**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q/A**

**(Amendment No. 1)**

 

| **þ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | **For the quarterly period ended June 30,  2005**                                                  |
| ** ** | **OR**                                                                                                  |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File No. 1-13603**

 

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**TE Products Pipeline Company, Limited Partnership**

(Exact name of Registrantas specified in its charter)

 

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

 

**1100 Louisiana Street, 13**th Floor

**P.O. Box 2521**

**Houston, Texas 77252-2521**

(Address of principal executive offices, including zipcode)

 

**(713) 381-3636**

(Registrant’s telephone number, 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 theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  þ     No  o

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes  o     No  þ

 

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**EXPLANATORY NOTE**

****ThisAmended Quarterly Report (“Report”) on Form 10-Q includes restatedfinancial statements as of and for the three months and six months ended June 30,2005 and 2004. The restated financial statements include the effect ofcorrecting the accounting for our excess investment in Centennial Pipeline LLCfrom an intangible asset with an indefinite life to an intangible asset with adeterminable life. The restatement caused a $1.1 million and $1.0 millionreduction to net income as previously reported for the three months ended June 30,2005 and 2004, respectively and a $2.1 million and $1.5 million reduction tonet income as previously reported for the six months ended June 30, 2005and 2004, respectively.****

For further discussion ofthe effect of the restatement, see Note 10. Restatement of ConsolidatedFinancial Statements in this Report and Note 19. Restatement of ConsolidatedFinancial Statements in our Annual Report on Form 10-K for thefiscal year ended December 31, 2005 (“2005 Annual Report”).

In our 2005 AnnualReport, we indicated in the introductory explanatory note that the restatementpresented in this filing would be reported in our Quarterly Report on Form 10-Qfor the quarterly period ended June 30, 2006. We also noted that we did notplan to file any other 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 June 30, 2005, in order toprovide investors with a more convenient comparative presentation of theeffects of the restatement for the quarterly periods ended June 30, 2005and 2004.

As a result of therestatement described above, this Report amends the following sections of our Form 10-Qfor the period ended June 30, 2005, which was filed with the Securitiesand Exchange Commission on August 2, 2005 (the “Initial Report”):

Part I—Item 1. Financial Statements

Part I—Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations

Except as specified withrespect to certain aspects of the restatement, we have not updated the disclosurescontained in this Report to reflect any events that occurred at a datesubsequent to the filing of the Initial Report, and this Report continues tospeak as of the date of the Initial Report. This Report does not affect theinformation originally set forth in the Initial Report that has not beenamended as described above. However, we have included the remaining portions ofthe Initial Report that have not been amended herein for ease of reference.

 

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**TE PRODUCTSPIPELINE COMPANY, LIMITED PARTNERSHIP**

**TABLE OF CONTENTS**

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

**Item 1. FinancialStatements**

**TE PRODUCTSPIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATEDBALANCE SHEETS(in thousands)**
| ** **                                                                                                           | ** ** | **June 30,**                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                           | ** ** | **2005**                            | ** ** | **2004**              | ** ** |
| ** **                                                                                                           | ** ** | **(as restated)  (Unaudited)** | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                           |       |                                |       |                  |       |
| Current assets:                                                                                                      |       |                                |       |                  |       |
| Cash and cash  equivalents                                                                                           |       | $                                   | 14         |                  | $          | — |   |
| Accounts  receivable, trade (net of allowance for doubtful accounts of $56 and $56)                                  |       | 15,712                              |       | 21,090                |       |
| Accounts  receivable, related parties                                                                                |       | 1,877                               |       | 2,379                 |       |
| Inventories                                                                                                          |       | 11,045                              |       | 10,093                |       |
| Other                                                                                                                |       | 13,061                              |       | 12,143                |       |
| Total current  assets                                                                                                |       | 41,709                              |       | 45,705                |       |
| Property, plant and  equipment, at cost (net of accumulated depreciation and amortization of  $328,189 and $311,197) |       | 729,413                             |       | 722,334               |       |
| Equity investments                                                                                                   |       | 155,440                             |       | 160,998               |       |
| Other assets                                                                                                         |       | 19,781                              |       | 16,156                |       |
| Total assets                                                                                                         |       | $                                   | 946,343    |                  | $          | 945,193 |   |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                           |       |                                |       |                  |       |
| Current  liabilities:                                                                                                |       |                                |       |                  |       |
| Accounts payable  and accrued liabilities                                                                            |       | $                                   | 7,689      |                  | $          | 10,211 |   |
| Accounts  payable, related parties                                                                                   |       | 44,293                              |       | 65,375                |       |
| Accrued interest                                                                                                     |       | 15,818                              |       | 17,063                |       |
| Other accrued  taxes                                                                                                 |       | 5,971                               |       | 5,605                 |       |
| Other                                                                                                                |       | 7,007                               |       | 9,339                 |       |
| Total current  liabilities                                                                                           |       | 80,778                              |       | 107,593               |       |
| Senior Notes                                                                                                         |       | 397,370                             |       | 393,317               |       |
| Note Payable, Parent  Partnership                                                                                    |       | 62,543                              |       | 301,686               |       |
| Other liabilities and  deferred credits                                                                              |       | 9,694                               |       | 9,980                 |       |
| Commitments and  contingencies                                                                                       |       |                                |       |                  |       |
| Partners’ capital:                                                                                              |       |                                |       |                  |       |
| General  partner’s interest                                                                                     |       | 4                                   |       | 2                     |       |
| Limited  partner’s interest                                                                                     |       | 395,954                             |       | 132,615               |       |
| Total partners’  capital                                                                                        |       | 395,958                             |       | 132,617               |       |
| Total liabilities and  partners’ capital                                                                        |       | $                                   | 946,343    |                  | $          | 945,193 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

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**TE PRODUCTSPIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF INCOME(Unaudited)(in thousands)**
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                              | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(as restated)**           | ** ** | **(as restated)**         | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Operating revenues:                     |       |                             |       |                           |       |   |   |   |   |
| Transportation —  Refined products |       | $                                | 37,834     |                           | $          | 38,937 |   | $ | 72,799 |   | $ | 69,908 |   |
| Transportation —  LPGs             |       | 14,470                           |       | 13,721                         |       | 46,701 |   | 42,501 |   |
| Other                                   |       | 10,217                           |       | 8,559                          |       | 20,037 |   | 22,470 |   |
| Total operating  revenues               |       | 62,521                           |       | 61,217                         |       | 139,537 |   | 134,879 |   |
| Costs and  expenses:                    |       |                             |       |                           |       |   |   |   |   |
| Operating,  general and administrative  |       | 28,150                           |       | 28,731                         |       | 54,655 |   | 57,779 |   |
| Operating fuel  and power               |       | 7,926                            |       | 7,192                          |       | 15,555 |   | 15,241 |   |
| Depreciation and  amortization          |       | 9,537                            |       | 8,998                          |       | 18,835 |   | 17,636 |   |
| Taxes — other  than income taxes   |       | 2,440                            |       | 2,492                          |       | 5,348 |   | 5,335 |   |
| Gains on sales  of assets               |       | (15                              | )          | (17                            | )          | (107 | ) | (17 | ) |
| Total costs and  expenses               |       | 48,038                           |       | 47,396                         |       | 94,286 |   | 95,974 |   |
| Operating income                        |       | 14,483                           |       | 13,821                         |       | 45,251 |   | 38,905 |   |
| Interest expense  — net            |       | (7,594                           | )          | (6,581                         | )          | (15,553 | ) | (13,490 | ) |
| Equity losses                           |       | (246                             | )          | (1,465                         | )          | (2,067 | ) | (3,243 | ) |
| Other income — net                 |       | 121                              |       | 173                            |       | 270 |   | 445 |   |
| Net income                              |       | $                                | 6,764      |                           | $          | 5,948 |   | $ | 27,901 |   | $ | 22,617 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

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**TE PRODUCTSPIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS(Unaudited)(in thousands)**
| ** **                                                                           | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **June 30,**              | ** ** |
| ** **                                                                           | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **(as restated)**         | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                               |       |                           |       |   |   |
| Net income                                                                           |       | $                              | 27,901     |   | $ | 22,617 |   |
| Adjustments to  reconcile net income to cash provided by operating  activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                       |       | 18,835                         |       | 17,636 |   |
| Losses in equity  investments, net of distributions                                  |       | 9,367                          |       | 8,193 |   |
| Non-cash portion  of interest expense                                                |       | 136                            |       | 15 |   |
| Gains on sales  of assets                                                            |       | (107                           | )          | (17 | ) |
| Decrease in  accounts receivable, trade                                              |       | 5,378                          |       | 9,332 |   |
| Decrease  (increase) in accounts receivable, related parties                         |       | 502                            |       | (2,609 | ) |
| (Increase)  decrease in inventories                                                  |       | (952                           | )          | 1,543 |   |
| (Increase)  decrease in other current assets                                         |       | (918                           | )          | 1,883 |   |
| Decrease in  accounts payable and accrued expenses                                   |       | (3,162                         | )          | (3,813 | ) |
| Decrease in  accounts payable, related parties                                       |       | (21,082                        | )          | 19,589 |   |
| Other                                                                                |       | (4,047                         | )          | (6,113 | ) |
| Net cash  provided by operating activities                                           |       | 31,851                         |       | 68,256 |   |
| Cash flows from  investing activities:                                               |       |                           |       |   |   |
| Investment in  Mont Belvieu Storage Partners, L.P                                    |       | (1,109                         | )          | (17,211 | ) |
| Purchase of  assets                                                                  |       | —                         |       | (1,962 | ) |
| Investment in  Centennial Pipeline LLC                                               |       | —                         |       | (1,500 | ) |
| Capital  expenditures                                                                |       | (27,025                        | )          | (24,640 | ) |
| Net cash used in  investing activities                                               |       | (28,134                        | )          | (45,313 | ) |
| Cash flows from  financing activities:                                               |       |                           |       |   |   |
| Proceeds from  note payable, Parent Partnership                                      |       | 58,481                         |       | 70,087 |   |
| Repayments of  note payable, Parent Partnership                                      |       | (297,624                       | )          | (34,633 | ) |
| Equity  contributions — Parent Partnership                                      |       | 294,822                        |       | — |   |
| Distributions  paid                                                                  |       | (59,382                        | )          | (58,585 | ) |
| Net cash used in  financing activities                                               |       | (3,703                         | )          | (23,131 | ) |
| Net increase  (decrease) in cash and cash equivalents                                |       | 14                             |       | (188 | ) |
| Cash and cash  equivalents at beginning of period                                    |       | —                         |       | 188 |   |
| Cash and cash  equivalents at end of period                                          |       | $                              | 14         |   | $ | — |   |
| **Supplemental  disclosure of cash flows:**                                          |       |                           |       |   |   |
| Cash paid for interest  (net of amounts capitalized)                                 |       | $                              | 16,006     |   | $ | 12,881 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

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**TE PRODUCTSPIPELINE COMPANY, LIMITED PARTNERSHIP**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**NOTE 1. ORGANIZATIONAND BASIS OF PRESENTATION**

TE Products PipelineCompany, Limited Partnership (the “Partnership”), a Delaware limitedpartnership, was formed in March 1990. TEPPCO Partners, L.P. (the “ParentPartnership”) owns a 99.999% interest in us as the sole limited partner. TEPPCOGP, Inc. (“TEPPCO GP” or “General Partner”), a wholly owned subsidiary ofthe Parent Partnership, holds a 0.001% general partner interest in us. TexasEastern Products Pipeline Company, LLC (the “Company”), a Delaware limitedliability company, serves as the general partner of our Parent Partnership. ThroughFebruary 23, 2005, the Company was an indirect wholly owned subsidiary ofDuke Energy Field Services, LLC (“DEFS”), a joint venture between Duke EnergyCorporation (“Duke Energy”) and ConocoPhillips. Through February 23, 2005,Duke Energy held an interest of approximately 70% in DEFS, and ConocoPhillipsheld the remaining interest of approximately 30%. On February 24, 2005,the 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 generalpartner, performs all of the management and operating functions required for usin accordance with the Agreement of Limited Partnership of TE Products PipelineCompany, Limited Partnership (the “Partnership Agreement”). We reimburse ourGeneral Partner and the Company for all reasonable direct and indirect expensesthat they incur in managing us.

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

The accompanyingunaudited consolidated financial statements reflect all adjustments that are,in the opinion of our management, of a normal and recurring nature andnecessary for a fair statement of our financial position as of June 30,2005, and the results of our operations and cash flows for the periodspresented. The results of operations for the three months and six months ended June 30,2005, are not necessarily indicative of results of our operations for the fullyear 2005. You should read these interim financial statements in conjunctionwith our consolidated financial statements and notes thereto presented in theTE Products Pipeline Company, Limited Partnership Annual Report on Form 10-Kfor the year ended December 31, 2004. We have reclassified certain amountsfrom prior periods to conform to the current presentation.

We restated ourconsolidated financial statements and related financial information for thethree months and six months ended June 30, 2005 and 2004, for anaccounting correction. See Note 10. Restatement of Consolidate FinancialStatements for a discussion of the restatement adjustment and the impact onpreviously issued financial statements.

We operate and report inone business segment: transportation and storage of refined products, liquefiedpetroleum gases (“LPGs”) and petrochemicals. Our interstate transportationoperations, including rates charged to customers, are subject to regulationsprescribed by the Federal Energy Regulatory Commission (“FERC”). We refer torefined products, LPGs and petrochemicals in this Report, collectively, as “petroleumproducts” or “products.”

At June 30, 2005,and December 31, 2004, we had working capital deficits of $39.1 millionand $61.9 million, respectively. Cash generated from operations and from ourParent Partnership’s credit facilities and debt and equity offerings are ourprimary sources of liquidity. Working capital deficits occur primarily from thetiming of operating cash receipts from customers, payment of cash distributionsand the payment of normal operating expenses and capital expenditures. OurParent Partnership has historically made capital contributions, loans orotherwise provided liquidity to us as needed, but the Parent Partnership has nocontractual obligation to do so. At June 30, 2005, our Parent Partnershiphad $278.6 million in available borrowing capacity under its revolving creditfacility and agreed to cover any of our working capital needs, if required.

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**New AccountingPronouncements**

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), *Share-BasedPayment*. SFAS 123(R) requires compensation costs related toshare-based payment transactions to be recognized in the financial statements. Withlimited exceptions, the amount of the compensation cost is to be measured basedon the grant-date fair value of the equity or liability instruments issued. Inaddition, liability awards are to be re-measured each reporting period. Compensationcost will be recognized over the period that an employee provides service inexchange for the award. SFAS 123(R) is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*,as amended by SFAS No. 148,*Accountingfor Stock-Based Compensation — Transition and Disclosure* andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*. SFAS123(R) is effective for public companies as of the first interim or annualreporting period of the first fiscal year beginning on or after June 15,2005. As such, we will adopt SFAS 123(R) in the first quarter of 2006. Companiesare permitted to adopt SFAS 123(R) prior to the extended date. All publiccompanies that adopted the fair-value-based method of accounting must use themodified prospective transition method and may elect to use the modifiedretrospective transition method. We do not believe that the adoption of SFAS123(R) will have a material effect on our financial position, results ofoperations or cash flows.

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

In March 2005, theFASB issued FASB Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143* (“FIN 47”). FIN 47 clarifies that the term,conditional asset retirement obligation, as used in SFAS No. 143, *Accounting for Asset Retirement Obligations*, refers to alegal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional upon a future event that may or maynot be within the control of the entity. Even though uncertainty about thetiming and/or method of settlement exists and may be conditional upon a futureevent, the obligation to perform the asset retirement activity is unconditional.Accordingly, an entity is required to recognize a liability for the fair valueof a conditional asset retirement obligation if the fair value of the liabilitycan be reasonably estimated. Uncertainty about the timing and/or method ofsettlement of a conditional asset retirement obligation should be factored intothe measurement of the liability when sufficient information exists. The fairvalue of a liability for the conditional asset retirement obligation should berecognized when incurred generally upon acquisition, construction, ordevelopment or through the normal operation of the asset. SFAS 143 acknowledgesthat in some cases, sufficient information may not be available to reasonablyestimate the fair value of an asset retirement obligation. FIN 47 alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN 47 is effectiveno later than the end of reporting periods ending after December 15, 2005.As such, we will adopt FIN 47 in the fourth quarter of 2005. Retrospectiveapplication for interim financial information is permitted but is not required.Early adoption of FIN 47 is encouraged. We do not believe that the adoption ofFIN 47 will have a material effect on our financial position, results ofoperations or cash flows.

In June 2005, theEITF reached consensus in EITF 04-5, *Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights*,to provide guidance on how general partners in a limited partnership shoulddetermine whether they 

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controla limited partnership and therefore should consolidate it. The EITF agreed thatthe presumption of general partner control would be overcome only when thelimited partners have either of two types of rights. The first type, referredto as kick-out rights, is the right to dissolve or liquidate the partnership orotherwise remove the general partner without cause. The second type, referredto as participating rights, is the right to effectively participate insignificant decisions made in the ordinary course of the partnership’sbusiness. The kick-out rights and the participating rights must be substantivein order to overcome the presumption of general partner control. The consensusis effective for general partners of all new limited partnerships formed andfor existing limited partnerships for which the partnership agreements aremodified subsequent to the date of FASB ratification (June 29, 2005). Theguidance in this EITF is effective for existing partnerships no later than thebeginning of the first reporting period in fiscal years beginning after December 15,2005. We are currently evaluating what impact this EITF will have on ourfinancial statements, but at this time, we do not believe that the adoption ofthis EITF will have a material effect on our financial position, results ofoperations or cash flows.

**NOTE 2. INTANGIBLEASSETS**

We account for ourintangible assets under SFAS No. 142, *Goodwill and OtherIntangible Assets*,**which wasissued by the FASB in July 2001. SFAS 142 prohibits amortization 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 will assessthe useful lives and residual values of all intangible assets on an annualbasis to determine if adjustments are required.

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

|                           | ** ** | **June 30, 2005**     | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible  assets:       |       |                            |       |                            |       |   |   |   |   |
| Transportation agreements |       | $                               | 1,328      |                            | $          | (294 | ) | $ | 1,328 |   | $ | (260 | ) |
|                      |       |                            |       |                            |       |   |   |   |   |
| Excess  investment:       |       |                            |       |                            |       |   |   |   |   |
| Centennial  Pipeline LLC  |       | $                               | 33,400     |                            | $          | (10,992 | ) | $ | 33,400 |   | $ | (8,875 | ) |

 

The value assigned to ourexcess investment in Centennial Pipeline LLC was created upon its formation. Approximately$30.0 million is related to a contract and is being amortized on aunit-of-production basis based upon the volumes transported under the contractcompared to the guaranteed total throughput of the contract over a 10-yearlife. The remaining $3.4 million is related to a pipeline and is beingamortized on a straight-line basis over the life of the pipeline, which is 35years.

Amortization expense onintangible assets was $16,603 for each of the three-month periods ended June 30,2005 and 2004, and $33,205 for each of the six-month periods ended June 30,2005 and 2004. Amortization expense on excess investments included in equityearnings was $1.1 million and $1.0 million for the three months ended June 30,2005 and 2004, respectively, and $2.1 million and $1.5 million for the sixmonths ended June 30, 2005 and 2004, respectively.

The following table setsforth the estimated amortization expense of intangible assets and the estimatedamortization expense allocated to equity earnings for the years ending December 31(in thousands):

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|      | ** ** | **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. INTERESTRATE SWAP**

In October 2001, weentered into an interest rate swap agreement to hedge our exposure to changesin the fair value of our fixed rate 7.51% Senior Notes due 2028. We designatedthis swap agreement as a fair value hedge. The swap agreement has a notionalamount of $210.0 million and matures in January 2028 to match theprincipal and maturity of the 7.51% Senior Notes. Under the swap agreement, wepay a floating rate of interest based on a three-month U.S. Dollar LIBOR rate,plus a spread, and receive a fixed rate of interest of 7.51%. During the sixmonths ended June 30, 2005 and 2004, we recognized reductions in interestexpense of $3.3 million and $5.1 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap. During the quarter ended June 30, 2005, we measuredthe hedge effectiveness of this interest rate swap and noted that no gain orloss from ineffectiveness was required to be recognized. The fair value of thisinterest rate swap was a gain of approximately $7.4 million and $3.4 million atJune 30, 2005, and December 31, 2004, respectively.

**NOTE 4. INVENTORIES**

Inventoriesare valued at the lower of cost (based on weighted average cost method) ormarket. The costs of inventories did not exceed market values at June 30,2005, and December 31, 2004. The major components of inventories were asfollows (in thousands):

|                         | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Refined products        |       | $                       | 1,440      |                        | $          | 5,665 |   |
| LPGs                    |       | 5,048                   |       | —                      |       |
| Materials and  supplies |       | 4,557                   |       | 4,428                       |       |
| Total                   |       | $                       | 11,045     |                        | $          | 10,093 |   |

 

**NOTE 5. EQUITYINVESTMENTS**

We own a 50% ownershipinterest in Centennial Pipeline Company LLC (“Centennial”), and MarathonAshland Petroleum LLC (“Marathon”) owns the remaining 50% interest. Centennialowns an interstate refined petroleum products pipeline extending from the upperTexas Gulf Coast to central Illinois. During the six months ended June 30,2005, we have not invested any additional funds in Centennial. During the sixmonths ended June 30, 2004, we invested an additional $1.5 million inCentennial, which is included in the equity investment balance at June 30,2005. We have not received any distributions from Centennial since its formation.

On January 1, 2003,we and Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”) formed Mont BelvieuStorage Partners, L.P. (“MB Storage”). We and Louis Dreyfus each own a 50%ownership interest in MB Storage. MB Storage owns storage capacity at the MontBelvieu fractionation and storage complex and a short haul transportationshuttle system that ties Mont Belvieu, Texas, to the upper Texas Gulf Coastenergy marketplace. MB 

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Storageis a service-oriented, fee-based venture serving the fractionation, refiningand petrochemical 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 will receive the first $1.7 million per quarter (or $6.78 million onan annual basis) of MB Storage’s income before depreciation expense, as definedin the operating agreement. For the year ended December 31, 2004, wereceived the first $1.8 million per quarter (or $7.15 million on an annualbasis) of MB Storage’s income before depreciation expense. Our share of MBStorage’s earnings is adjusted annually by the partners of MB Storage. Anyamount of MB Storage’s annual income before depreciation expense in excess of$6.78 million for 2005 and $7.15 million for 2004 is allocated evenly betweenus and Louis Dreyfus. Depreciation expense on assets each party originallycontributed to MB Storage is allocated between us and Louis Dreyfus based onthe net book value of the assets contributed. Depreciation expense on assetsconstructed or acquired by MB Storage subsequent to formation is allocatedevenly between us and Louis Dreyfus. For the six months ended June 30,2005 and 2004, our sharing ratio in the earnings of MB Storage wasapproximately 62.6% and 70.2%, respectively. During the six months ended June 30,2005, we received distributions of $7.3 million from MB Storage and contributed$1.1 million to MB Storage. During the six months ended June 30, 2004, wereceived distributions of $5.0 million from MB Storage and contributed $17.2million to MB Storage, of which $16.5 million was used to acquire storageassets in April 2004.

Weuse the equity method of accounting to account for our investments inCentennial and MB Storage. Summarized combined financial information forCentennial and MB Storage for the six months ended June 30, 2005 and 2004,is presented below (in thousands): 

|                   | ** ** | **Six Months Ended** | ** ** |
|-------------------|------------|--------------------------------|------------|
| ** **        | ** ** | **June 30,**              | ** ** |
| ** **        | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| Revenues          |       | $                              | 36,719     |   | $ | 28,508 |   |
| Net income (loss) |       | 3,847                          |       | (907 | ) |
|                   |            |                                |            |  |  |  |  |

 

Summarizedcombined balance sheet data for Centennial and MB Storage as of June 30,2005, and December 31, 2004, is presented below (in thousands):

|                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Current assets          |       | $                 | 39,882     |                  | $          | 39,228 |   |
| Noncurrent  assets      |       | 371,638           |       | 377,924               |       |
| Current  liabilities    |       | 36,116            |       | 36,015                |       |
| Long-term debt          |       | 140,000           |       | 140,000               |       |
| Noncurrent  liabilities |       | 22,183            |       | 20,383                |       |
| Partners’ capital  |       | 213,221           |       | 220,754               |       |
|                         |            |                   |            |                       |            |  |  |

 

**NOTE 6. DEBT**

**Senior Notes**

On January 27, 1998,we completed the issuance of $180.0 million principal amount of 6.45% SeniorNotes due 2008, and $210.0 million principal amount of 7.51% Senior Notes due2028 (collectively the “Senior Notes”). The 6.45% Senior Notes were issued at adiscount of $0.3 million and are being accreted to their face value over theterm of the notes. The 6.45% Senior Notes due 2008 are not subject toredemption prior to January 15, 2008. The 

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7.51%Senior Notes due 2028, issued at par, may be redeemed at any time after January 15,2008, at our option in whole or in part, at a premium.

The Senior Notes do nothave sinking fund requirements. Interest on the Senior Notes is payablesemiannually in arrears on January 15 and July 15 of each year. TheSenior Notes due 2008 are unsecured obligations and rank pari passu with all ofour other unsecured and unsubordinated indebtedness. The indenture governingthe Senior Notes contains covenants, including, but not limited to, covenantslimiting the creation of liens securing indebtedness and sale and leasebacktransactions. However, the indenture does not limit our ability to incuradditional indebtedness. As of June 30, 2005, we were in compliance withthe covenants of the Senior Notes.

We have entered into aninterest rate swap agreement to hedge our exposure to changes in the fair valueon a portion of the Senior Notes discussed above. At June 30, 2005, and December 31,2004, the Senior Notes include the fair value of our interest rate swap of $7.4million and $3.4 million, respectively (see Note 3. Interest Rate Swap).

Thefollowing table summarizes the estimated fair values of the Senior Notes as of June 30,2005, and December 31, 2004 (in millions):

|                                            | ** ** | ** **      | ** ** | **Fair Value**           | ** ** |
|--------------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Face  Value** | ** ** | **June 30,   2005** | ** ** | **December 31,  2004** | ** ** |
| 6.45% Senior  Notes, due January 2008 |       | $               | 180.0      |                          | $          | 188.5 |   | $ | 187.1 |   |
| 7.51% Senior Notes, due  January 2028 |       | 210.0           |       | 224.1                         |       | 225.6 |   |
|                                            |            |                 |            |                               |            |  |  |  |  |  |

 

**Other Long TermDebt and Credit Facilities**

We currently utilize debtfinancing available from our Parent Partnership through intercompany notes. Theterms of the intercompany notes generally match the principal and interestpayment dates under the Parent Partnership’s credit agreements. The interestrates charged by the Parent Partnership include the stated interest rate of theParent Partnership, plus a premium to cover debt issuance costs. The interestrate is also decreased or increased to cover gains and losses, respectively, onany interest rate swaps that the Parent Partnership may have in place on itsrespective credit agreements. These credit facilities of the Parent Partnershipare described below.

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

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

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On June 27, 2003,our Parent Partnership entered into a $550.0 million revolving credit facilitywith a three-year term, including the issuance of letters of credit of up to$20.0 million (“Revolving Credit Facility”). The interest rate is based, at ourParent Partnership’s option, on either the lender’s base rate plus a spread, orLIBOR plus a spread in effect at the time of the borrowings. The creditagreement for the Revolving Credit Facility contains certain restrictivefinancial covenant ratios. On October 21, 2004, our Parent Partnershipamended the Revolving Credit Facility to (i) increase the facility size to$600.0 million, (ii) extend the term to October 21, 2009, (iii) removecertain restrictive covenants, (iv) increase the available amount for theissuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing. On February 23,2005, the Parent Partnership again amended its Revolving Credit Facility toremove the requirement that DEFS must at all times own, directly or indirectly,100% of the Company, to allow for its acquisition by DFI (see Note 1.Organization and Basis of Presentation). During the second quarter of 2005, theParent Partnership used a portion of the proceeds from equity offerings in May 2005and June 2005 to repay a portion of the Revolving Credit Facility. On June 30,2005, $278.0 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 4.3%.

As of June 30, 2005,and December 31, 2004, we had intercompany notes payable to our ParentPartnership of $62.5 million and $301.7 million, respectively, whichrepresented borrowings under the Parent Partnership’s Revolving CreditFacility, 7.625% Senior Notes and 6.125% Senior Notes. The weighted averageinterest rate on the note payable to the Parent Partnership at June 30,2005, was 5.5%. At June 30, 2005, accrued interest includes $3.2 million dueto our Parent Partnership. For the six months ended June 30, 2005 and2004, interest costs incurred on the note payable to our Parent Partnershiptotaled $5.1 million and $6.1 million, respectively.

**NOTE 7. QUARTERLYDISTRIBUTONS OF AVAILABLE CASH**

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

During the six monthsended June 30, 2005 and 2004, we paid cash distributions to our ParentPartnership totaling $59.4 million and $58.6 million, respectively. On August ­5,2005, we will pay a cash distribution to our Parent Partnership of $32.5million for the quarter ended June 30, 2005.

**NOTE 8. EMPLOYEEBENEFIT PLANS**

**Retirement Plans**

The Parent Partnershiphas adopted the TEPPCO Retirement Cash Balance Plan (“TEPPCO RCBP”), which is anon-contributory, trustee-administered pension plan. In addition, certainexecutive officers participate in the TEPPCO Supplemental Benefit Plan (“TEPPCOSBP”), which is a non-contributory, nonqualified, defined benefit retirementplan. The TEPPCO SBP was established to restore benefit reductions caused bythe maximum benefit limitations that apply to qualified plans. The benefitformula for all eligible employees is a cash balance formula. Under a cashbalance formula, a plan participant accumulates a retirement benefit based uponpay credits and current interest credits. The pay credits are based on aparticipant’s salary, age and service. The Parent Partnership uses a December 31measurement date for these plans.

On May 27, 2005, theTEPPCO RCBP and the TEPPCO SBP were amended. Effective May 31, 2005,participation in the TEPPCO RCBP was frozen and no new participants wereeligible to be covered by the plan after that date. Effective December 31,2005, all plan benefits accrued will be frozen and participants will notreceive 

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additionalpay credits after that date. In addition, all plan participants will be 100%vested regardless of their years of service. Effective January 1, 2006,the TEPPCO RCBP plan will be terminated and plan participants will receive lumpsum benefit payments in 2006. Participants in the TEPPCO SBP will receive paycredits through November 30, 2005, and will receive lump sum benefitpayments in December 2005. Both lump sum benefit payments are discussedbelow.

In June 2005, theParent Partnership recorded a curtailment charge of $0.1 million in accordancewith SFAS No. 88, *Employers’ Accounting forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits*, as a result of the TEPPCO RCBP and TEPPCO SBPamendments. A portion of the charge was allocated to us. As of May 31,2005, the following assumptions were changed for purposes of determining thenet periodic benefit costs for the remainder of 2005: the discount rate, thelong-term rate of return on plan assets, and the assumed mortality table. Thediscount rate was decreased from 5.75% to 5.00% to reflect rates of returns onbonds currently available to settle the liability. 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 accelerated recognitionof the unrecognized prior service costs. The Parent Partnership expects torecord additional settlement charges of approximately $0.2 million in thefourth quarter of 2005 relating to the TEPPCO SBP and approximately $3.2million in 2006 relating to the TEPPCO RCBP for any existing unrecognizedlosses upon the plan termination and final distribution of the assets to theplan participants. We expect to be allocated a share of these charges.

The components of netpension benefits costs allocated to us for the TEPPCO RCBP and the TEPPCO SBPfor the three and six months ended June 30, 2005 and 2004, were as follows(in thousands):

|                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                     | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost  benefit earned during the period |       | $                                | 589        |                           | $          | 635 |   | $ | 1,154 |   | $ | 1,271 |   |
| Interest cost on  projected benefit obligation |       | 131                              |       | 120                            |       | 257 |   | 241 |   |
| Expected return  on plan assets                |       | (146                             | )          | (157                           | )          | (286 | ) | (315 | ) |
| Amortization of  prior service cost            |       | 1                                |       | 2                              |       | 2 |   | 4 |   |
| Recognized net  actuarial loss                 |       | 16                               |       | 3                              |       | 31 |   | 7 |   |
| SFAS 88  curtailment charge                    |       | 14                               |       | —                         |       | 28 |   | — |   |
| Net pension  benefits costs                    |       | $                                | 605        |                           | $          | 603 |   | $ | 1,186 |   | $ | 1,208 |   |

 

**OtherPostretirement Benefits**

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

In May 2005,benefits provided to employees under the TEPPCO OPB were changed. Employeeseligible for these benefits will receive them through December 31, 2005,however, effective January 1, 2006, these benefits will be terminated. In June 2005,as a result of this change in benefits and in accordance with SFAS 106, *Employers’ Accounting for Postretirement Benefits Other Than Pensions*,the Parent Partnership recorded a curtailment credit of approximately $2.6million in its accumulated postretirement obligation, partially offset by acurtailment charge of approximately $1.0 million related to the acceleratedrecognition of the unrecognized prior service costs. The net effect of thesecurtailment adjustments was to reduce its accumulated postretirement 

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obligationto the total of the expected remaining 2005 payments under the TEPPCO OPB. Aportion of these charges was allocated to us.

Thecomponents of net postretirement benefits cost allocated to us for the TEPPCOOPB for the three months and six months ended June 30, 2005 and 2004, wereas follows (in thousands):

|                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                      | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost  benefit earned during the period                  |       | $                                | 23         |                           | $          | 29 |   | $ | 45 |   | $ | 58 |   |
| Interest cost on  accumulated postretirement benefit obligation |       | 19                               |       | 33                             |       | 38 |   | 65 |   |
| Amortization of  prior service cost                             |       | 15                               |       | 28                             |       | 29 |   | 56 |   |
| Recognized net  actuarial loss                                  |       | 1                                |       | —                         |       | 2 |   | — |   |
| SFAS 106  curtailment credit                                    |       | (470                             | )          | —                         |       | (922 | ) | 1 |   |
| Net postretirement  benefits costs                              |       | $                                | (412       | )                              | $          | 90 |   | $ | (808 | ) | $ | 180 |   |

 

Effective June 1,2005, the payroll functions performed by DEFS for the Company were transferredfrom DEFS to EPCO. For those employees who were receiving certain otherpostretirement benefits at the time of the acquisition of the Company by DFI,DEFS will continue to provide these benefits to those employees. Effective June 1,2005, EPCO began providing certain other postretirement benefits to thoseemployees who became eligible for the benefits after June 1, 2005, andwill charge those benefit related costs to our Parent Partnership. As a resultof these changes, the Parent Partnership recorded a $1.2 million reduction inits other postretirement obligation in June 2005. A portion of thereduction was allocated to us.

**Estimated FutureBenefit Contributions**

The Parent Partnershipexpects to contribute approximately $1.1 million to its retirement plans andother postretirement benefit plans in 2005. We expect to be allocated a shareof these contributions.

**NOTE 9. COMMITMENTSAND CONTINGENCIES**

In the fall of 1999 andon December 1, 2000, the General Partner and the Partnership were named asdefendants in two separate lawsuits in Jackson County Circuit Court, JacksonCounty, Indiana, styled *Ryan E. McCleery andMarcia S. McCleery, et al. v. Texas Eastern Corporation, et al.*(includingthe General Partner and Partnership) and*Gilbert Richards and JeanRichards v. Texas Eastern Corporation, et al.*(including the GeneralPartner and Partnership). In both cases, the plaintiffs contend, among otherthings, that we and other defendants stored and disposed of toxic and hazardoussubstances and hazardous wastes in a manner that caused the materials to bereleased into the air, soil and water. They further contend that the releasecaused damages to the plaintiffs. In their complaints, the plaintiffs allegestrict liability for both personal injury and property damage together withgross negligence, continuing nuisance, trespass, criminal mischief and loss ofconsortium. The plaintiffs are seeking compensatory, punitive and trebledamages. On January 27, 2005, we entered into Release and SettlementAgreements with the McCleery plaintiffs and the Richards plaintiffs dismissingall of these plaintiffs’ claims. The settlement terms included a $2.0 millionpayment to the plaintiffs, which was accrued at December 31, 2004.

Although we did notsettle with all plaintiffs and we therefore remain named parties in the *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al*. action, a co-defendant has agreed to indemnifyus for all remaining claims asserted against us. Consequently, we do notbelieve that the outcome of 

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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 a defendant in a lawsuit in the 10th Judicial District,Natchitoches Parish, Louisiana, styled *Rebecca L. Grisham et al.v. TE Products Pipeline Company, Limited Partnership*. In this case,the plaintiffs contend that our pipeline, which crosses the plaintiffs’property, leaked toxic products onto their property and, consequently causeddamages to them. We have filed an answer to the plaintiffs’ petition denyingthe allegations, and we are defending ourselves vigorously against the lawsuit.The plaintiffs have not stipulated the amount of damages they are seeking inthe suit; however, this case is covered by insurance. We do not believe thatthe outcome of this lawsuit will have a material adverse effect on ourfinancial position, results of operations or cash flows.

In May 2003, theCompany was named as a defendant in a lawsuit styled *John R.James, et al. v. J Graves Insulation Company, et al.* as filed in thefirst Judicial District Court, Caddo Parish, Louisiana. There are numerousplaintiffs identified in the action that are alleged to have suffered damagesas a result of alleged exposure to asbestos-containing products and materials. Accordingto the 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.

On April 2, 2003,Centennial was served with a petition in a matter styled *Adams, etal. v. Centennial Pipeline Company LLC, et al*. This matter involvesapproximately 2,000 plaintiffs who allege that over 200 defendants, includingCentennial, generated, transported, and/or disposed of hazardous and toxicwaste at two sites in Bayou Sorrell, Louisiana, an underground injection welland a landfill. The plaintiffs allege personal injuries, allergies, birthdefects, cancer and death. The underground injection well has been in operationsince May 1976. Based upon current information, Centennial appears to be a*de minimis* contributor, having used thedisposal site during the two month time period of December 2001 to January 2002.Marathon has been handling this matter for Centennial under its operatingagreement with Centennial. We have a 50% ownership interest in Centennial. On November 30,2004, the court approved a class settlement, which included an $80,000 paymentby Centennial. The time period for parties to appeal this settlement expired inMarch 2005, and the class settlement became final. The terms of thesettlement did not have a material adverse effect on our financial position,results of operations or cash flows.

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

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

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

On March 26, 2004,an initial decision in *ARCO Products Co., et al.v. SFPP*, Docket OR96-2-000, et al. was issued by theFERC, which made several significant determinations with respect to finding “changedcircumstances” under the Energy Policy Act of 1992 (“EP Act”). The decisionlargely clarifies, but does not fully quantify, the standard required for acomplainant to demonstrate that an oil pipeline’s rates are no longer subjectto the rate protection of the EP Act by demonstrating that a substantial changein circumstances has occurred since 1992 with respect to the basis of the ratesbeing challenged. In the decision, the FERC found that a limited number of rateelements will significantly affect the economic basis for a pipeline company’srates. The elements identified in the decision are volume changes, allowedtotal return and total cost-of-service (including major cost elements such asrate base, tax rates and tax allowances, among others). The FERC did reject,however, the use of changes in tax rates and income tax allowances asstandalone factors. Judicial review of that decision, which has been sought bya number of parties to the case, is currently pending before the U.S. Court ofAppeals for the District of Columbia Circuit. We have not yet determined theimpact, if any, that the decision, if it is ultimately upheld, would have onour rates if they were reviewed under the criteria of this decision.

On July 20, 2004,the District of Columbia Circuit issued an opinion in *BP WestCoast Products LLC v. FERC*. In reviewing a series of ordersinvolving SFPP, L.P., the court held among other things that the FERC had notadequately justified its policy of providing an oil pipeline limitedpartnership with an income tax allowance equal to the proportion of its incomeattributable to partnership interests owned by corporate partners. Under theFERC’s initial ruling, SFPP, L.P. was permitted an income tax allowance on itscost-of-service filing for the percentage of its net operating (pre-tax) incomeattributable to partnership units held by corporations, and was denied anincome tax allowance equal to the percentage attributable to partnership unitsheld by non-corporate partners. The court remanded the case back to the FERCfor further review. As a result of the court’s remand, on December 2,2004, the FERC issued a Request for Comments seeking comments on whether thecourt’s ruling applies only to the specific facts of the SFPP, L.P. proceedingor also extends to other capital structures involving partnerships and otherforms of ownership. On May 4, 2005, the FERC issued its Policy Statementon Income Tax Allowances, which permits regulated partnerships, limitedliability companies and other pass-through entities an income tax allowance ontheir income attributable to any owner that has an actual or potential incometax liability on that income, regardless whether the owner is an individual orcorporation. If there is more than one level of pass-through entities, theregulated company income must be traced to where the ultimate tax liabilitylies. The Policy Statement is to be applied in individual cases, and theregulated entity bears the burden of proof to establish the tax status of itsowners. On June 1, 2005, the FERC issued an Order on Remand in the SFPP,L.P. proceedings holding the Policy Statement would apply in that case andrequesting briefs on whether additional evidence was necessary to apply it. Briefshave been filed but the FERC has not yet acted on them. The ultimate outcome ofthe FERC’s inquiry on income tax allowance should not affect our current ratesand rate structure because our rates are not based on cost-of-service methodology.However, the outcome of the income tax allowance would become relevant to usshould we (i) elect in the future to use cost-of-service to support ourrates, or (ii) be required to use such methodology to defend our indexedrates.

In 1994, the LouisianaDepartment of Environmental Quality (“LDEQ”) issued a compliance order forenvironmental contamination at our Arcadia, Louisiana facility. In 1999, ourArcadia facility and adjacent terminals 

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weredirected by the Remediation Services Division of the LDEQ to pursue remediationof this contamination. At June 30, 2005, we have an accrued liability of$0.2 million for remediation costs at our Arcadia facility. Effective March 2004,we executed an access agreement with an adjacent industrial landowner who islocated upgradient of the Arcadia facility. This agreement enables thelandowner to proceed with remediation activities at our Arcadia facility forwhich it has accepted shared responsibility. We do not expect that thecompletion of the remediation program proposed to the LDEQ will have a futurematerial adverse effect on our financial position, results of operations orcash flows.

On March 17, 2003,we experienced 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 with the State of Illinois whichrequired us to conduct an environmental investigation. At this time, we havecomplied with the terms of the Agreed Order, and the results of theenvironmental investigation indicated there were no soil or groundwater impactsfrom the release. We are in the process of negotiating a final settlement withthe State of Illinois, and we do not expect that compliance with the settlementwill have a future material adverse effect on our financial position, resultsof operations or cash flows.

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal. The released jet fuel was contained within a stormwater retention pond located on the terminal property. Six migratory waterfowlwere affected by the jet fuel and were subsequently euthanized by or at therequest of the United States Fish and Wildlife Service (“USFWS”). On October 1,2004, the USFWS served us with a Notice of Violation, alleging that we violated16 USC 703 of the Migratory Bird Treaty Act for the “take[ing] of migratorybirds by illegal methods.” On February 7, 2005, we entered into aMemorandum of Understanding (“MOU”) with the USFWS, and on June 23, 2005,we notified the USFWS that we had completed all requirements under the MOU,thus terminating the agreement and settling all aspects of this matter. Theterms of this settlement did not have a material effect on our financialposition, results of operations or cash flows.

On July 27, 2004, wereceived notice from the United States Department of Justice (“DOJ”) of itsintent to seek a civil penalty against us related to our November 21,2001, release of approximately 2,575 barrels of jet fuel from our 14-inchdiameter pipeline located in Orange County, Texas. The DOJ, at the request ofthe Environmental Protection Agency, is seeking a civil penalty against us foralleged violations of the Clean Water Act (“CWA”) arising out of this release. Themaximum statutory penalty calculated for this alleged violation of the CWA is$2.8 million. We are in discussions with the DOJ regarding this matter and haveresponded to its request for additional information. We do not expect a civilpenalty, if any, to have a material adverse effect on our financial position,results of operations or cash flows.

At June 30, 2005, wehave an accrued liability of $1.5 million related to sites requiringenvironmental remediation activities. We do not expect that the completion ofremediation programs associated these activities will have a future materialadverse effect on our financial position, results of operations or cash flows.

Centennial entered intocredit facilities totaling $150.0 million, and as of June 30, 2005, $150.0million was outstanding under those credit facilities. The proceeds were usedto fund construction and conversion costs of its pipeline system. We andMarathon have each guaranteed one-half of Centennial’s debt, up to a maximumamount of $75.0 million each.

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

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**NOTE 10. RESTATEMENTOF CONSOLIDATED FINANCIAL STATEMENTS**

****We arerestating our previously reported consolidated financial statements for thequarterly periods ended June 30, 2004 and 2005. In the fourth quarter of2005, we determined that our method of accounting for the $33.4 million excessinvestment in Centennial, previously described as an intangible asset with anindefinite life, was incorrect. Through our accounting for this excessinvestment in Centennial as an intangible asset with an indefinite life, we hadbeen 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 the excess investment in Centennial and increased amortizationexpense allocated to our equity earnings. The restatement caused a $1.1 millionand $1.0 million reduction to net income as previously reported for the threemonths ended June 30, 2005 and 2004, respectively, and a $2.1 million and$1.5 million reduction to net income as previously reported for the six monthsended June 30, 2005 and 2004, respectively. We restated previouslyreported consolidated financial statements for the fiscal year ended December 31,2003 and 2004 in our Annual Report on Form 10-K for the year ended December 31,2005.****

While we believe theimpact of this non-cash adjustment is not material to any previously issuedfinancial statements, we determined that the cumulative adjustment for thisnon-cash item was too material to record in the fourth quarter of 2005, andtherefore it was most appropriate to restate prior periods’ results. Thisnon-cash adjustment had no effect on our operating income, compensationexpense, debt balances or ability to meet all requirements related to our debtinstruments. The restatement had no impact on total cash flows from operatingactivities, investing activities or financing activities. All amounts in theaccompanying consolidated financial statements have been adjusted for thisrestatement.

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.

The following tablessummarize the impact of the restatement adjustment on previously reportedbalance sheet amounts for June 30, 2005, and income statement amounts andcash flow amounts for the periods ended June 30, 2005 and 2004 (in thousands):

**Balance Sheet Amounts:**

|                                               | ** ** | **June 30, 2005**      | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity  investments                           |       | $                                | 166,432    |   | $ | (10,992 | ) | $ | 155,440 |   |
| Total assets                                  |       | $                                | 957,335    |   | $ | (10,992 | ) | $ | 946,343 |   |
| Partners’ capital:                       |       |                             |       |   |   |   |   |
| General partner’s interest               |       | $                                | 4          |   | $ | — |   | $ | 4 |   |
| Limited partners’ interest               |       | 406,946                          |       | (10,992 | ) | 395,954 |   |
| Total partners’ capital                  |       | 406,950                          |       | (10,992 | ) | 395,958 |   |
| Total  liabilities and partners’ capital |       | $                                | 957,335    |   | $ | (10,992 | ) | $ | 946,343 |   |

 

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** **

**Income Statement Amounts:**

|                           | ** ** | **Three Months Ended  June 30, 2005** | ** ** |
|---------------------------|------------|-----------------------------------------------------------|------------|
| ** **                | ** ** | **As Previously  Reported**                          | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity earnings  (losses) |       | $                                                         | 892        |   | $ | (1,138 | ) | $ | (246 | ) |
| Net income                |       | 7,902                                                     |       | (1,138 | ) | 6,764 |   |
|                           |            |                                                           |            |  |  |  |  |  |  |  |

 

|               | ** ** | **Three Months Ended  June 30, 2004** | ** ** |
|---------------|------------|-----------------------------------------------------------|------------|
| ** **    | ** ** | **As Previously  Reported**                          | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity losses |       | $                                                         | (509       | ) | $ | (956 | ) | $ | (1,465 | ) |
| Net income    |       | 6,904                                                     |       | (956 | ) | 5,948 |   |
|               |            |                                                           |            |  |  |  |  |  |  |  |

 

|                           | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|---------------------------|------------|---------------------------------------------------------|------------|
| ** **                | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity earnings  (losses) |       | $                                                       | 50         |   | $ | (2,117 | ) | $ | (2,067 | ) |
| Net income                |       | 30,018                                                  |       | (2,117 | ) | 27,901 |   |
|                           |            |                                                         |            |  |  |  |  |  |  |  |

 

|               | ** ** | **Six Months Ended  June 30, 2004** | ** ** |
|---------------|------------|---------------------------------------------------------|------------|
| ** **    | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Equity losses |       | $                                                       | (1,747     | ) | $ | (1,496 | ) | $ | (3,243 | ) |
| Net income    |       | 24,113                                                  |       | (1,496 | ) | 22,617 |   |
|               |            |                                                         |            |  |  |  |  |  |  |  |

 

**Cash FlowAmounts:**

|                                                                  | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                       | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:                           |       |                                                    |       |   |   |   |   |
| Net income                                                       |       | $                                                       | 30,018     |   | $ | (2,117 | ) | $ | 27,901 |   |
| (Earnings)  losses from equity investments, net of distributions |       | 7,250                                                   |       | 2,117 |   | 9,367 |   |
|                                                                  |            |                                                         |            |  |  |  |  |  |  |  |

 

|                                                     | ** ** | **Six Months Ended  June 30, 2004** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                          | ** ** | **As Previously  Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash flows from  operating activities:              |       |                                                    |       |   |   |   |   |
| Net income                                          |       | $                                                       | 24,113     |   | $ | (1,496 | ) | $ | 22,617 |   |
| Losses in equity  investments, net of distributions |       | 6,697                                                   |       | 1,496 |   | 8,193 |   |
|                                                     |            |                                                         |            |  |  |  |  |  |  |  |

 

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** **

**NOTE 11. SUBSEQUENTEVENTS**

On July 12, 2005, wepurchased a refined products terminal and truck 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 revolving credit facility. The terminal serves thecentral Arkansas refined products market and complements our existinginfrastructure in North Little Rock, Arkansas.

We have initiated anexpansion of our refined products origin capabilities in the Houston, Texas,and Texas City, Texas areas. As part of that project, on July 15, 2005, weacquired from Texas Genco LLC (“Genco”) all of its interests in certaincompanies that own a 90-mile pipeline system and 5.5 million barrels ofstorage capacity for $70.6 million (including $8.6 million for the estimatedvalue of inventory). According to the terms of the purchase and sale agreementwith Genco, we will sell the acquired inventory (anticipated to occur in thethird quarter of 2005) and use the proceeds from the sale to offset the purchaseprice of the inventory, including costs incurred to consummate the sale. To theextent the proceeds from the inventory sale, including costs incurred toconsummate the sale, are greater than or less than the estimated amountpreviously paid to Genco, a final settlement payment will occur between Gencoand us, resulting in no gain or loss being recognized by us on the sale of theinventory. We funded the purchase through borrowings under our revolving creditfacility. The assets of the purchased companies will be integrated into ourorigin infrastructure in Texas City and Baytown, Texas. The integration andother system enhancements should be in service by the fourth quarter of 2006,at an estimated cost of $45.0 million. The strategic location of these assets,with refined products interconnections to major exchange terminals in theHouston area, will provide significant long-term value to our customers and theTexas Gulf Coast refining and logistics system.

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

**General**

You should read thefollowing review of our financial position and results of operations inconjunction with our Consolidated Financial Statements. Materialperiod-to-period variances in the consolidated statements of income arediscussed under “Results of Operations.” The adjustments resulting from therestatement of our financial statements are discussed under “Restatement ofConsolidated Financial Statements.” The “Financial Condition and Liquidity”section analyzes our cash flows and financial position. “Other Considerations”addresses trends, future plans and contingencies that are reasonably likely tomaterially affect future liquidity or earnings. The Consolidated FinancialStatements should be read in conjunction with the financial statements andrelated notes, together with our discussion and analysis of financial positionand results of operations included in our Annual Report on Form 10-Kfor the year ended December 31, 2004.

**Restatement of ConsolidatedFinancial Statements**

****We arerestating our previously reported consolidated financial statements for thequarterly periods ended June 30, 2004 and 2005. In the fourth quarter of2005, we determined that our method of accounting for the $33.4 million excessinvestment in Centennial, previously described as an intangible asset with anindefinite life, was incorrect. Through our accounting for this excessinvestment in Centennial as an intangible asset with an indefinite life, we hadbeen 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 the excess investment in Centennial, and increased amortizationexpense allocated to our equity earnings. The restatement caused a $1.1 millionand $1.0 million reduction to net income as previously reported for the threemonths ended June 30, 2005 and 2004, respectively, and a $2.1 million and$1.5 million reduction to net income as previously reported for the six monthsended June 30, 2005 and 2004, respectively. We restated previouslyreported consolidated financial statements for the fiscal year ended December 31,2003 and 2004 in our Annual Report on Form 10-K for the year ended December 31,2005.****

While we believe theimpact of this non-cash adjustment is not material to any previously issuedfinancial statements, we determined that the cumulative adjustment for thisnon-cash item was too material to record in the fourth quarter of 2005, andtherefore it was most appropriate to restate prior periods’ results. Thisnon-cash adjustment had no effect on our operating income, compensationexpense, debt balances or ability to meet all requirements related to our debtinstruments. The restatement had no impact on total cash flows from operatingactivities, investing activities or financing activities. All amounts in theaccompanying consolidated financial statements have been adjusted for thisrestatement.

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.

**CriticalAccounting Policies and Estimates**

A summary of thesignificant accounting policies we have adopted and followed in the preparationof our consolidated financial statements is detailed in our consolidatedfinancial statements for the year ended December 31, 2004, included in ourAnnual Report on Form 10-K. Certain of these accounting policiesrequire the use of estimates. The following estimates, in our opinion, aresubjective in nature, require the exercise of judgment and involve complexanalysis: revenue and expense accruals, including accruals for power costs,property taxes and crude oil margins; environmental costs; asset impairmentanalysis related to property, plant and equipment; and amortization expense andasset impairment analysis related to goodwill and other intangible assets. Theseestimates are based on our knowledge and understanding of current conditionsand actions we may take in the future. Changes in these estimates will occur asa result of the passage of time and the occurrence of future events. 

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Subsequentchanges in these estimates may have a significant impact on our financialcondition and results of operations.

****ManagementOverview of the Three Months and Six Months Ended June 30, 2005****

****Wereported net income of $27.9 million for the six months ended June 30,2005, compared with net income of $22.6 million for the six months ended June 30,2004, and net income of $6.8 million for the three months ended June 30,2005, compared with net income of $5.9 million for the three months ended June 30,2004.****

****Ourresults for the three months ended June 30, 2005, were impacted byincreased LPG transportation revenues and long-haul volumes delivered,increased refined products tender deduction revenues and increased revenuesfrom product location exchanges. These increases were partially offset bydecreased refined products transportation revenues, increased power costs, increasedpipeline operating expenses and increased rental expense from our CentennialPipeline LLC (“Centennial”) capacity lease agreement.****

****Theresults for the six months ended June 30, 2005, were impacted by increasedrefined products and LPG transportation revenues and volumes, partially offsetby lower propane inventory fee revenues, increased pipeline operating expenses,increased rental expense from our Centennial capacity lease agreement andincreased environmental assessment and remediation expenses. Additionally,pipeline integrity expenses decreased $1.4 million and $5.7 million for thethree months and six months ended June 30, 2005, respectively, comparedwith the prior year periods. We anticipate that our pipeline integrity expensesfor 2005 will be approximately $15.2 million lower than our 2004 expensesprimarily due to the completion of projects.****

We focus on the safe,reliable and efficient operation of the pipelines and facilities that we own oroperate while meeting increased regulations that govern the operation of ourassets and the costs associated with such regulations. We are also focused onour continued growth through expansion of the assets that we own and throughacquisition of assets that complement our current operations. We remain confidentthat our current strategy and focus will provide continued growth in earningsand cash 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, wepurchased a refined products terminal and truck 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.

We have initiated anexpansion of our refined products origin capabilities in the Houston, Texas,and Texas City, Texas areas. As part of that project, on July 15, 2005, weacquired from Texas Genco LLC (“Genco”) all of its interests in certaincompanies that own a 90-mile pipeline system and 5.5 million barrels ofstorage capacity for $70.6 million (including $8.6 million for the estimatedvalue of inventory). According to the terms of the purchase and sale agreementwith Genco, we will sell the acquired inventory (anticipated to occur in thethird quarter of 2005) and use the proceeds from the sale to offset the purchaseprice of the inventory, including costs incurred to consummate the sale. To theextent the proceeds from the inventory sale, including costs incurred toconsummate the sale, are greater than or less than the estimated amountpreviously paid to Genco, a final settlement payment will occur between Gencoand us, resulting in no gain or loss being recognized by us on the sale of theinventory. The assets of the purchased companies will be integrated into ourorigin infrastructure in Texas City and Baytown, Texas. The integration andother system enhancements should be in service by the fourth quarter of 2006,at an estimated cost of $45.0 million. The strategic location of these assets,with refined products interconnections to major exchange terminals in theHouston area, will provide significant long-term value to our customers and theTexas Gulf Coast refining and logistics system.

We are subject toeconomic and other factors that affect our industry. The demand for refinedproducts is dependent upon the price, prevailing economic conditions anddemographic changes in the markets served, trucking and railroad freight,agricultural usage and military usage; the demand for propane is sensitive tothe weather and 

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prevailingeconomic conditions; and the demand for petrochemicals is dependent upon pricesfor products produced from petrochemicals. We are also subject to regulatoryfactors such as the amounts we are allowed to charge our customers for theservices we provide on our regulated pipeline systems.

Consistent with ourbusiness strategy, we continuously evaluate possible acquisitions of assetsthat would complement our current operations. Such acquisition efforts involveparticipation by us in processes that have been made public and involve a numberof potential buyers, as well as situations in which we believe we are the onlyparty or one of a very limited number of potential buyers in negotiations withthe potential seller. These acquisition efforts often involve assets which, ifacquired, would have a material effect on our financial position, results ofoperations or cash flows****.****

**Our Business**

TE Products PipelineCompany, Limited Partnership (the “Partnership”), a Delaware limitedpartnership, was formed in March 1990. TEPPCO Partners, L.P. (the “ParentPartnership”) owns a 99.999% interest in us as the sole limited partner. TEPPCOGP, Inc. (“TEPPCO GP” or “General Partner”), a wholly owned subsidiary ofthe Parent Partnership, holds a 0.001% general partner interest in us. TexasEastern Products Pipeline Company, LLC (the “Company”), a Delaware limitedliability company, serves as the general partner of our Parent Partnership. ThroughFebruary 23, 2005, the Company was an indirect wholly owned subsidiary ofDuke Energy Field Services, LLC (“DEFS”), a joint venture between Duke EnergyCorporation (“Duke Energy”) and ConocoPhillips. Through February 23, 2005,Duke Energy held an interest of approximately 70% in DEFS, and ConocoPhillipsheld the remaining interest of approximately 30%. On February 24, 2005,the 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 generalpartner, performs all of the management and operating functions required for usin accordance with the Agreement of Limited Partnership of TE Products PipelineCompany, Limited Partnership (the “Partnership Agreement”). We reimburse ourGeneral Partner and the Company for all reasonable direct and indirect expensesthat they incur in managing us.

We operate and report inone business segment: transportation and storage of refined products, LPGs andpetrochemicals. Revenues are earned from transportation and storage of refinedproducts and LPGs, intrastate transportation of petrochemicals, sales ofproduct inventory and other ancillary services. Our two largest operatingexpense items are labor and electric power. We generally realize higherrevenues during the first and fourth quarters of each year since our operationsare somewhat seasonal. Refined products volumes are generally higher during thesecond and third quarters because of greater demand for gasolines during thespring and summer driving seasons. LPGs volumes are generally higher from November throughMarch due to higher demand in the Northeast for propane, a major fuel forresidential heating. Our results also include our equity investments inCentennial and Mont Belvieu Storage Partners, L.P. (“MB Storage”) (see Note 5. EquityInvestments).

We are one of threeoperating subsidiaries of our Parent Partnership. Our Parent Partnership ismanaged by its general partner, the Company. EPCO has approximately 1,200employees dedicated to the operations and management of our Parent Partnership operatingsubsidiaries. Our Parent Partnership allocates operating, general andadministrative expenses to us for legal, insurance, financial, communicationand other administrative services based upon the estimated level of effortdevoted to our various operations. We believe that the methods for allocatingcorporate operating, general and administrative expenses to us are reasonable.

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**Results ofOperations**

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

 

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

Revenues from refinedproducts transportation decreased $1.1 million for the three months ended June 30,2005, compared with the three months ended June 30, 2004, primarily due toa decrease in distillate volumes transported and a decrease in the refinedproducts average rate per barrel, partially offset by an overall increase inthe refined products volume delivered. The decrease in distillate volumes was aresult of low distillate price differentials. The decrease in the refinedproducts average rate per barrel from the prior year period was primarily dueto the impact of greater growth in the volume of products delivered under aCentennial tariff compared with the growth in deliveries under our tariff,which resulted in an increased proportion of lower tariff barrels transportedon our system. Prior to the construction of Centennial, deliveries on ourpipeline system were limited by our pipeline capacity, and transportationservices for our customers were allocated in accordance with a proration policy.With this incremental pipeline capacity, our previously constrained system hasexpanded deliveries in markets both south and north of Creal Springs, Illinois.In February 2003, we entered into a lease agreement with Centennial thatincreased our flexibility to deliver refined products to our market areas. Centennialhas provided our system with additional pipeline capacity for movement ofproducts originating in the U.S. Gulf Coast area. The overall increase inrefined products volume was primarily due to increased demand and market sharefor products supplied from the U.S. Gulf Coast into Midwest markets.

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

Other operating revenuesincreased $1.7 million for the three months ended June 30, 2005, comparedwith the three months ended June 30, 2004, primarily due to higher refinedproducts additive and tender deduction revenue and increased margins on productinventory sales.

Costs and expensesincreased $0.6 million for the three months ended June 30, 2005, comparedwith the three months ended June 30, 2004, due to increased operating fueland power and increased depreciation and amortization expense, partially offsetby decreased operating, general and administrative expenses and decreased taxes— other than income. Operating fuel and power increased $0.7 million primarilydue to increased mainline throughput and adjustments to power accruals. Depreciationexpense increased $0.5 million primarily due to assets placed into service in2005. Operating, general and administrative expenses decreased $0.6 millionprimarily due to a $1.4 million decrease in pipeline inspection and repaircosts associated with our integrity management program 

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and a$0.4 million decrease in consulting services and supplies primarily related toacquisition activities in 2004. These decreases were partially offset by a $0.7million increase in pipeline operating and maintenance expenses, a $0.3 millionincrease in rental expense from the Centennial pipeline capacity leaseagreement and a $0.2 million increase in insurance expense. Increased labor andbenefits expenses associated with vesting provisions in certain of ourcompensation plans as a result of changes in control of our General Partnerhigher incentive compensation expenses compared to the prior year period wereoffset by a $1.6 million decrease in postretirement benefit accruals related toplan amendments (see Note 8. Employee Benefit Plans).

Netlosses from equity investments decreased for the three months ended June 30,2005, compared with the three months ended June 30, 2004, as shown below(in thousands):

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

 

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

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

Revenues from refinedproducts transportation increased $2.9 million for the six months ended June 30,2005, compared with the six months ended June 30, 2004, due to an overallincrease in the refined products volumes delivered. This increase was primarilydue to deliveries of products moved on Centennial. Volume increases were due toincreased demand and market share for products supplied from the U.S. GulfCoast into Midwest markets. The refined products average rate per barreldecreased from the prior year period primarily due to the impact of greatergrowth in the volume of products delivered under a Centennial tariff comparedwith the growth in deliveries under our tariff, which resulted in an increasedproportion of lower tariff barrels transported on our system.

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

Other operating revenuesdecreased $2.4 million for the six months ended June 30, 2005, comparedwith the six months ended June 30, 2004, primarily due to lower propaneinventory fees in 2005 and lower volume of product inventory sales, partiallyoffset by higher refined products tender deduction and loading revenues.

Costs and expensesdecreased $1.7 million for the six months ended June 30, 2005, comparedwith the six months ended June 30, 2004, due to decreased operating,general and administrative expenses, partially offset by increased depreciationand amortization expense and increased operating fuel and power. Operating,general and administrative expenses decreased $3.1 million primarily due to a$5.7 million decrease in pipeline inspection and repair costs associated withour integrity management program, and a $1.6 million decrease in postretirementbenefit accruals related to plan amendments (see Note 8. Employee Benefit Plans)and a $0.3 million decrease in consulting services and supplies primarilyrelated to acquisition related activities in 2004. These decreases werepartially offset 

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by a$2.4 million increase in labor and benefits expenses associated with vestingprovisions in certain of our compensation plans as a result of changes incontrol of our General Partner and higher incentive compensation expensescompared to the prior year period, a $1.0 million increase in rental expensefrom the Centennial pipeline capacity lease agreement, a $0.6 million increasein environmental remediation and assessment costs and a $0.6 million increasein pipeline operating and maintenance expense. Depreciation expense increased$1.2 million primarily due to assets placed into service and assets retired todepreciation expense in 2005. Operating fuel and power increased $0.3 millionprimarily due to increased mainline throughput and adjustments to poweraccruals.

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

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

 

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

**FinancialCondition and Liquidity**

Cashflows for the six months ended June 30, 2005 and 2004, were as follows (inthousands):

|                              | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|--------------------------------|------------|
| ** **                   | ** ** | **June 30,**              | ** ** |
| ** **                   | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(as restated)**         | ** ** | **(as restated)** | ** ** |
| Cash provided by  (used in): |       |                           |       |   |   |
| Operating activities         |       | $                              | 31,8501    |   | $ | 68,256 |   |
| Investing activities         |       | (28,134                        | )          | (45,313 | ) |
| Financing activities         |       | (3,703                         | )          | (23,131 | ) |
|                              |            |                                |            |  |  |  |  |

 

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*OperatingActivities*

Netcash from operating activities for the six months ended June 30, 2005 and2004, were comprised of the following (in thousands):

|                                                       | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**              | ** ** |
| ** **                                            | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | **(as restated)**         | ** ** | **(as restated)** | ** ** |
| Net income                                            |       | $                              | 27,901     |   | $ | 22,617 |   |
| Depreciation and  amortization                        |       | 18,835                         |       | 17,636 |   |
| Losses in equity  investments                         |       | 2,067                          |       | 3,243 |   |
| Distributions from  equity investments                |       | 7,300                          |       | 4,950 |   |
| Non-cash portion of  interest expense                 |       | 136                            |       | 15 |   |
| Gains on sales of assets                              |       | (107                           | )          | (17 | ) |
| Cash provided by (used  in) working capital and other |       | (24,281                        | )          | 19,812 |   |
| Net  cash from operating activities                   |       | $                              | 31,851     |   | $ | 68,256 |   |

 

For a discussion ofchanges in net income, depreciation and amortization and equity earnings, seeResults of Operations in Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations. Cash provided by operatingactivities decreased $36.4 million for the six months ended June 30, 2005,compared with the six months ended June 30, 2004, primarily due to thetiming of cash disbursements and cash receipts for working capital componentspartially offset by higher net income and depreciation and amortization in the2005 period.

We believe that we willcontinue to have adequate liquidity to fund future recurring operating andinvesting activities. Our primary cash requirements consist of normal operatingexpenses, capital expenditures to sustain existing operations and revenuegenerating expenditures, interest payments on our Senior Notes and onborrowings under our Parent Partnership’s credit facilities and distributionsto our Parent Partnership. Short-term cash requirements, such as operatingexpenses, capital expenditures to sustain existing operations and quarterlydistributions to our Parent Partnership, are expected to be funded throughoperating cash flows. Long-term cash requirements for expansion projects areexpected to be funded by several sources, including cash flows from operatingactivities, borrowings under our Parent Partnership’s credit facilities and theissuance by our Parent Partnership of additional equity and debt securities. Thetiming of any debt or offerings by our Parent Partnership will depend onvarious factors, including prevailing market conditions, interest rates and ourParent Partnership’s financial condition and credit rating at the time.

At June 30, 2005,and December 31, 2004, we had working capital deficits of $39.1 millionand $61.9 million, respectively. Cash generated from operations and from ourParent Partnership’s credit facilities and debt and equity offerings are ourprimary sources of liquidity. Working capital deficits can occur primarily dueto the timing of operating cash receipts from customers, payment of cashdistributions and the payment of normal operating expenses and capitalexpenditures. We are a wholly owned subsidiary of the Parent Partnership. Weexpect that our Parent Partnership will make capital contributions, loans orotherwise provide liquidity to us as needed, but the Parent Partnership has nocontractual obligation to do so. We anticipate that the Parent Partnership willprovide the necessary liquidity to protect its investment in us. At June 30,2005, our Parent Partnership had $278.6 million in available borrowing capacityunder its revolving credit facility to cover any working capital needs, andexpects that cash flows from operating activities, the sale of additional debtor equity offerings will provide necessary liquidity to us.

*InvestingActivities*

Cash flows used in investingactivities totaled $28.1 million for the six months ended June 30, 2005,and were comprised of $27.0 million of capital expenditures and $1.1 million ofcash contributions for our ownership interest in MB Storage. Cash flows used ininvesting activities totaled $45.3 million for the six months ended June 30,2004, and were comprised of $24.6 million of capital expenditures, $17.2million of cash contributions for our 

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ownershipinterest in MB Storage, $2.0 million for the acquisition of assets and $1.5million of cash contributions for our ownership interest in Centennial.

*FinancingActivities*

Cash flows used infinancing activities totaled $3.7 million for the six months ended June 30,2005, and were comprised of $239.1 million of repayments on the note payable toour Parent Partnership, net of borrowings, and $59.4 million of distributionspaid to our Parent Partnership, partially offset by $294.8 million ofcontributions from our Parent Partnership. The contributions received from theParent Partnership during 2005 were primarily used to reduce the level ofindebtedness owed to our Parent Partnership. Cash flows used in financingactivities totaled $23.1 million for the six months ended June 30, 2004,and were comprised of $58.6 million of distributions paid to our ParentPartnership, partially offset by $35.5 million of proceeds received from ournote payable to our Parent Partnership.

Centennial entered intocredit facilities totaling $150.0 million and, as of June 30, 2005, $150.0million was outstanding under those credit facilities. The proceeds were usedto fund construction and conversion costs of Centennial’s pipeline system. Weand Marathon Ashland Petroleum LLC have each guaranteed one-half of Centennial’sdebt, up to a maximum of $75.0 million each.

*Parent PartnershipCredit Facilities*

We currently utilize debtfinancing available from our Parent Partnership through intercompany notes. Theterms of the intercompany notes generally match the principal and interestpayment dates under the Parent Partnership’s credit agreements. The interestrates charged by the Parent Partnership include the stated interest rate of theParent Partnership, plus a premium to cover debt issuance costs. The interestrate is also decreased or increased to cover gains and losses, respectively, onany interest rate swaps that the Parent Partnership may have in place on itsrespective credit agreements. These credit facilities of the Parent Partnershipare described below.

On June 27, 2003,our Parent Partnership entered into a $550.0 million revolving credit facilitywith a three-year term, including the issuance of letters of credit of up to$20.0 million (“Revolving Credit Facility”). The interest rate is based, at ourParent Partnership’s option, on either the lender’s base rate plus a spread, orLIBOR plus a spread in effect at the time of the borrowings. The creditagreement for the Revolving Credit Facility contains certain restrictivefinancial covenant ratios. On October 21, 2004, our Parent Partnershipamended the Revolving Credit Facility to (i) increase the facility size to$600.0 million, (ii) extend the term to October 21, 2009, (iii) removecertain restrictive covenants, (iv) increase the available amount for theissuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing. On February 23,2005, the Parent Partnership again amended its Revolving Credit Facility toremove the requirement that DEFS must at all times own, directly or indirectly,100% of the Company, to allow for its acquisition by DFI (see Note 1.Organization and Basis of Presentation). During the second quarter of 2005, theParent Partnership used a portion of the proceeds from equity offerings in May 2005and June 2005 to repay a portion of the Revolving Credit Facility. On June 30,2005, $278.0 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 4.3%.

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

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As of June 30, 2005,and December 31, 2004, we had intercompany notes payable to our ParentPartnership of $62.5 million and $301.7 million, respectively, whichrepresented borrowings under the Parent Partnership’s Revolving CreditFacility, 7.625% Senior Notes and 6.125% Senior Notes. The weighted averageinterest rate on the note payable to the Parent Partnership at June 30,2005, was 5.5%. At June 30, 2005, accrued interest includes $3.2 million dueto our Parent Partnership. For the six months ended June 30, 2005 and2004, interest costs incurred on the note payable to our Parent Partnershiptotaled $5.1 million and $6.1 million, respectively.

*Cash Distributions*

During the six monthsended June 30, 2005 and 2004, we paid cash distributions to our ParentPartnership totaling $59.4 million and $58.6 million, respectively. On August 5,2005, we will pay a cash distribution to our Parent Partnership of $32.5million for the quarter ended June 30, 2005.

*Future CapitalNeeds and Commitments*

We estimate that capitalexpenditures, excluding acquisitions, for 2005 will be approximately $88.4million (which includes $2.5 million of capitalized interest). We expect tospend approximately $43.8 million for revenue generating projects and facilityimprovements. We expect to spend approximately $20.4 million to sustainexisting operations, including life-cycle replacements for equipment at variousfacilities and pipeline and tank replacements and $21.7 million for varioussystem upgrade projects. We continually review and evaluate potential capitalimprovements and expansions that would be complementary to our present system. Theseexpenditures can vary greatly depending on the magnitude of our transactions. Wemay finance capital expenditures through internally generated funds, debt orcapital contributions from our Parent Partnership or any combination thereof.

Our debt repaymentobligations consist of payments for principal and interest on (i) our$62.5 million principal amount due to the Parent Partnership related to ourshare of the Parent Partnership’s Revolving Credit Facility due in October 2009,7.625% Senior Notes due in February 2012 and 6.125% Senior Notes due in February 2013,(ii) our $210.0 million 7.51% Senior Notes due January 15, 2028, and (iii) our$180.0 million 6.45% Senior Notes due January 15, 2008.

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

During the six monthsended June 30, 2005, we contributed $1.1 million to MB Storage. No amountswere contributed to Centennial during the six months ended June 30, 2005. Duringthe six months ended June 30, 2004, we contributed $1.5 million toCentennial to cover operating needs and capital expenditures and $17.2 millionto MB Storage, of which $16.5 million was used to acquire storage assets in April 2004.During the remainder of 2005, we may be required to contribute cash to Centennialto cover capital expenditures, acquisitions or other operating needs and to MBStorage to cover significant capital expenditures or additional acquisitions.

*Off-Balance SheetArrangements*

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

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*ContractualObligations*

The followingtable summarizes our debt repayment obligations and material contractualcommitments as of June 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           |       | $                                                                       | 62.5       |   | $ | — |   | $ | — |   | $ | 62.5 |   | $ | — |   |
| 6.45% Senior Notes due  2008 (1)            |       | 180.0                                                                   |       | — |   | 180.0 |   | — |   | — |   |
| 7.51% Senior Notes due  2028 (1)            |       | 210.0                                                                   |       | — |   | — |   | — |   | 210.0 |   |
| Debt subtotal                               |       | 452.5                                                                   |       | — |   | 180.0 |   | 62.5 |   | 210.0 |   |
| Operating leases                            |       | 56.4                                                                    |       | 12.4 |   | 21.1 |   | 9.1 |   | 13.8 |   |
| Capital expenditure  obligations (2)        |       | 0.3                                                                     |       | 0.3 |   | — |   | — |   | — |   |
| Other liabilities and  deferred credits (3) |       | 0.7                                                                     |       | — |   | 0.6 |   | 0.1 |   | — |   |
| Total                                       |       | $                                                                       | 509.9      |   | $ | 12.7 |   | $ | 201.7 |   | $ | 71.7 |   | $ | 223.8 |   |

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(1)             We entered into aninterest rate swap agreement to hedge our exposure to changes in the fair valueof our 7.51% Senior Notes due 2028. At June 30, 2005, the 7.51% SeniorNotes include an adjustment to increase the fair value of the debt by $7.4million related to this interest rate swap agreement. At June 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)             Includes accruals ofcost incurred but not yet paid relating to capital projects.

(3)             Excludesapproximately $9.1 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.

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

*Sources of FutureCapital*

We expect that our cashflow from operating activities will be adequate to fund cash distributions andcapital additions necessary to sustain existing operations. However,expansionary capital projects and acquisitions may require additional capitalcontributions from our Parent Partnership. The Parent Partnership has fundedits capital commitments from operating cash flow, borrowings under bank creditfacilities, the issuance of long term debt in capital markets and the publicoffering of Limited Partner Units. We expect future capital needs will besimilarly funded.

Our Parent Partnershiphas filed with the Securities and Exchange Commission a universal shelfregistration statement that, subject to agreement on terms at the time of useand appropriate supplementation, allows it to issue, in one or more offerings,up to an aggregate of $2.0 billion of equity securities, debt securities or acombination thereof. During the three months ended June 30, 2005, ourParent Partnership issued $279.2 million of equity securities. At June 30,2005, our Parent Partnership had $1.7 billion remaining under this shelf registration,subject to customary marketing terms and conditions.

Our Parent Partnership’ssenior unsecured debt is rated BBB- by Standard and Poors (“S&P”) and Baa3by Moody’s Investors Service (“Moody’s”). S&P assigned this rating on June 14,2005, following its review of the ownership structure, corporate governanceissues, and proposed funding after the acquisition of the Company by 

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DFI. Bothratings are with a stable outlook. A rating reflects only the view of a ratingagency and is not a recommendation to buy, sell or hold any indebtedness. Anyrating can be revised upward or downward or withdrawn at any time by a ratingagency if it determines that the circumstances warrant such a change. Thesenior unsecured debt of our rating is also rated BBB- by S&P and Baa3 byMoody’s. Both ratings are with a stable outlook.

**OtherConsiderations**

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

In 1994, the LouisianaDepartment of Environmental Quality (“LDEQ”) issued a compliance order forenvironmental contamination at our Arcadia, Louisiana facility. In 1999, ourArcadia facility and adjacent terminals were directed by the RemediationServices Division of the LDEQ to pursue remediation of this contamination. At June 30,2005, we have an accrued liability of $0.2 million for remediation costs at ourArcadia facility. Effective in March 2004, we executed an access agreementwith an adjacent industrial landowner who is located upgradient of the Arcadiafacility. This agreement enables the landowner to proceed with remediationactivities at our Arcadia facility for which it has accepted sharedresponsibility. We do not expect that the completion of the remediation programproposed to the LDEQ will have a future material adverse effect on ourfinancial position, results of operations or cash flows.

On March 17, 2003,we experienced 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 with the State of Illinois, whichrequired us to conduct an environmental investigation. At this time, we havecomplied with the terms of the Agreed Order, and the results of theenvironmental investigation indicated there were no soil or groundwater impactsfrom the release. We are in the process of negotiating a final settlement withthe State of Illinois, and we do not expect that compliance with the settlementwill have a future material adverse effect on our financial position, resultsof operations or cash flows.

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal. The released jet fuel was contained within a stormwater retention pond located on the terminal property. Six migratory waterfowlwere affected by the jet fuel and were subsequently euthanized by or at therequest of the United States Fish and Wildlife Service (“USFWS”). On October 1,2004, the USFWS served us with a Notice of Violation, alleging that we violated16 USC 703 of the Migratory Bird Treaty Act for the “take[ing] of migratorybirds by illegal methods.” On February 7, 2005, we entered into aMemorandum of Understanding (“MOU”) with the USFWS, and on June 23, 2005,we notified the USFWS that we had completed all requirements under the MOU,thus terminating the agreement and settling all aspects of this matter. Theterms of this settlement did not have a material effect on our financialposition, results of operations or cash flows.

On July 27, 2004, wereceived notice from the United States Department of Justice (“DOJ”) of itsintent to seek a civil penalty against us related to our November 21,2001, release of approximately 2,575 barrels of jet fuel from our 14-inchdiameter pipeline located in Orange County, Texas. The DOJ, at the request ofthe Environmental Protection Agency, is seeking a civil penalty against us foralleged violations of the Clean Water Act (“CWA”) arising out of this release. Themaximum statutory penalty calculated for this alleged violation of the CWA is$2.8 million. We are in discussions with the DOJ regarding this matter and haveresponded to its request for additional 

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information.We do not expect a civil penalty, if any, to have a material adverse effect onour financial position, results of operations or cash flows.

At June 30, 2005, wehave an accrued liability of $1.5 million related to various sites requiringenvironmental remediation activities. We do not expect that the completion ofremediation programs associated with these activities will have a futurematerial adverse effect on our financial position, results of operations orcash flows.

*Recent AccountingPronouncements*

See discussion of newaccounting pronouncements in Note 1. Organization and Basis of Presentation -New Accounting Pronouncements in the accompanying consolidated financialstatements.

*Retirement andElection of Officers*

On July 12, 2005, weannounced that Charles H. Leonard elected to retire effective July 8,2005, as Senior Vice President and Chief Financial Officer of the Company. TracyE. Ohmart, Controller of the Company, became the acting Chief FinancialOfficer.

Mr. Ohmart, age 37,has served as Controller of the Company since May 2002. Mr. Ohmartjoined the Company in January 2001 and has held various positions withinthe Company until he became Assistant Controller in May 2001. Prior to hisemployment with the Company, Mr. Ohmart spent 12 years in variouspositions at ARCO Pipe Line Company, most recently serving as supervisor ofgeneral accounting and policy.

**Forward-LookingStatements**

The matters discussedherein include “forward-looking statements” within the meaning of variousprovisions of the Securities Act of 1933 and the Securities Exchange Act of1934. All statements, other than statements of historical facts, included inthis document that address activities, events or developments that we expect oranticipate will or may occur in the future, including such things as estimatedfuture capital expenditures (including the amount and nature thereof), businessstrategy and measures to implement strategy, competitive strengths, goals,expansion and growth of our business and operations, plans, references tofuture success, references to intentions as to future matters and other suchmatters are forward-looking statements. These statements are based on certainassumptions and analyses made by us in light of our experience and ourperception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate under thecircumstances. However, whether actual results and developments will conformwith our expectations and predictions is subject to a number of risks anduncertainties, including general economic, market or business conditions, theopportunities (or lack thereof) that may be presented to and pursued by us,competitive actions by other pipeline companies, changes in laws orregulations, and other factors, many of which are beyond our control. Consequently,all of the forward-looking statements made in this document are qualified bythese cautionary statements and we cannot assure you that actual results ordevelopments that we anticipate will be realized or, even if substantiallyrealized, that they will have the expected consequences to or effect on us orour business 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.

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

We may be exposed tomarket risk through changes in commodity prices and interest rates. We do nothave foreign exchange risks. Our Risk Management Committee has establishedpolicies to monitor and control these market risks. The Risk ManagementCommittee is comprised, in part, of senior executives of the Company.

We have utilized andexpect to continue to utilize interest rate swap agreements to hedge a portionof our fair value risks. Interest rate swap agreements are used to manage thefixed interest rate mix of our debt portfolio 

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andoverall cost of borrowing. The interest rate swap related to our fair valuerisk is intended to reduce our exposure to changes in the fair value of ourfixed rate Senior Notes. The interest rate swap agreement involves the periodicexchange of payments without the exchange of the notional amount upon which thepayments are based. The related amount payable to or receivable fromcounterparties is included as an adjustment to accrued interest.

At June 30, 2005, wehad outstanding $180.0 million principal amount of 6.45% Senior Notes due 2008and $210.0 million principal amount of 7.51% Senior Notes due 2028. At June 30,2005, the estimated fair value of the 6.45% Senior Notes and 7.51% Senior Noteswere approximately $188.5 million and $224.1 million, respectively.

In October 2001, weentered into an interest rate swap agreement to hedge our exposure to changesin the fair value of our fixed rate 7.51% Senior Notes due 2028. We designatedthis swap agreement as a fair value hedge. The swap agreement has a notionalamount of $210.0 million and matures in January 2028 to match theprincipal and maturity of the Senior Notes. Under the swap agreement, we pay afloating rate of interest based on a three-month U.S. Dollar LIBOR rate, plus aspread, and receive a fixed rate of interest of 7.51%. During the six monthsended June 30, 2005, and 2004, we recognized reductions in interestexpense of $3.3 million and $5.1 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap. During the quarter ended June 30, 2005, we measuredthe hedge effectiveness of this interest rate swap and noted that no gain orloss from ineffectiveness was required to be recognized. The fair value of thisinterest rate swap was a gain of approximately $7.4 million and $3.4 million atJune 30, 2005, and December 31, 2004, respectively. Utilizing thebalance of the 7.51% Senior Notes outstanding at June 30, 2005, andincluding the effects of hedging activities, assuming market interest ratesincrease 100 basis points, the potential annual increase in interest expense is$2.7 million.

As of June 30, 2005,and December 31, 2004, we had intercompany notes payable to our ParentPartnership of $62.5 million and $301.7 million, respectively, whichrepresented borrowings under the Parent Partnership’s Revolving Credit Facility,7.625% Senior Notes and 6.125% Senior Notes. The weighted average interest rateon the note payable to the Parent Partnership at June 30, 2005, was 5.5%.At June 30, 2005, accrued interest includes $3.2 million due to our ParentPartnership. For the six months ended June 30, 2005 and 2004, interestcosts incurred on the note payable to our Parent Partnership totaled $5.1million and $6.1 million, respectively.

**Item 4. Controlsand Procedures**

The principal executiveofficer and principal financial officer of our General Partner, afterevaluating the effectiveness of our disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) asof June 30, 2005, have concluded that, as of such date, our disclosurecontrols and procedures are adequate and effective to ensure that materialinformation relating to us and our consolidated subsidiaries would be madeknown to them by others within those entities.

*Changes inInternal Control over Financial Reporting*

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

**PART II. OTHERINFORMATION**

**Item 1. LegalProceedings**

We have been, in theordinary course of business, a defendant in various lawsuits and a party tovarious other legal proceedings, some of which are covered in whole or in partby insurance. We believe that the outcome of these lawsuits and otherproceedings will not individually or in the aggregate have a material adverseeffect on 

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ourconsolidated financial position, results of operations or cash flows. Seediscussion of legal proceedings in Note 9. Commitments and Contingencies in theaccompanying consolidated financial statements.

**Item 6. Exhibits**

| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Second Amended and  Restated Agreement of Limited Partnership of TE Products Pipeline Company,  Limited Partnership, effective September 21, 2001 (Filed as  Exhibit 3.8 to Form 10-Q of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the quarter ended September 30, 2001,  and incorporated herein by reference).                                                                                                                                                                                                                                                                                              |
| 4.1             |       | Form of Indenture  between TE Products Pipeline Company, Limited Partnership and The Bank of New  York, as Trustee, dated as of January 27, 1998 (Filed as  Exhibit 4.3 to TE Products Pipeline Company, Limited Partnership’s  Registration Statement on Form S-3 (Commission File No. 333-38473)  and incorporated herein by reference).                                                                                                                                                                                                                                                                              |
| 4.2             |       | Form of Indenture  between TEPPCO Partners, L.P., as issuer, TE Products Pipeline Company,  Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. and Jonah  Gas Gathering Company, as subsidiary guarantors, and First Union National  Bank, NA, as trustee, dated as of February 20, 2002 (Filed as  Exhibit 99.2 to Form 8-K of TEPPCO Partners, L.P. (Commission  File No. 1-10403) dated as of February 20, 2002 and  incorporated herein by reference).                                                                                                                                               |
| 4.3             |       | First Supplemental  Indenture between TEPPCO Partners, L.P., as issuer, TE Products Pipeline  Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P.  and Jonah Gas Gathering Company, as subsidiary guarantors, and First Union  National Bank, NA, as trustee, dated as of February 20, 2002 (Filed as  Exhibit 99.3 to Form 8-K of TEPPCO Partners, L.P (Commission  File No. 1-10403) dated as of February 20, 2002 and  incorporated herein by reference).                                                                                                                                          |
| 4.4             |       | Second Supplemental  Indenture, dated as of June 27, 2002, among TEPPCO Partners, L.P., as  issuer, TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO  Midstream Companies, L.P., and Jonah Gas Gathering Company, as Initial  Subsidiary Guarantors, and Val Verde Gas Gathering Company, L.P., as New  Subsidiary Guarantor, and Wachovia Bank, National Association, formerly known  as First Union National Bank, as trustee (Filed as Exhibit 4.6 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the quarter ended June 30, 2002 and incorporated herein by  reference). |
| 4.5             |       | Third Supplemental  Indenture among TEPPCO Partners, L.P. as issuer, TE Products Pipeline  Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P.,  Jonah Gas Gathering Company and Val Verde Gas Gathering Company, L.P. as  Subsidiary Guarantors, and Wachovia Bank, National Association, as trustee,  dated as of January 30, 2003 (Filed as Exhibit 4.7 to Form 10-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  year ended December 31, 2002, and incorporated herein by reference).                                                                                         |
| 10.1+           |       | Amendments to the  TEPPCO Retirement Cash Balance Plan and the TEPPCO Supplemental Benefit Plan  dated as May 27, 2005 (Filed as Exhibit 10.1 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended June 30, 2005, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                              |
| 10.2+           |       | Agreement and Release  between Charles H. Leonard and Texas Eastern Products Pipeline Company, LLC  dated as of July 11, 2005 (Filed as Exhibit 10.2 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended June 30, 2005, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                       |
| 31.1*           |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

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| 31.2*  |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|--------|--------|------------------------------------------------------------------------------------------------------------|
| 32.1** |   | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
| 32.2** |   | Certification of Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

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                *      Filed herewith.

                **   Furnished herewith pursuant to Item601(b)-(32) of Regulation S-K.

                +      A management contract or compensation plan or arrangement.

**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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