** **

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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

**For the quarterly period endedJune 30, 2006**

**OR**

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

**Commission FileNo. 1-13603**

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**TE Products Pipeline Company, Limited Partnership**

(Exactname of Registrant as specified in its charter)

| **Delaware**             |       | ** ** |       | **76-0329620**         |
|--------------------------|------------|------------|------------|------------------------|
| (State of  Incorporation | ** ** | ** ** | ** ** | (I.R.S. Employer       |
| or  Organization)        | ** ** | ** ** |       | Identification Number) |

**1100 LouisianaStreet, Suite 1300Houston, Texas 77002**(Address of principalexecutive offices, including zip code)

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

**2929 AllenParkwayP.O. Box 2521****Houston, Texas 77252-2521**(Former address)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):    Large accelerated filer o     Accelerated Filer o     Non-accelerated Filer x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes  o****  No x

 

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**TE PRODUCTSPIPELINE COMPANY, LIMITED PARTNERSHIP**

**TABLE OF CONTENTS**
| **PART I. FINANCIAL  INFORMATION**                                                                              |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |
| Item  1. Financial Statements                                                                                   |
| Consolidated  Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005  (unaudited)                 |
|                                                                                                            |
| Consolidated Statements of Income for the three months  and six months ended June 30, 2006 and 2005 (unaudited) |
|                                                                                                            |
| Consolidated Statements of Cash Flows for the six  months ended June 30, 2006 and 2005 (unaudited)              |
|                                                                                                            |
| Consolidated Statement of Partners’ Capital for the  six months ended June 30, 2006 (unaudited)            |
|                                                                                                            |
| Notes to the Consolidated Financial Statements  (unaudited)                                                     |
|                                                                                                            |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations             |
|                                                                                                            |
| Cautionary Note Regarding 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 1A.Risk Factors                                                                                            |
|                                                                                                            |
| Item 6. Exhibits                                                                                                |
|                                                                                                            |
| Signatures                                                                                                      |
| ** **                                                                                                      |

 

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**PARTI.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**TEPRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(in thousands)**
|                                                                                                                           | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                                                                                      |       |                    |       |                        |       |
| **ASSETS**                                                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                           |       |                    |       |                        |       |
|  Cash and cash equivalents                                                                                           |       | $                       | —     |                        | $          | — |   |
|  Accounts receivable, trade (net of allowance  for doubtful accounts of $0 and $45)                                  |       | 15,833                  |       | 26,338                      |       |
|  Accounts receivable, related parties                                                                                |       | 4,246                   |       | 2,182                       |       |
|  Inventories                                                                                                         |       | 18,482                  |       | 16,449                      |       |
|  Other                                                                                                               |       | 13,954                  |       | 14,911                      |       |
| Total current  assets                                                                                                     |       | 52,515                  |       | 59,880                      |       |
| Property, plant and  equipment, at cost (net of accumulated depreciation and amortization of $358,432  and $340,562) |       | 816,542                 |       | 808,761                     |       |
| Equity investments                                                                                                        |       | 151,916                 |       | 157,335                     |       |
| Other assets                                                                                                              |       | 17,359                  |       | 16,566                      |       |
| Total assets                                                                                                              |       | $                       | 1,038,332  |                        | $          | 1,042,542 |   |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                                                                               |       |                    |       |                        |       |
| Current liabilities:                                                                                                      |       |                    |       |                        |       |
|  Accounts payable and accrued liabilities                                                                            |       | $                       | 9,173      |                        | $          | 13,540 |   |
|  Accounts payable, related parties                                                                                   |       | 1,188                   |       | 19,973                      |       |
|  Accrued interest                                                                                                    |       | 16,522                  |       | 16,151                      |       |
|  Other accrued taxes                                                                                                 |       | 7,171                   |       | 7,524                       |       |
|  Other                                                                                                               |       | 6,624                   |       | 7,220                       |       |
| Total current  liabilities                                                                                                |       | 40,678                  |       | 64,408                      |       |
| Senior notes                                                                                                              |       | 378,624                 |       | 389,048                     |       |
| Note payable, Parent  Partnership                                                                                         |       | 236,791                 |       | 206,906                     |       |
| Other liabilities and  deferred credits                                                                                   |       | 24,852                  |       | 14,500                      |       |
| Commitments and  contingencies                                                                                            |       |                    |       |                        |       |
| Partners’ capital:                                                                                                   |       |                    |       |                        |       |
|  General partner’s interest                                                                                     |       | 4                       |       | 4                           |       |
|  Limited partner’s interest                                                                                     |       | 357,383                 |       | 367,676                     |       |
| Total partners’  capital                                                                                             |       | 357,387                 |       | 367,680                     |       |
| Total liabilities and  partners’ capital                                                                             |       | $                       | 1,038,332  |                        | $          | 1,042,542 |   |

Seeaccompanying Notes to Unaudited Consolidated Financial Statements.

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**TEPRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF INCOME(Unaudited)(in thousands)**
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating revenues:                          |       |                                            |       |                                          |       |   |   |   |   |
|  Transportation – Refined products |       | $                                               | 39,443     |                                          | $          | 37,834 |   | $ | 71,242 |   | $ | 72,799 |   |
|  Transportation – LPGs             |       | 13,354                                          |       | 14,470                                        |       | 42,775 |   | 46,701 |   |
|  Other                                  |       | 15,601                                          |       | 10,217                                        |       | 27,179 |   | 20,037 |   |
| Total operating  revenues                    |       | 68,398                                          |       | 62,521                                        |       | 141,196 |   | 139,537 |   |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| Costs and expenses:                          |       |                                            |       |                                          |       |   |   |   |   |
|  Operating expenses                     |       | 26,168                                          |       | 24,641                                        |       | 49,493 |   | 46,944 |   |
|  Operating fuel and power               |       | 8,289                                           |       | 7,926                                         |       | 17,543 |   | 15,555 |   |
|  General and administrative             |       | 4,701                                           |       | 3,509                                         |       | 9,795 |   | 7,711 |   |
|  Depreciation and amortization          |       | 9,865                                           |       | 9,537                                         |       | 19,894 |   | 18,835 |   |
|  Taxes – other than income taxes   |       | 3,117                                           |       | 2,440                                         |       | 5,709 |   | 5,348 |   |
|  Gains on sales of assets               |       | (18                                             | )          | (15                                           | )          | (25 | ) | (107 | ) |
| Total costs and  expenses                    |       | 52,122                                          |       | 48,038                                        |       | 102,409 |   | 94,286 |   |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| Operating income                             |       | 16,276                                          |       | 14,483                                        |       | 38,787 |   | 45,251 |   |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| Interest expense – net                  |       | (7,955                                          | )          | (7,594                                        | )          | (16,289 | ) | (15,553 | ) |
| Equity losses                                |       | (2,366                                          | )          | (246                                          | )          | (3,632 | ) | (2,067 | ) |
| Other income – net                      |       | 164                                             |       | 121                                           |       | 943 |   | 270 |   |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| Net  income                                  |       | $                                               | 6,119      |                                          | $          | 6,764 |   | $ | 19,809 |   | $ | 27,901 |   |

Seeaccompanying Notes to Unaudited Consolidated Financial Statements.

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**TEPRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(in thousands)**
| ** **                                                                     | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,**              | ** ** |
| ** **                                                                     | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash flows from operating  activities:                                         |       |                           |       |   |   |
| Net income                                                                     |       | $                              | 19,809     |   | $ | 27,901 |   |
| Adjustments to  reconcile net income to cash provided byoperating  activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                 |       | 19,894                         |       | 18,835 |   |
| Losses in equity  investments                                                  |       | 3,632                          |       | 2,067 |   |
| Distributions  from equity investments                                         |       | 7,840                          |       | 7,300 |   |
| Non-cash portion  of interest expense                                          |       | 271                            |       | 136 |   |
| Gains on sales  of assets                                                      |       | (25                            | )          | (107 | ) |
| Decrease in  accounts receivable, trade                                        |       | 10,505                         |       | 5,378 |   |
| Decrease  (increase) in accounts receivable, related parties                   |       | (2,064                         | )          | 502 |   |
| Increase in  inventories                                                       |       | (2,033                         | )          | (952 | ) |
| Decrease  (increase) in other current assets                                   |       | 957                            |       | (918 | ) |
| Decrease in  accounts payable and accrued expenses                             |       | (5,518                         | )          | (3,162 | ) |
| Decrease in  accounts payable, related parties                                 |       | (18,785                        | )          | (21,082 | ) |
| Other                                                                          |       | (3,117                         | )          | (4,047 | ) |
| Net cash  provided by operating activities                                     |       | 31,366                         |       | 31,851 |   |
|                                                                           |       |                           |       |   |   |
| Cash flows from  investing activities:                                         |       |                           |       |   |   |
| Investment in  Mont Belvieu Storage Partners, L.P.                             |       | (1,720                         | )          | (1,109 | ) |
| Investment in  Centennial Pipeline LLC                                         |       | (2,500                         | )          | — |   |
| Capital expenditures                                                           |       | (27,223                        | )          | (27,025 | ) |
| Net cash used in  investing activities                                         |       | (31,443                        | )          | (28,134 | ) |
|                                                                           |       |                           |       |   |   |
| Cash flows from  financing activities:                                         |       |                           |       |   |   |
| Proceeds from  note payable, Parent Partnership                                |       | 44,812                         |       | 58,481 |   |
| Repayments of  note payable, Parent Partnership                                |       | (14,633                        | )          | (297,624 | ) |
| Equity  contributions – Parent Partnership                                |       | —-                        |       | 294,822 |   |
| Distributions  paid                                                            |       | (30,102                        | )          | (59,382 | ) |
| Net cash  provided by (used in) financing activities                           |       | 77                             |       | (3,703 | ) |
|                                                                           |       |                           |       |   |   |
| Net increase in cash  and cash equivalents                                     |       | —                         |       | 14 |   |
|                                                                           |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                              |       | —                         |       | — |   |
| Cash and cash  equivalents at end of period                                    |       | $                              | —     |   | $ | 14 |   |
|                                                                           |       |                           |       |   |   |
| **Supplemental disclosure of cash  flows:**                                    |       |                           |       |   |   |
| Cash paid for interest  (net of amounts capitalized)                           |       | $                              | 16,637     |   | $ | 16,006 |   |

Seeaccompanying Notes to Unaudited Consolidated Financial Statements.

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**TEPRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL(Unaudited)****(in thousands)**
| ** **                                   | ** ** | **General  Partner’s  Interest** | ** ** | **Limited  Partner’s  Interest** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|-----------|------------|
|                                         |       |                                  |       |                                  |       |      |       |
| Partners’ capital at  December 31, 2005 |       | $                                     | 4          |                                  | $          | 367,676   |       | $ | 367,680 |   |
| Net income  allocation                       |       | 1                                     |       | 19,808                                |       | 19,809    |       |
| Cash  distributions                          |       | (1                                    | )          | (30,101                               | )          | (30,102   | )          |
|                                         |       |                                  |       |                                  |       |      |       |
| Partners’ capital at June 30, 2006      |       | $                                     | 4          |                                  | $          | 357,383   |       | $ | 357,387 |   |

See accompanying Notes toUnaudited Consolidated Financial Statements.

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**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**NOTE 1.  ORGANIZATIONAND BASIS OF PRESENTATION**

TE Products Pipeline Company, Limited Partnership (the“Partnership”), a Delaware limited partnership, was formed in March 1990.  TEPPCO Partners, L.P. (the “ParentPartnership”) owns a 99.999% interest in us as the sole limited partner.  TEPPCO GP, Inc. (“TEPPCO GP” or “GeneralPartner”), a wholly owned subsidiary of the Parent Partnership, holds a 0.001% generalpartner interest in us.  Texas EasternProducts Pipeline Company, LLC (the “Company”), a Delaware limited liabilitycompany, serves as the general partner of our Parent Partnership.  Through February 23, 2005, the Company was anindirect wholly owned subsidiary of Duke Energy Field Services, LLC (“DEFS”), ajoint venture between Duke Energy Corporation (“Duke Energy”) andConocoPhillips.  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 controlled by DanL. Duncan, for approximately $1.1 billion. As a result of the transaction, DFI owns and controls the 2% generalpartner interest in our Parent Partnership and has the right to receive theincentive distribution rights associated with its general partner interest inour Parent Partnership.

As used in this Report, “we,” “us,” and “our” means TEProducts Pipeline Company, Limited Partnership and, where the context requires,include our subsidiaries.

On May 9, 2005, we formed TEPPCO Interests, LLC (“TEPPCOInterests”), a Delaware limited liability company, of which we own 100% of themember interests.  On July 15, 2005,TEPPCO Interests acquired from Texas Genco, LLC (i) 100% of its memberinterests in TG Pipeline GP, LLC, a Delaware limited liability company, whichis the owner of 100% of the general partner interests in TG Pipeline, L.P. (“PipelineLP”), a Texas limited partnership, and (ii) 100% of the membership interests inTG Pipeline LP, LLC, a Delaware limited liability company, which is the ownerof 100% of the limited partner interests in TG Pipeline, L.P.  On May 18, 2005, we formed TEPPCO Terminals,L.P. (“TEPPCO Terminals”), a Delaware limited partnership, and we own a 99.999%interest in TEPPCO Terminals as the sole limited partner.  TEPPCO GP serves as the general partner andholds a 0.001% general partner interest in TEPPCO Terminals.

TEPPCO GP, as our general partner, has all managementpowers over the business and affairs of our partnership under the terms of theAgreement of Limited Partnership of TE Products Pipeline Company, LimitedPartnership (the “Partnership Agreement”). All of our management, administrative and operating functions areperformed by employees of EPCO, pursuant to an administrative servicesagreement to which we and TEPPCO GP are parties, which was entered into as aresult of the change in ownership of the Company on February 24, 2005.  We reimburse EPCO for the allocated costs ofits employees who perform operating, management and other administrativefunctions for us.

The accompanying unaudited consolidated financialstatements reflect all adjustments that are, in the opinion of our management,of a normal and recurring nature and necessary for a fair statement of ourfinancial position as of June 30, 2006, and the results of our operations andcash flows for the periods presented. The results of operations for the three months and six months ended June30, 2006, are not necessarily indicative of results of our operations for thefull year 2006.  You should read theseinterim financial statements in conjunction with our consolidated financialstatements and notes thereto presented in the TE Products Pipeline Company,Limited Partnership Annual Report on Form 10-K for the year ended December 31,2005.  We have reclassified certainamounts from prior periods to conform to the current presentation.

We operate and report in one business segment:transportation and storage of refined products, liquefied petroleum gases (“LPGs”)and petrochemicals.  Our interstatetransportation operations, including rates charged to customers, are subject toregulations prescribed by the Federal Energy Regulatory Commission (“FERC”).  We refer to refined products, LPGs andpetrochemicals in this Report, collectively, as “petroleum products” or “products.”

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At June 30, 2006, we had working capital surplus of$11.8 million, while at December 31, 2005, we had a working capital deficit of$4.5 million.  Our primary sources ofliquidity are cash generated from operations and from loans or capitalcontributions from our Parent Partnership. Working capital deficits occur primarily from the timing of operatingcash receipts from customers, payment of cash distributions and the payment ofnormal operating expenses and capital expenditures.  Our Parent Partnership has historically madecapital contributions, loans or otherwise provided liquidity to us as needed,but the Parent Partnership has no contractual obligation to do so.  At June 30, 2006, our Parent Partnership had$240.8 million in available borrowing capacity under its revolving creditfacility.

**Asset Retirement Obligations**

During the second quarter of 2006, we recorded $0.3million of expense, included in depreciation and amortization expense, relatedto a conditional asset retirement obligation. Additionally, we recorded a $0.4 million liability, which represents thefair value, as measured at June 30, 2006, of the conditional asset retirementobligation related to structural restoration work to be completed on leasedoffice space that is required upon our anticipated office leasetermination.  This conditional assetretirement obligation was not previously recorded, due to the indeterminaterange of settlement dates and settlement methods, during the implementation ofStatement of Financial Accounting Standards (“SFAS”) No. 143, *Accounting for Asset Retirement Obligations*, and FinancialAccounting Standards Board (“FASB”) Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143*, which we adopted on January 1, 2003 and December31, 2005, respectively.  With theavailability of new information, we were able to assign probabilities forsettlement dates and settlement methods for use in an expected present valuemeasurement of fair value.

**New Accounting Pronouncements**

In December 2004, the FASB issued SFAS No. 123(R)(revised 2004), *Share-Based Payment*.  SFAS 123(R) is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*,as amended by SFAS No. 148,*Accounting forStock-Based Compensation — Transition and Disclosure* and supersedesAccounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS 123(R) requires that the cost resultingfrom all share-based payment transactions be recognized in the financialstatements at fair value.  In April 2005,both the FASB and the Securities and Exchange Commission decided to delay theeffective date for public companies to implement   SFAS 123(R). SFAS 123(R) became effective for public companies for annual periods beginningafter June 15, 2005.  Accordingly, ourParent Partnership adopted SFAS 123(R) in the first quarter of 2006, under themodified prospective transition method. Our Parent Partnership’s 1999 and 2005 Phantom Unit Plans are liabilityawards under the provisions of this statement. We are allocated a portion of the expense related to our ParentPartnership’s compensation plans.  Noadditional compensation expense has been recorded in connection with theadoption of SFAS 123(R) as our Parent Partnership has historically recorded theassociated liabilities at fair value. The adoption of SFAS 123(R) did not have a material effect on ourfinancial position, results of operations or cash flows.

In June 2005, the Emerging Issues Task Force (“EITF”)reached consensus in EITF 04-5, *Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights*,to provide guidance on how general partners in a limited partnership shoulddetermine whether they control a limited partnership and therefore shouldconsolidate it.  The EITF agreed that thepresumption of general partner control would be overcome only when the limitedpartners have either of two types of rights. The first type, referred to as “kick-outrights,” is the right to dissolve or liquidate the partnership or otherwiseremove the general partner without cause. The second type, referred to as “participating rights,” is the right toeffectively participate in significant decisions made in the ordinary course ofthe partnership’s business. The kick-out rights and the participating rightsmust be substantive in order to overcome the presumption of general partnercontrol. The consensus is effective for general partners of all new limitedpartnerships formed and for existing limited partnerships for which thepartnership agreements are modified subsequent to the date of FASB 

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ratification (June 29, 2005).  For existing limited partnerships that havenot been modified, the guidance in EITF 04-5 is effective no later than thebeginning of the first reporting period in fiscal years beginning afterDecember 15, 2005.  The adoption of EITF04-5 did not have a material effect on our financial position, results of operationsor cash flows.

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*.  SFAS 154 establishes new standards onaccounting for changes in accounting principles.  All such changes must be accounted for byretrospective application to the financial statements of prior periods unlessit is impracticable to do so.  SFAS 154completely replaces APB Opinion No. 20, *AccountingChanges,*and SFAS No. 3, *ReportingAccounting Changes in Interim Periods*.  However, it carries forward the guidance inthose pronouncements with respect to accounting for changes in estimates,changes in the reporting entity, and the correction of errors.  SFAS 154 is effective for accounting changesand error corrections made in fiscal years beginning after December 15, 2005,with early adoption permitted for changes and corrections made in yearsbeginning after June 1, 2005. The application of SFAS 154 does not affect thetransition provisions of any existing pronouncements, including those that arein the transition phase as of the effective date of SFAS 154.  The adoption of SFAS 154 did not have amaterial effect on our financial position, results of operations or cash flows.

In September 2005, the EITF reached consensus in EITF04-13, *Accounting for Purchases and Sales of Inventorywith the Same Counterparty*, to define when a purchase and a sale ofinventory with the same party that operates in the same line of business shouldbe considered a single nonmonetary transaction subject to APB Opinion No. 29, *Accounting for Nonmonetary Transactions*.  Two or more inventory transactions with thesame party should be combined if they are entered into in contemplation of oneanother.  The EITF also requires entitiesto account for exchanges of inventory in the same line of business at fairvalue or recorded amounts based on inventory classification.  The guidance in EITF 04-13 is effective fornew inventory arrangements entered into in reporting periods beginning afterMarch 15, 2006.  We adopted EITF 04-13 onApril 1, 2006, and the adoption of EITF 04-13 did not have a material effect onour financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS No. 155, **Accounting forCertain Hybrid Financial Instruments,**which amends SFASNo. 133, **Accounting for Derivative Instruments and HedgingActivities** and SFAS No. 140, **Accounting for Transfers and Servicingof Financial Assets and Extinguishments of Liabilities**.This statement improves the financial reporting of certain hybrid financial instrumentsand simplifies the accounting for these instruments. SFAS 155 permits fairvalue remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation, clarifies whichinterest-only and principal-only strips are not subject to the requirements ofSFAS 133, establishes a requirement to evaluate interests in securitizedfinancial assets to identify interests that are freestanding derivatives orthat are hybrid financial instruments that contain an embedded derivativerequiring bifurcation, clarifies that concentrations of credit risk in the formof subordination are not embedded derivatives, and amends SFAS 140 to eliminatethe prohibition on a qualifying special-purpose entity from holding aderivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument. SFAS 155 is effective for allfinancial instruments acquired, issued, or subject to a remeasurement eventoccurring after the fiscal year that begins after September 15, 2006(January 1, 2007).  At June 30, 2006, we did not have any hybrid financialsecurities outstanding and, as such, we do not believe that adoption of thisstatement will have  a material effect onour financial position, results of operations or cash flows.

In June 2006, the EITF reached consensus in EITF 06-3,*How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*. The accounting guidance permits companies to elect to present on eithera gross or net basis sales and other taxes that are imposed on and concurrentwith individual revenue-producing transactions between a seller and acustomer.  The gross basis includes thetaxes in revenues and costs; the net basis excludes the taxes from revenues. Theaccounting guidance does not apply to tax systems that are based on grossreceipts or total revenues.  

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EITF 06-3 requires companies to disclose their policyfor presenting the taxes and disclose any amounts presented on a gross basis ifthose amounts are significant.  Theguidance in EITF 06-3 is effective January 1, 2007.  As a matter of policy, we report such taxeson a net basis.  We believe that adoptionof EITF 06-3 will not have a material effect on our financial position, resultsof operations or cash flows.

**NOTE2.  INTANGIBLE ASSETS**

We account for our intangible assets under SFAS No.142, *Goodwill and Other Intangible Assets*,**which was issued by the FASB in July 2001.  SFAS 142 prohibits amortization of goodwilland intangible assets with indefinite useful lives, but instead requirestesting for impairment at least annually. SFAS 142 requires that intangibleassets with finite useful lives be amortized over their respective estimateduseful lives.  If an intangible asset hasa finite useful life, but the precise length of that life is not known, thatintangible asset shall be amortized over the best estimate of its usefullife.  At a minimum, we will assess theuseful lives and residual values of all intangible assets on an annual basis todetermine if adjustments are required.

**The following table reflects the components of amortizedintangible assets, included in other assets on the consolidated balance sheets,and excess investment included in equity investments, at June 30, 2006 andDecember 31, 2005 (in thousands):**

|                           | ** ** | **June 30, 2006**     | ** ** | **December 31, 2005** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                      |       |                            |       |                            |       |   |   |   |   |
| Intangible  assets:       |       |                            |       |                            |       |   |   |   |   |
| Transportation agreements |       | $                               | 1,000      |                            | $          | (283 | ) | $ | 1,328 |   | $ | (326 | ) |
|                      |       |                            |       |                            |       |   |   |   |   |
| Excess  investment:       |       |                            |       |                            |       |   |   |   |   |
| Centennial  Pipeline LLC  |       | $                               | 33,390     |                            | $          | (14,651 | ) | $ | 33,390 |   | $ | (12,947 | ) |

 

The value assigned to our excess investment inCentennial Pipeline LLC was created upon its formation.  Approximately $30.0 million is related to acontract and is being amortized on a unit-of-production basis based upon thevolumes transported under the contract compared to the guaranteed totalthroughput of the contract over a 10-year life. The remaining $3.4 million is related to a pipeline and is being amortizedon a straight-line basis over the life of the pipeline, which is 35 years.

Amortization expense on intangible assets was lessthan $0.1 million for the three-month and six-month periods ended June 30, 2006and 2005.  Amortization expense on excessinvestments included in equity earnings was $1.0 million and $1.1 million forthe three months ended June 30, 2006 and 2005, respectively, and was $1.7million and $2.1 million for the six months ended June 30, 2006 and 2005,respectively.

The following table sets forth the estimated amortizationexpense of intangible assets and the estimated amortization expense allocatedto equity earnings for the years ending December 31 (in thousands):

|      | ** ** | **Intangible Assets** | ** ** | **Excess Investments** | ** ** |
|------|------------|----------------------------|------------|-----------------------------|------------|
| 2006 |       | $                          | 50         |                        | $          | 3,999 |   |
| 2007 |       | 50                         |       | 4,422                       |       |
| 2008 |       | 50                         |       | 4,747                       |       |
| 2009 |       | 50                         |       | 6,187                       |       |
| 2010 |       | 50                         |       | 6,351                       |       |
|      |            |                            |            |                             |            |  |  |

 

8

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**NOTE 3.  INTEREST RATESWAP**

In October 2001, we entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our fixed rate7.51% 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% Senior Notes.  Under the swap agreement, we pay a floatingrate of interest based on a three-month U.S. Dollar LIBOR rate, plus a spreadof 147 basis points, and receive a fixed rate of interest of 7.51%.  During the six months ended June 30, 2006 and2005, we recognized reductions in interest expense of $1.2 million and $3.3million, respectively, related to the difference between the fixed rate and thefloating rate of interest on the interest rate swap.  During the quarters ended June 30, 2006 and2005, we measured the hedge effectiveness of this interest rate swap and notedthat no gain or loss from ineffectiveness was required to be recognized.  The fair value of this interest rate swap wasa loss of approximately $11.3 million and $0.9 million at June 30, 2006, andDecember 31, 2005, respectively.

**NOTE 4.  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 June 30, 2006, and December 31, 2005. The major components ofinventories were as follows (in thousands):

|                         | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Refined products        |       | $                       | —     |                        | $          | 4,461 |   |
| LPGs                    |       | 13,278                  |       | 7,403                       |       |
| Materials and  supplies |       | 5,204                   |       | 4,585                       |       |
| Total                   |       | $                       | 18,482     |                        | $          | 16,449 |   |

 

**NOTE 5.  EQUITYINVESTMENTS**

We own a 50% ownership interest in Centennial PipelineLLC (“Centennial”), and Marathon Petroleum Company LLC (“Marathon”) owns theremaining 50% interest. Centennial owns an interstate refined petroleumproducts pipeline extending from the upper Texas Gulf Coast to centralIllinois.  During the six months endedJune 30, 2006, we contributed an additional $2.5 million to Centennial.  During the six months ended June 30, 2005, wedid not invest any additional funds in Centennial.  We have received no cash distributions fromCentennial since its formation.

We own a 50% ownership interest in Mont BelvieuStorage Partners, L.P. (“MB Storage”), and Louis Dreyfus Energy Services L.P. (“LouisDreyfus”) owns the remaining 50% interest. MB Storage owns storage capacity at the Mont Belvieu fractionation andstorage complex and a short haul transportation shuttle system that ties MontBelvieu, Texas, to the upper Texas Gulf Coast energy marketplace. MB Storage isa service-oriented, fee-based venture serving the fractionation, refining andpetrochemical industries with substantial capacity and flexibility for thetransportation, terminaling and storage of NGLs, LPGs and refinedproducts.  MB Storage has no commoditytrading activity.  We operate thefacilities for MB Storage (see Note 10 regarding expected divestiture of MBStorage).

For the years ended December 31, 2006 and 2005, wereceive the first $1.7 million per quarter (or $6.78 million on an annualbasis) of MB Storage’s income before depreciation expense, as defined in theAgreement of Limited Partnership of MB Storage. Our share of MB Storage’s earnings may be adjusted annually by thepartners of MB Storage.  Any amount of MBStorage’s annual income before depreciation expense in excess of $6.78 million 

9

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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 six months ended June 30, 2006 and 2005, our sharingratios in the earnings of MB Storage were approximately 61.4% and 62.6%,respectively.  During the six months endedJune 30, 2006, we received distributions of $7.8 million from MB Storage andcontributed $1.7 million to MB Storage. During the six months ended June 30, 2005, we received distributions of$7.3 million from MB Storage and contributed $1.1 million to MB Storage.

We use the equity method of accounting to account forour investments in Centennial and MB Storage. Summarized combined financial information for Centennial and MB Storagefor the six months ended June 30, 2006 and 2005, is presented below (in thousands):

|                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------|------------|-----------------------------------------------|------------|
| ** **        | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Revenues          |       | $                                             | 33,900     |   | $ | 36,719 |   |
| Net income (loss) |       | (1,258                                        | )          | 3,847 |   |
|                   |            |                                               |            |  |  |  |  |

 

Summarized combined balance sheet data for Centennialand MB Storage as of June 30, 2006, and December 31, 2005, is presented below(in thousands):

|                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Current assets          |       | $                 | 26,769     |                  | $          | 36,647 |   |
| Noncurrent  assets      |       | 364,814           |       | 369,679               |       |
| Current  liabilities    |       | 10,326            |       | 23,621                |       |
| Long-term debt          |       | 150,000           |       | 150,000               |       |
| Noncurrent  liabilities |       | 20,872            |       | 13,522                |       |
| Partners’ capital  |       | 210,385           |       | 219,183               |       |
|                         |            |                   |            |                       |            |  |  |

 

**NOTE 6.  DEBT**

**Senior Notes**

On January 27, 1998, we completed the issuance of$180.0 million principal amount of 6.45% Senior Notes due 2008, and $210.0million principal amount of 7.51% Senior Notes due 2028 (collectively the “SeniorNotes”).  The 6.45% Senior Notes wereissued at a discount of $0.3 million and are being accreted to their face valueover the term of the notes.  The 6.45%Senior Notes due 2008 may not be redeemed prior to their maturity on January15, 2008.  The 7.51% Senior Notes due2028, issued at par, may be redeemed at any time after January 15, 2008, at ouroption, in whole or in part, at the following redemption prices (expressed inpercentages of the principal amount) during the twelve months beginning January15 of the years indicated:

|          | ** ** | **Redemption** | ** ** |
|----------|------------|----------------|------------|
| **Year** | ** ** | **Price**      | ** ** |
|     |       |           |       |
| 2008     |       | 103.755        | %          |
| 2009     |       | 103.380        | %          |
| 2010     |       | 103.004        | %          |
| 2011     |       | 102.629        | %          |
| 2012     |       | 102.253        | %          |
| 2013     |       | 101.878        | %          |
| 2014     |       | 101.502        | %          |
| 2015     |       | 101.127        | %          |
| 2016     |       | 100.751        | %          |
| 2017     |       | 100.376        | %          |

 

10

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and thereafter at 100% of the principal amount,together in each case with accrued interest at the redemption date.

The Senior Notes do not have sinking fundrequirements.  Interest on the SeniorNotes is payable semiannually in arrears on January 15 and July 15 of eachyear.  The Senior Notes are unsecuredobligations and rank pari passu 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 June 30, 2006, wewere in compliance with the covenants of the Senior Notes.

We have entered into an interest rate swap agreementto hedge our exposure to changes in the fair value on a portion of the SeniorNotes discussed above.  The fair value ofthis interest rate swap was a loss of approximately $11.3 million and $0.9million at June 30, 2006, and December 31, 2005, respectively (see Note 3).

The following table summarizes the estimated fairvalues of the Senior Notes as of June 30, 2006, and December 31, 2005 (in millions):

|                                       | ** ** | ** **      | ** ** | **Fair Value**     | ** ** |
|---------------------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                            | ** ** | **Face  Value** | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|                                  |       |            |       |                    |       |   |   |
| 6.45% Senior  Notes, due January 2008 |       | $               | 180.0      |                    | $          | 181.0 |   | $ | 183.7 |   |
| 7.51% Senior Notes, due  January 2028 |       | 210.0           |       | 221.1                   |       | 224.1 |   |
|                                       |            |                 |            |                         |            |  |  |  |  |  |

 

**Other Long Term Debt and Credit Facilities**

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s debt instruments.  Theinterest rates charged by the Parent Partnership include the stated interestrate paid by the Parent Partnership on its debt obligations, plus a premium tocover debt issuance costs.  The interestrate is also decreased or increased to cover gains and losses, respectively, onany interest rate swaps that the Parent Partnership may have in place on itsrespective debt instruments.  These debtinstruments of the Parent Partnership 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% Senior Notes were issued at adiscount of $2.2 million and are being accreted to their face value over theterm of the notes.  The 7.625% SeniorNotes may be redeemed at any time at our Parent Partnership’s option with thepayment of accrued interest and a make-whole premium determined by discountingremaining interest and principal payments using a discount rate equal to therate of the United States Treasury securities of comparable remaining maturityplus 35 basis points.  The indenturegoverning the 7.625% Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit our Parent Partnership’s abilityto incur additional indebtedness.

On January 30, 2003, our Parent Partnership issued$200.0 million principal amount of 6.125% Senior Notes due 2013.  The 6.125% Senior Notes were issued at adiscount of $1.4 million and are being accreted to their face value over theterm of the notes.   The 6.125% SeniorNotes may be redeemed at any time at our Parent Partnership’s option with thepayment of accrued interest and a make-whole premium determined by discountingremaining interest and principal payments using a discount rate equal to therate of the United States Treasury securities of comparable remaining maturityplus 35 basis points.  The indenturegoverning the 6.125% 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 the Parent Partnership’s abilityto incur additional indebtedness.

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On October 21, 2004, our Parent Partnership enteredinto a $600.0 million unsecured revolving credit facility with a five yearterm, including the issuance of letters of credit of up to $100.0 million (“RevolvingCredit Facility”).  The interest rate isbased, at our Parent Partnership’s option, on either the lender’s base rateplus a spread, or LIBOR plus a spread in effect at the time of theborrowings.  Financial covenants in theRevolving Credit Facility require that our Parent Partnership maintain a ratioof Consolidated Funded Debt to Pro Forma EBITDA (as defined and calculated inthe facility) of less than 4.75 to 1.00 (subject to adjustment for specifiedacquisitions) and a ratio of EBITDA to Interest Expense (as defined andcalculated in the facility) of at least 3.00 to 1.00, in each case with respectto specified twelve month periods.  Otherrestrictive covenants in the Revolving Credit Facility limit our ParentPartnership’s and its subsidiaries’ ability to, among other things, incuradditional indebtedness, make certain distributions, incur liens, engage inspecified transactions with affiliates and complete mergers, acquisitions andsales of assets.  On February 23, 2005,the Parent Partnership amended its Revolving Credit Facility to remove the requirementthat DEFS must at all times own, directly or indirectly, 100% of the Company,to allow for its acquisition by DFI (see Note 1).   During the second quarter of 2005, theParent Partnership used a portion of the proceeds from an equity offering inMay 2005 to repay a portion of the Revolving Credit Facility.  On December 13, 2005, the Parent Partnershipamended its Revolving Credit Facility as follows:

·                  Totalbank commitments increased from $600.0 million to $700.0 million.  The amendment also provided that thecommitments under the credit facility may be increased up to a maximum of$850.0 million upon our Parent Partnership’s request, subject to lenderapproval and the satisfaction of certain other conditions.

·                  Thefacility fee and the borrowing rate then in effect were reduced by 0.275%.

·                  Thematurity date of the credit facility was extended from October 21, 2009, toDecember 13, 2010.  Also under the termsof the amendment, the Parent Partnership may request up to two, one-yearextensions of the maturity date.  Theseextensions, if requested, will become effective subject to lender approval andsatisfaction of certain other conditions.

·                  The amendment also removed the $100.0million limit on the total amount of standby letters of credit that can beoutstanding under the credit facility.

At June 30, 2006, $445.0 million was outstanding underthe Parent Partnership’s Revolving Credit Facility at a weighted averageinterest rate of 5.8%. At June 30, 2006, our Parent Partnership was incompliance with the covenants of this credit facility. Please see Note 11 forinformation regarding an amendment to the Revolving Credit Facility.

AtJune 30, 2006 and December 31, 2005, we had unsecured intercompany notespayable to our Parent Partnership of $236.8 million and $206.9 million,respectively, which related to borrowings under the Parent Partnership’sRevolving Credit Facility, 7.625% Senior Notes and 6.125% Senior Notes. Theweighted average interest rate on the note payable to the Parent Partnership atJune 30, 2006, was 6.4%.  At June 30,2006, accrued interest includes $3.9 million due to our ParentPartnership.  For the six months endedJune 30, 2006 and 2005, interest expense incurred on the note payable to ourParent Partnership totaled $6.8 million and $5.1 million, respectively.

**NOTE 7.  QUARTERLYDISTRIBUTONS OF AVAILABLE CASH**

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

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During the six months ended June 30, 2006 and 2005, wepaid cash distributions to our Parent Partnership totaling $30.1 million and$59.4 million, respectively.  On August7, 2006, we will pay a cash distribution to our Parent Partnership of $20.3million for the quarter ended June 30, 2006.

**NOTE 8.RELATED PARTY TRANSACTIONS**

## **ParentPartnership**

We do not have any employees.  Our Parent Partnership is managed by theCompany, which prior to February 23, 2005, was an indirect wholly ownedsubsidiary of DEFS.  According to ourPartnership Agreement and an administrative services agreement with EPCO andcertain of its affiliates, we reimburse TEPPCO GP and the Company for alldirect and indirect expenses related to our business activities.  We reimburse EPCO for the allocated costs ofits employees who perform operating, management and other administrativefunctions for us (see Note 1).

Our Parent Partnership allocates operating, generaland administrative expenses to us for legal, insurance, financial,communication and other administrative services based upon the estimated levelof effort devoted to our various operations. In addition, we make cash payments on behalf of the Parent Partnershipfor various expenses.  At June 30, 2006,we had a net receivable of $3.2 million and at December 31, 2005, we had a netpayable of $18.5 million to our Parent Partnership related to these affiliatedactivities.

**EPCO andAffiliates and Duke Energy, DEFS and Affiliates**

The following table summarizes the related partytransactions with EPCO and affiliates and DEFS and affiliates for the three monthsand six months ended June 30, 2006 and 2005 (in millions):
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues from  EPCO and affiliates: (1)           |       |                                            |       |                                          |       |   |   |   | ** ** |
| Transportation – LPGs                        |       | $                                               | 0.6        |                                          | $          | 0.7 |   | $ | 2.4 |   | $ | 1.6 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Costs and  Expenses from EPCO and affiliates: (1) |       |                                            |       |                                          |       |   |   |   |   |
| Payroll, administrative and other (2)             |       | 12.1                                            |       | 3.8                                           |       | 24.7 |   | 3.8 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Revenues from  DEFS and affiliates: (3)           |       |                                            |       |                                          |       |   |   |   |   |
| Transportation – LPGs                        |       | —                                          |       | —                                        |       | — |   | 0.7 |   |
| Other operating revenues                          |       | —                                          |       | —                                        |       | — |   | 1.1 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Costs and  Expenses from DEFS and affiliates: (3) |       |                                            |       |                                          |       |   |   |   |   |
| Payroll,  administrative and other (4)            |       | —                                          |       | —                                        |       | — |   | 7.8 |   |
|                                                   |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

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(1)          Operating revenues earned and expensesincurred from activities with EPCO and its affiliates are considered related partytransactions beginning February 24, 2005, as a result of the change inownership of the Company.

(2)          Substantially all of these costs were relatedto payroll, payroll related expenses and administrative expenses, includingreimbursements related to employee benefits and employee benefit plans,incurred in managing us and our subsidiaries in accordance with the ASA.

(3)          Operating revenues earned and expensesincurred from activities with DEFS and its affiliates are considered relatedparty transactions prior to February 23, 2005, at which time a change inownership of the Company occurred.

13

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(4)          Substantially all of these costs were relatedto payroll, payroll related expenses and administrative expenses incurred inmanaging us and our subsidiaries.

At June 30, 2006 and December 31, 2005, we had areceivable from EPCO and affiliates of $0.1 million and $1.3 million,respectively, related to transportation services provided to EPCO andaffiliates.

Beginning February 24, 2005, the majority of ourinsurance coverage, including property, liability, business interruption, autoand directors and officers’ liability insurance, was obtained by our ParentPartnership through EPCO.  For the threemonths and six months ended June 30, 2006, we incurred insurance expenserelated to premiums paid by EPCO of $1.9 million and $3.0 million,respectively, and $0.9 million for the three months and six months ended June30, 2005. At June 30, 2006 and December 31, 2005, we had insurancereimbursement receivables due from EPCO of $1.8 million and $1.3 million,respectively.

**NOTE 9.  EMPLOYEEBENEFIT PLANS**

**RetirementPlans**

The Parent Partnership’s TEPPCO Retirement CashBalance Plan (“TEPPCO RCBP”) was a non-contributory, trustee-administeredpension plan.  In addition, the ParentPartnership’s TEPPCO Supplemental Benefit Plan (“TEPPCO SBP”) was anon-contributory, nonqualified, defined benefit retirement plan, in whichcertain executive officers participated. The TEPPCO SBP was established to restore benefit reductions caused by themaximum benefit limitations that apply to qualified plans.  The benefit formula for all eligibleemployees was a cash balance formula. Under a cash balance formula, a plan participant accumulated aretirement benefit based upon pay credits and current interest credits.  The pay credits were based on a participant’ssalary, age and service.  The ParentPartnership used a December 31 measurement date for these plans.

On May 27, 2005, the TEPPCO RCBP and the TEPPCO SBPwere amended.  Effective May 31, 2005,participation in the TEPPCO RCBP was frozen, and no new participants wereeligible to be covered by the plan after that date.  Effective June 1, 2005, EPCO adopted theTEPPCO RCBP and the TEPPCO SBP for the benefit of its employees providingservices to us and our Parent Partnership. Effective December 31, 2005, all plan benefits accrued were frozen,participants received no additional pay credits after that date, and all planparticipants were 100% vested regardless of their years of service.  The TEPPCO RCBP plan was terminated effectiveDecember 31, 2005, and plan participants have the option to receive theirbenefits either through a lump sum payment in 2006 or through an annuity.  In April 2006, our Parent Partnershipreceived a determination letter from the IRS providing IRS approval of the plantermination.  For those plan participantswho elect to receive an annuity, our Parent Partnership will purchase anannuity contract from an insurance company in which the plan participant ownsthe annuity, absolving our Parent Partnership of any future obligation to theparticipant.  Participants in the TEPPCOSBP received pay credits through November 30, 2005, and received lump sumbenefit payments in December 2005.  Boththe RCBP and SBP benefit payments are discussed below.

In June 2005, the Parent Partnership recorded acurtailment charge of $0.1 million in accordance with SFAS No. 88, *Employers’ Accounting for Settlements and Curtailments of DefinedBenefit Pension Plans and for Termination Benefits*, as a result ofthe TEPPCO RCBP and TEPPCO SBP amendments. A portion of the charge was allocated to us.  As of May 31, 2005, the following assumptionswere changed for purposes of determining the net periodic benefit costs for theremainder of 2005: the discount rate, the long-term rate of return on planassets, and the assumed mortality table. The discount rate was decreased from 5.75% to 5.00% to reflect rates ofreturns on bonds currently available to settle the liability.   The expected long-term rate of return onplan assets was changed from 8% to 2% due to the movement of plan funds fromequity investments into short-term money market funds.

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The mortality table was changed to reflect overallimprovements in mortality experienced by the general population.  The curtailment charge arose due to theaccelerated recognition of the unrecognized prior service costs.  The Parent Partnership recorded additionalsettlement charges of approximately $0.2 million in the fourth quarter of 2005relating to the TEPPCO SBP.  The ParentPartnership expects to record additional settlement charges of approximately$4.0 million in the third quarter of 2006 relating to the TEPPCO RCBP for anyexisting unrecognized losses upon the plan termination and final distributionof the assets to the plan participants. We expect to be allocated a share ofthese charges.  

The components of net pension benefits costs allocatedto us for the TEPPCO RCBP and the TEPPCO SBP for the three months and sixmonths ended June 30, 2006 and 2005, were as follows (in thousands):

|                                                | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                              | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost  benefit earned during the period |       | $                                                     | —     |                                                | $          | 589 |   | $ | — |   | $ | 1,154 |   |
| Interest cost on  projected benefit obligation |       | 169                                                   |       | 131                                                 |       | 335 |   | 257 |   |
| Expected return  on plan assets                |       | (77                                                   | )          | (146                                                | )          | (161 | ) | (286 | ) |
| Amortization of  prior service cost            |       | —                                                |       | 1                                                   |       | — |   | 2 |   |
| Amortization of  actuarial losses              |       | 21                                                    |       | 16                                                  |       | 43 |   | 31 |   |
| SFAS 88  curtailment chargee                   |       | —                                                |       | 14                                                  |       | — |   | 28 |   |
| Net pension  benefits costs                    |       | $                                                     | 113        |                                                | $          | 605 |   | $ | 217 |   | $ | 1,186 |   |

**Other Postretirement Benefits**

The Parent Partnership provided certain health careand life insurance benefits for retired employees on a contributory andnon-contributory basis (“TEPPCO OPB”). Employees became eligible for these benefits if they met certain age andservice requirements at retirement, as defined in the plans.  The Parent Partnership provided a fixeddollar contribution, which did not increase from year to year, towards retiredemployee medical costs.  The retiree paidall health care cost increases due to medical inflation. The Parent Partnershipused a December 31 measurement date for this plan.

In May 2005, benefits provided to employees under theTEPPCO OPB were changed.  Employeeseligible for these benefits received them through December 31, 2005, however,effective December 31, 2005, these benefits were terminated.  As a result of this change in benefits and inaccordance with SFAS No. 106, *Employers’ Accounting forPostretirement Benefits Other Than Pensions*, the Parent Partnershiprecorded a curtailment credit of approximately $1.7 million in its accumulatedpostretirement obligation, which reduced the Parent Partnership’s accumulatedpostretirement obligation to the total of the expected remaining 2005 paymentsunder the TEPPCO OPB.  The employeesparticipating in this plan at that time were transferred to DEFS, who isexpected to provide postretirement benefits to these retirees.  Our Parent Partnership recorded a one-timesettlement to DEFS in the third quarter of 2005 of $0.4 million for theremaining postretirement benefits.  Aportion of these charges were allocated to us. 

15

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The components of net postretirement benefits costallocated to us for the TEPPCO OPB for the three months and six months endedJune 30, 2006 and 2005, were as follows (in thousands):

|                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost  benefit earned during the period                  |       | $                                | —     |                           | $          | 23 |   | $ | — |   | $ | 45 |   |
| Interest cost on  accumulated postretirement benefit obligation |       | —                           |       | 19                             |       | — |   | 38 |   |
| Amortization of  prior service cost                             |       | —                           |       | 15                             |       | — |   | 29 |   |
| Recognized net  actuarial loss                                  |       | —                           |       | 1                              |       | — |   | 2 |   |
| SFAS 106  curtailment credit                                    |       | —                           |       | (470                           | )          | — |   | (922 | ) |
| Net  postretirement benefits costs                              |       | $                                | —     |                           | $          | (412 | ) | $ | — |   | $ | (808 | ) |

Effective June 1,2005, the payroll functions performed by DEFS for the Company were transferredfrom DEFS to EPCO.  For those employeeswho were receiving certain other postretirement benefits at the time of theacquisition of the Company by DFI, DEFS is expected to continue to providethese benefits to those employees. Effective June 1, 2005, EPCO began providing certain otherpostretirement benefits to those employees who became eligible for the benefitsafter June 1, 2005, and will charge those benefit related costs to our ParentPartnership.  We expect to be allocated aportion of these costs.  As a result ofthese changes, the Parent Partnership recorded a $1.2 million reduction in itsother postretirement obligation in June 2005. A portion of the reduction was allocated to us.  

## **EstimatedFuture Benefit Contributions**

Our Parent Partnership does not expect to make furthercontributions to its retirement plans and other post retirement benefitplans.  However, EPCO maintains a 401(k)plan for the benefit of employees providing services to our Parent Partnership,and our Parent Partnership will continue to reimburse EPCO for the cost ofmaintaining this plan in accordance with the ASA.  A portion of these charges are allocated tous.

**NOTE 10.  COMMITMENTSAND CONTINGENCIES**

In the fall of 1999, we and the Company were named asdefendants in a lawsuit in Jackson County Circuit Court, Jackson County,Indiana, styled *Ryan E. McCleery and MarciaS. McCleery, et al. and Michael and Linda Robson, et al. v. Texas EasternCorporation, et al. * **In thelawsuit, the plaintiffs contend, among other things, that we and other defendantsstored and disposed of toxic and hazardous substances and hazardous wastes in amanner that caused the materials to be released into the air, soil andwater.  They further contend that the release caused damages to theplaintiffs.  In their complaint, the plaintiffs allege strict liabilityfor both personal injury and property damage together with gross negligence,continuing nuisance, trespass, criminal mischief and loss of consortium. Theplaintiffs are seeking compensatory, punitive and treble damages.  OnMarch 18, 2005, we entered into Release and Settlement Agreements with theMcCleery plaintiffs dismissing all of these plaintiffs’ claims on terms thatdid not have a material adverse effect on our financial position, results ofoperations or cash flows.  Although we did not settle with all plaintiffsand we therefore remain named parties in the *Michaeland Linda Robson, et al. v. Texas Eastern Corporation, et al*.action, a co-defendant has agreed, by Cooperative DefenseAgreement, to fund the defense and satisfy all final judgments which mightbe rendered with the remaining claims asserted against us.  Consequently,we do not believe that the outcome of these remaining claims will have amaterial adverse effect on our financial position, results of operations orcash flows.

On December 21, 2001, we were named as a defendant ina lawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana, styled*Rebecca L. Grisham et al. v.  TE Products Pipeline Company, Limited*

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*Partnership*.  In this case, the plaintiffs contend that ourpipeline, which crosses the plaintiffs’ property, leaked toxic products ontotheir property and, consequently caused damages to them.  We have filed an answer to the plaintiffs’petition denying the allegations, and we are defending ourselves vigorouslyagainst the lawsuit.  The plaintiffsassert damages attributable to the remediation of the property of approximately$1.4 million; however, this case is covered by insurance, subject to applicablepolicy limits.  We do not believe thatthe outcome of this lawsuit will have a material adverse effect on ourfinancial position, results of operations or cash flows.

In May 2003, the Company was named as a defendant in alawsuit styled *John R. James, et al. v. J Graves InsulationCompany, et al.* as filed in the first Judicial District Court, CaddoParish, Louisiana.  There are numerousplaintiffs identified in the action that are alleged to have suffered damagesas a result 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 1971 throughJune 1972, who is alleged to have worked on a facility owned by the Company’spredecessor.  This period represents asmall portion of the total alleged exposure period from January 1964 throughDecember 2001 for this individual.  Theindividual’s claims involve numerous employers and alleged job sites.  In response to the exception filed on behalfof the Company, the plaintiffs have agreed to voluntarily dismiss the Companyfrom the suit.  We do not believe thatthe outcome of this lawsuit will have a material adverse effect on ourfinancial position, results of operations or cash flows.

In 1991, the Company and the Parent Partnership werenamed as a defendant in a matter styled *Jimmy R. Green, et al. v.Cities Service Refinery, et al.*as filed in the 26th Judicial District Court of Bossier Parish, Louisiana.  The plaintiffs in this matter reside orformerly resided on land that was once the site of a refinery owned by one ofour co-defendants.  The former refineryis located near our Bossier City facility. Plaintiffs have claimed personal injuries and property damage arisingfrom alleged contamination of the refinery property.  The plaintiffs have recently pursuedcertification as a class and have significantly increased their demand toapproximately $175.0 million.  Thisrevised demand includes amounts for environmental restoration not previouslyclaimed by the plaintiffs.  The Companyand the Parent Partnership have never owned any interest in the refineryproperty made the basis of this action, and we do not believe that wecontributed to any alleged contamination of this property.  While we cannot predict the ultimate outcome,we do not believe that the outcome of this lawsuit will have a material adverseeffect on our financial position, results of operations or cash flows.

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

**Regulatory Matters**

Our pipelines and associated facilities are subject tomultiple environmental obligations and potential liabilities under a variety offederal, state and local laws and regulations. These include, withoutlimitation: the Comprehensive Environmental Response, Compensation, andLiability Act; the Resource Conservation and Recovery Act; the Clean Air Act;the Federal Water Pollution Control Act or the Clean Water Act; the OilPollution Act; and analogous state and local laws and regulations. Such lawsand regulations affect many aspects of our present and future operations, andgenerally require us to obtain and comply with a wide variety of environmentalregistrations, licenses, permits, inspections and other approvals, with respectto air emissions, water quality, wastewater discharges, and solid and hazardouswaste management. Failure to comply with these requirements may expose us tofines, penalties and/or interruptions in our operations that could influenceour results of operations. If an accidental leak, spill or release of hazardoussubstances occurs at any facilities that we own, operate or otherwise use, orwhere we send materials for treatment or disposal, we could be held jointly andseverally liable for all 

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resulting liabilities, including investigation,remedial and clean-up costs. Likewise, we could be required to remove orremediate previously disposed wastes or property contamination, includinggroundwater contamination.  Any or all ofthis could materially affect our results of operations and cash flows.

We believe that our operations and facilities are insubstantial compliance with applicable environmental laws and regulations, andthat the cost of compliance with such laws and regulations will not have amaterial adverse effect on our results of operations or financial position. Wecannot ensure, however, that existing environmental regulations will not berevised or that new regulations will not be adopted or become applicable to us.The clear trend in environmental regulation is to place more restrictions andlimitations on activities that may be perceived to affect the environment, andthus there can be no assurance as to the amount or timing of futureexpenditures for environmental regulation compliance or remediation, and actualfuture expenditures may be different from the amounts we currently anticipate.Revised or additional regulations that result in increased compliance costs oradditional operating restrictions, particularly if those costs are not fullyrecoverable from our customers, could have material adverse effect on ourbusiness, financial position, results of operations and cash flows.  At June 30, 2006, and December 31, 2005, wehave an accrued liability of $1.0 million and $1.2 million, respectively,related to sites requiring environmental remediation activities.

In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana, facility.  In1999, our Arcadia facility and adjacent terminals were directed by theRemediation Services Division of the LDEQ to pursue remediation of thiscontamination.  Effective March 2004, weexecuted an access agreement with an adjacent industrial landowner who islocated upgradient of the Arcadia facility. This agreement enables the landowner to proceed with remediationactivities at our Arcadia facility for which it has accepted sharedresponsibility.  At June 30, 2006, wehave an accrued liability of $0.2 million for remediation costs at our Arcadiafacility.  We do not expect that thecompletion of the remediation program proposed to the LDEQ will have a futurematerial adverse effect on our financial position, results of operations orcash flows.

On July 27, 2004, wereceived notice from the United States Department of Justice (“DOJ”) of itsintent to seek a civil penalty against us related to our November 21, 2001,release of approximately 2,575 barrels of jet fuel from our 14-inch diameterpipeline located in Orange County, Texas. The DOJ, at the request of the Environmental Protection Agency, isseeking a civil penalty against us for alleged violations of the Clean WaterAct (“CWA”) arising out of this release, as well as three smaller spills atother locations in 2004 and 2005.  Wehave agreed with the DOJ on a proposed penalty of $2.865 million, along with ourcommitment to implement additional spill prevention measures, and expect tofinalize the settlement in the third quarter of 2006.  We do not expect this settlement to have amaterial adverse effect on our financial position, results of operations or cashflows.

On September 18, 2005, a propane release and fireoccurred at our Todhunter facility, near Middletown, Ohio.  The incident resulted in the death of one ofour employees; there were no other injuries. Repairs to the impacted facilities have been completed.  On March 17, 2006, we received a citationfrom the Occupational Safety and Health Administration (“OSHA”) arising out ofthis incident with a proposed penalty of $0.1 million.  We are currently in settlement discussionswith OSHA.  We do not expect that anysettlement of this citation will have a material adverse effect on ourfinancial position, results of operations or cash flows.

We are also in negotiations with the U.S. Departmentof Transportation with respect to a notice of probable violation that wereceived on April 25, 2005, for alleged violations of pipeline safetyregulations at our Todhunter facility, with a proposed $0.4 million civilpenalty.  We responded on June 30, 2005,by admitting certain of the alleged violations, contesting others andrequesting a reduction in the proposed civil penalty.  We do not expect any settlement, fine orpenalty to have a material adverse effect on our financial position, results ofoperations or cash flows. 

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On March 26, 2004, a decision in *ARCO ProductsCo., et al. v. SFPP*, Docket Nos. OR96-2-000 et al., was issued bythe FERC, which made several significant determinations with respect to finding“changed circumstances” 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 such as rate base, taxrates and tax allowances, among others). The FERC did reject, however, the use of changes in tax rates and incometax allowances as stand-alone factors. Judicial review of that decision, which has been sought by a number ofparties to the case, is currently pending before the U.S. Court of Appeals forthe District of Columbia Circuit.  Wehave not yet determined the impact, if any, that the decision, if it isultimately upheld, would have on our rates if they were reviewed under thecriteria of this decision.

On July 20, 2004, the District of Columbia Circuitissued an opinion in *BP West Coast Products LLCv. FERC*.  In reviewing aseries of orders involving SFPP, L.P., the court held among other things thatthe FERC had not adequately justified its policy of providing an oil pipelinelimited partnership with an income tax allowance equal to the proportion of itsincome attributable to partnership interests owned by corporate partners.  Under the FERC’s initial ruling, SFPP, L.P.was permitted an income tax allowance on its cost-of-service filing for thepercentage of its net operating (pre-tax) income attributable to partnershipunits held by corporations, and was denied an income tax allowance equal to thepercentage attributable to partnership units held by non-corporatepartners.  The court remanded the caseback to the FERC for further review. Following the court’s remand, on May 4, 2005, the FERC issued its PolicyStatement on Income Tax Allowances, which permits regulated partnerships,limited liability companies and other pass-through entities an income taxallowance on their income attributable to any owner that has an actual orpotential income tax liability on that income, regardless whether the owner isan individual or corporation.  If thereis more than one level of pass-through entities, the regulated company incomemust be traced to where the ultimate tax liability lies.  The Policy Statement is to be applied inindividual cases, and the regulated entity bears the burden of proof toestablish the tax status of its owners. On December 16, 2005, the FERC issued the first of those decisions, inan order involving SFPP (the “SFPP Order”).  The SFPP Order confirmed that a master limitedpartnership such as our Parent Partnership is entitled to a tax allowance withrespect to partnership income for which there is an “actual or potential incometax liability” and determined that a unitholder that is required to file a Form1040 or Form 1120 tax return that includes partnership income or loss ispresumed to have an actual or potential income tax liability sufficient tosupport a tax allowance on that partnership income.  The FERC also established certain otherpresumptions, including that corporate unitholders are presumed to be taxed atthe maximum corporate tax rate of 35% while individual unitholders (and certainother types of unitholders taxed like individuals) are presumed to be taxed at a28% tax rate.  The SFPP Order remainssubject to further administrative proceedings, including review by the FERC ofcompliance filings made by SFPP on March 7, 2006, as well as judicial review.  The ultimate outcome of the FERC’s inquiry onincome tax allowance should not affect our current rates and rate structurebecause our rates are not based on cost-of-service methodology.  However, the outcome of the income taxallowance would become relevant to us should we (i) elect in the future to usecost-of-service to support our rates, or (ii) be required to use suchmethodology to defend our indexed rates.

**Other**

Centennial entered into credit facilities totaling$150.0 million, and as of June 30, 2006, $150.0 million was outstanding underthose credit facilities, of which $140.0 million expires in 2024, and $10.0million expires in April 2007.  We andMarathon have each guaranteed one-half of the repayment of Centennial’soutstanding debt balance (plus interest) under these credit facilities.  The guarantees arose in order for Centennialto obtain adequate financing, and the proceeds of the credit facilities wereused to fund construction and conversion costs of its pipeline system.  Prior to the expiration of the long-termcredit facility, we could be relinquished from responsibility under theguarantee should Centennial meet certain financial tests.  If Centennial defaults on its outstandingbalance, the 

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estimated maximum potential amount of future paymentsfor Marathon and us is $75.0 million each at June 30, 2006.  

We, Marathon and Centennial have entered into alimited cash call agreement, which allows each member to contribute cash inlieu of Centennial procuring separate insurance in the event of a third-partyliability arising from a catastrophic event. There is an indefinite term for the agreement and each member is tocontribute cash in proportion to its ownership interest, up to a maximum of$50.0 million each.  As a result of thecatastrophic event guarantee, we have recorded a $4.5 million obligation, whichrepresents the present value of the estimated amount that we would have to payunder the guarantee.  If a catastrophicevent were to occur and we were required to contribute cash to Centennial,contributions exceeding our deductible might be covered by our insurance.

On February 24, 2005, the Company was acquired fromDEFS by DFI.  The Company owns a 2%general partner interest in the Parent Partnership and is the general partnerof the Parent Partnership.  On March 11,2005, the Bureau of Competition of the Federal Trade Commission (“FTC”)delivered written notice to DFI’s legal advisor that it was conducting anon-public investigation to determine whether DFI’s acquisition of the Companymay substantially lessen competition or violate other provisions of federalantitrust laws.  We, the Company and theParent Partnership have cooperated fully with this investigation.  In order to resolve the matter, we, theCompany and the Parent Partnership have negotiated with the staff of the FTCand agreed to a proposal that, if accepted by the FTC, would require thedivestiture of our 50% ownership interest in MB Storage and certain relatedassets.

**NOTE11.  SUBSEQUENT EVENT**

On July 31, 2006, our Parent Partnership executed athird amendment (“Third Amendment”) to its Revolving Credit Facility whichextends the maturity date of amounts borrowed under the Revolving CreditFacility from December 2010 to December 2011. The Third Amendment also releases Jonah Gas Gathering Company as aguarantor of the Revolving Credit Facility. In addition, the Third Amendment allows for swing line loans up to $25.0million (within the $700.0 million total borrowing limit) and modifies theParent Partnership’s financial covenants to, among other things, allow it toinclude in the calculation of its Consolidated EBITDA (as defined in theRevolving Credit Facility, as amended) pro forma adjustments for materialprojects.

Effective July 31, 2006, Jonah Gas Gathering Companywas also released from its guarantee to Wachovia Bank pursuant to theprovisions of Section 14.04 dated as of February 20, 2002, of the Indenturebetween the Parent Partnership, as issuer, TCTM, L.P., TEPPCO MidstreamCompanies, L.P., Jonah Gas Gathering Company and us, each as subsidiaryguarantors and Wachovia Bank, as trustee.

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

**General**

You should read the following review of our financialposition and results of operations in conjunction with our ConsolidatedFinancial Statements and the notes thereto. The Consolidated Financial Statements should be read in conjunction withthe financial statements and related notes, together with our discussion andanalysis of financial position and results of operations included in our AnnualReport on Form 10-K for the year ended December 31, 2005.  Our discussion and analysis includes thefollowing:

·                  Cautionary Note RegardingForward-Looking Statements. 

·                  Overview of Critical AccountingPolicies and Estimates.

·                  Overview of Business.

·                  Results of Operations – Discussesmaterial period-to-period variances in the consolidated statements of income.

·                  Financial Condition and Liquidity –Analyzes cash flows and financial position.

·                  Other Considerations – Addressesavailable sources of liquidity, trends, future plans and contingencies that arereasonably likely to materially affect future liquidity or earnings.

·                  Recent Accounting Pronouncements.

**CautionaryNote Regarding Forward-Looking Statements**

The matters discussed in this Quarterly Report on Form10-Q (this “Report”) include “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934.  All statementsthat express belief, expectation, estimates or intentions, as well as thosethat are not statements of historical facts are forward-lookingstatements.  The words “proposed”, “anticipate”,“potential”, “may”, “will”, “could”, “should”, “expect”, “estimate”, “believe”,“intend”, “plan”, “seek” and similar expressions are intended to identifyforward-looking statements.  Withoutlimiting the broader description of forward-looking statements above, wespecifically note that statements included in this document that addressactivities, events or developments that we expect or anticipate will or mayoccur in the future, including such things as future distributions, estimatedfuture capital expenditures (including the amount and nature thereof), businessstrategy and measures to implement strategy, competitive strengths, goals,expansion and growth of our business and operations, plans, references tofuture success, references to intentions as to future matters and other suchmatters are forward-looking statements. These statements are based on certain assumptions and analyses made byus in light of our experience and our perception of historical trends, currentconditions and expected future developments as well as other factors we believeare appropriate under the circumstances. While we believe our expectations reflected in these forward-lookingstatements are reasonable, whether actual results and developments will conformwith our expectations and predictions is subject to a number of risks anduncertainties, including general economic, market or business conditions, theopportunities (or lack thereof) that may be presented to and pursued by us,competitive actions by other pipeline companies, changes in laws or regulationsand other factors, many of which are beyond our control.  For example, the demand for refined productsis dependent upon the price, prevailing economic conditions and demographicchanges in the markets served, trucking and railroad freight, agriculturalusage and military usage and the demand for propane is sensitive to the weatherand prevailing economic conditions.  Weare also subject to regulatory factors such as the amounts we are allowed tocharge our customers for the services we provide on our regulated pipelinesystems.  Consequently, all of theforward-looking statements made in this document are qualified by thesecautionary statements, and we cannot assure you that actual 

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results or developments that we anticipate will berealized or, even if substantially realized, will have the expectedconsequences to or effect on us or our business or operations.  Also note that we provide a cautionarydiscussion of risks and uncertainties under the captions “Risk Factors” andelsewhere in this Form 10-Q, as well as under the captions “Risk Factors”, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andelsewhere in our Annual Report on Form 10-K for the year ended December 31,2005.

Theforward-looking statements contained in this Report speak only as of the datehereof.  Except as required by the federaland state securities laws, we undertake no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or any other reason.  Allforward-looking statements attributable to TE Products Pipeline Company,Limited Partnership or any person acting on its behalf are expressly qualifiedin their entirety by the cautionary statements contained or referred to in thisQuarterly  Report on Form 10-Q and in ourfuture periodic reports filed with the Securities and Exchange Commission (“SEC”).  In light of these risks, uncertainties andassumptions, the forward-looking events discussed in this Report may notoccur.  For additional discussion of suchrisks and uncertainties, see our Annual Report on Form 10-K for the year endedDecember 31, 2005, and other filings we have made with the SEC. 

**Overview of Critical Accounting Policies and Estimates**

A summary of the significant accounting policies wehave adopted and followed in the preparation of our consolidated financialstatements is included in our Annual Report on Form 10-K for the year endedDecember 31, 2005. Certain of these accounting policies require the use ofestimates.  As more fully describedtherein, the following estimates, in our opinion, are subjective in nature,require the exercise of judgment and involve complex analysis: revenue andexpense accruals, including accruals for power costs, property taxes;environmental costs; and asset impairment analysis related to property, plantand equipment.  These estimates are basedon our knowledge and understanding of current conditions and actions we maytake in 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 position andresults of operations. 

## ****Overview of Business****

We are one of the largest pipeline common carriers ofrefined petroleum products and LPGs in the United States.  Over the past few years, we have continued topursue growth opportunities and acquisitions to expand our market share anddeliveries into existing and new markets. The key elements of our strategy are to focus on internal growthprospects in order to increase the pipeline system and terminal throughput, toexpand and upgrade existing assets and services and construct new pipelines,terminals and facilities, to target accretive and complementary acquisitionsand expansion opportunities that provide attractive growth potential and tooperate in a safe, efficient and environmentally responsible manner.

Certain factors are key to our operations.  These include the safe, reliable andefficient operation of the pipelines and facilities that we own or operatewhile meeting increased regulations that govern the operation of our assets andthe costs associated with such regulations. We are also focused on our continued growth through expansion of theassets that we own and through the acquisition of assets that complement our currentoperations.

We operate and report in one business segment:  transportation and storage of refinedproducts, liquefied petroleum products (“LPGs”) and petrochemicals.  We own, operate or have investments inproperties located in 14 states, and our revenues are earned fromtransportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sale of product inventory and other ancillaryservices.  Our two largest operatingexpense items are labor and electric power. We generally realize higher revenues during the first and fourthquarters of each year since our operations are somewhat seasonal.  Refined products volumes are generally higherduring the second and third quarters because of greater demand for gasolinesduring the spring and summer driving seasons. LPGs volumes are generally higherfrom November through March due to higher demand for propane, a major fuel forresidential heating.  Our results alsoinclude our equity investments in Centennial Pipeline LLC (“Centennial”) andMont Belvieu Storage Partners, L.P. (“MB Storage”) (see Note 5 in the Notes tothe Consolidated Financial Statements). 

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We continue to build a base for long-term growth bypursuing new business opportunities, increasing throughput on our pipeline systems, constructing new pipeline systems,and expanding and upgrading our existing infrastructure.  We remain confident that our businessstrategy will provide continued growth in earnings and cash distributions.  We believe the following factors areimportant to our growth potential:       

·                  Expandingour gathering capacity of refined products along the upper Texas Gulf Coast.

·                  Utilizingavailable system capacity of Centennial to move refined products to Midwestmarket areas, which enables us to increase movements of long-haul propanevolumes.

·                  Expandingour system delivery capability of gasoline and diesel fuel in the Indianapolisand Chicago market areas.

·                  Pursuing acquisitions or organicgrowth projects that would complement our current operations.

For a discussion of important factors that couldaffect our growth, please read “-Cautionary Note Regarding Forward-LookingStatements” and “Risk Factors” in this Report.

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

**Results of Operations**

The following table presents volumes delivered inbarrels and average tariff per barrel for the three months and six months endedJune 30, 2006 and 2005 (in thousands, except tariff information):
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Six Months Ended** | ** ** | **Percentage** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------|------------|--------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **June 30,**                | ** ** | **Increase**   | ** ** | **June 30,**              | ** ** | **Increase**   | ** ** |
| ** **                        | ** ** | **2006**                         | ** ** | **2005**       | ** ** | **(Decrease)**                 | ** ** | **2006**       | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                        | ** ** | ** **                       | ** ** | ** **     | ** ** | ** **                     | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Volumes Delivered**             |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Refined products                  |       | 46,049                           |       | 42,097         |       | 9                              | %          | 81,857         |       | 80,692 |   | 1 | % |
| LPGs                              |       | 8,277                            |       | 7,855          |       | 5                              | %          | 21,117         |       | 22,657 |   | (7 | )% |
| Total                             |       | 54,326                           |       | 49,952         |       | 9                              | %          | 102,974        |       | 103,349 |   | — |   |
|                              |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| **Average Tariff per Barrel**     |       |                             |       |           |       |                           |       |           |       |   |   |   |   |
| Refined products                  |       | $                                | 0.86       |           | $          | 0.90                           |       | (4             | )%         | $ | 0.87 |   | $ | 0.90 |   | (3 | )% |
| LPGs                              |       | 1.33                             |       | 1.84           |       | (28                            | )%         | 1.91           |       | 2.06 |   | (7 | )% |
| Average system tariff  per barrel |       | $                                | 0.93       |           | $          | 1.05                           |       | (11            | )%         | $ | 1.08 |   | $ | 1.16 |   | (7 | )% |

*ThreeMonths Ended June 30, 2006 Compared with Three Months Ended June 30, 2005*

Revenues from refined products transportationincreased $1.6 million for the three months ended June 30, 2006, compared withthe three months ended June 30, 2005, primarily due to an overall increase of9% in the refined products volumes delivered. Volume increases were due to increased demand for products supplied fromthe U.S. Gulf Coast into Midwest markets resulting from higher distillate pricedifferentials and a greater demand for gasoline.  Refined products revenues were also impactedby a strong demand for gasoline blendstocks, partially offset by lower averagetariff jet fuel volumes during the three months ended June 30, 2006, comparedwith the three months ended June 30, 2005. In February 2003, we entered into a lease agreement with Centennial thatincreased our flexibility to deliver refined products to our market areas.  As a result, Centennial has provided oursystem with additional pipeline capacity for movement of products originatingin the U.S. Gulf Coast area.  Prior tothe construction of Centennial, deliveries on our pipeline system were limitedby our pipeline capacity, and transportation services for our customers wereallocated in accordance with a proration policy.  The Centennial capacity lease has relievedour previously constrained system and has permitted expanded deliveries inmarkets both south and north of Creal Springs, Illinois.  Movement of our product via the Centenniallease to the north end of our system permits expanded supply capability of oursystem for delivery to the south end of our system.  Movements of 

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refined products on Centennial has resulted in adecrease in the refined products average rate per barrel; however, utilizing Centennialfor refined products movements allows us to increase movements of long-haulpropane volumes.  

Revenues from LPGs transportation decreased $1.1million for the three months ended June 30, 2006, compared with the threemonths ended June 30, 2005, due to lower deliveries of propane in the upperMidwest and Northeast market areas as a result of high propane prices delayingsummer fill programs and scheduled maintenance, known as a turnaround, on amid-continent petrochemical plant. Additionally, revenues decreased due to lower isobutane deliveriesresulting from a Midwest refinery turnaround. The LPGs average rate per barrel decreased from the prior periodprimarily as a result of increased short-haul deliveries during the threemonths ended June 30, 2006, compared with the three months ended June 30,2005.  

Other operating revenues increased $5.4 million forthe three months ended June 30, 2006, compared with the three months ended June30, 2005, primarily due to increased volumes of product sales, higher storagerevenues on assets acquired from Texas Genco, LLC in July 2005 and higherrefined products tender deduction revenue. 

Costs and expenses increased $4.1 million for thethree months ended June 30, 2006, compared with the three months ended June 30,2005.  Operating expenses increased $1.5million primarily due to a $2.0 million increase in pipeline operating costsprimarily as a result of acquisitions made in 2005, $1.0 million of higherinsurance premiums, a $0.7 million regulatory penalty for past incidents, $0.6million in severance expense resulting from the migration to a shared servicesenvironment with EPCO and $0.4 million of expenses relating to the proposedreduction in the Company’s maximum percentage interest in our Parent Partnership’sdistributions.   These increases inoperating expenses were partially offset by $1.8 million in product measurementgains and a $1.0 million decrease in pipeline inspection and repair costsassociated with our integrity management program.  General and administrative expenses increased$1.2 million primarily due to severance expense resulting from the migration toa shared services environment with EPCO and other executive compensationexpense.  Taxes – other than income taxesincreased $0.7 million primarily due to a higher property asset base.  Operating fuel and power increased $0.4million primarily due to increased mainline throughput and higher powerrates.  Depreciation and amortizationexpense increased $0.3 million primarily due to the recording of a conditionalasset retirement obligation, as discussed below.

Net losses from equity investments increased for thethree months ended June 30, 2006, compared with the three months ended June 30,2005, as shown below (in thousands):

|                     | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** |
|---------------------|------------|----------------------------------|------------|--------------|------------|
| ** **          | ** ** | **June 30,**                | ** ** | **Increase** | ** ** |
| ** **          | ** ** | **2006**                         | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** |
| ** **          | ** ** | ** **                       | ** ** | ** **   | ** ** | ** ** | ** ** |
| Centennial          |       | $                                | (3,401     | )            | $          | (1,634 | ) | $ | (1,767 | ) |
| MB Storage          |       | 1,043                            |       | 1,365        |       | (322 | ) |
| Other               |       | (8                               | )          | 23           |       | (31 | ) |
| Total equity losses |       | $                                | (2,366     | )            | $          | (246 | ) | $ | (2,120 | ) |

Equity losses inCentennial increased $1.8 million for the three months ended June 30, 2006,compared with the three months ended June 30, 2005, primarily due to lowertransportation revenues and increased costs relating to pipeline inspection andrepair costs associated with its integrity management program, partially offsetby lower amortization expense on the portion of our excess investment inCentennial resulting from slightly lower volumes.  Equity earnings in MB Storage decreased $0.3million for the three months ended June 30, 2006, compared with the threemonths ended June 30, 2005, primarily due to higher system maintenance expenseson the MB Storage system and higher general and administrative expenses,partially offset by higher revenues.

Interest expense increased $1.4 million for the threemonths ended June 30, 2006, compared with the three months ended June 30, 2005,primarily due to higher outstanding debt balances and higher average interestrates under the note payable with our Parent Partnership.  Interest capitalized increased $1.1 millionfor the three months

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ended June 30, 2006, compared with the three monthsended June 30, 2005, primarily due to higher construction work-in-progressbalances in 2006 as compared to the 2005 period.

*SixMonths Ended June 30, 2006 Compared with Six Months Ended June 30, 2005*

Revenues from refined products transportationdecreased $1.6 million for the six months ended June 30, 2006, compared withthe six months ended June 30, 2005, primarily due to a decrease in the averagerate per barrel, partially offset by a 1% increase in the refined productsvolumes delivered.  Volume increases weredue to increased demand for products supplied from the U.S. Gulf Coast intoMidwest markets resulting from higher distillate price differentials and agreater demand for gasoline.  Refinedproducts volumes were also impacted by unfavorable differentials for motorfuels and distillate during the first quarter of 2006.  Movements of refined products on Centennialhas resulted in a decrease in the refined products average rate per barrel;however, utilizing Centennial for refined products movements allows us toincrease movements of long-haul propane volumes.

Revenues from LPGs transportation decreased $3.9million for the six months ended June 30, 2006, compared with the six monthsended June 30, 2005, due to lower deliveries of propane in the upper Midwestand Northeast market areas as a result of warmer than normal winter weather,high propane prices and plant turnarounds. The LPGs average rate per barrel decreased from the prior periodprimarily as a result of increased short-haul deliveries during the six monthsended June 30, 2006, compared with the six months ended June 30, 2005.

Other operating revenues increased $7.2 million forthe six months ended June 30, 2006, compared with the six months ended June 30,2005, primarily due to increased volumes of product sales, higher storagerevenues on assets acquired from Texas Genco, LLC in July 2005 and higherrefined products tender deduction revenue.

Costs and expenses increased $8.2 million for the sixmonths ended June 30, 2006, compared with the six months ended June 30,2005.  Operating expense increased $2.5million primarily due to a $3.8 million increase in pipeline operating costsprimarily as a result of acquisitions made in 2005, $1.5 million of higherinsurance premiums, $0.6 million in severance expense as a result of themigration to a shared services environment with EPCO, $0.4 million of expensesrelating to the proposed reduction in the Company’s maximum percentage interestin our Parent Partnership’s distributions and increases related to regulatorypenalties for past incidents, environmental remediation and assessments costsand transition costs.  These increases incosts and expenses were partially offset by a $3.0 million decrease in pipelineinspection and repair costs associated with our integrity management program,$1.5 million in product measurement gains and a $0.7 million decrease in rentalexpense from the Centennial pipeline capacity lease agreement.  General and administrative expenses increased$2.0 million primarily due to a $1.1 million increase relating to theretirement of an executive in February 2006 and $0.6 million in severanceexpense as a result of the migration to a shared services environment with EPCOand higher other executive compensation expense.  Operating fuel and power increased $2.0million primarily due to increased mainline throughput and higher powerrates.  Depreciation expense increased$1.1 million primarily due to assets placed into service, asset retirements in2006 and the recording of a conditional asset retirement obligation asdiscussed below.   Taxes — other thanincome taxes increased $0.4 million primarily due to a higher property assetbase in the 2006 period.

Net losses from equity investments increased for thesix months ended June 30, 2006, compared with the six months ended June 30,2005, as shown below (in thousands):

|                      | ** ** | **Six Months Ended** | ** ** | ** **   | ** ** |
|----------------------|------------|--------------------------------|------------|--------------|------------|
| ** **           | ** ** | **June 30,**              | ** ** | **Increase** | ** ** |
| ** **           | ** ** | **2006**                       | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** |
|                 |       |                           |       |         |       |   |   |
| Centennial           |       | $                              | (7,313     | )            | $          | (6,084 | ) | $ | (1,229 | ) |
| MB Storage           |       | 3,692                          |       | 3,998        |       | (306 | ) |
| Other                |       | (11                            | )          | 19           |       | (30 | ) |
| Total equity  losses |       | $                              | (3,632     | )            | $          | (2,067 | ) | $ | (1,565 | ) |

 

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Equity losses in Centennial increased $1.2 million forthe six months ended June 30, 2006, compared with the six months ended June 30,2005, primarily due to lower transportation revenues and volumes primarily dueto warmer than normal winter weather in the Northeast and increased costsrelating to pipeline inspection and repair costs associated with its integritymanagement program.  Equity earnings inMB Storage decreased $0.3 million for the six months ended June 30, 2006,compared with the six months ended June 30, 2005, primarily due to highersystem maintenance expenses and higher general and administrative expenses,partially offset by higher revenues.

Interest expense increased $2.6 million for the sixmonths ended June 30, 2006, compared with the six months ended June 30, 2005,primarily due to higher outstanding debt balances and higher average interest ratesunder the note payable with our Parent Partnership.  Interest capitalized increased $1.9 millionfor the six months ended June 30, 2006, compared with the six months ended June30, 2005, primarily due to higher construction work-in-progress balances in2006 as compared to the 2005 period.

Other income — net increased $0.7 million for the sixmonths ended June 30, 2006, compared with the six months ended June 30, 2005,due to higher interest income earned on cash investments and other investingactivities.

*AssetRetirement Obligations*

During the second quarter of 2006, we recorded $0.3million of expense, included in depreciation and amortization expense, relatedto a conditional asset retirement obligation. Additionally, we recorded a $0.4 million liability, which represents thefair value, as measured at June 30, 2006, of the conditional asset retirementobligation related to structural restoration work to be completed on leasedoffice space that is required upon our anticipated office lease termination(see Note 1 in the Notes to the Consolidated Financial Statements).

**Financial Condition and Liquidity**

Cash generated from operations and loans or capitalcontributions from our Parent Partnership are our primary sources ofliquidity.  At June 30, 2006, we had aworking capital surplus of $11.8 million, while at December 31, 2005, we had aworking capital deficit of $4.5 million. Working capital deficits can occur primarily due to the timing ofoperating cash receipts from customers, payments of cash distributions and thepayment of normal operating expenses and capital expenditures.  We are a wholly owned subsidiary of theParent Partnership.  We expect that ourParent Partnership will make capital contributions, loans or otherwise provideliquidity to us as needed, but the Parent Partnership has no contractualobligation to do so.  We anticipate thatthe Parent Partnership will provide the necessary liquidity to protect itsinvestment in us.  At June 30, 2006, ourParent Partnership had approximately $240.8 million in available borrowingcapacity under its revolving credit facility to cover any working capitalneeds, and we expect that our Parent Partnership’s cash flows from operatingactivities, the sale of additional debt or equity in the capital markets andcapacity under its Revolving Credit Facility will provide necessary liquidityto us.  For further discussion regardingour Parent Partnership’s sources of liquidity, please see Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Financial Condition andLiquidity in our Parent Partnership’s Quarterly Report on Form 10-Q for theQuarter Ended June 30, 2006, its Annual Report on Form 10-K for the year endedDecember 31, 2005 and its Current Report on Form 8-K filed on June 16,2006.  Cash flows for the six monthsended June 30, 2006 and 2005, were as follows (in thousands):

|                              | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|--------------------------------|------------|
| ** **                   | ** ** | **June 30,**              | ** ** |
| ** **                   | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Cash provided by  (used in): |       |                           |       |   |   |
| Operating activities         |       | $                              | 31,366     |   | $ | 31,851 |   |
| Investing activities         |       | (31,443                        | )          | (28,134 | ) |
| Financing activities         |       | 77                             |       | (3,703 | ) |
|                              |            |                                |            |  |  |  |  |

 

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*Operating Activities*

Net cash from operating activities for the six monthsended June 30, 2006 and 2005, were comprised of the following (in thousands):

|                                         | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 30,**              | ** ** |
| ** **                              | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Net income                              |       | $                              | 19,809     |   | $ | 27,901 |   |
| Depreciation and  amortization          |       | 19,894                         |       | 18,835 |   |
| Losses in equity  investments           |       | 3,632                          |       | 2,067 |   |
| Distributions  from equity investments  |       | 7,840                          |       | 7,300 |   |
| Non-cash portion  of interest expense   |       | 271                            |       | 136 |   |
| Gains on sales  of assets               |       | (25                            | )          | (107 | ) |
| Cash used in  working capital and other |       | (20,055                        | )          | (24,281 | ) |
| Net cash from operating activities      |       | $                              | 31,366     |   | $ | 31,851 |   |

 

Net cash from operating activities decreased $0.5million for the six months ended June 30, 2006, compared with the six monthsended June 30, 2005, primarily due to the timing of cash disbursements and cashreceipts for working capital components and lower net income, partially offsetby increased distributions received from our equity investment in MB Storage inthe 2006 period.  For a discussion ofchanges in net income, depreciation and amortization and losses in equityinvestments, see Results of Operations above.

Net cash from operating activities for the six monthsended June 30, 2006 and 2005, included interest payments, net of amountscapitalized, of $16.6 million and $16.0 million, respectively.  Excluding the effects of hedging activitiesand interest capitalized, during the year ended December 31, 2006, we expectinterest payments on our Senior Notes to be approximately $27.4 million.  We expect to pay our interest payments withcash flows from operating activities.

*Investing Activities*

Cash flows used in investing activities totaled $31.4million for the six months ended June 30, 2006, and were comprised of $27.2million of capital expenditures, $2.5 million of cash contributions for ourownership interest in Centennial for operating needs and $1.7 million of cashcontributions for our ownership interest in MB Storage for capitalexpenditures.  Cash flows used ininvesting activities totaled $28.1 million for the six months ended June 30,2005, and were comprised of $27.0 million of capital expenditures and $1.1 millionof cash contributions for our ownership interest in MB Storage for capitalexpenditures.

*Financing Activities*

Cash flows provided by financing activities totaled$0.1 million for the six months ended June 30, 2006, and were comprised of$30.2 million of borrowings on the note payable to our Parent Partnership,offset by  $30.1 million of distributionspaid to our Parent Partnership.  Cashflows used in financing activities totaled $3.7 million for the six months endedJune 30, 2005, and were comprised of $239.1 million of repayments on the notepayable to our Parent Partnership, net of borrowings, and $59.4 million ofdistributions paid to our Parent Partnership, partially offset by $294.8million of contributions from our Parent Partnership.   The contributions received from the ParentPartnership during 2005 were primarily used to reduce the level of indebtednessowed to our Parent Partnership.

During the six months ended June 30, 2006 and 2005, wepaid cash distributions to our Parent Partnership totaling $30.1 million and$59.4 million, respectively.  On August7, 2006, we will pay a cash distribution to our Parent Partnership of $20.3million for the quarter ended June 30, 2006.

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**Other Considerations**

*Universal Shelf*

**Our ParentPartnership has filed with the Securities and Exchange Commission a universalshelf registration statement that, subject to agreement on terms at the time ofuse and appropriate supplementation, allows it to issue, in one or moreofferings, up to an aggregate of $2.0 billion of equity securities, debtsecurities or a combination thereof. Taking into account our Parent Partnership’s May 2005 and July 2006equity offerings, in which our Parent Partnership issued $290.8 million and$204.1 million of equity securities, respectively, our Parent Partnership had$1.5 billion remaining under this shelf registration, subject to customarymarketing terms and conditions.**

*Credit Facilities*

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s debt instruments.  Theinterest rates charged by the Parent Partnership include the stated interestrate paid by the Parent Partnership on its debt obligations, plus a premium tocover debt issuance costs.  The interestrate is also decreased or increased to cover gains and losses, respectively, onany interest rate swaps that the Parent Partnership may have in place on itsrespective debt instruments.  The ParentPartnership’s revolving credit facility is described below (see Note 6 in theNotes to the Consolidated Financial Statements for a discussion of the ParentPartnership’s senior notes).

Our Parent Partnership has in place an unsecuredrevolving credit facility for up to $700.0 million (“Revolving Credit Facility”),which may be increased up to a maximum of $850.0 million upon our ParentPartnership’s request, subject to lender approval and the satisfaction ofcertain other conditions.  The RevolvingCredit Facility expires on December 13, 2010. Interest is payable at an applicable margin above either the lender’sbase rate or LIBOR.  At June 30, 2006,$445.0 million was outstanding under the facility, and our Parent Partnershiphad $240.8 million of available borrowing capacity, which includes $14.2million of outstanding letters of credit. Financial covenants in the Revolving Credit Facility require that ourParent Partnership maintain a ratio of Consolidated Funded Debt to Pro FormaEBITDA (as defined and calculated in the facility) of less than 4.75 to 1.00(subject to adjustment for specified acquisitions) and a ratio of EBITDA toInterest Expense (as defined and calculated in the facility) of at least 3.00to 1.00, in each case with respect to specified twelve month periods.  Other restrictive covenants in the creditagreement limit the Parent Partnership’s and its subsidiaries’ ability to,among other things, incur additional indebtedness, make certain distributions,incur liens, engage in specified transactions with affiliates and completemergers, acquisitions and sales of assets. Our Parent Partnership was in compliance with the covenants of itsRevolving Credit Facility at June 30, 2006. In July 2006, our Parent Partnership used the net proceeds of $195.5million from its July 2006 equity offering to reduce its outstanding borrowingsunder the Revolving Credit Facility.

On July 31, 2006, our Parent Partnership executed athird amendment (“Third Amendment”) to its Revolving Credit Facility whichextends the maturity date of amounts borrowed under the Revolving CreditFacility from December 2010 to December 2011. The Third Amendment also releases Jonah Gas Gathering Company as aguarantor of the Revolving Credit Facility. In addition, the Third Amendment allows for swing line loans up to $25.0million (within the $700.0 million total borrowing limit) and modifies theParent Partnership’s financial covenants to, among other things, allow it toinclude in the calculation of its Consolidated EBITDA (as defined in theRevolving Credit Facility, as amended) pro forma adjustments for materialprojects.

Effective July 31, 2006, Jonah Gas Gathering Companywas also released from its guarantee to Wachovia Bank pursuant to theprovisions of Section 14.04 dated as of February 20, 2002, of the Indenturebetween the Parent Partnership, as issuer, TCTM, L.P., TEPPCO MidstreamCompanies, L.P., Jonah Gas Gathering Company and us, each as subsidiaryguarantors and Wachovia Bank, as trustee.

At June 30, 2006 and December 31, 2005, we hadunsecured intercompany notes payable to our Parent Partnership of $236.8million and $206.9 million, respectively, which related to borrowings under theParent Partnership’s Revolving Credit Facility, 7.625% Senior Notes and 6.125%Senior Notes. The weighted average 

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interest rate on the notepayable to the Parent Partnership at June 30, 2006, was 6.4%.  At June 30, 2006, accrued interest includes$3.9 million due to our Parent Partnership. For the six months ended June 30, 2006 and 2005, interest expenseincurred on the note payable to our Parent Partnership totaled $6.8 million and$5.1 million, respectively.

### *Future Capital Needs and Commitments*

We estimate that capital expenditures, excludingacquisitions, for 2006 will be approximately $130.7 million (including $3.4million of capitalized interest). We expect to spend approximately $85.4million for revenue generating projects and facility improvements.  We expect to spend approximately $17.8million to sustain existing operations, including life-cycle replacements forequipment at various facilities and pipeline and tank replacements and $24.1million for various system upgrade projects. During the remainder of 2006, wemay be required to contribute additional cash to Centennial to cover capital expenditures,acquisitions or other operating needs and to MB Storage to cover significantcapital expenditures or additional acquisitions.  We continually review and evaluate potentialcapital improvements and expansions that would be complementary to our presentsystem.  These expenditures can varygreatly depending on the magnitude of our transactions.  We may finance capital expenditures throughinternally generated funds, debt or capital contributions from our ParentPartnership or any combination thereof.

### *Liquidity Outlook*

We believe that we will continue to have adequateliquidity to fund future recurring operating and investing activities.  Our primary cash requirements consist ofnormal operating expenses, capital expenditures to sustain existing operationsand revenue generating expenditures, interest payments on our Senior Notes,interest payments on intercompany notes payable to our Parent Partnership anddistributions to our Parent Partnership. Our cash requirements for 2006, such as operating expenses, capitalexpenditures to sustain existing operations and quarterly distributions to ourParent Partnership, are expected to be funded through operating cashflows.  Long-term cash requirements for expansion projects, acquisitionsand repayment of intercompany notes are expected to be funded by severalsources, including cash flows from operating activities and loans or capitalcontributions from our Parent Partnership. Our Parent Partnership may fund such loans or capital contributions withborrowings under its credit facility and possibly the issuance of additionalequity and debt securities.  The timingof any debt or equity offerings by our Parent Partnership will depend onvarious factors, including prevailing market conditions, interest rates and ourParent Partnership’s financial condition and credit rating at the time.

### *Off-Balance Sheet Arrangements*

We do not rely on off-balance sheet borrowings to fundour acquisitions.  We have no materialoff-balance sheet commitments for indebtedness other than the limited guarantyof Centennial debt and the limited guarantee of Centennial catastrophic eventsas discussed below.  In addition, we haveentered into various leases covering assets utilized in several areas of ouroperations.

We are a guarantor withrespect to $500.0 million principal amount of 7.625% Senior Notes due 2012issued in February 2002 and for $200.0 million principal amount of 6.125%Senior Notes due 2013 issued in January 2003 by our Parent Partnership.

Centennial entered intocredit facilities totaling $150.0 million, and as of June 30, 2006, $150.0million was outstanding under those credit facilities, of which $140.0 millionexpires in 2024, and $10.0 million expires in April 2007.  We and Marathon Petroleum Company LLC (“Marathon”)have each guaranteed one-half of the repayment of Centennial’s outstanding debtbalance (plus interest) under these credit facilities.  The guarantees arose in order for Centennialto obtain adequate financing, and the proceeds of the credit facilities wereused to fund construction and conversion costs of its pipeline system.  Prior to the expiration of the long-termcredit facility, we could be relinquished from responsibility under theguarantee should Centennial meet certain financial tests.  If Centennial defaults on its outstandingbalance, the estimated maximum potential amount of future payments for us andMarathon is $75.0 million each at June 30, 2006.

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We, Marathon, andCentennial have entered into a limited cash call agreement, which allows each memberto contribute cash in lieu of Centennial procuring separate insurance in theevent of a third-party liability arising from a catastrophic event.  There is an indefinite term for the agreementand each member is to contribute cash in proportion to its ownership interest,up to a maximum of $50.0 million each. As a result of the catastrophic event guarantee, we have recorded a $4.5million obligation, which represents the present value of the estimated amountthat we would have to pay under the guarantee. If a catastrophic event were to occur and we were required to contributecash to Centennial, contributions exceeding our deductible might be covered byour insurance.

*ContractualObligations*

The following table summarizes our debt repaymentobligations and material contractual commitments as of June 30, 2006 (inmillions):
| ** **                                  | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                                               | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** |
|                                        |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Note payable,  Parent Partnership           |       | $                                                                       | 236.8      |   | $ | — |   | $ | — |   | $ | 236.8 |   | $ | — |   |
| 6.45% Senior  Notes due 2008 (1)            |       | 180.0                                                                   |       | — |   | 180.0 |   | — |   | — |   |
| 7.51% Senior  Notes due 2028 (1)            |       | 210.0                                                                   |       | — |   | — |   | — |   | 210.0 |   |
| Interest  payments (2)                      |       | 456.9                                                                   |       | 42.8 |   | 73.9 |   | 59.4 |   | 280.8 |   |
| Debt and interest subtotal                  |       | 1,083.7                                                                 |       | 42.8 |   | 253.9 |   | 296.2 |   | 490.8 |   |
|                                        |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Operating leases  (3)                       |       | 75.4                                                                    |       | 18.4 |   | 24.4 |   | 13.7 |   | 18.9 |   |
| Capital  expenditure obligations (4)        |       | 0.5                                                                     |       | 0.5 |   | — |   | — |   | — |   |
| Other  liabilities and deferred credits (5) |       | 12.2                                                                    |       | — |   | 11.7 |   | 0.1 |   | 0.4 |   |
| Total                                       |       | $                                                                       | 1,171.8    |   | $ | 61.7 |   | $ | 290.0 |   | $ | 310.0 |   | $ | 510.1 |   |

 

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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 June 30, 2006,the 7.51% Senior Notes include an adjustment to decrease the fair value of thedebt by $11.3 million related to this interest rate swap agreement.  At June 30, 2006, our 6.45% Senior Notesinclude less than $0.1 million of unamortized debt discount.  The fair value adjustment and unamortizeddebt discount are excluded from this table.

(2)          Includes interest payments due on our SeniorNotes and interest payments and commitment fees due on our Note Payable to ourParent Partnership.  The interest amountcalculated on the Note Payable to our Parent Partnership is based on the assumptionthat the amount outstanding and the interest rate charged both remain at theircurrent levels.

(3)          Includes a pipeline capacity lease withCentennial.  In January 2003, we enteredinto a pipeline capacity lease agreement with Centennial for a period of fiveyears that contains a minimum throughput requirement.  For the six months ended June 30, 2006, weexceeded the minimum throughput requirements on the lease agreement.

(4)          Includes accruals forcosts incurred but not yet paid relating to capital projects.

(5)          Excludes approximately $8.4 million of long-term deferred revenuepayments, which are being transferred to income over the term of the respectiverevenue contracts and $4.2 million related to our estimated amount ofobligation under a catastrophic event guarantee for Centennial.  The amount of commitment by year is our bestestimate of projected payments of these long-term liabilities.

Weexpect to repay the long-term, senior unsecured obligations and note payable toour Parent Partnership through the issuance of additional long-term seniorunsecured debt at the time the 2008 and 2028 debts mature, with proceeds fromthe dispositions of assets, cash flows from operations, and contributions fromour Parent Partnership or any combination of the above items.

Our senior unsecured debt is also rated BBB- byStandard and Poors (“S&P”) and Baa3 by Moody’s Investors Service(“Moody’s”).  Both ratings are with astable outlook and were reaffirmed during the first quarter of 2006.  Our Parent Partnership’s senior unsecureddebt is rated BBB- by S&P and Baa3 by Moody’s.  S&P assigned this rating on June 14,2005, following its review of the ownership structure, corporate governanceissues, and proposed funding after the acquisition of the Company by DFI.  Both ratings are with a stable outlook.  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 and should be evaluated independently ofany other rating.

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***Recent AccountingPronouncements***

See discussion of new accounting pronouncements in Note1 in the Notes to the Consolidated Financial Statements.

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

Foradditional discussion of our exposure to market risks, please refer to “Item7A. Quantitative and Qualitative Disclosures About Market Risk” in our AnnualReport on Form 10-K for the year ended December 31, 2005.

*Commodity Risk*

We may be exposed to market risk through changes incommodity prices and interest rates.  Wedo not have foreign exchange risks.  OurRisk Management Committee has established policies to monitor and control thesemarket risks. The Risk Management Committee is comprised, in part, of seniorexecutives of the Company.

*Interest Rate Risk*

We have utilized and expect to continue to utilizeinterest rate swap agreements to hedge a portion of our fair value risks.  Interest rate swap agreements are used tomanage the fixed interest rate mix of our debt portfolio and overall cost ofborrowing.  The interest rate swaprelated to our fair value risk is intended to reduce our exposure to changes inthe fair value of our fixed rate Senior Notes. The interest rate swap agreement involves the periodic exchange ofpayments without the exchange of the notional amount upon which the paymentsare based. The related amount payable to or receivable from counterparties isincluded as an adjustment to accrued interest.

The following table summarizes the estimated fairvalues of the Senior Notes as of June 30, 2006 and December 31, 2005 (inmillions):

|                                       | ** ** | ** **      | ** ** | **Fair Value**     | ** ** |
|---------------------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **                            | ** ** | **Face  Value** | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| 6.45% Senior  Notes, due January 2008 |       | $               | 180.0      |                    | $          | 181.0 |   | $ | 183.7 |   |
| 7.51% Senior Notes, due  January 2028 |       | 210.0           |       | 221.1                   |       | 224.1 |   |
|                                       |            |                 |            |                         |            |  |  |  |  |  |

 

In October 2001, we entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our fixed rate7.51% Senior Notes due 2028. We designated this swap agreement as a fair valuehedge.  The swap agreement has a notionalamount of $210.0 million and matures in January 2028 to match the principal andmaturity of the 7.51% Senior Notes. Under the swap agreement, we pay a floating rate of interest based on athree-month U.S. Dollar LIBOR rate, plus a spread of 147 basis points, andreceive a fixed rate of interest of 7.51%. During the six months ended June 30, 2006, and 2005, we recognizedreductions in interest expense of $1.2 million and $3.3 million, respectively,related to the difference between the fixed rate and the floating rate ofinterest on the interest rate swap. During the quarters ended June 30, 2006 and 2005, we measured the hedgeeffectiveness of this interest rate swap and noted that no gain or loss fromineffectiveness was required to be recognized. The fair value of this interest rate swap was a loss of approximately $11.3million and $0.9 million at June 30, 2006, and December 31, 2005,respectively.  Utilizing the balance ofthe 7.51% Senior Notes outstanding at June 30, 2006, and including the effectsof hedging activities, if market interest rates increased 100 basis points, theannual increase in interest expense would be $2.1 million.

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At June 30, 2006,and December 31, 2005, we had unsecured intercompany notes payable to ourParent Partnership of $236.8 million and $206.9 million, respectively, whichrelated to borrowings under the Parent Partnership’s Revolving Credit Facility,7.625% Senior Notes and 6.125% Senior Notes. The weighted average interest rateon the note payable to the Parent Partnership at June 30, 2006, was 6.4%. AtJune 30, 2006, accrued interest includes $3.9 million due to our ParentPartnership.  For the six months endedJune 30, 2006 and 2005, interest expense incurred on the note payable to ourParent Partnership totaled $6.8 million and $5.1 million, respectively.

**Item 4.  Controls and Procedures**

As of the end of the period covered by this report,our management carried out an evaluation, with the participation of ourprincipal executive officer (the “CEO”) and our principal financial officer(the “CFO”), of the effectiveness of our disclosure controls and procedurespursuant to Rule 13a-15 of the Securities Exchange Act of 1934.  Based on those evaluations, as of June 30,2006, the CEO and CFO concluded:

(i)             that our disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to our management, including the CEO and CFO,as appropriate to allow timely decisions regarding required disclosure; and

(ii)          that our disclosurecontrols and procedures are effective.

*Changes in Internal Control over Financial Reporting*

Therehas been no change in our internal control over financial reporting during thesecond quarter of 2006 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

**PARTII.  OTHER INFORMATION**

**Item1.  Legal Proceedings**

Wehave been, in the ordinary course of business, a defendant in various lawsuitsand a party to various other legal proceedings, some of which are covered inwhole or in part by insurance.  Webelieve that the outcome of these lawsuits and other proceedings will notindividually or in the aggregate have a material adverse effect on ourconsolidated financial position, results of operations or cash flows.  See discussion of legal proceedings in Note10 in the Notes to the Consolidated Financial Statements.

**Item1A.  Risk Factors**

Investors and potential investors should carefullyconsider the following risk factors in addition to other information in thisReport and our Annual Report on Form 10-K for the year ended December 31, 2005.  We are identifying these risk factors asimportant factors that could cause our actual results to differ materially fromthose contained in any written or oral forward-looking statements made by or onbehalf of us.  We are relying upon thesafe-harbor for forward-looking statements, and any such statements made by oron behalf of us are qualified by reference to the following cautionarystatements, as well as to those set forth elsewhere in this Report.

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**Risks Relating to Our Business**

***Potentialfuture acquisitions and expansions may affect our business by substantiallyincreasing the level of our indebtedness and contingent liabilities andincreasing our risks of being unable to effectively integrate these newoperations.***

As part of our business strategy, we evaluate andacquire assets and businesses and undertake expansions that we believecomplement our existing assets and businesses. Acquisitions and expansions may require substantial capital or the incurrenceof substantial indebtedness.  Consummationof future acquisitions and expansions may significantly change ourcapitalization and results of operations. Our growth may be limited if acquisitions or expansions are not made oneconomically favorable terms.

Acquisitions and business expansions involve numerousrisks, including difficulties in the assimilation of the assets and operationsof the acquired businesses, inefficiencies and difficulties that arise becauseof unfamiliarity with new assets, personnel and the businesses associated with themand new geographic areas and the diversion of management’s attention from otherbusiness concerns.  Further, unexpectedcosts and challenges may arise whenever businesses with different operations ormanagement are combined, and we may experience unanticipated delays inrealizing the benefits of an acquisition. Following an acquisition, we may discover previously unknown liabilitiesassociated with the acquired business for which we may have no recourse orlimited recourse under applicable indemnification provisions.

***Our future debtlevel and the debt level of our Parent Partnership may limit our futurefinancial and operating flexibility.***

Loans and capital contributions from our ParentPartnership are principle sources of our liquidity. The amount of our futuredebt and that of our Parent Partnership could have significant effects on ouroperations, including, among other things:

·                  asignificant portion of our cash flow could be dedicated to the payment ofprincipal and interest on our future debt and that of our Parent Partnershipand may not be available for other purposes, including for capitalexpenditures;

·                  creditrating agencies may view our debt level and the debt level of our Parent Partnershipnegatively;

·                  covenantscontained in our Parent Partnership’s existing debt arrangements will requirethe Parent Partnership and its subsidiaries, including us, to continue to meetfinancial tests that may adversely affect our flexibility in planning for andreacting to changes in its business or our business;

·                  ourParent Partnership’s ability to obtain additional financing for workingcapital, capital expenditures, acquisitions and general partnership purposesmay be limited, which could limit the amount of financing available to us;

·                  wemay be at a competitive disadvantage relative to similar companies that haveless debt; and

·                  we may be more vulnerable to adverseeconomic and industry conditions as a result of our Parent Partnership’s andour significant debt levels.

We utilize debt financing from our Parent Partnershipthrough intercompany notes, the terms of which generally match the paymentdates under the Parent Partnership’s debt instruments, including its revolvingcredit facility.  Our ParentPartnership’s revolving credit facility contains restrictive financial andother covenants that, among other things, limit its ability to incur additionalindebtedness, make certain distributions, and complete mergers, acquisitionsand sales of assets.  The ParentPartnership’s breach of these restrictions or restrictions in the provisions ofits other indebtedness could permit the holders of the indebtedness to declareall amounts outstanding thereunder to be immediately due and payable and, in thecase of its revolving credit facility, to terminate all commitments to extendfurther credit.  Although our ParentPartnership’s revolving credit facility restricts its ability to incuradditional debt above certain levels, any debt the Parent Partnership may incurin compliance with these restrictions may still be substantial.

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If the rating agencies were to downgrade our or ourParent Partnership’s credit ratings, then we could experience an increase in borrowingcosts or difficulty accessing capital markets. Such a development could adversely affect our ability to obtainfinancing for working capital, capital expenditures or acquisitions or torefinance existing indebtedness.  If theParent Partnership is unable to access the capital markets on favorable termsat the time a debt obligation becomes due in the future, it might be forced torefinance some of its debt obligations through bank credit, as opposed tolong-term public debt securities or equity securities.  The price and terms upon which the ParentPartnership might receive such extensions or additional bank credit, if at all,could be more onerous than those contained in existing debt agreements.  Any such arrangements could, in turn,increase the risk that our leverage may adversely affect its future financialand operating flexibility.

***Our tariff rates are subject to review and possibleadjustment by federal and state regulators, which could have a material adverseeffect on our financial condition and results of operations******.***

The Federal Energy Regulatory Commission (“FERC”),pursuant to the Interstate Commerce Act of 1887, as amended, regulates thetariff rates for our interstate common carrier pipeline operations.  To be lawful under that Act, interstatetariff rates, terms and conditions of service must be just and reasonable and notunduly discriminatory, and must be on file with FERC.  In addition, pipelines may not confer anyundue preference upon any shipper. Shippers may protest, and the FERC may investigate, the lawfulness ofnew or changed tariff rates.  The FERCcan suspend those tariff rates for up to seven months.  It can also require refunds of amountscollected pursuant to rates that are ultimately found to be unlawful.  The FERC and interested parties can alsochallenge tariff rates that have become final and effective.  Because of the complexity of rate making, thelawfulness of any rate is never assured.

The FERC uses prescribed rate methodologies forapproving regulated tariff rates for transporting crude oil and refinedproducts.  Our interstate tariff ratesare either market-based or derived in accordance with the FERC’s indexingmethodology, which currently allows a pipeline to increase its rates by apercentage linked to the producer price index for finished goods.  These methodologies may limit our ability toset rates based on our actual costs or may delay the use of rates reflectingincreased costs.  Changes in the FERC’sapproved methodology for approving rates could adversely affect us.  Adverse decisions by the FERC in approvingour regulated rates could adversely affect our cash flow.  Challenges to our tariff rates could be filedwith the FERC.

***Ourpartnership status may be a disadvantage to us in calculating our cost ofservice for rate-making purposes.***

In May 2005, the FERC issued a policy statementpermitting the inclusion of an income tax allowance in the cost ofservice-based rates of a pipeline for partnership interests held by partnerswith an actual or potential income tax liability on public utility income, ifthe pipeline proves that the owner of the partnership interest has an actual orpotential income tax liability.  OnDecember 16, 2005, the FERC issued its first significant case-specific oilpipeline review of the income tax allowance issue in another pipeline company’srate case.  The FERC reaffirmed its newincome tax allowance policy and directed the subject pipeline to providecertain evidence necessary for the pipeline to determine its income taxallowance.  The new tax allowance policyand the December 16 order have been appealed to the United States Court ofAppeals for the District of Columbia Circuit. As a result, the ultimate outcome of these proceedings is not certainand could result in changes to the FERC’s treatment of income tax allowances incost of service.  Depending upon how thepolicy statement on income tax allowances is applied in practice to pipelinesorganized as pass-through entities, and whether it is ultimately upheld ormodified on judicial review, these decisions might adversely affect us.

***Competitioncould adversely affect our operating results.***

Ourrefined products and LPG transportation business competes with other pipelinesin the areas where we deliver products. We also compete with trucks, barges and railroads in some of the areaswe serve.  Competitive pressures mayadversely affect our tariff rates or volumes shipped.

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***Ourbusiness requires extensive credit risk management that may not be adequate toprotect against customer nonpayment.***

Risks of nonpayment and nonperformance by customersare a major consideration in our businesses. Our credit procedures and policies may not be adequate to fullyeliminate customer credit risk.  Wemanage our exposure to credit risk through credit analysis, credit approvals,credit limits and monitoring procedures. We utilize letters of credit and guarantees for certain of ourreceivables.  However, these proceduresand policies do not fully eliminate customer credit risk.

***Ourpipelines are dependent on their interconnections with other pipelines to reachtheir destination markets.***

Decreased throughput on interconnected pipelines dueto testing, line repair and reduced pressures could result in reducedthroughput on our pipeline systems.  Suchreduced throughput may adversely impact our profitability.

***Reduceddemand could affect shipments on the pipelines.***

Ourproducts pipeline business depends in large part on the demand for refinedproducts and LPGs in the markets served by our pipelines.  Reductions in that demand adversely affectour pipeline business.  Market demandvaries based upon the different end uses of the products we ship.  We cannot predict the impact of future fuelconservation measures, alternate fuel requirements, government regulation ortechnological advances in fuel economy and energy-generation devices, all ofwhich could reduce the demand for refined petroleum products and LPGs in theareas we serve.  Demand for gasoline,which has in recent years accounted for approximately forty percent of ourrefined products transportation revenues, depends upon price, prevailingeconomic conditions and demographic changes in the markets we serve.  Weather conditions, government policy andcrop prices affect the demand for refined products used in agriculturaloperations.  Demand for jet fuel, whichhas in recent years accounted for approximately twenty percent of our refinedproducts revenues, depends on prevailing economic conditions and militaryusage.  Propane deliveries are generallysensitive to the weather and meaningful year-to-year variances have occurredand will likely continue to occur.

***The use of derivative financial instrumentscould result in material financial losses by us.***

We historically have sought to limit a portion of theadverse effects resulting from changes in interest rates by using financialderivative instruments and other hedging mechanisms from time to time.  To the extent that we hedge our interest rateexposures, we will forego the benefits we would otherwise experience if interestrates were to change in our favor.  Inaddition, even though monitored by management, hedging activities can result inlosses.  Such losses could occur undervarious circumstances, including if a counterparty does not perform itsobligations under the hedge arrangement, the hedge is imperfect, or hedgingpolicies and procedures are not followed.

***Our pipeline integrity program may imposesignificant costs and liabilities on us.***

The U.S. Department of Transportation issued finalrules (effective March 2001 with respect to hazardous liquid pipelines andFebruary 2004 with respect to natural gas pipelines) requiring pipelineoperators to develop integrity management programs to comprehensively evaluatetheir pipelines and take measures to protect pipeline segments located in whatthe rules refer to as “high consequence areas.”  The final rule resulted from the enactment ofthe Pipeline Safety Improvement Act of 2002. At this time, we cannot predict the ultimate costs of compliance withthis rule because those costs will depend on the number and extent of anyrepairs found to be necessary as a result of the pipeline integrity testingthat is required by the rule.  We willcontinue our pipeline integrity testing programs to assess and maintain theintegrity of our pipelines.  The resultsof these tests could cause us to incur significant and unanticipated capitaland operating expenditures for repairs or upgrades deemed necessary to ensurethe continued safe and reliable operation of our pipelines.

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***Our operations are subject togovernmental laws and regulations relating to the protection of the environmentand safety which may expose us to significant costs and liabilities.***

Our facilities are subject to multiple environmentalobligations and potential liabilities under a variety of federal, state andlocal laws and regulations.  Such lawsand regulations affect many aspects of our present and future operations, andgenerally require us to obtain and comply with a wide variety of environmentalregistrations, licenses, permits, inspections and other approvals, with respectto air emissions, water quality, wastewater discharges, and solid and hazardouswaste management.  Failure to comply withthese requirements may expose us to fines, penalties and/or interruptions inour operations that could influence our results of operations.  If an accidental leak, spill or release ofhazardous substances occurs at any facilities that we own, operate or otherwiseuse, or where we send materials for treatment or disposal, we could be heldjointly and severally liable for all resulting liabilities, includinginvestigation, remedial and clean-up costs. Likewise, we could be required to remove or remediate previouslydisposed wastes or property contamination, including groundwater contamination.  Any or all of this could materially affectour results of operations and cash flows. We currently own or lease, and have owned or leased, many propertiesthat have been used for many years to terminal or store crude oil, petroleumproducts or other chemicals.  Owners,tenants or users of these properties may have disposed of or releasedhydrocarbons or solid wastes on or under them. Additionally, some sites we operate are located near current or formerrefining and terminaling operations. There is a risk that contamination has migrated from those sites to ours.

Further, we cannot ensure that existing environmentalregulations will not be revised or that new regulations will not be adopted orbecome applicable to us.  The clear trendin environmental regulation is to place more restrictions and limitations on activitiesthat may be perceived to affect the environment, and thus there can be noassurance as to the amount or timing of future expenditures for environmentalregulation compliance or remediation, and actual future expenditures may bedifferent from the amounts we currently anticipate.  Revised or additional regulations that resultin increased compliance costs or additional operating restrictions,particularly if those costs are not fully recoverable from our customers, couldhave material adverse effect on our business, financial position, results ofoperations and cash flows.

Various state and federal governmental authoritiesincluding the U.S. Environmental Protection Agency, the Bureau of LandManagement, the Department of Transportation and the Occupational Safety andHealth Administration have the power to enforce compliance with theseregulations and the permits issued under them, and violators are subject toadministrative, civil and criminal penalties, including civil fines,injunctions or both.  Liability may beincurred without regard to fault under CERCLA, RCRA, and analogous state lawsfor the remediation of contaminated areas. Private parties, including the owners of properties through which ourpipeline systems pass, may also have the right to pursue legal actions toenforce compliance as well as to seek damages for non-compliance withenvironmental laws and regulations or for personal injury or property damage.

Our insurance may not cover all environmental risksand costs or may not provide sufficient coverage in the event an environmentalclaim is made against us.  Our businessmay be adversely affected by increased costs due to stricter pollution controlrequirements or liabilities resulting from non-compliance with requiredoperating or other regulatory permits. New environmental regulations might adversely affect our products andactivities, including storage, transportation and construction and maintenanceactivities, as well as waste management and air emissions.  Federal and state agencies also could imposeadditional safety requirements, any of which could affect our profitability.

Contamination resulting from spills or releases ofpetroleum products is an inherent risk within the petroleum pipelineindustry.  While the costs of remediatinggroundwater contamination are generally site-specific, such costs can varysubstantially and may be material.

***Terroristattacks aimed at our facilities could adversely affect our business.***

On September 11, 2001, the United States was thetarget of terrorist attacks of unprecedented scale.  Since the September 11th attacks, the UnitedStates government has issued warnings that energy assets, specifically ournation’s pipeline infrastructure, may be the future target of terroristorganizations.  These developments have 

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subjected our operations to increased risks.  Any future terrorist attack on ourfacilities, those of our customers and, in some cases, those of otherpipelines, could have a material adverse effect on our business.

Changes in the insurance markets attributable toterrorist attacks may make certain types of insurance more difficult for us toobtain.  Moreover, the insurance that maybe available to us may be significantly more expensive than our existinginsurance coverage.  Instability in thefinancial markets as a result of terrorism or war could also affect our abilityto raise capital.

***Our business involves many hazards and operational risks,some of which may not be fully covered by insurance. If a significant accidentor event occurs that is not fully insured, our operations and financial resultscould be adversely affected******.***

Our operations are subject to the many hazardsinherent in the transportation of refined petroleum products and LPGs.  These risks could result in substantial lossesdue to personal injury or loss of life, severe damage to and destruction ofproperty and equipment and pollution or other environmental damage and mayresult in curtailment or suspension of our related operations.  We are not fully insured against all risksincident to our business, including environmental accidents that might occur,and market conditions have caused premiums and deductibles for some of ourinsurance policies to increase substantively. If a significant accident or event occurs that is not fully insured, itcould adversely affect our financial position or results of operations.

***We depend on the leadership and involvement of our keypersonnel for the success of our business.***

We depend on the leadership and involvement of our keypersonnel to identify and develop business opportunities and make strategicdecisions.  Our General Partner’spresident and chief executive officer was elected in April 2006, its chieffinancial officer was elected in January 2006, and its general counsel waselected in March 2006.  Our GeneralPartner’s president and chief executive officer has over 35 years ofrelevant experience and its chief financial officer and general counsel eachhave approximately 20 years of relevant experience.  While retention plans are in place forcertain senior executives, any future unplanned departures could have amaterial adverse effect on our business, financial condition and results ofoperations.  Legacy senior executiveshave compensation agreements in place but new officers may not be party to anycompensation agreements.

**Risks Relating to Our PartnershipStructure**

***Costreimbursements and fees due to the Company and its affiliates may besubstantial.***

Wereimburse our General Partner, the Company and its affiliates, including EPCOand the officers and directors of the Company, for expenses they incur on ourbehalf.  Under our partnership agreement,our General Partner has sole discretion to determine the amount of theseexpenses. Under the administrative services agreement pursuant to which EPCOprovides various services to us, we are obligated to pay EPCO for all directand indirect costs and expenses associated with services it provides thatrelate to our business or activities. In addition, our General Partner, theCompany and their affiliates may provide other services to us for which we willbe charged fees as determined by our General Partner or the Company.

***TheCompany and its affiliates may have conflicts with our partnership.***

The directors and officers of the Company and itsaffiliates (including EPCO and other affiliates of EPCO) have duties to manage theCompany in a manner that is beneficial to its member. At the same time, theCompany has duties to manage our Parent Partnership and, through control of ourParent Partnership, us, in a manner that is beneficial to us. EPCO alsocontrols another publicly traded partnership, Enterprise, which engages insimilar lines of business. We have significant business relationships withEnterprise and EPCO and other entities controlled by Dan L. Duncan.Therefore, the Company’s duties to our Parent Partnership and us may conflictwith the duties of its officers and directors to its member. Provisions of ourpartnership agreement and/or the administrative services agreement provide fora standard of care that may allow the Company to approve actions in the contextof possible conflicts, which under state law a corporation would be required toanalyze with greater scrutiny. Possible conflicts may include, among others,the following:

·                  decisionsof the Company regarding the amount and timing of cash expenditures, borrowingsand issuances of other Parent Partnership debt or equity securities that canaffect the amount of distributions we make to the Parent Partnership and theamount of incentive compensation distributions the Parent Partnership makes tothe Company;

·                  decisionsof the Company regarding our acquisitions, expansions or business strategy,which may provide benefits to the Company and its affiliates;

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·                  underour and our Parent Partnership’s partnership agreements, it is not a breach ofthe Company’s fiduciary duties for affiliates of the Company to engage inactivities that compete with us;

·                  thedirectors and officers of the Company are allowed to resolve conflicts ofinterest involving us and EPCO and its affiliates and are allowed to take intoaccount the interests of parties other than us, such as EPCO and itsaffiliates, including Enterprise, in resolving these conflicts of interest;

·                  anyresolution of a conflict of interest by the directors and officers of theCompany not made in bad faith and that is fair and reasonable to us is bindingon the partners and will not constitute a breach of our partnership agreement;

·                  wedo not have any employees and we rely solely on employees of EPCO;

·                  ourpartnership agreement does not restrict the Company from causing us to pay itor its affiliates for any services rendered to us or entering into additionalcontractual arrangements with any of these entities on our behalf; and

·                  the directors and officers of theCompany and EPCO control the enforcement of obligations owed to us by theCompany, EPCO and its affiliates.

***EPCO’s employees,including some of the Company’s executive officers and directors, may besubjected to conflicts in managing our business and the allocation of time andcompensation costs between our business and the business of EPCO and its otheraffiliates.***

Certain of the Company’s executive officers and threeof its directors are also officers and/or directors of EPCO and otheraffiliates of EPCO, including Enterprise. These relationships may createconflicts of interest regarding corporate opportunities and other matters, andthe resolution of any such conflicts may not always be in our or our bestinterests. In addition, these overlapping executive officers and directorsallocate their time among us, EPCO and other affiliates of EPCO. These officersand directors face potential conflicts regarding the allocation of their time,which may adversely affect our business, results of operations and financialcondition.

We have entered into an administrative servicesagreement that governs business opportunities among entities controlled by theCompany, including our Parent Partnership and us (“TEPPCO Companies”), entitiescontrolled by the general partners of Enterprise GP Holdings L.P. andEnterprise, including Enterprise GP Holdings and Enterprise (“EnterpriseCompanies”), and EPCO and its other affiliates. Under the administrativeservices agreement, we have no obligation to present any business opportunityoffered to or discovered by us to the Enterprise Companies, and they are notobligated to present business opportunities that are offered to or discoveredby them to us. However, the agreement requires that business opportunitiesoffered to or discovered by EPCO, which controls both the TEPPCO Companies andthe Enterprise Companies, be offered first to certain Enterprise Companiesbefore they may be pursued by EPCO and its other affiliates or offered to us.

Under the administrative services agreement, EPCO andits affiliates provide all administrative, operational and other services,including employee support, for us and the Company. Some of the EPCO employeesproviding these services to us may also have duties and responsibilitiesrelated to EPCO and its other affiliates, including Enterprise. The servicesperformed by these shared personnel will generally be limited to non-commercialfunctions, including but not limited to human resources, informationtechnology, financial and accounting services and legal services. EPCO mayencounter conflicts of interest in allocating the available time and employeecosts of shared personnel between us and other EPCO affiliates.

***The credit and riskprofile of the Company and its owners could adversely affect our credit ratingsand profile.***

The credit and business risk profiles of the generalpartner or owners of a general partner may be factors in credit evaluations ofa master limited partnership and its subsidiaries. This is because a generalpartner can exercise significant influence over the business activities of thepartnership, including its cash distribution and acquisition strategy andbusiness risk profile. Another factor that may be considered is the financialcondition of the general partner and its owners, including the degree of theirfinancial leverage and their dependence on cash flow from the partnership toservice their indebtedness.

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Entities controlling the owner of the Company havesignificant indebtedness outstanding and are dependent principally on the cashdistributions from the Company and limited partner equity interests in ourParent Partnership to service such indebtedness. Any distributions by ourParent Partnership to such entities will be made only after satisfying its thencurrent obligations to its creditors, which could be substantial. Although ourParent Partnership has taken certain steps in its organizational structure,financial reporting and contractual relationships to reflect the separatenessof it and us from the Company and the entities that control the Company, ourParent Partnership and our credit ratings and business risk profile could beadversely affected if the ratings and risk profiles of the entities thatcontrol the Company were viewed as substantially lower or more risky than ours.

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**Item6.  Exhibits**

**ExhibitNumber                  Description**

3.1                                                                                 Second Amended andRestated Agreement of Limited Partnership of TE Products Pipeline Company,Limited Partnership, effective September 21, 2001 (Filed as Exhibit 3.8 to Form10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarterended September 30, 2001, and incorporated herein by reference).

4.1                                                                                 Form of Indenture betweenTE Products Pipeline Company, Limited Partnership and The Bank of New York, asTrustee, dated as of January 27, 1998 (Filed as Exhibit 4.3 to TE ProductsPipeline Company, Limited Partnership’s Registration Statement on Form S-3(Commission File No. 333-38473) and incorporated herein by reference).

4.2                                                                                 Formof Indenture between TEPPCO Partners, L.P., as issuer, TE Products PipelineCompany, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. andJonah Gas Gathering Company, as subsidiary guarantors, and First Union NationalBank, NA, as trustee, dated as of February 20, 2002 (Filed as Exhibit 99.2 toForm 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as ofFebruary 20, 2002 and incorporated herein by reference).

4.3                                                                                 FirstSupplemental Indenture between TEPPCO Partners, L.P., as issuer, TE ProductsPipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies,L.P. and Jonah Gas Gathering Company, as subsidiary guarantors, and First UnionNational Bank, NA, as trustee, dated as of February 20, 2002 (Filed as Exhibit99.3 to Form 8-K of TEPPCO Partners, L.P (Commission File No. 1-10403) dated asof February 20, 2002 and incorporated herein by reference).

4.4                                                                                 Second SupplementalIndenture, dated as of June 27, 2002, among TEPPCO Partners, L.P., as issuer,TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO MidstreamCompanies, L.P., and Jonah Gas Gathering Company, as Initial SubsidiaryGuarantors, and Val Verde Gas Gathering Company, L.P., as New SubsidiaryGuarantor, and Wachovia Bank, National Association, formerly known as FirstUnion National Bank, as trustee (Filed as Exhibit 4.6 to Form 10-Q of TEPPCOPartners, L.P. (Commission File No. 1-10403) for the quarter ended June 30,2002 and incorporated herein by reference).

4.5                                                                                 Third SupplementalIndenture among TEPPCO Partners, L.P. as issuer, TE Products Pipeline Company,Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P., Jonah GasGathering Company and Val Verde Gas Gathering Company, L.P. as SubsidiaryGuarantors, and Wachovia Bank, National Association, as trustee, dated as ofJanuary 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, andincorporated herein by reference).

10.1+                                                                    TexasEastern Products Pipeline Company, LLC 2000 Long Term Incentive Plan Notice of2006 Award (Filed as Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P. 

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(Commission File No.1-10403) for the quarter ended June 30, 2006, and incorporated herein byreference).

10.2+                                                                    TexasEastern Products Pipeline Company, LLC 2005 Phantom Unit Plan Notice of 2006Award (Filed as Exhibit 10.2 to Form 10-Q of TEPPCO Partners, L.P. (CommissionFile No. 1-10403) for the quarter ended June 30, 2006, and incorporated hereinby reference).

10.3+                                                                    ThirdAmendment to Amended and Restated Credit Agreement, dated as of July 31, 2006,by and among TEPPCO Partners, L.P., the Borrower, several banks and otherfinancial institutions, the Lenders, SunTrust Bank, as the Administrative Agentfor the Lenders and as the LC Issuing Bank, Wachovia Bank, NationalAssociation, as Syndication Agent, and BNP Paribas, JPMorgan Chase Bank, N.A.,and The Royal Bank of Scotland Plc, as Co-Documentation Agents (Filed asExhibit 10.3 to Current Report on Form 8-K of TEPPCO Partners, L.P. (CommissionFile No. 1-10403) dated as of August 3, 2006 and incorporated herein byreference).

31.1*                                                                    Certificationof Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2*                                                                  Certificationof Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

32.1**                                                             Certificationof Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

32.2**                                                             Certificationof Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

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* Filed herewith.

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

+ A management contract or compensation plan orarrangement.

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                       | TE Products Pipeline Company, Limited Partnership                                                     |
|-----------------------|-------------------------------------------------------------------------------------------------------|
|                  |                                                                                                  |
| Date: August 4,  2006 | By:                                                                                                   | /s/ JERRY E. THOMPSON |   |
|                  | Jerry E.  Thompson,  President and Chief Executive Officer of  TEPPCO GP, Inc., General Partner       |
|                  |                                                                                                  |   |   |
|                  |                                                                                                  |   |   |
| Date: August 4,  2006 | By:                                                                                                   |  /s/ WILLIAM  G. MANIAS |   |
|                  | William G.  Manias,  Vice President and Chief Financial Officer of   TEPPCO GP, Inc., General Partner |
|                       |                                                                                                       |  |  |  |  |

 

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