** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

ý**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

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

 

**OR**

 

o**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File No. 1-13603**

 

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**TE Products Pipeline Company, Limited Partnership**

(Exact name of Registrant as specified in its charter)

** **

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

 

**2929 Allen Parkway**

**P.O. Box 2521**

**Houston, Texas 77252-2521**

(Addressof principal executive offices, including zip code)

 

**(713) 759-3636**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    Yes  ý    No  o

 

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

 

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

 

** **

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** **

**TE PRODUCTS PIPELINE COMPANY, LIMITEDPARTNERSHIP**

 

**TABLE OF CONTENTS**

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

** **

i

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** **

**PART I.FINANCIAL INFORMATION**

** **

**Item 1.Financial Statements**

** **

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

** **

**CONSOLIDATED BALANCESHEETS**

**(in thousands)**

** **
| ** **                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                          | ** ** | **2005**          | ** ** | **2004**         | ** ** |
| ** **                                                                                                          | ** ** | **(Unaudited)**   | ** ** | ** **       | ** ** |
|                                                                                                                |       |              |       |             |       |
| **ASSETS**                                                                                                          |       |              |       |             |       |
| Current assets:                                                                                                     |       |              |       |             |       |
| Cash and cash equivalents                                                                                           |       | $                 | —     |             | $          | — |   |
| Accounts receivable, trade (net of allowance for doubtful  accounts of $56 and $56)                                 |       | 20,559            |       | 21,090           |       |
| Accounts receivable, related parties                                                                                |       | 1,868             |       | 2,379            |       |
| Inventories                                                                                                         |       | 14,795            |       | 10,093           |       |
| Other                                                                                                               |       | 16,838            |       | 12,143           |       |
| Total current assets                                                                                                |       | 54,060            |       | 45,705           |       |
| Property, plant and equipment, at cost (net of accumulated  depreciation and amortization of $331,347 and $311,197) |       | 798,895           |       | 722,334          |       |
| Equity investments                                                                                                  |       | 168,016           |       | 169,873          |       |
| Other assets                                                                                                        |       | 18,529            |       | 16,156           |       |
| Total assets                                                                                                        |       | $                 | 1,039,500  |             | $          | 954,068 |   |
|                                                                                                                |       |              |       |             |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                          |       |              |       |             |       |
| ** **                                                                                                          |       |              |       |             |       |
| Current liabilities:                                                                                                |       |              |       |             |       |
| Accounts payable and accrued liabilities                                                                            |       | $                 | 8,879      |             | $          | 10,211 |   |
| Accounts payable, related parties                                                                                   |       | 26,621            |       | 65,375           |       |
| Accrued interest                                                                                                    |       | 7,014             |       | 17,063           |       |
| Other accrued taxes                                                                                                 |       | 7,993             |       | 5,605            |       |
| Other                                                                                                               |       | 12,178            |       | 9,339            |       |
| Total current liabilities                                                                                           |       | 62,685            |       | 107,593          |       |
| Senior Notes                                                                                                        |       | 391,260           |       | 393,317          |       |
| Note Payable, Parent Partnership                                                                                    |       | 188,948           |       | 301,686          |       |
| Other liabilities and deferred credits                                                                              |       | 14,780            |       | 9,980            |       |
| Commitments and contingencies                                                                                       |       |              |       |             |       |
| Partners’ capital:                                                                                             |       |              |       |             |       |
| General partner’s interest                                                                                     |       | 4                 |       | 2                |       |
| Limited partner’s interest                                                                                     |       | 381,823           |       | 141,490          |       |
| Total partners’ capital                                                                                        |       | 381,827           |       | 141,492          |       |
| Total liabilities and partners’ capital                                                                        |       | $                 | 1,039,500  |             | $          | 954,068 |   |
|                                                                                                                     |            |                   |            |                  |            |  |  |  |

 

See accompanying Notes to Consolidated Financial Statements.

 

1

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**TE PRODUCTS PIPELINE COMPANY, LIMITEDPARTNERSHIP**

** **

**CONSOLIDATED STATEMENTS OFINCOME**

**(Unaudited)**

**(in thousands)**

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                             | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                   |       |                  |       |   |   |   |   |
| Operating revenues:                    |       |                   |       |                  |       |   |   |   |   |
| Transportation — Refined products |       | $                      | 38,240     |                  | $          | 43,386 |   | $ | 111,039 |   | $ | 113,294 |   |
| Transportation — LPGs             |       | 16,519                 |       | 16,071                |       | 63,220 |   | 58,572 |   |
| Other                                  |       | 10,107                 |       | 7,908                 |       | 30,144 |   | 30,378 |   |
| Total operating revenues               |       | 64,866                 |       | 67,365                |       | 204,403 |   | 202,244 |   |
|                                   |       |                   |       |                  |       |   |   |   |   |
| Costs and expenses:                    |       |                   |       |                  |       |   |   |   |   |
| Operating, general and administrative  |       | 30,101                 |       | 32,841                |       | 84,756 |   | 90,718 |   |
| Operating fuel and power               |       | 8,142                  |       | 8,465                 |       | 23,697 |   | 23,706 |   |
| Depreciation and amortization          |       | 9,818                  |       | 12,756                |       | 28,653 |   | 30,392 |   |
| Taxes — other than income taxes   |       | 3,014                  |       | 1,979                 |       | 8,362 |   | 7,314 |   |
| Gains on sales of assets               |       | (24                    | )          | (472                  | )          | (131 | ) | (587 | ) |
| Total costs and expenses               |       | 51,051                 |       | 55,569                |       | 145,337 |   | 151,543 |   |
|                                   |       |                   |       |                  |       |   |   |   |   |
| Operating income                       |       | 13,815                 |       | 11,796                |       | 59,066 |   | 50,701 |   |
|                                   |       |                   |       |                  |       |   |   |   |   |
| Interest expense — net            |       | (7,286                 | )          | (6,979                | )          | (22,839 | ) | (20,469 | ) |
| Equity earnings (losses)               |       | 524                    |       | (322                  | )          | 574 |   | (2,069 | ) |
| Other income — net                |       | 306                    |       | 203                   |       | 576 |   | 648 |   |
|                                   |       |                   |       |                  |       |   |   |   |   |
| Net income                             |       | $                      | 7,359      |                  | $          | 4,698 |   | $ | 37,377 |   | $ | 28,811 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

2

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**TE PRODUCTS PIPELINE COMPANY, LIMITEDPARTNERSHIP**

** **

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**

**(in thousands)**

** **
| ** **                                                                     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                     | ** ** | **September 30,**     | ** ** |
| ** **                                                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                           |       |                  |       |   |   |
| Cash flows from operating activities:                                          |       |                  |       |   |   |
| Net income                                                                     |       | $                     | 37,377     |   | $ | 28,811 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                  |       |   |   |
| Depreciation and amortization                                                  |       | 28,653                |       | 30,392 |   |
| Earnings in equity investments, net of  distributions                          |       | 10,114                |       | 10,594 |   |
| Non-cash portion of interest expense                                           |       | 199                   |       | 22 |   |
| Gains on sales of assets                                                       |       | (131                  | )          | (587 | ) |
| Decrease in accounts receivable                                                |       | 531                   |       | 7,210 |   |
| (Increase) decrease in accounts receivable,  related parties                   |       | 511                   |       | (4,330 | ) |
| (Increase) decrease in inventories                                             |       | (4,642                | )          | 871 |   |
| (Increase) decrease in other current assets                                    |       | (4,695                | )          | 2,049 |   |
| Decrease in accounts payable and accrued expenses                              |       | (2,162                | )          | (11,237 | ) |
| Increase (decrease) in accounts payable, related  parties                      |       | (38,754               | )          | 44,470 |   |
| Other                                                                          |       | (7,351                | )          | (11,253 | ) |
| Net cash provided by operating activities                                      |       | 19,650                |       | 97,012 |   |
|                                                                           |       |                  |       |   |   |
| Cash flows from investing activities:                                          |       |                  |       |   |   |
| Proceeds from sale of assets                                                   |       | —                |       | 590 |   |
| Investment in Mont Belvieu Storage Partners, L.P                               |       | (2,635                | )          | (20,161 | ) |
| Purchase of assets                                                             |       | (68,969               | )          | (1,962 | ) |
| Investment in Centennial Pipeline LLC                                          |       | —                |       | (1,500 | ) |
| Capital expenditures                                                           |       | (38,266               | )          | (51,275 | ) |
| Net cash used in investing activities                                          |       | (109,870              | )          | (74,308 | ) |
|                                                                           |       |                  |       |   |   |
| Cash flows from financing  activities:                                         |       |                  |       |   |   |
| Proceeds from note payable, Parent Partnership                                 |       | 148,508               |       | 90,377 |   |
| Repayments of note payable, Parent Partnership                                 |       | (261,246              | )          | (24,993 | ) |
| Equity contributions — Parent Partnership                                 |       | 294,820               |       | — |   |
| Distributions paid                                                             |       | (91,862               | )          | (88,276 | ) |
| Net cash provided by (used in) financing  activities                           |       | 90,220                |       | (22,892 | ) |
|                                                                           |       |                  |       |   |   |
| Net decrease in cash and cash equivalents                                      |       | —                |       | (188 | ) |
|                                                                           |       |                  |       |   |   |
| Cash and cash equivalents at beginning of period                               |       | —                |       | 188 |   |
| Cash and cash equivalents at end of period                                     |       | $                     | —     |   | $ | — |   |
|                                                                           |       |                  |       |   |   |
| **Non-cash investing activities:**                                             |       |                  |       |   |   |
| Net assets transferred to Mont Belvieu Storage  Partners, L.P.                 |       | $                     | 1,429      |   | $ | — |   |
|                                                                           |       |                  |       |   |   |
| **Supplemental disclosure of cash flows:**                                     |       |                  |       |   |   |
| Cash paid for interest (net of amounts capitalized)                            |       | $                     | 30,786     |   | $ | 26,526 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

3

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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%general partner interest in us.  TexasEastern Products Pipeline Company, LLC (the “Company”), a Delaware limitedliability company, serves as the general partner of our ParentPartnership.  Through February 23, 2005,the Company was an indirect wholly owned subsidiary of Duke Energy FieldServices, LLC (“DEFS”), a joint venture between Duke Energy Corporation (“DukeEnergy”) and ConocoPhillips.  ThroughFebruary 23, 2005, Duke Energy held an interest of approximately 70% in DEFS,and ConocoPhillips 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 the general partner interest.

 

TEPPCO GP, as our general partner, performs all of the management andoperating functions required for us in accordance with the Agreement of LimitedPartnership of TE Products Pipeline Company, Limited Partnership.  We reimburse our General Partner and theCompany for all reasonable direct and indirect expenses that they incur inmanaging us.

 

On May 18, 2005, weformed TEPPCO Terminals, L.P. (“TEPPCO Terminals”), a Delaware limitedpartnership, and we own a 99.999% interest in TEPPCO Terminals as the solelimited partner.  TEPPCO GP serves as thegeneral partner and holds a 0.001% general partner interest in TEPPCOTerminals.  On July 12, 2005, TEPPCOTerminals purchased a refined products terminal and two-bay truck loading rackin North Little Rock, Arkansas, for $6.8 million from Exxon Mobil Corporation(see Note 5. Acquisitions).

 

On May 9, 2005, we formedTEPPCO Interests, LLC (“TEPPCO Interests”), a Delaware limited liabilitycompany, of which we own 100% of the member interests.  On July 15, 2005, TEPPCO Interests acquiredfrom Texas Genco LLC (i) 100% of its member interests in TG Pipeline GP, LLC, aDelaware limited liability company, which is the owner of 100% of the generalpartner interests in TG Pipeline, L.P. (“Pipeline LP”), a Texas limited partnership,and (ii) 100% of the membership interests in TG Pipeline LP, LLC, a Delawarelimited liability company, which is the owner of 100% of the limited partnerinterests in Pipeline LP (see Note 5. Acquisitions).

 

 

4

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As used in this Report, “we,” “us,” and “our” means TE ProductsPipeline Company, Limited Partnership and, where the context requires, includeour consolidated subsidiaries.

 

The accompanying unaudited consolidated financial statements reflectall adjustments that are, in the opinion of our management, of a normal andrecurring nature and necessary for a fair statement of our financial positionas of September 30, 2005, and the results of our operations and cash flows forthe periods presented.  The results ofoperations for the three months and nine months ended September 30, 2005, arenot necessarily indicative of results of our operations for the full year2005.  You should read these interimfinancial statements in conjunction with our consolidated financial statementsand notes thereto presented in the TE Products Pipeline Company, LimitedPartnership Annual Report on Form 10-K for the year ended December 31,2004.  We have reclassified certainamounts from prior periods to conform to the current presentation.

 

We operate and report in one business segment: transportation andstorage of refined products, liquefied petroleum gases (“LPGs”) andpetrochemicals.  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.”

 

At September 30, 2005, and December 31, 2004, we had working capitaldeficits of $8.6 million and $61.9 million, respectively.  Our primary sources of liquidity are cashgenerated from operations and from our Parent Partnership’s credit facilitiesand debt and equity offerings.  Workingcapital deficits occur primarily from the timing of operating cash receiptsfrom customers, payment of cash distributions and the payment of normaloperating expenses and capital expenditures. Our Parent Partnership has historically made capital contributions,loans or otherwise provided liquidity to us as needed, but the ParentPartnership has no contractual obligation to do so.  At September 30, 2005, our Parent Partnershiphad $139.5 million in available borrowing capacity under its revolving creditfacility and agreed to cover any of our working capital needs, if required.

** **

**New Accounting Pronouncements**

** **

**In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), *Share-Based Payment*.  SFAS 123(R) requires compensation costsrelated to share-based payment transactions to be recognized in the financialstatements.  With limited exceptions, theamount of the compensation cost is to be measured based on the grant-date fairvalue of the equity or liability instruments issued.  In addition, liability awards are to bere-measured each reporting period. Compensation cost will be recognized over the period that an employeeprovides service in exchange for the award. SFAS 123(R) is a revision of SFASNo. 123, *Accounting for Stock-BasedCompensation*, as amended by SFAS No. 148,*Accounting for Stock-Based Compensation — Transition and Disclosure*and supersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS 123(R) is effective for public companiesas of the first interim or annual reporting period of the first fiscal yearbeginning after June 15, 2005.  TheSecurities and Exchange Commission amended the implementation date of SFAS123(R) to begin with the first interim or annual reporting period of thecompany’s first fiscal year beginning on or after June 15, 2005.  As such, we will adopt SFAS 123(R) in thefirst quarter of 2006.  Companies arepermitted to adopt SFAS 123(R) prior to the extended date.  All public companies that adopted thefair-value-based method of accounting must use the modified prospectivetransition method and may elect to use the modified retrospective transitionmethod.  We do not believe that theadoption of SFAS 123(R) will have a material effect on our financial position,results of operations or cash flows.**

** **

**In November 2004, the Emerging Issues Task Force (“EITF”)reached consensus in EITF 03-13, *Applying the Conditions inParagraph 42 of FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, inDetermining Whether to Report Discontinued Operations*, to clarify whether acomponent of an enterprise that is either disposed of or classified as held forsale qualifies for income statement presentation as discontinued**

** **

**5**

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** **

**operations.  The FASB ratified the consensus on November30, 2004.  The consensus is to be appliedprospectively with regard to a component of an enterprise that is either disposedof or classified as held for sale in reporting periods beginning after December15, 2004.  The consensus may be appliedretrospectively for previously reported operating results related to disposaltransactions initiated within an enterprise’s reporting period that includedthe date that this consensus was ratified. The adoption of EITF 03-13 did nothave an effect on our financial position, results of operations or cash flows.**

** **

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

** **

In June 2005, the EITFreached consensus in EITF 04-5, *DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights*, to provide guidance on how general partners in a limitedpartnership should determine whether they control a limited partnership andtherefore should consolidate it.  TheEITF agreed that the presumption of general partner control would be overcomeonly when the limited partners have either of two types of rights. The firsttype, referred to as kick-out rights, is the right to dissolve or liquidate thepartnership or otherwise remove the general partner without cause.  The second type, referred to as participatingrights, is the right to effectively participate in significant decisions madein the ordinary course of the partnership’s business. The kick-out rights andthe participating rights must be substantive in order to overcome thepresumption of general partner control. The consensus is effective for generalpartners of all new limited partnerships formed and for existing limitedpartnerships for which the partnership agreements are modified subsequent tothe date of FASB ratification (June 29, 2005). For existing limited partnerships that have not been modified, theguidance in EITF 04-5 is effective no later than the beginning of the firstreporting period in fiscal years beginning after December 15, 2005.  We are currently evaluating what impact EITF04-5 will have on our financial statements, but at this time we do not believethat the adoption of EITF 04-5 will have a material effect on our financialposition, results of operations or cash flows.

 

In December 2004, the FASBissued SFAS No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion 29*.   SFAS 153 amends APB Opinion No. 29, *Accounting for Nonmonetary Exchanges,*to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance.  A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange.  SFAS 153 is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.

 

6

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We adopted SFAS 153 during the second quarter of 2005.  The adoption of SFAS 153 did not have amaterial effect on our financial position, results of operations or cash flows.

 

In May 2005, the FASB issuedSFAS No. 154, *Accounting Changes and ErrorCorrections*.  SFAS 154establishes new standards on accounting for changes in accountingprinciples.  All such changes must beaccounted for by retrospective application to the financial statements of priorperiods unless it is impracticable to do so. SFAS 154 completely replaces APB Opinion No. 20, *Accounting Changes,*and SFAS No. 3, *Reporting Accounting 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.  We do not believe that the adoption of SFAS154 will have a material effect on our financial position, results ofoperations or cash flows.

 

In September 2005, the EITFreached consensus in EITF 04-13, *Accounting for Purchasesand Sales of Inventory with the Same Counterparty*, to define when apurchase and a sale of inventory with the same party that operates in the sameline of business should be considered a single nonmonetary transaction subjectto APB Opinion No. 29, *Accounting for NonmonetaryTransactions*.  Two or moreinventory transactions with the same party should be combined if they are enteredinto in contemplation of one another. The consensus also requires entities to account for exchanges ofinventory in the same line of business at fair value or recorded amounts basedon inventory classification.  Theguidance in EITF 04-13 is effective for new inventory arrangements entered intoin reporting periods beginning after March 15, 2006.  We are currently evaluating what impact EITF04-13 will have on our financial statements, but at this time we do not believethat the adoption of EITF 04-13 will have a material effect on our financialposition, results of operations or cash flows.

** **

**NOTE 2.  INTANGIBLEASSETS**

** **

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

** **

Thefollowing table reflects the components of intangible assets being amortized,included in other assets on the consolidated balance sheets at September 30,2005, and December 31, 2004 (in thousands):

 
| ** **                          | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Gross Carrying**     | ** ** | **Accumulated**       | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                          | ** ** | **Amount**             | ** ** | **Amortization**      | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| ** **                          | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible assets being  amortized: |       |                   |       |                  |       |   |   |   |   |
| Transportation agreements           |       | $                      | 1,328      |                  | $          | (310 | ) | $ | 1,328 |   | $ | (260 | ) |
|                                     |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

** **

At September 30, 2005, we had $33.4 million of excess investment in ourequity investment in Centennial Pipeline LLC, which was created upon itsformation.  The excess investment isincluded in our equity investments

 

7

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account at September 30, 2005.  This excess investment is accounted for as anintangible asset with an indefinite life. We assess the intangible asset for impairment on an annual basis.

** **

Amortization expense on intangible assets was $16,603 for each of thethree-month periods ended September 30, 2005 and 2004, and $49,808 for each ofthe nine-month periods ended September 30, 2005 and 2004.

 

Amortization expense on intangible assets is estimated to be $0.1million for each of the years ending December 31, 2005 through 2009.

** **

**NOTE 3.  PROPERTY, PLANTAND EQUIPMENT**

** **

Weevaluate impairment of long-lived assets in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.  Long-lived assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of the carrying amount of assets to be held and used ismeasured by a comparison of the carrying amount of the asset to future net cashflows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell.

 

InSeptember 2005, our Todhunter facility, near Middletown, Ohio, experienced apropane release and fire at a dehydration unit within the storagefacility.   The dehydration unit wasdestroyed due to the propane release and fire, and as a result, we wrote offthe remaining book value of the asset of $0.8 million to depreciation andamortization expense during the third quarter of 2005.

 

Duringthe third quarter of 2004, we completed an evaluation of our marine terminalfacility in the Beaumont, Texas, area. The facility consists primarily of a barge dock, a ship dock, fourstorage tanks and various segments of connecting pipelines.  The evaluation indicated that the docks andother assets at the facility needed extensive work to continue to becommercially operational.  As a result,we performed an impairment test on the entire marine facility and recorded a$4.4 million non-cash impairment charge, included in depreciation andamortization expense in our consolidated statements of income, for the excesscarrying value over the fair value of the facility.

 

**NOTE 4.  INTEREST RATESWAP**

** **

In October 2001, we entered into an interest rate swap agreement tohedge our exposure to changes in the fair value of our fixed rate 7.51% SeniorNotes due 2028.  We designated this swapagreement as a fair value hedge.  Theswap agreement has a notional amount of $210.0 million and matures in January2028 to match the principal and maturity of the Senior Notes.  Under the swap agreement, we pay a floatingrate of interest based on a three-month U.S. Dollar LIBOR rate, plus a spread,and receive a fixed rate of interest of 7.51%. During the nine months ended September 30, 2005 and 2004, we recognizedreductions in interest expense of $4.6 million and $7.5 million, respectively,related to the difference between the fixed rate and the floating rate ofinterest on the interest rate swap. During the quarter ended September 30, 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 gain of approximately$1.3 million and $3.4 million at September 30, 2005, and December 31, 2004,respectively.

** **

**8**

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** **

**NOTE 5.  ACQUISITIONS**

 

**Refined Products Terminal and Truck Rack**

 

On July 12, 2005, TEPPCOTerminals purchased a refined products terminal and two-bay truck loading rackin North Little Rock, Arkansas, for $6.8 million from Exxon MobilCorporation.  The assets include threestorage tanks and a two-bay truck loading rack. We funded the purchase through borrowings under our Parent Partnership’srevolving credit facility.  We allocatedthe purchase price to property, plant and equipment and inventory, and weaccounted for the acquisition of these assets under the purchase method ofaccounting.  The terminal serves thecentral Arkansas refined products market and complements our existinginfrastructure in North Little Rock, Arkansas.

 

**Genco Assets**

 

On July 15, 2005, TEPPCO Interests acquired from Texas Genco LLC (“Genco”)all of its interests in certain companies that own a 90-mile pipeline systemand 5.5 million barrels of storage capacity for $62.1 million.  We funded the purchase through borrowingsunder our Parent Partnership’s revolving credit facility.  We allocated the purchase price to property,plant and equipment, and we accounted for the acquisition of these assets underthe purchase method of accounting.  Thisacquisition was made as part of an expansion of our refined products origincapabilities in the Houston, Texas, and Texas City, Texas areas.  The assets of the purchased companies will beintegrated into our origin infrastructure in Texas City and Baytown,Texas.  The integration and other systemenhancements should be in service by the fourth quarter of 2006, at anestimated cost of $45.0 million.  Thestrategic location of these assets, with refined products interconnections tomajor exchange terminals in the Houston area, will provide significantlong-term value to our customers and the Texas Gulf Coast refining andlogistics system.

** **

**NOTE6.  INVENTORIES**

** **

Inventories arevalued at the lower of cost (based on weighted average cost method) ormarket.  The costs of inventories did notexceed market values at September 30, 2005, and December 31, 2004. The major componentsof inventories were as follows (in thousands):

 
| ** **             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------|------------|-------------------|------------|------------------|------------|
| ** **             | ** ** | **2005**          | ** ** | **2004**         | ** ** |
| Refined products       |       | $                 | 7,335      |             | $          | 5,665 |   |
| LPGs                   |       | 2,511             |       | —           |       |
| Materials and supplies |       | 4,949             |       | 4,428            |       |
| Total                  |       | $                 | 14,795     |             | $          | 10,093 |   |
|                        |            |                   |            |                  |            |  |  |  |  |

** **

**NOTE 7.  EQUITY INVESTMENTS**

 

We owna 50% ownership interest in Centennial Pipeline Company LLC (“Centennial”), andMarathon Petroleum Company LLC (“Marathon”) owns the remaining 50% interest.Centennial owns an interstate refined petroleum products pipeline extendingfrom the upper Texas Gulf Coast to central Illinois.  During the nine months ended September 30,2005, we have not invested any additional funds in Centennial.  During the nine months ended September 30,2004, we invested an additional $1.5 million in Centennial, which is includedin the equity

 

9

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investmentbalance at September 30, 2005.  We havenot received any distributions from Centennial since its formation.

 

On January 1, 2003, we and Louis Dreyfus Energy Services L.P. (“LouisDreyfus”) formed Mont Belvieu Storage Partners, L.P. (“MB Storage”).  We and Louis Dreyfus each own a 50% ownershipinterest in MB Storage.  MB Storage ownsstorage capacity at the Mont Belvieu fractionation and storage complex and ashort haul transportation shuttle system that ties Mont Belvieu, Texas, to theupper Texas Gulf Coast energy marketplace. MB Storage is a service-oriented, fee-based venture serving thefractionation, refining and petrochemical industries with transportation,terminaling and storage.  MB Storage hasno commodity trading activity.  Weoperate the facilities for MB Storage.

 

For the year ended December 31, 2005, we will receive the first $1.7million per quarter (or $6.78 million on an annual basis) of MB Storage’sincome before depreciation expense, as defined in the operating agreement.  For the year ended December 31, 2004, wereceived the first $1.8 million per quarter (or $7.15 million on an annualbasis) of MB Storage’s income before depreciation expense.  Our share of MB Storage’s earnings isadjusted annually by the partners of MB Storage.  Any amount of MB Storage’s annual incomebefore depreciation expense in excess of $6.78 million for 2005 and $7.15million for 2004 is allocated evenly between us and Louis Dreyfus.  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 nine months ended September 30, 2005 and 2004, oursharing ratio in the earnings of MB Storage was approximately 64.3% and 72.3%,respectively.  During the nine months endedSeptember 30, 2005, we received distributions of $10.7 million from MB Storageand contributed $4.0 million to MB Storage, which includes a combination ofnon-cash asset transfers of $1.4 million and cash contributions of $2.6million.  During the nine months endedSeptember 30, 2004, we received distributions of $8.5 million from MB Storageand contributed $20.2 million to MB Storage, of which $16.5 million was used toacquire storage assets in April 2004.

 

We use the equity method of accounting to account for our investmentsin Centennial and MB Storage.  Summarizedcombined financial information for Centennial and MB Storage for the ninemonths ended September 30, 2005 and 2004, is presented below (in thousands):

 
| ** **        | ** ** | **Nine Months Ended** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **September 30,**     | ** ** |
| ** **        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Revenues          |       | $                     | 54,863     |   | $ | 44,210 |   |
| Net income (loss) |       | 6,091                 |       | (23 | ) |
|                   |            |                       |            |  |  |  |  |

 

Summarized combined balance sheet data for Centennial and MB Storage asof September 30, 2005, and December 31, 2004, is presented below (inthousands):

 
| ** **             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------|------------|-------------------|------------|------------------|------------|
| ** **             | ** ** | **2005**          | ** ** | **2004**         | ** ** |
| Current assets         |       | $                 | 46,836     |             | $          | 39,228 |   |
| Noncurrent assets      |       | 371,413           |       | 377,924          |       |
| Current liabilities    |       | 44,275            |       | 36,015           |       |
| Long-term debt         |       | 140,000           |       | 140,000          |       |
| Noncurrent liabilities |       | 18,863            |       | 20,383           |       |
| Partners’ capital |       | 215,111           |       | 220,754          |       |
|                        |            |                   |            |                  |            |  |  |

** **

**10**

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** **

**NOTE 8.  DEBT**

** **

## **Senior Notes**

## ** **

On January 27, 1998, we completed the issuance of $180.0 millionprincipal amount of 6.45% Senior Notes due 2008, and $210.0 million principalamount of 7.51% Senior Notes due 2028 (collectively, the “Senior Notes”).  The 6.45% Senior Notes were issued at adiscount of $0.3 million and are being accreted to their face value over theterm of the notes.  The 6.45% SeniorNotes due 2008 are not subject to redemption prior to January 15, 2008.  The 7.51% Senior Notes due 2028, issued atpar, may be redeemed at any time after January 15, 2008, at our option in wholeor in part, at a premium.

 

The Senior Notes do not have sinking fund requirements.  Interest on the Senior Notes is payablesemiannually in arrears on January 15 and July 15 of each year.  The Senior Notes are unsecured obligationsand rank pari passu with all other unsecured and unsubordinated indebtedness.  The indenture governing the Senior Notescontains covenants including but not limited to, covenants limiting thecreation of liens securing indebtedness and sale and leasebacktransactions.  However, the indenturedoes not limit our ability to incur additional indebtedness.  As of September 30, 2005, we were incompliance with the covenants of the Senior Notes.

 

We have entered into an interest rate swap agreement to hedge ourexposure to changes in the fair value on a portion of the Senior Notesdiscussed above.  At September 30, 2005,and December 31, 2004, the Senior Notes include the fair value of our interestrate swap of $1.3 million and $3.4 million, respectively (see Note 4. InterestRate Swap).

 

The following table summarizes the estimated fair values of the SeniorNotes as of September 30, 2005, and December 31, 2004 (in millions):

 
| ** **                            | ** ** | ** **     | ** ** | **Fair Value**         | ** ** |
|---------------------------------------|------------|----------------|------------|------------------------|------------|
| ** **                            | ** ** | **Face Value** | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| 6.45% Senior Notes, due  January 2008 |       | $              | 180.0      |                   | $          | 185.0 |   | $ | 187.1 |   |
| 7.51% Senior Notes, due  January 2028 |       | 210.0          |       | 223.9                  |       | 225.6 |   |
|                                       |            |                |            |                        |            |  |  |  |  |  |

** **

**Other Long Term Debt and Credit Facilities**

** **

We currently utilize debt financing available from our ParentPartnership through intercompany notes. The terms of the intercompany notesgenerally match the principal and interest payment dates under the ParentPartnership’s credit agreement and senior notes.  The interest rates charged by the ParentPartnership include the stated interest rate of the Parent Partnership, plus apremium to cover debt issuance costs. The interest rate is also decreased or increased to cover gains andlosses, respectively, on any interest rate swaps that the Parent Partnershipmay have in place on its credit agreement and senior notes.  The Parent Partnership’s senior notes andrevolving credit facility are described below.

 

On February 20, 2002, our Parent Partnership issued $500.0 millionprincipal 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 the termof the notes.  The 7.625% Senior Notesmay be redeemed at any time at our Parent Partnership’s option with the paymentof 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

 

11

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securities of comparable remaining maturity plus 35basis points.  The indenture governingthe 7.625% Senior Notes contains covenants, including, but not limited to,covenants limiting the creation of liens securing indebtedness and sale andleaseback transactions.  However, theindenture does not limit our Parent Partnership’s ability to incur additionalindebtedness.

 

On January 30, 2003, our Parent Partnership issued $200.0 millionprincipal 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 maturity plus35 basis points.  The indenture governingthe 6.125% Senior Notes contains covenants including, but not limited to,covenants limiting the creation of liens securing indebtedness and sale andleaseback transactions.  However, theindenture does not limit the Parent Partnership’s ability to incur additionalindebtedness.

 

On June 27, 2003, our Parent Partnership entered into a $550.0 millionunsecured revolving credit facility with a three-year term, including theissuance of letters of credit of up to $20.0 million (“Revolving CreditFacility”).  The interest rate is based,at our Parent Partnership’ option, on either the lender’s base rate plus aspread, or LIBOR plus a spread in effect at the time of the borrowings.  The credit agreement for the Revolving CreditFacility contains certain restrictive financial covenant ratios.  Restrictive covenants in the Revolving CreditFacility limit the Parent Partnership’s and its subsidiaries’ ability to, amongother things, incur additional indebtedness, make distributions in excess ofAvailable Cash (see Note 9. Quarterly Distributions of Available Cash) completemergers, acquisitions and sales of assets. On October 21, 2004, our Parent Partnership amended the Revolving CreditFacility to (i) increase the facility size to $600.0 million, (ii) extend theterm to October 21, 2009, (iii) remove certain restrictive covenants, (iv)increase the available amount for the issuance of letters of credit up to$100.0 million and (v) decrease the LIBOR rate spread charged at the time ofeach borrowing.  On February 23, 2005,our Parent Partnership again amended its Revolving Credit Facility to removethe requirement that DEFS must at all times own, directly or indirectly, 100%of the Company, to allow for its acquisition by DFI (see Note 1. Organizationand Basis of Presentation).  During thesecond quarter of 2005, the Parent Partnership used a portion of the proceedsfrom an equity offering in May 2005 to repay a portion of the Revolving CreditFacility.  At September 30, 2005, $460.5million was outstanding under the Revolving Credit Facility at a weightedaverage interest rate of 4.6%.  AtSeptember 30, 2005, our Parent Partnership was in compliance with the covenantsof this credit agreement.

 

At September 30, 2005, and December 31, 2004, we had intercompany notespayable to our Parent Partnership of $188.9 million and $301.7 million,respectively, which represented 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 atSeptember 30, 2005, was 5.7%.  AtSeptember 30, 2005, accrued interest includes $1.2 million due to our ParentPartnership.  For the nine months endedSeptember 30, 2005 and 2004, interest costs incurred on the note payable to ourParent Partnership totaled $7.6 million and $9.2 million, respectively.

 

**NOTE 9.  QUARTERLYDISTRIBUTONS OF AVAILABLE CASH**

** **

We make quarterly cash distributions of all of our Available Cash, generallydefined as consolidated cash receipts less consolidated cash disbursements andcash reserves established by the General Partner in its sole discretion.  We pay distributions of 99.999% to the ParentPartnership and 0.001% to the General Partner.

 

12

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Duringthe nine months ended September 30, 2005 and 2004, we paid cash distributionsto our Parent Partnership totaling $91.9 million and $88.3 million,respectively.  On November 7, 2005, wewill pay a cash distribution to our Parent Partnership of $20.1 million for thequarter ended September 30, 2005.

 

**NOTE 10.  EMPLOYEEBENEFIT PLANS**

 

**Retirement Plans**

 

The Parent Partnership has adopted the TEPPCO Retirement Cash BalancePlan (“TEPPCO RCBP”), which is a non-contributory, trustee-administered pensionplan.  In addition, the TEPPCOSupplemental Benefit Plan (“TEPPCO SBP”) is a non-contributory, nonqualified,defined benefit retirement plan, in which certain executive officersparticipate.  The TEPPCO SBP wasestablished to restore benefit reductions caused by the maximum benefitlimitations that apply to qualified plans. The benefit formula for all eligible employees is a cash balanceformula.  Under a cash balance formula, aplan participant accumulates a retirement benefit based upon pay credits andcurrent interest credits.  The paycredits are based on a participant’s salary, age and service.  The Parent Partnership uses a December 31measurement date for these plans.

 

On May 27, 2005, the TEPPCO RCBP and the TEPPCO SBP were amended.  Effective May 31, 2005, participation in theTEPPCO RCBP was frozen, and no new participants were eligible to be covered bythe plan after that date.  EffectiveDecember 31, 2005, all plan benefits accrued will be frozen, participants willnot receive additional pay credits after that date, and all plan participantswill be 100% vested regardless of their years of service.  The TEPPCO RCBP plan will be terminatedeffective December 31, 2005, and plan participants will have the option toreceive their benefits either through a lump sum payment in 2006 or through anannuity.  For those plan participants whoelect to receive an annuity, our Parent Partnership will purchase an annuitycontract from an insurance company in which the plan participant will own theannuity, absolving our Parent Partnership of any future obligation to theparticipant.  Participants in the TEPPCOSBP will receive pay credits through November 30, 2005, and will receive lumpsum benefit payments in December 2005. Both the RCBP and SBP benefit payments are discussed below.

 

In June 2005, the Parent Partnership recorded a curtailment charge of$0.1 million in accordance with SFAS No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*, as a result of the TEPPCO RCBP andTEPPCO SBP amendments.  A portion of thecharge was allocated to us.  As of May31, 2005, the following assumptions were changed for purposes of determiningthe net periodic benefit costs for the remainder of 2005: the discount rate,the long-term rate of return on plan assets, and the assumed mortalitytable.  The discount rate was decreasedfrom 5.75% to 5.00% to reflect rates of returns on bonds currently available tosettle the liability.   The expectedlong-term rate of return on plan assets was changed from 8% to 2% due to themovement of plan funds from equity investments into short-term money marketfunds.  The mortality table was changedto reflect overall improvements in mortality experienced by the generalpopulation.  The curtailment charge arosedue to the accelerated recognition of the unrecognized prior servicecosts.  The Parent Partnership expects torecord additional settlement charges of approximately $0.2 million in thefourth quarter of 2005 relating to the TEPPCO SBP and approximately $3.2million in 2006 relating to the TEPPCO RCBP for any existing unrecognizedlosses upon the plan termination and final distribution of the assets to theplan participants. We expect to be allocated a share of these charges.

 

13

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The components of net pension benefits costs allocated to us for theTEPPCO RCBP and the TEPPCO SBP for the three and nine months ended September30, 2005 and 2004, were as follows (in thousands):

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost benefit earned during the period |       | $                      | 735        |                  | $          | 635 |   | $ | 2,082 |   | $ | 1,905 |   |
| Interest cost on projected benefit obligation |       | 157                    |       | 120                   |       | 472 |   | 360 |   |
| Expected return on plan assets                |       | (53                    | )          | (157                  | )          | (414 | ) | (471 | ) |
| Amortization of prior service cost            |       | 1                      |       | 2                     |       | 4 |   | 6 |   |
| Recognized net actuarial loss                 |       | 24                     |       | 3                     |       | 61 |   | 9 |   |
| SFAS 88 curtailment chargee                   |       | —                 |       | —                |       | 39 |   | — |   |
| Net pension benefits costs                    |       | $                      | 864        |                  | $          | 603 |   | $ | 2,244 |   | $ | 1,809 |   |

 

**Other Postretirement Benefits**

 

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

 

In May 2005, benefits provided to employees under the TEPPCO OPB werechanged.  Employees eligible for thesebenefits will receive them through December 31, 2005, however, effectiveDecember 31, 2005, these benefits will be terminated.  In June 2005, as a result of this change inbenefits and in accordance with SFAS 106, *Employers’ Accounting forPostretirement Benefits Other Than Pensions*, the Parent Partnershiprecorded a curtailment credit of approximately $2.6 million in its accumulatedpostretirement obligation, partially offset by a curtailment charge ofapproximately $1.0 million related to the accelerated recognition of theunrecognized prior service costs.  Thenet effect of these curtailment adjustments was to reduce the ParentPartnership’s accumulated postretirement obligation to the total of theexpected remaining 2005 payments under the TEPPCO OPB. The current employeesparticipating in this plan were transferred to DEFS, who will continue toprovide 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 was allocated to us.

 

The components of net postretirement benefits cost allocated to us forthe TEPPCO OPB for the three months and nine months ended September  30, 2005 and 2004, were as follows (inthousands):

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                                     | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost benefit  earned during the period                 |       | $                      | —     |                  | $          | 29 |   | $ | 49 |   | $ | 87 |   |
| Interest cost on accumulated postretirement benefit obligation |       | —                 |       | 33                    |       | 57 |   | 99 |   |
| Amortization of prior  service cost                            |       | —                 |       | 28                    |       | 47 |   | 84 |   |
| Recognized net actuarial  loss                                 |       | —                 |       | —                |       | 3 |   | — |   |
| SFAS 106 curtailment  credit                                   |       | —                 |       | —                |       | (1,318 | ) | — |   |
| Net postretirement benefits costs                              |       | $                      | —     |                  | $          | 90 |   | $ | (1,162 | ) | $ | 270 |   |

 

14

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EffectiveJune 1, 2005, the payroll functions performed by DEFS for the Company weretransferred from DEFS to EPCO.  For thoseemployees who were receiving certain other postretirement benefits at the timeof the acquisition of the Company by DFI, DEFS will continue to provide thesebenefits to those employees.  EffectiveJune 1, 2005, EPCO began providing certain other postretirement benefits tothose employees who became eligible for the benefits after June 1, 2005, andwill charge those benefit related costs to our Parent Partnership.  As a result of these changes, the ParentPartnership recorded a $1.2 million reduction in its other postretirementobligation in June 2005.  A portion ofthe reduction was allocated to us.

## ** **

## **Estimated FutureBenefit Contributions**

 

The Parent Partnership expects to contribute approximately $1.1 millionto its retirement plans and other postretirement benefit plans in 2005.  We expect to be allocated a share of thesecontributions.

** **

**NOTE 11.  COMMITMENTSAND CONTINGENCIES**

** **

**Litigation**

 

In the fall of 1999 and on December 1, 2000, the Company and thePartnership were named as defendants in two separate lawsuits in Jackson CountyCircuit Court, Jackson County, Indiana, styled *Ryan E.McCleery and Marcia S. McCleery, et al. v. Texas Eastern Corporation, et al.*(includingthe Company and Partnership) and*Gilbert Richards and JeanRichards v. Texas Eastern Corporation, et al.*(including the Companyand Partnership).* *Inboth cases, the plaintiffs contend, among other things, that we and otherdefendants stored and disposed of toxic and hazardous substances and hazardouswastes in a manner that caused the materials to be released into the air, soiland water.  They further contend that therelease caused damages to the plaintiffs. In their complaints, the plaintiffs allege strict liability for bothpersonal injury and property damage together with gross negligence, continuingnuisance, trespass, criminal mischief and loss of consortium. The plaintiffsare seeking compensatory, punitive and treble damages.  On January 27, 2005, we entered into Releaseand Settlement Agreements with the McCleery plaintiffs and the Richardsplaintiffs dismissing all of these plaintiffs’ claims.  The settlement terms included a $2.0 millionpayment to the plaintiffs, which was accrued at December 31, 2004.

 

Although we did not settle with all plaintiffs and we therefore remainnamed parties in the *Ryan E. McCleery and MarciaS. McCleery, et al. v. Texas Eastern Corporation, et al*. action, aco-defendant has agreed to indemnify us for all remaining claims assertedagainst us.  Consequently, we do notbelieve that the outcome of these remaining claims will have a material adverseeffect on our financial position, results of operations or cash flows.

 

On December 21, 2001, we were named as a defendant in a lawsuit in the10th Judicial District, Natchitoches Parish, Louisiana, styled *Rebecca L. Grisham et al. v.  TEProducts Pipeline Company, Limited 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 plaintiffs havenot stipulated the amount of damages they are seeking in the suit; however,this case is covered by insurance.

 

15

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We do not believe that the outcome of this lawsuitwill have a material adverse effect on our financial position, results ofoperations or cash flows.

 

In May 2003, the Company was named as a defendant in a lawsuit styled *John R. James, et al. v. J Graves Insulation Company, et al.*as filed in the first Judicial District Court, Caddo Parish, Louisiana.  There are numerous plaintiffs identified inthe action that are alleged to have suffered damages as a result of allegedexposure 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.  The Company has been unable to confirminvolvement by the Company or its predecessors with the alleged location, andit is uncertain at this time whether this case is covered by insurance.Discovery is planned, and the Company intends to defend itself vigorouslyagainst this lawsuit.  The plaintiffshave not stipulated the amount of damages that they are seeking in thissuit.  We are obligated to reimburse theCompany for any costs it incurs related to this lawsuit.  We cannot estimate the loss, if any,associated with this pending lawsuit.  Wedo not believe that the outcome of this lawsuit will have a material adverseeffect on our financial position, results of operations or cash flows.

 

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

 

**Regulatory Matters**

 

Our operations are subject to federal, state and local laws andregulations governing the discharge of materials into the environment. Failureto comply with these laws and regulations may result in the assessment ofadministrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to performinvestigatory and remedial activities. Although we believe our operations are in material compliance withapplicable environmental laws and regulations, risks of significant costs andliabilities are inherent in pipeline operations, and we cannot assure you thatsignificant costs and liabilities will not be incurred. Moreover, it ispossible that other developments, such as increasingly strict environmentallaws and regulations and enforcement policies thereunder, and claims fordamages to property or persons resulting from our operations, could result insubstantial costs and liabilities to us. We believe that changes in environmental laws and regulations will nothave a material adverse effect on our financial position, results of operationsor cash flows in the near term.

 

On March 26, 2004, an initial decision in *ARCOProducts Co., et al. v. SFPP*, Docket OR96-2-000, was issued by theFERC, which made several significant determinations with respect to finding “changedcircumstances” under the Energy Policy Act of 1992 (“EP Act”).  The decision largely clarifies, but does notfully quantify, the standard required for a complainant to demonstrate that anoil pipeline’s rates are no longer subject to the rate protection of the EP Actby demonstrating that a substantial change in circumstances has occurred since1992 with respect to the basis of the rates being challenged.  In the decision, the FERC found that alimited number of rate elements will significantly affect the economic basisfor a pipeline company’s rates.  Theelements identified in the decision are volume changes, allowed total returnand total cost-of-service (including major cost elements  such as rate base, tax rates and taxallowances, among others).  The FERC didreject, however, the use of changes in tax rates and income tax allowances asstandalone factors.  Judicial review ofthat decision, which has been sought by a number of parties to the case, iscurrently pending before the U.S. Court of Appeals for the District of ColumbiaCircuit.

 

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We have not yet determined the impact, if any, thatthe decision, if it is ultimately upheld, would have on our rates if they werereviewed under the criteria of this decision.

 

On July 20, 2004, the District of Columbia Circuit issued an opinion in*BP West Coast Products LLC v. FERC*.  In reviewing a series of orders involvingSFPP, L.P., the court held among other things that the FERC had not adequatelyjustified its policy of providing an oil pipeline limited partnership with anincome tax allowance equal to the proportion of its income attributable topartnership 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.  Asa result of the court’s remand, on December 2, 2004, the FERC issued a Requestfor Comments seeking comments on whether the court’s ruling applies only to thespecific facts of the SFPP, L.P. proceeding or also extends to other capitalstructures involving partnerships and other forms of ownership.  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 June 1, 2005, the FERC issued an Order on Remand in the SFPP, L.P.proceedings holding the Policy Statement would apply in that case andrequesting briefs on whether additional evidence was necessary to applyit.  Briefs have been filed but the FERChas not yet acted on them.  The ultimateoutcome of the FERC’s inquiry on income tax allowance should not affect ourcurrent rates and rate structure because our rates are not based on cost-of-servicemethodology.  However, the outcome of theincome tax allowance would become relevant to us should we (i) elect in thefuture to use cost-of-service to support our rates, or (ii) be required to usesuch methodology to defend our indexed rates.

 

In 1994, the Louisiana Department of Environmental Quality (“LDEQ”)issued a compliance order for environmental contamination at our Arcadia,Louisiana facility.  In 1999, our Arcadiafacility and adjacent terminals were directed by the Remediation Services Divisionof the LDEQ to pursue remediation of this contamination.    Effective March 2004, we executed an accessagreement with an adjacent industrial landowner who is located upgradient ofthe Arcadia facility.  This agreementenables the landowner to proceed with remediation activities at our Arcadiafacility for which it has accepted shared responsibility.  At September 30, 2005, we have an accruedliability of $0.2 million for remediation costs at our Arcadia facility.  We do not expect that the completion of theremediation program proposed to the LDEQ will have a future material adverseeffect on our financial position, results of operations or cash flows.

 

On March 17, 2003, we experienced a releaseof 511 barrels of jet fuel from a storage tank at our Blue Island terminallocated in Cook County, Illinois.  As aresult of the release, we have entered into an Agreed Order with the State ofIllinois, which required us to conduct an environmental investigation.  At this time, we have complied with the termsof the Agreed Order, and the results of the environmental investigationindicated there were no soil or groundwater impacts from the release.  On August 30, 2005, a final settlement wasreached with the State of Illinois.  The settlementincluded the payment of a civil penalty of $0.1 million and the requirementthat we make certain modifications to the equipment of the facility, none ofwhich are expected to have a material adverse effect on our financial position,results of operations or cash flows.

 

On July 27, 2004, we received notice from theUnited States Department of Justice (“DOJ”) of its intent to seek a civilpenalty against us related to our November 21, 2001, release of approximately2,575 barrels of jet fuel from our 14-inch diameter pipeline located in OrangeCounty, Texas.  The DOJ, at the requestof the Environmental Protection Agency, is seeking a civil penalty against usfor alleged violations of the Clean Water Act (“CWA”) arising out of thisrelease.  We are in discussions with theDOJ regarding this matter and have responded to its

 

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request for additionalinformation.  The maximum statutorypenalty proposed by the DOJ for this alleged violation of the CWA is $2.1million.  We do not expect any civilpenalty to have a material adverse effect on our financial position, results ofoperations or cash flows.

 

At September 30, 2005, we have an accrued liability of $1.5 millionrelated to various sites requiring environmental remediation activities.  We do not expect that the completion ofremediation programs associated with our activities will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

**Other**

 

Centennial entered into credit facilities totaling $150.0 million, andas of September 30, 2005, $150.0 million was outstanding under those creditfacilities.  We and Marathon have eachguaranteed one-half of the repayment of Centennial’s outstanding debt balanceunder a long-term credit agreement, which expires in 2024, and a short-termcredit agreement, which expires in 2007. The guarantees arose in order for Centennial to obtain adequatefinancing, and the proceeds of the credit agreements were used to fundconstruction and conversion costs of its pipeline system.  Prior to the expiration of the long-termcredit agreement, 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 September 30, 2005.

 

We have entered into a limited cash call agreement with Marathon andCentennial, which allows each member to contribute cash in lieu of Centennialprocuring separate insurance in the event of a third-party liability arisingfrom a catastrophic event.  There is anindefinite term for the agreement and each member is to contribute cash inproportion to its ownership interest, up to a maximum of $50.0 millioneach.  As a result of the catastrophicevent guarantee, we have recorded a $4.7 million obligation, which representsthe present value of the estimated amount that we would have to pay under theguarantee.  In the event that acatastrophic event occurred and we were required to contribute cash toCentennial,  contributions exceeding ourdeductible may be covered by our insurance.

 

On February 24, 2005, the Company was acquired from DEFS by DFI.  The Company owns a 2% general partnerinterest in us and is the general partner of the Partnership.  On March 11, 2005, the Bureau of Competitionof the Federal Trade Commission (“FTC”) delivered written notice to DFI’s legaladvisor that it was conducting a non-public investigation to determine whetherDFI’s acquisition of the Company may substantially lessen competition.  The FTC has contacted the Company requestingdata.  The Company intends to cooperatefully with any such investigations and inquiries requested by the FTC or anyother regulatory authorities.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

** **

**General**

** **

You should read the following review of our financialposition and results of operations in conjunction with our ConsolidatedFinancial Statements and the notes thereto. Material period-to-period variances in the consolidated statements ofincome are discussed under “Results of Operations.”  The “Financial Condition and Liquidity”section analyzes our cash flows and financial position.  “Other Considerations” addresses trends,future plans and contingencies that are reasonably likely to materially affectfuture liquidity or earnings.  TheConsolidated Financial Statements should be read in conjunction with thefinancial 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, 2004.

 

**Forward-Looking Statements**

 

The matters discussed in this Report include “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934.  All statements that express belief,expectation, estimates or intentions, as well as those that are not statementsof historical facts are forward-looking statements.  The words “proposed”, “anticipates”, “potential”,“may”, “will”, “could”, “should”, “expect”, “estimate”, “believe”, “intend” andsimilar expressions are intended to identify forward-looking statements.  Without limiting the broader description offorward-looking statements above, we specifically note that statements includedin this document that address activities, events or developments that we expector anticipate will or may occur in the future, including such things asestimated future capital expenditures (including the amount and naturethereof), business strategy and measures to implement strategy, competitivestrengths, goals, expansion and growth of our business and operations, plans,references to future success, references to intentions as to future matters andother such matters are forward-looking statements.  These statements are based on certainassumptions and analyses made by us in light of our experience and ourperception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate under thecircumstances.  While we believe ourexpectations reflected in these forward-looking statements are reasonable,whether actual results and developments will conform with our expectations andpredictions is subject to a number of risks and uncertainties, includinggeneral economic, market or business conditions, the opportunities (or lackthereof) that may be presented to and pursued by us, competitive actions byother pipeline companies, changes in laws or regulations and other factors,many of which are beyond our control. For example, the demand for refined products is dependent upon theprice, prevailing economic conditions and demographic changes in the marketsserved, trucking and railroad freight, agricultural usage and military usage;the demand for propane is sensitive to the weather and prevailing economicconditions; and the demand for petrochemicals is dependent upon prices for productsproduced from petrochemicals. We are also subject to regulatory factors such asthe amounts we are allowed to charge our customers for the services we provideon our regulated pipeline systems. Consequently, all of the forward-looking statements made in thisdocument are qualified by these cautionary statements, and we cannot assure youthat actual results or developments that we anticipate will be realized or,even if substantially realized, will have the expected consequences to oreffect on us or our business or operations. For additional discussion of such risks and uncertainties, see ourAnnual Report on Form 10-K for the year ended December 31, 2004, and otherfilings we have made with the Securities and Exchange Commission (“SEC”).

 

**Critical Accounting Policies and Estimates**

 

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

 

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

## ** **

## ****Wereported net income of $7.4 million for the three months ended September 30,2005, compared with net income of $4.7 million for the three months ended September30, 2004, and net income of $37.4 million for the nine months ended September30, 2005, compared with net income of $28.8 million for the nine months endedSeptember 30, 2004.****

 

## ****Ouroperating income for the three months ended September 30, 2005, increasedcompared with the prior year period primarily due to lower depreciation expenseattributable to a $4.4 million asset impairment charge in the 2004 period (seeNote 3.  Property, Plant and Equipment),a $4.0 million decrease in pipeline integrity costs, increased margins onproduct inventory sales and decreased product measurement losses.  These increases to operating income werepartially offset by the recognition in the 2004 period of $4.1 million ofdeferred revenue related to the expiration of two customer transportationagreements, $1.3 million of regulatory penalties for past incidents, theimpacts of Hurricanes Katrina and Rita in the third quarter of 2005 whichreduced revenues by an estimated $1.5 million, the impact of a propane releaseand fire at an LPG storage facility in Ohio, which reduced revenues by anestimated $0.3 million, increased pipeline operating expense, higher propertytaxes, higher depreciation expense primarily due to asset acquisitions and theretirement of assets in the current period, increased environmental remediationand assessment costs and transition expenses related to the change in controlof the Company.****

 

## ****Forthe nine months ended September 30, 2005, operating income increased comparedwith the prior year period primarily due to a $9.7 million decrease in pipelineintegrity costs, lower depreciation expense attributable to an asset impairmentcharge in the 2004 period, increased refined products and LPG transportationrevenues and volumes and decreased product measurement losses.  We anticipate that our pipeline integrityexpenses for 2005 will be approximately $15.1 million lower than our 2004expenses primarily due to the completion of pipeline inspections and repairsunder our integrity management program. These increases to operating income were partially offset by therecognition of $4.1 million of deferred revenue in the 2004 period, $1.8million of regulatory penalties for past incidents, the impact of thehurricanes in the third quarter of 2005 and the propane release and fire at astorage facility in Ohio, increased pipeline operating expenses, higherproperty taxes, higher depreciation expense primarily due to asset acquisitionsand the retirement of assets in the current period, transition expenses relatedto the change in control of the Company and increased environmental remediationand assessment costs.****

## ** **

We focus on the safe, reliable and efficient operationof the pipelines and facilities that we own or operate while meeting increasedregulations that govern the operation of our assets and the costs associatedwith such regulations.  We are alsofocused on our continued growth through expansion of the assets that we own andthrough acquisition of assets that complement our current operations.  We believe that our current strategy andfocus will provide continued growth in earnings and cash distributions.  These opportunities include continued growth,resulting from our recent capacity expansion and grass roots facilityinvestments and growing demand for Gulf Coast sourced products.

 

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

 

On July 15, 2005, TEPPCO Interests acquired from Texas Genco LLC (“Genco”)all of its interests in certain companies that own a 90-mile pipeline systemand 5.5 million barrels of storage capacity for $62.1 million.  This acquisition was made as part of anexpansion of our refined products origin capabilities in the Houston, Texas,and Texas City, Texas areas.  The assetsof the purchased companies will be integrated into our origin infrastructure inTexas City and Baytown, Texas.  Theintegration and other system enhancements should be in service by the fourthquarter of 2006, at an estimated cost of $45.0 million.  The strategic location of these assets, withrefined products interconnections to major exchange terminals in the Houstonarea, will provide significant long-term value to our customers and the TexasGulf Coast refining and logistics system.

 

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Consistent with our business strategy, we continuously evaluatepossible acquisitions of assets that would complement our current operations,including assets which, if acquired, would have a material effect on ourfinancial position, results of operations or cash flows****.****

 

# **OurBusiness**

 

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%general partner interest in us.  TexasEastern Products Pipeline Company, LLC (the “Company”), a Delaware limitedliability company, serves as the general partner of our ParentPartnership.  Through February 23, 2005,the Company was an indirect wholly owned subsidiary of Duke Energy FieldServices, LLC (“DEFS”), a joint venture between Duke Energy Corporation (“DukeEnergy”) and ConocoPhillips. Through February 23, 2005, Duke Energy held aninterest of approximately 70% in DEFS, and ConocoPhillips held the remaininginterest of approximately 30%.  OnFebruary 24, 2005, the Company was acquired by DFI GP Holdings L.P. (formerlyEnterprise GP Holdings L.P.) (“DFI”), an affiliate of EPCO, Inc. (“EPCO”), aprivately held company controlled by Dan L. Duncan, for approximately $1.1billion.  As a result of the transaction,DFI owns and controls the 2% general partner interest in our Parent Partnershipand has the right to receive the incentive distribution rights associated withthe general partner interest.

 

TEPPCO GP, as our general partner, performs all of the management andoperating functions required for us in accordance with the Agreement of LimitedPartnership of TE Products Pipeline Company, Limited Partnership.  We reimburse our General Partner and theCompany for all reasonable direct and indirect expenses that they incur inmanaging us.

 

On May 18, 2005, we formed TEPPCO Terminals, L.P. (“TEPPCO Terminals”),a Delaware limited partnership, and we own a 99.999% interest in TEPPCOTerminals as the sole limited partner. TEPPCO GP serves as the general partner and holds a 0.001% generalpartner interest in TEPPCO Terminals.  OnJuly 12, 2005, TEPPCO Terminals purchased a refined products terminal two-bayand truck loading rack in North Little Rock, Arkansas, for $6.8 million fromExxon Mobil Corporation (see Note 5. Acquisitions).

 

On May 9, 2005, we formed TEPPCO Interests, LLC (“TEPPCO Interests”), aDelaware limited liability company, of which we own 100% of the memberinterests.  On July 15, 2005, TEPPCOInterests acquired from Texas Genco LLC 100% of its member interests in TGPipeline GP, LLC, a Delaware limited liability company, which is the owner of100% of the general partner interests in TG Pipeline, L.P. (“Pipeline LP”), a Texas limited partnership, and 100%of the membership interests in TG Pipeline LP, LLC, a Delaware limitedliability company, which is the owner of 100% of the limited partner interestsin Pipeline LP (see Note 5. Acquisitions).

 

We operate and report in one business segment:  transportation and storage of refinedproducts, liquefied petroleum gases (“LPGs”) and petrochemicals.  Revenues are earned from transportation andstorage of refined products and LPGs, intrastate transportation ofpetrochemicals, sales of product inventory and other ancillary services.  Our two largest operating expense items arelabor and electric power.  We generallyrealize higher revenues during the first and fourth quarters of each year sinceour operations are somewhat seasonal. Refined products volumes are generally higher during the second andthird quarters because of greater demand for gasolines during the spring andsummer driving seasons. LPGs volumes are generally higher from November throughMarch due to higher demand in the Northeast for propane, a major fuel forresidential heating.  Our results alsoinclude our equity investments in Centennial Pipeline Company, LLC (“Centennial”)and Mont Belvieu Storage Partners, L.P. (“MB Storage”) (see Note 7. EquityInvestments).

 

We are one of three operating subsidiaries of our ParentPartnership.  Our Parent Partnership ismanaged by its general partner, the Company. Approximately 1,200 employees of EPCO are dedicated to the operationsand management of our Parent Partnership’s operating subsidiaries. Our ParentPartnership allocates operating, general and administrative expenses to us forlegal, insurance, financial, communication and other administrative servicesbased upon the estimated level of effort devoted to our variousoperations.  We believe that the methodsfor allocating corporate operating, general and administrative expenses to usare reasonable.

 

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**Results of Operations**

 

The following table presents volumes delivered in barrels andaverage tariff per barrel for the three months and nine months ended September30, 2005 and 2004 (in thousands, except tariff information):

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

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(1)          The 2004 periods include $4.1 million ofdeferred revenue related to the expiration of two customer transportationagreements.

 

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

 

Revenuesfrom refined products transportation decreased $5.1 million for the threemonths ended September 30, 2005, compared with the three months ended September30, 2004, primarily due to the recognition in the 2004 period of $4.1 millionof deferred revenue related to the expiration of two customer transportationagreements.  The $4.1 million of deferredrevenue increased the refined products average tariff for the third quarter of2004 by $0.10 per barrel, or 11%. Excluding the effect of the deferred revenue recognized in the 2004period, the refined products average tariff per barrel decreased 5% from theprior year period primarily due to the impact of greater growth in the volumeof products delivered under a Centennial tariff compared with the growth indeliveries under a our tariff, which resulted in an increased proportion oflower tariff barrels transported on our system. Prior to the construction of Centennial, deliveries on our pipelinesystem were limited by our pipeline capacity, and transportation services forour customers were allocated in accordance with a proration policy.  With this incremental pipeline capacity, ourpreviously constrained system has expanded deliveries in markets both south andnorth of Creal Springs, Illinois.  In February2003, we entered into a lease agreement with Centennial that increased ourflexibility to deliver refined products to our market areas.  Centennial has provided our system withadditional pipeline capacity for movement of products originating in the U.S.Gulf Coast area.  The overall increase inrefined products volumes was primarily due to increased demand and market sharefor products supplied from the U.S. Gulf Coast into Midwest markets.

 

Revenuesfrom LPGs transportation increased $0.4 million for the three months endedSeptember 30, 2005, compared with the three months ended September 30, 2004,due to higher deliveries of isobutane in the upper Midwest market areas,partially offset by lower deliveries of propane.   The LPGs average rate per barrel increasedfrom the prior period primarily as a result of decreased short-haul deliveriesduring the three months ended September 30, 2005, and an increase in tariffrates which went into effect in July 2005. Our propane revenues also decreased due to a propane release and fire ata dehydration unit in September 2005 at our Todhunter storage facility, nearMiddletown, Ohio.  As a result of thepropane release and fire, our LPG storage facilities at Todhunter were shutdown for approximately three weeks.  Weestimate that the reduction to propane revenues for this occurrence wasapproximately $0.3 million for the third quarter of 2005.  The propane release and fire will also reducefourth quarter 2005 propane revenues, by an estimated which we estimate to beapproximately $0.3 million.

 

Revenuesfrom refined products and LPGs for the current period were also impacted byHurricane Katrina and Hurricane Rita, which affected the U.S. Gulf Coast inAugust and September 2005, respectively. Hurricane Katrina disrupted refineries and other pipeline systems in thecentral U.S. Gulf Coast, which provided us with additional deliveries atShreveport and Arcadia, Louisiana, as shippers used alternative sources tosupply product to

 

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areas where normaldistribution patterns were disrupted.  HurricaneKatrina also resulted in higher prices of refined products and LPGs, which hada negative impact on the current demand for the products.

 

HurricaneRita disrupted production at western U.S. Gulf Coast refineries, many of whichdirectly supply us with product. Hurricane Rita also disrupted power to our Beaumont terminal, whichresulted in the mainline being shut down for four days and Centennial beingshut down for ten days.  Our mainlinesystem was reopened, but has been operating at reduced rates as a result ofHurricane Rita.  At September 30, 2005,our 230,000 barrel per day capacity, 20-inch diameter mainline system, whichprimarily delivers LPGs and gasoline from the Texas Gulf Coast to the Midwest,was pumping from MB Storage’s facility at approximately 60% of normal operatingcapacity.  Our 110,000 barrel per daycapacity, 14-inch and 16-inch diameter pipelines, which primarily deliverdistillates and gasoline from the Texas Gulf Coast to the Midwest, were pumpingat approximately 75% of normal operating capacity from our Baytown, Texas,terminal.  We installed generators at ourBeaumont, Texas, facility, which enabled receipt and delivery of refinedproducts out of tankage at the terminal. Commercial power was restored to the Beaumont terminal and the Newton,Texas, pump station in mid-October and full operations were resumed.  Centennial resumed operating at its normalcapacity on October 1, 2005.  For thequarter ended September 30, 2005, we estimate that the hurricanes reducedrefined products and propane revenues by approximately $1.2 million and $0.3million, respectively.  The impact tooperating expenses for the period was less than $0.1 million through September30, 2005.  We expect the impact ofHurricane Rita to reduce our fourth quarter 2005 revenues as well, resulting inestimated losses in that period of approximately $4.0 million of refinedproducts revenues and $0.5 million of LPG revenues. The estimated impact tooperating expenses for the fourth quarter of 2005 is an increase ofapproximately $1.2 million.

 

Otheroperating revenues increased $2.2 million for the three months ended September30, 2005, compared with the three months ended September 30, 2004, primarilydue to increased margins on product inventory sales and higher refined productsadditive and tender deduction revenue.

 

Costsand expenses decreased $4.5 million for the three months ended September 30,2005, compared with the three months ended September 30, 2004, due to decreasedoperating, general and administrative expenses, decreased depreciation andamortization expense and decreased operating fuel and power, partially offsetby increased taxes — other than income taxes and lower gains on the sales ofassets in the 2005 period.  Operating,general and administrative expenses decreased $2.7 million primarily due to a$4.0 million decrease in pipeline inspection and repair costs associated withour integrity management program, a $0.6 million decrease in product losses, a$0.6 million decrease in labor and benefits expenses related to the vesting ofcertain of our Parent Partnership’s compensation plans in the first quarter of2005 as a result of changes in control of the Company, a $0.6 million decreasein rental expense from the Centennial pipeline capacity lease agreement and a$0.5 million decrease in rental expense on a lease agreement with a third-partypipeline.

 

Thesedecreases to costs and expenses were partially offset by a $1.3 millionincrease attributable to regulatory penalties for past incidents, a $0.7 millionincrease in pipeline operating and maintenance expenses, a $0.4 millionincrease in labor and benefits expense related to retirement plan settlementswith DEFS, a $0.4 million increase related to transition costs due to thechanges in control of the Company, a $0.4 million increase in environmentalassessment and remediation expenses and an increase in insurance expense.  Depreciation expense increased $2.7 millionprimarily due to a $0.8 million write-off of assets related to a propanerelease and fire at a storage facility in Ohio and assets retired todepreciation expense during the quarter, partially offset by a $4.4 millionnon-cash impairment charge in the third quarter of 2004 (see Note 3.  Property, Plant and Equipment).  Operating fuel and power decreased $0.3million primarily due to adjustments to power accruals, partially offset byincreased mainline throughput.  Taxes —other than income taxes increased $1.0 million primarily due to increases inproperty tax accruals and a higher asset base in the 2005 period.  During the three months ended September 30,2004, we recognized net gains of $0.5 million from the sales of various assets.

 

Interest expense increased $0.6 million for the three months endedSeptember 30, 2005, compared with the three months ended September 30, 2004,primarily due to higher short-term floating interest rates under the notepayable with our Parent Partnership. Interest capitalized increased $0.3 million for the three months endedSeptember 30, 2005, compared with the three months ended September 30, 2004, asa result of increased balances of construction work-in-progress.

 

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Netearnings from equity investments increased for the three months ended September30, 2005, compared with the three months ended September 30, 2004, as shownbelow (in thousands):

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|
| ** **                     | ** ** | **September 30,**      | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **2005**               | ** ** | **2004**   | ** ** | **Increase** | ** ** |
| Centennial                     |       | $                      | (1,216     | )          | $          | (1,839 | ) | $ | 623 |   |
| MB Storage                     |       | 1,728                  |       | 1,530      |       | 198 |   |
| Other                          |       | 12                     |       | (13        | )          | 25 |   |
| Total equity earnings (losses) |       | $                      | 524        |       | $          | (322 | ) | $ | 846 |   |

 

Equitylosses in Centennial decreased $0.6 million for the three months endedSeptember 30, 2005, compared with the three months ended September 30, 2004,primarily due to higher transportation revenues, decreased operating expensesand lower product measurement losses during the 2005 period.  Equity earnings in MB Storage increased $0.2million for the three months ended September 30, 2005, compared with the threemonths ended September 30, 2004, primarily due to increased tender deductionand lease line revenues on the MB Storage system.  As a result of Hurricane Rita, MB Storage’srevenues were reduced by approximately $0.2 million during the three monthsended September 30, 2005.  We expect theimpact of Hurricane Rita to reduce MB Storage’s fourth quarter 2005 revenues byan estimated $0.1 million and increase operating expenses by approximately $0.4million.

 

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

 

Revenuesfrom refined products transportation decreased $2.3 million for the nine monthsended September 30, 2005, compared with the nine months ended September 30,2004, primarily due to the recognition of $4.1 million of deferred revenue inthe 2004 period related to the expiration of two customer transportationagreements, and the effects of Hurricanes Katrina and Rita in August andSeptember 2005 as discussed above, partially offset by an overall increase inthe refined products volumes delivered. This increase was primarily due to deliveries of products moved onCentennial.  Volume increases were due toincreased demand and market share for products supplied from the U.S. GulfCoast into Midwest markets. The refined products average rate per barreldecreased from the prior year period primarily due to the impact of greatergrowth in the volume of products delivered under a Centennial tariff comparedwith the growth in deliveries under our tariff, which resulted in an increasedproportion of lower tariff barrels transported on our system.

 

Revenuesfrom LPGs transportation increased $4.7 million for the nine months endedSeptember 30, 2005, compared with the nine months ended September 30, 2004, dueto higher deliveries of propane in the upper Midwest and Northeast market areasprimarily resulting from cold weather in March 2005.  Prior year LPG transportation revenues werenegatively impacted by a price spike in the Mont Belvieu propane price in lateFebruary 2004, which resulted in our sourced propane being less competitivethan propane from other source points. Our propane revenues were also affected by Hurricane Rita and a propanerelease and fire at a storage facility in September 2005 as discussed above.

 

Otheroperating revenues decreased $0.2 million for the nine months ended September30, 2005, compared with the nine months ended September 30, 2004, primarily dueto lower propane inventory fees in the 2005 period, partially offset by higherrefined products tender deduction and loading revenues and increased margins onproduct inventory sales.

 

Costsand expenses decreased $6.2 million for the nine months ended September 30,2005, compared with the nine months ended September 30, 2004, due to decreasedoperating, general and administrative expenses and decreased depreciation andamortization expense, partially offset by increased taxes — other than incometaxes and lower gains on the sales of assets in the 2005 period.  Operating, general and administrativeexpenses decreased $5.8 million primarily due to a $9.7 million decrease inpipeline inspection and repair costs associated with our integrity managementprogram, a $2.0 million decrease in postretirement benefit accruals related toplan amendments (see Note 10. Employee Benefit Plans), a $1.1 million decreasein consulting services primarily related to acquisition related activities inthe 2004 period and a $0.7 million decrease in product losses.

 

24

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Thesedecreases to costs and expenses were partially offset by a $1.8 millionincrease in labor and benefits expenses associated with vesting provisions incertain of our Parent Partnership’s compensation plans as a result of changesin control of the Company resulting in higher incentive compensation expensescompared to the prior year period, a $1.8 million increase attributable toregulatory penalties for past incidents, a $1.4 million increase in pipelineoperating and maintenance expense, a $0.6 million increase related totransition costs due to the changes in control of the Company, a $0.4 millionincrease in environmental assessment and remediation expenses, a $0.4 millionincrease in labor and benefits expense related to retirement plan settlementswith DEFS and an increase in insurance expense. Depreciation expense decreased $1.7 million primarily due to a $4.4million non-cash impairment charge in the third quarter of 2004, partiallyoffset by a $0.8 million write-off of assets related to a propane release andfire at a storage facility in Ohio (see Note 3. Property Plant, and Equipment), assets placed into service and assetsretired to depreciation expense in the 2005 period.  Taxes — other than income taxes increased$1.0 million primarily due to asset acquisitions and a higher tax base in the2005 period.  During the nine monthsended September 30, 2004, we recognized net gains of $0.5 million from thesales of various assets.

 

Interest expense increased $2.5 million for the nine months endedSeptember 30, 2005, compared with the nine months ended September 30, 2004,primarily due to higher short-term floating interest rates under the notepayable with our Parent Partnership. Interest capitalized increased $0.1 million for the nine months ended September30, 2005, compared with the nine months ended September 30, 2004, as a resultof increased balances of construction work-in-progress.

 

Netearnings from equity investments increased for the nine months ended September30, 2005, compared with the nine months ended September 30, 2004, as shownbelow (in thousands):

 
| ** **                     | ** ** | **Nine Months Ended** | ** ** | ** **   | ** ** |
|--------------------------------|------------|-----------------------|------------|--------------|------------|
| ** **                     | ** ** | **September 30,**     | ** ** | **Increase** | ** ** |
| ** **                     | ** ** | **2005**              | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** |
| Centennial                     |       | $                     | (5,184     | )            | $          | (7,982 | ) | $ | 2,798 |   |
| MB Storage                     |       | 5,727                 |       | 5,944        |       | (217 | ) |
| Other                          |       | 31                    |       | (31          | )          | 62 |   |
| Total equity earnings (losses) |       | $                     | 574        |         | $          | (2,069 | ) | $ | 2,643 |   |
|                                |            |                       |            |              |            |  |  |  |  |  |  |  |

 

Equitylosses in Centennial decreased $2.8 million for the nine months ended September30, 2005, compared with the nine months ended September 30, 2004, primarily dueto higher transportation revenues and volumes and lower transmix relatedproduct replacement costs and product measurement losses during the 2005period.  Equity earnings in MB Storagedecreased $0.2 million for the nine months ended September 30, 2005, comparedwith the nine months ended September 30, 2004, primarily due to increaseddepreciation and amortization expense and higher general and administrativeexpenses, partially offset by higher rental and storage revenues andvolumes.  MB Storage’s revenues were alsoimpacted by Hurricane Rita as discussed above. In April 2004, MB Storage acquired storage and pipeline assets andcontracts for approximately $35.0 million, of which we contributed $16.5million.  Increases in storage revenue,shuttle revenue, rental revenue and depreciation and amortization expense forthe nine months ended September 30, 2005, compared with the nine months endedSeptember 30, 2004, are primarily related to the acquired storage assets andcontracts.

 

25

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** **

**Financial Condition and Liquidity**

 

Cash generated from operations and from our Parent Partnership’s creditfacilities and debt and equity offerings are our primary sources ofliquidity.  At September 30, 2005,and December 31, 2004, we had working capital deficits of $8.6 million and$61.9 million, respectively.  Cashgenerated from operations and from our Parent Partnership’s credit facilitiesand debt and equity offerings are our primary sources of liquidity.  Working capital deficits can occur primarilydue to the timing of operating cash receipts from customers, payment of cashdistributions and the payment of normal operating expenses and capitalexpenditures.  We are a wholly ownedsubsidiary of the Parent Partnership.  Weexpect that our Parent Partnership will make capital contributions, loans orotherwise provide liquidity to us as needed, but the Parent Partnership has nocontractual obligation to do so.  At September 30,2005, our Parent Partnership had $139.5 million in available borrowing capacityunder its revolving credit facility to cover any working capital needs, andexpects that cash generated from operating activities, credit facilities andthe sale of additional debt or equity offerings, if any, will provide necessaryliquidity to us.  Cash flows for the ninemonths ended September 30, 2005 and 2004 were as follows (in thousands):

 
| ** **                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **September 30,**     | ** ** |
| ** **                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Cash provided by (used  in): |       |                  |       |   |   |
| Operating activities         |       | $                     | 19,650     |   | $ | 97,012 |   |
| Investing activities         |       | (109,870              | )          | (74,308 | ) |
| Financing  activities        |       | 90,220                |       | (22,892 | ) |
|                              |            |                       |            |  |  |  |  |

 

*Operating Activities*

 

Net cash from operating activities for the nine months ended September30, 2005 and 2004, were comprised of the following (in thousands):

 
| ** **                                            | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **September 30,**     | ** ** |
| ** **                                            | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Net income                                            |       | $                     | 37,377     |   | $ | 28,811 |   |
| Depreciation and  amortization                        |       | 28,653                |       | 30,392 |   |
| Earnings (losses) in  equity investments              |       | (574                  | )          | 2,069 |   |
| Distributions from equity  investments                |       | 10,688                |       | 8,525 |   |
| Non-cash portion of  interest expense                 |       | 199                   |       | 22 |   |
| Gains on sales of assets                              |       | (131                  | )          | (587 | ) |
| Cash provided by (used in)  working capital and other |       | (56,562               | )          | 27,780 |   |
| Net cash from operating activities                    |       | $                     | 19,650     |   | $ | 97,012 |   |

 

For a discussion of changes in net income, depreciation andamortization and equity earnings, see “—Results of Operations”.  Cash provided by operating activitiesdecreased $77.4 million for the nine months ended September 30, 2005, comparedwith the nine months ended September 30, 2004, primarily due to the timing ofcash disbursements and cash receipts for working capital components partiallyoffset by higher net income and distributions from MB Storage in the 2005period.

 

26

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*Investing Activities*

 

Cash flows used in investing activities totaled $109.9 million for thenine months ended September 30, 2005, and were comprised of $69.0 million foracquisitions, $38.4 million of capital expenditures and $2.5 of cashcontributions of our ownership interest in MB Storage for capital expenditures.  Cash flows used in investing activitiestotaled $74.3 million for the nine months ended September 30, 2004, and werecomprised of $51.2 million of capital expenditures, $1.5 million of cashcontributions for our ownership interest in Centennial to cover operating needsand capital expenditures, $20.2 million of cash contributions for our ownershipinterest in MB Storage, of which $16.5 million was used to acquire storageassets and $2.0 million for the acquisition of assets, partially offset by $0.6million in net cash proceeds from the sale of various assets.

 

*Financing Activities*

 

Cash flows provided by financing activities totaled $90.2 million forthe nine months ended September 30, 2005, and were comprised of $294.8 millionof contributions from our Parent Partnership, partially offset by $112.7million of repayments on the note payable to our Parent Partnership, net ofborrowings, and $91.9 million of distributions paid to our ParentPartnership.  The contributions receivedfrom the Parent Partnership during 2005 were primarily used to reduce the levelof indebtedness owed to our Parent Partnership. Cash flows used in financing activities totaled $22.9 million for thenine months ended September 30, 2004, and were comprised of $88.3 million ofdistributions paid to our Parent Partnership, partially offset by $65.4 millionof borrowings under our notes payable to our Parent Partnership, net ofrepayments.

 

During the nine months ended September 30, 2005 and 2004, we paid cashdistributions to our Parent Partnership totaling $91.9 million and $88.3million, respectively.  On November 7,2005, we will pay a cash distribution to our Parent Partnership of $20.1 millionfor the quarter ended September 30, 2005.

 

*Universal Shelf*

 

Our Parent Partnership has filed with the SEC a universal shelfregistration statement that, subject to agreement on terms at the time of useand appropriate supplementation, allows it to issue, in one or more offerings,up to an aggregate of $2.0 billion of equity securities, debt securities or acombination thereof. In May 2005, our Parent Partnership issued $279.2 millionof equity securities.  At September 30,2005, our Parent Partnership had $1.7 billion remaining under this shelfregistration, subject to customary marketing terms and conditions.

 

*Credit Facilities*

 

We currently utilize debt financing available from our ParentPartnership through intercompany notes. The terms of the intercompany notesgenerally match the principal and interest payment dates under the ParentPartnership’s credit agreement and senior notes.  The interest rates charged by the ParentPartnership include the stated interest rate of the Parent Partnership, plus apremium to cover debt issuance costs. The interest rate is also decreased or increased to cover gains andlosses, respectively, on any interest rate swaps that the Parent Partnershipmay have in place on its credit agreement and senior notes.  The Parent Partnership’s revolving creditfacility is described below.

 

Our Parent Partnership has in place an unsecured revolving creditfacility for up to $600.0 million (“Revolving Credit Facility”), including theissuance of letters of credit of up to $100.0 million.  Interest is payable at an applicable marginabove either the lender’s base rate or LIBOR. At September 30, 2005, $460.5 million was outstanding under thefacility, and our Parent Partnership had $139.5 million of availability.  Restrictive covenants in the credit agreementlimit the Parent Partnership’s and its subsidiaries’ ability to, among otherthings, incur additional indebtedness, and make certain distributions, andcomplete mergers, acquisitions and sales of assets.  In addition, the credit agreement

 

27

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requires our Parent Partnership to maintain certainfinancial ratios, which our Parent Partnership was in compliance with atSeptember 30, 2005.

 

At September 30, 2005, and December 31, 2004, we had intercompany notespayable to our Parent Partnership of $188.9 million and $301.7 million,respectively, which represented 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 atSeptember 30, 2005, was 5.7%.  AtSeptember 30, 2005, accrued interest includes $1.2 million due to our ParentPartnership.  For the nine months endedSeptember 30, 2005 and 2004, interest costs incurred on the note payable to ourParent Partnership totaled $7.6 million and $9.2 million, respectively.

 

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

 

Centennial entered into credit facilities totaling $150.0 million, andas of September 30, 2005, $150.0 million was outstanding under those creditfacilities.  We and Marathon PetroleumCompany LLC (“Marathon”) have each guaranteed one-half of the repayment of Centennial’soutstanding debt balance (plus interest) under a long-term credit agreement,which expires in 2024, and a short-term credit agreement, which expires in2007.  The guarantees arose in order forCentennial to obtain adequate financing, and the proceeds of the creditagreements were used to fund construction and conversion costs of its pipelinesystem.  Prior to the expiration of thelong-term credit agreement, we could be relinquished from responsibility underthe guarantee 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 September 30, 2005.

 

### *2005 Capital Expenditures*

 

We estimate that capital expenditures, excluding acquisitions, for 2005will be approximately $52.2 million (including $2.5 million of capitalizedinterest). We expect to spend approximately $17.5 million for revenuegenerating projects and facility improvements. We expect to spend approximately $17.0 million to sustain existingoperations, including life-cycle replacements for equipment at variousfacilities and pipeline and tank replacements and $15.2 million for varioussystem upgrade projects. During the remainder of 2005, we may be required tocontribute cash to Centennial to cover capital expenditures, acquisitions orother operating needs and to MB Storage to cover significant capitalexpenditures or additional acquisitions. We continually review and evaluate potential capital improvements andexpansions that would be complementary to our present system.  These expenditures can vary greatly dependingon the magnitude of our transactions.  Wemay finance capital expenditures through internally generated funds, debt orcapital contributions from our Parent Partnership or any combination thereof.

 

*Liquidity Outlook*

 

We believe that we will continue to have adequate liquidity to fundfuture recurring operating and investing activities.  Our primary cash requirements consist of normaloperating expenses, capital expenditures to sustain existing operations andrevenue 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 the remainder of 2005 and 2006, such asoperating expenses, capital expenditures to sustain existing operations andquarterly distributions to our Parent Partnership, are expected to be fundedthrough operating cash flows.  Long-term cash requirements for expansionprojects, acquisitions and repayment of intercompany notes are expected to befunded by several sources, including cash flows from operating activities,borrowings under our Parent Partnership’s credit facilities and possibly theissuance by our Parent Partnership of additional equity and debtsecurities.  The timing of any debt orofferings by our Parent Partnership will depend on various factors, includingprevailing market conditions, interest rates and our Parent Partnership’sfinancial condition and credit rating at the time.

 

### *Off-Balance Sheet Arrangements*

 

We do not rely on off-balance sheet borrowings to fund ouracquisitions. We have no off-balance sheet commitments for indebtedness otherthan the limited guaranty of the Centennial debt, the limited guaranty ofCentennial catastrophic events, the Parent Partnership debt and leases coveringassets utilized in several areas of our operations.

 

28

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* *

*Contractual Obligations*

 

The following table summarizes our debt repayment obligations andmaterial contractual commitments as of September 30, 2005 (in millions):

 
| ** **                                 | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                     | ** ** | **Less than 1** | ** ** | ** ** | ** ** | ** ** | ** ** | **After 5** | ** ** |
| ** **                                 | ** ** | **Total**                                      | ** ** | **Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **Years** | ** ** |
| Note payable, Parent Partnership           |       | $                                              | 188.9      |   | $ | — |   | $ | — |   | $ | 188.9 |   | $ | — |   |
| 6.45% Senior Notes due 2008 (1)            |       | 180.0                                          |       | — |   | 180.0 |   | — |   | — |   |
| 7.51% Senior Notes due 2028 (1)            |       | 210.0                                          |       | — |   | — |   | — |   | 210.0 |   |
| Debt subtotal                              |       | 578.9                                          |       | — |   | 180.0 |   | 188.9 |   | 210.0 |   |
| Operating leases (2)                       |       | 57.7                                           |       | 13.0 |   | 21.1 |   | 10.4 |   | 13.2 |   |
| Capital expenditure obligations (3)        |       | 0.9                                            |       | 0.9 |   | — |   | — |   | — |   |
| Other liabilities and deferred credits (4) |       | 5.9                                            |       | — |   | 1.3 |   | 0.8 |   | 3.8 |   |
| Total                                      |       | $                                              | 643.4      |   | $ | 13.9 |   | $ | 202.4 |   | $ | 200.1 |   | $ | 227.0 |   |

----

(1)          We entered into an interestrate swap agreement to hedge our exposure to changes in the fair value of our7.51% Senior Notes due 2028.  AtSeptember 30, 2005, the 7.51% Senior Notes include an adjustment to increase thefair value of the debt by $1.3 million related to this interest rate swapagreement.  At September 30, 2005, our6.45% Senior Notes include less than $0.1 million of unamortized debtdiscount.  The fair value adjustment andunamortized debt discount are excluded from this table.

 

(2)          Includes a pipeline capacitylease with Centennial.  In January 2003,we entered into a pipeline capacity lease agreement with Centennial for aperiod of five years that contains a minimum throughput requirement.  For the year ended December 31, 2004, weexceeded the minimum throughput requirements on the lease agreement.

 

(3)          Includes accruals of costincurred but not yet paid relating to capital projects.

 

(4)          Excludes approximately $8.9million of long-term deferred revenue payments, which are being transferred toincome over the term of the respective revenue contracts.  The amount of commitment by year is our bestestimate of projected payments of these long-term liabilities.

 

We expect to repay thelong-term, senior unsecured obligations and note payable to our ParentPartnership through the issuance of additional long-term senior unsecured debtat the time the 2008 and 2028 debts mature, with proceeds from the dispositionsof assets, cash flows from operations, and contributions from our ParentPartnership or any combination of the above items.

 

We have entered into alimited cash call agreement with Marathon and Centennial, which allows eachmember to contribute cash in lieu of Centennial procuring separate insurance inthe event 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.  As aresult of the catastrophic event guarantee, we have recorded a $4.7 millionobligation, which represents the present value of the estimated amount that wewould have to pay under the guarantee. In the event that a catastrophic event occurred and we were required tocontribute cash to Centennial, contributions exceeding our deductible may becovered by our insurance.

 

Our Parent Partnership’s senior unsecured debt is rated BBB- byStandard and Poors (“S&P”) and Baa3 by Moody’s Investors Service (“Moody’s”).  S&P assigned this rating on June 14, 2005,following its review of the ownership structure, corporate governance issues,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.  Oursenior unsecured debt is also rated BBB- by S&P and Baa3 by Moody’s.  Both ratings are with a stable outlook.

 

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# **OtherConsiderations**

 

Our operations are subject to federal, state and local laws andregulations governing the discharge of materials into the environment. Failureto comply with these laws and regulations may result in the assessment ofadministrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to performinvestigatory and remedial activities. Although we believe our operations are in material compliance withapplicable environmental laws and regulations, risks of significant costs andliabilities are inherent in pipeline operations, and we cannot assure you thatsignificant costs and liabilities will not be incurred.  Moreover, it is possible that otherdevelopments, such as increasingly strict environmental laws and regulationsand enforcement policies thereunder, and claims for damages to property orpersons resulting from our operations, could result in substantial costs andliabilities to us.  We believe thatchanges in environmental laws and regulations will not have a material adverseeffect on our financial position, results of operations or cash flows in thenear term.

 

*Recent Accounting Pronouncements*

* *

**See discussion of new accounting pronouncements in Note1.  Organization and Basis ofPresentation - New Accounting Pronouncements in the accompanying consolidatedfinancial statements.**

** **

**Item 3. Quantitative and Qualitative Disclosures About MarketRisk**

** **

We may be exposed to market risk through changes in commodity pricesand interest rates.  We do not haveforeign exchange risks.  Our RiskManagement Committee has established policies to monitor and control these marketrisks. The Risk Management Committee is comprised, in part, of seniorexecutives of the Company.

 

We have utilized and expect to continue to utilize interest rate swapagreements 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.

 

At September 30, 2005, we had outstanding $180.0 million principalamount of 6.45% Senior Notes due 2008 and $210.0 million principal amount of7.51% Senior Notes due 2028.  AtSeptember 30, 2005, the estimated fair value of the 6.45% Senior Notes and7.51% Senior Notes was approximately $185.0 million and $223.9 million,respectively.

 

In October 2001, we entered into an interest rate swap agreement tohedge our exposure to changes in the fair value of our fixed rate 7.51% SeniorNotes due 2028. We designated this swap agreement as a fair value hedge.  The swap agreement has a notional amount of$210.0 million and matures in January 2028 to match the principal and maturityof the Senior Notes.  Under the swapagreement, we pay a floating rate of interest based on a three-month U.S.Dollar LIBOR rate, plus a spread, and receive a fixed rate of interest of7.51%.  During the nine months endedSeptember 30, 2005, and 2004, we recognized reductions in interest expense of$4.6 million and $7.5 million, respectively, related to the difference betweenthe fixed rate and the floating rate of interest on the interest rateswap.  During the quarter ended September30, 2005, we measured the hedge effectiveness of this interest rate swap andnoted that no gain or loss from ineffectiveness was required to berecognized.  The fair value of thisinterest rate swap was a gain of approximately $1.3 million and $3.4 million atSeptember 30, 2005, and December 31, 2004, respectively.  Utilizing the balance of the 7.51% SeniorNotes outstanding at September 30, 2005, and including the effects of hedgingactivities, assuming market interest rates increase 100 basis points, thepotential annual increase in interest expense is $2.1 million.

 

At September 30, 2005, and December 31, 2004, we had intercompany notespayable to our Parent Partnership of $188.9 million and $301.7 million,respectively, which represented 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 atSeptember 30, 2005, was 5.7%.  AtSeptember 30, 2005, 

 

30

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accrued interest includes $1.2 million due to ourParent Partnership.  For the nine monthsended September 30, 2005 and 2004, interest costs incurred on the note payableto our Parent Partnership totaled $7.6 million and $9.2 million, respectively.

 

**Item 4.  Controls andProcedures**

** **

As ofthe end of the period covered by this report, our management carried out anevaluation, with the participation of our principal executive officer (the “CEO”)and our principal financial officer (the “CFO”), of the effectiveness of ourdisclosure controls and procedures pursuant to Rule 13a-15 of the SecuritiesExchange Act of 1934.  Based on thoseevaluations, as of September 30, 2005, 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 FinancialReporting*

 

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

 

31

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**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 Note11.  Commitments and Contingencies in theaccompanying consolidated financial statements.

 

**Item6.  Exhibits**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.1         |       | Second  Amended and Restated Agreement of Limited Partnership of TE Products Pipeline  Company, Limited Partnership, effective September 21, 2001 (Filed as Exhibit  3.8 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for  the quarter ended September 30, 2001, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1         |       | Form of Indenture between TE Products Pipeline Company, Limited  Partnership and The Bank of New York, as Trustee, dated as of January 27,  1998 (Filed as Exhibit 4.3 to TE Products Pipeline Company, Limited  Partnership’s Registration Statement on Form S-3 (Commission File No.  333-38473) and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                      |
| 4.2         |       | Form of Indenture between TEPPCO Partners, L.P., as  issuer, TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO  Midstream Companies, L.P. and Jonah Gas Gathering Company, as subsidiary  guarantors, and First Union National Bank, NA, as trustee, dated as of  February 20, 2002 (Filed as Exhibit 99.2 to Form 8-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) dated as of February 20, 2002 and incorporated  herein by reference).                                                                                                                                                                                                                            |
| 4.3         |       | First Supplemental Indenture between TEPPCO  Partners, L.P., as issuer, TE Products Pipeline Company, Limited Partnership,  TCTM, L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company,  as subsidiary guarantors, and First Union National Bank, NA, as trustee,  dated as of February 20, 2002 (Filed as Exhibit 99.3 to Form 8-K of TEPPCO  Partners, L.P (Commission File No. 1-10403) dated as of February 20, 2002 and  incorporated herein by reference).                                                                                                                                                                                                                  |
| 4.4         |       | Second Supplemental Indenture, dated as of June 27, 2002, among TEPPCO  Partners, L.P., as issuer, TE Products Pipeline Company, Limited Partnership,  TCTM, L.P., TEPPCO Midstream Companies, L.P., and Jonah Gas Gathering  Company, as Initial Subsidiary Guarantors, and Val Verde Gas Gathering  Company, L.P., as New Subsidiary Guarantor, and Wachovia Bank, National  Association, formerly known as First Union National Bank, as trustee (Filed  as Exhibit 4.6 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the quarter ended June 30, 2002 and incorporated herein by  reference).                                                                         |
| 4.5         |       | Third Supplemental Indenture among TEPPCO Partners, L.P. as issuer, TE  Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream  Companies, L.P., Jonah Gas Gathering Company and Val Verde Gas Gathering Company,  L.P. as Subsidiary Guarantors, and Wachovia Bank, National Association, as  trustee, dated as of January 30, 2003 (Filed as Exhibit 4.7 to Form 10-K of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended  December 31, 2002, and incorporated herein by reference).                                                                                                                                                                 |
| 10.1        |       | Third Amended and Restated Administrative Services  Agreement by and among EPCO, Inc., Enterprise Products Partners L.P.,  Enterprise Products Operating L.P., Enterprise Products GP, LLC and  Enterprise Products OLPGP, Inc., Enterprise GP Holdings L.P., EPE Holdings,  LLC, TEPPCO Partners, L.P., Texas Eastern Products Pipeline Company, LLC, TE  Products Pipeline Company, Limited Partnership, TEPPCO Midstream Companies,  L.P., TCTM, L.P. and TEPPCO GP, Inc. dated August 15, 2005, but effective as  of February 24, 2005 (Filed as Exhibit 99.1 to Form 8-K of TEPPCO Partners,  L.P. (Commission File No. 1-10403) dated August 19, 2005 and incorporated  herein by reference). |
| 31.1*       |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange  Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2*       |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange  Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1**      |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2**      |       | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

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* Filed herewith.

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

 

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**SIGNATURES**

 

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

 

 
|                   | TE  Products Pipeline Company, Limited Partnership                                    |
|------------------------|---------------------------------------------------------------------------------------|
|                   |                                                                                  |
|                   |                                                                                  |
|                   | By:                                                                                   | /s/ BARRY R. PEARL |   |
| Date: November 1, 2005 | Barry  R. Pearl,                                                                      |   |
|                   | President,  Chief Executive Officer and  Director of TEPPCO GP, Inc., General Partner |   |
|                   |                                                                                  |   |
|                   | By:                                                                                   | /s/ TRACY E. OHMART |   |
| Date: November 1, 2005 | Tracy  E. Ohmart,                                                                     |   |
|                   | Chief  Financial Officer of  TEPPCO GP, Inc., General  Partner                   |   |

 

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