**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

**For thequarterly period ended September 30, 2006**

**OR**

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

**CommissionFile No. 1-13603**

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**TE Products Pipeline Company,Limited Partnership**

(Exact name ofRegistrant as specified in its charter)

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

 

**1100 Louisiana Street, Suite 1300**

**Houston, Texas 77002**

(Address ofprincipal executive offices, including zip code)

**(713) 381-3636**

(Registrant’stelephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  x   No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):Large accelerated filer o     Accelerated Filer o     Non-accelerated Filer x

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

 

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**TABLE OF CONTENTS**
| **PART I. FINANCIAL INFORMATION**                                                                                     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                  |       |
| Item  1. Financial Statements                                                                                         |       |
| Consolidated  Balance Sheets as of September 30, 2006 (unaudited) and December 31,  2005(unaudited)                   |       |
|                                                                                                                  |       |
| Consolidated Statements of Income for the three months  and nine months ended September 30, 2006 and 2005 (unaudited) |       |
|                                                                                                                  |       |
| Consolidated Statements of Cash Flows for the nine  months ended September 30, 2006 and 2005 (unaudited)              |       |
|                                                                                                                  |       |
| Consolidated Statement of Partners’ Capital for the  nine months ended September 30, 2006(unaudited)             |       |
|                                                                                                                  |       |
| Notes to the Consolidated Financial Statements  (unaudited)                                                           |       |
|                                                                                                                  |       |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                   |       |
|                                                                                                                  |       |
| Cautionary Note Regarding Forward-Looking Statements                                                                  |       |
|                                                                                                                  |       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                   |       |
|                                                                                                                  |       |
| Item 4. Controls and Procedures                                                                                       |       |
|                                                                                                                  |       |
| **PART  II. OTHER INFORMATION**                                                                                       |       |
|                                                                                                                  |       |
| Item  1. Legal Proceedings                                                                                            |       |
|                                                                                                                  |       |
| Item 1A.Risk Factors                                                                                                  |       |
|                                                                                                                  |       |
| Item 6. Exhibits                                                                                                      |       |
|                                                                                                                  |       |
| Signatures                                                                                                            |       |

 

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**PART I.  FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements**

** **

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

** **

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                           | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                                                                                                                 |       |                   |       |                  |       |
| **ASSETS**                                                                                                           |       |                   |       |                  |       |
|                                                                                                                 |       |                   |       |                  |       |
| Current assets:                                                                                                      |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                           |       | $                      | —     |                  | $          | — |   |
| Accounts  receivable, trade (net of allowance for doubtful accounts of $0 and $45)                                   |       | 23,020                 |       | 26,338                |       |
| Accounts  receivable, related parties                                                                                |       | 591                    |       | 2,182                 |       |
| Inventories                                                                                                          |       | 13,672                 |       | 16,449                |       |
| Other                                                                                                                |       | 13,167                 |       | 14,911                |       |
| Total current  assets                                                                                                |       | 50,450                 |       | 59,880                |       |
| Property, plant and  equipment, at cost (net of accumulated depreciation and amortization of  $367,947 and $340,562) |       | 838,551                |       | 808,761               |       |
| Equity investments                                                                                                   |       | 149,083                |       | 157,335               |       |
| Other assets                                                                                                         |       | 21,869                 |       | 16,566                |       |
| Total assets                                                                                                         |       | $                      | 1,059,953  |                  | $          | 1,042,542 |   |
|                                                                                                                 |       |                   |       |                  |       |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                                                                          |       |                   |       |                  |       |
| ** **                                                                                                           |       |                   |       |                  |       |
| Current liabilities:                                                                                                 |       |                   |       |                  |       |
| Accounts payable  and accrued liabilities                                                                            |       | $                      | 13,759     |                  | $          | 13,540 |   |
| Accounts  payable, related parties                                                                                   |       | 593                    |       | 19,973                |       |
| Accrued interest                                                                                                     |       | 6,991                  |       | 16,151                |       |
| Other accrued  taxes                                                                                                 |       | 5,442                  |       | 7,524                 |       |
| Other                                                                                                                |       | 7,044                  |       | 7,220                 |       |
| Total current  liabilities                                                                                           |       | 33,829                 |       | 64,408                |       |
| Senior notes                                                                                                         |       | 386,058                |       | 389,048               |       |
| Note payable, Parent  Partnership                                                                                    |       | 176,931                |       | 206,906               |       |
| Other liabilities and  deferred credits                                                                              |       | 17,387                 |       | 14,500                |       |
| Commitments and  contingencies                                                                                       |       |                   |       |                  |       |
| Partners’ capital:                                                                                              |       |                   |       |                  |       |
| General  partner’s interest                                                                                     |       | 4                      |       | 4                     |       |
| Limited  partner’s interest                                                                                     |       | 445,744                |       | 367,676               |       |
| Total partners’  capital                                                                                        |       | 445,748                |       | 367,680               |       |
| Total liabilities and  partners’ capital                                                                        |       | $                      | 1,059,953  |                  | $          | 1,042,542 |   |

 

See accompanying Notes to UnauditedConsolidated Financial Statements.

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**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

** **

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

**(in thousands)**

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating  revenues:                   |       |                             |       |                            |       |   |   |   |   |
| Transportation – Refined products |       | $                                | 42,067     |                            | $          | 38,240 |   | $ | 113,309 |   | $ | 111,039 |   |
| Transportation – LPGs             |       | 16,877                           |       | 16,519                          |       | 59,652 |   | 63,220 |   |
| Other                                  |       | 12,282                           |       | 10,107                          |       | 39,461 |   | 30,144 |   |
| Total operating revenues               |       | 71,226                           |       | 64,866                          |       | 212,422 |   | 204,403 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Costs and  expenses:                   |       |                             |       |                            |       |   |   |   |   |
| Operating expenses                     |       | 27,676                           |       | 25,485                          |       | 77,169 |   | 72,429 |   |
| Operating fuel and power               |       | 10,523                           |       | 8,142                           |       | 28,066 |   | 23,697 |   |
| General and administrative             |       | 3,455                            |       | 4,616                           |       | 13,250 |   | 12,327 |   |
| Depreciation and amortization          |       | 10,446                           |       | 9,818                           |       | 30,340 |   | 28,653 |   |
| Taxes – other than income taxes   |       | 256                              |       | 3,014                           |       | 5,965 |   | 8,362 |   |
| Gains on sales of assets               |       | (14                              | )          | (24                             | )          | (39 | ) | (131 | ) |
| Total costs and expenses               |       | 52,342                           |       | 51,051                          |       | 154,751 |   | 145,337 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Operating income                       |       | 18,884                           |       | 13,815                          |       | 57,671 |   | 59,066 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Interest expense  – net           |       | (8,096                           | )          | (7,286                          | )          | (24,385 | ) | (22,839 | ) |
| Equity losses                          |       | (2,949                           | )          | (651                            | )          | (6,581 | ) | (2,718 | ) |
| Other income –  net               |       | 289                              |       | 306                             |       | 1,232 |   | 576 |   |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Net income                             |       | $                                | 8,128      |                            | $          | 6,184 |   | $ | 27,937 |   | $ | 34,085 |   |

 

See accompanying Notes to UnauditedConsolidated Financial Statements.

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**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

** **

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

**(inthousands)**
| ** **                                                                     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**          | ** ** |
| ** **                                                                     | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                         |       |                            |       |   |   |
| Net income                                                                     |       | $                               | 27,937     |   | $ | 34,085 |   |
| Adjustments to reconcile net income to cash provided  by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                  |       | 30,340                          |       | 28,653 |   |
| Losses in equity investments                                                   |       | 6,581                           |       | 2,718 |   |
| Distributions from equity investments                                          |       | 11,228                          |       | 10,688 |   |
| Non-cash portion of interest expense                                           |       | 391                             |       | 199 |   |
| Gains on sales of assets                                                       |       | (39                             | )          | (131 | ) |
| Decrease in accounts receivable, trade                                         |       | 3,318                           |       | 531 |   |
| Decrease in accounts receivable, related parties                               |       | 1,591                           |       | 511 |   |
| Decrease (increase) in inventories                                             |       | 2,777                           |       | (4,642 | ) |
| Decrease (increase) in other current assets                                    |       | 1,744                           |       | (4,695 | ) |
| Decrease in accounts payable and accrued expenses                              |       | (10,146                         | )          | (2,162 | ) |
| Decrease in accounts payable, related parties                                  |       | (19,380                         | )          | (38,754 | ) |
| Other                                                                          |       | (8,004                          | )          | (7,351 | ) |
| Net cash provided by operating activities                                      |       | 48,338                          |       | 19,650 |   |
|                                                                           |       |                            |       |   |   |
| Cash flows from  investing activities:                                         |       |                            |       |   |   |
| Investment in Mont Belvieu Storage Partners, L.P.                              |       | (4,168                          | )          | (2,635 | ) |
| Purchase of assets                                                             |       | (10,975                         | )          | (68,969 | ) |
| Investment in Centennial Pipeline LLC                                          |       | (2,500                          | )          | — |   |
| Cash paid for linefill on assets owned                                         |       | (4,269                          | )          | — |   |
| Capital expenditures                                                           |       | (47,003                         | )          | (38,266 | ) |
| Net cash used in investing activities                                          |       | (68,915                         | )          | (109,870 | ) |
|                                                                           |       |                            |       |   |   |
| Cash flows from  financing activities:                                         |       |                            |       |   |   |
| Proceeds from note payable, Parent Partnership                                 |       | 45,203                          |       | 148,508 |   |
| Repayments of note payable, Parent Partnership                                 |       | (74,757                         | )          | (261,246 | ) |
| Equity contributions – Parent Partnership                                 |       | 100,502                         |       | 294,820 |   |
| Distributions paid                                                             |       | (50,371                         | )          | (91,862 | ) |
| Net cash provided by financing activities                                      |       | 20,577                          |       | 90,220 |   |
|                                                                           |       |                            |       |   |   |
| Net increase in  cash and cash equivalents                                     |       | —                          |       | — |   |
|                                                                           |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                              |       | —                          |       | — |   |
| Cash and cash  equivalents at end of period                                    |       | $                               | —     |   | $ | — |   |
|                                                                           |       |                            |       |   |   |
| **Non-cash  investing activities:**                                            |       |                            |       |   |   |
| Net assets transferred to Mont Belvieu Storage  Partners, L.P.                 |       | $                               | —     |   | $ | 1,429 |   |
|                                                                           |       |                            |       |   |   |
| **Supplemental  disclosure of cash flows:**                                    |       |                            |       |   |   |
| Cash paid for  interest (net of amounts capitalized)                           |       | $                               | 33,391     |   | $ | 30,786 |   |

 

See accompanying Notes to UnauditedConsolidated Financial Statements.

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

**CONSOLIDATED STATEMENT OFPARTNERS’ CAPITAL**

**(Unaudited)**

**(inthousands)**
| ** **                                    | ** ** | **General**        | ** ** | **Limited**        | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                                    | ** ** | **Partner’s** | ** ** | **Partner’s** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Interest**       | ** ** | **Interest**       | ** ** | **Total**  | ** ** |
|                                          |       |               |       |               |       |       |       |
| Partners’  capital at December 31, 2005  |       | $                  | 4          |               | $          | 367,676    |       | $ | 367,680 |   |
| Net income allocation                         |       | 1                  |       | 27,936             |       | 27,937     |       |
| Cash distributions                            |       | (1                 | )          | (50,370            | )          | (50,371    | )          |
| Capital contributions                         |       | —             |       | 100,502            |       | 100,502    |       |
|                                          |       |               |       |               |       |       |       |
| Partners’ capital at  September 30, 2006 |       | $                  | 4          |               | $          | 445,744    |       | $ | 445,748 |   |

 

See accompanyingNotes to Unaudited Consolidated Financial Statements.

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**TE PRODUCTS PIPELINE COMPANY,LIMITED PARTNERSHIP**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**NOTE 1.  ORGANIZATIONAND BASIS OF PRESENTATION**

TE Products Pipeline Company, Limited Partnership (the“Partnership”), a Delaware limited partnership, was formed in March 1990.  TEPPCO Partners, L.P. (the “ParentPartnership”) owns a 99.999% interest in us as the sole limited partner.  TEPPCO GP, Inc. (“TEPPCO GP” or “GeneralPartner”), a wholly owned subsidiary of the Parent Partnership, holds a 0.001% generalpartner interest in us.  Texas EasternProducts Pipeline Company, LLC (the “Company”), a Delaware limited liabilitycompany, serves as the general partner of our Parent Partnership.  Through February 23, 2005, the Company was anindirect wholly owned subsidiary of Duke Energy Field Services, LLC (“DEFS”), ajoint venture between Duke Energy Corporation (“Duke Energy”) andConocoPhillips.  Through February 23,2005, Duke Energy held an interest of approximately 70% in DEFS, andConocoPhillips held the remaining interest of approximately 30%.  On February 24, 2005, the Company wasacquired by DFI GP Holdings L.P. (formerly Enterprise GP Holdings L.P.) (“DFI”),an affiliate of EPCO, Inc. (“EPCO”), a privately held company controlled by DanL. Duncan, for approximately $1.1 billion. Mr. Duncan and his affiliates, including EPCO and Dan Duncan LLC,privately held companies controlled by him, control us, our Parent Partnership,the Company and Enterprise Products Partners L.P. (“Enterprise”).  As a result of the transaction, DFI owns andcontrols the 2% general partner interest in our Parent Partnership and has theright to receive the incentive distribution rights associated with its generalpartner interest in our Parent Partnership.

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

On May 9, 2005, we formed TEPPCO Interests, LLC (“TEPPCOInterests”), a Delaware limited liability company, of which we own 100% of themember interests.  On July 15, 2005,TEPPCO Interests acquired from Texas Genco, LLC (“Genco”) (i) 100% of itsmember interests in TG Pipeline GP, LLC, a Delaware limited liability company,which is the owner of 100% of the general partner interests in TG Pipeline,L.P. (“Pipeline LP”), a Texas limited partnership, and (ii) 100% of themembership interests in TG Pipeline LP, LLC, a Delaware limited liabilitycompany, which is the owner of 100% of the limited partner interests in TGPipeline, L.P.  On May 18, 2005, weformed TEPPCO Terminals, L.P. (“TEPPCO Terminals”), a Delaware limitedpartnership, and we own a 99.999% interest in TEPPCO Terminals as the solelimited partner.  TEPPCO GP serves as thegeneral partner and holds a 0.001% general partner interest in TEPPCOTerminals.

 TEPPCO GP, asour general partner, has all management powers over the business and affairs ofour partnership under the terms of the Agreement of Limited Partnership of TEProducts Pipeline Company, Limited Partnership (the “Partnership Agreement”).  All of our management, administrative andoperating functions are performed by employees of EPCO, pursuant to anadministrative services agreement to which we and TEPPCO GP are parties, whichwas entered into as a result of the change in ownership of the Company onFebruary 24, 2005.  We reimburse EPCO forthe allocated costs of its employees who perform operating, management andother administrative functions for us.

The accompanying unaudited consolidated financial statementsreflect all adjustments that are, in the opinion of our management, of a normaland recurring nature and necessary for a fair statement of our financialposition as of September 30, 2006, and the results of our operations and cashflows for the periods presented.  Theresults of operations for the three months and nine months ended September 30,2006, are not necessarily indicative of results of our operations for the fullyear 2006.  You should read these interimfinancial statements in conjunction with our consolidated financial statementsand notes thereto presented in the TE Products Pipeline Company, LimitedPartnership Annual Report on Form 10-K for the year ended December 31,2005.  We have reclassified certainamounts from prior periods to conform to the current presentation.

Weoperate and report in one business segment: transportation and storage ofrefined products, liquefied petroleum gases (“LPGs”) and petrochemicals.  Our interstate transportation operations,including rates charged to

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customers,are subject to regulations prescribed by the Federal Energy RegulatoryCommission (“FERC”).  We refer to refinedproducts, LPGs and petrochemicals in this Report, collectively, as “petroleumproducts” or “products.”

AtSeptember 30, 2006, we had a working capital surplus of $16.6 million, while atDecember 31, 2005, we had a working capital deficit of $4.5 million.  Our primary sources of liquidity are cashgenerated from operations and from loans or capital contributions from ourParent Partnership.  Working capitaldeficits occur primarily from the timing of operating cash receipts fromcustomers, payment of cash distributions and the payment of normal operatingexpenses 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.  AtSeptember 30, 2006, our Parent Partnership had $330.9 million in availableborrowing capacity under its revolving credit facility.

**Asset Retirement Obligation**

During the second quarter of 2006, we recorded $0.3million of expense, included in depreciation and amortization expense, relatedto a conditional asset retirement obligation. Additionally, we recorded a $0.4 million liability, which represents thefair value of a conditional asset retirement obligation related to structuralrestoration work to be completed on leased office space that is required uponour anticipated office lease termination. This conditional asset retirement obligation was not previouslyrecorded, due to the indeterminate range of settlement dates and settlementmethods, during the implementation of Statement of Financial AccountingStandards (“SFAS”) No. 143, *Accounting for Asset RetirementObligations*, and Financial Accounting Standards Board (“FASB”)Interpretation No. 47, *Accounting for ConditionalAsset Retirement Obligations, an interpretation of FASB Statement No. 143*,which we adopted on January 1, 2003 and December 31, 2005, respectively.  During the second quarter of 2006, weassigned probabilities for settlement dates and settlement methods for use inan expected present value measurement of fair value and a recorded assetretirement obligation.

**New Accounting Pronouncements**

In December 2004, the FASB issued SFAS No. 123(R)(revised 2004), *Share-Based Payment*.  SFAS 123(R) is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*,as amended by SFAS No. 148,*Accounting forStock-Based Compensation — Transition and Disclosure* and supersedesAccounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*.  SFAS 123(R) requires that the cost resultingfrom all share-based payment transactions be recognized in the financialstatements at fair value.  In April 2005,both the FASB and the Securities and Exchange Commission (“SEC”) decided todelay the effective date for public companies to implement SFAS 123(R). SFAS123(R) became effective for public companies for annual periods beginning afterJune 15, 2005.  Accordingly, our ParentPartnership adopted SFAS 123(R) in the first quarter of 2006, under themodified prospective transition method. Our Parent Partnership’s 1999 and 2005 Phantom Unit Plans are liabilityawards under the provisions of this statement. We are allocated a portion of the expense related to our ParentPartnership’s compensation plans.  Noadditional compensation expense has been recorded in connection with theadoption of SFAS 123(R) as our Parent Partnership has historically recorded theassociated liabilities at fair value. The adoption of SFAS 123(R) did not have a material effect on ourfinancial position, results of operations or cash flows.

In June 2005, the Emerging Issues Task Force (“EITF”)reached consensus in EITF 04-5, *Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights*,to provide guidance on how general partners in a limited partnership should determinewhether they control a limited partnership and therefore should consolidateit.  The EITF agreed that the presumptionof general partner control would be overcome only when the limited partnershave either of two types of rights. The first type, referred to as “kick-outrights,” is the right to dissolve or liquidate the partnership or otherwiseremove the general partner without cause. The second type, referred to as “participating

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

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

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

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

In June 2006, the EITF reached consensus in EITF 06-3,*How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*. The accounting guidance permits companies to elect to present on eithera gross or net basis sales

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and other taxes that are imposed on and concurrentwith individual revenue-producing transactions between a seller and acustomer.  The gross basis includes thetaxes in revenues and costs; the net basis excludes the taxes from revenues.The accounting guidance does not apply to tax systems that are based on grossreceipts or total revenues.  EITF 06-3requires companies to disclose their policy for presenting the taxes and discloseany amounts presented on a gross basis if those amounts are significant.  The guidance in EITF 06-3 is effectiveJanuary 1, 2007.  As a matter of policy,we report such taxes on a net basis.  Webelieve that adoption of EITF 06-3 will not have a material effect on ourfinancial position, results of operations or cash flows.

InJune 2006, the FASB issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, an Interpretation of SFAS 109,*Accounting for Income Taxes* (“FIN 48”).  FIN 48 provides that the tax effects of anuncertain tax position should be recognized in a company’s financial statementsif the position taken by the entity is more likely than not sustainable if itwere to be examined by an appropriate taxing authority, based on technicalmerit.  After determining if a taxposition meets such criteria, the amount of benefit to be recognized should bethe largest amount of benefit that has more than a 50% chance of being realizedupon settlement.  The provisions of FIN48 are effective for fiscal years beginning after December 15, 2006, and we arerequired to adopt FIN 48 as of January 1, 2007. We are currently assessing the impact, if any, that the adoption of FIN48 will have on our financial position, results of operations or cash flows.

**In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements.  SFAS 157applies only to fair-value measurements that are already required or permittedby other accounting standards and is expected to increase the consistency ofthose measurements.  SFAS 157 emphasizesthat fair value is a market-based measurement that should be determined basedon the assumptions that market participants would use in pricing an asset orliability. Companies will be required to disclose the extent to which fairvalue is used to measure assets and liabilities, the inputs used to develop themeasurements, and the effect of certain of the measurements on earnings (orchanges in net assets) for the period. SFAS 157 is effective for fiscal yearsbeginning after December 15, 2007, and we are required to adopt SFAS 157 as ofJanuary 1, 2008.  We are currentlyassessing the impact that the adoption of SFAS 157 will have on our financialposition, results of operations and cash flows.**

In September 2006, the SEC issued Staff AccountingBulletin No. 108, *Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements* (“SAB 108”).  SAB108 addresses how the effects of prior-year uncorrected misstatements should beconsidered when quantifying misstatements in current-year financial statements.  The SAB requires registrants to quantifymisstatements using both balance-sheet and income-statement approaches and toevaluate whether either approach results in quantifying an error that ismaterial in light of relevant quantitative and qualitative factors.  When the effect of initial adoption isdetermined to be material, SAB 108 allows registrants to record that effect asa cumulative-effect adjustment to beginning-of-year retained earnings.  The requirements are effective for annualfinancial statements covering the first fiscal year ending after November 15,2006.  Additionally, the nature andamount of each individual error being corrected through the cumulative-effectadjustment, when and how each error arose, and the fact that the errors had previouslybeen considered immaterial is required to be disclosed.  We are required to adopt SAB 108 for ourcurrent fiscal year ending December 31, 2006. We do not expect the adoption of SAB 108 to have a material effect onour financial position, results of operations or cash flows.

**NOTE2.  INTANGIBLE ASSETS**

We account for our intangible assets under SFAS No.142, *Goodwill and Other Intangible Assets*,**which was issued by the FASB in July 2001.  SFAS 142 prohibits amortization of goodwilland intangible assets with indefinite useful lives, but instead requirestesting for impairment at least annually. SFAS 142 requires that

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intangible assets with finite useful lives beamortized over their respective estimated useful lives.  If an intangible asset has a finite usefullife, but the precise length of that life is not known, that intangible assetshall be amortized over the best estimate of its useful life.  At a minimum, we will assess the useful livesand residual values of all intangible assets on an annual basis to determine ifadjustments are required.

The following table reflects the components ofamortized intangible assets, included in other assets on the consolidatedbalance sheets, and excess investment included in equity investments, atSeptember 30, 2006 and December 31, 2005 (in thousands):
|                           | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible  assets:       |       |                             |       |                            |       |   |   |   |   |
| Transportation agreements |       | $                                | 1,000      |                            | $          | (296 | ) | $ | 1,328 |   | $ | (326 | ) |
|                      |       |                             |       |                            |       |   |   |   |   |
| Excess  investment:       |       |                             |       |                            |       |   |   |   |   |
| Centennial  Pipeline LLC  |       | $                                | 33,390     |                            | $          | (15,678 | ) | $ | 33,390 |   | $ | (12,947 | ) |

 

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

Amortization expense on intangible assets was lessthan $0.1 million for the three-month and nine-month periods ended September30, 2006 and 2005.  Amortization expenseon excess investments included in equity earnings was $1.0 million and $1.2million for the three months ended September 30, 2006 and 2005, respectively,and $2.7 million and $3.3 million for the nine months ended September 30, 2006and 2005, respectively.

The following table sets forth the estimatedamortization expense of intangible assets and the estimated amortizationexpense allocated to equity earnings for the years ending December 31 (inthousands):
|      | ** ** | **Intangible Assets** | ** ** | **Excess Investments** | ** ** |
|------|------------|----------------------------|------------|-----------------------------|------------|
| 2006 |       | $                          | 50         |                        | $          | 3,999 |   |
| 2007 |       | 50                         |       | 4,422                       |       |
| 2008 |       | 50                         |       | 4,747                       |       |
| 2009 |       | 50                         |       | 6,187                       |       |
| 2010 |       | 50                         |       | 6,351                       |       |
|      |            |                            |            |                             |            |  |  |

 

**NOTE 3.  INTEREST RATESWAP**

In October 2001, we entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our fixed rate7.51% Senior Notes due 2028.  Wedesignated this swap agreement as a fair value hedge.  The swap agreement has a notional amount of$210.0 million and matures in January 2028 to match the principal and maturityof the 7.51% Senior Notes.  Under theswap agreement, we pay a floating rate of interest based on a three-month U.S.Dollar LIBOR rate, plus a spread of 147 basis points, and receive a fixed rateof interest of 7.51%.  During the ninemonths ended September 30, 2006 and 2005, we recognized reductions in interestexpense of $1.5 million and $4.6 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap.  During the quartersended September 30, 2006 and 2005, we reviewed the hedge

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effectiveness of this interest rate swap and notedthat no gain or loss from ineffectiveness was required to be recognized.  The fair values of this interest rate swap werelosses of approximately $3.9 million and $0.9 million at September 30, 2006,and December 31, 2005, respectively.

**NOTE 4. PROPERTY, PLANT AND EQUIPMENT**

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

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

**NOTE 5.  ACQUISITIONS**

**Refined Products Terminal andTruck Rack**

On July 12, 2005, we purchased a refined productsterminal and two-bay truck loading rack in North Little Rock, Arkansas, for$6.8 million from Exxon Mobil Corporation. The assets include three storage tanks and a two-bay truck loadingrack.  We funded the purchase throughborrowings from our Parent Partnership under its revolving credit facility, andwe allocated the purchase price to property, plant and equipment and inventory.The terminal serves the central Arkansas refined products market andcomplements our existing infrastructure in North Little Rock, Arkansas.

**Genco Assets**

On July 15, 2005, we acquired from Genco all of itsinterests in certain companies that own a 90-mile pipeline system and 5.5million barrels of storage capacity for $62.1 million.  We funded the purchase through borrowings fromour Parent Partnership under its revolving credit facility.  We allocated the purchase price to property,plant and equipment, and we accounted for the acquisition of these assets underthe purchase method of accounting.  Thisacquisition was made as part of an expansion of our refined products origincapabilities in the Houston, Texas, and Texas City, Texas, areas.  The assets of the purchased companies arebeing integrated into our origin infrastructure in Texas City and Baytown,Texas.  The integration and other systemenhancements should be in service by the first quarter of 2007, at an estimatedcost of $45.0 million.  See Note 13regarding the sale of certain of these assets to Enterprise.

**Terminal Assets**

On July 14, 2006, we purchased assets from New York LPGas Storage, Inc. for $10.0 million.  Theassets consist of two active caverns, one active brine pond, a four bay truckrack, seven above ground storage tanks, and a twelve-spot railcar rack locatedeast of our Watkins Glen, New York facility.  We funded the purchase through

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borrowings from our Parent Partnership under its revolvingcredit facility, and we allocated the purchase price, net of liabilitiesassumed, primarily to property, plant and equipment and inventory.

**NOTE 6.  INVENTORIES**

Inventories arevalued at the lower of cost (based on weighted average cost method) ormarket.  The costs of inventories did notexceed market values at September 30, 2006, and December 31, 2005. The majorcomponents of inventories were as follows (in thousands):
|                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Refined products  and LPGs (1) |       | $                            | 8,361      |                        | $          | 11,864 |   |
| Materials and  supplies        |       | 5,311                        |       | 4,585                       |       |
| Total                          |       | $                            | 13,672     |                        | $          | 16,449 |   |

 

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**(1)  Refined products and LPGs inventory ismanaged on a combined basis.**

**NOTE 7.  EQUITYINVESTMENTS**

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

We own a 50% ownership interest in Mont BelvieuStorage Partners, L.P. (“MB Storage”), and Louis Dreyfus Energy Services L.P. (“LouisDreyfus”) owns the remaining 50% interest. MB Storage owns storage capacity at the Mont Belvieu fractionation andstorage complex and a short haul transportation shuttle system that ties MontBelvieu, Texas, to the upper Texas Gulf Coast energy marketplace. MB Storage isa service-oriented, fee-based venture serving the fractionation, refining andpetrochemical industries with substantial capacity and flexibility for thetransportation, terminaling and storage of NGLs, LPGs and refinedproducts.  MB Storage has no commoditytrading activity.  We operate thefacilities for MB Storage.  See Note 12regarding the expected divestiture of MB Storage.

For the years ended December 31, 2006 and 2005, wereceive the first $1.7 million per quarter (or $6.78 million on an annualbasis) of MB Storage’s income before depreciation expense, as defined in theAgreement of Limited Partnership of MB Storage. Our share of MB Storage’s earnings may be adjusted annually by thepartners of MB Storage.  Any amount of MBStorage’s annual income before depreciation expense in excess of $6.78 millionis allocated evenly between Louis Dreyfus and us.  Depreciation expense on assets each partyoriginally contributed to MB Storage is allocated between us and Louis Dreyfusbased on the net book value of the assets contributed.  Depreciation expense on assets constructed oracquired by MB Storage subsequent to formation is allocated evenly between usand Louis Dreyfus. For the nine months ended September 30, 2006 and 2005, oursharing ratios in the earnings of MB Storage were approximately 63.8% and64.3%, respectively.  During the ninemonths ended September 30, 2006, we received distributions of $11.2 millionfrom MB Storage and contributed $4.2 million to MB Storage.  During the nine months ended September 30,2005, we received distributions of $10.7 million from

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MB Storage and contributed $4.0 million to MB Storage,which included a combination of non-cash asset transfers of $1.4 million andcash contributions of $2.6 million.

We use the equity method of accounting to account forour investments in Centennial and MB Storage. Summarized combined financial information for Centennial and MB Storagefor the nine months ended September 30, 2006 and 2005, is presented below (inthousands): 
|                   | ** ** | **Nine Months Ended** | ** ** |
|-------------------|------------|---------------------------------|------------|
| ** **        | ** ** | **September 30,**          | ** ** |
| ** **        | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Revenues          |       | $                               | 52,965     |   | $ | 54,863 |   |
| Net income (loss) |       | (2,383                          | )          | 6,091 |   |
|                   |            |                                 |            |  |  |  |  |

 

Summarized combined balance sheet information forCentennial and MB Storage as of September 30, 2006, and December 31, 2005, ispresented below (in thousands):
|                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Current assets          |       | $                      | 35,096     |                  | $          | 36,647 |   |
| Noncurrent  assets      |       | 361,416                |       | 369,679               |       |
| Current  liabilities    |       | 17,298                 |       | 23,621                |       |
| Long-term debt          |       | 150,000                |       | 150,000               |       |
| Noncurrent  liabilities |       | 21,040                 |       | 13,522                |       |
| Partners’ capital  |       | 208,174                |       | 219,183               |       |
|                         |            |                        |            |                       |            |  |  |

 

**NOTE 8.  DEBT**

**Senior Notes**

On January 27, 1998, we completed the issuance of$180.0 million principal amount of 6.45% Senior Notes due 2008, and $210.0million principal amount of 7.51% Senior Notes due 2028 (collectively the “SeniorNotes”).  The 6.45% Senior Notes were issuedat a discount of $0.3 million and are being accreted to their face value overthe term of the notes.  The 6.45% SeniorNotes due 2008 may not be redeemed prior to their maturity on January 15, 2008.  The 7.51% Senior Notes due 2028, issued atpar, may be redeemed at any time after January 15, 2008, at our option, inwhole or in part, at the following redemption prices (expressed in percentagesof the principal amount) during the twelve months beginning January 15 of theyears indicated:
|          | ** ** | **Redemption** | ** ** | ** ** | ** ** | **Redemption** | ** ** |
|----------|------------|----------------|------------|------------|------------|----------------|------------|
| **Year** | ** ** | **Price**      | ** ** | **Year**   | ** ** | **Price**      | ** ** |
|     |       |           |       |       |       |           |       |
| 2008     |       | 103.755        | %          | 2013       |       | 101.878        | %          |
| 2009     |       | 103.380        | %          | 2014       |       | 101.502        | %          |
| 2010     |       | 103.004        | %          | 2015       |       | 101.127        | %          |
| 2011     |       | 102.629        | %          | 2016       |       | 100.751        | %          |
| 2012     |       | 102.253        | %          | 2017       |       | 100.376        | %          |

 

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

The Senior Notes do not have sinking fundrequirements.  Interest on the SeniorNotes is payable semiannually in arrears on January 15 and July 15 of each year.  The Senior Notes are unsecured obligationsand

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rank pari passu with all of our other unsecured andunsubordinated indebtedness.  Theindenture governing the Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit our ability to incur additionalindebtedness.  As of September 30, 2006,we were in compliance with the covenants of the Senior Notes.

We have entered into an interest rate swap agreementto hedge our exposure to changes in the fair value on a portion of the SeniorNotes discussed above.  The fair valuesof this interest rate swap were losses of approximately $3.9 million and $0.9million at September 30, 2006, and December 31, 2005, respectively (see Note3).

The following table summarizes the estimated fairvalues of the Senior Notes as of September 30, 2006, and December 31, 2005 (inmillions):
|                                       | ** ** | ** **      | ** ** | **Fair Value**          | ** ** |
|---------------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                            | ** ** | **Face  Value** | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|                                  |       |            |       |                         |       |   |   |
| 6.45% Senior  Notes, due January 2008 |       | $               | 180.0      |                         | $          | 182.2 |   | $ | 183.7 |   |
| 7.51% Senior Notes, due  January 2028 |       | 210.0           |       | 222.6                        |       | 224.1 |   |
|                                       |            |                 |            |                              |            |  |  |  |  |  |

 

**Other Long Term Debt and Credit Facilities**

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s debt instruments.  Theinterest rates charged by the Parent Partnership include the stated interestrate paid by the Parent Partnership on its debt obligations, plus a premium tocover debt issuance costs.  The interestrate is also decreased or increased to cover gains and losses, respectively, onany interest rate swaps that the Parent Partnership may have in place on itsrespective debt instruments.  These debtinstruments of the Parent Partnership are described below.

On February 20, 2002, our Parent Partnership issued$500.0 million principal amount of 7.625% Senior Notes due 2012.  The 7.625% Senior Notes were issued at adiscount of $2.2 million and are being accreted to their face value over theterm of the notes.  The 7.625% SeniorNotes may be redeemed at any time at our Parent Partnership’s option with thepayment of accrued interest and a make-whole premium determined by discountingremaining interest and principal payments using a discount rate equal to therate of the United States Treasury securities of comparable remaining maturityplus 35 basis points.  The indenturegoverning the 7.625% Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit our Parent Partnership’s abilityto incur additional indebtedness.

On January 30, 2003, our Parent Partnership issued$200.0 million principal amount of 6.125% Senior Notes due 2013. The 6.125%Senior Notes were issued at a discount of $1.4 million and are being accretedto their face value over the term of the notes. The 6.125% Senior Notes may beredeemed at any time at our Parent Partnership’s option with the payment ofaccrued interest and a make-whole premium determined by discounting remaininginterest and principal payments using a discount rate equal to the rate of theUnited States Treasury securities of comparable remaining maturity plus 35basis points. The indenture governing the 6.125% Senior Notes containscovenants, including, but not limited to, covenants limiting the creation ofliens securing indebtedness and sale and leaseback transactions. However, theindenture does not limit the Parent Partnership’s ability to incur additionalindebtedness.

Our Parent Partnership has in place a $700.0 millionunsecured revolving credit facility, including the issuance of letters ofcredit (“Revolving Credit Facility”), which matures on December 13, 2011.  Commitments

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under the credit facility may be increased up to amaximum of $850.0 million upon our Parent Partnership’s request, subject tolender approval and the satisfaction of certain other conditions.  The interest rate is based, at our ParentPartnership’s option, on either the lender’s base rate plus a spread, or LIBORplus a spread in effect at the time of the borrowings.  Financial covenants in the Revolving CreditFacility require that our Parent Partnership maintain a ratio of ConsolidatedFunded Debt to Pro Forma EBITDA (as defined and calculated in the facility) ofless than 4.75 to 1.00 (subject to adjustment for specified acquisitions) and aratio of EBITDA to Interest Expense (as defined and calculated in the facility)of at least 3.00 to 1.00, in each case with respect to specified twelve monthperiods.  Other restrictive covenants inthe Revolving Credit Facility limit our Parent Partnership’s and itssubsidiaries’ (including us) ability to, among other things, incur additionalindebtedness, make certain distributions, incur liens, engage in specifiedtransactions with affiliates, including us, and complete mergers, acquisitionsand sales of assets.

On July 31, 2006, our Parent Partnership amended itsRevolving Credit Facility.  The primaryrevisions were as follows:

·                  Thematurity date of the credit facility was extended from December 13, 2010 toDecember 13, 2011.  Also under the termsof the amendment, the Parent Partnership may request up to two one-yearextensions of the maturity date.  Theseextensions, if requested, will become effective subject to lender approval andsatisfaction of certain other conditions.

·                  Theamendment releases Jonah Gas Gathering Company (“Jonah”) as a guarantor of theRevolving Credit Facility and restricts the amount of outstanding debt of theJonah joint venture to debt owing to the owners of its partnership interestsand other third-party debt in the principal aggregate amount of $50.0 million.

·                  Theamendment modifies the financial covenants to, among other things, allow theParent Partnership to include in the calculation of its Consolidated EBITDA (asdefined in the Revolving Credit Facility) pro forma adjustments for materialcapital projects.

·                  The amendment allows for the issuanceof Hybrid Securities (as defined in the Revolving Credit Facility) of up to 15%of our Parent Partnership’s Consolidated Total Capitalization (as defined inthe Revolving Credit Facility).

At September 30, 2006, $359.0 million was outstandingunder our Parent Partnership’s Revolving Credit Facility at a weighted averageinterest rate of 6.02%.  At September 30,2006, our Parent Partnership was in compliance with the covenants of thiscredit facility.

AtSeptember 30, 2006 and December 31, 2005, we had unsecured intercompany notespayable to our Parent Partnership of $176.9 million and $206.9 million,respectively, which related to borrowings under the Parent Partnership’sRevolving Credit Facility, 7.625% Senior Notes and 6.125% Senior Notes. Theweighted average interest rate on the note payable to the Parent Partnership atSeptember 30, 2006, was 6.8%.  AtSeptember 30, 2006, accrued interest includes $1.2 million due to our ParentPartnership.  For the nine months endedSeptember 30, 2006 and 2005, interest expense incurred on the note payable toour Parent Partnership totaled $8.6 million and $7.6 million, respectively.

**NOTE 9.  QUARTERLYDISTRIBUTONS OF AVAILABLE CASH**

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

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During the nine months ended September 30, 2006 and2005, we paid cash distributions to our Parent Partnership totaling $50.4million and $91.9 million, respectively. On November 7, 2006, we paid a cash distribution to our ParentPartnership of $21.7 million for the quarter ended September 30, 2006.

**NOTE 10.RELATED PARTY TRANSACTIONS**

## **ParentPartnership**

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

Our Parent Partnership allocates operating, generaland administrative expenses to us for legal, insurance, financial,communication and other administrative services based upon the estimated levelof effort devoted to our various operations. In addition, we make cash payments on behalf of the Parent Partnershipfor various expenses.  At September 30,2006, and December 31, 2005, we had net payables of $0.4 million and $18.5million, respectively, to our Parent Partnership related to these affiliated activities.

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

The followingtable summarizes the related party transactions with EPCO and affiliates andDEFS and affiliates for the three months and nine months ended September 30,2006 and 2005 (in millions):
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                        | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues from  EPCO and affiliates: (1)           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transportation – LPGs                        |       | $                                | 0.5        |                            | $          | 1.1 |   | $ | 2.8 |   | $ | 2.7 |   |
| Costs and  Expenses from EPCO and affiliates: (1) |       |                             |       |                            |       |   |   |   |   |
| Payroll, administrative and other (2)             |       | 13.0                             |       | 13.2                            |       | 41.6 |   | 17.0 |   |
| Revenues from  DEFS and affiliates: (3)           |       |                             |       |                            |       |   |   |   |   |
| Transportation – LPGs                        |       | —                           |       | —                          |       | — |   | 0.7 |   |
| Other operating revenues                          |       | —                           |       | —                          |       | — |   | 1.1 |   |
| Costs and  Expenses from DEFS and affiliates: (3) |       |                             |       |                            |       |   |   |   |   |
| Payroll,  administrative and other (4)            |       | —                           |       | —                          |       | — |   | 7.8 |   |
|                                                   |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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

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

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

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

At September 30, 2006 and December 31, 2005, we hadreceivables from EPCO and affiliates of $0.3 million and $1.3 million,respectively, related to transportation services provided to EPCO andaffiliates.

Beginning February 24, 2005, the majority of ourinsurance coverage, including property, liability, business interruption, autoand directors and officers’ liability insurance, was obtained by our ParentPartnership through EPCO.  For the threemonths and nine months ended September 30, 2006 and 2005, we incurred insuranceexpense related to premiums paid by EPCO of $1.6 million, $1.0 million, $4.6million, and 1.8 million, respectively. At September 30, 2006 and December 31, 2005, we had insurancereimbursement receivables due from EPCO of $1.4 million and $1.3 million,respectively.

On October 6, 2006, we sold certain idled refinedproducts pipeline assets in the Houston, Texas area, with a carrying value ofapproximately $5.5 million, to an affiliate of Enterprise for approximately$8.8 million (see Note 13).  We alsoanticipate selling additional refined products pipeline assets in the Houston,Texas area to an affiliate of Enterprise in the fourth quarter of 2006 forapproximately $8.0 million, which at September 30, 2006, have a carrying valueof approximately $2.5 million.  These transactionswere reviewed and recommended for approval by the Audit and Conflicts Committeeof the Board of Directors of the Company.

**NOTE 11.  EMPLOYEEBENEFIT PLANS**

**RetirementPlans**

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

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

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In June 2005, the Parent Partnership recorded acurtailment charge of $0.1 million in accordance with SFAS No. 88, *Employers’ Accounting for Settlements and Curtailments of DefinedBenefit Pension Plans and for Termination Benefits*, as a result ofthe TEPPCO RCBP and TEPPCO SBP amendments. A portion of the charge was allocated to us.  As of May 31, 2005, the following assumptionswere changed for purposes of determining the net periodic benefit costs for theremainder of 2005: the discount rate, the long-term rate of return on planassets, and the assumed mortality table. The discount rate was decreased from 5.75% to 5.00% to reflect rates ofreturns on bonds currently available to settle the liability.   The expected long-term rate of return onplan assets was changed from 8% to 2% due to the movement of plan funds fromequity investments into short-term money market funds.  The mortality table was changed to reflectoverall improvements in mortality experienced by the general population.  The curtailment charge arose due to theaccelerated recognition of the unrecognized prior service costs.  The Parent Partnership recorded additionalsettlement charges of approximately $0.2 million in the fourth quarter of 2005relating to the TEPPCO SBP.  The ParentPartnership expects to record additional settlement charges of approximately$4.0 million in the fourth quarter of 2006 relating to the TEPPCO RCBP for anyexisting unrecognized losses upon the plan termination and final distributionof the assets to the plan participants. We expect to be allocated a share ofthese charges.

The components of net pension benefits costs allocatedto us for the TEPPCO RCBP and the TEPPCO SBP for the three months and ninemonths ended September 30, 2006 and 2005, were as follows (in thousands):
|                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost  benefit earned during the period |       | $                                | —     |                            | $          | 735 |   | $ | — |   | $ | 2,082 |   |
| Interest cost on  projected benefit obligation |       | 169                              |       | 157                             |       | 504 |   | 472 |   |
| Expected return  on plan assets                |       | (77                              | )          | (53                             | )          | (238 | ) | (414 | ) |
| Amortization of  prior service cost            |       | —                           |       | 1                               |       | — |   | 4 |   |
| Amortization of  actuarial losses              |       | 21                               |       | 24                              |       | 64 |   | 61 |   |
| SFAS 88  curtailment chargee                   |       | —                           |       | —                          |       | — |   | 39 |   |
| Net pension  benefits costs                    |       | $                                | 113        |                            | $          | 864 |   | $ | 330 |   | $ | 2,244 |   |

 

**Other Postretirement Benefits**

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

In May 2005, benefits provided to employees under theTEPPCO OPB were changed.  Employeeseligible for these benefits received them through December 31, 2005, however,effective December 31, 2005, these benefits were terminated.  As a result of this change in benefits and inaccordance with SFAS No. 106, *Employers’ Accounting forPostretirement Benefits Other Than Pensions*, the Parent Partnershiprecorded a curtailment credit of approximately $1.7 million in its accumulatedpostretirement obligation, which reduced the Parent Partnership’s accumulatedpostretirement obligation to the total of the expected remaining 2005 paymentsunder the TEPPCO OPB, of which $1.3 million was allocated to us.  The employees participating in this plan atthat time were transferred to DEFS, who is expected to provide postretirementbenefits to these retirees.  Our ParentPartnership recorded a one-time settlement to DEFS in the third quarter of 2005of $0.4 million for the remaining postretirement benefits, of whichapproximately $0.4 million was allocated to us.

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The components of net postretirement benefits costallocated to us for the TEPPCO OPB for the three months and nine months endedSeptember 30, 2006 and 2005, were as follows (in thousands):
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost benefit earned during the period                  |       | $                                | —     |                            | $          | — |   | $ | — |   | $ | 49 |   |
| Interest cost on accumulated postretirement benefit obligation |       | —                           |       | —                          |       | — |   | 57 |   |
| Amortization of prior service cost                             |       | —                           |       | —                          |       | — |   | 47 |   |
| Recognized net actuarial loss                                  |       | —                           |       | —                          |       | — |   | 3 |   |
| SFAS 106 curtailment credit                                    |       | —                           |       | —                          |       | — |   | (1,318 | ) |
| Net postretirement  benefits costs                             |       | $                                | —     |                            | $          | — |   | $ | — |   | $ | (1,162 | ) |

 

Effective June 1, 2005, the payroll functionsperformed by DEFS for the Company were transferred from DEFS to EPCO.  For those employees who were receivingcertain other postretirement benefits at the time of the acquisition of theCompany by DFI, DEFS is expected to continue to provide these benefits to thoseemployees.  Effective June 1, 2005, EPCObegan providing certain other postretirement benefits to those employees whobecame eligible for the benefits after June 1, 2005, and will charge thosebenefit related costs to our Parent Partnership.  We expect to be allocated a portion of thesecosts.  As a result of these changes, theParent Partnership recorded a $1.2 million reduction in its other postretirementobligation in June 2005, of which $0.7 million was allocated to us.

## **EstimatedFuture Benefit Contributions**

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

**NOTE 12.  COMMITMENTSAND CONTINGENCIES**

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

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On December 21, 2001, we were named as a defendant ina lawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana, styled*Rebecca L. Grisham et al. v.  TE Products Pipeline Company, LimitedPartnership*.  In this case,the plaintiffs contend that our pipeline, which crosses the plaintiffs’property, leaked toxic products onto their property and, consequently causeddamages to them.  We have filed an answerto the plaintiffs’ petition denying the allegations, and we are defendingourselves vigorously against the lawsuit. The plaintiffs assert damages attributable to the remediation of theproperty of approximately $1.4 million; however, this case is covered byinsurance, subject to applicable policy limits. We do not believe that the outcome of this lawsuit will have a materialadverse effect on our financial position, results of operations or cash flows.

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

On September 18, 2006, Peter Brinckerhoff, a purportedunitholder of our Parent Partnership, filed a complaint in the Court ofChancery of New Castle County in the State of Delaware, in his individualcapacity, as a putative class action on behalf of our Parent Partnership’sother unitholders, and derivatively on its behalf, concerning proposals made toits unitholders in its definitive proxy statement filed with the SEC onSeptember 11, 2006  (“Proxy Statement”)and other transactions involving the Parent Partnership and Enterprise or itsaffiliates.  The complaint names asdefendants the Company; the Board of Directors of the Company; the parentcompanies of the Company, including EPCO; Enterprise and certain of itsaffiliates; and Dan L. Duncan.  TheParent Partnership is named as a nominal defendant.

The complaint alleges, among other things, thatcertain of the transactions proposed in the Proxy Statement, including aproposal to reduce the Company’s maximum percentage interest in the ParentPartnership’s distributions in exchange for limited partner units (the “IssuanceProposal”), are unfair to its unitholders and constitute a breach by thedefendants of fiduciary duties owed to its unitholders and that the ProxyStatement fails to provide its unitholders with all material facts necessaryfor them to make an informed decision whether to vote in favor of or againstthe proposals.  The complaint furtheralleges that, since Mr. Duncan acquired control of the Company in 2005, thedefendants, in breach of their fiduciary duties to the Parent Partnership andits unitholders, have caused the Parent Partnership to enter into certaintransactions with Enterprise or its affiliates that are unfair to it orotherwise unfairly favored Enterprise or its affiliates over the Parent Partnership.  These transactions are alleged to include theJonah joint venture entered into by the Parent Partnership and an Enterpriseaffiliate in August 2006, the sale by the Parent Partnership to an Enterpriseaffiliate of the Pioneer plant in March 2006 and the impending divestiture ofour interest in MB Storage in connection with an investigation by the FederalTrade Commission (“FTC”).  As more fullydescribed in the Proxy Statement, the Audit and Conflicts Committee of theBoard of Directors of the Company recommended the Issuance Proposal forapproval by the Board of Directors of the Company.  The complaint also alleges that Richard S.Snell, Michael B. Bracy and Murray H. Hutchison, constituting the three membersof the Audit and Conflicts Committee of the Board of Directors of the Company,cannot be considered independent because of their alleged ownership ofsecurities in Enterprise and its affiliates and their relationships with Mr.Duncan.

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The complaint seeks relief (i) requiring the ParentPartnership to issue a proxy statement that corrects the alleged misstatementsand omissions in the Proxy Statement; (ii) enjoining the October 26, 2006meeting of unitholders provided for in the Proxy Statement; (iii) rescindingtransactions in the complaint that have been consummated, or awardingrescissory damages in respect thereof, including the impending divestiture ofour interest in MB Storage; (iv) awarding damages for profits and special benefitsallegedly obtained by defendants as a result of the alleged wrongdoings in thecomplaint; and (v) awarding plaintiff costs of the action, including fees andexpenses of his attorneys and experts.

On September 22, 2006, the plaintiff in the action fileda motion to expedite the proceedings, requesting the Court to schedule ahearing on plaintiff’s motion for a preliminary injunction to enjoin thedefendants from proceeding with the October 26, 2006 special meeting ofunitholders.  On September 26, 2006, thedefendants advised the Court that the Parent Partnership would provide to itsunitholders specified supplemental disclosures, which were included in the Form8-K and supplemental proxy materials the Parent Partnership filed with the SECon October 5, 2006.  In light of theforegoing, the Parent Partnership believes that the plaintiff’s motionrequesting the Court to schedule a hearing to consider his motion to enjoin thespecial meeting is moot.  The specialmeeting was convened on October 26, 2006, and adjourned, without voting on theproposals, to November 30, 2006 by the Company for lack of a quorum.  While we cannot predict the ultimate outcome,we do not believe that the outcome of this lawsuit will have a material adverseeffect on our financial position, results of operations or cash flows.

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

**Regulatory Matters**

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

We believe that our operations and facilities are insubstantial compliance with applicable environmental laws and regulations, andthat the cost of compliance with such laws and regulations will not have amaterial adverse effect on our results of operations or financial position. Wecannot ensure, however, that existing environmental regulations will not berevised or that new regulations will not be adopted or become applicable to us.The clear trend in environmental regulation is to place more restrictions andlimitations on activities that may be perceived to affect the environment, andthus there can be no assurance as to the amount or timing of futureexpenditures for environmental regulation compliance or remediation, and actualfuture expenditures may be different from the amounts we currently anticipate.Revised or additional regulations that result in increased compliance costs or

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additional operating restrictions, particularly ifthose costs are not fully recoverable from our customers, could have materialadverse effect on our business, financial position, results of operations andcash flows.  At September 30, 2006, andDecember 31, 2005, we have an accrued liability of $1.0 million and $1.2million, respectively, related to sites requiring environmental remediationactivities.

In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana, facility.  In1999, our Arcadia facility and adjacent terminals were directed by theRemediation Services Division of the LDEQ to pursue remediation of thiscontamination.  Effective March 2004, weexecuted an access agreement with an adjacent industrial landowner who islocated upgradient of the Arcadia facility. This agreement enables the landowner to proceed with remediationactivities at our Arcadia facility for which it has accepted sharedresponsibility.  At September 30, 2006,we have an accrued liability of $0.1 million for remediation costs at ourArcadia facility.  We do not expect thatthe completion of the remediation program proposed to the LDEQ will have afuture material adverse effect on our financial position, results of operationsor 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-inch diameterpipeline located in Orange County, Texas. The DOJ, at the request of the Environmental Protection Agency, isseeking a civil penalty against us for alleged violations of the Clean WaterAct (“CWA”) arising out of this release, as well as three smaller spills atother locations in 2004 and 2005.  Wehave agreed with the DOJ on a proposed penalty of $2.865 million, along withour commitment to implement additional spill prevention measures, and expect tofinalize the settlement in the fourth quarter of 2006.  We do not expect this settlement to have amaterial adverse effect on our financial position, results of operations orcash flows.

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

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

The FERC, pursuant to the Interstate Commerce Act of1887, as amended, regulates the tariff rates for our interstate common carrierpipeline operations.  To be lawful underthat Act, interstate tariff rates, terms and conditions of service must be justand reasonable and not unduly discriminatory, and must be on file withFERC.  In addition, pipelines may notconfer any undue preference upon any shipper. Shippers may protest, and the FERC may investigate, the lawfulness ofnew or changed tariff rates.  The FERCcan suspend those tariff rates for up to seven months and can also requirerefunds of amounts collected pursuant to rates that are ultimately found to beunlawful.  The FERC and interestedparties can also challenge tariff rates that have become final andeffective.  Because of the complexity ofrate making, the lawfulness of any rate is never assured.  The FERC uses prescribed rate methodologiesfor approving regulated tariff rates for transporting crude oil and refinedproducts.  These methodologies may limitour ability to set rates based on our actual costs or may delay the use ofrates reflecting increased costs. Changes in the FERC’s approved methodology for approving rates couldadversely affect us.  Adverse decisionsby the FERC in approving our regulated rates could adversely affect our cashflow.  Challenges to our tariff ratescould be filed with the FERC.

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The intrastate liquids pipeline transportation servicewe provide is subject to various state laws and regulations that affect therates we charge and terms and conditions of that service.  Although state regulation typically is lessonerous than FERC regulation, proposed and existing rates subject to stateregulation and the provision of non-discriminatory service are subject tochallenge by complaint.

**Other**

Centennial entered intocredit facilities totaling $150.0 million, and as of September 30, 2006, $150.0million was outstanding under those credit facilities, of which $140.0 millionexpires in 2024, and $10.0 million expires in April 2007.  We and Marathon have each guaranteed one-halfof the repayment of Centennial’s outstanding debt balance (plus interest) underthese credit facilities.  The guaranteesarose in order for Centennial to obtain adequate financing, and the proceeds ofthe credit facilities were used to fund construction and conversion costs ofits pipeline system.  Prior to theexpiration of the long-term credit facility, we could be relinquished fromresponsibility under the guarantee should Centennial meet certain financialtests.  If Centennial defaults on itsoutstanding balance, the estimated maximum potential amount of future paymentsfor Marathon and us is $75.0 million each at September 30, 2006.

We, Marathon and Centennial have entered into alimited cash call agreement, which allows each member to contribute cash inlieu of Centennial procuring separate insurance in the event of a third-partyliability arising from a catastrophic event. There is an indefinite term for the agreement and each member is tocontribute cash in proportion to its ownership interest, up to a maximum of$50.0 million each.  As a result of thecatastrophic event guarantee, we have recorded a $4.4 million obligation, whichrepresents the present value of the estimated amount that we would have to payunder the guarantee.  If a catastrophicevent were to occur and we were required to contribute cash to Centennial,contributions exceeding our deductible might be covered by our insurance,depending upon the nature of the catastrophic event.

On February 24, 2005, the Company was acquired fromDEFS by DFI.  The Company owns a 2%general partner interest in the Parent Partnership and is the general partnerof the Parent Partnership.  On March 11,2005, the Bureau of Competition of the Federal Trade Commission (“FTC”)delivered written notice to DFI’s legal advisor that it was conducting anon-public investigation to determine whether DFI’s acquisition of the Companymay substantially lessen competition or violate other provisions of federalantitrust laws.  We, the Company and theParent Partnership cooperated fully with this investigation.

On October 31, 2006, an FTC order and consentagreement ending its investigation became final.  The order requires the divestiture of our 50%interest in MB Storage and certain related assets to one or more FTC-approvedbuyers no later than December 31, 2006 in a manner approved by the FTC andsubject to its final approval.  If we areunable to divest the interest and related assets by that date, the FTC mayappoint a divestiture trustee to oversee their sale to one or more approvedbuyers.  The order contains no minimumprice for the divestiture and requires that we provide the acquirer oracquirers the opportunity to hire employees who spend more than 10% of their timeworking on the divested assets.  Theorder also imposes specified operational, reporting and consent requirements onus including, among other things, in the event that we build a new pipelineconnecting to our mainline at Mont Belvieu, implement new allocation proceduresrelating to the movement of natural gas liquids (“NGLs”) between storagefacilities, our mainline and customers, or acquire interests in or operate saltdome storage facilities for NGLs in specified areas.

**NOTE 13.  SUBSEQUENT EVENTS**

OnOctober 6, 2006, we sold certain refined products pipeline assets in theHouston, Texas area, to an affiliate of Enterprise for approximately $8.8million.  These assets, which have beenidle since acquisition, were

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part ofthe assets acquired by us in 2005 from Genco (see Note 5).  The sales proceeds will be used to fundorganic growth projects, retire debt or for other general partnershippurposes.  The carrying value of thesepipeline assets at September 30, 2006, was approximately $5.5 million.

On November 1, 2006, weannounced plans to construct a new 20-inch diameter lateral pipeline that willconnect our mainline system to Enterprise’s storage facility at Mont Belvieu,Texas.  The new connection, which willprovide delivery of propane into our system at full line flow rates,complements our current ability to source product from MB Storage.  The new lateral will also offer the abilityto deliver other liquid products such as butanes and natural gasoline fromEnterprise’s storage facilities into our system at reduced flow rates untilenhancements can be made.  The capabilityto deliver butanes and natural gasoline from MB Storage at full flow rates isnot expected to be impacted. Construction of the new connection is expected to be completed aroundJanuary 1, 2007.

EffectiveNovember 1, 2006, we purchased a refined petroleum product terminal inAberdeen, Mississippi, for approximately $5.8 million from Mississippi Terminaland Marketing Inc. (“MTMI”).  Thefacility, located along the Tennessee/TomBigbee waterway system, has storagecapacity of 130,000 barrels for gasoline and diesel, which are supplied bybarge for delivery to local markets, including Tupelo and Columbus,Mississippi.  In connection with thisacquisition, we plan to construct a new 500,000-barrel terminal in Boligee,Alabama, at a cost of approximately $25.0 million, on an 80-acre site which weare leasing from the Greene County Industrial Development Board under a 60-yearagreement.  The Boligee terminal site islocated approximately two miles from Colonial Pipeline.  The new terminal is expected to begin serviceduring the fourth quarter of 2007.

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

 

**General**

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

·                  Cautionary Note RegardingForward-Looking Statements

·                  Overview of Critical AccountingPolicies and Estimates

·                  Overview of Business

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

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

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

·                  RecentAccounting Pronouncements

**CautionaryNote Regarding Forward-Looking Statements**

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

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results or developments that we anticipate will berealized or, even if substantially realized, will have the expectedconsequences to or effect on us or our business or operations.  Also note that we provide a cautionarydiscussion of risks and uncertainties under the caption “Risk Factors” in ourQuarterly Report on Form 10-Q for the period ended June 30, 2006; under thecaption “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and elsewhere in our Annual Report on Form 10-K for theyear ended December 31, 2005.

Theforward-looking statements contained in this Report speak only as of the datehereof.  Except as required by thefederal and state securities laws, we undertake no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or any other reason. All forward-looking statements attributable to TE Products PipelineCompany, Limited Partnership or any person acting on its behalf are expresslyqualified in their entirety by the cautionary statements contained or referredto in this Report and in our future periodic reports filed with the Securitiesand Exchange Commission (“SEC”).

**Overview of Critical Accounting Policies and Estimates**

A summary of the significant accounting policies wehave adopted and followed in the preparation of our consolidated financialstatements is included in our Annual Report on Form 10-K for the year endedDecember 31, 2005. Certain of these accounting policies require the use ofestimates.  As more fully describedtherein, the following estimates, in our opinion, are subjective in nature,require the exercise of judgment and involve complex analysis: revenue andexpense accruals, including accruals for power costs, property taxes;environmental costs; and asset impairment analysis related to property, plantand equipment.  These estimates are basedon our knowledge and understanding of current conditions and actions we maytake in the future.  Changes in theseestimates will occur as a result of the passage of time and the occurrence offuture events.  Subsequent changes in theseestimates may have a significant impact on our financial position and resultsof operations.

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

We are one of the largest pipeline common carriers ofrefined petroleum products and liquefied petroleum gases (“LPGs”) in the UnitedStates.  Over the past few years, we havecontinued to pursue growth opportunities and acquisitions to expand our marketshare and deliveries into existing and new markets.  The key elements of our strategy are to focuson internal growth prospects in order to increase the pipeline system andterminal throughput, to expand and upgrade existing assets and services andconstruct new pipelines, terminals and facilities, to target accretive andcomplementary acquisitions and expansion opportunities that provide attractivegrowth potential and to operate in a safe, efficient and environmentallyresponsible manner.

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

We operate and report in one business segment:  transportation and storage of refinedproducts, LPGs and petrochemicals.  Weown, operate or have investments in properties located in 14 states, and ourrevenues are earned from transportation and storage of refined products andLPGs, intrastate transportation of petrochemicals, sale of product inventoryand other ancillary services.  Our twolargest operating expense items are labor and electric power.  We generally realize higher revenues duringthe first and fourth quarters of each year since our operations are somewhatseasonal.  Refined products volumes aregenerally higher during the second and third quarters because of greater demandfor gasolines during the spring and summer driving seasons. LPGs volumes aregenerally higher from November through March due to higher demand for propane,a major fuel for residential heating. Our results also include our equity investments in Mont Belvieu StoragePartners, L.P. (“MB Storage”), which we are required to divest, and inCentennial Pipeline LLC (“Centennial”) (see Note 7 in the Notes to theConsolidated Financial Statements).

Wecontinue to build a base for long-term growth by pursuing new businessopportunities, increasing throughput on ourpipeline systems, constructing new pipeline systems, and expanding andupgrading our existing

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infrastructure.  We continueto believe that our business strategy will provide continued growth in earningsand cash distributions.  Based on adetailed analysis of the business environment, our management has identifiedkey trends or factors, each of which, in turn, drive our growth strategy beyondorganic growth as follows:

·                  We expect thatrefined products imports to the U.S. will increase.

·                  Acquire ordevelop facilities to take advantage of these increased volumes.

·                  We expect to seechanges in commercial terminal ownership and operations.

·                  Acquire refinedproducts terminals and distribution assets to provide logistical serviceofferings to companies seeking to outsource or partner.

·                  Ethanolconsumption is mandated to double by 2012.

·                  Participatein the aggregation, terminaling and transportation associated with the overallsupply and distribution of ethanol.

Wealso believe other growth opportunities are available to us, includingthrough:  expanding our deliverycapability of gasoline and diesel fuel in the Indianapolis and Chicago marketareas; utilizing available system capacity of Centennial to move refinedproducts to Midwest market areas, which enables us to increase movements oflong-haul propane volumes; expanding our gathering capacity of refined productsalong the upper Texas Gulf Coast; and pursuing acquisitions or organic growthprojects in any of our business segments that would complement our currentoperations.

Fora discussion of important factors that could affect our growth, please read “-CautionaryNote Regarding Forward-Looking Statements” in this Report and “Risk Factors” inour Quarterly Report on Form 10-Q for the period ended June 30, 2006.

Consistent with ourbusiness strategy, we continuously evaluate possible acquisitions of assetsthat would complement our current operations, including assets which, ifacquired, would have a material effect on our financial position, results ofoperations or cash flows.

*Recent Developments*

OnNovember 1, 2006, we announced plans to construct a new 20-inch diameterlateral pipeline that will connect our mainline system to Enterprise’s storagefacility at Mont Belvieu, Texas.  The newconnection, which will provide delivery of propane into our system at full lineflow rates, complements our current ability to source product from MBStorage.  The new lateral will also offerthe ability to deliver other liquid products such as butanes and naturalgasoline from Enterprise’s storage facilities into our system at reduced flowrates until enhancements can be made. The capability to deliver butanes and natural gasoline from MB Storageat full flow rates is not expected to be impacted.  Construction of the new connection isexpected to be completed around January 1, 2007.

Effective November 1,2006, we purchased a refined petroleum product terminal in Aberdeen,Mississippi, for approximately $5.8 million from Mississippi Terminal andMarketing Inc. (“MTMI”).  The facility,located along the Tennessee/TomBigbee waterway system, has storage capacity of130,000 barrels for gasoline and diesel, which are supplied by barge fordelivery to local markets, including Tupelo and Columbus, Mississippi.  In connection with this acquisition, we planto construct a new 500,000-barrel terminal in Boligee, Alabama, at a cost ofapproximately $25.0 million, on an 80-acre site which we are leasing from theGreene County Industrial Development Board under a 60-year agreement.  The Boligee terminal site is locatedapproximately two miles from Colonial Pipeline. The new terminal is expected to begin service during the fourth quarterof 2007.

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**Results of Operations**

 

Thefollowing table presents volumes delivered in barrels and average tariff perbarrel for the three months and nine months ended September 30, 2006 and 2005(in thousands, except tariff information):
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** | **Nine Months Ended** | ** ** | **Percentage** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------|------------|---------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **September 30,**           | ** ** | **Increase**   | ** ** | **September 30,**          | ** ** | **Increase**   | ** ** |
| ** **                        | ** ** | **2006**                         | ** ** | **2005**       | ** ** | **(Decrease)**                  | ** ** | **2006**       | ** ** | **2005** | ** ** | **(Decrease)** | ** ** |
| ** **                        | ** ** | ** **                       | ** ** | ** **     | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Volumes Delivered**             |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Refined products                  |       | 43,018                           |       | 43,067         |       | —                          |       | 125,061        |       | 123,759 |   | 1 | % |
| LPGs                              |       | 9,763                            |       | 8,646          |       | 13                              | %          | 30,880         |       | 31,303 |   | (1 | )% |
| Total                             |       | 52,781                           |       | 51,713         |       | 2                               | %          | 155,941        |       | 155,062 |   | 1 | % |
|                              |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| **Average Tariff per Barrel**     |       |                             |       |           |       |                            |       |           |       |   |   |   |   |
| Refined products                  |       | $                                | 0.98       |           | $          | 0.89                            |       | 10             | %          | $ | 0.91 |   | $ | 0.90 |   | 1 | % |
| LPGs                              |       | 1.73                             |       | 1.91           |       | (9                              | )%         | 1.93           |       | 2.02 |   | (4 | )% |
| Average system tariff  per barrel |       | $                                | 1.12       |           | $          | 1.06                            |       | 6              | %          | $ | 1.11 |   | $ | 1.12 |   | (1 | )% |

 

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

Revenues from refined products transportationincreased $3.8 million for the three months ended September 30, 2006, comparedwith the three months ended September 30, 2005, primarily due to a 10% increasein the refined products average tariff per barrel.  The average tariff increased primarily due toan increase in gasoline blendstock deliveries, which have a higher tariff, anincrease in system tariffs, which went into effect in April and July 2006, anda shift of volumes from Centennial to our tariffs.  Overall, refined products volumes remainedeffectively unchanged between periods. Increases in jet fuel and gasoline blendstock deliveries were offset bylower distillate deliveries.  Short-hauldeliveries of product received into our system from Centennial at CrealSprings, Illinois, also decreased. Centennial, through a lease agreement entered into in February 2003,provides our system with additional pipeline capacity for movement of productsoriginating in the U.S. Gulf Coast area. Prior to the construction of Centennial, deliveries on our pipelinesystem were limited by our pipeline capacity and transportation services forour customers were allocated in accordance with a proration policy.  The Centennial capacity lease has relievedour previously constrained system and has permitted expanded deliveries inmarkets both south and north of Creal Springs, Illinois.  Movement of our product via the Centenniallease to the north end of our system permits expanded supply capability of oursystem for delivery to the south end of our system.

Revenues from LPGs transportation increased $0.4million for the three months ended September 30, 2006, compared with the threemonths ended September 30, 2005, due to an increase in short-haul propanedeliveries on the Texas Gulf Coast.  The LPGs average rate per barreldecreased from the prior period primarily as a result of these increasedshort-haul deliveries during the three months ended September 30, 2006,compared with the three months ended September 30, 2005.

Other operatingrevenues increased $2.2 million for the three months ended September 30, 2006,compared with the three months ended September 30, 2005, primarily due toincreased  storage revenues on assets acquired from Texas Genco, LLC inJuly 2005 and higher other system storage revenues, partially offset bydecreased volumes of product sales.

Costsand expenses increased $1.3 million for the three months ended September 30, 2006,compared with the three months ended September 30, 2005.  Operating fuel and power increased $2.4million primarily due to increased mainline throughput and higher powerrates.  Operating expenses increased $2.2million primarily due to a $1.5 million increase in pipeline operating costsprimarily as a result of acquisitions made in 2005, a $0.7 million increase inrental expense on a lease with a third-party pipeline, a $0.6 million increasein rental expense from the Centennial pipeline capacity lease agreement and$0.6 million of higher insurance premiums. These increases in operating expenses were partially offset by a $0.8million decrease due to regulatory penalties in the prior year period and a$0.6 million decrease in pipeline inspection and repair costs associated withour integrity management

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program. Depreciation and amortization expense increased $0.7 million primarilydue to assets placed into service and asset retirements during the 2006period.  Taxes – other than income taxesdecreased $2.8 million primarily due to a true-up of property tax accruals forprior tax years and higher payroll taxes in the prior year period.  General and administrative expenses decreased$1.2 million primarily due to higher labor and benefits expenses in the prioryear period associated with vesting provisions in certain of our ParentPartnership’s incentive compensation plans and changes in ownership of theCompany.  These costs and expenses wereoffset by higher expenses relating to our Parent Partnership’s specialunitholder meeting to consider EPCO’s proposal to amend and restate our ParentPartnership’s partnership agreement and issue limited partner units to theCompany, as well as other proposals, and higher executive compensation expense.

 

Net losses from equityinvestments increased for the three months ended September 30, 2006, comparedwith the three months ended September 30, 2005, as shown below (in thousands):
|                      | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** |
|----------------------|------------|----------------------------------|------------|--------------|------------|
| ** **           | ** ** | **September 30,**           | ** ** | **Increase** | ** ** |
| ** **           | ** ** | **2006**                         | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** |
| Centennial           |       | $                                | (4,065     | )            | $          | (2,391 | ) | $ | (1,674 | ) |
| MB Storage           |       | 1,122                            |       | 1,728        |       | (606 | ) |
| Other                |       | (6                               | )          | 12           |       | (18 | ) |
| Total equity  losses |       | $                                | (2,949     | )            | $          | (651 | ) | $ | (2,298 | ) |

 

Equity losses in Centennial increased $1.7 million forthe three months ended September 30, 2006, compared with the three months endedSeptember 30, 2005, primarily due to lower transportation volumes and increasedcosts relating to pipeline inspection and repair costs associated with itsintegrity management program.  Equityearnings in MB Storage decreased $0.6 million for the three months endedSeptember 30, 2006, compared with the three months ended September 30, 2005,primarily due to higher product measurement losses on the MB Storage system andhigher operating fuel and power resulting from higher power rates and increasedvolumes, partially offset by higher revenues.

Interest expense – net increased $0.8 million for thethree months ended September 30, 2006, compared with the three months endedSeptember 30, 2005, due to an increase of $1.4 million in interest expense,partially offset by an increase of $0.6 million in interest capitalized.  Interest expense increased $1.4 million fromthe prior year period primarily due to higher outstanding debt balances andhigher average interest rates under the note payable to our ParentPartnership.  Interest capitalizedincreased $0.5 million from the prior year period primarily due to higherconstruction work-in-progress balances in 2006 as compared to the 2005 period.

*NineMonths Ended September 30, 2006 Compared with Nine Months Ended September 30,2005*

Revenues from refined productstransportation increased $2.3 million for the nine months ended September30, 2006, compared with the ninemonths ended September 30, 2005, primarily due to a slight overall increase inrefined products volumes transported and a minor increase in the average rateper barrel.  Volume increases were due toincreased demand for products supplied from the U.S. Gulf Coast into Midwestmarkets resulting from higher distillate price differentials and a greaterdemand for gasoline blendstocks, partially offset by unfavorable differentialsfor motor fuels during the first quarter of 2006.  Additionally, refined products revenuesincreased due to increased terminaling activity at truck racks and higherproduct storage fees.  Theaverage tariff increased primarily due to an increase in gasoline blendstockdeliveries, which have a higher tariff, and an increase in system tariffs,which went into effect in April and July 2006.  The increase inthe refined products average tariff rate is partially offset by the impact ofCentennial on the average rates.  When alarger proportion of the refined products deliveries are delivered under aCentennial tariff, our average tariff declines. Conversely, if the proportion of refined products deliveries movingunder a Centennial origin decrease, our average tariff increases.   Movements of refined products on Centennial thereforeresult in a decrease in the refined products average rate per barrel; however,utilizing Centennial for refined products movements allows us to increasemovements of long-haul propane volumes.

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Revenues from LPGs transportation decreased $3.6million for the nine months ended September 30, 2006, compared with the ninemonths ended September 30, 2005, due to lower deliveries of propane in theupper Midwest and Northeast market areas as a result of warmer than normalwinter weather in the first quarter of 2006, high propane prices and scheduledplant maintenance, known as a turnaround.  The LPGs average rate perbarrel decreased from the prior year period primarily as a result of increasedshort-haul deliveries during the nine months ended September 30, 2006, comparedwith the nine months ended September 30, 2005.  

Other operating revenues increased $9.3 million forthe nine months ended September30, 2006, compared with the ninemonths ended September 30, 2005, primarily due to increased storagerevenue on assets acquired from Texas Genco, LLC in July 2005 and increases inother system storage and tender deduction revenues. 

Costs and expenses increased $9.4 million for the nine months ended September30, 2006, compared with the ninemonths ended September 30, 2005. Operating expense increased $4.7 million primarily due to a $7.8 millionincrease in pipeline operating costs primarily as a result of acquisitions madein 2005, $2.1 million of higher insurance premiums, a $0.7 million increase inrental expense on a lease with a third-party pipeline, $0.6 million inseverance expense as a result of the migration to a shared services environmentwith EPCO, $0.4 million of expenses relating to our Parent Partnership’sspecial unitholder meeting as discussed above and a $0.3 million increase inenvironmental remediation and assessment costs. These increases in costs and expenses were partially offset by a $3.5million decrease in pipeline inspection and repair costs associated with ourintegrity management program, $1.4 million in product measurement gains, a $1.0million decrease in labor and benefits expense associated with ParentPartnership incentive compensation plan vestings in the prior year period and a$0.8 million decrease in regulatory penalties for past incidents.  Operating fuel and power increased $4.4million primarily due to increased mainline throughput and higher powerrates.  Depreciation expense increased$1.7 million primarily due to assets placed into service, asset retirements in2006 and the recording of a conditional asset retirement obligation as discussedbelow.  General and administrativeexpenses increased $0.9 million primarily due to a $1.1 million increaserelated to the retirement of an executive in February 2006, $0.7 million inseverance expense as a result of the migration to a shared services environmentwith EPCO and higher executive compensation expense, partially offset by higherlabor and benefits expenses in the prior year period associated with vestingprovisions in certain of our Parent Partnership’s incentive compensation plansand changes in ownership of the Company resulting in higher incentivecompensation expenses.  Taxes – otherthan income taxes decreased $2.4 million primarily due to a true-up of propertytax accruals for prior tax years and higher payroll taxes in the prior yearperiod. 

Net losses from equity investments increased for thenine months ended September 30, 2006, compared with the nine months endedSeptember 30, 2005, as shown below (in thousands):

|                      | ** ** | **Nine Months Ended** | ** ** | ** **   | ** ** |
|----------------------|------------|---------------------------------|------------|--------------|------------|
| ** **           | ** ** | **September 30,**          | ** ** | **Increase** | ** ** |
| ** **           | ** ** | **2006**                        | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** |
| Centennial           |       | $                               | (11,378    | )            | $          | (8,476 | ) | $ | (2,902 | ) |
| MB Storage           |       | 4,814                           |       | 5,727        |       | (913 | ) |
| Other                |       | (17                             | )          | 31           |       | (48 | ) |
| Total equity  losses |       | $                               | (6,581     | )            | $          | (2,718 | ) | $ | (3,863 | ) |

 

Equity losses in Centennial increased $2.9 million forthe nine months ended September30, 2006, compared with the ninemonths ended September 30, 2005, primarily due to lower propanerevenues and volumes primarily due to warmer than normal winter weather in theNortheast in the 2006 period and increased costs relating to pipelineinspection and repair costs associated with its integrity management program,partially offset by lower amortization expense on the portion of our excessinvestment in Centennial as a result of the lower volumes.  Equity earnings in MB Storage decreased $0.9million for the nine months ended September30, 2006, compared with the nine months ended September30, 2005, primarily dueto higher product measurement losses on the MB Storage system, higher systemmaintenance expenses and higher operating fuel and power resulting from higherpower rates and increased volumes, partially offset by higher revenues.

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Interest expense – net increased $1.5 million for thenine months ended September 30, 2006, compared with the nine months endedSeptember 30, 2005, due to an increase of $4.0 million in interest expense,partially offset by an increase of $2.5 million in interest capitalized.  Interest expense increased $4.0 million fromthe prior year period primarily due to higher outstanding debt balances andhigher average interest rates under the note payable to our ParentPartnership.  Interest capitalizedincreased $2.5 million from the prior year period primarily due to higherconstruction work-in-progress balances in 2006 as compared to the 2005 period.

Other income – net increased $0.7 million for the ninemonths ended September 30, 2006, compared with the nine months ended September30, 2005, due to higher interest income earned on cash investments and otherinvesting activities.

*AssetRetirement Obligation*

* *

During the secondquarter of 2006, we recorded $0.3 million of expense, included in depreciationand amortization expense, related to a conditional asset retirementobligation.  Additionally, we recorded a$0.4 million liability, which represents the fair value of the conditionalasset retirement obligation related to structural restoration work to becompleted on leased office space that is required upon our anticipated officelease termination (see Note 1 in the Notes to the Consolidated FinancialStatements).  

** **

**FinancialCondition and Liquidity**

** **

Cash generatedfrom operations and loans or capital contributions from our Parent Partnershipare our primary sources of liquidity.  AtSeptember 30, 2006, we had a working capital surplus of $16.6 million, while atDecember 31, 2005, we had a working capital deficit of $4.5 million.  Working capital deficits can occur primarilydue to the timing of operating cash receipts from customers, payments of cashdistributions and the payment of normal operating expenses and capital expenditures.  We are a wholly owned subsidiary of theParent Partnership.  We expect that ourParent Partnership will make capital contributions, loans or otherwise provideliquidity to us as needed to protect its investment in us, but the ParentPartnership has no contractual obligation to do so.  At September 30, 2006, our Parent Partnershiphad approximately $330.9 million in available borrowing capacity under itsrevolving credit facility to cover any working capital needs, and we expectthat our Parent Partnership’s cash flows from operating activities, the sale ofadditional debt or equity in the capital markets and capacity under itsRevolving Credit Facility will provide necessary liquidity to us.  For further discussion regarding our ParentPartnership’s sources of liquidity, please see Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Financial Condition andLiquidity in our Parent Partnership’s Quarterly Report on Form 10-Q for theQuarter Ended September 30, 2006, its Annual Report on Form 10-K for the yearended December 31, 2005 and its Current Report on Form 8-K filed on June 16,2006.  Cash flows for the nine monthsended September 30, 2006 and 2005, were as follows (in thousands):

 
|                              | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **September 30,**          | ** ** |
| ** **                   | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                         |       |                            |       |   |   |
| Cash provided by  (used in): |       |                            |       |   |   |
| Operating activities         |       | $                               | 48,338     |   | $ | 19,650 |   |
| Investing activities         |       | (68,915                         | )          | (109,870 | ) |
| Financing  activities        |       | 20,577                          |       | 90,220 |   |
|                              |            |                                 |            |  |  |  |  |

 

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*Operating Activities*

Net cash fromoperating activities for the nine months ended September 30, 2006 and 2005,were comprised of the following (in thousands):

 
|                                            | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **September 30,**          | ** ** |
| ** **                                 | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                                       |       |                            |       |   |   |
| Net income                                 |       | $                               | 27,937     |   | $ | 34,085 |   |
| Depreciation and  amortization             |       | 30,340                          |       | 28,653 |   |
| Losses in equity  investments              |       | 6,581                           |       | 2,718 |   |
| Distributions  from equity investments     |       | 11,228                          |       | 10,688 |   |
| Non-cash portion  of interest expense      |       | 391                             |       | 199 |   |
| Gains on sales  of assets                  |       | (39                             | )          | (131 | ) |
| Cash used in  working capital and other    |       | (28,100                         | )          | (56,562 | ) |
| Net cash  provided by operating activities |       | $                               | 48,338     |   | $ | 19,650 |   |

 

Net cash fromoperating activities increased $28.7 million for the nine months endedSeptember 30, 2006, compared with the nine months ended September 30, 2005,primarily due to the timing of cash receipts and cash disbursements for workingcapital components and increased distributions received from our equityinvestment in MB Storage in the 2006 period, partially offset by lower netincome.  For a discussion of changes innet income, depreciation and amortization and losses in equity investments, seeResults of Operations above.  

 

Net cash fromoperating activities for the nine months ended September 30, 2006 and 2005,included interest payments, net of amounts capitalized, of $33.3 million and$30.8 million, respectively.  Excludingthe effects of hedging activities and interest capitalized, during the yearended December 31, 2006, we expect interest payments on our Senior Notes to beapproximately $27.4 million.  We expectto make these interest payments with cash flows from operating activities.

 

*Investing Activities*

Cash flows used ininvesting activities totaled $68.9 million for the nine months ended September30, 2006, and were comprised of $47.0 million of capital expenditures, $11.0million for the acquisition of assets (see Note 5 in the Notes to theConsolidated Financial Statements), $4.2 million of cash paid for linefill onassets owned, $4.2 million of cash contributions for our ownership interest inMB Storage for capital expenditures and $2.5 million of cash contributions forour ownership interest in Centennial for operating needs.  Cash flows used in investing activitiestotaled $109.9 million for the nine months ended September 30, 2005, and werecomprised of $69.0 million for acquisitions (see Note 5 in the Notes to theConsolidated Financial Statements), $38.3 million of capital expenditures and$2.6 million of cash contributions for our ownership interest in MB Storage forcapital expenditures. 

 

*Financing Activities*

Cash flows provided by financing activities totaled$20.6 million for the nine months ended September 30, 2006, and were comprisedof $100.5 million of contributions from our Parent Partnership, partiallyoffset by $50.4 million of distributions paid to our Parent Partnership and$29.5 million of repayments on the note payable to our Parent Partnership, netof borrowings.  Cash flows provided byfinancing activities totaled $90.2 million for the nine months ended September 30,2005, and were comprised of $294.8 million of contributions from our ParentPartnership, partially offset by $112.7 million of repayments on the notepayable to our Parent Partnership, net of borrowings, and $91.9 million ofdistributions paid to our Parent Partnership.  The contributions received from the Parent Partnership during 2005 wereprimarily used to reduce the level of indebtedness owed to our ParentPartnership.

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During the nine monthsended September 30, 2006 and 2005, we paid cash distributions to our ParentPartnership totaling $50.4 million and $91.9 million, respectively.  On November 7, 2006, we paid a cashdistribution to our Parent Partnership of $21.7 million for the quarter endedSeptember 30, 2006.

 

# **OtherConsiderations**

 

*Universal Shelf*

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.  Taking into accountour Parent Partnership’s May 2005 and July 2006 equity offerings, in which ourParent Partnership issued $290.8 million and $204.1 million of equitysecurities, respectively, our Parent Partnership had approximately $1.5 billionremaining under this shelf registration, subject to customary marketing termsand conditions.

* *

*Credit Facilities*

* *

We currentlyutilize debt financing available from our Parent Partnership throughintercompany notes. The terms of the intercompany notes generally match theprincipal and interest payment dates under the Parent Partnership’s debtinstruments.  The interest rates chargedby the Parent Partnership include the stated interest rate paid by the ParentPartnership on its debt obligations, plus a premium to cover debt issuancecosts.  The interest rate is alsodecreased or increased to cover gains and losses, respectively, on any interestrate swaps that the Parent Partnership may have in place on its respective debtinstruments.  The Parent Partnership’srevolving credit facility is described below (see Note 8 in the Notes to theConsolidated Financial Statements for a discussion of the Parent Partnership’ssenior notes).

 

Our Parent Partnership has in place a $700.0 millionunsecured revolving credit facility, including the issuance of letters ofcredit (“Revolving Credit Facility”), which matures on December 13, 2011.  Commitments under the credit facility may beincreased up to a maximum of $850.0 million upon our Parent Partnership’srequest, subject to lender approval and the satisfaction of certain otherconditions.  The interest rate is based,at our Parent Partnership’s option, on either the lender’s base rate plus aspread, or LIBOR plus a spread in effect at the time of borrowings.  Financial covenants in the Revolving CreditFacility require that our Parent Partnership maintain a ratio of ConsolidatedFunded Debt to Pro Forma EBITDA (as defined and calculated in the facility) ofless than 4.75 to 1.00 (subject to adjustment for specified acquisitions) and aratio of EBITDA to Interest Expense (as defined and calculated in the facility)of at least 3.00 to 1.00, in each case with respect to specified twelve monthperiods.  Other restrictive covenants inthe Revolving Credit Facility limit the Parent Partnership’s and itssubsidiaries’ (including us) ability to, among other things, incur additionalindebtedness, make certain distributions, incur liens, engage in specifiedtransactions with affiliates, including us, and complete mergers, acquisitionsand sales of assets.   

 

On July 31, 2006, ourParent Partnership amended its Revolving Credit Facility.  The primary revisions were as follows:

·                  The maturitydate of the credit facility was extended from December 13, 2010, to December13, 2011.  Also under the terms of theamendment, the Parent Partnership may request up to two one-year extensions ofthe maturity date.  These extensions, ifrequested, will become effective subject to lender approval and satisfaction ofcertain other conditions.

·                  The amendmentreleases Jonah Gas Gathering Company (“Jonah”) as a guarantor of the RevolvingCredit Facility and restricts the amount of outstanding debt of the Jonah jointventure to debt owing to the owners of its partnership interests and otherthird-party debt in the principal aggregate amount of $50.0 million.  

·                  The amendmentmodifies the financial covenants to, among other things, allow the Parent Partnershipto include in the calculation of its Consolidated EBITDA (as defined in theRevolving Credit Facility) pro forma adjustments for material capital projects.

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·                  The amendmentallows for the issuance of Hybrid Securities (as defined in the RevolvingCredit Facility) of up to 15% of the Parent Partnership’s Consolidated TotalCapitalization (as defined in the Revolving Credit Facility).   

 

At September 30, 2006,$359.0 million was outstanding under the Revolving Credit Facility at aweighted average interest rate of 6.02%. At September 30, 2006, our Parent Partnership was in compliance with thecovenants of its Revolving Credit Facility.     

 

At September 30,2006 and December 31, 2005, we had unsecured intercompany notes payable to ourParent Partnership of $176.9 million and $206.9 million, respectively, whichrelated to borrowings under the Parent Partnership’s Revolving Credit Facility,7.625% Senior Notes and 6.125% Senior Notes. The weighted average interest rateon the note payable to the Parent Partnership at September 30, 2006, was6.8%.  At September 30, 2006, accruedinterest includes $1.2 million due to our Parent Partnership.  For the nine months ended September 30, 2006and 2005, interest expense incurred on the note payable to our Parent Partnershiptotaled $8.6 million and $7.6 million, respectively.

 

*Future Capital Needs and Commitments*

 

We estimate that capital expenditures, excludingacquisitions and joint venture contributions, for 2006 will be approximately$88.0 million (including $5.5 million of capitalized interest). We expect tospend approximately $47.5 million for revenue generating projects and facilityimprovements.  We expect to spendapproximately $16.0 million to sustain existing operations, includinglife-cycle replacements for equipment at various facilities and pipeline andtank replacements and $19.0 million for various system upgrade projects.   These estimates are lower than previouslyreported amounts primarily due to timing delays of construction projects.  

During the remainder of 2006, we may be required tocontribute additional cash to Centennial to cover capital expenditures,acquisitions or other operating needs and to MB Storage to cover significantcapital expenditures or additional acquisitions.  We continually review and evaluate potentialcapital improvements and expansions that would be complementary to our presentsystem.  These expenditures can varygreatly depending on the magnitude of our transactions.  We may finance capital expenditures throughinternally generated funds, debt or capital contributions from our ParentPartnership or any combination thereof.

*Liquidity Outlook*

* *

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

*Off-Balance Sheet Arrangements*

 

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

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We are a guarantor with respect to $500.0 millionprincipal amount of 7.625% Senior Notes due 2012 issued in February 2002 andfor $200.0 million principal amount of 6.125% Senior Notes due 2013 issued inJanuary 2003 by our Parent Partnership.

Centennial entered into credit facilities totaling$150.0 million, and as of September 30, 2006, $150.0 million was outstandingunder those credit facilities, of which $140.0 million expires in 2024, and$10.0 million expires in April 2007.  Weand Marathon Petroleum Company LLC (“Marathon”) have each guaranteed one-halfof the repayment of Centennial’s outstanding debt balance (plus interest) underthese credit facilities.  The guaranteesarose in order for Centennial to obtain adequate financing, and the proceeds ofthe credit facilities were used to fund construction and conversion costs ofits pipeline system.  Prior to theexpiration of the long-term credit facility, we could be relinquished fromresponsibility under the guarantee should Centennial meet certain financialtests.  If Centennial defaults on itsoutstanding balance, the estimated maximum potential amount of future paymentsfor us and Marathon is $75.0 million each at September 30, 2006.  

We, Marathon and Centennial have entered into alimited cash call agreement, which allows each member to contribute cash inlieu of Centennial procuring separate insurance in the event of a third-partyliability arising from a catastrophic event. There is an indefinite term for the agreement and each member is tocontribute cash in proportion to its ownership interest, up to a maximum of$50.0 million each.  As a result of thecatastrophic event guarantee, we have recorded a $4.4 million obligation, whichrepresents the present value of the estimated amount that we would have to payunder the guarantee.  If a catastrophicevent were to occur and we were required to contribute cash to Centennial,contributions exceeding our deductible might be covered by our insurance,depending upon the nature of the catastrophic event.  

*ContractualObligations*

The followingtable summarizes our debt repayment obligations and material contractualcommitments as of September 30, 2006 (in millions):

 
|                                             | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                              | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After 5** | ** ** |
| ** **                                  | ** ** | **Total**                                                               | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **Years** | ** ** |
| Note payable,  Parent Partnership           |       | $                                                                       | 176.9      |   | $ | — |   | $ | — |   | $ | — |   | $ | 176.9 |   |
| 6.45% Senior  Notes due 2008 (1)            |       | 180.0                                                                   |       | — |   | 180.0 |   | — |   | — |   |
| 7.51% Senior  Notes due 2028 (1)            |       | 210.0                                                                   |       | — |   | — |   | — |   | 210.0 |   |
| Interest  payments (2)                      |       | 437.7                                                                   |       | 41.9 |   | 66.4 |   | 60.7 |   | 268.7 |   |
| Debt and interest subtotal                  |       | 1,004.6                                                                 |       | 41.9 |   | 246.4 |   | 60.7 |   | 655.6 |   |
|                                        |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Operating leases  (3)                       |       | 58.9                                                                    |       | 13.6 |   | 15.9 |   | 11.5 |   | 17.9 |   |
| Contributions to  Centennial (4)            |       | 8.6                                                                     |       | 8.6 |   | — |   | — |   | — |   |
| Capital  expenditure obligations (5)        |       | 1.6                                                                     |       | 1.6 |   | — |   | — |   | — |   |
| Other  liabilities and deferred credits (6) |       | 5.0                                                                     |       | — |   | 4.4 |   | 0.1 |   | 0.5 |   |
|                                        |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Total                                       |       | $                                                                       | 1,078.7    |   | $ | 65.7 |   | $ | 266.7 |   | $ | 72.3 |   | $ | 674.0 |   |

 

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(1)          We entered into an interest rate swap agreement to hedge our exposure tochanges in the fair value of our 7.51% Senior Notes due 2028.  At September 30, 2006, the 7.51% Senior Notesinclude an adjustment to decrease the fair value of the debt by $3.9 millionrelated to this interest rate swap agreement. At September 30, 2006, our 6.45% Senior Notes include less than $0.1million of unamortized debt discount. The fair value adjustment and unamortized debt discount are excludedfrom this table. 

 

(2)          Includes interest payments due on our Senior Notes and interest paymentsand commitment fees due on our Note Payable to our Parent Partnership.  The interest amount calculated on the Note Payableto our Parent Partnership is based on the assumption that the amountoutstanding and the interest rate charged both remain at their current levels.

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(3)          Includesa pipeline capacity lease with Centennial. In January 2003, we entered into a pipeline capacity lease agreementwith Centennial for a period of five years that contains a minimum throughputrequirement.  For the nine months endedSeptember 30, 2006, we exceeded the minimum throughput requirements on thelease agreement.

 

(4)          Expected contribution to Centennial during 2007 for anobligation of Centennial related to the formation of Centennial Pipeline LLC in2001.

 

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

 

(6)          Excludes approximately $8.2 million oflong-term deferred revenue payments, which are being transferred to income overthe term of the respective revenue contracts and $4.2 million related to ourestimated amount of obligation under a catastrophic event guarantee forCentennial.  The amount of commitment byyear is our best estimate of projected payments of these long-term liabilities.

 

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

* *

Our seniorunsecured debt is rated BBB- by Standard and Poors (“S&P”) and Baa3 byMoody’s Investors Service (“Moody’s”). Both ratings are with a stable outlook and were reaffirmed during thefirst quarter of 2006.  Our ParentPartnership’s senior unsecured debt is rated BBB- by S&P and Baa3 byMoody’s.  S&P assigned this rating onJune 14, 2005, following its review of the ownership structure, corporategovernance issues, and proposed funding after the acquisition of the Company byDFI.  Both ratings are with a stableoutlook.  A rating reflects only the viewof a rating agency and is not a recommendation to buy, sell or hold anyindebtedness.  Any rating can be revisedupward or downward or withdrawn at any time by a rating agency if it determinesthat the circumstances warrant such a change and should be evaluatedindependently of any other rating.  

*** ***

***Recent Accounting Pronouncements***

 

See discussion of new accounting pronouncements inNote 1 in the Notes to the Consolidated Financial Statements.

** **

** **

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

** **

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

*Commodity Risk*

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

*Interest Rate Risk*

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

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The following table summarizes the estimated fairvalues of the Senior Notes as of September 30, 2006 and December 31, 2005 (inmillions):
|                                       | ** ** | ** **      | ** ** | **Fair Value**          | ** ** |
|---------------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                            | ** ** | **Face  Value** | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| 6.45% Senior  Notes, due January 2008 |       | $               | 180.0      |                         | $          | 182.2 |   | $ | 183.7 |   |
| 7.51% Senior Notes, due  January 2028 |       | 210.0           |       | 222.6                        |       | 224.1 |   |
|                                       |            |                 |            |                              |            |  |  |  |  |  |

 

In October 2001, we entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our fixed rate7.51% Senior Notes due 2028. We designated this swap agreement as a fair valuehedge.  The swap agreement has a notionalamount of $210.0 million and matures in January 2028 to match the principal andmaturity of the 7.51% Senior Notes. Under the swap agreement, we pay a floating rate of interest based on athree-month U.S. Dollar LIBOR rate, plus a spread of 147 basis points, andreceive a fixed rate of interest of 7.51%. During the nine months ended September 30, 2006, and 2005, we recognizedreductions in interest expense of $1.5 million and $4.6 million, respectively,related to the difference between the fixed rate and the floating rate ofinterest on the interest rate swap. During the quarters ended September 30, 2006 and 2005, we reviewed thehedge effectiveness of this interest rate swap and noted that no gain or lossfrom ineffectiveness was required to be recognized.  The fair values of this interest rate swapwere losses of approximately $3.9 million and $0.9 million at September 30,2006, and December 31, 2005, respectively. Utilizing the balance of the 7.51% Senior Notes outstanding at September30, 2006, and including the effects of hedging activities, if market interestrates increased 100 basis points, the annual increase in interest expense wouldbe $2.1 million.

AtSeptember 30, 2006, and December 31, 2005, we had unsecured intercompany notespayable to our Parent Partnership of $176.9 million and $206.9 million,respectively, which related to borrowings under the Parent Partnership’sRevolving Credit Facility, 7.625% Senior Notes and 6.125% Senior Notes. Theweighted average interest rate on the note payable to the Parent Partnership atSeptember 30, 2006, was 6.8%. At September 30, 2006, accrued interest includes$1.2 million due to our Parent Partnership. For the nine months ended September 30, 2006 and 2005, interest expenseincurred on the note payable to our Parent Partnership totaled $8.6 million and$7.6 million, respectively. 

**Item 4.  Controls andProcedures**

** **

As of the end of theperiod covered by this report, our management carried out an evaluation, withthe participation of our principal executive officer (the “CEO”) and ourprincipal financial officer (the “CFO”), of the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15 of the Securities Exchange Actof 1934.  Based on those evaluations, asof September 30, 2006, the CEO and CFO concluded:

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

 

(ii)          that our disclosurecontrols and procedures are effective.

 

*Changesin Internal Control over Financial Reporting*

* *

During 2006, wecommenced a project to replace or upgrade our general ledger and consolidationsoftware.  The implementation is expectedto occur in the first quarter of 2007. The project is not in response to anyidentified deficiency or weakness in our internal control over financial reporting.  Other than these proposed changes, there hasbeen no change in our internal control over financial reporting during thethird quarter of 2006 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

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The certifications of theCompany’s CEO and CFO required under Sections 302 and 906 of the Sarbanes-OxleyAct of 2002 have been included as exhibits to this Report.  

 

**PARTII.  OTHER INFORMATION**

**Item 1. Legal Proceedings**

** **

We have been, in the ordinary course of business, adefendant in various lawsuits and a party to various other legal proceedings,some of which are covered in whole or in part by insurance.  We believe that the outcome of these lawsuitsand other proceedings will not individually or in the aggregate have a materialadverse effect on our consolidated financial position, results of operations orcash flows.  See discussion of legalproceedings in Note 12 in the Notes to the Consolidated Financial Statements,which is incorporated into this item by reference.

 

**Item1A.  Risk Factors**

 

Investors andpotential investors should carefully consider the risk factors set forth in ourQuarterly Report on Form 10-Q for the period ended June 30, 2006, in  addition to other information in our AnnualReport on Form 10-K for the year ended December 31, 2005, and this Report.  We identified these risk factors as importantfactors that could cause our actual results to differ materially from thosecontained in any written or oral forward-looking statements made by or onbehalf of us. 

 

**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                                                          |

 

37

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|        |   | National Bank, as trustee (Filed as Exhibit 4.6 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended June 30, 2002 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.5    |   | Third Supplemental Indenture among TEPPCO Partners,  L.P. as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,  L.P., TEPPCO Midstream Companies, L.P., Jonah Gas Gathering Company and Val  Verde Gas Gathering Company, L.P. as Subsidiary Guarantors, and Wachovia  Bank, National Association, as trustee, dated as of January 30, 2003 (Filed  as Exhibit 4.7 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)  for the year ended December 31, 2002, and incorporated herein by reference).                                                                                                                    |
| 10.1   |   | Third Amendment to Amended and Restated Credit  Agreement, dated as of July 31, 2006, by and among TEPPCO Partners, L.P., the  Borrower, several banks and other financial institutions, the Lenders,  SunTrust Bank, as the Administrative Agent for the Lenders and as the LC  Issuing Bank, Wachovia Bank, National Association, as Syndication Agent, and  BNP Paribas, JPMorgan Chase Bank, N.A., and The Royal Bank of Scotland Plc,  as Co-Documentation Agents (Filed as Exhibit 10.3 to Current Report on Form  8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as of August  3, 2006 and incorporated herein by reference). |
| 31.1*  |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2*  |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1** |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.2** |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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* Filed herewith.

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

+ A management contract or compensation plan orarrangement.

**SIGNATURES**

 

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

 
|                        |   |   | TE Products Pipeline Company, Limited Partnership |
|------------------------|--------|--------|---------------------------------------------------|
|                   |   |   |                                              |   |
|                   |   |   |                                              |   |
| Date: November 7, 2006 |   |   | By:                                               | /s/   JERRY E. THOMPSON |   |
|                   |   |   |                                              | Jerry E.  Thompson, |
|                   |   |   |                                              | President and Chief Executive Officer of |
|                   |   |   |                                              | TEPPCO GP, Inc.,  General Partner |
|                   |   |   |                                              |   |
| Date: November 7, 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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