**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-Q**

 
| **ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------------------------------------------------|
|                                                                                                   |
| **For the quarterly period ended March 31, 2006**                                                      |
|                                                                                                   |
| **OR**                                                                                                 |
|                                                                                                   |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |

 

**Commission FileNo. 1-13603**

 

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**TE ProductsPipeline Company, Limited Partnership**

**(Exact name of Registrant asspecified in its charter)**

 

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

 

**2929 AllenParkway**

**P.O. Box 2521**

**Houston, Texas77252-2521**

(Addressof principal executive offices, including zip code)

 

**(713) 759-3636**

(Registrant’stelephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý   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 largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):    Large accelerated filer o     Accelerated Filer o     Non-accelerated Filer ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o No ý

 

 

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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  March 31, 2006 (unaudited) and December 31, 2005 (unaudited)**                                  | ** **                                                                                      |
| ** **                                                                                                                           | ** **                                                                                      |
| **Consolidated Statements of  Income for the three months ended March 31, 2006 (unaudited) and 2005  (unaudited) (as restated)**     | ** **                                                                                      |
| ** **                                                                                                                           | ** **                                                                                      |
| **Consolidated Statements of  Cash Flows for the three months ended March 31, 2006 (unaudited) and 2005  (unaudited) (as restated)** | ** **                                                                                      |
| ** **                                                                                                                           | ** **                                                                                      |
| **Consolidated Statement of  Partners’ Capital for the three months ended March 31, 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**                                                                                                                       | ** **                                                                                      |

 

i

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**PART I. FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

** **

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

** **

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                           | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                           |       |               |       |                  |       |
| Current assets:                                                                                                      |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                           |       | $                  | —     |                  | $          | — |   |
| Accounts  receivable, trade (net of allowance for doubtful accounts of $0 and $45)                                   |       | 17,497             |       | 26,338                |       |
| Accounts  receivable, related parties                                                                                |       | 1,254              |       | 2,182                 |       |
| Inventories                                                                                                          |       | 17,715             |       | 16,449                |       |
| Other                                                                                                                |       | 14,267             |       | 14,911                |       |
| Total current  assets                                                                                                |       | 50,733             |       | 59,880                |       |
| Property, plant  and equipment, at cost (net of accumulated depreciation and amortization of  $349,501 and $340,562) |       | 810,237            |       | 808,761               |       |
| Equity  investments                                                                                                  |       | 150,876            |       | 157,335               |       |
| Other assets                                                                                                         |       | 17,188             |       | 16,566                |       |
| Total assets                                                                                                         |       | $                  | 1,029,034  |                  | $          | 1,042,542 |   |
|                                                                                                                 |       |               |       |                  |       |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                           |       |               |       |                  |       |
| Current  liabilities:                                                                                                |       |               |       |                  |       |
| Accounts payable  and accrued liabilities                                                                            |       | $                  | 8,156      |                  | $          | 13,540 |   |
| Accounts  payable, related parties                                                                                   |       | 10,070             |       | 19,973                |       |
| Accrued interest                                                                                                     |       | 7,562              |       | 16,151                |       |
| Other accrued  taxes                                                                                                 |       | 6,309              |       | 7,524                 |       |
| Other                                                                                                                |       | 6,694              |       | 7,220                 |       |
| Total current  liabilities                                                                                           |       | 38,791             |       | 64,408                |       |
| Senior Notes                                                                                                         |       | 382,982            |       | 389,048               |       |
| Note Payable,  Parent Partnership                                                                                    |       | 222,348            |       | 206,906               |       |
| Other  liabilities and deferred credits                                                                              |       | 20,266             |       | 14,500                |       |
| Commitments and  contingencies                                                                                       |       |               |       |                  |       |
| Partners’  capital:                                                                                             |       |               |       |                  |       |
| General  partner’s interest                                                                                     |       | 4                  |       | 4                     |       |
| Limited  partner’s interest                                                                                     |       | 364,643            |       | 367,676               |       |
| Total partners’  capital                                                                                        |       | 364,647            |       | 367,680               |       |
| Total  liabilities and partners’ capital                                                                        |       | $                  | 1,029,034  |                  | $          | 1,042,542 |   |

 

See accompanying Notes to Unaudited ConsolidatedFinancial Statements.

 

1

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

** **

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

**(in thousands)**

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **March 31,**               | ** ** |
| ** **                              | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                              | ** ** | ** **                       | ** ** | **(as restated)** | ** ** |
| Operating  revenues:                    |       |                             |       |   |   |
| Transportation –  Refined products |       | $                                | 31,799     |   | $ | 34,965 |   |
| Transportation –  LPGs             |       | 29,421                           |       | 32,231 |   |
| Other                                   |       | 11,578                           |       | 9,820 |   |
| Total operating  revenues               |       | 72,798                           |       | 77,016 |   |
|                                    |       |                             |       |   |   |
| Costs and  expenses:                    |       |                             |       |   |   |
| Operating,  general and administrative  |       | 28,419                           |       | 26,505 |   |
| Operating fuel  and power               |       | 9,254                            |       | 7,629 |   |
| Depreciation and  amortization          |       | 10,029                           |       | 9,298 |   |
| Taxes – other  than income taxes   |       | 2,592                            |       | 2,908 |   |
| Gains on sales  of assets               |       | (7                               | )          | (92 | ) |
| Total costs and  expenses               |       | 50,287                           |       | 46,248 |   |
|                                    |       |                             |       |   |   |
| Operating income                        |       | 22,511                           |       | 30,768 |   |
|                                    |       |                             |       |   |   |
| Interest expense  – net            |       | (8,334                           | )          | (7,959 | ) |
| Equity losses                           |       | (1,266                           | )          | (1,821 | ) |
| Other income –  net                |       | 779                              |       | 149 |   |
|                                    |       |                             |       |   |   |
| Net income                              |       | $                                | 13,690     |   | $ | 21,137 |   |

 

See accompanying Notes to Unaudited Consolidated FinancialStatements.

 

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**               | ** ** |
| ** **                                                                     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | ** **                       | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                         |       |                             |       |   |   |
| Net income                                                                     |       | $                                | 13,690     |   | $ | 21,137 |   |
| Adjustments to  reconcile net income to cash provided by operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                 |       | 10,029                           |       | 9,298 |   |
| Losses in equity  investments                                                  |       | 1,266                            |       | 1,821 |   |
| Distributions  from equity investments                                         |       | 7,840                            |       | — |   |
| Non-cash portion  of interest expense                                          |       | 138                              |       | 68 |   |
| Gains on sales  of assets                                                      |       | (7                               | )          | (92 | ) |
| Decrease in  accounts receivable                                               |       | 8,841                            |       | 1,204 |   |
| Decrease in  accounts receivable, related parties                              |       | 928                              |       | 1,906 |   |
| Increase in  inventories                                                       |       | (1,266                           | )          | (446 | ) |
| (Increase)  decrease in other current assets                                   |       | 644                              |       | (696 | ) |
| Decrease in  accounts payable and accrued expenses                             |       | (13,818                          | )          | (9,014 | ) |
| Decrease in  accounts payable, related parties                                 |       | (1,179                           | )          | (919 | ) |
| Other                                                                          |       | (12,533                          | )          | 715 |   |
| Net cash  provided by operating activities                                     |       | 14,573                           |       | 24,982 |   |
|                                                                           |       |                             |       |   |   |
| Cash flows from  investing activities:                                         |       |                             |       |   |   |
| Investment in  Mont Belvieu Storage Partners, L.P.                             |       | (1,720                           | )          | — |   |
| Capital  expenditures                                                          |       | (11,706                          | )          | (14,140 | ) |
| Net cash used in  investing activities                                         |       | (13,426                          | )          | (14,140 | ) |
|                                                                           |       |                             |       |   |   |
| Cash flows from  financing activities:                                         |       |                             |       |   |   |
| Proceeds from  note payable, Parent Partnership                                |       | 38,075                           |       | 38,788 |   |
| Repayments of  note payable, Parent Partnership                                |       | (22,499                          | )          | (19,938 | ) |
| Distributions  paid                                                            |       | (16,723                          | )          | (29,691 | ) |
| Net cash used in  financing activities                                         |       | (1,147                           | )          | (10,841 | ) |
| Net increase in  cash and cash equivalents                                     |       | —                           |       | 1 |   |
| Cash and cash  equivalents at beginning of period                              |       | —                           |       | — |   |
| Cash and cash  equivalents at end of period                                    |       | $                                | —     |   | $ | 1 |   |
|                                                                           |       |                             |       |   |   |
| **Supplemental  disclosure of cash flows:**                                    |       |                             |       |   |   |
| Cash paid for  interest (net of amounts capitalized)                           |       | $                                | 15,603     |   | $ | 15,330 |   |

 

See accompanying Notes to Unaudited ConsolidatedFinancial Statements.

 

3

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

** **

**CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL**

**(Unaudited)**

**(in thousands)**

 
| ** **                                   | ** ** | **General**        | ** ** | **Limited**        | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                                   | ** ** | **Partner’s** | ** ** | **Partner’s** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Interest**       | ** ** | **Interest**       | ** ** | **Total**  | ** ** |
| Partners’  capital at December 31, 2005 |       | $                  | 4          |               | $          | 367,676    |       | $ | 367,680 |   |
| Net income  allocation                       |       | 1                  |       | 13,689             |       | 13,690     |       |
| Cash  distributions                          |       | (1                 | )          | (16,722            | )          | (16,723    | )          |
|                                         |       |               |       |               |       |       |       |
| Partners’  capital at March 31, 2006    |       | $                  | 4          |               | $          | 364,643    |       | $ | 364,647 |   |

 

See accompanying Notes to Unaudited ConsolidatedFinancial Statements.

 

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

** **

**NOTES TO CONSOLIDATED 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. TEPPCOPartners, L.P. (the “Parent Partnership”) owns a 99.999% interest in us as thesole limited partner. TEPPCO GP, Inc. (“TEPPCO GP” or “General Partner”), awholly owned subsidiary of the Parent Partnership, holds a 0.001% generalpartner interest in us. Texas Eastern Products Pipeline Company, LLC (the “Company”),a Delaware limited liability company, serves as the general partner of ourParent Partnership. Through February 23, 2005, the Company was an indirectwholly owned subsidiary of Duke Energy Field Services, LLC (“DEFS”), a jointventure between Duke Energy Corporation (“Duke Energy”) and ConocoPhillips. ThroughFebruary 23, 2005, Duke Energy held an interest of approximately 70% in DEFS,and ConocoPhillips held the remaining interest of approximately 30%. OnFebruary 24, 2005, the Company was acquired by DFI GP Holdings L.P. (formerlyEnterprise GP Holdings L.P.) (“DFI”), an affiliate of EPCO, Inc. (“EPCO”), aprivately held company controlled by Dan L. Duncan, for approximately $1.1billion. As a result of the transaction, DFI owns and controls the 2% generalpartner interest in our Parent Partnership and has the right to receive theincentive distribution rights associated with its general partner interest inour Parent Partnership.

 

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

 

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

 

TEPPCO GP, as our generalpartner, has all management powers over the business and affairs of ourpartnership 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 on February 24,2005.  We reimburse EPCO for theallocated costs of its employees who perform operating, management and otheradministrative 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 March 31, 2006, and the results of our operations and cash flowsfor the periods presented. The results of operations for the three months endedMarch 31, 2006, are not necessarily indicative of results of our operations forthe full year 2006. You should read these interim financial statements inconjunction with our consolidated financial statements and notes theretopresented in the TE Products Pipeline Company, Limited Partnership Annual Reporton Form 10-K for the year ended December 31, 2005. We have reclassified certainamounts from prior periods to conform to the current presentation.

 

We restated our consolidated financial statements andrelated financial information for the three months ended March 31, 2005, for anaccounting correction. See Note 11 for a discussion of the restatementadjustment and the impact on previously issued financial statements. 

 

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

 

At March 31, 2006 and December 31, 2005, we had aworking capital surplus of $11.9 million and a working capital deficit of $4.5million, respectively. Our primary sources of liquidity are cash generated fromoperations and from loans or capital contributions from our Parent Partnership.Working capital deficits occur primarily from the timing of operating cashreceipts from customers, payment of cash distributions and the payment ofnormal operating expenses and capital expenditures. Our Parent Partnership hashistorically made capital contributions, loans or otherwise provided liquidityto us as needed, but the Parent Partnership has no contractual obligation to doso. At March 31, 2006, our Parent Partnership had $253.1 million in availableborrowing capacity under its revolving credit facility.

 

**New AccountingPronouncements**

** **

**In December 2004,the Financial Accounting Standards Board (“FASB”) issued**Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (revised 2004), *Share-Based Payment*. SFAS 123(R) is arevision of SFAS No. 123, *Accounting forStock-Based Compensation*, as amended by SFAS No. 148,*Accounting for Stock-Based Compensation – Transitionand Disclosure* and supersedes Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for Stock Issuedto Employees*. SFAS 123(R) requires that the cost resulting from allshare-based payment transactions be recognized in the financial statements atfair value. In April 2005, both the FASB and the Securities and ExchangeCommission decided to delay the effective date for public companies toimplement SFAS 123(R). SFAS 123(R) is now effective for public companies forannual periods beginning after June 15, 2005. Accordingly, we adopted SFAS123(R) in the first quarter of 2006. We adopted SFAS 123(R) under the modifiedprospective transition method. Our Parent Partnership’s 2000 Long TermIncentive Plan and its 2005 Phantom Unit Plan are liability awards under theprovisions of this statement. No additional compensation expense has beenrecorded in connection with the adoption of SFAS 123(R) as our ParentPartnership has historically recorded the associated liabilities at fair value.The adoption of SFAS 123(R) did not have a material effect on our financialposition, results of operations or cash flows.

** **

In June 2005, the Emerging Issues Task Force (“EITF”)reached consensus in EITF 04-5, *Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights*,to provide guidance on how general partners in a limited partnership shoulddetermine whether they control a limited partnership and therefore should consolidateit. The EITF agreed that the presumption of general partner control would beovercome only when the limited partners have either of two types of rights. Thefirst type, referred to as “kick-out rights,” is the right to dissolve orliquidate the partnership or otherwise remove the general partner without cause.The second type, referred to as “participating rights,” is the right toeffectively participate in significant decisions made in the ordinary course ofthe partnership’s business. The kick-out rights and the participating rightsmust be substantive in order to overcome the presumption of general partnercontrol. The consensus is effective for general partners of all new limitedpartnerships formed and for existing limited partnerships for which thepartnership agreements are modified subsequent to the date of FASB ratification(June 29, 2005). For existing limited partnerships that have not been modified,the guidance in EITF 04-5 is effective no later than the beginning of the firstreporting period in fiscal years beginning after December 15, 2005. Theadoption of EITF 04-5 did not have a material effect on our financial position,results of operations or cash flows.

 

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*. SFAS154 establishes new standards on accounting for changes in accountingprinciples. All such changes must be accounted

 

6

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for byretrospective application to the financial statements of prior periods unlessit is impracticable to do so. SFAS 154 completely replaces APB Opinion No. 20, *Accounting Changes,*and SFAS No. 3, *Reporting Accounting Changes in Interim Periods*.However, it carries forward the guidance in those pronouncements with respectto accounting for changes in estimates, changes in the reporting entity, andthe correction of errors. SFAS 154 is effective for accounting changes anderror corrections made in fiscal years beginning after December 15, 2005, withearly adoption permitted for changes and corrections made in years beginningafter June 1, 2005. The application of SFAS 154 does not affect the transitionprovisions of any existing pronouncements, including those that are in thetransition phase as of the effective date of SFAS 154. The adoption of SFAS 154did not have a material effect on our financial position, results of operationsor cash flows.

 

**In September 2005,the EITF reached consensus in EITF 04-13, *Accounting for Purchasesand Sales of Inventory with the Same Counterparty*, to define when apurchase and a sale of inventory with the same party that operates in the sameline of business should be considered a single nonmonetary transaction subjectto APB Opinion No. 29, *Accounting for NonmonetaryTransactions*. Two or more inventory transactions with the same partyshould be combined if they are entered into in contemplation of one another. TheEITF also requires entities to account for exchanges of inventory in the sameline of business at fair value or recorded amounts based on inventoryclassification. The guidance in EITF 04-13 is effective for new inventoryarrangements entered into in reporting periods beginning after March 15, 2006. Weare currently evaluating what impact EITF 04-13 will have on our financialstatements, but at this time, we do not believe that the adoption of EITF 04-13will have a material effect on our financial position, results of operations orcash flows.**

** **

**NOTE 2. INTANGIBLEASSETS**

** **

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

** **

**The following table reflects thecomponents of amortized intangible assets, included in other assets on theconsolidated balance sheets, and excess investment included in equityinvestments, at March 31, 2006 and December 31, 2005 (in thousands):**

** **
| ** **                 | ** ** | **March 31, 2006**    | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                       |       |                            |       |                            |       |   |   |   |   |
| Intangible  assets:        |       |                            |       |                            |       |   |   |   |   |
| Transportation  agreements |       | $                               | 1,000      |                            | $          | (271 | ) | $ | 1,328 |   | $ | (326 | ) |
|                       |       |                            |       |                            |       |   |   |   |   |
| Excess  investment:        |       |                            |       |                            |       |   |   |   |   |
| Centennial  Pipeline LLC   |       | $                               | 33,390     |                            | $          | (13,681 | ) | $ | 33,390 |   | $ | (12,947 | ) |

 

The value assigned to our excess investment inCentennial Pipeline LLC was created upon its formation. Approximately $30.0million is related to a contract and is being amortized on a unit-of-productionbasis based upon the volumes transported under the contract compared to theguaranteed total throughput of the contract over a 10-year life. The remaining$3.4 million is related to a pipeline and is being amortized on a straight-linebasis over the life of the pipeline, which is 35 years.

 

7

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Amortization expense on intangible assets was lessthan $0.1 million for the three months ended March 31, 2006 and 2005,respectively. Amortization expense on excess investments included in equityearnings was $0.7 million and $1.0 million for the three months ended March 31,2006 and 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. INTERESTRATE SWAP**

** **

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 notional amount of $210.0 million and maturesin January 2028 to match the principal and maturity of the 7.51% Senior Notes. Underthe swap agreement, we pay a floating rate of interest based on a three-monthU.S. Dollar LIBOR rate, plus a spread of 147 basis points, and receive a fixedrate of interest of 7.51%. During the three months ended March 31, 2006 and 2005,we recognized reductions in interest expense of $0.7 million and $1.8 million,respectively, related to the difference between the fixed rate and the floatingrate of interest on the interest rate swap. During the quarters ended March 31,2006 and 2005, we measured the hedge effectiveness of this interest rate swapand noted that no gain or loss from ineffectiveness was required to berecognized. The fair value of this interest rate swap was a loss ofapproximately $7.0 million and $0.9 million at March 31, 2006, and December 31,2005, respectively.

 

**NOTE 4. INVENTORIES**

** **

Inventories are valued at the lower of cost (based onweighted average cost method) or market. The costs of inventories did notexceed market values at March 31, 2006, and December 31, 2005. The majorcomponents of inventories were as follows (in thousands):

 
| ** **              | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Refined products        |       | $                        | 3,801      |                        | $          | 4,461 |   |
| LPGs                    |       | 9,103                    |       | 7,403                       |       |
| Materials and  supplies |       | 4,811                    |       | 4,585                       |       |
| Total                   |       | $                        | 17,715     |                        | $          | 16,449 |   |

 

**NOTE 5. EQUITYINVESTMENTS**

** **

We own a 50% ownership interest in Centennial PipelineLLC (“Centennial”), and Marathon Petroleum Company LLC (“Marathon”) owns theremaining 50% interest. Centennial owns an interstate refined petroleumproducts pipeline extending from the upper Texas Gulf Coast to central Illinois.During the three months ended March 31, 2006 and 2005, we did not invest anyadditional funds in Centennial. We have not received any distributions fromCentennial since its formation.

 

8

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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 atthe Mont Belvieu fractionation and storage complex and a short haultransportation shuttle system that ties Mont Belvieu, Texas, to the upper TexasGulf Coast energy marketplace. MB Storage is a service-oriented, fee-basedventure serving the fractionation, refining and petrochemical industries withsubstantial capacity and flexibility for the transportation, terminaling andstorage of NGLs, LPGs and refined products. MB Storage has no commodity tradingactivity. We operate the facilities for 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 the Agreementof Limited Partnership of MB Storage. Our share of MB Storage’s earnings may beadjusted annually by the partners of MB Storage. Any amount of MB Storage’sannual income before depreciation expense in excess of $6.78 million is allocatedevenly 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 onassets constructed or acquired by MB Storage subsequent to formation isallocated evenly between us and Louis Dreyfus. For the three months ended March31, 2006 and 2005, our sharing ratio in the earnings of MB Storage wasapproximately 57.9% and 58.1%, respectively. During the three months endedMarch 31, 2006, we received distributions from MB Storage of $7.8 million and contributed$1.7 million to MB Storage. During the three months ended March 31, 2005, wereceived no distributions from MB Storage and made no contributions to MBStorage.

 

We use the equity method of accounting to account forour investments in Centennial and MB Storage. Summarized combined financialinformation for Centennial and MB Storage for the three months ended March 31, 2006and 2005, is presented below (in thousands): 

 
| ** ** | ** ** | **Three Months Ended** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **March 31,**               | ** ** |
| ** ** | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Revenues   |       | $                                | 17,072     |   | $ | 18,797 |   |
| Net income |       | 292                              |       | 548 |   |
|            |            |                                  |            |  |  |  |  |

 

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

 
| ** **              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Current assets          |       | $                  | 21,814     |                  | $          | 36,647 |   |
| Noncurrent  assets      |       | 366,679            |       | 369,679               |       |
| Current  liabilities    |       | 17,397             |       | 23,621                |       |
| Long-term debt          |       | 150,000            |       | 150,000               |       |
| Noncurrent  liabilities |       | 14,162             |       | 13,522                |       |
| Partners’  capital |       | 206,934            |       | 219,183               |       |
|                         |            |                    |            |                       |            |  |  |

** **

**NOTE 6. DEBT**

** **

**SeniorNotes**

** **

On January 27, 1998, we completed the issuance of$180.0 million principal amount of 6.45% Senior Notes due 2008, and $210.0million principal amount of 7.51% Senior Notes due 2028 (collectively the “SeniorNotes”).

 

9

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The 6.45% Senior Notes were issued at a discount of$0.3 million and are being accreted to their face value over the term of thenotes. The 6.45% Senior Notes due 2008 may not be redeemed prior to theirmaturity on January 15, 2008. The 7.51% Senior Notes due 2028, issued at par,may be redeemed at any time after January 15, 2008, at our option, in whole orin part, at the following redemption prices (expressed in percentages of theprincipal amount) during the twelve months beginning January 15 of the yearsindicated:

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

 

and thereafter at 100% ofthe principal amount, together in each case with accrued interest at theredemption date.

 

The Senior Notes do not have sinking fund requirements.Interest on the Senior Notes is payable semiannually in arrears on January 15and July 15 of each year. The Senior Notes are unsecured obligations and rank paripassu with all of our other unsecured and unsubordinated indebtedness. Theindenture governing the Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit ourability to incur additional indebtedness. As of March 31, 2006, we were incompliance with the covenants of the Senior Notes.

 

We have entered into an interest rate swap agreementto hedge our exposure to changes in the fair value on a portion of the SeniorNotes discussed above. The fair value of this interest rate swap was a loss ofapproximately $7.0 million and $0.9 million at March 31, 2006, and December 31,2005, respectively (see Note 3).

 

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

 
| ** **                            | ** ** | ** **      | ** ** | **Fair Value**      | ** ** |
|---------------------------------------|------------|-----------------|------------|--------------------------|------------|
| ** **                            | ** ** | **Face  Value** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| 6.45% Senior  Notes, due January 2008 |       | $               | 180.0      |                     | $          | 182.6 |   | $ | 183.7 |   |
| 7.51% Senior  Notes, due January 2028 |       | 210.0           |       | 223.4                    |       | 224.1 |   |
|                                       |            |                 |            |                          |            |  |  |  |  |  |

** **

**OtherLong 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. The interest rates charged by the ParentPartnership include the stated interest rate paid by the Parent Partnership onits debt obligations, plus a premium to cover debt issuance costs. The interestrate is also decreased or increased to cover gains and losses, respectively, onany interest rate swaps that the Parent Partnership may have in place on itsrespective debt instruments. These debt instruments of the Parent Partnershipare described below.

 

On February 20, 2002, our Parent Partnership issued$500.0 million principal amount of 7.625% Senior Notes due 2012. The 7.625%Senior Notes were issued at a discount of $2.2 million and are being accretedto their face value over the term of the notes. The 7.625% 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 7.625% Senior Notes

 

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contains covenants, including, but not limited to,covenants limiting the creation of liens securing indebtedness and sale andleaseback transactions. However, the indenture does not limit our ParentPartnership’s ability to 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.

 

On June 27, 2003, our Parent Partnership entered intoa $550.0 million unsecured revolving credit facility with a three year term,including the issuance of letters of credit of up to $20.0 million (“RevolvingCredit Facility”). The interest rate is based, at our Parent Partnership’soption, on either the lender’s base rate plus a spread, or LIBOR plus a spreadin effect at the time of the borrowings. Financial covenants in the RevolvingCredit Facility require that our Parent Partnership maintain a ratio ofConsolidated Funded Debt to Pro Forma EBITDA (as defined and calculated in thefacility) of less than 4.75 to 1.00 (subject to adjustment for specifiedacquisitions) and a ratio of EBITDA to Interest Expense (as defined andcalculated in the facility) of at least 3.00 to 1.00, in each case with respectto specified twelve month periods. Other restrictive covenants in the RevolvingCredit Facility limit our Parent Partnership’s and its subsidiaries’ abilityto, among other things, incur additional indebtedness, make certain distributions,incur liens, engage in specified transactions with affiliates and completemergers, acquisitions and sales of assets. On October 21, 2004, our ParentPartnership amended and restated the Revolving Credit Facility to (i) increasethe facility size to $600.0 million, (ii) extend the term to October 21, 2009,(iii) remove certain restrictive covenants, (iv) increase the available amountfor the issuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing. On February 23, 2005, theParent Partnership amended its Revolving Credit Facility to remove therequirement that DEFS must at all times own, directly or indirectly, 100% of theCompany, to allow for its acquisition by DFI (see Note 1). During the secondquarter of 2005, the Parent Partnership used a portion of the proceeds from anequity offering in May 2005 to repay a portion of the Revolving Credit Facility.On December 13, 2005, the Parent Partnership amended its Revolving CreditFacility as follows:

 

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

•                  The facility fee and the borrowingrate then in effect were reduced by 0.275%.

•                  The maturity date of the creditfacility was extended from October 21, 2009, to December 13, 2010. Also underthe terms of the amendment, the Parent Partnership may request up to two,one-year extensions of the maturity date. These extensions, if requested, willbecome effective subject to lender approval and satisfaction of certain otherconditions.

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

 

At March 31, 2006, $435.0 million was outstanding underthe Parent Partnership’s Revolving Credit Facility at a weighted averageinterest rate of 5.3%. At March 31, 2006, our Parent Partnership was incompliance with the covenants of this credit facility.

 

11

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At March 31, 2006 and December 31, 2005, we had unsecuredintercompany notes payable to our Parent Partnership of $222.3 million and $206.9million, 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 atMarch 31, 2006, was 6.6%. At March 31, 2006, accrued interest includes $1.8 milliondue to our Parent Partnership. For the three months ended March 31, 2006 and 2005,interest costs incurred on the note payable to our Parent Partnership totaled $3.5million and $3.4 million, respectively.

 

**NOTE 7. QUARTERLYDISTRIBUTONS OF AVAILABLE CASH**

** **

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

 

During the three months ended March 31, 2006 and 2005,we paid cash distributions to our Parent Partnership totaling $16.7 million and$29.7 million, respectively. On May 5, 2006, we will pay a cash distribution toour Parent Partnership of $13.4 million for the quarter ended March 31, 2006.

 

**NOTE 8. RELATED PARTY TRANSACTIONS**

 

## **Parent Partnership**

 

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 paymentson behalf of the Parent Partnership for various expenses. At March 31, 2006,and December 31, 2005, we had a net payable of $9.8 million and $18.5 million,respectively, to our Parent Partnership related to these affiliated activities.

 

12

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

 

The following table summarizes the related partytransactions with EPCO and affiliates and DEFS and affiliates for the threemonths ended March 31, 2006 and 2005 (in millions):

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **March 31,**               | ** ** |
| ** **                                        | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Revenues from  EPCO and affiliates: (1)           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Transportation –  LPGs                       |       | $                                | 1.7        |   | $ | 0.8 |   |
|                                              |       |                             |       |   |   |
| Costs and  Expenses from EPCO and affiliates: (1) |       |                             |       |   |   |
| Payroll and  administrative (2)                   |       | 12.7                             |       | — |   |
|                                              |       |                             |       |   |   |
| Revenues from  DEFS and affiliates: (3)           |       |                             |       |   |   |
| Transportation –  LPGs                       |       | —                           |       | 0.7 |   |
| Other operating  revenues                         |       | —                           |       | 1.1 |   |
|                                              |       |                             |       |   |   |
| Costs and  Expenses from DEFS and affiliates: (3) |       |                             |       |   |   |
| Payroll and  administrative (2)                   |       | —                           |       | 7.8 |   |
|                                                   |            |                                  |            |  |  |  |  |

 

----

(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 incurred inmanaging us and our subsidiaries.

 

(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.

 

At March 31, 2006 and December 31, 2005, we had areceivable from EPCO and affiliates of $0.7 million and $1.3 million,respectively, related to transportation services provided to EPCO andaffiliates. At March 31, 2006, we had a payable to EPCO and affiliates of $0.2million, related to direct operational related costs.

 

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 three months ended March 31, 2006, weincurred insurance expense related to premiums paid by EPCO of $1.1 million. AtMarch 31, 2006 and December 31, 2005, we had insurance reimbursementreceivables due from EPCO of $1.3 million.

 

**NOTE 9. EMPLOYEEBENEFIT PLANS**

** **

**Retirement Plans**

 

The Parent Partnership’s TEPPCO Retirement CashBalance Plan (“TEPPCO RCBP”) was a non-contributory, trustee-administeredpension plan. In addition, the Parent Partnership’s TEPPCO Supplemental BenefitPlan (“TEPPCO SBP”) was a non-contributory, nonqualified, defined benefitretirement plan, in which certain executive officers participated. The TEPPCOSBP was established to restore benefit reductions caused by the maximum benefitlimitations that apply to qualified plans. The benefit formula for all eligibleemployees was a cash balance formula. Under a cash balance formula, a planparticipant accumulated a retirement benefit based upon pay credits and currentinterest credits. The pay credits were based on a participant’s salary, age andservice. The Parent Partnership used a December 31 measurement date for theseplans.

 

13

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On May 27, 2005, the TEPPCO RCBP and the TEPPCO SBPwere amended. Effective May 31, 2005, participation in the TEPPCO RCBP wasfrozen, and no new participants were eligible to be covered by the plan afterthat date. 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 TEPPCORCBP plan was terminated effective December 31, 2005 and plan participants willhave the option to receive their benefits either through a lump sum payment in2006 or through an annuity. In April 2006, our Parent Partnership received adetermination letter from the IRS providing IRS approval of the plantermination. For those plan participants who elect to receive an annuity, ourParent Partnership will purchase an annuity contract from an insurance companyin which the plan participant owns the annuity, absolving our ParentPartnership of any future obligation to the participant. Participants in theTEPPCO SBP received pay credits through November 30, 2005, and received lumpsum benefit payments in December 2005. Both the RCBP and SBP benefit paymentsare discussed below.

 

In June 2005, the Parent Partnership recorded acurtailment charge of $0.1 million in accordance with SFAS No. 88, *Employers’ Accounting for Settlements and Curtailments of DefinedBenefit Pension Plans and for Termination Benefits*, as a result ofthe TEPPCO RCBP and TEPPCO SBP amendments. A portion of the charge wasallocated to us. As of May 31, 2005, the following assumptions were changed forpurposes of determining the net periodic benefit costs for the remainder of2005: the discount rate, the long-term rate of return on plan assets, and theassumed mortality table. The discount rate was decreased from 5.75% to 5.00% toreflect rates of returns on bonds currently available to settle the liability. Theexpected long-term rate of return on plan assets was changed from 8% to 2% dueto the movement of plan funds from equity investments into short-term moneymarket funds. The mortality table was changed to reflect overall improvementsin mortality experienced by the general population. The curtailment chargearose due to the accelerated recognition of the unrecognized prior servicecosts. The Parent Partnership recorded additional settlement charges ofapproximately $0.2 million in the fourth quarter of 2005 relating to the TEPPCOSBP. The Parent Partnership expects to record additional settlement charges ofapproximately $4.0 million in 2006 relating to the TEPPCO RCBP for any existingunrecognized losses upon the plan termination and final distribution of theassets to the plan participants. We expect to be allocated a share of thesecharges.

 

The components of net pension benefits costs allocatedto us for the TEPPCO RCBP and the TEPPCO SBP for the three months ended March31, 2006 and 2005, were as follows (in thousands):

 
| ** **                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Service cost  benefit earned during the period |       | $                                                | —     |   | $ | 656 |   |
| Interest cost on  projected benefit obligation |       | 166                                              |       | 152 |   |
| Expected return  on plan assets                |       | (45                                              | )          | (209 | ) |
| Amortization of  prior service cost            |       | —                                           |       | 2 |   |
| Recognized net  actuarial loss                 |       | 21                                               |       | 7 |   |
| Net pension  benefits costs                    |       | $                                                | 142        |   | $ | 608 |   |

 

**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 thesebenefits if they met certain age and service requirements at retirement, asdefined in the plans. The Parent Partnership provided a fixed dollarcontribution, which did not increase from year to year, towards retiredemployee medical costs. The retiree paid all health care cost increases due tomedical inflation. The Parent Partnership used a December 31 measurement datefor this plan.

 

14

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In May 2005, benefits provided to employees under theTEPPCO OPB were changed. Employees eligible for these benefits received themthrough December 31, 2005, however, effective December 31, 2005, these benefitswere terminated. As a result of this change in benefits and in accordance withSFAS No. 106, *Employers’ Accounting for PostretirementBenefits Other Than Pensions*, the Parent Partnership recorded acurtailment credit of approximately $1.7 million in its accumulatedpostretirement obligation, which reduced the Parent Partnership’s accumulatedpostretirement obligation to the total of the expected remaining 2005 paymentsunder the TEPPCO OPB. The employees participating in this plan at that time weretransferred to DEFS, who is expected to provide postretirement benefits tothese retirees. Our Parent Partnership recorded a one-time settlement to DEFSin the third quarter of 2005 of $0.4 million for the remaining postretirementbenefits. A portion of these charges was allocated to us.

 

The components of net postretirement benefits costallocated to us for the TEPPCO OPB for the three months ended March 31, 2006and 2005, were as follows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                                                            |       |                                             |       |   |   |
| Service cost  benefit earned during the period                  |       | $                                                | —     |   | $ | 30 |   |
| Interest cost on  accumulated postretirement benefit obligation |       | —                                           |       | 35 |   |
| Amortization of  prior service cost                             |       | —                                           |       | 28 |   |
| Recognized net  actuarial loss                                  |       | —                                           |       | 3 |   |
| Net  postretirement benefits costs                              |       | $                                                | —     |   | $ | 96 |   |

 

## **Estimated Future Benefit Contributions**

## ** **

Our Parent Partnership does not expect to make furthercontributions to its retirement plans and other postretirement benefit plans.

 

**NOTE 10. COMMITMENTSAND CONTINGENCIES**

** **

**Litigation**

 

In the fall of 1999 and on December 1, 2000, we and theCompany were named as defendants in two separate lawsuits in Jackson CountyCircuit Court, Jackson County, Indiana, styled *Ryan E.McCleery and Marcia S. McCleery, et al. v. Texas Eastern Corporation, et al.*(includingthe Company and us) and*Gilbert Richards and JeanRichards v. Texas Eastern Corporation, et al.*(including the Companyand us). In both cases, the plaintiffs contend, among other things, that we andother defendants stored and disposed of toxic and hazardous substances andhazardous wastes in a manner that caused the materials to be released into theair, soil and water. They further contend that the release caused damages tothe plaintiffs. In their complaints, the plaintiffs allege strict liability forboth 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. On January27, 2005, we entered into Release and Settlement Agreements with the McCleeryplaintiffs and the Richards plaintiffs dismissing all of these plaintiffs’claims on terms that did not have a material adverse effect on our financialposition, results of operations or cash flows. Although we did not settle withall plaintiffs and we therefore remain named parties in the *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al*. action, a co-defendant has agreed to indemnifyus for all remaining claims asserted against us. Consequently, we do notbelieve that the outcome of these remaining claims will have a material adverseeffect on our financial position, results of operations or cash flows.

 

15

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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 PipelineCompany, Limited Partnership*. In this case, the plaintiffs contendthat our pipeline, which crosses the plaintiffs’ property, leaked toxicproducts onto their property and, consequently caused damages to them. We havefiled an answer to the plaintiffs’ petition denying the allegations, and we aredefending ourselves vigorously against the lawsuit. The plaintiffs have notstipulated the amount of damages they are seeking in the suit; however, thiscase is covered by insurance, subject to applicable policy limits. We do notbelieve that the outcome of this lawsuit will have a material adverse effect onour financial position, results of operations or cash flows.

 

In May 2003, the Company was named as a defendant in alawsuit styled *John R. James, et al. v. J Graves InsulationCompany, et al.* as filed in the first Judicial District Court, CaddoParish, Louisiana. There are numerous plaintiffs identified in the action thatare alleged to have suffered damages as the result of alleged exposure toasbestos-containing products and materials. According to the petition and as aresult of a preliminary investigation, the Company believes that the only claimasserted against it results from one individual for the period from July 1971through June 1972, who is alleged to have worked on a facility owned by theCompany’s predecessor. This period represents a small portion of the totalalleged exposure period from January 1964 through December 2001 for thisindividual. The individual’s claims involve numerous employers and alleged jobsites. The Company has been unable to confirm involvement by the Company or itspredecessors with the alleged location, and it is uncertain at this timewhether this case is covered by insurance. Discovery is planned, and theCompany intends to defend itself vigorously against this lawsuit. Theplaintiffs have not stipulated the amount of damages that they are seeking inthis suit. We anticipate reimbursing the Company for any costs it incursrelated to this lawsuit. We cannot estimate the loss, if any, associated withthis pending lawsuit. We do not believe that the outcome of this lawsuit willhave a material adverse effect on our financial position, results of operationsor 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 26thJudicial District Court of Bossier Parish, Louisiana. The plaintiffs in thismatter reside or formerly resided on land that was once the site of a refineryowned by one of our co-defendants. The former refinery is located near ourBossier City facility. Plaintiffs have claimed personal injuries and propertydamage arising from alleged contamination of the refinery property. Theplaintiffs have recently pursued certification as a class and havesignificantly increased their demand to approximately $175.0 million. Thisrevised demand includes amounts for environmental restoration not previouslyclaimed by the plaintiffs. The Company and the Parent Partnership have neverowned any interest in the refinery property made the basis of this action, andwe do not believe that we contributed to any alleged contamination of thisproperty. While we cannot predict the ultimate outcome, we do not believe thatthe outcome of this lawsuit will have a material adverse effect on our financialposition, 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 environmental

 

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registrations,licenses, permits, inspections and other approvals, with respect to airemissions, water quality, wastewater discharges, and solid and hazardous wastemanagement. Failure to comply with these requirements may expose us to fines,penalties and/or interruptions in our operations that could influence ourresults 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 of this could materially affect ourresults 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 future expendituresfor environmental regulation compliance or remediation, and actual futureexpenditures may be different from the amounts we currently anticipate. Revisedor additional regulations that result in increased compliance costs oradditional operating restrictions, particularly if those costs are not fullyrecoverable from our customers, could have material adverse effect on ourbusiness, financial position, results of operations and cash flow. At March 31,2006, and December 31, 2005, we have an accrued liability of $1.1 million and$1.2 million, respectively, related to sites requiring environmentalremediation activities.

 

On March 26, 2004, a decision in *ARCOProducts Co., et al. v. SFPP*, Docket Nos. OR96-2-000 et al., wasissued by the FERC, which made several significant determinations with respectto finding “changed circumstances” under the Energy Policy Act of 1992 (“EPAct”). The decision largely clarifies, but does not fully quantify, thestandard required for a complainant to demonstrate that an oil pipeline’s ratesare no longer subject to the rate protection of the EP Act by demonstratingthat a substantial change in circumstances has occurred since 1992 with respectto the basis of the rates being challenged. In the decision, the FERC found thata limited number of rate elements will significantly affect the economic basisfor a pipeline company’s rates. The elements identified in the decision arevolume changes, allowed total return and total cost-of-service (including majorcost elements such as rate base, tax rates and tax allowances, among others).The FERC did reject, however, the use of changes in tax rates and income taxallowances as stand-alone factors. Judicial review of that decision, which hasbeen sought by a number of parties to the case, is currently pending before theU.S. Court of Appeals for the District of Columbia Circuit. We have not yetdetermined the impact, if any, that the decision, if it is ultimately upheld,would have on our rates if they were reviewed under the criteria of thisdecision.

 

On July 20, 2004, the District of Columbia Circuitissued an opinion in *BP West Coast Products LLCv. FERC*. In reviewing a series of orders involving SFPP, L.P., thecourt held among other things that the FERC had not adequately justified itspolicy of providing an oil pipeline limited partnership with an income taxallowance equal to the proportion of its income attributable to partnershipinterests owned by corporate partners. Under the FERC’s initial ruling, SFPP,L.P. was permitted an income tax allowance on its cost-of-service filing forthe percentage of its net operating (pre-tax) income attributable topartnership units held by corporations, and was denied an income tax allowanceequal to the percentage attributable to partnership units held by non-corporatepartners. The court remanded the case back to the FERC for further review.Following the court’s remand, on May 4, 2005, the FERC issued its PolicyStatement on Income Tax Allowances, which permits regulated partnerships, limitedliability companies and other pass-through entities an income tax allowance ontheir income attributable to any owner that has an actual or potential incometax liability on that income, regardless whether the owner is an individual orcorporation. If there is more than one level of pass-through entities, theregulated company income must be traced to where the ultimate tax liabilitylies. The Policy Statement is to be applied in individual cases, and theregulated entity bears the burden of proof to establish the tax status of itsowners. On December 16, 2005, the 

 

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FERC issued the first of those decisions, in an orderinvolving SFPP (the “SFPP Order”). The SFPP Order confirmed that a masterlimited partnership such as our Parent Partnership is entitled to a taxallowance with respect to partnership income for which there is an “actual orpotential income tax liability” and determined that a unitholder that isrequired to file a Form 1040 or Form 1120 tax return that includes partnershipincome or loss is presumed to have an actual or potential income tax liabilitysufficient to support a tax allowance on that partnership income. The FERC alsoestablished certain other presumptions, including that corporate unitholdersare presumed to be taxed at the maximum corporate tax rate of 35% whileindividual unitholders (and certain other types of unitholders taxed likeindividuals) are presumed to be taxed at a 28% tax rate. The SFPP Order remainssubject to further administrative proceedings, including review by the FERC ofcompliance filings made by SFPP on March 7, 2006, as well as judicial review.The ultimate outcome of the FERC’s inquiry on income tax allowance should notaffect our current rates and rate structure because our rates are not based oncost-of-service methodology. However, the outcome of the income tax allowancewould become relevant to us should we (i) elect in the future to usecost-of-service to support our rates, or (ii) be required to use suchmethodology to defend our indexed rates.

 

In 1994, the Louisiana Department of EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana, facility. In 1999, our Arcadia facility and adjacent terminalswere directed by the Remediation Services Division of the LDEQ to pursueremediation of this contamination. Effective March 2004, we executed an accessagreement with an adjacent industrial landowner who is located upgradient ofthe Arcadia facility. This agreement enables the landowner to proceed withremediation activities at our Arcadia facility for which it has accepted sharedresponsibility. At March 31, 2006, we have an accrued liability of $0.2 millionfor remediation costs at our Arcadia facility. We do not expect that thecompletion of the remediation program proposed to the LDEQ will have a futurematerial adverse effect on our financial position, results of operations orcash flows.

 

On July 27, 2004, wereceived notice from the United States Department of Justice (“DOJ”) of itsintent to seek a civil penalty against us related to our November 21, 2001,release of approximately 2,575 barrels of jet fuel from our 14-inch diameterpipeline located in Orange County, Texas. The DOJ, at the request of theEnvironmental Protection Agency, is seeking a civil penalty against us foralleged violations of the Clean Water Act (“CWA”) arising out of this release,as well as three smaller spills at other locations in 2004 and 2005. We are indiscussions with the DOJ regarding these matters. The settlement proposed bythe DOJ for these alleged violations of the CWA is a $3.0 million penalty,along with our commitment to implement additional spill prevention measures. Wedo not expect this settlement to have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

On September 18, 2005, a propane release and fireoccurred at our Todhunter facility, near Middletown, Ohio. The incidentresulted in the death of one of our employees; there were no other injuries.Repairs to the impacted facilities have been completed. On March 17, 2006, wereceived a citation from the Occupational Safety and Health Administration(“OSHA”) arising out of this incident with a proposed penalty of less than $0.2million. We are in settlement negotiations with OSHA representatives regardingthis matter. We do not expect any settlement, fine or penalty to have amaterial adverse effect on our financial position, results of operations orcash flows.

 

**Other**

 

Centennial entered into credit facilities totaling$150.0 million, and as of March 31, 2006, $150.0 million was outstanding underthose credit facilities, of which $140.0 million expires in 2024, and $10.0million expires in April 2007. We and Marathon have each guaranteed one-half ofthe repayment of Centennial’s outstanding debt balance (plus interest) underthese credit facilities. The guarantees arose in order for Centennial to obtainadequate financing, and the proceeds of the credit facilities were used to fundconstruction and conversion costs of its 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 its outstanding balance, the

 

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estimated maximum potential amount of future paymentsfor Marathon and us is $75.0 million each at March 31, 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 forthe agreement and each member is to contribute cash in proportion to itsownership interest, up to a maximum of $50.0 million each. As a result of thecatastrophic event guarantee, we have recorded a $4.6 million obligation, whichrepresents the present value of the estimated amount that we would have to payunder the guarantee. If a catastrophic event were to occur and we were requiredto contribute cash to Centennial, contributions exceeding our deductible mightbe covered by our insurance.

 

On February 24, 2005, the Company was acquired fromDEFS by DFI. The Company owns a 2% general partner interest in our ParentPartnership and is the general partner of 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. The Company is cooperating fully withthis investigation.

 

**NOTE 11. RESTATEMENT OFCONSOLIDATED FINANCIAL STATEMENTS**

 

In the fourth quarter of2005, we determined that our method of accounting for the $33.4 million excessinvestment in Centennial, previously described as an intangible asset with anindefinite life, was incorrect. Through our accounting for this excessinvestment in Centennial as an intangible asset with an indefinite life, we hadbeen testing the amount for impairment on an annual basis as opposed toamortizing it over a determinable life. We determined that it would be moreappropriate to account for this excess investment as an intangible asset with adeterminable life. As a result, we made a non-cash adjustment that reduced thenet value of the excess investment in Centennial, and increased amortizationexpense allocated to our equity earnings. We restated previously reportedconsolidated financial statements for the fiscal year ended December 31, 2003and 2004 in our Annual Report on Form 10-K for the year ended December 31,2005. The effect of this restatement caused a $1.0 million reduction to netincome as previously reported for the three months ended March 31, 2005. As aresult, we are restating our previously reported consolidated financialstatements for the three months ended March 31, 2005.

 

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

 

We will continue to amortize the $30.0 million excessinvestment in Centennial related to a contract using units-of-productionmethodology over a 10-year life. The remaining $3.4 million related to apipeline will continue to be amortized on a straight-line basis over 35 years.

 

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The following tablessummarize the impact of the restatement adjustment on previously reportedincome statement amounts and cash flow amounts for the three months ended March31, 2005 (in thousands):

 

**IncomeStatement Amounts:**

 
| ** **    | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|---------------|------------|------------------------------------------------------------|------------|
| ** **    | ** ** | **As Previously  Reported**                           | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **    | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity losses |       | $                                                          | (842       | ) | $ | (979 | ) | $ | (1,821 | ) |
| Net income    |       | 22,116                                                     |       | (979 | ) | 21,137 |   |
|               |            |                                                            |            |  |  |  |  |  |  |  |

 

**Cash FlowAmounts:**

 
| ** **                             | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                             | ** ** | **As Previously  Reported**                           | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| ** **                             | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows from  operating activities: |       |                                                       |       |   |   |   |   |
| Net income                             |       | $                                                          | 22,116     |   | $ | (979 | ) | $ | 21,137 |   |
| Losses in equity  investments          |       | 842                                                        |       | 979 |   | 1,821 |   |
|                                        |            |                                                            |            |  |  |  |  |  |  |  |

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

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 FinancialStatements should be read in conjunction with the financial statements andrelated notes, together with our discussion and analysis of financial positionand results of operations included in our Annual Report on Form 10-K for theyear ended December 31, 2005. Our discussion and analysis includes thefollowing:

 

•                  Cautionary Note RegardingForward-Looking Statements.

 

•                  Overview of Critical AccountingPolicies and Estimates.

 

•                  Overview of Business.

 

•                  Restatement of Consolidated FinancialStatements.

 

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

 

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

 

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

 

•                  Recent Accounting Pronouncements.

 

**CautionaryNote Regarding Forward-Looking Statements**

 

The matters discussed in this Quarterly Report on Form10-Q (this “Report”) include “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934. All statements that express belief, expectation, estimatesor intentions, as well as those that are not statements of historical facts areforward-looking statements. The words “proposed”, “anticipate”, “potential”,“may”, “will”, “could”, “should”, “expect”, “estimate”, “believe”, “intend”,“plan”, “seek” and similar expressions are intended to identify forward-lookingstatements. Without limiting the broader description of forward-lookingstatements above, we specifically note that statements included in thisdocument that address activities, events or developments that we expect oranticipate will or may occur in the future, including such things as estimatedfuture capital expenditures (including the amount and nature thereof), businessstrategy and measures to implement strategy, competitive strengths, goals,expansion and growth of our business and operations, plans, references tofuture success, references to intentions as to future matters and other suchmatters are forward-looking statements. These statements are based on certainassumptions and analyses made by us in light of our experience and ourperception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate under thecircumstances. While we believe our expectations reflected in theseforward-looking statements are reasonable, whether actual results anddevelopments will conform with our expectations and predictions is subject to anumber of risks and uncertainties, including general economic, market orbusiness conditions, the opportunities (or lack thereof) that may be presentedto and pursued by us, competitive actions by other pipeline companies, changesin laws or regulations and other factors, many of which are beyond our control.For example, the demand for refined products is dependent upon the price,prevailing economic conditions and demographic changes in the markets served,trucking and railroad freight, agricultural usage and military usage and thedemand for propane is sensitive to the weather and prevailing economic conditions.We are 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 the forward-looking statements made in thisdocument are qualified by these cautionary statements, and we cannot assure youthat actual results or developments that we anticipate will

 

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be realized or, even if substantially realized, willhave the expected consequences to or effect on us or our business oroperations. Also note that we provide a cautionary discussion of risks anduncertainties under the captions “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and elsewhere in this Form 10-Q,as well as under the captions “Risk Factors”, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and elsewhere in ourAnnual Report on Form 10-K for the year ended December 31, 2005.

 

The forward-looking statements contained in thisReport speak only as of the date hereof. Except as required by the federal andstate securities laws, we undertake no obligation to publicly update or reviseany forward-looking statements, whether as a result of new information, futureevents or any other reason. All forward-looking statements attributable to TEProducts Pipeline Company, Limited Partnership or any person acting on itsbehalf are expressly qualified in their entirety by the cautionary statementscontained or referred to in this Quarterly Report on Form 10-Q and in ourfuture periodic reports filed with the Securities and Exchange Commission(“SEC”). In light of these risks, uncertainties and assumptions, theforward-looking events discussed in this Report may not occur. For additionaldiscussion of such risks and uncertainties, see our Annual Report on Form 10-Kfor the year ended December 31, 2005, and other filings we have made with theSEC.

 

**Overviewof Critical Accounting Policies and Estimates**

 

Asummary of the significant accounting policies we have adopted and followed inthe preparation of our consolidated financial statements is included in ourAnnual Report on Form 10-K for the year ended December 31, 2005. Certain ofthese accounting policies require the use of estimates. 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 of power costs, property taxes,environmental costs and property, plant and equipment. These estimates arebased on our knowledge and understanding of current conditions and actions wemay take in the future. Changes in these estimates will occur as a result ofthe passage of time and the occurrence of future events. Subsequent changes inthese estimates may have a significant impact on our financial position andresults of operations.

 

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

## ** **

We are one of the largest pipeline common carriers ofrefined petroleum products and LPGs in the United States. Over the past fewyears, we have continued to pursue growth opportunities and acquisitions toexpand our market share and deliveries into existing and new markets. The keyelements of our strategy are to focus on internal growth prospects in order toincrease the pipeline system and terminal throughput, to expand and upgradeexisting assets and services and construct new pipelines, terminals andfacilities, to target accretive and complementary acquisitions and expansionopportunities that provide attractive growth potential and to operate in asafe, efficient and environmentally responsible manner.

 

Certain factors are key to our operations. Theseinclude the safe, reliable and efficient operation of the pipelines andfacilities that we own or operate while meeting increased regulations thatgovern the operation of our assets and the costs associated with suchregulations. We are also focused on our continued growth through expansion ofthe assets that we own and through the acquisition of assets that complementour current operations.

 

We operate and report in one business segment:  transportation and storage of refinedproducts, LPGs and petrochemicals. We own, operate or have investments inproperties located in 14 states, and our revenues are earned fromtransportation and storage of refined products and LPGs, intrastatetransportation of petrochemicals, sale of product inventory and other ancillaryservices. Our two largest operating expense items are labor and electric power.We generally realize higher revenues during the first and fourth quarters ofeach year since our operations are somewhat seasonal. Refined products volumesare generally higher during the second and third quarters because of greaterdemand for gasolines during the spring and summer driving seasons. LPGs volumesare generally higher from November through March due to higher demand forpropane, a major fuel for residential heating. Our results

 

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also include our equity investments in Centennial andMB Storage (see Note 6 in the Notes to the Consolidated Financial Statements).

 

We continue to build abase for long-term growth by pursuing new business opportunities, increasing throughput on our pipeline systems, constructingnew pipeline systems, and expanding and upgrading our existing infrastructure.We remain confident that our business strategy will provide continuedgrowth in earnings and cash distributions. This growth potential is based on,among other things:

 

•                  Expanding our gathering capacity ofrefined products along the upper Texas Gulf Coast.

•                  Utilizing available system capacityof Centennial to move refined products to Midwest market areas.

•                  Expanding our system deliverycapability of gasoline and diesel fuel in the Indianapolis and Chicago marketareas.

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

 

For a discussion of importantfactors that could affect our growth, please read “-Cautionary Note RegardingForward-Looking Statements” in this Report and “Risk Factors” in this Reportand our Annual Report on Form 10-K for the year ended December 31, 2005.

 

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

 

*Changes in Leadership*

 

On April 5, 2006, the Board of Directors of theCompany elected Jerry E. Thompson as President, Chief Executive Officer and adirector of the Company and of TEPPCO GP, effective April 11, 2006. Mr.Thompson, age 56, was previously chief operating officer of CITGO PetroleumCorporation (“CITGO”) from 2003 to March 2006, when he retired. Mr. Thompsonjoined CITGO in 1971 and advanced from a process engineer to positions ofincreasing responsibilities in the operations, supply and logistics, businessdevelopment, planning and financial aspects of CITGO. He was elected vicepresident of CITGO’s refining business in 1987 and as its senior vice presidentin 1998. Mr. Thompson will serve as the principal executive officer of theCompany.

 

**Restatement of Consolidated Financial Statements**

 

In the fourth quarter of2005, we determined that our method of accounting for the $33.4 million excessinvestment in Centennial, previously described as an intangible asset with anindefinite life, was incorrect. Through our accounting for this excessinvestment in Centennial as an intangible asset with an indefinite life, we hadbeen testing the amount for impairment on an annual basis as opposed toamortizing it over a determinable life. We determined that it would be moreappropriate to account for this excess investment as an intangible asset with adeterminable life. As a result, we made a non-cash adjustment that reduced thenet value of the excess investment in Centennial, and increased amortizationexpense allocated to our equity earnings. We restated previously reportedconsolidated financial statements for the fiscal year ended December 31, 2003and 2004 in our Annual Report on Form 10-K for the year ended December 31,2005. The effect of this restatement caused a $1.0 million reduction to netincome as previously reported for the three months ended March 31, 2005. As aresult, we are restating our previously reported consolidated financialstatements for the three months ended March 31, 2005 (see Note 11 in the Notesto the Consolidated Financial Statements).

 

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

 

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We will continue to amortize the $30.0 million excessinvestment in Centennial related to a contract using units-of-productionmethodology over a 10-year life. The remaining $3.4 million related to apipeline will continue to be amortized on a straight-line basis over 35 years.

 

**Resultsof Operations**

** **

The following table presents volumes delivered in barrels andaverage tariff per barrel for the three months ended March 31, 2006 and 2005(in thousands, except tariff information):

 
| ** **                        | ** ** | **Three Months Ended** | ** ** | **Percentage** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **March 31,**               | ** ** | **Increase**   | ** ** |
| ** **                        | ** ** | **2006**                         | ** ** | **2005**       | ** ** | **(Decrease)** | ** ** |
| Volumes  Delivered:               |       |                             |       |           |       |   |   |   |
| Refined products                  |       | 35,808                           |       | 38,595         |       | (7 | )% |   |
| LPGs                              |       | 12,840                           |       | 14,801         |       | (13 | )% |   |
| Total                             |       | 48,648                           |       | 53,396         |       | (9 | )% |   |
|                              |       |                             |       |           |       |   |   |   |
| Average Tariff  per Barrel:       |       |                             |       |           |       |   |   |   |
| Refined products                  |       | $                                | 0.89       |           | $          | 0.91 |   | (2 | )% |   |
| LPGs                              |       | 2.29                             |       | 2.18           |       | (5 | )% |   |
| Average system  tariff per barrel |       | 1.26                             |       | 1.26           |       | — |   |   |
|                                   |            |                                  |            |                |            |  |  |  |  |  |

 

*Three Months Ended March 31, 2006Compared with Three Months Ended March 31, 2005*

 

Revenues from refinedproducts transportation decreased $3.2 million for the three months ended March31, 2006, compared with the three months ended March 31, 2005, due to anoverall decrease of 7% in the refined products volumes delivered. Volumedecreases were due to decreased demand for products supplied from the U.S. GulfCoast into Midwest markets compared with unusually high demand in the firstquarter of 2005 due to refinery downtime in Chicago, Illinois. Refined productsvolumes were impacted by unfavorable differentials for motor fuels lower jetfuel demand during the three months ended March 31, 2006, compared with thethree months ended March 31, 2005. The decrease in demand for U.S. Gulf Coastsource products also resulted in lower deliveries of products on Centennial. InFebruary 2003, we entered into a lease agreement with Centennial that increasedour flexibility to deliver refined products to our market areas. As a result,Centennial has provided our system with additional pipeline capacity formovement of products originating in the U.S. Gulf Coast area. Prior to theconstruction of Centennial, deliveries on our pipeline system were limited byour pipeline capacity, and transportation services for our customers wereallocated in accordance with a proration policy. With this incremental pipelinecapacity and our supporting lease of pipeline capacity, our previouslyconstrained system has expanded deliveries in markets both south and north ofCreal Springs, Illinois. Movement of our product via the Centennial lease tothe north end of our system permits expanded supply capability on our systemfor delivery to the south end of our system. Increased movements of refinedproducts on Centennial has resulted in a decrease in the refined productsaverage rate per barrel; however, utilizing Centennial for refined productsmovements allows us to increase movements of long-haul propane volumes.

 

Revenues from LPGs transportation decreased $2.8million for the three months ended March 31, 2006, compared with the threemonths ended March 31, 2005, due to lower deliveries of propane in the upperMidwest and Northeast market areas as a result of warmer than normal winterweather and decreased short-haul propane deliveries to U.S. Gulf Coastpetrochemical customers in the first quarter of 2006.

 

Other operating revenues increased $1.8 million forthe three months ended March 31, 2006, compared with the three months endedMarch 31, 2005, primarily due to increased rental revenues from leasing storagecapacity on pipeline assets acquired in July 2005, and higher refined productsexcess inventory fees, partially offset by lower volumes of product inventorysales.

 

Costs and expenses increased $3.9 million for thethree months ended March 31, 2006, compared with the three months ended March31, 2005, due to increased operating, general and administrative expenses,increased operating fuel and power, increased depreciation and amortizationexpense and lower gains on the sales of assets in the current period, partiallyoffset by decreased taxes – other than income taxes. Operating, general and

 

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administrative expenses increased primarily due to a$1.4 million increase in pipeline operating costs primarily as a result ofasset acquisitions in 2005, a $1.2 million increase related to the retirementof an executive in February 2006, as well as higher insurance premiums, productmeasurement and settlement losses and transition costs. These increases werepartially offset by a $1.9 million decrease in pipeline inspection and repaircosts associated with our integrity management program and a $0.5 milliondecrease in rental expense from the Centennial pipeline capacity leaseagreement. Operating fuel and power increased $1.6 million primarily due toadjustments to power accruals and higher power rates. Depreciation andamortization expense increased $0.7 million primarily due to a higher assetbase in the 2006 period. Taxes – other than income taxes decreased due todecreases in property tax accruals.

 

Net losses from equity investments decreased for thethree months ended March 31, 2006, compared with the three months ended March31, 2005, as shown below (in thousands):

 
| ** **           | ** ** | **Three Months Ended** | ** ** | ** **             | ** ** |
|----------------------|------------|----------------------------------|------------|------------------------|------------|
| ** **           | ** ** | **March 31,**               | ** ** | **Increase**           | ** ** |
| ** **           | ** ** | **2006**                         | ** ** | **2005**               | ** ** | **(Decrease)** | ** ** |
| ** **           | ** ** | ** **                       | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **                       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Centennial           |       | $                                | (3,913     | )                      | $          | (4,450 | ) | $ | 537 |   |
| MB Storage           |       | 2,651                            |       | 2,634                  |       | 17 |   |
| Other                |       | (4                               | )          | (5                     | )          | 1 |   |
| Total equity  losses |       | $                                | (1,266     | )                      | $          | (1,821 | ) | $ | 555 |   |

 

Equity losses in Centennial decreased $0.5 million forthe three months ended March 31, 2006, compared with the three months endedMarch 31, 2005, primarily due to lower amortization expense on the portion ofour excess investment in Centennial resulting from lower transportation volumesin the current period, partially offset by lower transportation revenues andvolumes primarily due to warmer than normal winter weather in the Northeast.Equity earnings in MB Storage were virtually unchanged for the three monthsended March 31, 2006, compared with the three months ended March 31, 2005, withhigher revenues offset by higher operating costs.

 

Interest expense increased $1.2 million for the threemonths ended March 31, 2006, compared with the three months ended March 31,2005, primarily due to higher outstanding debt balances and higher averageinterest rates under the note payable with our Parent Partnership. Interestcapitalized increased $0.8 million for the three months ended March 31, 2006,compared with the three months ended March 31, 2005, primarily due to higherconstruction work-in-progress balances in 2006 as compared to the 2005 period.

 

**Other income – netincreased $0.6 million for the three months ended March 31, 2006, compared withthe three months ended March 31, 2005, primarily due to higher interest incomeearned on a capital lease.**

** **

**FinancialCondition and Liquidity**

** **

Cash generated from operations and loans or capitalcontributions from our Parent Partnership are our primary sources of liquidity.At March 31, 2006 and December 31, 2005, we had a working capital surplus of$11.9 million and a working capital deficit of $4.5 million, respectively.Working capital deficits can occur primarily due to the timing of operatingcash receipts from customers, payments of cash distributions and the payment ofnormal operating expenses and capital expenditures. We are a wholly ownedsubsidiary of the Parent Partnership. We expect that our Parent Partnershipwill make capital contributions, loans or otherwise provide liquidity to us asneeded, but the Parent Partnership has no contractual obligation to do so. We anticipatethat the Parent Partnership will provide the necessary liquidity to protect itsinvestment in us. At March 31, 2006, our Parent Partnership had approximately$253.1 million in available borrowing capacity under its revolving creditfacility to cover any working capital needs, and we expect that our ParentPartnership’s cash flows from operating activities, the sale of additional debtor equity in the capital markets and capacity under its Revolving CreditFacility will provide sufficient funds to it to provide necessary liquidity tous in the form of contributions or loans. For further discussion regarding ourParent Partnership’s sources of liquidity, please see Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations –

 

25

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Financial Condition and Liquidity in our ParentPartnership’s Quarterly Report on Form 10-Q for the Quarter Ended March 31,2006 and its Annual Report on Form 10-K for the year ended December 31, 2005.Cash flows for the three months ended March 31, 2006 and 2005, were as follows(in thousands):

 
| ** **                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **March 31,**               | ** ** |
| ** **                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                   | ** ** | ** **                       | ** ** | **(as restated)** | ** ** |
| Cash provided by  (used in): |       |                             |       |   |   |
| Operating  activities        |       | $                                | 14,573     |   | $ | 24,982 |   |
| Investing  activities        |       | (13,426                          | )          | (14,140 | ) |
| Financing activities         |       | (1,147                           | )          | (10,841 | ) |
|                              |            |                                  |            |  |  |  |  |

 

*Operating Activities*

 

Net cash from operating activities for the threemonths ended March 31, 2006 and 2005, was comprised of the following (inthousands):

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **March 31,**               | ** ** |
| ** **                              | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                              | ** ** | ** **                       | ** ** | **(as restated)** | ** ** |
| Net income                              |       | $                                | 13,690     |   | $ | 21,137 |   |
| Depreciation and  amortization          |       | 10,029                           |       | 9,298 |   |
| Losses in equity  investments           |       | 1,266                            |       | 1,821 |   |
| Distributions  from equity investments  |       | 7,840                            |       | — |   |
| Non-cash portion  of interest expense   |       | 138                              |       | 68 |   |
| Cash used in  working capital and other |       | (18,390                          | )          | (7,342 | ) |
| Net cash from operating activities      |       | $                                | 14,573     |   | $ | 24,982 |   |

 

Net cash from operating activities decreased $10.4million for the three months ended March 31, 2006, compared with the threemonths ended March 31, 2005, primarily due to the timing of cash disbursementsand cash receipts for working capital components and lower net income partiallyoffset by increased distributions received from our equity investments andhigher depreciation and amortization in the 2006 period. For a discussion ofchanges in net income, depreciation and amortization and losses in equityinvestments, see Results of Operations above.

 

Net cash from operating activities for the three monthsended March 31, 2006 and 2005, included interest payments, net of amountscapitalized, of $15.6 million and $15.3 million, respectively. Excluding theeffects of hedging activities and interest capitalized, during the year endedDecember 31, 2006, we expect interest payments on our Senior Notes to beapproximately $27.4 million. We expect to pay our interest payments with cashflows from operating activities.

 

*Investing Activities*

 

Cash flows used in investing activities totaled $13.4million for the three months ended March 31, 2006, and were comprised of $11.7million of capital expenditures and $1.7 million of investments in MB Storagefor capital expenditures. Cash flows used in investing activities totaled $14.1million for the three months ended March 31, 2005, and were comprised of $14.1million of capital expenditures.

 

*Financing Activities*

 

Cash flows used in financing activities totaled $1.1million for the three months ended March 31, 2006, and were comprised of $16.7million of distributions paid to our Parent Partnership, partially offset by$15.6 million of net proceeds under our Note Payable to our Parent Partnership.Cash flows used in financing activities totaled $10.8 million for the threemonths ended March 31, 2005, and were comprised of $29.7 million ofdistributions paid to our

 

26

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Parent Partnership, partially offset by $18.9 millionof net proceeds from our Note Payable to our Parent Partnership.

 

During the three monthsended March 31, 2006 and 2005, we paid cash distributions to our ParentPartnership totaling $16.7 million and $29.7 million, respectively. On May 5,2006, we will pay a cash distribution to our Parent Partnership of $13.4million for the quarter ended March 31, 2006.

 

# **OtherConsiderations**

# ** **

*Universal Shelf*

 

**Our Parent Partnership has filed with the SEC a universalshelf registration statement that, subject to agreement on terms at the time ofuse and appropriate supplementation, allows it to issue, in one or moreofferings, up to an aggregate of $2.0 billion of equity securities, debtsecurities or a combination thereof. In the May 2005, our Parent Partnershipissued $279.2 million of equity securities, leaving $1.7 billion availableunder this shelf registration at March 31, 2006, subject to customary marketingterms and conditions.**

** **

*Credit Facilities*

 

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s credit facility and senior notes. The interest rates charged bythe 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 also decreased or increased to cover gains andlosses, respectively, on any interest rate swaps that the Parent Partnershipmay have in place on its credit facility and senior notes. The ParentPartnership’s revolving credit facility is described below.

 

Our Parent Partnership has in place an unsecuredrevolving credit facility for up to $700.0 million (“Revolving CreditFacility”), which may be increased up to a maximum of $850.0 million upon ourParent Partnership’s request, subject to lender approval and the satisfactionof certain other conditions. The Revolving Credit Facility expires on December13, 2010. Interest is payable at an applicable margin above either the lender’sbase rate or LIBOR. At March 31, 2006, $435.0 million was outstanding under thefacility, and our Parent Partnership had $253.1 million of available borrowingcapacity, which includes $11.9 million of outstanding letters of credit.Financial covenants in the Revolving Credit Facility require that our ParentPartnership maintain a ratio of Consolidated Funded Debt to Pro Forma EBITDA(as defined and calculated in the facility) of less than 4.75 to 1.00 (subjectto adjustment for specified acquisitions) and a ratio of EBITDA to InterestExpense (as defined and calculated in the facility) of at least 3.00 to 1.00,in each case with respect to specified twelve month periods. Other restrictivecovenants in the credit agreement limit the Parent Partnership’s and itssubsidiaries’ ability to, among other things, incur additional indebtedness,make certain distributions, incur liens, engage in specified transactions withaffiliates and complete mergers, acquisitions and sales of assets. Our ParentPartnership was in compliance with the covenants of its Revolving CreditFacility at March 31, 2006.

 

At March 31, 2006 and December 31, 2005, we hadintercompany notes payable to our Parent Partnership of $222.3 million and$206.9 million, respectively, which related to borrowings under the ParentPartnership’s Revolving Credit Facility, 7.625% Senior Notes and 6.125% SeniorNotes. The weighted average interest rate on the note payable to the ParentPartnership at March 31, 2006, was 6.6%. At March 31, 2006, accrued interestincludes $1.8 million due to our Parent Partnership. For the three months endedMarch 31, 2006 and 2005, interest costs incurred on the note payable to ourParent Partnership totaled $3.5 million and $3.4 million, respectively.

 

### *2006 Capital Expenditures*

### * *

We estimate that capital expenditures, excludingacquisitions, for 2006 will be approximately $115.3 million (including $3.4million of capitalized interest). We expect to spend approximately $74.9million for revenue generating projects and facility improvements. We expect tospend approximately $18.0 million to sustain existing

 

27

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operations, including life-cycle replacements forequipment at various facilities and pipeline and tank replacements and $19.0million for various system upgrade projects. During the remainder of 2006, wemay be required to contribute 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 andevaluate potential capital improvements and expansions that would becomplementary to our present system. These expenditures can vary greatlydepending on the magnitude of our transactions. We may finance capitalexpenditures through internally generated funds, debt or capital contributionsfrom our Parent Partnership or any combination thereof.

 

*Liquidity Outlook*

 

We believe that we will continue to have adequateliquidity to fund future recurring operating and investing activities. Our primarycash requirements consist of normal operating expenses, capital expenditures tosustain existing operations and revenue generating expenditures, interestpayments on our Senior Notes, interest payments on intercompany notes payableto our Parent Partnership and distributions to our Parent Partnership. Our cashrequirements for 2006, such as operating expenses, capital expenditures tosustain existing operations and quarterly distributions to our ParentPartnership, are expected to be funded through operating cash flows. Long-term cash requirements for expansion projects, acquisitions and repaymentof intercompany notes are expected to be funded by several sources, includingcash flows from operating activities and loans or capital contributions fromour Parent Partnership. Our Parent Partnership may fund such loans or capitalcontributions with borrowings under its credit facility and possibly theissuance of additional equity and debt securities. The timing of any offeringsby our Parent Partnership will depend on various factors, including prevailingmarket conditions, interest rates and our Parent Partnership’s financialcondition and credit rating at the time.

 

### *Off-Balance Sheet Arrangements*

### * *

We do not rely on off-balance sheet borrowings to fundour acquisitions. We have no material off-balance sheet commitments forindebtedness other than the limited guaranty of Centennial debt and the limitedguarantee of Centennial catastrophic events as discussed below. In addition, wehave entered into various leases covering assets utilized in several areas ofour operations.

 

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 March 31, 2006, $150.0 million was outstanding underthose credit facilities, of which $140.0 million expires in 2024, and $10.0million expires in April 2007. We and Marathon have each guaranteed one-half ofthe repayment of Centennial’s outstanding debt balance (plus interest) underthese credit facilities. The guarantees arose in order for Centennial to obtainadequate financing, and the proceeds of the credit facilities were used to fundconstruction and conversion costs of its 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 its outstanding balance, the estimated maximumpotential amount of future payments for us and Marathon is $75.0 million eachat March 31, 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 forthe agreement and each member is to contribute cash in proportion to itsownership interest, up to a maximum of $50.0 million each. As a result of thecatastrophic event guarantee, we have recorded a $4.6 million obligation, whichrepresents the present value of the estimated amount that we would have to payunder the guarantee. If a catastrophic event were to occur and we were requiredto contribute cash to Centennial, contributions exceeding our deductible mightbe covered by our insurance.

 

28

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*Contractual Obligations*

 

The following table summarizes our debt repaymentobligations and material contractual commitments as of March 31, 2006 (inmillions):

 
| ** **                                  | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                                               | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** |
|                                        |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Note payable,  Parent Partnership           |       | $                                                                       | 222.3      |   | $ | — |   | $ | — |   | $ | 222.3 |   | $ | — |   |
| 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)                      |       | 451.0                                                                   |       | 41.4 |   | 71.2 |   | 58.3 |   | 280.1 |   |
| Debt and  interest subtotal                 |       | 1,063.3                                                                 |       | 41.4 |   | 251.2 |   | 280.62 |   | 490.1 |   |
|                                        |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Operating leases  (3)                       |       | 62.5                                                                    |       | 13.0 |   | 19.8 |   | 10.3 |   | 19.4 |   |
| Capital  expenditure obligations (4)        |       | 0.2                                                                     |       | 0.2 |   | — |   | — |   | — |   |
| Other  liabilities and deferred credits (5) |       | 7.4                                                                     |       | — |   | 7.3 |   | 0.1 |   | — |   |
| Total                                       |       | $                                                                       | 1,133.4    |   | $ | 54.6 |   | $ | 278.3 |   | $ | 291.02 |   | $ | 509.5 |   |

 

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(1)          We entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our 7.51%Senior Notes due 2028. At March 31, 2006, the 7.51% Senior Notes include anadjustment to decrease the fair value of the debt by $7.0 million related tothis interest rate swap agreement. At March 31, 2006, our 6.45% Senior Notesinclude less than $0.1 million of unamortized debt discount. The fair valueadjustment and unamortized debt discount are excluded from this table.

 

(2)          Includes interest payments due on our SeniorNotes and interest payments and commitment fees due on our Note Payable to ourParent Partnership. The interest amount calculated on the Note Payable to ourParent Partnership is based on the assumption that the amount outstanding andthe interest rate charged both remain at their current levels.

 

(3)          Includesa pipeline capacity lease with Centennial. In January 2003, we entered into apipeline capacity lease agreement with Centennial for a period of five yearsthat contains a minimum throughput requirement. For the three months endedMarch 31, 2006, we exceeded the minimum throughput requirements on the leaseagreement.

 

(4)          Includes accruals for costs incurred but notyet paid relating to capital projects.

 

(5)          Excludes approximately $8.6 million oflong-term deferred revenue payments, which are being transferred to income overthe term of the respective revenue contracts and $4.3 million related to ourestimated amount of obligation under a catastrophic event guarantee forCentennial. The amount of commitment by year is our best estimate of projectedpayments of these long-term liabilities.

 

We expect to repay the long-term, senior unsecuredobligations and note payable to our Parent Partnership through the issuance ofadditional long-term senior unsecured debt at the time the 2008 and 2028 debtsmature, with proceeds from the dispositions of assets, cash flows fromoperations, and contributions from our Parent Partnership or any combination ofthe above items.

 

Our Parent Partnership’s senior unsecured debt israted BBB- by Standard and Poors (“S&P”) and Baa3 by Moody’s InvestorsService (“Moody’s”). S&P assigned this rating on June 14, 2005, followingits review of the ownership structure, corporate governance issues, andproposed funding after the acquisition of the Company by DFI. Both ratings arewith a stable outlook. A rating reflects only the view of a rating agency andis not a recommendation to buy, sell or hold any indebtedness. Any rating canbe revised upward or downward or withdrawn at any time by a rating agency if itdetermines that the circumstances warrant such a change and should be evaluatedindependently of any other rating. Our senior unsecured debt is also rated BBB-by S&P and Baa3 by Moody’s. Both ratings are with a stable outlook and werereaffirmed during the first quarter of 2006.

 

29

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***Recent Accounting Pronouncements***

* *

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

 

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

** **

For additional discussion of our exposure to marketrisks, please refer to “Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk” in our Annual Report 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. We do not have foreign exchange risks. OurRisk Management Committee has established policies to monitor and control thesemarket risks. The Risk Management Committee is comprised, in part, of seniorexecutives of the Company.

 

*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 to manage the fixed interest rate mix ofour debt portfolio and overall cost of borrowing. 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 agreementinvolves the periodic exchange of payments without the exchange of the notionalamount upon which the payments are based. The related amount payable to orreceivable from counterparties is included as an adjustment to accruedinterest.

 

The following table summarizes the estimated fair valuesof the Senior Notes as of March 31, 2006 and December 31, 2005 (in millions):

 
| ** **                                        | ** ** | ** **      | ** ** | **Fair Value**      | ** ** |
|---------------------------------------------------|------------|-----------------|------------|--------------------------|------------|
| ** **                                        | ** ** | **Face  Value** | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|                                              |       |            |       |                     |       |   |   |
| 6.45% TE  Products Senior Notes, due January 2008 |       | $               | 180.0      |                     | $          | 182.6 |   | $ | 183.7 |   |
| 7.51% TE Products  Senior Notes, due January 2028 |       | 210.0           |       | 223.4                    |       | 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 notional amount of $210.0 million and maturesin January 2028 to match the principal and maturity of the Senior Notes. Underthe swap 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 three months ended March 31, 2006 and 2005, werecognized reductions in interest expense of $0.7 million and $1.8 million,respectively, related to the difference between the fixed rate and the floatingrate of interest on the interest rate swap. During the quarters ended March 31,2006 and 2005, we measured the hedge effectiveness of this interest rate swapand noted that no gain or loss from ineffectiveness was required to berecognized. The fair value of this interest rate swap was a loss ofapproximately $7.0 million and $0.9 million at March 31, 2006, and December 31,2005, respectively. Utilizing the balance of the 7.51% Senior Notes outstandingat March 31, 2006, and including the effects of hedging activities, if marketinterest rates increased 100 basis points, the annual increase in interestexpense would be $2.1 million.

 

At March 31, 2006, and December 31, 2005, we hadintercompany notes payable to our Parent Partnership of $222.3 million and$206.9 million, respectively, which related to borrowings under the ParentPartnership’s Revolving Credit Facility, 7.625% Senior Notes and 6.125% SeniorNotes. The weighted average interest rate on the note payable to the ParentPartnership at March 31, 2006, was 6.6%. At March 31, 2006, accrued interestincludes

 

30

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$1.8 million due to our Parent Partnership. For thethree months ended March 31, 2006 and 2005, interest costs incurred on the notepayable to our Parent Partnership totaled $3.5 million and $3.4 million,respectively. Utilizing the balance of the note payable to our ParentPartnership outstanding at March 31, 2006, if market interest rates increased100 basis points, the annual increase in interest expense would be $2.2million.

 

**Item4. Controls and Procedures**

** **

As of the end of the period covered by this report,our management carried out an evaluation, with the participation of our principalexecutive officer (the “CEO”) and our principal financial officer (the “CFO”),of the effectiveness of our disclosure controls and procedures pursuant to Rule13a-15 of the Securities Exchange Act of 1934. Based on those evaluations, asof March 31, 2006, the CEO and CFO concluded:

 

(i)             thatour disclosure controls and procedures are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including theCEO and CFO, as appropriate to allow timely decisions regarding required disclosure;and

 

(ii)          that ourdisclosure controls and procedures are effective.

 

*Changes in Internal Control over FinancialReporting*

 

There has been no change in our internal control overfinancial reporting during the first quarter of 2006 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

We have been, in the ordinary course of business, adefendant in various lawsuits and a party to various other legal proceedings,some of which are covered in whole or in part by insurance. We believe that theoutcome of these lawsuits and other proceedings will not individually or in theaggregate have a material adverse effect on our consolidated financialposition, results of operations or cash flows. See discussion of legalproceedings in Note 10 in the Notes to the Consolidated Financial Statements,which is incorporated into this item by reference.

 

**Item 1A.Risk Factors**

 

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

 

***We depend on the leadership and involvementof our General Partner’s key personnel for the success of our business.***

 

We depend on the leadership and involvement of keypersonnel of our General Partner to identify and develop business opportunitiesand make strategic decisions. Our General Partner’s president and chiefexecutive officer was elected in April 2006, our General Partner’s chieffinancial officer was elected in January 2006, and its general

 

31

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counsel was elected in March 2006. Our GeneralPartner’s president and chief executive officer has over 35 years of relevantexperience and its chief financial officer and general counsel each haveapproximately 20 years of relevant experience. While retention plans are inplace for certain senior executives, any future unplanned departures could havea material adverse effect on our business, financial conditions and results ofoperations. Legacy senior executives have compensation agreements in place; newofficers may not be party to any compensation agreements.

 

**Item 6.  Exhibits**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.1         |       | Second  Amended and Restated Agreement of Limited Partnership of TE Products Pipeline  Company, Limited Partnership, effective September 21, 2001 (Filed as Exhibit  3.8 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for  the quarter ended September 30, 2001, and incorporated herein by reference).                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1         |       | Form of  Indenture between TE Products Pipeline Company, Limited Partnership and The  Bank of New York, as Trustee, dated as of January 27, 1998 (Filed as Exhibit  4.3 to TE Products Pipeline Company, Limited Partnership’s Registration  Statement on Form S-3 (Commission File No. 333-38473) and incorporated herein  by reference).                                                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2         |       | Form of  Indenture between TEPPCO Partners, L.P., as issuer, TE Products Pipeline  Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P.  and Jonah Gas Gathering Company, as subsidiary guarantors, and First Union  National Bank, NA, as trustee, dated as of February 20, 2002 (Filed as  Exhibit 99.2 to Form 8-K of TEPPCO Partners, L.P. (Commission File No.  1-10403) dated as of February 20, 2002 and incorporated herein by reference).                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3         |       | First Supplemental  Indenture between TEPPCO Partners, L.P., as issuer, TE Products Pipeline  Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P.  and Jonah Gas Gathering Company, as subsidiary guarantors, and First Union  National Bank, NA, as trustee, dated as of February 20, 2002 (Filed as  Exhibit 99.3 to Form 8-K of TEPPCO Partners, L.P (Commission File No.  1-10403) dated as of February 20, 2002 and incorporated herein by reference).                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4         |       | Second  Supplemental Indenture, dated as of June 27, 2002, among TEPPCO Partners,  L.P., as issuer, TE Products Pipeline Company, Limited Partnership, TCTM,  L.P., TEPPCO Midstream Companies, L.P., and Jonah Gas Gathering Company, as  Initial Subsidiary Guarantors, and Val Verde Gas Gathering Company, L.P., as New  Subsidiary Guarantor, and Wachovia Bank, National Association, formerly known  as First Union National Bank, as trustee (Filed as Exhibit 4.6 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended  June 30, 2002 and incorporated herein by reference). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.5         |       | Third  Supplemental Indenture among TEPPCO Partners, L.P. as issuer, TE Products  Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream  Companies, L.P., Jonah Gas Gathering Company and Val Verde Gas Gathering  Company, L.P. as Subsidiary Guarantors, and Wachovia Bank, National  Association, as trustee, dated as of January 30, 2003 (Filed as Exhibit 4.7  to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  year ended December 31, 2002, and incorporated herein by reference).                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1        |       | Agreement and  Release between James C. Ruth and Texas Eastern Products Pipeline Company,  LLC dated as of January 25, 2006 (Filed as Exhibit 10.53 to Form 10-K of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended  December 31, 2005 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                       |

 

32

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| 10.2   |   | Waiver of  Provisions of the Conflicts Policies and Procedures of the Third Amended and  Restated Administrative Services Agreement (Filed as Exhibit 10.56 to Form  10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year  ended December 31, 2005 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.

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

 

**SIGNATURES**

 

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

 

 
|              | TE Products Pipeline Company, Limited Partnership                                                       |
|-------------------|---------------------------------------------------------------------------------------------------------|
|              |                                                                                                    |
| Date: May 3, 2006 | By:                                                                                                     | /s/   JERRY E.  THOMPSON |   |
|              | Jerry E. Thompson,President and Chief Executive  Officer ofTEPPCO GP, Inc., General Partner             |   |
|              |                                                                                                    |
| Date: May 3, 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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