**UNITEDSTATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q/A**

**(Amendment No. 1)**

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

**For the quarterly period ended June 30, 2005**

**OR**

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**

**Commission File No. 1-10403**

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**TEPPCO Partners,L.P.**

**(Exact name of Registrant as specified in its charter)**

** **

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

 

**1100 Louisiana Street, 13****th**** Floor****P.O. Box 2521****Houston, Texas 77252-2521****(Address of principal executiveoffices, including zip code)**

**(713) 381-3636****(Registrant’s telephone number,including area code)**

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

Yes þ   No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

Yes þ   No o

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date. Limited Partner Units outstanding as of August 1,2005:   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 six months ended June 30,2005 and 2004. The restated financial statements include the effect ofcorrecting the accounting for our excess investments in Centennial Pipeline LLCand Seaway Crude Pipeline Company from an intangible asset with an indefinitelife and equity method goodwill, respectively, to intangible assets withdeterminable lives. The restatement caused a $1.3 million, or $0.02 per unit,and $1.1 million, or $0.02 per unit, reduction to net income and earnings perunit as previously reported for the three months ended June 30, 2005 and2004, respectively. The restatement caused a $2.5 million, or $0.03 per unit,and $1.8 million, or $0.02 per unit, reduction to net income and earnings perunit as previously reported for the six months ended June 30, 2005 and2004, respectively.****

For furtherdiscussion of the effect of the restatement, see Note 14. Restatement ofConsolidated 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 AnnualReport, we indicated in the introductory explanatory note that the restatementpresented in this filing would be reported in our Quarterly Report on Form 10-Qfor the quarterly period ended June 30, 2006. We also noted that we didnot plan to file any other amendments to our previously filed Quarterly Reportson Form 10-Q since we had included restated financial data for thequarterly periods ended March 31, 2005 and 2004, June 30, 2005 and2004, and September 30, 2005 and 2004 in our 2005 Annual Report. However,we are amending our Quarterly Report on Form 10-Q for the periodended June 30, 2005, in order to provide investors with a more convenientcomparative presentation of the effects of the restatement for the quarterlyperiods ended June 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 June 30, 2005, which was filed with the Securitiesand Exchange Commission on August 2, 2005 (the “Initial Report”):**

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.

i

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**TEPPCO PARTNERS, L.P.**

**TABLE OF CONTENTS**
|                                                                                                                                    | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I.  FINANCIAL INFORMATION**                                                                                            |       |       |
| ** **                                                                                                                         |       |       |
| Item  1. Financial Statements                                                                                                      |       |       |
| Consolidated  Balance Sheets as of June 30, 2005 (unaudited) (as restated) and  December 31, 2004                        |       |       |
|                                                                                                                               |       |       |
| Consolidated Statements of Income for the three months  and six months ended June 30, 2005 and 2004 (unaudited) (as restated) |       |       |
|                                                                                                                               |       |       |
| Consolidated Statements of Cash Flows for the six  months ended June 30, 2005 and 2004 (unaudited) (as restated)              |       |       |
|                                                                                                                               |       |       |
| Consolidated Statement of Partners’ Capital for the  six months ended June 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                                                                                                                         |       |       |

 

ii

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**PART I.FINANCIAL INFORMATION**

**Item 1. FinancialStatements**

**TEPPCO PARTNERS,  L.P.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

** **
| ** **                                                                                                           | ** ** | **June 30,**      | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                           | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                                           | ** ** | **(as restated)** | ** ** | ** **            | ** ** |
| ** **                                                                                                           | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                           |       |
| Current assets:                                                                                                      |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                            |       | $                      | 1,494      |                  | $          | 16,422 |   |
| Accounts receivable, trade (net of allowance for  doubtful accounts of $182 and $112)                                |       | 686,677                |       | 553,628               |       |
| Accounts receivable, related parties                                                                                 |       | 3,402                  |       | 11,845                |       |
| Inventories                                                                                                          |       | 98,487                 |       | 19,521                |       |
| Other                                                                                                                |       | 57,504                 |       | 42,138                |       |
| Total current assets                                                                                                 |       | 847,564                |       | 643,554               |       |
| Property, plant  and equipment, at cost (net of accumulated depreciation and amortization of  $442,282 and $407,670) |       | 1,789,866              |       | 1,703,702             |       |
| Equity  investments                                                                                                  |       | 360,239                |       | 363,307               |       |
| Intangible  assets                                                                                                   |       | 393,271                |       | 407,358               |       |
| Goodwill                                                                                                             |       | 16,944                 |       | 16,944                |       |
| Other assets                                                                                                         |       | 58,746                 |       | 51,419                |       |
| Total assets                                                                                                         |       | $                      | 3,466,630  |                  | $          | 3,186,284 |   |

**LIABILITIES AND PARTNERS’ CAPITAL**
| Current liabilities:                          |   |      |      |      |   |
|-----------------------------------------------|--------|-----------|-----------|-----------|--------|
| Accounts payable and accrued liabilities      |   | $         | 685,563   |      | $      | 564,464 |   |
| Accounts payable, related parties             |   | 5,420     |      | 24,654    |   |
| Accrued interest                              |   | 32,506    |      | 32,292    |   |
| Other accrued taxes                           |   | 13,407    |      | 13,309    |   |
| Other                                         |   | 48,641    |      | 46,593    |   |
| Total current liabilities                     |   | 785,537   |      | 681,312   |   |
| Senior Notes                                  |   | 1,129,394 |      | 1,127,226 |   |
| Other long-term  debt                         |   | 278,000   |      | 353,000   |   |
| Other  liabilities and deferred credits       |   | 12,729    |      | 13,643    |   |
| Commitments and  contingencies                |   |      |      |      |   |
| Partners’ capital:                       |   |      |      |      |   |
| General partner’s interest               |   | (43,868   | )         | (35,881   | )      |
| Limited partners’ interests              |   | 1,304,838 |      | 1,046,984 |   |
| Total partners’ capital                  |   | 1,260,970 |      | 1,011,103 |   |
| Total  liabilities and partners’ capital |   | $         | 3,466,630 |      | $      | 3,186,284 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

1

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**TEPPCO PARTNERS, L.P.**

**CONSOLIDATED STATEMENTS OF INCOME(Unaudited)(in thousands, except per Unit amounts)**

** **
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                   | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | **(as restated)**           | ** ** | **(as restated)**         | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Operating revenues:                                          |       |                             |       |                           |       |   |   |   |   |
| Sales of petroleum products                                  |       | $                                | 1,963,617  |                           | $          | 1,232,807 |   | $ | 3,350,826 |   | $ | 2,414,920 |   |
| Transportation — Refined products                  |       | 37,834                           |       | 38,937                         |       | 72,799 |   | 69,908 |   |
| Transportation — LPGs                                   |       | 14,470                           |       | 13,721                         |       | 46,701 |   | 42,501 |   |
| Transportation — Crude oil                              |       | 9,042                            |       | 9,213                          |       | 18,214 |   | 18,876 |   |
| Transportation — NGLs                                   |       | 11,387                           |       | 10,578                         |       | 21,606 |   | 20,592 |   |
| Gathering — Natural gas                                 |       | 36,956                           |       | 34,427                         |       | 73,516 |   | 68,929 |   |
| Other                                                        |       | 17,074                           |       | 14,881                         |       | 33,323 |   | 36,899 |   |
| Total operating revenues                                     |       | 2,090,380                        |       | 1,354,564                      |       | 3,616,985 |   | 2,672,625 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Costs and expenses:                                          |       |                             |       |                           |       |   |   |   |   |
| Purchases of petroleum products                              |       | 1,943,696                        |       | 1,217,312                      |       | 3,316,156 |   | 2,384,653 |   |
| Operating, general and administrative                        |       | 49,979                           |       | 52,640                         |       | 99,997 |   | 104,443 |   |
| Operating fuel and power                                     |       | 11,546                           |       | 11,035                         |       | 22,616 |   | 22,995 |   |
| Depreciation and amortization                                |       | 26,292                           |       | 26,411                         |       | 52,055 |   | 54,231 |   |
| Taxes — other than income taxes                         |       | 4,272                            |       | 4,831                          |       | 9,708 |   | 10,125 |   |
| Gains on sales of assets                                     |       | (68                              | )          | (66                            | )          | (566 | ) | (124 | ) |
| Total costs and expenses                                     |       | 2,035,717                        |       | 1,312,163                      |       | 3,499,966 |   | 2,576,323 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Operating income                                             |       | 54,663                           |       | 42,401                         |       | 117,019 |   | 96,302 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Interest expense  — net                                 |       | (21,627                          | )          | (16,464                        | )          | (40,914 | ) | (36,059 | ) |
| Equity earnings                                              |       | 7,751                            |       | 10,453                         |       | 11,845 |   | 15,391 |   |
| Other income —  net                                     |       | 135                              |       | 240                            |       | 401 |   | 716 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Net income                                                   |       | $                                | 40,922     |                           | $          | 36,630 |   | $ | 88,351 |   | $ | 76,350 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Net Income Allocation:                                       |       |                             |       |                           |       |   |   |   |   |
| Limited Partner  Unitholders                                 |       | $                                | 28,748     |                           | $          | 26,063 |   | $ | 62,495 |   | $ | 54,325 |   |
| General Partner                                              |       | 12,174                           |       | 10,567                         |       | 25,856 |   | 22,025 |   |
| Total net income allocated                                   |       | $                                | 40,922     |                           | $          | 36,630 |   | $ | 88,351 |   | $ | 76,350 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Basic and  diluted net income per Limited Partner Unit  |       | $                                | 0.43       |                           | $          | 0.41 |   | $ | 0.96 |   | $ | 0.86 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Weighted average  Limited Partner Units outstanding          |       | 66,559                           |       | 62,999                         |       | 64,789 |   | 62,999 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

2

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**TEPPCO PARTNERS, L.P.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS(Unaudited)(in thousands)**

 
| ** **                                                                     | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,**              | ** ** |
| ** **                                                                     | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(as restated)**         | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                         |       |                           |       |   |   |
| Net income                                                                     |       | $                              | 88,351     |   | $ | 76,350 |   |
| Adjustments to reconcile net income to cash provided  by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                  |       | 52,055                         |       | 54,231 |   |
| Earnings in equity investments, net of distributions                           |       | 7,202                          |       | 5,459 |   |
| Gains on sales of assets                                                       |       | (566                           | )          | (124 | ) |
| Non-cash portion of interest expense                                           |       | 810                            |       | (219 | ) |
| Increase in accounts receivable, trade                                         |       | (133,049                       | )          | (93,044 | ) |
| Decrease (increase) in accounts receivable, related  parties                   |       | 8,443                          |       | (7,225 | ) |
| Increase in inventories                                                        |       | (70,587                        | )          | (213 | ) |
| (Increase) decrease in other current assets                                    |       | (15,265                        | )          | 3,244 |   |
| Increase in accounts payable and accrued expenses                              |       | 116,025                        |       | 98,800 |   |
| Decrease in accounts payable, related parties                                  |       | (19,234                        | )          | (9,161 | ) |
| Other                                                                          |       | (9,585                         | )          | 3,950 |   |
| Net cash provided by operating activities                                      |       | 24,600                         |       | 132,048 |   |
|                                                                           |       |                           |       |   |   |
| Cash flows from  investing activities:                                         |       |                           |       |   |   |
| Proceeds from the sales of assets                                              |       | 510                            |       | 141 |   |
| Purchase of assets                                                             |       | (42,482                        | )          | (2,962 | ) |
| Investment in Centennial Pipeline LLC                                          |       | —                         |       | (1,500 | ) |
| Investment in Mont Belvieu Storage Partners, L.P.                              |       | (1,109                         | )          | (17,211 | ) |
| Capital expenditures                                                           |       | (82,963                        | )          | (60,390 | ) |
| Net cash used in investing activities                                          |       | (126,044                       | )          | (81,922 | ) |
|                                                                           |       |                           |       |   |   |
| Cash flows from  financing activities:                                         |       |                           |       |   |   |
| Proceeds from revolving credit facility                                        |       | 299,307                        |       | 149,800 |   |
| Repayments on revolving credit facility                                        |       | (374,307                       | )          | (99,800 | ) |
| Issuance of Limited Partner Units, net                                         |       | 278,832                        |       | — |   |
| Distributions paid                                                             |       | (117,316                       | )          | (115,741 | ) |
| Net cash provided by (used in) financing activities                            |       | 86,516                         |       | (65,741 | ) |
|                                                                           |       |                           |       |   |   |
| Net decrease in  cash and cash equivalents                                     |       | (14,928                        | )          | (15,615 | ) |
|                                                                           |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                              |       | 16,422                         |       | 29,469 |   |
| Cash and cash  equivalents at end of period                                    |       | $                              | 1,494      |   | $ | 13,854 |   |
|                                                                           |       |                           |       |   |   |
| **Supplemental  disclosure of cash flows:**                                    |       |                           |       |   |   |
| Cash paid for interest  (net of amounts capitalized)                           |       | $                              | 41,067     |   | $ | 41,208 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

3

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**TEPPCO PARTNERS,L.P.**

**CONSOLIDATEDSTATEMENT OF PARTNERS’ CAPITAL****(Unaudited)**

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

 
| ** **                                                  | ** ** | **Outstanding** | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                                                  | ** ** | **Limited**     | ** ** | **General**        | ** ** | **Limited**        | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Partner**     | ** ** | **Partner’s** | ** ** | **Partners’** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Units**       | ** ** | **Interest**       | ** ** | **Interests**      | ** ** | **Total**  | ** ** |
| Partners’  capital at December 31, 2004           |       | 62,998,554      |       | $                  | (35,881    | )                  | $          | 1,046,984  |       | $ | 1,011,103 |   |
| Issuance of Limited Partner Units, net                      |       | 6,965,000       |       | —             |       | 278,832            |       | 278,832    |       |
| Net income allocation                                       |       | —          |       | 25,856             |       | 62,495             |       | 88,351     |       |
| Cash distributions                                          |       | —          |       | (33,843            | )          | (83,473            | )          | (117,316   | )          |
|                                                        |       |            |       |               |       |               |       |       |       |
| Partners’ capital at  June 30, 2005 (as restated) |       | 69,963,554      |       | $                  | (43,868    | )                  | $          | 1,304,838  |       | $ | 1,260,970 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

4

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**TEPPCO PARTNERS,L.P.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**NOTE 1. ORGANIZATIONAND 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, except for some administrative services for certain of theTEPPCO Midstream assets that are currently performed by DEFS on our behalf. Wereimburse EPCO for all reasonable direct and indirect expenses that have beenincurred in managing us. Under a transition services agreement entered into aspart of the sale of the General Partner, DEFS will continue to provide someadministrative services for certain of the TEPPCO Midstream assets for us for aperiod of time until we assume these services on our own. In connection with usassuming the operations of these TEPPCO Midstream assets from DEFS, certainDEFS employees became employees of EPCO effective June 1, 2005. As part ofthe transition services agreement, Duke Energy will continue to provide someadministrative support services to us until we or EPCO assume those activities.

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 Limited PartnerUnits were assigned to Duke Energy when ownership of the Company wastransferred from Duke Energy to DEFS in 2000. On February 24, 2005, DFIentered into an LP Unit Purchase and Sale Agreement with Duke Energy andpurchased these 2,500,000 DPIs for approximately $100.0 million.

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

The accompanying unaudited consolidated financial statementsreflect all adjustments that are, in the opinion of our management, of a normaland recurring nature and necessary for a fair statement of our financialposition as of June 30, 2005, and the results of our operations and cashflows for the periods presented. The results of operations for the three monthsand six months ended June 30, 2005, are not necessarily indicative ofresults of our operations for the full year 2005. You should read these interimfinancial statements in conjunction with our consolidated financial statements andnotes thereto presented in the TEPPCO Partners, L.P. Annual Report on Form 10-Kfor the year ended December 31, 2004. We have reclassified certain amountsfrom prior periods to conform to the current presentation.

5

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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”). Our reportable segments offer different productsand services and are managed separately because each requires differentbusiness 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  and sixmonths ended June 30, 2005 and 2004, for an accounting correction. SeeNote 14. Restatement of Consolidated Financial Statements for a discussion ofthe restatement adjustment and the impact on previously issued financialstatements.

**Net Income PerUnit**

Basic net income per Limited Partner Unit (“Unit” or “Units”)is computed by dividing our net income, after deduction of the General Partner’sinterest, by the weighted average number of Units outstanding (a total of 66.6million and 64.8 million Units for the three months and six months ended June 30,2005, respectively, and 63.0 million Units for the three months and six monthsended June 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 8. Partners’ Capital and Distributions). The GeneralPartner was allocated $12.2 million (representing 29.75%) and $10.6 million(representing 28.85%) of our net income for the three months ended June 30,2005 and 2004, respectively, and $25.9 million (representing 29.27%) and $22.0million (representing 28.85%) of our net income for the six months ended June 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.

Diluted net income per Unit equaled basic net income per Unit foreach of the three-month and six-month periods ended June 30, 2005 and2004, as there 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 on or after June 15, 2005. As such, we will adoptSFAS 123(R) in the first quarter of 2006. Companies are permitted to adoptSFAS 123(R) prior to the extended date. All public companies that adoptedthe fair-value-based method of accounting must use the modified prospectivetransition method and may elect to use the modified retrospective transitionmethod. We do not believe that the adoption of SFAS 123(R) will have amaterial effect on our 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. As such, we will adoptFIN 47 in the fourth quarter of 2005. Retrospective application for interimfinancial information is permitted but is not required. Early adoption of FIN47 is encouraged. We do not believe that the adoption of FIN 47 will have amaterial effect on our financial position, results of operations or cash flows.**

In June 2005,the EITF reached consensus in EITF 04-5, *DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights*, to provide guidance on how general partners in a limitedpartnership should determine whether they control a limited partnership andtherefore should consolidate it. The EITF agreed that the presumption ofgeneral partner control would be overcome only when the limited partners haveeither of two types of rights. The first type, referred to as kick-out rights,is the right to dissolve or liquidate the partnership or otherwise remove thegeneral partner without cause. The second type, referred to as participatingrights, is the right to effectively participate in significant decisions madein the ordinary course of the partnership’s business. The kick-out rights andthe participating rights must be substantive in order to overcome thepresumption of general partner control. The consensus is effective for generalpartners of all new limited partnerships formed and for existing limitedpartnerships for which the partnership agreements are modified subsequent tothe date of FASB ratification (June 29, 2005). The guidance in this EITFis effective for existing partnerships no later than the beginning of the firstreporting period in fiscal years beginning after December 15, 2005. We arecurrently evaluating what impact this EITF will have on our financialstatements, but at this time, we do not believe that the adoption of this EITFwill have a material effect on our financial position, results of operations orcash flows.

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**NOTE 2. GOODWILLAND OTHER INTANGIBLE ASSETS**

**Goodwill**

Goodwill represents the excess of purchase price overfair value of net assets acquired and is presented on the consolidated balancesheets net of accumulated amortization. We account for goodwill under SFAS No. 142,*Goodwill 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.

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

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

 

**Other IntangibleAssets**

The following table reflects the components of intangibleassets, including excess investments, being amortized at June 30, 2005, andDecember 31, 2004 (in thousands):
| ** **                              | ** ** | **June 30, 2005**     | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible  assets:                     |       |                            |       |                            |       |   |   |   |   |
| Gathering and transportation agreements |       | $                               | 464,337    |                            | $          | (103,856 | ) | $ | 464,337 |   | $ | (91,262 | ) |
| Fractionation agreement                 |       | 38,000                          |       | (13,775                         | )          | 38,000 |   | (12,825 | ) |
| Other                                   |       | 11,520                          |       | (2,955                          | )          | 12,262 |   | (3,154 | ) |
| Subtotal                                |       | 513,857                         |       | (120,586                        | )          | 514,599 |   | (107,241 | ) |
| Excess investments:                     |       |                            |       |                            |       |   |   |   |   |
| Centennial Pipeline LLC                 |       | 33,400                          |       | (10,992                         | )          | 33,400 |   | (8,875 | ) |
| Seaway Crude Pipeline Company           |       | 27,100                          |       | (3,418                          | )          | 27,100 |   | (3,072 | ) |
| Subtotal                                |       | 60,500                          |       | (14,410                         | )          | 60,500 |   | (11,947 | ) |
| Total intangible  assets                |       | $                               | 574,357    |                            | $          | (134,996 | ) | $ | 575,099 |   | $ | (119,188 | ) |

 

SFAS 142 requires that intangible assets with finite usefullives be amortized over their respective estimated useful lives. If anintangible asset has a finite useful life, but the precise length of that lifeis not known, that intangible asset shall be amortized over the best estimateof its useful life. At a minimum, we will assess the useful lives and residualvalues of all intangible assets on an annual basis to determine if adjustmentsare required. 

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Amortizationexpense on intangible assets was $7.0 million and $8.3 million for the three monthsended June 30, 2005 and 2004, respectively, and $14.1 million and $16.5million for the six months ended June 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 June 30, 2005 and 2004,respectively, and $2.5 million and $1.8 million for the six months ended June 30,2005 and 2004, respectively.

The value assigned to our intangible assets for natural gasgathering contracts is amortized on a unit-of-production basis, based upon theactual throughput of the system over the expected total throughput for thelives of the contracts. We update throughput estimates and evaluate theremaining expected useful lives of the contract assets on a quarterly basisbased on the best available information. During the fourth quarter of 2004 andthe first and second quarters of 2005, certain limited production forecastswere obtained from some of the producers on the Jonah Gas Gathering Company (“Jonah”)system related to future expansions of the system, and as a result, weincreased our best estimate of future throughput on the Jonah system. Revisionsto these estimates may occur as additional production information is madeavailable to us.

The amortization of the contracts related to the Val Verde GasGathering Company (“Val Verde”) assets is also amortized on aunit-of-production basis. During the fourth quarter of 2004, certain limitedproduction forecasts were obtained from some of the producers on the Val Verdesystem, and as a result, we increased our best estimate of future throughput onthe Val Verde system. Revisions to these estimates may occur as additionalproduction information is made available to us.

The values assigned to our fractionation agreement and otherintangible assets are generally amortized on a straight-line basis. Ourfractionation agreement with DEFS is being amortized over its contract periodof 20 years. The amortization periods for our other intangible assets, whichinclude non-compete and other agreements, range from 3 years to 15 years. Thevalues assigned to our crude supply and transportation intangible customercontracts are being amortized on a 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 relatedto a pipeline and is being amortized on a straight-line basis over the life ofthe pipeline, 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 |       | $                          | 28,417     |                        | $          | 4,763 |   |
| 2006 |       | 31,327                     |       | 4,691                       |       |
| 2007 |       | 33,066                     |       | 5,113                       |       |
| 2008 |       | 33,148                     |       | 5,438                       |       |
| 2009 |       | 31,115                     |       | 6,878                       |       |
|      |            |                            |            |                             |            |  |  |

 

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**NOTE 3. INTERESTRATE 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 sixmonths ended June 30, 2005 and 2004, we recognized reductions in interestexpense of $3.3 million and $5.1 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap. During the quarter ended June 30, 2005, we measuredthe hedge effectiveness of this interest rate swap and noted that no gain or lossfrom ineffectiveness was required to be recognized. The fair value of thisinterest rate swap was a gain of approximately $7.4 million and $3.4 million atJune 30, 2005, and December 31, 2004, respectively.

**During 2002, we entered into interest rate swap agreements,designated as fair value hedges, to hedge our exposure to changes in the fairvalue of our fixed rate 7.625% Senior Notes due 2012. The swap agreements had acombined notional amount of $500.0 million and matured in 2012 to match theprincipal and maturity of the Senior Notes. Under the swap agreements, we paida floating rate of interest based on a U.S. Dollar LIBOR rate, plus a spread,and received a fixed rate of interest of 7.625%. These swap agreements werelater terminated in 2002 resulting in gains of $44.9 million. The gainsrealized from the swap terminations have been deferred as adjustments to thecarrying value of the Senior Notes and are being amortized using the effectiveinterest method as reductions to future interest expense over the remainingterm of the Senior Notes. At June 30, 2005, the unamortized balance of thedeferred gains was $34.6 million. In the event of early extinguishment of theSenior Notes, any remaining unamortized gains would be recognized in theconsolidated statement of income at the time of extinguishment.**

**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 fixed interestrate for a debt offering that was proposed to occur in the second quarter of2005. During June 2005, the proposed debt offering was cancelled, and thetreasury lock was terminated with a realized loss of $2.0 million. The realizedloss was recorded as a component of interest expense in the consolidatedstatements of income in June 2005.**

**NOTE 4. ACQUISITIONS**

**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 from Mexia,Texas, to 

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the Houston, Texas, area and two stations in southHouston with connections to a BP pipeline that originates in south Houston. 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. Wewill integrate 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.

**Storage and Terminaling Assets**

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 assetsunder the purchase method of accounting. The storage and terminaling assetswill complement our existing infrastructure in Cushing and strengthen ourgathering and marketing business in our Upstream Segment.

**NOTE 5. 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 June 30,2005, and December 31, 2004. The major components of inventories were asfollows (in thousands):

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

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(1)             AtJune 30, 2005, substantially all of our crude oil inventory was subject toforward sales contracts.

**NOTE 6. EQUITYINVESTMENTS**

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 thatcarries mostly imported crude oil from a marine terminal at Freeport, Texas, toCushing, Oklahoma, and from a marine terminal at Texas City, Texas, torefineries in the Texas City and Houston, Texas, areas. The Seaway CrudePipeline Company Partnership Agreement provides for varying participationratios 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 six months ended June 30, 2005and 2004, we received distributions from Seaway of $11.7 million and $15.9million, respectively.

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TEProducts owns a 50% ownership interest in Centennial Pipeline Company LLC (“Centennial”),and Marathon Ashland Petroleum 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 sixmonths ended June 30, 2005, TE Products has not invested any additionalfunds in Centennial. During the six months ended June 30, 2004, TEProducts invested an additional $1.5 million in Centennial, which is includedin the equity investment balance at June 30, 2005. TE Products has notreceived any distributions from Centennial since its formation.

On January 1, 2003, TE Products and Louis DreyfusEnergy Services L.P. (“Louis Dreyfus”) formed Mont Belvieu Storage Partners,L.P. (“MB Storage”). TE Products 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 shuttle systemthat ties Mont Belvieu, Texas, to the upper Texas Gulf Coast energy marketplace.MB Storage is a service-oriented, fee-based venture serving the fractionation,refining and petrochemical industries with transportation, terminaling andstorage. 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 six monthsended June 30, 2005 and 2004, TE Products’ sharing ratio in the earningsof MB Storage was approximately 62.6% and 70.2%, respectively. During the sixmonths ended June 30, 2005, TE Products received distributions of $7.3million from MB Storage and contributed $1.1 million to MB Storage. During thesix months ended June 30, 2004, TE Products received distributions of $5.0million from MB Storage and contributed $17.2 million to MB Storage, of which$16.5 million was used to acquire storage assets in April 2004.

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

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

 

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

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

 

**NOTE 7. DEBT**

## **SeniorNotes**

On January 27, 1998, TE Products completed 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 June 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 June 30, 2005, we were incompliance 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 notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the 

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indenture does not limit our ability to incuradditional indebtedness. As of June 30, 2005, we were in compliance withthe covenants of these Senior Notes.

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

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

 

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

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

On June 27, 2003, we entered into a $550.0million revolving credit facility with a three-year term, including theissuance of letters of credit of up to $20.0 million (“Revolving CreditFacility”). The interest rate is based, at our option, on either the lender’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. On October 21, 2004, weamended our Revolving Credit Facility to (i) increase the facility size to$600.0 million, (ii) extend the term to October 21, 2009, (iii) removecertain restrictive covenants, (iv) increase the available amount for theissuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing. On February 23,2005, we again amended our Revolving Credit Facility to remove the requirementthat DEFS must at all times own, directly or indirectly, 100% of our GeneralPartner, to allow for its acquisition by DFI (see Note 1. Organization andBasis of Presentation). During the second quarter of 2005, we used a portion ofthe proceeds from equity offerings in May 2005 and June 2005 to repaya portion of the Revolving Credit Facility (see Note 8. Partners’ Capital andDistributions). At June 30, 2005, $278.0 million was outstanding under theRevolving Credit Facility at a weighted average interest rate of 4.3%. At June 30,2005, we were in compliance with the covenants of this credit agreement.

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

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

 

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

**Equity Offering**

On May 5,2005, we sold in an underwritten public offering 6.1 million Units at $41.75per Unit. The proceeds from 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 cashdistributions 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                   | %          |

 

The following table reflects the allocation of totaldistributions paid during the six months ended June 30, 2005 and 2004 (inthousands, except per Unit amounts):

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

 

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

**General Partner’sInterest**

Asof June 30, 2005, and December 31, 2004, we had deficit balances of$43.9 million and $35.9 million, respectively, in our General Partner’s equityaccount. These negative balances do not represent assets to us and do notrepresent obligations of the General Partner to contribute cash or otherproperty to us. The General Partner’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 

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General Partner’s equityaccount). For the six months ended June 30, 2005, the General Partner wasallocated $25.9 million (representing 29.27%) of our net income and received$33.8 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 June 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 six monthsended June 30, 2005, resulted in deficits in the General Partner’s equityaccount at December 31, 2004, and June 30, 2005. Future cashdistributions that exceed net income will result in an increase in the deficitbalance in the General Partner’s equity account.

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 9. EMPLOYEEBENEFIT 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 TEPPCO SBPwere amended.  Effective May 31, 2005,participation in the TEPPCO RCBP was frozen and no new participants wereeligible to be covered by the plan after 

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that date. Effective December 31, 2005, all planbenefits accrued will be frozen and participants will not receive additionalpay credits after that date. In addition, all plan participants will be 100%vested regardless of their years of service. Effective January 1, 2006,the TEPPCO RCBP plan will be terminated and plan participants will receive lumpsum benefit payments in 2006. Participants in the TEPPCO SBP will receive paycredits through November 30, 2005, and will receive lump sum benefitpayments in December 2005. Both lump sum benefit payments are discussedbelow.

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 tosettle the liability.  The expectedlong-term rate of return on plan assets was changed from 8% to 2% due to themovement of plan funds from equity investments into short-term money marketfunds. The mortality table was changed to reflect overall improvements inmortality experienced by the general population. The curtailment charge arosedue to the accelerated recognition of the unrecognized prior service costs. Weexpect to record additional settlement charges of approximately $0.2 million inthe fourth 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.

The components of net pension benefits costs for theTEPPCO RCBP and the TEPPCO SBP for the three months and six months ended June 30,2005 and 2004, were as follows (in thousands):
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost benefit  earned during the period |       | $                                               | 1,069      |                                          | $          | 913 |   | $ | 2,099 |   | $ | 1,826 |   |
| Interest cost on  projected benefit obligation |       | 234                                             |       | 180                                           |       | 468 |   | 360 |   |
| Expected return on plan  assets                |       | (223                                            | )          | (220                                          | )          | (520 | ) | (440 | ) |
| Amortization of prior  service cost            |       | 1                                               |       | 2                                             |       | 3 |   | 4 |   |
| Recognized net  actuarial loss                 |       | 30                                              |       | 14                                            |       | 56 |   | 28 |   |
| SFAS 88 curtailment  charge                    |       | 50                                              |       | —                                        |       | 50 |   | — |   |
| Net pension  benefits costs                    |       | $                                               | 1,161      |                                          | $          | 889 |   | $ | 2,156 |   | $ | 1,778 |   |

 

## **Other Postretirement 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 January 1, 2006,these benefits will be terminated. In June 2005, as a result of thischange in benefits and in accordance with SFAS 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 

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effect of these curtailment adjustments was to reduceour accumulated postretirement obligation to the total of the expectedremaining 2005 payments under the TEPPCO OPB.

The components of net postretirement benefits cost forthe TEPPCO OPB for the three and six months ended June 30, 2005 and 2004,were as follows (in thousands):
| ** **                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost benefit  earned during the period                  |       | $                                               | 32         |                                          | $          | 41 |   | $ | 81 |   | $ | 82 |   |
| Interest cost on  accumulated postretirement benefit obligation |       | 28                                              |       | 38                                            |       | 69 |   | 76 |   |
| Amortization of prior  service cost                             |       | 21                                              |       | 32                                            |       | 53 |   | 64 |   |
| Recognized net  actuarial loss                                  |       | 2                                               |       | —                                        |       | 4 |   | — |   |
| SFAS 106 curtailment  credit                                    |       | (1,676                                          | )          | —                                        |       | (1,676 | ) | — |   |
| Net  postretirement benefits costs                              |       | $                                               | (1,593     | )                                             | $          | 111 |   | $ | (1,469 | ) | $ | 222 |   |

 

Effective June 1, 2005, the payroll 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 the acquisition of our General Partner by DFI, DEFS will continue toprovide these benefits to those employees. Effective June 1, 2005, EPCObegan providing certain other postretirement benefits to those employees whobecame eligible for the benefits after June 1, 2005, and will charge thosebenefit related costs to us. As a result of these changes, we recorded a $1.2million reduction in our other postretirement obligation in June 2005.

## **Estimated Future Benefit Contributions**

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

**NOTE 10. SEGMENT INFORMATION**

We have three 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 

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higher revenues during the first and fourth quartersof each year since our operations are somewhat seasonal. Refined productsvolumes are generally higher during the second and third quarters because ofgreater demand for gasolines during the spring and summer driving seasons. LPGsvolumes 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 and MB Storage (see Note 6. 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 6. 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 (Chaparral) from West Texas and New Mexico to Mont Belvieu; thegathering of natural gas in the Green River Basin in southwestern Wyoming,through Jonah, and the gathering of coal bed methane (“CBM”) and conventionalnatural gas in the San Juan Basin in New Mexico and Colorado, through ValVerde.

The table below includes financial information byreporting segment for the three months and six months ended June 30, 2005and 2004 (in thousands):
| ** **                             | ** ** | **Three Months Ended June 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           |       | $                                                             | —     |   | $ | 1,961,302 |   | $ | 2,315 |   | $ | 1,963,617 |   | $ | — |   | $ | 1,963,617 |   |
| Operating revenues                     |       | 63,438                                                        |       | 11,698 |   | 52,336 |   | 127,472 |   | (709 | ) | 126,763 |   |
| Purchases of petroleum  products       |       | —                                                        |       | 1,942,599 |   | 1,806 |   | 1,944,405 |   | (709 | ) | 1,943,696 |   |
| Operating expenses,  including power   |       | 38,680                                                        |       | 15,214 |   | 11,903 |   | 65,797 |   | — |   | 65,797 |   |
| Depreciation and  amortization expense |       | 9,801                                                         |       | 3,651 |   | 12,840 |   | 26,292 |   | — |   | 26,292 |   |
| Gains on sales of  assets              |       | (15                                                           | )          | (53 | ) | — |   | (68 | ) | — |   | (68 | ) |
| Operating income                       |       | 14,972                                                        |       | 11,589 |   | 28,102 |   | 54,663 |   | — |   | 54,663 |   |
| Equity earnings  (losses)              |       | (246                                                          | )          | 7,997 |   | — |   | 7,751 |   | — |   | 7,751 |   |
| Other income, net                      |       | 121                                                           |       | (46 | ) | 60 |   | 135 |   | — |   | 135 |   |
| Earnings before  interest              |       | $                                                             | 14,847     |   | $ | 19,540 |   | $ | 28,162 |   | $ | 62,549 |   | $ | — |   | $ | 62,549 |   |

 

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| ** **                             | ** ** | **Three Months Ended June 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           |       | $                                                             | —     |   | $ | 1,231,019 |   | $ | 1,788 |   | $ | 1,232,807 |   | $ | — |   | $ | 1,232,807 |   |
| Operating  revenues                    |       | 62,364                                                        |       | 11,841 |   | 48,216 |   | 122,421 |   | (664 | ) | 121,757 |   |
| Purchases of  petroleum products       |       | —                                                        |       | 1,216,307 |   | 1,669 |   | 1,217,976 |   | (664 | ) | 1,217,312 |   |
| Operating  expenses, including power   |       | 38,551                                                        |       | 15,050 |   | 14,905 |   | 68,506 |   | — |   | 68,506 |   |
| Depreciation and  amortization expense |       | 9,211                                                         |       | 3,045 |   | 14,155 |   | 26,411 |   | — |   | 26,411 |   |
| Gains on sales  of assets              |       | (17                                                           | )          | (49 | ) | — |   | (66 | ) | — |   | (66 | ) |
| Operating income                       |       | 14,619                                                        |       | 8,507 |   | 19,275 |   | 42,401 |   | — |   | 42,401 |   |
| Equity earnings  (losses)              |       | (1,465                                                        | )          | 11,918 |   | — |   | 10,453 |   | — |   | 10,453 |   |
| Other income,  net                     |       | 173                                                           |       | 51 |   | 16 |   | 240 |   | — |   | 240 |   |
| Earnings before interest               |       | $                                                             | 13,327     |   | $ | 20,476 |   | $ | 19,291 |   | $ | 53,094 |   | $ | — |   | $ | 53,094 |   |

 
| ** **                             | ** ** | **Six Months Ended June 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           |       | $                                                           | —     |   | $ | 3,346,369 |   | $ | 4,457 |   | $ | 3,350,826 |   | $ | — |   | $ | 3,350,826 |   |
| Operating revenues                     |       | 141,605                                                     |       | 23,411 |   | 103,192 |   | 268,208 |   | (2,049 | ) | 266,159 |   |
| Purchases of petroleum  products       |       | —                                                      |       | 3,315,029 |   | 3,176 |   | 3,318,205 |   | (2,049 | ) | 3,316,156 |   |
| Operating expenses,  including power   |       | 75,866                                                      |       | 30,659 |   | 25,796 |   | 132,321 |   | — |   | 132,321 |   |
| Depreciation and  amortization expense |       | 19,362                                                      |       | 7,152 |   | 25,541 |   | 52,055 |   | — |   | 52,055 |   |
| Gains on sales of  assets              |       | (107                                                        | )          | (52 | ) | (407 | ) | (566 | ) | — |   | (566 | ) |
| Operating income                       |       | 46,484                                                      |       | 16,992 |   | 53,543 |   | 117,019 |   | — |   | 117,019 |   |
| Equity earnings  (losses)              |       | (2,067                                                      | )          | 13,912 |   | — |   | 11,845 |   | — |   | 11,845 |   |
| Other income, net                      |       | 270                                                         |       | 29 |   | 102 |   | 401 |   | — |   | 401 |   |
| Earnings before  interest              |       | $                                                           | 44,687     |   | $ | 30,933 |   | $ | 53,645 |   | $ | 129,265 |   | $ | — |   | $ | 129,265 |   |

 

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| ** **                             | ** ** | **Six Months Ended June 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           |       | $                                                           | —     |   | $ | 2,411,786 |   | $ | 3,134 |   | $ | 2,414,920 |   | $ | — |   | $ | 2,414,920 |   |
| Operating revenues                     |       | 137,173                                                     |       | 25,564 |   | 97,033 |   | 259,770 |   | (2,065 | ) | 257,705 |   |
| Purchases of petroleum  products       |       | —                                                      |       | 2,383,732 |   | 2,986 |   | 2,386,718 |   | (2,065 | ) | 2,384,653 |   |
| Operating expenses,  including power   |       | 78,601                                                      |       | 29,076 |   | 29,886 |   | 137,563 |   | — |   | 137,563 |   |
| Depreciation and  amortization expense |       | 18,288                                                      |       | 6,113 |   | 29,830 |   | 54,231 |   | — |   | 54,231 |   |
| Gains on sales of  assets              |       | (17                                                         | )          | (107 | ) | — |   | (124 | ) | — |   | (124 | ) |
| Operating income                       |       | 40,301                                                      |       | 18,536 |   | 37,465 |   | 96,302 |   | — |   | 96,302 |   |
| Equity earnings  (losses)              |       | (3,243                                                      | )          | 18,634 |   | — |   | 15,391 |   | — |   | 15,391 |   |
| Other income, net                      |       | 445                                                         |       | 197 |   | 74 |   | 716 |   | — |   | 716 |   |
| Earnings before  interest              |       | $                                                           | 37,503     |   | $ | 37,367 |   | $ | 37,539 |   | $ | 112,409 |   | $ | — |   | $ | 112,409 |   |

 

The following table shows total assets and capitalexpenditures for each segment as of and for the periods ended June 30,2005, and December 31, 2004 (in thousands):
| ** **                         | ** ** | **Downstream  Segment** | ** ** | **Upstream  Segment** | ** ** | **Midstream  Segment** | ** ** | **Segments  Total** | ** ** | **Partnership  and Other** | ** ** | **Consolidated** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------|------------|------------------------|------------|---------------------|------------|---------------------------------|------------|------------------|------------|
| June 30, 2005 (as  restated): |       |                    |       |                  |       |                   |       |                |       |                            |       |             |       |
| Total assets                       |       | $                       | 959,950    |                  | $          | 1,319,202              |       | $                   | 1,213,233  |                            | $          | 3,492,385        |       | $ | (25,755 | ) | $ | 3,466,630 |   |
| Capital  expenditures              |       | 27,322                  |       | 19,746                |       | 35,383                 |       | 82,451              |       | 512                             |       | 82,963           |       |
|                               |       |                    |       |                  |       |                   |       |                |       |                            |       |             |       |
| 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          |       |

 

The following table reconciles the segments’ total earningsbefore interest to consolidated net income for the three months and six monthsended June 30, 2005 and 2004 (in thousands):

|                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **(as restated)**                          | ** ** | **(as restated)**                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Earnings before  interest   |       | $                                               | 62,549     |                                          | $          | 53,094 |   | $ | 129,265 |   | $ | 112,409 |   |
| Interest expense — net |       | (21,627                                         | )          | (16,464                                       | )          | (40,914 | ) | (36,059 | ) |
| Net income                  |       | $                                               | 40,922     |                                          | $          | 36,630 |   | $ | 88,351 |   | $ | 76,350 |   |

 

**NOTE 11. COMMITMENTSAND CONTINGENCIES**

In the fall of 1999 and on December 1, 2000, theGeneral Partner and the Partnership were named as defendants in two separatelawsuits in Jackson County Circuit Court, Jackson County, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al.*(including the General 

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Partner and Partnership) and*GilbertRichards and Jean Richards v. Texas Eastern Corporation, et al.*(includingthe General Partner and Partnership). In both cases, the plaintiffs contend,among other things, that we and other defendants stored and disposed of toxicand hazardous substances and hazardous wastes in a manner that caused thematerials to be released into the air, soil and water. They further contendthat the release caused damages to the plaintiffs. In their complaints, theplaintiffs allege strict liability for both personal injury and property damagetogether with gross negligence, continuing nuisance, trespass, criminalmischief and loss of consortium. The plaintiffs are seeking compensatory,punitive and treble damages. On January 27, 2005, we entered into Releaseand Settlement Agreements with the McCleery plaintiffs and the Richardsplaintiffs dismissing all of these plaintiffs’ claims. The settlement terms includeda $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.

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 April 2, 2003, Centennial was served with apetition in a matter styled *Adams, et al. v.Centennial Pipeline Company LLC, et al*.  This matter involves approximately 2,000plaintiffs who allege that over 200 defendants, including Centennial,generated, transported, and/or disposed of hazardous and toxic waste at twosites in Bayou Sorrell, Louisiana, an underground injection well and alandfill.  The plaintiffs allege personalinjuries, allergies, birth defects, cancer and death.  The underground injection well has been inoperation since May 1976.  Based uponcurrent information, Centennial appears to be a *de minimis*contributor, having used the disposal site during the two month time period ofDecember 2001 to January 2002.  Marathon hasbeen handling this matter for Centennial under its operating agreement withCentennial.  TE Products has a 50%ownership interest in Centennial.  OnNovember 30, 2004, the court approved a class settlement, which included an$80,000 payment by Centennial.  The timeperiod for parties to appeal this settlement expired in March 2005, and the classsettlement became final.

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The terms of the settlement did not have a materialadverse effect on our financial position, results of operations or cash flows.

On February 4, 2005, we received a letternotifying us of a claim for approximately $1.45 million in damages allegedlydue to a shipper being delivered off-specification gasoline during November 2004.We are contesting liability for this matter, and to the extent there may beliability, we would seek reimbursement from the third party refiner whosupplied the gasoline into our pipeline system. We do not believe that theoutcome of this matter will have a future material adverse effect on ourfinancial position, results of operations or cash flows.

On February 7, 2005, we received a letter from BPAmoco’s counsel placing us on notice of a lawsuit filed by ConocoPhillipsagainst BP Amoco Seaway Products Pipeline Company. Pursuant to provisions ofthe Amended and Restated Purchase Agreement dated May 10, 2000, between usand ARCO Pipe Line Company (BP Amoco), BP Amoco requested indemnity should BPAmoco have any liability to ConocoPhillips. The litigation arises out of anincome tax liability alleged by ConocoPhillips due to a partnership merger. Theplaintiff estimates the income tax liability to be $3,964,788. We haverequested information from BP Amoco that will allow us to assess liability, ifany, that we may have in this matter. We do not believe that the outcome ofthis lawsuit will have a future material adverse effect on our financialposition, 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.

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.

On March 26, 2004, an initial decision in *ARCO Products Co., et al. v. SFPP*, Docket OR96-2-000,et al. was issued by the FERC, which made several significant determinationswith respect to finding “changed circumstances” under the Energy Policy Act of1992 (“EP Act”). The decision largely clarifies, but does not fully quantify,the standard required for a complainant to demonstrate that an oil pipeline’srates are no longer subject to the rate protection of the EP Act bydemonstrating that a substantial change in circumstances has occurred since1992 with respect to the basis of the rates being challenged. In the decision,the FERC found that a limited number of rate elements will significantly affectthe economic basis for a pipeline company’s rates. The elements identified inthe decision are volume changes, allowed total return and total cost-of-service(including major cost elements  such asrate base, tax rates and tax allowances, among others). The FERC did reject,however, the use of changes in tax rates and income tax allowances asstandalone factors. Judicial review of that decision, which has been sought bya number of parties to the case, is currently pending before the U.S. Court ofAppeals for the District of Columbia Circuit. We have not yet determined theimpact, if any, that the decision, if it is ultimately upheld, would have onour rates if they were reviewed under the criteria of this decision.

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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 the FERChas not yet acted on them. The ultimate outcome of the FERC’s inquiry on incometax allowance should not affect our current rates and rate structure becauseour rates are not based on cost-of-service methodology. However, the outcome ofthe 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. At June 30, 2005, we have anaccrued liability of $0.2 million for remediation costs at our Arcadia facility.Effective March 2004, we executed an access agreement with an adjacentindustrial landowner who is located upgradient of the Arcadia facility. Thisagreement enables the landowner to proceed with remediation activities at ourArcadia facility for which it has accepted shared responsibility. We do notexpect that the completion of the remediation program proposed to the LDEQ willhave a future material adverse effect on our financial position, results ofoperations or cash flows.

On March 17, 2003, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois. As a result of the release,we have entered into an Agreed Order with the State of Illinois, which requiredus to conduct an environmental investigation. At this time, we have compliedwith the terms of the Agreed Order, and the results of the environmentalinvestigation indicated there were no soil or groundwater impacts from therelease. We are in the process of negotiating a final settlement with the Stateof Illinois, and we do not expect that compliance with the settlementwill have a future material adverse effect on our financial position, resultsof operations or cash flows.

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal. The released jet fuel was contained within a stormwater retention pond located on the terminal property. Six migratory waterfowlwere affected by the jet fuel and were subsequently euthanized by or at therequest of the United States Fish and Wildlife Service (“USFWS”). On October 1,2004, the USFWS served us with a Notice of Violation, alleging that we violated16 USC 703 of the Migratory Bird Treaty Act for the “take[ing] of migratorybirds by illegal methods.”  On February 7,2005, we entered into a Memorandum of Understanding (“MOU”) with the USFWS, andon June 23, 2005, we notified the USFWS that we had completed allrequirements 

24

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under the MOU, thusterminating the agreement and settling all aspects of this matter. The terms ofthis settlement did not have a material 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. Themaximum statutory penalty calculated for this alleged violation of the CWA is$2.8 million. We are in discussions with the DOJ regarding this matter and haveresponded to its request for additional information. We do not expect a civilpenalty, if any, to have a material adverse effect on our financial position,results of operations or cash flows.

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

Centennial entered into credit facilities totaling$150.0 million, and as of June 30, 2005, $150.0 million was outstandingunder those credit facilities. The proceeds were used to fund construction andconversion costs of its pipeline system. TE Products and Marathon have eachguaranteed one-half of Centennial’s debt, up to a maximum amount of $75.0million each.

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 12.COMPREHENSIVE INCOME**

SFAS No. 130, *Reporting ComprehensiveIncome* requires certain items such as foreign currency translationadjustments, minimum pension liability adjustments and unrealized gains andlosses on certain investments to be reported in a financial statement. As ofand for the six months ended June 30, 2004, the components ofcomprehensive income were due to the interest rate swap related to our variablerate revolving credit facility, which was designated as a cash flow hedge. Theinterest rate swap matured in April 2004. While the interest rate swap wasin effect, changes in the fair value of the cash flow hedge, to the extent thehedge was effective, were recognized in other comprehensive income until thehedge interest costs were recognized in net income. All other comprehensiveincome was recognized in net income during the six months ended June 30,2004.

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The table below reconciles reported net income tototal comprehensive income for the three months and six months ended June 30,2005 and 2004 (in thousands):
| ** **                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(as restated)**                          | ** ** | **(as restated)**                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Net income                     |       | $                                               | 40,922     |                                          | $          | 36,630 |   | $ | 88,351 |   | $ | 76,350 |   |
| Net income on  cash flow hedge |       | —                                          |       | 220                                           |       | — |   | 2,902 |   |
| Total  comprehensive income    |       | $                                               | 40,922     |                                          | $          | 36,850 |   | $ | 88,351 |   | $ | 79,252 |   |

 

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

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

 

**NOTE 13. SUPPLEMENTALCONDENSED CONSOLIDATING FINANCIAL INFORMATION**

Our significant operating subsidiaries, TE ProductsPipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies,L.P., Jonah Gas Gathering Company and Val Verde Gas Gathering Company, L.P.,have issued unconditional guarantees of our debt securities. The guarantees 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.”

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.

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| ** **                                    | ** ** | **June 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                                |       | $                                                   | 36,236     |   | $ | 69,805 |   | $ | 794,408 |   | $ | (52,885 | ) | $ | 847,564 |   |
| Property, plant and equipment — net      |       | —                                              |       | 1,250,727 |   | 539,139 |   | — |   | 1,789,866 |   |
| Equity investments                            |       | 1,260,998                                           |       | 465,943 |   | 204,823 |   | (1,571,525 | ) | 360,239 |   |
| Intercompany notes receivable                 |       | 1,007,646                                           |       | — |   | — |   | (1,007,646 | ) | — |   |
| Intangible assets                             |       | —                                              |       | 360,049 |   | 33,222 |   | — |   | 393,271 |   |
| Other assets                                  |       | 5,487                                               |       | 25,561 |   | 44,642 |   | — |   | 75,690 |   |
| Total assets                                  |       | $                                                   | 2,310,367  |   | $ | 2,172,085 |   | $ | 1,616,234 |   | $ | (2,632,056 | ) | $ | 3,466,630 |   |
|                                          |       |                                                |       |   |   |   |   |   |   |   |   |
| Liabilities and  partners’ capital       |       |                                                |       |   |   |   |   |   |   |   |   |
| Current liabilities                           |       | $                                                   | 37,913     |   | $ | 117,631 |   | $ | 682,878 |   | $ | (52,885 | ) | $ | 785,537 |   |
| Long-term debt                                |       | 1,010,024                                           |       | 397,370 |   | — |   | — |   | 1,407,394 |   |
| Intercompany notes payable                    |       | —                                              |       | 496,282 |   | 511,365 |   | (1,007,647 | ) | — |   |
| Other long term liabilities                   |       | 1,460                                               |       | 9,759 |   | 1,510 |   | — |   | 12,729 |   |
| Total partners’ capital                  |       | 1,260,970                                           |       | 1,151,043 |   | 420,481 |   | (1,571,524 | ) | 1,260,970 |   |
| Total  liabilities and partners’ capital |       | $                                                   | 2,310,367  |   | $ | 2,172,085 |   | $ | 1,616,234 |   | $ | (2,632,056 | ) | $ | 3,466,630 |   |

 
| ** **                                    | ** ** | **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 June 30, 2005 (as restated)** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **TEPPCO  Partners, L.P.**                                                       | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                   | ** ** | **(in thousands)**                                                               | ** ** |
| Operating  revenues          |       | $                                                                                     | —     |   | $ | 103,657 |   | $ | 1,987,432 |   | $ | (709 | ) | $ | 2,090,380 |   |
| Costs and  expenses          |       | —                                                                                |       | 69,269 |   | 1,967,225 |   | (709 | ) | 2,035,785 |   |
| Gains on sales  of assets    |       | —                                                                                |       | (15 | ) | (53 | ) | — |   | (68 | ) |
| Operating income             |       | —                                                                                |       | 34,403 |   | 20,260 |   | — |   | 54,663 |   |
| Interest expense  — net |       | —                                                                                |       | (14,257 | ) | (7,370 | ) | — |   | (21,627 | ) |
| Equity earnings              |       | 40,922                                                                                |       | 20,614 |   | 7,997 |   | (61,782 | ) | 7,751 |   |
| Other income —  net     |       | —                                                                                |       | 162 |   | (27 | ) | — |   | 135 |   |
| Net income                   |       | $                                                                                     | 40,922     |   | $ | 40,922 |   | $ | 20,860 |   | $ | (61,782 | ) | $ | 40,922 |   |

 
| ** **                   | ** ** | **Three Months Ended June 30, 2004 (as restated)** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **TEPPCO  Partners, L.P.**                                                       | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                   | ** ** | **(in thousands)**                                                               | ** ** |
| Operating  revenues          |       | $                                                                                     | —     |   | $ | 98,813 |   | $ | 1,256,415 |   | $ | (664 | ) | $ | 1,354,564 |   |
| Costs and  expenses          |       | —                                                                                |       | 71,431 |   | 1,241,462 |   | (664 | ) | 1,312,229 |   |
| Gains on sales  of assets    |       | —                                                                                |       | (17 | ) | (49 | ) | — |   | (66 | ) |
| Operating income             |       | —                                                                                |       | 27,399 |   | 15,002 |   | — |   | 42,401 |   |
| Interest expense  — net |       | —                                                                                |       | (11,219 | ) | (5,245 | ) | — |   | (16,464 | ) |
| Equity earnings              |       | 36,630                                                                                |       | 20,264 |   | 11,918 |   | (58,359 | ) | 10,453 |   |
| Other income —  net     |       | —                                                                                |       | 186 |   | 54 |   | — |   | 240 |   |
| Net income                   |       | $                                                                                     | 36,630     |   | $ | 36,630 |   | $ | 21,729 |   | $ | (58,359 | ) | $ | 36,630 |   |

 

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| ** **                  | ** ** | **Six Months Ended June 30, 2005 (as restated)** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **TEPPCO  Partners, L.P.**                                                     | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                  | ** ** | **(in thousands)**                                                             | ** ** |
| Operating revenues          |       | $                                                                                   | —     |   | $ | 221,582 |   | $ | 3,397,452 |   | $ | (2,049 | ) | $ | 3,616,985 |   |
| Costs and expenses          |       | —                                                                              |       | 137,048 |   | 3,365,533 |   | (2,049 | ) | 3,500,532 |   |
| Gains on sales of  assets   |       | —                                                                              |       | (514 | ) | (52 | ) | — |   | (566 | ) |
| Operating income            |       | —                                                                              |       | 85,048 |   | 31,971 |   | — |   | 117,019 |   |
| Interest expense — net |       | —                                                                              |       | (27,275 | ) | (13,639 | ) | — |   | (40,914 | ) |
| Equity earnings             |       | 88,351                                                                              |       | 30,233 |   | 13,912 |   | (120,651 | ) | 11,845 |   |
| Other income — net     |       | —                                                                              |       | 345 |   | 56 |   | — |   | 401 |   |
| Net income                  |       | $                                                                                   | 88,351     |   | $ | 88,351 |   | $ | 32,300 |   | $ | (120,651 | ) | $ | 88,351 |   |

 
| ** **                  | ** ** | **Six Months Ended June 30, 2004 (as restated)** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **TEPPCO  Partners, L.P.**                                                     | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **TEPPCO  Partners, L.P.  Consolidated** | ** ** |
| ** **                  | ** ** | **(in thousands)**                                                             | ** ** |
| Operating revenues          |       | $                                                                                   | —     |   | $ | 210,701 |   | $ | 2,463,989 |   | $ | (2,065 | ) | $ | 2,672,625 |   |
| Costs and expenses          |       | —                                                                              |       | 144,847 |   | 2,433,665 |   | (2,065 | ) | 2,576,447 |   |
| Gain on sale of assets      |       | —                                                                              |       | (17 | ) | (107 | ) | — |   | (124 | ) |
| Operating income            |       | —                                                                              |       | 65,871 |   | 30,431 |   | — |   | 96,302 |   |
| Interest expense — net |       | —                                                                              |       | (24,011 | ) | (12,048 | ) | — |   | (36,059 | ) |
| Equity earnings             |       | 76,350                                                                              |       | 33,998 |   | 18,634 |   | (113,591 | ) | 15,391 |   |
| Other income — net     |       | —                                                                              |       | 492 |   | 224 |   | — |   | 716 |   |
| Net income                  |       | $                                                                                   | 76,350     |   | $ | 76,350 |   | $ | 37,241 |   | $ | (113,591 | ) | $ | 76,350 |   |

 

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| ** **                                                                                   | ** ** | **Six Months Ended June 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                                                                                   |       | $                                                                                   | 88,351     |   | $ | 88,351 |   | $ | 32,300 |   | $ | (120,651 | ) | $ | 88,351 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                               |       | —                                                                              |       | 39,820 |   | 12,235 |   | — |   | 52,055 |   |
| Earnings  (losses) in equity investments, net of distributions                               |       | 28,965                                                                              |       | 731 |   | (2,165 | ) | (20,329 | ) | 7,202 |   |
| Gains on sales  of assets                                                                    |       | —                                                                              |       | (514 | ) | (52 | ) | — |   | (566 | ) |
| Changes in  assets and liabilities and other                                                 |       | 74,856                                                                              |       | (30,004 | ) | (91,052 | ) | (76,242 | ) | (122,442 | ) |
| Net cash provided by  (used in) operating activities                                         |       | 192,172                                                                             |       | 98,384 |   | (48,734 | ) | (217,222 | ) | 24,600 |   |
| Cash flows from  investing activities                                                        |       | (278,832                                                                            | )          | (2,606 | ) | (62,094 | ) | 217,488 |   | (126,044 | ) |
| Cash flows from  financing activities                                                        |       | 86,516                                                                              |       | (108,122 | ) | 108,244 |   | (122 | ) | 86,516 |   |
| Net decrease in cash  and cash equivalents                                                   |       | (144                                                                                | )          | (12,344 | ) | (2,584 | ) | 144 |   | (14,928 | ) |
| Cash and cash  equivalents at beginning of period                                            |       | 4,116                                                                               |       | 13,596 |   | 2,826 |   | (4,116 | ) | 16,422 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                                                                   | 3,972      |   | $ | 1,252 |   | $ | 242 |   | $ | (3,972 | ) | $ | 1,494 |   |

 
| ** **                                                                                   | ** ** | **Six Months Ended June 30, 2004 (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                                                                                   |       | $                                                                                   | 76,350     |   | $ | 76,350 |   | $ | 37,241 |   | $ | (113,591 | ) | $ | 76,350 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                |       | —                                                                              |       | 43,066 |   | 11,165 |   | — |   | 54,231 |   |
| Earnings (losses) in equity investments, net of  distributions                               |       | (19,267                                                                             | )          | (5,701 | ) | (2,734 | ) | 33,161 |   | 5,459 |   |
| Gains on sales of assets                                                                     |       | —                                                                              |       | (17 | ) | (107 | ) | — |   | (124 | ) |
| Changes in assets and liabilities and other                                                  |       | (67,886                                                                             | )          | (1,978 | ) | 2,389 |   | 63,607 |   | (3,868 | ) |
| Net cash  provided by (used in) operating activities                                         |       | (10,803                                                                             | )          | 111,720 |   | 47,954 |   | (16,823 | ) | 132,048 |   |
| Cash flows from investing activities                                                         |       | 98                                                                                  |       | (3,690 | ) | (21,069 | ) | (57,261 | ) | (81,922 | ) |
| Cash flows from  financing activities                                                        |       | (7,083                                                                              | )          | (116,019 | ) | (31,612 | ) | 88,973 |   | (65,741 | ) |
| Net decrease in  cash and cash equivalents                                                   |       | (17,788                                                                             | )          | (7,989 | ) | (4,727 | ) | 14,889 |   | (15,615 | ) |
| Cash and cash  equivalents at beginning of period                                            |       | 19,744                                                                              |       | 19,243 |   | 5,670 |   | (15,188 | ) | 29,469 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                                                                   | 1,956      |   | $ | 11,254 |   | $ | 943 |   | $ | (299 | ) | $ | 13,854 |   |

 

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**NOTE 14. RESTATEMENTOF CONSOLIDATED FINANCIAL STATEMENTS**

Weare restating our previously reported consolidated financial statements for thequarterly periods ended June 30, 2004 and 2005. In the fourth quarter of2005, we determined that our method of accounting for the $33.4 million excessinvestment in Centennial, previously described as an intangible asset with anindefinite life, and the $27.1 million excess investment in Seaway, previouslydescribed as equity method goodwill, was incorrect. Through our accounting forthese excess investments in Centennial and Seaway as intangible assets withindefinite lives and equity method goodwill, respectively, we have been testingthe amounts for impairment on an annual basis as opposed to amortizing themover a determinable life. We determined that it would be more appropriate toaccount for these excess investments as intangible assets with determinablelives. As a result, we made non-cash adjustments that reduced the net value ofthe excess investments in Centennial and Seaway, and increased amortizationexpense allocated to our equity earnings. ****Therestatement caused a $1.3 million and $1.1 million reduction to net income aspreviously reported for the three months ended June 30, 2005 and 2004,respectively, and a $2.5 million and $1.8 million reduction to net income aspreviously reported for the six months ended June 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.

Wewill continue to amortize the $30.0 million excess investment in Centennialrelated to a contract using units-of-production methodology over a 10-yearlife. The remaining $3.4 million related to a pipeline will continue to beamortized on a straight-line basis over 35 years. We will continue to amortizethe $27.1 million excess investment in Seaway on a straight-line basis over a 39-yearlife related primarily to a pipeline.

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

**Balance Sheet Amounts:**

|                                               | ** ** | **June 30, 2005**      | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|                                          |       |                             |       |   |   |   |   |
| Equity  investments                           |       | $                                | 373,047    |   | $ | (12,808 | ) | $ | 360,239 |   |
| Total assets                                  |       | $                                | 3,479,438  |   | $ | (12,808 | ) | $ | 3,466,630 |   |
|                                          |       |                             |       |   |   |   |   |
| Partners’  capital:                      |       |                             |       |   |   |   |   |
| General partner’s interest               |       | $                                | (40,272    | ) | $ | (3,596 | ) | $ | (43,868 | ) |
| Limited partners’ interest               |       | 1,314,050                        |       | (9,212 | ) | 1,304,838 |   |
| Total partners’ capital                  |       | 1,273,778                        |       | (12,808 | ) | 1,260,970 |   |
| Total  liabilities and partners’ capital |       | $                                | 3,479,438  |   | $ | (12,808 | ) | $ | 3,466,630 |   |

 

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**Income Statement Amounts:**
|                                                        | ** ** | **Three Months Ended  June 30, 2005** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                          | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|                                                   |       |                                                      |       |   |   |   |   |
| Equity earnings                                        |       | $                                                         | 9,062      |   | $ | (1,311 | ) | $ | 7,751 |   |
| Net income                                             |       | 42,233                                                    |       | (1,311 | ) | 40,922 |   |
| Net Income Allocation:                                 |       |                                                      |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | $                                                         | 29,671     |   | $ | (923 | ) | $ | 28,748 |   |
| General Partner                                        |       | 12,562                                                    |       | (388 | ) | 12,174 |   |
| Total net income allocated                             |       | $                                                         | 42,233     |   | $ | (1,311 | ) | $ | 40,922 |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                                         | 0.45       |   | $ | (0.02 | ) | $ | 0.43 |   |

 
| ** **                                             | ** ** | **Three Months Ended  June 30, 2004** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                          | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|                                                   |       |                                                      |       |   |   |   |   |
| Equity earnings                                        |       | $                                                         | 11,582     |   | $ | (1,129 | ) | $ | 10,453 |   |
| Net income                                             |       | 37,759                                                    |       | (1,129 | ) | 36,630 |   |
| Net Income Allocation:                                 |       |                                                      |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | $                                                         | 26,867     |   | $ | (804 | ) | $ | 26,063 |   |
| General Partner                                        |       | 10,892                                                    |       | (325 | ) | 10,567 |   |
| Total net income allocated                             |       | $                                                         | 37,759     |   | $ | (1,129 | ) | $ | 36,630 |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                                         | 0.43       |   | $ | (0.02 | ) | $ | 0.41 |   |

 
| ** **                                             | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|                                                   |       |                                                    |       |   |   |   |   |
| Equity earnings                                        |       | $                                                       | 14,308     |   | $ | (2,463 | ) | $ | 11,845 |   |
| Net income                                             |       | 90,814                                                  |       | (2,463 | ) | 88,351 |   |
| Net Income Allocation:                                 |       |                                                    |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | $                                                       | 64,237     |   | $ | (1,742 | ) | $ | 62,495 |   |
| General Partner                                        |       | 26,577                                                  |       | (721 | ) | 25,856 |   |
| Total net income allocated                             |       | $                                                       | 90,814     |   | $ | (2,463 | ) | $ | 88,351 |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                                       | 0.99       |   | $ | (0.03 | ) | $ | 0.96 |   |

 

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| ** **                                             | ** ** | **Six Months Ended  June 30, 2004** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|                                                   |       |                                                    |       |   |   |   |   |
| Equity earnings                                        |       | $                                                       | 17,233     |   | $ | (1,842 | ) | $ | 15,391 |   |
| Net income                                             |       | 78,192                                                  |       | (1,842 | ) | 76,350 |   |
| Net Income Allocation:                                 |       |                                                    |       |   |   |   |   |
| Limited Partner  Unitholders                           |       | $                                                       | 55,636     |   | $ | (1,311 | ) | $ | 54,325 |   |
| General Partner                                        |       | 22,556                                                  |       | (531 | ) | 22,025 |   |
| Total net income allocated                             |       | $                                                       | 78,192     |   | $ | (1,842 | ) | $ | 76,350 |   |
| Basic and diluted net  income per Limited Partner Unit |       | $                                                       | 0.88       |   | $ | (0.02 | ) | $ | 0.86 |   |

 

**Cash Flow Amounts:**
|                                                       | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                            | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:                |       |                                                    |       |   |   |   |   |
| Net income                                            |       | $                                                       | 90,814     |   | $ | (2,463 | ) | $ | 88,351 |   |
| Earnings in  equity investments, net of distributions |       | 4,739                                                   |       | 2,463 |   | 7,202 |   |
|                                                       |            |                                                         |            |  |  |  |  |  |  |  |

 
| ** **                                            | ** ** | **Six Months Ended  June 30, 2004** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                            | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:                |       |                                                    |       |   |   |   |   |
| Net income                                            |       | $                                                       | 78,192     |   | $ | (1,842 | ) | $ | 76,350 |   |
| Earnings in  equity investments, net of distributions |       | 3,617                                                   |       | 1,842 |   | 5,459 |   |
|                                                       |            |                                                         |            |  |  |  |  |  |  |  |

 

**Partners’ Capital Amounts:**
| ** **                                                           | ** ** | **Outstanding** | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                                                           | ** ** | **Limited**     | ** ** | **General**        | ** ** | **Limited**        | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Partner**     | ** ** | **Partner’s** | ** ** | **Partners’** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Units**       | ** ** | **Interest**       | ** ** | **Interests**      | ** ** | **Total**  | ** ** |
| Partners’  capital at June 30, 2005 as previously reported |       | 69,963,554      |       | $                  | (40,272    | )                  | $          | 1,314,050  |       | $ | 1,273,778 |   |
| Restatement adjustment                                               |       | —          |       | (3,596             | )          | (9,212             | )          | (12,808    | )          |
| Partners’ capital at  June 30, 2005 as restated            |       | 69,963,554      |       | $                  | (43,868    | )                  | $          | 1,304,838  |       | $ | 1,260,970 |   |

 

**NOTE 15. SUBSEQUENT EVENTS**

On July 12,2005, we purchased a refined products terminal and truck rack in North LittleRock, Arkansas for $6.8 million from Exxon Mobil Corporation. The assetsinclude three storage tanks and a two-bay truck loading 

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rack. We fundedthe purchase through borrowings under our revolving credit facility. Theterminal serves the central Arkansas refined products market and complementsour existing Downstream Segment infrastructure in North Little Rock, Arkansas.

Wehave initiated an expansion of our refined products origin capabilities in theHouston, Texas, and Texas City, Texas areas. As part of that project, on July 15,2005, we acquired from Texas Genco LLC (“Genco”) all of its interests incertain companies that own a 90-mile pipeline system and 5.5 millionbarrels of storage capacity for $70.6 million (including $8.6 million for theestimated value of inventory). According to the terms of the purchase and saleagreement with Genco, we will sell the acquired inventory (anticipated to occurin the third quarter of 2005) and use the proceeds from the sale to offset thepurchase price of the inventory, including costs incurred to consummate thesale. To the extent the proceeds from the inventory sale, including costsincurred to consummate the sale, are greater than or less than the estimatedamount previously paid to Genco, a final settlement payment will occur betweenGenco and us, resulting in no gain or loss being recognized by us on the saleof the inventory. We funded the purchase through borrowings under our revolvingcredit facility. The assets of the purchased companies will be integrated intoour Downstream Segment origin infrastructure in Texas City and Baytown, Texas. Theintegration and other system enhancements should be in service by the fourthquarter of 2006, at an estimated cost of $45.0 million. The strategic locationof these assets, with refined products interconnections to major exchangeterminals in the Houston area, will provide significant long-term value to ourcustomers and the Texas Gulf Coast refining and logistics system.

 

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**Item 2. Management’s Discussionand 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.

****Restatementof Consolidated Financial Statements****

Weare restating our previously reported consolidated financial statements for thequarterly periods ended June 30, 2004 and 2005. In the fourth quarter of2005, we determined that our method of accounting for the $33.4 million excessinvestment in Centennial, previously described as an intangible asset with anindefinite life, and the $27.1 million excess investment in Seaway, previouslydescribed as equity method goodwill, was incorrect. Through our accounting forthese excess investments in Centennial and Seaway as intangible assets withindefinite lives and equity method goodwill, respectively, we have been testingthe amounts for impairment on an annual basis as opposed to amortizing themover a determinable life. We determined that it would be more appropriate toaccount for these excess investments as intangible assets with determinablelives. As a result, we made non-cash adjustments that reduced the net value ofthe excess investments in Centennial and Seaway, and increased amortizationexpense allocated to our equity earnings. ****Therestatement caused a $1.3 million, or $0.02 per Unit, and $1.1 million, or$0.02 per Unit, reduction to net income and earnings per unit as previouslyreported for the three months ended June 30, 2005 and 2004, respectively,and a $2.5 million, or $0.03 per Unit, and $1.8 million, or $0.02 per Unit,reduction to net income and earnings per unit as previously reported for thesix months ended June 30, 2005 and 2004, respectively.  ****We restated previouslyreported consolidated financial statements for the fiscal years ended December 31,2003 and 2004 in 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.

Wewill continue to amortize the $30.0 million excess investment in Centennialrelated to a contract using units-of-production methodology over a 10-yearlife. The remaining $3.4 million related to a pipeline will continue to beamortized on a straight-line basis over 35 years. We will continue to amortizethe $27.1 million 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

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crude oil margins; environmental costs; assetimpairment analysis related to property, plant and equipment; and amortizationexpense and asset impairment analysis related to goodwill and other intangibleassets. These estimates are based on our knowledge and understanding of currentconditions and actions we may take in the future. Changes in these estimateswill occur as a result of the passage of time and the occurrence of futureevents. Subsequent changes in these estimates may have a significant impact onour financial condition and results of operations.

## ****Management Overview of the Three Months andSix Months Ended June 30, 2005****

## ****We reported net income of $40.9 million, or$0.43 per Limited Partner Unit (“Unit” or “Units”), for the three months ended June 30,2005, compared with net income of $36.6 million, or $0.41 per Unit, for thethree months ended June 30, 2004. Net income was $88.4 million, or $0.96per Unit, for the six months ended June 30, 2005, compared with net incomeof $76.4 million, or $0.86 per Unit, for the six months ended June 30,2004. The weighted average number of Units outstanding was 66.6 million and63.0 million for the three months ended June 30, 2005 and 2004,respectively, and 64.8 million and 63.0 million for the six months ended June 30,2005 and 2004, respectively.****

## ****Our Downstream Segment results for the threemonths ended June 30, 2005, were impacted by increased LPG transportationrevenues and long-haul volumes delivered, increased refined products tenderdeduction revenues and increased revenues from product location exchanges. Theseincreases were partially offset by decreased refined products transportationrevenues, increased power costs, increased pipeline operating expenses andincreased rental expense from our Centennial Pipeline LLC (“Centennial”)capacity lease agreement. The results for the six months ended June 30,2005, were impacted by increased refined products and LPG transportationrevenues and volumes, partially offset by lower propane inventory fee revenues,increased pipeline operating expenses, increased rental expense from ourCentennial capacity lease agreement and increased environmental assessment andremediation expenses. Additionally, pipeline integrity expenses decreased $1.4million and $5.7 million for the three months and six months ended June 30,2005, respectively, compared with the prior year periods. We anticipate thatour pipeline integrity expenses for our Downstream Segment for 2005 will beapproximately $15.2 million lower than our 2004 expenses primarily due to thecompletion of projects.****

## ****Our Upstream Segment results for the threemonths and six months ended June 30, 2005, were impacted by increasedmarketing volumes, gains related to marking crude oil grade and location swapcontracts to market and increased transportation revenues. Increased pipelineoperating costs were partially offset by decreased environmental assessment andremediation expenses. Equity earnings from Seaway Crude Pipeline Company (“Seaway”)decreased compared with the prior year period primarily due to lower transportationvolumes, higher operating, general and administrative expenses and a gainrecognized on an inventory settlement in 2004. Pipeline integrity expensesdecreased $0.3 million and $0.2 million for the three months and six monthsended June 30, 2005, respectively, compared with the prior year periods. Weanticipate that our 2005 pipeline integrity expenses for our Upstream Segmentwill be approximately $1.9 million higher than our 2004 expenses as we continueto perform pipeline inspections and repairs under our integrity managementprogram.****

## ****Our Midstream Segment benefited fromincreased revenues and volumes on Jonah Gas Gathering Company (“Jonah”),resulting from our 2003 Phase III expansion and the installation of additionalcapacity during the fourth quarter of 2004. Revenues on Val Verde Gas GatheringCompany (“Val Verde”) increased due to new connections made to the system in May andDecember 2004, partially offsetting the impact of reduced revenues relatedto the natural decline of coal bed methane (“CBM”) production from existingwells. Additionally, our operating and gas settlement expenses decreasedcompared with the prior year period. Pipeline integrity expenses decreased $0.6million and $0.6 million for the three months and six months ended June 30,2005, respectively, compared with the prior year periods. These increases tooperating income were partially offset by lower gathering rates on the newconnections at Val Verde, on which the gathering rates are lower than existingaverage rates on the system.****

We are subject to economic and other factors thataffect our industry. The demand for refined products is dependent upon theprice, prevailing economic conditions and demographic changes in the marketsserved, trucking and railroad freight, agricultural usage and military usage;the demand for propane is sensitive to the weather and

36

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prevailing economic conditions; the demand forpetrochemicals is dependent upon prices for products produced frompetrochemicals; the demand for crude oil and petroleum products is dependentupon the price of crude oil and the products produced from the refining ofcrude oil; and the demand for natural gas is dependent upon the price ofnatural gas and the locations in which natural gas is drilled. We are also subjectto regulatory factors such as the amounts we are allowed to charge ourcustomers for the services we provide on our regulated pipeline systems.

Certain factors are inherent in 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 remain confident thatour current strategy and focus will provide continued growth in earnings andcash distributions. These growth opportunities include:

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

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

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

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

On March 31, 2005, we purchased crude oilpipeline assets for $7.1 million from BP Pipelines (North America) Inc. (“BP”).The assets include approximately 158 miles of pipeline which extend from Mexia,Texas, to the Houston, Texas, area and two stations in south Houston withconnections to a BP pipeline that originates in south Houston. We willintegrate 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 truck rack in North Little Rock, Arkansas for $6.8 million fromExxon Mobil Corporation. The assets include three storage tanks and a two-baytruck loading rack. The terminal serves the central Arkansas refined productsmarket and complements our existing Downstream Segment infrastructure in NorthLittle Rock, Arkansas.

We have initiated an expansion of our refined productsorigin capabilities in the Houston, Texas, and Texas City, Texas areas. As partof that project, on July 15, 2005, we acquired from Texas Genco LLC (“Genco”)all of its interests in certain companies that own a 90-mile pipelinesystem and 5.5 million barrels of storage capacity for $70.6 million (including$8.6 million for the estimated value of inventory). According to the terms ofthe purchase and sale agreement with Genco, we will sell the acquired inventory(anticipated to occur in the third quarter of 2005) and use the proceeds fromthe sale to offset the purchase price of the inventory, including costsincurred to consummate the sale. To the extent the proceeds from the inventorysale, including costs incurred to consummate the sale, are greater than or lessthan the estimated amount previously paid to Genco, a final settlement paymentwill occur between Genco and us, resulting in no gain or loss being recognizedby us on the sale of the inventory. The assets of the purchased companies willbe integrated into our Downstream Segment origin infrastructure in Texas Cityand Baytown, Texas. The integration and other system enhancements should be inservice by the fourth quarter of 2006, at an estimated cost of $45.0 million. Thestrategic location of these assets, with refined products

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interconnections to major exchange terminals in theHouston area, will provide significant long-term value to our customers and theTexas Gulf Coast refining and logistics system.

Consistent with our business strategy, we continuouslyevaluate possible acquisitions of assets that would complement our currentoperations. Such acquisition efforts involve participation by us in processesthat have been made public and involve a number of potential buyers, as well assituations in which we believe we are the only party or one of a very limitednumber of potential buyers in negotiations with the potential seller. Theseacquisition efforts often involve assets which, if acquired, would have amaterial effect on our financial position, results of operations or cash flows****.****

## ****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 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, except for some administrative services for certain of theTEPPCO Midstream assets that are currently performed by DEFS on our behalf. Wereimburse EPCO for all reasonable direct and indirect expenses that have beenincurred in managing us. Under a transition services agreement entered into aspart of the sale of the General Partner, DEFS will continue to provide someadministrative services for certain of the TEPPCO Midstream assets for us for aperiod of time until we assume these services on our own. In connection with usassuming the operations of these TEPPCO Midstream assets from DEFS, certainDEFS employees became employees of EPCO effective June 1, 2005. As part ofthe transition services agreement, Duke Energy will continue to provide someadministrative support services to us until we or EPCO assume those activities.

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 Limited PartnerUnits were assigned to Duke Energy when ownership of the Company wastransferred from Duke Energy to DEFS in 2000. On February 24, 2005, DFIentered into an LP Unit Purchase and Sale Agreement with Duke Energy andpurchased these 2,500,000 DPIs for approximately $100.0 million.

We operate and report in three business segments:

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

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

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

Our reportable 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 interest andmanages 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 gasolines during the spring and summer drivingseasons. 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 Mont Belvieu StoragePartners, L.P. (“MB Storage”) (see Note 6. Equity Investments).

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, andarranging the necessary transportation logistics for the ultimate sale of thecrude oil to local refineries, marketers or other end users. Our UpstreamSegment also includes our equity investment in Seaway (see Note 6. EquityInvestments). Seaway consists of large diameter pipelines that transport crudeoil from Seaway’s marine terminals on the U.S. Gulf Coast to Cushing, Oklahoma,a crude oil distribution point for the central United States, and to refineriesin the Texas City and Houston areas.

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

39

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**Results ofOperations**

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

 
| ** **                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                        | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(as restated)**                          | ** ** | **(as restated)**                              | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Operating revenues:            |       |                                            |       |                                                |       |   |   |   |   |
| Downstream Segment             |       | $                                               | 63,438     |                                                | $          | 62,364 |   | $ | 141,605 |   | $ | 137,173 |   |
| Upstream Segment               |       | 1,973,000                                       |       | 1,242,860                                           |       | 3,369,780 |   | 2,437,350 |   |
| Midstream Segment              |       | 54,651                                          |       | 50,004                                              |       | 107,649 |   | 100,167 |   |
| Intersegment eliminations      |       | (709                                            | )          | (664                                                | )          | (2,049 | ) | (2,065 | ) |
| Total operating revenues       |       | 2,090,380                                       |       | 1,354,564                                           |       | 3,616,985 |   | 2,672,625 |   |
|                           |       |                                            |       |                                                |       |   |   |   |   |
| Operating income:              |       |                                            |       |                                                |       |   |   |   |   |
| Downstream Segment             |       | 14,972                                          |       | 14,619                                              |       | 46,484 |   | 40,301 |   |
| Upstream Segment               |       | 11,589                                          |       | 8,507                                               |       | 16,992 |   | 18,536 |   |
| Midstream Segment              |       | 28,102                                          |       | 19,275                                              |       | 53,543 |   | 37,465 |   |
| Total operating income         |       | 54,663                                          |       | 42,401                                              |       | 117,019 |   | 96,302 |   |
|                           |       |                                            |       |                                                |       |   |   |   |   |
| Earnings before  interest:     |       |                                            |       |                                                |       |   |   |   |   |
| Downstream Segment             |       | 14,847                                          |       | 13,327                                              |       | 44,687 |   | 37,503 |   |
| Upstream Segment               |       | 19,540                                          |       | 20,476                                              |       | 30,933 |   | 37,367 |   |
| Midstream Segment              |       | 28,162                                          |       | 19,291                                              |       | 53,645 |   | 37,539 |   |
| Total earnings before interest |       | 62,549                                          |       | 53,094                                              |       | 129,265 |   | 112,409 |   |
|                           |       |                                            |       |                                                |       |   |   |   |   |
| Interest expense               |       | (22,780                                         | )          | (18,048                                             | )          | (43,169 | ) | (38,507 | ) |
| Interest capitalized           |       | 1,153                                           |       | 1,584                                               |       | 2,255 |   | 2,448 |   |
| Net income                     |       | $                                               | 40,922     |                                                | $          | 36,630 |   | $ | 88,351 |   | $ | 76,350 |   |

 

The following is adetailed analysis of the results of operations, including reasons for changesin results, by each of our operating segments.

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**DownstreamSegment**

The following tableprovides financial information for the Downstream Segment for the three monthsand six months ended June 30, 2005 and 2004 (in thousands):
| ** **                              | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** | **Six Months Ended** | ** ** | ** **             | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **June 30,**                | ** ** | **Increase**           | ** ** | **June 30,**              | ** ** | **Increase**           | ** ** |
| ** **                              | ** ** | **2005**                         | ** ** | **2004**               | ** ** | **(Decrease)**                 | ** ** | **2005**               | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| ** **                              | ** ** | **(as restated)**           | ** ** | **(as restated)** | ** ** | ** **                     | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **                     | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transportation —  Refined products |       | $                                | 37,834     |                   | $          | 38,937                         |       | $                      | (1,103     | ) | $ | 72,799 |   | $ | 69,908 |   | $ | 2,891 |   |
| Transportation — LPGs              |       | 14,470                           |       | 13,721                 |       | 749                            |       | 46,701                 |       | 42,501 |   | 4,200 |   |
| Other                                   |       | 11,134                           |       | 9,706                  |       | 1,428                          |       | 22,105                 |       | 24,764 |   | (2,659 | ) |
| Total operating  revenues               |       | 63,438                           |       | 62,364                 |       | 1,074                          |       | 141,605                |       | 137,173 |   | 4,432 |   |
|                                    |       |                             |       |                   |       |                           |       |                   |       |   |   |   |   |
| Operating, general and administrative   |       | 28,281                           |       | 28,864                 |       | (583                           | )          | 54,896                 |       | 58,019 |   | (3,123 | ) |
| Operating fuel and  power               |       | 7,957                            |       | 7,193                  |       | 764                            |       | 15,617                 |       | 15,243 |   | 374 |   |
| Depreciation and  amortization          |       | 9,801                            |       | 9,211                  |       | 590                            |       | 19,362                 |       | 18,288 |   | 1,074 |   |
| Taxes — other than  income taxes   |       | 2,442                            |       | 2,494                  |       | (52                            | )          | 5,353                  |       | 5,339 |   | 14 |   |
| Gains on sales of  assets               |       | (15                              | )          | (17                    | )          | 2                              |       | (107                   | )          | (17 | ) | (90 | ) |
| Total costs and  expenses               |       | 48,466                           |       | 47,745                 |       | 721                            |       | 95,121                 |       | 96,872 |   | (1,751 | ) |
|                                    |       |                             |       |                   |       |                           |       |                   |       |   |   |   |   |
| Operating income                        |       | 14,972                           |       | 14,619                 |       | 353                            |       | 46,484                 |       | 40,301 |   | 6,183 |   |
|                                    |       |                             |       |                   |       |                           |       |                   |       |   |   |   |   |
| Equity earnings  (losses)               |       | (246                             | )          | (1,465                 | )          | 1,219                          |       | (2,067                 | )          | (3,243 | ) | 1,176 |   |
| Other income — net                 |       | 121                              |       | 173                    |       | (52                            | )          | 270                    |       | 445 |   | (175 | ) |
|                                    |       |                             |       |                   |       |                           |       |                   |       |   |   |   |   |
| Earnings before interest                |       | $                                | 14,847     |                   | $          | 13,327                         |       | $                      | 1,520      |   | $ | 44,687 |   | $ | 37,503 |   | $ | 7,184 |   |

 

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

 

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

Revenues fromrefined products transportation decreased $1.1 million for the three monthsended June 30, 2005, compared with the three months ended June 30,2004, primarily due to a decrease in distillate volumes transported and adecrease in the refined products average rate per barrel, partially offset byan overall increase in the refined products volume delivered. The decrease indistillate volumes was a result of low distillate price differentials. Thedecrease in the refined products average rate per barrel from the prior yearperiod was primarily due to the impact of greater growth in the volume ofproducts delivered under a Centennial tariff compared with the growth indeliveries under a TEPPCO tariff, which resulted in an increased proportion oflower tariff barrels transported on our system. Prior to the construction ofCentennial, deliveries on our pipeline system were limited by our pipelinecapacity, and transportation services for our customers were allocated in accordancewith a proration policy. With this incremental pipeline capacity, ourpreviously constrained system has expanded deliveries in 

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marketsboth south and north of Creal Springs, Illinois. In February 2003, weentered into a lease agreement with Centennial that increased our flexibilityto deliver refined products to our market areas. Centennial has provided oursystem with additional pipeline capacity for movement of products originatingin the U.S. Gulf Coast area. The overall increase in refined products volumewas primarily due to increased demand and market share for products suppliedfrom the U.S. Gulf Coast into Midwest markets.

Revenues from LPGs transportation increased $0.7 million forthe three months ended June 30, 2005, compared with the three months endedJune 30, 2004, due to higher deliveries of propane in the upper Midwestand Northeast market areas.  The LPGsaverage rate per barrel increased from the prior period primarily as a resultof decreased short-haul deliveries during the three months ended June 30,2005.

Other operating revenues increased $1.4 million for the threemonths ended June 30, 2005, compared with the three months ended June 30,2004, primarily due to higher refined products additive and tender deductionrevenue and increased margins on product inventory sales.

Costs and expenses increased $0.7 million for the three monthsended June 30, 2005, compared with the three months ended June 30,2004, due to increased operating fuel and power and increased depreciation andamortization expense, partially offset by decreased operating, general andadministrative expenses and decreased taxes — other than income. Operating fueland power increased $0.8 million primarily due to increased mainline throughputand adjustments to power accruals. Depreciation expense increased $0.6 millionprimarily due to assets placed into service in 2005. Operating, general andadministrative expenses decreased $0.6 million primarily due to a $1.4 milliondecrease in pipeline inspection and repair costs associated with our integritymanagement program and a $0.4 million decrease in consulting services andsupplies primarily related to acquisition activities in 2004. These decreaseswere partially offset by a $0.7 million increase in pipeline operating andmaintenance expenses, a $0.3 million increase in rental expense from theCentennial pipeline capacity lease agreement and a $0.2 million increase ininsurance expense. Increased labor and benefits expenses associated withvesting provisions in certain of our compensation plans as a result of changesin control of our General Partner and higher incentive compensation expensescompared to the prior year period were offset by a $1.6 million decrease inpostretirement benefit accruals related to plan amendments (see Note 9.Employee Benefit Plans).

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

|                                 | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** |
|---------------------------------|------------|----------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **June 30,**                | ** ** | **Increase**           | ** ** |
| ** **                      | ** ** | **2005**                         | ** ** | **2004**               | ** ** | **(Decrease)** | ** ** |
| ** **                      | ** ** | **(as restated)**           | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Centennial                      |       | $                                | (1,634     | )                      | $          | (3,242 | ) | $ | 1,608 |   |
| MB Storage                      |       | 1,365                            |       | 1,785                  |       | (420 | ) |
| Other                           |       | 23                               |       | (8                     | )          | 31 |   |
| Total equity  earnings (losses) |       | $                                | (246       | )                      | $          | (1,465 | ) | $ | 1,219 |   |

 

Equitylosses in Centennial decreased $1.6 million for the three months ended June 30,2005, compared with the three months ended June 30, 2004, primarily due tohigher transportation revenues and volumes, partially offset by higher transmixrelated product replacement costs and product measurement losses during the2005 period. Equity earnings in MB Storage decreased $0.4 million for the threemonths ended June 30, 2005, compared with the three months ended June 30,2004, primarily due to higher pipeline rehabilitation expenses on the MBStorage system.

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

Revenues from refined products transportationincreased $2.9 million for the six months ended June 30, 2005, comparedwith the six months ended June 30, 2004, due to an overall increase in therefined products volumes 

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delivered.This increase was primarily due to deliveries of products moved on Centennial. Volumeincreases were due to increased demand and market share for products suppliedfrom the U.S. Gulf Coast into Midwest markets. The refined products averagerate per barrel decreased from the prior year period primarily due to theimpact of greater growth in the volume of products delivered under a Centennialtariff compared with the growth in deliveries under a TEPPCO tariff, whichresulted in an increased proportion of lower tariff barrels transported on oursystem.

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

Otheroperating revenues decreased $2.7 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, primarily due tolower propane inventory fees in 2005 and lower volume of product inventorysales, partially offset by higher refined products tender deduction and loadingrevenues.

Costs andexpenses decreased $1.8 million for the six months ended June 30, 2005,compared with the six months ended June 30, 2004, due to decreasedoperating, general and administrative expenses, partially offset by increaseddepreciation and amortization expense and increased operating fuel and power. Operating,general and administrative expenses decreased $3.1 million primarily due to a$5.7 million decrease in pipeline inspection and repair costs associated withour integrity management program, a $1.6 million decrease in postretirementbenefit accruals related to plan amendments (see Note 9. Employee BenefitPlans) and a $0.3 million decrease in consulting services and suppliesprimarily related to acquisition related activities in 2004. These decreaseswere partially offset by a $2.4 million increase in labor and benefits expensesassociated with vesting provisions in certain of our compensation plans as aresult of changes in control of our General Partner and higher incentivecompensation expenses compared to the prior year period, a $1.0 millionincrease in rental expense from the Centennial pipeline capacity leaseagreement, a $0.6 million increase in environmental remediation and assessmentcosts and a $0.6 million increase in pipeline operating and maintenance expense.Depreciation expense increased $1.1 million primarily due to assets placed intoservice and assets retired to depreciation expense in 2005. Operating fuel andpower increased $0.4 million primarily due to increased mainline throughput andadjustments to power accruals.

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

 

|                                 | ** ** | **Six Months Ended** | ** ** | ** **             | ** ** |
|---------------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **June 30,**              | ** ** | **Increase**           | ** ** |
| ** **                      | ** ** | **2005**                       | ** ** | **2004**               | ** ** | **(Decrease)** | ** ** |
| ** **                      | ** ** | **(as restated)**         | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Centennial                      |       | $                              | (6,084     | )                      | $          | (7,639 | ) | $ | 1,555 |   |
| MB Storage                      |       | 3,998                          |       | 4,414                  |       | (416 | ) |
| Other                           |       | 19                             |       | (18                    | )          | 37 |   |
| Total equity  earnings (losses) |       | $                              | (2,067     | )                      | $          | (3,243 | ) | $ | 1,176 |   |

 

Equitylosses in Centennial decreased $1.6 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, primarily due tohigher transportation revenues and volumes, partially offset by higher transmixrelated product replacement costs and product measurement losses during the2005 period. Equity earnings in MB Storage decreased $0.4 million for the sixmonths ended June 30, 2005, compared with the six months ended June 30,2004, primarily due to increased depreciation and amortization expense, higherpipeline rehabilitation expenses and higher general and administrativeexpenses, partially offset by higher revenues and volumes. In April 2004,MB Storage acquired storage and pipeline assets and contracts for approximately$34.0 million, of which TE Products contributed $16.5 million. Increases instorage revenue, shuttle revenue, rental 

 

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revenueand depreciation and amortization expense for the six months ended June 30,2005, compared with the six months ended June 30, 2004, are primarilyrelated to the acquired storage assets and contracts.

Otherincome — net decreased $0.2 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, due to lowerinterest income earned on cash investments and other investing activities.

**Upstream Segment**

Thefollowing table provides financial information for the Upstream Segment for thethree months and six months ended June 30, 2005 and 2004 (in thousands):
| ** **                                   | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** | **Six Months Ended** | ** ** | ** **             | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **June 30,**                | ** ** | **Increase**           | ** ** | **June 30,**              | ** ** | **Increase**           | ** ** |
| ** **                                   | ** ** | **2005**                         | ** ** | **2004**               | ** ** | **(Decrease)**                 | ** ** | **2005**               | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| ** **                                   | ** ** | **(as restated)**           | ** ** | **(as restated)** | ** ** | ** **                     | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
|                                         |       |                             |       |                   |       |                           |       |                   |       |   |   |   |   |
| Sales of  petroleum products                 |       | $                                | 1,961,302  |                   | $          | 1,231,019                      |       | $                      | 730,283    |   | $ | 3,346,369 |   | $ | 2,411,786 |   | $ | 934,583 |   |
| Transportation —  Crude oil             |       | 9,042                            |       | 9,213                  |       | (171                           | )          | 18,214                 |       | 18,876 |   | (662 | ) |
| Other                                        |       | 2,656                            |       | 2,628                  |       | 28                             |       | 5,197                  |       | 6,688 |   | (1,491 | ) |
| Total operating revenues                     |       | 1,973,000                        |       | 1,242,860              |       | 730,140                        |       | 3,369,780              |       | 2,437,350 |   | 932,430 |   |
| Purchases of  petroleum products             |       | 1,942,599                        |       | 1,216,307              |       | 726,292                        |       | 3,315,029              |       | 2,383,732 |   | 931,297 |   |
| Operating,  general and administrative  |       | 12,912                           |       | 12,682                 |       | 230                            |       | 25,728                 |       | 23,867 |   | 1,861 |   |
| Operating fuel  and power                    |       | 1,234                            |       | 1,393                  |       | (159                           | )          | 2,462                  |       | 3,133 |   | (671 | ) |
| Depreciation and  amortization               |       | 3,651                            |       | 3,045                  |       | 606                            |       | 7,152                  |       | 6,113 |   | 1,039 |   |
| Taxes — other  than income taxes.       |       | 1,068                            |       | 975                    |       | 93                             |       | 2,469                  |       | 2,076 |   | 393 |   |
| Gains on sales  of assets                    |       | (53                              | )          | (49                    | )          | (4                             | )          | (52                    | )          | (107 | ) | 55 |   |
| Total costs and expenses                     |       | 1,961,411                        |       | 1,234,353              |       | 727,058                        |       | 3,352,788              |       | 2,418,814 |   | 933,974 |   |
| Operating income                             |       | 11,589                           |       | 8,507                  |       | 3,082                          |       | 16,992                 |       | 18,536 |   | (1,544 | ) |
| Equity earnings                              |       | 7,997                            |       | 11,918                 |       | (3,921                         | )          | 13,912                 |       | 18,634 |   | (4,722 | ) |
| Other income —  net                     |       | (46                              | )          | 51                     |       | (97                            | )          | 29                     |       | 197 |   | (168 | ) |
| Earnings before  interest                    |       | $                                | 19,540     |                   | $          | 20,476                         |       | $                      | (936       | ) | $ | 30,933 |   | $ | 37,367 |   | $ | (6,434 | ) |

 

Informationpresented in the following table includes the margin of the Upstream Segment,which may be viewed as a non-GAAP (Generally Accepted Accounting Principles)financial measure under the rules of the Securities and ExchangeCommission. We calculate the margin of the Upstream Segment as revenuesgenerated from the sale of crude oil and lubrication oil, and transportation ofcrude oil, less the costs of purchases of crude oil and lubrication oil. Webelieve that margin is a more meaningful measure of financial performance thansales and purchases of crude oil and lubrication oil due to the significantfluctuations in sales and purchases caused by variations in the level ofvolumes marketed and prices for products marketed. Additionally, we use margininternally to evaluate the financial performance of the Upstream Segment as webelieve margin is a better indicator of performance than operating income asoperating, general and administrative expenses, operating fuel and power anddepreciation expense are not directly related to the margin activities. Marginand volume information for the three months and six months ended June 30,2005 and 2004 is presented below (in thousands, except per barrel and pergallon amounts):

44

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| ** **                              | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Six Months Ended** | ** ** | **Percentage** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------|------------|--------------------------------|------------|----------------|------------|
| ** **                              | ** ** | **June 30,**                | ** ** | **Increase**   | ** ** | **June 30,**              | ** ** | **Increase**   | ** ** |
| ** **                              | ** ** | **2005**                         | ** ** | **2004**       | ** ** | **(Decrease)**                 | ** ** | **2005**       | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
|                                    |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Margins: (1)                            |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Crude oil transportation                |       | $                                | 15,165     |           | $          | 13,279                         |       | 14             | %          | $ | 29,356 |   | $ | 26,375 |   | 11 | % |
| Crude oil marketing                     |       | 9,056                            |       | 6,901          |       | 31                             | %          | 12,532         |       | 12,593 |   | — |   |
| Crude oil terminaling                   |       | 1,848                            |       | 2,241          |       | (18                            | %)         | 4,233          |       | 4,966 |   | (15 | %) |
| Lubrication oil sales                   |       | 1,676                            |       | 1,504          |       | 11                             | %          | 3,433          |       | 2,996 |   | 15 | % |
| Total margin                            |       | $                                | 27,745     |           | $          | 23,925                         |       | 16             | %          | $ | 49,554 |   | $ | 46,930 |   | 6 | % |
|                                    |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Total barrels:                          |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Crude oil transportation                |       | 23,768                           |       | 24,686         |       | (4                             | %)         | 47,522         |       | 50,848 |   | (7 | %) |
| Crude oil marketing                     |       | 48,864                           |       | 42,270         |       | 16                             | %          | 93,158         |       | 87,924 |   | 6 | % |
| Crude oil terminaling                   |       | 21,287                           |       | 27,800         |       | (23                            | %)         | 48,406         |       | 60,888 |   | (20 | %) |
|                                    |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Lubrication oil  volume (total gallons) |       | 3,153                            |       | 2,949          |       | 7                              | %          | 7,325          |       | 6,419 |   | 14 | % |
|                                    |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Margin per barrel:                      |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Crude oil transportation                |       | $                                | 0.638      |           | $          | 0.538                          |       | 19             | %          | $ | 0.618 |   | $ | 0.519 |   | 19 | % |
| Crude oil marketing                     |       | 0.185                            |       | 0.163          |       | 14                             | %          | 0.135          |       | 0.143 |   | (6 | %) |
| Crude oil terminaling                   |       | 0.087                            |       | 0.081          |       | 8                              | %          | 0.087          |       | 0.082 |   | 7 | % |
|                                    |       | 0.                               |       |           |       |                           |       |           |       |   |   |   |   |
| Lubrication oil margin  (per gallon)    |       | 0.532                            |       | 0.510          |       | 4                              | %          | 0.469          |       | 0.467 |   | — |   |

----

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

The following table reconciles theUpstream Segment margin to the consolidated statements of income using theinformation presented in the consolidated statements of income and thestatements of income in Note 10. Segment Information (in thousands):
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                             | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales of  petroleum products           |       | $                                | 1,961,302  |                           | $          | 1,231,019 |   | $ | 3,346,369 |   | $ | 2,411,786 |   |
| Transportation —  Crude oil       |       | 9,042                            |       | 9,213                          |       | 18,214 |   | 18,876 |   |
| Less: Purchases  of petroleum products |       | (1,942,599                       | )          | (1,216,307                     | )          | (3,315,029 | ) | (2,383,732 | ) |
| Total margin                           |       | 27,745                           |       | 23,925                         |       | 49,554 |   | 46,930 |   |
| Other operating  revenues              |       | 2,656                            |       | 2,628                          |       | 5,197 |   | 6,688 |   |
| Net operating revenues                 |       | 30,401                           |       | 26,553                         |       | 54,751 |   | 53,618 |   |
| Operating,  general and administrative |       | 12,912                           |       | 12,682                         |       | 25,728 |   | 23,867 |   |
| Operating fuel  and power              |       | 1,234                            |       | 1,393                          |       | 2,462 |   | 3,133 |   |
| Depreciation and  amortization         |       | 3,651                            |       | 3,045                          |       | 7,152 |   | 6,113 |   |
| Taxes — other  than income taxes  |       | 1,068                            |       | 975                            |       | 2,469 |   | 2,076 |   |
| Gains on sales  of assets              |       | (53                              | )          | (49                            | )          | (52 | ) | (107 | ) |
| Operating income                       |       | $                                | 11,589     |                           | $          | 8,507 |   | $ | 16,992 |   | $ | 18,536 |   |

 

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

Our margin increased $3.8 million forthe three months ended June 30, 2005, compared with the three months endedJune 30, 2004. Crude oil marketing margin increased $2.1 million primarilydue to an increase in volumes marketed and unrealized gains of $1.8 millionrelated to marking crude oil grade and location swap contracts to currentmarket value, partially offset by increased transportation costs. Crude oiltransportation margin 

45

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increased$1.9 million primarily due to increased transportation volumes and revenues onour South Texas system and higher revenues on our Basin system related tomovements on higher tariff segments, partially offset by decreases intransportation volumes on our Red River system and on lower tariff segments ofour Basin system. Lubrication oil sales margin increased $0.2 million due toincreased sales of chemical volumes and the acquisition of a lubrication oildistributor in Casper, Wyoming, in August 2004. Crude oil terminalingmargin decreased $0.4 million as a result of a decrease in pumpover volumes atMidland, Texas and Cushing, Oklahoma.

Costs andexpenses, excluding expenses associated with purchases of crude oil andlubrication oil, increased $0.7 million for the three months ended June 30,2005, compared with the three months ended June 30, 2004, primarily due toincreased depreciation and amortization expense, increased operating, generaland administrative expenses and increased taxes — other than income taxes,partially offset by decreased operating fuel and power. Depreciation andamortization expense increased $0.6 million as a result of assets placed inservice in 2004 and due to assets retired to depreciation expense during theperiod. Operating, general and administrative expenses increased $0.2 millionfrom the prior year period primarily due to a $1.8 increase in labor andbenefits expense related to vesting provisions in certain of our compensationplans as a result of changes in control of our General Partner, an increase inthe number of employees and higher incentive compensation expenses betweenperiods, a $0.9 million increase in supplies and pipeline operating andmaintenance expense and a $0.4 million increase in insurance expense, partiallyoffset by a $1.2 million decrease in postretirement benefit accruals related toplan amendments (see Note 9. Employee Benefit Plans), a $1.1 million decreasein expense as a result of measurement gains on the systems and higher crude oilprices and a $0.7 million decrease in environmental assessment and remediationcosts. Operating fuel and power decreased $0.2 million primarily as a result oflower transportation volumes in 2005.

Equity earnings from our investment inSeaway decreased $3.9 million for the three months ended June 30, 2005,compared with the three months ended June 30, 2004, primarily due todecreased transportation volumes attributable to reduced operating pressures asa result of a pipeline release in May 2005, decreased gains on inventorysales, higher operating, general and administrative expenses and higherdepreciation expense in the second quarter of 2005.

After Seaway’s pipelinerelease in May 2005, the maximum operating pressure on the pipeline systemwas reduced by 20% as is standard procedure until the cause of the failure isdetermined and any required corrective measures implemented. A study of thefailed pipe was performed by independent, metallurgical experts who determinedthat the pipe failed due to damage that occurred during rail shipmentassociated with its installation thirty years ago. The corrective actionsinclude running a very sophisticated, high definition inspection tool throughthe pipe to determine if there are any other sections of pipe that have similardamage.  This approach is consistent withdirectives from the United States Department of Transportation’s Office ofPipeline Safety in past failures of this type. We are in the initial stages ofevaluating 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. At this time, we do not believe this willhave a material adverse effect on our financial position, results of operationsor cash flows.

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

Our margin increased $2.6 million forthe six months ended June 30, 2005, compared with the six months ended June 30,2004. Crude oil transportation margin increased $3.0 million primarily due toincreased transportation volumes and revenues on our South Texas system andother gathering systems and higher revenues on our Basin and West Texas systemsrelated to movements on higher tariff segments, partially offset by decreasesin transportation volumes on our Red River system and on lower tariff segmentsof our Basin system.  Lubrication oilsales margin increased $0.4 million due to increased sales of chemical volumesand the acquisition of a lubrication oil distributor in Casper, Wyoming, in August 2004.Crude oil terminaling margin decreased $0.7 million as a result of a decreasein pumpover volumes at Midland, Texas and Cushing, Oklahoma. Crude oilmarketing margin 

46

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decreased$0.1 million, primarily due to increased transportation expenses, partiallyoffset by an increase in volumes marketed and unrealized gains of $0.8 millionrelated to marking crude oil grade and location swap contracts to currentmarket value.

Otheroperating revenues decreased $1.5 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, primarily due to a$1.4 million favorable settlement of inventory imbalances in the first quarterof 2004 and lower revenues from documentation and other services to supportcustomers’ trading activity at Midland and Cushing in the first six months of2005.

Costs andexpenses, excluding expenses associated with purchases of crude oil andlubrication oil, increased $2.7 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, due to increasedoperating, general and administrative expenses, increased depreciation andamortization expense and increased taxes — other than income taxes, partiallyoffset by decreased operating fuel and power. Operating, general andadministrative expenses increased $1.9 million from the prior year period. Thisincrease was primarily due to a $2.7 million increase in labor and benefitsexpense related to vesting provisions in certain of our compensation plans as aresult of changes in control of our General Partner and an increase in thenumber of employees between periods, a $2.3 million increase in supplies andpipeline operating and maintenance expense, and a $0.4 million increase ininsurance expense, partially offset by a $1.2 million decrease inpostretirement benefit accruals related to plan amendments (see Note 9.Employee Benefit Plans), a $1.2 million decrease in environmental assessmentand remediation costs and a $1.1 million decrease in expense as a result ofmeasurement gains on the systems and higher crude oil prices. Depreciation andamortization expense increased $1.0 million as a result of assets placed inservice in 2004, and due to assets retired to depreciation expense during theperiod. Taxes — other than income taxes increased $0.4 million due to increasesin property tax accruals and a higher asset base in 2005. Operating fuel andpower decreased $0.7 million primarily as a result of lower transportationvolumes in 2005.

Equity earnings from our investment inSeaway decreased $4.7 million for the six months ended June 30, 2005,compared with the six months ended June 30, 2004, primarily due to decreased transportation volumesattributable to reduced operating pressures as a result of a pipeline releasein May 2005, decreased gains on inventory sales, higher operating, general and administrative expenses,higher depreciation expense  and a favorable settlement in the firstquarter of 2004 with a former owner of Seaway’s crude oil assets regardinginventory imbalances that were not acquired by us.

**Midstream Segment**

Thefollowing table provides financial information for the Midstream Segment forthe three months and six months ended June 30, 2005 and 2004 (inthousands):

47

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

 

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

 

48

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The following table reconciles the Midstream Segment margin tooperating income in the consolidated statements of income using the informationpresented in the tables above, in the consolidated statements of income and inthe statements of income in Note 10. Segment Information (in thousands):

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

 

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

Revenues from the gathering of natural gas increased $2.5million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004. Natural gas gathering revenues from the Jonahsystem increased $2.5 million and volumes gathered increased 15.6 billion cubicfeet (“Bcf”) for the three months ended June 30, 2005, primarily due tothe expansion of the Jonah system in 2004. Installation of additional 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 tohigher system wellhead pressures. Natural gas gathering revenues from the ValVerde system remained constant and volumes gathered increased 8.6 Bcf for thethree months ended June 30, 2005, primarily due to increased volumes fromtwo new connections made to the Val Verde system in May and December 2004,partially offset by the natural decline of CBM production and slower thananticipated completion and connection of infill wells. Val Verde’s average naturalgas gathering rate per MMcf decreased due to contracts entered into relating tothe new connections, which have lower rates than the existing Val Verde system’saverage rates.

Margin (sales of petroleum products less purchases ofpetroleum products) resulting from the processing arrangements at the JonahPioneer plant increased $0.4 million for the three months ended June 30,2005, compared with the three months ended June 30, 2004, primarily due toincreased volumes and higher NGL prices.  Jonah’s Pioneer gas processing plant wascompleted during the first quarter of 2004, as a part of the Phase IIIexpansion to increase the processing capacity in southwestern Wyoming. Pioneer’sprocessing agreements allow the producers to elect annually whether to becharged under a fee-based arrangement or a fee plus keep-whole arrangement. Underthe fee-based election, Jonah receives a fee for its processing services. Underthe fee plus keep-whole election, Jonah receives a lower fee for its processingservices, retains and sells the NGLs extracted during the process and deliversto producers the residue gas equivalent in energy to the natural gas receivedfrom the producers. Jonah sells the NGLs it retains and purchases gas toreplace the equivalent energy removed in the liquids. For the 2004 and 2005periods, the producers have elected the fee plus keep-whole arrangement.

Revenues from the transportation of NGLs increased $0.8million for the three months ended June 30, 2005, compared with the threemonths ended June 30, 2004, primarily due to increases in volumestransported on the Panola Pipeline, partially offset by decreases in volumestransported on the Chaparral, Dean and Wilcox Pipelines. 

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Theincrease in the NGL transportation average rate per barrel resulted from higheraverage rates per barrel on volumes transported on the Panola Pipeline.

Other operating revenues increased $0.8 million for the threemonths ended June 30, 2005, compared with the three months ended June 30,2004. Val Verde’s other operating revenues increased $0.5 million due torevenues generated as a result of contractual producer minimum fuel levelsexceeding actual operating fuel usage during the three months ended June 30,2005. Val Verde retains a portion of its producers’ gas to compensate for fuelused in operations. The actual usage of gas can differ from the amountcontractually retained from producers. Value retained from producers or salesgenerated as a result of efficient fuel usage is recognized as other operatingrevenues. NGL fractionation revenues increased $0.2 million as a result ofhigher volumes.

Costs and expenses (excluding purchases of petroleum products)decreased $4.3 million for the three months ended June 30, 2005, comparedwith the three months ended June 30, 2004, due to decreases in operating,general and administrative expenses, depreciation and amortization expense,taxes — other than income taxes and operating fuel and power. Operating,general and administrative expenses decreased $2.3 million primarily due to a$1.7 million decrease in gas settlement expenses and a $1.6 million decrease inpipeline operating and maintenance expenditures primarily on Val Verde,partially offset by a $1.0 million increase in labor and benefits expenseprimarily associated with vesting provisions in certain of our compensationplans as a result of changes in control of our General Partner and certain DEFSemployees becoming employees of EPCO. Amortization expense on the Jonah systemdecreased $0.9 million primarily due to revisions to the estimated life ofintangible assets under the units-of-production method, partially offset by a$0.3 million increase as a result of higher volumes in the 2005 period. Duringthe fourth quarter of 2004 and the first and second quarters of 2005, updatedproduction forecasts were obtained from some of the producers on the Jonahsystem related to future expansions of the system, and as a result, weincreased our best estimate of future throughput on the Jonah system. Thisincrease in the estimate of future throughput extended the amortization periodof Jonah’s natural gas gathering contracts (see Note 2. Goodwill and OtherIntangible Assets). Amortization expense on the Val Verde system decreased $0.2million primarily due to lower volumes in the 2005 period on contracts includedin the intangible assets, resulting from the natural decline in CBM production.Depreciation expense decreased $0.2 million primarily due to a $1.0 milliondecrease on Jonah as a result of increases to the estimated lives of Jonah’sassets, partially offset by a $0.6 million increase on Val Verde as a result ofassets placed into service in 2004 and an increase on Panola due to assetsretired to depreciation expense. Taxes — other than income taxes decreased $0.6million due to actual property taxes being lower than previously estimated.

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

Revenues from the gathering of natural gas increased $4.6million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004. Natural gas gathering revenues from the Jonahsystem increased $4.4 million and volumes gathered increased 29.0 Bcf for thesix months ended June 30, 2005, primarily due to the expansion of theJonah system in 2004. Installation of additional capacity of 100 million cubicfeet per day was completed during the fourth quarter of 2004. Jonah’s averagenatural gas gathering rate per MMcf decreased due to higher system wellheadpressures. Natural gas gathering revenues from the Val Verde system increased$0.2 million and volumes gathered increased 16.4 Bcf for the six months ended June 30,2005, primarily due to increased volumes from two new connections made to theVal Verde system in May and December 2004, partially offset by thenatural decline of CBM production and slower than anticipated completion andconnection of infill wells. Val Verde’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 ofpetroleum products) resulting from the processing arrangements at the JonahPioneer plant increased $1.1 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, primarily due toincreased volumes and higher NGL prices.

Revenues from the transportation of NGLs increased $1.0million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004, primarily due to increases in volumestransported on the Panola 

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Pipeline,partially offset by decreases in volumes transported on the Chaparral, Dean andWilcox Pipelines. The increase in the NGL transportation average rate perbarrel resulted from higher average rates per barrel on volumes transported onthe Panola Pipeline.

Other operating revenues increased $0.6 million for the sixmonths ended June 30, 2005, compared with the six months ended June 30,2004. Val Verde’s other operating revenues increased $0.6 million due torevenues generated as a result of contractual producer minimum fuel levelsexceeding actual operating fuel usage during the six months ended June 30,2005. NGL fractionation revenues increased $0.2 million as a result of highervolumes. Jonah’s other operating revenues decreased $0.2 million primarily dueto lower condensate sales.

Costs and expenses (excluding purchases of petroleum products)decreased $8.8 million for the six months ended June 30, 2005, compared withthe six months ended June 30, 2004, due to decreases in depreciation andamortization expense, operating, general and administrative expenses, taxes —other than income taxes and operating fuel and power, partially offset by a netgain recorded on the sale of an asset. Amortization expense on the Jonah systemdecreased $1.7 million primarily due to revisions to the estimated life ofintangible assets under the units-of-production method, partially offset by a$0.6 million increase as a result of higher volumes in the 2005 period. Amortizationexpense on the Val Verde system decreased $0.5 million primarily due to lowervolumes in the 2005 period on contracts included in the intangible assets,resulting from the natural decline in CBM production. Depreciation expensedecreased $2.1 million primarily due to a $3.4 million decrease on Jonah as aresult of increases to the estimated lives of Jonah’s assets, partially offsetby a $1.2 million increase on Val Verde as a result of assets placed intoservice in 2004. Operating, general and administrative expenses decreased $3.2million primarily due to a $3.5 million decrease in gas settlement expenses anda $1.1 million decrease in pipeline operating and maintenance expendituresprimarily on Val Verde, partially offset by a $1.2 million increase in laborand benefits expense primarily associated with vesting provisions in certain ofour compensation plans as a result of changes in control of our General Partnerand certain DEFS employees becoming employees of EPCO. Taxes — other thanincome taxes decreased $0.8 million due to actual property taxes being lowerthan previously estimated. A net gain of $0.4 million was recognized on thesale of equipment in the current period.

**Interest Expense and Capitalized Interest**

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

Interest expense increased $4.7 million for the three monthsended June 30, 2005, compared with the three months ended June 30,2004, primarily due to higher short term floating interest rates on ourrevolving credit facility, $2.0 million of expense related to the terminationof a treasury lock (see Note 3. Interest Rate Swaps) and higher outstandingdebt balances.

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

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

Interest expense increased $4.7 million for the six monthsended June 30, 2005, compared with the six months ended June 30,2004, primarily due to higher short term floating interest rates on ourrevolving credit facility, $2.0 million of expense related to the terminationof a treasury lock (see Note 3. Interest Rate Swaps) and higher outstandingdebt balances. These increases were partially offset by an increased percentageof variable interest rate debt during the six months ended June 30, 2005,that carried a lower rate of interest as compared with fixed interest rate debt.The higher percentage of variable interest rate debt resulted from theexpiration of an interest rate swap in April 2004 (see Note 3. InterestRate Swaps).

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

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**Financial Condition and Liquidity**

Cash generated from operations, credit facilities anddebt and equity offerings are our primary sources of liquidity. At June 30,2005, we had a working capital surplus of $62.0 million, while at December 31,2004, we had a working capital deficit of $37.8 million. At June 30, 2005,we had approximately $278.6 million in available borrowing capacity under ourrevolving credit facility to cover any working capital needs. Cash flows forthe six months ended June 30, 2005 and 2004 were as follows (in millions):

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

 

*Operating Activities*

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

|                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(as restated)**                        | ** ** | **(as restated)** | ** ** |
| Net income                             |       | $88.4                                         |       | $76.4 |   |
| Depreciation and amortization          |       | 52.1                                          |       | 54.2 |   |
| Earnings in equity investments         |       | (11.9                                         | )          | (15.4 | ) |
| Distributions from equity investments  |       | 19.0                                          |       | 20.8 |   |
| Gains on sales of assets               |       | (0.6                                          | )          | (0.1 | ) |
| Non-cash portion of interest expense   |       | 0.8                                           |       | (0.2 | ) |
| Cash used in working capital and other |       | (123.2                                        | )          | (3.7 | ) |
|                                   |       |                                          |       |   |   |
| Net cash from operating activities     |       | $24.6                                         |       | $132.0 |   |

 

For a discussion of changes in earnings beforeinterest, depreciation and amortization, equity earnings, gain on sales ofassets by segment and consolidated interest expense — net, see Results ofOperations for the Downstream Segment, Upstream Segment and Midstream Segmentin Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations. Cash provided by operating activities decreased $107.4million for the six months ended June 30, 2005, compared with the sixmonths ended June 30, 2004, primarily due to the timing of cashdisbursements and cash receipts for crude oil inventory and other workingcapital components and a decrease in distributions received from our equityinvestments during the six months ended June 30, 2005, partially offset byhigher net income and lower depreciation and amortization expense in the 2005period.

During the second quarter of 2005, we purchased crudeoil and simultaneously entered into offsetting sales contracts for physicaldelivery during the third quarter of 2005. The purpose of these contracts wasto lock in a margin on the crude oil while it is stored in our facilities. Thesepurchases had a negative impact on cash flows from operating activities whenthe invoices for the crude oil were paid during the second quarter of 2005. Weutilized borrowings under our revolving credit facility to fund a large portionof the crude oil purchases. These borrowings on our revolving credit facilityare shown as financing activities in the statement of cash flows. As such,until we deliver the crude oil and receive payment from our customers,operating activities in the statement of cash flows will be negatively impactedby this activity.

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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 generating expenditures,interest payments on our Senior Notes and revolving credit facility,distributions to our General Partner and unitholders and acquisitions of newassets or businesses. Short-term cash requirements, such as operating expenses,capital expenditures to sustain existing operations and quarterly distributionsto our General Partner and unitholders, are expected to be funded throughoperating cash flows. Long-term cash requirements for expansion projects andacquisitions are expected to be funded by several sources, including cash flowsfrom operating activities, borrowings under credit facilities, and the issuanceof additional equity and debt securities. Our ability to complete future debtand equity offerings and the timing of any such offerings will depend onvarious factors, including prevailing market conditions, interest rates, ourfinancial condition and our credit rating at the time.

Net cash from operating activities for the six monthsended June 30, 2005 and 2004, included interest payments, net of amountscapitalized, of $41.1 million and $41.2 million, respectively. Excluding theeffects of hedging activities and interest capitalized during the year ended December 31,2005, we expect interest payments on our fixed rate Senior Notes to beapproximately $77.8 million. We expect to pay our interest payments with cashflows from operating activities.

*Investing Activities*

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

*Financing Activities*

Cash flows provided by financing activities totaled$86.5 million for the six months ended June 30, 2005, and were comprisedof $278.8 million from the issuance of 7.0 million Units in May and June 2005,partially offset by $­­117.3 million of distributions paid to unitholders and$75.0 million in repayments, net of borrowings, on our revolving creditfacility. Cash flows used in financing activities totaled $65.7 million for thesix months ended June 30, 2004, and were comprised of $115.7 million ofdistributions paid to unitholders, partially offset by $50.0 million inborrowings, net of repayments, from our revolving credit facility.

Centennialentered into credit facilities totaling $150.0 million and, as of June 30,2005, $150.0 million was outstanding under those credit facilities. Theproceeds were used to fund construction and conversion costs of Centennial’spipeline system. TE Products and Marathon Ashland Petroleum LLC (“Marathon”)have each guaranteed one-half of Centennial’s debt, up to a maximum of $75.0million each.

***Universal Shelf***

**We have filed with the Securities andExchange Commission a universal shelf registration statement that, subject toagreement on terms at the time of use and appropriate supplementation, allowsus to issue, in one or more offerings, up to an aggregate of $2.0 billion ofequity securities, debt securities or a combination thereof. During the threemonths ended June 30, 2005, we issued $279.2 million of equity securities.At June 30, 2005, we had $1.7 billion remaining under this shelfregistration, subject to customary marketing terms and conditions.**

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** **

*Credit Facilitiesand Interest Rate Swap Agreements*

On June 27, 2003, we entered into a $550.0 millionrevolving credit facility with a three-year term, including the issuance ofletters of credit of up to $20.0 million (“Revolving Credit Facility”). 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. Thecredit agreement for the Revolving Credit Facility contains certain restrictivefinancial covenant ratios. On October 21, 2004, we amended our RevolvingCredit Facility to (i) increase the facility size to $600.0 million, (ii) extendthe term to October 21, 2009, (iii) remove certain 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. During the second quarter of 2005, we used aportion of the proceeds from equity offerings in May 2005 and June 2005to repay a portion of the Revolving Credit Facility (see Note 8. Partners’Capital and Distributions). At June 30, 2005, $278.0 million wasoutstanding under the Revolving Credit Facility at a weighted average interestrate of 4.3%. At June 30, 2005, we were in compliance with the covenantsof this credit agreement.

We have entered into interest rate swap agreements to hedgeour exposure to cash flows and fair value changes. These agreements are morefully described in Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.

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

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

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(1)            OurRevolving Credit Facility contains restrictive covenants that require us tomaintain certain financial ratios. Under the most restrictive financialcovenant, approximately $278.6 million was available to be borrowed for workingcapital needs at June 30, 2005. Certain of these restrictive covenants areadjusted in the event of an acquisition by us, which would permit additionalborrowings under the facility.

(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. AtJune 30, 2005, the 7.51% Senior Notes include an adjustment to increasethe fair value of the debt by $7.4 million related to this interest rate swapagreement. We also entered into interest rate swap agreements to hedge ourexposure to changes in the fair value of our 7.625% Senior Notes due 2012. At June 30,2005, the 7.625% Senior Notes include a deferred gain, net of amortization,from previous interest rate swap terminations of $34.6 million. At June 30,2005, our 6.45% Senior Notes, our 7.625% Senior Notes and our 6.125% SeniorNotes include $2.6 million of unamortized debt discounts. The fair valueadjustments, the deferred gain adjustment and the unamortized debt discountsare excluded from this table.

### *Distributions and Issuance of Additional Limited Partner Units*

We paid cash distributions of $117.3 million ($1.325per Unit) and $115.7 million ($1.3125 per Unit) during the six months ended June 30,2005 and 2004, respectively. Additionally, we declared a cash distribution of 

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$0.675 per Unit for the quarter ended June 30,2005. We will pay the distribution of $66.9 million on August 5, 2005, tounitholders of record on July 29, 2005.

On May 5, 2005, we sold in 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.

*General Partner Interest*

Asof June 30, 2005, and December 31, 2004, we had deficit balances of$43.9 million and $35.9 million, respectively, in our General Partner’s equityaccount. These negative balances do not represent assets to us and do notrepresent obligations of the General Partner to contribute cash or otherproperty to us. The General Partner’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 six months ended June 30, 2005, the General Partner was allocated$25.9 million (representing 29.27%) of our net income and received $33.8million 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 June 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 six monthsended June 30, 2005, resulted in deficits in the General Partner’s equityaccount at December 31, 2004, and June 30, 2005. Future cashdistributions that exceed net income will result in an increase in the deficitbalance in the General Partner’s equity account.

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.

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*Future Capital Needs and Commitments*

We estimate that capital expenditures, excludingacquisitions, for 2005 will be approximately $283.0 million (which includes$7.0 million of capitalized interest). We expect to spend approximately $209.8million for revenue generating projects and facility improvements. Capitalspending on revenue generating projects and facility improvements will includeapproximately $43.8 million for the expansion of our Downstream Segmentfacilities. We expect to spend $25.7 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 $41.0 million to sustainexisting operations, including life-cycle replacements for equipment at variousfacilities and pipeline and tank replacements among all of our businesssegments. We expect to spend approximately $25.2 million to improve operationalefficiencies and reduce costs among all of our business segments. 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. Wemay finance capital expenditures through internally generated funds, debt orthe issuance of additional equity.

Our debt repayment obligations consist of payments forprincipal and interest on (i) the TE Products $180.0 million 6.45% SeniorNotes due January 15, 2008, (ii) outstanding principal amounts underthe Revolving Credit Facility due in October 2009 ($278.0 millionoutstanding at June 30, 2005), (iii) our $500.0 million 7.625% SeniorNotes due February 15, 2012, (iv) our $200.0 million 6.125% SeniorNotes due February 1, 2013, and (v) the TE Products $210.0 million7.51% Senior Notes due January 15, 2028.

TE Products is contingently liable as guarantor forthe lesser of one-half or $75.0 million principal amount (plus interest) of theborrowings of Centennial. In January 2003, TE Products entered into apipeline capacity lease agreement with Centennial for a period of five yearsthat contains a minimum throughput requirement. For the year ended December 31,2004, TE Products exceeded the minimum throughput requirements on the leaseagreement.

During the six months ended June 30, 2005, TEProducts contributed $1.1 million to MB Storage. No amounts were contributed toCentennial during the six months ended June 30, 2005. During the sixmonths ended June 30, 2004, TE Products contributed $1.5 million toCentennial to cover operating needs and capital expenditures and $17.2 millionto MB Storage, of which $16.5 million was used to acquire storage assets in April 2004.During the remainder of 2005, TE Products may be required to contribute cash toCentennial to cover capital expenditures, acquisitions or other operating needsand to MB Storage to cover significant capital expenditures or additionalacquisitions.

*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 and leases covering assetsutilized in several areas of our operations.

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*ContractualObligations*

The following table summarizes our debt repaymentobligations and material contractual commitments as of June 30, 2005 (inmillions):

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

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(1)          Obligations of TE Products.

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

(3)          Includes accruals for costs incurred but not yet paid relatingto capital projects.

(4)          Excludes approximately $9.1 million of long-term deferredrevenue payments, which are being transferred to income over the term of therespective revenue contracts. The amount of commitment by year is our bestestimate of projected payments of these 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.

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 six months ended June 30,2005, crude oil purchases averaged approximately $552.5 million per month.

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### *Sources of Future Capital*

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

As of June 30, 2005, we had $278.6 million inavailable borrowing capacity under the Revolving Credit Facility, subject tocompliance with prescribed financial covenants. We expect that cash flows fromoperating activities will be adequate to fund cash distributions and capitaladditions necessary to sustain existing operations. However, futureexpansionary capital projects and acquisitions will require funding throughborrowings under our Revolving Credit Facility or proceeds from the sale ofadditional debt or equity offerings, or any combination thereof.

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 arecommendation to buy, sell or hold any indebtedness. Any rating can be revisedupward or downward or withdrawn at any time by a rating agency if it determinesthat the circumstances 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.

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. At June 30, 2005, we have anaccrued liability of $0.2 million for remediation costs at our Arcadia facility.Effective in March 2004, we executed an access agreement with an adjacentindustrial landowner who is located upgradient of the Arcadia facility. Thisagreement enables the landowner to proceed with remediation activities at ourArcadia facility for which it has accepted shared responsibility. We do notexpect that the completion of the remediation program proposed to the LDEQ willhave a future material adverse effect on our financial position, results ofoperations or cash flows.

On March 17, 2003, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois. As a result of the release,we have entered into an Agreed Order with the State of Illinois, which requiredus to conduct an environmental investigation. At this time, we have compliedwith the terms of the Agreed Order, and the results of the environmentalinvestigation indicated there were no soil or groundwater impacts from therelease. We are in the process of negotiating a final settlement with the Stateof Illinois, and we do not expect that compliance with the settlementwill have a future material adverse effect on our financial position, resultsof operations or cash flows.

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On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal. The released jet fuel was contained within a stormwater retention pond located on the terminal property. Six migratory waterfowlwere affected by the jet fuel and were subsequently euthanized by or at therequest of the United States Fish and Wildlife Service (“USFWS”). On October 1,2004, the USFWS served us with a Notice of Violation, alleging that we violated16 USC 703 of the Migratory Bird Treaty Act for the “take[ing] of migratorybirds by illegal methods.”  On February 7,2005, we entered into a Memorandum of Understanding (“MOU”) with the USFWS, andon June 23, 2005, we notified the USFWS that we had completed allrequirements under the MOU, thus terminating the agreement and settling allaspects of this matter. The terms of this settlement did not have a materialeffect 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 for alleged violations of theClean Water Act (“CWA”) arising out of this release. The maximum statutorypenalty calculated for this alleged violation of the CWA is $2.8 million. Weare in discussions with the DOJ regarding this matter and have responded to itsrequest for additional information. We do not expect a civil penalty, if any,to have a material adverse effect on our financial position, results ofoperations or cash flows.

At June 30, 2005, we have an accrued liability of$4.1 million related to various TCTM and TE Products sites requiringenvironmental remediation activities.  Wedo not expect that the completion of remediation programs associated with TCTMand TE Products activities will have a future material adverse effect on ourfinancial position, results of operations or cash flows.

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.

***RecentAccounting Pronouncements***

See discussion of new accounting pronouncements inNote 1. Organization and Basis of Presentation - New Accounting Pronouncementsin the accompanying consolidated financial statements.

***CorporateGovernance Guidelines***

Effective March 22, 2005, the General Partner’sLLC Agreement was amended to delete a provision requiring that members of ourGeneral Partner’s board of directors must retire at the first meeting of theboard of directors following attainment of the age of 70 years. The agreementwas amended to allow for the election of the new members of the board ofdirectors, one of whom is over the age of 70. As a result of the amendment,there is now no retirement age for the members of the General Partner’s boardof directors. Our Corporate Governance Guidelines, which were also amended toreflect this change, are available on our website at www.teppco.com.

**On March 22, 2005, the members of theboard of directors of the General Partner, Jim W. Mogg, Mark A. Borer, MichaelJ. Bradley, Milton Carroll, Derrill Cody, John P. DesBarres, William H. EasterIII and Paul F. Ferguson, Jr., each of whom had been elected to the boardof the General Partner by DEFS, resigned and new directors were elected. Thenewly elected directors are Ralph S. Cunningham, Lee W. Marshall, Sr.,Murray H. Hutchison and Michael B. Bracy. Barry R. Pearl will continue to servethe General Partner as chief executive**

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officer, president and a director. The newly electedboard is comprised of a majority of outside directors who are independent underthe criteria of the New York Stock Exchange and the U.S. Securities andExchange Commission.

***Retirementand Election of Officers***

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

Mr. Ohmart, age 37, has served as Controller ofour General Partner since May 2002. Mr. Ohmart joined our GeneralPartner in January 2001 and has held various positions within the Companyuntil he became Assistant Controller in May 2001. Prior to his employmentwith our General Partner, Mr. Ohmart spent 12 years in various positionsat ARCO Pipe Line Company, most recently serving as supervisor of generalaccounting and policy.

Mr. William Ordemann was elected Senior VicePresident of our General Partner effective July 25, 2005. Mr. Ordemannwill be responsible for leading commercial development activities for Jonah.Mr. Ordemann also serves as Senior Vice President of Enterprise ProductsGP, LLC (“Enterprise GP”), the general partner of Enterprise Products PartnersL.P. Prior to joining Enterprise GP, Mr. Ordemann served as vice presidentof Tejas Natural Gas Liquids, LLC from February 1998 to September 1999,and vice president of Shell Midstream Enterprises, LLC from January 1997to February 1998.

Mr. Stephen O. McNair was elected Vice Presidentof our General Partner effective July 25, 2005. Mr. McNair will haveleadership responsibility for our Natural Gas Services organization, including Jonah operations and ValVerde activities. Mr. McNair joined our General Partner in June 2005.He was previously Rockies Region vice president for DEFS. He joined DEFS asgeneral manager of Operations, West Permian Region in 2000. Prior to hisemployment with DEFS, Mr. McNair held various engineering, commercial andoperations management positions with Conoco Inc. and GPM Gas Corporation.

**Forward-Looking Statements**

The matters discussed in this Report include “forward-lookingstatements” within the meaning of various provisions of the Securities Act of1933 and the Securities Exchange Act of 1934. All statements, other thanstatements of historical facts, included in this document that addressactivities, events or developments that we expect or anticipate will or mayoccur in the future, including such things as estimated future capitalexpenditures (including the amount and nature thereof), business strategy andmeasures to implement strategy, competitive strengths, goals, expansion andgrowth of our business and operations, plans, references to future success,references to intentions as to future matters and other such matters areforward-looking statements. These statements are based on certain assumptionsand analyses made by us in light of our experience and our perception ofhistorical trends, current conditions and expected future developments as wellas other factors we believe are appropriate under the circumstances. However,whether actual results and developments will conform with our expectations andpredictions is subject to a number of risks and uncertainties, includinggeneral economic, market or business conditions, the opportunities (or lackthereof) that may be presented to and pursued by us, competitive actions byother pipeline companies, changes in laws or regulations and other factors,many of which are beyond our control. Consequently, all of the forward-lookingstatements made in this document are qualified by these cautionary statementsand we cannot assure you that actual results or developments that we anticipatewill be realized or, even if substantially realized, will have the expectedconsequences to or effect on us or our business or operations. For additionaldiscussion of such risks and uncertainties, see our Annual Report on Form 10-Kfor the year ended December 31, 2004, and other filings we have made withthe Securities and Exchange Commission.

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** **

**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 June 30,2005, we have $75.8 million of crude oil inventory for which we have enteredinto forward crude sales contracts to mitigate the risk of price volatility.

Occasionally, customers require pricing terms which 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 June 30, 2005, we had $278.0 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 June 30, 2005, andassuming market interest rates increase 100 basis points, the potential annualincrease in interest expense would be $2.8 million.

At June 30, 2005, TE Products had outstanding$180.0 million principal amount of 6.45% Senior Notes due 2008 and $210.0million principal amount of 7.51% Senior Notes due 2028 (collectively, the “TEProducts Senior Notes”). At June 30, 2005, the estimated fair value of theTE Products Senior Notes was approximately $412.6 million. At June 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. AtJune 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$570.4 million and $212.0 million, respectively.

We have utilized and expect to continue to utilizeinterest rate swap agreements to hedge a portion of our cash flow and fairvalue risks. Interest rate 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 toreduce our exposure to changes in the fair value of the fixed rate debt. Interestrate swap agreements involve the periodic exchange of payments without theexchange of the notional amount upon which the payments are based. The relatedamount payable to or receivable from counterparties is included as anadjustment to accrued 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

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principal and maturity of the TE Products Senior Notes.Under the swap agreement, TE Products pays a floating rate of interest based ona three-month U.S. Dollar LIBOR rate, plus a spread, and receives a fixed rateof interest of 7.51%. During the six months ended June 30, 2005, and 2004,we recognized reductions in interest expense of $3.3 million and $5.1 million,respectively, related to the difference between the fixed rate and the floatingrate of interest on the interest rate swap. During the quarter ended June 30,2005, we measured the hedge effectiveness of this interest rate swap and notedthat no gain or loss from ineffectiveness was required to be recognized. Thefair value of this interest rate swap was a gain of approximately $7.4 millionand $3.4 million at June 30, 2005, and December 31, 2004,respectively. Utilizing the balance of the 7.51% TE Products Senior Notesoutstanding at June 30, 2005 and including the effects of hedgingactivities, assuming market interest rates increase 100 basis points, thepotential annual increase in interest expense 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 $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.

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 combined notional amount of $500.0 million and matured in 2012to match the principal and maturity of the Senior Notes. Under the swapagreements, we paid a floating rate of interest based on a U.S. Dollar LIBORrate, plus a spread, and received a fixed rate of interest of 7.625%. Theseswap agreements were later terminated in 2002 resulting in gains of $44.9million. The gains realized from the swap terminations have been deferred asadjustments to the carrying value of the Senior Notes and are being amortizedusing the effective interest method as reductions to future interest expenseover the remaining term of the Senior Notes. At June 30, 2005, theunamortized balance of the deferred gains was $34.6 million. In the event ofearly extinguishment of the Senior Notes, any remaining unamortized gains wouldbe recognized in the consolidated statement of income at the time ofextinguishment.

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.

**Item 4. Controls and Procedures**

The principal executive officer and principalfinancial officer of our General Partner, after evaluating the effectiveness ofour disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of June 30, 2005, have concluded that, as of suchdate, our disclosure controls and procedures are adequate and effective toensure that material information relating to us and our consolidatedsubsidiaries would be made known to them by others within those entities.

*Changes in Internal Control overFinancial Reporting*

Through February 23, 2005, our General Partner wasan indirect subsidiary of Duke Energy, and Duke Energy’s Audit ServicesDepartment provided our internal audit functions. On February 24, 2005,the General Partner was acquired by DFI, an affiliate of EPCO. EPCO, using itsown personnel and third party providers, will provide us with internal auditservices. EPCO expects the transition of internal audit functions to becompleted in

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the third quarter of 2005. This change is not expectedto adversely affect our internal audit process or our internal control overfinancial reporting.

There hasbeen no significant change in our internal control over financial reportingduring the second quarter of 2005 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting. As a result, no corrective actions were required or undertaken.

**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 11. Commitments andContingencies in the accompanying consolidated financial statements.

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

 

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|        |   | L.P. and Jonah Gas Gathering Company, as subsidiary  guarantors, and First Union National Bank, NA, as trustee, dated as of  February 20, 2002 (Filed as Exhibit 99.3 to Form 8-K of  TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as of  February 20, 2002 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6    |   | Second Supplemental Indenture, dated as of  June 27, 2002, among TEPPCO Partners, L.P., as issuer, TE Products  Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream  Companies, L.P., and Jonah Gas Gathering Company, as Initial Subsidiary  Guarantors, and Val Verde Gas Gathering Company, L.P., as New Subsidiary  Guarantor, and Wachovia Bank, National Association, formerly known as First  Union National Bank, as trustee (Filed as Exhibit 4.6 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended June 30, 2002 and incorporated herein by reference). |
| 4.7    |   | Third Supplemental Indenture among TEPPCO Partners,  L.P. as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,  L.P., TEPPCO Midstream Companies, L.P., Jonah Gas Gathering Company and Val  Verde Gas Gathering Company, L.P. as Subsidiary Guarantors, and Wachovia  Bank, National Association, as trustee, dated as of January 30, 2003  (Filed as Exhibit 4.7 to Form 10-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the year ended December 31,  2002 and incorporated herein by reference).                                                                                         |
| 10.1+* |   | Amendments to the TEPPCO Retirement Cash Balance  Plan and the TEPPCO Supplemental Benefit Plan dated as of May 27, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2+  |   | Agreement and Release between Charles H. Leonard and  Texas Eastern Products Pipeline Company, LLC as of July 11, 2005 (Filed  as Exhibit 10.2 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the quarter ended June 30,  2005 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                             |
| 10.3+* |   | Form of Supplemental Agreement No. 2 to  Employment Agreements between EPCO, Inc. and Barry R. Pearl, J. Michael Cockrell,  John N. Goodpasture, Stephen W. Russell, C. Bruce Shaffer, Barbara A.  Carroll, Thomas R. Harper, Charles H. Leonard, James C. Ruth and Leonard W.  Mallett dated as of May 24, 2005.                                                                                                                                                                                                                                                                                                                |
| 10.4+* |   | Texas Eastern Products Pipeline Company, LLC 2005  Phantom Unit Plan, effective January 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5+* |   | Texas Eastern Products Pipeline Company, LLC 2000  Long Term Incentive Plan Award Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6+* |   | Texas Eastern Products Pipeline Company, LLC 2005  Phantom Unit Plan Award Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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  June 30, 2005 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.1*  |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2*  |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1** |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2** |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

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*                    Filedherewith.

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

+                    Amanagement contract or compensation plan or arrangement.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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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