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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 1-10403   TEPPCO Partners, L.P. (Exact name of Registrant as specified in its charter)
 Delaware
(State of Incorporation
or Organization)
    
    76-0291058
(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 filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Limited Partner Units
outstanding as of April 28, 2004: 62,998,554




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TEPPCO PARTNERS, L.P. TABLE OF CONTENTS PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003
    
    
    1Consolidated Statements of Income for the three months ended March 31, 2004 and 2003 (unaudited)
    
    
    2Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)
    
    
    3Consolidated Statement of Partners Capital for the three months ended March 31, 2004 (unaudited)
    
    
    4Notes to the Consolidated Financial Statements (unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Forward-Looking Statements
    
    
    44Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    46PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    46Item 6. Exhibits and Reports on Form 8-K
    
    
    47Signatures
    
    
    52Statement of Computation of Ratio of EarningsCertification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO pursuant to Section 906Certification of CFO pursuant to Section 906
  i




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements TEPPCO PARTNERS, L.P. 
 CONSOLIDATED BALANCE SHEETS
(in thousands) March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,145
    
    
    $
    29,469Accounts receivable, trade (net of allowance for doubtful accounts of
$4,700)
    
    
    436,638
    
    
    
    371,938Accounts receivable, related parties
    
    
    7,872
    
    
    
    3,143Inventories
    
    
    16,606
    
    
    
    16,060Other
    
    
    30,068
    
    
    
    32,208Total current assets
    
    
    494,329
    
    
    
    452,818Property, plant and equipment, at cost (net of accumulated
depreciation and amortization of $363,913 and $345,357)
    
    
    1,619,416
    
    
    
    1,619,163Equity investments
    
    
    367,201
    
    
    
    365,286Intangible assets
    
    
    431,276
    
    
    
    438,565Goodwill
    
    
    16,944
    
    
    
    16,944Other assets
    
    
    59,845
    
    
    
    48,216Total assets
    
    $
    2,989,011
    
    
    $
    2,940,992LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    431,323
    
    
    $
    359,660Accounts payable, related parties
    
    
    12,943
    
    
    
    16,269Accrued interest
    
    
    15,647
    
    
    
    35,111Other accrued taxes
    
    
    7,846
    
    
    
    9,941Other
    
    
    47,461
    
    
    
    54,610Total current liabilities
    
    
    515,220
    
    
    
    475,591Senior Notes
    
    
    1,135,349
    
    
    
    1,129,650Other long-term debt
    
    
    226,500
    
    
    
    210,000Other liabilities and deferred credits
    
    
    16,924
    
    
    
    16,430Commitments and contingenciesPartners capital:Accumulated other comprehensive loss
    
    
    (220
    )
    
    
    (2,902
    )General partners interest
    
    
    (11,651
    )
    
    
    (7,181
    )Limited partners interests
    
    
    1,106,889
    
    
    
    1,119,404Total partners capital
    
    
    1,095,018
    
    
    
    1,109,321Total liabilities and partners capital
    
    $
    2,989,011
    
    
    $
    2,940,992
 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 EndedMarch 31,2004
    
    2003Operating revenues:Sales of petroleum products
    
    $
    1,182,113
    
    
    $
    975,960Transportation  Refined products
    
    
    30,971
    
    
    
    26,894Transportation  LPGs
    
    
    28,780
    
    
    
    30,821Transportation  Crude oil
    
    
    9,663
    
    
    
    6,905Transportation  NGLs
    
    
    10,014
    
    
    
    9,899Gathering  Natural gas
    
    
    34,502
    
    
    
    34,282Other
    
    
    22,018
    
    
    
    14,478Total operating revenues
    
    
    1,318,061
    
    
    
    1,099,239Costs and expenses:Purchases of petroleum products
    
    
    1,167,341
    
    
    
    962,844Operating, general and administrative
    
    
    52,413
    
    
    
    42,635Operating fuel and power
    
    
    11,292
    
    
    
    10,177Depreciation and amortization
    
    
    27,820
    
    
    
    27,313Taxes  other than income taxes
    
    
    5,294
    
    
    
    4,928Total costs and expenses
    
    
    1,264,160
    
    
    
    1,047,897Operating income
    
    
    53,901
    
    
    
    51,342Interest expense  net
    
    
    (19,595
    )
    
    
    (21,309
    )Equity earnings
    
    
    5,651
    
    
    
    3,710Other income  net
    
    
    476
    
    
    
    182Net income
    
    $
    40,433
    
    
    $
    33,925Net Income Allocation:Limited Partner Unitholders
    
    $
    28,769
    
    
    $
    23,087Class B Unitholder
    
    
    
    
    
    
    1,680General Partner
    
    
    11,664
    
    
    
    9,158Total net income allocated
    
    $
    40,433
    
    
    $
    33,925Basic and diluted net income per Limited
Partner and Class B Unit
    
    $
    0.46
    
    
    $
    0.43Weighted average Limited Partner and Class B
Units outstanding
    
    
    62,999
    
    
    
    57,728
 See accompanying Notes to Consolidated Financial Statements. 2




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TEPPCO PARTNERS, L.P. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands) Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    40,433
    
    
    $
    33,925Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    27,820
    
    
    
    27,313Earnings in equity investments, net of distributions
    
    
    349
    
    
    
    (3,779
    )Non-cash portion of interest expense
    
    
    (574
    )
    
    
    1,031Increase in accounts receivable
    
    
    (64,701
    )
    
    
    (87,082
    )Increase in inventories
    
    
    (546
    )
    
    
    (6,396
    )Decrease (increase) in other current assets
    
    
    (8,038
    )
    
    
    5,816Increase in accounts payable and accrued expenses
    
    
    40,547
    
    
    
    63,250Other
    
    
    7,933
    
    
    
    3,466Net cash provided by operating activities
    
    
    43,223
    
    
    
    37,544Cash flows from investing activities:Acquisition of crude oil assets
    
    
    (1,000
    )
    
    
    Acquisition of additional interest in Centennial Pipeline LLC
    
    
    
    
    
    
    (20,000
    )Investment in Centennial Pipeline LLC
    
    
    (1,000
    )
    
    
    (1,000
    )Capital expenditures
    
    
    (26,964
    )
    
    
    (17,324
    )Net cash used in investing activities
    
    
    (28,964
    )
    
    
    (38,324
    )Cash flows from financing activities:Proceeds from revolving credit facilities
    
    
    60,000
    
    
    
    40,000Repayments on revolving credit facilities
    
    
    (43,500
    )
    
    
    (207,000
    )Issuance of Senior Notes
    
    
    
    
    
    
    198,570Debt issuance costs
    
    
    
    
    
    
    (1,300
    )Issuance of Limited Partner Units, net
    
    
    
    
    
    
    12General Partners contributions
    
    
    
    
    
    
    2Distributions paid
    
    
    (57,083
    )
    
    
    (46,533
    )Net cash used in financing activities
    
    
    (40,583
    )
    
    
    (16,249
    )Net decrease in cash and cash equivalents
    
    
    (26,324
    )
    
    
    (17,029
    )Cash and cash equivalents at beginning of period
    
    
    29,469
    
    
    
    30,968Cash and cash equivalents at end of period
    
    $
    3,145
    
    
    $
    13,939Non-cash investing activities:Net assets transferred to Mont Belvieu Storage Partners, L.P.
    
    $
    
    
    
    $
    61,042Supplemental disclosure of cash flows:Cash paid for interest (net of amounts capitalized)
    
    $
    37,945
    
    
    $
    32,491
 See accompanying Notes to Consolidated Financial Statements. 3




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TEPPCO PARTNERS, L.P. 
 CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(Unaudited)
(in thousands, except Unit amounts) Outstanding
    
    
    
    
    
    
    
    
    
    AccumulatedLimited
    
    General
    
    Limited
    
    OtherPartner
    
    Partners
    
    Partners
    
    ComprehensiveUnits
    
    Interest
    
    Interests
    
    Loss
    
    TotalPartners capital at December 31, 2003
    
    
    62,998,554
    
    
    $
    (7,181
    )
    
    $
    1,119,404
    
    
    $
    (2,902
    )
    
    $
    1,109,321Adjustment to issuance of Limited
Partner Units, net
    
    
    
    
    
    
    
    
    
    
    (335
    )
    
    
    
    
    
    
    (335
    )Net income on cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,682
    
    
    
    2,682Net income allocation
    
    
    
    
    
    
    11,664
    
    
    
    28,769
    
    
    
    
    
    
    
    40,433Cash distributions
    
    
    
    
    
    
    (16,134
    )
    
    
    (40,949
    )
    
    
    
    
    
    
    (57,083
    )Partners capital at March 31, 2004
    
    
    62,998,554
    
    
    $
    (11,651
    )
    
    $
    1,106,889
    
    
    $
    (220
    )
    
    $
    1,095,018
 See accompanying Notes to Consolidated Financial Statements. 4




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TEPPCO PARTNERS, L.P. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION TEPPCO Partners, L.P. (the Partnership), a Delaware limited partnership,
is a master limited partnership formed in March 1990. We operate through TE
Products Pipeline Company, Limited Partnership (TE Products), TCTM, L.P.
(TCTM) and TEPPCO Midstream Companies, L.P. (TEPPCO Midstream).
Collectively, TE Products, TCTM and TEPPCO Midstream are referred to as the
Operating Partnerships. Texas Eastern Products Pipeline Company, LLC (the
Company or General Partner), a Delaware limited liability company, serves
as our general partner and owns a 2% general partner interest in us. The
General Partner is a wholly owned subsidiary of Duke Energy Field Services, LLC
(DEFS), a joint venture between Duke Energy Corporation (Duke Energy) and
ConocoPhillips. Duke Energy holds an interest of approximately 70% in DEFS,
and ConocoPhillips holds the remaining interest of approximately 30%. The
Company, as general partner, performs all management and operating functions
required for us, except for the management and operations of certain of the
TEPPCO Midstream assets that are managed by DEFS on our behalf. We reimburse
the General Partner for all reasonable direct and indirect expenses incurred in
managing us. As used in this Report, we, us, our, and the Partnership mean
TEPPCO Partners, L.P. and, where the context requires, include our
subsidiaries. The accompanying unaudited consolidated financial statements reflect all
adjustments that are, in the opinion of our management, of a normal and
recurring nature and necessary for a fair statement of our financial position
as of March 31, 2004, and the results of our operations and cash flows for the
periods presented. The results of operations for the three months ended March
31, 2004, are not necessarily indicative of results of our operations for the
full year 2004. You should read these interim financial statements in
conjunction with our consolidated financial statements and notes thereto
presented in the TEPPCO Partners, L.P. Annual Report on Form 10-K for the year
ended December 31, 2003. We have reclassified certain amounts from prior
periods to conform with the current presentation. We operate and report in three business segments: transportation and
storage of refined products, liquefied petroleum gases (LPGs) and
petrochemicals (Downstream Segment); gathering, transportation, marketing and
storage of crude oil and distribution of lubrication oils and specialty
chemicals (Upstream Segment); and gathering of natural gas, fractionation of
natural gas liquids (NGLs) and transportation of NGLs (Midstream Segment).
Our reportable segments offer different products and services and are managed
separately because each requires a different business strategy. Our interstate transportation operations, including rates charged to
customers, are subject to regulations prescribed by the Federal Energy
Regulatory Commission (FERC). We refer to refined products, LPGs,
petrochemicals, crude oil, NGLs and natural gas in this Report, collectively,
as petroleum products or products. Net Income Per Unit Basic net income per Limited Partner and Class B Unit (collectively,
Units) is computed by dividing our net income, after deduction of the General
Partners interest, by the weighted average number of Units outstanding (a
total of 63.0 million Units for the three months ended March 31, 2004, and 57.7
million Units for the three months ended March 31, 2003). The General
Partners percentage interest in our net income is based on its percentage of
cash distributions from Available Cash for each period (see Note 8. Partners
Capital and Distributions). The General Partner was allocated $11.7 million
(representing 28.85%) and $9.2 million (representing 26.99%) of our net income
for the three months ended March 31, 2004, and 2003, respectively. The General
Partners percentage interest in our net income increases as cash distributions
paid per Unit increase, in accordance with our limited partnership agreement. 5




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Diluted net income per Unit is similar to the computation of basic net
income per Unit above, except that the denominator is increased to include the
dilutive effect of outstanding Unit options by application of the treasury
stock method. For the three months ended March 31, 2003, the denominator was
increased by 18,313 Units. For the three months ended March 31, 2004, the
denominator was not changed as all remaining outstanding Unit options were
exercised during the third quarter of 2003. No Unit options were outstanding
at March 31, 2004. New Accounting Pronouncements In December 2003, the Financial Accounting Standards Board (FASB)
revised FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51(FIN 46). FIN 46, issued by the
FASB in January 2003, requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors
in the entity do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The revised statement, FASB Interpretation No. 46(R), Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51(FIN 46(R)),
clarifies some of the requirements of FIN 46, eases some implementation
problems that companies experienced implementing FIN 46, adds new scope
exceptions and makes the probability more likely for many companies that
potential variable interest entities will be identified and consolidated. We
adopted the new requirements detailed in FIN 46(R) as of March 31, 2004. In
connection with our adoption of FIN 46(R), we evaluated our investments in
Centennial Pipeline LLC, Seaway Crude Pipeline Company and Mont Belvieu Storage
Partners, L.P. and determined that these entities are not materially affected
by our adoption of FIN 46(R), and thus we have accounted for them as equity
method investments (see Note 6. Equity Investments). The adoption of FIN 46(R)
did not have an effect on our financial position, results of operations or cash
flows. On December 8, 2003, President Bush signed into a law a bill that expands
Medicare, primarily adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. We anticipate that the benefits we pay after 2006
could be lower as a result of the new Medicare provisions; however, at this
time the retiree medical obligations and costs reported do not reflect any
changes as a result of this legislation. Deferring the recognition of the new
Medicare provisions impact is permitted by FASB Staff Position 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, due to open questions about
some of the new Medicare provisions and a lack of authoritative accounting
guidance about certain matters. The final accounting guidance could require
changes to previously reported information. We do not believe that this
regulation will have a material adverse effect on our financial position,
results of operations or cash flows. In December 2003, the FASB issued a revision to Statement of Financial
Accounting Standards (SFAS) No. 132, Employers Disclosures about Pensions
and Other Post-Retirement Benefits. This revision required that companies
provide more details about their plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. A description of investment
policies and strategies and target allocation percentages, or target ranges,
for these asset categories also are required in financial statements. Cash
flows will include projections of future benefit payments and an estimate of
contributions to be made in the next year to fund pension and other
postretirement benefit plans. In addition to expanded annual disclosures, the
FASB is requiring companies to report the various elements of pension and other
postretirement benefit costs on a quarterly basis. The guidance is effective
for fiscal years ending after December 15, 2003, and for quarters beginning
after December 15, 2003. We adopted the provisions of the revised SFAS 132
effective December 31, 2003, and certain provisions regarding disclosure of
information about estimated future benefit payments in the first quarter of
2004. 6




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Goodwill represents the excess of purchase price over fair value of net
assets acquired and is presented on the consolidated balance sheets net of
accumulated amortization. We account for goodwill under SFAS No. 142, Goodwill
and Other Intangible Assets, which was issued by the FASB in July 2001. SFAS
142 prohibits amortization of goodwill and intangible assets with indefinite
useful lives, and instead requires testing for impairment at least annually. To perform an impairment test of goodwill, we have identified our
reporting units and have determined the carrying value of each reporting unit
by assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units. We then determine the fair value
of each reporting unit and compare it to the carrying value of the reporting
unit. We will continue to compare the fair value of each reporting unit to its
carrying value on an annual basis to determine if an impairment loss has
occurred. At March 31, 2004, we had $16.9 million of unamortized goodwill and $25.5
million of excess investment in our equity investment in Seaway Crude Pipeline
Company (equity method goodwill). The excess investment is included in our
equity investments account at March 31, 2004. The following table presents the
carrying amount of goodwill and equity method goodwill at March 31, 2004, by
business segment (in thousands): Downstream
    
    Midstream
    
    Upstream
    
    SegmentsSegment
    
    Segment
    
    Segment
    
    TotalGoodwill
    
    $
    
    
    
    $
    2,777
    
    
    $
    14,167
    
    
    $
    16,944Equity method goodwill
    
    
    
    
    
    
    
    
    
    
    25,502
    
    
    
    25,502
 Other Intangible Assets The following table reflects the components of amortized intangible assets
at March 31, 2004, and December 31, 2003 (in thousands): March 31, 2004
    
    December 31, 2003Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAmortized intangible assets:Gathering and transportation agreements
    
    $
    464,337
    
    
    $
    (69,795
    )
    
    $
    464,337
    
    
    $
    (62,436
    )Fractionation agreement
    
    
    38,000
    
    
    
    (11,400
    )
    
    
    38,000
    
    
    
    (10,925
    )Other
    
    
    12,162
    
    
    
    (2,028
    )
    
    
    11,270
    
    
    
    (1,681
    )Total
    
    $
    514,499
    
    
    $
    (83,223
    )
    
    $
    513,607
    
    
    $
    (75,042
    )
 At March 31, 2004, we had $33.4 million of excess investment in our equity
investment in Centennial Pipeline LLC, which was created upon formation of the
company (see Note 6. Equity Investments). The excess investment is included
in our equity investments account at March 31, 2004. This excess investment is
accounted for as an intangible asset with an indefinite life. We will assess
the intangible asset for impairment on an annual basis. SFAS 142 requires that intangible assets with finite useful lives be
amortized over their respective estimated useful lives. If an intangible asset
has a finite useful life, but the precise length of that life is not known,
that intangible asset shall be amortized over the best estimate of its useful
life. At a minimum, we will assess the useful 7




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) lives and residual values of all
intangible assets on an annual basis to determine if adjustments are required.
With respect to our natural gas gathering contracts, we update throughput estimates
and evaluate the remaining expected useful life of the contract assets on a
quarterly basis based on the best available information. Amortization expense
on intangible assets was $8.2 million and $11.5 million for the three months
ended March 31, 2004 and 2003, respectively. The value assigned to our intangible assets for natural gas gathering
contracts is amortized on a unit-of-production basis, based upon the actual
throughput of the system over the expected total throughput for the lives of
the contracts. Due to expansions on the gathering systems at Jonah Gas
Gathering Company (Jonah) and because of certain limited production forecasts
obtained from producers on the Jonah system related to the expansions, in the
second quarter of 2003, we increased our best estimate of future throughput on
the Jonah system. This increase in the estimate of future throughput extended
the amortization period of Jonahs natural gas gathering contracts by an
estimated 9 years, increasing from approximately 16 years to 25 years. Further
revisions to this estimate may occur as additional production information is
made available to us. The following table sets forth the estimated amortization expense of
intangible assets for the years ending December 31 (in thousands): 2004
    
    $
    35,4402005
    
    
    36,5422006
    
    
    38,0282007
    
    
    35,1502008
    
    
    32,833
 NOTE 3. INTEREST RATE SWAPS We have entered into an interest rate swap agreement to hedge our exposure
to increases in the benchmark interest rate underlying our variable rate
revolving credit facility. This interest rate swap matured on April 6, 2004.
We designated this swap agreement, which hedged exposure to variability in
expected future cash flows attributed to changes in interest rates, as a cash
flow hedge. The swap agreement was based on a notional amount of $250.0
million. Under the swap agreement, we paid a fixed rate of interest of 6.955%
and received a floating rate based on a three-month U.S. Dollar LIBOR rate.
Since this swap was designated as a cash flow hedge, the changes in fair value,
to the extent the swap was effective, were recognized in other comprehensive
income until the hedged interest costs were recognized in earnings. On June
27, 2003, we repaid the amounts outstanding under our revolving credit facility
with borrowings under a new three year revolving credit facility and canceled
the old facility (see Note 7. Debt). We redesignated this interest rate swap
as a hedge of our exposure to increases in the benchmark interest rate
underlying the new variable rate revolving credit facility. During the three
months ended March 31, 2004 and 2003, we recognized increases in interest
expense of $2.7 million and $3.4 million, respectively, related to the
difference between the fixed rate and the floating rate of interest on the
interest rate swap. During 2003, we determined that we would repay a portion of the amount
outstanding under the revolving credit facility with proceeds from our Unit
offering in August 2003 (see Note 8. Partners Capital and Distributions)
resulting in a reduction of probable future interest payments under the credit
facility. We reduced the outstanding balance of the revolving credit facility
at December 31, 2003, to $210.0 million. In the first quarter of 2004, we
borrowed an additional amount under the revolving credit facility, and at March
31, 2004, the outstanding balance of the revolving credit facility was $226.5
million. As a result of the determination of repayments and borrowings under
the revolving credit facility, we measured and reclassified amounts previously
accumulated in other comprehensive income related to the discontinued portion
of the hedge and recognized a gain of $0.2 million during 8




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) first quarter of 2004, which has been included in interest expense. The total fair value of the
interest rate swap was a loss of approximately $0.2 million at March 31, 2004, and a loss of
approximately $3.9 million at December 31, 2003. The remaining $0.2 million of
accumulated other comprehensive loss at March 31, 2004, will be transferred
into earnings in April 2004. On October 4, 2001, TE Products entered into an interest rate swap
agreement to hedge its exposure to changes in the fair value of its fixed rate
7.51% Senior Notes due 2028. We designated 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 maturity of the TE Products Senior
Notes. Under the swap agreement, TE Products pays a floating rate of interest
based on a three-month U.S. Dollar LIBOR rate, plus a spread, and receives a
fixed rate of interest of 7.51%. During the three months ended March 31, 2004,
and 2003, we recognized reductions in interest expense of $2.6 million and $2.4
million, respectively, related to the difference between the fixed rate and the
floating rate of interest on the interest rate swap. During the quarter ended
March 31, 2004, we measured the hedge effectiveness of this interest rate swap
and noted that no gain or loss from ineffectiveness was required to be
recognized. The fair value of this interest rate swap was a gain of
approximately $8.9 million at March 31, 2004, and a gain of approximately $2.3
million at December 31, 2003. On February 20, 2002, we entered into interest rate swap agreements,
designated as fair value hedges, to hedge our exposure to changes in the fair
value of our fixed rate 7.625% Senior Notes due 2012. The swap agreements had
a combined notional amount of $500.0 million and matured in 2012 to match the
principal and maturity of the Senior Notes. Under the swap agreements, we paid
a floating rate of interest based on a U.S. Dollar LIBOR rate, plus a spread,
and received a fixed rate of interest of 7.625%. On July 16, 2002, the swap
agreements were terminated resulting in a gain of approximately $18.0 million.
Concurrent with the swap terminations, we entered into new interest rate swap
agreements, with identical terms as the previous swap agreements; however, the
floating rate of interest was based upon a spread of an additional 50 basis
points. In December 2002, the swap agreements entered into on July 16, 2002,
were terminated, resulting in a gain of approximately $26.9 million. The gains
realized from the July 2002 and December 2002 swap terminations have been
deferred as adjustments to the carrying value of the Senior Notes and are being
amortized using the effective interest method as reductions to future interest
expense over the remaining term of the Senior Notes. At March 31, 2004, the
unamortized balance of the deferred gains was $39.6 million. In the event of
early extinguishment of the Senior Notes, any remaining unamortized gains would
be recognized in the consolidated statement of income at the time of
extinguishment. NOTE 4. ACQUISITIONS AND DISPOSITIONS Rancho Pipeline In connection with our acquisition of crude oil assets in 2000, we
acquired an approximate 23.5% undivided joint interest in the Rancho Pipeline,
which was a crude oil pipeline system from West Texas to Houston, Texas. In
March 2003, the Rancho Pipeline ceased operations, and segments of the pipeline
were sold to certain of the owners which previously held undivided interests in
the pipeline. We acquired approximately 230 miles of the pipeline in exchange
for cash of $5.5 million and our interests in other portions of the Rancho
Pipeline. We sold part of the segment we acquired to other entities for cash
and assets valued at approximately $8.5 million. We recorded a net gain of
$3.9 million on the transactions in the second quarter of 2003. Genesis Pipeline On November 1, 2003, we completed the purchase of crude supply and
transportation assets along the upper Texas Gulf Coast for $21.0 million from
Genesis Crude Oil, L.P. and Genesis Pipeline Texas, L.P. (Genesis). The 9




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) transaction was funded with proceeds from our August 2003 equity offering (see
Note 8. Partners Capital and Distributions). We allocated the purchase price, net of liabilities assumed,
primarily to property, plant and equipment and intangible assets. The assets
acquired included approximately 150 miles of small diameter trunk lines, 26,000
barrels per day of throughput and 12,000 barrels per day of lease marketing and
supply business. We have integrated these assets into our South Texas pipeline
system which has allowed us to consolidate gathering and marketing assets in
key operating areas in a cost effective manner and will provide future growth
opportunities. Accordingly, the results of the acquisition are included in the
consolidated financial statements from November 1, 2003. The following table allocates the estimated fair value of the Genesis
assets acquired on November 1, 2003 (in thousands): Property, plant and equipment
    
    $
    12,811Intangible assets
    
    
    8,742Other
    
    
    144Total assets
    
    
    21,697Total liabilities assumed
    
    
    (687
    )Net assets acquired
    
    $
    21,010
 NOTE 5. INVENTORIES Inventories are valued at the lower of cost (based on weighted average
cost method) or market. The costs of inventories did not exceed market values
at March 31, 2004, and December 31, 2003. The major components of inventories
were as follows (in thousands): March 31,
    
    December 31,2004
    
    2003Crude oil
    
    $
    2,422
    
    
    $
    1,303Refined products
    
    
    5,119
    
    
    
    6,632LPGs
    
    
    418
    
    
    
    517Lubrication oils and specialty chemicals
    
    
    3,361
    
    
    
    3,080Materials and supplies
    
    
    5,145
    
    
    
    4,528Other
    
    
    141
    
    
    
    Total
    
    $
    16,606
    
    
    $
    16,060
 NOTE 6. EQUITY INVESTMENTS 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 by ConocoPhillips. Seaway owns a pipeline that 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 Partnership Agreement provides for varying participation
ratios throughout the life of the Seaway partnership. From June 2002 through
May 2006, we receive 60% of revenue and expense of Seaway. Thereafter, we will
receive 40% of revenue and expense of Seaway. 10




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) In August 2000, TE Products entered into agreements with Panhandle Eastern
Pipeline Company (PEPL), a former subsidiary of CMS Energy Corporation, and
Marathon Ashland Petroleum LLC (Marathon) to form Centennial Pipeline LLC (Centennial).
Centennial owns an interstate refined petroleum products pipeline extending from the upper Texas Gulf Coast
to central Illinois. Through February 9, 2003, each participant owned a
one-third interest in Centennial. On February 10, 2003, TE Products and
Marathon each acquired an additional interest in Centennial from PEPL for $20.0
million each, increasing their ownership percentages in Centennial to 50% each.
During the quarter ended March 31, 2004, TE Products invested $1.0 million in
Centennial, which is included in the equity investment balance at March 31,
2004. On January 1, 2003, TE Products and Louis Dreyfus Energy Services L.P.
(Louis Dreyfus) formed Mont Belvieu Storage Partners, L.P. (MB Storage).
TE Products and Louis Dreyfus each own a 50% ownership interest in MB Storage.
The purpose of MB Storage is to expand services to the upper Texas Gulf Coast
energy marketplace by increasing pipeline throughput and the mix of products
handled through the existing system and establishing new receipt and delivery
connections. MB Storage is a service-oriented, fee-based venture with no
commodity trading activity. TE Products operates the facilities for MB
Storage. Effective January 1, 2003, TE Products contributed property and
equipment with a net book value of $67.1 million to MB Storage. Additionally,
as of the contribution date, Louis Dreyfus had invested $6.1 million for
expansion projects for MB Storage that TE Products was required to reimburse if
the original joint development and marketing agreement was terminated by either
party. This deferred liability was also contributed and converted to the
capital account of Louis Dreyfus in MB Storage. TE Products receives the first $1.8 million per quarter (or $7.15 million
on an annual basis) of MB Storages income before depreciation expense less
mandatory capital expenditures, as defined in the operating agreement. Any
amount of MB Storages annual income before depreciation expense less mandatory
capital expenditures in excess of $7.15 million is allocated evenly between TE
Products and Louis Dreyfus. Depreciation expense on assets each originally
contributed to MB Storage is allocated between TE Products and Louis Dreyfus
based on the net book value of the assets contributed. Depreciation expense on
assets constructed or acquired by MB Storage subsequent to formation is
allocated evenly between TE Products and Louis Dreyfus. For the three months
ended March 31, 2004, TE Products sharing ratio in the earnings of MB Storage
was approximately 66.4%. We use the equity method of accounting to account for our investments in
Seaway, Centennial and MB Storage. Summarized combined financial information
for Seaway, Centennial and MB Storage for the three months ended March 31, 2004
and 2003, is presented below (in thousands): Three Months EndedMarch 31,2004
    
    2003Revenues
    
    $
    33,313
    
    
    $
    24,322Net income
    
    
    11,817
    
    
    
    5,286
 Summarized combined balance sheet information for Seaway, Centennial and
MB Storage as of March 31, 2004, and December 31, 2003, is presented below (in
thousands): March 31,
    
    December 31,2004
    
    2003Current assets
    
    $
    84,792
    
    
    $
    56,243Noncurrent assets
    
    
    603,192
    
    
    
    609,215Current liabilities
    
    
    44,385
    
    
    
    43,177Long-term debt
    
    
    140,000
    
    
    
    140,000Noncurrent liabilities
    
    
    13,292
    
    
    
    13,182Partners capital
    
    
    490,307
    
    
    
    469,099
 11




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Our investments in Seaway and Centennial include excess net investment
amounts of $25.5 million and $33.4 million, respectively. Excess investment is
the amount by which our investment balance exceeds our proportionate share of
the net assets of the investment. NOTE 7. DEBT Senior Notes On January 27, 1998, TE Products completed the issuance of $180.0 million
principal amount of 6.45% Senior Notes due 2008, and $210.0 million principal
amount of 7.51% Senior Notes due 2028 (collectively the TE Products Senior
Notes). The 6.45% TE Products Senior Notes were issued at a discount of $0.3
million and are being accreted to their face value over the term of the notes.
The 6.45% TE Products Senior Notes due 2008 are 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 the option of TE
Products, in whole or in part, at a premium. The TE Products Senior Notes do not have sinking fund requirements.
Interest on the TE Products Senior Notes is payable semiannually in arrears on
January 15 and July 15 of each year. The TE Products Senior Notes are
unsecured obligations of TE Products and rank on a parity with all other
unsecured and unsubordinated indebtedness of TE Products. The indenture
governing the TE Products Senior Notes contains covenants, including, but not
limited to, covenants limiting the creation of liens securing indebtedness and
sale and leaseback transactions. However, the indenture does not limit our
ability to incur additional indebtedness. As of March 31, 2004, TE Products
was in compliance 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 a discount of $2.2 million and are being accreted to their face value
over the term of the notes. The Senior Notes may be redeemed at any time at
our option with the payment of accrued interest and a make-whole premium
determined by discounting remaining interest and principal payments using a
discount rate equal to the rate of the United States Treasury securities of
comparable remaining maturity plus 35 basis points. The indenture governing
our 7.625% Senior Notes contains covenants, including, but not limited to,
covenants limiting the creation of liens securing indebtedness and sale and
leaseback transactions. However, the indenture does not limit our ability to
incur additional indebtedness. As of March 31, 2004, we were in compliance
with the covenants of these Senior Notes. On January 30, 2003, we completed the issuance of $200.0 million principal
amount of 6.125% Senior Notes due 2013. The 6.125% Senior Notes were issued at
a discount of $1.4 million and are being accreted to their face value over the
term of the notes. We used $182.0 million of the proceeds from the offering to
reduce the outstanding principal on our $500.0 million revolving credit
facility to $250.0 million. The balance of the net proceeds received was used
for general partnership purposes. The Senior Notes may be redeemed at any time
at our option with the payment of accrued interest and a make-whole premium
determined by discounting remaining interest and principal payments using a
discount rate equal to the rate of the United States Treasury securities of
comparable remaining maturity plus 35 basis points. The indenture governing
our 6.125% Senior Notes contains covenants, including, but not limited to,
covenants limiting the creation of liens securing indebtedness and sale and
leaseback transactions. However, the indenture does not limit our ability to
incur additional indebtedness. As of March 31, 2004, we were in compliance
with the covenants of these Senior Notes. 12




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The following table summarizes the estimated fair values of the Senior
Notes as of March 31, 2004, and December 31, 2003 (in millions): Face
    
    March 31,
    
    December 31,Value
    
    2004
    
    20036.45% TE Products Senior Notes, due January 2008
    
    $
    180.0
    
    
    $
    198.5
    
    
    $
    204.87.625% Senior Notes, due February 2012
    
    
    500.0
    
    
    
    586.4
    
    
    
    578.26.125% Senior Notes, due February 2013
    
    
    200.0
    
    
    
    213.4
    
    
    
    206.77.51% TE Products Senior Notes, due January 2028
    
    
    210.0
    
    
    
    238.2
    
    
    
    228.0
 We have entered into interest rate swap agreements to hedge our exposure
to changes in the fair value on a portion of the Senior Notes discussed above.
See Note 3. Interest Rate Swaps. Other Long Term Debt and Credit Facilities On April 6, 2001, we entered into a $500.0 million revolving credit
facility including the issuance of letters of credit of up to $20.0 million
(Three Year Facility). The interest rate was based, at our option, on either
the lenders base rate plus a spread, or LIBOR plus a spread in effect at the
time of the borrowings. The credit agreement for the Three Year Facility
contained certain restrictive financial covenant ratios. During the first
quarter of 2003, we repaid $182.0 million of the outstanding balance of the
Three Year Facility with proceeds from the issuance of our 6.125% Senior Notes
on January 30, 2003. On June 27, 2003, we repaid the outstanding balance under
the Three Year Facility with borrowings under a new credit facility, and
canceled the Three Year Facility. On June 27, 2003, we entered into a $550.0 million revolving credit
facility with a three year term, including the issuance of letters of credit of
up to $20.0 million (Revolving Credit Facility). The interest rate is based,
at our option, on either the lenders base rate plus a spread, or LIBOR plus a
spread in effect at the time of the borrowings. The credit agreement for the
Revolving Credit Facility contains certain restrictive financial covenant
ratios. We borrowed $263.0 million under the Revolving Credit Facility and
repaid the outstanding balance of the Three Year Facility. On March 31, 2004,
$226.5 million was outstanding under the Revolving Credit Facility at a
weighted average interest rate, before the effects of hedging activities, of
1.9%. At March 31, 2004, we were in compliance with the covenants of this
credit agreement. We have entered into an interest rate swap agreement to hedge our exposure
to increases in interest rates on a portion of the credit facilities discussed
above. See Note 3. Interest Rate Swaps. Short Term Credit Facilities On April 6, 2001, we entered into a 364-day, $200.0 million revolving
credit agreement (Short-term Revolver). The interest rate was based, at our
option, on either the lenders base rate plus a spread, or LIBOR plus a spread
in effect at the time of the borrowings. The credit agreement contained certain
restrictive financial covenant ratios. On March 28, 2002, the Short-term
Revolver was extended for an additional period of 364 days, ending in March
2003. The Short-term Revolver expired on March 27, 2003. 13




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The following table summarizes the principal amounts outstanding under our
credit facilities as of March 31, 2004, and December 31, 2003 (in thousands): March 31,
    
    December 31,2004
    
    2003Credit Facilities:Revolving Credit Facility, due June 2006
    
    $
    226,500
    
    
    $
    210,0006.45% TE Products Senior Notes, due January 2008
    
    
    179,883
    
    
    
    179,8767.625% Senior Notes, due February 2012
    
    
    498,272
    
    
    
    498,2166.125% Senior Notes, due February 2013
    
    
    198,738
    
    
    
    198,7027.51% TE Products Senior Notes, due January 2028
    
    
    210,000
    
    
    
    210,000Total borrowings
    
    
    1,313,393
    
    
    
    1,296,794Adjustment to carrying value associated with
hedges of fair value
    
    
    48,456
    
    
    
    42,856Total Credit Facilities
    
    $
    1,361,849
    
    
    $
    1,339,650
 NOTE 8. PARTNERS CAPITAL AND DISTRIBUTIONS Equity Offerings On April 2, 2003, we sold in an underwritten public offering 3.9 million
Units at $30.35 per Unit. The proceeds from the offering, net of underwriting
discount, totaled approximately $114.5 million, of which approximately $113.8
million was used to repurchase and retire all of the 3.9 million previously
outstanding Class B Units held by Duke Energy Transport and Trading Company,
LLC. We received approximately $0.7 million in proceeds from the offering in
excess of the amount needed to repurchase and retire the Class B Units. On August 7, 2003, we sold in an underwritten public offering 5.0 million
Units at $34.68 per Unit. The proceeds from the offering, net of underwriting
discount, totaled approximately $166.0 million. On August 19, 2003, 162,900
Units were sold upon exercise of the underwriters over-allotment option
granted in connection with the offering on August 7, 2003. Proceeds from the
over-allotment sale, net of underwriting discount, totaled $5.4 million.
Approximately $53.0 million of the proceeds were used to repay indebtedness
under our revolving credit facility and $21.0 million was used to fund the
acquisition of the Genesis assets (see Note 4. Acquisitions and Dispositions).
The remaining amount was used primarily to fund revenue-generating and system
upgrade capital expenditures and for general partnership purposes. Quarterly Distributions of Available Cash We make quarterly cash distributions of all of our Available Cash,
generally defined as consolidated cash receipts less consolidated cash
disbursements and cash reserves established by the General Partner in its sole
discretion. Pursuant to the Partnership Agreement, the Company receives
incremental incentive cash distributions when cash distributions exceed certain
target thresholds as follows: 14




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) GeneralUnitholders
    
    PartnerQuarterly 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 total distributions paid
during the three months ended March 31, 2004, and 2003 (in thousands, except
per Unit amounts): Three Months EndedMarch 31,2004
    
    2003Limited Partner Units
    
    $
    40,949
    
    
    $
    32,286General Partner Ownership Interest
    
    
    836
    
    
    
    707General Partner Incentive
    
    
    15,298
    
    
    
    11,191Total Partners Capital Cash Distributions
    
    
    57,083
    
    
    
    44,184Class B Units
    
    
    
    
    
    
    2,349Total Cash Distributions Paid
    
    $
    57,083
    
    
    $
    46,533Total Cash Distributions Paid Per Unit
    
    $
    0.65
    
    
    $
    0.60
 On May 7, 2004, we will pay a cash distribution of $0.6625 per Unit for
the quarter ended March 31, 2004. The first quarter 2004 cash distribution
will total $58.7 million. General Partners Interest As of March 31, 2004, and December 31, 2003, we had a deficit balance of
$11.7 million and $7.2 million, respectively, in our General Partners equity
account. This negative balance does not represent an asset to us and does not
represent an obligation of the General Partner to contribute cash or other
property to us. The General Partners equity account generally consists of its
cumulative share of our net income less cash distributions made to the General
Partner plus capital contributions that it has made to us. For the quarter
ended March 31, 2004, the General Partner was allocated $11.7 million
(representing 28.85%) of our net income and received $16.1 million in cash
distributions. Capital Accounts, as defined under our Partnership Agreement, are
maintained for our General Partner and our limited partners. The Capital
Account provisions of our Partnership Agreement incorporate principles
established for U.S. federal income tax purposes and are not comparable to the
equity accounts reflected under accounting principles generally accepted in the
United States in our financial statements. Under our Partnership Agreement,
the General Partner is only required to make additional capital contributions
to us upon the issuance of any additional Units and only if necessary to
maintain a Capital Account balance equal to 1.999999% of the total Capital
Accounts of all partners. At March 31, 2004, and December 31, 2003, the
General Partners Capital Account balance substantially exceeded this
requirement. Net income is allocated between the General Partner and the limited
partners in the same proportion as aggregate cash distributions made to the
General Partner and the limited partners during the period. This is generally
consistent with the manner of allocating net income under our Partnership
Agreement. Net income determined under our Partnership Agreement, however,
incorporates principles established for U.S. federal income tax purposes and is 15




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) not comparable to net income reflected under accounting principles generally
accepted in the United States in our financial statements. Cash distributions that we make during a period may exceed our net income
for the period. We make quarterly cash distributions of all of our Available
Cash, generally defined as consolidated cash receipts less consolidated cash
disbursements and cash reserves established by the General Partner in its sole
discretion. Cash distributions in excess of net income allocations and capital
contributions during the year ended December 31, 2003, and the three months
ended March 31, 2004, resulted in a deficit in the General Partners equity
account at March 31, 2004, and December 31, 2003. Future cash distributions
that exceed net income will result in an increase in the deficit balance in the
General Partners equity account. According to the Partnership Agreement, in the event of our dissolution,
after satisfying our liabilities, our remaining assets would be divided among
our limited partners and the General Partner generally in the same proportion
as Available Cash but calculated on a cumulative basis over the life of the
Partnership. After all allocations are made between the partners, if a deficit
balance still remains in the General Partners equity account, the General
Partner would not be required to make whole any such deficit. NOTE 9. EMPLOYEE BENEFIT PLANS Retirement Plans We have adopted the TEPPCO Retirement Cash Balance Plan (TEPPCO RCBP),
which is a noncontributory, trustee-administered pension plan. In addition,
certain executive officers participate in the TEPPCO Supplemental Benefit Plan
(TEPPCO SBP), which is a noncontributory, nonqualified, defined benefit
retirement plan. The TEPPCO SBP was established to restore benefit reductions
caused by the maximum benefit limitations that apply to qualified plans. The
benefit formula for all eligible employees is a cash balance formula. Under a
cash balance formula, a plan participant accumulates a retirement benefit based
upon pay credits and current interest credits. The pay credits are based on a
participants salary, age and service. We use a December 31 measurement date
for these plans. The components of net pension benefits costs for the TEPPCO RCBP and the
TEPPCO SBP for the three months ended March 31, 2004 and 2003, were as follows
(in thousands): Three Months EndedMarch 31,2004
    
    2003Service cost
benefit earned during the period
    
    $
    936
    
    
    $
    795Interest cost on projected benefit obligation
    
    
    176
    
    
    
    126Expected return on plan assets
    
    
    (224
    )
    
    
    (151
    )Amortization of prior service cost
    
    
    2
    
    
    
    2Recognized net actuarial loss
    
    
    4
    
    
    
    6Net pension benefits costs
    
    $
    894
    
    
    $
    778
 Other Postretirement Benefits Effective January 1, 2001, we provide certain health care and life
insurance benefits for retired employees on a contributory and non-contributory
basis (TEPPCO OPB). Employees become eligible for these benefits if they
meet certain age and service requirements at retirement, as defined in the
plans. We provide a fixed dollar 16




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) contribution, which does not increase from year to year, towards retired
employee medical costs. The retiree pays all health care cost increases due to
medical inflation. We use a December 31 measurement date for this plan. The components of net postretirement benefits cost for the TEPPCO OPB for
the three months ended March 31, 2004 and 2003, were as follows (in thousands): Three Months EndedMarch 31,2004
    
    2003Service cost
benefit earned during the period
    
    $
    44
    
    
    $
    34Interest cost on accumulated postretirement benefit obligation
    
    
    39
    
    
    
    34Amortization of prior service cost
    
    
    32
    
    
    
    32Net postretirement benefits costs
    
    $
    115
    
    
    $
    100
 Estimated Future Benefit Contributions We expect to contribute approximately $3.0 million to our retirement plans
and other postretirement benefit plans in 2004. NOTE 10. SEGMENT INFORMATION We have three reporting segments: transportation and storage of refined
products, LPGs and petrochemicals, which operates as the Downstream Segment;
gathering, transportation, marketing and storage of crude oil and distribution
of lubrication oils and specialty chemicals, which operates as the Upstream
Segment; and gathering of natural gas, fractionation of NGLs and transportation
of NGLs, which operates as the Midstream Segment. The amounts indicated below
as Partnership and Other relate primarily to intersegment eliminations and
assets that we hold that have not been allocated to any of our reporting
segments. Our Downstream Segment revenues are earned from transportation and storage
of refined products and LPGs, intrastate transportation of petrochemicals,
sales of product inventory and other ancillary services. The two largest
operating expense items of the Downstream Segment are labor and electric power.
We generally realize higher revenues during the first and fourth quarters of
each year since our operations are somewhat seasonal. Refined products volumes
are generally higher during the second and third quarters because of greater
demand for gasolines during the spring and summer driving seasons. LPGs volumes
are generally higher from November through March due to higher demand in the
Northeast for propane, a major fuel for residential heating. Our Downstream
Segment also includes the results of operations of the northern portion of the
Dean Pipeline, which transports refinery grade propylene (RGP) from Mont
Belvieu to Point Comfort, Texas. Our Downstream Segment also includes our
equity investments in Centennial and MB Storage (see Note 6. Equity
Investments). Our Upstream Segment revenues are earned from gathering, transportation,
marketing and storage of crude oil and distribution of lubrication oils and
specialty chemicals, principally in Oklahoma, Texas, New Mexico and the Rocky
Mountain region. Marketing operations consist primarily of aggregating
purchased crude oil along our pipeline systems, or along third party pipeline
systems, and arranging the necessary transportation logistics for the ultimate
sale of the crude oil to local refineries, marketers or other end users. Our
Upstream Segment also includes our equity investment in Seaway. Seaway
consists of large diameter pipelines that transport crude oil from Seaways
marine terminals on the U.S. Gulf Coast to Cushing, Oklahoma, a crude oil
distribution point for the central United States, and to refineries in the
Texas City and Houston areas. 17




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Our Midstream Segment revenues are earned from the fractionation of NGLs
in Colorado; transportation of NGLs from two trunkline NGL pipelines in South
Texas, two NGL pipelines in East Texas and a pipeline system (Chaparral) from
West Texas and New Mexico to Mont Belvieu; the gathering of natural gas in the
Green River Basin in southwestern Wyoming, through Jonah; and the gathering of
coal bed methane (CBM) in the San Juan Basin in New Mexico and Colorado,
through Val Verde Gas Gathering Company (Val Verde). DEFS manages and
operates the Val Verde, Jonah and Chaparral assets for us under contractual
agreements. The table below includes financial information by reporting segment for
the three months ended March 31, 2004 and 2003 (in thousands): Three Months Ended March 31, 2004Downstream
    
    Upstream
    
    Midstream
    
    Segments
    
    PartnershipSegment
    
    Segment
    
    Segment
    
    Total
    
    and Other
    
    ConsolidatedRevenues
    
    $
    74,809
    
    
    $
    1,194,490
    
    
    $
    50,163
    
    
    $
    1,319,462
    
    
    $
    (1,401
    )
    
    $
    1,318,061Purchases of petroleum
products
    
    
    
    
    
    
    1,167,425
    
    
    
    1,317
    
    
    
    1,168,742
    
    
    
    (1,401
    )
    
    
    1,167,341Operating expenses,
including power
    
    
    40,050
    
    
    
    13,968
    
    
    
    14,981
    
    
    
    68,999
    
    
    
    
    
    
    
    68,999Depreciation and
amortization expense
    
    
    9,077
    
    
    
    3,068
    
    
    
    15,675
    
    
    
    27,820
    
    
    
    
    
    
    
    27,820Operating income
    
    
    25,682
    
    
    
    10,029
    
    
    
    18,190
    
    
    
    53,901
    
    
    
    
    
    
    
    53,901Equity earnings (losses)
    
    
    (1,238
    )
    
    
    6,889
    
    
    
    
    
    
    
    5,651
    
    
    
    
    
    
    
    5,651Other income, net
    
    
    272
    
    
    
    146
    
    
    
    58
    
    
    
    476
    
    
    
    
    
    
    
    476Earnings before interest
    
    $
    24,716
    
    
    $
    17,064
    
    
    $
    18,248
    
    
    $
    60,028
    
    
    $
    
    
    
    $
    60,028
 Three Months Ended
March 31, 2003Downstream
    
    Upstream
    
    Midstream
    
    Segments
    
    PartnershipSegment
    
    Segment
    
    Segment
    
    Total
    
    and Other
    
    ConsolidatedRevenues
    
    $
    67,965
    
    
    $
    985,380
    
    
    $
    46,904
    
    
    $
    1,100,249
    
    
    $
    (1,010
    )
    
    $
    1,099,239Purchases of petroleum
products
    
    
    
    
    
    
    963,854
    
    
    
    
    
    
    
    963,854
    
    
    
    (1,010
    )
    
    
    962,844Operating expenses,
including power
    
    
    31,549
    
    
    
    14,837
    
    
    
    11,354
    
    
    
    57,740
    
    
    
    
    
    
    
    57,740Depreciation and
amortization expense
    
    
    7,147
    
    
    
    3,065
    
    
    
    17,101
    
    
    
    27,313
    
    
    
    
    
    
    
    27,313Operating income
    
    
    29,269
    
    
    
    3,624
    
    
    
    18,449
    
    
    
    51,342
    
    
    
    
    
    
    
    51,342Equity earnings (losses)
    
    
    (1,259
    )
    
    
    4,969
    
    
    
    
    
    
    
    3,710
    
    
    
    
    
    
    
    3,710Other income, net
    
    
    (6
    )
    
    
    189
    
    
    
    37
    
    
    
    220
    
    
    
    (38
    )
    
    
    182Earnings before interest
    
    $
    28,004
    
    
    $
    8,782
    
    
    $
    18,486
    
    
    $
    55,272
    
    
    $
    (38
    )
    
    $
    55,234
 18




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The following table provides total assets, capital expenditures and
significant non-cash investing activities for each segment as of March 31,
2004, and December 31, 2003 (in thousands): Downstream
    
    Upstream
    
    Midstream
    
    Segments
    
    PartnershipSegment
    
    Segment
    
    Segment
    
    Total
    
    and Other
    
    ConsolidatedMarch 31, 2004:Total assets
    
    $
    919,154
    
    
    $
    911,847
    
    
    $
    1,168,617
    
    
    $
    2,999,618
    
    
    $
    (10,607
    )
    
    $
    2,989,011Capital expenditures
    
    
    7,440
    
    
    
    9,722
    
    
    
    9,535
    
    
    
    26,697
    
    
    
    267
    
    
    
    26,964December 31, 2003:Total assets
    
    
    916,917
    
    
    
    834,502
    
    
    
    1,194,844
    
    
    
    2,946,263
    
    
    
    (5,271
    )
    
    
    2,940,992Capital expenditures
    
    
    59,061
    
    
    
    13,427
    
    
    
    67,882
    
    
    
    140,370
    
    
    
    147
    
    
    
    140,517Non-cash investing activities
    
    
    61,408
    
    
    
    
    
    
    
    
    
    
    
    61,408
    
    
    
    
    
    
    
    61,408
 The following table reconciles the segments total earnings before
interest to consolidated net income for the three months ended March 31, 2004
and 2003 (in thousands): Three Months EndedMarch 31,2004
    
    2003Earnings before interest
    
    $
    60,028
    
    
    $
    55,234Interest expense  net
    
    
    (19,595
    )
    
    
    (21,309
    )Net income
    
    $
    40,433
    
    
    $
    33,925
 NOTE 11. COMMITMENTS AND CONTINGENCIES In the fall of 1999 and on December 1, 2000, the General Partner and the
Partnership were named as defendants in two separate lawsuits in Jackson County
Circuit Court, Jackson County, Indiana, styled Ryan E. McCleery and Marcia S.
McCleery, et al. v. Texas Eastern Corporation, et al.(including the General
Partner and Partnership) and Gilbert Richards and Jean Richards v. Texas
Eastern Corporation, et al.(including the General Partner and Partnership).
In both cases, the plaintiffs contend, among other things, that we and other
defendants stored and disposed of toxic and hazardous substances and hazardous
wastes in a manner that caused the materials to be released into the air, soil
and water. They further contend that the release caused damages to the
plaintiffs. In their complaints, the plaintiffs allege strict liability for
both personal injury and property damage together with gross negligence,
continuing nuisance, trespass, criminal mischief and loss of consortium. The
plaintiffs are seeking compensatory, punitive and treble damages. We have
filed an answer to both complaints, denying the allegations, as well as various
other motions. In April 2004, the court granted a partial motion for summary
judgment in favor of the defendants, dismissing two of the plaintiffs personal
injury claims in their entirety. It is anticipated that the plaintiffs will
appeal this ruling. These cases are not covered by insurance. Discovery is
ongoing, and we are defending ourselves vigorously against the lawsuits. The
plaintiffs have not stipulated the amount of damages that they are seeking in
the suits. We cannot estimate the loss, if any, associated with these pending
lawsuits. On December 21, 2001, TE Products was named as a defendant in a lawsuit in
the 10th Judicial District, Natchitoches Parish, Louisiana, styled Rebecca L.
Grisham et al. v. TE Products Pipeline Company, Limited Partnership. In this
case, the plaintiffs contend that our pipeline, which crosses the plaintiffs
property, leaked toxic products onto their property and consequently, caused
damages to them. We have filed an answer to the plaintiffs petition denying
the allegations and are defending ourselves vigorously against the lawsuit.
The plaintiffs have 19




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) not stipulated the amount of damages they are seeking in
the suit; however, this case is covered by insurance. We do not believe that
the outcome of this lawsuit will have a material adverse effect on our financial
position, results of operations or cash flows. In May 2003, the General Partner was named as a defendant in a lawsuit
styled John R. James, et al. v. J Graves Insulation Company, et al.,as filed
in the first Judicial District Court, Caddo Parish, Louisiana. There are
numerous plaintiffs identified in the action that are alleged to have suffered
damages as the result of alleged exposure to asbestos-containing products and
materials. According to the petition and as a result of a preliminary
investigation, the General Partner believes that the only claim asserted
against it results from one individual for the period from July 1971 through
June 1972, who is alleged to have worked on a facility owned by the General
Partners predecessor. This period represents a small portion of the total
alleged exposure period from January 1964 through December 2001 for this
individual. The individuals claims involve numerous employers and alleged job
sites. The General Partner has been unable to confirm involvement
by the General Partner or its predecessors with the alleged location, and it is
uncertain at this time whether this case is covered by insurance. Discovery is
planned, and the General Partner intends to defend itself vigorously against
this lawsuit. The plaintiffs have not stipulated the amount of damages that
they are seeking in this suit. We are obligated to reimburse the General
Partner for any costs it incurs related to this lawsuit. We cannot estimate
the loss, if any, associated with this pending lawsuit. We do not believe that
the outcome of this lawsuit will have a material adverse effect on our
financial position, results of operations or cash flows. On April 2, 2003, Centennial was served with a petition in a matter styled
Adams, et al. v. Centennial Pipeline Company LLC, et al. This matter involves
approximately 2,000 plaintiffs who allege that over 200 defendants, including
Centennial, generated, transported, and/or disposed of hazardous and toxic
waste at two sites in Bayou Sorrell, Louisiana, an underground injection well
and a landfill. The plaintiffs allege personal injuries, allergies, birth
defects, cancer and death. The underground injection well has been in
operation since May 1976. Based upon current information, Centennial appears
to be a de minimiscontributor, having used the disposal site during the two
month time period of December 2001 to January 2002. Marathon has been handling
this matter for Centennial under its operating agreement with Centennial. TE
Products has a 50% ownership interest in Centennial. Based upon Centennials
limited involvement with the disposal site, we do not believe that the outcome
of this matter will have a material adverse effect on our financial position,
results of operations or cash flows. On December 16, 2003, Centennial, the General Partner, the Partnership and
other Partnership entities were named as defendants in a lawsuit in the 128th
District Court of Orange County, Texas, styled Elwood Karr et al. v. Centennial
Pipeline, LLC et al. In this case, the plaintiffs contend that our pipeline
leaked toxic substances on their property, causing them property damage. We
have filed an answer to the plaintiffs petition, denying the allegations and
are defending ourselves vigorously against this lawsuit. This case is
covered by insurance. We do not believe that the outcome of this lawsuit will
have a material adverse effect on our financial position, results of operations
or cash flows. In addition to the litigation discussed above, we have been, in the
ordinary course of business, a defendant in various lawsuits and a party to
various other legal proceedings, some of which are covered in whole or in part
by insurance. We believe that the outcome of these lawsuits and other
proceedings will not individually or in the aggregate have a material adverse
effect on our consolidated financial position, results of operations or cash
flows. Our operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment. Failure
to comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, imposition of injunctions
delaying or prohibiting certain activities and the need to perform
investigatory and remedial activities. Although we believe our operations are
in material compliance with applicable environmental laws and regulations,
risks of significant costs and liabilities are inherent 20




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) in pipeline operations, and we cannot assure you that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as increasingly strict
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 laws and regulations will not have a material adverse effect on
our financial position, results of operations or cash flows in the near term. On February 6, 2004, a lawsuit styled San Juan Citizens Alliance et al. v.
Norton et al., was filed against the United States Department of Interior and
the Bureau of Land Management (BLM) in the U.S. District Court, District of
Columbia, challenging a recent decision by the BLM. In that decision, the BLM
adopted a Resource Management Plan that authorized the development of
additional gas wells on public lands in northwestern New Mexico. A substantial
portion of the development activity in the area that is the subject of the suit
involves the infill drilling in the Basin-Fruitland Coal Gas Pool, which covers
most of the San Juan Basin. We believe the BLM followed the requirements of
the law and reached a balanced decision in adopting the Resource Management
Plan. However, an adverse decision could impact infill drilling activities in
the San Juan Basin. On March 26, 2004, an initial decision in ARCO Products Co., et al. v.
SFPP, Docket OR96-2-000, et al. (SFPP) was issued by the FERC, which made
several significant determinations with respect to finding changed
circumstances under the Energy Policy Act of 1992 (EP Act). The decision
lists factors that will be considered by the FERC, which include showing a
substantial change in economic circumstances, the time factor that will be
reviewed, what will be considered the basis of the rate and a pipelines
documentary requirements. The decision largely clarifies, but does not fully
quantify, the standard required for a complainant to demonstrate that an oil
pipelines rates are no longer subject to the rate protection of the EP Act by
demonstrating that a substantial change in circumstances has occurred since
1992 with respect to the basis of the rates being challenged. In the SFPP
decision, the FERC found that a limited number of rate elements will
significantly affect the economic basis for a pipeline companys rates. The
elements identified in the decision are volume changes, allowed total return
and total cost of service (including major cost elements of rate base such as
tax rates and tax allowances, among others). The FERC did reject, however, the use
of changes in tax rate and income tax allowances as standalone factors. The
FERC further found that if a complainant can show that a pipelines volumes and
overall cost of service collectively reflect a significant increase in net
earnings between the establishment of the challenged rate pre-1992 and the time
of the complaint, based primarily on the combined impact of changes in volumes
and changes in overall cost of service, the complainant has met its burden
relative to establishing changed circumstances. It appears very likely that
the decision will be appealed. We have not yet determined the impact, if any,
that the decision could have on our rates if they were reviewed under the
criteria of the SFPP decision. In 1994, the Louisiana Department of Environmental Quality (LDEQ) issued
a compliance order for environmental contamination at our Arcadia, Louisiana,
facility. In 1999, our Arcadia facility and adjacent terminals were directed
by the Remediation Services Division of the LDEQ to pursue remediation of this
contamination. At March 31, 2004, we have an accrued liability of $0.3 million
for remediation costs at our Arcadia facility. Effective in March 2004, we
executed an access agreement with an adjacent industrial landowner who is
located upgradient of the Arcadia facility. This agreement enables the
landowner to proceed with remediation activities at our Arcadia facility for
which they have accepted shared responsibility. We do not expect that the
completion of the remediation program proposed to the LDEQ will have a future
material adverse effect on our financial position, results of operations or
cash flows. On March 17, 2003, we experienced a release of 511 barrels of jet fuel
from a storage tank at our Blue Island terminal located in Cook County,
Illinois. As a result of the release, we have entered into an Agreed Order
with the State of Illinois. The Agreed Order requires us, in part, to complete
a site investigation plan to delineate the scope of any potential contamination
resulting from the release and to remediate any contamination present above
regulatory standards. This site investigation plan has been completed and
submitted to the State of Illinois. The 21




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Agreed Order does not contain any provision for any fines or penalties; however, it does not preclude the State
of Illinois from assessing these at a later date. We do not expect that the
completion of the Agreed Order will have a future material adverse effect on
our financial position, results of operations or cash flows. At March 31, 2004, we have an accrued liability of $8.0 million, related
to various TCTM and TE Products sites requiring environmental remediation
activities. We do not expect that the completion of remediation programs
associated with TCTM and TE Products activities will have a future material
adverse effect on our financial position, results of operations or cash flows. We regularly review our long-lived assets for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. At March 31, 2004, we have identified certain assets that we are
monitoring for possible impairment. We are unable to reasonably estimate the
probabilities associated with the performance of an impairment test. We are
continuing to monitor the circumstances surrounding the assets and will test
the assets for impairment as more information becomes available. We do not
believe that the resolution of the matter will have a material effect on our
financial condition, results of operations or cash flows. Centennial entered into credit facilities totaling $150.0 million and, as
of March 31, 2004, $150.0 million was outstanding under those credit
facilities. The proceeds were used to fund construction and conversion costs
of Centennials pipeline system. TE Products and Marathon have each guaranteed one-half
of Centennials debt, up to a maximum amount of $75.0 million each. NOTE 12. COMPREHENSIVE INCOME SFAS No. 130, Reporting Comprehensive Incomerequires certain items such
as foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on certain investments to be
reported in a financial statement. As of and for the three months ended March
31, 2004 and 2003, the components of comprehensive income were due to the
interest rate swap related to our variable rate revolving credit facility,
which is designated as a cash flow hedge. Changes in the fair value of the
cash flow hedge, to the extent the hedge is effective, are recognized in other
comprehensive income until the hedge interest costs are recognized in earnings. The table below reconciles reported net income to total comprehensive
income for the three months ended March 31, 2004 and 2003 (in thousands): Three Months Ended March 31,2004
    
    2003Net income
    
    $
    40,433
    
    
    $
    33,925Net income on cash flow hedge
    
    
    2,682
    
    
    
    5,469Total comprehensive income
    
    $
    43,115
    
    
    $
    39,394
 22




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##### Table of Contents



TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) The accumulated balance of other comprehensive loss related to our cash
flow hedge is as follows (in thousands): Balance at December 31, 2002
    
    $
    (20,055
    )Reclassification due to discontinued portion of cash flow hedge
    
    
    989Transferred to earnings
    
    
    14,417Change in fair value of cash flow hedge
    
    
    1,747Balance at December 31, 2003
    
    $
    (2,902
    )Transferred to earnings
    
    
    2,719Change in fair value of cash flow hedge
    
    
    (37
    )Balance at March 31, 2004
    
    $
    (220
    )
 NOTE 13. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION Our significant operating subsidiaries, TE Products Pipeline Company,
Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P., Jonah Gas
Gathering Company and Val Verde Gas Gathering Company, L.P., have issued
unconditional guarantees of our debt securities. The guarantees are full,
unconditional, and joint and several. 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. are collectively referred to
as the Guarantor Subsidiaries. The following supplemental condensed consolidating financial information
reflects our separate accounts, the combined accounts of the Guarantor
Subsidiaries, the combined accounts of our other non-guarantor subsidiaries,
the combined consolidating adjustments and eliminations and our consolidated
accounts for the dates and periods indicated. For purposes of the following
consolidating information, our investments in our subsidiaries and the
Guarantor Subsidiaries investments in their subsidiaries are accounted for
under the equity method of accounting. 23




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TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) March 31, 2004TEPPCOTEPPCO
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Partners, L.P.Partners, L .P.
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    Consolidated(in thousands)AssetsCurrent assets
    
    $
    32,788
    
    
    $
    81,070
    
    
    $
    419,126
    
    
    $
    (38,655
    )
    
    $
    494,329Property, plant and equipment  net
    
    
    
    
    
    
    1,142,967
    
    
    
    476,449
    
    
    
    
    
    
    
    1,619,416Equity investments
    
    
    1,095,266
    
    
    
    409,057
    
    
    
    211,094
    
    
    
    (1,348,216
    )
    
    
    367,201Intercompany notes receivable
    
    
    959,359
    
    
    
    
    
    
    
    
    
    
    
    (959,359
    )
    
    
    Intangible assets
    
    
    
    
    
    
    394,056
    
    
    
    37,220
    
    
    
    
    
    
    
    431,276Other assets
    
    
    5,863
    
    
    
    32,459
    
    
    
    38,467
    
    
    
    
    
    
    
    76,789Total assets
    
    $
    2,093,276
    
    
    $
    2,059,609
    
    
    $
    1,182,356
    
    
    $
    (2,346,230
    )
    
    $
    2,989,011Liabilities and partners capitalCurrent liabilities
    
    $
    33,666
    
    
    $
    83,236
    
    
    $
    436,975
    
    
    $
    (38,657
    )
    
    $
    515,220Long-term debt
    
    
    963,115
    
    
    
    398,734
    
    
    
    
    
    
    
    
    
    
    
    1,361,849Intercompany notes payable
    
    
    
    
    
    
    583,384
    
    
    
    376,256
    
    
    
    (959,640
    )
    
    
    Other long term liabilities
    
    
    1,477
    
    
    
    14,782
    
    
    
    665
    
    
    
    
    
    
    
    16,924Total partners capital
    
    
    1,095,018
    
    
    
    979,473
    
    
    
    368,460
    
    
    
    (1,347,933
    )
    
    
    1,095,018Total liabilities and partners capital
    
    $
    2,093,276
    
    
    $
    2,059,609
    
    
    $
    1,182,356
    
    
    $
    (2,346,230
    )
    
    $
    2,989,011
 December 31, 2003TEPPCOTEPPCO
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Partners, L.P.Partners, L.P.
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    Consolidated(in thousands)AssetsCurrent assets
    
    $
    38,281
    
    
    $
    92,817
    
    
    $
    360,564
    
    
    $
    (38,844
    )
    
    $
    452,818Property, plant and equipment  net
    
    
    
    
    
    
    1,146,455
    
    
    
    472,708
    
    
    
    
    
    
    
    1,619,163Equity investments
    
    
    1,112,252
    
    
    
    404,886
    
    
    
    209,438
    
    
    
    (1,361,290
    )
    
    
    365,286Intercompany notes receivable
    
    
    943,447
    
    
    
    
    
    
    
    
    
    
    
    (943,447
    )
    
    
    Intangible assets
    
    
    
    
    
    
    401,404
    
    
    
    37,161
    
    
    
    
    
    
    
    438,565Other assets
    
    
    6,157
    
    
    
    21,444
    
    
    
    37,559
    
    
    
    
    
    
    
    65,160Total assets
    
    $
    2,100,137
    
    
    $
    2,067,006
    
    
    $
    1,117,430
    
    
    $
    (2,343,581
    )
    
    $
    2,940,992Liabilities and partners capitalCurrent liabilities
    
    $
    41,895
    
    
    $
    105,285
    
    
    $
    367,260
    
    
    $
    (38,849
    )
    
    $
    475,591Long-term debt
    
    
    947,486
    
    
    
    392,164
    
    
    
    
    
    
    
    
    
    
    
    1,339,650Intercompany notes payable
    
    
    
    
    
    
    557,842
    
    
    
    385,604
    
    
    
    (943,446
    )
    
    
    Other long term liabilities
    
    
    1,435
    
    
    
    14,995
    
    
    
    
    
    
    
    
    
    
    
    16,430Total partners capital
    
    
    1,109,321
    
    
    
    996,720
    
    
    
    364,566
    
    
    
    (1,361,286
    )
    
    
    1,109,321Total liabilities and partners capital
    
    $
    2,100,137
    
    
    $
    2,067,006
    
    
    $
    1,117,430
    
    
    $
    (2,343,581
    )
    
    $
    2,940,992
 24




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##### Table of Contents



TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Three Months Ended March 31, 2004TEPPCOTEPPCO
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Partners, L.P.Partners, L.P.
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    Consolidated(in thousands)Operating revenues
    
    $
    
    
    
    $
    111,888
    
    
    $
    1,207,574
    
    
    $
    (1,401
    )
    
    $
    1,318,061Costs and expenses
    
    
    
    
    
    
    73,416
    
    
    
    1,192,145
    
    
    
    (1,401
    )
    
    
    1,264,160Operating income
    
    
    
    
    
    
    38,472
    
    
    
    15,429
    
    
    
    
    
    
    
    53,901Interest expense  net
    
    
    
    
    
    
    (12,792
    )
    
    
    (6,803
    )
    
    
    
    
    
    
    (19,595
    )Equity earnings
    
    
    40,433
    
    
    
    14,447
    
    
    
    6,889
    
    
    
    (56,118
    )
    
    
    5,651Other income  net
    
    
    
    
    
    
    306
    
    
    
    170
    
    
    
    
    
    
    
    476Net income
    
    $
    40,433
    
    
    $
    40,433
    
    
    $
    15,685
    
    
    $
    (56,118
    )
    
    $
    40,433
 Three Months Ended March 31, 2003TEPPCOTEPPCO
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Partners, L.P.Partners, L.P.
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    Consolidated(in thousands)Operating revenues
    
    $
    
    
    
    $
    102,079
    
    
    $
    998,170
    
    
    $
    (1,010
    )
    
    $
    1,099,239Costs and expenses
    
    
    
    
    
    
    60,877
    
    
    
    988,030
    
    
    
    (1,010
    )
    
    
    1,047,897Operating income
    
    
    
    
    
    
    41,202
    
    
    
    10,140
    
    
    
    
    
    
    
    51,342Interest expense  net
    
    
    (17,409
    )
    
    
    (13,519
    )
    
    
    (7,828
    )
    
    
    17,447
    
    
    
    (21,309
    )Equity earnings
    
    
    33,925
    
    
    
    6,253
    
    
    
    4,969
    
    
    
    (41,437
    )
    
    
    3,710Other income  net
    
    
    17,409
    
    
    
    (11
    )
    
    
    231
    
    
    
    (17,447
    )
    
    
    182Net income
    
    $
    33,925
    
    
    $
    33,925
    
    
    $
    7,512
    
    
    $
    (41,437
    )
    
    $
    33,925
 25




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##### Table of Contents



TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited) Three Months Ended March 31, 2004TEPPCOTEPPCO
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Partners, L.P.Partners, L.P.
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    Consolidated(in thousands)Cash flows from operating activitiesNet income
    
    $
    40,433
    
    
    $
    40,433
    
    
    $
    15,685
    
    
    $
    (56,118
    )
    
    $
    40,433Adjustments to reconcile net
income to net cash provided by
operating activities:Depreciation and amortization
    
    
    
    
    
    
    22,107
    
    
    
    5,713
    
    
    
    
    
    
    
    27,820Earnings in equity investments,
net of distributions
    
    
    16,650
    
    
    
    (2,932
    )
    
    
    (889
    )
    
    
    (12,480
    )
    
    
    349Changes 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
    
    
    
    28,522
    
    
    
    (40,908
    )
    
    
    43,223Cash flows from investing activities
    
    
    335
    
    
    
    10,169
    
    
    
    (10,610
    )
    
    
    (28,858
    )
    
    
    (28,964
    )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
    )
    
    
    29,469Cash and cash equivalents at end of period
    
    $
    839
    
    
    $
    3,613
    
    
    $
    2,430
    
    
    $
    (3,737
    )
    
    $
    3,145
 Three Months Ended March 31, 2003TEPPCOTEPPCO
    
    Guarantor
    
    Non-Guarantor
    
    Consolidating
    
    Partners, L.P.Partners, L.P.
    
    Subsidiaries
    
    Subsidiaries
    
    Adjustments
    
    Consolidated(in thousands)Cash flows from operating activitiesNet income
    
    $
    33,925
    
    
    $
    33,925
    
    
    $
    7,512
    
    
    $
    (41,437
    )
    
    $
    33,925Adjustments to reconcile net
income to net cash provided by
operating activities:Depreciation and amortization
    
    
    
    
    
    
    21,864
    
    
    
    5,449
    
    
    
    
    
    
    
    27,313Earnings in equity investments,
net of distributions
    
    
    12,608
    
    
    
    2,845
    
    
    
    (5,038
    )
    
    
    (14,194
    )
    
    
    (3,779
    )Changes in assets and
liabilities and other
    
    
    (30,269
    )
    
    
    (10,940
    )
    
    
    (4,309
    )
    
    
    25,603
    
    
    
    (19,915
    )Net cash provided by operating activities
    
    
    16,264
    
    
    
    47,694
    
    
    
    3,614
    
    
    
    (30,028
    )
    
    
    37,544Cash flows from investing activities
    
    
    (13
    )
    
    
    (35,495
    )
    
    
    (2,829
    )
    
    
    13
    
    
    
    (38,324
    )Cash flows from financing activities
    
    
    (16,251
    )
    
    
    (15,390
    )
    
    
    (14,623
    )
    
    
    30,015
    
    
    
    (16,249
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (3,191
    )
    
    
    (13,838
    )
    
    
    
    
    
    
    (17,029
    )Cash and cash equivalents at beginning of
period
    
    
    
    
    
    
    8,247
    
    
    
    22,721
    
    
    
    
    
    
    
    30,968Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    5,056
    
    
    $
    8,883
    
    
    $
    
    
    
    $
    13,939
 26




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations General You should read the following review of our financial position and results
of operations in conjunction with our Consolidated Financial Statements.
Material period-to-period variances in the consolidated statements of income
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 our future liquidity or earnings. The
Consolidated Financial Statements should be read in conjunction with the
financial statements and related notes, together with our discussion and
analysis of financial position and results of operations included in our Annual
Report on Form 10-K for the year ended December 31, 2003. Critical Accounting Policies and Estimates A summary of the significant accounting policies we have adopted and
followed in the preparation of our consolidated financial statements is
detailed in our consolidated financial statements for the year ended December
31, 2003, included in our Annual Report on Form 10-K. Certain of these
accounting policies require the use of estimates. The following estimates, in
our opinion, are subjective in nature, require the exercise of judgment and
involve complex analysis: revenue and expense accruals, including power costs,
property taxes and crude oil margins, environmental costs, property, plant and
equipment and goodwill and intangible assets. These estimates are based on our
knowledge and understanding of current conditions and actions we may take in
the future. Changes in these estimates will occur as a result of the passage
of time and the occurrence of future events. Subsequent changes in these
estimates may have a significant impact on our financial condition and results
of operations. Management Overview of the Quarter Ended March 31, 2004 We reported net income of $40.4 million, or $0.46 per Unit, for the three
months ended March 31, 2004, compared with net income of $33.9 million, or
$0.43 per Unit, for the three months ended March 31, 2003. Our Upstream
Segment had a particularly strong quarter, primarily due to the benefits of our
recent acquisition of the Genesis assets and increased volumes on Seaway Crude Pipeline Company (Seaway). Our
Downstream Segment results were impacted by higher pipeline integrity costs,
which essentially offset strong revenues from both our refined products and
propane businesses. We anticipate that our pipeline integrity costs for the
remainder of 2004 will be higher than our 2003 costs as we continue to perform
pipeline maintenance under our integrity management program. Our Midstream
Segment benefited from increased volumes on Jonah Gas Gathering Company (Jonah), resulting from our recent
Phase III expansion, offsetting the impact of reduced volumes on Val Verde Gas Gathering Company (Val Verde) as a
result of the natural decline of coal bed methane production (CBM). We also
increased our quarterly distribution from $0.65 per Unit to $0.6625 per Unit
for the first quarter of 2004. We are focused on opportunities, challenges and risks that are inherent in
our business segments. These include the safe, reliable and efficient
operation of the pipelines and facilities that we own or operate while meeting
increased regulations that govern the operation of our assets and the costs
associated with such regulations. We are also focused on our continued growth
through expansion of the assets that we own and through acquisition of assets
that complement the segments in which we operate. We remain confident that our current strategy and focus will provide
continued growth in earnings and cash distributions. These growth
opportunities include:  
    
    Continued development of refined products and propane market opportunities.
    
    Continued development of the Jonah gas gathering system which serves the Jonah and Pinedale fields.
    
    Integration of the Genesis crude oil assets and increased utilization of Seaway.
    
    Gathering of volumes from infill drilling of CBM by producers and
new connections of conventional gas in the San Juan Basin, where our
Val Verde system is located.
    
    Construction of a new truck loading facility in Bossier City,
Louisiana. 27




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##### Table of Contents



We are continuing to pursue a plan to make system changes to allow for
bi-directional flow and deliveries into the Shreveport market area. We have
completed feasibility studies and are in discussions with potential customers
regarding the transportation of volumes through the pipeline system in this
area. Engineering design work and property acquisition for the terminal site
in Bossier City, Louisiana, are currently under way along with engineering
efforts to reverse the flow of the pipeline segment from Shreveport to El
Dorado, Arkansas. The project is scheduled to be completed by the end of 2004. We have begun a Phase II project to further expand our delivery capacity
of liquefied petroleum gases (LPGs) to the Northeast by 8,000 to 10,000 barrels per day. In 2003, we
increased the delivery capability between Todhunter, Ohio, and Coshocton, Ohio,
by 8,000 to 10,000 barrels per day and increased storage and improved loading
capability at Oneonta, New York. The Phase II expansion includes the
construction of three pump stations between Coshocton and Greensburg,
Pennsylvania, and two stations from Greensburg to Watkins Glen, New York.
Additional work on the pipeline segment between Greensburg and Philadelphia,
Pennsylvania, will increase delivery rates to the Philadelphia area.
Improvements will also be made at our Dubois, Pennsylvania, and Eagle,
Pennsylvania, terminals. The project is scheduled for completion in October
2004. Our Business TEPPCO Partners, L.P., a Delaware limited partnership, is a publicly
traded master limited partnership formed in March 1990. We operate through TE
Products Pipeline Company, Limited Partnership (TE Products), TCTM, L.P.
(TCTM) and TEPPCO Midstream Companies, L.P. (TEPPCO Midstream), which are
collectively referred to as the Operating Partnerships. Texas Eastern
Products Pipeline Company, LLC (the Company or General Partner), a Delaware
limited liability company, serves as our general partner and owns a 2% general
partner interest in us. The General Partner is a wholly owned subsidiary of
Duke Energy Field Services, LLC (DEFS), a joint venture between Duke Energy
Corporation (Duke Energy) and ConocoPhillips. Duke Energy holds an interest
of approximately 70% in DEFS, and ConocoPhillips holds the remaining interest
of approximately 30%. The Company, as general partner, performs all management
and operating functions required for us, except for the management and
operations of certain of the TEPPCO Midstream assets that are managed by DEFS
on our behalf. We reimburse the General Partner for all reasonable direct and
indirect expenses incurred in managing us. TEPPCO GP, Inc. (TEPPCO GP), our
subsidiary, is the general partner of our Operating Partnerships. We hold a
99.999% limited partner interest in the Operating Partnerships and TEPPCO GP
holds a 0.001% general partner interest. We operate and report in three business segments:  
    
    Downstream Segment  transportation and storage of refined
products, LPGs and petrochemicals;
    
    Upstream Segment  gathering, transportation, marketing and
storage of crude oil and distribution of lubrication oils and
specialty chemicals; and
    
    Midstream Segment  gathering of natural gas, transportation
of natural gas liquids (NGLs) and fractionation of NGLs. Our reportable segments offer different products and services and are
managed separately because each requires a different business strategy. TEPPCO
GP, our wholly owned subsidiary, acts as managing general partner of our
Operating Partnerships, with a 0.001% general partner interest in each, and
manages our subsidiaries. Our Downstream Segment revenues are earned from transportation and storage
of refined products and LPGs, intrastate transportation of petrochemicals,
sales of product inventory and other ancillary services. The two largest
operating expense items of the Downstream Segment are labor and electric power.
We generally realize higher revenues during the first and fourth quarters of
each year since our operations are somewhat seasonal. Refined products volumes
are generally higher during the second and third quarters because of greater
demand for gasolines 28




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##### Table of Contents



during the spring and summer driving seasons. LPGs volumes are
generally higher from November through March due to higher demand in the
Northeast for propane, a major fuel for residential heating. Our Downstream
Segment also includes the results of operations of the northern portion of the
Dean Pipeline, which transports refinery grade propylene from Mont Belvieu,
Texas, to Point Comfort, Texas. Our Downstream Segment also includes our
equity investments in Centennial Pipeline LLC (Centennial) and Mont Belvieu
Storage Partners, L.P. (MB Storage) (see Note 6. Equity Investments). Our Upstream Segment revenues are earned from gathering, transportation,
marketing and storage of crude oil and distribution of lubrication oils and
specialty chemicals, principally in Oklahoma, Texas, New Mexico and the Rocky
Mountain region. Marketing operations consist primarily of aggregating
purchased crude oil along our pipeline systems, or along third party pipeline
systems, and arranging the necessary transportation logistics for the ultimate
sale of the crude oil to local refineries, marketers or other end users. Our
Upstream Segment also includes our equity investment in Seaway (see Note 6. Equity Investments). Our Midstream Segment revenues are earned from the fractionation of NGLs
in Colorado; transportation of NGLs from two trunkline NGL pipelines in South
Texas, two NGL pipelines in East Texas and a pipeline system (Chaparral) from
West Texas and New Mexico to Mont Belvieu; the gathering of natural gas in the
Green River Basin in southwestern Wyoming, through Jonah and the gathering of
CBM in the San Juan Basin in New Mexico and
Colorado, through Val Verde. DEFS manages
and operates the Val Verde, Jonah and Chaparral assets for us under contractual
agreements. We earn revenues and income and generate cash by charging our customers a
fee for the transportation, storage, gathering, terminaling, fractionation and
other services we provide. In our Upstream Segment, we seek to maintain a
balanced marketing position until we make physical delivery of the crude oil,
thereby minimizing or eliminating our exposure to price fluctuations occurring
after the initial purchase. We are subject to economic and other factors that
affect our industry. The demand for crude oil and petroleum products is
dependent on the price of crude oil and the products produced from the refining
of crude oil; the price of natural gas and locations in which natural gas is
drilled; and the demand for petrochemicals, which is dependent on prices for
products produced from petrochemicals. We are also subject to regulatory
factors such as the amounts we are allowed to charge our customers for the
services we provide on our regulated pipeline systems. Acquisitions We completed several acquisitions in 2001, 2002 and 2003, discussed below,
that have impacted our results of operations and liquidity as discussed in this
Report. The following acquisitions were accounted for, and the purchase price
was allocated, in accordance with the purchase method of accounting. We
adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, in 2001 and have followed the provisions of that statement for
all business combinations initiated after June 30, 2001. Acquisition
    
    Date of Acquisition
    
    Purchase PriceJonah (1)
    
    September 30, 2001
    
    $367.1 millionChaparral (2)
    
    March 1, 2002
    
    $132.4 millionVal Verde (3)
    
    June 30, 2002
    
    $444.2 millionGenesis (4)
    
    November 1, 2003
    
    $21.0 million
   (1)
    
    The acquisition of Jonah in 2001 served as our entry into the
natural gas gathering industry.(2)
    
    Chaparral extends from West Texas and New Mexico to Mont
Belvieu. The pipeline delivers NGLs to fractionators and to MB
Storages existing storage facilities in Mont Belvieu. 29




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##### Table of Contents



(3)
    
    The Val Verde system gathers CBM from the Fruitland Coal
Formation of the San Juan Basin in New Mexico and Colorado. The
system is one of the largest CBM gathering and treating facilities
in the United States.(4)
    
    The assets acquired included approximately 150 miles of small
diameter trunk lines, 26,000 barrels per day of throughput and
12,000 barrels per day of lease marketing and supply business. We
have integrated these assets into our South Texas pipeline system
which has allowed us to consolidate gathering and marketing assets
in key operating areas in a cost effective manner and will provide
future growth opportunities (see Note 4. Acquisitions and
Dispositions). Since the acquisition of Jonah, we have expanded both the pipeline
capacity and processing capacity of the Jonah system. In 2002, we completed
the Phase I and Phase II expansions of Jonah, which nearly doubled the capacity
of the Jonah system. The Phase I expansion was completed in May 2002 at a cost
of approximately $25.0 million and increased system capacity by 62%, from
approximately 450 million cubic feet per day (MMcf/day) to approximately 730
MMcf/day. In October 2002, the Phase II expansion was completed at a cost of
approximately $45.0 million, which increased the capacity of the Jonah system
from 730 MMcf/day to approximately 880 MMcf/day. In 2003, the Phase III
expansion was begun, which included an 80-mile expansion on the system and the
building of a new 250 MMcf/day gas processing plant near Opal, Wyoming. Phase
III was substantially completed during the fourth quarter of 2003, with system
capacity increasing to 1,180 MMcf/day at a cost of approximately $59.0 million. In connection with our acquisition of crude oil assets in 2000, we
acquired an approximate 23.5% undivided joint interest in the Rancho Pipeline,
which was a crude oil pipeline system from West Texas to Houston. In March
2003, the Rancho Pipeline ceased operations, and segments of the pipeline were
sold to certain of the owners which previously held undivided interests in the
pipeline. We acquired approximately 230 miles of the pipeline in exchange for
cash of $5.5 million and our interests in other portions of the Rancho
Pipeline. We sold part of the segment we acquired to other entities for cash
and assets valued at approximately $8.5 million. We recorded a net gain of
$3.9 million on the transactions in the second quarter of 2003. Consistent with our business strategy, we continuously evaluate possible
acquisitions of assets that would complement our current operating segments.
Such acquisition efforts involve participation by us in processes that have
been made public and involve a number of potential buyers, as well as
situations where we believe we are the only party or one of a very limited
number of potential buyers in negotiations with the potential seller. These
acquisition efforts often involve assets which, if acquired, would have a
material effect on our financial position, results of operations or cash flows. 30




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##### Table of Contents



Results of Operations The following table summarizes financial information by business segment
for the three months ended March 31, 2004 and 2003 (in thousands): Three Months EndedMarch 31,2004
    
    2003Operating revenues:Downstream Segment
    
    $
    74,809
    
    
    $
    67,965Upstream Segment
    
    
    1,194,490
    
    
    
    985,380Midstream Segment
    
    
    50,163
    
    
    
    46,904Intercompany eliminations
    
    
    (1,401
    )
    
    
    (1,010
    )Total operating revenues
    
    
    1,318,061
    
    
    
    1,099,239Operating income:Downstream Segment
    
    
    25,682
    
    
    
    29,269Upstream Segment
    
    
    10,029
    
    
    
    3,624Midstream Segment
    
    
    18,190
    
    
    
    18,449Total operating income
    
    
    53,901
    
    
    
    51,342Earnings before interest:Downstream Segment
    
    
    24,716
    
    
    
    28,004Upstream Segment
    
    
    17,064
    
    
    
    8,782Midstream Segment
    
    
    18,248
    
    
    
    18,486Intercompany eliminations
    
    
    
    
    
    
    (38
    )Total earnings before interest
    
    
    60,028
    
    
    
    55,234Interest expense
    
    
    (20,459
    )
    
    
    (21,905
    )Interest capitalized
    
    
    864
    
    
    
    596Net income
    
    $
    40,433
    
    
    $
    33,925
 Below is a detailed analysis of the results of operations, including
reasons for changes in results, for each of our operating segments. Downstream Segment The following table presents volumes delivered in barrels and average
tariff per barrel for the three months ended March 31, 2004 and 2003: Three Months EndedMarch 31,
    
    PercentageIncrease2004
    
    2003
    
    (Decrease)(in thousands, except tariff information)Volumes DeliveredRefined products
    
    
    32,522
    
    
    
    30,232
    
    
    
    8
    %LPGs
    
    
    13,208
    
    
    
    13,700
    
    
    
    (4
    %)Total
    
    
    45,730
    
    
    
    43,932
    
    
    
    4
    %Average Tariff per BarrelRefined products
    
    $
    0.95
    
    
    $
    0.89
    
    
    
    7
    %LPGs
    
    
    2.18
    
    
    
    2.25
    
    
    
    (3
    %)Average system tariff per barrel
    
    $
    1.31
    
    
    $
    1.31
    
    
    
    
 31




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##### Table of Contents



Our Downstream Segment reported earnings before interest of $24.7 million
for the three months ended March 31, 2004, compared with earnings before
interest of $28.0 million for the three months ended March 31, 2003. Earnings
before interest decreased $3.3 million primarily due to an increase of $10.5
million in costs and
expenses partially offset by an increase of $6.9 million in operating revenues
and an increase of $0.3 million in other income  net. We discuss the factors
influencing our operating performance below. Revenues from refined products transportation increased $4.1 million for
the three months ended March 31, 2004, compared with the three months ended
March 31, 2003, due to an overall increase of 8% in the refined products
volumes delivered. This increase was primarily due to deliveries of products
received into our pipeline from Centennial at Creal Springs, Illinois.
Centennial has provided our system with additional pipeline capacity for
products originating in the U.S. Gulf Coast area. Prior to the construction of
Centennial, deliveries on our pipeline system were limited by our pipeline
capacity, and transportation services for our customers were allocated in
accordance with a proration policy. With this incremental pipeline capacity,
our previously constrained system has expanded deliveries in markets both south
and north of Creal Springs. In February 2003, we entered into a lease
agreement with Centennial that increased our flexibility to deliver refined
products to our market areas. Volume increases were due to increased demand
and market share for products supplied from the U.S. Gulf Coast into Midwest
markets. The refined products average rate per barrel increased 7% from the
prior year period primarily due to higher market-based tariff rates which went
into effect in July 2003, partially offset by the impact of the Midwest origin
point for barrels received from Centennial, which resulted in an increase in
short-haul barrels transported on our system. Revenues from LPGs transportation decreased $2.0 million for the three
months ended March 31, 2004, compared with the three months ended March 31,
2003, primarily due to lower deliveries of propane in the upper Midwest and
Northeast market areas attributable to warmer weather during the first quarter
of 2004. Additionally, in late February 2004, the Mont Belvieu propane price
spiked, which resulted in our sourced propane being less competitive than
propane from other source points. This decrease was partially offset by
increased deliveries of isobutane to Chicago area refineries. The LPGs average
rate per barrel decreased 3% from the prior year period as a result of a
decreased percentage of long-haul deliveries during the three months ended
March 31, 2004, partially offset by an increase in LPG tariff rates, which went
into effect in July 2003. Other operating revenues increased $4.8 million for the three months ended
March 31, 2004, compared with the three months ended March 31, 2003, primarily
due to higher propane inventory fees, higher propane deliveries at our
Providence, Rhode Island import facility and higher refined product loading
fees. These increases were partially offset by lower margins on product
inventory sales. Costs and expenses increased $10.5 million for the three months ended
March 31, 2004, compared with the three months ended March 31, 2003. The
increase was made up of an $8.5 million increase in operating, general and
administrative expenses, a $1.9 million increase in depreciation and
amortization expense and a $0.2 million increase in taxes  other than income
taxes. These increases were partially offset by a $0.1 million decrease in
operating fuel and power. Operating, general and administrative expenses
increased primarily due to higher pipeline maintenance expenses due to pipeline
rehabilitation expenses associated with our integrity management program,
increased consulting and contract services primarily related to compliance with
the Sarbanes-Oxley Act of 2002, increased labor costs primarily due to an
increase in the number of employees between years, increased rental expense
from the Centennial pipeline capacity lease agreement that we entered into in
February 2003 and increased general and administrative supplies expense.
Depreciation expense increased from the prior year period because of assets
placed in service during 2003, partially offset by an increase in the estimated
remaining life of a section of our pipeline system in the Northeast, as a
result of pipeline improvements made as part of our integrity management
program. Taxes  other than income taxes increased as a result of actual
property taxes being slightly higher than previously estimated. Operating fuel
and power expense decreased slightly as a result of a more efficient use of our
transportation assets, partially offset by increased mainline throughput. 32




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Net losses from equity investments remained virtually unchanged for the
three months ended March 31, 2004, compared with the three months ended March
31, 2003, as shown below (in thousands): Three Months EndedMarch 31,
    
    Increase2004
    
    2003
    
    (Decrease)Centennial
    
    $
    (3,856
    )
    
    $
    (3,178
    )
    
    $
    (678
    )MB Storage
    
    
    2,629
    
    
    
    1,945
    
    
    
    684Other
    
    
    (11
    )
    
    
    (26
    )
    
    
    15Total equity losses
    
    $
    (1,238
    )
    
    $
    (1,259
    )
    
    $
    21
 Equity losses in Centennial increased primarily due to the acquisition of
an additional 16.7% interest in Centennial on February 10, 2003, bringing TE
Products ownership interest to 50% and higher pipeline cleaning expenses,
partially offset by an increase in transportation volumes on Centennial. The
losses from Centennial are partially offset by increased earnings of $0.7
million from our 50% ownership interest in MB Storage. Equity earnings in MB
Storage increased between periods due to increased storage revenue and receipt
revenue, lower general and administrative expenses and lower pipeline
rehabilitation expenses on the MB Storage system. Other income  net increased $0.3 million for the three months ended March
31, 2004, compared with the three months ended March 31, 2003, primarily due to
higher interest income earned on cash investments and other investing
activities. 33




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##### Table of Contents



Upstream Segment Information presented in the following table includes the margin of the
Upstream Segment, which may be viewed as a non-GAAP (Generally Accepted
Accounting Principles) financial measure under the rules of the Securities and
Exchange Commission. We calculate the margin of the Upstream Segment 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 and
lubrication oil. We believe that margin is a more meaningful measure of
financial performance than operating revenues and operating expenses due to the
significant fluctuations in revenues and expenses caused by variations in the
level of marketing activity and prices for products marketed. Margin and
volume information for the three months ended March 31, 2004 and 2003, is
presented below (in thousands, except per barrel and per gallon amounts): Three Months EndedMarch 31,
    
    PercentageIncrease2004
    
    2003
    
    (Decrease)Margins:Crude oil transportation
    
    $
    13,096
    
    
    $
    10,804
    
    
    
    21
    %Crude oil marketing
    
    
    5,692
    
    
    
    4,735
    
    
    
    20
    %Crude oil terminaling
    
    

    2,725
    
    
    
    2,120
    
    
    
    29
    %Lubrication oil sales
    
    
    1,492
    
    
    
    1,352
    
    
    
    10
    %Total margin
    
    $
    23,005
    
    
    $
    19,011
    
    
    
    21
    %Total barrels:Crude oil transportation
    
    
    26,162
    
    
    
    22,625
    
    
    
    16
    %Crude oil marketing
    
    
    45,654
    
    
    
    37,672
    
    
    
    21
    %Crude oil terminaling
    
    
    33,088
    
    
    
    27,369
    
    
    
    21
    %Lubrication oil volume (total gallons)
    
    
    3,470
    
    
    
    2,843
    
    
    
    22
    %Margin per barrel:Crude oil transportation
    
    $
    0.501
    
    
    $
    0.478
    
    
    
    5
    %Crude oil marketing
    
    
    0.125
    
    
    
    0.126
    
    
    
    (1
    %)Crude oil terminaling
    
    
    0.082
    
    
    
    0.077
    
    
    
    6
    %Lubrication oil margin (per gallon)
    
    
    0.430
    
    
    
    0.476
    
    
    
    (10
    %)
 The following table reconciles the Upstream Segment margin to the
consolidated statements of income using the information presented in the
consolidated statements of income and the statements of income in Note 10.
Segment Information (in thousands): Three Months Ended March 31,2004
    
    2003Sales of petroleum products
    
    $
    1,180,767
    
    
    $
    975,960Transportation  Crude oil
    
    
    9,663
    
    
    
    6,905Less: Purchases of petroleum products
    
    
    (1,167,425
    )
    
    
    (963,854
    )Total margin
    
    $
    23,005
    
    
    $
    19,011
 Our Upstream Segment reported earnings before interest of $17.1 million
for the three months ended March 31, 2004, compared with earnings before
interest of $8.8 million for the three months ended March 31, 2003. Earnings
before interest increased $8.3 million primarily due to an increase of $4.0
million in margin, an increase of $1.5 million in other operating revenues, a
decrease of $0.9 million in costs and expenses (excluding purchases of crude
oil and lubrication oil) and an increase of $1.9 million in equity earnings of
Seaway. We discuss factors influencing our operating performance below. 34




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Our margin increased $4.0 million for the three months ended March 31,
2004, compared with the three months ended March 31, 2003. Crude oil
transportation margin increased $2.3 million primarily due to increased
revenues on our Basin, South Texas and West Texas systems, resulting from a 16%
increase in transportation volumes primarily as a result of the acquisition of
the Genesis assets. During the fourth quarter of 2003, we completed the
purchase of crude supply and transportation assets (Genesis), which was
integrated into our South Texas system (see Note 4. Acquisitions and
Dispositions). Crude oil marketing margin increased $1.0 million due to
increased volumes marketed, partially offset by an invoicing settlement on a
marketing contract in the first quarter of 2003, which reduced the marketing
margin in 2003. Crude oil terminaling margin increased $0.6 million as a
result of higher pumpover volumes at Cushing, Oklahoma, partially offset by
lower pumpover volumes at Midland, Texas. Lubrication oil sales margin
increased $0.1 million due to increased sales of chemical volumes and increased
volumes related to the acquisition of a lubrication oil distributor in Abilene,
Texas, in December 2003. Other operating revenue of the Upstream Segment increased $1.5 million for
the three months ended March 31, 2004, compared with the three months ended
March 31, 2003, primarily due to a $1.4 million settlement with the former
owner of some of our crude oil assets for inventory imbalances with customers
on assets that were not acquired by us and higher revenues from documentation
and other services to support customers trading activity at Midland and
Cushing. Costs and expenses, excluding expenses associated with purchases of crude
oil and lubrication oil, decreased $0.9 million for the three months ended
March 31, 2004, compared with the three months ended March 31, 2003. The
decrease was made up of a $2.1 million decrease in operating, general and
administrative expenses, partially offset by a $1.0 million increase in
operating fuel and power and a $0.2 million increase in taxes  other than
income taxes. Operating, general and administrative expenses decreased $2.1
million from the prior year period primarily due to $1.6 million of higher
environmental assessment and remediation costs in 2003, $1.7 million of expense
in 2003 from the net settlement of crude oil imbalances with customers and $0.4
million of higher legal costs in 2003 related to the litigation and settlement
with D.R.D. Environmental Services, Inc. These decreases were partially offset
by increases of $0.2 million in consulting and contract services primarily
related to compliance with the Sarbanes-Oxley Act of 2002, increased labor
costs primarily due to an increase in the number of employees between years as
a result of the acquisition of Genesis and higher pipeline maintenance expenses
due to pipeline rehabilitation expenses associated with our integrity
management program. Operating fuel and power increased $1.0 million primarily
as a result of the acquisition of the Genesis assets and higher volumes in
2004. Taxes  other than income taxes increased $0.2 million due to slight
increases in property tax accruals. Equity earnings in Seaway increased $1.9 million for the three months
ended March 31, 2004, compared with the three months ended March 31, 2003, due
to higher long-haul and short-haul third-party transportation volumes, gains on
inventory sales, a settlement with the former owner of Seaways crude oil
assets regarding inventory imbalances with customers on assets that were not
acquired by us and lower general and administrative expenses. 35




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##### Table of Contents



Midstream Segment The following table presents volume and average rate information for the
three months ended March 31, 2004 and 2003 (in thousands, except average fee and average rate amounts): Three Months EndedMarch 31,
    
    PercentageIncrease2004
    
    2003
    
    (Decrease)Gathering  Natural Gas  Jonah:Million cubic feet
    
    
    83,928
    
    
    
    74,265
    
    
    
    13
    %Million British thermal units (MMBtu)
    
    
    92,897
    
    
    
    81,945
    
    
    
    13
    %Average fee per MMBtu
    
    $
    0.198
    
    
    $
    0.191
    
    
    
    4
    %Gathering  Natural Gas  Val Verde:Million cubic feet
    
    
    35,491
    
    
    
    41,709
    
    
    
    (15
    %)MMBtu
    
    
    29,804
    
    
    
    35,267
    
    
    
    (15
    %)Average fee per MMBtu
    
    $
    0.541
    
    
    $
    0.529
    
    
    
    2
    %Transportation  NGLs:Thousand barrels
    
    
    14,680
    
    
    
    14,268
    
    
    
    3
    %Average rate per barrel
    
    $
    0.682
    
    
    $
    0.694
    
    
    
    (2
    %)Fractionation  NGLs:Thousand barrels
    
    
    1,115
    
    
    
    1,071
    
    
    
    4
    %Average rate per barrel
    
    $
    1.689
    
    
    $
    1.734
    
    
    
    (3
    %)Sales  Condensate:Thousand barrels
    
    
    41,819
    
    
    
    30,771
    
    
    
    36
    %Average rate per barrel
    
    $
    33.51
    
    
    $
    32.84
    
    
    
    2
    %
 Our Midstream Segment reported earnings before interest of $18.3 million
for the three months ended March 31, 2004, compared with earnings before
interest of $18.5 million for the three months ended March 31, 2003. Earnings
before interest decreased $0.2 million due to an increase of $2.3 million in
costs and expenses (excluding purchases of petroleum products) partially offset by an
increase of $2.0 million in operating revenues and margin and an increase of
$0.1 million in other income  net. We discuss factors influencing our
operating performance below. Revenues from the gathering of natural gas increased $0.2 million for the
three months ended March 31, 2004, compared with the three months ended March
31, 2003. Natural gas gathering revenues from the Jonah system increased $2.7
million and volumes delivered increased 9.7 Bcf for the three months ended
March 31, 2004, due to the expansion of the Jonah system during 2003. The
Phase III expansion was substantially completed during the fourth quarter of
2003 and increased system capacity from 880 MMcf/day to 1,180 MMcf/day. The
increase in Jonahs revenues is also partially due to an increase in the
average natural gas gathering rate due to certain volume thresholds being
exceeded. Natural gas gathering revenues from the Val Verde system decreased
$2.5 million and volumes delivered decreased 6.2 Bcf for the three months ended
March 31, 2004, primarily due to the natural decline of CBM production, which
resulted in decreased revenues, partially offset by an increase in the average
natural gas gathering rate due to annual fee escalations in gathering
agreements and higher carbon dioxide treating fees as a result of increasing
carbon dioxide content in the natural gas. During the first quarter of 2004, Jonahs Pioneer gas processing plant,
which was constructed as a part of the Phase III expansion to increase the
processing capacity in southwestern Wyoming, was completed. Pioneers
processing agreements allow the producers to elect annually whether to be
charged under a fee-based arrangement or a fee plus keep-whole arrangement.
Under the fee-based election, Jonah receives a fee for its processing services.
Under the fee plus keep-whole election, Jonah receives a lower fee for its
processing services, retains and sells the 36




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##### Table of Contents



NGLs extracted during the process and delivers to the producers residue gas
equivalent in energy to the natural gas received from the producers. Jonah
purchases gas from a DEFS affiliate to replace the equivalent energy removed in
the liquids. Jonah sells the NGLs it retains to a DEFS affiliate. These
transactions resulted in sales and purchases in the first quarter of 2004, with
a margin of $0.1 million. The margin from the sales and purchases related to
the keep-whole election processing contracts is expected to remain very small. Revenues from the transportation of NGLs increased $0.1 million for the
three months ended March 31, 2004, compared with the three months ended March
31, 2003, primarily due to slight increases in volumes transported on the
southern portion of the Dean Pipeline and on Chaparral. The decrease in the
NGL transportation average rate per barrel resulted from a lower average rate
per barrel on volumes transported on Chaparral. Other operating revenues increased $1.6 million for the three months ended
March 31, 2004, compared with the three months ended March 31, 2003, due to an
increase of $0.4 million in condensate sales on the Jonah system and an
increase of $0.8 million in processing fee revenues as a result of the Pioneer
processing plant, which was constructed as part of the Phase III expansion,
being placed in service in January 2004. The remaining increase in other
revenues is primarily due to an increase in stabilizer overhead gas sales on
the Jonah system. Costs and expenses (excluding purchases of petroleum products) increased $2.3 million
for the three months ended March 31, 2004, compared with the three months ended
March 31, 2003, due to a $3.4 million increase in operating, general and
administrative expense and a $0.3 million increase in operating fuel and power,
partially offset by a $1.4 million decrease in depreciation and amortization
expense. Operating, general and administrative expense increased due to higher
general and administrative labor expense, higher pipeline maintenance expenses
on the southern portion of the Dean Pipeline and higher expenses related to
marking to market natural gas imbalances. Operating fuel and power increased
$0.3 million primarily due to increased NGL volumes and higher power costs.
Amortization expense decreased $3.5 million primarily due to a decrease of $3.3
million on Jonahs intangible assets under the units-of-production method
resulting from an extension of the expected amortization period from 16 years
to 25 years (see Note 2. Goodwill and Other Intangible Assets), partially
offset by an increase of $0.3 million as a result of higher volumes between
periods. Amortization expense on the Val Verde system decreased by $0.5
million primarily due to lower volumes between periods. These decreases were
partially offset by increased depreciation expense of $2.1 million on Jonah as
a result of assets placed in service in 2003 related to the expansion of the
Jonah system. Interest Expense and Capitalized Interest Interest expense decreased $1.5 million for the three months ended March
31, 2004, compared with the three months ended March 31, 2003, primarily due to
lower LIBOR interest rates in effect during the three months ended March 31,
2004, lower outstanding debt balances and lower expense on an interest rate
swap in 2004. Capitalized interest increased $0.3 million for the three months ended
March 31, 2004, compared with the three months ended March 31, 2003, due to
interest capitalized on construction work-in-progress in 2004. Financial Condition and Liquidity Cash generated from operations, credit facilities and debt and equity
offerings are our primary sources of liquidity. At March 31, 2004, and
December 31, 2003, we had working capital deficits of $20.9 million and $22.8
million, respectively. At March 31, 2004, we had $323.5 million in available
borrowing capacity under our revolving credit facility to cover any working
capital shortfalls. Cash flows for the three months ended March 31, 2004 and
2003 were as follows (in millions): 37




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##### Table of Contents



Three Months EndedMarch 31,2004
    
    2003Cash provided by (used in):Operating activities
    
    $
    43.2
    
    
    $
    37.5Investing activities
    
    
    (28.9
    )
    
    
    (38.3
    )Financing activities
    
    
    (40.6
    )
    
    
    (16.2
    )
 Operating Activities Net cash from operating activities for the three months ended March 31,
2004 and 2003, was comprised of the following (in millions): Three Months EndedMarch 31,2004
    
    2003Net income
    
    $
    40.4
    
    
    $
    33.9Depreciation and amortization
    
    
    27.8
    
    
    
    27.3Losses in equity investments
    
    
    (5.6
    )
    
    
    (3.8
    )Distributions from equity investments
    
    
    6.0
    
    
    
    Non-cash portion of interest expense
    
    
    (0.6
    )
    
    
    1.0Cash used in working capital and other
    
    
    (24.8
    )
    
    
    (20.9
    )Net cash from operating activities
    
    $
    43.2
    
    
    $
    37.5
 Cash provided by operating activities increased for the three months ended
March 31, 2004, compared with the three months ended March 31, 2003, primarily
due to higher net income and $6.0 million of distributions from our equity
investment in Seaway, partially offset by timing of payments for working
capital components. We believe that we will continue to have adequate liquidity to fund future
recurring operating and investing activities. Our primary cash requirements
consist of normal operating expenses, capital expenditures to sustain existing
operations and revenue generating expenditures, interest payments on our Senior
Notes and revolving credit facility, distributions to our General Partner and
unitholders and acquisitions of new assets or businesses. Short-term cash
requirements, such as operating expenses, capital expenditures to sustain
existing operations and quarterly distributions to our General Partner and
unitholders, are expected to be funded through operating cash flows. Long-term
cash requirements for expansion projects and acquisitions are expected to be
funded by several sources, including cash flows from operating activities,
borrowings under credit facilities, and the issuance of additional equity and
debt securities. Our ability to complete future debt and equity offerings and
the timing of any such offerings will depend on various factors, including
prevailing market conditions, interest rates, our financial condition and our
credit rating at the time. Net cash from operating activities for the three months ended March 31,
2004 and 2003, included interest payments, net of amounts capitalized, of $37.9
million and $32.5 million, respectively. Excluding the effects of hedging
activities and interest capitalized, during the year ended December 31, 2004,
we expect interest payments on our fixed rate Senior Notes to be approximately
$78.0 million. We expect to pay our interest payments with cash flows from
operating activities. 38




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##### Table of Contents



Investing Activities Cash flows used in investing activities totaled $28.9 million for the
three months ended March 31, 2004, and were comprised of $26.9 million of
capital expenditures, $1.0 million of cash contributions for TE Products
ownership interest in Centennial and $1.0 million for the acquisition of crude
oil assets acquired in the first quarter of 2004. Cash flows used in
investing activities totaled $38.3 million for the three months ended March 31,
2003, and were comprised of $17.3 million of capital expenditures, $20.0
million for TE Products acquisition of an additional 16.7% interest in
Centennial and $1.0 million of cash contributions for TE Products ownership
interest in Centennial. Financing Activities Cash flows used in financing activities totaled $40.6 million for the
three months ended March 31, 2004, and were comprised of $43.5 million of
repayments on our revolving credit facilities and $57.1 million of
distributions paid to unitholders, partially offset by $60.0 million in
proceeds from revolving credit facilities. Cash flows used in financing
activities totaled $16.2 million for the three months ended March 31, 2003, and
were comprised of $207.0 million of repayments on our revolving credit
facilities and $46.5 million of distributions paid to unitholders, partially
offset by $40.0 million in proceeds from revolving credit facilities and $198.6
million from the issuance in January 2003 of our 6.125% Senior Notes due 2013,
offset by debt issuance costs of $1.3 million. Centennial entered into credit facilities totaling $150.0 million and, as
of March 31, 2004, $150.0 million was outstanding under those credit
facilities. The proceeds were used to fund construction and conversion costs
of Centennials pipeline system. TE Products and Marathon Ashland Petroleum LLC
(Marathon) have each guaranteed one-half of Centennials debt, up to a
maximum of $75.0 million each. Credit Facilities and Interest Rate Swap Agreements On April 6, 2001, we entered into a $500.0 million revolving credit
facility including the issuance of letters of credit of up to $20.0 million
(Three Year Facility). The interest rate was based, at our option, on either
the lenders base rate plus a spread, or LIBOR plus a spread in effect at the
time of the borrowings. The credit agreement for the Three Year Facility
contained certain restrictive financial covenant ratios. During the first
quarter of 2003, we repaid $182.0 million of the outstanding balance of the
Three Year Facility with proceeds from the issuance of our 6.125% Senior Notes
on January 30, 2003. On June 27, 2003, we repaid the outstanding balance under
the Three Year Facility with borrowings under a new credit facility, and
canceled the Three Year Facility. On June 27, 2003, we entered into a $550.0 million revolving credit
facility with a three year term, including the issuance of letters of credit of
up to $20.0 million (Revolving Credit Facility). The interest rate is based,
at our option, on either the lenders base rate plus a spread, or LIBOR plus a
spread in effect at the time of the borrowings. The credit agreement for the
Revolving Credit Facility contains certain restrictive financial covenant
ratios. We borrowed $263.0 million under the Revolving Credit Facility and
repaid the outstanding balance of the Three Year Facility. On March 31, 2004,
$226.5 million was outstanding under the Revolving Credit Facility at a
weighted average interest rate, before the effects of hedging activities, of
1.9%. At March 31, 2004, we were in compliance with the covenants in this
credit agreement. 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 a discount of $2.2 million and are being accreted to their face value
over the term of the notes. The Senior Notes may be redeemed at any time at
our option with the payment of accrued interest and a make-whole premium
determined by discounting remaining interest and principal payments using a
discount rate equal to the rate of the United States Treasury securities of
comparable remaining maturity plus 35 basis points. The indenture governing
the 7.625% Senior Notes contains covenants, including, but not limited to,
covenants limiting the creation of liens securing indebtedness and sale and
leaseback transactions. However, the
indenture does not limit our ability to incur additional indebtedness. As of
March 31, 2004, we were in compliance with the covenants of these Senior Notes. 39




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##### Table of Contents



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
a discount of $1.4 million and are being accreted to their face value over the
term of the notes. We used $182.0 million of the proceeds from the offering to
reduce the outstanding principal on the Three Year Facility to $250.0 million.
The balance of the net proceeds received was used for general partnership
purposes. The Senior Notes may be redeemed at any time at our option with the
payment of accrued interest and a make-whole premium determined by discounting
remaining interest and principal payments using a discount rate equal to the
rate of the United States Treasury securities of comparable remaining maturity
plus 35 basis points. The indenture governing our 6.125% Senior Notes contains
covenants, including, but not limited to, covenants limiting the creation of
liens securing indebtedness and sale and leaseback transactions. However, the
indenture does not limit our ability to incur additional indebtedness. As of
March 31, 2004, we were in compliance with the covenants of these Senior Notes. We have entered into interest rate swap agreements to hedge our exposure
to cash flows and fair value changes. These agreements are more fully
described in Item 3. Quantitative and Qualitative Disclosures About Market
Risk. The following table summarizes our credit facilities as of March 31, 2004
(in millions): As of March 31, 2004AvailableOutstanding
    
    Borrowing
    
    MaturityDescription:
    
    Principal
    
    Capacity
    
    DateRevolving Credit Facility
    
    $
    226.5
    
    
    $
    323.5
    
    
    June 20066.45% Senior Notes (1)
    
    
    180.0
    
    
    
    
    
    
    January 20087.625% Senior Notes (1)
    
    
    500.0
    
    
    
    
    
    
    February 20126.125% Senior Notes (1)
    
    
    200.0
    
    
    
    
    
    
    February 20137.51% Senior Notes (1)
    
    
    210.0
    
    
    
    
    
    
    January 2028Total
    
    $
    1,316.5
    
    
    $
    323.5
   (1)
    
    Our TE Products subsidiary entered into an interest rate swap
agreement to hedge its exposure to changes in the fair value of its
7.51% Senior Notes due 2028. At March 31, 2004, the 7.51% Senior Notes
include an adjustment to increase the fair value of the debt by $8.9
million related to this interest rate swap agreement. We also entered
into interest rate swap agreements to hedge our exposure to changes in
the fair value of our 7.625% Senior Notes due 2012. At March 31, 2004,
the 7.625% Senior Notes include a deferred gain, net of amortization,
from previous interest rate swap terminations of $39.6 million. At
March 31, 2004, our 6.45% Senior Notes, our 7.625% Senior Notes and our
6.125% Senior Notes include $3.2 million of unamortized debt discounts.
The fair value adjustments, the deferred gain adjustment and the
unamortized debt discounts are excluded from this table. Distributions and Issuance of Additional Limited Partner Units We paid cash distributions of $57.1 million ($0.65 per Unit) and $46.5
million ($0.60 per Unit) during each of the three months ended March 31, 2004
and 2003, respectively. Additionally, we declared a cash distribution of
$0.6625 per Unit for the quarter ended March 31, 2004. We will pay the
distribution of $58.7 million on May 7, 2004, to unitholders of record on April
30, 2004. On April 2, 2003, we sold in an underwritten public offering 3.9 million
Units at $30.35 per Unit. The proceeds from the offering, net of underwriting
discount, totaled approximately $114.5 million, of which approximately $113.8
million was used to repurchase and retire all of the 3.9 million previously
outstanding Class B Units held by Duke Energy Transport and Trading Company,
LLC. We received approximately $0.7 million in proceeds from the offering in
excess of the amount needed to repurchase and retire the Class B Units. 40




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On August 7, 2003, we sold in an underwritten public offering 5.0 million
Units at $34.68 per Unit. The proceeds from the offering, net of underwriting
discount, totaled approximately $166.0 million. On August 19, 2003, 162,900
Units were sold upon exercise of the underwriters over-allotment option
granted in connection with the offering on August 7, 2003. Proceeds from the
over-allotment sale, net of underwriting discount, totaled $5.4 million.
Approximately $53.0 million of the proceeds were used to repay indebtedness
under our revolving credit facility and $21.0 million was used to fund the
acquisition of the Genesis assets (see Note 4. Acquisitions and Dispositions).
The remaining amount was used primarily to fund revenue-generating and system
upgrade capital expenditures and for general partnership purposes. General Partner Interest As of March 31, 2004, and December 31, 2003, we had a deficit balance of
$11.7 and $7.2 million, respectively, in our General Partners equity account.
This negative balance does not represent an asset to us and does not represent
an obligation of the General Partner to contribute cash or other property to
us. The General Partners equity account generally consists of its cumulative
share of our net income less cash distributions made to the General Partner
plus capital contributions that it has made to us. For the quarter ended March
31, 2004, the General Partner was allocated $11.7 million (representing 28.85%)
of our net income and received $16.1 million in cash distributions. Capital Accounts, as defined under our Partnership Agreement, are
maintained for our General Partner and our limited partners. The Capital
Account provisions of our Partnership Agreement incorporate principles
established for U.S. federal income tax purposes and are not comparable to the
equity accounts reflected under accounting principles generally accepted in the
United States in our financial statements. Under our Partnership Agreement,
the General Partner is only required to make additional capital contributions
to us upon the issuance of any additional Units and only if necessary to
maintain a Capital Account balance equal to 1.999999% of the total Capital
Accounts of all partners. At March 31, 2004, and December 31, 2003, the
General Partners Capital Account balance substantially exceeded this
requirement. Net income is allocated between the General Partner and the limited
partners in the same proportion as aggregate cash distributions made to the
General Partner and the limited partners during the period. This is generally
consistent with the manner of allocating net income under our Partnership
Agreement. Net income determined under our Partnership Agreement, however,
incorporates principles established for U.S. federal income tax purposes and is
not comparable to net income reflected under accounting principles generally
accepted in the United States in our financial statements. Cash distributions that we make during a period may exceed our net income
for the period. We make quarterly cash distributions of all of our Available
Cash, generally defined as consolidated cash receipts less consolidated cash
disbursements and cash reserves established by the General Partner in its sole
discretion. Cash distributions in excess of net income allocations and capital
contributions during the year ended December 31, 2003, and the three months
ended March 31, 2004, resulted in a deficit in the General Partners equity
account at March 31, 2004, and December 31, 2003. Future cash distributions
that exceed net income will result in an increase in the deficit balance in the
General Partners equity account. According to the Partnership Agreement, in the event of our dissolution,
after satisfying our liabilities, our remaining assets would be divided among
our limited partners and the General Partner generally in the same proportion
as Available Cash but calculated on a cumulative basis over the life of the
Partnership. After all allocations are made between the partners, if a deficit
balance still remains in the General Partners equity account, the General
Partner would not be required to make whole any such deficit. Future Capital Needs and Commitments We estimate that capital expenditures, excluding acquisitions, for 2004
will be approximately $149.0 million (which includes $4.0 million of
capitalized interest). We expect to spend approximately $110.0 million for
revenue generating projects and facility improvements. Capital spending on
revenue generating projects and facility 41




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improvements will include
approximately $46.0 million for the expansion of our Downstream Segment
facilities including pipelines extending from Seymour to Indianapolis, Indiana,
further expansions of our Northeast pipeline system and construction of a new
truck loading terminal in Bossier City, Louisiana. We expect to spend $23.0
million to expand our Upstream Segment pipelines and facilities in South Texas
and Oklahoma and approximately $41.0 million to expand our Midstream Segment
assets. We expect to spend approximately $35.0 million of capital costs to
sustain existing operations, including life-cycle replacements for equipment at
various facilities and pipeline and tank replacements among all of our business
segments. We continually review and evaluate potential capital improvements
and expansions that would be complementary to our present business segments.
These expenditures can vary greatly depending on the magnitude of our
transactions. We may finance capital expenditures through internally generated
funds, debt or the issuance of additional equity. Our debt repayment obligations consist of payments for principal and
interest on (i) outstanding principal amounts under the Revolving Credit
Facility due in June 2006 ($226.5 million outstanding at March 31,2004), (ii)
the TE Products $180.0 million 6.45% Senior Notes due January 15, 2008, (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 TE Products
$210.0 million 7.51% Senior Notes due January 15, 2028. TE Products is contingently liable as guarantor for the lesser of one-half
or $75.0 million principal amount (plus interest) of Centennials borrowings.
In January 2003, TE Products entered into a pipeline capacity
lease agreement with Centennial for a period of five years that contains a
minimum throughput requirement. During the year ended December 31, 2003, TE
Products exceeded the minimum throughput requirements on the lease
agreement. During the three months ended
March 31, 2004, TE Products contributed $1.0 million to
Centennial to cover operating needs and capital expenditures. On
April 1, 2004, TE Products contributed $16.5 million to MB
Storage for its acquisition of storage assets. During the remainder
of 2004, TE Products may be required to contribute cash to both
Centennial and MB Storage to cover capital expenditures, acquisitions
or other operating needs. Off-Balance Sheet Arrangements We do not rely on off-balance sheet borrowings to fund our acquisitions.
We have no off-balance sheet commitments for indebtedness other than the
limited guaranty of Centennial debt and leases covering assets utilized in
several areas of our operations. Contractual Obligations The following table summarizes our debt repayment obligations and material
contractual commitments as of March 31, 2004 (in millions): Amount of Commitment Expiration Per PeriodLess than
    
    
    
    
    
    
    
    
    
    After 5Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    YearsRevolving Credit Facility
    
    $
    226.5
    
    
    $
    
    
    
    $
    226.5
    
    
    $
    
    
    
    $
    6.45% Senior Notes due 2008 (1) (2)
    
    
    180.0
    
    
    
    
    
    
    
    
    
    
    
    180.0
    
    
    
    7.625% Senior Notes due 2012 (2)
    
    
    210.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210.06.125% Senior Notes due 2013 (2)
    
    
    500.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500.07.51% Senior Notes due 2028 (1) (2)
    
    
    200.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200.0Debt subtotal
    
    
    1,316.5
    
    
    
    
    
    
    
    226.5
    
    
    
    180.0
    
    
    
    910.0Operating leases
    
    
    66.9
    
    
    
    16.4
    
    
    
    27.2
    
    
    
    12.2
    
    
    
    11.1Total
    
    $
    1,383.4
    
    
    $
    16.4
    
    
    $
    253.7
    
    
    $
    192.2
    
    
    $
    921.1
   (1)
    
    Obligations of TE Products.(2)
    
    Our TE Products subsidiary entered into an interest rate swap agreement
to hedge its exposure to changes in the fair value of its 7.51% Senior
Notes due 2028. At March 31, 2004, the 7.51% Senior Notes include an
adjustment to increase the fair value of the debt by $8.9 million related
to this interest rate swap agreement. We also entered into interest
rate swap 42




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agreements to hedge our exposure to changes in the fair value of our
7.625% Senior Notes due 2012. At March 31, 2004, the 7.625% Senior Notes
include a deferred gain, net of amortization, from previous interest rate
swap terminations of $39.6 million. At March 31, 2004, our 6.45% Senior
Notes, our 7.625% Senior Notes and our 6.125% Senior Notes include $3.2
million of unamortized debt discounts. The fair value adjustments, the
deferred gain adjustments and the unamortized debt discounts are excluded
from this table. We expect to repay the long-term, senior unsecured obligations and bank
debt through the issuance of additional long-term senior unsecured debt at the
time the 2008, 2012, 2013 and 2028 debt matures, issuance of additional equity,
proceeds from dispositions of assets, cash flow from operations or any
combination of the above items. Sources of Future Capital Historically, we have funded our capital commitments from operating cash
flow and borrowings under bank credit facilities or bridge loans. We repaid
these loans in part by the issuance of long term debt in capital markets and
the public offering of Units. We expect future capital needs would be
similarly funded to the extent not otherwise available from cash flow from
operations. As of March 31, 2004, we had $323.5 million in available borrowing
capacity under the Revolving Credit Facility. We expect that cash flows from
operating activities will be adequate to fund cash distributions and capital
additions necessary to sustain existing operations. However, future
expansionary capital projects and acquisitions may require funding through
proceeds from the sale of additional debt or equity offerings. Our senior unsecured debt is rated BBB by Standard and Poors (S&P) and
Baa3 by Moodys Investors Service (Moodys). Both ratings are stable. A
rating reflects only the view of a rating agency and is not a recommendation to
buy, sell or hold any indebtedness. Any rating can be revised upward or
downward or withdrawn at any time by a rating agency if it determines that the
circumstances warrant such a change. The senior unsecured debt of our
subsidiary, TE Products, is also rated BBB by S&P and Baa3 by Moodys. Other Considerations Our operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment. Failure
to comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, imposition of injunctions
delaying or prohibiting certain activities and the need to perform
investigatory and remedial activities. Although we believe our operations are
in material compliance with applicable environmental laws and regulations,
risks of significant costs and liabilities are inherent in pipeline operations,
and we cannot assure you that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as
increasingly strict 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 laws and regulations will not have a
material adverse effect on our financial position, results of operations or
cash flows in the near term. In 1994, the Louisiana Department of Environmental Quality (LDEQ) issued
a compliance order for environmental contamination at our Arcadia, Louisiana,
facility. In 1999, our Arcadia facility and adjacent terminals were directed
by the Remediation Services Division of the LDEQ to pursue remediation of this
contamination. At March 31, 2004, we have an accrued liability of $0.3 million
for remediation costs at our Arcadia facility. Effective in March 2004, we
executed an access agreement with an adjacent industrial landowner who is
located upgradient of the Arcadia facility. This agreement enables the
landowner to proceed with remediation activities at our Arcadia facility for
which they have accepted shared responsibility. We do not expect that the
completion of the remediation
program proposed to the LDEQ will have a future material adverse effect on
our financial position, results of operations or cash flows. 43




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On March 17, 2003, we experienced a release of 511 barrels of jet fuel
from a storage tank at our Blue Island terminal located in Cook County,
Illinois. As a result of the release, we have entered into an Agreed Order
with the State of Illinois. The Agreed Order requires us, in part, to complete
a site investigation plan to delineate the scope of any potential contamination
resulting from the release and to remediate any contamination present above
regulatory standards. This site investigation plan has been completed and
submitted to the State of Illinois. The Agreed Order does not contain any
provision for any fines or penalties; however, it does not preclude the State
of Illinois from assessing these at a later date. We do not expect that the
completion of the Agreed Order will have a future material adverse effect on
our financial position, results of operations or cash flows. At March 31, 2004, we have an accrued liability of $8.0 million, related
to various TCTM and TE Products sites requiring environmental remediation
activities. We do not expect that the completion of remediation programs
associated with TCTM and TE Products activities will have a future material
adverse effect on our financial position, results of operations or cash flows. We regularly review our long-lived assets for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. At March 31, 2004, we have identified certain assets that we are
monitoring for possible impairment. We are unable to reasonably estimate the
probabilities associated with the performance of an impairment test. We are
continuing to monitor the circumstances surrounding the assets and will test
the assets for impairment as more information becomes available. We do not
believe that the resolution of the matter will have a material effect on our
financial condition, results of operations or cash flows. Recent Accounting Pronouncements See discussion of new accounting pronouncements in Note 1. Organization
and Basis of Presentation  New Accounting Pronouncements in the accompanying
consolidated financial statements. 
 Forward-Looking Statements The matters discussed in this Report include forward-looking statements
within the meaning of various provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included in this document that address activities, events or
developments that we expect or anticipate will or may occur in the future,
including such things as estimated future capital expenditures (including the
amount and nature thereof), business strategy and measures to implement
strategy, competitive strengths, goals, expansion and growth of our business
and operations, plans, references to future success, references to intentions
as to future matters and other such matters are forward-looking statements.
These statements are based on certain assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions and expected future developments as well as other factors we believe
are appropriate under the circumstances. However, whether actual results and
developments will conform with our expectations and predictions is subject to a
number of risks and uncertainties, including general economic, market or
business conditions, the opportunities (or lack thereof) that may be presented
to and pursued by us, competitive actions by other pipeline companies, changes
in laws or regulations and other factors, many of which are beyond our control.
Consequently, all of the forward-looking statements made in this document are
qualified by these cautionary statements and we cannot assure you that actual
results or developments that we anticipate will be realized or, even if
substantially realized, will have the expected consequences to or effect on us
or our business or operations. For additional discussion of such risks and
uncertainties, see our Annual Report on Form 10-K for the year ended December
31, 2003, and other filings we have made with the Securities and Exchange
Commission. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We may be exposed to market risk through changes in crude oil commodity
prices and interest rates. We do not have foreign exchange risks. Our Risk
Management Committee has established policies to monitor and 44




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control these
market risks. The Risk Management Committee is comprised, in part, of senior
executives of the Company. At March 31, 2004, we had $226.5 million outstanding under our variable
interest rate revolving credit agreement. The interest rate is based, at our
option, on either the lenders base rate plus a spread or LIBOR plus a spread
in effect at the time of the borrowings and is adjusted monthly, bimonthly,
quarterly or semiannually. Utilizing the balances of our variable interest
rate debt outstanding at March 31, 2004, and assuming market interest rates
increase 100 basis points, the potential annual increase in interest expense
would be $2.3 million. We have utilized and expect to continue to utilize interest rate swap
agreements to hedge a portion of our cash flow and fair value risks. Interest
rate swap agreements are used to manage the fixed and floating interest rate
mix of our total debt portfolio and overall cost of borrowing. The interest
rate swap related to our cash flow risk is intended to reduce our exposure to
increases in the benchmark interest rates underlying our variable rate
revolving credit facility. The interest rate swaps related to our fair value
risks are intended to reduce our exposure to changes in the fair value of the
fixed rate Senior Notes. The interest rate swap agreements involve the
periodic exchange of payments without the exchange of the notional amount upon
which the payments are based. The related amount payable to or receivable from
counterparties is included as an adjustment to accrued interest. At March 31, 2004, TE Products had outstanding $180.0 million principal
amount of 6.45% Senior Notes due 2008, and $210.0 million principal amount of
7.51% Senior Notes due 2028 (collectively, the TE Products Senior Notes). At
March 31, 2004, the estimated fair value of the TE Products Senior Notes was
approximately $436.7 million. At March 31, 2004, we had outstanding $500.0
million principal amount of 7.625% Senior Notes due 2012 and $200.0 million
principal amount of 6.125% Senior Notes due 2013. At March 31, 2004, the
estimated fair value of the $500.0 million 7.625% Senior Notes and the $200.0
million 6.125% Senior Notes was approximately $586.4 million and $213.4
million, respectively. On October 4, 2001, TE Products entered into an interest rate swap
agreement to hedge its exposure to changes in the fair value of its fixed rate
7.51% Senior Notes due 2028. We designated 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 maturity of the TE Products Senior
Notes. Under the swap agreement, TE Products pays a floating rate of interest
based on a three-month U.S. Dollar LIBOR rate, plus a spread, and receives a
fixed rate of interest of 7.51%. During the three months ended March 31, 2004,
and 2003, we recognized reductions in interest expense of $2.6 million and $2.4
million, respectively, related to the difference between the fixed rate and the
floating rate of interest on the interest rate swap. During the quarter ended
March 31, 2004, we measured the hedge effectiveness of this interest rate swap
and noted that no gain or loss from ineffectiveness was required to be
recognized. The fair value of this interest rate swap was a gain of
approximately $8.9 million at March 31, 2004, and a gain of approximately $2.3
million at December 31, 2003. Utilizing the balance of the 7.51% TE Products
Senior Notes outstanding at March 31, 2004, and including the effects of
hedging activities, assuming market interest rates increase 100 basis points,
the potential annual increase in interest expense is $2.1 million. We have entered into an interest rate swap agreement to hedge our exposure
to increases in the benchmark interest rate underlying our variable rate
revolving credit facility. This interest rate swap matured on April 6, 2004.
We designated this swap agreement, which hedged exposure to variability in
expected future cash flows attributed to changes in interest rates, as a cash
flow hedge. The swap agreement was based on a notional amount of $250.0
million. Under the swap agreement, we paid a fixed rate of interest of 6.955%
and received a floating rate based on a three-month U.S. Dollar LIBOR rate.
Since this swap was designated as a cash flow hedge, the changes in fair value,
to the extent the swap is effective, were recognized in other comprehensive
income until the hedged interest costs were recognized in earnings. On June
27, 2003, we repaid the amounts outstanding under our revolving credit facility
with borrowings under a new three year revolving credit facility and canceled
the old facility (see Note 7. Debt). We redesignated this interest rate swap
as a hedge of our exposure to increases in the benchmark interest rate
underlying the new variable rate revolving credit facility. During the
three months ended March 31, 2004 and 2003, we recognized increases in interest
expense of $2.7 million and $3.4 million, respectively, related to the
difference between the fixed rate and the floating rate of interest on the
interest rate swap. 45




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During 2003, we determined that we would repay a portion of the amount
outstanding under the revolving credit facility with proceeds from our Unit
offering in August 2003 (see Note 8. Partners Capital and Distributions)
resulting in a reduction of probable future interest payments under the credit
facility. We reduced the outstanding balance of the revolving credit facility
at December 31, 2003, to $210.0 million. In the first quarter of 2004, we
borrowed an additional amount under the revolving credit facility, and at March
31, 2004, the outstanding balance of the revolving credit facility was $226.5
million. As a result of the determination of repayments and borrowings under
the revolving credit facility, we measured and reclassified amounts previously
accumulated in other comprehensive income related to the discontinued portion
of the hedge and recognized a gain of $0.2 million during first quarter of
2004, which has been included in interest expense. The total fair value of the
interest rate swap was a loss of approximately $0.2 million at March 31, 2004,
and a loss of approximately $3.9 million at December 31, 2003. The remaining
$0.2 million of accumulated other comprehensive loss at March 31, 2004, will be
transferred into earnings in April 2004. On February 20, 2002, we entered into interest rate swap agreements,
designated as fair value hedges, to hedge our exposure to changes in the fair
value of our fixed rate 7.625% Senior Notes due 2012. The swap agreements had
a combined notional amount of $500.0 million and matured in 2012 to match the
principal and maturity of the Senior Notes. Under the swap agreements, we paid
a floating rate of interest based on a U.S. Dollar LIBOR rate, plus a spread,
and received a fixed rate of interest of 7.625%. On July 16, 2002, the swap
agreements were terminated resulting in a gain of approximately $18.0 million.
Concurrent with the swap terminations, we entered into new interest rate swap
agreements, with identical terms as the previous swap agreements; however, the
floating rate of interest was based upon a spread of an additional 50 basis
points. In December 2002, the swap agreements entered into on July 16, 2002,
were terminated, resulting in a gain of approximately $26.9 million. The gains
realized from the July 2002 and December 2002 swap terminations have been
deferred as adjustments to the carrying value of the Senior Notes and are being
amortized using the effective interest method as reductions to future interest
expense over the remaining term of the Senior Notes. At March 31, 2004, the
unamortized balance of the deferred gains was $39.6 million. In the event of
early extinguishment of the Senior Notes, any remaining unamortized gains would
be recognized in the consolidated statement of income at the time of
extinguishment. 
 Item 4. Controls and Procedures The principal executive officer and principal financial officer of our
General Partner, after evaluating the effectiveness of our disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
March 31, 2004, have concluded that, as of such date, our disclosure controls
and procedures are adequate and effective to ensure that material information
relating to us and our consolidated subsidiaries would be made known to them by
others within those entities. During the first quarter of 2004, there have been no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, those internal controls subsequent to
the date of the evaluation. As a result, no corrective actions were required
or undertaken. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings We have been, in the ordinary course of business, a defendant in various
lawsuits and a party to various other legal proceedings, some of which are
covered in whole or in part by insurance. We believe that the outcome of these
lawsuits and other proceedings will not individually or in the aggregate have a
material adverse effect on our consolidated financial position, results of
operations or cash flows. See discussion of legal proceedings in Note 11.
Commitments and Contingencies in the accompanying consolidated financial
statements. 46




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Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: ExhibitNumber
    
    Description3.1
    
    Certificate of Limited Partnership of TEPPCO Partners, L.P.
(Filed as Exhibit 3.2 to the Registration Statement of TEPPCO
Partners, L.P. (Commission File No. 33-32203) and incorporated
herein by reference).3.2
    
    Third Amended and Restated Agreement of Limited Partnership
of TEPPCO Partners, L.P., dated September 21, 2001 (Filed as Exhibit
3.7 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 2001 and incorporated
herein by reference).4.1
    
    Form of Certificate representing Limited Partner Units (Filed
as Exhibit 4.1 to the Registration Statement of TEPPCO Partners,
L.P. (Commission File No. 33-32203) and incorporated herein by
reference).4.2
    
    Form of Indenture between TE Products Pipeline Company,
Limited Partnership and The Bank of New York, as Trustee, dated as
of January 27, 1998 (Filed as Exhibit 4.3 to TE Products Pipeline
Company, Limited Partnerships Registration Statement on Form S-3
(Commission File No. 333-38473) and incorporated herein by
reference).4.3
    
    Form of Certificate representing Class B Units (Filed as
Exhibit 4.3 to Form 10-K of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the year ended December 31, 1998 and incorporated
herein by reference).4.4
    
    Form of Indenture between TEPPCO Partners, L.P., as issuer,
TE Products Pipeline Company, Limited Partnership, TCTM, L.P.,
TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company, as
subsidiary guarantors, and First Union National Bank, NA, as
trustee, dated as of February 20, 2002 (Filed as Exhibit 99.2 to
Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
dated as of February 20, 2002 and incorporated herein by reference).4.5
    
    First Supplemental Indenture between TEPPCO Partners, L.P.,
as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,
L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering
Company, as subsidiary guarantors, and First Union National Bank,
NA, as trustee, dated as of February 20, 2002 (Filed as Exhibit 99.3
to Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
dated as of February 20, 2002 and incorporated herein by reference).4.6
    
    Second Supplemental Indenture, dated as of June 27, 2002,
among TEPPCO Partners, L.P., as issuer, TE Products Pipeline
Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream
Companies, L.P., and Jonah Gas Gathering Company, as Initial
Subsidiary Guarantors, and Val Verde Gas Gathering Company, L.P., as
New Subsidiary Guarantor, and Wachovia Bank, National Association,
formerly known as First Union National Bank, as trustee (Filed as
Exhibit 4.6 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended June 30, 2002 and incorporated
herein by reference).4.7
    
    Third Supplemental Indenture among TEPPCO Partners, L.P. as
issuer, TE Products Pipeline Company, Limited Partnership, TCTM,
L.P., TEPPCO Midstream Companies, L.P., Jonah Gas Gathering Company
and Val Verde Gas Gathering Company, L.P. as
Subsidiary Guarantors, and Wachovia Bank, National
Association, as trustee, dated as of January 30, 2003 (Filed
as Exhibit 4.7 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31,
2002 and incorporated herein by reference).10.1+
    
    Duke Energy Corporation Executive Savings Plan (Filed as
Exhibit 10.7 to Form 10-K of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the year ended December 31, 1999 and incorporated
herein by reference).
 47




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##### Table of Contents



ExhibitNumber
    
    Description10.2+
    
    
    Duke Energy Corporation Executive Cash Balance Plan (Filed
as Exhibit 10.8 to Form 10-K of TEPPCO Partners, L.P. (Commission
File No. 1-10403) for the year ended December 31, 1999 and
incorporated herein by reference).10.3+
    
    
    Duke Energy Corporation Retirement Benefit Equalization Plan
(Filed as Exhibit 10.9 to Form 10-K for TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31, 1999
and incorporated herein by reference).10.4+
    
    
    Texas Eastern Products Pipeline Company 1994 Long Term
Incentive Plan executed on March 8, 1994 (Filed as Exhibit 10.1 to
Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for
the quarter ended March 31, 1994 and incorporated herein by
reference).10.5+
    
    
    Texas Eastern Products Pipeline Company 1994 Long Term
Incentive Plan, Amendment 1, effective January 16, 1995 (Filed as
Exhibit 10.12 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended June 30, 1999 and incorporated
herein by reference).10.6+
    
    
    Form of Employment Agreement between the Company and Thomas
R. Harper, Charles H. Leonard, James C. Ruth, John N. Goodpasture,
Leonard W. Mallett, Stephen W. Russell, David E. Owen, and Barbara
A. Carroll (Filed as Exhibit 10.20 to Form 10-K of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the year ended December 31,
1998 and incorporated herein by reference).10.7
    
    
    Services and Transportation Agreement between TE Products
Pipeline Company, Limited Partnership and Fina Oil and Chemical
Company, BASF Corporation and BASF Fina Petrochemical Limited
Partnership, dated February 9, 1999 (Filed as Exhibit 10.22 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 1999 and incorporated herein by reference).10.8
    
    
    Call Option Agreement, dated February 9, 1999 (Filed as
Exhibit 10.23 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended March 31, 1999 and incorporated
herein by reference).10.9+
    
    
    Texas Eastern Products Pipeline Company Retention Incentive
Compensation Plan, effective January 1, 1999 (Filed as Exhibit 10.24
to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended March 31, 1999 and incorporated herein by
reference).10.10+
    
    
    Form of Employment and Non-Compete Agreement between the Company
and J. Michael Cockrell effective January 1, 1999 (Filed as Exhibit
10.29 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 1999 and incorporated
herein by reference).10.11+
    
    
    Texas Eastern Products Pipeline Company Non-employee Directors
Unit Accumulation Plan, effective April 1, 1999 (Filed as Exhibit
10.30 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 1999 and incorporated
herein by reference).10.12+
    
    
    Texas Eastern Products Pipeline Company Non-employee Directors
Deferred Compensation Plan, effective November 1, 1999 (Filed as
Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended September 30, 1999 and
incorporated herein by reference).10.13+
    
    
    Texas Eastern Products Pipeline Company Phantom Unit Retention
Plan, effective August 25, 1999 (Filed as Exhibit 10.32 to Form 10-Q
of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the quarter ended September
30, 1999 and incorporated herein by reference).10.14+
    
    
    Texas Eastern Products Pipeline Company, LLC 2000 Long Term
Incentive Plan, Amendment and Restatement, effective January 1, 2000
(Filed as Exhibit 10.28 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31, 2000
and incorporated herein by reference).10.15+
    
    
    TEPPCO Supplemental Benefit Plan, effective April 1, 2000 (Filed
as Exhibit 10.29 to Form 10-K of TEPPCO Partners, L.P. (Commission
File No. 1-10403) for the year ended December 31, 2000 and
incorporated herein by reference).
 48




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##### Table of Contents



ExhibitNumber
    
    Description10.16+
    
    
    Employment Agreement with Barry R. Pearl (Filed as Exhibit 10.30
to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended March 31, 2001 and incorporated herein by
reference).10.17
    
    
    Amended and Restated Credit Agreement among TEPPCO Partners,
L.P. as Borrower, SunTrust Bank as Administrative Agent and LC
Issuing Bank, and Certain Lenders, dated as of April 6, 2001
($500,000,000 Revolving Facility) (Filed as Exhibit 10.31 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 2001 and incorporated herein by reference).10.18
    
    
    Credit Agreement among TEPPCO Partners, L.P. as Borrower,
SunTrust Bank as Administrative Agent, and Certain Lenders, dated as
of April 6, 2001 ($200,000,000 Revolving Facility) (Filed as Exhibit
10.32 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended March 31, 2001 and incorporated
herein by reference).10.19
    
    
    Amendment 1, dated as of September 28, 2001, to the Amended
and Restated Credit Agreement among TEPPCO Partners, L.P. as
Borrower, SunTrust Bank as Administrative Agent and LC Issuing Bank,
and Certain Lenders, dated as of April 6, 2001 ($500,000,000
Revolving Facility) (Filed as Exhibit 10.33 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the quarter ended
September 30, 2001 and incorporated herein by reference).10.20
    
    
    Amendment 1, dated as of September 28, 2001, to the Credit
Agreement among TEPPCO Partners, L.P. as Borrower, SunTrust Bank as
Administrative Agent, and Certain Lenders, dated as of April 6, 2001
($200,000,000 Revolving Facility) (Filed as Exhibit 10.34 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended September 30, 2001 and incorporated herein by
reference).10.21
    
    
    Amendment and Restatement, dated as of November 13, 2001, to
the Credit Agreement among TEPPCO Partners, L.P. as Borrower,
SunTrust Bank as Administrative Agent, and Certain Lenders, dated as
of April 6, 2001 ($200,000,000 Revolving Facility) (Filed as Exhibit
10.35 to Form 10-K of TEPPCO Partners, L.P (Commission File No.
1-10403) for the year ended December 31, 2001 and incorporated
herein by reference).10.22
    
    
    Second Amendment and Restatement, dated as of November 13,
2001, to the Amended and Restated Credit Agreement amount TEPPCO
Partners, L.P. as Borrower, SunTrust Bank as Administrative Agent
and LC Issuing Bank, and Certain Lenders, dated as of April 6, 2001
($500,000,000 Revolving Facility) (Filed as Exhibit 10.36 to Form
10-K of TEPPCO Partners, L.P (Commission File No. 1-10403) for the
year ended December 31, 2001 and incorporated herein by reference).10.23
    
    
    Second Amended and Restated Agreement of Limited Partnership
of TE Products Pipeline Company, Limited Partnership, dated
September 21, 2001 (Filed as Exhibit 3.8 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the quarter ended
September 30, 2001 and incorporated herein by reference).10.24
    
    
    Amended and Restated Agreement of Limited Partnership of
TCTM, L.P., dated September 21, 2001 (Filed as Exhibit 3.9 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended September 30, 2001 and incorporated herein by
reference).10.25
    
    
    Contribution, Assignment and Amendment Agreement among
TEPPCO Partners, L.P., TE Products Pipeline Company, Limited
Partnership, TCTM, L.P., Texas Eastern Products Pipeline Company,
LLC, and TEPPCO GP, Inc., dated July 26, 2001 (Filed as Exhibit 3.6
to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended June 30, 2001 and incorporated herein by
reference).10.26
    
    
    Certificate of Formation of TEPPCO Colorado, LLC (Filed as
Exhibit 3.2 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended March 31, 1998 and incorporated
herein by reference).10.27
    
    
    Agreement of Limited Partnership of TEPPCO Midstream
Companies, L.P., dated September 24, 2001 (Filed as Exhibit 3.10 to
Form 10-Q of TEPPCO Partners, L.P.
 49




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##### Table of Contents



ExhibitNumber
    
    Description(Commission File No. 1-10403) for
the quarter ended September 30, 2001 and incorporated herein by
reference).10.28
    
    
    Agreement of Partnership of Jonah Gas Gathering Company
dated June 20, 1996 as amended by that certain Assignment of
Partnership Interests dated September 28, 2001 (Filed as Exhibit
10.40 to Form 10-K of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the year ended December 31, 2001 and incorporated
herein by reference).10.29
    
    
    Unanimous Written Consent of the Board of Directors of
TEPPCO GP, Inc. dated February 13, 2002 (Filed as Exhibit 10.41 to
Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for
the year ended December 31, 2001 and incorporated herein by
reference).10.30
    
    
    Credit Agreement among TEPPCO Partners, L.P. as Borrower,
SunTrust Bank as Administrative Agent and Certain Lenders, as
Lenders dated as of March 28, 2002 ($200,000,000 Revolving Credit
Facility) (Filed as Exhibit 10.44 to Form 10-Q of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the three months ended March
31, 2002 and incorporated herein by reference).10.31
    
    
    Amended and Restated Credit Agreement among TEPPCO Partners,
L.P. as Borrower, SunTrust Bank, as Administrative Agent and LC
Issuing Bank and Certain Lenders, as Lenders dated as of March 28,
2002 ($500,000,000 Revolving Facility) (Filed as Exhibit 10.45 to
Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for
the three months ended March 31, 2002 and incorporated herein by
reference).10.32
    
    
    Purchase and Sale Agreement between Burlington Resources
Gathering Inc. as Seller and TEPPCO Partners, L.P., as Buyer, dated
May 24, 2002 (Filed as Exhibit 99.1 to Form 8-K of TEPPCO Partners,
L.P. (Commission File No. 1-10403) dated as of July 2, 2002 and
incorporated herein by reference).10.33
    
    
    Credit Agreement among TEPPCO Partners, L.P., as Borrower,
SunTrust Bank, as Administrative Agent and Certain Lenders, as
Lenders dated as of June 27, 2002 ($200,000,000 Term Facility)
(Filed as Exhibit 99.2 to Form 8-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) dated as of July 2, 2002 and
incorporated herein by reference).10.34
    
    
    Amendment, dated as of June 27, 2002 to the Amended and
Restated Credit Agreement among TEPPCO Partners, L.P., as Borrower,
SunTrust Bank, as Administrative Agent, and Certain Lenders, dated
as of March 28, 2002 ($500,000,000 Revolving Credit Facility) (Filed
as Exhibit 99.3 to Form 8-K of TEPPCO Partners, L.P. (Commission
File No. 1-10403) dated as of July 2, 2002 and incorporated herein
by reference).10.35
    
    
    Amendment 1, dated as of June 27, 2002 to the Credit
Agreement among TEPPCO Partners, L.P., as Borrower, SunTrust Bank,
as Administrative Agent and Certain Lenders, dated as of March 28,
2002 ($200,000,000 Revolving Credit Facility) (Filed as Exhibit 99.4
to Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
dated as of July 2, 2002 and incorporated herein by reference).10.36
    
    
    Agreement of Limited Partnership of Val Verde Gas Gathering
Company, L.P., dated May 29, 2002 (Filed as Exhibit 10.48 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended June 30, 2002 and incorporated herein by reference).10.37+
    
    
    Texas Eastern Products Pipeline Company, LLC 2002 Phantom Unit
Retention Plan, effective June 1, 2002 (Filed as Exhibit 10.43 to
Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for
the quarter ended June 30, 2002 and incorporated herein by
reference).10.38+
    
    
    Amended and Restated TEPPCO Supplemental Benefit Plan, effective
November 1, 2002 (Filed as Exhibit 10.44 to Form 10-K of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the year ended
December 31, 2002 and incorporated herein by reference).10.39+
    
    
    Texas Eastern Products Pipeline Company, LLC 2000 Long Term
Incentive Plan, Second Amendment and Restatement, effective January
1, 2003 (Filed as Exhibit 10.45 to Form 10-K of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the year ended December 31,
2002 and incorporated herein by reference).
 50




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##### Table of Contents



ExhibitNumber
    
    Description10.40+
    
    
    Amended and Restated Texas Eastern Products Pipeline Company, LLC
Management Incentive Compensation Plan, effective January 1, 2003
(Filed as Exhibit 10.46 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31, 2002
and incorporated herein by reference).10.41+
    
    
    Amended and Restated TEPPCO Retirement Cash Balance Plan,
effective January 1, 2002 (Filed as Exhibit 10.47 to Form 10-K of
TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year
ended December 31, 2002 and incorporated herein by reference).10.42
    
    
    Formation Agreement between Panhandle Eastern Pipe Line
Company and Marathon Ashland Petroleum LLC and TE Products Pipeline
Company, Limited Partnership, dated as of August 10, 2000 (Filed as
Exhibit 10.48 to Form 10-K of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the year ended December 31, 2002 and incorporated
herein by reference).10.43
    
    
    Amended and Restated Limited Liability Company Agreement of
Centennial Pipeline LLC dated as of August 10, 2000 (Filed as
Exhibit 10.49 to Form 10-K of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the year ended December 31, 2002 and incorporated
herein by reference).10.44
    
    
    Guaranty Agreement, dated as of September 27, 2002, between
TE Products Pipeline Company, Limited Partnership and Marathon
Ashland Petroleum LLC for Note Agreements of Centennial Pipeline LLC
(Filed as Exhibit 10.50 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31, 2002
and incorporated herein by reference).10.45
    
    
    LLC Membership Interest Purchase Agreement By and Between
CMS Panhandle Holdings, LLC, As Seller and Marathon Ashland
Petroleum LLC and TE Products Pipeline Company, Limited Partnership,
Severally as Buyers, dated February 10, 2003 (Filed as Exhibit 10.51
to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the year ended December 31, 2002 and incorporated herein by
reference).10.46
    
    
    Joint Development Agreement between TE Products Pipeline
Company, Limited Partnership and Louis Dreyfus Plastics Corporation
dated February 10, 2000 (Filed as Exhibit 10.52 to Form 10-Q of
TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter
ended March 31, 2003 and incorporated herein by reference).10.47
    
    
    Credit Agreement among TEPPCO Partners, L.P. as Borrower,
SunTrust Bank as Administrative Agent and LC Issuing Bank and The
Lenders Party Hereto, as Lenders, dated as of June 27, 2003
($550,000,000 Revolving Facility) (Filed as Exhibit 10.52 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended June 30, 2003 and incorporated herein by reference).10.48
    
    
    Agreement of Limited Partnership of Mont Belvieu Storage
Partners, L.P. dated effective January 21, 2003 (Filed as Exhibit
10.53 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 2003 and incorporated
herein by reference).10.49
    
    
    Letter of Agreement Clarifying Rights and Obligations of the
Parties Under the Mont Belvieu Storage Partners, L.P., Partnership
Agreement and the Mont Belvieu Venture,
LLC, LLC Agreement, dated October 13, 2003 (Filed as Exhibit
10.54 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended September 30, 2003 and
incorporated herein by reference).12.1*
    
    
    Statement of Computation of Ratio of Earnings to Fixed
      Charges.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.
 51




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##### Table of Contents



*
    
    Filed herewith.**
    
    Furnished herewith pursuant to Item 601(b)-(32) of
Regulation S-K.+
    
    A management contract or compensation plan or arrangement.(b)
    Reports on Form 8-K filed with or furnished to the Securities
and Exchange Commission during the quarter ended March 31, 2004: A current report on Form 8-K was furnished on February 12,
2004, in connection with disclosure of fourth quarter
estimates and 2003 annual results. A current report on Form 8-K was furnished on February 18,
2004, in connection with a presentation to analysts and
investors. A current report on Form 8-K was filed on March 2, 2004, in
connection with a presentation at an industry conference. A current report on Form 8-K was filed on March 24, 2004, in
connection with a presentation at an industry conference. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. TEPPCO Partners,
L.P.(Registrant)(A Delaware Limited Partnership)By:
    
    Texas Eastern Products PipelineCompany, LLC, as General PartnerBy:
    
    /s/ BARRY R. PEARLBarry R. Pearl,President and Chief Executive OfficerBy:
    
    /s/ CHARLES H. LEONARDCharles H. Leonard,Senior Vice President and ChiefFinancial Officer
 Date: April 28, 2004 52




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##### Table of Contents



Exhibit Index Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: ExhibitNumber
    
    Description3.1
    
    Certificate of Limited Partnership of TEPPCO Partners, L.P.
(Filed as Exhibit 3.2 to the Registration Statement of TEPPCO
Partners, L.P. (Commission File No. 33-32203) and incorporated
herein by reference).3.2
    
    Third Amended and Restated Agreement of Limited Partnership
of TEPPCO Partners, L.P., dated September 21, 2001 (Filed as Exhibit
3.7 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 2001 and incorporated
herein by reference).4.1
    
    Form of Certificate representing Limited Partner Units (Filed
as Exhibit 4.1 to the Registration Statement of TEPPCO Partners,
L.P. (Commission File No. 33-32203) and incorporated herein by
reference).4.2
    
    Form of Indenture between TE Products Pipeline Company,
Limited Partnership and The Bank of New York, as Trustee, dated as
of January 27, 1998 (Filed as Exhibit 4.3 to TE Products Pipeline
Company, Limited Partnerships Registration Statement on Form S-3
(Commission File No. 333-38473) and incorporated herein by
reference).4.3
    
    Form of Certificate representing Class B Units (Filed as
Exhibit 4.3 to Form 10-K of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the year ended December 31, 1998 and incorporated
herein by reference).4.4
    
    Form of Indenture between TEPPCO Partners, L.P., as issuer,
TE Products Pipeline Company, Limited Partnership, TCTM, L.P.,
TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company, as
subsidiary guarantors, and First Union National Bank, NA, as
trustee, dated as of February 20, 2002 (Filed as Exhibit 99.2 to
Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
dated as of February 20, 2002 and incorporated herein by reference).4.5
    
    First Supplemental Indenture between TEPPCO Partners, L.P.,
as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,
L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering
Company, as subsidiary guarantors, and First Union National Bank,
NA, as trustee, dated as of February 20, 2002 (Filed as Exhibit 99.3
to Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
dated as of February 20, 2002 and incorporated herein by reference).4.6
    
    Second Supplemental Indenture, dated as of June 27, 2002,
among TEPPCO Partners, L.P., as issuer, TE Products Pipeline
Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream
Companies, L.P., and Jonah Gas Gathering Company, as Initial
Subsidiary Guarantors, and Val Verde Gas Gathering Company, L.P., as
New Subsidiary Guarantor, and Wachovia Bank, National Association,
formerly known as First Union National Bank, as trustee (Filed as
Exhibit 4.6 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended June 30, 2002 and incorporated
herein by reference).4.7
    
    Third Supplemental Indenture among TEPPCO Partners, L.P. as
issuer, TE Products Pipeline Company, Limited Partnership, TCTM,
L.P., TEPPCO Midstream Companies, L.P., Jonah Gas Gathering Company
and Val Verde Gas Gathering Company, L.P. as
Subsidiary Guarantors, and Wachovia Bank, National
Association, as trustee, dated as of January 30, 2003 (Filed
as Exhibit 4.7 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31,
2002 and incorporated herein by reference).10.1+
    
    Duke Energy Corporation Executive Savings Plan (Filed as
Exhibit 10.7 to Form 10-K of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the year ended December 31, 1999 and incorporated
herein by reference).
 47




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##### Table of Contents



ExhibitNumber
    
    Description10.2+
    
    
    Duke Energy Corporation Executive Cash Balance Plan (Filed
as Exhibit 10.8 to Form 10-K of TEPPCO Partners, L.P. (Commission
File No. 1-10403) for the year ended December 31, 1999 and
incorporated herein by reference).10.3+
    
    
    Duke Energy Corporation Retirement Benefit Equalization Plan
(Filed as Exhibit 10.9 to Form 10-K for TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31, 1999
and incorporated herein by reference).10.4+
    
    
    Texas Eastern Products Pipeline Company 1994 Long Term
Incentive Plan executed on March 8, 1994 (Filed as Exhibit 10.1 to
Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for
the quarter ended March 31, 1994 and incorporated herein by
reference).10.5+
    
    
    Texas Eastern Products Pipeline Company 1994 Long Term
Incentive Plan, Amendment 1, effective January 16, 1995 (Filed as
Exhibit 10.12 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended June 30, 1999 and incorporated
herein by reference).10.6+
    
    
    Form of Employment Agreement between the Company and Thomas
R. Harper, Charles H. Leonard, James C. Ruth, John N. Goodpasture,
Leonard W. Mallett, Stephen W. Russell, David E. Owen, and Barbara
A. Carroll (Filed as Exhibit 10.20 to Form 10-K of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the year ended December 31,
1998 and incorporated herein by reference).10.7
    
    
    Services and Transportation Agreement between TE Products
Pipeline Company, Limited Partnership and Fina Oil and Chemical
Company, BASF Corporation and BASF Fina Petrochemical Limited
Partnership, dated February 9, 1999 (Filed as Exhibit 10.22 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 1999 and incorporated herein by reference).10.8
    
    
    Call Option Agreement, dated February 9, 1999 (Filed as
Exhibit 10.23 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended March 31, 1999 and incorporated
herein by reference).10.9+
    
    
    Texas Eastern Products Pipeline Company Retention Incentive
Compensation Plan, effective January 1, 1999 (Filed as Exhibit 10.24
to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended March 31, 1999 and incorporated herein by
reference).10.10+
    
    
    Form of Employment and Non-Compete Agreement between the Company
and J. Michael Cockrell effective January 1, 1999 (Filed as Exhibit
10.29 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 1999 and incorporated
herein by reference).10.11+
    
    
    Texas Eastern Products Pipeline Company Non-employee Directors
Unit Accumulation Plan, effective April 1, 1999 (Filed as Exhibit
10.30 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 1999 and incorporated
herein by reference).10.12+
    
    
    Texas Eastern Products Pipeline Company Non-employee Directors
Deferred Compensation Plan, effective November 1, 1999 (Filed as
Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended September 30, 1999 and
incorporated herein by reference).10.13+
    
    
    Texas Eastern Products Pipeline Company Phantom Unit Retention
Plan, effective August 25, 1999 (Filed as Exhibit 10.32 to Form 10-Q
of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the quarter ended September
30, 1999 and incorporated herein by reference).10.14+
    
    
    Texas Eastern Products Pipeline Company, LLC 2000 Long Term
Incentive Plan, Amendment and Restatement, effective January 1, 2000
(Filed as Exhibit 10.28 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31, 2000
and incorporated herein by reference).10.15+
    
    
    TEPPCO Supplemental Benefit Plan, effective April 1, 2000 (Filed
as Exhibit 10.29 to Form 10-K of TEPPCO Partners, L.P. (Commission
File No. 1-10403) for the year ended December 31, 2000 and
incorporated herein by reference).
 48




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##### Table of Contents



ExhibitNumber
    
    Description10.16+
    
    
    Employment Agreement with Barry R. Pearl (Filed as Exhibit 10.30
to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended March 31, 2001 and incorporated herein by
reference).10.17
    
    
    Amended and Restated Credit Agreement among TEPPCO Partners,
L.P. as Borrower, SunTrust Bank as Administrative Agent and LC
Issuing Bank, and Certain Lenders, dated as of April 6, 2001
($500,000,000 Revolving Facility) (Filed as Exhibit 10.31 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended March 31, 2001 and incorporated herein by reference).10.18
    
    
    Credit Agreement among TEPPCO Partners, L.P. as Borrower,
SunTrust Bank as Administrative Agent, and Certain Lenders, dated as
of April 6, 2001 ($200,000,000 Revolving Facility) (Filed as Exhibit
10.32 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended March 31, 2001 and incorporated
herein by reference).10.19
    
    
    Amendment 1, dated as of September 28, 2001, to the Amended
and Restated Credit Agreement among TEPPCO Partners, L.P. as
Borrower, SunTrust Bank as Administrative Agent and LC Issuing Bank,
and Certain Lenders, dated as of April 6, 2001 ($500,000,000
Revolving Facility) (Filed as Exhibit 10.33 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the quarter ended
September 30, 2001 and incorporated herein by reference).10.20
    
    
    Amendment 1, dated as of September 28, 2001, to the Credit
Agreement among TEPPCO Partners, L.P. as Borrower, SunTrust Bank as
Administrative Agent, and Certain Lenders, dated as of April 6, 2001
($200,000,000 Revolving Facility) (Filed as Exhibit 10.34 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended September 30, 2001 and incorporated herein by
reference).10.21
    
    
    Amendment and Restatement, dated as of November 13, 2001, to
the Credit Agreement among TEPPCO Partners, L.P. as Borrower,
SunTrust Bank as Administrative Agent, and Certain Lenders, dated as
of April 6, 2001 ($200,000,000 Revolving Facility) (Filed as Exhibit
10.35 to Form 10-K of TEPPCO Partners, L.P (Commission File No.
1-10403) for the year ended December 31, 2001 and incorporated
herein by reference).10.22
    
    
    Second Amendment and Restatement, dated as of November 13,
2001, to the Amended and Restated Credit Agreement amount TEPPCO
Partners, L.P. as Borrower, SunTrust Bank as Administrative Agent
and LC Issuing Bank, and Certain Lenders, dated as of April 6, 2001
($500,000,000 Revolving Facility) (Filed as Exhibit 10.36 to Form
10-K of TEPPCO Partners, L.P (Commission File No. 1-10403) for the
year ended December 31, 2001 and incorporated herein by reference).10.23
    
    
    Second Amended and Restated Agreement of Limited Partnership
of TE Products Pipeline Company, Limited Partnership, dated
September 21, 2001 (Filed as Exhibit 3.8 to Form 10-Q of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the quarter ended
September 30, 2001 and incorporated herein by reference).10.24
    
    
    Amended and Restated Agreement of Limited Partnership of
TCTM, L.P., dated September 21, 2001 (Filed as Exhibit 3.9 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended September 30, 2001 and incorporated herein by
reference).10.25
    
    
    Contribution, Assignment and Amendment Agreement among
TEPPCO Partners, L.P., TE Products Pipeline Company, Limited
Partnership, TCTM, L.P., Texas Eastern Products Pipeline Company,
LLC, and TEPPCO GP, Inc., dated July 26, 2001 (Filed as Exhibit 3.6
to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended June 30, 2001 and incorporated herein by
reference).10.26
    
    
    Certificate of Formation of TEPPCO Colorado, LLC (Filed as
Exhibit 3.2 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended March 31, 1998 and incorporated
herein by reference).10.27
    
    
    Agreement of Limited Partnership of TEPPCO Midstream
Companies, L.P., dated September 24, 2001 (Filed as Exhibit 3.10 to
Form 10-Q of TEPPCO Partners, L.P.
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##### Table of Contents



ExhibitNumber
    
    Description(Commission File No. 1-10403) for
the quarter ended September 30, 2001 and incorporated herein by
reference).10.28
    
    
    Agreement of Partnership of Jonah Gas Gathering Company
dated June 20, 1996 as amended by that certain Assignment of
Partnership Interests dated September 28, 2001 (Filed as Exhibit
10.40 to Form 10-K of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the year ended December 31, 2001 and incorporated
herein by reference).10.29
    
    
    Unanimous Written Consent of the Board of Directors of
TEPPCO GP, Inc. dated February 13, 2002 (Filed as Exhibit 10.41 to
Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for
the year ended December 31, 2001 and incorporated herein by
reference).10.30
    
    
    Credit Agreement among TEPPCO Partners, L.P. as Borrower,
SunTrust Bank as Administrative Agent and Certain Lenders, as
Lenders dated as of March 28, 2002 ($200,000,000 Revolving Credit
Facility) (Filed as Exhibit 10.44 to Form 10-Q of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the three months ended March
31, 2002 and incorporated herein by reference).10.31
    
    
    Amended and Restated Credit Agreement among TEPPCO Partners,
L.P. as Borrower, SunTrust Bank, as Administrative Agent and LC
Issuing Bank and Certain Lenders, as Lenders dated as of March 28,
2002 ($500,000,000 Revolving Facility) (Filed as Exhibit 10.45 to
Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for
the three months ended March 31, 2002 and incorporated herein by
reference).10.32
    
    
    Purchase and Sale Agreement between Burlington Resources
Gathering Inc. as Seller and TEPPCO Partners, L.P., as Buyer, dated
May 24, 2002 (Filed as Exhibit 99.1 to Form 8-K of TEPPCO Partners,
L.P. (Commission File No. 1-10403) dated as of July 2, 2002 and
incorporated herein by reference).10.33
    
    
    Credit Agreement among TEPPCO Partners, L.P., as Borrower,
SunTrust Bank, as Administrative Agent and Certain Lenders, as
Lenders dated as of June 27, 2002 ($200,000,000 Term Facility)
(Filed as Exhibit 99.2 to Form 8-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) dated as of July 2, 2002 and
incorporated herein by reference).10.34
    
    
    Amendment, dated as of June 27, 2002 to the Amended and
Restated Credit Agreement among TEPPCO Partners, L.P., as Borrower,
SunTrust Bank, as Administrative Agent, and Certain Lenders, dated
as of March 28, 2002 ($500,000,000 Revolving Credit Facility) (Filed
as Exhibit 99.3 to Form 8-K of TEPPCO Partners, L.P. (Commission
File No. 1-10403) dated as of July 2, 2002 and incorporated herein
by reference).10.35
    
    
    Amendment 1, dated as of June 27, 2002 to the Credit
Agreement among TEPPCO Partners, L.P., as Borrower, SunTrust Bank,
as Administrative Agent and Certain Lenders, dated as of March 28,
2002 ($200,000,000 Revolving Credit Facility) (Filed as Exhibit 99.4
to Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
dated as of July 2, 2002 and incorporated herein by reference).10.36
    
    
    Agreement of Limited Partnership of Val Verde Gas Gathering
Company, L.P., dated May 29, 2002 (Filed as Exhibit 10.48 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended June 30, 2002 and incorporated herein by reference).10.37+
    
    
    Texas Eastern Products Pipeline Company, LLC 2002 Phantom Unit
Retention Plan, effective June 1, 2002 (Filed as Exhibit 10.43 to
Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for
the quarter ended June 30, 2002 and incorporated herein by
reference).10.38+
    
    
    Amended and Restated TEPPCO Supplemental Benefit Plan, effective
November 1, 2002 (Filed as Exhibit 10.44 to Form 10-K of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the year ended
December 31, 2002 and incorporated herein by reference).10.39+
    
    
    Texas Eastern Products Pipeline Company, LLC 2000 Long Term
Incentive Plan, Second Amendment and Restatement, effective January
1, 2003 (Filed as Exhibit 10.45 to Form 10-K of TEPPCO Partners,
L.P. (Commission File No. 1-10403) for the year ended December 31,
2002 and incorporated herein by reference).
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##### Table of Contents



ExhibitNumber
    
    Description10.40+
    
    
    Amended and Restated Texas Eastern Products Pipeline Company, LLC
Management Incentive Compensation Plan, effective January 1, 2003
(Filed as Exhibit 10.46 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31, 2002
and incorporated herein by reference).10.41+
    
    
    Amended and Restated TEPPCO Retirement Cash Balance Plan,
effective January 1, 2002 (Filed as Exhibit 10.47 to Form 10-K of
TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year
ended December 31, 2002 and incorporated herein by reference).10.42
    
    
    Formation Agreement between Panhandle Eastern Pipe Line
Company and Marathon Ashland Petroleum LLC and TE Products Pipeline
Company, Limited Partnership, dated as of August 10, 2000 (Filed as
Exhibit 10.48 to Form 10-K of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the year ended December 31, 2002 and incorporated
herein by reference).10.43
    
    
    Amended and Restated Limited Liability Company Agreement of
Centennial Pipeline LLC dated as of August 10, 2000 (Filed as
Exhibit 10.49 to Form 10-K of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the year ended December 31, 2002 and incorporated
herein by reference).10.44
    
    
    Guaranty Agreement, dated as of September 27, 2002, between
TE Products Pipeline Company, Limited Partnership and Marathon
Ashland Petroleum LLC for Note Agreements of Centennial Pipeline LLC
(Filed as Exhibit 10.50 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31, 2002
and incorporated herein by reference).10.45
    
    
    LLC Membership Interest Purchase Agreement By and Between
CMS Panhandle Holdings, LLC, As Seller and Marathon Ashland
Petroleum LLC and TE Products Pipeline Company, Limited Partnership,
Severally as Buyers, dated February 10, 2003 (Filed as Exhibit 10.51
to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the year ended December 31, 2002 and incorporated herein by
reference).10.46
    
    
    Joint Development Agreement between TE Products Pipeline
Company, Limited Partnership and Louis Dreyfus Plastics Corporation
dated February 10, 2000 (Filed as Exhibit 10.52 to Form 10-Q of
TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter
ended March 31, 2003 and incorporated herein by reference).10.47
    
    
    Credit Agreement among TEPPCO Partners, L.P. as Borrower,
SunTrust Bank as Administrative Agent and LC Issuing Bank and The
Lenders Party Hereto, as Lenders, dated as of June 27, 2003
($550,000,000 Revolving Facility) (Filed as Exhibit 10.52 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the
quarter ended June 30, 2003 and incorporated herein by reference).10.48
    
    
    Agreement of Limited Partnership of Mont Belvieu Storage
Partners, L.P. dated effective January 21, 2003 (Filed as Exhibit
10.53 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the quarter ended September 30, 2003 and incorporated
herein by reference).10.49
    
    
    Letter of Agreement Clarifying Rights and Obligations of the
Parties Under the Mont Belvieu Storage Partners, L.P., Partnership
Agreement and the Mont Belvieu Venture,
LLC, LLC Agreement, dated October 13, 2003 (Filed as Exhibit
10.54 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended September 30, 2003 and
incorporated herein by reference).12.1*
    
    
    Statement of Computation of Ratio of Earnings to Fixed
Charges.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.
 51