**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly period ended March 31, 2005**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE********SECURITIES 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 of principal executive offices, including zip code)

 

**(713) 759-3636**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes ý  No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). 

Yes ý  No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.  Limited Partner Units outstanding as of April26, 2005:   62,998,554

 

** **

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** **

**TEPPCOPARTNERS, L.P.**

** **

**TABLE OFCONTENTS**

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

** **

**i**

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** **

**PART I. FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

** **

**TEPPCO PARTNERS,  L.P.**

** **

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands)**

 
| ** **                                                                                                           | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                           | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                           |       |                |       |                   |       |
| Current assets:                                                                                                      |       |                |       |                   |       |
| Cash and cash  equivalents                                                                                           |       | $                   | 18,387     |                   | $          | 16,422 |   |
| Accounts receivable,  trade (net of allowance for doubtful accounts of $112 and $112)                                |       | 519,274             |       | 553,628                |       |
| Accounts receivable,  related parties                                                                                |       | 3,415               |       | 12,921                 |       |
| Inventories                                                                                                          |       | 21,311              |       | 19,521                 |       |
| Other                                                                                                                |       | 42,844              |       | 42,138                 |       |
| Total current assets                                                                                                 |       | 605,231             |       | 644,630                |       |
| Property, plant and  equipment, at cost (net of accumulated  depreciation and amortization of $424,624 and $407,670) |       | 1,713,314           |       | 1,703,702              |       |
| Equity investments                                                                                                   |       | 375,977             |       | 373,652                |       |
| Intangible assets                                                                                                    |       | 400,294             |       | 407,358                |       |
| Goodwill                                                                                                             |       | 16,944              |       | 16,944                 |       |
| Other assets                                                                                                         |       | 47,800              |       | 51,419                 |       |
| Total assets                                                                                                         |       | $                   | 3,159,560  |                   | $          | 3,197,705 |   |
|                                                                                                                 |       |                |       |                   |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                           |       |                |       |                   |       |
|                                                                                                                 |       |                |       |                   |       |
| Current liabilities:                                                                                                 |       |                |       |                   |       |
| Accounts payable and  accrued liabilities                                                                            |       | $                   | 515,837    |                   | $          | 564,464 |   |
| Accounts payable,  related parties                                                                                   |       | 5,554               |       | 25,730                 |       |
| Accrued interest                                                                                                     |       | 13,064              |       | 32,292                 |       |
| Other accrued taxes                                                                                                  |       | 12,161              |       | 13,309                 |       |
| Other                                                                                                                |       | 32,189              |       | 46,593                 |       |
| Total current  liabilities                                                                                           |       | 578,805             |       | 682,388                |       |
| Senior Notes                                                                                                         |       | 1,123,406           |       | 1,127,226              |       |
| Other long-term debt                                                                                                 |       | 432,000             |       | 353,000                |       |
| Other liabilities and  deferred credits                                                                              |       | 13,978              |       | 13,643                 |       |
| Commitments and  contingencies                                                                                       |       |                |       |                   |       |
| Partners’ capital:                                                                                              |       |                |       |                   |       |
| General partner’s  interest                                                                                     |       | (35,913             | )          | (33,006                | )          |
| Limited partners’  interests                                                                                    |       | 1,047,284           |       | 1,054,454              |       |
| Total partners’ capital                                                                                         |       | 1,011,371           |       | 1,021,448              |       |
| Total liabilities and  partners’ capital                                                                        |       | $                   | 3,159,560  |                   | $          | 3,197,705 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

1

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** **

**TEPPCO PARTNERS,  L.P.**

** **

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

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

** **
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Operating revenues:                                    |       |                              |       |   |   |
| Sales of petroleum  products                           |       | $                                 | 1,387,209  |   | $ | 1,182,113 |   |
| Transportation –  Refined products                |       | 34,965                            |       | 30,971 |   |
| Transportation – LPGs                             |       | 32,231                            |       | 28,780 |   |
| Transportation – Crude  oil                       |       | 9,172                             |       | 9,663 |   |
| Transportation – NGLs                             |       | 10,219                            |       | 10,014 |   |
| Gathering – Natural gas                           |       | 36,560                            |       | 34,502 |   |
| Other                                                  |       | 16,249                            |       | 22,018 |   |
| Total operating  revenues                              |       | 1,526,605                         |       | 1,318,061 |   |
|                                                   |       |                              |       |   |   |
| Costs and expenses:                                    |       |                              |       |   |   |
| Purchases of petroleum  products                       |       | 1,372,460                         |       | 1,167,341 |   |
| Operating, general and  administrative                 |       | 50,674                            |       | 52,471 |   |
| Operating fuel and  power                              |       | 10,414                            |       | 11,292 |   |
| Depreciation and  amortization                         |       | 25,763                            |       | 27,820 |   |
| Taxes – other than  income taxes                  |       | 5,436                             |       | 5,294 |   |
| Gains on sales of  assets                              |       | (498                              | )          | (58 | ) |
| Total costs and  expenses                              |       | 1,464,249                         |       | 1,264,160 |   |
|                                                   |       |                              |       |   |   |
| Operating income                                       |       | 62,356                            |       | 53,901 |   |
|                                                   |       |                              |       |   |   |
| Interest expense – net                            |       | (19,287                           | )          | (19,595 | ) |
| Equity earnings                                        |       | 5,246                             |       | 5,651 |   |
| Other income – net                                |       | 266                               |       | 476 |   |
|                                                   |       |                              |       |   |   |
| Net income                                             |       | $                                 | 48,581     |   | $ | 40,433 |   |
|                                                   |       |                              |       |   |   |
| Net Income  Allocation:                                |       |                              |       |   |   |
| Limited Partner  Unitholders                           |       | $                                 | 34,566     |   | $ | 28,769 |   |
| General Partner                                        |       | 14,015                            |       | 11,664 |   |
| Total net income  allocated                            |       | $                                 | 48,581     |   | $ | 40,433 |   |
|                                                   |       |                              |       |   |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                 | 0.55       |   | $ | 0.46 |   |
|                                                   |       |                              |       |   |   |
| Weighted average  Limited Partner Units outstanding    |       | 62,999                            |       | 62,999 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

 

2

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**TEPPCO PARTNERS, L.P.**

** **

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

**(in thousands)**

** **
| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash flows from operating  activities:                         |       |                              |       |   |   |
| Net income                                                     |       | $                                 | 48,581     |   | $ | 40,433 |   |
| Adjustments to  reconcile net income to cash provided by       |       |                              |       |   |   |
| operating activities:                                          |       |                              |       |   |   |
| Depreciation and  amortization                                 |       | 25,763                            |       | 27,820 |   |
| Earnings (losses) in  equity investments, net of distributions |       | (527                              | )          | 349 |   |
| Gains on sales of  assets                                      |       | (498                              | )          | (58 | ) |
| Non-cash portion of  interest expense                          |       | 405                               |       | (574 | ) |
| Decrease (increase) in  accounts receivable                    |       | 34,354                            |       | (64,701 | ) |
| Increase in inventories                                        |       | (1,790                            | )          | (546 | ) |
| Increase in other  current assets                              |       | (605                              | )          | (8,038 | ) |
| (Decrease) increase in  accounts payable and accrued expenses  |       | (60,480                           | )          | 40,547 |   |
| Other                                                          |       | (29,400                           | )          | 7,933 |   |
| Net cash provided by  operating activities                     |       | 15,803                            |       | 43,165 |   |
|                                                           |       |                              |       |   |   |
| Cash flows from  investing activities:                         |       |                              |       |   |   |
| Proceeds from sale of  assets                                  |       | 510                               |       | — |   |
| Purchase of assets                                             |       | (7,101                            | )          | (1,000 | ) |
| Investment in  Centennial Pipeline LLC                         |       | —                            |       | (1,000 | ) |
| Capital expenditures                                           |       | (27,589                           | )          | (26,906 | ) |
| Net cash used in  investing activities                         |       | (34,180                           | )          | (28,906 | ) |
|                                                           |       |                              |       |   |   |
| Cash flows from  financing activities:                         |       |                              |       |   |   |
| Proceeds from revolving  credit facilities                     |       | 138,700                           |       | 60,000 |   |
| Repayments on revolving  credit facilities                     |       | (59,700                           | )          | (43,500 | ) |
| Distributions paid                                             |       | (58,658                           | )          | (57,083 | ) |
| Net cash provided by  (used in) financing activities           |       | 20,342                            |       | (40,583 | ) |
|                                                           |       |                              |       |   |   |
| Net increase (decrease)  in cash and cash equivalents          |       | 1,965                             |       | (26,324 | ) |
|                                                           |       |                              |       |   |   |
| Cash and cash  equivalents at beginning of period              |       | 16,422                            |       | 29,469 |   |
| Cash and cash  equivalents at end of period                    |       | $                                 | 18,387     |   | $ | 3,145 |   |
|                                                           |       |                              |       |   |   |
| **Supplemental  disclosure of cash flows:**                    |       |                              |       |   |   |
| Cash paid for interest  (net of amounts capitalized)           |       | $                                 | 36,759     |   | $ | 37,945 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

 

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** | ** ** | **Total**  | ** ** |
|----------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | ** **                               | ** ** | ** **                            | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Partners’ capital at  December 31, 2004 |       | 62,998,554                               |       | $                                     | (33,006    | )                                      | $          | 1,054,454  |       | $ | 1,021,448 |   |
| Net income allocation                        |       | —                                   |       | 14,015                                |       | 34,566                                 |       | 48,581     |       |
| Cash distributions                           |       | —                                   |       | (16,922                               | )          | (41,736                                | )          | (58,658    | )          |
|                                         |       |                                     |       |                                  |       |                                   |       |       |       |
| Partners’ capital at  March 31, 2005    |       | 62,998,554                               |       | $                                     | (35,913    | )                                      | $          | 1,047,284  |       | $ | 1,011,371 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

 

4

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** **

**TEPPCO PARTNERS, L.P.**

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

** **

**NOTE1.  ORGANIZATION AND BASIS OFPRESENTATION**

** **

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

 

The Company, as general partner, performs allmanagement and operating functions required for us, except for the managementand operations of certain of the TEPPCO Midstream assets that are currently managedby DEFS on our behalf.  We reimburse theGeneral Partner for all reasonable direct and indirect expenses that have been incurredin managing us.  Under a transitionservices agreement entered into as part of the sale of the General Partner,DEFS will continue to operate certain of the TEPPCO Midstream assets for us andcontinue to provide certain administrative services for a period of time untilwe assume the operations of these assets and provide these services on ourown.  In connection with us assumingthese processes and services, certain DEFS employees currently providing theseservices to us will become employees of our General Partner.  As part of the transition services agreement,Duke Energy will continue to provide payroll and other administrative supportservices to us until DFI assumes those activities.

 

In connection with our formation in 1990, the Companyreceived 2,500,000 Deferred Participation Interests (“DPIs”).  Effective April 1, 1994, the DPIs beganparticipating in distributions of cash and allocations of profit and loss in amanner identical to Limited Partner Units and are treated as Limited PartnerUnits for purposes of this Report.  TheseLimited Partner Units were assigned to Duke Energy when ownership of theCompany was transferred from Duke Energy to DEFS in 2000.  On February 24, 2005, DFI entered into an LPUnit Purchase and Sale Agreement with Duke Energy and purchased these 2,500,000DPIs for approximately $100.0 million.

 

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

 

The accompanying unauditedconsolidated financial statements reflect all adjustments that are, in theopinion of our management, of a normal and recurring nature and necessary for afair statement of our financial position as of March 31, 2005, and the resultsof our operations and cash flows for the periods presented.  The results of operations for the threemonths ended March 31, 2005, are not necessarily indicative of results of our operationsfor the full year 2005.  You should readthese interim financial statements in conjunction with our consolidatedfinancial statements and notes thereto presented in the TEPPCO Partners, L.P.Annual Report on Form 10-K for the year ended December 31, 2004.  We have reclassified certain amounts fromprior periods to conform with the current presentation.

 

5

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We operate and report in threebusiness segments: transportation and storage of refined products,  liquefied petroleum gases (“LPGs”) andpetrochemicals (“Downstream Segment”); gathering, transportation, marketing andstorage of crude oil and distribution of lubrication oils and specialtychemicals (“Upstream Segment”); and gathering of natural gas, fractionation ofnatural gas liquids (“NGLs”) and transportation of NGLs (“Midstream Segment”).  Our reportable segments offer differentproducts and services and are managed separately because each requires differentbusiness strategies.

 

Our interstate transportationoperations, including rates charged to customers, are subject to regulationsprescribed by the Federal Energy Regulatory Commission (“FERC”).  We refer to refined products, LPGs,petrochemicals, crude oil, NGLs and natural gas in this Report, collectively,as “petroleum products” or “products.”

 

**Net Income Per Unit**

 

Basic net income per Limited Partner Unit(“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 Units for each of the three months endedMarch 31, 2005 and 2004).  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 General Partnerwas allocated $14.0 million (representing 28.85%) and $11.7 million (representing28.85%) of our net income for the three months ended March 31, 2005 and 2004,respectively.  The General Partner’spercentage interest in our net income increases as cash distributions paid perUnit increase, in accordance with our limited partnership agreement.

 

Diluted net income per Unit equaledbasic net income per Unit for each of the three months ended March 31, 2005 and2004, as there were no dilutive instruments outstanding.

 

**New Accounting Pronouncements**

 

**In December 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 123(R), *Share-BasedPayment*.  SFAS 123(R) requirescompensation costs related to share-based payment transactions to be recognizedin the financial statements.  Withlimited exceptions, the amount of the compensation cost is to be measured basedon the grant-date fair value of the equity or liability instrumentsissued.  In addition, liability awardsare to be re-measured each reporting period. Compensation cost will be recognized over the period that an employeeprovides service in exchange for the award. SFAS 123(R) is a revision of SFASNo. 123, *Accounting for Stock-BasedCompensation*, as amended by SFAS No. 148,*Accounting for Stock-Based Compensation – Transition and Disclosure*and supersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS 123(R) is effective for public companiesas of the first interim or annual reporting period of the first fiscal yearbeginning on or after June 15, 2005.  Assuch, we will adopt SFAS 123(R) in the first quarter of 2006.  Early adoption is permitted, but not required.  All public companies that adopted thefair-value-based method of accounting must use the modified prospective transitionmethod and may elect to use the modified retrospective transition method.  We do not believe that the adoption of SFAS123(R) will have a material effect on our financial position, results ofoperations or cash flows.**

** **

**In November 2004,the Emerging Issues Task Force (“EITF”) reached consensus in EITF 03-13, *Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for Impairment or Disposal ofLong-Lived Assets, in Determining Whether to Report DiscontinuedOperations*, to clarify whether a component of an enterprise that is eitherdisposed of or classified as held for sale qualifies for income statement presentationas discontinued operations.  The EITFratified the consensus on November 30, 2004. The consensus is to be applied prospectively with regard to a componentof an enterprise that is either disposed of or classified as held for sale in reportingperiods beginning after December 15, 2004. The consensus may be applied retrospectively for previously reported**

** **

**6**

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** **

**operating results related to disposaltransactions initiated within an enterprise’s reporting period that includedthe date that this consensus was ratified. The adoption of EITF 03-13 did nothave an effect on our financial position, results of operations or cash flows.**

** **

**In March 2005, theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143* (“FIN 47”). FIN 47 clarifies that the term, conditional asset retirement obligationas used in SFAS No. 143, *Accounting for AssetRetirement Obligations*, refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional upon a future event that may or may not be within the control ofthe entity.  Even though uncertaintyabout the timing and/or method of settlement exists and may be conditional upona future event, the obligation to perform the asset retirement activity isunconditional.  Accordingly, an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated.  Uncertainty about the timingand/or method of settlement of a conditional asset retirement obligation shouldbe factored into the measurement of the liability when sufficient informationexists.  The fair value of a liabilityfor the conditional asset retirement obligation should be recognized whenincurred generally upon acquisition, construction, or development or throughthe normal operation of the asset.  SFAS143 acknowledges that in some cases, sufficient information may not beavailable to reasonably estimate the fair value of an asset retirementobligation.  FIN 47 also clarifies whenan entity would have sufficient information to reasonably estimate the fairvalue of an asset retirement obligation. FIN 47 is effective no later than the end of reporting periods endingafter December 15, 2005.  Retrospectiveapplication for interim financial information is permitted but is notrequired.  Early adoption of FIN 47 isencouraged.  We are currently evaluatingwhat impact FIN 47 will have on our financial statements, but at this time, wedo not believe that the adoption of FIN 47 will have a material effect on ourfinancial position, results of operations or cash flows.**

** **

**NOTE 2. GOODWILLAND OTHER INTANGIBLE ASSETS**

** **

**Goodwill**

 

Goodwill represents the excess of purchase price overfair value of net assets acquired and is presented on the consolidated balancesheets net of accumulated amortization. We account for goodwill under SFAS No. 142, *Goodwill andOther Intangible Assets,*which was issued by the FASB in July2001.  SFAS 142 prohibits amortization ofgoodwill and intangible assets with indefinite useful lives, but insteadrequires testing for impairment at least annually.

 

To perform an impairment test of goodwill, we haveidentified our reporting units and have determined the carrying value of eachreporting unit by assigning the assets and liabilities, including the existinggoodwill and intangible assets, to those reporting units.  We then determine the fair value of eachreporting unit and compare it to the carrying value of the reporting unit.  We will continue to compare the fair value ofeach reporting unit to its carrying value on an annual basis to determine if animpairment loss has occurred.   There havebeen no goodwill impairment losses recorded since the adoption of SFAS 142.

 

At March 31, 2005, and December 31,2004, we have $16.9 million of unamortized goodwill and $25.5 million of excessinvestment in our equity investment in Seaway Crude Pipeline Company (equitymethod goodwill).  The excess investmentis included in our equity investments account at March 31, 2005.  The following table presents the carryingamount of goodwill and equity method goodwill at March 31, 2005, and December31, 2004, by business segment (in thousands):

 

7

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

 

**Other Intangible Assets**

 

The following table reflects thecomponents of intangible assets being amortized at March 31, 2005, and December31, 2004 (in thousands):

 
| ** **                               | ** ** | **March 31, 2005**         | ** ** | **December 31, 2004**         | ** ** |
|------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible assets being  amortized:      |       |                       |       |                          |       |   |   |   |   |
| Gathering and  transportation agreements |       | $                          | 464,337    |                          | $          | (97,571 | ) | $ | 464,337 |   | $ | (91,262 | ) |
| Fractionation agreement                  |       | 38,000                     |       | (13,300                       | )          | 38,000 |   | (12,825 | ) |
| Other                                    |       | 11,520                     |       | (2,692                        | )          | 12,262 |   | (3,154 | ) |
| Total                                    |       | $                          | 513,857    |                          | $          | (113,563 | ) | $ | 514,599 |   | $ | (107,241 | ) |

 

SFAS 142 requires that intangibleassets with finite useful lives be amortized over their respective estimateduseful lives.  If an intangible asset hasa finite useful life, but the precise length of that life is not known, thatintangible asset shall be amortized over the best estimate of its usefullife.  At a minimum, we will assess theuseful lives and residual values of all intangible assets on an annual basis todetermine if adjustments are required. Amortization expense on intangible assets was $7.1 million and $8.2million for the three months ended March 31, 2005 and 2004, respectively.

 

The value assigned to our intangibleassets for natural gas gathering contracts is amortized on a unit-of-productionbasis, based upon the actual throughput of the system over the expected totalthroughput for the lives of the contracts. We update throughput estimates and evaluate the remaining expecteduseful lives of the contract assets on a quarterly basis based on the bestavailable information.  During the fourthquarter of 2004 and the first quarter of 2005, certain limited productionforecasts were obtained from some of the producers on the Jonah Gas GatheringCompany (“Jonah”) system related to future expansions of the system, and as aresult, we increased our best estimate of future throughput on the Jonahsystem.  These increases in the estimateof future throughput extended the amortization period of Jonah’s natural gasgathering contracts by an estimated 10 years, increasing from approximately 25years to approximately 35 years. Revisions to these estimates may occur as additional productioninformation is made available to us.

 

The amortization of the contractsrelated to the Val Verde Gas Gathering Company (“Val Verde”) assets is also amortizedon a unit-of-production basis.  Duringthe fourth quarter of 2004, certain limited production forecasts were obtainedfrom some of the producers on the Val Verde system, and as a result, theamortization period of Val Verde’s natural gas gathering contracts was extendedby an estimated 10 years, increasing from approximately 20 years toapproximately 30 years.  Revisions tothese estimates may occur as additional production information is madeavailable to us.

 

The values assigned to our fractionationagreement and other intangible assets are generally amortized on astraight-line basis.  Our fractionationagreement with DEFS is being amortized over its contract period of 20 years.  The amortization periods for our otherintangible assets, which include non-compete and other agreements, range from 3years to 15 years.  The values assignedto our crude supply and transportation intangible customer contracts are beingamortized on a unit-of-production basis.

 

At March 31, 2005, we have $33.4million of excess investment in our equity investment in Centennial PipelineLLC, which was created upon formation of the company.  The excess investment is included in ourequity

 

8

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investments account at March 31, 2005.  This excess investment is accounted for as anintangible asset with an indefinite life. We assess the intangible asset for impairment on an annual basis.

 

The following table sets forth theestimated amortization expense of intangible assets for the years endingDecember 31 (in thousands):

 

| 2005 |   | $      | 29,096 |   |
|------|--------|--------|--------|--------|
| 2006 |   | 31,364 |   |
| 2007 |   | 31,684 |   |
| 2008 |   | 30,491 |   |
| 2009 |   | 28,467 |   |

 

**NOTE 3.  INTEREST RATE SWAPS**

** **

In July 2000, we entered into an interest rate swapagreement to hedge our exposure to increases in the benchmark interest rateunderlying our variable rate revolving credit facility.  This interest rate swap matured in April2004.  We designated this swap agreement,which hedged exposure to variability in expected future cash flows attributedto changes in interest rates, as a cash flow hedge.  The swap agreement was based on a notionalamount of $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 cashflow hedge, the changes in fair value, to the extent the swap was effective,were recognized in other comprehensive income until the hedged interest costswere recognized in earnings.  During the threemonths ended March 31, 2004, we recognized an increase in interest expense of $2.7million related to the difference between the fixed rate and the floating rateof interest on the interest rate swap.

 

In October 2001, TE Products entered into an interestrate swap agreement to hedge its exposure to changes in the fair value of itsfixed rate 7.51% Senior Notes due 2028.  Wedesignated this swap agreement as a fair value hedge.  The swap agreement has a notional amount of$210.0 million and matures in January 2028 to match the principal and maturityof the TE Products Senior Notes.  Underthe swap agreement, TE Products pays a floating rate of interest based on athree-month U.S. Dollar LIBOR rate, plus a spread, and receives a fixed rate ofinterest of 7.51%.  During the threemonths ended March 31, 2005 and 2004, we recognized reductions in interestexpense of $1.8 million and $2.6 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap.  During the quarter endedMarch 31, 2005, we measured the hedge effectiveness of this interest rate swapand noted that no gain or loss from ineffectiveness was required to berecognized.  The fair value of thisinterest rate swap was a gain of approximately $0.5 million and $3.4 million atMarch 31, 2005, and December 31, 2004, respectively.

 

During 2002, we entered into interest rate swapagreements, designated as fair value hedges, to hedge our exposure to changesin the fair value of our fixed rate 7.625% Senior Notes due 2012.  The swap agreements had a combined notionalamount of $500.0 million and matured in 2012 to match the principal andmaturity of the Senior Notes.  Under theswap agreements, we paid a floating rate of interest based on a U.S. DollarLIBOR rate, plus a spread, and received a fixed rate of interest of7.625%.  These swap agreements were laterterminated in 2002 resulting in gains of $44.9 million.  The gains realized from the swap terminationshave been deferred as adjustments to the carrying value of the Senior Notes andare being amortized using the effective interest method as reductions to futureinterest expense over the remaining term of the Senior Notes.  At March 31, 2005, the unamortized balance ofthe deferred gains was $35.6 million.  Inthe event of early extinguishment of the Senior Notes, any remainingunamortized gains would be recognized in the consolidated statement of incomeat the time of extinguishment.

 

9

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**NOTE 4.  ACQUISITIONS**

** **

**Mexia Pipeline**

 

On March 31, 2005, we purchased crude oil pipelineassets for $7.1 million from BP Pipelines (North America) Inc. (“BP”).  The assets include approximately 245 miles ofpipeline which extend from Mexia, Texas, to the Houston, Texas, area and twostations in south Houston with connections to a BP pipeline that originates insouth Houston.  We will integrate theseassets into our South Texas pipeline system, included in our Upstream Segment,which will allow us to realize synergies within our existing asset base andwill provide future growth opportunities.

 

**NOTE 5.  INVENTORIES**

** **

Inventories are valued at the lower ofcost (based on weighted average cost method) or market.  The costs of inventories did not exceedmarket values at March 31, 2005, and December 31, 2004.  The major components of inventories were asfollows (in thousands):

 
| ** **                                | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------|------------|---------------------|------------|------------------------|------------|
| Crude oil                                 |       | $                   | 4,663      |                   | $          | 3,690 |   |
| Refined products                          |       | 5,323               |       | 5,665                  |       |
| LPGs                                      |       | 706                 |       | —                 |       |
| Lubrication oils and  specialty chemicals |       | 4,275               |       | 4,002                  |       |
| Materials and supplies                    |       | 6,317               |       | 6,135                  |       |
| Other                                     |       | 27                  |       | 29                     |       |
| Total                                     |       | $                   | 21,311     |                   | $          | 19,521 |   |

 

**NOTE 6.  EQUITYINVESTMENTS**

** **

Through one of our indirect wholly owned subsidiaries,we own a 50% ownership interest in Seaway Crude Pipeline Company (“Seaway”).  The remaining 50% interest is owned byConocoPhillips.  Seaway owns a pipelinethat carries mostly imported crude oil from a marine terminal at Freeport,Texas, to Cushing, Oklahoma, and from a marine terminal at Texas City, Texas,to refineries in the Texas City and Houston, Texas, areas.  The Seaway Crude Pipeline Company PartnershipAgreement provides for varying participation ratios throughout the life of theSeaway partnership.  From June 2002through May 2006, we receive 60% of revenue and expense of Seaway.  Thereafter, we will receive 40% of revenueand expense of Seaway.   During the three months ended March 31, 2005and 2004, we received distributions from Seaway of $4.7 million and $6.0 million,respectively.

 

TE Products owns a 50% ownership interest inCentennial Pipeline Company LLC (“Centennial”), and Marathon Ashland PetroleumLLC (“Marathon”) owns the remaining 50% interest. Centennial owns an interstaterefined petroleum products pipeline extending from the upper Texas Gulf Coastto central Illinois.  During the threemonths ended March 31, 2005, TE Products has not invested any additional fundsin Centennial. During the three months ended March 31, 2004, TE Productsinvested an additional $1.0 million in Centennial, which is included in theequity investment balance at March 31, 2005. TE Products has not receivedany distributions from Centennial since its formation.

 

On January 1, 2003, TE Products and Louis DreyfusEnergy Services L.P. (“Louis Dreyfus”) formed Mont Belvieu Storage Partners,L.P. (“MB Storage”).  TE Products andLouis Dreyfus each own a 50% ownership interest in MB Storage.  The purpose of MB Storage is to expandservices to the upper Texas Gulf Coast energy marketplace

 

10

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by increasing pipelinethroughput and the mix of products handled through the existing system andestablishing 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.

 

For the year ended December 31, 2005, TE Products willreceive the first $1.7 million per quarter (or $6.78 million on an annualbasis) of MB Storage’s income before depreciation expense, as defined in theoperating agreement.  For the year endedDecember 31, 2004, TE Products received the first $1.8 million per quarter (or$7.15 million on an annual basis) of MB Storage’s income before depreciationexpense.  TE Products’ share of MBStorage’s earnings is adjusted annually by the partners of MB Storage.  Any amount of MB Storage’s annual incomebefore depreciation expense in excess of $6.78 million for 2005 and $7.15million for 2004 is allocated evenly between TE Products and LouisDreyfus.  Depreciation expense on assetseach party originally contributed to MB Storage is allocated between TEProducts and Louis Dreyfus based on the net book value of the assetscontributed.  Depreciation expense onassets constructed or acquired by MB Storage subsequent to formation isallocated evenly between TE Products and Louis Dreyfus. For the three monthsended March 31, 2005 and 2004, TE Products’ sharing ratio in the earnings of MBStorage was approximately 58.1% and 66.4%, respectively.  During the three months ended March 31, 2005and 2004, TE Products received no distributions from MB Storage and made no contributionsto MB Storage.

 

We use the equity method of accounting to account forour investments in Seaway, Centennial and MB Storage.  Summarized combined financial information forSeaway, Centennial and MB Storage for the three months ended March 31, 2005 and2004, is presented below (in thousands):

 
| ** ** | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Revenues   |       | $                                 | 38,529     |   | $ | 33,313 |   |
| Net income |       | 11,257                            |       | 11,817 |   |
|            |            |                                   |            |  |  |  |  |

 

Summarized combined balance sheet information forSeaway, Centennial and MB Storage as of March 31, 2005, and December 31, 2004,is presented below (in thousands):

 
| ** **             | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------|------------|---------------------|------------|------------------------|------------|
| Current assets         |       | $                   | 71,342     |                   | $          | 59,314 |   |
| Noncurrent assets      |       | 629,773             |       | 633,222                |       |
| Current liabilities    |       | 43,940              |       | 41,209                 |       |
| Long-term debt         |       | 140,000             |       | 140,000                |       |
| Noncurrent liabilities |       | 22,030              |       | 20,440                 |       |
| Partners’ capital |       | 495,145             |       | 490,887                |       |
|                        |            |                     |            |                        |            |  |  |

** **

**NOTE 7.  DEBT**

** **

## **Senior Notes**

## ** **

On January 27, 1998, TE Products completed theissuance of $180.0 million principal amount of 6.45% Senior Notes due 2008, and$210.0 million principal amount of 7.51% Senior Notes due 2028 (collectivelythe “TE Products Senior Notes”).  The6.45% TE Products Senior Notes were issued at a discount of $0.3 million andare being accreted to their face value over the term of the notes.  The 6.45% TE Products Senior Notes due 2008are not subject to redemption prior to January 15, 2008.  The 7.51% TE Products Senior Notes due 2028,issued at par, may be redeemed at any time after January 15, 2008, at theoption of TE Products, in whole or in part, at a premium.

 

11

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The TE Products Senior Notes do not have sinking fundrequirements.  Interest on the TEProducts Senior Notes is payable semiannually in arrears on January 15 and July15 of each year.  The TE Products SeniorNotes are unsecured obligations of TE Products and rank on a parity with allother unsecured and unsubordinated indebtedness of TE Products.  The indenture governing the TE ProductsSenior Notes contains covenants, including, but not limited to, covenantslimiting the creation of liens securing indebtedness and sale and leasebacktransactions.  However, the indenturedoes not limit our ability to incur additional indebtedness.  As of March 31, 2005, TE Products was incompliance with the covenants of the TE Products Senior Notes.

 

On February 20, 2002, we completed the issuance of$500.0 million principal amount of 7.625% Senior Notes due 2012.  The 7.625% Senior Notes were issued at adiscount of $2.2 million and are being accreted to their face value over theterm of the notes.  The Senior Notes maybe redeemed at any time at our option with the payment of accrued interest anda make-whole premium determined by discounting remaining interest and principalpayments using a discount rate equal to the rate of the United States Treasurysecurities of comparable remaining maturity plus 35 basis points.  The indenture governing our 7.625% SeniorNotes contains covenants, including, but not limited to, covenants limiting thecreation of liens securing indebtedness and sale and leasebacktransactions.  However, the indenturedoes not limit our ability to incur additional indebtedness.  As of March 31, 2005, we were in compliancewith the covenants of these Senior Notes.

 

On January 30, 2003, we completed the issuance of$200.0 million principal amount of 6.125% Senior Notes due 2013.  The 6.125% Senior Notes were issued at adiscount of $1.4 million and are being accreted to their face value over theterm of the notes.  The Senior Notes maybe redeemed at any time at our option with the payment of accrued interest anda make-whole premium determined by discounting remaining interest and principalpayments using a discount rate equal to the rate of the United States Treasurysecurities of comparable remaining maturity plus 35 basis points.  The indenture governing our 6.125% SeniorNotes contains covenants, including, but not limited to, covenants limiting thecreation of liens securing indebtedness and sale and leasebacktransactions.  However, the indenturedoes not limit our ability to incur additional indebtedness.  As of March 31, 2005, we were in compliancewith the covenants of these Senior Notes.

 

The following table summarizes the estimated fairvalues of the Senior Notes as of March 31, 2005, and December 31, 2004 (inmillions):

 
| ** **                                        | ** ** | ** **      | ** ** | **Fair Value**      | ** ** |
|---------------------------------------------------|------------|-----------------|------------|---------------------|------------|
| ** **                                        | ** ** | **Face  Value** | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|                                              |       |            |       |                |       |   |   |
| 6.45% TE Products  Senior Notes, due January 2008 |       | $               | 180.0      |                | $          | 186.2 |   | $ | 187.1 |   |
| 7.625% Senior Notes,  due February 2012           |       | 500.0           |       | 563.8               |       | 569.6 |   |
| 6.125% Senior Notes,  due February 2013           |       | 200.0           |       | 208.0               |       | 210.2 |   |
| 7.51% TE Products  Senior Notes, due January 2028 |       | 210.0           |       | 223.2               |       | 225.6 |   |
|                                                   |            |                 |            |                     |            |  |  |  |  |  |

 

We have entered into interest rate swap agreements tohedge our exposure to changes in the fair value on a portion of the Senior Notesdiscussed above (see Note 3.  InterestRate Swaps).

 

## **Other Long Term Credit Facility**

## ** **

On June 27, 2003, we entered into a $550.0 millionrevolving credit facility with a three year term, including the issuance ofletters of credit of up to $20.0 million (“Revolving Credit Facility”).  The interest rate is based, at our option, oneither the lender’s base rate plus a spread, or LIBOR plus a spread in effectat the time of the borrowings.  Thecredit agreement for the Revolving Credit Facility contains certain restrictivefinancial covenant ratios.  On October21, 2004, we amended our Revolving Credit Facility to (i) increase the facilitysize to $600.0 million, (ii) extend the term to October 21, 2009, (iii) removecertain restrictive covenants, (iv) increase the available amount for theissuance of letters of credit up to $100.0 million and (v) decrease the LIBORrate spread charged at

 

12

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the time of eachborrowing.  On February 23, 2005, we againamended our Revolving Credit Facility to remove the requirement that DEFS mustat all times own, directly or indirectly, 100% of our General Partner, to allowfor its acquisition by DFI (see Note 1. Organization and Basis of Presentation).  At March 31, 2005, $432.0 million wasoutstanding under the Revolving Credit Facility at a weighted average interestrate of 3.4%.  At March 31, 2005, we werein compliance with the covenants of this credit agreement.

 

The following table summarizes the principal amountsoutstanding under all of our credit facilities as of March 31, 2005, andDecember 31, 2004 (in thousands):

 
| ** **                                                         | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
|                                                               |       |                |       |                   |       |
| Credit Facilities:                                                 |       |                |       |                   |       |
| Revolving Credit  Facility, due October 2009                       |       | $                   | 432,000    |                   | $          | 353,000 |   |
| 6.45% TE Products  Senior Notes, due January 2008                  |       | 179,914             |       | 179,906                |       |
| 7.625% Senior Notes,  due February 2012                            |       | 498,493             |       | 498,438                |       |
| 6.125% Senior Notes,  due February 2013                            |       | 198,881             |       | 198,845                |       |
| 7.51% TE Products  Senior Notes, due January 2028                  |       | 210,000             |       | 210,000                |       |
| Total borrowings                                                   |       | 1,519,288           |       | 1,440,189              |       |
| Adjustment to carrying  value associated with hedges of fair value |       | 36,118              |       | 40,037                 |       |
| Total Credit Facilities                                            |       | $                   | 1,555,406  |                   | $          | 1,480,226 |   |

 

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

 

## **Quarterly Distributions ofAvailable Cash**

## ** **

We make quarterly cash distributions of all of ourAvailable Cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion.  Pursuantto the Partnership Agreement, the Company receives incremental incentive cashdistributions when cash distributions exceed certain target thresholds asfollows:

 
| ** **                                                           | ** ** | **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 table reflects the allocation of totaldistributions paid during the three months ended March 31, 2005, and 2004 (inthousands, except per Unit amounts):

 

13

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| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Limited Partner Units                   |       | $                                 | 41,736     |   | $ | 40,949 |   |
| General Partner  Ownership Interest     |       | 852                               |       | 836 |   |
| General Partner  Incentive              |       | 16,070                            |       | 15,298 |   |
| Total Cash  Distributions Paid          |       | $                                 | 58,658     |   | $ | 57,083 |   |
| Total Cash  Distributions Paid Per Unit |       | $                                 | 0.6625     |   | $ | 0.65 |   |

 

On May 6, 2005, we will pay a cashdistribution of $0.6625 per Unit for the quarter ended March 31, 2005.  The first quarter 2005 cash distribution willtotal $58.7 million.

 

**General Partner’s Interest**

 

As of March 31, 2005, and December 31,2004, we had deficit balances of $35.9 million and $33.0 million, respectively,in our General Partner’s equity account. These negative balances do not represent assets to us and do notrepresent obligations of the General Partner to contribute cash or otherproperty to us.  The General Partner’sequity account generally consists of its cumulative share of our net income lesscash distributions made to it plus capital contributions that it has made to us(see our Consolidated Statement of Partners’ Capital for a detail of theGeneral Partner’s equity account).  Forthe three months ended March 31, 2005, the General Partner was allocated $14.0million (representing 28.85%) of our net income and received $16.9 million incash distributions.

 

Capital Accounts, as defined under ourPartnership Agreement, are maintained for our General Partner and our limitedpartners.  The Capital Account provisionsof our Partnership Agreement incorporate principles established for U.S.federal income tax purposes and are not comparable to the equity accountsreflected under accounting principles generally accepted in the United Statesin our financial statements.  Under ourPartnership Agreement, the General Partner is required to make additionalcapital contributions to us upon the issuance of any additional Units ifnecessary to maintain a Capital Account balance equal to 1.999999% of the totalCapital Accounts of all partners.  At March31, 2005, and December 31, 2004, the General Partner’s Capital Account balancesubstantially exceeded this requirement.

 

Net income is allocated between theGeneral Partner and the limited partners in the same proportion as aggregatecash distributions made to the General Partner and the limited partners duringthe period.  This is generally consistentwith the manner of 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 duringa period may exceed our net income for the period.  We make quarterly cash distributions of allof our Available Cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion.  Cashdistributions in excess of net income allocations and capital contributionsduring the year ended December 31, 2004, and the three months ended March 31,2005, resulted in deficits in the General Partner’s equity account at December31, 2004, and March 31, 2005.  Futurecash distributions that exceed net income will result in an increase in thedeficit balance in the General Partner’s equity account.

 

According to the Partnership Agreement, in the 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.  If a deficitbalance still remains in the General Partner’s equity account after allallocations are made between the partners, the General Partner would not berequired to make whole any such deficit.

 

 

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**NOTE 9. EMPLOYEE BENEFIT PLANS**

 

## **Retirement Plans**

## ** **

We have adopted the TEPPCO Retirement Cash BalancePlan (“TEPPCO RCBP”), which is a non-contributory, trustee-administered pensionplan.  In addition, certain executiveofficers participate in the TEPPCO Supplemental Benefit Plan (“TEPPCO SBP”),which is a non-contributory, nonqualified, defined benefit retirementplan.  The TEPPCO SBP was established torestore benefit reductions caused by the maximum benefit limitations that applyto qualified plans.  The benefit formulafor all eligible employees is a cash balance formula.  Under a cash balance formula, a planparticipant accumulates a retirement benefit based upon pay credits and currentinterest credits.  The pay credits arebased on a participant’s salary, age and service.  We use a December 31 measurement date forthese plans.

 

The components of net pension benefits costs for theTEPPCO RCBP and the TEPPCO SBP for the three months ended March 31, 2005 and 2004,were as follows (in thousands):

 
| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Service cost benefit  earned during the period |       | $                                 | 1,005      |   | $ | 913 |   |
| Interest cost on  projected benefit obligation |       | 225                               |       | 180 |   |
| Expected return on plan  assets                |       | (300                              | )          | (220 | ) |
| Amortization of prior  service cost            |       | 2                                 |       | 2 |   |
| Recognized net  actuarial loss                 |       | 10                                |       | 14 |   |
| Net pension benefits  costs                    |       | $                                 | 942        |   | $ | 889 |   |

 

## **Other Postretirement Benefits**

## ** **

Effective January 1, 2001, we provide employees withcertain health care and life insurance benefits for retired employees on acontributory 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 retiree paysall health care cost increases due to medical inflation.  We use a December 31 measurement date forthis plan.

 

The components of net postretirement benefits cost forthe TEPPCO OPB for the three months ended March 31, 2005 and 2004, were asfollows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                                            |       |                              |       |   |   |
| Service cost benefit  earned during the period                  |       | $                                 | 49         |   | $ | 41 |   |
| Interest cost on  accumulated postretirement benefit obligation |       | 42                                |       | 38 |   |
| Amortization of prior  service cost                             |       | 32                                |       | 32 |   |
| Recognized net  actuarial loss                                  |       | 4                                 |       | — |   |
| Net postretirement  benefits costs                              |       | $                                 | 127        |   | $ | 111 |   |

 

## **Estimated Future Benefit Contributions**

## ** **

We expect to contribute approximately $3.5 million toour retirement plans and other postretirement benefit plans in 2005.

 

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**NOTE 10. SEGMENT INFORMATION**

 

We have three reporting segments:

 

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

 

•                  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 indicated below as “Partnership and Other”relate primarily to intersegment eliminations and assets that we hold that havenot been allocated to any of our reporting segments.

 

Our Downstream Segment revenues are earned fromtransportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sale of product inventory and other ancillaryservices. The two largest operating expense items of the Downstream Segment arelabor and electric power.  We generallyrealize higher revenues during the first and fourth quarters of each year sinceour operations are somewhat seasonal. Refined products volumes are generallyhigher during the second and third quarters because of greater demand forgasolines during the spring and summer driving seasons. LPGs volumes aregenerally higher from November through March due to higher demand in theNortheast for propane, a major fuel for residential heating.  Our Downstream Segment also includes theresults of operations of the northern portion of the Dean Pipeline, whichtransports refinery grade propylene from Mont Belvieu to Point Comfort, Texas.  Our Downstream Segment also includes our equityinvestments in Centennial and MB Storage (see Note 6.  Equity Investments).

 

Our Upstream Segment revenues are earned fromgathering, transportation, marketing and storage of crude oil and distributionof lubrication oils and specialty chemicals, principally in Oklahoma, Texas,New Mexico and the Rocky Mountain region. Marketing operations consist primarily of aggregating purchased crudeoil along our pipeline systems, or from third party pipeline systems, and arrangingthe necessary transportation logistics for the ultimate sale of the crude oilto local refineries, marketers or other end users.  Our Upstream Segment also includes our equityinvestment in Seaway (see Note 6. Equity Investments).  Seaway consists of large diameter pipelinesthat transport crude oil from Seaway’s marine terminals on the U.S. Gulf Coastto Cushing, Oklahoma, a crude oil distribution point for the central UnitedStates, and to refineries in the Texas City and Houston areas.

 

 Our MidstreamSegment revenues are earned from the fractionation of NGLs in Colorado,transportation of NGLs from two trunkline NGL pipelines in South Texas, two NGLpipelines in East Texas and a pipeline system (Chaparral) from West Texas andNew Mexico to Mont Belvieu; the gathering of natural gas in the Green RiverBasin in southwestern Wyoming, through Jonah, and the gathering of coal bedmethane (“CBM”) and conventional natural gas in the San Juan Basin in NewMexico and Colorado, through Val Verde. DEFS currently manages and operates the Val Verde, Jonah and Chaparralassets for us under contractual agreements.

 

The table below includes financialinformation by reporting segment for the three months ended March 31, 2005 and 2004(in thousands):

 

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| ** **                             | ** ** | **Three Months Ended March 31,  2005** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **Downstream  Segment**                | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales of petroleum  products           |       | $                                      | —     |   | $ | 1,385,067 |   | $ | 2,142 |   | $ | 1,387,209 |   | $ | — |   | $ | 1,387,209 |   |
| Operating revenues                     |       | 78,167                                 |       | 11,713 |   | 50,856 |   | 140,736 |   | (1,340 | ) | 139,396 |   |
| Purchases of petroleum  products       |       | —                                 |       | 1,372,430 |   | 1,370 |   | 1,373,800 |   | (1,340 | ) | 1,372,460 |   |
| Operating expenses,  including power   |       | 37,186                                 |       | 15,445 |   | 13,893 |   | 66,524 |   | — |   | 66,524 |   |
| Depreciation and  amortization expense |       | 9,561                                  |       | 3,501 |   | 12,701 |   | 25,763 |   | — |   | 25,763 |   |
| (Gains) losses on sales  of assets     |       | (92                                    | )          | 1 |   | (407 | ) | (498 | ) | — |   | (498 | ) |
| Operating income                       |       | 31,512                                 |       | 5,403 |   | 25,441 |   | 62,356 |   | — |   | 62,356 |   |
| Equity earnings (losses)               |       | (842                                   | )          | 6,088 |   | — |   | 5,246 |   | — |   | 5,246 |   |
| Other income, net                      |       | 149                                    |       | 75 |   | 42 |   | 266 |   | — |   | 266 |   |
| Earnings before  interest              |       | $                                      | 30,819     |   | $ | 11,566 |   | $ | 25,483 |   | $ | 67,868 |   | $ | — |   | $ | 67,868 |   |

 

 
| ** **                             | ** ** | **Three Months Ended March 31,  2004** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **Downstream  Segment**                | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales of petroleum  products           |       | $                                      | —     |   | $ | 1,180,767 |   | $ | 1,346 |   | $ | 1,182,113 |   | $ | — |   | $ | 1,182,113 |   |
| Operating revenues                     |       | 74,809                                 |       | 13,723 |   | 48,817 |   | 137,349 |   | (1,401 | ) | 135,948 |   |
| Purchases of petroleum  products       |       | —                                 |       | 1,167,425 |   | 1,317 |   | 1,168,742 |   | (1,401 | ) | 1,167,341 |   |
| Operating expenses,  including power   |       | 40,050                                 |       | 14,026 |   | 14,981 |   | 69,057 |   | — |   | 69,057 |   |
| Depreciation and  amortization expense |       | 9,077                                  |       | 3,068 |   | 15,675 |   | 27,820 |   | — |   | 27,820 |   |
| Gains on sales of  assets              |       | —                                 |       | (58 | ) | — |   | (58 | ) | — |   | (58 | ) |
| Operating income                       |       | 25,682                                 |       | 10,029 |   | 18,190 |   | 53,901 |   | — |   | 53,901 |   |
| Equity earnings  (losses)              |       | (1,238                                 | )          | 6,889 |   | — |   | 5,651 |   | — |   | 5,651 |   |
| Other income, net                      |       | 272                                    |       | 146 |   | 58 |   | 476 |   | — |   | 476 |   |
| Earnings before  interest              |       | $                                      | 24,716     |   | $ | 17,064 |   | $ | 18,248 |   | $ | 60,028 |   | $ | — |   | $ | 60,028 |   |

 

The following table provides totalassets and capital expenditures for each segment as of and for the periodsended March 31, 2005, and December 31, 2004 (in thousands):

 

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| ** **           | ** ** | **Downstream  Segment** | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
|----------------------|------------|-------------------------|------------|-----------------------|------------|------------------------|------------|---------------------|------------|----------------------------|------------|------------------|------------|
| ** **           | ** ** | ** **              | ** ** | ** **            | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                 | ** ** | ** **       | ** ** |
| March 31, 2005:      |       |                    |       |                  |       |                   |       |                |       |                       |       |             |       |
| Total assets         |       | $                       | 967,320    |                  | $          | 1,081,757              |       | $                   | 1,159,734  |                       | $          | 3,208,811        |       | $ | (49,251 | ) | $ | 3,159,560 |   |
| Capital expenditures |       | 14,258                  |       | 7,006                 |       | 6,313                  |       | 27,577              |       | 12                         |       | 27,589           |       |
| ** **           | ** ** | ** **              | ** ** | ** **            | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                 | ** ** | ** **       | ** ** |
| December 31, 2004:   |       |                    |       |                  |       |                   |       |                |       |                       |       |             |       |
| Total assets         |       | $                       | 968,993    |                  | $          | 1,070,477              |       | $                   | 1,184,184  |                       | $          | 3,223,654        |       | $ | (25,949 | ) | $ | 3,197,705 |   |
| Capital expenditures |       | 80,930                  |       | 37,448                |       | 45,075                 |       | 163,453             |       | 694                        |       | 164,147          |       |

 

The following table reconciles the segments’ totalearnings before interest to consolidated net income for the three months endedMarch 31, 2005 and 2004 (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Earnings before  interest   |       | $                                 | 67,868     |   | $ | 60,028 |   |
| Interest expense – net |       | (19,287                           | )          | (19,595 | ) |
| Net income                  |       | $                                 | 48,581     |   | $ | 40,433 |   |

 

**NOTE 11.  COMMITMENTS AND CONTINGENCIES**

 

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

 

Although we did not settle with all plaintiffs and wetherefore remain named parties in the *Ryan E. McCleery and MarciaS. McCleery, et al. v. Texas Eastern Corporation, et al*. action, aco-defendant has agreed to indemnify us for all remaining claims assertedagainst us.  Consequently, we do notbelieve that the outcome of these remaining claims will have a material adverseeffect on our financial position, results of operations or cash flows.

 

On December 21, 2001, TE Products was named as adefendant 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 an answerto the plaintiffs’ petition denying the allegations, and we are defendingourselves vigorously against the lawsuit. The plaintiffs have not stipulated the amount of damages they areseeking in the suit; however, this case is covered by insurance.  We do not believe that the outcome of thislawsuit will have a material adverse effect on our financial position, resultsof operations or cash flows.

 

In May 2003, the General Partner was named as adefendant in a lawsuit styled *John R. James, et al. v. JGraves Insulation Company, et al.* as filed in the first JudicialDistrict Court, Caddo Parish, Louisiana. There are numerous plaintiffs identified in the action that are allegedto have suffered damages as the result of alleged exposure

 

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

 

On April 2, 2003, Centennial was served with apetition in a matter styled *Adams, et al. v.Centennial Pipeline Company LLC, et al*.  This matter involves approximately 2,000plaintiffs who allege that over 200 defendants, including Centennial,generated, transported, and/or disposed of hazardous and toxic waste at twosites in Bayou Sorrell, Louisiana, an underground injection well and alandfill.  The plaintiffs allege personalinjuries, allergies, birth defects, cancer and death.  The underground injection well has been inoperation since May 1976.  Based uponcurrent information, Centennial appears to be a *de minimis*contributor, having used the disposal site during the two month time period ofDecember 2001 to January 2002.  Marathonhas been handling this matter for Centennial under its operating agreement withCentennial.  TE Products has a 50%ownership interest in Centennial.  OnNovember 30, 2004, the court approved a class settlement, which included an $80,000payment by Centennial.  The time periodfor parties to appeal this settlement expired in March 2005, and the classsettlement became final.  The terms ofthe settlement did not have a material adverse effect on our financialposition, results of operations or cash flows.

 

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

 

On February 7, 2005, we received a letter from BPAmoco’s counsel placing us on notice of a lawsuit filed by ConocoPhillipsagainst BP Amoco Seaway Products Pipeline Company.  Pursuant to provisions of the Amended andRestated Purchase Agreement dated May 10, 2000, between us and ARCO Pipe LineCompany (BP Amoco), BP Amoco requested indemnity should BP Amoco have anyliability to ConocoPhillips.  Thelitigation arises out of an income tax liability alleged by ConocoPhillips dueto a partnership merger.  The plaintiffestimates the income tax liability to be $3,964,788.  We have requested information from BP Amoco thatwill allow us to assess liability, if any, that we may have in this matter.  We do not believe that the outcome of thislawsuit will have a future material adverse effect on our financial position,results of operations or cash flows.

 

In addition to the litigation discussed above, we havebeen, in the ordinary course of business, a defendant in various lawsuits and aparty to various other legal proceedings, some of which are covered in whole orin part by

 

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insurance. We believethat the outcome of these lawsuits and other proceedings will not individuallyor in the aggregate have a future material adverse effect on our consolidatedfinancial position, results of operations or cash flows.

 

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

 

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

 

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

 

In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana, facility.  In1999, our Arcadia facility and adjacent terminals were directed by theRemediation Services Division of the LDEQ to pursue remediation of thiscontamination.  At March 31, 2005, wehave an accrued liability of $0.2 million for remediation costs at our Arcadia

 

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facility.  Effective in March 2004, we executed anaccess agreement with an adjacent industrial landowner who is locatedupgradient of the Arcadia facility.  Thisagreement enables the landowner to proceed with remediation activities at ourArcadia facility for which it has accepted shared responsibility.  We do not expect that the completion of theremediation program proposed to the LDEQ will have a future material adverseeffect on our financial position, results of operations or cash flows.

 

On March 17, 2003, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois.  As a result of the release, we have enteredinto an Agreed Order with the State of Illinois which required us to conduct anenvironmental investigation.  At thistime, we have complied with the terms of the Agreed Order, and the results ofthe environmental investigation indicated there were no soil or groundwater impactsfrom the release.  We are in the processof negotiating a final settlement with the State of Illinois, and we donot expect that compliance with the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal.  Thereleased jet fuel was contained within a storm water retention pond located onthe terminal property.  Six migratorywaterfowl were affected by the jet fuel and were subsequently euthanized by orat the request of the United States Fish and Wildlife Service (“USFWS”).  On October 1, 2004, the USFWS served us witha Notice of Violation, alleging that we violated 16 USC 703 of the MigratoryBird Treaty Act for the “take[ing] of migratory birds by illegal methods.”  On February 7, 2005, we entered into aMemorandum of Understanding with the USFWS, settling all aspects of thismatter.  The terms of this settlement didnot have a material effect on our financial position, results of operations orcash flows.

 

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

 

At March 31, 2005, we have an accrued liability of $4.2million related to various TCTM and TE Products sites requiring environmentalremediation activities.  We do not expectthat the completion of remediation programs associated with TCTM and TEProducts activities will have a future material adverse effect on our financialposition, results of operations or cash flows.

 

Centennial entered into credit facilities totaling$150.0 million, and as of March 31, 2005, $150.0 million was outstanding underthose credit facilities.  The proceedswere used to fund construction and conversion costs of its pipelinesystem.  TE Products and Marathon haveeach guaranteed one-half of Centennial’s debt, up to a maximum amount of $75.0million each.

 

On February 24, 2005, the General Partner was acquiredfrom DEFS by DFI.  The General Partnerowns a 2% general partner interest in us and is the general partner of thePartnership.  On March 11, 2005, theBureau of Competition of the Federal Trade Commission (“FTC”) delivered writtennotice to DFI’s legal advisor that it was conducting a non-public investigationto determine whether DFI’s acquisition of the General Partner may substantiallylessen competition.  The FTC hascontacted the General Partner requesting data. The General Partner intends to cooperate fully with any suchinvestigations and inquiries requested by the FTC or any other regulatoryauthorities.

 

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**NOTE 12. COMPREHENSIVE INCOME**

 

SFAS No. 130, *Reporting ComprehensiveIncome* requires certain items such as foreign currency translationadjustments, minimum pension liability adjustments and unrealized gains andlosses on certain investments to be reported in a financial statement.  As of and for the three months ended March31, 2004, the components of comprehensive income were due to the interest rateswap related to our variable rate revolving credit facility, which wasdesignated as a cash flow hedge.  Theinterest rate swap matured in April 2004. While the interest rate swap was in effect, changes in the fair value ofthe cash flow hedge, to the extent the hedge was effective, were recognized inother comprehensive income until the hedge interest costs were recognized innet income.  All other comprehensiveincome was recognized in net income during 2004.

 

The table below reconciles reported net income tototal comprehensive income for the three months ended March 31, 2005 and 2004 (inthousands):

 
| ** **                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net income                     |       | $                                 | 48,581     |   | $ | 40,433 |   |
| Net income on cash flow  hedge |       | —                            |       | 2,682 |   |
| Total comprehensive  income    |       | $                                 | 48,581     |   | $ | 43,115 |   |

 

The accumulated balance of othercomprehensive loss related to our cash flow hedge is as follows (in thousands):  

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

** **

**NOTE 13.  SUPPLEMENTAL CONDENSED CONSOLIDATINGFINANCIAL INFORMATION**

** **

Our significant operating subsidiaries, TE ProductsPipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies,L.P., Jonah Gas Gathering Company and Val Verde Gas Gathering Company, L.P.,have issued unconditional guarantees of our debt securities.  The guarantees are full, unconditional, andjoint and several.  TE Products PipelineCompany, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P.,Jonah Gas Gathering Company and Val Verde Gas Gathering Company, L.P. arecollectively referred to as the “Guarantor Subsidiaries.”

 

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

 

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| ** **                                    | ** ** | **March 31, 2005**         | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **TEPPCO  Partners, L.P.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                    | ** ** | **(in thousands)**         | ** ** |
| Assets                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Current assets                                |       | $                          | 31,850     |   | $ | 81,318 |   | $ | 563,019 |   | $ | (70,956 | ) | $ | 605,231 |   |
| Property, plant and  equipment – net     |       | —                     |       | 1,211,213 |   | 502,101 |   | — |   | 1,713,314 |   |
| Equity investments                            |       | 1,011,399                  |       | 429,726 |   | 205,467 |   | (1,270,615 | ) | 375,977 |   |
| Intercompany notes  receivable                |       | 1,162,344                  |       | — |   | — |   | (1,162,344 | ) | — |   |
| Intangible assets                             |       | —                     |       | 366,324 |   | 33,970 |   | — |   | 400,294 |   |
| Other assets                                  |       | 5,734                      |       | 19,175 |   | 39,835 |   | — |   | 64,744 |   |
| Total assets                                  |       | $                          | 2,211,327  |   | $ | 2,107,756 |   | $ | 1,344,392 |   | $ | (2,503,915 | ) | $ | 3,159,560 |   |
| Liabilities and  partners’ capital       |       |                       |       |   |   |   |   |   |   |   |   |
| Current liabilities                           |       | $                          | 32,335     |   | $ | 116,561 |   | $ | 500,864 |   | $ | (70,955 | ) | $ | 578,805 |   |
| Long-term debt                                |       | 1,164,974                  |       | 390,432 |   | — |   | — |   | 1,555,406 |   |
| Intercompany notes  payable                   |       | —                     |       | 702,377 |   | 459,969 |   | (1,162,346 | ) | — |   |
| Other long term  liabilities                  |       | 2,647                      |       | 9,865 |   | 1,466 |   | — |   | 13,978 |   |
| Total partners’ capital                  |       | 1,011,371                  |       | 888,521 |   | 382,093 |   | (1,270,614 | ) | 1,011,371 |   |
| Total liabilities and  partners’ capital |       | $                          | 2,211,327  |   | $ | 2,107,756 |   | $ | 1,344,392 |   | $ | (2,503,915 | ) | $ | 3,159,560 |   |

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

 

23

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| ** **                         | ** ** | **Three Months Ended March 31,  2005** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **TEPPCO  Partners, L.P.**             | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                         | ** ** | **(in thousands) **               | ** ** |
| Operating revenues                 |       | $                                      | —     |   | $ | 117,925 |   | $ | 1,410,020 |   | $ | (1,340 | ) | $ | 1,526,605 |   |
| Costs and expenses                 |       | —                                 |       | 67,779 |   | 1,398,308 |   | (1,340 | ) | 1,464,747 |   |
| (Gains) losses on sales  of assets |       | —                                 |       | (499 | ) | 1 |   | — |   | (498 | ) |
| Operating income                   |       | —                                 |       | 50,645 |   | 11,711 |   | — |   | 62,356 |   |
| Interest expense – net        |       | —                                 |       | (13,018 | ) | (6,269 | ) | — |   | (19,287 | ) |
| Equity earnings                    |       | 48,581                                 |       | 10,771 |   | 6,088 |   | (60,194 | ) | 5,246 |   |
| Other income – net            |       | —                                 |       | 183 |   | 83 |   | — |   | 266 |   |
| Net income                         |       | $                                      | 48,581     |   | $ | 48,581 |   | $ | 11,613 |   | $ | (60,194 | ) | $ | 48,581 |   |

 
| ** **                  | ** ** | **Three Months Ended March 31,  2004** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | **TEPPCO  Partners, L.P.**             | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                  | ** ** | **(in thousands) **               | ** ** |
| Operating revenues          |       | $                                      | —     |   | $ | 111,888 |   | $ | 1,207,574 |   | $ | (1,401 | ) | $ | 1,318,061 |   |
| Costs and expenses          |       | —                                 |       | 73,416 |   | 1,192,203 |   | (1,401 | ) | 1,264,218 |   |
| Gains on sales of  assets   |       | —                                 |       | — |   | (58 | ) | — |   | (58 | ) |
| Operating income            |       | —                                 |       | 38,472 |   | 15,429 |   | — |   | 53,901 |   |
| Interest expense – net |       | —                                 |       | (12,792 | ) | (6,803 | ) | — |   | (19,595 | ) |
| Equity earnings             |       | 40,433                                 |       | 14,447 |   | 6,889 |   | (56,118 | ) | 5,651 |   |
| Other income – net     |       | —                                 |       | 306 |   | 170 |   | — |   | 476 |   |
| Net income                  |       | $                                      | 40,433     |   | $ | 40,433 |   | $ | 15,685 |   | $ | (56,118 | ) | $ | 40,433 |   |

 

24

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| ** **                                                                                   | ** ** | **Three Months Ended March 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                   | ** ** | **TEPPCO  Partners, L.P.**             | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                     | ** ** |
| Cash flows from  operating activities                                                        |       |                                   |       |   |   |   |   |   |   |   |   |
| Net income                                                                                   |       | $                                      | 48,581     |   | $ | 48,581 |   | $ | 11,613 |   | $ | (60,194 | ) | $ | 48,581 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                   |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                               |       | —                                 |       | 19,729 |   | 6,034 |   | — |   | 25,763 |   |
| Earnings (losses) in  equity investments, net of distributions                               |       | 10,077                                 |       | 1,061 |   | (1,369 | ) | (10,296 | ) | (527 | ) |
| (Gains) losses on sales  of assets                                                           |       | —                                 |       | (499 | ) | 1 |   | — |   | (498 | ) |
| Changes in assets and  liabilities and other                                                 |       | (55,364                                | )          | (28,813 | ) | (45,981 | ) | 72,642 |   | (57,516 | ) |
| Net cash provided by  (used in) operating activities                                         |       | 3,294                                  |       | 40,059 |   | (29,702 | ) | 2,152 |   | 15,803 |   |
|                                                                                         |       |                                   |       |   |   |   |   |   |   |   |   |
| Cash flows from  investing activities                                                        |       | —                                 |       | 9,088 |   | (14,301 | ) | (28,967 | ) | (34,180 | ) |
| Cash flows from  financing activities                                                        |       | 20,342                                 |       | (62,243 | ) | 41,452 |   | 20,791 |   | 20,342 |   |
| Net increase (decrease)  in cash and cash equivalents                                        |       | 23,636                                 |       | (13,096 | ) | (2,551 | ) | (6,024 | ) | 1,965 |   |
| Cash and cash equivalents  at beginning of period                                            |       | 4,116                                  |       | 13,596 |   | 2,826 |   | (4,116 | ) | 16,422 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                      | 27,752     |   | $ | 500 |   | $ | 275 |   | $ | (10,140 | ) | $ | 18,387 |   |

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,  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                                                                         |       | $                                      | 40,433     |   | $ | 40,433 |   | $ | 15,685 |   | $ | (56,118 | ) | $ | 40,433 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                   |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                     |       | —                                 |       | 22,107 |   | 5,713 |   | — |   | 27,820 |   |
| Earnings (losses) in  equity investments, net of distributions                     |       | 16,650                                 |       | (2,932 | ) | (889 | ) | (12,480 | ) | 349 |   |
| Gains on sales of  assets                                                          |       | —                                 |       | — |   | (58 | ) | — |   | (58 | ) |
| Changes in assets and  liabilities and other                                       |       | (35,740                                | )          | (25,342 | ) | 8,013 |   | 27,690 |   | (25,379 | ) |
| Net cash provided by  operating activities                                         |       | 21,343                                 |       | 34,266 |   | 28,464 |   | (40,908 | ) | 43,165 |   |
|                                                                               |       |                                   |       |   |   |   |   |   |   |   |   |
| Cash flows from  investing activities                                              |       | 335                                    |       | 10,169 |   | (10,552 | ) | (28,858 | ) | (28,906 | ) |
| Cash flows from  financing activities                                              |       | (40,583                                | )          | (60,065 | ) | (21,152 | ) | 81,217 |   | (40,583 | ) |
| Net decrease in cash  and cash equivalents                                         |       | (18,905                                | )          | (15,630 | ) | (3,240 | ) | 11,451 |   | (26,324 | ) |
| 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                                        |       | $                                      | 839        |   | $ | 3,613 |   | $ | 2,430 |   | $ | (3,737 | ) | $ | 3,145 |   |

 

25

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**NOTE 14. SUBSEQUENT EVENT**

 

On April 1, 2005, we purchased crudeoil storage and terminaling assets in Cushing, Oklahoma, from Koch Supply &Trading, L.P. for $35.0 million.  Theassets consist of eight storage tanks with 945,000 barrels of storage capacity,receipt and delivery manifolds, interconnections to several pipelines, crudeoil inventory and approximately 70 acres of land.  The storage and terminaling assets willcomplement our existing infrastructure in Cushing and strengthen our gatheringand marketing business in our Upstream Segment.

 

26

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

 

**General**

** **

You should read the following review of our financialposition and results of operations in conjunction with our ConsolidatedFinancial Statements and the notes thereto. Material period-to-period variances in the consolidated statements ofincome are discussed under “Results of Operations.”  The “Financial Condition and Liquidity”section analyzes our cash flows and financial position.  “Other Considerations” addresses trends,future plans and contingencies that are reasonably likely to materially affect ourfuture liquidity or earnings.  TheConsolidated Financial Statements should be read in conjunction with thefinancial statements and related notes, together with our discussion andanalysis of financial position and results of operations included in our AnnualReport on Form 10-K for the year ended December 31, 2004.

 

**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, 2004, 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; asset impairmentanalysis related to property, plant and equipment; and amortization expense andasset impairment analysis related to goodwill and other intangible assets.  These estimates are based on our knowledgeand understanding of current conditions and actions we may take in thefuture.  Changes in these estimates willoccur as a result of the passage of time and the occurrence of futureevents.  Subsequent changes in theseestimates may have a significant impact on our financial condition and resultsof operations.

 

## ****Management Overview of the ThreeMonths Ended March 31, 2005****

## ** **

## ****We reported net income of $48.6 million, or$0.55 per Limited Partner Unit (“Unit” or “Units”), for the three months endedMarch 31, 2005, compared with net income of $40.4 million, or $0.46 per Unit,for the three months ended March 31, 2004. The weighted average number of Units outstanding was 63.0 million foreach of the three months ended March 31, 2005 and 2004.****

## ** **

## ****Our Downstream Segment had a strong threemonths, with increased refined products and LPG transportation revenues andvolumes delivered.  These increases werepartially offset by lower propane inventory fee revenues, increasedenvironmental expenses and increased rental expense from our CentennialPipeline LLC (“Centennial”) capacity lease agreement.  Additionally, pipeline integrity expensesdecreased $4.4 million compared to our first quarter 2004 costs.  We anticipate that our pipeline integrityexpenses for our Downstream Segment for 2005 will be approximately $17.6million lower than our 2004 expenses primarily due to the completion ofprojects.****

## ** **

## ****Our Upstream Segment results for the threemonths ended March 31, 2005, were impacted by decreased transportation andmarketing volumes, increased transportation costs and expenses related tomarking crude oil physical swaps to market. Increased pipeline operating costs were partially offset by decreasedenvironmental remediation expenses.  Equityearnings from Seaway Crude Pipeline Company (“Seaway”) decreased compared tothe prior year period primarily due to a gain recognized on an inventorysettlement in 2004, partially offset by increased transportation volumes in2005.  Pipeline integrity expensesincreased $0.1 million compared to our first quarter 2004 costs.  We anticipate that our 2005 pipelineintegrity expenses for our Upstream Segment will be approximately $1.6 millionhigher than our 2004 expenses as we continue to perform pipeline inspectionsand repairs under our integrity management program.****

## ** **

## ****Our Midstream Segment benefited fromincreased revenues and volumes on Jonah Gas Gathering Company (“Jonah”),resulting from our 2003 Phase III expansion and the installation of additionalcapacity during the fourth quarter of 2004. Revenues on Val Verde Gas Gathering Company (“Val Verde”) increased dueto new connections****

**** ****

****27****

----

**** ****

## ****made to the system in May and December 2004, partially offsettingthe impact of reduced revenues related to the natural decline of coal bedmethane (“CBM”) production from existing wells. Additionally, our operating and gas settlement expenses decreasedcompared to our first quarter 2004 costs. These increases to operating income were partially offset by lower gatheringrates on the new connections at Val Verde, on which the gathering rates arelower than existing average rates on the system.****

 

We are subject to economic and other factors thataffect our industry.  The demand forrefined products is dependent upon the price, prevailing economic conditionsand demographic changes in the markets served, trucking and railroad freight,agricultural usage and military usage; the demand for propane is sensitive tothe weather and prevailing economic conditions; the demand for petrochemicalsis dependent upon prices for products produced from petrochemicals; the demandfor crude oil and petroleum products is dependent upon the price of crude oiland the products produced from the refining of crude oil; and the demand fornatural gas is dependent upon the price of natural gas and the locations inwhich natural gas is drilled.  We arealso subject to regulatory factors such as the amounts we are allowed to chargeour customers for the services we provide on our regulated pipeline systems.

 

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

 

Weremain confident that our current strategy and focus will provide continuedgrowth in earnings and cash distributions. These growth opportunities include:

 

•                 Continued solid performance in ourUpstream Segment, as we build on our existing asset base and concentrate onacquisitions in our core operating areas;

•                 Continued development of the Jonahsystem which serves the Jonah and Pinedale fields;

•                 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; and

•                   Growth in our Downstream Segment,resulting from our recent capacity expansion and grass roots facilityinvestments and growing demand for Gulf Coast sourced products.

 

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

 

On April 1, 2005, we purchased crude oil storage andterminaling assets in Cushing, Oklahoma, from Koch Supply & Trading, L.P.for $35.0 million.  The assets consist ofeight storage tanks with 945,000 barrels of storage capacity, receipt anddelivery manifolds, interconnections to several pipelines, crude oil inventoryand approximately 70 acres of land.  Thestorage and terminaling assets will complement our existing infrastructure inCushing and strengthen our gathering and marketing business in our UpstreamSegment.

 

Consistent with our business strategy, we continuouslyevaluate possible 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****.****

 

28

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**** ****

## ****Our Business****

## ** **

TEPPCO Partners, L.P. (the “Partnership”), a Delawarelimited partnership, is a master limited partnership formed in March 1990.  We operate through TE Products PipelineCompany, Limited Partnership (“TE Products”), TCTM, L.P. (“TCTM”) and TEPPCOMidstream Companies, L.P. (“TEPPCO Midstream”). Collectively, TE Products, TCTM and TEPPCO Midstream are referred to asthe “Operating Partnerships.”  TEPPCO GP,Inc. (“TEPPCO GP”), our wholly owned subsidiary, is the general partner of ourOperating Partnerships.  We hold a99.999% limited partner interest in the Operating Partnerships, and TEPPCO GPholds a 0.001% general partner interest. Texas Eastern Products Pipeline Company, LLC (the “Company” or “GeneralPartner”), a Delaware limited liability company, serves as our general partnerand owns a 2% general partner interest in us. Through February 23, 2005, the General Partner was an indirect whollyowned subsidiary of Duke Energy Field Services, LLC (“DEFS”), a joint venturebetween Duke Energy Corporation (“Duke Energy”) and ConocoPhillips.  Through February 23, 2005, Duke Energy heldan interest of approximately 70% in DEFS, and ConocoPhillips held the remaininginterest of approximately 30%.  OnFebruary 24, 2005, the General Partner was acquired by DFI GP Holdings L.P. (formerlyEnterprise GP Holdings L.P.) (“DFI”), an affiliate of EPCO, Inc. (“EPCO”), aprivately held company controlled by Dan L. Duncan, for approximately $1.1billion.  As a result of the transaction,DFI owns and controls the 2% general partner interest in us and has the rightto receive the incentive distribution rights associated with the generalpartner interest.

 

The Company, as general partner, performs allmanagement and operating functions required for us, except for the managementand operations of certain of the TEPPCO Midstream assets that are currentlymanaged by DEFS on our behalf.  Wereimburse the General Partner for all reasonable direct and indirect expensesthat have been incurred in managing us. Under a transition services agreement entered into as part of the saleof the General Partner, DEFS will continue to operate certain of the TEPPCOMidstream assets for us and continue to provide certain administrative servicesfor a period of time until we assume the operations of these assets and providethese services on our own.  In connectionwith us assuming these processes and services, certain DEFS employees currentlyproviding these services to us will become employees of our GeneralPartner.  As part of the transitionservices agreement, Duke Energy will continue to provide payroll and otheradministrative support services to us until DFI assumes those activities.

 

In connection with our formation in 1990, the Companyreceived 2,500,000 Deferred Participation Interests (“DPIs”).  Effective April 1, 1994, the DPIs beganparticipating in distributions of cash and allocations of profit and loss in amanner identical to Limited Partner Units and are treated as Limited PartnerUnits for purposes of this Report.  TheseLimited Partner Units were assigned to Duke Energy when ownership of theCompany was transferred from Duke Energy to DEFS in 2000.  On February 24, 2005, DFI entered into an LPUnit Purchase and Sale Agreement with Duke Energy and purchased these 2,500,000DPIs for approximately $100.0 million.

 

We operate and report in three business segments:

 

•                  Downstream Segment – transportationand storage of refined products, liquefied petroleum gases (“LPGs”) andpetrochemicals;

 

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

 

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

 

Our reportable segments offer different products andservices and are managed separately because each requires different businessstrategies.  TEPPCO GP, our wholly ownedsubsidiary, acts as managing general partner of our Operating Partnerships,with a 0.001% general partner interest and manages our subsidiaries.

 

Our Downstream Segment revenues are earned fromtransportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sale of product inventory and other ancillaryservices.  The two 

 

29

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largest operating expenseitems of the Downstream Segment are labor and electric power.  We generally realize higher revenues duringthe first and fourth quarters of each year since our operations are somewhatseasonal.  Refined products volumes aregenerally higher during the second and third quarters because of greater demandfor gasolines during the spring and summer driving seasons.  LPGs volumes are generally higher 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 to Point Comfort, Texas. Our Downstream Segment also includes our equity investments inCentennial and Mont Belvieu Storage Partners, L.P. (“MB Storage”) (see Note 6.  Equity Investments).

 

Our Upstream Segment revenues areearned from gathering, transportation, marketing and storage of crude oil anddistribution of lubrication oils and specialty chemicals, principally inOklahoma, Texas, New Mexico and the Rocky Mountain region.  Marketing operations consist primarily ofaggregating purchased crude oil along our pipeline systems, or from third partypipeline systems, and arranging the necessary transportation logistics for theultimate sale of the crude oil to local refineries, marketers or other endusers.  Our Upstream Segment alsoincludes our equity investment in Seaway (see Note 6.  Equity Investments).  Seaway consists of large diameter pipelinesthat transport crude oil from Seaway’s marine terminals on the U.S. Gulf Coastto Cushing, Oklahoma, a crude oil distribution point for the central UnitedStates, and to refineries in the Texas City and Houston areas.

 

Our Midstream Segment revenues are earned from thefractionation of NGLs in Colorado, transportation of NGLs from two trunklineNGL pipelines in South Texas, two NGL pipelines in East Texas and a pipelinesystem (Chaparral) from West Texas and New Mexico to Mont Belvieu; thegathering of natural gas in the Green River Basin in southwestern Wyoming,through Jonah, and the gathering of CBM and conventional natural gas in the SanJuan Basin in New Mexico and Colorado, through Val Verde.  DEFS currently manages and operates the ValVerde, Jonah and Chaparral assets for us under contractual agreements.

 

**Results of Operations**

 

The following table summarizesfinancial information by business segment for the three months ended March 31, 2005and 2004 (in thousands):

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Operating revenues:             |       |                              |       |   |   |
| Downstream Segment              |       | $                                 | 78,167     |   | $ | 74,809 |   |
| Upstream Segment                |       | 1,396,780                         |       | 1,194,490 |   |
| Midstream Segment               |       | 52,998                            |       | 50,163 |   |
| Intercompany  eliminations      |       | (1,340                            | )          | (1,401 | ) |
| Total operating  revenues       |       | 1,526,605                         |       | 1,318,061 |   |
|                            |       |                              |       |   |   |
| Operating income:               |       |                              |       |   |   |
| Downstream Segment              |       | 31,512                            |       | 25,682 |   |
| Upstream Segment                |       | 5,403                             |       | 10,029 |   |
| Midstream Segment               |       | 25,441                            |       | 18,190 |   |
| Total operating income          |       | 62,356                            |       | 53,901 |   |
|                            |       |                              |       |   |   |
| Earnings before  interest:      |       |                              |       |   |   |
| Downstream Segment              |       | 30,819                            |       | 24,716 |   |
| Upstream Segment                |       | 11,566                            |       | 17,064 |   |
| Midstream Segment               |       | 25,483                            |       | 18,248 |   |
| Total earnings before  interest |       | 67,868                            |       | 60,028 |   |
|                            |       |                              |       |   |   |
| Interest expense                |       | (20,389                           | )          | (20,459 | ) |
| Interest capitalized            |       | 1,102                             |       | 864 |   |
| Net income                      |       | $                                 | 48,581     |   | $ | 40,433 |   |

 

30

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Below is a detailed analysis of the results ofoperations, including reasons for changes in results, for each of our operatingsegments.

 

**Downstream Segment**

 

The following table provides financialinformation for the Downstream Segment for the three months ended March 31, 2005and 2004 (in thousands):

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|--------------|------------|
| ** **                              | ** ** | **2005**                          | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** |
|                                    |       |                              |       |         |       |   |   |
| Transportation –  Refined products |       | $                                 | 34,965     |         | $          | 30,971 |   | $ | 3,994 |   |
| Transportation – LPGs              |       | 32,231                            |       | 28,780       |       | 3,451 |   |
| Other                                   |       | 10,971                            |       | 15,058       |       | (4,087 | ) |
| Total operating  revenues               |       | 78,167                            |       | 74,809       |       | 3,358 |   |
|                                    |       |                              |       |         |       |   |   |
| Operating, general and  administrative  |       | 26,615                            |       | 29,155       |       | (2,540 | ) |
| Operating fuel and  power               |       | 7,660                             |       | 8,050        |       | (390 | ) |
| Depreciation and  amortization          |       | 9,561                             |       | 9,077        |       | 484 |   |
| Taxes – other than  income taxes   |       | 2,911                             |       | 2,845        |       | 66 |   |
| Gains on sales of  assets               |       | (92                               | )          | —       |       | (92 | ) |
| Total costs and  expenses               |       | 46,655                            |       | 49,127       |       | (2,472 | ) |
|                                    |       |                              |       |         |       |   |   |
| Operating income                        |       | 31,512                            |       | 25,682       |       | 5,830 |   |
|                                    |       |                              |       |         |       |   |   |
| Equity losses                           |       | (842                              | )          | (1,238       | )          | 396 |   |
| Other income – net                 |       | 149                               |       | 272          |       | (123 | ) |
|                                    |       |                              |       |         |       |   |   |
| Earnings before  interest               |       | $                                 | 30,819     |         | $          | 24,716 |   | $ | 6,103 |   |

 

The following table presents volumesdelivered in barrels and average tariff per barrel for the three months endedMarch 31, 2005 and 2004 (in thousands, except tariff information):

 
| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|----------------|------------|
| ** **                        | ** ** | ** **                        | ** ** | ** **     | ** ** | **Increase** | ** ** |
| ** **                        | ** ** | **2005**                          | ** ** | **2004**       | ** ** | **(Decrease)** | ** ** |
| Volumes Delivered:                |       |                              |       |           |       |   |   |
| Refined products                  |       | 38,595                            |       | 32,522         |       | 19 | % |
| LPGs                              |       | 14,801                            |       | 13,208         |       | 12 | % |
| Total                             |       | 53,396                            |       | 45,730         |       | 17 | % |
|                              |       |                              |       |           |       |   |   |
| Average Tariff per  Barrel:       |       |                              |       |           |       |   |   |
| Refined products                  |       | $                                 | 0.91       |           | $          | 0.95 |   | (4 | )% |
| LPGs                              |       | 2.18                              |       | 2.18           |       | — |   |
| Average system tariff  per barrel |       | $                                 | 1.26       |           | $          | 1.31 |   | (4 | )% |

 

*Three Months Ended March 31, 2005Compared with Three Months Ended March 31, 2004*

 

Revenues from refined productstransportation increased $4.0 million for the three months ended March 31,2005, compared with the three months ended March 31, 2004, due to an overallincrease of 19% in the refined products volumes delivered. This increase wasprimarily due to deliveries of products moved on Centennial.  Centennial has provided our system withadditional pipeline capacity for movement of products originating in the U.S.Gulf Coast area.  Prior to theconstruction of Centennial, deliveries on our pipeline system were limited byour pipeline capacity, and transportation services for our customers wereallocated in accordance with a proration policy.  With this incremental pipeline capacity, ourpreviously constrained system has expanded deliveries in markets both south andnorth of Creal Springs.  In February2003, we entered into a lease agreement with Centennial that 

 

31

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increasedour flexibility to deliver refined products to our market areas.  Volume increases were due to increased demandand market share for products supplied from the U.S. Gulf Coast into Midwestmarkets. The refined products average rate per barrel decreased 4% from theprior year period primarily due to the impact of greater growth in the volumeof products delivered under a Centennial tariff compared to the growth indeliveries under a TEPPCO tariff, which resulted in an increased proportion oflower tariff barrels transported on our system.

 

Revenues from LPGs transportationincreased $3.5 million for the three months ended March 31, 2005, compared withthe three months ended March 31, 2004, due to higher deliveries of propane inthe upper Midwest and Northeast market areas and increased short-haul propanedeliveries to U.S. Gulf Coast petrochemical customers in the first quarter of 2005.  Prior year LPG transportation revenues werenegatively impacted by a price spike in the Mont Belvieu propane price in lateFebruary 2004, which resulted in TEPPCO sourced propane being less competitivethan propane from other source points.

 

                Otheroperating revenues decreased $4.1 million for the three months ended March 31,2005, compared with the three months ended March 31, 2004, primarily due to lowerpropane inventory fees in 2005 and lower volume of product inventory sales,partially offset by higher refined products tender deduction and loadingrevenues.

 

Costs and expenses decreased $2.4million for the three months ended March 31, 2005, compared with the threemonths ended March 31, 2004, due to decreased operating, general andadministrative expenses and decreased operating fuel and power, partiallyoffset by increased depreciation and amortization expense and increased taxes –other than income taxes.  Operating,general and administrative expenses decreased primarily due to a $4.4 million decreasein pipeline inspection and repair costs associated with our integritymanagement program, partially offset by a $0.6 million increase in rentalexpense from the Centennial pipeline capacity lease agreement, a $0.8 million increasein labor and benefits expense primarily associated with vesting provisions incertain of our compensation plans as a result of changes in control of ourGeneral Partner and a $0.6 million increase in environmental remediation andassessment costs.  Operating fuel andpower decreased $0.4 million primarily due to adjustments to poweraccruals.  Depreciation expense increased$0.3 million primarily due to assets retired to depreciation expense in 2005.  Taxes – other than income taxes increased dueto increases in property tax accruals.

 

Net losses from equity investments decreasedfor the three months ended March 31, 2005, compared with the three months endedMarch 31, 2004, as shown below (in thousands):

 
| ** **          | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** |
|---------------------|------------|-----------------------------------|------------|--------------|------------|
| ** **          | ** ** | **2005**                          | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** |
|                |       |                              |       |         |       |   |   |
| Centennial          |       | $                                 | (3,471     | )            | $          | (3,856 | ) | $ | 385 |   |
| MB Storage          |       | 2,634                             |       | 2,629        |       | 5 |   |
| Other               |       | (5                                | )          | (11          | )          | 6 |   |
| Total equity losses |       | $                                 | (842       | )            | $          | (1,238 | ) | $ | 396 |   |

 

Equity losses in Centennial decreased $0.4 million forthe three months ended March 31, 2005, compared with the three months endedMarch 31, 2004, primarily due to higher transportation revenues and volumes,partially offset by higher transmix related product replacement costs andproduct measurement losses during the 2005 period.  Equity earnings in MB Storage were virtuallyunchanged for the three months ended March 31, 2005, compared with the threemonths ended March 31, 2004.  In April 2004, MB Storage acquired storage and pipelineassets and contracts for approximately $34.0 million, of which TE Productscontributed $16.5 million.  Equityearnings increased due to increased storage revenue, shuttle revenue andrental revenue primarily from the acquired contracts,  lower pipeline rehabilitation expenses on theMB Storage system and lower general and administrative expenses offset byincreased depreciation and amortization expense on storage assets and contractsacquired.

 

32

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**UpstreamSegment**

** **

The following table provides financial information forthe Upstream Segment for the three months ended March 31, 2005 and 2004 (inthousands):

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|--------------|------------|
| ** **                             | ** ** | **2005**                          | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** |
|                                   |       |                              |       |         |       |   |   |
| Sales of petroleum  products           |       | $                                 | 1,385,067  |         | $          | 1,180,767 |   | $ | 204,300 |   |
| Transportation – Crude  oil       |       | 9,172                             |       | 9,663        |       | (491 | ) |
| Other                                  |       | 2,541                             |       | 4,060        |       | (1,519 | ) |
| Total operating  revenues              |       | 1,396,780                         |       | 1,194,490    |       | 202,290 |   |
|                                   |       |                              |       |         |       |   |   |
| Purchases of petroleum  products       |       | 1,372,430                         |       | 1,167,425    |       | 205,005 |   |
| Operating, general and  administrative |       | 12,816                            |       | 11,185       |       | 1,631 |   |
| Operating fuel and  power              |       | 1,228                             |       | 1,740        |       | (512 | ) |
| Depreciation and  amortization         |       | 3,501                             |       | 3,068        |       | 433 |   |
| Taxes – other than  income taxes  |       | 1,401                             |       | 1,101        |       | 300 |   |
| (Gains) losses on sales  of assets     |       | 1                                 |       | (58          | )          | 59 |   |
| Total costs and  expenses              |       | 1,391,377                         |       | 1,184,461    |       | 206,916 |   |
|                                   |       |                              |       |         |       |   |   |
| Operating income                       |       | 5,403                             |       | 10,029       |       | (4,626 | ) |
|                                   |       |                              |       |         |       |   |   |
| Equity earnings                        |       | 6,088                             |       | 6,889        |       | (801 | ) |
| Other income – net                |       | 75                                |       | 146          |       | (71 | ) |
|                                   |       |                              |       |         |       |   |   |
| Earnings before  interest              |       | $                                 | 11,566     |         | $          | 17,064 |   | $ | (5,498 | ) |

 

Information presented in the followingtable includes the margin of the Upstream Segment, which may be viewed as anon-GAAP (Generally Accepted Accounting Principles) financial measure under therules of the Securities and Exchange Commission.  We calculate the margin of the UpstreamSegment as revenues generated from the sale of crude oil and lubrication oil,and transportation of crude oil, less the costs of purchases of crude oil andlubrication oil.  We believe that marginis a more meaningful measure of financial performance than sales and purchasesof crude oil and lubrication oil due to the significant fluctuations in salesand purchases caused by variations in the level of volumes marketed and pricesfor products marketed.  Additionally, weuse margin internally to evaluate the financial performance of the UpstreamSegment as we believe margin is a better indicator of performance thanoperating income as operating, general and administrative expenses, operatingfuel and power and depreciation expense are not directly related to the marginactivities.  Margin and volumeinformation for the three months ended March 31, 2005 and 2004 is presentedbelow (in thousands, except per barrel and per gallon amounts):

 

33

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| ** **                              | ** ** | **Three Months Ended   March 31,** | ** ** | **Percentage  Increase** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **2005**                           | ** ** | **2004**                 | ** ** | **(Decrease)** | ** ** |
|                                    |       |                               |       |                     |       |   |   |
| Margins: (1)                            |       |                               |       |                     |       |   |   |
| Crude oil  transportation               |       | $                                  | 14,191     |                     | $          | 13,096 |   | 8 | % |
| Crude oil marketing                     |       | 3,476                              |       | 5,692                    |       | (39 | )% |
| Crude oil terminaling                   |       | 2,385                              |       | 2,725                    |       | (12 | )% |
| Lubrication oil sales                   |       | 1,757                              |       | 1,492                    |       | 18 | % |
| Total margin                            |       | $                                  | 21,809     |                     | $          | 23,005 |   | (5 | )% |
|                                    |       |                               |       |                     |       |   |   |
| Total barrels:                          |       |                               |       |                     |       |   |   |
| Crude oil  transportation               |       | 23,754                             |       | 26,162                   |       | (9 | )% |
| Crude oil marketing                     |       | 44,294                             |       | 45,654                   |       | (3 | )% |
| Crude oil terminaling                   |       | 27,119                             |       | 33,088                   |       | (18 | )% |
|                                    |       |                               |       |                     |       |   |   |
| Lubrication oil volume  (total gallons) |       | 4,172                              |       | 3,470                    |       | 20 | % |
|                                    |       |                               |       |                     |       |   |   |
| Margin per barrel:                      |       |                               |       |                     |       |   |   |
| Crude oil  transportation               |       | $                                  | 0.597      |                     | $          | 0.501 |   | 19 | % |
| Crude oil marketing                     |       | 0.078                              |       | 0.125                    |       | (37 | )% |
| Crude oil terminaling                   |       | 0.088                              |       | 0.082                    |       | 7 | % |
|                                    |       |                               |       |                     |       |   |   |
| Lubrication oil margin  (per gallon)    |       | 0.421                              |       | 0.430                    |       | (2 | )% |

 

----

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

 

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

 
| ** **                             | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Sales of petroleum  products           |       | $                                  | 1,385,067  |   | $ | 1,180,767 |   |
| Transportation – Crude  oil       |       | 9,172                              |       | 9,663 |   |
| Less: Purchases of  petroleum products |       | (1,372,430                         | )          | (1,167,425 | ) |
| Total margin                           |       | 21,809                             |       | 23,005 |   |
| Other operating  revenues              |       | 2,541                              |       | 4,060 |   |
| Net operating revenues                 |       | 24,350                             |       | 27,065 |   |
| Operating, general and  administrative |       | 12,816                             |       | 11,185 |   |
| Operating fuel and  power              |       | 1,228                              |       | 1,740 |   |
| Depreciation and  amortization         |       | 3,501                              |       | 3,068 |   |
| Taxes – other than  income taxes  |       | 1,401                              |       | 1,101 |   |
| (Gains) losses on sales  of assets     |       | 1                                  |       | (58 | ) |
| Operating income                       |       | $                                  | 5,403      |   | $ | 10,029 |   |

 

*Three Months Ended March 31, 2005Compared with Three Months Ended March 31, 2004*

 

Our margin decreased $1.2 million forthe three months ended March 31, 2005, compared with the three months endedMarch 31, 2004.  Crude oil marketingmargin decreased $2.2 million primarily due to a 3% decrease in volumesmarketed, increased transportation costs and unrealized losses of $1.0 millionrelated to marking crude oil physical swaps to market.  Crude oil terminaling margin decreased $0.3million as a result of an 18% decrease in pumpover volumes at Midland, Texasand Cushing, Oklahoma.  Crude oiltransportation margin increased $1.1 million primarily due to increasedtransportation volumes and revenues on our South Texas system and increasedtransportation revenues on our West Texas system. Crude oil transportationmargin on our Red River and Basin systems remained constant between periods asa result of higher revenues due to movements of barrels on higher 

 

34

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tariff segments, offset by a decrease in transportationvolumes.  Lubrication oil sales marginincreased $0.2 million due to a 20% increase in volumes primarily related toincreased sales of chemical volumes and the acquisition of a lubrication oildistributor in Casper, Wyoming, in August 2004.

 

Other operating revenues of theUpstream Segment decreased $1.5 million for the three months ended March 31,2005, compared with the three months ended March 31, 2004, primarily due to a$1.4 million favorable settlement of inventory imbalances in the first quarterof 2004 and lower revenues from documentation and other services to supportcustomers’ trading activity at Midland and Cushing in the first quarter of2005.

 

Costs and expenses, excluding expensesassociated with purchases of crude oil and lubrication oil, increased $1.9million for the three months ended March 31, 2005, compared with the threemonths ended March 31, 2004, due to increased operating, general andadministrative expenses, increased depreciation and amortization expense andincreased taxes – other than income taxes, partially offset by decreased operatingfuel and power.  Operating, general andadministrative expenses increased $1.6 million from the prior year period primarilydue to a $0.7 million increase in labor and benefits expense related to vestingprovisions in certain of our compensation plans as a result of changes incontrol of our General Partner and an increase in the number of employeesbetween periods, a $0.6 million increase in operational supplies and expensesand a $0.5 million increase in consulting and contract services, partiallyoffset by a $0.5 million decrease in environmental assessment and remediationcosts.  Depreciation and amortizationexpense increased $0.4 million as a result of assets placed in service in 2004and due to assets retired to depreciation expense during the period.  Taxes – other than income taxes increased $0.3million due to increases in property tax accruals and a higher asset base in2005.  Operating fuel and power decreased$0.5 million primarily as a result of lower transportation volumes in 2005.

 

**Equity earningsfrom our investment in Seaway decreased $0.8 million for the three months endedMarch 31, 2005, compared with the three months ended March 31, 2004, primarily due to a favorable settlement in the firstquarter of 2004 with a former owner of Seaway’s crude oil assets regardinginventory imbalances that were not acquired by us, partially offset by highertransportation volumes, gains on crude oil inventory sales, and lower operating, general and administrative expensesin the first quarter of 2005.**

** **

**MidstreamSegment**

** **

The following table provides financialinformation for the Midstream Segment for the three months ended March 31, 2005and 2004 (in thousands):

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|--------------|------------|
| ** **                             | ** ** | **2005**                          | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** |
|                                   |       |                              |       |         |       |   |   |
| Sales of petroleum  products           |       | $                                 | 2,142      |         | $          | 1,346 |   | $ | 796 |   |
| Gathering – Natural Gas           |       | 36,560                            |       | 34,502       |       | 2,058 |   |
| Transportation – NGLs             |       | 10,219                            |       | 10,014       |       | 205 |   |
| Other                                  |       | 4,077                             |       | 4,301        |       | (224 | ) |
| Total operating  revenues              |       | 52,998                            |       | 50,163       |       | 2,835 |   |
|                                   |       |                              |       |         |       |   |   |
| Purchases of petroleum  products       |       | 1,370                             |       | 1,317        |       | 53 |   |
| Operating, general and  administrative |       | 11,243                            |       | 12,131       |       | (888 | ) |
| Operating fuel and  power              |       | 1,526                             |       | 1,502        |       | 24 |   |
| Depreciation and  amortization         |       | 12,701                            |       | 15,675       |       | (2,974 | ) |
| Taxes – other than  income taxes  |       | 1,124                             |       | 1,348        |       | (224 | ) |
| Gains on sales of  assets              |       | (407                              | )          | —       |       | (407 | ) |
| Total costs and  expenses              |       | 27,557                            |       | 31,973       |       | (4,416 | ) |
|                                   |       |                              |       |         |       |   |   |
| Operating income                       |       | 25,441                            |       | 18,190       |       | 7,251 |   |
|                                   |       |                              |       |         |       |   |   |
| Other income – net                |       | 42                                |       | 58           |       | (16 | ) |
|                                   |       |                              |       |         |       |   |   |
| Earnings before  interest              |       | $                                 | 25,483     |         | $          | 18,248 |   | $ | 7,235 |   |

 

35

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The following table presents volume and average rateinformation for the three months ended March 31, 2005 and 2004 (in thousands,except average fee and average rate amounts):

 
| ** **                                         | ** ** | **Three Months Ended  March 31,** | ** ** | **Percentage  Increase** | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|
| ** **                                         | ** ** | **2005**                          | ** ** | **2004**                 | ** ** | **(Decrease)** | ** ** |
| Gathering – Natural Gas  – Jonah:        |       |                              |       |                     |       |   |   |
| Million cubic feet  (“MMcf”)             |       | 97,350                            |       | 83,928                   |       | 16 | % |
| Million British thermal  units (“MMBtu”) |       | 107,300                           |       | 92,897                   |       | 16 | % |
| Average fee per MMBtu                              |       | $                                 | 0.189      |                     | $          | 0.198 |   | (5 | )% |
|                                               |       |                              |       |                     |       |   |   |
| Gathering – Natural Gas  – Val Verde:    |       |                              |       |                     |       |   |   |
| MMcf                                               |       | 41,719                            |       | 35,491                   |       | 18 | % |
| MMBtu                                              |       | 36,624                            |       | 29,804                   |       | 23 | % |
| Average fee per MMBtu                              |       | $                                 | 0.445      |                     | $          | 0.541 |   | (18 | )% |
|                                               |       |                              |       |                     |       |   |   |
| Transportation – NGLs:                        |       |                              |       |                     |       |   |   |
| Thousand barrels                                   |       | 13,836                            |       | 14,680                   |       | (6 | )% |
| Average rate per barrel                            |       | $                                 | 0.739      |                     | $          | 0.682 |   | 8 | % |
|                                               |       |                              |       |                     |       |   |   |
| Fractionation – NGLs:                         |       |                              |       |                     |       |   |   |
| Thousand barrels                                   |       | 1,139                             |       | 1,115                    |       | 2 | % |
| Average rate per barrel                            |       | $                                 | 1.647      |                     | $          | 1.689 |   | (3 | )% |
|                                               |       |                              |       |                     |       |   |   |
| Sales – Condensate:                           |       |                              |       |                     |       |   |   |
| Thousand barrels                                   |       | 27.9                              |       | 41.8                     |       | (33 | )% |
| Average rate per barrel                            |       | $                                 | 48.11      |                     | $          | 33.51 |   | 44 | % |

 

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

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Sales of petroleum products            |       | $                                 | 2,142      |   | $ | 1,346 |   |
| Less: Purchases of  petroleum products |       | (1,370                            | )          | (1,317 | ) |
| Total margin                           |       | 772                               |       | 29 |   |
| Gathering – Natural Gas           |       | 36,560                            |       | 34,502 |   |
| Transportation – NGLs             |       | 10,219                            |       | 10,014 |   |
| Other operating  revenues              |       | 4,077                             |       | 4,301 |   |
| Net operating revenues                 |       | 51,628                            |       | 48,846 |   |
| Operating, general and  administrative |       | 11,243                            |       | 12,131 |   |
| Operating fuel and  power              |       | 1,526                             |       | 1,502 |   |
| Depreciation and  amortization         |       | 12,701                            |       | 15,675 |   |
| Taxes – other than  income taxes  |       | 1,124                             |       | 1,348 |   |
| Gains on sales of  assets              |       | (407                              | )          | — |   |
| Operating income                       |       | $                                 | 25,441     |   | $ | 18,190 |   |

 

*Three Months Ended March 31, 2005Compared with Three Months Ended March 31, 2004*

 

Revenues from the gathering of naturalgas increased $2.1 million for the three months ended March 31, 2005, comparedwith the three months ended March 31, 2004. Natural gas gathering revenues from the Jonah system increased $1.9million and volumes gathered increased 13.4 billion cubic feet (“Bcf”) for thethree months ended March 31, 2005, primarily due to the expansion of the Jonahsystem in 2004.  Installation of additionalcapacity of 100 million cubic feet per day was completed during the fourthquarter of 2004. Jonah’s average natural gas gathering rate per MMcf decreaseddue to higher system wellhead pressures. Natural gas gathering revenues fromthe Val Verde system increased $0.2 million and volumes gathered increased 6.2Bcf for the three months 

 

36

----

 

endedMarch 31, 2005, primarily due to increased volumes from two new connectionsmade to the Val Verde system in May and December 2004, partially offset by thenatural decline of CBM production and slower than anticipated completion andconnection of infill wells.  Val Verde’saverage natural gas gathering rate per MMcf decreased due to contracts enteredinto relating to the new connections, which have lower rates than the existingVal Verde system’s average rates.    

 

Margin(sales of petroleum products less purchases of petroleum products) resultingfrom the processing arrangements at the Jonah Pioneer plant increased $0.7 millionfor the three months ended March 31, 2005, compared with the three months endedMarch 31, 2004, primarily due to increased NGL prices.   Jonah’s Pioneer gas processing plant wascompleted during the first quarter of 2004, as a part of the Phase IIIexpansion to increase the processing capacity in southwestern Wyoming.  Pioneer’s processing agreements allow theproducers to elect annually whether to be charged under a fee-based arrangementor a fee plus keep-whole arrangement. Under the fee-based election, Jonah receives a fee for its processingservices.  Under the fee plus keep-wholeelection, Jonah receives a lower fee for its processing services, retains andsells the NGLs extracted during the process and delivers to producers the residuegas equivalent in energy to the natural gas received from the producers.  Jonah sells the NGLs it retains and purchasesgas to replace the equivalent energy removed in the liquids.   For the 2004 and 2005 periods, the producershave elected the fee plus keep-whole arrangement.

 

Revenuesfrom the transportation of NGLs increased $0.2 million for the three monthsended March 31, 2005, compared with the three months ended March 31, 2004,primarily due to increases in volumes transported on the Panola Pipeline,partially offset by decreases in volumes transported on the Chaparral, Dean andWilcox Pipelines.  The increase in theNGL transportation average rate per barrel resulted from higher average ratesper barrel on volumes transported on the Panola Pipeline. 

 

Otheroperating revenues decreased $0.2 million for the three months ended March 31,2005, compared with the three months ended March 31, 2004, primarily due tolower condensate sales on Jonah.     

 

Costs and expenses(excluding purchases of petroleum products) decreased $4.5 million for the threemonths ended March 31, 2005, compared with the three months ended March 31,2004, due to decreases in depreciation and amortization expense, operating,general and administrative expense and  taxes – other than income taxes, partiallyoffset by a net gain recorded on the sale of an asset.  Depreciation expense decreased $2.0 millionprimarily due to a $2.6 million decrease on Jonah as a result of increases tothe estimated lives of Jonah’s assets, partially offset by a $0.6 millionincrease on Val Verde as a result of assets placed into service in 2004.  Amortization expense on the Jonah system decreased$1.1 million primarily due to revisions to the estimated life of intangibleassets under the units-of-production method, partially offset by a $0.3 millionincrease as a result of higher volumes in the 2005 period.  During the fourth quarter of 2004 and thefirst quarter of 2005, updated production forecasts were obtained from some ofthe producers on the Jonah system related to future expansions of the system,and as a result, we increased our best estimate of future throughput on theJonah system.  This increase in the estimateof future throughput extended the amortization period of Jonah’s natural gasgathering contracts by an estimated 10 years, increasing from approximately 25years to approximately 35 years (see Note 2. Goodwill and Other Intangible Assets). Amortization expense on the Val Verde system decreased $0.2 millionprimarily due to lower volumes on contracts included in the intangible assetsin the 2005 period, resulting from the natural decline in CBM production.  Operating, general and administrative expensedecreased $0.9 million primarily due to a $1.8 million decrease in gassettlement expenses, partially offset by a $0.7 million increase in maintenanceexpenditures on Val Verde and Jonah.  Taxes– other than income taxes decreased $0.2 million due to actual property taxesbeing lower than previously estimated.  Anet gain of $0.4 million was recognized on the sale of equipment in the currentperiod.

* *

**Interest Expense and Capitalized Interest**

** **

*Three Months Ended March 31, 2005Compared with Three Months Ended March 31, 2004*   

 

Interest expense decreased $0.1 million for the threemonths ended March 31, 2005, compared with the three months ended March 31,2004, due to a higher percentage of variable interest rate debt during thethree months

 

37

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endedMarch 31, 2005, 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 afixed rate interest rate swap in April 2004 (see Note 3. Interest Rate Swaps).  The decrease was partially offset by higherbalances outstanding on our revolving credit facility in 2005.

 

Capitalizedinterest increased $0.2 million for the three months ended March 31, 2005,compared with the three months ended March 31, 2004, due to higher constructionwork-in-progress balances in the 2005 period.

 

**FinancialCondition and Liquidity**

** **

Cash generated from operations, credit facilities anddebt and equity offerings are our primary sources of liquidity.  At March 31, 2005, we had a working capitalsurplus of $26.4 million, while at December 31, 2004, we had a working capitaldeficit of $37.8 million.  At March 31,2005, we had approximately $81.5 million in available borrowing capacity underour revolving credit facility to cover any working capital needs.  Cash flows for the three months ended March31, 2005 and 2004, were as follows (in millions):

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash  provided by (used in): |       |                              |       |   |   |
| Operating  activities        |       | $                                 | 15.8       |   | $ | 43.2 |   |
| Investing  activities        |       | (34.1                             | )          | (28.9 | ) |
| Financing activities         |       | 20.3                              |       | (40.6 | ) |
|                              |            |                                   |            |  |  |  |  |

 

*Operating Activities*

 

Net cash from operating activities for the threemonths ended March 31, 2005 and 2004, was comprised of the following (inmillions):

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net income                              |       | $                                 | 48.6       |   | $ | 40.4 |   |
| Depreciation and  amortization          |       | 25.8                              |       | 27.8 |   |
| Losses in equity  investments           |       | (5.2                              | )          | (5.6 | ) |
| Distributions from  equity investments  |       | 4.7                               |       | 6.0 |   |
| Gains on sales of  assets               |       | (0.5                              | )          | (0.1 | ) |
| Non-cash portion of  interest expense   |       | 0.4                               |       | (0.6 | ) |
| Cash used in working  capital and other |       | (58.0                             | )          | (24.7 | ) |
|                                    |       |                              |       |   |   |
| Net  cash from operating activities     |       | $                                 | 15.8       |   | $ | 43.2 |   |

 

For a discussion of changes in earnings beforeinterest, depreciation and amortization, equity earnings, gain on sales ofassets by segment and consolidated interest expense – net, see Results ofOperations for the Downstream Segment, Upstream Segment and Midstream Segmentin Item 2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations.  Cash provided by operating activitiesdecreased $27.4 million for the three months ended March 31, 2005, comparedwith the three months ended March 31, 2004, primarily due to the timing of cashdisbursements and cash receipts for working capital components and a decreasein distributions received from our equity investment in Seaway during the threemonths ended March 31, 2005, partially offset by higher net income and lowerdepreciation and amortization expense in the 2005 period.

 

We believe that we will continue to have adequateliquidity to fund future recurring operating and investing activities.  Our primary cash requirements consist ofnormal operating expenses, capital expenditures to sustain existing operationsand revenue generating expenditures, interest payments on our Senior Notes andrevolving credit facility, distributions to our General Partner and unitholdersand acquisitions of new assets or businesses. Short-term cash requirements, such as operating expenses, capitalexpenditures to sustain existing operations and quarterly

 

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distributions to ourGeneral Partner and unitholders, are expected to be funded through operatingcash flows.  Long-term cash requirements for expansion projects andacquisitions are expected to be funded by several sources, including cash flowsfrom operating activities, borrowings under credit facilities, and the issuanceof additional equity and debt securities. Our ability to complete future debt and equity offerings and the timingof any such offerings will depend on various factors, including prevailingmarket conditions, interest rates, our financial condition and our creditrating at the time.

 

Net cash from operating activities for the three monthsended March 31, 2005 and 2004, included interest payments, net of amountscapitalized, of $36.8 million and $37.9 million, respectively.  Excluding the effects of hedging activitiesand interest capitalized during the year ended December 31, 2005, we expectinterest payments on our fixed rate Senior Notes to be approximately $78.0million.  We expect to pay our interestpayments with cash flows from operating activities.

 

*Investing Activities*

 

Cash flows used in investing activities totaled $34.1million for the three months ended March 31, 2005, and were comprised of $27.5million of capital expenditures and $7.1 million for the acquisition of crudeoil assets acquired in the first quarter of 2005, partially offset by $0.5million in net cash proceeds from an asset sale in our Midstream Segment.  Cash flows used in investing activitiestotaled $28.9 million for the three months ended March 31, 2004, and werecomprised of $26.9 million of capital expenditures, $1.0 million of cashcontributions for TE Products’ ownership interest in Centennial and $1.0million for the acquisition of crude oil assets acquired in the first quarterof 2004.

 

*Financing Activities*

 

Cash flows provided by financing activities totaled$20.3 million for the three months ended March 31, 2005, and were comprised of$79.0 million in borrowings, net of repayments, from our revolving creditfacility, partially offset by $58.7 million of distributions paid tounitholders.  Cash flows used in financingactivities totaled $40.6 million for the three months ended March 31, 2004, andwere comprised of $57.1 million of distributions paid to unitholders, partiallyoffset by $16.5 million in borrowings, net of repayments, from our revolvingcredit facility.

 

Centennial entered intocredit facilities totaling $150.0 million and, as of March 31, 2005, $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 Ashland PetroleumLLC (“Marathon”) have each guaranteed one-half of Centennial’s debt, up to amaximum of $75.0 million each.

 

***Universal Shelf***

** **

**We have filed with the Securities and Exchange Commission auniversal shelf registration statement that, subject to agreement on terms atthe time of use and appropriate supplementation, allows us to issue, in one ormore offerings, up to an aggregate of $2.0 billion of equity securities, debtsecurities or a combination thereof.  AtMarch 31, 2005, we had $2.0 billion available under this shelf registration,subject to customary marketing terms and conditions.**

** **

*Credit Facilitiesand Interest Rate Swap Agreements*

 

 On June 27,2003, we entered into a $550.0 million revolving credit facility with a threeyear 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 Revolving CreditFacility contains certain restrictive financial covenant ratios.  On October 21, 2004, we amended our RevolvingCredit Facility to (i) increase the facility size to $600.0 million, (ii) extendthe term to October 21, 2009, (iii) remove certain restrictive covenants, (iv)increase the available amount for the issuance of letters of credit up to$100.0 million and (v) decrease the LIBOR rate spread charged at the time ofeach borrowing.  On February 23, 2005, weagain amended our Revolving Credit Facility to remove the

 

39

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requirement that DEFS must at all times own, directly or indirectly,100% of our General Partner, to allow for its acquisition by DFI.  At March 31, 2005, $432.0 million wasoutstanding under the Revolving Credit Facility at a weighted average interestrate of 3.4%.  At March 31, 2005, we werein compliance with the covenants of this credit agreement.

 

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

 

The following table summarizes ourcredit facilities as of March 31, 2005 (in millions):

 

| ** **                     | ** ** | **As of March 31, 2005**   | ** ** |
|--------------------------------|------------|----------------------------|------------|
| **Description:**               | ** ** | **Outstanding  Principal** | ** ** | **Available  Borrowing  Capacity** | ** ** | **Maturity  Date** | ** ** |
| Revolving Credit  Facility (1) |       | $                          | 432.0      |   | $ | 168.0 |   | October 2009 |   |
| 6.45% Senior Notes (2)         |       | 180.0                      |       | — |   | January 2008 |   |
| 7.625% Senior Notes (2)        |       | 500.0                      |       | — |   | February 2012 |   |
| 6.125% Senior Notes (2)        |       | 200.0                      |       | — |   | February 2013 |   |
| 7.51% Senior Notes (2)         |       | 210.0                      |       | — |   | January 2028 |   |
| Total                          |       | $                          | 1,522.0    |   | $ | 168.0 |   |   |   |
|                                |            |                            |            |  |  |  |  |  |  |  |  |

----

(1)          Our Revolving Credit Facilitycontains restrictive covenants that require us to maintain certain financialratios.  Under the most restrictivefinancial covenant, approximately $81.5 million was available to be borrowedfor working capital needs at March 31, 2005. Certain of these restrictive covenants are adjusted in the event of anacquisition by us, which would permit additional borrowings under the facility.

 

(2)          Our TE Products subsidiaryentered into an interest rate swap agreement to hedge its exposure to changesin the fair value of its 7.51% Senior Notes due 2028.  At March 31, 2005, the 7.51% Senior Notesinclude an adjustment to increase the fair value of the debt by $0.5 millionrelated to this interest rate swap agreement. We also entered into interest rate swap agreements to hedge our exposureto changes in the fair value of our 7.625% Senior Notes due 2012.  At March 31, 2005, the 7.625% Senior Notesinclude a deferred gain, net of amortization, from previous interest rate swapterminations of $35.6 million.  At March31, 2005, our 6.45% Senior Notes, our 7.625% Senior Notes and our 6.125% SeniorNotes include $2.7 million of unamortized debt discounts.  The fair value adjustments, the deferred gainadjustment and the unamortized debt discounts are excluded from this table.

 

### ***Distributions***

### ** **

We paid cash distributions of $58.7 million ($0.6625per Unit) and $57.1 million ($0.65 per Unit) during each of the three monthsended March 31, 2005 and 2004, respectively. Additionally, we declared a cash distribution of $0.6625 per Unit forthe quarter ended March 31, 2005. We will pay the distribution of $58.7 millionon May 6, 2005, to unitholders of record on April 29, 2005.

 

*General Partner Interest*

 

As of March 31, 2005, and December 31,2004, we had deficit balances of $35.9 million and $33.0 million, respectively,in our General Partner’s equity account. These negative balances do notrepresent assets to us and do not represent obligations of the General Partnerto contribute cash or other property to us. The General Partner’s equityaccount generally consists of its cumulative share of our net income less cashdistributions made to it plus capital contributions that it has made to us (seeour Consolidated Statement of Partners’ Capital for a detail of the GeneralPartner’s equity account).  For the threemonths ended March 31, 2005, the General Partner was allocated $14.0 million(representing 28.85%) of our net income and received $16.9 million in cashdistributions.

 

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

 

Net income is allocated between theGeneral Partner and the limited partners in the same proportion as aggregatecash distributions made to the General Partner and the limited partners duringthe period.  This is generally consistentwith the manner of 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 duringa period may exceed our net income for the period.  We make quarterly cash distributions of allof our Available Cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion.  Cashdistributions in excess of net income allocations and capital contributionsduring the year ended December 31, 2004, and the three months ended March 31,2005, resulted in deficits in the General Partner’s equity account at December31, 2004, and March 31, 2005.  Futurecash distributions that exceed net income will result in an increase in thedeficit balance in the General Partner’s equity account.

 

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

 

*Future Capital Needs andCommitments*

 

We estimate that capital expenditures, excludingacquisitions, for 2005 will be approximately $236.0 million (which includes$6.0 million of capitalized interest). We expect to spend approximately $168.0 million for revenue generatingprojects and facility improvements. Capital spending on revenue generating projects and facilityimprovements will include approximately $23.0 million for the expansion of ourDownstream Segment facilities.  We expectto spend $5.0 million to expand our Upstream Segment pipelines and facilitiesin West Texas and Oklahoma and approximately $140.0 million to expand ourMidstream Segment assets, with further expansions on our Jonah system.  We expect to spend approximately $44.0million to sustain existing operations, including life-cycle replacements forequipment at various facilities and pipeline and tank replacements among all ofour business segments.  We expect to spendapproximately $18.0 million to improve operational efficiencies and reducecosts among all of our business segments. We continually review and evaluate potential capital improvements andexpansions that would be complementary to our present business operations.  These expenditures can vary greatly dependingon the magnitude of our transactions.  Wemay finance capital expenditures through internally generated funds, debt orthe issuance of additional equity.

 

Our debt repayment obligations consist of payments forprincipal and interest on (i) the TE Products $180.0 million 6.45% Senior Notesdue January 15, 2008, (ii) outstanding principal amounts under the RevolvingCredit Facility due in October 2009 ($432.0 million outstanding at March 31,2005), (iii) our $500.0 million 7.625% Senior Notes due February 15, 2012, (iv)our $200.0 million 6.125% Senior Notes due February 1, 2013, and (v) the TEProducts $210.0 million 7.51% Senior Notes due January 15, 2028.

 

TE Products is contingently liable as guarantor forthe lesser of one-half or $75.0 million principal amount (plus interest) of theborrowings of Centennial.  In January2003, TE Products entered into a pipeline capacity lease 

 

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agreement with Centennialfor a period of five years that contains a minimum throughput requirement.  For the year ended December 31, 2004, TEProducts exceeded the minimum throughput requirements on the lease agreement.

 

During the three months ended March 31, 2004, TEProducts contributed $1.0 million to Centennial to cover operating needs andcapital expenditures.  No amounts werecontributed to either Centennial or MB Storage during the three months endedMarch 31, 2005.  During 2005, TE Productsmay be required to contribute cash to Centennial to cover capital expenditures,acquisitions or other operating needs and to MB Storage to cover significantcapital expenditures or additional acquisitions.

 

*Off-Balance Sheet Arrangements*

 

We do not rely on off-balance sheet borrowings to fundour acquisitions.  We have no off-balancesheet commitments for indebtedness other than the limited guaranty ofCentennial debt and leases covering assets utilized in several areas of ouroperations.

 

*Contractual Obligations*

 

The following table summarizes our debt repaymentobligations and material contractual commitments as of March 31, 2005 (inmillions):  

 
| ** **                                  | ** ** | **Amount of Commitment Expiration  Per Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                       | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** |
|                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Revolving Credit  Facility                  |       | $                                               | 432.0      |   | $ | — |   | $ | — |   | $ | 432.0 |   | $ | — |   |
| 6.45% Senior Notes due  2008 (1) (2)        |       | 180.0                                           |       | — |   | 180.0 |   | — |   | — |   |
| 7.625% Senior Notes due  2012 (2)           |       | 500.0                                           |       | — |   | — |   | — |   | 500.0 |   |
| 6.125% Senior Notes due  2013 (2)           |       | 200.0                                           |       | — |   | — |   | — |   | 200.0 |   |
| 7.51% Senior Notes due  2028 (1) (2)        |       | 210.0                                           |       | — |   | — |   | — |   | 210.0 |   |
| Debt subtotal                               |       | 1,522.0                                         |       | — |   | 180.0 |   | 432.0 |   | 910.0 |   |
|                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Operating leases                            |       | 77.7                                            |       | 18.6 |   | 30.0 |   | 12.0 |   | 17.1 |   |
| Capital expenditure  obligations (3)        |       | 3.8                                             |       | 3.8 |   | — |   | — |   | — |   |
| Other liabilities and  deferred credits (4) |       | 4.7                                             |       | — |   | 2.5 |   | 0.5 |   | 1.7 |   |
|                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Total                                       |       | $                                               | 1,608.2    |   | $ | 22.4 |   | $ | 212.5 |   | $ | 444.5 |   | $ | 928.8 |   |

 

----

(1)          Obligations of TE Products.

 

(2)          Our TE Products subsidiaryentered into an interest rate swap agreement to hedge its exposure to changesin the fair value of its 7.51% Senior Notes due 2028.  At March 31, 2005, the 7.51% Senior Notesinclude an adjustment to increase the fair value of the debt by $0.5 millionrelated to this interest rate swap agreement. We also entered into interest rate swap agreements to hedge our exposureto changes in the fair value of our 7.625% Senior Notes due 2012.  At March 31, 2005, the 7.625% Senior Notesinclude a deferred gain, net of amortization, from previous interest rate swapterminations of $35.6 million.  At March31, 2005, our 6.45% Senior Notes, our 7.625% Senior Notes and our 6.125% SeniorNotes include $2.7 million of unamortized debt discounts.  The fair value adjustments, the deferred gainadjustment and the unamortized debt discounts are excluded from this table.

 

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

 

(4)          Excludes approximately $9.3 million oflong-term deferred revenue payments, which are being transferred to income overthe term of the respective revenue contracts. The amount of commitment by year is our best estimate of projectedpayments of these long-term liabilities.

 

We expect to repay the long-term, senior unsecuredobligations and bank debt through the issuance of additional long-term senior unsecureddebt at the time the 2008, 2012, 2013 and 2028 debt matures, issuance of

 

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additional equity, withproceeds from dispositions of assets, cash flow from operations or anycombination of the above items.

 

In addition to the items in the table above, we haveentered into various operational commitments and agreements related to pipelineoperations and to the marketing, transportation, terminaling and storage ofcrude oil.  The majority of contractual commitmentsfor the purchase of crude oil that are made range in term from a thirty-dayevergreen to three years.  A substantialportion of the contracts for the purchase of crude oil that extend beyondthirty days include cancellation provisions that allow us to cancel thecontract with thirty days written notice. During the three months ended March 31, 2005, crude oil purchasesaveraged approximately $457.5 million per month.

 

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

### ** **

Historically, we have funded our capital commitmentsfrom operating cash flow and borrowings under bank credit facilities or bridgeloans.  We repaid these loans in part bythe issuance of long term debt in capital markets and the public offering ofUnits.  We expect future capital needswould be similarly funded to the extent not otherwise available from cash flowfrom operations.

 

As of March 31, 2005, we had $81.5 million inavailable borrowing capacity under the Revolving Credit Facility, subject tocompliance with prescribed financial covenants. We expect that cash flows from operating activities will be adequate tofund cash distributions and capital additions necessary to sustain existingoperations.  However, future expansionarycapital projects and acquisitions will require funding through borrowings underour Revolving Credit Facility or proceeds from the sale of additional debt orequity offerings, or any combination thereof.

 

Our senior unsecured debt is rated BBB with negativeimplications by Standard and Poors (“S&P”) and Baa3 by Moody’s InvestorsService (“Moody’s”).  S&P assignedthis rating on February 24, 2005, following the announcement of the acquisitionof the General Partner by DFI, which is not rated by S&P.  Moody’s rating is 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.  Thesenior unsecured debt of our subsidiary, TE Products, is also rated BBB withnegative implications by S&P and Baa3 by Moody’s.  The Moody’s rating is stable.

 

****OtherConsiderations****

** **

Our operations are subject to federal, state and locallaws and regulations governing the discharge of materials into the environment.Failure to comply with these laws and regulations may result in the assessmentof administrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to perform investigatoryand remedial activities.  Although webelieve our operations are in material compliance with applicable environmentallaws and regulations, risks of significant costs and liabilities are inherentin pipeline operations, and we cannot assure you that significant costs andliabilities will not be incurred. Moreover, it is possible that other developments, such as increasinglystrict environmental laws and regulations and enforcement policies thereunder,and claims for damages to property or persons resulting from our operations,could result in substantial costs and liabilities to us.  We believe that changes in environmental lawsand regulations will not have a material adverse effect on our financialposition, results of operations or cash flows in the near term.

 

In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana, facility.  In1999, our Arcadia facility and adjacent terminals were directed by the RemediationServices Division of the LDEQ to pursue remediation of this contamination.  At March 31, 2005, we have an accruedliability of $0.2 million for remediation costs at our Arcadia facility.  Effective in March 2004, we executed anaccess agreement with an adjacent industrial landowner who is locatedupgradient of the Arcadia facility.  Thisagreement enables the landowner to proceed with remediation activities at ourArcadia facility for which it has accepted shared responsibility.  We do not expect that the completion of theremediation program proposed to the LDEQ will have a future material adverseeffect on our financial position, results of operations or cash flows.

 

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On March 17, 2003, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois.  As a result of the release, we have enteredinto an Agreed Order with the State of Illinois, which required us to conductan environmental investigation.  At thistime, we have complied with the terms of the Agreed Order, and the results ofthe environmental investigation indicated there were no soil or groundwaterimpacts from the release.  We are in theprocess of negotiating a final settlement with the State of Illinois, and wedo not expect that compliance with the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal.  Thereleased jet fuel was contained within a storm water retention pond located onthe terminal property.  Six migratorywaterfowl were affected by the jet fuel and were subsequently euthanized by orat the request of the United States Fish and Wildlife Service (“USFWS”).  On October 1, 2004, the USFWS served us witha Notice of Violation, alleging that we violated 16 USC 703 of the MigratoryBird Treaty Act for the “take[ing] of migratory birds by illegal methods.”  On February 7, 2005, we entered into aMemorandum of Understanding with the USFWS, settling all aspects of thismatter.  The terms of this settlement didnot have a material adverse effect on our financial position, results ofoperations or cash flows.

 

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

 

At March 31, 2005, we have an accrued liability of $4.2million related to various TCTM and TE Products sites requiring environmentalremediation activities.   We do notexpect that the completion of remediation programs associated with TCTM and TEProducts activities will have a future material adverse effect on our financialposition, results of operations or cash flows.

 

On February 24, 2005, the General Partner was acquiredfrom DEFS by DFI.  The General Partnerowns a 2% general partner interest in us and is the general partner of thePartnership.  On March 11, 2005, theBureau of Competition of the Federal Trade Commission (“FTC”) delivered writtennotice to DFI’s legal advisor that it was conducting a non-public investigationto determine whether DFI’s acquisition of the General Partner may substantiallylessen competition.  The FTC hascontacted the General Partner requesting data. The General Partner intends to cooperate fully with any suchinvestigations and inquiries requested by the FTC or any other regulatoryauthorities.

 

*Recent AccountingPronouncements*

* *

**See discussion ofnew accounting pronouncements in Note 1. Organization and Basis of Presentation - New Accounting Pronouncementsin the accompanying consolidated financial statements.**

** **

*Corporate GovernanceGuidelines*

* *

**Effective March 22, 2005, theGeneral Partner’s LLC Agreement was amended to delete a provision requiringthat members of our General Partner’s board of directors must retire at thefirst meeting of the board of directors following attainment of the age of 70years.  The agreement was amended toallow for the election of the new members of the board of directors, one ofwhom is over the age of 70.  As a resultof the amendment, there is now no retirement age for the members of the GeneralPartner’s board of directors.  O**ur Corporate Governance Guidelines,which were also amended to reflect this change, are available on our website atwww.teppco.com.

 

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**On March 22, 2005, the members of the board of directors ofthe General Partner, Jim W. Mogg, Mark A. Borer, Michael J. Bradley, MiltonCarroll, Derrill Cody, John P. DesBarres, William H. Easter III and Paul F.Ferguson, Jr., each of whom had been elected to the board of the GeneralPartner by DEFS, resigned and new directors were elected.  The newly elected directors are Ralph S.Cunningham, Lee W. Marshall, Sr., Murray H. Hutchison and Michael B.Bracy.  Barry R. Pearl will continue toserve the General Partner as chief executive officer, president and adirector.  The newly elected board iscomprised of a majority of outside directors who are independent under thecriteria of the New York Stock Exchange and the U.S. Securities and ExchangeCommission.**

** **

**Forward-Looking Statements**

 

The matters discussed in this Reportinclude “forward-looking statements” within the meaning of various provisionsof the Securities Act of 1933 and the Securities Exchange Act of 1934.  All statements, other than statements ofhistorical facts, included in this document that address activities, events ordevelopments that we expect or anticipate will or may occur in the future,including such things as estimated future capital expenditures (including theamount and nature thereof), business strategy and measures to implementstrategy, competitive strengths, goals, expansion and growth of our businessand operations, plans, references to future success, references to intentionsas to future matters and other such matters are forward-lookingstatements.  These statements are basedon certain assumptions and analyses made by us in light of our experience andour perception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate under thecircumstances.  However, whether actualresults and developments will conform with our expectations and predictions issubject to a number of risks and uncertainties, including general economic,market or business conditions, the opportunities (or lack thereof) that may bepresented to and pursued by us, competitive actions by other pipelinecompanies, changes in laws or regulations and other factors, many of which arebeyond our control.  Consequently, all ofthe forward-looking statements made in this document are qualified by thesecautionary statements and we cannot assure you that actual results ordevelopments that we anticipate will be realized or, even if substantiallyrealized, will have the expected consequences to or effect on us or ourbusiness or operations.  For additionaldiscussion of such risks and uncertainties, see our Annual Report on Form 10-Kfor the year ended December 31, 2004, and other filings we have made with theSecurities and Exchange Commission.

 

**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk**

** **

We may be exposed to market risk through changes incrude oil commodity prices and interest rates. We do not have foreign exchange risks. Our Risk Management Committee has established policies to monitor andcontrol these market risks.  The RiskManagement Committee is comprised, in part, of senior executives of theCompany.

 

We seek to maintain a position that is substantiallybalanced between crude oil purchases and sales and future deliveryobligations.  On the majority of ourcrude oil derivative contracts, we take the normal purchase and normal saleexclusion in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 133, *Accounting for Derivative Instruments and HedgingActivities*, and SFAS No. 138, *Accounting for CertainDerivative Instruments and Certain Hedging Activities, an amendment of FASBStatement No. 133*.

 

Occasionally, customers require pricing terms which donot allow us to balance our position. Additionally, certain pricing terms may expose us to movements inmargin.  On a small portion of our crudeoil marketing business, we enter into derivative contracts such as physicalswaps and other business hedging devices for which we cannot take the normalpurchase and normal sale exclusion and for which we do not elect hedgeaccounting.  The terms of these contractsare less than one year.  The purpose isto balance our position or lock in a margin and, as such, not expose us to anyadditional significant market risk.  Wemark these transactions to market and the changes in the fair value arerecognized in current earnings.  Thiscould potentially result in some financial statement variability duringquarterly periods; however, any unrealized gains and losses reflected in thefinancial statements related to marking these transactions to market will beoffset by realized gains and losses in different quarterly periods when therelated physical transactions are settled.

 

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At March 31, 2005, we had $432.0 million outstandingunder our variable interest rate revolving credit facility.  The interest rate is based, at our option, oneither the lender’s base rate plus a spread or LIBOR plus a spread in effect atthe time of the borrowings and is adjusted monthly, bimonthly, quarterly orsemiannually.  Utilizing the balances ofour variable interest rate debt outstanding at March 31, 2005, and assumingmarket interest rates increase 100 basis points, the potential annual increasein interest expense would be $4.3 million.

 

At March 31, 2005, TE Products had outstanding $180.0million principal amount of 6.45% Senior Notes due 2008 and $210.0 millionprincipal amount of 7.51% Senior Notes due 2028 (collectively, the “TE ProductsSenior Notes”).  At March 31, 2005, theestimated fair value of the TE Products Senior Notes was approximately $409.4million.  At March 31, 2005, we hadoutstanding $500.0 million principal amount of 7.625% Senior Notes due 2012 and$200.0 million principal amount of 6.125% Senior Notes due 2013.  At March 31, 2005, the estimated fair valueof the $500.0 million 7.625% Senior Notes and the $200.0 million 6.125% SeniorNotes was approximately $563.8 million and $208.0 million, respectively.

 

We have utilized and expect to continue to utilizeinterest rate swap agreements to hedge a portion of our cash flow and fairvalue risks.  Interest rate swapagreements are used to manage the fixed and floating interest rate mix of ourtotal debt portfolio and overall cost of borrowing.  Interest rate swaps that manage our cash flowrisk reduce our exposure to increases in the benchmark interest ratesunderlying variable rate debt.  Interestrate swaps that manage our fair value risks are intended to reduce our exposureto changes in the fair value of the fixed rate debt.  Interest rate swap agreements involve theperiodic exchange of payments without the exchange of the notional amount uponwhich the payments are based.  Therelated amount payable to or receivable from counterparties is included as anadjustment to accrued interest.

 

In October 2001, TE Products entered into an interestrate swap agreement to hedge its exposure to changes in the fair value of itsfixed rate 7.51% Senior Notes due 2028. We designated this swap agreement as afair value hedge.  The swap agreement hasa notional amount of $210.0 million and matures in January 2028 to match theprincipal and maturity of the TE Products Senior Notes.  Under the swap agreement, TE Products pays afloating rate of interest based on a three-month U.S. Dollar LIBOR rate, plus aspread, and receives a fixed rate of interest of 7.51%.  During the three months ended March 31, 2005,and 2004, we recognized reductions in interest expense of $1.8 million and $2.6million, respectively, related to the difference between the fixed rate and thefloating rate of interest on the interest rate swap.  During the quarter ended March 31, 2005, wemeasured the hedge effectiveness of this interest rate swap and noted that nogain or loss from ineffectiveness was required to be recognized.  The fair value of this interest rate swap wasa gain of approximately $0.5 million and $3.4 million at March 31, 2005, and December31, 2004, respectively.  Utilizing thebalance of the 7.51% TE Products Senior Notes outstanding at March 31, 2005,and including the effects of hedging activities, assuming market interest ratesincrease 100 basis points, the potential annual increase in interest expense is$2.1 million.

 

In July 2000, we entered into an interest rate swapagreement to hedge our exposure to increases in the benchmark interest rateunderlying our variable rate revolving credit facility.  This interest rate swap matured in April2004.  We designated this swap agreement,which hedged exposure to variability in expected future cash flows attributedto changes in interest rates, as a cash flow hedge. The swap agreement wasbased on a notional amount of $250.0 million. Under the swap agreement, we paid a fixed rate of interest of 6.955% andreceived a floating rate based on a three-month U.S. Dollar LIBOR rate.  Because this swap was designated as a cashflow hedge, the changes in fair value, to the extent the swap was effective,were recognized in other comprehensive income until the hedged interest costswere recognized in earnings.  During thethree months ended March 31, 2004, we recognized an increase in interestexpense of $2.7 million related to the difference between the fixed rate andthe floating rate of interest on the interest rate swap.

 

During 2002, we entered into interest rate swapagreements, designated as fair value hedges, to hedge our exposure to changesin the fair value of our fixed rate 7.625% Senior Notes due 2012.  The swap agreements had a combined notionalamount of $500.0 million and matured in 2012 to match the principal andmaturity of the Senior Notes.  Under theswap agreements, we paid a floating rate of interest based on a U.S. DollarLIBOR rate, plus a spread, and received a fixed rate of interest of7.625%.  These swap agreements were laterterminated in 2002 resulting in gains of $44.9 million.  The gains realized from the swap terminationshave been deferred as adjustments 

 

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to the carrying value of the Senior Notes and are being amortized usingthe effective interest method as reductions to future interest expense over theremaining term of the Senior Notes.  AtMarch 31, 2005, the unamortized balance of the deferred gains was $35.6million.  In the event of earlyextinguishment of the Senior Notes, any remaining unamortized gains would berecognized in the consolidated statement of income at the time ofextinguishment.

 

**Item 4.  Controls and Procedures**

** **

The principal executive officer andprincipal financial officer of our General Partner, after evaluating theeffectiveness of our disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) as of March 31, 2005, have concluded that,as of such date, our disclosure controls and procedures are adequate andeffective to ensure that material information relating to us and ourconsolidated subsidiaries would be made known to them by others within thoseentities.

 

*Changes in Internal Control overFinancial Reporting*

 

**Through February 23, 2005, ourGeneral Partner was an indirect subsidiary of Duke Energy, and Duke Energy’sAudit Services Department provided our internal audit functions.  On February 24, 2005, the General Partner wasacquired by DFI, an affiliate of EPCO.**  Our GeneralPartner, using its own personnel and third party providers, will provide uswith internal audit services.  TheGeneral Partner expects the transition of internal audit functions to be completedin the second quarter of 2005.  Thischange is not expected to adversely affect our internal audit process or ourinternal control over financial reporting.

** **

There has been no change in ourinternal control over financial reporting during the first quarter of 2005 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting. As a result, no corrective actions were required or undertaken.

 

**PART II.  OTHERINFORMATION**

 

**Item 1.  Legal Proceedings**

 

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

 

**Item 6.  Exhibits.**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                         |
| 3.1                 |       | Certificate of Limited Partnership of TEPPCO  Partners, L.P. (Filed as Exhibit 3.2 to the Registration Statement of TEPPCO  Partners, L.P. (Commission File No. 33-32203) and incorporated herein by  reference).                                                                            |
| 3.2                 |       | Third Amended and Restated Agreement of Limited  Partnership of TEPPCO Partners, L.P., dated September 21, 2001 (Filed as  Exhibit 3.7 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the quarter ended September 30, 2001 and incorporated herein by  reference). |
| 4.1                 |       | Form of Certificate representing Limited Partner  Units (Filed as Exhibit 4.1 to the Registration Statement of TEPPCO Partners,  L.P. (Commission File No. 33-32203) and incorporated herein by reference).                                                                                  |
| 4.2                 |       | Form of Indenture between TE Products Pipeline  Company, Limited Partnership and The Bank of New York, as Trustee, dated as  of January 27, 1998 (Filed as Exhibit 4.3 to TE                                                                                                                 |

 

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|   |   | 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. (Commission File No.  1-10403) for the year ended December 31, 2002 and incorporated herein by  reference).                                                                                         |
| 10.1*  |   | Supplemental Agreement to Employment Agreement  between the Company and Barry R. Pearl dated as of February 23, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2*  |   | Supplemental Agreement to Employment and Non-Compete  Agreement between the Company and J. Michael Cockrell dated as of February  23, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3*  |   | Supplemental Form Agreement to Form of Employment  Agreement between the Company and John N. Goodpasture, Stephen W. Russell, C.  Bruce Shaffer and Barbara A. Carroll dated as of February 23, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4*  |   | Supplemental Form Agreement to Form of Employment and  Agreement between the Company and Thomas R. Harper, Charles H. Leonard, James  C. Ruth and Leonard W. Mallett dated as of February 23, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 12.1*  |   | Statement of Computation of Ratio of Earnings to  Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1*  |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2*  |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1** |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2** |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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* Filed herewith.

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

+ A management contract or compensation plan or arrangement.

 

**SIGNATURES**

 

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

 
|                 | TEPPCO Partners, L.P.                        |                          |
|----------------------|----------------------------------------------|-------------------------------|
|                 | (Registrant)                                 |                          |
|                 | (A Delaware Limited Partnership)             |
|                 |                                         |
|                 |                                         |
|                 | By: Texas Eastern Products Pipeline          |
|                 |   Company, LLC, as General Partner |
|                 |                                         |
|                 |                                         |
|                 | By:                                          |  /s/ BARRY R.  PEARL     |   |
|                 | Barry R. Pearl,                              |                          |
|                 | President and Chief Executive Officer        |
|                 |                                         |
|                 |                                         |
|                 | By:                                          |  /s/ CHARLES H.  LEONARD |   |
|                 | Charles H. Leonard,                          |                          |
|                 | Senior Vice President and Chief              |
|                 | Financial Officer                            |                          |
| Date: April 27, 2005 |                                         |
|                      |                                              |                               |  |  |  |  |

 

 

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