**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q/A**

**(AmendmentNo. 1)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended September 30, 2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**CommissionFile No. 1-10403**

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**TEPPCO Partners, L.P.**

(Exact name of Registrantas specified in its charter)

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

 

**1100 Louisiana Street, 13**th Floor

**P.O. Box 2521**

**Houston, Texas 77252-2521**

(Address of principalexecutive offices, including zip code)

**(713) 381-3636**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.Yes x   No o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes x   No o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).Yes o   No x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date. Limited Partner Units outstanding asof October 28, 2005:   69,963,554

 

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****EXPLANATORY NOTE****

****ThisAmended Quarterly Report (“Report”) on Form 10-Q includes restatedfinancial statements as of and for the three months and nine months ended September 30,2005 and 2004. The restated financial statements include the effect of correctingthe accounting for our excess investments in Centennial Pipeline LLC and SeawayCrude Pipeline Company from an intangible asset with an indefinite life andequity method goodwill, respectively, to intangible assets with determinablelives. The restatement caused a $1.3 million, or $0.01 per unit, and $1.1million, or $0.01 per unit, reduction to net income and earnings per unit aspreviously reported for the three months ended September 30, 2005 and2004, respectively. The restatement caused a $3.8 million, or $0.04 per unit,and $2.9 million, or $0.04 per unit, reduction to net income and earnings perunit as previously reported for the nine months ended September 30, 2005and 2004, respectively.****

Forfurther discussion of the effect of the restatement, see Note 15. Restatementof Consolidated Financial Statements in this Report and Note 20. Restatement ofConsolidated Financial Statements in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2005 (“2005 Annual Report”).

**In our 2005 Annual Report, we indicated in the introductoryexplanatory note that the restatement presented in this filing would bereported in our Quarterly Report on Form 10-Q for the quarterlyperiod ended September 30, 2006. We also noted that we did not plan tofile any other amendments to our previously filed Quarterly Reports on Form 10-Qsince we had included restated financial data for the quarterly periods ended March 31,2005 and 2004, June 30, 2005 and 2004, and September 30, 2005 and2004 in our 2005 Annual Report. However, we are amending our Quarterly Reporton Form 10-Q for the period ended September 30, 2005, in orderto provide investors with a more convenient comparative presentation of theeffects of the restatement for the quarterly periods ended September 30,2005 and 2004.**

As a result of therestatement described above, this Report amends the following sections of our Form 10-Qfor the period ended September 30, 2005, which was filed with theSecurities and Exchange Commission on October 31, 2005 (the “InitialReport”):

Part I—Item1. Financial Statements

Part I—Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations

Except as specified with respect to certain aspects ofthe restatement, we have not updated the disclosures contained in this Reportto reflect any events that occurred at a date subsequent to the filing of theInitial Report, and this Report continues to speak as of the date of theInitial Report. This Report does not affect the information originally setforth in the Initial Report that has not been amended as described above. However,we have included the remaining portions of the Initial Report that have notbeen amended herein for ease of reference.

 

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**TEPPCO PARTNERS, L.P.**

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

 

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**PART I.FINANCIAL INFORMATION**

**Item 1. FinancialStatements**

**TEPPCO PARTNERS, L.P.**

**CONSOLIDATED BALANCE SHEETS****(in thousands)**
| ** **                                                                                                           | ** ** | **September 30,  2005**        | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                           | ** ** | **(as restated)  (Unaudited)** | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                           | ** ** |
| Current assets:                                                                                                      |       |                                |       |                        |       |
| Cash and cash equivalents                                                                                            |       | $                                   | 72         |                        | $          | 16,422 |   |
| Accounts receivable, trade (net of allowance for  doubtful accounts of $287 and $112)                                |       | 849,968                             |       | 553,628                     |       |
| Accounts receivable, related parties                                                                                 |       | 5,322                               |       | 11,845                      |       |
| Inventories                                                                                                          |       | 139,005                             |       | 19,521                      |       |
| Other                                                                                                                |       | 63,483                              |       | 42,138                      |       |
| Total current assets                                                                                                 |       | 1,057,850                           |       | 643,554                     |       |
| Property, plant  and equipment, at cost (net of accumulated depreciation and amortization of  $454,787 and $407,670) |       | 1,907,840                           |       | 1,703,702                   |       |
| Equity  investments                                                                                                  |       | 360,375                             |       | 363,307                     |       |
| Intangible  assets                                                                                                   |       | 385,119                             |       | 407,358                     |       |
| Goodwill                                                                                                             |       | 16,944                              |       | 16,944                      |       |
| Other assets                                                                                                         |       | 60,212                              |       | 51,419                      |       |
| Total assets                                                                                                         |       | $                                   | 3,788,340  |                        | $          | 3,186,284 |   |
|                                                                                                                 |       |                                |       |                        |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                           | ** ** |
| Current liabilities:                                                                                                 |       |                                |       |                        |       |
| Accounts payable and accrued liabilities                                                                             |       | $                                   | 851,206    |                        | $          | 564,464 |   |
| Accounts payable, related parties                                                                                    |       | 9,858                               |       | 24,654                      |       |
| Accrued interest                                                                                                     |       | 13,501                              |       | 32,292                      |       |
| Other accrued taxes                                                                                                  |       | 18,736                              |       | 13,309                      |       |
| Other                                                                                                                |       | 71,043                              |       | 46,593                      |       |
| Total current liabilities                                                                                            |       | 964,344                             |       | 681,312                     |       |
| Senior Notes                                                                                                         |       | 1,122,317                           |       | 1,127,226                   |       |
| Other long-term  debt                                                                                                |       | 460,500                             |       | 353,000                     |       |
| Other  liabilities and deferred credits                                                                              |       | 17,494                              |       | 13,643                      |       |
| Commitments and  contingencies                                                                                       |       |                                |       |                        |       |
| Partners’ capital:                                                                                              |       |                                |       |                        |       |
| Accumulated other comprehensive income                                                                               |       | 35                                  |       | —                      |       |
| General partner’s interest                                                                                      |       | (54,880                             | )          | (35,881                     | )          |
| Limited partners’ interests                                                                                     |       | 1,278,530                           |       | 1,046,984                   |       |
| Total partners’ capital                                                                                         |       | 1,223,685                           |       | 1,011,103                   |       |
| Total  liabilities and partners’ capital                                                                        |       | $                                   | 3,788,340  |                        | $          | 3,186,284 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

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**TEPPCO PARTNERS, L.P.**

**CONSOLIDATED STATEMENTS OF INCOME****(Unaudited)****(in thousands, except per Unit amounts)**
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(as restated)**                               | ** ** | **(as restated)**                              | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Operating  revenues:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Sales of petroleum products                            |       | $                                                    | 2,370,710  |                                                | $          | 1,359,954 |   | $ | 5,721,536 |   | $ | 3,774,874 |   |
| Transportation — Refined products                 |       | 38,240                                               |       | 43,386                                              |       | 111,039 |   | 113,294 |   |
| Transportation — LPGs                             |       | 16,519                                               |       | 16,071                                              |       | 63,220 |   | 58,572 |   |
| Transportation — Crude oil                        |       | 10,001                                               |       | 9,288                                               |       | 28,215 |   | 28,164 |   |
| Transportation — NGLs                             |       | 11,829                                               |       | 10,430                                              |       | 33,435 |   | 31,022 |   |
| Gathering — Natural gas                           |       | 38,833                                               |       | 35,515                                              |       | 112,349 |   | 104,444 |   |
| Other                                                  |       | 17,664                                               |       | 15,366                                              |       | 50,987 |   | 52,265 |   |
| Total operating revenues                               |       | 2,503,796                                            |       | 1,490,010                                           |       | 6,120,781 |   | 4,162,635 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and  expenses:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Purchases of petroleum products                        |       | 2,352,504                                            |       | 1,345,677                                           |       | 5,668,660 |   | 3,730,330 |   |
| Operating, general and administrative                  |       | 57,801                                               |       | 60,492                                              |       | 157,798 |   | 164,935 |   |
| Operating fuel and power                               |       | 12,538                                               |       | 13,464                                              |       | 35,154 |   | 36,459 |   |
| Depreciation and amortization                          |       | 30,960                                               |       | 30,277                                              |       | 83,015 |   | 84,508 |   |
| Taxes — other than income taxes                   |       | 5,954                                                |       | 3,868                                               |       | 15,662 |   | 13,993 |   |
| Gains on sales of assets                               |       | (31                                                  | )          | (849                                                | )          | (597 | ) | (973 | ) |
| Total costs and expenses                               |       | 2,459,726                                            |       | 1,452,929                                           |       | 5,959,692 |   | 4,029,252 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Operating income                                       |       | 44,070                                               |       | 37,081                                              |       | 161,089 |   | 133,383 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense  — net                           |       | (19,726                                              | )          | (17,131                                             | )          | (60,640 | ) | (53,190 | ) |
| Equity earnings                                        |       | 4,747                                                |       | 4,536                                               |       | 16,592 |   | 19,927 |   |
| Other income —  net                               |       | 484                                                  |       | 284                                                 |       | 885 |   | 1,000 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                             |       | $                                                    | 29,575     |                                                | $          | 24,770 |   | $ | 117,926 |   | $ | 101,120 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net Income  Allocation:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | $                                                    | 20,915     |                                                | $          | 17,624 |   | $ | 83,410 |   | $ | 71,949 |   |
| General Partner                                        |       | 8,660                                                |       | 7,146                                               |       | 34,516 |   | 29,171 |   |
| Total net income allocated                             |       | $                                                    | 29,575     |                                                | $          | 24,770 |   | $ | 117,926 |   | $ | 101,120 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and diluted  net income per Limited Partner Unit |       | $                                                    | 0.30       |                                                | $          | 0.28 |   | $ | 1.25 |   | $ | 1.14 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  Limited Partner Units outstanding    |       | 69,964                                               |       | 62,999                                              |       | 66,533 |   | 62,999 |   |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

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**TEPPCO PARTNERS, L.P.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS****(Unaudited)****(in thousands)**
| ** **                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(as restated)**                              | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                         |       |                                                |       |   |   |
| Net income                                                                     |       | $                                                   | 117,926    |   | $ | 101,120 |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                  |       | 83,015                                              |       | 84,508 |   |
| Earnings in equity investments, net of distributions                           |       | 11,586                                              |       | 19,498 |   |
| Gains on sales of assets                                                       |       | (597                                                | )          | (973 | ) |
| Non-cash portion of interest expense                                           |       | 1,214                                               |       | 177 |   |
| Increase in accounts receivable                                                |       | (296,340                                            | )          | (139,808 | ) |
| (Increase) decrease in accounts receivable, related  parties                   |       | 6,523                                               |       | (15,129 | ) |
| Increase in inventories                                                        |       | (111,094                                            | )          | (13,124 | ) |
| Increase in other current assets                                               |       | (21,002                                             | )          | (2,855 | ) |
| Increase in accounts payable and accrued expenses                              |       | 283,167                                             |       | 140,663 |   |
| Decrease in accounts payable, related parties                                  |       | (14,796                                             | )          | (3,335 | ) |
| Other                                                                          |       | (15,654                                             | )          | 3,191 |   |
| Net cash provided by operating activities                                      |       | 43,948                                              |       | 173,933 |   |
|                                                                           |       |                                                |       |   |   |
| Cash flows from  investing activities:                                         |       |                                                |       |   |   |
| Proceeds from the sales of assets                                              |       | 510                                                 |       | 1,202 |   |
| Purchase of assets                                                             |       | (112,231                                            | )          | (3,421 | ) |
| Investment in Centennial Pipeline LLC                                          |       | —                                              |       | (1,500 | ) |
| Investment in Mont Belvieu Storage Partners, L.P.                              |       | (2,635                                              | )          | (20,161 | ) |
| Capital expenditures                                                           |       | (148,063                                            | )          | (110,998 | ) |
| Net cash used in investing activities                                          |       | (262,419                                            | )          | (134,878 | ) |
|                                                                           |       |                                                |       |   |   |
| Cash flows from  financing activities:                                         |       |                                                |       |   |   |
| Proceeds from revolving credit facility                                        |       | 549,657                                             |       | 256,300 |   |
| Repayments on revolving credit facility                                        |       | (442,157                                            | )          | (140,800 | ) |
| Issuance of Limited Partner Units, net                                         |       | 278,830                                             |       | — |   |
| Distributions paid                                                             |       | (184,209                                            | )          | (174,399 | ) |
| Net cash provided by (used in) financing activities                            |       | 202,121                                             |       | (58,899 | ) |
|                                                                           |       |                                                |       |   |   |
| Net decrease in  cash and cash equivalents                                     |       | (16,350                                             | )          | (19,844 | ) |
|                                                                           |       |                                                |       |   |   |
| Cash and cash  equivalents at beginning of period                              |       | 16,422                                              |       | 29,469 |   |
| Cash and cash  equivalents at end of period                                    |       | $                                                   | 72         |   | $ | 9,625 |   |
|                                                                           |       |                                                |       |   |   |
| **Non-cash investing activities:**                                             |       |                                                |       |   |   |
| Net assets transferred to Mont Belvieu Storage  Partners, L.P.                 |       | $                                                   | 1,429      |   | $ | — |   |
|                                                                           |       |                                                |       |   |   |
| **Supplemental disclosure of cash  flows:**                                    |       |                                                |       |   |   |
| Cash paid for  interest (net of amounts capitalized)                           |       | $                                                   | 78,504     |   | $ | 75,498 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

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**TEPPCO PARTNERS,L.P.**

**CONSOLIDATEDSTATEMENT OF PARTNERS’ CAPITAL(Unaudited)********(inthousands, except Unit amounts)**
| ** **                                                       | ** ** | **Outstanding  Limited  Partner  Units** | ** ** | **General  Partner’s  Interest** | ** ** | **Limited  Partners’  Interests** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|-----------|------------|
| Partners’  capital at December 31, 2004                |       | 62,998,554                               |       | $                                     | (35,881    | )                                      | $          | 1,046,984                                     |       | $         | —     |   | $ | 1,011,103 |   |
| Issuance of Limited Partner Units, net                           |       | 6,965,000                                |       | —                                |       | 278,830                                |       | —                                        |       | 278,830   |       |
| Net income allocation                                            |       | —                                   |       | 34,516                                |       | 83,410                                 |       | —                                        |       | 117,926   |       |
| Change in fair value of crude oil hedge                          |       | —                                   |       | —                                |       | —                                 |       | 35                                            |       | 35        |       |
| Cash distributions                                               |       | —                                   |       | (53,515                               | )          | (130,694                               | )          | —                                        |       | (184,209  | )          |
|                                                             |       |                                     |       |                                  |       |                                   |       |                                          |       |      |       |
| Partners’ capital at  September 30, 2005 (as restated) |       | 69,963,554                               |       | $                                     | (54,880    | )                                      | $          | 1,278,530                                     |       | $         | 35         |   | $ | 1,223,685 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

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** **

**TEPPCO PARTNERS, L.P.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS****(Unaudited)**

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

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

EPCO performs all management and operating functionsrequired for us, and we reimburse EPCO for all direct and indirect expensesthat have been incurred in managing us. As a result of the sale of our GeneralPartner, DEFS and Duke Energy will continue to provide some administrativeservices for us for a period of time until we assume these services. Inconnection with us assuming the operations of certain of the TEPPCO Midstreamassets from DEFS, certain DEFS employees became employees of EPCO effective June 1,2005.

In connection with our formation in 1990, the Companyreceived 2,500,000 Deferred Participation Interests (“DPIs”). Effective April 1,1994, the DPIs began participating in distributions of cash and allocations ofprofit and loss in a manner identical to Limited Partner Units and are treatedas Limited Partner Units for purposes of this Report. These DPIs were assignedto Duke Energy when ownership of the Company was transferred from Duke Energyto DEFS in 2000. On February 24, 2005, DFI entered into an LP UnitPurchase and Sale Agreement with Duke Energy and purchased these 2,500,000 DPIsfor approximately $100.0 million.

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

The accompanying unaudited consolidated financialstatements reflect all adjustments that are, in the opinion of our management,of a normal and recurring nature and necessary for a fair statement of ourfinancial position as of September 30, 2005, and the results of ouroperations and cash flows for the periods presented. The results of operationsfor the three months and nine months ended September 30, 2005, are notnecessarily indicative of results of our operations for the full year 2005. Youshould read these interim financial statements in conjunction with ourconsolidated financial statements and notes thereto presented in the TEPPCOPartners, L.P. Annual Report on Form 10-K for the year ended December 31,2004. We have reclassified certain amounts from prior periods to conform to thecurrent presentation.

Weoperate and report in three business segments: transportation and storage ofrefined products,  liquefied petroleumgases (“LPGs”) and petrochemicals (“Downstream Segment”); gathering,transportation, marketing and storage of crude oil and distribution oflubrication oils and specialty chemicals (“Upstream Segment”); and gathering ofnatural gas, fractionation of natural gas liquids (“NGLs”) and transportationof NGLs (“Midstream Segment”). 

5

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Ourreportable segments offer different products and services and are managedseparately because each requires different business strategies.

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

Werestated our consolidated financial statements and related financialinformation for the three months  andnine months ended September 30, 2005 and 2004, for an accountingcorrection. See Note 15. Restatement of Consolidated Financial Statements for adiscussion of the restatement adjustment and the impact on previously issuedfinancial statements.

**Net Income PerUnit**

Basic netincome per Limited Partner Unit (“Unit” or “Units”) is computed by dividing ournet income, after deduction of the General Partner’s interest, by the weightedaverage number of Units outstanding (a total of 70.0 million and 66.5 millionUnits for the three months and nine months ended September 30, 2005,respectively, and 63.0 million Units for the three months and nine months endedSeptember 30, 2004). The General Partner’s percentage interest in our netincome is based on its percentage of cash distributions from Available Cash foreach period (see Note 9. Partners’ Capital and Distributions). The GeneralPartner was allocated $8.7 million (representing 29.27%) and $7.1 million(representing 28.85%) of our net income for the three months ended September 30,2005 and 2004, respectively, and $34.5 million (representing 29.27%) and $29.2million (representing 28.85%) of our net income for the nine months ended September 30,2005 and 2004, respectively. The General Partner’s percentage interest in ournet income increases as cash distributions paid per Unit increase, inaccordance with our limited partnership agreement.

Dilutednet income per Unit equaled basic net income per Unit for each of thethree-month and nine-month periods ended September 30, 2005 and 2004, asthere were no dilutive instruments outstanding.

**New Accounting Pronouncements**

**In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R),*Share-Based Payment*. SFAS 123(R) requirescompensation costs related to share-based payment transactions to be recognizedin the financial statements. With limited exceptions, the amount of thecompensation cost is to be measured based on the grant-date fair value of theequity or liability instruments issued. In addition, liability awards are to bere-measured each reporting period. Compensation cost will be recognized overthe period that an employee provides service in exchange for the award. SFAS123(R) is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*, as amended by SFAS No. 148,*Accounting for Stock-Based Compensation — Transitionand Disclosure* and supersedes Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for StockIssued to Employees*. SFAS 123(R) is effective for publiccompanies as of the first interim or annual reporting period of the firstfiscal year beginning after June 15, 2005. The Securities and ExchangeCommission amended the implementation date of SFAS 123(R) to begin withthe first interim or annual reporting period of the company’s first fiscal yearbeginning on or after June 15, 1005. As such, we will adopt SFAS 123(R) inthe first quarter of 2006. Companies are permitted to adopt SFAS 123(R) priorto the extended date. All public companies that adopted the fair-value-basedmethod of accounting must use the modified prospective transition method andmay elect to use the modified retrospective transition method. We do notbelieve that the adoption of SFAS 123(R) will have a material effect onour financial position, results of operations or cash flows.**

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**In November 2004, the Emerging Issues Task Force (“EITF”)reached consensus in EITF 03-13, *Applying the Conditions inParagraph 42 of FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, inDetermining Whether to Report Discontinued Operations*, to clarify whether acomponent of an enterprise that is either disposed of or classified as held forsale qualifies for income statement presentation as discontinued operations. TheFASB ratified the consensus on November 30, 2004. The consensus is to beapplied prospectively with regard to a component of an enterprise that iseither disposed of or classified as held for sale in reporting periodsbeginning after December 15, 2004. The consensus may be appliedretrospectively for previously reported operating results related to disposaltransactions initiated within an enterprise’s reporting period that includedthe date that this consensus was ratified. The adoption of EITF 03-13 didnot have an effect on our financial position, results of operations or cashflows.**

**In March 2005, the FASB issued FASB Interpretation No. 47,*Accounting for Conditional Asset RetirementObligations, an interpretation of FASB Statement No. 143* (“FIN47”). FIN 47 clarifies that the term, conditional asset retirement obligationas used in SFAS No. 143, *Accounting for AssetRetirement Obligations*, refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional upon a future event that may or may not be within the control ofthe entity. Even though uncertainty about the timing and/or method ofsettlement exists and may be conditional upon a future event, the obligation toperform the asset retirement activity is unconditional. Accordingly, an entityis required to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated. Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. The fair value of aliability for the conditional asset retirement obligation should be recognizedwhen incurred generally upon acquisition, construction, or development orthrough the normal operation of the asset. SFAS 143 acknowledges that in somecases, sufficient information may not be available to reasonably estimate thefair value of an asset retirement obligation. FIN 47 also clarifies when anentity would have sufficient information to reasonably estimate the fair valueof an asset retirement obligation. FIN 47 is effective no later than the end ofreporting periods ending after December 15, 2005, and early adoption ofFIN 47 is encouraged. We will adopt FIN 47 in the fourth quarter of 2005. We donot believe that the adoption of FIN 47 will have a material effect on ourfinancial position, results of operations or cash flows.**

**In June2005, the EITF reached consensus in EITF 04-5, *Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights*, to provide guidance on how generalpartners in a limited partnership should determine whether they control alimited partnership and therefore should consolidate it. The EITF agreed thatthe presumption of general partner control would be overcome only when the**limited partners have either of two types of rights. Thefirst type, referred to as kick-out rights, is the right to dissolve orliquidate the partnership or otherwise remove the general partner without cause.The second type, referred to as participating rights, is the right toeffectively participate in significant decisions made in the ordinary course ofthe partnership’s business. The kick-out rights and the participating rightsmust be substantive in order to overcome the presumption of general partnercontrol. The consensus is effective for general partners of all new limitedpartnerships formed and for existing limited partnerships for which thepartnership agreements are modified subsequent to the date of FASB ratification(June 29, 2005). For existing limited partnerships that have not beenmodified, the guidance in EITF 04-5 is effective no later than thebeginning of the first reporting period in fiscal years beginning after December 15,2005. We are currently evaluating what impact EITF 04-5 will have on ourfinancial statements, but at this time we do not believe that the adoption ofEITF 04-5 will have a material effect on our financial position, resultsof operations or cash flows.

**In December2004, the FASB issued SFAS No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion 29*.  SFAS 153 amends**APB Opinion No. 29, *Accounting for NonmonetaryExchanges,*to eliminate the exception for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial 

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**substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange. SFAS 153 is effective for nonmonetary asset exchangesoccurring in fiscal periods beginning after June 15, 2005. We adopted SFAS153 during the second quarter of 2005. The adoption of SFAS 153 did not have amaterial effect on our financial position, results of operations or cash flows.**

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections. SFAS 154 establishes new standards onaccounting for changes in accounting principles. All such changes must beaccounted for by retrospective application to the financial statements of priorperiods unless it is impracticable to do so. SFAS 154 completely replaces APBOpinion No. 20, Accounting Changes, and SFAS No. 3, ReportingAccounting Changes in Interim Periods. However, it carries forward the guidancein those pronouncements with respect to accounting for changes in estimates,changes in the reporting entity, and the correction of errors. SFAS 154 iseffective for accounting changes and error corrections made in fiscal yearsbeginning after December 15, 2005, with early adoption permitted forchanges and corrections made in years beginning after June 1, 2005. Theapplication of SFAS 154 does not affect the transition provisions of anyexisting pronouncements, including those that are in the transition phase as ofthe effective date of SFAS 154. We do not believe that the adoption of SFAS 154will have a material effect on our financial position, results of operations orcash flows.

In September 2005, the EITF reached consensus inEITF 04-13, Accounting for Purchases and Sales of Inventory with the SameCounterparty, to define when a purchase and a sale of inventory with the sameparty that operates in the same line of business should be considered a singlenonmonetary transaction subject to APB Opinion No. 29, Accounting forNonmonetary Transactions. Two or more inventory transactions with the sameparty should be combined if they are entered into in contemplation of oneanother. The consensus also requires entities to account for exchanges ofinventory in the same line of business at fair value or recorded amounts basedon inventory classification. The guidance in EITF 04-13 is effective fornew inventory arrangements entered into in reporting periods beginning after March 15,2006. We are currently evaluating what impact EITF 04-13 will have on ourfinancial statements, but at this time we do not believe that the adoption ofEITF 04-13 will have a material effect on our financial position, resultsof operations or cash flows.

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

**Goodwill**

Goodwill represents the excess of purchase price overfair value of net assets acquired and is presented on the consolidated balancesheets net of accumulated amortization. We account for goodwill under SFAS No. 142,*Goodwill and Other Intangible Assets,*whichwas issued by the FASB in July 2001. SFAS 142 prohibits amortization ofgoodwill, but instead requires testing for impairment at least annually. Wetest goodwill for impairment annually at December 31.

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

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Thefollowing table presents the carrying amount of goodwill at both September 30,2005, and December 31, 2004, by business segment (in thousands):

|          | ** ** | **Downstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Upstream  Segment** | ** ** | **Segments  Total** | ** ** |
|----------|------------|-------------------------|------------|------------------------|------------|-----------------------|------------|---------------------|------------|
| Goodwill |       | $                       | —     |                   | $          | 2,777                 |       | $                   | 14,167     |   | $ | 16,944 |   |
|          |            |                         |            |                        |            |                       |            |                     |            |  |  |  |  |

 

**Other IntangibleAssets**

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

|                                         | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible  assets:                     |       |                             |       |                            |       |   |   |   |   |
| Gathering and transportation agreements |       | $                                | 464,337    |                            | $          | (111,367 | ) | $ | 464,337 |   | $ | (91,262 | ) |
| Fractionation agreement                 |       | 38,000                           |       | (14,250                         | )          | 38,000 |   | (12,825 | ) |
| Other                                   |       | 10,226                           |       | (1,827                          | )          | 12,262 |   | (3,154 | ) |
| Subtotal                                |       | 512,563                          |       | (127,444                        | )          | 514,599 |   | (107,241 | ) |
|                                    |       |                             |       |                            |       |   |   |   |   |
| Excess  investments:                    |       |                             |       |                            |       |   |   |   |   |
| Centennial Pipeline LLC                 |       | 33,400                           |       | (12,167                         | )          | 33,400 |   | (8,875 | ) |
| Seaway Crude Pipeline Company           |       | 27,100                           |       | (3,591                          | )          | 27,100 |   | (3,072 | ) |
| Subtotal                                |       | 60,500                           |       | (15,758                         | )          | 60,500 |   | (11,947 | ) |
|                                    |       |                             |       |                            |       |   |   |   |   |
| Total intangible  assets                |       | $                                | 573,063    |                            | $          | (143,202 | ) | $ | 575,099 |   | $ | (119,188 | ) |

 

SFAS 142requires that intangible assets with finite useful lives be amortized overtheir respective estimated useful lives. If an intangible asset has a finite usefullife, but the precise length of that life is not known, that intangible assetshall be amortized over the best estimate of its useful life. At a minimum, wewill assess the useful lives and residual values of all intangible assets on anannual basis to determine if adjustments are required. Amortization expense onintangible assets was $8.2 million and $8.6 million for the three months ended September 30,2005 and 2004, respectively, and $22.3 million and $25.0 million for the ninemonths ended September 30, 2005 and 2004, respectively. Amortizationexpense on excess investments included in equity earnings was $1.3 million and$1.1 million for the three months ended September 30, 2005 and 2004,respectively, and $3.8 million and $2.9 million for the nine months ended September 30,2005 and 2004, respectively.

Thevalues assigned to our intangible assets for natural gas gathering contracts onthe Jonah Gas Gathering Company (“Jonah”) and the Val Verde Gas GatheringCompany (“Val Verde”) systems are amortized on a unit-of-production basis,based upon the actual throughput of the systems over the expected totalthroughput for the lives of the contracts. On a quarterly basis, we may obtainlimited production forecasts and updated throughput estimates from some of theproducers on the systems, and as a result, we evaluate the remaining expecteduseful lives of the contract assets based on the best available information. Duringthe fourth quarter of 2004 and the first and second quarters of 2005, certainlimited production forecasts were obtained from some of the producers on theJonah system related to future expansions of the system, and as a result, weincreased our best estimate of future throughput on the system, which resultedin extensions in the remaining lives of the intangible assets. During thefourth quarter of 2004 and the third quarter of 2005, certain limited coal bedmethane production forecasts were obtained from some of the producers on theVal Verde system whose contracts are included in the intangible assets. Theseforecasts 

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indicatedlower coal bed methane production estimates over the contract periods, and as aresult, we decreased our best estimate of future throughput on the Val Verdesystem, which resulted in increases to amortization expense on the intangibleassets. Further revisions to these estimates may occur as additional productioninformation is made available to us.

Thevalues assigned to our fractionation agreement and other intangible assets aregenerally amortized on a straight-line basis. Our fractionation agreement withDEFS is being amortized over its contract period of 20 years. The amortizationperiods for our other intangible assets, which include non-compete and otheragreements, range from 3 years to 15 years. The values assigned to our crudesupply and transportation intangible customer contracts are being amortized ona unit-of-production basis.

The valueassigned to our excess investment in Centennial Pipeline LLC was created uponits formation. Approximately $30.0 million is related to a contract and isbeing amortized on a unit-of-production basis based upon the volumestransported under the contract compared to the guaranteed total throughput ofthe contract over a 10-year life. The remaining $3.4 million is related toa pipeline and is being amortized on a straight-line basis over the life of thepipeline, which is 35 years. The value assigned to our excess investment inSeaway Crude Pipeline Company was created upon acquisition of our 50% ownershipinterest in 2000. We are amortizing the $27.1 million excess investment on astraight-line basis over a 39-year life related primarily to the life ofthe pipeline.

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

|      | ** ** | **Intangible  Assets** | ** ** | **Excess  Investments** | ** ** |
|------|------------|------------------------|------------|-------------------------|------------|
| 2005 |       | $                      | 29,573     |                    | $          | 4,763 |   |
| 2006 |       | 29,621                 |       | 4,691                   |       |
| 2007 |       | 33,109                 |       | 5,113                   |       |
| 2008 |       | 33,219                 |       | 5,438                   |       |
| 2009 |       | 31,213                 |       | 6,878                   |       |
|      |            |                        |            |                         |            |  |  |

 

**NOTE 3. PROPERTY, PLANT AND EQUIPMENT**

We evaluateimpairment of long-lived assets in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.Long-lived assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of the carrying amount of assets to be held andused is measured by a comparison of the carrying amount of the asset to futurenet cash flows expected to be generated by the asset. If such assets areconsidered to be impaired, the impairment to be recognized is measured by theamount by which the carrying amount of the assets exceeds the fair value of theassets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell.

Duringthe third quarter of 2005, our Upstream Segment was notified by a connectingcarrier that the flow of its pipeline system would be reversed, which woulddirectly impact the viability of one of our pipeline systems. This system, locatedin East Texas, consists of approximately 45 miles of pipeline, six tanks ofvarious sizes and other equipment and asset costs. As a result of changes tothe connecting carrier, we performed an impairment test of the system andrecorded a $1.8 million non-cash impairment charge, included in depreciationand amortization expense in our consolidated statements of income, for theexcess carrying value over the fair value of the system.

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Duringthe third quarter of 2005, we completed an evaluation of a crude oil systemincluded in our Upstream Segment. The system, located in Oklahoma, consists ofapproximately six miles of pipelines, tanks and other equipment and asset costs.The usage of the system has declined in recent months as a result of shiftingcrude oil production into areas not supported by the system, and as such, ithas become more economical to transport barrels by truck to our other pipelinesystems. As a result, we performed an impairment test on the system andrecorded a $0.8 million non-cash impairment charge, included in depreciationand amortization expense in our consolidated statements of income, for theexcess carrying value over the fair value of the system.

In September 2005,our Todhunter facility, near Middletown, Ohio, experienced a propane releaseand fire at a dehydration unit within the storage facility. The facility isincluded in our Downstream Segment. The dehydration unit was destroyed due tothe propane release and fire, and as a result, we wrote off the remaining bookvalue of the asset of $0.8 million to depreciation and amortization expenseduring the third quarter of 2005.

Duringthe third quarter of 2004, we completed an evaluation of our marine terminalfacility in the Beaumont, Texas, area. The facility consists primarily of abarge dock, a ship dock, four storage tanks and various segments of connectingpipelines and is included in our Downstream Segment. The evaluation indicatedthat the docks and other assets at the facility needed extensive work tocontinue to be commercially operational. As a result, we performed animpairment test on the entire marine facility and recorded a $4.4 millionnon-cash impairment charge, included in depreciation and amortization expensein our consolidated statements of income, for the excess carrying value overthe fair value of the facility.

**NOTE 4. INTEREST RATE SWAPS**

In July 2000, we entered into an interest rateswap agreement to hedge our exposure to increases in the benchmark interestrate underlying our variable rate revolving credit facility. This interest rateswap matured in April 2004. We designated this swap agreement, whichhedged exposure to variability in expected future cash flows attributed tochanges in interest rates, as a cash flow hedge. The swap agreement was basedon a notional amount of $250.0 million. Under the swap agreement, we paid afixed rate of interest of 6.955% and received a floating rate based on athree-month U.S. Dollar LIBOR rate. Because this swap was designated as a cashflow hedge, the changes in fair value, to the extent the swap was effective,were recognized in other comprehensive income until the hedged interest costswere recognized in earnings. From January 2004 through April 2004, werecognized an increase in interest expense of $2.9 million related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap.

In October 2001, TE Products entered into aninterest rate swap agreement to hedge its exposure to changes in the fair valueof its fixed rate 7.51% Senior Notes due 2028. We designated this swapagreement as a fair value hedge. The swap agreement has a notional amount of$210.0 million and matures in January 2028 to match the principal andmaturity of the TE Products Senior Notes. Under the swap agreement, TE Productspays 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 ninemonths ended September 30, 2005 and 2004, we recognized reductions ininterest expense of $4.6 million and $7.5 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap. During the quarter ended September 30, 2005, wemeasured the hedge effectiveness of this interest rate swap and noted that nogain or loss from ineffectiveness was required to be recognized. The fair valueof this interest rate swap was a gain of approximately $1.3 million and $3.4million at September 30, 2005, and December 31, 2004, respectively.

During 2002, we entered into interest rate swapagreements, designated as fair value hedges, to hedge our exposure to changesin the fair value of our fixed rate 7.625% Senior Notes due 2012. The swapagreements had a 

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**combined notionalamount of $500.0 million and matured in 2012 to match the principal andmaturity of the Senior Notes. Under the swap agreements, we paid a floatingrate of interest based on a U.S. Dollar LIBOR rate, plus a spread, and receiveda fixed rate of interest of 7.625%. These swap agreements were later terminatedin 2002 resulting in gains of $44.9 million. The gains realized from the swapterminations have been deferred as adjustments to the carrying value of theSenior Notes and are being amortized using the effective interest method asreductions to future interest expense over the remaining term of the SeniorNotes. At September 30, 2005, the unamortized balance of the deferredgains was $33.5 million. In the event of early extinguishment of the SeniorNotes, any remaining unamortized gains would be recognized in the consolidatedstatement of income at the time of extinguishment.**

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

**NOTE 5. ACQUISITIONS AND DISPOSITIONS**

**Rancho Pipeline**

Inconnection with our acquisition of crude oil assets in 2000, we acquired anapproximate 23.5% undivided joint interest in the Rancho Pipeline, which was acrude oil pipeline system from West Texas to Houston, Texas. In March 2003,the Rancho Pipeline ceased operations, and segments of the pipeline were sold tocertain of the owners that previously held undivided interests in the pipeline.We acquired 241 miles of the pipeline in exchange for cash of $5.5 million andour interests in other portions of the Rancho Pipeline. We sold 183 miles ofthe segment we acquired to other entities for cash and assets valued atapproximately $8.5 million. We recorded a net gain of $3.9 million on thetransactions in the second quarter of 2003. During the third quarter of 2004,we sold our remaining interest in the original Rancho Pipeline system for a netgain of $0.4 million. These gains are included in the gains on sales of assetsin our consolidated statements of income in the 2004 period.

**Mexia Pipeline**

On March 31, 2005, we purchased crude oilpipeline assets for $7.1 million from BP Pipelines (North America) Inc. (“BP”).The assets include approximately 158 miles of pipeline, which extend fromMexia, Texas, to the Houston, Texas, area and two stations in south Houstonwith connections to a BP pipeline that originates in south Houston. We fundedthe purchase through borrowings under our revolving credit facility. Weallocated the purchase price to property, plant and equipment, and we accountedfor the acquisition of these assets under the purchase method of accounting. Weare integrating these assets into our South Texas pipeline system, included inour Upstream Segment, which will allow us to realize synergies within ourexisting asset base and will provide future growth opportunities.

**Crude Oil Storage and TerminalingAssets**

On April 1, 2005, we purchased crude oil storageand terminaling assets in Cushing, Oklahoma, from Koch Supply &Trading, L.P. for $35.4 million. The assets consist of eight storage tanks with945,000 barrels of storage capacity, receipt and delivery manifolds,interconnections to several pipelines, crude oil inventory and approximately 70acres of land. We funded the purchase through borrowings under our revolvingcredit facility. We allocated the purchase price to property, plant andequipment and inventory, and we accounted for the acquisition of these assets 

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under the purchase method of accounting. The storageand terminaling assets will complement our existing infrastructure in Cushingand strengthen our gathering and marketing business in our Upstream Segment.

**Refined Products Terminal andTruck Rack**

On July 12, 2005, we purchased a refined productsterminal and two-bay truck loading rack in North Little Rock, Arkansas, for$6.8 million from Exxon Mobil Corporation. The assets include three storagetanks and a two-bay truck loading rack. We funded the purchase throughborrowings under our revolving credit facility. We allocated the purchase priceto property, plant and equipment and inventory, and we accounted for theacquisition of these assets under the purchase method of accounting. Theterminal serves the central Arkansas refined products market and complementsour existing Downstream Segment infrastructure in North Little Rock, Arkansas.

**Genco Assets**

On July 15, 2005, we acquired from Texas GencoLLC (“Genco”) all of its interests in certain companies that own a 90-milepipeline system and 5.5 million barrels of storage capacity for $62.1 million. Wefunded the purchase through borrowings under our revolving credit facility. Weallocated the purchase price to property, plant and equipment, and we accountedfor the acquisition of these assets under the purchase method of accounting. Thisacquisition was made as part of an expansion of our refined products origincapabilities in the Houston, Texas, and Texas City, Texas, areas. The assets ofthe purchased companies will be integrated into our Downstream Segment origininfrastructure in Texas City and Baytown, Texas. The integration and othersystem enhancements should be in service by the fourth quarter of 2006, at anestimated cost of $45.0 million. The strategic location of these assets, withrefined products interconnections to major exchange terminals in the Houstonarea, will provide significant long-term value to our customers and the TexasGulf Coast refining and logistics system.

**NOTE 6. INVENTORIES**

Inventoriesare valued at the lower of cost (based on weighted average cost method) ormarket. The costs of inventories did not exceed market values at September 30,2005, and December 31, 2004. The major components of inventories were asfollows (in thousands):

|                                           | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Crude oil(1)                              |       | $                            | 114,407    |                        | $          | 3,690 |   |
| Refined products                          |       | 7,335                        |       | 5,665                       |       |
| LPGs                                      |       | 2,511                        |       | —                      |       |
| Lubrication oils  and specialty chemicals |       | 5,015                        |       | 4,002                       |       |
| Materials and  supplies                   |       | 6,774                        |       | 6,135                       |       |
| Other                                     |       | 2,963                        |       | 29                          |       |
| Total                                     |       | $                            | 139,005    |                        | $          | 19,521 |   |

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         (1)            At September 30,2005, substantially all of our crude oil inventory was subject to forward salescontracts.

**NOTE 7. EQUITY INVESTMENTS**

Through one of our indirect wholly owned subsidiaries,we own a 50% ownership interest in Seaway Crude Pipeline Company (“Seaway”). Theremaining 50% interest is owned by ConocoPhillips. Seaway owns a pipeline 

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that carries mostly imported crude oil from a marineterminal at Freeport, Texas, to Cushing, Oklahoma, and from a marine terminalat Texas City, Texas, to refineries in the Texas City and Houston, Texas, areas.The Seaway Crude Pipeline Company Partnership Agreement provides for varyingparticipation ratios throughout the life of the Seaway partnership. From June 2002through May 2006, we receive 60% of revenue and expense of Seaway. Thereafter,we will receive 40% of revenue and expense of Seaway.  During the nine months ended September 30,2005 and 2004, we received distributions from Seaway of $17.5 million and $30.9million, respectively.

TEProducts owns a 50% ownership interest in Centennial Pipeline Company LLC (“Centennial”),and Marathon Petroleum Company LLC (“Marathon”) owns the remaining 50%interest. Centennial owns an interstate refined petroleum products pipelineextending from the upper Texas Gulf Coast to central Illinois. During the ninemonths ended September 30, 2005, TE Products has not invested anyadditional funds in Centennial. During the nine months ended September 30,2004, TE Products invested an additional $1.5 million in Centennial, which isincluded in the equity investment balance at September 30, 2005. TEProducts has not received any distributions from Centennial since itsformation.

On January 1, 2003, TE Products and Louis DreyfusEnergy Services L.P. (“Louis Dreyfus”) formed Mont Belvieu Storage Partners,L.P. (“MB Storage”). TE Products and Louis Dreyfus each own a 50% ownershipinterest in MB Storage. MB Storage owns storage capacity at the Mont Belvieufractionation and storage complex and a short haul transportation shuttlesystem that ties Mont Belvieu, Texas, to the upper Texas Gulf Coast energymarketplace. MB Storage is a service-oriented, fee-based venture serving thefractionation, refining and petrochemical industries with transportation,terminaling and storage. MB Storage has no commodity trading activity.  TE Products operates the facilities for MBStorage.

For the year ended December 31, 2005, TE Productswill receive the first $1.7 million per quarter (or $6.78 million on an annualbasis) of MB Storage’s income before depreciation expense, as defined in theoperating agreement. For the year ended December 31, 2004, TE Productsreceived the first $1.8 million per quarter (or $7.15 million on an annualbasis) of MB Storage’s income before depreciation expense. TE Products’ shareof MB Storage’s earnings is adjusted annually by the partners of MB Storage. Anyamount of MB Storage’s annual income before depreciation expense in excess of$6.78 million for 2005 and $7.15 million for 2004 is allocated evenly betweenTE Products and Louis Dreyfus. Depreciation expense on assets each partyoriginally contributed to MB Storage is allocated between TE Products and LouisDreyfus based on the net book value of the assets contributed. Depreciationexpense on assets constructed or acquired by MB Storage subsequent to formationis allocated evenly between TE Products and Louis Dreyfus. For the nine monthsended September 30, 2005 and 2004, TE Products’ sharing ratio in theearnings of MB Storage was approximately 64.3% and 72.3%, respectively. Duringthe nine months ended September 30, 2005, TE Products receiveddistributions of $10.7 million from MB Storage and contributed $4.0 million toMB Storage, which includes a combination of non-cash asset transfers of $1.4million and cash contributions of $2.6 million. During the nine months ended September 30,2004, TE Products received distributions of $8.5 million from MB Storage andcontributed $20.2 million to MB Storage, of which $16.5 million was used toacquire storage assets in April 2004.

We use the equity method of accounting to account forour investments in Seaway, Centennial and MB Storage. Summarized combinedfinancial information for Seaway, Centennial and MB Storage for the nine monthsended September 30, 2005 and 2004, is presented below (in thousands):

|            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Revenues   |       | $                                                   | 123,224    |   | $ | 115,843 |   |
| Net income |       | 39,896                                              |       | 44,344 |   |
|            |            |                                                     |            |  |  |  |  |

 

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Summarized combined balance sheet information forSeaway, Centennial and MB Storage as of September 30, 2005, and December 31,2004, is presented below (in thousands):

|                         | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Current assets          |       | $                            | 74,863     |                        | $          | 59,314 |   |
| Noncurrent  assets      |       | 629,143                      |       | 633,222                     |       |
| Current  liabilities    |       | 52,805                       |       | 41,209                      |       |
| Long-term debt          |       | 140,000                      |       | 140,000                     |       |
| Noncurrent  liabilities |       | 18,952                       |       | 20,440                      |       |
| Partners’ capital  |       | 492,249                      |       | 490,887                     |       |
|                         |            |                              |            |                             |            |  |  |

** **

**NOTE 8. DEBT**

## **SeniorNotes**

On January 27, 1998, TE Products completed theissuance of $180.0 million principal amount of 6.45% Senior Notes due 2008, and$210.0 million principal amount of 7.51% Senior Notes due 2028 (collectivelythe “TE Products Senior Notes”). The 6.45% TE Products Senior Notes were issuedat a discount of $0.3 million and are being accreted to their face value overthe term of the notes. The 6.45% TE Products Senior Notes due 2008 are notsubject to redemption prior to January 15, 2008. The 7.51% TE ProductsSenior 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 fundrequirements. Interest on the TE Products Senior Notes is payable semiannuallyin arrears on January 15 and July 15 of each year. The TE ProductsSenior Notes are unsecured obligations of TE Products and rank pari passu withall other unsecured and unsubordinated indebtedness of TE Products. Theindenture governing the TE Products Senior Notes contains covenants, including,but not limited to, covenants limiting the creation of liens securingindebtedness and sale and leaseback transactions. However, the indenture doesnot limit our ability to incur additional indebtedness. As of September 30,2005, TE Products was in compliance with the covenants of the TE ProductsSenior Notes.

On February 20, 2002, we completed the issuanceof $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 accretedto their face value over the term of the notes. The Senior Notes may beredeemed at any time at our option with the payment of accrued interest and amake-whole premium determined by discounting remaining interest and principalpayments using a discount rate equal to the rate of the United States Treasurysecurities of comparable remaining maturity plus 35 basis points. The indenturegoverning our 7.625% Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit ourability to incur additional indebtedness. As of September 30, 2005, wewere 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 accretedto their face value over the term of the notes. The Senior Notes may beredeemed at any time at our option with the payment of accrued interest and amake-whole premium determined by discounting remaining interest and principalpayments using a discount rate equal to the rate of the United States Treasurysecurities of comparable remaining maturity plus 35 basis points. The indenturegoverning our 6.125% Senior Notes contains covenants including, but not limitedto, covenants limiting the creation of liens securing indebtedness and sale andleaseback transactions. However, the 

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indenture does not limit our ability to incuradditional indebtedness. As of September 30, 2005, we were in compliancewith the covenants of these Senior Notes.

The following table summarizes the estimated fairvalues of the Senior Notes as of September 30, 2005, and December 31,2004 (in millions):

|                                                        | ** ** | ** **      | ** ** | **Fair Value**          | ** ** |
|--------------------------------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **Face  Value** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| 6.45% TE  Products Senior Notes, due January 2008 |       | $               | 180.0      |                         | $          | 185.0 |   | $ | 187.1 |   |
| 7.625% Senior  Notes, due February 2012           |       | 500.0           |       | 555.3                        |       | 569.6 |   |
| 6.125% Senior  Notes, due February 2013           |       | 200.0           |       | 206.3                        |       | 210.2 |   |
| 7.51% TE Products  Senior Notes, due January 2028 |       | 210.0           |       | 223.9                        |       | 225.6 |   |
|                                                        |            |                 |            |                              |            |  |  |  |  |  |

 

We have entered into interest rate swap agreements tohedge our exposure to changes in the fair value on a portion of the SeniorNotes discussed above (see Note 4. Interest Rate Swaps).

## **RevolvingCredit Facility**

On June 27, 2003, we entered into a $550.0million unsecured revolving credit facility with a three-year term, includingthe issuance of letters of credit of up to $20.0 million (“Revolving CreditFacility”). The interest rate is based, at our option, on either the lender’sbase rate plus a spread, or LIBOR plus a spread in effect at the time of theborrowings. The credit agreement for the Revolving Credit Facility containscertain restrictive financial covenant ratios. Restrictive covenants in theRevolving Credit Facility limit our ability to, among other things, incuradditional indebtedness, make distributions in excess of Available Cash (seeNote 9. Partners’ Capital and Distributions) and complete mergers, acquisitionsand sales of assets. On October 21, 2004, we amended our Revolving CreditFacility to (i) increase the facility size to $600.0 million, (ii) extendthe term to October 21, 2009, (iii) remove certain restrictivecovenants, (iv) increase the available amount for the issuance of lettersof credit up to $100.0 million and (v) decrease the LIBOR rate spreadcharged at the time of each borrowing. On February 23, 2005, we againamended our Revolving Credit Facility to remove the requirement that DEFS mustat all times own, directly or indirectly, 100% of our General Partner, to allowfor its acquisition by DFI (see Note 1. Organization and Basis of Presentation).During the second quarter of 2005, we used a portion of the proceeds from theequity offering in May 2005 to repay a portion of the Revolving CreditFacility (see Note 9. Partners’ Capital and Distributions). At September 30,2005, $460.5 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 4.6%. At September 30, 2005, we were incompliance with the covenants of this credit agreement.

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The following table summarizes the principal amountsoutstanding under all of our credit facilities as of September 30, 2005,and December 31, 2004 (in thousands):

|                                                                    | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Credit Facilities:                                                 |       |                         |       |                        |       |
| Revolving Credit Facility, due October 2009                   |       | $                            | 460,500    |                        | $          | 353,000 |   |
| 6.45% TE Products Senior Notes, due  January 2008             |       | 179,929                      |       | 179,906                     |       |
| 7.625% Senior Notes, due February 2012                        |       | 498,604                      |       | 498,438                     |       |
| 6.125% Senior Notes, due February 2013                        |       | 198,952                      |       | 198,845                     |       |
| 7.51% TE Products Senior Notes, due  January 2028             |       | 210,000                      |       | 210,000                     |       |
| Total borrowings                                                   |       | 1,547,985                    |       | 1,440,189                   |       |
| Adjustment to carrying value associated with hedges  of fair value |       | 34,832                       |       | 40,037                      |       |
| Total Credit  Facilities                                           |       | $                            | 1,582,817  |                        | $          | 1,480,226 |   |

 

**NOTE 9. PARTNERS’CAPITAL AND DISTRIBUTIONS**

**Equity Offering**

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

## **QuarterlyDistributions of Available Cash**

We make quarterly cash distributions of all of ourAvailable Cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion. Pursuant to the Partnership Agreement, theCompany receives incremental incentive cash distributions when unitholders’cash distributions exceed certain target thresholds as follows:

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

 

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The following table reflects the allocation of totaldistributions paid during the nine months ended September 30, 2005 and2004 (in thousands, except per Unit amounts):

|                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Limited Partner  Units                  |       | $                                                   | 130,694    |   | $ | 124,422 |   |
| General Partner  Ownership Interest     |       | 2,667                                               |       | 2,539 |   |
| General Partner  Incentive              |       | 50,848                                              |       | 47,438 |   |
| Total Cash Distributions Paid           |       | $                                                   | 184,209    |   | $ | 174,399 |   |
| Total Cash  Distributions Paid Per Unit |       | $                                                   | 2.00       |   | $ | 1.975 |   |

 

On November 7,2005, we will pay a cash distribution of $0.675 per Unit for the quarter ended September 30,2005. The third quarter 2005 cash distribution will total $66.9 million.

**General Partner’sInterest**

Asof September 30, 2005, and December 31, 2004, we had deficit balancesof $54.9 million and $35.9 million, respectively, in our General Partner’sequity account. These negative balances do not represent assets to us and donot represent obligations of the General Partner to contribute cash or otherproperty to us. The General Partner’s equity account generally consists of itscumulative share of our net income less cash distributions made to it pluscapital contributions that it has made to us (see our Consolidated Statement ofPartners’ Capital for a detail of the General Partner’s equity account). Forthe nine months ended September 30, 2005, the General Partner wasallocated $34.5 million (representing 29.27%) of our net income and received$53.5 million in cash distributions.

CapitalAccounts, as defined under our Partnership Agreement, are maintained for ourGeneral Partner and our limited partners. The Capital Account provisions of ourPartnership Agreement incorporate principles established for U.S. federalincome tax purposes and are not comparable to the equity accounts reflectedunder accounting principles generally accepted in the United States in ourfinancial statements. Under our Partnership Agreement, the General Partner isrequired to make additional capital contributions to us upon the issuance ofany additional Units if necessary to maintain a Capital Account balance equalto 1.999999% of the total Capital Accounts of all partners. At September 30,2005, and December 31, 2004, the General Partner’s Capital Account balancesubstantially exceeded this requirement.

Netincome is allocated between the General Partner and the limited partners in thesame proportion as aggregate cash distributions made to the General Partner andthe limited partners during the period. This is generally consistent with themanner of allocating net income under our Partnership Agreement. Net incomedetermined under our Partnership Agreement, however, incorporates principlesestablished for U.S. federal income tax purposes and is not comparable to netincome reflected under accounting principles generally accepted in the UnitedStates in our financial statements.

Cashdistributions that we make during a period may exceed our net income for theperiod. We make quarterly cash distributions of all of our Available Cash,generally defined as consolidated cash receipts less consolidated cashdisbursements and cash reserves established by the General Partner in its solediscretion. Cash distributions in excess of net income allocations and capitalcontributions during the year ended December 31, 2004, and the nine monthsended September 30, 2005, resulted in deficits in the General Partner’sequity account at December 31, 2004, and September 30, 2005. Futurecash distributions that exceed net income will result in an increase in thedeficit balance in the General Partner’s equity account.

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Accordingto the Partnership Agreement, in the event of our dissolution, after satisfyingour liabilities, our remaining assets would be divided among our limitedpartners and the General Partner generally in the same proportion as AvailableCash but calculated on a cumulative basis over the life of the Partnership. Ifa deficit balance still remains in the General Partner’s equity account afterall allocations are made between the partners, the General Partner would not berequired to make whole any such deficit.

**NOTE 10. EMPLOYEE BENEFIT PLANS**

## **RetirementPlans**

The TEPPCO Retirement Cash Balance Plan (“TEPPCO RCBP”)is a non-contributory, trustee-administered pension plan. In addition, theTEPPCO Supplemental Benefit Plan (“TEPPCO SBP”) is a non-contributory,nonqualified, defined benefit retirement plan, in which certain executiveofficers participate. The TEPPCO SBP was established to restore benefitreductions caused by the maximum benefit limitations that apply to qualifiedplans. The benefit formula for all eligible employees is a cash balance formula.Under a cash balance formula, a plan participant accumulates a retirementbenefit based upon pay credits and current interest credits. The pay creditsare based on a participant’s salary, age and service. We use a December 31measurement date for these plans.

On May 27, 2005, the TEPPCO RCBP and the TEPPCOSBP were amended. Effective May 31, 2005, participation in the TEPPCO RCBPwas frozen, and no new participants were eligible to be covered by the planafter that date. Effective December 31, 2005, all plan benefits accruedwill be frozen, participants will not receive additional pay credits after thatdate, and all plan participants will be 100% vested regardless of their yearsof service. The TEPPCO RCBP plan will be terminated effective December 31,2005, and plan participants will have the option to receive their benefitseither through a lump sum payment in 2006 or through an annuity. For those planparticipants who elect to receive an annuity, we will purchase an annuitycontract from an insurance company in which the plan participant will own theannuity, absolving us of any future obligation to the participant. Participantsin the TEPPCO SBP will receive pay credits through November 30, 2005, andwill receive lump sum benefit payments in December 2005. Both the RCBP andSBP benefit payments are discussed below.

In June 2005, we recorded a curtailment charge of$0.1 million in accordance with SFAS No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*, as a result of the TEPPCO RCBP andTEPPCO SBP amendments. As of May 31, 2005, the following assumptions werechanged for purposes of determining the net periodic benefit costs for theremainder of 2005: the discount rate, the long-term rate of return on planassets, and the assumed mortality table. The discount rate was decreased from5.75% to 5.00% to reflect rates of returns on bonds currently available to settlethe liability.  The expected long-termrate of return on plan assets was changed from 8% to 2% due to the movement ofplan funds from equity investments into short-term money market funds. Themortality table was changed to reflect overall improvements in mortalityexperienced by the general population. The curtailment charge arose due to theaccelerated recognition of the unrecognized prior service costs. We expect torecord additional settlement charges of approximately $0.2 million in thefourth quarter of 2005 relating to the TEPPCO SBP and approximately $3.2million in 2006 relating to the TEPPCO RCBP for any existing unrecognizedlosses upon the plan termination and final distribution of the assets to theplan participants.

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The components of net pension benefits costs for theTEPPCO RCBP and the TEPPCO SBP for the three months and nine months ended September 30,2005 and 2004, were as follows (in thousands):

|                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost  benefit earned during the period |       | $                                                    | 1,147      |                                                | $          | 913 |   | $ | 3,246 |   | $ | 2,739 |   |
| Interest cost on  projected benefit obligation |       | 233                                                  |       | 180                                                 |       | 701 |   | 540 |   |
| Expected return  on plan assets                |       | (76                                                  | )          | (220                                                | )          | (595 | ) | (660 | ) |
| Amortization of  prior service cost            |       | 1                                                    |       | 2                                                   |       | 4 |   | 6 |   |
| Recognized net  actuarial loss                 |       | 37                                                   |       | 14                                                  |       | 92 |   | 42 |   |
| SFAS 88  curtailment charge                    |       | —                                               |       | —                                              |       | 50 |   | — |   |
| Net pension  benefits costs                    |       | $                                                    | 1,342      |                                                | $          | 889 |   | $ | 3,498 |   | $ | 2,667 |   |

##  

## **OtherPostretirement Benefits**

We provide certain health care and life insurancebenefits for retired employees on a contributory and non-contributory basis (“TEPPCOOPB”). Employees become eligible for these benefits if they meet certain ageand service requirements at retirement, as defined in the plans. We provide afixed dollar contribution, which does not increase from year to year, towardsretired employee medical costs. The retiree pays all health care cost increasesdue to medical inflation. We use a December 31 measurement date for thisplan.

In May 2005, benefits provided to employees underthe TEPPCO OPB were changed. Employees eligible for these benefits will receivethem through December 31, 2005, however, effective December 31, 2005,these benefits will be terminated. In June 2005, as a result of this changein benefits and in accordance with SFAS No. 106, *Employers’Accounting for Postretirement Benefits Other Than Pensions*, werecorded a curtailment credit of approximately $2.6 million in our accumulatedpostretirement obligation, partially offset by a curtailment charge ofapproximately $1.0 million related to the accelerated recognition of theunrecognized prior service costs. The net effect of these curtailmentadjustments was to reduce our accumulated postretirement obligation to thetotal of the expected remaining 2005 payments under the TEPPCO OPB. The currentemployees participating in this plan were transferred to DEFS, who willcontinue to provide postretirement benefits to these retirees. We recorded aone-time settlement to DEFS in the third quarter of 2005 of $0.4 million forthe remaining postretirement benefits.

The components of net postretirement benefits cost forthe TEPPCO OPB for the three and nine months ended September 30, 2005 and2004, were as follows (in thousands):

|                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost  benefit earned during the period                  |       | $                                                    | —     |                                                | $          | 41 |   | $ | 81 |   | $ | 123 |   |
| Interest cost on  accumulated postretirement benefit obligation |       | —                                               |       | 38                                                  |       | 69 |   | 114 |   |
| Amortization of  prior service cost                             |       | —                                               |       | 32                                                  |       | 53 |   | 96 |   |
| Recognized net  actuarial loss                                  |       | —                                               |       | —                                              |       | 4 |   | — |   |
| SFAS 106  curtailment credit                                    |       | —                                               |       | —                                              |       | (1,676 | ) | — |   |
| Net  postretirement benefits costs                              |       | $                                                    | —     |                                                | $          | 111 |   | $ | (1,469 | ) | $ | 333 |   |

 

Effective June 1, 2005, the payroll functionsperformed by DEFS for our General Partner were transferred from DEFS to EPCO. Forthose employees who were receiving certain other postretirement benefits at thetime of 

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the acquisition of our General Partner by DFI, DEFSwill continue to provide these benefits to those employees. Effective June 1,2005, EPCO began providing certain other postretirement benefits to thoseemployees who became eligible for the benefits after June 1, 2005, andwill charge those benefit related costs to us. As a result of these changes, werecorded a $1.2 million reduction in our other postretirement obligation in June 2005.

## **EstimatedFuture Benefit Contributions**

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

**NOTE 11. SEGMENT INFORMATION**

We have three reporting segments:

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

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

·                  gathering of natural gas,fractionation of NGLs and transportation of NGLs, which operates as theMidstream Segment.

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

Our Downstream Segment revenues are earned fromtransportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sale of product inventory and other ancillaryservices. The two largest operating expense items of the Downstream Segment arelabor and electric power. We generally realize higher revenues during the firstand fourth quarters of each year since our operations are somewhat seasonal.Refined products volumes are generally higher during the second and thirdquarters because of greater demand for gasolines during the spring and summerdriving seasons. LPGs volumes are generally higher from November through March dueto higher demand in the Northeast for propane, a major fuel for residentialheating. Our Downstream Segment also includes the results of operations of thenorthern portion of the Dean Pipeline, which transports refinery gradepropylene from Mont Belvieu to Point Comfort, Texas. Our Downstream Segmentalso includes our equity investments in Centennial and MB Storage (see Note 7. EquityInvestments).

Our Upstream Segment revenues are earned fromgathering, transportation, marketing and storage of crude oil and distributionof lubrication oils and specialty chemicals, principally in Oklahoma, Texas,New Mexico and the Rocky Mountain region. Marketing operations consistprimarily of aggregating purchased crude oil along our pipeline systems, orfrom third party pipeline systems, and arranging the necessary transportationlogistics for the ultimate sale of the crude oil to local refineries, marketersor other end users. Our Upstream Segment also includes our equity investment inSeaway (see Note 7. Equity Investments). Seaway consists of large diameterpipelines 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 centralUnited States, and to refineries in the Texas City and Houston areas.

Our Midstream Segment revenues are earned from thefractionation of NGLs in Colorado, transportation of NGLs from two trunklineNGL pipelines in South Texas, two NGL pipelines in East Texas and a pipelinesystem 

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

The tablebelow includes financial information by reporting segment for the three monthsand nine months ended September 30, 2005 and 2004 (in thousands):
| ** **                                 | ** ** | **Three Months Ended September 30, 2005** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Downstream  Segment**                                            | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                                 | ** ** | **(as restated)**                                             | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Sales of  petroleum products               |       | $                                                                  | —     |   | $ | 2,367,984 |   | $ | 2,880 |   | $ | 2,370,864 |   | $ | (154 | ) | $ | 2,370,710 |   |
| Operating  revenues                        |       | 66,094                                                             |       | 12,750 |   | 54,430 |   | 133,274 |   | (188 | ) | 133,086 |   |
| Purchases of  petroleum products           |       | —                                                             |       | 2,350,107 |   | 2,585 |   | 2,352,692 |   | (188 | ) | 2,352,504 |   |
| Operating  expenses, including power  |       | 41,405                                                             |       | 18,956 |   | 16,086 |   | 76,447 |   | (154 | ) | 76,293 |   |
| Depreciation and  amortization expense     |       | 10,098                                                             |       | 6,471 |   | 14,391 |   | 30,960 |   | — |   | 30,960 |   |
| Gains on sales  of assets                  |       | (24                                                                | )          | (7 | ) | — |   | (31 | ) | — |   | (31 | ) |
| Operating income                           |       | 14,615                                                             |       | 5,207 |   | 24,248 |   | 44,070 |   | — |   | 44,070 |   |
| Equity earnings  (losses)                  |       | (651                                                               | )          | 5,398 |   | — |   | 4,747 |   | — |   | 4,747 |   |
| Other income,  net                         |       | 306                                                                |       | 103 |   | 75 |   | 484 |   | — |   | 484 |   |
| Earnings before  interest                  |       | $                                                                  | 14,270     |   | $ | 10,708 |   | $ | 24,323 |   | $ | 49,301 |   | $ | — |   | $ | 49,301 |   |

 
| ** **                                 | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Downstream  Segment**                                            | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                                 | ** ** | **(as restated)**                                             | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Sales of  petroleum products               |       | $                                                                  | —     |   | $ | 1,358,220 |   | $ | 1,734 |   | $ | 1,359,954 |   | $ | — |   | $ | 1,359,954 |   |
| Operating  revenues                        |       | 68,546                                                             |       | 11,866 |   | 49,961 |   | 130,373 |   | (317 | ) | 130,056 |   |
| Purchases of  petroleum products           |       | —                                                             |       | 1,344,613 |   | 1,381 |   | 1,345,994 |   | (317 | ) | 1,345,677 |   |
| Operating  expenses, including power  |       | 43,419                                                             |       | 17,804 |   | 16,601 |   | 77,824 |   | — |   | 77,824 |   |
| Depreciation and  amortization expense     |       | 12,818                                                             |       | 3,268 |   | 14,191 |   | 30,277 |   | — |   | 30,277 |   |
| Gains on sales  of assets                  |       | (472                                                               | )          | (377 | ) | — |   | (849 | ) | — |   | (849 | ) |
| Operating income                           |       | 12,781                                                             |       | 4,778 |   | 19,522 |   | 37,081 |   | — |   | 37,081 |   |
| Equity earnings  (losses)                  |       | (1,234                                                             | )          | 5,770 |   | — |   | 4,536 |   | — |   | 4,536 |   |
| Other income,  net                         |       | 203                                                                |       | 60 |   | 21 |   | 284 |   | — |   | 284 |   |
| Earnings before  interest                  |       | $                                                                  | 11,750     |   | $ | 10,608 |   | $ | 19,543 |   | $ | 41,901 |   | $ | — |   | $ | 41,901 |   |

 

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| ** **                                 | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Downstream  Segment**                                           | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                                 | ** ** | **(as restated)**                                            | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Sales of  petroleum products               |       | $                                                                 | —     |   | $ | 5,714,353 |   | $ | 7,337 |   | $ | 5,721,690 |   | $ | (154 | ) | $ | 5,721,536 |   |
| Operating  revenues                        |       | 207,699                                                           |       | 36,161 |   | 157,622 |   | 401,482 |   | (2,237 | ) | 399,245 |   |
| Purchases of  petroleum products           |       | —                                                            |       | 5,665,136 |   | 5,761 |   | 5,670,897 |   | (2,237 | ) | 5,668,660 |   |
| Operating  expenses, including power  |       | 117,271                                                           |       | 49,615 |   | 41,882 |   | 208,768 |   | (154 | ) | 208,614 |   |
| Depreciation and  amortization expense     |       | 29,460                                                            |       | 13,623 |   | 39,932 |   | 83,015 |   | — |   | 83,015 |   |
| Gains on sales  of assets                  |       | (131                                                              | )          | (59 | ) | (407 | ) | (597 | ) | — |   | (597 | ) |
| Operating income                           |       | 61,099                                                            |       | 22,199 |   | 77,791 |   | 161,089 |   | — |   | 161,089 |   |
| Equity earnings  (losses)                  |       | (2,718                                                            | )          | 19,310 |   | — |   | 16,592 |   | — |   | 16,592 |   |
| Other income,  net                         |       | 576                                                               |       | 132 |   | 177 |   | 885 |   | — |   | 885 |   |
| Earnings before  interest                  |       | $                                                                 | 58,957     |   | $ | 41,641 |   | $ | 77,968 |   | $ | 178,566 |   | $ | — |   | $ | 178,566 |   |

 
| ** **                                 | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Downstream  Segment**                                           | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
| ** **                                 | ** ** | **(as restated)**                                            | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
| Sales of  petroleum products               |       | $                                                                 | —     |   | $ | 3,770,006 |   | $ | 4,868 |   | $ | 3,774,874 |   | $ | — |   | $ | 3,774,874 |   |
| Operating  revenues                        |       | 205,719                                                           |       | 37,430 |   | 146,994 |   | 390,143 |   | (2,382 | ) | 387,761 |   |
| Purchases of  petroleum products           |       | —                                                            |       | 3,728,345 |   | 4,367 |   | 3,732,712 |   | (2,382 | ) | 3,730,330 |   |
| Operating  expenses, including power  |       | 122,020                                                           |       | 46,880 |   | 46,487 |   | 215,387 |   | — |   | 215,387 |   |
| Depreciation and  amortization expense     |       | 31,106                                                            |       | 9,381 |   | 44,021 |   | 84,508 |   | — |   | 84,508 |   |
| Gains on sales  of assets                  |       | (489                                                              | )          | (484 | ) | — |   | (973 | ) | — |   | (973 | ) |
| Operating income                           |       | 53,082                                                            |       | 23,314 |   | 56,987 |   | 133,383 |   | — |   | 133,383 |   |
| Equity earnings  (losses)                  |       | (4,477                                                            | )          | 24,404 |   | — |   | 19,927 |   | — |   | 19,927 |   |
| Other income,  net                         |       | 648                                                               |       | 257 |   | 95 |   | 1,000 |   | — |   | 1,000 |   |
| Earnings before  interest                  |       | $                                                                 | 49,253     |   | $ | 47,975 |   | $ | 57,082 |   | $ | 154,310 |   | $ | — |   | $ | 154,310 |   |

 

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Thefollowing table shows total assets, capital expenditures and non-cash investingactivities for each segment as of and for the periods ended September 30,2005, and December 31, 2004 (in thousands):
| ** **                              | ** ** | **Downstream  Segment** | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------|------------|------------------------|------------|---------------------|------------|---------------------------------|------------|------------------|------------|
| September 30, 2005  (as restated): |       |                    |       |                  |       |                   |       |                |       |                            |       |             |       |
| Total assets                            |       | $                       | 1,040,716  |                  | $          | 1,512,362              |       | $                   | 1,241,780  |                            | $          | 3,794,858        |       | $ | (6,518 | ) | $ | 3,788,340 |   |
| Capital expenditures                    |       | 38,617                  |       | 30,677                |       | 78,089                 |       | 147,383             |       | 680                             |       | 148,063          |       |
| Non-cash investing activities           |       | 1,429                   |       | —                |       | —                 |       | 1,429               |       | —                          |       | 1,429            |       |
|                                    |       |                    |       |                  |       |                   |       |                |       |                            |       |             |       |
| December 31, 2004:                 |       |                    |       |                  |       |                   |       |                |       |                            |       |             |       |
| Total assets                            |       | $                       | 959,042    |                  | $          | 1,069,007              |       | $                   | 1,184,184  |                            | $          | 3,212,233        |       | $ | (25,949 | ) | $ | 3,186,284 |   |
| Capital  expenditures                   |       | 80,930                  |       | 37,448                |       | 45,075                 |       | 163,453             |       | 694                             |       | 164,147          |       |

 

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

|                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                   | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(as restated)**                               | ** ** | **(as restated)**                              | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Earnings before  interest    |       | $                                                    | 49,301     |                                                | $          | 41,901 |   | $ | 178,566 |   | $ | 154,310 |   |
| Interest expense  — net |       | (19,726                                              | )          | (17,131                                             | )          | (60,640 | ) | (53,190 | ) |
| Net income                   |       | $                                                    | 29,575     |                                                | $          | 24,770 |   | $ | 117,926 |   | $ | 101,120 |   |

 

**NOTE 12. COMMITMENTSAND CONTINGENCIES**

**Litigation**

In the fall of 1999 and on December 1, 2000, theGeneral Partner and the Partnership were named as defendants in two separatelawsuits in Jackson County Circuit Court, Jackson County, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al.*(including the General Partner and Partnership)and*Gilbert Richards and Jean Richards v. TexasEastern Corporation, et al.*(including the General Partner andPartnership). In both cases, the plaintiffs contend, among other things, thatwe and other defendants stored and disposed of toxic and hazardous substancesand hazardous wastes in a manner that caused the materials to be released intothe air, soil and water. They further contend that the release caused damagesto the plaintiffs. In their complaints, the plaintiffs allege strict liabilityfor both personal injury and property damage together with gross negligence,continuing nuisance, trespass, criminal mischief and loss of consortium. Theplaintiffs are seeking compensatory, punitive and treble damages. On January 27,2005, we entered into Release and Settlement Agreements with the McCleeryplaintiffs and the Richards plaintiffs dismissing all of these plaintiffs’claims. The settlement terms included a $2.0 million payment to the plaintiffs,which was accrued at December 31, 2004.

Although we did not settle with all plaintiffs and wetherefore remain named parties in the *Ryan E. McCleery andMarcia S. McCleery, et al. v. Texas Eastern Corporation, et al*.action, a co-defendant has agreed to indemnify us for all remaining claimsasserted against us. Consequently, we do not believe that the outcome of theseremaining claims will have a material adverse effect on our financial position,results of operations or cash flows.

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On December 21, 2001, TE Products was named as adefendant in a lawsuit in the 10th Judicial District, Natchitoches Parish,Louisiana, styled *Rebecca L. Grisham et al. v. TE ProductsPipeline Company, Limited Partnership*. In this case, the plaintiffscontend that our pipeline, which crosses the plaintiffs’ property, leaked toxicproducts onto their property and, consequently caused damages to them. We havefiled an answer to the plaintiffs’ petition denying the allegations, and we aredefending ourselves vigorously against the lawsuit. The plaintiffs have notstipulated the amount of damages they are seeking in the suit; however, thiscase is covered by insurance. We do not believe that the outcome of thislawsuit will have a material adverse effect on our financial position, resultsof operations or cash flows.

In May 2003, the General Partner was named as adefendant in a lawsuit styled *John R. James, et al. v. JGraves Insulation Company, et al.* as filed in the first JudicialDistrict Court, Caddo Parish, Louisiana. There are numerous plaintiffsidentified in the action that are alleged to have suffered damages as a resultof alleged exposure to asbestos-containing products and materials. According tothe petition and as a result of a preliminary investigation, the GeneralPartner believes that the only claim asserted against it results from oneindividual for the period from July 1971 through June 1972, who isalleged to have worked on a facility owned by the General Partner’s predecessor.This period represents a small portion of the total alleged exposure periodfrom January 1964 through December 2001 for this individual. Theindividual’s claims involve numerous employers and alleged job sites. TheGeneral Partner has been unable to confirm involvement by the General Partneror its predecessors with the alleged location, and it is uncertain at this timewhether this case is covered by insurance. Discovery is planned, and theGeneral Partner intends to defend itself vigorously against this lawsuit. Theplaintiffs have not stipulated the amount of damages that they are seeking inthis suit. We are obligated to reimburse the General Partner for any costs itincurs related to this lawsuit. We cannot estimate the loss, if any, associatedwith this pending lawsuit. We do not believe that the outcome of this lawsuitwill have a material adverse effect on our financial position, results ofoperations or cash flows.

On August 5, 2005, we were named as a third-partydefendant in a matter styled *ConocoPhillips, et al. v.BP Amoco Seaway Products Pipeline Company as filed in the 55**th Judicial District of Harris County, Texas*.ConocoPhillips alleges a right to indemnity from BP Amoco Seaway ProductsPipeline Company (“BP Amoco”) for tax liability incurred by ConocoPhillips as aresult of the reverse merger of Seaway Pipeline Company (the “Original SeawayPartnership”). The reverse merger of the Original Seaway Partnership wasundertaken in preparation for our purchase of ARCO Pipe Line Company pursuantto the Amended and Restated Purchase Agreement (the “Purchase Agreement”) datedMay 10, 2000, between us and Atlantic Richfield Company. BP Amoco hasclaimed a right to indemnity from us under the Purchase Agreement should BPAmoco have any indemnity liability to ConocoPhillips. ConocoPhillips allegesthe income tax liability to be approximately $4.0 million. Our discovery is atan early stage in this matter. While we cannot predict the ultimate outcome, wedo not believe that the outcome of this lawsuit will have a material adverseeffect on our financial position, results of operations or cash flows.

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

**Regulatory Matters**

Our operations are subject to federal, state and locallaws and regulations governing the discharge of materials into the environment.Failure to comply with these laws and regulations may result in the assessmentof administrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to performinvestigatory and remedial activities. Although we believe our operations arein material 

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compliance with applicable environmental laws andregulations, risks of significant costs and liabilities are inherent inpipeline operations, and we cannot assure you that significant costs andliabilities will not be incurred. Moreover, it is possible that other developments,such as increasingly strict environmental laws and regulations and enforcementpolicies thereunder, and claims for damages to property or persons resultingfrom our operations, could result in substantial costs and liabilities to us. Webelieve that changes in environmental laws and regulations will not have amaterial adverse effect on our financial position, results of operations orcash flows in the near term.

On March 26, 2004, an initial decision in *ARCO Products Co., et al. v. SFPP*, Docket OR96-2-000,was issued by the FERC, which made several significant determinations withrespect to finding “changed circumstances” under the Energy Policy Act of 1992(“EP Act”). The decision largely clarifies, but does not fully quantify, thestandard required for a complainant to demonstrate that an oil pipeline’s ratesare no longer subject to the rate protection of the EP Act by demonstratingthat a substantial change in circumstances has occurred since 1992 with respectto the basis of the rates being challenged. In the decision, the FERC foundthat a limited number of rate elements will significantly affect the economicbasis for a pipeline company’s rates. The elements identified in the decisionare volume changes, allowed total return and total cost-of-service (includingmajor cost elements  such as rate base,tax rates and tax allowances, among others). The FERC did reject, however, theuse of changes in tax rates and income tax allowances as standalone factors. Judicialreview of that decision, which has been sought by a number of parties to thecase, is currently pending before the U.S. Court of Appeals for the District ofColumbia Circuit. We have not yet determined the impact, if any, that thedecision, if it is ultimately upheld, would have on our rates if they werereviewed under the criteria of this decision.

On July 20, 2004, the District of ColumbiaCircuit issued an opinion in *BP West Coast Products LLCv. FERC*. In reviewing a series of orders involving SFPP, L.P., thecourt held among other things that the FERC had not adequately justified itspolicy of providing an oil pipeline limited partnership with an income taxallowance equal to the proportion of its income attributable to partnershipinterests owned by corporate partners. Under the FERC’s initial ruling, SFPP,L.P. was permitted an income tax allowance on its cost-of-service filing forthe percentage of its net operating (pre-tax) income attributable topartnership units held by corporations, and was denied an income tax allowanceequal to the percentage attributable to partnership units held by non-corporatepartners. The court remanded the case back to the FERC for further review. As aresult of the court’s remand, on December 2, 2004, the FERC issued aRequest for Comments seeking comments on whether the court’s ruling appliesonly to the specific facts of the SFPP, L.P. proceeding or also extends toother capital structures involving partnerships and other forms of ownership. OnMay 4, 2005, the FERC issued its Policy Statement on Income TaxAllowances, which permits regulated partnerships, limited liability companiesand other pass-through entities an income tax allowance on their incomeattributable to any owner that has an actual or potential income tax liabilityon that income, regardless whether the owner is an individual or corporation. Ifthere is more than one level of pass-through entities, the regulated companyincome must be traced to where the ultimate tax liability lies. The PolicyStatement is to be applied in individual cases, and the regulated entity bearsthe burden of proof to establish the tax status of its owners. On June 1,2005, the FERC issued an Order on Remand in the SFPP, L.P. proceedings holdingthe Policy Statement would apply in that case and requesting briefs on whetheradditional evidence was necessary to apply it. Briefs have been filed but theFERC has not yet acted on them. The ultimate outcome of the FERC’s inquiry onincome tax allowance should not affect our current rates and rate structurebecause our rates are not based on cost-of-service methodology. However, theoutcome of the income tax allowance would become relevant to us should we (i) electin the future to use cost-of-service to support our rates, or (ii) berequired to use such methodology to defend our indexed rates.

In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana facility. In 1999, our Arcadia facility and adjacentterminals were directed by the Remediation Services Division of the LDEQ topursue remediation of this contamination. Effective March 2004, weexecuted an access agreement with an adjacent industrial landowner who islocated 

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upgradient of the Arcadia facility. This agreementenables the landowner to proceed with remediation activities at our Arcadiafacility for which it has accepted shared responsibility. At September 30,2005, we have an accrued liability of $0.2 million for remediation costs at ourArcadia facility. We do not expect that the completion of the remediationprogram proposed to the LDEQ will have a future material adverse effect on ourfinancial position, results of operations or cash flows.

On March 17, 2003, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois. As a result of therelease, we have entered into an Agreed Order with the State of Illinois, whichrequired us to conduct an environmental investigation. At this time, we havecomplied with the terms of the Agreed Order, and the results of theenvironmental investigation indicated there were no soil or groundwater impactsfrom the release. On August 30, 2005, a final settlement was reached withthe State of Illinois. The settlement included the payment of a civilpenalty of $0.1 million and the requirement that we make certain modificationsto the equipment of the facility, none of which are expected to have a materialadverse effect on our financial position, results of operations or cash flows.

On July 27, 2004, wereceived notice from the United States Department of Justice (“DOJ”) of itsintent to seek a civil penalty against us related to our November 21,2001, release of approximately 2,575 barrels of jet fuel from our 14-inchdiameter pipeline located in Orange County, Texas. The DOJ, at the request ofthe Environmental Protection Agency, is seeking a civil penalty against us foralleged violations of the Clean Water Act (“CWA”) arising out of this release. Weare in discussions with the DOJ regarding this matter and have responded to itsrequest for additional information. The maximum statutory penalty proposed bythe DOJ for this alleged violation of the CWA is $2.1 million. We do not expectany civil penalty to have a material adverse effect on our financial position,results of operations or cash flows.

At September 30, 2005, we have an accruedliability of $4.0 million related to various sites requiring environmentalremediation activities. We do not expect that the completion of remediationprograms associated with our activities will have a future material adverseeffect on our financial position, results of operations or cash flows.

**Other**

Centennial entered into credit facilities totaling$150.0 million, and as of September 30, 2005, $150.0 million wasoutstanding under those credit facilities. TE Products and Marathon have eachguaranteed one-half of the repayment of Centennial’s outstanding debt balanceunder a long-term credit agreement, which expires in 2024, and a short-termcredit agreement, which expires in 2007. The guarantees arose in order forCentennial to obtain adequate financing, and the proceeds of the creditagreements were used to fund construction and conversion costs of its pipelinesystem. Prior to the expiration of the long-term credit agreement, TE Productscould be relinquished from responsibility under the guarantee should Centennialmeet certain financial tests. If Centennial defaults on its outstandingbalance, the estimated maximum potential amount of future payments for TEProducts and Marathon is $75.0 million each at September 30, 2005.

TE Products, Marathon and Centennial have entered intoa limited cash call agreement, which allows each member to contribute cash inlieu of Centennial procuring separate insurance in the event of a third-partyliability arising from a catastrophic event. There is an indefinite term forthe agreement and each member is to contribute cash in proportion to itsownership interest, up to a maximum of $50.0 million each. As a result of thecatastrophic event guarantee, TE Products has recorded a $4.7 millionobligation, which represents the present value of the estimated amount that wewould have to pay under the guarantee. In the event that a catastrophic eventoccurred and we were required to contribute cash to Centennial, contributionsexceeding our deductible may be covered by our insurance.

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On February 24, 2005, the General Partner wasacquired from DEFS by DFI. The General Partner owns a 2% general partnerinterest in us and is the general partner of the Partnership. On March 11,2005, the Bureau of Competition of the Federal Trade Commission (“FTC”)delivered written notice to DFI’s legal advisor that it was conducting anon-public investigation to determine whether DFI’s acquisition of the GeneralPartner may substantially lessen competition. The FTC has contacted the GeneralPartner requesting data. The General Partner intends to cooperate fully withany such investigations and inquiries requested by the FTC or any otherregulatory authorities.

**NOTE 13. COMPREHENSIVE INCOME**

SFAS No. 130, *Reporting ComprehensiveIncome* requires certain items such as foreign currency translationadjustments, minimum pension liability adjustments and unrealized gains andlosses on certain investments to be reported in a financial statement. As ofand for the nine months ended September 30, 2005, the component ofcomprehensive income was due to a crude oil hedge. The crude oil hedge maturesin December 2006. While the crude oil hedge is in effect, changes in thefair value of the crude oil hedge, to the extent the hedge is effective, arerecognized in other comprehensive income until they are recognized in netincome in future periods. As of and for the nine months ended September 30,2004, the components of comprehensive income were due to the interest rate swaprelated to our variable rate revolving credit facility, which was designated asa cash flow hedge. The interest rate swap matured in April 2004. While theinterest rate swap was in effect, changes in the fair value of the cash flowhedge, to the extent the hedge was effective, were recognized in othercomprehensive income until the hedge interest costs were recognized in netincome.

The table below reconciles reported net income to totalcomprehensive income for the three months and nine months ended September 30,2005 and 2004 (in thousands):

|                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(as restated)**                               | ** ** | **(as restated)**                              | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Net income                      |       | $                                                    | 29,575     |                                                | $          | 24,770 |   | $ | 117,926 |   | $ | 101,120 |   |
| Net income on  cash flow hedges |       | 35                                                   |       | —                                              |       | 35 |   | 2,902 |   |
| Total  comprehensive income     |       | $                                                    | 29,610     |                                                | $          | 24,770 |   | $ | 117,961 |   | $ | 104,022 |   |

 

Theaccumulated balance of other comprehensive income related to our crude oil cashflow hedge is as follows (in thousands):

| Balance at December 31,  2004                |   | $  | — |   |
|---------------------------------------------------|--------|----|--------|--------|
| Change in fair value of crude oil cash flow hedge |   | 35 |   |
| Balance at  September 30, 2005               |   | $  | 35     |   |

 

**NOTE 14. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIALINFORMATION**

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

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The following supplemental condensed consolidatingfinancial information reflects our separate accounts, the combined accounts ofthe Guarantor Subsidiaries, the combined accounts of our other non-guarantorsubsidiaries, the combined consolidating adjustments and eliminations and ourconsolidated accounts for the dates and periods indicated. For purposes of thefollowing consolidating information, our investments in our subsidiaries andthe Guarantor Subsidiaries’ investments in their subsidiaries are accounted forunder the equity method of accounting.
| ** **                                   | ** ** | **September 30, 2005 (as restated)** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                   | ** ** | **TEPPCO  Partners, L .P.**                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                                  | ** ** |
| Assets                                       |       |                                                     |       |   |   |   |   |   |   |   |   |
| Current assets                               |       | $                                                        | 25,988     |   | $ | 76,609 |   | $ | 978,222 |   | $ | (22,969 | ) | $ | 1,057,850 |   |
| Property, plant and equipment — net     |       | —                                                   |       | 1,294,104 |   | 613,736 |   | — |   | 1,907,840 |   |
| Equity investments                           |       | 1,223,678                                                |       | 461,383 |   | 204,549 |   | (1,529,235 | ) | 360,375 |   |
| Intercompany notes receivable                |       | 1,189,428                                                |       | — |   | — |   | (1,189,428 | ) | — |   |
| Intangible assets                            |       | —                                                   |       | 352,548 |   | 32,571 |   | — |   | 385,119 |   |
| Other assets                                 |       | 5,237                                                    |       | 24,064 |   | 47,855 |   | — |   | 77,156 |   |
| Total assets                                 |       | $                                                        | 2,444,331  |   | $ | 2,208,708 |   | $ | 1,876,933 |   | $ | (2,741,632 | ) | $ | 3,788,340 |   |
| Liabilities and  partners’ capital      |       |                                                     |       |   |   |   |   |   |   |   |   |
| Current liabilities                          |       | $                                                        | 27,683     |   | $ | 110,933 |   | $ | 849,608 |   | $ | (23,880 | ) | $ | 964,344 |   |
| Long-term debt                               |       | 1,191,557                                                |       | 391,260 |   | — |   | — |   | 1,582,817 |   |
| Intercompany notes payable                   |       | —                                                   |       | 581,150 |   | 608,279 |   | (1,189,429 | ) | — |   |
| Other long term liabilities                  |       | 1,441                                                    |       | 14,843 |   | 1,210 |   | — |   | 17,494 |   |
| Total partners’ capital                 |       | 1,223,650                                                |       | 1,110,522 |   | 417,836 |   | (1,528,323 | ) | 1,223,685 |   |
| Total liabilities and partners’ capital |       | $                                                        | 2,444,331  |   | $ | 2,208,708 |   | $ | 1,876,933 |   | $ | (2,741,632 | ) | $ | 3,788,340 |   |

 
| ** **                                    | ** ** | **December  31, 2004** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **TEPPCO  Partners, L.P.**       | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                    | ** ** | **(in thousands)**               | ** ** |
| Assets                                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Current assets                                |       | $                                     | 44,125     |   | $ | 85,992 |   | $ | 576,365 |   | $ | (62,928 | ) | $ | 643,554 |   |
| Property, plant and equipment — net      |       | —                                |       | 1,211,312 |   | 492,390 |   | — |   | 1,703,702 |   |
| Equity investments                            |       | 1,011,131                             |       | 420,343 |   | 202,326 |   | (1,270,493 | ) | 363,307 |   |
| Intercompany notes receivable                 |       | 1,084,034                             |       | — |   | — |   | (1,084,034 | ) | — |   |
| Intangible assets                             |       | —                                |       | 372,621 |   | 34,737 |   | — |   | 407,358 |   |
| Other assets                                  |       | 5,980                                 |       | 22,183 |   | 40,200 |   | — |   | 68,363 |   |
| Total assets                                  |       | $                                     | 2,145,270  |   | $ | 2,112,451 |   | $ | 1,346,018 |   | $ | (2,417,455 | ) | $ | 3,186,284 |   |
| Liabilities and  partners’ capital       |       |                                  |       |   |   |   |   |   |   |   |   |
| Current liabilities                           |       | $                                     | 45,255     |   | $ | 142,513 |   | $ | 556,474 |   | $ | (62,930 | ) | $ | 681,312 |   |
| Long-term debt                                |       | 1,086,909                             |       | 393,317 |   | — |   | — |   | 1,480,226 |   |
| Intercompany notes payable                    |       | —                                |       | 676,993 |   | 407,040 |   | (1,084,033 | ) | — |   |
| Other long term liabilities                   |       | 2,003                                 |       | 9,980 |   | 1,660 |   | — |   | 13,643 |   |
| Total partners’ capital                  |       | 1,011,103                             |       | 889,648 |   | 380,844 |   | (1,270,492 | ) | 1,011,103 |   |
| Total  liabilities and partners’ capital |       | $                                     | 2,145,270  |   | $ | 2,112,451 |   | $ | 1,346,018 |   | $ | (2,417,455 | ) | $ | 3,186,284 |   |

 

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| ** **                   | ** ** | **Three Months Ended September 30, 2005 (as restated)** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **TEPPCO  Partners, L.P.**                                                            | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                   | ** ** | **(in thousands)**                                                                    | ** ** |
| Operating  revenues          |       | $                                                                                          | —     |   | $ | 107,728 |   | $ | 2,396,410 |   | $ | (342 | ) | $ | 2,503,796 |   |
| Costs and  expenses          |       | —                                                                                     |       | 77,759 |   | 2,382,340 |   | (342 | ) | 2,459,757 |   |
| Gains on sales  of assets    |       | —                                                                                     |       | (24 | ) | (7 | ) | — |   | (31 | ) |
| Operating income             |       | —                                                                                     |       | 29,993 |   | 14,077 |   | — |   | 44,070 |   |
| Interest expense  — net |       | —                                                                                     |       | (12,476 | ) | (7,250 | ) | — |   | (19,726 | ) |
| Equity earnings              |       | 29,575                                                                                     |       | 11,723 |   | 5,398 |   | (41,949 | ) | 4,747 |   |
| Other income —  net     |       | —                                                                                     |       | 335 |   | 149 |   | — |   | 484 |   |
| Net income                   |       | $                                                                                          | 29,575     |   | $ | 29,575 |   | $ | 12,374 |   | $ | (41,949 | ) | $ | 29,575 |   |

 
| ** **                   | ** ** | **Three Months Ended September 30, 2004 (as restated)** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **TEPPCO  Partners, L.P.**                                                            | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                   | ** ** | **(in thousands)**                                                                    | ** ** |
| Operating  revenues          |       | $                                                                                          | —     |   | $ | 106,776 |   | $ | 1,383,551 |   | $ | (317 | ) | $ | 1,490,010 |   |
| Costs and  expenses          |       | —                                                                                     |       | 81,291 |   | 1,372,804 |   | (317 | ) | 1,453,778 |   |
| Gains on sales  of assets    |       | —                                                                                     |       | (472 | ) | (377 | ) | — |   | (849 | ) |
| Operating income             |       | —                                                                                     |       | 25,957 |   | 11,124 |   | — |   | 37,081 |   |
| Interest expense  — net |       | —                                                                                     |       | (11,625 | ) | (5,506 | ) | — |   | (17,131 | ) |
| Equity earnings              |       | 24,770                                                                                     |       | 10,219 |   | 5,770 |   | (36,223 | ) | 4,536 |   |
| Other income —  net     |       | —                                                                                     |       | 219 |   | 65 |   | — |   | 284 |   |
| Net income                   |       | $                                                                                          | 24,770     |   | $ | 24,770 |   | $ | 11,453 |   | $ | (36,223 | ) | $ | 24,770 |   |

 

30

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| ** **                   | ** ** | **Nine Months Ended September 30, 2005 (as restated)** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **TEPPCO  Partners, L.P.**                                                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                   | ** ** | **(in thousands)**                                                                   | ** ** |
| Operating  revenues          |       | $                                                                                         | —     |   | $ | 329,310 |   | $ | 5,793,862 |   | $ | (2,391 | ) | $ | 6,120,781 |   |
| Costs and  expenses          |       | —                                                                                    |       | 214,807 |   | 5,747,873 |   | (2,391 | ) | 5,960,289 |   |
| Gains on sales  of assets    |       | —                                                                                    |       | (538 | ) | (59 | ) | — |   | (597 | ) |
| Operating income             |       | —                                                                                    |       | 115,041 |   | 46,048 |   | — |   | 161,089 |   |
| Interest expense  — net |       | —                                                                                    |       | (39,751 | ) | (20,889 | ) | — |   | (60,640 | ) |
| Equity earnings              |       | 117,926                                                                                   |       | 41,956 |   | 19,310 |   | (162,600 | ) | 16,592 |   |
| Other income —  net     |       | —                                                                                    |       | 680 |   | 205 |   | — |   | 885 |   |
| Net income                   |       | $                                                                                         | 117,926    |   | $ | 117,926 |   | $ | 44,674 |   | $ | (162,600 | ) | $ | 117,926 |   |

 
| ** **                   | ** ** | **Nine Months Ended September 30, 2004 (as restated)** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **TEPPCO  Partners, L.P.**                                                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                   | ** ** | **(in thousands)**                                                                   | ** ** |
| Operating  revenues          |       | $                                                                                         | —     |   | $ | 317,477 |   | $ | 3,847,540 |   | $ | (2,382 | ) | $ | 4,162,635 |   |
| Costs and  expenses          |       | —                                                                                    |       | 226,138 |   | 3,806,469 |   | (2,382 | ) | 4,030,225 |   |
| Gains on sales  of assets    |       | —                                                                                    |       | (489 | ) | (484 | ) | — |   | (973 | ) |
| Operating income             |       | —                                                                                    |       | 91,828 |   | 41,555 |   | — |   | 133,383 |   |
| Interest expense  — net |       | —                                                                                    |       | (35,636 | ) | (17,554 | ) | — |   | (53,190 | ) |
| Equity earnings              |       | 101,120                                                                                   |       | 44,217 |   | 24,404 |   | (149,814 | ) | 19,927 |   |
| Other income —  net     |       | —                                                                                    |       | 711 |   | 289 |   | — |   | 1,000 |   |
| Net income                   |       | $                                                                                         | 101,120    |   | $ | 101,120 |   | $ | 48,694 |   | $ | (149,814 | ) | $ | 101,120 |   |

 

31

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| ** **                                                                                   | ** ** | **Nine Months Ended September 30, 2005 (as restated)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **TEPPCO  Partners, L.P.**                                                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                                                                   | ** ** |
| Cash flows from  operating activities                                                        |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Net income                                                                                   |       | $                                                                                         | 117,926    |   | $ | 117,926 |   | $ | 44,674 |   | $ | (162,600 | ) | $ | 117,926 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                |       | —                                                                                    |       | 61,573 |   | 21,442 |   | — |   | 83,015 |   |
| Earnings (losses) in equity investments, net of  distributions                          |       | 66,282                                                                                    |       | 6,542 |   | (1,820 | ) | (59,418 | ) | 11,586 |   |
| Gains on sales of assets                                                                     |       | —                                                                                    |       | (538 | ) | (59 | ) | — |   | (597 | ) |
| Changes in assets and liabilities and other                                                  |       | (108,054                                                                                  | )          | (52,386 | ) | (113,346 | ) | 105,804 |   | (167,982 | ) |
| Net cash  provided by (used in) operating activities                                         |       | 76,154                                                                                    |       | 133,117 |   | (49,109 | ) | (116,214 | ) | 43,948 |   |
|                                                                                         |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Cash flows from  investing activities                                                        |       | (278,830                                                                                  | )          | (21,909 | ) | (144,749 | ) | 183,069 |   | (262,419 | ) |
| Cash flows from  financing activities                                                        |       | 202,121                                                                                   |       | (124,614 | ) | 191,061 |   | (66,447 | ) | 202,121 |   |
| Net decrease in  cash and cash equivalents                                              |       | (555                                                                                      | )          | (13,406 | ) | (2,797 | ) | 408 |   | (16,350 | ) |
| Cash and cash  equivalents at beginning of period                                            |       | 4,116                                                                                     |       | 13,596 |   | 2,826 |   | (4,116 | ) | 16,422 |   |
| Cash and cash  equivalents at end of period                                             |       | $                                                                                         | 3,561      |   | $ | 190 |   | $ | 29 |   | $ | (3,708 | ) | $ | 72 |   |

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30, 2004 (as restated)** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **TEPPCO  Partners, L.P.**                                                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                                                                   | ** ** |
| Cash flows from  operating activities                                              |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Net income                                                                         |       | $                                                                                         | 101,120    |   | $ | 101,120 |   | $ | 48,694 |   | $ | (149,814 | ) | $ | 101,120 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                      |       | —                                                                                    |       | 67,784 |   | 16,724 |   | — |   | 84,508 |   |
| Earnings (losses) in equity investments, net of  distributions                     |       | 73,279                                                                                    |       | (512 | ) | 6,495 |   | (59,764 | ) | 19,498 |   |
| Gains on sales of assets                                                           |       | —                                                                                    |       | (489 | ) | (484 | ) | — |   | (973 | ) |
| Changes in assets and liabilities and other                                        |       | (133,125                                                                                  | )          | 4,060 |   | (27,902 | ) | 126,747 |   | (30,220 | ) |
| Net cash  provided by operating activities                                         |       | 41,274                                                                                    |       | 171,963 |   | 43,527 |   | (82,831 | ) | 173,933 |   |
|                                                                               |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Cash flows from  investing activities                                              |       | 98                                                                                        |       | (18,725 | ) | (29,888 | ) | (86,363 | ) | (134,878 | ) |
| Cash flows from  financing activities                                              |       | (58,899                                                                                   | )          | (165,268 | ) | (16,897 | ) | 182,165 |   | (58,899 | ) |
| Net decrease in  cash and cash equivalents                                         |       | (17,527                                                                                   | )          | (12,030 | ) | (3,258 | ) | 12,971 |   | (19,844 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 19,744                                                                                    |       | 19,243 |   | 5,670 |   | (15,188 | ) | 29,469 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                                                         | 2,217      |   | $ | 7,213 |   | $ | 2,412 |   | $ | (2,217 | ) | $ | 9,625 |   |

 

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**NOTE 15. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS**

Weare restating our previously reported consolidated financial statements for thequarterly periods ended September 30, 2004 and 2005. In the fourth quarterof 2005, we determined that our method of accounting for the $33.4 millionexcess investment in Centennial, previously described as an intangible assetwith an indefinite life, and the $27.1 million excess investment in Seaway,previously described as equity method goodwill, was incorrect. Through ouraccounting for these excess investments in Centennial and Seaway as intangibleassets with indefinite lives and equity method goodwill, respectively, we havebeen testing the amounts for impairment on an annual basis as opposed toamortizing them over a determinable life. We determined that it would be moreappropriate to account for these excess investments as intangible assets withdeterminable lives. As a result, we made non-cash adjustments that reduced thenet value of the excess investments in Centennial and Seaway, and increasedamortization expense allocated to our equity earnings. The restatement caused a$1.3 million and $1.1 million reduction to net income as previously reportedfor the three months ended September 30, 2005 and 2004, respectively, anda $3.8 million and $2.9 million reduction to net income as previously reportedfor the nine months ended September 30, 2005 and 2004, respectively. Werestated previously reported consolidated financial statements for the fiscalyears ended December 31, 2003 and 2004 in our Annual Report on Form 10-Kfor the year ended December 31, 2005.

Whilewe believe the impacts of these non-cash adjustments are not material to anypreviously issued financial statements, we determined that the cumulative adjustmentfor these non-cash items was too material to record in the fourth quarter of2005, and therefore it was most appropriate to restate prior periods’ results. Thesenon-cash adjustments had no effect on our operating income, compensationexpense, debt balances or ability to meet all requirements related to our debtfacilities. The restatement had no impact on total cash flows from operatingactivities, investing activities or financing activities. All amounts in theaccompanying consolidated financial statements have been adjusted for thisrestatement.

We will continueto amortize the $30.0 million excess investment in Centennial related to acontract using units-of-production methodology over a 10-year life. Theremaining $3.4 million related to a pipeline will continue to be amortized on astraight-line basis over 35 years. We will continue to amortize the $27.1million excess investment in Seaway on a straight-line basis over a 39-yearlife related primarily to a pipeline.

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Thefollowing tables summarize the impact of the restatement adjustment onpreviously reported balance sheet amounts and partners’ capital amounts for September 30,2005, and income statement amounts and cash flow amounts for the periods ended September 30,2005 and 2004 (in thousands):

**Balance Sheet Amounts:**

|                                               | ** ** | **September 30, 2005** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity  investments                           |       | $                                | 374,531    |   | $ | (14,156 | ) | $ | 360,375 |   |
| Total assets                                  |       | $                                | 3,802,496  |   | $ | (14,156 | ) | $ | 3,788,340 |   |
|                                          |       |                             |       |   |   |   |   |
| Partners’ capital:                       |       |                             |       |   |   |   |   |
| Accumulated other comprehensive income        |       | $                                | 35         |   | $ | —- |   | $ | 35 |   |
| General partner’s interest               |       | (50,889                          | )          | (3,991 | ) | (54,880 | ) |
| Limited partners’ interest               |       | 1,288,695                        |       | (10,165 | ) | 1,278,530 |   |
| Total partners’ capital                  |       | 1,237,841                        |       | (14,156 | ) | 1,223,685 |   |
| Total  liabilities and partners’ capital |       | $                                | 3,802,496  |   | $ | (14,156 | ) | $ | 3,788,340 |   |

 

**Income Statement Amounts:**

|                                                        | ** ** | **Three Months Ended  September 30, 2005** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                               | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity earnings                                        |       | $                                                              | 6,095      |   | $ | (1,348 | ) | $ | 4,747 |   |
| Net income                                             |       | 30,923                                                         |       | (1,348 | ) | 29,575 |   |
|                                                   |       |                                                           |       |   |   |   |   |
| Net Income Allocation:                                 |       |                                                           |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | $                                                              | 21,872     |   | $ | (957 | ) | $ | 20,915 |   |
| General Partner                                        |       | 9,051                                                          |       | (391 | ) | 8,660 |   |
| Total net income allocated                             |       | $                                                              | 30,923     |   | $ | (1,348 | ) | $ | 29,575 |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                                              | 0.31       |   | $ | (0.01 | ) | $ | 0.30 |   |

 

|                                                        | ** ** | **Three Months Ended  September 30, 2004** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                               | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity earnings                                        |       | $                                                              | 5,621      |   | $ | (1,085 | ) | $ | 4,536 |   |
| Net income                                             |       | 25,855                                                         |       | (1,085 | ) | 24,770 |   |
|                                                   |       |                                                           |       |   |   |   |   |
| Net Income Allocation:                                 |       |                                                           |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | $                                                              | 18,396     |   | $ | (772 | ) | $ | 17,624 |   |
| General Partner                                        |       | 7,459                                                          |       | (313 | ) | 7,146 |   |
| Total net income allocated                             |       | $                                                              | 25,855     |   | $ | (1,085 | ) | $ | 24,770 |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                                              | 0.29       |   | $ | (0.01 | ) | $ | 0.28 |   |

 

34

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|                                                        | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity earnings                                        |       | $                                                             | 20,403     |   | $ | (3,811 | ) | $ | 16,592 |   |
| Net income                                             |       | 121,737                                                       |       | (3,811 | ) | 117,926 |   |
|                                                   |       |                                                          |       |   |   |   |   |
| Net Income Allocation:                                 |       |                                                          |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | 86,105                                                        |       | (2,695 | ) | 83,410 |   |
| General Partner                                        |       | 35,632                                                        |       | (1,116 | ) | 34,516 |   |
| Total net income allocated                             |       | $                                                             | 121,737    |   | $ | (3,811 | ) | $ | 117,926 |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                                             | 1.29       |   | $ | (0.04 | ) | $ | 1.25 |   |

 

|                                                        | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity earnings                                        |       | $                                                             | 22,854     |   | $ | (2,927 | ) | $ | 19,927 |   |
| Net income                                             |       | 104,047                                                       |       | (2,927 | ) | 101,120 |   |
|                                                   |       |                                                          |       |   |   |   |   |
| Net Income Allocation:                                 |       |                                                          |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | $                                                             | 74,032     |   | $ | (2,083 | ) | $ | 71,949 |   |
| General Partner                                        |       | 30,015                                                        |       | (844 | ) | 29,171 |   |
| Total net income allocated                             |       | $                                                             | 104,047    |   | $ | (2,927 | ) | $ | 101,120 |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                                             | 1.18       |   | $ | (0.04 | ) | $ | 1.14 |   |

 

**Cash Flow Amounts:**

|                                                       | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                            | ** ** | **As Previously  Reported**                              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:                |       |                                                          |       |   |   |   |   |
| Net income                                            |       | $                                                             | 121,737    |   | $ | (3,811 | ) | $ | 117,926 |   |
| Earnings in  equity investments, net of distributions |       | 7,775                                                         |       | 3,811 |   | 11,586 |   |
|                                                       |            |                                                               |            |  |  |  |  |  |  |  |

 

|                                                       | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                            | ** ** | **As Previously  Reported**                              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:                |       |                                                          |       |   |   |   |   |
| Net income                                            |       | $                                                             | 104,047    |   | $ | (2,927 | ) | $ | 101,120 |   |
| Earnings in  equity investments, net of distributions |       | 16,571                                                        |       | 2,927 |   | 19,498 |   |
|                                                       |            |                                                               |            |  |  |  |  |  |  |  |

 

35

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**Partners’ Capital Amounts:**
| ** **                                                                | ** ** | **Outstanding  Limited  Partner  Units** | ** ** | **General  Partner’s  Interest** | ** ** | **Limited  Partners’  Interests** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|-----------|------------|
| Partners’  capital at September 30, 2005 as previously reported |       | 69,963,554                               |       | $                                     | (50,889    | )                                      | $          | 1,288,695                                     |       | $         | 35         |   | $ | 1,237,841 |   |
| Restatement adjustment                                                    |       | —                                   |       | (3,991                                | )          | (10,165                                | )          | —                                        |       | (14,156   | )          |
|                                                                      |       |                                     |       |                                  |       |                                   |       |                                          |       |      |       |
| Partners’ capital at  September 30, 2005 as restated            |       | 69,963,554                               |       | $                                     | (54,880    | )                                      | $          | 1,278,530                                     |       | $         | 35         |   | $ | 1,223,685 |   |

 

36

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**General**

You should read the following review of our financialposition and results of operations in conjunction with our ConsolidatedFinancial Statements and the notes thereto. Material period-to-period variancesin the consolidated statements of income are discussed under “Results ofOperations.”  The adjustments resultingfrom the restatement of our financial statements are discussed under “Restatementof Consolidated Financial Statements.” The “Financial Condition and Liquidity” section analyzes our cash flowsand financial position. “Other Considerations” addresses trends, future plansand contingencies that are reasonably likely to materially affect our futureliquidity or earnings. The Consolidated Financial Statements should be read inconjunction with the financial statements and related notes, together with ourdiscussion and analysis of financial position and results of operationsincluded in our Annual Report on Form 10-K for the year ended December 31,2004.

**Forward-Looking Statements**

Thematters discussed in this Report include “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. All statements that express belief,expectation, estimates or intentions, as well as those that are not statementsof historical facts are forward-looking statements. The words “proposed”, “anticipates”,“potential”, “may”, “will”, “could”, “should”, “expect”, “estimate”, “believe”,“intend” and similar expressions are intended to identify forward-lookingstatements. Without limiting the broader description of forward-lookingstatements above, we specifically note that statements included in thisdocument that address activities, events or developments that we expect oranticipate will or may occur in the future, including such things as estimatedfuture capital expenditures (including the amount and nature thereof), businessstrategy and measures to implement strategy, competitive strengths, goals,expansion and growth of our business and operations, plans, references tofuture success, references to intentions as to future matters and other suchmatters are forward-looking statements. These statements are based on certainassumptions and analyses made by us in light of our experience and ourperception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate under thecircumstances. While we believe our expectations reflected in theseforward-looking statements are reasonable, whether actual results anddevelopments will conform with our expectations and predictions is subject to anumber of risks and uncertainties, including general economic, market orbusiness conditions, the opportunities (or lack thereof) that may be presentedto and pursued by us, competitive actions by other pipeline companies, changesin laws or regulations and other factors, many of which are beyond our control.For example, the demand for refined products is dependent upon the price,prevailing economic conditions and demographic changes in the markets served,trucking and railroad freight, agricultural usage and military usage; thedemand for propane is sensitive to the weather and prevailing economicconditions; the demand for petrochemicals is dependent upon prices for productsproduced from petrochemicals; the demand for crude oil and petroleum productsis dependent upon the price of crude oil and the products produced from therefining of crude oil; and the demand for natural gas is dependent upon theprice of natural gas and the locations in which natural gas is drilled. We arealso subject to regulatory factors such as the amounts we are allowed to chargeour customers for the services we provide on our regulated pipeline systems. Consequently,all of the forward-looking statements made in this document are qualified bythese cautionary statements, and we cannot assure you that actual results ordevelopments that we anticipate will be realized or, even if substantiallyrealized, will have the expected consequences to or effect on us or our businessor operations. For additional discussion of such risks and uncertainties, seeour Annual Report on Form 10-K for the year ended December 31,2004, and other filings we have made with the Securities and ExchangeCommission (“SEC”).

**Restatement of Consolidated Financial Statements**

Weare restating our previously reported consolidated financial statements for thequarterly periods ended September 30, 2004 and 2005. In the fourth quarterof 2005, we determined that our method of accounting for the $33.4 millionexcess investment in Centennial, previously described as an intangible assetwith an indefinite life, and the $27.1 million excess investment in Seaway,previously described as equity method goodwill, was incorrect. 

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Through ouraccounting for these excess investments in Centennial and Seaway as intangibleassets with indefinite lives and equity method goodwill, respectively, we havebeen testing the amounts for impairment on an annual basis as opposed toamortizing them over a determinable life. We determined that it would be moreappropriate to account for these excess investments as intangible assets withdeterminable lives. As a result, we made non-cash adjustments that reduced thenet value of the excess investments in Centennial and Seaway, and increasedamortization expense allocated to our equity earnings. The restatement caused a$1.3 million, or $0.01 per Unit, and $1.1 million, or $0.01 per Unit, reductionto net income and earnings per unit as previously reported for the three monthsended September 30, 2005 and 2004, respectively, and a $3.8 million, or$0.04 per Unit, and $2.9 million, or $0.04 per Unit, reduction to net incomeand earnings per unit as previously reported for the nine months ended September 30,2005 and 2004, respectively. We restated previously reported consolidatedfinancial statements for the fiscal years ended December 31, 2003 and 2004in our Annual Report on Form 10-K for the year ended December 31,2005.

Whilewe believe the impacts of these non-cash adjustments are not material to anypreviously issued financial statements, we determined that the cumulativeadjustment for these non-cash items was too material to record in the fourthquarter of 2005, and therefore it was most appropriate to restate prior periods’results. These non-cash adjustments had no effect on our operating income,compensation expense, debt balances or ability to meet all requirements relatedto our debt facilities. The restatement had no impact on total cash flows fromoperating activities, investing activities or financing activities. All amountsin the accompanying consolidated financial statements have been adjusted forthis restatement.

We will continueto amortize the $30.0 million excess investment in Centennial related to acontract using units-of-production methodology over a 10-year life. Theremaining $3.4 million related to a pipeline will continue to be amortized on astraight-line basis over 35 years. We will continue to amortize the $27.1million excess investment in Seaway on a straight-line basis over a 39-yearlife related primarily to a pipeline.

**Critical Accounting Policies and Estimates**

A summary of the significant accounting policies wehave adopted and followed in the preparation of our consolidated financialstatements is detailed in our consolidated financial statements for the yearended December 31, 2004, included in our Annual Report on Form 10-K.Certain of these accounting policies require the use of estimates. Thefollowing estimates, in our opinion, are subjective in nature, require theexercise of judgment and involve complex analysis: revenue and expenseaccruals, including accruals for power costs, property taxes and crude oilmargins; environmental costs; asset impairment analysis related to property,plant and equipment; and amortization expense and asset impairment analysisrelated to goodwill and other intangible assets. These estimates are based onour knowledge and understanding of current conditions and actions we may takein the future. Changes in these estimates will occur as a result of the passageof time and the occurrence of future events. Subsequent changes in theseestimates may have a significant impact on our financial condition and resultsof operations.

## **ManagementOverview of the Three Months and Nine Months Ended September 30, 2005**

## We reported net income of $29.6 million, or$0.30 per Limited Partner Unit (“Unit” or “Units”), for the three months ended September 30,2005, compared with net income of $24.8 million, or $0.28 per Unit, for thethree months ended September 30, 2004. Net income was $117.9 million, or$1.25 per Unit, for the nine months ended September 30, 2005, comparedwith net income of $101.1 million, or $1.14 per Unit, for the nine months endedSeptember 30, 2004. The weighted average number of Units outstanding was70.0 million and 63.0 million for the three months ended September 30,2005 and 2004, respectively, and 66.5 million and 63.0 million for the ninemonths ended September 30, 2005 and 2004, respectively.

## Our Downstream Segment’s operating income forthe three months ended September 30, 2005, increased compared with theprior year period primarily due to lower depreciation expense attributable to a$4.4 million asset impairment charge in the 2004 period (see Note 3. Property,Plant and Equipment), a $4.0 million decrease in 

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## pipeline integrity costs, increased margins on product inventory salesand decreased product measurement losses. These increases to operating incomewere partially offset by the recognition in the 2004 period of $4.1 million ofdeferred revenue related to the expiration of two customer transportationagreements, $1.3 million of regulatory penalties for past incidents, theimpacts of Hurricanes Katrina and Rita in the third quarter of 2005 whichreduced revenues by an estimated $1.5 million, the impact of a propane releaseand fire at an LPG storage facility in Ohio, which reduced revenues by anestimated $0.3 million, increased pipeline operating expense, higher propertytaxes, higher depreciation expense primarily due to asset acquisitions and theretirement of assets in the current period, increased environmental remediationand assessment costs and transition expenses related to the change in controlof our general partner.

## For the nine months ended September 30,2005, operating income for the Downstream Segment increased compared with theprior year period primarily due to a $9.7 million decrease in pipelineintegrity costs, lower depreciation expense attributable to an asset impairmentcharge in the 2004 period, increased refined products and LPG transportationrevenues and volumes and decreased product measurement losses. We anticipatethat our pipeline integrity expenses for our Downstream Segment for 2005 willbe approximately $15.1 million lower than our 2004 expenses primarily due tothe completion of pipeline inspections and repairs under our integritymanagement program. These increases to operating income were partially offsetby the recognition of $4.1 million of deferred revenue in the 2004 period, $1.8million of regulatory penalties for past incidents, the impact of thehurricanes in the third quarter of 2005 and the propane release and fire at astorage facility in Ohio, increased pipeline operating expenses, higherproperty taxes, higher depreciation expense primarily due to asset acquisitionsand the retirement of assets in the current period, transition expenses relatedto the change in control of our general partner and increased environmentalremediation and assessment costs.

## Our Upstream Segment’s operating income forthe three months ended September 30, 2005, increased compared with theprior year period primarily due to a $3.4 million increase in marketing marginsrelated to asset acquisitions, lower pipeline integrity costs and increasedtransportation revenues on the South Texas and West Texas systems. Theseincreases to operating income were partially offset by a $2.6 million non-cashasset impairment charge related to two of our crude oil systems and higherproperty taxes, depreciation expense and operating expenses related toacquisitions earlier this year (see Note 5. Acquisitions and Dispositions). Forthe nine months ended September 30, 2005, operating income for theUpstream Segment decreased compared with the prior year period primarily due tothe non-cash impairment charge, increased operating expenses of acquired assetsand higher insurance and labor expenses. These decreases to operating incomewere partially offset by a $4.1 million increase in transportation revenuesprimarily on the South Texas and West Texas systems, a $3.4 million increase inmarketing margins, lower pipeline integrity costs, lower product measurementlosses and lower environmental remediation and assessment costs. Pipelineintegrity expenses decreased $1.5 million and $1.8 million for the three monthsand nine months ended September 30, 2005, respectively, compared with theprior year periods. We anticipate that our 2005 pipeline integrity expenses forour Upstream Segment will be approximately $2.1 million lower than our 2004expenses due to the completion of pipeline inspections and repairs under ourintegrity management program. Equity earnings from Seaway Crude PipelineCompany (“Seaway”) decreased for the three months and nine months ended September 30,2005, compared with the prior year periods primarily due to higher operating,general and administrative expenses primarily related to a pipeline release in May 2005and a gain recognized on an inventory settlement in 2004, partially offset byincreased transportation volumes in the 2005 periods.

## Our Midstream Segment’s operating income forthe three months and nine months ended September 30, 2005, increasedcompared to the prior year periods primarily due to increased revenues andvolumes on Jonah Gas Gathering Company (“Jonah”), resulting from our 2003 PhaseIII expansion and the installation of additional capacity during the fourthquarter of 2004. Revenues on Val Verde Gas Gathering Company (“Val Verde”)increased due to new connections made to the system in May and December 2004,partially offset by the impact of reduced revenues related to the naturaldecline of coal bed methane (“CBM”) production from existing wells. Additionally,our operating and gas settlement expenses decreased compared with the prioryear period. Transportation revenues on the Panola and Chaparral Pipelinesincreased from the prior year periods. Pipeline integrity expenses decreased$0.7 million for the nine months ended September 30, 2005, compared withthe prior 

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## year period. These increases to operating income were partially offsetby lower gathering rates on the new connections at Val Verde, on which thegathering rates are lower than existing average rates on the system.

Certain factors are key to ourbusiness segments as discussed in this Report. These include the safe, reliableand efficient operation of the pipelines and facilities that we own or operatewhile meeting increased regulations that govern the operation of our assets andthe costs associated with such regulations. We are also focused on ourcontinued growth through expansion of the assets that we own and through theacquisition of assets that complement our current operations.

We believe that ourcurrent strategy and focus will provide continued growth in earnings and cashdistributions. This growth potential is based on:

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

·                 Continued development of the Jonah system,which serves the Jonah and Pinedale fields;

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

·                  Growth in our Downstream Segment, resultingfrom our recent capacity expansion, grass roots facility investments,acquisitions and growing demand for Gulf Coast sourced products.

On March 31, 2005, we purchased crude oilpipeline assets for $7.1 million from BP Pipelines (North America) Inc. (“BP”).The assets include approximately 158 miles of pipeline, which extend fromMexia, Texas, to the Houston, Texas, area and two stations in south Houstonwith connections to a BP pipeline that originates in south Houston. We areintegrating these assets into our South Texas pipeline system, included in ourUpstream Segment, which will allow us to realize synergies within our existingasset base and will provide future growth opportunities.

On April 1, 2005, we purchased crude oil storageand terminaling assets in Cushing, Oklahoma, from Koch Supply &Trading, L.P. for $35.4 million. The assets consist of eight storage tanks with945,000 barrels of storage capacity, receipt and delivery manifolds,interconnections to several pipelines, crude oil inventory and approximately 70acres of land. The storage and terminaling assets will complement our existinginfrastructure in Cushing and strengthen our gathering and marketing businessin our Upstream Segment.

On July 12, 2005, we purchased a refined productsterminal and two-bay truck loading rack in North Little Rock, Arkansas, for$6.8 million from Exxon Mobil Corporation. The assets include three storagetanks and a two-bay truck loading rack. The terminal serves the centralArkansas refined products market and complements our existing DownstreamSegment infrastructure in North Little Rock, Arkansas.

On July 15, 2005, we acquired from Texas GencoLLC (“Genco”) all of its interests in certain companies that own a 90-milepipeline system and 5.5 million barrels of storage capacity for $62.1 million. Thisacquisition was made as part of an expansion of our refined products origincapabilities in the Houston, Texas, and Texas City, Texas, areas. The assets ofthe purchased companies will be integrated into our Downstream Segment origininfrastructure in Texas City and Baytown, Texas. The integration and othersystem enhancements should be in service by the fourth quarter of 2006, at anestimated cost of $45.0 million. The strategic location of these assets, with refinedproducts interconnections to major exchange terminals in the Houston area, willprovide significant long-term value to our customers and the Texas Gulf Coastrefining and logistics system.

Consistent with our business strategy, we continuouslyevaluate possible acquisitions of assets that would complement our currentoperations, including assets which, if acquired, would have a material effecton our financial position, results of operations or cash flows**.**

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

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

EPCO performs all management and operating functionsrequired for us, and we reimburse EPCO for all direct and indirect expensesthat have been incurred in managing us. As a result of the sale of our GeneralPartner, DEFS and Duke Energy will continue to provide some administrativeservices for us for a period of time until we assume these services. Inconnection with us assuming the operations of certain of the TEPPCO Midstreamassets from DEFS, certain DEFS employees became employees of EPCO effective June 1,2005.

In connection with our formation in 1990, the Companyreceived 2,500,000 Deferred Participation Interests (“DPIs”). Effective April 1,1994, the DPIs began participating in distributions of cash and allocations ofprofit and loss in a manner identical to Limited Partner Units and are treatedas Limited Partner Units for purposes of this Report. These DPIs were assignedto Duke Energy when ownership of the Company was transferred from Duke Energyto DEFS in 2000. On February 24, 2005, DFI entered into an LP UnitPurchase and Sale Agreement with Duke Energy and purchased these 2,500,000 DPIsfor approximately $100.0 million.

We operate and report in three business segments:

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

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

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

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

Our Downstream Segment revenues are earned fromtransportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sale of product inventory and other ancillaryservices. The two largest operating expense items of the Downstream Segment arelabor and electric power. We generally realize higher revenues during the firstand fourth quarters of each year since our operations are somewhat seasonal. Refinedproducts volumes are generally higher during the second and third quartersbecause of greater demand for 

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gasolines during the spring and summer driving seasons.LPGs volumes are generally higher from November through March due tohigher demand in the Northeast for propane, a major fuel for residentialheating. Our Downstream Segment also includes the results of operations of thenorthern portion of the Dean Pipeline, which transports refinery gradepropylene from Mont Belvieu to Point Comfort, Texas. Our Downstream Segmentalso includes our equity investments in Centennial Pipeline LLC (“Centennial”)and Mont Belvieu Storage Partners, L.P. (“MB Storage”) (see Note 7. EquityInvestments).

OurUpstream Segment revenues are earned from gathering, transportation, marketingand storage of crude oil and distribution of lubrication oils and specialtychemicals, principally in Oklahoma, Texas, New Mexico and the Rocky Mountainregion. Marketing operations consist primarily of aggregating purchased crudeoil along our pipeline systems, or from third party pipeline systems, and arrangingthe necessary transportation logistics for the ultimate sale of the crude oilto local refineries, marketers or other end users. Our Upstream Segment alsoincludes our equity investment in Seaway (see Note 7. Equity Investments). Seawayconsists of large diameter pipelines that transport crude oil from Seaway’smarine terminals on the U.S. Gulf Coast to Cushing, Oklahoma, a crude oildistribution point for the central United States, and to refineries in theTexas City and Houston areas.

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

**Results of Operations**

Thefollowing table summarizes financial information by business segment for thethree months and nine months ended September 30, 2005 and 2004 (inthousands):
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                             | ** ** | **2004**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(as restated)**                               | ** ** | **(as restated)**                                    | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Operating revenues:        |       |                                                 |       |                                                      |       |   |   |   |   |
| Downstream Segment         |       | $                                                    | 66,094     |                                                      | $          | 68,546 |   | $ | 207,699 |   | $ | 205,719 |   |
| Upstream Segment           |       | 2,380,734                                            |       | 1,370,086                                                 |       | 5,750,514 |   | 3,807,436 |   |
| Midstream Segment          |       | 57,310                                               |       | 51,695                                                    |       | 164,959 |   | 151,862 |   |
| Intersegment eliminations  |       | (342                                                 | )          | (317                                                      | )          | (2,391 | ) | (2,382 | ) |
| Total operating revenues   |       | 2,503,796                                            |       | 1,490,010                                                 |       | 6,120,781 |   | 4,162,635 |   |
|                       |       |                                                 |       |                                                      |       |   |   |   |   |
| Operating income:          |       |                                                 |       |                                                      |       |   |   |   |   |
| Downstream Segment         |       | 14,615                                               |       | 12,781                                                    |       | 61,099 |   | 53,082 |   |
| Upstream Segment           |       | 5,207                                                |       | 4,778                                                     |       | 22,199 |   | 23,314 |   |
| Midstream Segment          |       | 24,248                                               |       | 19,522                                                    |       | 77,791 |   | 56,987 |   |
| Total operating income     |       | 44,070                                               |       | 37,081                                                    |       | 161,089 |   | 133,383 |   |
|                       |       |                                                 |       |                                                      |       |   |   |   |   |
| Earnings before  interest: |       |                                                 |       |                                                      |       |   |   |   |   |
| Downstream Segment         |       | 14,270                                               |       | 11,750                                                    |       | 58,957 |   | 49,253 |   |
| Upstream Segment           |       | 10,708                                               |       | 10,608                                                    |       | 41,641 |   | 47,975 |   |
| Midstream Segment          |       | 24,323                                               |       | 19,543                                                    |       | 77,968 |   | 57,082 |   |
|                       |       |                                                 |       |                                                      |       |   |   |   |   |
| Interest expense           |       | (22,033                                              | )          | (18,495                                                   | )          | (65,202 | ) | (57,002 | ) |
| Interest  capitalized      |       | 2,307                                                |       | 1,364                                                     |       | 4,562 |   | 3,812 |   |
| Net income                 |       | $                                                    | 29,575     |                                                      | $          | 24,770 |   | $ | 117,926 |   | $ | 101,120 |   |

 

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Thefollowing is a detailed analysis of the results of operations, includingreasons for changes in results, by each of our operating segments.

**Downstream Segment**

Thefollowing table provides financial information for the Downstream Segment forthe three months and nine months ended September 30, 2005 and 2004 (inthousands):
| ** **                              | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** | **Nine Months Ended** | ** ** | ** **             | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **Increase**           | ** ** | **September 30,**          | ** ** | **Increase**           | ** ** |
| ** **                              | ** ** | **2005**                         | ** ** | **2004**               | ** ** | **(Decrease)**                  | ** ** | **2005**               | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| ** **                              | ** ** | **(as restated)**           | ** ** | **(as restated)** | ** ** | ** **                      | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| Transportation —  Refined products |       | $                                | 38,240     |                   | $          | 43,386                          |       | $                      | (5,146     | ) | $ | 111,039 |   | $ | 113,294 |   | $ | (2,255 | ) |
| Transportation —  LPGs             |       | 16,519                           |       | 16,071                 |       | 448                             |       | 63,220                 |       | 58,572 |   | 4,648 |   |
| Other                                   |       | 11,335                           |       | 9,089                  |       | 2,246                           |       | 33,440                 |       | 33,853 |   | (413 | ) |
| Total operating revenues                |       | 66,094                           |       | 68,546                 |       | (2,452                          | )          | 207,699                |       | 205,719 |   | 1,980 |   |
|                                    |       |                             |       |                   |       |                            |       |                   |       |   |   |   |   |
| Operating,  general andadministrative   |       | 30,219                           |       | 32,905                 |       | (2,686                          | )          | 85,115                 |       | 90,924 |   | (5,809 | ) |
| Operating fuel  and power               |       | 8,170                            |       | 8,533                  |       | (363                            | )          | 23,787                 |       | 23,776 |   | 11 |   |
| Depreciation and  amortization          |       | 10,098                           |       | 12,818                 |       | (2,720                          | )          | 29,460                 |       | 31,106 |   | (1,646 | ) |
| Taxes — other  than income taxes   |       | 3,016                            |       | 1,981                  |       | 1,035                           |       | 8,369                  |       | 7,320 |   | 1,049 |   |
| Gains on sales  of assets               |       | (24                              | )          | (472                   | )          | 448                             |       | (131                   | )          | (489 | ) | 358 |   |
| Total costs and expenses                |       | 51,479                           |       | 55,765                 |       | (4,286                          | )          | 146,600                |       | 152,637 |   | (6,037 | ) |
|                                    |       |                             |       |                   |       |                            |       |                   |       |   |   |   |   |
| Operating income                        |       | 14,615                           |       | 12,781                 |       | 1,834                           |       | 61,099                 |       | 53,082 |   | 8,017 |   |
|                                    |       |                             |       |                   |       |                            |       |                   |       |   |   |   |   |
| Equity earnings  (losses)               |       | (651                             | )          | (1,234                 | )          | 583                             |       | (2,718                 | )          | (4,477 | ) | 1,759 |   |
| Other income —  net                |       | 306                              |       | 203                    |       | 103                             |       | 576                    |       | 648 |   | (72 | ) |
|                                    |       |                             |       |                   |       |                            |       |                   |       |   |   |   |   |
| Earnings before  interest               |       | $                                | 14,270     |                   | $          | 11,750                          |       | $                      | 2,520      |   | $ | 58,957 |   | $ | 49,253 |   | $ | 9,704 |   |

 

The following table presents volumesdelivered in barrels and average tariff per barrel for the three months andnine months ended September 30, 2005 and 2004 (in thousands, except tariffinformation):
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Nine Months Ended** | ** ** | **Percentage** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------|------------|---------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** | **Increase**   | ** ** | **September 30,**          | ** ** | **Increase**   | ** ** |
| ** **                        | ** ** | **2005**                         | ** ** | **2004**       | ** ** | **(Decrease)**                  | ** ** | **2005**       | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| **Volumes Delivered:**            |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Refined products                  |       | 43,067                           |       | 41,726         |       | 3                               | %          | 123,759        |       | 116,184 |   | 7 | % |
| LPGs                              |       | 8,646                            |       | 9,107          |       | (5                              | )%         | 31,303         |       | 31,109 |   | 1 | % |
| Total                             |       | 51,713                           |       | 50,833         |       | 2                               | %          | 155,062        |       | 147,293 |   | 5 | % |
|                              |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| **Average Tariff per Barrel:**    |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Refined products (1)              |       | $                                | 0.89       |           | $          | 1.04                            |       | (14            | )%         | $ | 0.90 |   | $ | 0.98 |   | (8 | )% |
| LPGs                              |       | 1.91                             |       | 1.76           |       | 9                               | %          | 2.02           |       | 1.88 |   | 7 | % |
| Average system  tariff per barrel |       | $                                | 1.06       |           | $          | 1.17                            |       | (9             | )%         | $ | 1.12 |   | $ | 1.17 |   | (4 | )% |

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(1)          The 2004periods include $4.1 million of deferred revenue related to the expiration oftwo customer transportation agreements.

*Three MonthsEnded September 30, 2005 Compared with Three Months Ended September 30,2004*

Revenues from refined products transportationdecreased $5.1 million for the three months ended September 30, 2005, comparedwith the three months ended September 30, 2004, primarily due to therecognition in 

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the2004 period of $4.1 million of deferred revenue related to the expiration oftwo customer transportation agreements. The $4.1 million of deferred revenueincreased the refined products average tariff for the third quarter of 2004 by$0.10 per barrel, or 11%. Excluding the effect of the deferred revenuerecognized in the 2004 period, the refined products average tariff per barreldecreased 5% from the prior year period primarily due to the impact of greatergrowth in the volume of products delivered under a Centennial tariff comparedwith the growth in deliveries under a TEPPCO tariff, which resulted in anincreased proportion of lower tariff barrels transported on our system. Priorto the construction of Centennial, deliveries on our pipeline system werelimited by our pipeline capacity, and transportation services for our customerswere allocated in accordance with a proration policy. With this incrementalpipeline capacity, our previously constrained system has expanded deliveries inmarkets both south and north of Creal Springs, Illinois. In February 2003,we entered into a lease agreement with Centennial that increased ourflexibility to deliver refined products to our market areas. Centennial hasprovided our system with additional pipeline capacity for movement of productsoriginating in the U.S. Gulf Coast area. The overall increase in refinedproducts volumes was primarily due to increased demand and market share forproducts supplied from the U.S. Gulf Coast into Midwest markets.

Revenuesfrom LPGs transportation increased $0.4 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, due tohigher deliveries of isobutane in the upper Midwest market areas, partiallyoffset by lower deliveries of propane.  The LPGs average rate per barrel increasedfrom the prior period primarily as a result of decreased short-haul deliveriesduring the three months ended September 30, 2005, and an increase intariff rates which went into effect in July 2005. Our propane revenuesalso decreased due to a propane release and fire at a dehydration unit in September 2005at our Todhunter storage facility, near Middletown, Ohio. As a result of thepropane release and fire, our LPG loading facilities at Todhunter were shutdown for approximately three weeks. We estimate that the reduction to propanerevenues for this occurrence was approximately $0.3 million for the thirdquarter of 2005. The propane release and fire will also reduce fourth quarter2005 propane revenues by an estimated $0.3 million.

Revenues from refined products and LPGs for thecurrent period were also impacted by Hurricane Katrina and Hurricane Rita,which affected the U.S. Gulf Coast in August and September 2005,respectively. Hurricane Katrina disrupted refineries and other pipeline systemsin the central U.S. Gulf Coast, which provided us with additional deliveries atShreveport and Arcadia, Louisiana, as shippers used alternative sources tosupply product to areas where normal distribution patterns were disrupted. HurricaneKatrina also resulted in higher prices of refined products and LPGs, which hada negative impact on the current demand for the products.

Hurricane Rita disrupted production at western U.S.Gulf Coast refineries, many of which directly supply us with product. HurricaneRita also disrupted power to our Beaumont terminal, which resulted in themainline being shut down for four days and Centennial being shut down for tendays. Our mainline system was reopened, but has been operating at reduced ratesas a result of Hurricane Rita. At September 30, 2005, our 230,000 barrelper day capacity, 20-inch diameter mainline system, which primarilydelivers LPGs and gasoline from the Texas Gulf Coast to the Midwest, waspumping from MB Storage’s facility at approximately 60% of normal operatingcapacity. Our 110,000 barrel per day capacity, 14-inch and 16-inchdiameter pipelines, which primarily deliver distillates and gasoline from theTexas Gulf Coast to the Midwest, were pumping at approximately 75% of normaloperating capacity from our Baytown, Texas, terminal. We installed generatorsat our Beaumont, Texas, facility, which enabled receipt and delivery of refinedproducts out of tankage at the terminal. Commercial power was restored to theBeaumont terminal and the Newton, Texas, pump station in mid-October andfull operations were resumed. Centennial resumed operating at its normalcapacity on October 1, 2005. For the quarter ended September 30,2005, we estimate that the hurricanes reduced refined products and propanerevenues by approximately $1.2 million and $0.3 million, respectively. Theimpact to operating expenses for the period was less than $0.1 million through September 30,2005. We expect the impact of Hurricane Rita to reduce our fourth quarter 2005revenues as well, resulting in estimated losses in that period of approximately$4.0 million of refined products revenues and $0.5 million of LPG revenues. Theestimated impact to operating expenses for the fourth quarter of 2005 is anincrease of approximately $1.2 million.

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Otheroperating revenues increased $2.2 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, primarilydue to increased margins on product inventory sales and  higher refined products additive and tenderdeduction revenue.

Costs andexpenses decreased $4.3 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, due todecreased operating, general and administrative expenses, decreaseddepreciation and amortization expense and decreased operating fuel and power,partially offset by increased taxes — other than income taxes and lower gainson the sales of assets in the 2005 period. Operating, general andadministrative expenses decreased $2.7 million primarily due to a $4.0 milliondecrease in pipeline inspection and repair costs associated with our integritymanagement program, a $0.6 million decrease in product losses, a $0.6 milliondecrease in labor and benefits expenses related to the vesting of certain ofour compensation plans in the first quarter of 2005 as a result of changes incontrol of our General Partner, a $0.6 million decrease in rental expense fromthe Centennial pipeline capacity lease agreement and a $0.5 million decrease inrental expense on a lease agreement with a third-party pipeline.

Thesedecreases to costs and expenses were partially offset by a $1.3 millionincrease attributable to regulatory penalties for past incidents, a $0.7million increase in pipeline operating and maintenance expenses, a $0.4 millionincrease in labor and benefits expense related to retirement plan settlementswith DEFS, a $0.4 million increase related to transition costs due to thechanges in control of our General Partner, a $0.4 million increase inenvironmental assessment and remediation expenses and an increase in insuranceexpense. Depreciation expense increased $2.7 million primarily due to a $0.8million write-off of assets related to the propane release and fire at astorage facility in Ohio and assets retired to depreciation expense during thequarter, partially offset by a $4.4 million non-cash impairment charge in thethird quarter of 2004 (see Note 3. Property, Plant and Equipment). Operatingfuel and power decreased $0.4 million primarily due to adjustments to poweraccruals, partially offset by increased mainline throughput. Taxes — other thanincome taxes increased $1.0 million primarily due to increases in property taxaccruals and a higher asset base in the 2005 period. During the three monthsended September 30, 2004, we recognized net gains of $0.5 million from thesales of various assets in the Downstream Segment.

Netearnings from equity investments increased for the three months ended September 30,2005, compared with the three months ended September 30, 2004, as shownbelow (in thousands):

|                                 | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | ** **             | ** ** |
| ** **                      | ** ** | **2005**                         | ** ** | **2004**               | ** ** | **Increase** | ** ** |
| ** **                      | ** ** | **(as restated)**           | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| Centennial                      |       | $                                | (2,391     | )                      | $          | (2,751 | ) | $ | 360 |   |
| MB Storage                      |       | 1,728                            |       | 1,530                  |       | 198 |   |
| Other                           |       | 12                               |       | (13                    | )          | 25 |   |
| Total equity  earnings (losses) |       | $                                | (651       | )                      | $          | (1,234 | ) | $ | 583 |   |

 

Equitylosses in Centennial decreased $0.4 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, primarilydue to higher transportation revenues, decreased operating expenses and lowerproduct measurement losses during the 2005 period. Equity earnings in MBStorage increased $0.2 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, primarilydue to increased tender deduction and lease line revenues on the MB Storagesystem. As a result of Hurricane Rita, MB Storage’s revenues were reduced byapproximately $0.2 million during the three months ended September 30,2005. We expect the impact of Hurricane Rita to reduce MB Storage’s fourthquarter 2005 revenues by an estimated $0.1 million and increase operatingexpenses by an estimated $0.4 million.

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*Nine Months EndedSeptember 30, 2005 Compared with Nine Months Ended September 30, 2004*

Revenues from refined products transportationdecreased $2.3 million for the nine months ended September 30, 2005,compared with the nine months ended September 30, 2004, primarily due tothe recognition of $4.1 million of deferred revenue in the 2004 period relatedto the expiration of two customer transportation agreements, and the effects ofHurricanes Katrina and Rita in August and September 2005 as discussedabove, partially offset by an overall increase in the refined products volumesdelivered. This increase was primarily due to deliveries of products moved onCentennial. Volume increases were due to increased demand and market share forproducts supplied from the U.S. Gulf Coast into Midwest markets. The refinedproducts average rate per barrel decreased from the prior year period primarilydue to the impact of greater growth in the volume of products delivered under aCentennial tariff compared with the growth in deliveries under a TEPPCO tariff,which resulted in an increased proportion of lower tariff barrels transportedon our system.

Revenuesfrom LPGs transportation increased $4.7 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, due tohigher deliveries of propane in the upper Midwest and Northeast market areasprimarily resulting from cold weather in March 2005. Prior year LPGtransportation revenues were negatively impacted by a price spike in the MontBelvieu propane price in late February 2004, which resulted in TEPPCOsourced propane being less competitive than propane from other source points. Ourpropane revenues were also affected by Hurricane Rita and the propane releaseand fire at a storage facility in September 2005 as discussed above.

Otheroperating revenues decreased $0.4 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, primarilydue to lower propane inventory fees in the 2005 period, partially offset byhigher refined products tender deduction and loading revenues and increasedmargins on product inventory sales.

Costs andexpenses decreased $6.0 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, due todecreased operating, general and administrative expenses and decreaseddepreciation and amortization expense, partially offset by increased taxes —other than income taxes and lower gains on the sales of assets in the 2005period. Operating, general and administrative expenses decreased $5.8 millionprimarily due to a $9.7 million decrease in pipeline inspection and repaircosts associated with our integrity management program, a $2.0 million decreasein postretirement benefit accruals related to plan amendments (see Note 10.Employee Benefit Plans), a $1.1 million decrease in consulting servicesprimarily related to acquisition related activities in the 2004 period and a$0.7 million decrease in product losses.

Thesedecreases to costs and expenses were partially offset by a $1.8 millionincrease in labor and benefits expenses associated with vesting provisions incertain of our compensation plans as a result of changes in control of ourGeneral Partner resulting in higher incentive compensation expenses compared tothe prior year period, a $1.8 million increase attributable to regulatorypenalties for past incidents, a $1.4 million increase in pipeline operating andmaintenance expense, a $0.6 million increase related to transition costs due tothe changes in control of our General Partner, a $0.4 million increase inenvironmental assessment and remediation expenses, a $0.4 million increase inlabor and benefits expense related to retirement plan settlements with DEFS andan increase in insurance expense. Depreciation expense decreased $1.6 millionprimarily due to a $4.4 million non-cash impairment charge in the third quarterof 2004, partially offset by a $0.8 million write-off of assets related to thepropane release and fire at a storage facility in Ohio (see Note 3. PropertyPlant, and Equipment), assets placed into service and assets retired todepreciation expense in the 2005 period. Taxes — other than income taxesincreased $1.0 million primarily due to asset acquisitions and a higher taxbase in the 2005 period. During the nine months ended September 30, 2004,we recognized net gains of $0.5 million from the sales of various assets in theDownstream Segment.

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Netearnings from equity investments increased for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, as shownbelow (in thousands):

|                                 | ** ** | **Nine Months Ended** | ** ** | ** **             | ** ** |
|---------------------------------|------------|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **September 30,**          | ** ** | **Increase**           | ** ** |
| ** **                      | ** ** | **2005**                        | ** ** | **2004**               | ** ** | **(Decrease)** | ** ** |
| ** **                      | ** ** | **(as restated)**          | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| Centennial                      |       | $                               | (8,476     | )                      | $          | (10,390 | ) | $ | 1,914 |   |
| MB Storage                      |       | 5,727                           |       | 5,944                  |       | (217 | ) |
| Other                           |       | 31                              |       | (31                    | )          | 62 |   |
| Total equity  earnings (losses) |       | $                               | (2,718     | )                      | $          | (4,477 | ) | $ | 1,759 |   |

 

Equity lossesin Centennial decreased $1.9 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, primarilydue to higher transportation revenues and volumes and lower transmix relatedproduct replacement costs and product measurement losses during the 2005 period.Equity earnings in MB Storage decreased $0.2 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, primarilydue to increased depreciation and amortization expense and higher general andadministrative expenses, partially offset by higher rental and storage revenuesand volumes. MB Storage’s revenues were also impacted by Hurricane Rita asdiscussed above. In April 2004, MB Storage acquired storage and pipelineassets and contracts for approximately $35.0 million, of which TE Productscontributed $16.5 million. Increases in storage revenue, shuttle revenue,rental revenue and depreciation and amortization expense for the nine monthsended September 30, 2005, compared with the nine months ended September 30,2004, are primarily related to the acquired storage assets and contracts.

**Upstream Segment**

Thefollowing table provides financial information for the Upstream Segment for thethree months and nine months ended September 30, 2005 and 2004 (inthousands):
| ****                                   | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** | **Nine Months Ended** | ** ** | ** **             | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **Increase**           | ** ** | **September 30,**          | ** ** | **Increase**           | ** ** |
| ** **                             | ** ** | **2005**                         | ** ** | **2004**               | ** ** | **(Decrease)**                  | ** ** | **2005**               | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| ** **                             | ** ** | **(as restated)**           | ** ** | **(as restated)** | ** ** | ** **                      | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **                      | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales of  petroleum products           |       | $                                | 2,367,984  |                   | $          | 1,358,220                       |       | $                      | 1,009,764  |   | $ | 5,714,353 |   | $ | 3,770,006 |   | $ | 1,944,347 |   |
| Transportation —  Crude oil       |       | 10,001                           |       | 9,288                  |       | 713                             |       | 28,215                 |       | 28,164 |   | 51 |   |
| Other                                  |       | 2,749                            |       | 2,578                  |       | 171                             |       | 7,946                  |       | 9,266 |   | (1,320 | ) |
| Total operating revenues               |       | 2,380,734                        |       | 1,370,086              |       | 1,010,648                       |       | 5,750,514              |       | 3,807,436 |   | 1,943,078 |   |
|                                   |       |                             |       |                   |       |                            |       |                   |       |   |   |   |   |
| Purchases of  petroleum products       |       | 2,350,107                        |       | 1,344,613              |       | 1,005,494                       |       | 5,665,136              |       | 3,728,345 |   | 1,936,791 |   |
| Operating,  general and administrative |       | 15,972                           |       | 15,412                 |       | 560                             |       | 41,700                 |       | 39,279 |   | 2,421 |   |
| Operating fuel  and power              |       | 1,247                            |       | 1,240                  |       | 7                               |       | 3,709                  |       | 4,373 |   | (664 | ) |
| Depreciation and  amortization         |       | 6,471                            |       | 3,268                  |       | 3,203                           |       | 13,623                 |       | 9,381 |   | 4,242 |   |
| Taxes — other  than income taxes. |       | 1,737                            |       | 1,152                  |       | 585                             |       | 4,206                  |       | 3,228 |   | 978 |   |
| Gains on sales  of assets              |       | (7                               | )          | (377                   | )          | 370                             |       | (59                    | )          | (484 | ) | 425 |   |
| Total costs and expenses               |       | 2,375,527                        |       | 1,365,308              |       | 1,010,219                       |       | 5,728,315              |       | 3,784,122 |   | 1,944,193 |   |
|                                   |       |                             |       |                   |       |                            |       |                   |       |   |   |   |   |
| Operating income                       |       | 5,207                            |       | 4,778                  |       | 429                             |       | 22,199                 |       | 23,314 |   | (1,115 | ) |
|                                   |       |                             |       |                   |       |                            |       |                   |       |   |   |   |   |
| Equity earnings                        |       | 5,398                            |       | 5,770                  |       | (372                            | )          | 19,310                 |       | 24,404 |   | (5,094 | ) |
| Other income —  net               |       | 103                              |       | 60                     |       | 43                              |       | 132                    |       | 257 |   | (125 | ) |
| Earnings before  interest              |       | $                                | 10,708     |                   | $          | 10,608                          |       | $                      | 100        |   | $ | 41,641 |   | $ | 47,975 |   | $ | (6,334 | ) |

 

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Informationpresented in the following table includes the margin of the Upstream Segment,which may be viewed as a non-GAAP (Generally Accepted Accounting Principles)financial measure under the rules of the SEC. We calculate the margin ofthe Upstream Segment as revenues generated from the sale of crude oil andlubrication oil, and transportation of crude oil, less the costs of purchasesof crude oil and lubrication oil. We believe that margin is a more meaningfulmeasure of financial performance than sales and purchases of crude oil andlubrication oil due to the significant fluctuations in sales and purchasescaused by variations in the level of volumes marketed and prices for productsmarketed. Additionally, we use margin internally to evaluate the financialperformance of the Upstream Segment as we believe margin is a better indicatorof performance than operating income as operating, general and administrativeexpenses, operating fuel and power and depreciation expense are not directlyrelated to the margin activities. Margin and volume information for the threemonths and nine months ended September 30, 2005 and 2004 is presentedbelow (in thousands, except per barrel and per gallon amounts):
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Nine Months Ended** | ** ** | **Percentage** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------|------------|---------------------------------|------------|----------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **Increase**   | ** ** | **September 30,**          | ** ** | **Increase**   | ** ** |
| ** **                              | ** ** | **2005**                         | ** ** | **2004**       | ** ** | **(Decrease)**                  | ** ** | **2005**       | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| ** **                              | ** ** | ** **                       | ** ** | ** **     | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Margins: (1)                            |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Crude oil transportation                |       | $                                | 15,626     |           | $          | 14,485                          |       | 8              | %          | $ | 44,982 |   | $ | 40,860 |   | 10 | % |
| Crude oil marketing                     |       | 7,750                            |       | 4,327          |       | 79                              | %          | 20,282         |       | 16,920 |   | 20 | % |
| Crude oil terminaling                   |       | 2,552                            |       | 2,426          |       | 5                               | %          | 6,785          |       | 7,392 |   | (8 | )% |
| Lubrication oil sales                   |       | 1,950                            |       | 1,657          |       | 18                              | %          | 5,383          |       | 4,653 |   | 16 | % |
| Total margin                            |       | $                                | 27,878     |           | $          | 22,895                          |       | 22             | %          | $ | 77,432 |   | $ | 69,825 |   | 11 | % |
|                                    |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Total barrels:                          |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Crude oil transportation                |       | 23,659                           |       | 25,093         |       | (6                              | )%         | 71,181         |       | 75,941 |   | (6 | )% |
| Crude oil marketing                     |       | 54,747                           |       | 43,284         |       | 26                              | %          | 147,905        |       | 131,208 |   | 13 | % |
| Crude oil terminaling                   |       | 28,528                           |       | 28,889         |       | (1                              | )%         | 76,934         |       | 89,777 |   | (14 | )% |
|                                    |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Lubrication oil  volume (total gallons) |       | 3,573                            |       | 3,346          |       | 7                               | %          | 10,898         |       | 9,765 |   | 12 | % |
|                                    |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Margin per  barrel:                     |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Crude oil transportation                |       | $                                | 0.660      |           | $          | 0.577                           |       | 14             | %          | $ | 0.632 |   | $ | 0.538 |   | 17 | % |
| Crude oil marketing                     |       | 0.142                            |       | 0.100          |       | 42                              | %          | 0.137          |       | 0.129 |   | 6 | % |
| Crude oil terminaling                   |       | 0.089                            |       | 0.084          |       | 7                               | %          | 0.088          |       | 0.082 |   | 7 | % |
|                                    |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Lubrication oil margin  (per gallon)    |       | 0.546                            |       | 0.495          |       | 10                              | %          | 0.494          |       | 0.476 |   | 4 | % |

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(1)                Margins in thistable are presented prior to the elimination of intercompany sales, revenuesand purchases between TEPPCO Crude Oil, L.P. and TEPPCO Crude Pipeline, L.P.

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The following table reconciles theUpstream Segment margin to the consolidated statements of income using theinformation presented in the consolidated statements of income and thestatements of income in Note 11. Segment Information (in thousands):
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                             | ** ** | **2005**                         | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales of  petroleum products           |       | $                                | 2,367,984  |                            | $          | 1,358,220 |   | $ | 5,714,353 |   | $ | 3,770,006 |   |
| Transportation —  Crude oil       |       | 10,001                           |       | 9,288                           |       | 28,215 |   | 28,164 |   |
| Less: Purchases of  petroleum products |       | (2,350,107                       | )          | (1,344,613                      | )          | (5,665,136 | ) | (3,728,345 | ) |
| Total margin                           |       | 27,878                           |       | 22,895                          |       | 77,432 |   | 69,825 |   |
| Other operating  revenues              |       | 2,749                            |       | 2,578                           |       | 7,946 |   | 9,266 |   |
| Net operating revenues                 |       | 30,627                           |       | 25,473                          |       | 85,378 |   | 79,091 |   |
| Operating,  general and administrative |       | 15,972                           |       | 15,412                          |       | 41,700 |   | 39,279 |   |
| Operating fuel  and power              |       | 1,247                            |       | 1,240                           |       | 3,709 |   | 4,373 |   |
| Depreciation and  amortization         |       | 6,471                            |       | 3,268                           |       | 13,623 |   | 9,381 |   |
| Taxes — other  than income taxes  |       | 1,737                            |       | 1,152                           |       | 4,206 |   | 3,228 |   |
| Gains on sales  of assets              |       | (7                               | )          | (377                            | )          | (59 | ) | (484 | ) |
| Operating income                       |       | $                                | 5,207      |                            | $          | 4,778 |   | $ | 22,199 |   | $ | 23,314 |   |

 

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

Our margin increased $5.0 million forthe three months ended September 30, 2005, compared with the three monthsended September 30, 2004. Crude oil marketing margin increased $3.4million primarily due to an increase in volumes marketed primarily due to assetacquisitions, partially offset by unrealized losses of $1.2 million related tomarking crude oil grade and location swap contracts to current market value andincreased transportation costs. Crude oil transportation margin increased $1.2million primarily due to increased transportation volumes and revenues on ourSouth Texas and West Texas systems, partially offset by decreasedtransportation volumes on our Red River and Basin systems. Lubrication oilsales margin increased $0.3 million due to increased sales of chemical volumesand the acquisitions of lubrication oil distributors in Casper, Wyoming, in August 2004,and in Dumas, Texas, in July 2005. Crude oil terminaling margin increased$0.1 million as a result of an increase in pumpover volumes at Cushing,Oklahoma, partially offset by a decrease in pumpover volumes at Midland, Texas.

Otheroperating revenues increased $0.2 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, primarilydue increased revenues from documentation and other services to supportcustomers’ trading activity at Midland and Cushing.

Costs andexpenses, excluding expenses associated with purchases of crude oil andlubrication oil, increased $4.8 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, primarilydue to increased depreciation and amortization expense, increased operating,general and administrative expenses, increased taxes — other than income taxesand lower gains on sales of assets in the 2005 period. Depreciation and amortizationexpense increased $3.2 million as a result of a $2.6 million non-cashimpairment charge in the third quarter of 2005, resulting from the impairmentof two crude oil systems (see Note 3. Property, Plant and Equipment). Depreciationexpense also increased as a result of assets placed into service in the 2005period related to acquisitions and assets retired to depreciation expenseduring the period. Operating, general and administrative expenses increased$0.6 million from the prior year period primarily due to a $1.1 millionincrease in pipeline operating and maintenance expense, a $0.4 million increasein insurance expense, a $0.3 million increase in labor and benefits expenserelating to plan amendments (see Note 10. Employee Benefit Plans) and a $0.2million increase in transition expenses related to changes in control of ourGeneral Partner. These increases were partially offset by a $1.5 milliondecrease in pipeline inspection and repair costs associated with our integritymanagement program and a $0.2 million decrease in labor and benefits expenserelated to the vesting of certain of our compensation plans in the firstquarter of 2005 as a result of changes in control of our General Partner. Taxes— 

49

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otherthan income taxes increased $0.6 million primarily as a result of a higherasset base in the 2005 period primarily due to acquisitions of assets. Duringthe three months ended September 30, 2004, we recognized a gain of $0.4million from the sale of our remaining interest in the original Rancho Pipelinesystem (see Note 5. Acquisitions and Dispositions).

Equity earnings from our investment inSeaway decreased $0.4 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, primarily due to higher operating, general andadministrative expenses related to a pipeline release in May 2005 anddecreased gains on inventory sales, partially offset by increased long-haultransportation volumes.

After Seaway’s pipelinerelease in May 2005, the maximum operating pressure on the pipeline systemwas reduced by 20% until the cause of the failure is determined and anyrequired corrective measures are implemented. A study of the failed pipe wasperformed by independent, metallurgical experts who determined that the pipefailed due to damage that occurred during rail shipment associated with itsinstallation thirty years ago. The corrective actions include running a verysophisticated, high definition inspection tool through the pipe to determine ifthere are any other sections of pipe that have similar damage.  This approach is consistent with directivesfrom the United States Department of Transportation’s Office of Pipeline Safetyin past failures of this type. We are in the initial stages of evaluatingapproximately 300 miles of Seaway’s pipeline that have similar vintage pipe. Becauseof the complexity of the inspection tool being used, we expect that it willtake several months to complete the analysis of the data, as well as completeany additional repairs that are identified from the analysis. Based on theseprojections, we expect Seaway to be operating at reduced maximum pressuresthrough the first quarter of 2006. As a result of operating at reduced maximumpressures, during the third quarter of 2005, we began using a drag reducingagent to increase the flow of product through the pipeline system. The dragreducing agent allowed us to maintain the higher volumes transported, but alsoincreased our operating costs. At this time, we do not believe the reduced pressureswill have a material adverse effect on our financial position, results ofoperations or cash flows.

*Nine Months Ended September 30,2005 Compared with Nine Months Ended September 30, 2004*

Our margin increased $7.6 million forthe nine months ended September 30, 2005, compared with the nine monthsended September 30, 2004. Crude oil transportation margin increased $4.1million primarily due to increased transportation volumes and revenues on ourSouth Texas system and higher revenues on our Basin and West Texas systemsrelated to movements on higher tariff segments, partially offset by decreasesin transportation volumes on our Red River system and on lower tariff segmentsof our Basin system. Crude oil marketing margin increased $3.4 million primarilydue to increased volumes marketed as a result of asset acquisitions, partiallyoffset by increased transportation costs and unrealized losses of $0.4 millionrelated to marking crude oil grade and location swap contracts to currentmarket value. Lubrication oil sales margin increased $0.7 million due toincreased sales of chemical volumes and the acquisitions of lubrication oildistributors in Casper, Wyoming, in August 2004, and in Dumas, Texas, in July 2005.Crude oil terminaling margin decreased $0.6 million as a result of a decreasein pumpover volumes at Midland, Texas, and Cushing, Oklahoma.

Otheroperating revenues decreased $1.3 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, primarilydue to a $1.4 million favorable settlement of inventory imbalances in the firstquarter of 2004 and lower revenues from documentation and other services tosupport customers’ trading activity at Midland and Cushing in the first ninemonths of 2005.

Costs andexpenses, excluding expenses associated with purchases of crude oil andlubrication oil, increased $7.4 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, due toincreased depreciation and amortization expense, increased operating, generaland administrative expenses, increased taxes — other than income taxes andlower gains on sales of assets in the 2005 period, partially offset bydecreased operating fuel and power. Depreciation and amortization expenseincreased $4.4 million primarily as a result of a $2.6 million non-cashimpairment charge (see Note 3. Property, Plant and Equipment). Depreciationexpense also increased as a result of assets placed in service and assetsretired to depreciation expense during the period. Operating, general andadministrative expenses increased $2.4 million from 

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the prioryear period. This increase was primarily due to a $2.6 million increase inpipeline operating and maintenance expense, a $2.4 million increase in laborand benefits expense related to vesting provisions in certain of ourcompensation plans as a result of changes in control of our General Partner andan increase in the number of employees between periods and a $0.7 millionincrease in insurance expense. These increases were partially offset by a $0.6million decrease in postretirement benefit accruals related to plan amendments(see Note 10. Employee Benefit Plans), a $1.8 million decrease in pipelineinspection and repair costs associated with our integrity management program, a$1.4 million decrease in environmental assessment and remediation costs and a$1.4 million decrease in product measurement losses. Taxes — other than incometaxes increased $1.0 million due to increases in property tax accruals and ahigher asset base in the 2005 period. During the nine months ended September 30,2004, we recognized a gain of $0.4 million from the sale of our remaininginterest in the original Rancho Pipeline system (see Note 5. Acquisitions andDispositions). Operating fuel and power decreased $0.7 million primarily as aresult of lower transportation volumes in the 2005 period.

Equity earnings from our investment inSeaway decreased $5.1 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, primarily due to higher operating, general andadministrative expenses related to a pipeline release in May 2005 asdiscussed above, decreased gains on inventory sales, higher depreciation expense  anda favorable settlement in the first quarter of 2004 with a former ownerof Seaway’s crude oil assets regarding inventory imbalances that were notacquired by us, partially offset by higher long-haul transportation volumes.

**Midstream Segment**

Thefollowing table provides financial information for the Midstream Segment forthe three months and nine months ended September 30, 2005 and 2004 (inthousands):
| ** **                             | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | **Nine Months Ended** | ** ** | ** **   | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------|------------|---------------------------------|------------|--------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **Increase** | ** ** | **September 30,**          | ** ** | **Increase** | ** ** |
| ** **                             | ** ** | **2005**                         | ** ** | **2004**     | ** ** | **(Decrease)**                  | ** ** | **2005**     | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| ** **                             | ** ** | ** **                       | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales of  petroleum products           |       | $                                | 2,880      |         | $          | 1,734                           |       | $            | 1,146      |   | $ | 7,337 |   | $ | 4,868 |   | $ | 2,469 |   |
| Gathering —  Natural Gas          |       | 38,833                           |       | 35,515       |       | 3,318                           |       | 112,349      |       | 104,444 |   | 7,905 |   |
| Transportation —  NGLs            |       | 11,829                           |       | 10,430       |       | 1,399                           |       | 33,435       |       | 31,022 |   | 2,413 |   |
| Other                                  |       | 3,768                            |       | 4,016        |       | (248                            | )          | 11,838       |       | 11,528 |   | 310 |   |
| Total operating revenues               |       | 57,310                           |       | 51,695       |       | 5,615                           |       | 164,959      |       | 151,862 |   | 13,097 |   |
|                                   |       |                             |       |         |       |                            |       |         |       |   |   |   |   |
| Purchases of  petroleum products       |       | 2,585                            |       | 1,381        |       | 1,204                           |       | 5,761        |       | 4,367 |   | 1,394 |   |
| Operating, general  and administrative |       | 11,764                           |       | 12,175       |       | (411                            | )          | 31,137       |       | 34,732 |   | (3,595 | ) |
| Operating fuel  and power              |       | 3,121                            |       | 3,691        |       | (570                            | )          | 7,658        |       | 8,310 |   | (652 | ) |
| Depreciation and  amortization         |       | 14,391                           |       | 14,191       |       | 200                             |       | 39,932       |       | 44,021 |   | (4,089 | ) |
| Taxes — other  than income taxes  |       | 1,201                            |       | 735          |       | 466                             |       | 3,087        |       | 3,445 |   | (358 | ) |
| Gains on sales  of assets              |       | —                           |       | —       |       | —                          |       | (407         | )          | — |   | (407 | ) |
| Total costs and expenses               |       | 33,062                           |       | 32,173       |       | 889                             |       | 87,168       |       | 94,875 |   | (7,707 | ) |
|                                   |       |                             |       |         |       |                            |       |         |       |   |   |   |   |
| Operating income                       |       | 24,248                           |       | 19,522       |       | 4,726                           |       | 77,791       |       | 56,987 |   | 20,804 |   |
|                                   |       |                             |       |         |       |                            |       |         |       |   |   |   |   |
| Other income —  net               |       | 75                               |       | 21           |       | 54                              |       | 177          |       | 95 |   | 82 |   |
|                                   |       |                             |       |         |       |                            |       |         |       |   |   |   |   |
| Earnings before  interest              |       | $                                | 24,323     |         | $          | 19,543                          |       | $            | 4,780      |   | $ | 77,968 |   | $ | 57,082 |   | $ | 20,886 |   |

 

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Thefollowing table presents volume and average rate information for the threemonths and nine months ended September 30, 2005 and 2004:
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Nine Months Ended** | ** ** | **Percentage** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|----------------|------------|---------------------------------|------------|----------------|------------|
| ** **                                                        | ** ** | **September 30,**           | ** ** | **Increase**   | ** ** | **September 30,**          | ** ** | **Increase**   | ** ** |
| ** **                                                        | ** ** | **2005**                         | ** ** | **2004**       | ** ** | **(Decrease)**                  | ** ** | **2005**       | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Gathering — Natural Gas  — Jonah:                       |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Million cubic feet (“MMcf”)                             |       | 105,993                          |       | 90,005         |       | 18                              | %          | 302,388        |       | 257,402 |   | 17 | % |
| Billion British thermal units (“MMmbtu”)                |       | 117,006                          |       | 99,531         |       | 18                              | %          | 333,823        |       | 284,858 |   | 17 | % |
| Average fee per Million British thermal unit  (“MMBtu”) |       | $                                | 0.185      |           | $          | 0.191                           |       | (4             | )%         | $ | 0.187 |   | $ | 0.195 |   | (4 | )% |
|                                                              |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Gathering — Natural Gas  — Val Verde:                   |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| MMcf                                                              |       | 46,273                           |       | 36,733         |       | 26                              | %          | 131,646        |       | 108,213 |   | 22 | % |
| MMmbtu                                                            |       | 40,881                           |       | 31,294         |       | 31                              | %          | 115,685        |       | 91,459 |   | 26 | % |
| Average fee per MMBtu                                             |       | $                                | 0.422      |           | $          | 0.527                           |       | (20            | )%         | $ | 0.430 |   | $ | 0.533 |   | (19 | )% |
|                                                              |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Transportation — NGLs:                                       |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Thousand barrels                                                  |       | 16,332                           |       | 15,064         |       | 8                               | %          | 45,708         |       | 45,209 |   | 1 | % |
| Average rate per barrel                                           |       | $                                | 0.724      |           | $          | 0.692                           |       | 5              | %          | $ | 0.731 |   | $ | 0.686 |   | 7 | % |
|                                                              |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Fractionation — NGLs:                                        |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Thousand barrels                                                  |       | 1,068                            |       | 994            |       | 7                               | %          | 3,294          |       | 3,064 |   | 7 | % |
| Average rate per barrel                                           |       | $                                | 1.768      |           | $          | 1.866                           |       | (6             | )%         | $ | 1.744 |   | $ | 1.802 |   | (3 | )% |
|                                                              |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Sales — Condensate:                                          |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Thousand barrels                                                  |       | 3.4                              |       | 7.3            |       | (54                             | )%         | 44.6           |       | 67.0 |   | (33 | )% |
| Average rate per  barrel                                          |       | $                                | 55.60      |           | $          | 43.54                           |       | 28             | %          | $ | 50.21 |   | $ | 35.58 |   | 41 | % |

 

The following table reconciles theMidstream Segment margin to operating income in the consolidated statements ofincome using the information presented in the tables above, in the consolidatedstatements of income and in the statements of income in Note 11. SegmentInformation (in thousands):

|                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                             | ** ** | **2005**                         | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales of  petroleum products           |       | $                                | 2,880      |                            | $          | 1,734 |   | $ | 7,337 |   | $ | 4,868 |   |
| Less: Purchases  of petroleum products |       | (2,585                           | )          | (1,381                          | )          | (5,761 | ) | (4,367 | ) |
| Total margin                           |       | 295                              |       | 353                             |       | 1,576 |   | 501 |   |
| Gathering —  Natural Gas          |       | 38,833                           |       | 35,515                          |       | 112,349 |   | 104,444 |   |
| Transportation —  NGLs            |       | 11,829                           |       | 10,430                          |       | 33,435 |   | 31,022 |   |
| Other operating  revenues              |       | 3,768                            |       | 4,016                           |       | 11,838 |   | 11,528 |   |
| Net operating revenues                 |       | 54,725                           |       | 50,314                          |       | 159,198 |   | 147,495 |   |
| Operating,  general and administrative |       | 11,764                           |       | 12,175                          |       | 31,137 |   | 34,732 |   |
| Operating fuel  and power              |       | 3,121                            |       | 3,691                           |       | 7,658 |   | 8,310 |   |
| Depreciation and  amortization         |       | 14,391                           |       | 14,191                          |       | 39,932 |   | 44,021 |   |
| Taxes — other  than income taxes  |       | 1,201                            |       | 735                             |       | 3,087 |   | 3,445 |   |
| Gains on sales  of assets              |       | —                           |       | —                          |       | (407 | ) | — |   |
| Operating income                       |       | $                                | 24,248     |                            | $          | 19,522 |   | $ | 77,791 |   | $ | 56,987 |   |

 

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

Revenues from the gathering of natural gas increased$3.3 million for the three months ended September 30, 2005, compared withthe three months ended September 30, 2004. Natural gas gathering revenuesfrom the 

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Jonahsystem increased $2.5 million and volumes gathered increased 16.0 billion cubicfeet (“Bcf”) for the three months ended September 30, 2005, primarily dueto the expansion of the Jonah system in 2004. Installation of additionalcapacity of 100 million cubic feet per day was completed during the fourthquarter of 2004. Jonah’s average natural gas gathering rate per MMcf decreaseddue to higher system wellhead pressures. Natural gas gathering revenues fromthe Val Verde system increased $0.8 million and volumes gathered increased 7.0Bcf for the three months ended September 30, 2005, primarily due toincreased volumes from two new connections made to the Val Verde system in May andDecember 2004, partially offset by the natural decline of CBM production,slower than anticipated completion and connection of infill wells and less volume from infillwells than was anticipated. Val Verde’saverage natural gas gathering rate per MMcf decreased due to contracts enteredinto relating to the new connections, which have lower rates than the existingVal Verde system’s average rates.

Revenuesfrom the transportation of NGLs increased $1.4 million for the three monthsended September 30, 2005, compared with the three months ended September 30,2004, primarily due to increases in volumes transported on the Panola andChaparral Pipelines, partially offset by decreases in volumes transported onthe Dean and Wilcox Pipelines. The increase in the NGL transportation averagerate per barrel resulted from higher average rates per barrel on volumestransported on the Panola and Chaparral Pipelines.

Otheroperating revenues decreased $0.3 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004. Thedecrease was due to various miscellaneous revenue items.

Costs andexpenses (excluding purchases of petroleum products) decreased $0.4 million forthe three months ended September 30, 2005, compared with the three monthsended September 30, 2004, due to decreases in operating, general andadministrative expenses and operating fuel and power, partially offset byincreases in taxes — other than income taxes and depreciation and amortizationexpense. Operating, general and administrative expenses decreased $0.5 millionprimarily due to a $1.3 million decrease in gas settlement expenses and adecrease in consulting and contract services related to compliance with theSarbanes-Oxley Act of 2002, partially offset by a $0.9 million increase inlabor and benefits expenses associated with certain of our compensation plansand a $0.4 million increase in transition expenses as a result of changes incontrol of our General Partner. Operating fuel and power decreased $0.6 millioncompared to the prior year period due to adjustments to the fuel and poweraccrual in the prior year period, partially offset by increased expenses in the2005 period related to higher transportation volumes. Taxes — other than incometaxes increased $0.5 million as a result of adjustments to property taxaccruals primarily related to the expansion of the Jonah system. Depreciationexpense increased $0.4 million primarily due to a $0.4 million increase on ValVerde as a result of assets placed into service in 2004 and an increase onPanola due to assets retired to depreciation expense, partially offset by a$0.2 million decrease on Jonah as a result of increases to the estimated livesof Jonah’s assets. Amortization expense on the Jonah system decreased $1.0million primarily due to a $1.3 million decrease related to revisions to theestimated life of intangible assets under the units-of-production method,partially offset by a $0.3 million increase as a result of higher volumes onthe Jonah system in the 2005 period. Amortization expense on the Val Verdesystem increased $0.8 million primarily due to at $1.3 million increase relatedto revisions to the estimated life of intangible assets under theunits-of-production method, partially offset by a $0.5 million decrease as aresult of lower volumes in the 2005 period on contracts included in theintangible assets, resulting from the natural decline in CBM production. Fromtime to time, updated production forecasts are obtained from some of theproducers on the Jonah and Val Verde systems, and as a result, we revise ourbest estimate of future throughput on the these systems (see Note 2. Goodwilland Other Intangible Assets).

*Nine Months Ended September 30,2005 Compared with Nine Months Ended September 30, 2004*

Revenues from the gathering of natural gas increased$7.9 million for the nine months ended September 30, 2005, compared withthe nine months ended September 30, 2004. Natural gas gathering revenuesfrom the Jonah system increased $6.9 million and volumes gathered increased45.0 Bcf for the nine months ended September 30, 2005, primarily due tothe expansion of the Jonah system in 2004. Installation of additional capacityof 100 million cubic feet per day was completed during the fourth quarter of2004. Jonah’s average natural gas gathering rate per MMcf decreased due to highersystem wellhead pressures. Natural gas gathering revenues from the Val Verdesystem increased $1.0 million and volumes gathered increased 23.4 Bcf for thenine months ended September 30, 

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2005,primarily due to increased volumes from two new connections made to the ValVerde system in May and December 2004, partially offset by thenatural decline of CBM production, slower than anticipated completion andconnection of infill wells and less volume from infill wells than was anticipated. Val Verde’s average natural gas gathering rate perMMcf decreased due to contracts entered into relating to the new connections,which have lower rates than the existing Val Verde system’s average rates.

Margin(sales of petroleum products less purchases of petroleum products) resultingfrom the processing arrangements at the Jonah Pioneer plant increased $1.1million for the nine months ended September 30, 2005, compared with thenine months ended September 30, 2004, primarily due to increased volumesand higher NGL prices. Jonah’s Pioneer gas processing plant was completedduring the first quarter of 2004, as a part of the Phase III expansion toincrease the processing capacity in southwestern Wyoming. Pioneer’s processingagreements allow the producers to elect annually whether to be charged under afee-based arrangement or a fee plus keep-whole arrangement. Under the fee-basedelection, Jonah receives a fee for its processing services. Under the fee pluskeep-whole election, Jonah receives a lower fee for its processing services,retains and sells the NGLs extracted during the process and delivers toproducers the residue gas equivalent in energy to the natural gas received fromthe producers. Jonah sells the NGLs it retains and purchases gas to replace theequivalent energy removed in the liquids. For the 2004 and 2005 periods, theproducers elected the fee plus keep-whole arrangement.

Revenuesfrom the transportation of NGLs increased $2.4 million for the nine monthsended September 30, 2005, compared with the nine months ended September 30,2004, primarily due to increases in volumes transported on the Panola andChaparral Pipelines, partially offset by decreases in volumes transported onthe Dean and Wilcox Pipelines. The increase in the NGL transportation averagerate per barrel resulted from higher average rates per barrel on volumestransported on the Panola and Chaparral Pipelines.

Otheroperating revenues increased $0.3 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004. Thisincrease was primarily due to a $0.2 million increase in NGL fractionationrevenues as a result of higher volumes.

Costs and expenses(excluding purchases of petroleum products) decreased $9.1 million for the ninemonths ended September 30, 2005, compared with the nine months ended September 30,2004, due to decreases in depreciation and amortization expense, operating,general and administrative expenses, operating fuel and power and taxes — otherthan income taxes and a net gain recorded on the sale of an asset. Amortizationexpense on the Jonah system decreased $2.7 million primarily due to a $3.7million decrease related to revisions to the estimated life of intangibleassets under the units-of-production method, partially offset by a $1.0 millionincrease as a result of higher volumes in the 2005 period. Amortization expenseon the Val Verde system increased $0.3 million primarily due to a $1.4 millionincrease related to revisions to the estimated life of intangible assets underthe units-of-production method, partially offset by a $1.1 million decrease asa result of lower volumes in the 2005 period on contracts included in theintangible assets, resulting from the natural decline in CBM production. Depreciationexpense decreased $1.7 million primarily due to a $3.7 million decrease onJonah as a result of increases to the estimated lives of Jonah’s assets,partially offset by a $1.7 million increase on Val Verde and a $0.3 millionincrease on Panola as a result of assets placed into service in 2004. Operating,general and administrative expenses decreased $3.6 million primarily due to a$4.8 million decrease in gas settlement expenses, a $0.7 million decrease ininspection and repair costs associated with our integrity management programand a decrease in consulting and contract services related to compliance withthe Sarbanes-Oxley Act of 2002. These decreases were partially offset by a $2.1million increase in labor and benefits expense primarily associated withvesting provisions in certain of our compensation plans and with certain DEFSemployees becoming employees of EPCO and a $0.7 million increase in transitionexpenses as a result of changes in control of our General Partner. Operatingfuel and power decreased $0.7 million compared to the prior year period due toadjustments to the fuel and power accrual in the prior year period, partiallyoffset by increased expenses in the 2005 period related to highertransportation volumes. Taxes — other than income taxes decreased $0.3 millionas a result of adjustments to property tax accruals. A net gain of $0.4 millionwas recognized on the sale of equipment in the current period.

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**Interest Expenseand Capitalized Interest**

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

Interest expense increased $3.5 million for the threemonths ended September 30, 2005, compared with the three months ended September 30,2004, primarily due to higher short term floating interest rates on ourrevolving credit facility and higher outstanding debt balances.

Capitalized interest increased $0.9 million for thethree months ended September 30, 2005, compared with the three monthsended September 30, 2004, due to higher construction work-in-progressbalances in the 2005 period.

*Nine Months Ended September 30,2005 Compared with Nine Months Ended September 30, 2004*

Interest expense increased $8.2 million for the nine monthsended September 30, 2005, compared with the nine months ended September 30,2004, primarily due to higher outstanding borrowings and higher short termfloating interest rates on our revolving credit facility and $2.0 million ofexpense related to the termination of a treasury lock (see Note 4. InterestRate Swaps). These increases were partially offset by a higher percentage offixed interest rate debt during the nine months ended September 30, 2004,that carried a higher rate of interest as compared with floating interest ratedebt. The higher percentage of fixed interest rate debt resulted from aninterest rate swap that expired in April 2004 (see Note 4. Interest RateSwaps).

Capitalized interest increased $0.7 million for thenine months ended September 30, 2005, compared with the nine months ended September 30,2004, due to higher construction work-in-progress balances in the 2005 period.

**Financial Condition and Liquidity**

Cash generated from operations, credit facilities anddebt and equity offerings are our primary sources of liquidity. At September 30,2005, we had a working capital surplus of $93.5 million, while at December 31,2004, we had a working capital deficit of $37.8 million. At September 30,2005, we had approximately $139.5 million in available borrowing capacity underour revolving credit facility. Cash flows for the nine months ended September 30,2005 and 2004 were as follows (in millions):
|                              | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **September 30,**          | ** ** |
| ** **                   | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Cash provided by (used  in): |       |                            |       |   |   |
| Operating activities         |       | $                               | 44.0       |   | $ | 173.9 |   |
| Investing activities         |       | (262.4                          | )          | (134.9 | ) |
| Financing  activities        |       | 202.1                           |       | (58.9 | ) |
|                              |            |                                 |            |  |  |  |  |

 

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*OperatingActivities*

Net cash from operating activities for the nine monthsended September 30, 2005 and 2004, was comprised of the following (inmillions):

|                                         | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                              |       | $                               | 117.9      |   | $ | 101.1 |   |
| Depreciation and  amortization          |       | 83.0                            |       | 84.5 |   |
| Earnings in  equity investments         |       | (16.6                           | )          | (19.9 | ) |
| Distributions  from equity investments  |       | 28.2                            |       | 39.5 |   |
| Gains on sales  of assets               |       | (0.6                            | )          | (1.0 | ) |
| Non-cash portion  of interest expense   |       | 1.2                             |       | 0.2 |   |
| Cash used in  working capital and other |       | (169.1                          | )          | (30.5 | ) |
| Net  cash from operating activities     |       | $                               | 44.0       |   | $ | 173.9 |   |

 

For a discussion of changes in earnings beforeinterest, depreciation and amortization, equity earnings, gain on sales ofassets by segment and consolidated interest expense — net, see “— Results ofOperations for the Downstream Segment, Upstream Segment and Midstream Segment.”  Cash provided by operating activitiesdecreased $129.9 million for the nine months ended September 30, 2005,compared with the nine months ended September 30, 2004, primarily due tothe timing of cash disbursements and cash receipts for crude oil inventory andother working capital components and an $11.3 million decrease in distributionsreceived from our equity investments during the nine months ended September 30,2005, partially offset by higher net income and lower depreciation andamortization expense in the 2005 period.

 During thesecond and third quarters of 2005, we purchased crude oil and simultaneouslyentered into offsetting sales contracts for physical delivery during the fourthquarter of 2005. The purpose of these contracts was to lock in a margin on thecrude oil while it is stored in our facilities. These purchases had a negativeimpact on cash from operating activities when the invoices for the purchase ofthe crude oil were paid. We utilized borrowings under our revolving creditfacility to fund a large portion of the crude oil purchases. These borrowingson our revolving credit facility are shown as financing activities in thestatement of cash flows. Until we deliver the crude oil in the fourth quarterof 2005 and subsequently receive payment from our customers, cash fromoperating activities will be negatively impacted by this activity.

Net cash from operating activities for the nine monthsended September 30, 2005 and 2004, included interest payments, net ofamounts capitalized, of $78.5 million and $75.5 million, respectively. Excludingthe effects of hedging activities and interest capitalized during the yearended December 31, 2005, we expect interest payments on our fixed rateSenior Notes to be approximately $77.8 million. We expect to pay our interestpayments with cash flows from operating activities.

*InvestingActivities*

Cash flows used in investing activities totaled $262.4million for the nine months ended September 30, 2005, and were comprisedof $148.1 million of capital expenditures, $68.9 million for the acquisition ofDownstream Segment assets, $43.3 million for the acquisition of UpstreamSegment assets and $2.6 million of cash contributions for TE Products’ownership interest in MB Storage for capital expenditures, partially offset by$0.5 million in net cash proceeds from an asset sale in our Midstream Segment. Cashflows used in investing activities totaled $134.9 million for the nine monthsended September 30, 2004, and were comprised of $111.0 million of capitalexpenditures, $1.5 million of cash contributions for TE Products’ ownershipinterest in Centennial to cover operating needs and capital expenditures, $20.2million of cash contributions for TE Products’ ownership interest in MB Storage,of which $16.5 million was used to acquire storage assets, and $3.4 million forthe acquisition of assets 

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during the nine months ended September 30, 2004,partially offset by $1.2 million in net cash proceeds from the sales of variousassets in our Upstream and Downstream Segments.

*FinancingActivities*

Cash flows provided by financing activities totaled$202.1 million for the nine months ended September 30, 2005, and werecomprised of $278.8 million of net proceeds received from the issuance of 7.0 millionUnits in May and June 2005 and $107.5 million in borrowings, net ofrepayments, on our revolving credit facility, partially offset by $184.2million of distributions paid to unitholders. Cash flows used in financingactivities totaled $58.9 million for the nine months ended September 30,2004, and were comprised of $174.4 million of distributions paid tounitholders, partially offset by $115.5 million in borrowings, net ofrepayments, on our revolving credit facility.

We paid cash distributions of $184.2 million ($2.00per Unit) and $174.4 million ($1.975 per Unit) during the nine months ended September 30,2005 and 2004, respectively. Additionally, we declared a cash distribution of$0.675 per Unit for the quarter ended September 30, 2005. We will pay thedistribution of $66.9 million on November 7, 2005, to unitholders ofrecord on October 31, 2005.

On May 5, 2005, we sold in an underwritten publicoffering 6.1 million Units at $41.75 per Unit. The proceeds from the offering,net of underwriting discount, totaled approximately $244.5 million. On June 8,2005, 865,000 Units were sold upon exercise of the underwriters’ over-allotmentoption granted in connection with the offering on May 5, 2005. Proceedsfrom the over-allotment sale, net of underwriting discount, totaled $34.7million. The proceeds were used to reduce indebtedness under our revolvingcredit facility, to fund revenue generating and system upgrade capitalexpenditures and for general partnership purposes.

***Universal Shelf***

**We have filed withthe SEC a universal shelf registration statement that, subject to agreement onterms at the time of use and appropriate supplementation, allows us to issue,in one or more offerings, up to an aggregate of $2.0 billion of equitysecurities, debt securities or a combination thereof. In the May 2005equity offering, we issued $279.2 million of equity securities. At September 30,2005, we had $1.7 billion remaining under this shelf registration, subject tocustomary marketing terms and conditions.**

*Credit Facilities*

We havein place an unsecured revolving credit facility for up to $600.0 million (“RevolvingCredit Facility”), including the issuance of letters of credit of up to $100.0million. Interest is payable at an applicable margin above either the lender’sbase rate or LIBOR. At September 30, 2005, $460.5 million was outstandingunder the facility, and we had $139.5 million of availability. Restrictivecovenants in the credit agreement limit our ability to, among other things,incur additional indebtedness, make distributions in excess of Available Cash(see Note 9. Partners’ Capital and Distributions), and complete mergers,acquisitions and sales of assets. In addition, the credit agreement requires usto maintain certain financial ratios, which we were in compliance with at September 30,2005.

Centennialentered into credit facilities totaling $150.0 million, and as of September 30,2005, $150.0 million was outstanding under those credit facilities. TE Productsand Marathon Petroleum Company LLC (“Marathon”) have each guaranteed one-halfof the repayment of Centennial’s outstanding debt balance (plus interest) undera long-term credit agreement, which expires in 2024, and a short-term creditagreement, which expires in 2007. The guarantees arose in order for Centennialto obtain adequate financing, and the proceeds of the credit agreements wereused to fund construction and conversion costs of its pipeline system. Prior tothe expiration of the long-term credit agreement, TE Products could berelinquished from responsibility under the guarantee should Centennial meetcertain financial tests. If Centennial defaults on its outstanding balance, theestimated maximum potential amount of future payments for TE Products andMarathon is $75.0 million each at September 30, 2005.

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*2005 Capital Expenditures*

We estimate that capital expenditures, excludingacquisitions, for 2005 will be approximately $239.0 million (including $7.0million of capitalized interest). We expect to spend approximately $176.6million for revenue generating projects and facility improvements. Capitalspending on revenue generating projects and facility improvements will includeapproximately $17.5 million for the expansion of our Downstream Segmentfacilities. We expect to spend $18.8 million to expand our Upstream Segmentpipelines and facilities in West Texas and Oklahoma and approximately $140.3million to expand our Midstream Segment assets, with further expansions on ourJonah system. We expect to spend approximately $36.2 million to sustain existingoperations, including life-cycle replacements for equipment at variousfacilities and pipeline and tank replacements among all of our businesssegments. We expect to spend approximately $19.2 million to improve operationalefficiencies and reduce costs among all of our business segments. During theremainder of 2005, TE Products may be required to contribute cash to Centennialto cover capital expenditures, acquisitions or other operating needs and to MBStorage to cover significant capital expenditures or additional acquisitions. Wecontinually review and evaluate potential capital improvements and expansionsthat would be complementary to our present business operations. Theseexpenditures can vary greatly depending on the magnitude of our transactions.

*LiquidityOutlook*

We believe that we will continue to have adequateliquidity to fund future recurring operating and investing activities. Ourprimary cash requirements consist of normal operating expenses, capitalexpenditures to sustain existing operations and revenue generatingexpenditures, interest payments on our Senior Notes and Revolving CreditFacility, distributions to our General Partner and unitholders and acquisitionsof new assets or businesses. Our cash requirements for the remainder of 2005and 2006, such as operating expenses, capital expenditures to sustain existingoperations and quarterly distributions to our General Partner and unitholders,are expected to be funded through operating cash flows. Long-term cashrequirements for expansion projects, acquisitions and debt repayments areexpected to be funded by several sources, including cash flows from operatingactivities, borrowings under credit facilities, and possibly the issuance ofadditional equity and debt securities. Our ability to complete future debt andequity offerings and the timing of any such offerings will depend on variousfactors, including prevailing market conditions, interest rates, our financialcondition and our credit rating at the time.

*Off-BalanceSheet Arrangements*

We do not rely on off-balance sheet borrowings to fundour acquisitions. We have no off-balance sheet commitments for indebtednessother than the limited guaranty of Centennial debt, the limited guaranty ofCentennial catastrophic events and leases covering assets utilized in severalareas of our operations.

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*ContractualObligations*

The following table summarizes our debt repaymentobligations and material contractual commitments as of September 30, 2005(in millions):  
| ** **                                  | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                                               | ** ** | **Less than 1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
| Revolving Credit  Facility                  |       | $                                                                       | 460.5      |   | $ | — |   | $ | — |   | $ | 460.5 |   | $ | — |   |
| 6.45% Senior  Notes due 2008 (1) (2)   |       | 180.0                                                                   |       | — |   | 180.0 |   | — |   | — |   |
| 7.625% Senior  Notes due 2012 (2)           |       | 500.0                                                                   |       | — |   | — |   | — |   | 500.0 |   |
| 6.125% Senior  Notes due 2013 (2)           |       | 200.0                                                                   |       | — |   | — |   | — |   | 200.0 |   |
| 7.51% Senior  Notes due 2028 (1) (2)   |       | 210.0                                                                   |       | — |   | — |   | — |   | 210.0 |   |
| Debt subtotal                               |       | 1,550.5                                                                 |       | — |   | 180.0 |   | 460.5 |   | 910.0 |   |
|                                        |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Operating leases  (3)                       |       | 79.7                                                                    |       | 18.9 |   | 30.2 |   | 15.1 |   | 15.5 |   |
| Capital  expenditure obligations (4)        |       | 24.7                                                                    |       | 24.7 |   | — |   | — |   | — |   |
| Other  liabilities and deferred credits (5) |       | 8.5                                                                     |       | — |   | 3.5 |   | 1.0 |   | 4.0 |   |
| Total                                       |       | $                                                                       | 1,663.4    |   | $ | 43.6 |   | $ | 213.7 |   | $ | 476.6 |   | $ | 929.5 |   |

_____________________________

(1)             Obligationsof TE Products.

(2)             OurTE Products subsidiary entered into an interest rate swap agreement to hedgeits exposure to changes in the fair value of its 7.51% Senior Notes due 2028. AtSeptember 30, 2005, the 7.51% Senior Notes include an adjustment toincrease the fair value of the debt by $1.3 million related to this interestrate swap agreement. We also entered into interest rate swap agreements tohedge our exposure to changes in the fair value of our 7.625% Senior Notes due2012. At September 30, 2005, the 7.625% Senior Notes include a deferredgain, net of amortization, from previous interest rate swap terminations of$33.5 million. At September 30, 2005, our 6.45% Senior Notes, our 7.625%Senior Notes and our 6.125% Senior Notes include $2.5 million of unamortizeddebt discounts. The fair value adjustments, the deferred gain adjustment andthe unamortized debt discounts are excluded from this table.

(3)             Includesa pipeline capacity lease with Centennial. In January 2003, TE Productsentered into a pipeline capacity lease agreement with Centennial for a periodof five years that contains a minimum throughput requirement. For the yearended December 31, 2004, TE Products exceeded the minimum throughputrequirements on the lease agreement.

(4)             Includesaccruals for costs incurred but not yet paid relating to capital projects.

(5)             Excludesapproximately $9.0 million of long-term deferred revenue payments, which arebeing transferred to income over the term of the respective revenue contracts. Theamount of commitment by year is our best estimate of projected payments ofthese long-term liabilities.

We expect to repay the long-term, senior unsecuredobligations and bank debt through the issuance of additional long-term seniorunsecured debt at the time the 2008, 2012, 2013 and 2028 debt matures, issuanceof additional equity, with proceeds from dispositions of assets, cash flow fromoperations or any combination of the above items.

TEProducts, Marathon and Centennial have entered into a limited cash callagreement, which allows each member to contribute cash in lieu of Centennialprocuring separate insurance in the event of a third-party liability arisingfrom a catastrophic event. There is an indefinite term for the agreement andeach member is to contribute cash in proportion to its ownership interest, upto a maximum of $50.0 million each. As a result of the catastrophic eventguarantee, TE Products has recorded a $4.7 million obligation, which representsthe present value of the estimated amount that we would have to pay under theguarantee. In the event that a catastrophic event occurred and 

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wewere required to contribute cash to Centennial, contributions exceeding ourdeductible may be covered by our insurance.

In addition to the items in the table above, we haveentered into various operational commitments and agreements related to pipelineoperations and to the marketing, transportation, terminaling and storage ofcrude oil. The majority of contractual commitments for the purchase of crudeoil that are made range in term from a thirty-day evergreen to three years. Asubstantial portion of the contracts for the purchase of crude oil that extendbeyond thirty days include cancellation provisions that allow us to cancel thecontract with thirty days written notice. During the nine months ended September 30,2005, crude oil purchases averaged approximately $629.5 million per month.

Our senior unsecured debt is rated BBB- by Standardand Poors (“S&P”) and Baa3 by Moody’s Investors Service (“Moody’s”). S&Passigned this rating on June 14, 2005, following its review of theownership structure, corporate governance issues, and proposed funding afterthe acquisition of the General Partner by DFI. Both ratings are with a stableoutlook. A rating reflects only the view of a rating agency and is not a recommendationto buy, sell or hold any indebtedness. Any rating can be revised upward ordownward or withdrawn at any time by a rating agency if it determines that thecircumstances warrant such a change. The senior unsecured debt of oursubsidiary, TE Products, is also rated BBB- by S&P and Baa3 by Moody’s. Bothratings are with a stable outlook.

****Other Considerations****

Our operations are subject to federal, state and locallaws and regulations governing the discharge of materials into the environment.Failure to comply with these laws and regulations may result in the assessmentof administrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to performinvestigatory and remedial activities. Although we believe our operations arein 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 beincurred. Moreover, it is possible that other developments, such asincreasingly strict environmental laws and regulations and enforcement policiesthereunder, and claims for damages to property or persons resulting from ouroperations, could result in substantial costs and liabilities to us. We believethat changes in environmental laws and regulations will not have a materialadverse effect on our financial position, results of operations or cash flowsin the near term.

***Recent Accounting Pronouncements***

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

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

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

We seek to maintain a position that is substantiallybalanced between crude oil purchases and sales and future delivery obligations.On the majority of our crude oil derivative contracts, we take the normalpurchase and normal sale exclusion in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, and SFAS No. 138, *Accounting for Certain Derivative Instruments and Certain HedgingActivities, an amendment of FASB Statement No. 133*. At September 30,2005, we have $108.7 million of crude oil inventory for which we have enteredinto forward crude sales contracts to mitigate the risk of price volatility.

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Occasionally, customers require pricing terms that donot allow us to balance our position. Additionally, certain pricing terms mayexpose us to movements in margin. On a small portion of our crude oil marketingbusiness, we enter into derivative contracts such as swaps and other businesshedging devices for which we cannot take the normal purchase and normal saleexclusion and for which we do not elect hedge accounting. The terms of thesecontracts are less than one year. The purpose is to balance our position orlock in a margin and, as such, do not expose us to any additional significantmarket risk. We mark these transactions to market and the changes in the fairvalue are recognized in current earnings. This results in some financialstatement variability during quarterly periods; however, any unrealized gainsand losses reflected in the financial statements related to marking thesetransactions to market are offset by realized gains and losses in differentquarterly periods when the transactions are settled.

At September 30, 2005, we had $460.5 millionoutstanding under our variable interest rate revolving credit facility. Theinterest rate is based, at our option, on either the lender’s base rate plus aspread or LIBOR plus a spread in effect at the time of the borrowings and isadjusted monthly, bimonthly, quarterly or semiannually. Utilizing the balancesof our variable interest rate debt outstanding at September 30, 2005, andassuming market interest rates increase 100 basis points, the potential annualincrease in interest expense would be $4.6 million.

At September 30, 2005, TE Products hadoutstanding $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 September 30, 2005, the estimated fairvalue of the TE Products Senior Notes was approximately $408.9 million. At September 30,2005, we had outstanding $500.0 million principal amount of 7.625% Senior Notesdue 2012 and $200.0 million principal amount of 6.125% Senior Notes due 2013. AtSeptember 30, 2005, the estimated fair value of the $500.0 million 7.625%Senior Notes and the $200.0 million 6.125% Senior Notes was approximately$555.3 million and $206.3 million, respectively.

We have utilized and expect to continue to utilizeinterest rate swap agreements to hedge a portion of our cash flow and fairvalue risks. Interest rate swap agreements are used to manage the fixed andfloating interest rate mix of our total debt portfolio and overall cost ofborrowing. Interest rate swaps that manage our cash flow risk reduce ourexposure to increases in the benchmark interest rates underlying variable ratedebt. Interest rate swaps that manage our fair value risks are intended to reduceour exposure to changes in the fair value of the fixed rate debt. Interest rateswap agreements involve the periodic exchange of payments without the exchangeof the notional amount upon which the payments are based. The related amountpayable to or receivable from counterparties is included as an adjustment toaccrued interest.

In October 2001, TE Products entered into aninterest rate swap agreement to hedge its exposure to changes in the fair valueof its fixed rate 7.51% Senior Notes due 2028. We designated this swapagreement as a fair value hedge. The swap agreement has a notional amount of$210.0 million and matures in January 2028 to match the principal andmaturity of the TE Products Senior Notes. Under the swap agreement, TE Productspays 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 ninemonths ended September 30, 2005, and 2004, we recognized reductions ininterest expense of $4.6 million and $7.5 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap. During the quarter ended September 30, 2005, wemeasured the hedge effectiveness of this interest rate swap and noted that nogain or loss from ineffectiveness was required to be recognized. The fair valueof this interest rate swap was a gain of approximately $1.3 million and $3.4million at September 30, 2005, and December 31, 2004, respectively. Utilizingthe balance of the 7.51% TE Products Senior Notes outstanding at September 30,2005 and including the effects of hedging activities, assuming market interestrates increase 100 basis points, the potential annual increase in interestexpense is $2.1 million.

In July 2000, we entered into an interest rateswap agreement to hedge our exposure to increases in the benchmark interestrate underlying our variable rate revolving credit facility. This interest rateswap matured in April 2004. We designated this swap agreement, whichhedged exposure to variability in expected future cash flows attributed tochanges in interest rates, as a cash flow hedge. The swap agreement was basedon a notional amount of 

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$250.0 million. Under the swap agreement, we paid afixed rate of interest of 6.955% and received a floating rate based on athree-month U.S. Dollar LIBOR rate. Because this swap was designated as a cashflow hedge, the changes in fair value, to the extent the swap was effective,were recognized in other comprehensive income until the hedged interest costswere recognized in earnings. From January 2004 through April 2004, werecognized an increase in interest expense of $2.9 million related to thedifference between the fixed rate and the floating rate of interest on the interestrate swap.

During2002, we entered into interest rate swap agreements, designated as fair valuehedges, to hedge our exposure to changes in the fair value of our fixed rate7.625% Senior Notes due 2012. The swap agreements had a combined notional amountof $500.0 million and matured in 2012 to match the principal and maturity ofthe Senior Notes. Under the swap agreements, we paid a floating rate ofinterest based on a U.S. Dollar LIBOR rate, plus a spread, and received a fixedrate of interest of 7.625%. These swap agreements were later terminated in 2002resulting in gains of $44.9 million. The gains realized from the swapterminations have been deferred as adjustments to the carrying value of theSenior Notes and are being amortized using the effective interest method asreductions to future interest expense over the remaining term of the SeniorNotes. At September 30, 2005, the unamortized balance of the deferredgains was $33.5 million. In the event of early extinguishment of the SeniorNotes, any remaining unamortized gains would be recognized in the consolidatedstatement of income at the time of extinguishment.

During May 2005,we executed a treasury rate lock agreement with a notional amount of $200.0million to hedge our exposure to increases in the treasury rate that was to beused to establish the fixed interest rate for a debt offering that was proposedto occur in the second quarter of 2005. During June 2005, the proposeddebt offering was cancelled, and the treasury lock was terminated with arealized loss of $2.0 million. The realized loss was recorded as a component ofinterest expense in the consolidated statements of income.

**Item 4. Controls and Procedures**

As of theend of the period covered by this report, our management carried out an evaluation,with the participation of our principal executive officer (the “CEO”) and ourprincipal financial officer (the “CFO”), of the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15 of the SecuritiesExchange Act of 1934. Based on those evaluations, as of September 30,2005, the CEO and CFO concluded:

(i)             that our disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including the CEO and CFO, as appropriate toallow timely decisions regarding required disclosure; and

(ii)          that our disclosure controls and procedures are effective.

*Changes in Internal Control overFinancial Reporting*

**Through February 23, 2005, our General Partner was anindirect subsidiary of Duke Energy, and Duke Energy’s Audit Services Departmentprovided our internal audit functions. On February 24, 2005, the GeneralPartner was acquired by DFI, an affiliate of EPCO. EPCO, using its ownpersonnel and third party providers, will provide us with internal auditservices. The transition of internal audit functions was completed in the thirdquarter of 2005. This change is not expected to adversely affect our internalaudit process.**

There hasbeen no change in our internal control over financial reporting during thethird quarter of 2005 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II. OTHER INFORMATION**

**Item 1. Legal Proceedings**

We havebeen, in the ordinary course of business, a defendant in various lawsuits and aparty to various other legal proceedings, some of which are covered in whole orin part by insurance. We believe that the outcome of these lawsuits and otherproceedings will not individually or in the aggregate have a material adverseeffect on our consolidated financial position, results of operations or cashflows. See discussion of legal proceedings in Note 12. Commitments andContingencies in the accompanying consolidated financial statements.

**Item 6. Exhibits**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.1             |       | Certificate of Limited  Partnership of TEPPCO Partners, L.P. (Filed as Exhibit 3.2 to the  Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203)  and incorporated herein by reference).                                                                                                                                                                                                                                                                                   |       |
| 3.2             |       | Third Amended and  Restated Agreement of Limited Partnership of TEPPCO Partners, L.P., dated  September 21, 2001 (Filed as Exhibit 3.7 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended September 30, 2001 and incorporated herein by reference).                                                                                                                                                                                         |       |
| 3.3             |       | Limited Liability  Company Agreement of Texas Eastern Products Pipeline Company, LLC, dated  March 31, 2000 (Filed as Exhibit 3.3 to Form 10-Q/A of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended June 30, 2005 and incorporated herein by reference).                                                                                                                                                                                                 |       |
| 3.4             |       | Amendment to Limited  Liability Company Agreement of Texas Eastern Products Pipeline Company, LLC,  dated March 22, 2005 (Filed as Exhibit 3.4 to Form 10-Q/A  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended June 30, 2005 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). |       |

 

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| 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   |   | Third Amended and  Restated Administrative Services Agreement by and among EPCO, Inc.,  Enterprise Products Partners L.P., Enterprise Products Operating L.P.,  Enterprise Products GP, LLC and Enterprise Products OLPGP, Inc.,  Enterprise GP Holdings L.P., EPE Holdings, LLC, TEPPCO Partners, L.P., Texas  Eastern Products Pipeline Company, LLC, TE Products Pipeline Company, Limited  Partnership, TEPPCO Midstream Companies, L.P., TCTM, L.P. and TEPPCO  GP, Inc. dated August 15, 2005, but effective as of  February 24, 2005 (Filed as Exhibit 99.1 to Form 8-K of  TEPPCO Partners, L.P. (Commission File No. 1-10403) dated  August 19, 2005 and incorporated herein by reference). |   |
| 12.1   |   | Statement of  Computation of Ratio of Earnings to Fixed Charges (Filed as Exhibit 12.1  to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the quarter ended September 30, 2005 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| 31.1*  |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a), promulgated under the Securities Exchange Act of  1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 31.2*  |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a), promulgated under the Securities Exchange Act of  1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 32.1** |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 32.2** |   | Certification Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |

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*                    Filedherewith.

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

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.
|                          | TEPPCO Partners, L.P. |
|--------------------------|-----------------------|
|                     |                  |   |
| Date: June 16, 2006 | By:                   | /s/ JERRY E.  THOMPSON |
|                     |                  | Jerry E.  Thompson,  President and Chief Executive Officer of   Texas Eastern Products Pipeline Company, LLC,   General Partner |
|                     |                  |   |
| Date: June 16, 2006 | By:                   | /s/ WILLIAM G.  MANIAS |
|                     |                  | William G. Manias,    Vice President and Chief Financial Officer of  Texas Eastern Products Pipeline Company, LLC,   General Partner |

 

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