**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q/A**

**(AmendmentNo. 1)**

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

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

**OR**

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

**CommissionFile No. 1-13603**

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**TE Products Pipeline Company, Limited Partnership**

(Exact name of Registrantas specified in its charter)

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

 

**1100 Louisiana Street, 13**th FloorP.O. Box 2521Houston, Texas 77252-2521

(Address of principalexecutive offices, including zip code)

**(713) 381-3636**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of 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 x   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 x

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

 

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**** ****

****EXPLANATORY NOTE****

****ThisAmended Quarterly Report (“Report”) on Form 10-Q includes restatedfinancial statements as of and for the three months and nine months ended September 30,2005 and 2004. The restated financial statements include the effect of correctingthe accounting for our excess investment in Centennial Pipeline LLC from anintangible asset with an indefinite life to an intangible asset with adeterminable life. The restatement caused a $1.2 million and $0.9 millionreduction to net income as previously reported for the three months ended September 30,2005 and 2004, respectively, and a $3.3 million and $2.4 million reduction tonet income as previously reported for the nine months ended September 30,2005 and 2004, respectively.****

Forfurther discussion of the effect of the restatement, see Note 12. Restatementof Consolidated Financial Statements in this Report and Note 19. Restatement ofConsolidated Financial Statements in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2005 (“2005 Annual Report”).

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

As a result of therestatement described above, this Report amends the following sections of our Form 10-Qfor the period ended September 30, 2005, which was filed with theSecurities and Exchange Commission on November 1, 2005 (the “InitialReport”):

Part I—Item1. Financial Statements

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

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

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**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

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

 

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATEDBALANCE SHEETS(in thousands)**
| ** **                                                                                                           | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                           | ** ** | **(as restated)**       | ** ** | ** **             | ** ** |
| ** **                                                                                                           | ** ** | **(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                                                                                                  |       | 155,849                 |       | 160,998                |       |
| Other assets                                                                                                         |       | 18,529                  |       | 16,156                 |       |
| Total assets                                                                                                         |       | $                       | 1,027,333  |                   | $          | 945,193 |   |
|                                                                                                                 |       |                    |       |                   |       |
| **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                                                                                      |       | 369,656                 |       | 132,615                |       |
| Total partners’ capital                                                                                         |       | 369,660                 |       | 132,617                |       |
| Total  liabilities and partners’ capital                                                                        |       | $                       | 1,027,033  |                   | $          | 945,193 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF INCOME(Unaudited)(in thousands)**
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(as restated)**                               | ** ** | **(as restated)**                              | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| 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 losses                          |       | (651                                                 | )          | (1,234                                              | )          | (2,718 | ) | (4,477 | ) |
| Other income —  net               |       | 306                                                  |       | 203                                                 |       | 576 |   | 648 |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                             |       | $                                                    | 6,184      |                                                | $          | 3,786 |   | $ | 34,085 |   | $ | 26,403 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS(Unaudited)(in thousands)**
| ** **                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(as restated)**                              | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                         |       |                                                |       |   |   |
| Net income                                                                     |       | $                                                   | 34,085     |   | $ | 26,403 |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                  |       | 28,653                                              |       | 30,392 |   |
| Losses from equity investments, net of distributions                           |       | 13,406                                              |       | 13,002 |   |
| 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 ConsolidatedFinancial Statements.

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**NOTE 1. ORGANIZATION AND BASIS OFPRESENTATION**

TE Products Pipeline Company, Limited Partnership (the“Partnership”), a Delaware limited partnership, was formed in March 1990. TEPPCOPartners, L.P. (the “Parent Partnership”) owns a 99.999% interest in us as thesole limited partner. TEPPCO GP, Inc. (“TEPPCO GP” or “General Partner”),a wholly owned subsidiary of the Parent Partnership, holds a 0.001% generalpartner interest in us. Texas Eastern Products Pipeline Company, LLC (the “Company”),a Delaware limited liability company, serves as the general partner of ourParent Partnership. Through February 23, 2005, the Company was an indirectwholly owned subsidiary of Duke Energy Field Services, LLC (“DEFS”), a jointventure between Duke Energy Corporation (“Duke Energy”) and ConocoPhillips. ThroughFebruary 23, 2005, Duke Energy held an interest of approximately 70% inDEFS, and ConocoPhillips held the remaining interest of approximately 30%. On February 24,2005, the Company was acquired by DFI GP Holdings L.P. (formerly Enterprise GPHoldings L.P.) (“DFI”), an affiliate of EPCO, Inc. (“EPCO”), a privatelyheld company controlled by Dan L. Duncan, for approximately $1.1 billion. As aresult of the transaction, DFI owns and controls the 2% general partnerinterest in our Parent Partnership and has the right to receive the incentivedistribution rights associated with the general partner interest.

TEPPCO GP, as our general partner, performs all of themanagement and operating functions required for us in accordance with theAgreement of Limited Partnership of TE Products Pipeline Company, LimitedPartnership. We reimburse our General Partner and the Company for allreasonable direct and indirect expenses that they incur in managing 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 TEPPCO Terminals as the sole limited partner. TEPPCO GP serves asthe general partner and holds a 0.001% general partner interest in TEPPCOTerminals. 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 (see Note 5. Acquisitions).

On May 9, 2005, we formed TEPPCO Interests, LLC (“TEPPCOInterests”), a Delaware limited liability company, of which we own 100% of themember interests. On July 15, 2005, TEPPCO Interests acquired from TexasGenco 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 limitedpartnership, and (ii) 100% of the membership interests in TG Pipeline LP,LLC, a Delaware limited liability company, which is the owner of 100% of thelimited partner interests in Pipeline LP (see Note 5. Acquisitions).

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

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

We restated our consolidated financial statements andrelated financial information for the three months and nine months ended September 30,2005 and 2004, for an accounting correction. See Note 12. Restatement ofConsolidated Financial Statements for a discussion of the restatementadjustment and the impact on previously issued financial statements.

We operate and report in one business segment:transportation and storage of refined products, liquefied petroleum gases (“LPGs”)and petrochemicals. Our interstate transportation operations, including rates chargedto customers, are subject to regulations prescribed by the Federal EnergyRegulatory 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 capital deficits of $8.6 million and $61.9 million,respectively. Our primary sources of liquidity are cash generated fromoperations and from our Parent Partnership’s credit facilities and debt andequity offerings. Working capital deficits occur primarily from the timing ofoperating cash receipts from customers, payment of cash distributions and thepayment of normal operating expenses and capital expenditures. Our ParentPartnership has historically made capital contributions, loans or otherwiseprovided liquidity to us as needed, but the Parent Partnership has nocontractual obligation to do so. At September 30, 2005, our ParentPartnership had $139.5 million in available borrowing capacity under itsrevolving credit facility and agreed to cover any of our working capital needs,if required.

**New Accounting Pronouncements**

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

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** **

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

**In March 2005, the FASB issued FASB Interpretation No. 47,*Accounting for Conditional Asset RetirementObligations, an interpretation of FASB Statement No. 143* (“FIN47”). FIN 47 clarifies that the term, conditional asset retirement obligationas used in SFAS No. 143, *Accounting for AssetRetirement Obligations*, refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement areconditional upon a future event that may or may not be within the control ofthe entity. Even though uncertainty about the timing and/or method ofsettlement exists and may be conditional upon a future event, the obligation toperform the asset retirement activity is unconditional. Accordingly, an entityis required to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonably estimated.Uncertainty about the timing and/or method of settlement of a conditional assetretirement obligation should be factored into the measurement of the liabilitywhen sufficient information exists. The fair value of a liability for theconditional asset retirement obligation should be recognized when incurredgenerally upon acquisition, construction, or development or through the normaloperation of the asset. SFAS 143 acknowledges that in some cases, sufficientinformation may not be available to reasonably estimate the fair value of anasset retirement obligation. FIN 47 also clarifies when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement obligation. FIN 47 is effective no later than the end of reportingperiods ending after December 15, 2005, and early adoption of FIN 47 isencouraged. We will adopt FIN 47 in the 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 EITF reached consensus in EITF 04-5, *DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights*, to provide guidance on how general partners in a limitedpartnership should determine whether they control a limited partnership andtherefore should consolidate it. The EITF agreed that the presumption ofgeneral partner control would be overcome only when the limited partners haveeither of two types of rights. The first type, referred to as kick-out rights,is the right to dissolve or liquidate the partnership or otherwise remove thegeneral partner without cause. The second type, referred to as participatingrights, is the right to effectively participate in significant decisions madein the ordinary course of the partnership’s business. The kick-out rights andthe participating rights must be substantive in order to overcome thepresumption of general partner control. The consensus is effective for generalpartners of all new limited partnerships formed and for existing limitedpartnerships for which the partnership agreements are modified subsequent tothe date of FASB ratification (June 29, 2005). For existing limitedpartnerships that have not been modified, the guidance in EITF 04-5 iseffective no later than the beginning of the first reporting period in fiscalyears beginning after December 15, 2005. We are currently evaluating whatimpact EITF 04-5 will have on our financial statements, but at this timewe do not believe that the adoption of EITF 04-5 will have a materialeffect on our financial position, results of operations or cash flows.

In December 2004,the FASB issued 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

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exchanges of nonmonetaryassets that do not have commercial substance. A nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange. SFAS 153 is effective fornonmonetary asset exchanges occurring in fiscal periods beginning after June 15,2005. We adopted SFAS 153 during the second quarter of 2005. The adoption ofSFAS 153 did not have a material effect on our financial position, results ofoperations or cash flows.

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

In September 2005,the EITF reached consensus in EITF 04-13, *Accountingfor Purchases and Sales of Inventory with the Same Counterparty*, todefine when a purchase and a sale of inventory with the same party thatoperates in the same line of business should be considered a single nonmonetarytransaction subject to APB Opinion No. 29, *Accountingfor Nonmonetary Transactions*. Two or more inventory transactionswith the same party should be combined if they are entered into incontemplation of one another. The consensus also requires entities to accountfor exchanges of inventory in the same line of business at fair value orrecorded amounts based on inventory classification. The guidance in EITF 04-13is effective for new inventory arrangements entered into in reporting periodsbeginning after March 15, 2006. We are currently evaluating what impactEITF 04-13 will have on our financial statements, but at this time we donot believe that the adoption of EITF 04-13 will have a material effecton our financial position, results of operations or cash flows.

**NOTE 2. INTANGIBLE ASSETS**

**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 ofgoodwill and intangible assets with indefinite useful lives, but insteadrequires testing for impairment at least annually. SFAS 142 requires thatintangible assets with definite useful lives be amortized over their respectiveestimated useful lives. If an intangible asset has a finite useful life, butthe precise length of that life is not known, that intangible asset shall beamortized over the best estimate of its useful 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.**

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** **

The following table reflects the components of  amortized intangible assets, included inother assets on the consolidated balance sheets, and excess investmentsincluded in equity investments, at September 30, 2005, and December 31,2004 (in thousands):

|                           | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                      |       |                             |       |                            |       |   |   |   |   |
| Intangible  assets:       |       |                             |       |                            |       |   |   |   |   |
| Transportation agreements |       | $                                | 1,328      |                            | $          | (310 | ) | $ | 1,328 |   | $ | (260 | ) |
|                      |       |                             |       |                            |       |   |   |   |   |
| Excess  investment:       |       |                             |       |                            |       |   |   |   |   |
| Centennial  Pipeline LLC  |       | $                                | 33,400     |                            | $          | (12,167 | ) | $ | 33,400 |   | $ | (8,875 | ) |

** **

**The value assigned to our excess investment in CentennialPipeline LLC was created upon its formation. Approximately $30.0 million isrelated to a contract and is being amortized on a unit-of-production basisbased upon the volumes transported under the contract compared to theguaranteed total throughput of the contract over a 10-year life. Theremaining $3.4 million is related to a pipeline and is being amortized on astraight-line basis over the life of the pipeline, which is 35 years.**

**Amortization expense on intangible assets was $16,603 for eachof the three-month periods ended September 30, 2005 and 2004, and $49,808for each of the nine-month periods ended September 30, 2005 and 2004. Amortizationexpense on our excess investment included in equity earnings was $1.2 millionand $0.9 million for the three months ended September 30, 2005 and 2004,respectively, and $3.3 million and $2.4 million for the nine months ended September 30,2005 and 2004, respectively.**

The following table sets forth the estimatedamortization expense of intangible assets and the estimated amortizationexpense allocated to equity earnings for the years ending December 31 (inthousands):

|      | ** ** | **Intangible Assets** | ** ** | **Excess Investment** | ** ** |
|------|------------|----------------------------|------------|----------------------------|------------|
| 2005 |       | $                          | 66         |                       | $          | 4,072 |   |
| 2006 |       | 66                         |       | 3,999                      |       |
| 2007 |       | 66                         |       | 4,422                      |       |
| 2008 |       | 66                         |       | 4,747                      |       |
| 2009 |       | 66                         |       | 6,187                      |       |
|      |            |                            |            |                            |            |  |  |

** **

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

We evaluate impairment of long-lived assets inaccordance with SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*. Long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofthe carrying amount of assets to be held and used is measured by a comparisonof the carrying amount of the asset to future net cash flows expected to begenerated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets. Assets to bedisposed of are reported at the lower of the carrying amount or fair value lesscosts to sell.

In September 2005, our Todhunter facility, nearMiddletown, Ohio, experienced a propane release and fire at a dehydration unitwithin the storage facility.  Thedehydration unit was destroyed due to the propane release 

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and fire, and as a result, we wrote off the remainingbook value of the asset of $0.8 million to depreciation and amortizationexpense during the third quarter of 2005.

During the third quarter of 2004, we completed anevaluation of our marine terminal facility in the Beaumont, Texas, area. Thefacility consists primarily of a barge dock, a ship dock, four storage tanksand various segments of connecting pipelines. The evaluation indicated that thedocks and other assets at the facility needed extensive work to continue to becommercially operational. As a result, we performed an impairment test on theentire marine facility and recorded a $4.4 million non-cash impairment charge,included in depreciation and amortization expense in our consolidatedstatements of income, for the excess carrying value over the fair value of thefacility.

**NOTE 4. INTEREST RATE SWAP**

In October 2001, we entered into an interest rateswap agreement to hedge our exposure to changes in the fair value of our fixedrate 7.51% Senior Notes due 2028. We designated this swap agreement as a fairvalue hedge. The swap agreement has a notional amount of $210.0 million andmatures in January 2028 to match the principal and maturity of the SeniorNotes. Under the swap agreement, we pay a floating rate of interest based on athree-month U.S. Dollar LIBOR rate, plus a spread, and receive a fixed rate ofinterest of 7.51%. During the nine months ended September 30, 2005 and2004, we recognized reductions in interest expense of $4.6 million and $7.5million, respectively, related to the difference between the fixed rate and thefloating rate of interest on the interest rate swap. During the quarter ended September 30,2005, we measured the hedge effectiveness of this interest rate swap and notedthat no gain or loss from ineffectiveness was required to be recognized. Thefair value of this interest rate swap was a gain of approximately $1.3 millionand $3.4 million at September 30, 2005, and December 31, 2004,respectively.

**NOTE 5. ACQUISITIONS**

**Refined Products Terminal andTruck Rack**

On July 12, 2005, TEPPCO Terminals purchased arefined products terminal and two-bay truck loading rack in North Little Rock,Arkansas, for $6.8 million from Exxon Mobil Corporation. The assets includethree storage tanks and a two-bay truck loading rack. We funded the purchasethrough borrowings under our Parent Partnership’s revolving credit facility. Weallocated the purchase price to property, plant and equipment and inventory,and we accounted for the acquisition of these assets under the purchase methodof accounting. The terminal serves the central Arkansas refined products marketand complements our existing infrastructure in North Little Rock, Arkansas.

**Genco Assets**

On July 15, 2005, TEPPCO Interests acquired fromTexas Genco LLC (“Genco”) all of its interests in certain companies that own a90-mile pipeline system and 5.5 million barrels of storage capacity for$62.1 million. We funded the purchase through borrowings under our ParentPartnership’s revolving credit facility. We allocated the purchase price toproperty, plant and equipment, and we accounted for the acquisition of theseassets under the purchase method of accounting. This acquisition was made aspart of an expansion of our refined products origin capabilities in theHouston, Texas, and Texas City, Texas areas. The assets of the purchasedcompanies will be integrated into our origin infrastructure in Texas City andBaytown, Texas. The integration and other system enhancements should be inservice by the fourth quarter of 2006, at an estimated cost of $45.0 million. Thestrategic 

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location of these assets, with refined productsinterconnections to major exchange terminals in the Houston area, will providesignificant long-term value to our customers and the Texas Gulf Coast refiningand logistics system.

**NOTE 6. INVENTORIES**

Inventories are valued at the lower of cost (based on weighted averagecost method) or market. The costs of inventories did not exceed market valuesat September 30, 2005, and December 31, 2004. The major components ofinventories were as follows (in thousands):

|                         | ** ** | **September 30,  2005** | ** ** | **December 31,  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 own a 50% ownership interest in Centennial PipelineCompany LLC (“Centennial”), and Marathon Petroleum Company LLC (“Marathon”)owns the remaining 50% interest. Centennial owns an interstate refinedpetroleum products pipeline extending from the upper Texas Gulf Coast tocentral Illinois. During the nine months ended September 30, 2005, we havenot 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 investment balance at September 30, 2005. We have notreceived any distributions from Centennial since its formation.

On January 1, 2003, we and Louis Dreyfus EnergyServices L.P. (“Louis Dreyfus”) formed Mont Belvieu Storage Partners, L.P. (“MBStorage”). We and Louis Dreyfus each own a 50% ownership interest in MB Storage.MB Storage owns storage capacity at the Mont Belvieu fractionation and storagecomplex and a short haul transportation shuttle system that ties Mont Belvieu,Texas, to the upper Texas Gulf Coast energy marketplace. MB Storage is aservice-oriented, fee-based venture serving the fractionation, refining andpetrochemical industries with transportation, terminaling and storage. MBStorage has no commodity trading activity. We operate the facilities for MBStorage.

For the year ended December 31, 2005, we willreceive the first $1.7 million per quarter (or $6.78 million on an annualbasis) of MB Storage’s income before depreciation expense, as defined in theoperating agreement. For the year ended December 31, 2004, we received thefirst $1.8 million per quarter (or $7.15 million on an annual basis) of MBStorage’s income before depreciation expense. Our share of MB Storage’searnings is adjusted annually by the partners of MB Storage. Any amount of MBStorage’s annual income before depreciation expense in excess of $6.78 millionfor 2005 and $7.15 million for 2004 is allocated evenly between us and LouisDreyfus. Depreciation expense on assets each party originally contributed to MBStorage is allocated between us and Louis Dreyfus based on the net book valueof 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,our sharing ratio in the earnings of MB Storage was approximately 64.3% and72.3%, respectively. During the nine months ended September 30, 2005, wereceived distributions of $10.7 million from MB Storage and contributed $4.0million to MB Storage, which includes a combination of non-cash asset transfersof $1.4 million and cash contributions of $2.6 million. During the nine monthsended September

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30, 2004, we received distributions of $8.5 millionfrom MB Storage and contributed $20.2 million to MB Storage, of which $16.5million was used to acquire storage assets in April 2004.

We use the equity method of accounting to account forour investments in Centennial and MB Storage. Summarized combined financial informationfor Centennial and MB Storage for the nine months ended September 30, 2005and 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 Centennialand MB Storage as of September 30, 2005, and December 31, 2004, ispresented below (in thousands):

|                         | ** ** | **September 30,  2005** | ** ** | **December 31,  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                     |       |
|                         |            |                              |            |                             |            |  |  |

** **

**NOTE 8. DEBT**

## **SeniorNotes**

On January 27, 1998, we completed the issuance of$180.0 million principal amount of 6.45% Senior Notes due 2008, and $210.0million principal amount of 7.51% Senior Notes due 2028 (collectively, the “SeniorNotes”). The 6.45% Senior Notes were issued at a discount of $0.3 million andare being accreted to their face value over the term of the notes. The 6.45%Senior Notes due 2008 are not subject to redemption prior to January 15,2008. The 7.51% Senior Notes due 2028, issued at par, may be redeemed at anytime after January 15, 2008, at our option in whole or in part, at apremium.

The Senior Notes do not have sinking fund requirements.Interest on the Senior Notes is payable semiannually in arrears on January 15and July 15 of each year. The Senior Notes are unsecured obligations andrank pari passu with all other unsecured and unsubordinated indebtedness. Theindenture governing the Senior Notes contains covenants including but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit ourability to incur additional indebtedness. As of September 30, 2005, wewere in compliance with the covenants of the Senior Notes.

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

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

|                                            | ** ** | ** **      | ** ** | **Fair Value**          | ** ** |
|--------------------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **Face  Value** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| 6.45% 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 CreditFacilities**

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s credit agreement and senior notes. The interest rates charged bythe Parent Partnership include the stated interest rate of the ParentPartnership, plus a premium to cover debt issuance costs. The interest rate isalso decreased or increased to cover gains and losses, respectively, on anyinterest rate swaps that the Parent Partnership may have in place on its creditagreement and senior notes. The Parent Partnership’s senior notes and revolvingcredit facility are described below.

On February 20, 2002, our Parent Partnershipissued $500.0 million principal amount of 7.625% Senior Notes due 2012. The7.625% Senior Notes were issued at a discount of $2.2 million and are beingaccreted to their face value over the term of the notes. The 7.625% SeniorNotes may be redeemed at any time at our Parent Partnership’s option with thepayment of accrued interest and a make-whole premium determined by discountingremaining interest and principal payments using a discount rate equal to therate of the United States Treasury securities of comparable remaining maturityplus 35 basis points. The indenture governing the 7.625% Senior Notes containscovenants, including, but not limited to, covenants limiting the creation ofliens securing indebtedness and sale and leaseback transactions. However, theindenture does not limit our Parent Partnership’s ability to incur additionalindebtedness.

On January 30, 2003, our Parent Partnershipissued $200.0 million principal amount of 6.125% Senior Notes due 2013. The6.125% Senior Notes were issued at a discount of $1.4 million and are beingaccreted to their face value over the term of the notes.  The 6.125% Senior Notes may be redeemed at anytime at our Parent Partnership’s option with the payment of accrued interestand a make-whole premium determined by discounting remaining interest andprincipal payments using a discount rate equal to the rate of the United StatesTreasury securities of comparable remaining maturity plus 35 basis points. Theindenture governing the 6.125% Senior Notes contains covenants including, butnot limited to, covenants limiting the creation of liens securing indebtednessand sale and leaseback transactions. However, the indenture does not limit theParent Partnership’s ability to incur additional indebtedness.

On June 27, 2003, our Parent Partnership enteredinto a $550.0 million unsecured revolving credit facility with a three-year term,including the issuance of letters of credit of up to $20.0 million (“RevolvingCredit Facility”). The interest rate is based, at our Parent Partnership’option, on either the lender’s base rate plus a spread, or LIBOR plus a spreadin effect at the time of the borrowings. The credit agreement for the RevolvingCredit Facility contains certain restrictive financial covenant ratios. Restrictivecovenants in the Revolving Credit Facility limit the Parent Partnership’s andits subsidiaries’ ability to, among other things, incur additionalindebtedness, make distributions in excess of Available Cash (see Note 9.Quarterly Distributions of Available Cash) complete mergers, acquisitions andsales of assets. On October 21, 2004, our Parent Partnership amended theRevolving Credit Facility to (i) increase the facility size to $600.0million, (ii) extend the term to October 21, 2009, (iii) removecertain restrictive covenants, (iv) increase the available amount for theissuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing. On February 23,2005, our 

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Parent Partnership again amended its Revolving CreditFacility to remove the requirement that DEFS must at all times own, directly orindirectly, 100% of the Company, to allow for its acquisition by DFI (see Note1. Organization and Basis of Presentation). During the second quarter of 2005,the Parent Partnership used a portion of the proceeds from an equity offeringin May 2005 to repay a portion of the Revolving Credit Facility. At September 30,2005, $460.5 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 4.6%. At September 30, 2005, our ParentPartnership was in compliance with the covenants of this credit agreement.

At September 30, 2005, and December 31,2004, we had intercompany notes payable to our Parent Partnership of $188.9million and $301.7 million, respectively, which represented borrowings underthe Parent Partnership’s Revolving Credit Facility, 7.625% Senior Notes and6.125% Senior Notes. The weighted average interest rate on the note payable tothe Parent Partnership at September 30, 2005, was 5.7%. At September 30,2005, accrued interest includes $1.2 million due to our Parent Partnership. Forthe nine months ended September 30, 2005 and 2004, interest costs incurredon the note payable to our Parent Partnership totaled $7.6 million and $9.2million, respectively.

**NOTE 9. QUARTERLY DISTRIBUTONS OFAVAILABLE CASH**

We make quarterly cash distributions of all of ourAvailable Cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion. We pay distributions of 99.999% to the ParentPartnership and 0.001% to the General Partner.

During the nine months ended September 30, 2005and 2004, we paid cash distributions to our Parent Partnership totaling $91.9million and $88.3 million, respectively. On November 7, 2005, we will paya cash distribution to our Parent Partnership of $20.1 million for the quarterended September 30, 2005.

**NOTE 10. EMPLOYEE BENEFIT PLANS**

**RetirementPlans**

The Parent Partnership has adopted the TEPPCORetirement Cash Balance Plan (“TEPPCO RCBP”), which is a non-contributory,trustee-administered pension plan. In addition, the TEPPCO Supplemental BenefitPlan (“TEPPCO SBP”) is a non-contributory, nonqualified, defined benefitretirement plan, in which certain executive officers participate. The TEPPCOSBP was established to restore benefit reductions caused by the maximum benefitlimitations that apply to qualified plans. The benefit formula for all eligibleemployees is a cash balance formula. Under a cash balance formula, a planparticipant accumulates a retirement benefit based upon pay credits and currentinterest credits. The pay credits are based on a participant’s salary, age andservice. The Parent Partnership uses a December 31 measurement date forthese plans.

On May 27, 2005, the TEPPCO RCBP and the TEPPCOSBP were amended. Effective May 31, 2005, participation in the TEPPCO RCBPwas frozen, and no new participants were eligible to be covered by the planafter that date. Effective December 31, 2005, all plan benefits accruedwill be frozen, participants will not receive additional pay credits after thatdate, and all plan participants will be 100% vested regardless of their yearsof service. The TEPPCO RCBP plan will be terminated effective December 31,2005, and plan participants will have the option to receive their benefitseither through a lump sum payment in 2006 or through an annuity. For those planparticipants who elect to receive an annuity, our Parent Partnership willpurchase an annuity contract from an insurance company in which the planparticipant will own the annuity, absolving our Parent Partnership of any 

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future obligation to the participant. Participants inthe TEPPCO SBP will receive pay credits through November 30, 2005, andwill receive lump sum benefit payments in December 2005. Both the RCBP andSBP benefit payments are discussed below.

In June 2005, the Parent Partnership recorded acurtailment charge of $0.1 million in accordance with SFAS No. 88, *Employers’ Accounting for Settlements and Curtailments of DefinedBenefit Pension Plans and for Termination Benefits*, as a result ofthe TEPPCO RCBP and TEPPCO SBP amendments. A portion of the charge wasallocated to us. As of May 31, 2005, the following assumptions werechanged for purposes of determining the net periodic benefit costs for the remainderof 2005: the discount rate, the long-term rate of return on plan assets, andthe assumed mortality table. The discount rate was decreased from 5.75% to5.00% to reflect rates of returns on bonds currently available to settle theliability.  The expected long-term rateof return on plan assets was changed from 8% to 2% due to the movement of planfunds from equity investments into short-term money market funds. The mortalitytable was changed to reflect overall improvements in mortality experienced bythe general population. The curtailment charge arose due to the acceleratedrecognition of the unrecognized prior service costs. The Parent Partnershipexpects to record additional settlement charges of approximately $0.2 millionin the fourth quarter of 2005 relating to the TEPPCO SBP and approximately $3.2million in 2006 relating to the TEPPCO RCBP for any existing unrecognizedlosses upon the plan termination and final distribution of the assets to theplan participants. We expect to be allocated a share of these charges.

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

|                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost  benefit earned during the period |       | $                                                    | 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 careand life insurance benefits for retired employees on a contributory andnon-contributory basis (“TEPPCO OPB”). Employees become eligible for thesebenefits if they meet certain age and service requirements at retirement, asdefined in the plans. The Parent Partnership provides a fixed dollarcontribution, which does not increase from year to year, towards retiredemployee medical costs. The retiree pays all health care cost increases due tomedical inflation. The Parent Partnership uses a December 31 measurementdate for this plan.

In May 2005, benefits provided to employees underthe TEPPCO OPB were changed. Employees eligible for these benefits will receivethem through December 31, 2005, however, effective December 31, 2005,these benefits will be terminated. In June 2005, as a result of thischange in benefits and in accordance with SFAS 106, *Employers’Accounting for Postretirement Benefits Other Than Pensions*, theParent Partnership recorded a curtailment credit of approximately $2.6 millionin its accumulated postretirement obligation, partially offset by a curtailmentcharge of approximately $1.0 million related to the accelerated recognition ofthe unrecognized prior service costs. The net effect of these curtailmentadjustments was to reduce the Parent Partnership’s accumulated 

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postretirement obligation to the total of the expectedremaining 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 Partnershiprecorded a one-time settlement to DEFS in the third quarter of 2005 of $0.4million for the remaining postretirement benefits. A portion of these chargeswas allocated to us.

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

|                                                                 | ** ** | **Three Months Ended  September  30,** | ** ** | **Nine Months Ended  September  30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                                   | ** ** | **2004**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost  benefit earned during the period                  |       | $                                                          | —     |                                                      | $          | 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 |   |

 

EffectiveJune 1, 2005, the payroll functions performed by DEFS for the Company weretransferred from DEFS to EPCO. For those employees who were receiving certainother postretirement benefits at the time of the acquisition of the Company byDFI, DEFS will continue to provide these benefits to those employees. EffectiveJune 1, 2005, EPCO began providing certain other postretirement benefitsto those employees who became eligible for the benefits after June 1,2005, and will charge those benefit related costs to our Parent Partnership. Asa result of these changes, the Parent Partnership recorded a $1.2 millionreduction in its other postretirement obligation in June 2005. A portionof the reduction was allocated to us.

## **EstimatedFuture Benefit Contributions**

The Parent Partnership expects to contribute approximately$1.1 million to its retirement plans and other postretirement benefit plans in2005. We expect to be allocated a share of these contributions.

**NOTE 11. COMMITMENTS AND CONTINGENCIES**

**Litigation**

In the fall of 1999 and on December 1, 2000, theCompany and the Partnership were named as defendants in two separate lawsuitsin Jackson County Circuit Court, Jackson County, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al.*(including the Company and Partnership) and*Gilbert Richards and Jean Richards v. Texas Eastern Corporation, etal.*(including the Company and Partnership). In both cases, theplaintiffs contend, among other things, that we and other defendants stored anddisposed of toxic and hazardous substances and hazardous wastes in a mannerthat caused the materials to be released into the air, soil and water. Theyfurther contend that the release caused damages to the plaintiffs. In theircomplaints, the plaintiffs allege strict liability for both personal injury andproperty damage together with gross negligence, continuing nuisance, trespass,criminal mischief and loss of consortium. The plaintiffs are seekingcompensatory, punitive and treble damages. On January 27, 2005, we enteredinto Release and Settlement Agreements with the McCleery plaintiffs and theRichards plaintiffs dismissing all of these plaintiffs’ claims. The settlementterms included a $2.0 million payment to the plaintiffs, which was accrued at December 31,2004.

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

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

In May 2003, the Company was named as a defendantin a lawsuit styled *John R. James, et al. v. JGraves Insulation Company, et al.* as filed in the first JudicialDistrict Court, Caddo Parish, Louisiana. There are numerous plaintiffsidentified in the action that are alleged to have suffered damages as a resultof alleged exposure to asbestos-containing products and materials. According tothe petition and as a result of a preliminary investigation, the Companybelieves that the only claim asserted against it results from one individualfor the period from July 1971 through June 1972, who is alleged tohave worked on a facility owned by the Company’s predecessor. This periodrepresents a small portion of the total alleged exposure period from January 1964through December 2001 for this individual. The individual’s claims involvenumerous employers and alleged job sites. The Company has been unable toconfirm involvement by the Company or its predecessors with the allegedlocation, and it is uncertain at this time whether this case is covered byinsurance. Discovery is planned, and the Company intends to defend itselfvigorously against this lawsuit. The plaintiffs have not stipulated the amountof damages that they are seeking in this suit. We are obligated to reimbursethe Company for any costs it incurs related to this lawsuit. We cannot estimatethe loss, if any, associated with this pending lawsuit. We do not believe thatthe outcome of this lawsuit will have a material adverse effect on ourfinancial position, results of operations or cash flows.

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

**Regulatory Matters**

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

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

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

In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana facility. In 1999, our Arcadia facility and adjacentterminals were directed by the Remediation Services Division of the LDEQ topursue remediation of this contamination.   Effective March 2004, we executed anaccess agreement with an adjacent industrial landowner who is locatedupgradient of the Arcadia facility. This agreement enables the landowner toproceed with remediation activities at our Arcadia facility for which it hasaccepted shared responsibility. At September 30, 2005, we have an accruedliability of $0.2 million for remediation costs at our Arcadia facility. We donot expect that the completion of the remediation program proposed to the LDEQwill have a future material adverse effect on our financial position, resultsof operations or cash flows.

On March 17, 2003, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois. As a result of therelease, we have entered into an Agreed Order 

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with the State of Illinois,which required us to conduct an environmental investigation. At this time, wehave complied with the terms of the Agreed Order, and the results of the environmentalinvestigation indicated there were no soil or groundwater impacts from therelease. On August 30, 2005, a final settlement was reached with the Stateof Illinois. The settlement included the payment of a civil penalty of$0.1 million and the requirement that we make certain modifications to theequipment of the facility, none of which are expected to have a materialadverse effect on our financial position, results of operations or cash flows.

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

At September 30, 2005, we have an accruedliability of $1.5 million related to various sites requiring environmentalremediation activities. We do not expect that the completion of remediationprograms associated with our activities will have a future material adverseeffect on our financial position, results of operations or cash flows.

**Other**

Centennial entered into credit facilities totaling$150.0 million, and as of September 30, 2005, $150.0 million wasoutstanding under those credit facilities. We and Marathon have each guaranteedone-half of the repayment of Centennial’s outstanding debt balance under along-term credit agreement, which expires in 2024, and a short-term creditagreement, which expires in 2007. The guarantees arose in order for Centennialto obtain adequate financing, and the proceeds of the credit agreements wereused to fund construction and conversion costs of its pipeline system. Prior tothe expiration of the long-term credit agreement, we could be relinquished fromresponsibility under the guarantee should Centennial meet certain financialtests. If Centennial defaults on its outstanding balance, the estimated maximumpotential amount of future payments for us and Marathon is $75.0 million eachat September 30, 2005.

We have entered into a limited cash call agreementwith Marathon and Centennial, which allows each member to contribute cash inlieu of Centennial procuring separate insurance in the event of a third-partyliability arising from a catastrophic event. There is an indefinite term forthe agreement and each member is to contribute cash in proportion to itsownership interest, up to a maximum of $50.0 million each. As a result of thecatastrophic event guarantee, we have recorded a $4.7 million obligation, whichrepresents the present value of the estimated amount that we would have to payunder the guarantee. In the event that a catastrophic event occurred and wewere required to contribute cash to Centennial, contributions exceeding ourdeductible may be covered by our insurance.

On February 24, 2005, the Company was acquiredfrom DEFS by DFI. The Company owns a 2% general partner interest in us and isthe general partner of the Partnership. On March 11, 2005, the Bureau ofCompetition of the Federal Trade Commission (“FTC”) delivered written notice toDFI’s legal advisor that it was conducting a non-public investigation todetermine whether DFI’s acquisition of the Company may substantially lessencompetition. The FTC has contacted the Company requesting data. The Companyintends to cooperate fully with any such investigations and inquiries requestedby the FTC or any other regulatory authorities.

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**NOTE 12.              RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS**

We are restating our previously reported consolidatedfinancial statements for the quarterly periods ended September 30, 2004and 2005. In the fourth quarter of 2005, we determined that our method ofaccounting for the $33.4 million excess investment in Centennial, previouslydescribed as an intangible asset with an indefinite life, was incorrect. Throughour accounting for this excess investment in Centennial as an intangible assetwith an indefinite life, we have been testing the amount for impairment on anannual basis as opposed to amortizing it over a determinable life. Wedetermined that it would be more appropriate to account for this excessinvestment as an intangible asset with a determinable life. As a result, wemade a non-cash adjustment that reduced the net value of the excess investmentin Centennial and increased amortization expense allocated to our equityearnings. ****The restatement caused a $1.2 millionand $0.9 million reduction to net income as previously reported for the threemonths ended September 30, 2005 and 2004, respectively, and a $3.3 millionand $2.4 million reduction to net income as previously reported for the ninemonths ended September 30, 2005 and 2004, respectively.****Werestated previously reported consolidated financial statements for the fiscalyears ended December 31, 2003 and 2004 in our Annual Report on Form 10-Kfor the year ended December 31, 2005.

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

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

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

**Balance Sheet Amounts:**

|                                               | ** ** | **September 30, 2005** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
|                                          |       |                             |       |   |   |   |   |
| Equity  investments                           |       | $                                | 168,016    |   | $ | (12,167 | ) | $ | 155,849 |   |
| Total assets                                  |       | $                                | 1,039,500  |   | $ | (12,167 | ) | $ | 1,027,333 |   |
|                                          |       |                             |       |   |   |   |   |
| Partners’ capital:                       |       |                             |       |   |   |   |   |
| General partner’s interest               |       | $                                | 4          |   | $ | —- |   | $ | 4 |   |
| Limited partners’ interest               |       | 381,823                          |       | (12,167 | ) | 369,656 |   |
| Total partners’ capital                  |       | 381,827                          |       | (12,167 | ) | 369,660 |   |
| Total  liabilities and partners’ capital |       | $                                | 1,039,500  |   | $ | (12,167 | ) | $ | 1,027,333 |   |

 

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**Income Statement Amounts:**

|                           | ** ** | **Three Months Ended  September 30, 2005** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|
| ** **                | ** ** | **As Previously  Reported**                               | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity earnings  (losses) |       | $                                                              | 524        |   | $ | (1,175 | ) | $ | (651 | ) |
| Net income                |       | 7,359                                                          |       | (1,175 | ) | 6,184 |   |
|                           |            |                                                                |            |  |  |  |  |  |  |  |

 

|               | ** ** | **Three Months Ended  September 30, 2004** | ** ** |
|---------------|------------|----------------------------------------------------------------|------------|
| ** **    | ** ** | **As Previously  Reported**                               | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity losses |       | $                                                              | (322       | ) | $ | (912 | ) | $ | (1,234 | ) |
| Net income    |       | 4,698                                                          |       | (912 | ) | 3,786 |   |
|               |            |                                                                |            |  |  |  |  |  |  |  |

** **

|                           | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|---------------------------|------------|---------------------------------------------------------------|------------|
| ** **                | ** ** | **As Previously  Reported**                              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity earnings  (losses) |       | $                                                             | 574        |   | $ | (3,292 | ) | $ | (2,718 | ) |
| Net income                |       | 37,377                                                        |       | (3,292 | ) | 34,085 |   |
|                           |            |                                                               |            |  |  |  |  |  |  |  |

** **

|               | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|
| ** **    | ** ** | **As Previously  Reported**                              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity losses |       | $                                                             | (2,069     | ) | $ | (2,408 | ) | $ | (4,477 | ) |
| Net income    |       | 28,811                                                        |       | (2,408 | ) | 26,403 |   |
|               |            |                                                               |            |  |  |  |  |  |  |  |

 

**Cash Flow Amounts:**

|                                                                  | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **As Previously  Reported**                              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:                           |       |                                                          |       |   |   |   |   |
| Net income                                                       |       | $                                                             | 37,377     |   | $ | (3,292 | ) | $ | 34,085 |   |
| (Earnings) losses from equity investments, net of  distributions |       | 10,114                                                        |       | 3,292 |   | 13,406 |   |
|                                                                  |            |                                                               |            |  |  |  |  |  |  |  |

** **

|                                                    | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                         | ** ** | **As Previously  Reported**                              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:             |       |                                                          |       |   |   |   |   |
| Net income                                         |       | $                                                             | 28,811     |   | $ | (2,408 | ) | $ | 26,403 |   |
| Losses in equity investments, net of distributions |       | 10,594                                                        |       | 2,408 |   | 13,002 |   |
|                                                    |            |                                                               |            |  |  |  |  |  |  |  |

** **

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

**Forward-LookingStatements**

The matters discussed in this Report include “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. Allstatements that express belief, expectation, estimates or intentions, as wellas those that are not statements of historical facts are forward-lookingstatements. The words “proposed”, “anticipates”, “potential”, “may”, “will”, “could”,“should”, “expect”, “estimate”, “believe”, “intend” and similar expressions areintended to identify forward-looking statements. Without limiting the broaderdescription of forward-looking statements above, we specifically note thatstatements included in this document that address activities, events ordevelopments that we expect or anticipate will or may occur in the future,including such things as estimated future capital expenditures (including theamount and nature thereof), business strategy and measures to implementstrategy, competitive strengths, goals, expansion and growth of our businessand operations, plans, references to future success, references to intentionsas to future matters and other such matters are forward-looking statements. Thesestatements are based on certain assumptions and analyses made by us in light ofour experience and our perception of historical trends, current conditions andexpected future developments as well as other factors we believe areappropriate under the circumstances. While we believe our expectationsreflected in these forward-looking statements are reasonable, whether actualresults and developments will conform with our expectations and predictions issubject to a number of risks and uncertainties, including general economic,market or business conditions, the opportunities (or lack thereof) that may bepresented to and pursued by us, competitive actions by other pipelinecompanies, changes in laws or regulations and other factors, many of which arebeyond our control. For example, the demand for refined products is dependentupon the price, prevailing economic conditions and demographic changes in themarkets served, trucking and railroad freight, agricultural usage and militaryusage; the demand for propane is sensitive to the weather and prevailingeconomic conditions; and the demand for petrochemicals is dependent upon pricesfor products produced from petrochemicals. We are also subject to regulatoryfactors such as the amounts we are allowed to charge our customers for theservices we provide on our regulated pipeline systems. Consequently, all of theforward-looking statements made in this document are qualified by thesecautionary statements, and we cannot assure you that actual results ordevelopments that we anticipate will be realized or, even if substantiallyrealized, will have the expected consequences to or effect on us or ourbusiness or operations. For additional discussion of such risks anduncertainties, see our Annual Report on Form 10-K for the year endedDecember 31, 2004, and other filings we have made with the Securities andExchange Commission (“SEC”).

# **Restatement of Consolidated Financial Statements**

Weare restating our previously reported consolidated financial statements for thequarterly periods ended September 30, 2004 and 2005. In the fourth quarterof 2005, we determined that our method of accounting for the $33.4 millionexcess investment in Centennial, previously described as an intangible assetwith an indefinite life, was incorrect. Through our accounting for this excessinvestment in Centennial as an intangible asset with an indefinite life, wehave been testing the amount for impairment on an annual basis as opposed toamortizing it over a determinable life. We determined that it would be moreappropriate to account for this excess investment as an intangible asset with adeterminable life. As a result, we made a non-cash adjustment that reduced thenet value of 

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the excessinvestment in Centennial and increased amortization expense allocated to ourequity earnings. The restatement caused a $1.2 million and $0.9 millionreduction to net income as previously reported for the three months ended September 30,2005 and 2004, respectively, and a $3.3 million and $2.4 million reduction tonet income as previously reported for the nine months ended September 30,2005 and 2004, respectively. We restated previously reported consolidatedfinancial statements for the fiscal years ended December 31, 2003 and 2004in our Annual Report on Form 10-K for the year ended December 31,2005.

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

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

**Critical Accounting Policies andEstimates**

A summary of the significant accounting policies wehave adopted and followed in the preparation of our consolidated financialstatements is detailed in our consolidated financial statements for the yearended December 31, 2004, included in our Annual Report on Form 10-K.Certain of these accounting policies require the use of estimates. Thefollowing estimates, in our opinion, are subjective in nature, require theexercise of judgment and involve complex analysis: revenue and expenseaccruals, including power costs, property taxes, environmental costs andproperty, plant and equipment. These estimates are based on our knowledge andunderstanding of current conditions and actions we may take in the future. Changesin these estimates will occur as a result of the passage of time and theoccurrence of future events. Subsequent changes in these estimates may have asignificant impact on our financial condition and results of operations.

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

## We reported net income of $6.2 million for the three months ended September 30,2005, compared with net income of $3.8 million for the three months ended September 30,2004, and net income of $34.1 million for the nine months ended September 30,2005, compared with net income of $26.4 million for the nine months ended September 30,2004.

## Our operating income for the three months ended September 30,2005, increased compared with the prior year period primarily due to lowerdepreciation expense attributable to a $4.4 million asset impairment charge inthe 2004 period (see Note 3. Property, Plant and Equipment), a $4.0 milliondecrease in pipeline integrity costs, increased margins on product inventorysales and decreased product measurement losses. These increases to operatingincome were partially offset by the recognition in the 2004 period of $4.1million of deferred revenue related to the expiration of two customertransportation agreements, $1.3 million of regulatory penalties for pastincidents, the impacts of Hurricanes Katrina and Rita in the third quarter of2005 which reduced revenues by an estimated $1.5 million, the impact of apropane release and fire at an LPG storage facility in Ohio, which reducedrevenues by an estimated $0.3 million, increased pipeline operating expense,higher property taxes, higher depreciation expense primarily due to assetacquisitions and the retirement of assets in the current period, increasedenvironmental remediation and assessment costs and transition expenses relatedto the change in control of the Company.

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## For the nine months ended September 30, 2005, operating incomeincreased compared with the prior year period primarily due to a $9.7 milliondecrease in pipeline integrity costs, lower depreciation expense attributableto an asset impairment charge in the 2004 period, increased refined productsand LPG transportation revenues and volumes and decreased product measurementlosses. We anticipate that our pipeline integrity expenses for 2005 will beapproximately $15.1 million lower than our 2004 expenses primarily due to thecompletion of pipeline inspections and repairs under our integrity managementprogram. 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 thesafe, reliable and efficient operation of the pipelines and facilities that weown or operate while meeting increased regulations that govern the operation ofour assets and the costs associated with such regulations. We are also focusedon our continued growth through expansion of the assets that we own and throughacquisition of assets that complement our current operations. We believe thatour current strategy and focus will provide continued growth in earnings andcash distributions. These opportunities include continued growth, resultingfrom our recent capacity expansion and grass roots facility investments andgrowing demand for Gulf Coast sourced products.

On July 12, 2005, TEPPCO Terminals purchased arefined products terminal and two-bay truck loading rack in North Little Rock,Arkansas, for $6.8 million from Exxon Mobil Corporation. The assets includethree storage tanks and a two-bay truck loading rack. The terminal serves thecentral Arkansas refined products market and complements our existinginfrastructure in North Little Rock, Arkansas.

On July 15, 2005, TEPPCO Interests acquired fromTexas Genco LLC (“Genco”) all of its interests in certain companies that own a90-mile pipeline system and 5.5 million barrels of storage capacity for$62.1 million. This acquisition was made as part of an expansion of our refinedproducts origin capabilities in the Houston, Texas, and Texas City, Texas areas.The assets of the purchased companies will be integrated into our origininfrastructure in Texas City and Baytown, Texas. The integration and othersystem enhancements should be in service by the fourth quarter of 2006, at anestimated cost of $45.0 million. The strategic location of these assets, withrefined products interconnections to major exchange terminals in the Houstonarea, will provide significant long-term value to our customers and the TexasGulf Coast refining and logistics system.

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

# **Our Business**

TE Products Pipeline Company, Limited Partnership (the“Partnership”), a Delaware limited partnership, was formed in March 1990. TEPPCOPartners, L.P. (the “Parent Partnership”) owns a 99.999% interest in us as thesole limited partner. TEPPCO GP, Inc. (“TEPPCO GP” or “General Partner”),a wholly owned subsidiary of the Parent Partnership, holds a 0.001% generalpartner interest in us. Texas Eastern Products Pipeline Company, LLC (the “Company”),a Delaware limited liability company, serves as the general partner of ourParent Partnership. Through February 23, 2005, the Company was an indirectwholly owned subsidiary of Duke Energy Field Services, LLC (“DEFS”), a jointventure between Duke Energy Corporation (“Duke Energy”) and ConocoPhillips.Through February 23, 2005, Duke Energy held an interest of approximately70% in DEFS, and ConocoPhillips held the remaining interest of approximately30%. On February 24, 2005, the Company was acquired by DFI GP HoldingsL.P. (formerly Enterprise GP Holdings L.P.) (“DFI”), an affiliate of EPCO, Inc.(“EPCO”), a privately held company controlled by Dan L. Duncan, forapproximately $1.1 billion. As a result of the transaction, DFI owns andcontrols the 2% general partner interest in our Parent Partnership and has theright to receive the incentive distribution rights associated with the generalpartner interest.

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TEPPCO GP, as our general partner, performs all of themanagement and operating functions required for us in accordance with theAgreement of Limited Partnership of TE Products Pipeline Company, LimitedPartnership. We reimburse our General Partner and the Company for allreasonable direct and indirect expenses that they incur in managing 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 TEPPCO Terminals as the sole limited partner. TEPPCO GP serves asthe general partner and holds a 0.001% general partner interest in TEPPCOTerminals. On July 12, 2005, TEPPCO Terminals purchased a refined productsterminal two-bay and truck loading rack in North Little Rock, Arkansas, for$6.8 million from Exxon Mobil Corporation (see Note 5. Acquisitions).

On May 9, 2005, we formed TEPPCO Interests, LLC (“TEPPCOInterests”), a Delaware limited liability company, of which we own 100% of themember interests. On July 15, 2005, TEPPCO Interests acquired from TexasGenco LLC 100% of its member interests in TG Pipeline GP, LLC, a Delawarelimited liability company, which is the owner of 100% of the general partnerinterests in  TG Pipeline, L.P. (“PipelineLP”), a Texas limited partnership, and 100% of the membership interests in TGPipeline LP, LLC, a Delaware limited liability company, which is the owner of100% of the limited partner interests in 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 areearned from transportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sales of product inventory and otherancillary services. Our two largest operating expense items are labor andelectric power. We generally realize higher revenues during the first andfourth quarters of each year since our operations are somewhat seasonal. Refinedproducts volumes are generally higher during the second and third quartersbecause of greater demand for gasolines during the spring and summer drivingseasons. LPGs volumes are generally higher from November through March dueto higher demand in the Northeast for propane, a major fuel for residentialheating. Our results also include our equity investments in Centennial PipelineCompany, LLC (“Centennial”) and Mont Belvieu Storage Partners, L.P. (“MBStorage”) (see Note 7. Equity Investments).

We are one of three operating subsidiaries of ourParent Partnership. Our Parent Partnership is managed 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 various operations. Webelieve that the methods for allocating corporate operating, general andadministrative expenses to us are reasonable.

**Results of Operations**

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

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

24

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*ThreeMonths 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 September 30,2004, primarily due to the recognition in the 2004 period of $4.1 million ofdeferred revenue related to the expiration of two customer transportationagreements. The $4.1 million of deferred revenue increased the refined productsaverage tariff for the third quarter of 2004 by $0.10 per barrel, or 11%. Excludingthe effect of the deferred revenue recognized in the 2004 period, the refinedproducts average tariff per barrel decreased 5% from the prior year periodprimarily due to the impact of greater growth in the volume of productsdelivered under a Centennial tariff compared with the growth in deliveriesunder a our tariff, which resulted in an increased proportion of lower tariffbarrels transported on our system. Prior to the construction of Centennial,deliveries on our pipeline system were limited by our pipeline capacity, andtransportation services for our customers were allocated in accordance with aproration policy. With this incremental pipeline capacity, our previouslyconstrained system has expanded deliveries in markets both south and north ofCreal Springs, Illinois. In February 2003, we entered into a leaseagreement with Centennial that increased our flexibility to deliver refinedproducts 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 in refined products volumes was primarilydue to increased demand and market share for products supplied from the U.S.Gulf Coast into Midwest markets.

Revenues from LPGs transportationincreased $0.4 million for the three months ended September 30, 2005,compared with the three months ended September 30, 2004, due to higherdeliveries of isobutane in the upper Midwest market areas, partially offset bylower deliveries of propane.  The LPGsaverage rate per barrel increased from the prior period primarily as a resultof decreased short-haul deliveries during the three months ended September 30,2005, and an increase in tariff rates which went into effect in July 2005.Our propane revenues also decreased due to a propane release and fire at adehydration unit in September 2005 at our Todhunter storage facility, nearMiddletown, Ohio. As a result of the propane release and fire, our LPG storagefacilities at Todhunter were shut down 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 releaseand fire will also reduce fourth quarter 2005 propane revenues, by an estimatedwhich we estimate to be approximately $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 in August andSeptember 2005, respectively. Hurricane Katrina disrupted refineries andother pipeline systems in the central U.S. Gulf Coast, which provided us withadditional deliveries at Shreveport and Arcadia, Louisiana, as shippers usedalternative sources to supply product to areas where normal distributionpatterns were disrupted. Hurricane Katrina also resulted in higher prices ofrefined products and LPGs, which had a negative impact on the current demandfor 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 ourBeaumont terminal, which resulted in the mainline being shut down for four daysand Centennial being shut down for ten days. Our mainline system was reopened,but has been operating at reduced rates as a result of Hurricane Rita. At September 30,2005, our 230,000 barrel per day capacity, 20-inch diameter mainlinesystem, which primarily delivers LPGs and gasoline from the Texas Gulf Coast tothe Midwest, was pumping from MB Storage’s facility at approximately 60% ofnormal operating capacity. Our 110,000 barrel per day capacity, 14-inchand 16-inch diameter pipelines, which primarily deliver distillates andgasoline from the Texas Gulf Coast to the Midwest, were pumping atapproximately 75% of normal operating capacity from our Baytown, Texas,terminal. We installed generators at our Beaumont, Texas, facility, whichenabled receipt and delivery of refined products 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. Centennialresumed operating at its normal capacity 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 

25

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and $0.3 million,respectively. The impact to operating expenses for the period was less than$0.1 million through September 30, 2005. We expect the impact of HurricaneRita to reduce our fourth quarter 2005 revenues as well, resulting in estimatedlosses in that period of approximately $4.0 million of refined productsrevenues and $0.5 million of LPG revenues. The estimated impact to operatingexpenses for the fourth quarter of 2005 is an increase of approximately $1.2million.

Other operating revenues increased $2.2 million forthe three months ended September 30, 2005, compared with the three monthsended September 30, 2004, primarily due to increased margins on productinventory sales and higher refined products additive and tender deduction revenue.

Costs and expenses decreased $4.5 million for thethree months ended September 30, 2005, compared with the three monthsended September 30, 2004, due to decreased operating, general andadministrative expenses, decreased depreciation and amortization expense anddecreased operating fuel and power, partially offset by increased taxes — otherthan income taxes and lower gains on the sales of assets 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.

These decreases to costs and expenses were partiallyoffset by a $1.3 million increase attributable to regulatory penalties for pastincidents, a $0.7 million increase in pipeline operating and maintenanceexpenses, a $0.4 million increase in labor and benefits expense related toretirement plan settlements with DEFS, a $0.4 million increase related totransition costs due to the changes in control of the Company, a $0.4 millionincrease in environmental assessment and remediation expenses and an increasein insurance expense. Depreciation expense increased $2.7 million primarily dueto a $0.8 million write-off of assets related to a propane release and fire ata storage facility in Ohio and assets retired to depreciation expense duringthe quarter, partially offset by a $4.4 million non-cash impairment charge inthe third quarter of 2004 (see Note 3. Property, Plant and Equipment). Operatingfuel and power decreased $0.3 million primarily due to adjustments to poweraccruals, partially offset by increased mainline throughput. Taxes — other thanincome taxes increased $1.0 million primarily due to increases in property taxaccruals and a higher asset base in the 2005 period. During the three monthsended September 30, 2004, we recognized net gains of $0.5 million from thesales of various assets.

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

Net losses from equity investments decreased for thethree months ended September 30, 2005, compared with the three monthsended September 30, 2004, as shown below (in thousands):

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

 

Equity losses in Centennial decreased $0.4 million forthe three months ended September 30, 2005, compared with the three monthsended September 30, 2004, primarily due to higher transportation revenues,decreased operating expenses and lower product measurement losses during the2005 period. Equity earnings in 

26

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MB Storage increased $0.2 million for the three monthsended September 30, 2005, compared with the three months ended September 30,2004, primarily due to increased tender deduction and lease line revenues onthe MB Storage system. As a result of Hurricane Rita, MB Storage’s revenueswere reduced by approximately $0.2 million during the three months ended September 30,2005. We expect the impact of Hurricane Rita to reduce MB Storage’s fourthquarter 2005 revenues by an estimated $0.1 million and increase operatingexpenses by approximately $0.4 million.

*NineMonths Ended September 30, 2005 Compared with Nine Months Ended September 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 transportation agreements,and the effects of Hurricanes Katrina and Rita in August and September 2005as discussed above, partially offset by an overall increase in the refinedproducts volumes delivered. This increase was primarily due to deliveries ofproducts moved on Centennial. Volume increases were due to increased demand andmarket share for products supplied from the U.S. Gulf Coast into Midwestmarkets. The refined products average rate per barrel decreased from the prioryear period primarily due to the impact of greater growth in the volume ofproducts delivered under a Centennial tariff compared with the growth indeliveries under our tariff, which resulted in an increased proportion of lowertariff barrels transported on our system.

Revenues from LPGs transportation increased $4.7million for the nine months ended September 30, 2005, compared with thenine months ended September 30, 2004, due to higher deliveries of propanein the upper Midwest and Northeast market areas primarily resulting from coldweather in March 2005. Prior year LPG transportation revenues werenegatively impacted by a price spike in the Mont Belvieu propane price in late February 2004,which resulted in our sourced propane being less competitive than propane fromother source points. Our propane revenues were also affected by Hurricane Ritaand a propane release and fire at a storage facility in September 2005 asdiscussed above.

Other operating revenues decreased $0.2 million forthe nine months ended September 30, 2005, compared with the nine monthsended September 30, 2004, primarily due to lower propane inventory fees inthe 2005 period, partially offset by higher refined products tender deductionand loading revenues and increased margins on product inventory sales.

Costs and expenses decreased $6.2 million for the ninemonths ended September 30, 2005, compared with the nine months ended September 30,2004, due to decreased operating, general and administrative expenses anddecreased depreciation and amortization expense, partially offset by increasedtaxes — other than income taxes and lower gains on the sales of assets in the2005 period. Operating, general and administrative expenses decreased $5.8million primarily due to a $9.7 million decrease in pipeline inspection andrepair costs associated with our integrity management program, a $2.0 milliondecrease in postretirement benefit accruals related to plan amendments (seeNote 10. Employee Benefit Plans), a $1.1 million decrease in consultingservices primarily related to acquisition related activities in the 2004 periodand a $0.7 million decrease in product losses.

These decreases to costs and expenses were partiallyoffset by a $1.8 million increase in labor and benefits expenses associatedwith vesting provisions in certain of our Parent Partnership’s compensationplans as a result of changes in control of the Company resulting in higherincentive compensation expenses compared to the prior year period, a $1.8million increase attributable to regulatory penalties for past incidents, a $1.4million increase in pipeline operating and maintenance expense, a $0.6 millionincrease related to transition costs due to the changes in control of theCompany, a $0.4 million increase in environmental assessment and remediationexpenses, a $0.4 million increase in labor and benefits expense related toretirement plan settlements with DEFS and an increase in insurance expense. Depreciationexpense decreased $1.7 million primarily due to a $4.4 million non-cashimpairment charge in the third quarter of 2004, partially offset by a $0.8million write-off of assets related to a propane release and fire at a storagefacility in Ohio (see Note 3. Property Plant, and Equipment), assets placedinto service and assets retired to depreciation expense in the 2005 period. Taxes— other than income taxes increased $1.0 million primarily due to assetacquisitions and a higher tax base in the 2005 period. During the nine monthsended September 30, 2004, we recognized net gains of $0.5 million from thesales of various assets.

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Interest expense increased $2.5 million for the ninemonths ended September 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 $0.1million for the nine months ended September 30, 2005, compared with thenine months ended September 30, 2004, as a result of increased balances ofconstruction work-in-progress.

Net losses from equity investments decreased for thenine months ended September 30, 2005, compared with the nine months ended September 30,2004, as shown below (in thousands):

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

 

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

**Financial Condition and Liquidity**

Cash generated from operations and from our ParentPartnership’s credit facilities and debt and equity offerings are our primarysources of liquidity. At September 30, 2005, and December 31, 2004,we had working capital deficits of $8.6 million and $61.9 million, respectively.Cash generated from operations and from our Parent Partnership’s creditfacilities and debt and equity offerings are our primary sources of liquidity. Workingcapital deficits can occur primarily due to the timing of operating cashreceipts from customers, payment of cash distributions and the payment ofnormal operating expenses and capital expenditures. We are a wholly ownedsubsidiary of the Parent Partnership. We expect that our Parent Partnershipwill make capital contributions, loans or otherwise provide liquidity to us asneeded, but the Parent Partnership has no contractual 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 nine months ended September 30, 2005and 2004 were as follows (in thousands):

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

 

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*Operating Activities*

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

|                                                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(as restated)**                              | ** ** | **(as restated)** | ** ** |
| Net income                                            |       | $                                                   | 34,085     |   | $ | 26,403 |   |
| Depreciation and  amortization                        |       | 28,653                                              |       | 30,392 |   |
| Losses in equity  investments                         |       | 2,718                                               |       | 4,477 |   |
| 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 and amortization and equity earnings, see “—Results of Operations”.Cash provided by operating activities decreased $77.4 million for the ninemonths ended September 30, 2005, compared with the nine months ended September 30,2004, primarily due to the timing of cash disbursements and cash receipts forworking capital components partially offset by higher net income anddistributions from MB Storage in the 2005 period.

*Investing Activities*

Cash flows used in investing activities totaled $109.9million for the nine months ended September 30, 2005, and were comprisedof $69.0 million for acquisitions, $38.4 million of capital expenditures and$2.5 million of cash contributions of our ownership interest in MB Storage forcapital expenditures. Cash flows used in investing activities totaled $74.3million for the nine months ended September 30, 2004, and were comprisedof $51.2 million of capital expenditures, $1.5 million of cash contributionsfor our ownership interest in Centennial to cover operating needs and capitalexpenditures, $20.2 million of cash contributions for our ownership interest inMB Storage, of which $16.5 million was used to acquire storage assets and $2.0million for the acquisition of assets, partially offset by $0.6 million in netcash proceeds from the sale of various assets.

*Financing Activities*

Cash flows provided by financing activities totaled$90.2 million for the nine months ended September 30, 2005, and werecomprised of $294.8 million of contributions from our Parent Partnership,partially offset by $112.7 million of repayments on the note payable to ourParent Partnership, net of borrowings, and $91.9 million of distributions paidto our Parent Partnership. The contributions received from the ParentPartnership during 2005 were primarily used to reduce the level of indebtednessowed to our Parent Partnership. Cash flows used in financing activities totaled$22.9 million for the nine months ended September 30, 2004, and werecomprised of $88.3 million of distributions paid to our Parent Partnership,partially offset by $65.4 million of borrowings under our notes payable to ourParent Partnership, net of repayments.

During the nine months ended September 30, 2005and 2004, we paid cash distributions to our Parent Partnership totaling $91.9million and $88.3 million, respectively. On November 7, 2005, we will paya cash distribution to our Parent Partnership of $20.1 million for the quarterended September 30, 2005.

*Universal Shelf*

Our Parent Partnership has filed with the SEC auniversal shelf registration statement that, subject to agreement on terms atthe time of use and appropriate supplementation, allows it to issue, in one ormore offerings, up to an aggregate of $2.0 billion of equity securities, debtsecurities or a combination thereof. In May 2005, our 

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Parent Partnership issued $279.2 million of equitysecurities. At September 30, 2005, our Parent Partnership had $1.7 billionremaining under this shelf registration, subject to customary marketing termsand conditions.

*Credit Facilities*

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s credit agreement and senior notes. The interest rates charged bythe Parent Partnership include the stated interest rate of the ParentPartnership, plus a premium to cover debt issuance costs. The interest rate isalso decreased or increased to cover gains and losses, respectively, on anyinterest rate swaps that the Parent Partnership may have in place on its creditagreement and senior notes. The Parent Partnership’s revolving credit facilityis described below.

Our Parent Partnership has in place an unsecuredrevolving credit facility for up to $600.0 million (“Revolving Credit Facility”),including the issuance of letters of credit of up to $100.0 million. Interestis payable at an applicable margin above either the lender’s base rate or LIBOR.At September 30, 2005, $460.5 million was outstanding under the facility,and our Parent Partnership had $139.5 million of availability. Restrictivecovenants in the credit agreement limit the Parent Partnership’s and itssubsidiaries’ ability to, among other things, incur additional indebtedness,and make certain distributions, and complete mergers, acquisitions and sales ofassets. In addition, the credit agreement requires our Parent Partnership tomaintain certain financial ratios, which our Parent Partnership was incompliance with at September 30, 2005.

At September 30, 2005, and December 31,2004, we had intercompany notes payable to our Parent Partnership of $188.9million and $301.7 million, respectively, which represented borrowings underthe Parent Partnership’s Revolving Credit Facility, 7.625% Senior Notes and6.125% Senior Notes. The weighted average interest rate on the note payable tothe Parent Partnership at September 30, 2005, was 5.7%. At September 30,2005, accrued interest includes $1.2 million due to our Parent Partnership. Forthe nine months ended September 30, 2005 and 2004, interest costs incurredon the note payable to our Parent Partnership totaled $7.6 million and $9.2million, respectively.

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

Centennial entered into credit facilities totaling$150.0 million, and as of September 30, 2005, $150.0 million wasoutstanding under those credit facilities. We and Marathon Petroleum CompanyLLC (“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 in 2007.The guarantees arose in order for Centennial to obtain adequate financing, andthe proceeds of the credit agreements were used to fund construction andconversion costs of its pipeline system. Prior to the expiration of thelong-term credit agreement, we could be relinquished from responsibility underthe guarantee should Centennial meet certain financial tests. If Centennialdefaults on its outstanding balance, the estimated maximum potential amount offuture payments for us and Marathon is $75.0 million each at September 30,2005.

*2005 Capital Expenditures*

We estimate that capital expenditures, excludingacquisitions, for 2005 will be approximately $52.2 million (including $2.5million of capitalized interest). We expect to spend approximately $17.5million for revenue generating projects and facility improvements. We expect tospend approximately $17.0 million to sustain existing operations, includinglife-cycle replacements for equipment at various facilities and pipeline andtank replacements and $15.2 million for various system upgrade projects. Duringthe remainder of 2005, we may be required to contribute cash to Centennial tocover capital expenditures, acquisitions or other operating needs and to MBStorage to cover significant capital expenditures or additional acquisitions. Wecontinually review and evaluate potential capital improvements and expansionsthat would be complementary to our present system. These expenditures can 

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vary greatly depending on the magnitude of ourtransactions. We may finance capital expenditures through internally generatedfunds, debt or capital contributions from our Parent Partnership or anycombination thereof.

*Liquidity Outlook*

Webelieve that we will continue to have adequate liquidity to fund futurerecurring operating and investing activities. Our primary cash requirementsconsist of normal operating expenses, capital expenditures to sustain existingoperations and revenue generating expenditures, interest payments on our SeniorNotes, interest payments on intercompany notes payable to our ParentPartnership and distributions to our Parent Partnership. Our cash requirementsfor the remainder of 2005 and 2006, such as operating expenses, capitalexpenditures to sustain existing operations and quarterly distributions to ourParent Partnership, are expected to be funded through operating cash flows. Long-termcash requirements for expansion projects, acquisitions and repayment ofintercompany notes are expected to be funded by several sources, including cashflows from operating activities, borrowings under our Parent Partnership’scredit facilities and possibly the issuance by our Parent Partnership ofadditional equity and debt securities. The timing of any debt or offerings byour Parent Partnership will depend on various factors, including prevailingmarket conditions, interest rates and our Parent Partnership’s financialcondition and credit rating at the time.

*Off-Balance Sheet Arrangements*

We do not rely on off-balance sheet borrowings to fundour acquisitions. We have no off-balance sheet commitments for indebtednessother than 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.

*ContractualObligations*

The following table summarizes our debt repaymentobligations and material contractual commitments as of September 30, 2005(in millions):

|                                             | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                                               | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **After 5  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 |   |

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(1)             Weentered into an interest rate swap agreement to hedge our exposure to changesin the fair value of our 7.51% Senior Notes due 2028. At September 30,2005, the 7.51% Senior Notes include an adjustment to increase the fair valueof the debt by $1.3 million related to this interest rate swap agreement. At September 30,2005, our 6.45% Senior Notes include less than $0.1 million of unamortized debtdiscount. The fair value adjustment and unamortized debt discount are excludedfrom this table.

(2)             Includesa pipeline capacity lease with Centennial. In January 2003, we enteredinto a pipeline capacity lease agreement with Centennial for a period of fiveyears that contains a minimum throughput requirement. For the year ended December 31,2004, we exceeded the minimum throughput requirements on the lease agreement.

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

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(4)             Excludesapproximately $8.9 million of long-term deferred revenue payments, which arebeing transferred to income over the term of the respective revenue contracts. Theamount of commitment by year is our best estimate of projected payments ofthese long-term liabilities.

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

Wehave entered into a limited cash call agreement with Marathon and Centennial,which allows each member to contribute cash in lieu of Centennial procuringseparate insurance in the event of a third-party liability arising from acatastrophic event. There is an indefinite term for the agreement and eachmember is to contribute cash in proportion to its ownership interest, up to amaximum of $50.0 million. As a result of the catastrophic event guarantee, wehave recorded a $4.7 million obligation, which represents the present value ofthe estimated amount that we would have to pay under the guarantee. In theevent that a catastrophic event occurred and we were required to contributecash to Centennial, contributions exceeding our deductible may be covered byour insurance.

Our Parent Partnership’s senior unsecured debt israted BBB- by Standard and Poors (“S&P”) and Baa3 by Moody’s InvestorsService (“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 ratingsare with a stable outlook. A rating reflects only the view of a rating agencyand is not a recommendation to buy, sell or hold any indebtedness. Any ratingcan be revised upward or downward or withdrawn at any time by a rating agencyif it determines that the circumstances warrant such a change. Our seniorunsecured debt is also rated BBB- by S&P and Baa3 by Moody’s. Both ratingsare with a stable outlook.

# **Other Considerations**

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

*Recent Accounting Pronouncements*

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

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

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

We have utilized and expect to continue to utilizeinterest rate swap agreements to hedge a portion of our fair value risks. Interestrate swap agreements are used to manage the fixed interest rate mix of our debtportfolio and overall cost of borrowing. The interest rate swap related to ourfair value risk is intended to reduce our exposure to changes in the fair valueof our fixed rate Senior Notes. The interest rate swap agreement involves theperiodic 

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exchange of payments without the exchange of thenotional amount upon which the payments are based. The related amount payableto or receivable from counterparties is included as an adjustment to accruedinterest.

At September 30, 2005, we had outstanding $180.0million principal amount of 6.45% Senior Notes due 2008 and $210.0 millionprincipal amount of 7.51% Senior Notes due 2028. At September 30, 2005,the estimated fair value of the 6.45% Senior Notes and 7.51% Senior Notes wasapproximately $185.0 million and $223.9 million, respectively.

In October 2001, we entered into an interest rateswap agreement to hedge our exposure to changes in the fair value of our fixedrate 7.51% Senior Notes due 2028. We designated this swap agreement as a fairvalue hedge. The swap agreement has a notional amount of $210.0 million andmatures in January 2028 to match the principal and maturity of the SeniorNotes. Under the swap agreement, we pay a floating rate of interest based on athree-month U.S. Dollar LIBOR rate, plus a spread, and receive a fixed rate ofinterest of 7.51%. During the nine months ended September 30, 2005, and2004, we recognized reductions in interest expense of $4.6 million and $7.5million, respectively, related to the difference between the fixed rate and thefloating rate of interest on the interest rate swap. During the quarter ended September 30,2005, we measured the hedge effectiveness of this interest rate swap and notedthat no gain or loss from ineffectiveness was required to be recognized. Thefair value of this interest rate swap was a gain of approximately $1.3 millionand $3.4 million at September 30, 2005, and December 31, 2004,respectively. Utilizing the balance of the 7.51% Senior Notes outstanding at September 30,2005, and including the effects of hedging activities, assuming market interestrates increase 100 basis points, the potential annual increase in interestexpense is $2.1 million.

At September 30, 2005, and December 31,2004, we had intercompany notes payable to our Parent Partnership of $188.9million and $301.7 million, respectively, which represented borrowings underthe Parent Partnership’s Revolving Credit Facility, 7.625% Senior Notes and6.125% Senior Notes. The weighted average interest rate on the note payable tothe Parent Partnership at September 30, 2005, was 5.7%. At September 30,2005, accrued interest includes $1.2 million due to our Parent Partnership. Forthe nine months ended September 30, 2005 and 2004, interest costs incurredon the note payable to our Parent Partnership totaled $7.6 million and $9.2million, respectively.

**Item 4. Controlsand Procedures**

As of the end of the period covered by this report,our management carried out an evaluation, with the participation of ourprincipal executive officer (the “CEO”) and our principal financial officer(the “CFO”), of the effectiveness of our disclosure controls and procedurespursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Basedon those evaluations, 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 suchinformation is accumulated and communicated to our management, including theCEO and CFO, as appropriate to allow timely decisions regarding requireddisclosure; and

(ii)          that our disclosurecontrols and procedures are effective.

*Changes in Internal Control over FinancialReporting*

There has been no change in our internal control overfinancial reporting during the third quarter of 2005 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

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**PART II.OTHER INFORMATION**

**Item 1. Legal Proceedings**

We have been, in the ordinary course of business, adefendant in various lawsuits and a party to various other legal proceedings,some of which are covered in whole or in part by insurance. We believe that theoutcome of these lawsuits and other proceedings will not individually or in theaggregate have a material adverse effect on our consolidated financialposition, results of operations or cash flows. See discussion of legalproceedings in Note 11. Commitments and Contingencies in the accompanyingconsolidated financial statements.

**Item 6. Exhibits**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.1             |       | Second Amended and Restated Agreement of Limited  Partnership of TE Products Pipeline Company, Limited Partnership, effective  September 21, 2001 (Filed as Exhibit 3.8 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended September 30, 2001, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                          |       |
| 4.1             |       | Form of Indenture between TE Products Pipeline  Company, Limited Partnership and The Bank of New York, as Trustee, dated as  of January 27, 1998 (Filed as Exhibit 4.3 to TE Products Pipeline  Company, Limited Partnership’s Registration Statement on Form S-3  (Commission File No. 333-38473) and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                         |       |
| 4.2             |       | Form of Indenture between TEPPCO Partners,  L.P., as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,  L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company, as  subsidiary guarantors, and First Union National Bank, NA, as trustee, dated  as of February 20, 2002 (Filed as Exhibit 99.2 to Form 8-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as of  February 20, 2002 and incorporated herein by reference).                                                                                                                                                                                                                                           |       |
| 4.3             |       | First Supplemental Indenture between TEPPCO  Partners, L.P., as issuer, TE Products Pipeline Company, Limited Partnership,  TCTM, L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company,  as subsidiary guarantors, and First Union National Bank, NA, as trustee,  dated as of February 20, 2002 (Filed as Exhibit 99.3 to Form 8-K  of TEPPCO Partners, L.P (Commission File No. 1-10403) dated as of  February 20, 2002 and incorporated herein by reference).                                                                                                                                                                                                                                      |       |
| 4.4             |       | Second Supplemental Indenture, dated as of  June 27, 2002, among TEPPCO Partners, L.P., as issuer, TE Products  Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream  Companies, L.P., and Jonah Gas Gathering Company, as Initial Subsidiary  Guarantors, and Val Verde Gas Gathering Company, L.P., as New Subsidiary  Guarantor, and Wachovia Bank, National Association, formerly known as First  Union National Bank, as trustee (Filed as Exhibit 4.6 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended June 30, 2002 and incorporated herein by reference).                                                                                             |       |
| 4.5             |       | Third Supplemental Indenture among TEPPCO Partners,  L.P. as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,  L.P., TEPPCO Midstream Companies, 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). |       |

 

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| 31.1*  |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) and Rule 15d-14(a), promulgated  under the Securities Exchange Act of 1934, as amended. |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 31.2*  |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) and Rule 15d-14(a), promulgated  under the Securities Exchange Act of 1934, as amended. |   |
| 32.1** |   | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                         |   |
| 32.2** |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                         |   |

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*                    Filedherewith.

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

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                           | TE Products Pipeline Company, Limited Partnership |
|---------------------------|---------------------------------------------------|
|                      |                                              |
|                      |                                              |
| Date:  June 16, 2006 | By:                                               | /s/ JERRY E.  THOMPSON |
|                      |                                              | Jerry E. Thompson, |
|                      |                                              | President and Chief Executive Officer of  TEPPCO GP, Inc., General Partner |
|                      |                                              |   |
|                      |                                              |   |
| Date:  June 16, 2006 | By:                                               | /s/ WILLIAM G.  MANIAS |
|                      |                                              | William G. Manias, |
|                      |                                              | Vice President and Chief Financial Officer of  TEPPCO GP, Inc., General Partner |

 

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