $ | 67,869 |   |

 

**NOTE 11.  COMMITMENTS AND CONTINGENCIES**

 

In the fall of 1999 andon December 1, 2000, the General Partner and the Partnership were named asdefendants in two separate lawsuits in Jackson County Circuit Court, JacksonCounty, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v.Texas Eastern Corporation, et al.*(including the General Partner andPartnership) and*Gilbert Richards and Jean Richards v. Texas Eastern Corporation, etal.*(including the General Partner and Partnership).* *In both cases, the plaintiffscontend, among other things, that we and other defendants stored and disposedof toxic and hazardous substances and hazardous wastes in a manner that causedthe materials to be released into the air, soil and water.  They further contend that the release causeddamages to the plaintiffs.  In theircomplaints, the plaintiffs allege strict liability for both personal injury andproperty damage together with gross negligence, continuing nuisance, trespass,criminal mischief and loss of consortium. The plaintiffs are seekingcompensatory, punitive and treble damages. We have filed an answer to both complaints, denying the allegations, aswell as various other motions.  In April2004, the court granted a partial motion for summary judgment in favor of thedefendants, dismissing two of the plaintiffs’ personal injury claims in theirentirety.  It is anticipated that theplaintiffs will appeal this ruling. These cases are not covered by insurance.  Discovery is ongoing, and we are defending ourselves vigorouslyagainst the lawsuits.  The plaintiffshave not stipulated the amount of damages that they are seeking in thesuits.  We cannot estimate the loss, ifany, associated with these pending lawsuits.

 

On December 21, 2001, TEProducts was named as a defendant in a lawsuit in the 10th Judicial District,Natchitoches Parish, Louisiana, styled *Rebecca L. Grisham et al. v.  TE Products Pipeline Company, LimitedPartnership*.  In this case,the plaintiffs contend that our pipeline, which crosses the plaintiffs’property, leaked toxic products onto their property and, consequently, causeddamages to them.  We have filed ananswer to the plaintiffs’ petition denying the allegations and are defendingourselves vigorously against the lawsuit. The plaintiffs have not

 

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stipulated theamount of damages they are seeking in the suit; however, this case is coveredby insurance.  We do not believe thatthe outcome of this lawsuit will have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

In May 2003, the GeneralPartner was named as a defendant in a lawsuit styled *John R. James, et al. v. J GravesInsulation Company, et al*.,**as filed in the first Judicial DistrictCourt, Caddo Parish, Louisiana.  Thereare numerous plaintiffs identified in the action that are alleged to havesuffered damages as the result of alleged exposure to asbestos-containingproducts and materials.  According tothe petition and as a result of a preliminary investigation, the GeneralPartner believes that the only claim asserted against it results from oneindividual for the period from July 1971 through June 1972, who is alleged tohave worked on a facility owned by the General Partner’s predecessor.  This period represents a small portion ofthe total alleged exposure period from January 1964 through December 2001 forthis 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,if any, 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 a matter styled *Adams, et al. v. Centennial PipelineCompany LLC, et al*.  Thismatter involves approximately 2,000 plaintiffs who allege that over 200defendants, including Centennial, generated, transported, and/or disposed ofhazardous and toxic waste at two sites in Bayou Sorrell, Louisiana, anunderground injection well and a landfill. The plaintiffs allege personal injuries, allergies, birth defects,cancer and death.  The undergroundinjection well has been in operation since May 1976.  Based upon current information, Centennial appears to be a *de minimis*contributor, having used the disposal site during the two month time period ofDecember 2001 to January 2002.  Marathonhas been handling this matter for Centennial under its operating agreement withCentennial.  TE Products has a 50%ownership interest in Centennial.  Basedupon Centennial’s limited involvement with the disposal site, we do not believethat the outcome of this matter will have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

On December 16, 2003,Centennial, the General Partner, the Partnership and other Partnership entitieswere named as defendants in a lawsuit in the 128th District Court of OrangeCounty, Texas, styled *Elwood Karr et al. v. Centennial Pipeline, LLC et al*.  In this case, the plaintiffs contend thatour pipeline leaked toxic substances on their property, causing them propertydamage.  We have filed an answer to theplaintiffs’ petition, denying the allegations and are defending ourselvesvigorously against this lawsuit.  Thiscase is covered by insurance.  We do notbelieve that the outcome of this lawsuit will have a material adverse effect onour financial position, results of operations or cash flows.

 

In addition to thelitigation discussed above, we have been, in the ordinary course of business, adefendant in various lawsuits and a party to various other legal proceedings,some of which are covered in whole or in part by insurance. We believe that theoutcome of these lawsuits and other proceedings will not individually or in theaggregate have a material adverse effect on our consolidated financialposition, results of operations or cash flows.

 

Our operations aresubject to federal, state and local laws and regulations governing thedischarge of materials into the environment. Failure to comply with these lawsand regulations may result in the assessment of administrative, civil andcriminal penalties, imposition of injunctions delaying or prohibiting certainactivities and the need to perform investigatory and remedial activities.  Although we believe our operations are inmaterial compliance with applicable environmental laws and regulations, risksof significant costs and liabilities are inherent

 

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in pipelineoperations, and we cannot assure you that significant costs and liabilitieswill not be incurred. Moreover, it is possible that other developments, such asincreasingly strict environmental laws and regulations and enforcement policiesthereunder, and claims for damages to property or persons resulting from ouroperations, could result in substantial costs and liabilities to us.  We believe that changes in environmentallaws and regulations will not have a material adverse effect on our financialposition, results of operations or cash flows in the near term.

 

On February 6, 2004, alawsuit styled *San Juan Citizens Alliance et al. v. Norton et al*., wasfiled against the United States Department of Interior and the Bureau of LandManagement (“BLM”) in the U.S. District Court, District of Columbia,challenging a recent decision by the BLM. In that decision, the BLM adopted a Resource Management Plan thatauthorized the development of additional gas wells on public lands innorthwestern New Mexico.  A substantialportion of the development activity in the area that is the subject of the suitinvolves the infill drilling in the Basin-Fruitland Coal Gas Pool, which coversmost of the San Juan Basin.  The ValVerde system, in our Midstream segment, gathers CBM from the Fruitland CoalFormation in the San Juan Basin in New Mexico and Colorado.  We believe the BLM followed the requirementsof the law and reached a balanced decision in adopting the Resource ManagementPlan.  However, an adverse decisioncould impact infill drilling activities in the San Juan Basin.

 

On March 26, 2004, aninitial decision in *ARCO Products Co., et al. v. SFPP*, DocketOR96-2-000, et al. was issued by the FERC, which made several significantdeterminations with respect to finding “changed circumstances” under the EnergyPolicy Act of 1992 (“EP Act”).  Thedecision lists factors that will be considered by the FERC, which includeshowing a substantial change in economic circumstances, the time factor thatwill be reviewed, what will be considered the basis of the rate and apipeline’s documentary requirements. The decision largely clarifies, but does not fully quantify, thestandard required for a complainant to demonstrate that an oil pipeline’s ratesare no longer subject to the rate protection of the EP Act by demonstratingthat a substantial change in circumstances has occurred since 1992 with respectto the basis of the rates being challenged. In the decision, the FERC found that a limited number of rate elementswill significantly affect the economic basis for a pipeline company’srates.  The elements identified in thedecision are volume changes, allowed total return and total cost of service(including major cost elements of rate base such as tax rates and tax allowances,among others).  The FERC did reject,however, the use of changes in tax rate and income tax allowances as standalonefactors.  The FERC further found that ifa complainant can show that a pipeline’s volumes and overall cost of servicecollectively reflect a significant increase in net earnings between theestablishment of the challenged rate pre-1992 and the time of the complaint,based primarily on the combined impact of changes in volumes and changes inoverall cost of service, the complainant has met its burden relative toestablishing “changed circumstances.” It appears likely that the decision will be appealed.  We have not yet determined the impact, ifany, that the decision could have on our rates if they were reviewed under thecriteria of this decision.

 

On July 20, 2004, theUnited States Court of Appeals for the District of Columbia Circuit issued adecision in *BPWest Coast Products, LLC v. Federal Energy Regulatory Commission and UnitedStates of America*, which reviewed the decisions that the FERC issuedin Opinion Nos. 435, 435-A, 435-B and Clarification and Rehearing Order.  In these opinions, the FERC considered thetariffs of SFPP, L.P. (“SFPP”) and complaints and other filings by shippercustomers of SFPP.  The Courtdetermined, in part, that SFPP, a publicly traded limited partnership, is notallowed to include income tax allowance in its cost-of-service analysis in thedetermination of just and reasonable rates that were not grandfathered underthe EP Act.  With respect to SFPP’sgrandfathered rates, the Court remanded to the FERC for further review, inlight of the Court’s holding on income tax allowance, of the FERC’sdetermination that changes in the FERC’s tax allowance policy do not constitute“substantially changed circumstances” under the EP Act.  The Court’s decision on income tax allowancedoes not affect our current rates and rate structure because our rates are notbased on the cost-of-service methodology. However, the Court’s decision might become relevant to us should we (i)elect in the future to use cost-of-service to support our rates or (ii) berequired to use such methodology to defend our indexed rates against a shippercomplaint.

 

23

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In 1994, the LouisianaDepartment of Environmental Quality (“LDEQ”) issued a compliance order forenvironmental 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, 2004, we have an accrued liability of $0.3 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 jet fuel from a storage tankat our Blue Island terminal located in Cook County, Illinois.  As a result of the release, we have enteredinto an Agreed Order with the State of Illinois.  We are complying with the Agreed Order and are in the process ofnegotiating a final settlement with the State of Illinois.  We do not expect that compliance with theAgreed Order or the settlement will have a future material adverse effect onour financial position, results of operations or cash flows.

 

At June 30, 2004, we havean accrued liability of $7.9 million, related to various TCTM and TE Productssites requiring environmental remediation activities.  We do not expect that the completion of remediation programsassociated with TCTM and TE Products activities will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

We regularly review ourlong-lived assets for impairment in accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  At June 30, 2004, we have identified certainassets that we are assessing for recoverability resulting from recentoperational changes.  We are continuingto monitor these circumstances; however, we do not believe that the resolutionof the matter will have a material effect on our financial condition, resultsof operations or cash flows.

 

Centennial entered intocredit facilities totaling $150.0 million and, as of June 30, 2004, $150.0million was outstanding under those credit facilities.  The proceeds were used to fund constructionand conversion costs of Centennial’s pipeline system.  TE Products and Marathon have each guaranteed one half ofCentennial’s debt, up to a maximum amount of $75.0 million each.

 

**NOTE 12. COMPREHENSIVEINCOME**

 

SFAS No. 130, *ReportingComprehensive Income* requires certain items such as foreign currencytranslation adjustments, minimum pension liability adjustments, and unrealizedgains and losses on certain investments to be reported in a financialstatement.  As of June 30, 2004, and forthe six months ended June 30, 2004 and 2003, the components of comprehensiveincome were due to the interest rate swap related to our variable raterevolving credit facility, which was designated as a cash flow hedge.  This interest rate swap matured on April 6,2004.  While the interest rate swap wasin effect, changes in the fair value of the cash flow hedge, to the extent thehedge was effective, were recognized in other comprehensive income until thehedged interest costs were recognized in net income.  As of June 30, 2004, all other comprehensive income has been recognizedin net income.

 

24

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The table belowreconciles reported net income to total comprehensive income for the threemonths and six months ended June 30, 2004 and 2003 (in thousands):

 
|                           |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                           |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
| Net income                     |   | $                                 | 37,759 |                            | $      | 33,944 |   | $ | 78,192 |   | $ | 67,869 |   |
| Net income on cash flow hedges |   | 220                               |   | 3,235                           |   | 2,902 |   | 8,704 |   |
| Total comprehensive income     |   | $                                 | 37,979 |                            | $      | 37,179 |   | $ | 81,094 |   | $ | 76,573 |   |

 

The accumulated balance of other comprehensive loss related to our cashflow hedge is as follows (in thousands):

 
| Balance at December 31, 2002                                     |   | $      | (20,055 | )      |
|------------------------------------------------------------------|--------|--------|---------|--------|
| Reclassification due to discontinued  portion of cash flow hedge |   | 989    |    |
| Transferred to earnings                                          |   | 14,417 |    |
| Change in fair value of cash flow hedge                          |   | 1,747  |    |
| Balance at December 31, 2003                                     |   | $      | (2,902  | )      |
| Transferred to earnings                                          |   | 2,939  |    |
| Change in fair value of cash flow hedge                          |   | (37    | )       |
| Balance at June 30, 2004                                         |   | $      | —  |   |

 

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

 

Our significant operatingsubsidiaries, TE Products Pipeline Company, Limited Partnership, TCTM, L.P.,TEPPCO Midstream Companies, L.P., Jonah Gas Gathering Company and Val Verde GasGathering Company, L.P., have issued unconditional guarantees of our debtsecurities.  The guarantees are full,unconditional, and joint and several. TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCOMidstream Companies, L.P., Jonah Gas Gathering Company and Val Verde GasGathering Company, L.P. are collectively referred to as the “GuarantorSubsidiaries.”

 

The followingsupplemental condensed consolidating financial information reflects ourseparate accounts, the combined accounts of the Guarantor Subsidiaries, thecombined accounts of our other non-guarantor subsidiaries, the combinedconsolidating adjustments and eliminations and our consolidated accounts forthe dates and periods indicated.  Forpurposes of the following consolidating information, our investments in oursubsidiaries and the Guarantor Subsidiaries’ investments in their subsidiariesare accounted for under the equity method of accounting.        

 

25

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|                                         |   | **June 30,  2004**          |      |
|----------------------------------------------|--------|-----------------------------|-----------|
|                                         |   | **TEPPCO  Partners, L .P.** |      | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **TEPPCO  Partners, L.P.  Consolidated** |   |
|                                         |   | **(in  thousands)**         |      |
| Assets                                       |   |                        |      |   |   |   |   |   |   |   |   |
| Current assets                               |   | $                           | 42,548    |   | $ | 84,583 |   | $ | 452,074 |   | $ | (44,765 | ) | $ | 534,440 |   |
| Property, plant and equipment – net     |   | —                      |      | 1,154,304 |   | 482,444 |   | — |   | 1,636,748 |   |
| Equity investments                           |   | 1,074,604                   |      | 431,045 |   | 214,129 |   | (1,336,022 | ) | 383,756 |   |
| Intercompany notes receivable                |   | 992,268                     |      | — |   | — |   | (992,268 | ) | — |   |
| Intangible assets                            |   | —                      |      | 386,663 |   | 36,311 |   | — |   | 422,974 |   |
| Other assets                                 |   | 5,608                       |      | 23,463 |   | 38,289 |   | — |   | 67,360 |   |
| Total assets                                 |   | $                           | 2,115,028 |   | $ | 2,080,058 |   | $ | 1,223,247 |   | $ | (2,373,055 | ) | $ | 3,045,278 |   |
| Liabilities and partners’ capital       |   |                        |      |   |   |   |   |   |   |   |   |
| Current liabilities                          |   | $                           | 43,098    |   | $ | 103,406 |   | $ | 466,422 |   | $ | (44,766 | ) | $ | 568,160 |   |
| Long-term debt                               |   | 995,728                     |      | 386,995 |   | — |   | — |   | 1,382,723 |   |
| Intercompany notes payable                   |   | —                      |      | 614,930 |   | 377,339 |   | (992,269 | ) | — |   |
| Other long term liabilities                  |   | 1,627                       |      | 17,577 |   | 616 |   | — |   | 19,820 |   |
| Total partners’ capital                 |   | 1,074,575                   |      | 957,150 |   | 378,870 |   | (1,336,020 | ) | 1,074,575 |   |
| Total liabilities and partners’ capital |   | $                           | 2,115,028 |   | $ | 2,080,058 |   | $ | 1,223,247 |   | $ | (2,373,055 | ) | $ | 3,045,278 |   |

 
|                                         |   | **December  31, 2003** |      |
|----------------------------------------------|--------|-----------------------------|-----------|
|                                         |   | **TEPPCO  Partners, L.P.**  |      | **Guarantor  Subsidiaries** |   | **Non-Guarantor   Subsidiaries** |   | **Consolidating  Adjustments** |   | **TEPPCO  Partners, L.P.  Consolidated** |   |
|                                         |   | **(in thousands)**          |      |
| Assets                                       |   |                        |      |   |   |   |   |   |   |   |   |
| Current assets                               |   | $                           | 38,281    |   | $ | 92,817 |   | $ | 360,564 |   | $ | (38,844 | ) | $ | 452,818 |   |
| Property, plant and equipment – net     |   | —                      |      | 1,146,455 |   | 472,708 |   | — |   | 1,619,163 |   |
| Equity investments                           |   | 1,112,252                   |      | 404,886 |   | 209,438 |   | (1,361,290 | ) | 365,286 |   |
| Intercompany notes receivable                |   | 943,447                     |      | — |   | — |   | (943,447 | ) | — |   |
| Intangible assets                            |   | —                      |      | 401,404 |   | 37,161 |   | — |   | 438,565 |   |
| Other assets                                 |   | 6,157                       |      | 21,444 |   | 37,559 |   | — |   | 65,160 |   |
| Total assets                                 |   | $                           | 2,100,137 |   | $ | 2,067,006 |   | $ | 1,117,430 |   | $ | (2,343,581 | ) | $ | 2,940,992 |   |
| Liabilities and partners’ capital       |   |                        |      |   |   |   |   |   |   |   |   |
| Current liabilities                          |   | $                           | 41,895    |   | $ | 105,285 |   | $ | 367,260 |   | $ | (38,849 | ) | $ | 475,591 |   |
| Long-term debt                               |   | 947,486                     |      | 392,164 |   | — |   | — |   | 1,339,650 |   |
| Intercompany notes payable                   |   | —                      |      | 557,842 |   | 385,604 |   | (943,446 | ) | — |   |
| Other long term liabilities                  |   | 1,435                       |      | 14,995 |   | — |   | — |   | 16,430 |   |
| Total partners’ capital                 |   | 1,109,321                   |      | 996,720 |   | 364,566 |   | (1,361,286 | ) | 1,109,321 |   |
| Total liabilities and partners’ capital |   | $                           | 2,100,137 |   | $ | 2,067,006 |   | $ | 1,117,430 |   | $ | (2,343,581 | ) | $ | 2,940,992 |   |

 

26

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|                        |   | **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          |   | —                                |   | 71,414 |   | 1,241,413 |   | (664 | ) | 1,312,163 |   |
| 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 |   |

 
|                       |   | **Three  Months Ended June 30, 2003** |   |
|----------------------------|--------|---------------------------------------|--------|
|                       |   | **TEPPCO  Partners, L.P.**            |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **TEPPCO  Partners, L.P.  Consolidated** |   |
|                       |   | **(in  thousands)**                   |   |
| Operating revenues         |   | $                                     | — |   | $ | 91,812 |   | $ | 949,406 |   | $ | (418 | ) | $ | 1,040,800 |   |
| Costs and expenses         |   | —                                |   | 62,363 |   | 934,817 |   | (418 | ) | 996,762 |   |
| Gain on sale of assets     |   | —                                |   | — |   | (3,948 | ) | — |   | (3,948 | ) |
| Operating income           |   | —                                |   | 29,449 |   | 18,537 |   | — |   | 47,986 |   |
| Interest expense –net |   | —                                |   | (14,472 | ) | (8,115 | ) | 37 |   | (22,550 | ) |
| Equity earnings            |   | 33,944                                |   | 18,918 |   | 8,186 |   | (52,798 | ) | 8,250 |   |
| Other income – net    |   | —                                |   | 49 |   | 246 |   | (37 | ) | 258 |   |
| Net income                 |   | $                                     | 33,944 |   | $ | 33,944 |   | $ | 18,854 |   | $ | (52,798 | ) | $ | 33,944 |   |

 
|                        |   | **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          |   | —                              |   | 144,830 |   | 2,433,558 |   | (2,065 | ) | 2,576,323 |   |
| 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 |   |

 

27

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|                        |   | **Six Months  Ended June 30, 2003** |   |
|-----------------------------|--------|-------------------------------------|--------|
|                        |   | **TEPPCO  Partners, L.P.**          |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **TEPPCO  Partners, L.P.  Consolidated** |   |
|                        |   | **(in  thousands)**                 |   |
| Operating revenues          |   | $                                   | — |   | $ | 193,891 |   | $ | 1,947,576 |   | $ | (1,428 | ) | $ | 2,140,039 |   |
| Costs and expenses          |   | —                              |   | 123,240 |   | 1,922,847 |   | (1,428 | ) | 2,044,659 |   |
| Gain on sale of assets      |   | —                              |   | — |   | (3,948 | ) | — |   | (3,948 | ) |
| Operating income            |   | —                              |   | 70,651 |   | 28,677 |   | — |   | 99,328 |   |
| Interest expense – net |   | —                              |   | (27,991 | ) | (15,943 | ) | 73 |   | (43,861 | ) |
| Equity earnings             |   | 67,869                              |   | 25,171 |   | 13,155 |   | (94,235 | ) | 11,960 |   |
| Other income – net     |   | —                              |   | 38 |   | 477 |   | (73 | ) | 442 |   |
| Net income                  |   | $                                   | 67,869 |   | $ | 67,869 |   | $ | 26,366 |   | $ | (94,235 | ) | $ | 67,869 |   |

 
|                                                                                         |   | **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 in equity investments, net of  distributions                                        |   | (21,109                             | )      | (7,543 | ) | (3,080 | ) | 35,349 |   | 3,617 |   |
| Changes in assets and liabilities and other                                                  |   | (67,886                             | )      | (1,978 | ) | 2,248 |   | 63,748 |   | (3,868 | ) |
| Net cash provided by (used in) operating  activities                                         |   | (10,803                             | )      | 111,737 |   | 47,920 |   | (16,682 | ) | 132,172 |   |
|                                                                                         |   |                                |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities                                                         |   | 98                                  |   | (3,707 | ) | (21,035 | ) | (57,402 | ) | (82,046 | ) |
| 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 |   |

 

28

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|                                                                               |   | **Six Months  Ended June 30, 2003** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                               |   | **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                                                                         |   | $                                   | 67,869 |   | $ | 67,869 |   | $ | 26,366 |   | $ | (94,235 | ) | $ | 67,869 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                      |   | —                              |   | 40,590 |   | 10,210 |   | — |   | 50,800 |   |
| Equity earnings, net of distributions                                              |   | 28,105                              |   | (6,393 | ) | (2,415 | ) | (20,517 | ) | (1,220 | ) |
| Changes in assets and liabilities and other                                        |   | (24,615                             | )      | 17,259 |   | (1,154 | ) | 23,602 |   | 15,092 |   |
| Net cash provided by operating activities                                          |   | 71,359                              |   | 119,325 |   | 33,007 |   | (91,150 | ) | 132,541 |   |
|                                                                               |   |                                |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities                                               |   | (2,519                              | )      | (59,883 | ) | (3,964 | ) | 2,519 |   | (63,847 | ) |
| Cash flows from financing activities                                               |   | (68,840                             | )      | (53,931 | ) | (34,698 | ) | 88,631 |   | (68,838 | ) |
| Net decrease in cash and cash equivalents                                          |   | —                              |   | 5,511 |   | (5,655 | ) | — |   | (144 | ) |
| Cash and cash equivalents at beginning of  period                                  |   | —                              |   | 8,247 |   | 22,721 |   | — |   | 30,968 |   |
| Cash and cash equivalents at end of period                                         |   | $                                   | — |   | $ | 13,758 |   | $ | 17,066 |   | $ | — |   | $ | 30,824 |   |

 

29

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**Item2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**General**

 

You should read thefollowing review of our financial position and results of operations inconjunction with our Consolidated Financial Statements and the notesthereto.  Material period-to-periodvariances in the consolidated statements of income are discussed under “Resultsof 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 should be read inconjunction with the financial statements and related notes, together with ourdiscussion and analysis of financial position and results of operationsincluded in our Annual Report on Form 10-K for the year ended December 31,2003.

 

**Critical Accounting Policies and Estimates**

 

A summary of the significant accounting policies wehave adopted and followed in the preparation of our consolidated financialstatements is detailed in our consolidated financial statements for the yearended December 31, 2003, included in our Annual Report on Form 10-K.Certain of these accounting 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, property, plant andequipment and goodwill and intangible assets. These estimates are based on our knowledge and understanding of currentconditions and actions we may take in the future.  Changes in these estimates will occur as a result of the passageof time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact onour financial condition and results of operations.

 

**ManagementOverview of the Six Months Ended June 30, 2004**

 

We reported net income of $78.2 million, or$0.88 per Limited Partner and Class B Unit (collectively, “Unit” or “Units”),for the six months ended June 30, 2004, compared with net income of $67.9million, or $0.86 per Unit, for the six months ended June 30, 2003.  Net income for the three months ended June30, 2004, was $37.8 million, or $0.43 per Unit, compared with net income of$33.9 million, or $0.43 per Unit, for the three months ended June 30, 2003.  The weighted average number of Unitsoutstanding for the three months and six months ended June 30, 2004, was 63.0million for both periods, compared with 57.7 million for the corresponding 2003periods.  Our Upstream Segment had astrong six months, with increased transportation volumes on Seaway CrudePipeline Company (“Seaway”) and on our South Texas system, which benefited fromour recent acquisition of the Genesis assets in November 2003.  Our Downstream Segment results for the threemonths and six months ended June 30, 2004, were impacted by higher pipelineintegrity costs of $2.6 million and $8.0 million, respectively, whichessentially offset increased revenues from both our refined products andpropane businesses.  We anticipate thatour pipeline integrity costs for our Downstream Segment for 2004 will beapproximately $3.0 million to $5.0 million higher than our 2003 costs as wecontinue to perform pipeline maintenance under our integrity managementprogram.  Our Midstream Segmentbenefited from increased volumes on Jonah Gas Gathering Company (“Jonah”),resulting from our recent Phase III expansion, offsetting the impact of reducedvolumes on Val Verde Gas Gathering Company (“Val Verde”) primarily as a resultof the natural decline of coal bed methane (“CBM”) production and slower thananticipated infill drilling.  Weincreased our quarterly distribution from $0.65 per Unit to $0.6625 per Unitfor the first quarter of 2004.  Oursecond quarter distribution will remain at $0.6625 per Unit and will be paid onAugust 6, 2004.

 

We are focused on opportunities, challenges and risksthat are inherent in our business segments. These include the safe, reliable and efficient operation of thepipelines and facilities that we own or operate while meeting increasedregulations that govern the operation of our assets and the costs associatedwith such regulations.  We are alsofocused on our continued growth through expansion of the assets that we own andthrough acquisition of assets that complement our current operations.

 

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

 

•                   Continued development of refinedproducts and propane market opportunities, including pipeline and terminalexpansions.

•                   Continued development of the Jonahgas gathering system which serves the Jonah and Pinedale fields.

•                   Integration of the Genesis crude oilassets and increased utilization of Seaway.

•                   Gathering of volumes from infilldrilling of CBM by producers and new connections of conventional gas in the SanJuan Basin, where our Val Verde system is located.

 

We are continuing to pursue a plan to makesystem changes to allow for bi-directional flow and deliveries into theShreveport market area.  We havecompleted feasibility studies and are in discussions with potential customersregarding the transportation of volumes through the pipeline system in thisarea.  Engineering design work iscurrently under way to reverse the flow of the pipeline segment from Shreveportto El Dorado, Arkansas.  The project isscheduled to be completed by the end of 2004.

 

We are planning to build a new refinedproducts truck loading terminal in Bossier City, Louisiana.  The facility will include six storage tanksand a fully automated two-bay truck loading rack.  The terminal will expand delivery capacity of refined products tothe Northwest Louisiana and East Texas markets by more than 20,000 barrels perday.  The facility will increase thedelivery of branded and unbranded premium and regular gasoline, as well aslow-sulfur diesel fuels, which will meet the different product specificationsof both market areas.  The project isscheduled to be completed in the first quarter of 2005.

 

We have begun a Phase II project to furtherexpand our delivery capacity of liquefied petroleum gases (“LPGs”) to theNortheast by 8,000 to 10,000 barrels per day. In 2003, we increased the delivery capability between Todhunter, Ohio,and Coshocton, Ohio, by 8,000 to 10,000 barrels per day and increased storageand improved loading capability at Oneonta, New York.  The Phase II expansion includes the construction of three pumpstations between Coshocton and Greensburg, Pennsylvania, and two stations fromGreensburg to Watkins Glen, New York. Additional work on the pipeline segment between Greensburg andPhiladelphia, Pennsylvania, will increase delivery rates to the Philadelphiaarea.  Improvements will also be made atour Dubois, Pennsylvania, and Eagle, Pennsylvania, terminals.  The project is scheduled to be completed inthe fourth quarter of 2004.

 

**OurBusiness**

 

TEPPCO Partners, L.P., aDelaware limited partnership, is a publicly traded master limited partnershipformed in March 1990.  We operate throughTE Products Pipeline Company, Limited Partnership (“TE Products”), TCTM, L.P.(“TCTM”) and TEPPCO Midstream Companies, L.P. (“TEPPCO Midstream”), which arecollectively referred to as the “Operating Partnerships.”  Texas Eastern Products Pipeline Company, LLC(the “Company” or “General Partner”), a Delaware limited liability company,serves as our general partner and owns a 2% general partner interest inus.  The General Partner is a whollyowned subsidiary of Duke Energy Field Services, LLC (“DEFS”), a joint venturebetween Duke Energy Corporation (“Duke Energy”) and ConocoPhillips.  Duke Energy holds an interest ofapproximately 70% in DEFS, and ConocoPhillips holds the remaining interest ofapproximately 30%.  The Company, asgeneral partner, performs all management and operating functions required forus, except for the management and operations of certain of our TEPPCO Midstreamassets that are managed by DEFS on our behalf. We reimburse the General Partner for all reasonable direct and indirectexpenses incurred in managing us. TEPPCO GP, Inc. (“TEPPCO GP”), our subsidiary, is the general partner ofour Operating Partnerships.  We hold a99.999% limited partner interest in the Operating Partnerships and TEPPCO GPholds a 0.001% general partner interest.

 

We operate and report inthree business segments:

 

•                  Downstream Segment – transportationand storage of refined products, LPGs and petrochemicals;

 

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

 

•                  Midstream Segment – gathering ofnatural gas, transportation of natural gas liquids (“NGLs”) and fractionationof NGLs.

 

Our reportable segmentsoffer different products and services and are managed separately because eachrequires a different business strategy. TEPPCO GP, our wholly owned subsidiary,acts as managing general partner of our Operating Partnerships, with a 0.001%general partner interest in each, and manages our subsidiaries.

 

Our Downstream Segmentrevenues are earned from transportation and storage of refined products andLPGs, intrastate transportation of petrochemicals, sales of product inventoryand other ancillary services.  The two largestoperating expense items of the Downstream Segment are labor and electricpower.  We generally realize higherrevenues during the first and fourth quarters of each year as our operationsare somewhat seasonal. Refined products volumes are generally higher during thesecond and third quarters because of greater demand for gasolines during thespring and summer driving seasons. LPGs volumes are generally higher fromNovember through March due to higher demand in the Northeast for propane, amajor fuel for residential heating.  OurDownstream Segment also includes the results of operations of the northernportion of the Dean Pipeline, which transports refinery grade propylene fromMont Belvieu, Texas, to Point Comfort, Texas. Our Downstream Segment also includes our equity investments inCentennial Pipeline LLC (“Centennial”) and Mont Belvieu Storage Partners, L.P.(“MB Storage”) (see Note 6.  EquityInvestments).

 

Our Upstream Segment revenues are earned from gathering,transportation, marketing and storage of crude oil and distribution oflubrication oils and specialty chemicals, principally in Oklahoma, Texas, NewMexico and the Rocky Mountain region. Marketing operations consist primarily of aggregating purchased crudeoil along our pipeline systems, or along third party pipeline systems, andarranging the necessary transportation logistics for the ultimate sale of thecrude oil to local refineries, marketers or other end users.  Our Upstream Segment also includes ourequity investment in Seaway (see Note 6. Equity Investments).

 

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(“Chaparral”) from West Texas and New Mexico to Mont Belvieu; the gathering ofnatural gas in the Green River Basin in southwestern Wyoming, through Jonah;and the gathering of CBM in the San Juan Basin in New Mexico and Colorado,through Val Verde.  DEFS manages and operatesthe Val Verde, Jonah and Chaparral assets for us under contractual agreements.

 

We earn revenues and income and generate cash by charging our customersa fee for the transportation, storage, gathering, terminaling, fractionationand other services we provide.  In ourUpstream Segment, we seek to maintain a balanced marketing position until wemake physical delivery of the crude oil, thereby minimizing or eliminating ourexposure to price fluctuations occurring after the initial purchase.  We are subject to economic and other factorsthat affect our industry.  The demandfor crude oil and petroleum products is dependent on the price of crude oil andthe products produced from the refining of crude oil; the price of natural gasand locations in which natural gas is drilled; and the demand forpetrochemicals, which is dependent on prices for products produced frompetrochemicals.  We are also subject toregulatory factors such as the amounts we are allowed to charge our customersfor the services we provide on our regulated pipeline systems.

 

**Acquisitions**

 

We completed severalacquisitions in 2001, 2002 and 2003, discussed below, that have impacted ourresults of operations and liquidity as discussed in this Report.  The following acquisitions were accountedfor, and the purchase price was allocated, in accordance with the purchasemethod of accounting.  We adoptedStatement of Financial Accounting Standards (“SFAS”) No. 141, *BusinessCombinations*, as of June 30, 2001, and have followed the provisionsof that statement for all business combinations initiated after June 30,2001.  

 

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| **Acquisition** |   | **Date of  Acquisition** |   | **Purchase  Price** |   |
|-----------------|--------|--------------------------|--------|---------------------|--------|
| Jonah (1)       |   | September 30, 2001       |   | $367.1 million      |   |
| Chaparral (2)   |   | March 1, 2002            |   | $132.4 million      |   |
| Val Verde (3)   |   | June 30, 2002            |   | $444.2 million      |   |
| Genesis (4)     |   | November 1, 2003         |   | $21.0 million       |   |

 

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(1)          Theacquisition of Jonah in 2001 served as our entry into the natural gas gatheringindustry.

 

(2)          Chaparralextends from West Texas and New Mexico to Mont Belvieu.  The pipeline delivers NGLs to fractionatorsand to MB Storage’s existing storage facilities in Mont Belvieu.

 

(3)          The ValVerde system gathers CBM from the Fruitland Coal Formation of the San JuanBasin in New Mexico and Colorado.  Thesystem is one of the largest CBM gathering and treating facilities in theUnited States.

 

(4)          The assetsacquired included approximately 150 miles of small diameter trunk lines, 26,000barrels per day of throughput and 12,000 barrels per day of lease marketing andsupply business.  We are integratingthese assets into our South Texas pipeline system (see Note 4.  Acquisitions and Dispositions).

 

Since the acquisition ofJonah, we have expanded both the pipeline capacity and processing capacity ofthe Jonah system.  In 2002, we completedthe Phase I and Phase II expansions of Jonah, which nearly doubled the capacityof the Jonah system.  The Phase Iexpansion was completed in May 2002 at a cost of approximately $25.0 millionand increased system capacity by 62%, from approximately 450 million cubic feetper day (“MMcf/day”) to approximately 730 MMcf/day.  In October 2002, the Phase II expansion was completed at a costof approximately $45.0 million, which increased the capacity of the Jonahsystem from 730 MMcf/day to approximately 880 MMcf/day.  In 2003, the Phase III expansion was begun,which included an 80-mile expansion on the system and the building of a new 250MMcf/day gas processing plant near Opal, Wyoming.  Phase III was substantially completed during the fourth quarterof 2003, with system capacity increasing to 1,180 MMcf/day at a cost ofapproximately $59.0 million.

 

In connection with our acquisition of crude oil assets in 2000, weacquired an approximate 23.5% undivided joint interest in the Rancho Pipeline,which was a crude oil pipeline system from West Texas to Houston.  In March 2003, the Rancho Pipeline ceasedoperations, and segments of the pipeline were sold to certain of the ownerswhich previously held undivided interests in the pipeline.  We acquired 241 miles of the pipeline inexchange for cash of $5.5 million and our interests in other portions of theRancho Pipeline.  We sold 183 miles ofthe segment we acquired to other entities for cash and assets valued atapproximately $8.5 million.  We recordeda net gain of $3.9 million on the transactions in the second quarter of 2003,which is included in the gain on sale of assets in our consolidated statementsof income.

 

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.

 

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**Results of Operations**

 

The following table summarizes financial information by businesssegment for the three months and six months ended June 30, 2004 and 2003 (inthousands):

 
|                           |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                           |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
| Operating revenues:            |   |                              |   |                            |   |   |   |   |   |
| Downstream Segment             |   | $                                 | 62,364 |                            | $      | 60,058 |   | $ | 137,173 |   | $ | 128,023 |   |
| Upstream Segment               |   | 1,242,860                         |   | 936,698                         |   | 2,437,350 |   | 1,922,078 |   |
| Midstream Segment              |   | 50,004                            |   | 44,462                          |   | 100,167 |   | 91,366 |   |
| Intersegment eliminations      |   | (664                              | )      | (418                            | )      | (2,065 | ) | (1,428 | ) |
| Total operating revenues       |   | 1,354,564                         |   | 1,040,800                       |   | 2,672,625 |   | 2,140,039 |   |
|                           |   |                              |   |                            |   |   |   |   |   |
| Operating income:              |   |                              |   |                            |   |   |   |   |   |
| Downstream Segment             |   | 14,619                            |   | 16,723                          |   | 40,301 |   | 45,992 |   |
| Upstream Segment               |   | 8,507                             |   | 11,663                          |   | 18,536 |   | 15,287 |   |
| Midstream Segment              |   | 19,275                            |   | 19,600                          |   | 37,465 |   | 38,049 |   |
| Total operating income         |   | 42,401                            |   | 47,986                          |   | 96,302 |   | 99,328 |   |
|                           |   |                              |   |                            |   |   |   |   |   |
| Earnings before interest:      |   |                              |   |                            |   |   |   |   |   |
| Downstream Segment             |   | 14,283                            |   | 16,842                          |   | 38,999 |   | 44,846 |   |
| Upstream Segment               |   | 20,649                            |   | 20,062                          |   | 37,713 |   | 28,844 |   |
| Midstream Segment              |   | 19,291                            |   | 19,627                          |   | 37,539 |   | 38,113 |   |
| Intersegment eliminations      |   | —                            |   | (37                             | )      | — |   | (73 | ) |
| Total earnings before interest |   | 54,223                            |   | 56,494                          |   | 114,251 |   | 111,730 |   |
|                           |   |                              |   |                            |   |   |   |   |   |
| Interest expense               |   | (18,048                           | )      | (23,513                         | )      | (38,507 | ) | (45,420 | ) |
| Interest capitalized           |   | 1,584                             |   | 963                             |   | 2,448 |   | 1,559 |   |
| Net income                     |   | $                                 | 37,759 |                            | $      | 33,944 |   | $ | 78,192 |   | $ | 67,869 |   |

 

The following is a detailed analysis of the results of operations,including reasons for changes in results, by each of our operating segments.

 

**Downstream Segment**

 

The following table presents volumes delivered in barrels and averagetariff per barrel for the three months and six months ended June 30, 2004 and2003 (in thousands, except tariff information):

 
|                             |   | **Three  Months Ended  June 30,** |   | **Percentage  Increase  (Decrease)** |   | **Six Months  Ended  June 30,** |   | **Percentage  Increase  (Decrease)** |   |
|----------------------------------|--------|-----------------------------------|--------|--------------------------------------|--------|---------------------------------|--------|--------------------------------------|--------|
|                             |
| **2004**                         |   | **2003**                          |   | **2004**                             |   | **2003**                        |
| **Volumes Delivered**            |   |                              |   |                                 |   |                            |   |                                 |   |   |   |   |   |
| Refined products                 |   | 41,936                            |   | 42,256                               |   | (1)%                            |   | 74,458                               |   | 72,488 |   | 3% |   |
| LPGs                             |   | 8,794                             |   | 6,832                                |   | 29%                             |   | 22,002                               |   | 20,532 |   | 7% |   |
| Total                            |   | 50,730                            |   | 49,088                               |   | 3%                              |   | 96,460                               |   | 93,020 |   | 4% |   |
|                             |   |                              |   |                                 |   |                            |   |                                 |   |   |   |   |   |
| **Average Tariff per Barrel**    |   |                              |   |                                 |   |                            |   |                                 |   |   |   |   |   |
| Refined products                 |   | $                                 | 0.93   |                                 | $      | 0.89                            |   | 5%                                   |   | $ | 0.94 |   | $ | 0.89 |   | 6% |   |
| LPGs                             |   | 1.56                              |   | 1.96                                 |   | (20)%                           |   | 1.93                                 |   | 2.15 |   | (10)% |   |
| Average system tariff per barrel |   | $                                 | 1.04   |                                 | $      | 1.04                            |   | —                               |   | $ | 1.17 |   | $ | 1.17 |   | — |   |

 

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*ThreeMonths Ended June 30, 2004 Compared with Three Months Ended June 30, 2003*

 

Our Downstream Segment reported earnings beforeinterest of $14.3 million for the three months ended June 30, 2004, comparedwith earnings before interest of $16.9 million for the three months ended June30, 2003.  Earnings before interestdecreased $2.6 million primarily due to an increase of $4.4 million in costsand expenses, increased losses of $0.6 million from equity investments,partially offset by an increase of $2.3 million in operating revenues and anincrease of $0.1 million in other income – net.  We discuss the factors influencing our operating performancebelow.

 

Revenues from refined products transportationincreased $1.1 million for the three months ended June 30, 2004, compared withthe three months ended June 30, 2003, primarily due to an increase indistillate volumes transported as a result of a strong trucking market.  For the three months ended June 30, 2004,the refined products average tariff increased 5% from the prior year periodprimarily due to higher market-based tariff rates which went into effect inJuly 2003, and decreased short-haul deliveries of product received into oursystem from Centennial at Creal Springs, Illinois.  Prior to the construction of Centennial, deliveries on ourpipeline system were limited by our pipeline capacity, and transportationservices for our customers were allocated in accordance with a prorationpolicy.  With this incremental pipelinecapacity, our previously constrained system has expanded deliveries in marketsboth south and north of Creal Springs.  InFebruary 2003, we entered into a lease agreement with Centennial that increasedour flexibility to deliver refined products to our market areas.  During the three months ended June 30, 2004,overall refined product volumes transported decreased primarily due to lowershort-haul volumes received into our system from Centennial, partially offsetby increased demand and market share for products supplied from the U.S. GulfCoast into Midwest markets.

 

Revenues from LPGs transportation increased $0.4 million for the threemonths ended June 30, 2004, compared with the three months ended June 30, 2003,primarily due to higher deliveries of isobutane to Chicago area refineries andincreased short-haul propane deliveries to Gulf Coast petrochemical customerspartially offset by lower deliveries of propane in the upper Midwest andNortheast market areas attributable to the impact of high propane prices andlow inventories at Mont Belvieu during the second quarter of 2004.  The LPGs average rate per barrel decreased20% from the prior year period primarily as a result of increased short-hauldeliveries during the three months ended June 30, 2004.

 

Other operating revenues increased $0.8 million forthe three months ended June 30, 2004, compared with the three months ended June30, 2003, primarily due to higher margins on product inventory sales, higherrefined products tender deduction fees and higher propane deliveries at ourProvidence, Rhode Island import facility. These increases were partially offset by lower revenues from productexchanges, which are used to position product in the Midwest market area.

 

Costs and expenses increased $4.4 million for the three months endedJune 30, 2004, compared with the three months ended June 30, 2003. The increasewas made up of a $2.8 million increase in operating, general and administrativeexpenses and a $2.1 million increase in depreciation and amortization expensepartially offset by a $0.5 million decrease in operating fuel and power.  Operating, general and administrativeexpenses increased primarily due to a $2.6 million increase in pipelineintegrity management expenses associated with our integrity management program,an $0.8 million increase in rental expense from the Centennial pipelinecapacity lease agreement that we entered into in February 2003, and an increasein consulting and contract services primarily related to compliance with theSarbanes-Oxley Act of 2002.  Theseincreases were partially offset by lower expenses in the 2004 period associatedwith the write-off of receivables related to customer bankruptcies and othercustomer non-payments in 2003. Depreciation expense increased from the prior year period because ofassets placed in service during 2003, partially offset by an increase in theestimated remaining life of a section of our pipeline system in the Northeast,as a result of pipeline improvements made as part of our integrity managementprogram.  Operating fuel and powerexpense decreased as a result of a more efficient use of our transportationassets, partially offset by increased mainline throughput.

 

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Net losses from equity investments increased $0.6 million for the threemonths ended June 30, 2004, compared with the three months ended June 30, 2003,as shown below (in thousands):

 
|                           |   | **Three  Months Ended  June 30,** |   | **Increase** |   |
|--------------------------------|--------|-----------------------------------|--------|--------------|--------|
|                           |   | **2004**                          |   | **2003**     |   | **(Decrease)** |   |
|                           |   |                              |   |         |   |   |   |
| Centennial                     |   | $                                 | (2,286 | )            | $      | (1,827 | ) | $ | (459 | ) |
| MB Storage                     |   | 1,785                             |   | 1,899        |   | (114 | ) |
| Other                          |   | (8                                | )      | (8           | )      | — |   |
| Total equity earnings (losses) |   | $                                 | (509   | )            | $      | 64 |   | $ | (573 | ) |

 

Equity losses in Centennial increased primarily due to higher operatingexpenses, partially offset by an increase in transportation volumes onCentennial.  Equity earnings from our50% ownership interest in MB Storage decreased $0.1 million for the threemonths ended June 30, 2004, compared with the three months ended June 30,2003.  In April 2004, MB Storageacquired storage assets and contracts for $33.5 million, of which TE Productscontributed $16.5 million.  The decreasein equity earnings was due to increased amortization and depreciation expenseon the acquired storage assets and contracts, partially offset by increasedstorage revenue, shuttle revenue and rental revenue primarily from the acquiredcontracts and lower pipeline rehabilitation expenses on the MB Storage system.

 

Other income – net increased $0.1 million for the three months endedJune 30, 2004, compared with the three months ended June 30, 2003, primarilydue to higher interest income earned on cash investments and other investingactivities.

 

*SixMonths Ended June 30, 2004 Compared with Six Months Ended June 30, 2003*

 

Our Downstream Segment reported earnings beforeinterest of $39.0 million for the six months ended June 30, 2004, compared withearnings before interest of $44.9 million for the six months ended June 30,2003.  Earnings before interestdecreased $5.9 million primarily due to an increase of $14.8 million in costsand expenses and increased losses of $0.6 million from equity investmentspartially offset by an increase of $9.1 million in operating revenues and anincrease of $0.4 million in other income – net.  We discuss the factors influencing our operating performancebelow.

 

Revenues from refined products transportationincreased $5.2 million for the six months ended June 30, 2004, compared withthe six months ended June 30, 2003, due to an overall increase of 3% in therefined products volumes delivered, primarily due to increases in motor fueland distillate volumes transported as a result of a strong truckingmarket.  These increases were primarilydue to deliveries of products received into our pipeline from Centennial atCreal Springs, Illinois.  Centennial hasprovided our system with additional pipeline capacity for products originatingin the U.S. Gulf Coast area.  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, our previouslyconstrained system has expanded deliveries in markets both south and north ofCreal Springs.  In February 2003, weentered into a lease agreement with Centennial that increased our flexibilityto deliver refined products to our market areas.  Volume increases were due to increased demand and market sharefor products supplied from the U.S. Gulf Coast into Midwest markets.  The refined products average rate per barrelincreased 6% from the prior year period primarily due to higher market-basedtariff rates which went into effect in July 2003, partially offset by theimpact of the Midwest origin point for barrels received from Centennial, whichresulted in decreased short-haul barrels transported on our system.

 

Revenues from LPGs transportation decreased $1.7 million for the sixmonths ended June 30, 2004, compared with the six months ended June 30, 2003,primarily due to lower deliveries of propane in the upper

 

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Midwest andNortheast market areas attributable to warmer weather during the first threemonths of 2004.  Additionally, in lateFebruary 2004, the Mont Belvieu propane price spiked, which resulted in oursourced propane being less competitive than propane from other sourcepoints.  This decrease was partiallyoffset by increased deliveries of isobutane to Chicago area refineries andincreased short-haul propane deliveries to Gulf Coast petrochemicalcustomers.  The LPGs average rate perbarrel decreased 10% from the prior year period primarily as a result ofincreased short-haul deliveries during the six months ended June 30, 2004.

 

Other operating revenues increased $5.6 million forthe six months ended June 30, 2004, compared with the six months ended June 30,2003, primarily due to higher propane inventory fees, higher refined productstender deduction fees, higher margins on product inventory sales and higherpropane deliveries at our Providence, Rhode Island import facility.

 

Costs and expenses increased $14.8 million for the six months endedJune 30, 2004, compared with the six months ended June 30, 2003. The increasewas made up of an $11.2 million increase in operating, general and administrativeexpenses, a $4.1 million increase in depreciation and amortization expense anda $0.2 million increase in taxes – other than income taxes.  These increases were partially offset by a$0.7 million decrease in operating fuel and power.  Operating, general and administrative expenses increasedprimarily due to an $8.0 million increase in pipeline integrity managementexpenses associated with our integrity management program, a $1.7 millionincrease in rental expense from the Centennial pipeline capacity leaseagreement that we entered into in February 2003, a $2.1 million increase inconsulting and contract services primarily related to compliance with theSarbanes-Oxley Act of 2002 and acquisition related activities and a $0.4million increase in environmental assessment and remediation activities.  These increases were partially offset bylower expenses in the 2004 period associated with the write-off of receivablesrelated to customer bankruptcies and other customer non-payments in 2003.  Depreciation expense increased from theprior year period because of assets placed in service during 2003, partiallyoffset by an increase in the estimated remaining life of a section of ourpipeline system in the Northeast, as a result of pipeline improvements made aspart of our integrity management program. Taxes – other than income taxes increased as a result of actual propertytaxes being slightly higher than previously estimated.  Operating fuel and power expense decreasedas a result of a more efficient use of our transportation assets, partiallyoffset by increased mainline throughput.

 

Net losses from equity investments increased $0.6 million for the sixmonths ended June 30, 2004, compared with the six months ended June 30, 2003,as shown below (in thousands):

 
|                |   | **Six Months  Ended  June 30,** |   | **Increase  (Decrease)** |   |
|---------------------|--------|---------------------------------|--------|--------------------------|--------|
| **2004**            |   | **2003**                        |
| Centennial          |   | $                               | (6,143 | )                        | $      | (5,005 | ) | $ | (1,138 | ) |
| MB Storage          |   | 4,414                           |   | 3,844                    |   | 570 |   |
| Other               |   | (18                             | )      | (34                      | )      | 16 |   |
| Total equity losses |   | $                               | (1,747 | )                        | $      | (1,195 | ) | $ | (552 | ) |

 

Equity losses in Centennial increased primarily due to the acquisitionof an additional 16.7% interest in Centennial on February 10, 2003, bringing TEProducts’ ownership interest to 50%, and higher operating expenses, partiallyoffset by an increase in transportation volumes on Centennial.  Equity earnings from our 50% ownershipinterest in MB Storage increased $0.6 million for the six months ended June 30,2004, compared with the six months ended June 30, 2003.  In April 2004, MB Storage acquired storageassets and contracts for $33.5 million, of which TE Products contributed $16.5million.  The increase in equityearnings is due to increased storage revenue, shuttle revenue and rentalrevenue primarily from the acquired contracts and lower pipeline rehabilitationexpenses on the MB Storage system, partially offset by increased amortizationand depreciation expense on storage assets and contracts acquired.

 

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Other income – net increased $0.4 million for the six months ended June30, 2004, compared with the six months ended June 30, 2003, primarily due tohigher interest income earned on cash investments.

 

**Upstream Segment**

 

Information presented in the following table includes the margin of theUpstream Segment, which may be viewed as a non-GAAP (Generally AcceptedAccounting Principles) financial measure under the rules of the Securities andExchange Commission.  We calculate themargin of the Upstream Segment as revenues generated from the sale of crude oiland lubrication oil, and transportation of crude oil, less the costs ofpurchases of crude oil and lubrication oil. We believe that margin is a more meaningful measure of financialperformance than operating revenues and operating expenses due to thesignificant fluctuations in revenues and expenses caused by variations in thelevel of marketing activity and prices for products marketed.  Margin and volume information for the threemonths and six months ended June 30, 2004 and 2003, is presented below (inthousands, except per barrel and per gallon amounts):

 
|                                   |   | **Three  Months Ended  June 30,** |     | **Percentage  Increase  (Decrease)** |     | **Six Months  Ended  June 30,** |   | **Percentage  Increase  (Decrease)** |   |
|----------------------------------------|--------|-----------------------------------|----------|--------------------------------------|----------|---------------------------------|--------|--------------------------------------|--------|
| **2004**                               |   | **2003**                          | **2004** |                                 | **2003** |
|                                   |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Margins:                               |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Crude oil transportation               |   | $                                 | 13,279   |                                 | $        | 11,292                          |   | 18%                                  |   | $ | 26,375 |   | $ | 22,096 |   | 19% |   |
| Crude oil marketing                    |   | 6,901                             |     | 6,469                                |     | 7%                              |   | 12,593                               |   | 11,204 |   | 12% |   |
| Crude oil terminaling                  |   | 2,241                             |     | 2,429                                |     | (8)%                            |   | 4,966                                |   | 4,549 |   | 9% |   |
| Lubrication oil sales                  |   | 1,504                             |     | 1,339                                |     | 12%                             |   | 2,996                                |   | 2,691 |   | 11% |   |
| Total margin                           |   | $                                 | 23,925   |                                 | $        | 21,529                          |   | 11%                                  |   | $ | 46,930 |   | $ | 40,540 |   | 16% |   |
|                                   |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Total barrels:                         |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Crude oil transportation               |   | 24,686                            |     | 25,931                               |     | (5)%                            |   | 50,848                               |   | 48,556 |   | 5% |   |
| Crude oil marketing                    |   | 42,270                            |     | 36,903                               |     | 15%                             |   | 87,924                               |   | 74,575 |   | 18% |   |
| Crude oil terminaling                  |   | 27,800                            |     | 28,193                               |     | (1)%                            |   | 60,888                               |   | 55,562 |   | 10% |   |
|                                   |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Lubrication oil volume (total gallons) |   | 2,949                             |     | 2,310                                |     | 28%                             |   | 6,419                                |   | 5,153 |   | 25% |   |
|                                   |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Margin per barrel:                     |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Crude oil transportation               |   | $                                 | 0.538    |                                 | $        | 0.435                           |   | 24%                                  |   | $ | 0.519 |   | $ | 0.455 |   | 14% |   |
| Crude oil marketing                    |   | 0.163                             |     | 0.175                                |     | (7)%                            |   | 0.143                                |   | 0.150 |   | (5)% |   |
| Crude oil terminaling                  |   | 0.081                             |     | 0.086                                |     | (6)%                            |   | 0.082                                |   | 0.082 |   | — |   |
|                                   |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Lubrication oil margin (per gallon)    |   | 0.510                             |     | 0.580                                |     | (12)%                           |   | 0.467                                |   | 0.522 |   | (11)% |   |

 

The following table reconciles the Upstream Segment margin to theconsolidated statements of income using the information presented in theconsolidated statements of income and the statements of income in Note 10.  Segment Information (in thousands):

 
|                                         |   | **Three  Months Ended  June 30,** |      | **Six Months  Ended  June 30,** |   |
|----------------------------------------------|--------|-----------------------------------|-----------|---------------------------------|--------|
|                                         |   | **2004**                          |      | **2003**                        |   | **2004** |   | **2003** |   |
| Sales of petroleum products                  |   | $                                 | 1,231,019 |                            | $      | 927,232 |   | $ | 2,411,786 |   | $ | 1,903,192 |   |
| Transportation – Crude oil              |   | 9,213                             |      | 7,059                           |   | 18,876 |   | 13,964 |   |
| Less:   Purchases of petroleum products |   | (1,216,307                        | )         | (912,762                        | )      | (2,383,732 | ) | (1,876,616 | ) |
| Total margin                                 |   | $                                 | 23,925    |                            | $      | 21,529 |   | $ | 46,930 |   | $ | 40,540 |   |

 

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*ThreeMonths Ended June 30, 2004 Compared with Three Months Ended June 30, 2003*

 

Our Upstream Segment reported earnings before interest of $20.6 millionfor the three months ended June 30, 2004, compared with earnings beforeinterest of $20.0 million for the three months ended June 30, 2003.  Earnings before interest increased $0.6million primarily due to an increase of $2.4 million in margin, an increase of$3.9 million in equity earnings from Seaway and an increase of $0.2 million inother operating revenues, partially offset by an increase of $1.8 million incosts and expenses (excluding purchases of crude oil and lubrication oil) and adecrease of $0.2 million in other income – net.  Additionally, for the three months ended June 30, 2003, werecognized a gain of $3.9 million on the sale of assets.  We discuss factors influencing our operatingperformance below.

 

Our margin increased $2.4 million for the three months ended June 30,2004, compared with the three months ended June 30, 2003. Crude oiltransportation margin increased $2.0 million primarily due to an increase intransportation revenues primarily on our South Texas system, as a result of theacquisition of the Genesis assets and increased revenues on our Basinsystem.  These increases were partiallyoffset by lower transportation volumes on our West Texas and other gatheringsystems.  During the fourth quarter of2003, we completed the purchase of crude supply and transportation assets(Genesis), which are being integrated into our South Texas system (see Note4.  Acquisitions and Dispositions).  Crude oil marketing margin increased $0.4million primarily due to increased volumes marketed and favorable crude oilprice differentials.  Lubrication oilsales margin increased $0.2 million due to increased sales of chemical volumesand increased volumes related to the acquisition of a lubrication oildistributor in Abilene, Texas, in December 2003.  Crude oil terminaling margin decreased $0.2 million as a resultof lower pumpover volumes at Midland, Texas, partially offset by higherpumpover volumes at Cushing, Oklahoma.

 

Other operating revenue of the Upstream Segment increased $0.2 millionfor the three months ended June 30, 2004, compared with the three months endedJune 30, 2003, primarily due to higher revenues from documentation and otherservices to support customers’ trading activity at Midland and Cushing.

 

Costs and expenses, excluding expenses associated with purchases ofcrude oil and lubrication oil, increased $1.8 million for the three monthsended June 30, 2004, compared with the three months ended June 30, 2003.  The increase was made up of a $0.9 millionincrease in operating, general and administrative expenses, a $0.6 millionincrease in depreciation and amortization expense and a $0.5 million increasein operating fuel and power, partially offset by a  $0.2 million decrease in taxes – other than income taxes.  Operating, general and administrativeexpenses increased $0.9 million from the prior year period primarily due to an$0.8 million increase in pipeline integrity management expenses associated withour integrity management program, increases in consulting and contract servicesprimarily related to compliance with the Sarbanes-Oxley Act of 2002 andincreased labor costs primarily due to an increase in the number of employeesbetween years as a result of the acquisition of Genesis.  Depreciation and amortization expenseincreased $0.6 million due to the assets placed in service as a result of theGenesis acquisition.  Operating fuel andpower increased $0.5 million primarily as a result of the acquisition of theGenesis assets and higher volumes in 2004. Taxes – other than income taxes decreased $0.2 million due to decreasesin property tax accruals.

 

In June 2003, we recorded a net gain of $3.9 million, included in thegain on sale of assets in our consolidated statements of income, on the sale ofcertain of the assets of the Rancho Pipeline. In connection with our acquisition of crude oil assets in 2000, weacquired an approximate 23.5% undivided joint interest in the Rancho Pipeline,which was a crude oil pipeline system from West Texas to Houston.  In March 2003, the Rancho Pipeline ceasedoperations, and segments of the pipeline were sold to certain of the currentowners of the Rancho Pipeline.  Weacquired 241 miles of the pipeline in exchange for cash of $5.5 million and ourinterests in other portions of the Rancho Pipeline.  We sold 183 miles of the segment we acquired to other entitiesfor cash and assets valued at approximately $8.5 million.

 

Equity earnings in Seaway increased $3.9 million for the three monthsended June 30, 2004, compared with the three months ended June 30, 2003, due to higher third-party transportationvolumes, gains on inventory sales and lowergeneral and administrative expenses.

 

39

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Other income – net decreased $0.2 million for the six months ended June30, 2004, compared with the six months ended June 30, 2003, due to lowerinterest income earned on cash investments.

 

*SixMonths Ended June 30, 2004 Compared with Six Months Ended June 30, 2003*

 

Our Upstream Segment reported earnings before interest of $37.7 millionfor the six months ended June 30, 2004, compared with earnings before interestof $28.8 million for the six months ended June 30, 2003.  Earnings before interest increased $8.9million primarily due to an increase of $6.4 million in margin, an increase of$5.8 million in equity earnings from Seaway and an increase of $1.8 million inother operating revenues, partially offset by an increase of $1.0 million incosts and expenses (excluding purchases of crude oil and lubrication oil) and adecrease of $0.2 million in other income – net.  Additionally, for the six months ended June 30, 2003, werecognized a gain of $3.9 million on the sale of assets.  We discuss factors influencing our operatingperformance below.

 

Our margin increased $6.4 million for the six months ended June 30,2004, compared with the six months ended June 30, 2003.  Crude oil transportation margin increased$4.3 million primarily due to an increase in transportation volumes andrevenues on our South Texas system, as a result of the acquisition of theGenesis assets, and increased revenues on our Basin system.  These increases were partially offset bylower transportation volumes on our West Texas and other gatheringsystems.  During the fourth quarter of2003, we completed the purchase of crude supply and transportation assets(Genesis), which are being integrated into our South Texas system (see Note4.  Acquisitions and Dispositions).  Crude oil marketing margin increased $1.4million due to increased volumes marketed and favorable crude oil pricedifferentials, partially offset by an invoicing settlement on a marketing contractin the first quarter of 2003, which reduced the marketing margin in 2003.  Crude oil terminaling margin increased $0.4million as a result of higher pumpover volumes at Cushing, Oklahoma, partiallyoffset by lower pumpover volumes at Midland, Texas.  Lubrication oil sales margin increased $0.3 million due toincreased sales of chemical volumes and increased volumes related to theacquisition of a lubrication oil distributor in Abilene, Texas, in December2003.

 

Other operating revenue of the Upstream Segment increased $1.8 millionfor the six months ended June 30, 2004, compared with the six months ended June30, 2003, primarily due to a $1.4 million settlement with the former owner ofsome of our crude oil assets for inventory imbalances with customers on assetsthat were not acquired by us and higher revenues from documentation and otherservices to support customers’ trading activity at Midland and Cushing.

 

Costs and expenses, excluding expenses associated with purchases ofcrude oil and lubrication oil, increased $1.0 million for the six months endedJune 30, 2004, compared with the six months ended June 30, 2003.  The increase was made up of a $1.5 millionincrease in operating fuel and power, a $0.6 million increase in depreciationand amortization expense and a $0.1 million increase in taxes – other thanincome taxes, partially offset by a decrease of $1.2 million in operating,general and administrative expenses. Operating fuel and power increased $1.5 million primarily as a result ofthe acquisition of the Genesis assets and higher volumes in 2004.  Depreciation and amortization expenseincreased $0.6 million due to the assets placed in service as a result of theGenesis acquisition.  Taxes – other thanincome taxes increased $0.1 million due to increases in property tax accruals.Operating, general and administrative expenses decreased $1.2 million from theprior year period primarily due to $3.1 million of higher environmentalassessment and remediation costs in 2003, $1.7 million of expense in 2003 fromthe net settlement of crude oil imbalances with customers and higher legalcosts in 2003 related to the litigation and settlement with D.R.D.Environmental Services, Inc.  Thesedecreases were partially offset by a $1.5 million increase in pipelineintegrity management expenses associated with our integrity management program,increases in consulting and contract services primarily related to compliancewith the Sarbanes-Oxley Act of 2002 and increased labor costs primarily due toan increase in the number of employees between years as a result of theacquisition of Genesis.

 

In June 2003, we recorded a net gain of $3.9 million, included in thegain on sale of assets in our consolidated statements of income, on the sale ofcertain of the assets of the Rancho Pipeline.

 

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Equity earnings in Seaway increased $5.8 million for the six monthsended June 30, 2004, compared with the six months ended June 30, 2003, due to higher third-party transportationvolumes, gains on inventory sales, a settlement with the former owner ofSeaway’s crude oil assets regarding inventory imbalances with customers onassets that were not acquired by us andlower general and administrative expenses.

 

Other income – net decreased $0.2 million for the six months ended June30, 2004, compared with the six months ended June 30, 2003, due to lowerinterest income earned on cash investments.

 

**Midstream Segment**

 

The following table presents volume and average rate information forthe three months and six months ended June 30, 2004 and 2003 (in thousands,except average fee and average rate amounts):

 
|                                                    |   | **Three  Months Ended  June 30,** |     | **Percentage  Increase  (Decrease)** |     | **Six Months  Ended  June 30,** |   | **Percentage  Increase  (Decrease)** |   |
|---------------------------------------------------------|--------|-----------------------------------|----------|--------------------------------------|----------|---------------------------------|--------|--------------------------------------|--------|
| **2004**                                                |   | **2003**                          | **2004** |                                 | **2003** |
| Gathering – Natural Gas – Jonah :             |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Million cubic feet                                      |   | 83,469                            |     | 70,528                               |     | 18%                             |   | 167,397                              |   | 144,793 |   | 16% |   |
| Million British thermal units  (“MMBtu”) |   | 92,430                            |     | 78,509                               |     | 18%                             |   | 185,327                              |   | 160,454 |   | 16% |   |
| Average fee per MMBtu                                   |   | $                                 | 0.197    |                                 | $        | 0.192                           |   | 3%                                   |   | $ | 0.198 |   | $ | 0.191 |   | 4% |   |
|                                                    |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Gathering – Natural Gas – Val Verde:          |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Million cubic feet                                      |   | 35,989                            |     | 39,927                               |     | (10)%                           |   | 71,480                               |   | 81,636 |   | (12)% |   |
| Million British thermal units  (“MMBtu”) |   | 30,361                            |     | 33,492                               |     | (9)%                            |   | 60,165                               |   | 68,759 |   | (12)% |   |
| Average fee per MMBtu                                   |   | $                                 | 0.533    |                                 | $        | 0.514                           |   | 4%                                   |   | $ | 0.537 |   | $ | 0.522 |   | 3% |   |
|                                                    |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Transportation – NGLs:                             |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Thousand barrels                                        |   | 15,465                            |     | 13,953                               |     | 11%                             |   | 30,145                               |   | 28,221 |   | 7% |   |
| Average rate per barrel                                 |   | $                                 | 0.684    |                                 | $        | 0.677                           |   | 1%                                   |   | $ | 0.683 |   | $ | 0.685 |   | — |   |
|                                                    |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Fractionation – NGLs:                              |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Thousand barrels                                        |   | 956                               |     | 1,007                                |     | (5)%                            |   | 2,070                                |   | 2,078 |   | — |   |
| Average rate per barrel                                 |   | $                                 | 1.867    |                                 | $        | 1.846                           |   | 1%                                   |   | $ | 1.771 |   | $ | 1.788 |   | (1)% |   |
|                                                    |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Sales – Condensate:                                |   |                              |     |                                 |     |                            |   |                                 |   |   |   |   |   |
| Thousand barrels                                        |   | 17.9                              |     | 15.2                                 |     | 18%                             |   | 59.7                                 |   | 46.0 |   | 30% |   |
| Average rate per barrel                                 |   | $                                 | 37.17    |                                 | $        | 27.43                           |   | 36%                                  |   | $ | 34.61 |   | $ | 31.05 |   | 11% |   |

 

*ThreeMonths Ended June 30, 2004 Compared with Three Months Ended June 30, 2003*

 

Our Midstream Segment reported earnings before interest of $19.3million for the three months ended June 30, 2004, compared with earnings beforeinterest of $19.6 million for the three months ended June 30, 2003.  Earnings before interest decreased $0.3million due to an increase of $4.2 million in costs and expenses (excludingpurchases of petroleum products) partially offset by an increase of $3.9million in operating revenues and margin. We discuss factors influencing our operating performance below.

 

Revenues from the gathering of natural gas increased $2.2 million forthe three months ended June 30, 2004, compared with the three months ended June30, 2003.  Natural gas gatheringrevenues from the Jonah system increased $3.2 million and volumes deliveredincreased 12.9 Bcf for the three months ended June 30, 2004, due to

 

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the expansion ofthe Jonah system during 2003.  The PhaseIII expansion was substantially completed during the fourth quarter of 2003 andincreased system capacity from 880 MMcf/day to 1,180 MMcf/day.  The increase in Jonah’s revenues is alsopartially due to an increase in the average natural gas gathering rate due tocertain pressure thresholds being achieved. Natural gas gathering revenues from the Val Verde system decreased $1.0million and volumes delivered decreased 3.9 Bcf for the three months ended June30, 2004, primarily due to the natural decline of CBM production and slowerthan anticipated infill drilling, which resulted in decreased revenues, partiallyoffset by an increase in the average natural gas gathering rate due to annualfee escalations in gathering agreements and higher carbon dioxide treating feesas a result of increasing carbon dioxide content in the natural gas.

 

During the first quarter of 2004, Jonah’s Pioneer gas processing plant,which was constructed as a part of the Phase III expansion to increase theprocessing capacity in southwestern Wyoming, was completed.  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 the producersresidue gas equivalent in energy to the natural gas received from theproducers.  Jonah purchases gas from aDEFS affiliate to replace the equivalent energy removed in the liquids.  Jonah sells the NGLs it retains to a DEFSaffiliate.  These transactions resultedin sales and purchases in the second quarter of 2004 with a margin of $0.1million.  The margin from the sales andpurchases related to the keep-whole election processing contracts is expectedto remain very small*.*

 

Revenues from the transportation of NGLs increased $1.1 million for thethree months ended June 30, 2004, compared with the three months ended June 30,2003, primarily due to increased volumes transported on the Chaparral andPanola pipelines, partially offset by decreased volumes transported on the Deanand Wilcox pipelines.  The increase inthe NGL transportation average rate per barrel resulted primarily from higheraverage rates per barrel on volumes transported on the Panola and Wilcoxpipelines.

 

Other operating revenues increased $0.5 million for the three monthsended June 30, 2004, compared with the three months ended June 30, 2003, due toa $0.2 million increase in condensate sales on the Jonah system and a $0.7million increase in processing fee revenues as a result of Jonah’s Pioneerprocessing plant, which was constructed as part of the Phase III expansionbeing placed in service in January 2004. These increases were partially offset by decreases of $0.4 million inother miscellaneous revenue.

 

Costs and expenses (excluding purchases of petroleum products)increased $4.2 million for the three months ended June 30, 2004, compared withthe three months ended June 30, 2003, due to a $3.1 million increase inoperating, general and administrative expense, a $0.5 million increase inoperating fuel and power, a $0.4 million increase in taxes – other than incometaxes and a $0.2 million increase in depreciation and amortization expense.  Operating, general and administrativeexpense increased due to a $1.6 million increase in gas settlement expenses, a$1.3 million increase in pipeline maintenance and repair expenses and a $0.6million increase in general and administrative labor expense, partially offsetby a $0.6 million decrease in expense related to the sale of our Enron Corp.receivable, which had been fully reserved in 2001.  Operating fuel and power increased $0.5 million primarily due toincreased NGL volumes and higher power costs.  Taxes – other than income taxes increased $0.4 million as a resultof higher property balances. Depreciation expense increased $0.5 million primarily as a result ofassets placed in service in 2003 related to the expansion of the Jonahsystem.  This increase was partiallyoffset by decreased amortization expense of $0.3 million, due to a $0.7 milliondecrease on Val Verde as a result of lower volumes in 2004, partially offset bya $0.4 million increase in amortization expense on Jonah as a result of highervolumes in 2004.

 

*SixMonths Ended June 30, 2004 Compared with Six Months Ended June 30, 2003*

 

Our Midstream Segment reported earnings before interest of $37.5million for the six months ended June 30, 2004, compared with earnings beforeinterest of $38.1 million for the six months ended June 30, 2003.  Earnings before interest decreased $0.6million due to an increase of $6.4 million in costs and expenses (excludingpurchases

 

42

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of petroleumproducts) partially offset by an increase of $5.8 million in operating revenuesand margin.  We discuss factorsinfluencing our operating performance below.

 

Revenues from the gathering of natural gas increased $2.4 million forthe six months ended June 30, 2004, compared with the six months ended June 30,2003.  Natural gas gathering revenuesfrom the Jonah system increased $6.0 million and volumes delivered increased22.6 Bcf for the six months ended June 30, 2004, due to the expansion of theJonah system during 2003.  The Phase IIIexpansion was substantially completed during the fourth quarter of 2003 andincreased system capacity from 880 MMcf/day to 1,180 MMcf/day.  The increase in Jonah’s revenues is alsopartially due to an increase in the average natural gas gathering rate due tocertain pressure thresholds being achieved. Natural gas gathering revenues from the Val Verde system decreased $3.6million and volumes delivered decreased 10.2 Bcf for the six months ended June30, 2004, primarily due to the natural decline of CBM production and slowerthan anticipated infill drilling, which resulted in decreased revenues,partially offset by an increase in the average natural gas gathering rate dueto annual fee escalations in gathering agreements and higher carbon dioxidetreating fees as a result of increasing carbon dioxide content in the naturalgas.

 

During the first quarter of 2004, Jonah’s Pioneer gas processing plant,which was constructed as a part of the Phase III expansion to increase theprocessing capacity in southwestern Wyoming, was completed.  For the six months ended June 30, 2004, thesales and purchases under the fee arrangements at the Pioneer plant resulted ina margin of $0.1 million.

 

Revenues from the transportation of NGLs increased $1.3 million for thesix months ended June 30, 2004, compared with the six months ended June 30,2003, primarily due to increases in volumes transported on the Chaparral andPanola pipelines, partially offset by decreased volumes on the Dean and Wilcoxpipelines.  Lower average rates perbarrel on volumes transported on the Chaparral and Dean pipelines were offsetby higher average rates per barrel on volumes transported on the Panola andWilcox pipelines.

 

Other operating revenues increased $2.0 million for the six monthsended June 30, 2004, compared with the six months ended June 30, 2003, due toan increase of $1.4 million in processing fee revenues as a result of thePioneer processing plant, constructed as part of the Phase III expansion, whichwas placed in service in January 2004 and an increase of $0.6 million incondensate sales on the Jonah system.

 

Costs and expenses (excluding purchases of petroleum products)increased $6.4 million for the six months ended June 30, 2004, compared withthe six months ended June 30, 2003, due to a $6.5 million increase inoperating, general and administrative expense, a $0.7 million increase inoperating fuel and power and a $0.4 million increase in taxes – other thanincome taxes, partially offset by a $1.2 million decrease in depreciation andamortization expense.  Operating,general and administrative expense increased due to a $3.4 million increase ingas settlement expenses, a $1.8 million increase in pipeline maintenance repairexpenses, a $1.4 million increase in general and administrative labor expenseand an increase in consulting and contract services primarily related tocompliance with the Sarbanes-Oxley Act of 2002.  These increases are partially offset by a $0.6 million decreasein expense related to the sale of our Enron Corp. receivable, which had beenfully reserved in 2001.  Operating fueland power increased $0.7 million primarily due to increased NGL volumes andhigher power costs.  Taxes – other thanincome taxes increased $0.4 million as a result of higher propertybalances.  Amortization expensedecreased $3.7 million primarily due to a $3.2 million decrease on Jonah’sintangible assets under the units-of-production method resulting from anextension of the expected amortization period from 16 years to 25 years (seeNote 2.  Goodwill and Other IntangibleAssets), partially offset by a $0.7 million increase as a result of highervolumes in 2004.  Amortization expenseon the Val Verde system decreased $1.2 million primarily due to lower volumesin 2004, as a result of the natural decline in CBM production.  These decreases were partially offset byincreased depreciation expense of $2.5 million, primarily as a result of assetsplaced in service in 2003 related to the expansion of the Jonah system.

 

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**Interest Expense and CapitalizedInterest**

 

*ThreeMonths Ended June 30, 2004 Compared with Three Months Ended June 30, 2003*

 

Interest expense decreased $5.5 million for the three months ended June30, 2004, compared with the three months ended June 30, 2003, primarily due toa higher percentage of variable interest rate debt during the three monthsended June 30, 2004, that carried a lower rate of interest as compared to fixedinterest rate debt.  The higherpercentage of variable interest rate debt resulted from the expiration of aninterest rate swap in April 2004 (see Note 3. Interest Rate Swaps).

 

Capitalized interest increased $0.6 million for the three months endedJune 30, 2004, compared with the three months ended June 30, 2003, due tointerest capitalized on construction work-in-progress in 2004.

 

*SixMonths Ended June 30, 2004 Compared with Six Months Ended June 30, 2003*

 

Interest expense decreased $6.9 million for the six months ended June30, 2004, compared with the six months ended June 30, 2003, due to loweroutstanding debt balances and a higher percentage of variable interest ratedebt during the six months ended June 30, 2004, that carried a lower rate ofinterest as compared to fixed interest rate debt.  The higher percentage of variable interest rate debt resultedfrom the expiration of an interest rate swap in April 2004 (see Note 3.Interest Rate Swaps).

 

Capitalized interest increased $0.9 million for the six months endedJune 30, 2004, compared with the six months ended June 30, 2003, due tointerest capitalized on construction work-in-progress in 2004.

 

**Financial Condition and Liquidity**

 

Cash generated fromoperations, credit facilities and debt and equity offerings is our primarysource of liquidity.  At June 30, 2004,and December 31, 2003, we had working capital deficits of $33.7 million and$22.8 million, respectively.  At June30, 2004, we had $290.0 million in available borrowing capacity under ourrevolving credit facility to cover any working capital needs.  Cash flows for the six months ended June 30,2004 and 2003 were as follows (in millions): 

 
|                        |   | **Six Months  Ended  June 30,** |   |
|-----------------------------|--------|---------------------------------|--------|
|                        |   | **2004**                        |   | **2003** |   |
|                        |   |                            |   |   |   |
| Cash provided by (used in): |   |                            |   |   |   |
| Operating activities        |   | $                               | 132.2  |   | $ | 132.5 |   |
| Investing activities        |   | (82.1                           | )      | (63.9 | ) |
| Financing activities        |   | (65.7                           | )      | (68.8 | ) |
|                             |        |                                 |        |  |  |  |  |

 

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*OperatingActivities*

 

Net cash from operatingactivities for the six months ended June 30, 2004 and 2003, was comprised ofthe following (in millions):

 
|                                                  |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------|--------|---------------------------------|--------|
|                                                  |   | **2004**                        |   | **2003** |   |
|                                                  |   |                            |   |   |   |
| Net income                                            |   | $                               | 78.2   |   | $ | 67.9 |   |
| Depreciation and amortization                         |   | 54.2                            |   | 50.8 |   |
| Earnings in equity investments                        |   | (17.2                           | )      | (12.0 | ) |
| Distributions from equity investments                 |   | 20.8                            |   | 10.8 |   |
| Gain on sale of assets                                |   | —                          |   | (3.9 | ) |
| Non-cash portion of interest expense                  |   | (0.2                            | )      | 3.1 |   |
| Cash provided by (used in) working capital  and other |   | (3.6                            | )      | 15.8 |   |
|                                                  |   |                            |   |   |   |
| Net cash from operating  activities                   |   | $                               | 132.2  |   | $ | 132.5 |   |

 

Cash provided byoperating activities decreased $0.3 million for the six months ended June 30,2004, compared with the six months ended June 30, 2003, primarily due to thetiming of payments for working capital components, partially offset by highernet income in the 2004 period and an increase of $10.0 million in distributionsreceived from our equity investments in Seaway and MB Storage during the sixmonths ended June 30, 2004.

 

We believe that we willcontinue to have adequate liquidity to fund future recurring operating andinvesting activities.  Our primary cashrequirements consist of normal operating expenses, capital expenditures 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 market conditions,interest rates, our financial condition and our credit rating at the time.

 

Net cash from operatingactivities for the six months ended June 30, 2004 and 2003, included interestpayments, net of amounts capitalized, of $41.2 million and $39.6 million,respectively.  Excluding the effects ofhedging activities and interest capitalized, during the year ended December 31,2004, we expect interest payments on our fixed rate Senior Notes to beapproximately $78.0 million.  We expectto pay our interest payments with cash flows from operating activities.

 

*InvestingActivities*

 

Cash flows used ininvesting activities totaled $82.1 million for the six months ended June 30,2004, and were comprised of $60.4 million of capital expenditures, $1.5 millionof cash 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 acquired during the six monthsended June 30, 2004.  Cash flows used ininvesting activities totaled $63.9 million for the six months ended June 30,2003, and were comprised of $45.9 million of capital expenditures, $20.0million for TE Products’ acquisition of an additional 16.7% interest inCentennial and $1.0 million of cash contributions for TE Products’ ownershipinterest in Centennial, partially offset by $3.0 million in net cash proceedsfrom the Rancho Pipeline transactions.

 

45

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*FinancingActivities*

 

Cash flows used infinancing activities totaled $65.7 million for the six months ended June 30,2004, and were comprised of $115.7 million of distributions paid tounitholders, partially offset by $50.0 million in borrowings, net of repaymentsfrom our revolving credit facility. Cash flows used in financing activities totaled $68.8 million for thesix months ended June 30, 2003, and were comprised of $504.0 million ofrepayments on our revolving credit facility; $113.8 million to repurchase andretire the outstanding Class B Units and $96.0 million of distributions paid tounitholders.  These uses of cash for thesix months ended June 30, 2003, were partially offset by $335.0 million inproceeds from our revolving credit facility; $198.6 million from the issuancein January 2003 of our 6.125% Senior Notes due 2013, partially offset by debtissuance costs of $3.1 million; and $114.5 million from the issuance of 3.9million Units in April 2003.

 

**Centennial entered into creditfacilities totaling $150.0 million and, as of June 30, 2004, $150.0 million wasoutstanding under those credit facilities. The proceeds were used to fund construction and conversion costs ofCentennial’s pipeline system.  TEProducts and Marathon Ashland Petroleum LLC (“Marathon”) have each guaranteedone half of Centennial’s debt, up to a maximum of $75.0 million each.**

 

***Universal Shelf***

 

**We have filed with the Securitiesand Exchange Commission a universal shelf registration statement that, subjectto effectiveness, agreement on terms at the time of use and appropriatesupplementation, allows us to issue, in one or more offerings, up to anaggregate of $2.0 billion of equity securities, debt securities or acombination thereof.  At June 30, 2004,we have $2.0 billion remaining under this shelf registration.**

 

*Credit Facilities and Interest Rate Swap Agreements*

 

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

 

On June 27, 2003, we entered into a $550.0 million revolving creditfacility with a three year term, including the issuance of letters of credit ofup to $20.0 million (“Revolving Credit Facility”).  The interest rate is based, at our option, on either the lender’sbase rate plus a spread, or LIBOR plus a spread in effect at the time of theborrowings.  The credit agreement forthe Revolving Credit Facility contains certain restrictive financial covenantratios.  We borrowed $263.0 millionunder the Revolving Credit Facility and repaid the outstanding balance of theThree Year Facility.  On June 30, 2004,$260.0 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 2.2%. At June 30, 2004, we were in compliance with the covenants in thiscredit agreement.

 

On January 30, 2003, we completed the issuance of $200.0 millionprincipal amount of 6.125% Senior Notes due 2013.  The 6.125% Senior Notes were issued at a discount of $1.4 millionand are being accreted to their face value over the term of the notes.  We used $182.0 million of the proceeds fromthe offering to reduce the outstanding principal on the Three Year Facility to$250.0 million.  The balance of the net proceedsreceived was used for general partnership purposes.  The Senior Notes may be redeemed at any time at our option withthe payment of accrued interest and a make-whole premium determined bydiscounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing our 6.125% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale and leaseback transactions.

 

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However, theindenture does not limit our ability to incur additional indebtedness.  As of June 30, 2004, we were in compliancewith the covenants of these Senior Notes.

 

We have entered into interest rate swap agreements to hedge ourexposure to cash flows and fair value changes. These agreements are more fully described in Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk.

 

The following table summarizes our credit facilities as of June 30,2004 (in millions):

 
|                      |   | **As of June  30, 2004**   |    |
|---------------------------|--------|----------------------------|---------|
| **Description:**          |   | **Outstanding  Principal** |    | **Available  Borrowing  Capacity** |   | **Maturity  Date** |   |
| Revolving Credit Facility |   | $                          | 260.0   |   | $ | 290.0 |   | June 2006 |   |
| 6.45% Senior Notes (1)    |   | 180.0                      |    | — |   | January 2008 |   |
| 7.625% Senior Notes (1)   |   | 500.0                      |    | — |   | February 2012 |   |
| 6.125% Senior Notes (1)   |   | 200.0                      |    | — |   | February 2013 |   |
| 7.51% Senior Notes (1)    |   | 210.0                      |    | — |   | January 2028 |   |
| Total                     |   | $                          | 1,350.0 |   | $ | 290.0 |   |   |   |
|                           |        |                            |         |  |  |  |  |  |  |  |

 

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(1)          Our TE Products subsidiary entered into aninterest rate swap agreement to hedge its exposure to changes in the fair valueof its 7.51% Senior Notes due 2028.  AtJune 30, 2004, the 7.51% Senior Notes include an adjustment to decrease thefair value of the debt by $2.9 million related to this interest rate swapagreement.  We also entered intointerest rate swap agreements to hedge our exposure to changes in the fairvalue of our 7.625% Senior Notes due 2012. At June 30, 2004, the 7.625% Senior Notes include a deferred gain, netof amortization, from previous interest rate swap terminations of $38.6million.  At June 30, 2004, our 6.45%Senior Notes, our 7.625% Senior Notes and our 6.125% Senior Notes include $3.0million of unamortized debt discounts. The fair value adjustments, the deferred gain adjustment and theunamortized debt discounts are excluded from this table.

 

### ***Distributions and Issuance of Additional Limited PartnerUnits***

 

We paid cashdistributions of $115.7 million ($1.3125 per Unit) and $96.0 million ($1.225per Unit) during the six months ended June 30, 2004 and 2003,respectively.  Additionally, we declareda cash distribution of $0.6625 per Unit for the quarter ended June 30, 2004. Wewill pay the distribution of $58.7 million on August 6, 2004, to unitholders ofrecord on July 30, 2004.

 

On April 2, 2003, we sold in an underwritten public offering 3.9million Units at $30.35 per Unit.  Theproceeds from the offering, net of underwriting discount, totaled approximately$114.5 million, of which approximately $113.8 million was used to repurchaseand retire all of the 3.9 million previously outstanding Class B Units held byDuke Energy Transport and Trading Company, LLC.  We received approximately $0.7 million in proceeds from the offeringin excess of the amount needed to repurchase and retire the Class B Units.

 

On August 7, 2003, we sold in an underwritten public offering 5.0million Units at $34.68 per Unit.  Theproceeds from the offering, net of underwriting discount, totaled approximately$166.0 million.  On August 19, 2003,162,900 Units were sold upon exercise of the underwriters’ over-allotmentoption granted in connection with the offering on August 7, 2003.  Proceeds from the over-allotment sale, netof underwriting discount, totaled $5.4 million.  Approximately $53.0 million of the proceeds was used to repayindebtedness under our revolving credit facility and $21.0 million was used tofund the acquisition of the Genesis assets (see Note 4.  Acquisitions and Dispositions).  The remaining amount was used primarily tofund revenue generating and system upgrade capital expenditures and for generalpartnership purposes.

 

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*GeneralPartner Interest*

 

As of June 30, 2004, and December 31, 2003, we had a deficit balance of$17.7 million and $7.2 million, respectively, in our General Partner’s equityaccount. This negative balance does not represent an asset to us and does notrepresent an obligation of the General Partner to contribute cash or otherproperty to us. The General Partner’s equity account generally consists of itscumulative share of our net income less cash distributions made to the GeneralPartner plus capital contributions that it has made to us.  For the six months ended June 30, 2004, theGeneral Partner was allocated $22.6 million (representing 28.85%) of our netincome and received $33.1 million in cash distributions.

 

Capital Accounts, as defined under our Partnership Agreement, aremaintained for our General Partner and our limited partners.  The Capital Account provisions of ourPartnership Agreement incorporate principles established for U.S. federalincome tax purposes and are not comparable to the equity accounts reflectedunder accounting principles generally accepted in the United States in ourfinancial statements.  Under ourPartnership Agreement, the General Partner is only 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.  AtJune 30, 2004, and December 31, 2003, the General Partner’s Capital Accountbalance substantially exceeded this requirement.

 

Net income is allocated between the General Partner and the limitedpartners in the same proportion as aggregate cash distributions made to theGeneral Partner and the limited partners during the period.  This is generally consistent with the mannerof allocating net income under our Partnership Agreement.  Net income determined under our PartnershipAgreement, however, incorporates principles established for U.S. federal incometax purposes and is not comparable to net income reflected under accountingprinciples generally accepted in the United States in our financial statements.

 

Cash distributions that we make during a period may exceed our netincome for the period.  We makequarterly cash distributions of all of our Available Cash, generally defined asconsolidated cash receipts less consolidated cash disbursements and cashreserves established by the General Partner in its sole discretion.  Cash distributions in excess of net incomeallocations and capital contributions during the year ended December 31, 2003,and the six months ended June 30, 2004, resulted in a deficit in the GeneralPartner’s equity account at June 30, 2004, and December 31, 2003.  Future cash distributions that exceed netincome will result in an increase in the deficit balance in the GeneralPartner’s equity account.

 

According to the Partnership Agreement, in the event of ourdissolution, after satisfying our liabilities, our remaining assets would bedivided among our limited partners and the General Partner generally in thesame proportion as Available Cash but calculated on a cumulative basis over thelife of the Partnership. After all allocations are made between the partners,if a deficit balance still remains in the General Partner’s equity account, theGeneral Partner would not be required to make whole any such deficit.

 

*FutureCapital Needs and Commitments*

 

We estimate that capitalexpenditures, excluding acquisitions, for 2004 will be approximately $162.7million (which includes $4.0 million of capitalized interest).  We expect to spend approximately $124.2million for revenue generating projects and facility improvements.  Capital spending on revenue generatingprojects and facility improvements will include approximately $54.4 million forthe expansion of our Downstream Segment facilities including pipelines extendingfrom Seymour to Indianapolis, Indiana, further expansions of our Northeastpipeline system and construction of a new truck loading terminal in BossierCity, Louisiana.  We expect to spend$22.2 million to expand our Upstream Segment pipelines and facilities in SouthTexas and Oklahoma and approximately $47.6 million to expand our MidstreamSegment assets.  We expect to spendapproximately $34.5 million of capital costs to sustain existing operations,including life-cycle replacements for equipment at various facilities andpipeline and tank replacements among all of our business segments.  We continually review and evaluate potentialcapital improvements and expansions that would be complementary to our presentbusiness segments. These expenditures

 

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can vary greatlydepending on the magnitude of our transactions.  We may finance capital expenditures through internally generatedfunds, debt or the issuance of additional equity.

 

Our debt repaymentobligations consist of payments for principal and interest on (i) outstandingprincipal amounts under the Revolving Credit Facility due in June 2006 ($260.0million outstanding at June 30, 2004), (ii) the TE Products $180.0 million6.45% Senior Notes due January 15, 2008, (iii) our $500.0 million 7.625% SeniorNotes due February 15, 2012, (iv) our $200.0 million 6.125% Senior Notes dueFebruary 1, 2013, and (v) the TE Products $210.0 million 7.51% Senior Notes dueJanuary 15, 2028.

 

TE Products iscontingently liable as guarantor for the lesser of one half or $75.0 millionprincipal amount (plus interest) of Centennial’s borrowings.  In January 2003, TE Products entered into apipeline capacity lease agreement with Centennial for a period of five yearsthat contains a minimum throughput requirement.  For the year ended December 31, 2003, and for the six monthsended June 30, 2004, TE Products exceeded the minimum throughput requirementson the lease agreement.

 

During the six monthsended June 30, 2004, TE Products contributed $1.5 million to Centennial tocover operating needs and capital expenditures.  During the six months ended June 30, 2004, TE Productscontributed $17.2 million to MB Storage, of which $16.5 million was used forits acquisition of storage assets in April 2004.  TE Products may be required to contribute cash to Centennialduring the remainder of 2004, to cover capital expenditures, acquisitions orother operating needs and to MB Storage to cover significant capitalexpenditures or additional acquisitions.

 

*Off-BalanceSheet 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.

 

*ContractualObligations*

 

The following tablesummarizes our debt repayment obligations and material contractual commitmentsas of June 30, 2004 (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           |   | $                                               | 260.0   |   | $ | — |   | $ | 260.0 |   | $ | — |   | $ | — |   |
| 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                       |   | 1,350.0                                         |    | — |   | 260.0 |   | 180.0 |   | 910.0 |   |
|                                |   |                                            |    |   |   |   |   |   |   |   |   |
| Operating leases                    |   | 65.4                                            |    | 17.3 |   | 27.3 |   | 10.4 |   | 10.4 |   |
|                                |   |                                            |    |   |   |   |   |   |   |   |   |
| Total                               |   | $                                               | 1,415.4 |   | $ | 17.3 |   | $ | 287.3 |   | $ | 190.4 |   | $ | 920.4 |   |

 

----

(1)          Obligationsof TE Products.

 

(2)          Our TE Products subsidiary entered into an interest rate swap agreementto hedge its exposure to changes in the fair value of its 7.51% Senior Notesdue 2028.  At June 30, 2004, the 7.51%Senior Notes include an adjustment to decrease the fair value of the debt by$2.9 million related to this interest rate swap agreement.  We also entered into interest rate swap

 

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agreements to hedge our exposure to changes inthe fair value of our 7.625% Senior Notes due 2012.  At June 30, 2004, the 7.625% Senior Notes include a deferredgain, net of amortization, from previous interest rate swap terminations of$38.6 million.  At June 30, 2004, our6.45% Senior Notes, our 7.625% Senior Notes and our 6.125% Senior Notes include$3.0 million of unamortized debt discounts. The fair value adjustments, the deferred gain adjustments and theunamortized debt discounts are excluded from this table.

 

We expect to repay thelong-term, senior unsecured obligations and bank debt through the issuance ofadditional long-term senior unsecured debt at the time the 2008, 2012, 2013 and2028 debt matures, issuance of additional equity, proceeds from dispositions ofassets, cash flow from operations or any combination of the above items.

 

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

 

Historically, we havefunded our capital commitments from operating cash flow and borrowings under bankcredit facilities or bridge loans.  Werepaid these loans in part by the issuance of long term debt in capital marketsand the public offering of Units.  Weexpect future capital needs would be similarly funded to the extent nototherwise available from cash flow from operations.

 

As of June 30, 2004, wehad $290.0 million in available borrowing capacity under the Revolving CreditFacility.  We expect that cash flowsfrom operating activities will be adequate to fund cash distributions and capitaladditions necessary to sustain existing operations.  However, future expansionary capital projects and acquisitionsmay require funding through proceeds from the sale of additional debt or equityofferings.

 

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

 

**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 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 that other developments, such asincreasingly strict environmental laws and regulations and enforcement policiesthereunder, and claims for damages to property or persons resulting from ouroperations, could result in substantial costs and liabilities to us.  We believe that changes in environmentallaws and regulations will not have a material adverse effect on our financialposition, results of operations or cash flows in the near term.

 

In 1994, the LouisianaDepartment of Environmental Quality (“LDEQ”) issued a compliance order forenvironmental 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, 2004, we have an accrued liability of $0.3 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 financial position,results of operations or cash flows.

 

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On March 17,2003, we experienced a release of 511 barrels of jet fuel from a storage tankat our Blue Island terminal located in Cook County, Illinois.  As a result of the release, we have enteredinto an Agreed Order with the State of Illinois.  We are complying with the Agreed Order and are in the process ofnegotiating a final settlement with the State of Illinois.  We do not expect that compliance with theAgreed Order or the settlement will have a future material adverse effect onour financial position, results of operations or cash flows.

 

At June 30, 2004, we havean accrued liability of $7.9 million, related to various TCTM and TE Productssites requiring environmental remediation activities.  We do not expect that the completion of remediation programsassociated with TCTM and TE Products activities will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

On February 6, 2004, alawsuit styled *San Juan Citizens Alliance et al. v. Norton et al*., wasfiled against the United States Department of Interior and the Bureau of LandManagement (“BLM”) in the U.S. District Court, District of Columbia,challenging a recent decision by the BLM. In that decision, the BLM adopted a Resource Management Plan thatauthorized the development of additional gas wells on public lands innorthwestern New Mexico.  A substantialportion of the development activity in the area that is the subject of the suitinvolves the infill drilling in the Basin-Fruitland Coal Gas Pool, which coversmost of the San Juan Basin.  The ValVerde system, in our Midstream segment, gathers CBM from the Fruitland CoalFormation in the San Juan Basin in New Mexico and Colorado.  We believe the BLM followed the requirementsof the law and reached a balanced decision in adopting the Resource ManagementPlan.  However, an adverse decisioncould impact infill drilling activities in the San Juan Basin.

 

We regularly review ourlong-lived assets for impairment in accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  At June 30, 2004, we have identified certainassets that we are assessing for recoverability resulting from recentoperational changes.  We are continuingto monitor these circumstances; however, we do not believe that the resolutionof the matter will have a material effect on our financial condition, resultsof operations or cash flows.

 

*Recent AccountingPronouncements*

* *

**See discussion of new accounting pronouncements in Note1.  Organization and Basis ofPresentation - New Accounting Pronouncements in the accompanying consolidatedfinancial statements.**

** **

**Forward-Looking Statements**

 

The matters discussed in this Report include “forward-looking statements”within the meaning of various provisions of the Securities Act of 1933 and theSecurities Exchange Act of 1934.  Allstatements, other than statements of historical facts, included in thisdocument that address activities, events or developments that we expect oranticipate will or may occur in the future, including such things as estimatedfuture capital expenditures (including the amount and nature thereof), businessstrategy and measures to implement strategy, competitive strengths, goals, expansionand growth of our business and operations, plans, references to future success,references to intentions as to future matters and other such matters areforward-looking statements.  Thesestatements are based on certain assumptions and analyses made by us in light ofour experience and our perception of historical trends, current conditions andexpected future developments as well as other factors we believe areappropriate under the circumstances. However, whether actual results and developments will conform with ourexpectations and predictions is subject to a number of risks and uncertainties,including general economic, market or business conditions, the opportunities(or lack thereof) that may be presented to and pursued by us, competitive actionsby other pipeline companies, changes in laws or regulations and other factors,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, 2003, and otherfilings we have made with the Securities and Exchange Commission.

 

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Our Corporate Governance Guidelines are available on our website atwww.teppco.com.

 

**Item 3**.Quantitative and Qualitative Disclosures About Market Risk

 

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

 

At June 30, 2004, we had$260.0 million outstanding under our variable interest rate revolving creditagreement.  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 and is adjusted monthly,bimonthly, quarterly or semiannually.  Utilizingthe balances of our variable interest rate debt outstanding at June 30, 2004,and assuming market interest rates increase 100 basis points, the potentialannual increase in interest expense would be $2.6 million.

 

We have utilized andexpect to continue to utilize interest rate swap agreements to hedge a portionof 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 of borrowing.  The interest rate swap related to our cashflow risk is intended to reduce our exposure to increases in the benchmarkinterest rates underlying our variable rate revolving credit facility.  The interest rate swaps related to our fairvalue risks are intended to reduce our exposure to changes in the fair value ofthe fixed rate Senior Notes.  Theinterest rate swap agreements involve the periodic exchange of payments withoutthe exchange of the notional amount upon which the payments are based.  The related amount payable to or receivablefrom counterparties is included as an adjustment to accrued interest.

 

At June 30, 2004, TEProducts had outstanding $180.0 million principal amount of 6.45% Senior Notesdue 2008 and $210.0 million principal amount of 7.51% Senior Notes due 2028(collectively, the “TE Products Senior Notes”).  At June 30, 2004, the estimated fair value of the TE ProductsSenior Notes was approximately $397.2 million. At June 30, 2004, we had outstanding $500.0 million principal amount of 7.625%Senior Notes due 2012 and $200.0 million principal amount of 6.125% SeniorNotes due 2013.  At June 30, 2004, theestimated fair value of the $500.0 million 7.625% Senior Notes and the $200.0million 6.125% Senior Notes was approximately $542.7 million and $197.4million, respectively.

 

On October 4, 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. Wedesignated this swap agreement as a fair value hedge.  The swap agreement has a notional amount of $210.0 million andmatures in January 2028 to match the principal and maturity of the TE ProductsSenior Notes.  Under the swap agreement,TE Products pays a floating rate of interest based on a three-month U.S. DollarLIBOR rate, plus a spread, and receives a fixed rate of interest of 7.51%.During the six months ended June 30, 2004 and 2003, we recognized reductions ininterest expense of $5.1 million and $4.9 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap.  During the quarterended June 30, 2004, 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 loss of approximately $2.9 million at June 30, 2004,and a gain of approximately $2.3 million at December 31, 2003.  Utilizing the balance of the 7.51% TEProducts Senior Notes outstanding at June 30, 2004, and including the effectsof hedging activities, assuming market interest rates increase 100 basispoints, the potential annual increase in interest expense is $2.1 million.

 

We entered into aninterest rate swap agreement to hedge our exposure to increases in thebenchmark interest rate underlying our variable rate revolving credit facility.This interest rate swap matured on April 6, 2004.  We designated this swap agreement, which hedged exposure tovariability in expected future cash flows attributed to changes in interestrates, as a cash flow hedge. The swap agreement was based on a notional amountof $250.0 million.  Under the swapagreement, we paid a fixed rate of interest of 6.955% and received a floatingrate based on a three-month U.S. Dollar LIBOR rate.  Because this swap was designated as a cash flow hedge, thechanges in fair 

 

52

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value, to the extent the swap was effective, wererecognized in other comprehensive income until the hedged interest costs wererecognized in earnings.  On June 27,2003, we repaid the amounts outstanding under our revolving credit facilitywith borrowings under a new three year revolving credit facility and canceledthe old facility (see Note 7. Debt).  We redesignated thisinterest rate swap as a hedge of our exposure to increases in the benchmarkinterest rate underlying the new variable rate revolving credit facility.  During the six months ended June 30, 2004and 2003, we recognized increases in interest expense of $2.9 million and $7.0million, respectively, related to the difference between the fixed rate and thefloating rate of interest on the interest rate swap.

 

During 2003, we determined that we would repay a portion of the amountoutstanding under the revolving credit facility with proceeds from our Unitoffering in August 2003 (see Note 8. Partners’ Capital and Distributions) resulting in a reduction ofprobable future interest payments under the credit facility.  We reduced the outstanding balance of therevolving credit facility at December 31, 2003, to $210.0 million.  During the year ended December 31, 2003, werecognized a loss of $1.0 million for the portion of the discontinued hedge.  The total fair value of the interest rateswap was a loss of approximately $3.9 million at December 31, 2003.  The remaining $2.9 million of othercomprehensive income was transferred to earnings during the period from January1, 2004, through the maturity of the interest rate swap on April 6, 2004.

 

On February 20, 2002, we entered into interest rate swap agreements,designated as fair value hedges, to hedge our exposure to changes in the fairvalue of our fixed rate 7.625% Senior Notes due 2012.  The swap agreements had a combined notional amount of $500.0million and matured in 2012 to match the principal and maturity of the SeniorNotes.  Under the swap agreements, wepaid a floating rate of interest based on a U.S. Dollar LIBOR rate, plus aspread, and received a fixed rate of interest of 7.625%.  On July 16, 2002, the swap agreements wereterminated resulting in a gain of approximately $18.0 million.  Concurrent with the swap terminations, weentered into new interest rate swap agreements, with identical terms as theprevious swap agreements; however, the floating rate of interest was based upona spread of an additional 50 basis points. In December 2002, the swap agreements entered into on July 16, 2002,were terminated, resulting in a gain of approximately $26.9 million.  The gains realized from the July 2002 andDecember 2002 swap terminations have been deferred as adjustments to thecarrying value of the Senior Notes and are being amortized using the effectiveinterest method as reductions to future interest expense over the remaining termof the Senior Notes.  At June 30, 2004,the unamortized balance of the deferred gains was $38.6 million.  In the event of early extinguishment of theSenior Notes, any remaining unamortized gains would be recognized in theconsolidated statement of income at the time of extinguishment.

 

**Item4.  Controls and Procedures**

** **

The principal executive officer and principal financial officer of ourGeneral Partner, after evaluating the effectiveness of our disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as ofJune 30, 2004, have concluded that, as of such date, our disclosure controlsand procedures are adequate and effective to ensure that material informationrelating to us and our consolidated subsidiaries would be made known to them byothers within those entities.

 

During the second quarter of 2004, there have been no changes in ourinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, those internal controls subsequent tothe date of the evaluation.  As aresult, no corrective actions were required or undertaken.

 

**PART II.  OTHERINFORMATION**

 

**Item 1.  LegalProceedings**

 

We have been, in the ordinary course of business, a defendant invarious lawsuits and a party to various other legal proceedings, some of whichare covered in whole or in part by insurance. We believe that the outcome of these lawsuits and other proceedings willnot individually or in the aggregate have a material adverse effect on our 

 

53

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consolidated financial position, results of operations or cashflows.  See discussion of legalproceedings in Note 11.  Commitments andContingencies in the accompanying consolidated financial statements.

 

**Item 6.  Exhibits andReports on Form 8-K.**

 

(a)           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).                                                                                                                                                                                                                                                                                                                                                                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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.                                                                                                                                                                                                    |

 

54

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|   |   |  (Commission File No. 1-10403) for the year  ended December 31, 2002 and incorporated herein by reference).                                                                                                                                                                                                                                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1+  |   | Duke Energy  Corporation Executive Savings Plan (Filed as Exhibit 10.7 to Form 10-K of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended  December 31, 1999 and incorporated herein by reference).                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2+  |   | Duke Energy  Corporation Executive Cash Balance Plan (Filed as Exhibit 10.8 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended  December 31, 1999 and incorporated herein by reference).                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3+  |   | Duke Energy  Corporation Retirement Benefit Equalization Plan (Filed as Exhibit 10.9 to  Form 10-K for TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  year ended December 31, 1999 and incorporated herein by reference).                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4+  |   | Texas Eastern  Products Pipeline Company 1994 Long Term Incentive Plan executed on March 8,  1994 (Filed as Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the quarter ended March 31, 1994 and incorporated  herein by reference).                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5+  |   | Texas Eastern  Products Pipeline Company 1994 Long Term Incentive Plan, Amendment 1,  effective January 16, 1995 (Filed as Exhibit 10.12 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended June 30,  1999 and incorporated herein by reference).                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6+  |   | Form of  Employment Agreement between the Company and Thomas R. Harper, Charles H.  Leonard, James C. Ruth, John N. Goodpasture, Leonard W. Mallett, Stephen W.  Russell, David E. Owen, and Barbara A. Carroll (Filed as Exhibit 10.20 to  Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 1998 and incorporated herein by reference).                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7   |   | Services and  Transportation Agreement between TE Products Pipeline Company, Limited  Partnership and Fina Oil and Chemical Company, BASF Corporation and BASF Fina  Petrochemical Limited Partnership, dated February 9, 1999 (Filed as Exhibit  10.22 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for  the quarter ended March 31, 1999 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8   |   | Call Option  Agreement, dated February 9, 1999 (Filed as Exhibit 10.23 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31,  1999 and incorporated herein by reference).                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9+  |   | Form of  Employment and Non-Compete Agreement between the Company and J. Michael  Cockrell effective January 1, 1999 (Filed as Exhibit 10.29 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended  September 30, 1999 and incorporated herein by reference).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10+ |   | Texas Eastern  Products Pipeline Company Non-employee Directors Unit Accumulation Plan,  effective April 1, 1999 (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended September  30, 1999 and incorporated herein by reference).                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11+ |   | Texas Eastern  Products Pipeline Company Non-employee Directors Deferred Compensation Plan,  effective November 1, 1999 (Filed as Exhibit 10.31 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended September  30, 1999 and incorporated herein by reference).                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.12+ |   | Texas Eastern  Products Pipeline Company Phantom Unit Retention Plan, effective August 25,  1999 (Filed as Exhibit 10.32 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended September 30, 1999 and  incorporated herein by reference).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.13+ |   | Texas Eastern  Products Pipeline Company, LLC 2000 Long Term Incentive Plan, Amendment and  Restatement, effective January 1, 2000 (Filed as Exhibit 10.28 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended  December 31, 2000 and incorporated herein by reference).                                                                                             |

 

55

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| 10.14+ |   | TEPPCO  Supplemental Benefit Plan, effective April 1, 2000 (Filed as Exhibit 10.29 to  Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2000 and incorporated herein by reference).                                                                                                                                                                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15+ |   | Employment  Agreement with Barry R. Pearl (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31,  2001 and incorporated herein by reference).                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16  |   | Amended and  Restated Credit Agreement among TEPPCO Partners, L.P. as Borrower, SunTrust  Bank as Administrative Agent and LC Issuing Bank, and Certain Lenders, dated  as of April 6, 2001 ($500,000,000 Revolving Facility) (Filed as Exhibit 10.31  to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended March 31, 2001 and incorporated herein by reference).                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17  |   | Credit Agreement  among TEPPCO Partners, L.P. as Borrower, SunTrust Bank as Administrative  Agent, and Certain Lenders, dated as of April 6, 2001 ($200,000,000 Revolving  Facility) (Filed as Exhibit 10.32 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended March 31, 2001 and  incorporated herein by reference).                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.18  |   | Amendment 1,  dated as of September 28, 2001, to the Amended and Restated Credit Agreement  among TEPPCO Partners, L.P. as Borrower, SunTrust Bank as Administrative  Agent and LC Issuing Bank, and Certain Lenders, dated as of April 6, 2001  ($500,000,000 Revolving Facility) (Filed as Exhibit 10.33 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).                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.19  |   | Amendment 1,  dated as of September 28, 2001, to the Credit Agreement among TEPPCO  Partners, L.P. as Borrower, SunTrust Bank as Administrative Agent, and  Certain Lenders, dated as of April 6, 2001 ($200,000,000 Revolving Facility)  (Filed as Exhibit 10.34 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).                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.20  |   | Amendment and  Restatement, dated as of November 13, 2001, to the Credit Agreement among  TEPPCO Partners, L.P. as Borrower, SunTrust Bank as Administrative Agent, and  Certain Lenders, dated as of April 6, 2001 ($200,000,000 Revolving Facility)  (Filed as Exhibit 10.35 to Form 10-K of TEPPCO Partners, L.P (Commission File  No. 1-10403) for the year ended December 31, 2001 and incorporated herein by  reference).                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21  |   | Second Amendment  and Restatement, dated as of November 13, 2001, to the Amended and Restated  Credit Agreement amount TEPPCO Partners, L.P. as Borrower, SunTrust Bank as  Administrative Agent and LC Issuing Bank, and Certain Lenders, dated as of  April 6, 2001 ($500,000,000 Revolving Facility) (Filed as Exhibit 10.36 to  Form 10-K of TEPPCO Partners, L.P (Commission File No. 1-10403) for the year  ended December 31, 2001 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.22  |   | Second Amended  and Restated Agreement of Limited Partnership of TE Products Pipeline  Company, Limited Partnership, dated September 21, 2001 (Filed as Exhibit 3.8  to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended September 30, 2001 and incorporated herein by reference).                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.23  |   | Amended and  Restated Agreement of Limited Partnership of TCTM, L.P., dated September 21,  2001 (Filed as Exhibit 3.9 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).                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.24  |   | Contribution,  Assignment and Amendment Agreement among TEPPCO Partners, L.P., TE Products  Pipeline Company, Limited Partnership, TCTM, L.P., Texas Eastern Products  Pipeline Company, LLC, and TEPPCO GP, Inc., dated July 26, 2001 (Filed as  Exhibit 3.6 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the quarter ended June 30, 2001 and incorporated herein by  reference).                                                                   |

 

56

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| 10.25  |   | Certificate of  Formation of TEPPCO Colorado, LLC (Filed as Exhibit 3.2 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended  March 31, 1998 and incorporated herein by reference).                                                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.26  |   | Agreement of  Limited Partnership of TEPPCO Midstream Companies, L.P., dated September 24,  2001 (Filed as Exhibit 3.10 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).                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.27  |   | Agreement of  Partnership of Jonah Gas Gathering Company dated June 20, 1996 as amended by  that certain Assignment of Partnership Interests dated September 28, 2001  (Filed as Exhibit 10.40 to Form 10-K of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the year ended December 31, 2001 and incorporated  herein by reference).                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.28  |   | Unanimous  Written Consent of the Board of Directors of TEPPCO GP, Inc. dated February  13, 2002 (Filed as Exhibit 10.41 to Form 10-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the year ended December 31, 2001 and  incorporated herein by reference).                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.29  |   | Credit Agreement  among TEPPCO Partners, L.P. as Borrower, SunTrust Bank as Administrative  Agent and Certain Lenders, as Lenders dated as of March 28, 2002  ($200,000,000 Revolving Credit Facility) (Filed as Exhibit 10.44 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the three months  ended March 31, 2002 and incorporated herein by reference).                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.30  |   | Amended and  Restated Credit Agreement among TEPPCO Partners, L.P. as Borrower, SunTrust  Bank, as Administrative Agent and LC Issuing Bank and Certain Lenders, as  Lenders dated as of March 28, 2002 ($500,000,000 Revolving Facility) (Filed  as Exhibit 10.45 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the three months ended March 31, 2002 and incorporated herein by  reference).    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.31  |   | Purchase and  Sale Agreement between Burlington Resources Gathering Inc. as Seller and  TEPPCO Partners, L.P., as Buyer, dated May 24, 2002 (Filed as Exhibit 99.1 to  Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as of  July 2, 2002 and incorporated herein by reference).                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.32  |   | Credit Agreement  among TEPPCO Partners, L.P., as Borrower, SunTrust Bank, as Administrative  Agent and Certain Lenders, as Lenders dated as of June 27, 2002 ($200,000,000  Term Facility) (Filed as Exhibit 99.2 to Form 8-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) dated as of July 2, 2002 and incorporated  herein by reference).                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.33  |   | Amendment, dated  as of June 27, 2002 to the Amended and Restated Credit Agreement among TEPPCO  Partners, L.P., as Borrower, SunTrust Bank, as Administrative Agent, and  Certain Lenders, dated as of March 28, 2002 ($500,000,000 Revolving Credit  Facility) (Filed as Exhibit 99.3 to Form 8-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) dated as of July 2, 2002 and incorporated  herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.34  |   | Amendment 1,  dated as of June 27, 2002 to the Credit Agreement among TEPPCO Partners,  L.P., as Borrower, SunTrust Bank, as Administrative Agent and Certain  Lenders, dated as of March 28, 2002 ($200,000,000 Revolving Credit Facility)  (Filed as Exhibit 99.4 to Form 8-K of TEPPCO Partners, L.P. (Commission File  No. 1-10403) dated as of July 2, 2002 and incorporated herein by reference).                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.35  |   | Agreement of  Limited Partnership of Val Verde Gas Gathering Company, L.P., dated May 29,  2002 (Filed as Exhibit 10.48 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended June 30, 2002 and  incorporated herein by reference).                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.36+ |   | Texas Eastern  Products Pipeline Company, LLC 2002 Phantom Unit Retention Plan, effective  June 1, 2002 (Filed as Exhibit 10.43 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).                                                                                                                                             |

 

57

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| 10.37+ |   | Amended and  Restated TEPPCO Supplemental Benefit Plan, effective November 1, 2002 (Filed  as Exhibit 10.44 to Form 10-K of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the year ended December 31, 2002 and incorporated herein by  reference).                                                                                                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.38+ |   | Texas Eastern  Products Pipeline Company, LLC 2000 Long Term Incentive Plan, Second  Amendment and Restatement, effective January 1, 2003 (Filed as Exhibit 10.45  to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  year ended December 31, 2002 and incorporated herein by reference).                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.39+ |   | Amended and  Restated Texas Eastern Products Pipeline Company, LLC Management Incentive  Compensation Plan, effective January 1, 2003 (Filed as Exhibit 10.46 to Form  10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2002 and incorporated herein by reference).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.40+ |   | Amended and  Restated TEPPCO Retirement Cash Balance Plan, effective January 1, 2002  (Filed as Exhibit 10.47 to Form 10-K of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the year ended December 31, 2002 and incorporated  herein by reference).                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.41  |   | Formation  Agreement between Panhandle Eastern Pipe Line Company and Marathon Ashland  Petroleum LLC and TE Products Pipeline Company, Limited Partnership, dated as  of August 10, 2000 (Filed as Exhibit 10.48 to Form 10-K of TEPPCO Partners,  L.P. (Commission File No. 1-10403) for the year ended December 31, 2002 and  incorporated herein by reference).                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.42  |   | Amended and  Restated Limited Liability Company Agreement of Centennial Pipeline LLC dated  as of August 10, 2000 (Filed as Exhibit 10.49 to Form 10-K of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the year ended December 31,  2002 and incorporated herein by reference).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.43  |   | Guaranty  Agreement, dated as of September 27, 2002, between TE Products Pipeline  Company, Limited Partnership and Marathon Ashland Petroleum LLC for Note  Agreements of Centennial Pipeline LLC (Filed as Exhibit 10.50 to Form 10-K of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended  December 31, 2002 and incorporated herein by reference).                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.44  |   | LLC Membership  Interest Purchase Agreement By and Between CMS Panhandle Holdings, LLC, As  Seller and Marathon Ashland Petroleum LLC and TE Products Pipeline Company,  Limited Partnership, Severally as Buyers, dated February 10, 2003 (Filed as  Exhibit 10.51 to Form 10-K of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the year ended December 31, 2002 and incorporated herein by  reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.45  |   | Joint  Development Agreement between TE Products Pipeline Company, Limited  Partnership and Louis Dreyfus Plastics Corporation dated February 10, 2000  (Filed as Exhibit 10.52 to Form 10-Q of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the quarter ended March 31, 2003 and incorporated  herein by reference).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.46  |   | Credit Agreement  among TEPPCO Partners, L.P. as Borrower, SunTrust Bank as Administrative  Agent and LC Issuing Bank and The Lenders Party Hereto, as Lenders, dated as  of June 27, 2003 ($550,000,000 Revolving Facility) (Filed as Exhibit 10.52 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended June 30, 2003 and incorporated herein by reference).                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.47  |   | Agreement of  Limited Partnership of Mont Belvieu Storage Partners, L.P. dated effective  January 21, 2003 (Filed as Exhibit 10.53 to Form 10-Q of TEPPCO Partners,  L.P. (Commission File No. 1-10403) for the quarter ended September 30, 2003  and incorporated herein by reference).                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.48  |   | Letter of  Agreement Clarifying Rights and Obligations of the Parties Under the Mont  Belvieu Storage Partners, L.P., Partnership Agreement and the Mont Belvieu  Venture, LLC, LLC Agreement, dated October 13, 2003 (Filed as Exhibit 10.54  to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended September 30, 2003 and incorporated herein by reference).                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 12.1*  |   | Statement of  Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                      |

 

58

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| 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 Item 601(b)-(32) of Regulation S-K.

+  A management contract orcompensation plan or arrangement.

 

(b)                                       Reportson Form 8-K filed with or furnished to the Securities and Exchange Commissionduring the quarter ended June 30, 2004:

 

A current report on Form 8-K was furnished on April 27, 2004, reportingfirst quarter financial results.

 

A current report on Form 8-K was filed on June 7, 2004, including as anexhibit the audited balance sheet of Texas Eastern Products Pipeline Company,LLC, as of December 31, 2003.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned 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/ CHARLES H.  LEONARD        |   |
|   | Charles H. Leonard,                       |                           |
|   | Senior Vice President and Chief           |                           |
|   | Financial Officer                         |                           |
|        |                                           |                                |        |        |  |

 

Date:  August 3, 2004

 

59

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