**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-Q**

 
| **ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                        |
| **For the quarterly period ended March 31, 2005**                                                                                                 |
|                                                                                                                                              |
| **OR**                                                                                                                                            |
|                                                                                                                                              |
| **o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                                              |
| **Commission File No. 1-13603**                                                                                                                   |

 

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**TEProducts Pipeline Company, Limited Partnership**

(Exact name of Registrant as specified in its charter)

 
| **Delaware**                                                         |       | **76-0329620**                           |
|----------------------------------------------------------------------|------------|------------------------------------------|
| (State of Incorporation  or Organization)                            | ** ** | (I.R.S. Employer  Identification Number) |
|                                                                 | ** ** |                                     |
| **2929 Allen Parkway****P.O. Box 2521****Houston, Texas 77252-2521** |
| (Address of principal executive offices,  including zip code)   |
|                                                                 |
| **(713) 759-3636**                                                   |
| (Registrant’s telephone number, including  area code)           |

 

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

Yes   **ý**  No  **o**

 

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

Yes   **o**  No  **ý**

 

 

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**TABLE OF CONTENTS**

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

 

i

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**PART I.  FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                                                                                          | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                          | ** ** | **(Unaudited)**     | ** ** | ** **             | ** ** |
| ** **                                                                                                          | ** ** | ** **          | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                          | ** ** | ** **          | ** ** | ** **             | ** ** |
| ** **                                                                                                          | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current assets:                                                                                                     |       |                |       |                   |       |
| Cash and cash equivalents                                                                                           |       | $                   | 1          |                   | $          | — |   |
| Accounts receivable, trade (net of  allowance for doubtful accounts of $56 and $56)                                 |       | 17,980              |       | 21,090                 |       |
| Accounts receivable, related parties                                                                                |       | 1,893               |       | 3,455                  |       |
| Inventories                                                                                                         |       | 10,539              |       | 10,093                 |       |
| Other                                                                                                               |       | 12,839              |       | 12,143                 |       |
| Total current assets                                                                                                |       | 43,252              |       | 46,781                 |       |
| Property, plant and equipment, at cost (net  of accumulated depreciation and amortization of $319,129 and $311,197) |       | 726,540             |       | 722,334                |       |
| Equity investments                                                                                                  |       | 170,526             |       | 169,873                |       |
| Other assets                                                                                                        |       | 13,272              |       | 16,156                 |       |
| Total assets                                                                                                        |       | $                   | 953,590    |                   | $          | 955,144 |   |
|                                                                                                                |       |                |       |                   |       |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                                                                         |       |                |       |                   |       |
|                                                                                                                |       |                |       |                   |       |
| Current liabilities:                                                                                                |       |                |       |                   |       |
| Accounts payable and accrued liabilities                                                                            |       | $                   | 8,740      |                   | $          | 10,211 |   |
| Accounts payable, related parties                                                                                   |       | 70,179              |       | 66,451                 |       |
| Accrued interest                                                                                                    |       | 7,354               |       | 17,063                 |       |
| Other accrued taxes                                                                                                 |       | 5,453               |       | 5,605                  |       |
| Other                                                                                                               |       | 7,129               |       | 9,339                  |       |
| Total current liabilities                                                                                           |       | 98,855              |       | 108,669                |       |
| Senior Notes                                                                                                        |       | 390,432             |       | 393,317                |       |
| Note Payable, Parent Partnership                                                                                    |       | 320,536             |       | 301,686                |       |
| Other liabilities and deferred credits                                                                              |       | 9,849               |       | 9,980                  |       |
| Commitments and contingencies                                                                                       |       |                |       |                   |       |
| Partners’ capital:                                                                                             |       |                |       |                   |       |
| General partner’s interest                                                                                     |       | 2                   |       | 2                      |       |
| Limited partner’s interest                                                                                     |       | 133,916             |       | 141,490                |       |
| Total partners’ capital                                                                                        |       | 133,918             |       | 141,492                |       |
| Total liabilities and partners’ capital                                                                        |       | $                   | 953,590    |                   | $          | 955,144 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

**(in thousands)**

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2005**                          | ** ** | **2004** |   |
| Operating revenues:                    |       |                              |       |   |   |
| Transportation – Refined products |       | $                                 | 34,965     |   | $ | 30,971 |   |
| Transportation – LPGs             |       | 32,231                            |       | 28,780 |   |
| Other                                  |       | 9,820                             |       | 13,911 |   |
| Total operating revenues               |       | 77,016                            |       | 73,662 |   |
|                                   |       |                              |       |   |   |
| Costs and expenses:                    |       |                              |       |   |   |
| Operating, general and administrative  |       | 26,505                            |       | 29,048 |   |
| Operating fuel and power               |       | 7,629                             |       | 8,049 |   |
| Depreciation and amortization          |       | 9,298                             |       | 8,638 |   |
| Taxes – other than income taxes   |       | 2,908                             |       | 2,843 |   |
| Gains on sales of assets               |       | (92                               | )          | — |   |
| Total costs and expenses               |       | 46,248                            |       | 48,578 |   |
|                                   |       |                              |       |   |   |
| Operating income                       |       | 30,768                            |       | 25,084 |   |
|                                   |       |                              |       |   |   |
| Interest expense – net            |       | (7,959                            | )          | (6,909 | ) |
| Equity losses                          |       | (842                              | )          | (1,238 | ) |
| Other income – net                |       | 149                               |       | 272 |   |
|                                   |       |                              |       |   |   |
| Net income                             |       | $                                 | 22,116     |   | $ | 17,209 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                          |       |                              |       |   |   |
| Net income                                                                     |       | $                                 | 22,116     |   | $ | 17,209 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                              |       |   |   |
| Depreciation and amortization                                                  |       | 9,298                             |       | 8,638 |   |
| Losses in equity investments, net of  distributions                            |       | 842                               |       | 1,238 |   |
| Non-cash portion of interest expense                                           |       | 68                                |       | 7 |   |
| Gains on sales of assets                                                       |       | (92                               | )          | — |   |
| Decrease in accounts receivable                                                |       | 3,110                             |       | 6,793 |   |
| (Increase) decrease in inventories                                             |       | (446                              | )          | 1,015 |   |
| (Increase) decrease in other current assets                                    |       | (696                              | )          | 3,700 |   |
| Decrease in accounts payable and accrued  expenses                             |       | (9,933                            | )          | (13,332 | ) |
| Other                                                                          |       | 715                               |       | (8,200 | ) |
| Net cash provided by operating activities                                      |       | 24,982                            |       | 17,068 |   |
|                                                                           |       |                              |       |   |   |
| Cash flows from investing activities:                                          |       |                              |       |   |   |
| Investment in Centennial Pipeline LLC                                          |       | —                            |       | (1,000 | ) |
| Capital expenditures                                                           |       | (14,140                           | )          | (7,820 | ) |
| Net cash used in investing activities                                          |       | (14,140                           | )          | (8,820 | ) |
|                                                                           |       |                              |       |   |   |
| Cash flows from financing activities:                                          |       |                              |       |   |   |
| Proceeds from note payable, Parent  Partnership                                |       | 38,788                            |       | 35,474 |   |
| Repayments of notes payable, Parent  Partnership                               |       | (19,938                           | )          | (14,973 | ) |
| Distributions paid                                                             |       | (29,691                           | )          | (28,894 | ) |
| Net cash used in financing activities                                          |       | (10,841                           | )          | (8,393 | ) |
|                                                                           |       |                              |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                          |       | 1                                 |       | (145 | ) |
|                                                                           |       |                              |       |   |   |
| Cash and cash equivalents at beginning of  period                              |       | —                            |       | 188 |   |
| Cash and cash equivalents at end of period                                     |       | $                                 | 1          |   | $ | 43 |   |
|                                                                           |       |                              |       |   |   |
| **Supplemental disclosure of cash flows:**                                     |       |                              |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                           |       | $                                 | 15,330     |   | $ | 12,610 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

3

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE1.  ORGANIZATION AND BASIS OFPRESENTATION**

 

TE Products PipelineCompany, Limited Partnership (the “Partnership”), a Delaware limitedpartnership, was formed in March 1990. TEPPCO Partners, L.P. (the “Parent Partnership”) owns a 99.999% interestin us as the sole limited partner. TEPPCO GP, Inc. (“TEPPCO GP” or “General Partner”), a wholly ownedsubsidiary of the Parent Partnership, holds a 0.001% general partner interestin us.  Texas Eastern Products PipelineCompany, LLC (the “Company”), a Delaware limited liability company, serves asthe general partner of our Parent Partnership. Through February 23, 2005, the Company was an indirect wholly ownedsubsidiary of Duke Energy Field Services, LLC (“DEFS”), a joint venture betweenDuke Energy Corporation (“Duke Energy”) and ConocoPhillips.  Through February 23, 2005, Duke Energyheld an interest of approximately 70% in DEFS, and ConocoPhillips held theremaining interest of approximately 30%. On February 24, 2005, the Company was acquired by DFI GP HoldingsL.P. (formerly Enterprise GP Holdings L.P.) (“DFI”), an affiliate of EPCO, Inc.(“EPCO”), a privately held company controlled by Dan L. Duncan, forapproximately $1.1 billion.  As a resultof the transaction, DFI owns and controls the 2% general partner interest inour Parent Partnership and has the right to receive the incentive distributionrights associated with the general partner interest.

 

 TEPPCO GP, as our general partner, performsall of the management and operating functions required for us in accordancewith the Agreement of Limited Partnership of TE Products Pipeline Company,Limited Partnership (the “Partnership Agreement”).  We reimburse our General Partner and theCompany for all reasonable direct and indirect expenses that they incur inmanaging us.

 

As used in this Report, “we,”“us,”  and “our” means TE ProductsPipeline Company, Limited Partnership.

 

The accompanyingunaudited consolidated financial statements reflect all adjustments that are,in the opinion of our management, of a normal and recurring nature andnecessary for a fair statement of our financial position as of March 31,2005, and the results of our operations and cash flows for the periodspresented.  The results of operations forthe three months ended March 31, 2005, are not necessarily indicative ofresults of our operations for the full year 2005.  You should read these interim financialstatements in conjunction with our consolidated financial statements and notesthereto presented in the TE Products Pipeline Company, Limited PartnershipAnnual Report on Form 10-K for the year ended December 31, 2004.  We have reclassified certain amounts fromprior periods to conform with the current presentation.

 

We operate and report inone business segment: transportation and storage of refined products, liquefiedpetroleum gases (“LPGs”) and petrochemicals. Our interstate transportation operations, including rates charged tocustomers, are subject to regulations prescribed by the Federal EnergyRegulatory Commission (“FERC”).  We referto refined products, LPGs and petrochemicals in this Report, collectively, as “petroleumproducts” or “products.”

 

At March 31, 2005,and December 31, 2004, we had working capital deficits of $55.6 millionand $61.9 million, respectively.  Cashgenerated from operations and from our Parent Partnership’s credit facilitiesand debt and equity offerings are our primary sources of liquidity.  Working capital deficits can occur primarilydue to the timing of operating cash receipts from customers, payment of cashdistributions and the payment of normal operating expenses and capitalexpenditures.  Our Parent Partnership hashistorically made capital contributions, loans or otherwise provided liquidityto us as needed, but the Parent Partnership has no contractual obligation to doso.  At March 31, 2005, our ParentPartnership had $81.5 million in available borrowing capacity under itsrevolving credit facility and agreed to cover any working capital needs, ifrequired.

 

4

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**NewAccounting Pronouncements**

 

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

 

**In November 2004,the Emerging Issues Task Force (“EITF”) reached consensus in EITF 03-13, *Applying the Conditions in Paragraph 42 of FASB Statement No. 144,Accounting for Impairment orDisposal of Long-Lived Assets, in Determining Whether to ReportDiscontinued Operations*, to clarify whether a component of an enterprisethat is either disposed of or classified as held for sale qualifies for incomestatement presentation as discontinued operations.  The EITF ratified the consensus on November 30,2004.  The consensus is to be appliedprospectively with regard to a component of an enterprise that is eitherdisposed of or classified as held for sale in reporting periods beginning afterDecember 15, 2004.  The consensusmay be applied retrospectively for previously reported operating resultsrelated to disposal transactions initiated within an enterprise’s reportingperiod that included the date that this consensus was ratified. The adoption ofEITF 03-13 did not have an effect on our financial position, results ofoperations or cash flows.**

 

**In March 2005,the FASB issued FASB Interpretation No. 47, *Accounting for Conditional Asset Retirement Obligations, aninterpretation of FASB Statement No. 143* (“FIN 47”).  FIN 47 clarifies that the term, conditionalasset retirement obligation as used in SFAS No. 143, *Accountingfor Asset Retirement Obligations*, refers to a legal obligation toperform an asset retirement activity in which the timing and/or method ofsettlement are conditional upon a future event that may or may not be withinthe control of the entity.  Even thoughuncertainty about the timing and/or method of settlement exists and may beconditional upon a future event, the obligation to perform the asset retirementactivity is unconditional.  Accordingly,an entity is required to recognize a liability for the fair value of aconditional asset retirement obligation if the fair value of the liability canbe reasonably estimated.  Uncertaintyabout the timing and/or method of settlement of a conditional asset retirementobligation should be factored into the measurement of the liability whensufficient information exists.  The fairvalue of a liability for the conditional asset retirement obligation should berecognized when incurred generally upon acquisition, construction, ordevelopment or through the normal operation of the asset.  SFAS 143 acknowledges that in some cases,sufficient information may not be available to reasonably estimate the fairvalue of an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient informationto reasonably estimate the fair value of an asset retirement obligation.  FIN 47 is effective no later than the end ofreporting periods ending after December 15, 2005. Retrospectiveapplication for interim financial information is permitted but is notrequired.  Early adoption of FIN 47 isencouraged.  We are currently evaluatingwhat impact FIN 47 will have on our financial statements, but at this time, wedo not believe that the adoption of FIN 47 will have a material effect on ourfinancial position, results of operations or cash flows.**

 

5

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**NOTE2.  INTANGIBLE ASSETS**

 

**We account for ourintangible assets under SFAS No. 142, *Goodwill and OtherIntangible Assets*,**which wasissued by the FASB in July 2001. SFAS 142 prohibits amortization of goodwill and intangible assets withindefinite useful lives, but instead requires testing for impairment at leastannually.  SFAS 142 requires thatintangible assets with definite useful lives be amortized over their respectiveestimated useful lives.  If an intangibleasset has a finite useful life, but the precise length of that life is notknown, that intangible asset shall be amortized over the best estimate of itsuseful life.  At a minimum, we willassess the useful lives and residual values of all intangible assets on anannual basis to determine if adjustments are required.**

 

The following tablereflects the components of intangible assets being amortized, included in otherassets on the consolidated balance sheets at March 31, 2005, and December 31,2004 (in thousands):

 
| ** **                          | ** ** | **March 31, 2005**         | ** ** | **December 31, 2004**         | ** ** |
|-------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                          | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible  assets being amortized: |       |                       |       |                          |       |   |   |   |   |
| Transportation agreements           |       | $                          | 1,328      |                          | $          | (277 | ) | $ | 1,328 |   | $ | (260 | ) |
|                                     |            |                            |            |                               |            |  |  |  |  |  |  |  |  |

 

**At March 31,2005, we had $33.4 million of excess investment in our equity investment inCentennial Pipeline LLC, which was created upon formation of the company.  The excess investment is included in ourequity investments account at March 31, 2005.  This excess investment is accounted for as anintangible asset with an indefinite life. We assess the intangible asset for impairment on an annual basis.**

 

**Amortizationexpense on intangible assets was $16,603 for each of the three month periodsended March 31, 2005 and 2004.**

 

Estimated amortizationexpense on intangible assets will be $0.1 million for each of the years ending December 31,2005 through 2009.

 

**NOTE3.  INTEREST RATE SWAP**

 

In October 2001, weentered into an interest rate swap agreement to hedge our exposure to changesin the fair value of our fixed rate 7.51% Senior Notes due 2028. We designatedthis swap agreement as a fair value hedge. The swap agreement has a notional amount of $210.0 million and maturesin January 2028 to match the principal and maturity of the 7.51% SeniorNotes.  Under the swap agreement, we paya floating rate of interest based on a three-month U.S. Dollar LIBOR rate, plusa spread, and receive a fixed rate of interest of 7.51%. During the threemonths ended March 31, 2005, and 2004, we recognized reductions ininterest expense of $1.8 million and $2.6 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap.  During the quarterended March 31, 2005, we measured the hedge effectiveness of this interestrate swap and noted that no gain or loss from ineffectiveness was required tobe recognized.  The fair value of thisinterest rate swap was a gain of approximately $0.5 million and $3.4 million atMarch 31, 2005, and December 31, 2004, respectively.

 

6

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**NOTE4.  INVENTORIES**

 

Inventories are valued atthe lower of cost (based on weighted average cost method) or market.  The costs of inventories did not exceedmarket values at March 31, 2005, and December 31, 2004. The majorcomponents of inventories were as follows (in thousands):

 
| ** **             | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Refined products       |       | $                        | 5,323      |                        | $          | 5,665 |   |
| LPGs                   |       | 706                      |       | —                      |       |
| Materials and supplies |       | 4,510                    |       | 4,428                       |       |
| Total                  |       | $                        | 10,539     |                        | $          | 10,093 |   |

 

**NOTE5.  EQUITY INVESTMENTS**

 

We own a 50% ownershipinterest in Centennial Pipeline Company LLC (“Centennial”), and MarathonAshland Petroleum LLC (“Marathon”) owns the remaining 50% interest. Centennialowns an interstate refined petroleum products pipeline extending from the upperTexas Gulf Coast to central Illinois. During the three months ended March 31, 2005, we have not investedany additional funds in Centennial. During the three months ended March 31, 2004, we invested anadditional $1.0 million in Centennial, which is included in the equityinvestment balance at March 31, 2005. We have not received any distributions from Centennial since itsformation.

 

On January 1, 2003,we and Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”) formed Mont BelvieuStorage Partners, L.P. (“MB Storage”). We and Louis Dreyfus each have a 50% ownership interest in MBStorage.  The purpose of MB Storage is toexpand services to the upper Texas Gulf Coast energy marketplace by increasingpipeline throughput and the mix of products handled through the existing systemand establishing new receipt and delivery connections.  MB Storage is a service-oriented, fee-basedventure with no commodity trading activity. We operate the facilities for MB Storage.

 

For the year ended December 31,2005, we will receive the first $1.7 million per quarter (or $6.78 million onan annual basis) of MB Storage’s income before depreciation expense, as definedin the operating agreement.  For the yearended December 31, 2004, we received the first $1.8 million per quarter(or $7.15 million on an annual basis) of MB Storage’s income beforedepreciation expense.  Our share of MBStorage’s earnings is adjusted annually by the partners of MB Storage.  Any amount of MB Storage’s annual incomebefore depreciation expense in excess of $6.78 million for 2005 and $7.15million for 2004 is allocated evenly between Louis Dreyfus and us.  Depreciation expense on assets each partyoriginally contributed to MB Storage is allocated between us and Louis Dreyfusbased on the net book value of the assets contributed.  Depreciation expense on assets constructed oracquired by MB Storage subsequent to formation is allocated evenly between usand Louis Dreyfus. For the three months ended March 31, 2005 and 2004, oursharing ratio in the earnings of MB Storage was approximately 58.1% and 66.4%,respectively.  During the three monthsended March 31, 2005 and 2004, we received no distributions from MBStorage and made no contributions to MB Storage.

 

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

 

7

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| ** **        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------|------------|----------------------------------------|------------|
| ** **        | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Revenues          |       | $                                      | 18,797     |   | $ | 12,151 |   |
| Net income (loss) |       | 548                                    |       | (996 | ) |
|                   |            |                                        |            |  |  |  |  |

 

Summarized combinedbalance sheet data for Centennial and MB Storage as of March 31, 2005, andDecember 31, 2004, is presented below (in thousands):

 
| ** **             | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Current assets         |       | $                        | 48,376     |                        | $          | 39,228 |   |
| Noncurrent assets      |       | 374,660                  |       | 377,924                     |       |
| Current liabilities    |       | 39,799                   |       | 36,015                      |       |
| Long-term debt         |       | 140,000                  |       | 140,000                     |       |
| Noncurrent liabilities |       | 21,935                   |       | 20,383                      |       |
| Partners’ capital |       | 221,302                  |       | 220,754                     |       |
|                        |            |                          |            |                             |            |  |  |

 

**NOTE6.  DEBT**

 

**SeniorNotes**

 

On January 27, 1998,we completed the issuance of $180.0 million principal amount of 6.45% SeniorNotes due 2008, and $210.0 million principal amount of 7.51% Senior Notes due2028 (collectively the “Senior Notes”). The 6.45% Senior Notes were issued at a discount of $0.3 million and arebeing accreted to their face value over the term of the notes.  The 6.45% Senior Notes due 2008 are notsubject to redemption prior to January 15, 2008.  The 7.51% Senior Notes due 2028, issued atpar, may be redeemed at any time after January 15, 2008, at our option inwhole or in part, at a premium.

 

The Senior Notes do nothave sinking fund requirements.  Intereston the Senior Notes is payable semiannually in arrears on January 15 and July 15of each year.  The Senior Notes areunsecured obligations and rank on a parity with all of our other unsecured andunsubordinated indebtedness.  Theindenture governing the Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit our ability to incur additionalindebtedness.  As of March 31, 2005,we were in compliance with the covenants of the Senior Notes.

 

We have entered into aninterest rate swap agreement to hedge our exposure to changes in the fair valueon a portion of the Senior Notes discussed above.  At March 31, 2005 and December 31,2004, the Senior Notes include the fair value of our interest rate swap of $0.5million and $3.4 million, respectively (see Note 3. Interest Rate Swap).

 

The following tablesummarizes the estimated fair values of the Senior Notes as of March 31,2005, and December 31, 2004 (in millions):

 
| ** **                                | ** ** | ** **      | ** ** | **Fair Value**           | ** ** |
|-------------------------------------------|------------|-----------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Face  Value** | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| ** **                                | ** ** | ** **      | ** ** | ** **               | ** ** | ** ** | ** ** |
| 6.45% Senior Notes, due January 2008 |       | $               | 180.0      |                     | $          | 186.2 |   | $ | 187.1 |   |
| 7.51% Senior Notes, due January 2028 |       | 210.0           |       | 223.2                    |       | 225.6 |   |
|                                           |            |                 |            |                          |            |  |  |  |  |  |

 

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**OtherLong Term Debt and Credit Facilities**

 

We currently utilize debtfinancing available from our Parent Partnership through intercompany notes. Theterms of the intercompany notes generally match the principal and interestpayment dates under the Parent Partnership’s credit agreements.  The interest rates charged by the ParentPartnership include the stated interest rate of the Parent Partnership, plus apremium to cover debt issuance costs. The interest rate is also decreased or increased to cover gains andlosses, respectively, on any interest rate swaps that the Parent Partnershipmay have in place on its respective credit agreements.  These credit facilities of the ParentPartnership are described below.

 

On February 20,2002, our Parent Partnership issued $500.0 million principal amount of 7.625%Senior Notes due 2012.  The 7.625% SeniorNotes were issued at a discount of $2.2 million and are being accreted to theirface value over the term of the notes. The Senior Notes may be redeemed at any time at our Parent Partnership’soption with the payment of accrued interest and a make-whole premium determinedby discounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing these 7.625% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale and leaseback transactions.  However, the indenture does not limit ourParent Partnership’s ability to incur additional indebtedness.

 

On January 30, 2003,our Parent Partnership issued $200.0 million principal amount of 6.125% SeniorNotes due 2013.  The 6.125% Senior Noteswere issued at a discount of $1.4 million and are being accreted to their facevalue over the term of the notes.  TheSenior Notes may be redeemed at any time at our Parent Partnership’s optionwith the payment of accrued interest and a make-whole premium determined bydiscounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing the 6.125% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale and leaseback transactions.  However, the indenture does not limit theParent Partnership’s ability to incur additional indebtedness.

 

On June 27, 2003,our Parent Partnership entered into a $550.0 million revolving credit facilitywith a three year term, including the issuance of letters of credit of up to$20.0 million (“Revolving Credit Facility”). The interest rate is based, at our Parent Partnership’s option, oneither the lender’s base rate plus a spread, or LIBOR plus a spread in effectat the time of the borrowings.  Thecredit agreement for the Revolving Credit Facility contains certain restrictivefinancial covenant ratios.  On October 21,2004, our Parent Partnership amended the Revolving Credit Facility to (i) increasethe facility size to $600.0 million, (ii) extend the term to October 21,2009, (iii) remove certain restrictive covenants, (iv) increase theavailable amount for the issuance of letters of credit up to $100.0 million and(v) decrease the LIBOR rate spread charged at the time of eachborrowing.  On February 23, 2005,the Parent Partnership amended its Revolving Credit Facility to remove therequirement that DEFS must at all times own, directly or indirectly, 100% ofthe Company, to allow for its acquisition by DFI (see Note 1. Organization andBasis of Presentation).  On March 31,2005, $432.0 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 3.4%.

 

As of March 31,2005, and December 31, 2004, we had intercompany notes payable to ourParent Partnership of $320.5 million and $301.7 million, respectively, whichrepresented borrowings under the Parent Partnership’s Revolving CreditFacility, 7.625% Senior Notes and 6.125% Senior Notes. The weighted averageinterest rate on the note payable to the Parent Partnership at March 31,2005, was 4.5%.  At March 31, 2005,accrued interest includes $1.7 million due to our Parent Partnership.  For the three months ended March 31,2005 and 2004, interest costs incurred on the note payable to our ParentPartnership totaled $3.4 million and $2.9 million, respectively.

 

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**NOTE7.  QUARTERLY DISTRIBUTONS OF AVAILABLECASH**

 

We make quarterly cashdistributions of all of our Available Cash, generally defined as consolidatedcash receipts less consolidated cash disbursements and cash reservesestablished by the General Partner in its sole discretion.  We pay distributions of 99.999% to the ParentPartnership and 0.001% to the General Partner.

 

During the three monthsended March 31, 2005 and 2004, we paid cash distributions to our ParentPartnership totaling $29.7 million and $28.9 million, respectively.  On May 6, 2005, we will pay a cashdistribution to our Parent Partnership of $29.7 million for the quarter ended March 31,2005.

 

**NOTE8.  EMPLOYEE BENEFIT PLANS**

 

**Retirement Plans**

 

The Parent Partnershiphas adopted the TEPPCO Retirement Cash Balance Plan (“TEPPCO RCBP”), which is anon-contributory, trustee-administered pension plan.  In addition, certain executive officersparticipate in the TEPPCO Supplemental Benefit Plan (“TEPPCO SBP”), which is anon-contributory, nonqualified, defined benefit retirement plan.  The TEPPCO SBP was established to restorebenefit reductions caused by the maximum benefit limitations that apply toqualified plans.  The benefit formula forall eligible employees is a cash balance formula.  Under a cash balance formula, a planparticipant accumulates a retirement benefit based upon pay credits and currentinterest credits.  The pay credits arebased on a participant’s salary, age and service.  The Parent Partnership uses a December 31measurement date for these plans.

 

The components of netpension benefits costs allocated to us for the TEPPCO RCBP and the TEPPCO SBPfor the three months ended March 31, 2005 and 2004, were as follows (inthousands):

 
| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Service cost  benefit earned during the period | ** ** | $                                      | 656        | ** ** | $ | 596 | ** ** |
| Interest cost on projected benefit  obligation |       | 152                                    |       | 123 |   |
| Expected return on plan assets                 |       | (209                                   | )          | (155 | ) |
| Amortization of prior service cost             |       | 2                                      |       | 1 |   |
| Recognized net actuarial loss                  |       | 7                                      |       | 10 |   |
| Net pension benefits costs                     |       | $                                      | 608        |   | $ | 575 |   |

 

**Other Postretirement Benefits**

 

Effective January 1,2001, the Parent Partnership provides certain health care and life insurancebenefits for retired employees on a contributory and non-contributory basis (“TEPPCOOPB”).  Employees become eligible forthese benefits if they meet certain age and service requirements at retirement,as defined in the plans.  The ParentPartnership provides a fixed dollar contribution, which does not increase fromyear to year, towards retired employee medical costs.  The retiree pays all health care costincreases due to medical inflation. The Parent Partnership uses a December 31measurement date for this plan.

 

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The components of netpostretirement benefits cost allocated to us for the TEPPCO OPB for the threemonths ended March 31, 2005 and 2004, were as follows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Service cost benefit earned during the period                   |       | $                                      | 30         |   | $ | 26 |   |
| Interest cost on accumulated postretirement  benefit obligation |       | 35                                     |       | 32 |   |
| Amortization of prior service cost                              |       | 28                                     |       | 28 |   |
| Recognized net actuarial loss                                   |       | 3                                      |       | — |   |
| Net postretirement benefits costs                               |       | $                                      | 96         |   | $ | 86 |   |

 

**Estimated Future Benefit Contributions**

 

The Parent Partnershipexpects to contribute approximately $3.5 million to its retirement plans andother postretirement benefit plans in 2005. We expect to be allocated a share of these contributions.

 

**NOTE9.  COMMITMENTS AND CONTINGENCIES**

 

In the fall of 1999 andon December 1, 2000, the Company and the Parent Partnership were named asdefendants in two separate lawsuits in Jackson County Circuit Court, JacksonCounty, Indiana, styled *Ryan E. McCleery andMarcia S. McCleery, et al. v. Texas Eastern Corporation, et al.*(includingthe Company and Parent Partnership) and*Gilbert Richards and JeanRichards v. Texas Eastern Corporation, et al.*(including the Companyand Parent Partnership).* *In both cases, the plaintiffscontend, among other things, that we and other defendants stored and disposedof toxic and hazardous substances and hazardous wastes in a manner that causedthe materials to be released into the air, soil and water.  They further contend that the release causeddamages to the plaintiffs.  In theircomplaints, the plaintiffs allege strict liability for both personal injury andproperty damage together with gross negligence, continuing nuisance, trespass,criminal mischief and loss of consortium. The plaintiffs are seeking compensatory,punitive and treble damages.  On January 27,2005, we entered into Release and Settlement Agreements with the McCleeryplaintiffs and the Richards plaintiffs dismissing all of these plaintiffs’claims.  The settlement terms included a$2.0 million payment to the plaintiffs, which did not have a material adverseeffect on our financial position, results of operations or cash flows.

 

Although we did notsettle with all plaintiffs and we therefore remain named parties in the *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al*. action, a co-defendant has agreed to indemnifyus for all remaining claims asserted against us.  Consequently, we do not believe that theoutcome of these remaining claims will have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

On December 21,2001, we were named as a defendant in a lawsuit in the 10th Judicial District,Natchitoches Parish, Louisiana, styled *Rebecca L. Grisham et al.v.  TE Products Pipeline Company, LimitedPartnership*.  In this case,the plaintiffs contend that our pipeline, which crosses the plaintiffs’property, leaked toxic products onto their property and, consequently causeddamages to them.  We have filed an answerto the plaintiffs’ petition denying the allegations, and we are defendingourselves vigorously against the lawsuit. The plaintiffs have not stipulated the amount of damages they areseeking in the suit; however, this case is covered by insurance.  We do not believe that the outcome of thislawsuit will have a material adverse effect on our financial position, resultsof operations or cash flows.

 

In May 2003, theCompany was named as a defendant in a lawsuit styled *John R.James, et al. v. J Graves Insulation Company, et al.* as filed in thefirst Judicial District Court, Caddo Parish, Louisiana.  There are numerous

 

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plaintiffsidentified in the action that are alleged to have suffered damages as theresult of alleged exposure to asbestos-containing products and materials.  According to the petition and as a result ofa preliminary investigation, the Company believes that the only claim assertedagainst it results from one individual for the period from July 1971through June 1972, who is alleged to have worked on a facility owned bythe Company’s predecessor.  This periodrepresents a small portion of the total alleged exposure period from January 1964through December 2001 for this individual. The individual’s claims involve numerous employers and alleged jobsites.  The Company has been unable toconfirm involvement by the Company or its predecessors with the allegedlocation, and it is uncertain at this time whether this case is covered byinsurance. Discovery is planned, and the Company intends to defend itselfvigorously against this lawsuit.  Theplaintiffs have not stipulated the amount of damages that they are seeking inthis suit.  We are obligated to reimbursethe Company for any costs it incurs related to this lawsuit.  We cannot estimate the loss, if any,associated with this pending lawsuit.  Wedo not believe that the outcome of this lawsuit will have a material adverseeffect on our financial position, results of operations or cash flows.

 

On April 2, 2003, Centennialwas served with a petition in a matter styled *Adams, etal. 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.  Basedupon current information, Centennial appears to be a *de minimis*contributor, having used the disposal site during the two month time period of December 2001to January 2002.  Marathon has beenhandling this matter for Centennial under its operating agreement withCentennial.  We have a 50% ownershipinterest in Centennial.  On November 30,2004, the court approved a class settlement, which included an $80,000 paymentby Centennial.  The time period forparties to appeal this settlement expired in March 2005, and the classsettlement became final.  The terms ofthe settlement did not have a material adverse effect on our financialposition, results of operations or cash flows.

 

On February 4, 2005,we received a letter notifying us of a claim for approximately $1.45 million indamages allegedly due to a shipper being delivered off-specification gasolineduring November 2004.  We arecontesting liability for this matter, and to the extent there may be liability,we would seek reimbursement from the third party refiner who supplied thegasoline into our pipeline system.  We donot believe that the outcome of this matter will have a future material adverseeffect on our financial position, results of operations or cash flows.

 

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

 

Our operations aresubject to federal, state and local laws and regulations governing thedischarge of materials into the environment. Failure to comply with these lawsand regulations may result in the assessment of administrative, civil andcriminal penalties, imposition of injunctions delaying or prohibiting certainactivities and the need to perform investigatory and remedial activities.  Although we believe our operations are inmaterial compliance with applicable environmental laws and regulations, risksof significant costs and liabilities are inherent in pipeline operations, andwe cannot assure you that significant costs and liabilities will not beincurred. Moreover,

 

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it is possiblethat other developments, such as increasingly strict environmental laws andregulations and enforcement policies thereunder, and claims for damages toproperty or persons resulting from our operations, could result in substantialcosts 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 theFERC, which made several significant determinations with respect to finding “changedcircumstances” under the Energy Policy Act of 1992 (“EP Act”).  The decision largely clarifies, but does notfully quantify, the standard required for a complainant to demonstrate that anoil pipeline’s rates are no longer subject to the rate protection of the EP Actby demonstrating 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 alimited number of rate elements will significantly affect the economic basisfor a pipeline company’s rates.  Theelements identified in the decision are volume changes, allowed total returnand total cost-of-service (including major cost elements of rate base such astax rates and tax allowances, among others). The FERC did reject, however, the use of changes in tax rate and incometax allowances as standalone factors.  Itappears likely that the decision will be appealed.  We have not yet determined the impact, ifany, that the decision, if it is ultimately upheld, would have on our rates ifthey were reviewed under the criteria of this decision.

 

On July 20, 2004,the Court of Appeals for the District of Columbia Circuit issued an opinion in *BP West Coast Producers LLC v. FERC*.  In reviewing a series of orders involvingSFPP, L.P., the court held among other things that the FERC had not adequatelyjustified its policy of providing an oil pipeline limited partnership with anincome tax allowance equal to the proportion of its limited partnershipinterests owned by corporate partners. Under the FERC’s initial ruling, SFPP, L.P. was permitted an income taxallowance on its cost-of-service filing for 42.7% of the net operating(pre-tax) income expected from operations and was denied an income taxallowance equal to 57.3% of its limited partnership interests that were held bynon-corporate partners.  The courtremanded the case back to the FERC for further review.  As a result of the court’s remand, on December 2,2004, the FERC issued a Request for Comments seeking comments on whether thecourt’s ruling applies only to the specific facts of the SFPP, L.P. proceedingor also extends to other capital structures involving partnerships and otherforms of ownership.  The ultimate outcomeof the FERC’s inquiry on income tax allowance should not affect our currentrates and rate structure because our rates are not based on cost-of-servicemethodology.  However, the outcome of theincome tax allowance would become relevant to us should we (i) elect inthe 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 LouisianaDepartment of Environmental Quality (“LDEQ”) issued a compliance order forenvironmental contamination at our Arcadia, Louisiana, facility.  In 1999, our Arcadia facility and adjacentterminals were directed by the Remediation Services Division of the LDEQ topursue remediation of this contamination. At March 31, 2005, we have an accrued liability of $0.2 million forremediation costs at our Arcadia facility. Effective in March 2004, we executed an access agreement with anadjacent industrial landowner who is located upgradient of the Arcadiafacility.  This agreement enables thelandowner to proceed with remediation activities at our Arcadia facility forwhich it has accepted shared responsibility. We do not expect that the completion of the remediation program proposedto the LDEQ will have a future material adverse effect on our financialposition, results of operations or cash flows.

 

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

 

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OnJuly 22, 2004, we experienced a release of approximately 12 barrels of jetfuel from a sump at our Lebanon, Ohio, terminal.  The released jet fuel was contained within astorm water retention pond located on the terminal property.  Six migratory waterfowl were affected by thejet fuel and were subsequently euthanized by or at the request of the UnitedStates Fish and Wildlife Service (“USFWS”). On October 1, 2004, the USFWS served us with a Notice of Violation,alleging that we violated 16 USC 703 of the Migratory Bird Treaty Act for the “take[ing]of migratory birds by illegal methods.” On February 7, 2005, we entered into a Memorandum of Understandingwith the USFWS, settling all aspects of this matter.  The terms of this settlement did not have amaterial effect on our financial position, results of operations or cash flows.

 

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

 

At March 31, 2005,we have an accrued liability of $1.5 million related to sites requiringenvironmental remediation activities.  Wedo not expect that the completion of remediation programs associated theseactivities will have a future material adverse effect on our financialposition, results of operations or cash flows.

 

Centennial entered intocredit facilities totaling $150.0 million, and as of March 31, 2005,$150.0 million was outstanding under those credit facilities.  The proceeds were used to fund constructionand conversion costs of its pipeline system. We and Marathon have each guaranteed one-half of Centennial’s debt, upto a maximum amount of $75.0 million each.

 

On February 24,2005, the Company was acquired from DEFS by DFI.  The Company owns a 2% general partnerinterest in our Parent Partnership and is the general partner of the ParentPartnership.  On March 11, 2005, theBureau of Competition of the Federal Trade Commission (“FTC”) delivered writtennotice to DFI’s legal advisor that it was conducting a non-public investigationto determine whether DFI’s acquisition of the Company may substantially lessencompetition.  The FTC has contacted theCompany requesting data.  The Companyintends to cooperate fully with any such investigations and inquiries requestedby the FTC or any other regulatory authorities.

 

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

 

**General**

 

You should read thefollowing review of our financial position and results of operations inconjunction with our Consolidated Financial Statements.  Material period-to-period variances in theconsolidated statements of income are discussed under “Results of Operations.”  The “Financial Condition and Liquidity” section analyzesour cash flows and financial position.  “OtherConsiderations” addresses trends, future plans and contingencies that arereasonably likely to materially affect future liquidity or earnings.  The Consolidated Financial Statements shouldbe read in conjunction with the financial statements and related notes,together with our discussion and analysis of financial position and results ofoperations included in our Annual Report on Form 10-K for the yearended December 31, 2004.

 

**Critical Accounting Policies andEstimates**

 

A summary of the significantaccounting policies we have adopted and followed in the preparation of ourconsolidated financial statements is detailed in our consolidated financialstatements for the year ended December 31, 2004, included in our AnnualReport on Form 10-K. Certain of these accounting policies requirethe use of estimates.  The followingestimates, in our opinion, are subjective in nature, require the exercise ofjudgment and involve complex analysis: revenue and expense accruals, includingpower costs, property taxes, environmental costs and property, plant andequipment.  These estimates are based onour knowledge and understanding of current conditions and actions we may takein the future.  Changes in theseestimates will occur as a result of the passage of time and the occurrence offuture events.  Subsequent changes inthese estimates may have a significant impact on our financial condition andresults of operations.

 

****ManagementOverview of the Three Months Ended March 31, 2005****

 

****We reported net income of $22.1 million forthe three months ended March 31, 2005, compared with net income of $17.2million for the three months ended March 31, 2004.  Our results were impacted by increased refinedproducts and LPG transportation revenues and volumes delivered. These increaseswere partially offset by lower propane inventory fee revenues, increasedenvironmental expenses and increased rental expense from our CentennialPipeline LLC (“Centennial”) capacity lease agreement.  Additionally, pipeline integrity expensesdecreased $4.4 million compared to our first quarter 2004 costs.  We anticipate that our pipeline integrityexpenses for 2005 will be approximately $17.6 million lower than our 2004 expensesdue to the completion of projects.****

 

Certain factorsare inherent in our business. These include the safe, reliable and efficientoperation of the pipelines and facilities that we own or operate while meetingincreased regulations that govern the operation of our assets and the costsassociated with such regulations.  We arealso focused on our continued growth through expansion of the assets that weown and through acquisition of assets that complement our currentoperations.  We remain confident that ourcurrent strategy and focus will provide continued growth in earnings and cashdistributions.  These opportunitiesinclude continued growth, resulting from our recent capacity expansion andgrass roots facility investments and growing demand for Gulf Coast sourcedproducts.

 

We are subject toeconomic and other factors that affect our industry.  The demand for refined products is dependentupon the price, prevailing economic conditions and demographic changes in themarkets served, trucking and railroad freight, agricultural usage and militaryusage; the demand for propane is sensitive to the weather and prevailingeconomic conditions; and the demand for petrochemicals is dependent upon pricesfor products produced from petrochemicals. We are also subject to regulatoryfactors such as the amounts we are allowed to charge our customers for theservices we provide on our regulated pipeline systems.

 

Consistent with ourbusiness strategy, we continuously evaluate possible acquisitions of assetsthat would complement our current operations. Such acquisition efforts involve participation by us in processes thathave been made public and involve a number of potential buyers, as well assituations in which we believe we are the only

 

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party or one of avery limited number of potential buyers in negotiations with the potentialseller.  These acquisition efforts ofteninvolve assets which, if acquired, would have a material effect on ourfinancial position, results of operations or cash flows****.****

 

# **Our Business**

 

TE Products PipelineCompany, Limited Partnership (the “Partnership”), a Delaware limitedpartnership, was formed in March 1990. TEPPCO Partners, L.P. (the “Parent Partnership”) owns a 99.999% interestin us as the sole limited partner. TEPPCO GP, Inc. (“TEPPCO GP” or “General Partner”), a wholly ownedsubsidiary of the Parent Partnership, holds a 0.001% general partner interestin us.  Texas Eastern Products PipelineCompany, LLC (the “Company”), a Delaware limited liability company, serves asthe general partner of our Parent Partnership. Through February 23, 2005, the Company was an indirect wholly ownedsubsidiary of Duke Energy Field Services, LLC (“DEFS”), a joint venture betweenDuke Energy Corporation (“Duke Energy”) and ConocoPhillips. Through February 23,2005, Duke Energy held an interest of approximately 70% in DEFS, andConocoPhillips held the remaining interest of approximately 30%.  On February 24, 2005, the Company wasacquired by DFI GP Holdings L.P. (formerly Enterprise GP Holdings L.P.) (“DFI”),an affiliate of EPCO, Inc. (“EPCO”), a privately held company controlledby Dan L. Duncan, for approximately $1.1 billion.  As a result of the transaction, DFI owns andcontrols the 2% general partner interest in our Parent Partnership and has theright to receive the incentive distribution rights associated with the generalpartner interest.

 

TEPPCO GP, as our generalpartner, performs all of the management and operating functions required for usin accordance with the Agreement of Limited Partnership of TE Products PipelineCompany, Limited Partnership (the “Partnership Agreement”).  We reimburse our General Partner and theCompany for all reasonable direct and indirect expenses that they incur inmanaging us.

 

We operate and report inone business segment:  transportation andstorage of refined products, LPGs and petrochemicals.  Revenues are earned from transportation andstorage of refined products and LPGs, intrastate transportation ofpetrochemicals, sales of product inventory and other ancillary services.  Our two largest operating expense items arelabor and electric power.  We generallyrealize higher revenues during the first and fourth quarters of each year sinceour operations are somewhat seasonal. Refined products volumes are generally higher during the second andthird quarters because of greater demand for gasolines during the spring andsummer driving seasons. LPGs volumes are generally higher from November throughMarch due to higher demand in the Northeast for propane, a major fuel forresidential heating.  Our results alsoinclude our equity investments in Centennial and Mont Belvieu Storage Partners,L.P. (“MB Storage”) (see Note 5.  EquityInvestments).

 

We are one of threeoperating subsidiaries of our Parent Partnership.  Our Parent Partnership is managed by itsgeneral partner, the Company, which has approximately 1,000 employees dedicatedto the operations and management of the operating subsidiaries.  Our Parent Partnership allocates operating,general and administrative expenses to us for legal, insurance, financial,communication and other administrative services based upon the estimated levelof effort devoted to our various operations. We believe that the methods for allocating corporate operating, generaland administrative expenses to us are reasonable.

 

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**Resultsof Operations**

 

The followingtable presents volumes delivered in barrels and average tariff per barrel forthe three months ended March 31, 2005 and 2004 (in thousands, excepttariff information):

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

 

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

 

Revenues from refined products transportationincreased $4.0 million for the three months ended March 31, 2005, comparedwith the three months ended March 31, 2004, due to an overall increase of19% in the refined products volumes delivered. This increase was primarily dueto deliveries of products moved on Centennial. Centennial has provided our system with additional pipeline capacity formovement of products originating in the U.S. Gulf Coast area.  Prior to the construction of Centennial,deliveries on our pipeline system were limited by our pipeline capacity, andtransportation services for our customers were allocated in accordance with aproration policy.  With this incrementalpipeline capacity, our previously constrained system has expanded deliveries inmarkets both south and north of Creal Springs. In February 2003, we entered into a lease agreement with Centennialthat increased our flexibility to deliver refined products to our marketareas.  Volume increases were due toincreased demand and market share for products supplied from the U.S. GulfCoast into Midwest markets. The refined products average rate per barreldecreased 4% from the prior year period primarily due to the impact of greatergrowth in the volume of products delivered under a Centennial tariff comparedto the growth in deliveries under our tariff, which resulted in an increasedproportion of lower tariff barrels transported on our system.

 

Revenues from LPGstransportation increased $3.5 million for the three months ended March 31,2005, compared with the three months ended March 31, 2004, due to higherdeliveries of propane in the upper Midwest and Northeast market areas andincreased short-haul propane deliveries to U.S. Gulf Coast petrochemicalcustomers in the first quarter of 2005. Prior year LPG transportation revenueswere negatively impacted by a price spike in the Mont Belvieu propane price inlate February 2004, which resulted in our sourced propane being lesscompetitive than propane from other source points.

 

Other operating revenuesdecreased $4.1 million for the three months ended March 31, 2005, comparedwith the three months ended March 31, 2004, primarily due to lower propaneinventory fees in 2005 and lower volume of product inventory sales, partiallyoffset by higher refined products tender deduction and loading revenues.

 

Costs and expensesdecreased $2.3 million for the three months ended March 31, 2005, comparedwith the three months ended March 31, 2004, due to decreased operating,general and administrative expenses and decreased operating fuel and power,partially offset by increased depreciation and amortization expense andincreased taxes – other than income taxes. Operating, general and administrative expenses decreased primarily dueto a $4.4 million decrease in pipeline inspection and repair costs associatedwith our integrity management program, partially offset by a $0.6 millionincrease in rental expense from the Centennial pipeline capacity lease agreement,a $0.8 million increase in labor and benefits expense primarily associated withvesting provisions in certain of our compensation plans as a result of changesin control of the Company and a $0.6 million increase in environmentalremediation and assessment costs.  Depreciationexpense increased $0.7 million primarily due to assets retired to depreciationexpense in 2005.  Operating fuel andpower decreased $0.4 million primarily due to adjustments to power accruals.  Taxes – other than income taxes increased dueto increases in property tax accruals.

 

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Interest expenseincreased $1.0 million for the three months ended March 31, 2005, comparedwith the three months ended March 31, 2004, as a result of higheroutstanding debt balances under the note payable with our Parent Partnership,and an increased percentage of fixed-rate debt in 2005, compared with2004.  Interest capitalized decreased$0.1 million for the three months ended March 31, 2005, compared with thethree months ended March 31, 2004, as a result of decreased constructionwork-in-progress balances.

 

Net losses from equityinvestments decreased for the three months ended March 31, 2005, comparedwith the three months ended March 31, 2004, as shown below (in thousands):

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

 

Equity losses inCentennial decreased $0.4 million for the three months ended March 31,2005, compared with the three months ended March 31, 2004, primarily dueto higher transportation revenues and volumes, partially offset by highertransmix related product replacement costs and product measurement lossesduring the 2005 period.  Equity earningsin MB Storage remained virtually unchanged for the three months ended March 31,2005, compared with the three months ended March 31, 2004.  In April 2004, MB Storage acquiredstorage and pipeline assets and contracts for approximately $34.0 million, ofwhich we contributed $16.5 million. Equity earnings increased due to increased storage revenue, shuttlerevenue and rental revenue primarily from the acquired contracts, lower pipelinerehabilitation expenses on the MB Storage system and lower general andadministrative expenses offset by increased depreciation and amortizationexpense on storage assets and contracts acquired.

 

**FinancialCondition and Liquidity**

 

Cash flows for the threemonths ended March 31, 2005 and 2004, were as follows (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                        |       |                                   |       |   |   |
| Cash provided by (used in): |       |                                   |       |   |   |
| Operating activities        |       | $                                      | 24,982     |   | $ | 17,068 |   |
| Investing activities        |       | (14,140                                | )          | (8,820 | ) |
| Financing activities        |       | (10,841                                | )          | (8,393 | ) |
|                             |            |                                        |            |  |  |  |  |

 

*OperatingActivities*

 

Net cash from operatingactivities for the three months ended March 31, 2005 and 2004, werecomprised of the following (in thousands):

 
| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                   |       |                              |       |   |   |
| Net income                             |       | $                                 | 22,116     |   | $ | 17,209 |   |
| Depreciation and amortization          |       | 9,298                             |       | 8,638 |   |
| Losses in equity investments           |       | 842                               |       | 1,238 |   |
| Non-cash portion of interest expense   |       | 68                                |       | 7 |   |
| Cash used in working capital and other |       | (7,342                            | )          | (10,024 | ) |
| Net cash from operating  activities    |       | $                                 | 24,982     |   | $ | 17,068 |   |

 

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For a discussion ofchanges in net income, depreciation and amortization and equity earnings, seeResults of Operations in Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.  Cash provided byoperating activities increased $7.9 million for the three months ended March 31,2005, compared with the three months ended March 31, 2004, primarily dueto the timing of cash disbursements and cash receipts for working capitalcomponents and higher net income partially offset by higher depreciation andamortization in the 2005 period.

 

We believe that we willcontinue to have adequate liquidity to fund future recurring operating andinvesting activities.  Our primary cashrequirements consist of normal operating expenses, capital expenditures tosustain existing operations and revenue generating expenditures, interestpayments on our Senior Notes and on borrowings under our Parent Partnership’scredit facilities and distributions to our Parent Partnership.  Short-term cash requirements, such asoperating expenses, capital expenditures to sustain existing operations andquarterly distributions to our Parent Partnership, are expected to be fundedthrough operating cash flows.  Long-term cash requirements for expansionprojects are expected to be funded by several sources, including cash flowsfrom operating activities, borrowings under our Parent Partnership’s creditfacilities and the issuance by our Parent Partnership of additional equity anddebt securities.  The timing of any debtor offerings by our Parent Partnership will depend on various factors,including prevailing market conditions, interest rates and our ParentPartnership’s financial condition and credit rating at the time.

 

At March 31, 2005,and December 31, 2004 we had working capital deficits of $55.6 million and$61.9 million, respectively.  Cashgenerated from operations and from our Parent Partnership’s credit facilitiesand debt and equity offerings are our primary sources of liquidity.  Working capital deficits can occur primarilydue to the timing of operating cash receipts from customers, payment of cashdistributions and the payment of normal operating expenses and capitalexpenditures.  We are a wholly ownedsubsidiary of the Parent Partnership.  Weexpect that our Parent Partnership will make capital contributions, loans orotherwise provide liquidity to us as needed, but the Parent Partnership has nocontractual obligation to do so.  Weanticipate that the Parent Partnership will provide the necessary liquidity toprotect its investment in us.  At March 31,2005, our Parent Partnership had $81.5 million in available borrowing capacityunder its revolving credit facility to cover any working capital needs, andexpects that cash flows from operating activities, the sale of additional debtor equity offerings will provide necessary liquidity to us.

 

*InvestingActivities*

 

Cash flows used ininvesting activities totaled $14.1 million for the three months ended March 31,2005, and were comprised of $14.1 million of capital expenditures.  Cash flows used in investing activitiestotaled $8.8 million for the three months ended March 31, 2004, and werecomprised of $7.8 million of capital expenditures and $1.0 million of cashcontributions for our ownership interest in Centennial.

 

*FinancingActivities*

 

Cash flows used infinancing activities totaled $10.8 million for the three months ended March 31,2005, and were comprised of $29.7 million of distributions paid to our ParentPartnership and $19.9 million of repayments on our term loan, partially offsetby $38.8 million of proceeds from our term loan. Cash flows used in financingactivities totaled $8.4 million for the three months ended March 31, 2004,and were comprised of $28.9 million of distributions paid to our ParentPartnership and $15.0 million of repayments on our term loan, partially offsetby $35.5 million of proceeds from our term loan.

 

Centennial entered into creditfacilities totaling $150.0 million and, as of March 31, 2005, $150.0million was outstanding under those credit facilities.  The proceeds were used to fund constructionand conversion costs of Centennial’s pipeline system.  We and Marathon Ashland Petroleum LLC haveeach guaranteed one-half of Centennial’s debt, up to a maximum of $75.0 millioneach.

 

19

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*ParentPartnership Credit Facilities*

 

We currently utilize debtfinancing available from our Parent Partnership through intercompany notes. Theterms of the intercompany notes generally match the principal and interestpayment dates under the Parent Partnership’s credit agreements.  The interest rates charged by the ParentPartnership include the stated interest rate of the Parent Partnership, plus apremium to cover debt issuance costs. The interest rate is also decreased or increased to cover gains andlosses, respectively, on any interest rate swaps that the Parent Partnershipmay have in place on its respective credit agreements.  These credit facilities of the ParentPartnership are described below.

 

On June 27, 2003,our Parent Partnership entered into a $550.0 million revolving credit facilitywith a three year term, including the issuance of letters of credit of up to$20.0 million (“Revolving Credit Facility”). The interest rate is based, at our Parent Partnership’s option, on thelender’s base rate plus a spread, or LIBOR plus a spread in effect at the timeof the borrowings.  The credit agreementfor the Revolving Credit Facility contains certain restrictive financialcovenant ratios.  On October 21,2004, the Parent Partnership amended its Revolving Credit Facility to (i) increasethe facility size to $600.0 million, (ii) extend the term to October 21,2009, (iii) remove certain restrictive covenants, (iv) increase theavailable amount for the issuance of letters of credit up to $100.0 million and(v) decrease the LIBOR rate spread charged at the time of eachborrowing.  On February 23, 2005, theParent Partnership amended its Revolving Credit Facility to remove therequirement that DEFS must at all times own, directly or indirectly, 100% ofthe Company, to allow for its acquisition by DFI.  At March 31, 2005, $432.0 million wasoutstanding under the Revolving Credit Facility at a weighted average interestrate of 3.4%.

 

On January 30, 2003,our Parent Partnership issued $200.0 million principal amount of 6.125% SeniorNotes due 2013.  The 6.125% Senior Noteswere issued at a discount of $1.4 million and are being accreted to their facevalue over the term of the notes.  TheSenior Notes may be redeemed at any time at our Parent Partnership’s optionwith the payment of accrued interest and a make-whole premium determined bydiscounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing the 6.125% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale and leaseback transactions.  However, the indenture does not limit theParent Partnership’s ability to incur additional indebtedness.

 

As of March 31,2005, and December 31, 2004, we had intercompany notes payable to ourParent Partnership of $320.5 million and $301.7 million, respectively, whichrepresented borrowings under the Parent Partnership’s Revolving CreditFacility, 7.625% Senior Notes and 6.125% Senior Notes. The weighted averageinterest rate on the note payable to the Parent Partnership at March 31,2005, was 4.5%.  At March 31, 2005,accrued interest includes $1.7 million due to our Parent Partnership.  For the three months ended March 31,2005 and 2004, interest costs incurred on the note payable to our ParentPartnership totaled $3.4 million and $2.9 million, respectively.

 

### *CashDistributions*

 

During the three monthsended March 31, 2005 and 2004, we paid cash distributions to our ParentPartnership totaling $29.7 million and $28.9 million, respectively.  On May 6, 2005, we will pay a cashdistribution to our Parent Partnership of $29.7 million for the quarter ended March 31,2005.

 

### *FutureCapital Needs and Commitments*

 

We estimate that capitalexpenditures, excluding acquisitions, for 2005 will be approximately $59.6million (which includes $2.3 million of capitalized interest). We expect tospend approximately $22.7 million for revenue generating projects and facilityimprovements.  We expect to spendapproximately $20.0 million to sustain existing operations, includinglife-cycle replacements for equipment at various facilities and pipeline andtank replacements and $14.6 million for various system upgrade projects.  We continually review and evaluate potential capitalimprovements and expansions that would be complementary to our present system.  These expenditures can vary

 

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greatly dependingon the magnitude of our transactions.  Wemay finance capital expenditures through internally generated funds, debt orcapital contributions from our Parent Partnership or any combination thereof.

 

Our debt repaymentobligations consist of payments for principal and interest on (i) our$320.5 million principal amount due to the Parent Partnership related to ourshare of the Parent Partnership’s Revolving Credit Facility due in October 2009,7.625% Senior Notes due in February 2012 and 6.125% Senior Notes due in February 2013,(ii) our $210.0 million 7.51% Senior Notes due January 15, 2028, and (iii) our$180.0 million 6.45% Senior Notes due January 15, 2008.

 

We are also contingentlyliable as guarantor for the lesser of one half or $75.0 million principalamount (plus interest) of the borrowings of Centennial. In January 2003,we entered into a pipeline capacity lease agreement with Centennial for aperiod of five years that contains a minimum throughput requirement.  For the year ended December 31, 2004, weexceeded the minimum throughput requirements on the lease agreement.  We are also contingently liable as guarantorfor $500.0 million principal amount of 7.625% Senior Notes due 2012 issued in February 2002and for $200.0 million principal amount of 6.125% Senior Notes due 2013 issuedin January 2003 by our Parent Partnership.

 

During the three monthsended March 31, 2004, we contributed $1.0 million to Centennial to coveroperating needs and capital expenditures. No amounts were contributed to either Centennial or MB Storage duringthe three months ended March 31, 2005. During 2005, we may be required to contribute cash to Centennial tocover capital expenditures, acquisitions or other operating needs and to MBStorage to cover significant capital expenditures or additional acquisitions.

 

### *Off-BalanceSheet Arrangements*

 

We do not rely onoff-balance sheet borrowings to fund our acquisitions. We have no off-balancesheet commitments for indebtedness other than the limited guaranty of theCentennial debt, the Parent Partnership debt and leases covering assetsutilized in several areas of our operations.

 

*Contractual Obligations*

 

The following tablesummarizes our debt repayment obligations and material contractual commitmentsas of March 31, 2005 (in millions):

 
| ** **                                 | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                      | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5  Years** | ** ** |
| ** **                                 | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Note payable, Parent Partnership           |       | $                                              | 320.5      |   | $ | — |   | $ | — |   | $ | 320.5 |   | $ | — |   |
| 6.45% Senior Notes due 2008 (1)            |       | 180.0                                          |       | — |   | 180.0 |   | — |   | — |   |
| 7.51% Senior Notes due 2028 (1)            |       | 210.0                                          |       | — |   | — |   | — |   | 210.0 |   |
| Debt subtotal                              |       | 710.5                                          |       | — |   | 180.0 |   | 320.5 |   | 210.0 |   |
|                                       |       |                                           |       |   |   |   |   |   |   |   |   |
| Operating leases                           |       | 57.0                                           |       | 12.2 |   | 21.8 |   | 8.6 |   | 14.4 |   |
| Capital expenditure obligations (2)        |       | 0.8                                            |       | 0.8 |   | — |   | — |   | — |   |
| Other liabilities and deferred credits (3) |       | 0.7                                            |       | — |   | 0.6 |   | 0.1 |   | — |   |
| Total                                      |       | $                                              | 769.0      |   | $ | 13.0 |   | $ | 202.4 |   | $ | 329.2 |   | $ | 224.4 |   |

 

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(1)          We entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our 7.51%Senior Notes due 2028.  At March 31,2005, the 7.51% Senior Notes include an adjustment to increase the fair valueof the debt by $0.5 million related to this interest rate swap agreement.  At March 31, 2005, our 6.45% SeniorNotes include $0.1 million of unamortized debt discount.  The fair value adjustment and unamortizeddebt discount are excluded from this table.

 

(2)          Includesaccruals of cost incurred but not yet paid relating to capital projects.

 

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(3)          Excludesapproximately $9.1 million of long-term deferred revenue payments, which arebeing transferred to income over the term of the respective revenuecontracts.  The amount of commitment byyear is our best estimate of projected payments of these long-term liabilities.

 

We expect to repay the long-term, seniorunsecured obligations and note payable to our Parent Partnership through theissuance of additional long-term senior unsecured debt at the time the 2008 and2028 debts mature, with proceeds from the dispositions of assets, cash flowsfrom operations, and contributions from our Parent Partnership or anycombination of the above items.

 

*Sources of Future Capital*

 

We expect that our cashflow from operating activities will be adequate to fund cash distributions andcapital additions necessary to sustain existing operations.  However, expansionary capital projects andacquisitions may require additional capital contributions from our ParentPartnership.  The Parent Partnership hasfunded its capital commitments from operating cash flow, borrowings under bankcredit facilities, the issuance of long term debt in capital markets and thepublic offering of Limited Partner Units. We expect future capital needs will be similarly funded.

 

Our Parent Partnershiphas filed with the SEC a universal shelf registration statement that, subjectto agreement on terms at the time of use and appropriate supplementation,allows it to issue, in one or more offerings, up to an aggregate of $2.0billion of equity securities, debt securities or a combination thereof.  At December 31, 2004, our ParentPartnership had $2.0 billion available under this shelf registration, subjectto customary marketing terms and conditions.

 

Our Parent Partnership’ssenior unsecured debt is rated BBB with negative implications by Standard andPoors (“S&P”) and Baa3 by Moody’s Investors Service (“Moody’s”).  S&P assigned this rating on February 24,2005, following the announcement of the acquisition of the Company by DFI,which is not rated by S&P.  Oursenior unsecured debt is also rated BBB with negative implications by S&Pand Baa3 by Moody’s. The Moody’s ratings are stable.  A rating reflects only the view of a ratingagency and is not a recommendation to buy, sell or hold any indebtedness.  Any rating can be revised upward or downwardor withdrawn at any time by a rating agency if it determines that thecircumstances warrant such a change.

 

# **Other Considerations**

 

Our operations aresubject to federal, state and local laws and regulations governing thedischarge of materials into the environment. Failure to comply with these lawsand regulations may result in the assessment of administrative, civil andcriminal penalties, imposition of injunctions delaying or prohibiting certainactivities and the need to perform investigatory and remedial activities.  Although we believe our operations are inmaterial compliance with applicable environmental laws and regulations, risksof significant costs and liabilities are inherent in pipeline operations, andwe cannot assure you that significant costs and liabilities will not be incurred.  Moreover, it is possible that otherdevelopments, such as increasingly strict environmental laws and regulationsand enforcement policies thereunder, and claims for damages to property orpersons resulting from our operations, could result in substantial costs andliabilities to us.  We believe thatchanges in environmental laws and regulations will not have a material adverseeffect on our financial position, results of operations or cash flows in thenear term.

 

In 1994, the LouisianaDepartment of Environmental Quality (“LDEQ”) issued a compliance order forenvironmental contamination at our Arcadia, Louisiana, facility.  In 1999, our Arcadia facility and adjacentterminals were directed by the Remediation Services Division of the LDEQ topursue remediation of this contamination. At March 31, 2005, we have an accrued liability of $0.2 million forremediation costs at our Arcadia facility. Effective in March 2004, we executed an access agreement with anadjacent industrial landowner who is located upgradient of the Arcadiafacility.  This agreement enables thelandowner to proceed with remediation activities at our Arcadia facility forwhich it has accepted shared responsibility. We do not expect that the completion of the remediation program proposedto the LDEQ will have a future material adverse effect on our financialposition, results of operations or cash flows.

 

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

 

OnJuly 22, 2004, we experienced a release of approximately 12 barrels of jetfuel from a sump at our Lebanon, Ohio, terminal.  The released jet fuel was contained within astorm water retention pond located on the terminal property.  Six migratory waterfowl were affected by thejet fuel and were subsequently euthanized by or at the request of the United StatesFish 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 with the USFWS, settlingall aspects of this matter.  The terms ofthis settlement did not have a material adverse effect on our financialposition, results of operations or cash flows.

 

OnJuly 27, 2004, we received notice from the United States Department ofJustice (“DOJ”) of its intent to seek a civil penalty against us related to ourNovember 21, 2001, release of approximately 2,575 barrels of jet fuel fromour 14-inch diameter pipeline located in Orange County, Texas.  The DOJ, at the request of the EnvironmentalProtection Agency, is seeking acivil penalty against us for alleged violations of the Clean Water Act (“CWA”)arising out of this release.  The maximumstatutory penalty calculated for this alleged violation of the CWA is $2.8million.  We are in discussions with theDOJ regarding this matter and have responded to its request for additionalinformation.  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 March 31, 2005,we have an accrued liability of $1.5 million related to various sites requiringenvironmental remediation activities.  Wedo not expect that the completion of remediation programs associated with theseactivities will have a future material adverse effect on our financialposition, results of operations or cash flows.

 

*Recent AccountingPronouncements*

 

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

 

**Forward-LookingStatements**

 

The matters discussedherein include “forward-looking statements” within the meaning of variousprovisions of the Securities Act of 1933 and the Securities Exchange Act of1934.  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.  Thesestatements are based on certain assumptions and analyses made by us in light ofour experience and our perception of historical trends, current conditions andexpected future developments as well as other factors we believe areappropriate under the circumstances. However, whether actual results and developments will conform with ourexpectations and predictions is subject to a number of risks and uncertainties,including general economic, market or business conditions, the opportunities(or lack thereof) that may be presented to and pursued by us, competitiveactions by other pipeline companies, changes in laws or regulations, and otherfactors, many of which are beyond our control. Consequently, all of the forward-looking statements made in thisdocument are qualified by these cautionary statements and we cannot assure youthat actual results or developments that we anticipate will be realized or,even if substantially realized, that they will have the expected consequencesto or effect on us or our business or

 

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operations.  For additional discussion of such risks anduncertainties, see our Annual Report on Form 10-K for the year ended December 31,2004, and other filings we have made with the Securities and ExchangeCommission.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

We may be exposed tomarket risk through changes in commodity prices and interest rates.  We do not have foreign exchange risks.  Our Risk Management Committee has establishedpolicies to monitor and control these market risks. The Risk ManagementCommittee is comprised, in part, of senior executives of the Company.

 

We have utilized andexpect to continue to utilize interest rate swap agreements to hedge a portionof our fair value risks.  Interest rateswap agreements are used to manage the fixed interest rate mix of our debt portfolioand overall cost of borrowing.  Theinterest rate swap related to our fair value risk is intended to reduce ourexposure to changes in the fair value of our fixed rate Senior Notes.  The interest rate swap agreement involves theperiodic exchange of payments without the exchange of the notional amount uponwhich the payments are based. The related amount payable to or receivable fromcounterparties is included as an adjustment to accrued interest.

 

At March 31, 2005,we had outstanding $180.0 million principal amount of 6.45% Senior Notes due2008 and $210.0 million principal amount of 7.51% Senior Notes due 2028.  At March 31, 2005, the estimated fairvalue of the 6.45% Senior Notes and 7.51% Senior Notes were approximately$186.2 million and $223.2 million, respectively.

 

In October 2001, weentered into an interest rate swap agreement to hedge our exposure to changesin the fair value of our fixed rate 7.51% Senior Notes due 2028. We designatedthis swap agreement as a fair value hedge. The swap agreement has a notional amount of $210.0 million and maturesin January 2028 to match the principal and maturity of the SeniorNotes.  Under the swap agreement, we paya floating rate of interest based on a three-month U.S. Dollar LIBOR rate, plusa spread, and receive a fixed rate of interest of 7.51%.  During the three months ended March 31,2005, and 2004, we recognized reductions in interest expense of $1.8 millionand $2.6 million, respectively, related to the difference between the fixedrate and the floating rate of interest on the interest rate swap.  During the quarter ended March 31, 2005,we measured the hedge effectiveness of this interest rate swap and noted thatno gain or loss from ineffectiveness was required to be recognized.  The fair value of this interest rate swap wasa gain of approximately $0.5 million and $3.4 million at March 31, 2005,and December 31, 2004, respectively. Utilizing the balance of the 7.51% Senior Notes outstanding at March 31,2005, and including the effects of hedging activities, assuming market interestrates increase 100 basis points, the potential annual increase in interestexpense is $2.1 million.

 

As of March 31,2005, and December 31, 2004, we had intercompany notes payable to ourParent Partnership of $320.5 million and $301.7 million, respectively, whichrepresented borrowings under the Parent Partnership’s Revolving CreditFacility, 7.625% Senior Notes and 6.125% Senior Notes. The weighted averageinterest rate on the note payable to the Parent Partnership at March 31,2005, was 4.5%.  At March 31, 2005,accrued interest includes $1.7 million due to our Parent Partnership.  For the three months ended March 31,2005 and 2004, interest costs incurred on the note payable to our ParentPartnership totaled $3.4 million and $2.9 million, respectively.

 

**Item4.  Controls and Procedures**

 

The principal executiveofficer and principal financial officer of our General Partner, afterevaluating the effectiveness of our disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31,2005, have concluded that, as of such date, our disclosure controls andprocedures are adequate and effective to ensure that material informationrelating to us and our consolidated subsidiaries would be made known to them byothers within those entities.

 

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*Changes in Internal Control over FinancialReporting*

 

There has been no changein our internal control over financial reporting during the first quarter of2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.  As a result, no corrective actions wererequired or undertaken.

 

**PART II.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

We have been, in theordinary course of business, a defendant in various lawsuits and a party tovarious other legal proceedings, some of which are covered in whole or in partby insurance.  We believe that theoutcome of these lawsuits and other proceedings will not individually or in theaggregate have a material adverse effect on our consolidated financialposition, results of operations or cash flows. See discussion of legal proceedings in Note 9.  Commitments and Contingencies in theaccompanying consolidated financial statements.

 

**Item 6. Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1                 |       | Second  Amended and Restated Agreement of Limited Partnership of TE Products Pipeline  Company, Limited Partnership, effective September 21, 2001 (Filed as  Exhibit 3.8 to Form 10-Q of TEPPCO Partners, L.P. (Commission File  No. 1-10403) for the quarter ended September 30, 2001, and  incorporated herein by reference).                                                                                                                                                                                                                                                                                              |
| 4.1                 |       | 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).                                                                                                                                                                                                                                                                              |
| 4.2                 |       | 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).                                                                                                                                               |
| 4.3                 |       | First Supplemental  Indenture between TEPPCO Partners, L.P., as issuer, TE Products Pipeline  Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P.  and Jonah Gas Gathering Company, as subsidiary guarantors, and First Union  National Bank, NA, as trustee, dated as of February 20, 2002 (Filed as  Exhibit 99.3 to Form 8-K of TEPPCO Partners, L.P (Commission File  No. 1-10403) dated as of February 20, 2002 and incorporated herein  by reference).                                                                                                                                          |
| 4.4                 |       | 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). |
| 4.5                 |       | Third  Supplemental Indenture among TEPPCO Partners, L.P. as issuer, TE Products  Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream  Companies,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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|   |   | L.P.,  Jonah Gas Gathering Company and Val Verde Gas Gathering Company, L.P. as  Subsidiary Guarantors, and Wachovia Bank, National Association, as trustee,  dated as of January 30, 2003 (Filed as Exhibit 4.7 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2002, and incorporated herein by reference).                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1   |   | Supplemental Agreement  to Employment Agreement between the Company and Barry R. Pearl dated as of  February 23, 2005 (Filed as Exhibit 10.1 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter  ended March 31, 2005 and incorporated herein by reference).                                                                                            |
| 10.2   |   | Supplemental Agreement  to Employment and Non-Compete Agreement between the Company and J. Michael  Cockrell dated as of February 23, 2005 (Filed as Exhibit 10.2 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the quarter ended March 31, 2005 and incorporated herein by  reference).                                                                      |
| 10.3   |   | Supplemental  Form Agreement to Form of Employment Agreement between the Company  and John N. Goodpasture, Stephen W. Russell, C. Bruce Shaffer and Barbara A.  Carroll dated as of February 23, 2005 (Filed as Exhibit 10.3 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the quarter ended March 31, 2005 and incorporated herein by  reference). |
| 10.4   |   | Supplemental  Form Agreement to Form of Employment and Agreement between the  Company and Thomas R. Harper, Charles H. Leonard, James C. Ruth and Leonard  W. Mallett dated as of February 23, 2005 (Filed as Exhibit 10.4 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the quarter ended March 31, 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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*                 Filed herewith.

**          Furnished herewithpursuant to Item 601(b)-(32) of Regulation S-K.

+                 A managementcontract or compensation plan or arrangement.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                       | TE Products  Pipeline Company, Limited Partnership |
|----------------------------|----------------------------------------------------|
|                       | (Registrant)                                       |   |
|                       | (A Delaware Limited Partnership)                   |   |
|                       |                                               |
|                       |                                               |
|                       |                                               |
|                       | By:                                                | TEPPCO  GP, Inc., |
|                       | as General Partner                                 |   |
|                       |                                               |
|                       |                                               |
|                       | By:                                                | /s/   BARRY  R. PEARL |   |
|                       |                                               | Barry R. Pearl, |   |
|                       |                                               | President, Chief Executive |   |
|                       |                                               | Officer and Director |   |
|                       |                                               |
|                       | By:                                                | /s/  CHARLES  H. LEONARD |   |
|                       |                                               | Charles H. Leonard, |   |
|                       |                                               | Senior Vice President, Chief Financial  Officer and Director |   |
|                       |                                               |
|                       |                                               |
| Date:  April 28, 2005 |                                               |
|                            |                                                    |  |  |  |  |  |  |  |  |

 

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