**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-Q**

 

ý  **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended June 30, 2004**

 

**OR**

 

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

 

**CommissionFile No. 1-13603**

 

----

 

**TE ProductsPipeline Company, Limited Partnership**

(Exact name of Registrant as specified in its charter)

 

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

 

**2929Allen Parkway**

**P.O. Box2521**

**Houston,Texas 77252-2521**

(Address of principal executive offices,including zip code)

 

**(713)759-3636**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes  ý  No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  o  No ý

 

 

----

 

**TE PRODUCTS PIPELINE COMPANY, LIMITEDPARTNERSHIP**

 

**TABLE OF CONTENTS**

 
| **PART I.  FINANCIAL INFORMATION**                                                                                    |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                       |   |
| **Item 1.  Financial Statements**                                                                                     |   |
| **Consolidated Balance Sheets  as of June 30, 2004 (unaudited) and December 31, 2003**                           | **1**  |
|                                                                                                                       |   |
| **Consolidated Statements  of Income for the three months and six months ended June 30, 2004   and 2003 (unaudited)** | **2**  |
|                                                                                                                       |   |
| **Consolidated  Statements of Cash Flows for the six months ended June 30, 2004   and 2003 (unaudited)**              | **3**  |
|                                                                                                                       |   |
| **Notes to the Consolidated Financial Statements  (unaudited)**                                                            | **4**  |
|                                                                                                                       |   |
| **Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations**             | **14** |
|                                                                                                                       |   |
| **Forward-Looking Statements**                                                                                             | **24** |
|                                                                                                                       |   |
| **Item  3.  Quantitative and Qualitative  Disclosures About Market Risk**                                             | **25** |
|                                                                                                                       |   |
| **Item 4.  Controls and Procedures**                                                                                  | **25** |
|                                                                                                                       |   |
| **PART II.  OTHER INFORMATION**                                                                                       |   |
|                                                                                                                       |   |
| **Item 1.  Legal Proceedings**                                                                                        | **26** |
|                                                                                                                       |   |
| **Item 6.  Exhibits and Reports on Form 8-K**                                                                         | **26** |
|                                                                                                                       |   |
| **Signatures**                                                                                                             | **31** |

 

i

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

**TE PRODUCTS PIPELINE COMPANY, LIMITEDPARTNERSHIP**

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
|                                                                                                                |   | **June 30,  2004** |    | **December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                                                                                                |   | **(Unaudited)**         |    |                        |   |
|                                                                                                                |   |                    |    |                        |   |
| **ASSETS**                                                                                                          |   |                    |    |                        |   |
|                                                                                                                |   |                    |    |                        |   |
| Current assets:                                                                                                     |   |                    |    |                        |   |
| Cash and cash equivalents                                                                                           |   | $                       | —  |                        | $      | 188 |   |
| Accounts receivable, trade (net of  allowance for doubtful accounts of $374)                                        |   | 16,045                  |    | 25,377                      |   |
| Accounts receivable, related parties                                                                                |   | 2,763                   |    | 154                         |   |
| Inventories                                                                                                         |   | 9,643                   |    | 11,186                      |   |
| Other                                                                                                               |   | 8,347                   |    | 10,230                      |   |
| Total current assets                                                                                                |   | 36,798                  |    | 47,135                      |   |
| Property, plant and equipment, at cost (net  of accumulated depreciation and amortization of $295,707 and $279,395) |   | 691,887                 |    | 682,385                     |   |
| Equity investments                                                                                                  |   | 169,644                 |    | 155,861                     |   |
| Other assets                                                                                                        |   | 17,739                  |    | 15,267                      |   |
| Total assets                                                                                                        |   | $                       | 916,068 |                        | $      | 900,648 |   |
|                                                                                                                |   |                    |    |                        |   |
| **LIABILITIES AND PARTNERS’ CAPITAL**                                                                          |   |                    |    |                        |   |
|                                                                                                                |   |                    |    |                        |   |
| Current liabilities:                                                                                                |   |                    |    |                        |   |
| Accounts payable and accrued liabilities                                                                            |   | $                       | 13,939  |                        | $      | 11,518 |   |
| Accounts payable, related parties                                                                                   |   | 31,866                  |    | 12,277                      |   |
| Accrued interest                                                                                                    |   | 16,645                  |    | 15,877                      |   |
| Other accrued taxes                                                                                                 |   | 6,360                   |    | 5,732                       |   |
| Other                                                                                                               |   | 7,608                   |    | 13,983                      |   |
| Total current liabilities                                                                                           |   | 76,418                  |    | 59,387                      |   |
| Senior Notes                                                                                                        |   | 386,995                 |    | 392,164                     |   |
| Note Payable, Parent Partnership                                                                                    |   | 246,768                 |    | 211,314                     |   |
| Other liabilities and deferred credits                                                                              |   | 17,526                  |    | 14,995                      |   |
| Commitments and contingencies                                                                                       |   |                    |    |                        |   |
| Partners’ capital:                                                                                             |   |                    |    |                        |   |
| General partner’s interest                                                                                     |   | 2                       |    | 2                           |   |
| Limited partner’s interest                                                                                     |   | 188,359                 |    | 222,786                     |   |
| Total partners’ capital                                                                                        |   | 188,361                 |    | 222,788                     |   |
| Total liabilities and partners’ capital                                                                        |   | $                       | 916,068 |                        | $      | 900,648 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

1

----

 

**TE PRODUCTS PIPELINE COMPANY, LIMITEDPARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

**(in thousands)**

 
|                                   |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                   |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Operating revenues:                    |   |                                   |   |                                 |   |   |   |   |   |
| Transportation – Refined products |   | $                                      | 38,937 |                                 | $      | 37,802 |   | $ | 69,908 |   | $ | 64,696 |   |
| Transportation – LPGs             |   | 13,721                                 |   | 13,357                               |   | 42,501 |   | 44,178 |   |
| Other                                  |   | 8,559                                  |   | 7,646                                |   | 22,470 |   | 16,900 |   |
| Total operating revenues               |   | 61,217                                 |   | 58,805                               |   | 134,879 |   | 125,774 |   |
|                                   |   |                                   |   |                                 |   |   |   |   |   |
| Costs and expenses:                    |   |                                   |   |                                 |   |   |   |   |   |
| Operating, general and administrative  |   | 28,714                                 |   | 25,825                               |   | 57,762 |   | 46,326 |   |
| Operating fuel and power               |   | 7,192                                  |   | 7,724                                |   | 15,241 |   | 15,902 |   |
| Depreciation and amortization          |   | 8,998                                  |   | 6,929                                |   | 17,636 |   | 13,937 |   |
| Taxes – other than income taxes   |   | 2,492                                  |   | 2,428                                |   | 5,335 |   | 5,076 |   |
| Total costs and expenses               |   | 47,396                                 |   | 42,906                               |   | 95,974 |   | 81,241 |   |
|                                   |   |                                   |   |                                 |   |   |   |   |   |
| Operating income                       |   | 13,821                                 |   | 15,899                               |   | 38,905 |   | 44,533 |   |
|                                   |   |                                   |   |                                 |   |   |   |   |   |
| Interest expense – net            |   | (6,581                                 | )      | (7,245                               | )      | (13,490 | ) | (14,047 | ) |
| Equity earnings (losses)               |   | (509                                   | )      | 64                                   |   | (1,747 | ) | (1,195 | ) |
| Other income – net                |   | 173                                    |   | 55                                   |   | 445 |   | 49 |   |
|                                   |   |                                   |   |                                 |   |   |   |   |   |
| Net income                             |   | $                                      | 6,904  |                                 | $      | 8,773 |   | $ | 24,113 |   | $ | 29,340 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

2

----

 

**TE PRODUCTS PIPELINE COMPANY, LIMITEDPARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
|                                                                           |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                           |   | **2004**                             |   | **2003** |   |
| Cash flows from operating activities:                                          |   |                                 |   |   |   |
| Net income                                                                     |   | $                                    | 24,113 |   | $ | 29,340 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |   |                                 |   |   |   |
| Depreciation and amortization                                                  |   | 17,636                               |   | 13,937 |   |
| Losses in equity investments, net of  distributions                            |   | 6,697                                |   | 1,195 |   |
| Non-cash portion of interest expense                                           |   | 15                                   |   | 16 |   |
| Decrease in accounts receivable                                                |   | 9,332                                |   | 2,539 |   |
| Decrease (increase) in inventories                                             |   | 1,543                                |   | (2,925 | ) |
| Decrease in other current assets                                               |   | 1,883                                |   | 2,429 |   |
| (Decrease) increase in accounts payable and  accrued expenses                  |   | (3,813                               | )      | 4,466 |   |
| Other                                                                          |   | 10,867                               |   | 11,744 |   |
| Net cash provided by operating activities                                      |   | 68,273                               |   | 62,741 |   |
|                                                                           |   |                                 |   |   |   |
| Cash flows from investing activities:                                          |   |                                 |   |   |   |
| Investment in Mont Belvieu Storage  Partners, L.P.                             |   | (17,211                              | )      | — |   |
| Acquisition of additional interest in  Centennial Pipeline LLC                 |   | —                               |   | (20,000 | ) |
| Acquisition of assets                                                          |   | (1,962                               | )      | — |   |
| Investment in Centennial Pipeline LLC                                          |   | (1,500                               | )      | (1,000 | ) |
| Capital expenditures, net                                                      |   | (24,657                              | )      | (25,053 | ) |
| Net cash used in investing activities                                          |   | (45,330                              | )      | (46,053 | ) |
|                                                                           |   |                                 |   |   |   |
| Cash flows from financing activities:                                          |   |                                 |   |   |   |
| Proceeds from term loan                                                        |   | 70,087                               |   | 57,356 |   |
| Repayments of term loan                                                        |   | (34,633                              | )      | (20,500 | ) |
| Equity contribution – Parent Partnership                                  |   | —                               |   | 1,896 |   |
| Distributions paid                                                             |   | (58,585                              | )      | (51,200 | ) |
| Net cash used in financing activities                                          |   | (23,131                              | )      | (12,448 | ) |
|                                                                           |   |                                 |   |   |   |
| Net (decrease) increase in cash and cash  equivalents                          |   | (188                                 | )      | 4,240 |   |
|                                                                           |   |                                 |   |   |   |
| Cash and cash equivalents at beginning of  period                              |   | 188                                  |   | 485 |   |
| Cash and cash equivalents at end of period                                     |   | $                                    | — |   | $ | 4,725 |   |
|                                                                           |   |                                 |   |   |   |
| **Non-cash investing  activities:**                                            |   |                                 |   |   |   |
| Net assets transferred to Mont Belvieu  Storage Partners, L.P.                 |   | $                                    | — |   | $ | 61,042 |   |
|                                                                           |   |                                 |   |   |   |
| **Supplemental  disclosure of cash flows:**                                    |   |                                 |   |   |   |
| Cash paid for interest (net of amounts  capitalized)                           |   | $                                    | 12,881 |   | $ | 15,809 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

3

----

 

**TE PRODUCTS PIPELINE COMPANY, LIMITEDPARTNERSHIP**

 

**NOTES****TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION**

 

TE ProductsPipeline Company, Limited Partnership (the “Partnership”), a Delaware limitedpartnership, was formed in March 1990. TEPPCO Partners, L.P. (the “Parent Partnership”) owns a 99.999% interestin us as the sole limited partner. TEPPCO GP, Inc. (“TEPPCO GP” or “General Partner”), a subsidiary of theParent Partnership, holds a 0.001% General Partner interest in us.  Texas Eastern Products Pipeline Company, LLC(the “Company”), a Delaware limited liability company, serves as the generalpartner of our Parent Partnership.  TheCompany is a wholly owned subsidiary of Duke Energy Field Services, LLC(“DEFS”), a joint venture between Duke Energy Corporation (“Duke Energy”) andConocoPhillips.  Duke Energy holds aninterest of approximately 70% in DEFS, and ConocoPhillips holds the remaininginterest of approximately 30%.  TEPPCOGP, as general partner, performs all of the management and operating functionsrequired for us in accordance with the Agreement of Limited Partnership of TEProducts Pipeline Company, Limited Partnership (the “PartnershipAgreement”).  We reimburse our GeneralPartner and the Company for all reasonable direct and indirect expenses thatthey incur in managing us.

 

As used in thisReport, “we,” “us,” and “our” means TE Products Pipeline Company, LimitedPartnership.

 

The accompanyingunaudited consolidated financial statements reflect all adjustments that are,in the opinion of our management, of a normal and recurring nature andnecessary for a fair statement of our financial position as of June 30,2004, and the results of our operations and cash flows for the periods presented.  The results of operations for the threemonths and six months ended June 30, 2004, are not necessarily indicativeof results of our operations for the full year 2004.  You should read these interim financial statements in conjunctionwith our consolidated financial statements and notes thereto presented in theTE Products Pipeline Company, Limited Partnership Annual Report on Form 10-Kfor the year ended December 31, 2003. We have reclassified certain amounts from prior periods to conform withthe current presentation.

 

We operate and report inone business segment: transportation and storage of refined products, liquefiedpetroleum gases (“LPGs”) and petrochemicals. Our interstate transportation operations, including rates charged tocustomers, are subject to regulations prescribed by the Federal EnergyRegulatory Commission (“FERC”).  Werefer to refined products, LPGs and petrochemicals in this Report,collectively, as “petroleum products” or “products.”

 

At June 30, 2004,and December 31, 2003, we had working capital deficits of $39.6 millionand $12.3 million, respectively.  Cashgenerated from operations and from our Parent Partnership’s credit facilitiesand debt and equity offerings are our primary sources of liquidity.  Working capital deficits can occur primarilydue to the timing of operating cash receipts from customers, payment of cashdistributions and the payment of normal operating expenses and capitalexpenditures.  Our Parent Partnershiphas historically made capital contributions, loans or otherwise providedliquidity to us as needed, but the Parent Partnership has no contractualobligation to do so.  At June 30,2004, our Parent Partnership had $290.0 million in available borrowing capacityunder its revolving credit facility and agreed to cover any working capitalneeds, if required.

 

**New Accounting Pronouncements**

 

**In December 2003, the Financial Accounting StandardsBoard (“FASB”) revised FASB Interpretation No. 46, *Consolidation of Variable InterestEntities, an interpretation of ARB No. 51* (“FIN 46”).  FIN 46, issued by the FASB inJanuary 2003, requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  The revised statement, FASBInterpretation No. 46(R), *Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51* (“FIN 46(R)”), clarifies some of therequirements of FIN 46, eases some implementation problems that companiesexperienced implementing FIN 46, adds new scope exceptions and makes theprobability more likely for many companies that potential variable interestentities will be identified and**

 

4

----

 

**consolidated.  We adopted the new requirements detailed inFIN 46(R) as of March 31, 2004.  Inconnection with our adoption of FIN 46(R), we evaluated our investments inCentennial Pipeline LLC and Mont Belvieu Storage Partners, L.P. and determinedthat these entities are not materially affected by our adoption of FIN 46(R),and thus we have accounted for them as equity method investments (see Note 5.Equity Investments).  Our adoption ofFIN 46(R) did not have an effect on our financial position, results ofoperations or cash flows.**

 

**On December 8, 2003, President Bush signed into a lawa bill that expands Medicare, primarily adding a prescription drug benefit forMedicare-eligible retirees starting in 2006. We anticipate that the benefits our Parent Partnership pays after 2006could be lower as a result of the new Medicare provisions; however, at thistime the retiree medical obligations and costs reported do not reflect anychanges as a result of this legislation. Deferring the recognition of the new Medicare provisions’ impact waspermitted by FASB Staff Position (“FSP”) Nos. 106-1 and 106-2, *Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003*, due to open questionsabout some of the new Medicare provisions and a lack of authoritativeaccounting guidance about certain matters. The final accounting guidance could require changes to previouslyreported information.  We will adopt theprovisions of these FSPs in the quarter ended September 30, 2004; however, wedo not believe that this regulation will have a material adverse effect on ourfinancial position, results of operations or cash flows.**

 

**In December 2003, the FASB issued a revision toStatement of Financial Accounting Standards (“SFAS”) No. 132, *Employers’Disclosures about Pensions and Other Post-Retirement Benefits*.  This revision required that companiesprovide** more details about their plan assets, benefit obligations, cash flows,benefit costs and other relevant information. A description of investment policies and strategies and targetallocation percentages, or target ranges, for these asset categories also isrequired in financial statements.  Cashflows will include projections of future benefit payments and an estimate ofcontributions to be made in the next year to fund pension and otherpostretirement benefit plans.  Inaddition to expanded annual disclosures, the FASB is requiring companies toreport the various elements of pension and other postretirement benefit costson a quarterly basis.  The guidance iseffective for fiscal years ending after December 15, 2003, and forquarters beginning after December 15, 2003.  We adopted the provisions of the revised SFAS 132 effectiveDecember 31, 2003, and certain provisions regarding disclosure ofinformation about estimated future benefit payments in the first quarter of2004.

 

**NOTE 2. INTANGIBLE ASSETS**

 

**We account for our intangible assets under SFAS No. 142, *Goodwill andOther Intangible Assets*,**which was issued by the FASB inJuly 2001.  SFAS 142 prohibitsamortization of goodwill and intangible assets with indefinite useful lives,and instead requires testing for impairment at least annually.  SFAS 142 requires that intangible assetswith finite useful lives be amortized over their respective estimated usefullives.  If an intangible asset has afinite useful life, but the precise length of that life is not known, thatintangible asset shall be amortized over the best estimate of its usefullife.  At a minimum, we will assess theuseful lives and residual values of all intangible assets on an annual basis todetermine if adjustments are required.**

 

**The following table reflects the components of amortizedintangible assets, included in other assets on the consolidated balance sheetsat June 30, 2004, and December 31, 2003 (in thousands):**

 

|                         |   | **June 30,  2004**     |   | **December 31,  2003**   |   |
|------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
|                         |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
|                         |   |                        |   |                          |   |   |   |   |   |
| Amortized intangible assets: |   |                        |   |                          |   |   |   |   |   |
| Transportation agreements    |   | $                           | 1,328  |                          | $      | (227 | ) | $ | 1,328 |   | $ | (194 | ) |
|                              |        |                             |        |                               |        |  |  |  |  |  |  |  |  |

 

5

----

 

**Amortization expense on intangible assets was $16,603 foreach of the three month periods ended June 30, 2004 and 2003, and $33,205for each of the six month periods ended June 30, 2004 and 2003.**

 

Estimatedamortization expense on intangible assets will be $0.1 million for each of theyears ending December 31, 2004 through 2008.

 

**At June 30, 2004, we had $33.4 million of excessinvestment in our equity investment in Centennial Pipeline LLC, which wascreated upon formation of the company (see Note 5.  Equity Investments).  Theexcess investment is included in our equity investments account atJune 30, 2004, and is accounted for as an intangible asset with anindefinite life.  We assess theintangible asset for impairment on an annual basis.**

 

**NOTE 3. INTEREST RATE SWAP**

 

**On October 4, 2001, we entered into an interest rateswap agreement to hedge our exposure to changes in the fair value of our fixedrate 7.51% Senior Notes due 2028. We designated this swap agreement as a fairvalue hedge.  The swap agreement has anotional amount of $210.0 million and matures in January 2028 to match theprincipal and maturity of our 7.51% Senior Notes.  Under the swap agreement, we pay a floating rate of interestbased on a three-month U.S. Dollar LIBOR rate, plus a spread, and receive afixed rate of interest of 7.51%. During the six months ended June 30, 2004and 2003, we recognized reductions in interest expense of $5.1 million and $4.9million, respectively, related to the difference between the fixed rate and thefloating rate of interest on the interest rate swap.  During the quarter ended June 30, 2004, we measured thehedge effectiveness of this interest rate swap and noted that no gain or lossfrom ineffectiveness was required to be recognized.  The fair value of this interest rate swap was a loss ofapproximately $2.9 million at June 30, 2004, and a gain of approximately$2.3 million at December 31, 2003.**

 

**NOTE 4. INVENTORIES**

 

Inventories are valued atthe lower of cost (based on weighted average cost method) or market.  The costs of inventories did not exceedmarket values at June 30, 2004, and December 31, 2003. The majorcomponents of inventories were as follows (in thousands):

 
|                   |   | **June 30,  2004** |   | **December 31,  2003** |   |
|------------------------|--------|-------------------------|--------|-----------------------------|--------|
| Refined products       |   | $                       | 995    |                        | $      | 6,632 |   |
| LPGs                   |   | 4,203                   |   | 517                         |   |
| Materials and supplies |   | 4,445                   |   | 4,037                       |   |
| Total                  |   | $                       | 9,643  |                        | $      | 11,186 |   |

 

**NOTE 5.  EQUITYINVESTMENTS**

 

InAugust 2000, we entered into agreements with Panhandle Eastern PipelineCompany (“PEPL”), a former subsidiary of CMS Energy Corporation, and MarathonAshland Petroleum LLC (“Marathon”) to form Centennial Pipeline LLC(“Centennial”).  Centennial owns aninterstate refined petroleum products pipeline extending from the upper TexasGulf Coast to central Illinois.  ThroughFebruary 9, 2003, each participant owned a one-third interest inCentennial.  On February 10, 2003,we and Marathon each acquired an additional 16.7% interest in Centennial fromPEPL for $20.0 million each, increasing our ownership percentages in Centennialto 50% each.  During the six

 

6

----

 

months ended June 30, 2004, we invested $1.5 million inCentennial, which is included in the equity investment balance at June 30,2004.

 

As ofJanuary 1, 2003, we and Louis Dreyfus Energy Services, L.P. (“LouisDreyfus”) formed Mont Belvieu Storage Partners, L.P. (“MB Storage”).  We and Louis Dreyfus each own a 50%ownership interest in MB Storage.  Thepurpose of MB Storage is to expand services to the upper Texas Gulf Coastenergy marketplace by increasing pipeline throughput and the mix of productshandled through the existing system and establishing new receipt and deliveryconnections.  MB Storage is aservice-oriented, fee-based venture with no commodity trading activity.  We operate the facilities for MBStorage.  Effective January 1,2003, we contributed property, plant and equipment with a net book value of$67.1 million to MB Storage. Additionally, as of the contribution date, Louis Dreyfus had invested$6.1 million for expansion projects for MB Storage that we were required toreimburse if the original joint development and marketing agreement wasterminated by either party.  Thisdeferred liability was also contributed and credited to the capital account ofLouis Dreyfus in MB Storage.

 

We receive thefirst $1.8 million per quarter (or $7.15 million on an annual basis) of MBStorage’s income before depreciation expense less mandatory capitalexpenditures, as defined in the operating agreement.  Any amount of MB Storage’s annual income before depreciationexpense less mandatory capital expenditures in excess of $7.15 million isallocated evenly between Louis Dreyfus and us. Depreciation expense on assets each originally contributed to MB Storageis allocated between us and Louis Dreyfus based on the net book value of theassets contributed.  Depreciationexpense on assets constructed or acquired by MB Storage subsequent to formationis allocated evenly between us and Louis Dreyfus.  For the six months ended June 30, 2004, our sharing ratio inthe earnings of MB Storage was approximately 70.2%.  During the six months ended June 30, 2004, we contributed$17.2 million to MB Storage, of which $16.5 million was used to acquire storageassets in April 2004.  During thesix months ended June 30, 2004, we received distributions of $5.0 millionfrom MB Storage.  These amounts areincluded in the equity investment balance at June 30, 2004.

 

We use the equitymethod of accounting to account for our investments in Centennial and MBStorage.  Summarized combined financialinformation for Centennial and MB Storage for the six months endedJune 30, 2004 and 2003, is presented below (in thousands):

 
|     |   | **Six Months  Ended  June 30,** |   |
|----------|--------|--------------------------------------|--------|
|     |   | **2004**                             |   | **2003** |   |
| Revenues |   | $                                    | 28,508 |   | $ | 22,229 |   |
| Net loss |   | (907                                 | )      | (3,839 | ) |
|          |        |                                      |        |  |  |  |  |

 

Summarized combinedbalance sheet data for Centennial and MB Storage as of June 30, 2004, andDecember 31, 2003, is presented below (in thousands):

 
|                   |   | **June 30,  2004** |   | **December 31,  2003** |   |
|------------------------|--------|-------------------------|--------|-----------------------------|--------|
| Current assets         |   | $                       | 33,554 |                        | $      | 26,771 |   |
| Noncurrent assets      |   | 382,178                 |   | 351,241                     |   |
| Current liabilities    |   | 43,240                  |   | 35,032                      |   |
| Long-term debt         |   | 140,000                 |   | 140,000                     |   |
| Noncurrent liabilities |   | 13,308                  |   | 13,182                      |   |
| Partners’ capital |   | 219,184                 |   | 189,798                     |   |
|                        |        |                         |        |                             |        |  |  |

 

7

----

 

**Our investment in Centennial includes an excess netinvestment amount of $33.4 million (see Note 2.  Intangible Assets). Excess investment is the amount by which our investment balance exceedsour proportionate share of the net assets of the investment.**

 

**NOTE 6.  DEBT**

 

**Senior Notes**

 

OnJanuary 27, 1998, we completed the issuance of $180.0 million principalamount of 6.45% Senior Notes due 2008 and $210.0 million principal amount of7.51% Senior Notes due 2028 (collectively the “Senior Notes”).  The 6.45% Senior Notes were issued at adiscount of $0.3 million and are being accreted to their face value over theterm of the notes.  The 6.45% SeniorNotes due 2008 are not subject to redemption prior to January 15,2008.  The 7.51% Senior Notes due 2028,issued at par, may be redeemed at any time after January 15, 2008, at ouroption, in whole or in part, at a premium.

 

The Senior Notesdo not have sinking fund requirements. Interest on the Senior Notes is payable semiannually in arrears onJanuary 15 and July 15 of each year. The Senior Notes are unsecured obligations and rank on a parity with allof our other unsecured and unsubordinated indebtedness.  The indenture governing the Senior Notescontains covenants, including, but not limited to, covenants limiting thecreation of liens securing indebtedness and sale and leasebacktransactions.  However, the indenturedoes not limit our ability to incur additional indebtedness.  As of June 30, 2004, we were incompliance with the covenants of the Senior Notes.

 

We have enteredinto an interest rate swap agreement to hedge our exposure to changes in thefair value on a portion of the Senior Notes discussed above (see Note 3.  Interest Rate Swap).

 

At June 30,2004, the estimated fair values of the 6.45% Senior Notes and 7.51% SeniorNotes were approximately $185.5 million and $211.7 million, respectively.  Market prices for recent transactions andrates currently available to us for debt with similar terms and maturities wereused to estimate fair value.

 

**Other Long Term Debt and Credit Facilities**

 

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

 

On April 6,2001, our Parent Partnership entered into a $500.0 million revolving creditfacility including the issuance of letters of credit of up to $20.0 million(“Three Year Facility”).  The interestrate was based, at our Parent Partnership’s option, on either the lender’s baserate plus a spread, or LIBOR plus a spread in effect at the time of the borrowings.  The credit agreement for the Three YearFacility contained certain restrictive financial covenant ratios.  During the first quarter of 2003, our ParentPartnership repaid $182.0 million of the outstanding balance of the Three YearFacility with proceeds from the issuance of its 6.125% Senior Notes onJanuary 30, 2003.  On June 27,2003, our Parent Partnership repaid the outstanding balance under the ThreeYear Facility with borrowings under a new credit facility, and canceled theThree Year Facility.

 

OnFebruary 20, 2002, our Parent Partnership issued $500.0 million principalamount of 7.625% Senior Notes due 2012. The 7.625% Senior Notes were issued at a discount of $2.2 million andare being accreted to their face value over the term of the notes.  The Senior Notes may be redeemed at any timeat our Parent Partnership’s

 

8

----

 

option with the payment of accrued interest and a make-whole premiumdetermined by discounting remaining interest and principal payments using adiscount rate equal to the rate of the United States Treasury securities ofcomparable remaining maturity plus 35 basis points.  The indenture governing these 7.625% Senior Notes containscovenants, including, but not limited to, covenants limiting the creation ofliens securing indebtedness and sale and leaseback transactions.  However, the indenture does not limit ourParent Partnership’s ability to incur additional indebtedness.

 

OnJanuary 30, 2003, our Parent Partnership issued $200.0 million principalamount of 6.125% Senior Notes due 2013. The 6.125% Senior Notes were issued at a discount of $1.4 million andare being accreted to their face value over the term of the notes.  The Parent Partnership used $182.0 millionof the proceeds from the offering to reduce the outstanding principal on theThree Year Facility to $250.0 million. The balance of the net proceeds received was used for general ParentPartnership purposes.  The Senior Notesmay be redeemed at any time at our Parent Partnership’s option with the paymentof accrued interest and a make-whole premium determined by discountingremaining interest and principal payments using a discount rate equal to therate of the United States Treasury securities of comparable remaining maturityplus 35 basis points.  The indenturegoverning the 6.125% 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 the Parent Partnership’s abilityto incur additional indebtedness.

 

On June 27,2003, our Parent Partnership entered into a $550.0 million revolving creditfacility with a three year term, including the issuance of letters of credit ofup to $20.0 million (“Revolving Credit Facility”).  The interest rate is based, at our Parent Partnership’s option,on either the lender’s base rate plus a spread, or LIBOR plus a spread ineffect at the time of the borrowings. The credit agreement for the Revolving Credit Facility contains certainrestrictive financial covenant ratios. Our Parent Partnership borrowed $263.0 million under the RevolvingCredit Facility and repaid the outstanding balance of the Three Year Facility.  At June 30, 2004, $260.0 million wasoutstanding under the Revolving Credit Facility.

 

As of June 30, 2004,and December 31, 2003, we had an intercompany note payable to our ParentPartnership of $246.8 million and $211.3 million, respectively, whichrepresented borrowings under the Parent Partnership’s Revolving CreditFacility, 7.625% Senior Notes and 6.125% Senior Notes. The weighted averageinterest rate on the note payable to the Parent Partnership at June 30,2004, was 5.2%.  At June 30, 2004,accrued interest includes $4.1 million due to the Parent Partnership.  For the six months ended June 30, 2004and 2003, interest costs incurred on the note payable to the Parent Partnershiptotaled $6.1 million and $6.0 million, respectively.

 

**NOTE 7. QUARTERLY DISTRIBUTONS OF AVAILABLE CASH**

 

We make quarterlycash distributions of all of our available cash, generally defined asconsolidated cash receipts less consolidated cash disbursements and cashreserves established by the General Partner in its sole discretion.  We pay distributions of 99.999% to theParent Partnership and 0.001% to the General Partner.

 

During the sixmonths ended June 30, 2004 and 2003, we paid cash distributions totaling$58.6 million and $51.2 million, respectively, to our Parent Partnership.  On August 6, 2004, we will pay a cashdistribution to our Parent Partnership of $29.7 million for the quarter endedJune 30, 2004.

 

9

----

 

**NOTE 8. EMPLOYEE BENEFIT PLANS**

 

**Retirement Plans**

 

The ParentPartnership has adopted the TEPPCO Retirement Cash Balance Plan (“TEPPCORCBP”), which is a non-contributory, trustee-administered pension plan.  In addition, certain executive officersparticipate in the TEPPCO Supplemental Benefit Plan (“TEPPCO SBP”), which is anon-contributory, nonqualified, defined benefit retirement plan.  The TEPPCO SBP was established to restorebenefit reductions caused by the maximum benefit limitations that apply toqualified plans.  The benefit formulafor all eligible employees is a cash balance formula.  Under a cash balance formula, a plan participant accumulates aretirement benefit based upon pay credits and current interest credits.  The pay credits are based on a participant’ssalary, age and service.  The ParentPartnership uses a December 31 measurement date for these plans.

 

The components ofnet pension benefits costs allocated to us for the TEPPCO RCBP and the TEPPCOSBP for the three months and six months ended June 30, 2004 and 2003, wereas follows (in thousands):

 

|                                          |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                          |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Service cost benefit earned during the period |   | $                                      | 635    |                                 | $      | 540 |   | $ | 1,271 |   | $ | 1,080 |   |
| Interest cost on projected benefit obligation |   | 120                                    |   | 87                                   |   | 241 |   | 174 |   |
| Expected return on plan assets                |   | (157                                   | )      | (108                                 | )      | (315 | ) | (216 | ) |
| Amortization of prior service cost            |   | 2                                      |   | 2                                    |   | 4 |   | 4 |   |
| Recognized net actuarial loss                 |   | 3                                      |   | 4                                    |   | 7 |   | 9 |   |
| Net pension benefits costs                    |   | $                                      | 603    |                                 | $      | 525 |   | $ | 1,208 |   | $ | 1,051 |   |

 

**Other Postretirement Benefits**

 

EffectiveJanuary 1, 2001, the Parent Partnership provides certain health care andlife insurance benefits for retired employees on a contributory andnon-contributory basis (“TEPPCO OPB”). Employees become eligible for these benefits if they meet certain age andservice requirements at retirement, as defined in the plans.  The Parent Partnership provides a fixeddollar contribution, which does not increase from year to year, towards retiredemployee medical costs.  The retireepays all health care cost increases due to medical inflation.  The Parent Partnership uses aDecember 31 measurement date for this plan.

 

The components ofnet postretirement benefits costs allocated to us for the TEPPCO OPB for thethree months and six months ended June 30, 2004 and 2003, were as follows(in thousands):

 

|                                                            |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                            |   | **2004**                               |   | **2003**                             |   | **2004** |   | **2003** |   |
| Service cost benefit earned during the  period                  |   | $                                      | 29     |                                 | $      | 23 |   | $ | 58 |   | $ | 46 |   |
| Interest cost on accumulated postretirement  benefit obligation |   | 33                                     |   | 29                                   |   | 65 |   | 58 |   |
| Amortization of prior service cost                              |   | 28                                     |   | 28                                   |   | 56 |   | 56 |   |
| Recognized net actuarial loss                                   |   | —                                 |   | —                               |   | 1 |   | — |   |
| Net postretirement benefits costs                               |   | $                                      | 90     |                                 | $      | 80 |   | $ | 180 |   | $ | 160 |   |

 

10

----

 

**Estimated Future Benefit Contributions**

 

**The Parent Partnership expects tocontribute approximately $3.0 million to the retirement plans and otherpostretirement benefit plans in 2004. We expect to be allocated a share of these contributions.**

 

**NOTE 9. COMMITMENTS AND CONTINGENCIES**

 

In the fall of1999 and on December 1, 2000, the Company and the Parent Partnership werenamed as defendants in two separate lawsuits in Jackson County Circuit Court,Jackson County, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v.Texas Eastern Corporation, et al.*(including the Company and theParent Partnership) and*Gilbert Richards and Jean Richards v. Texas EasternCorporation, et al.*(including the Company and the ParentPartnership).* *In both cases, theplaintiffs contend, among other things, that we and other defendants stored anddisposed of toxic and hazardous substances and hazardous wastes in a mannerthat caused the materials to be released into the air, soil and water.  They further contend that the release causeddamages to the plaintiffs.  In theircomplaints, the plaintiffs allege strict liability for both personal injury andproperty damage together with gross negligence, continuing nuisance, trespass,criminal mischief and loss of consortium. The plaintiffs are seekingcompensatory, punitive and treble damages. We have filed an answer to both complaints, denying the allegations, aswell as various other motions.  InApril 2004, the court granted a partial motion for summary judgment infavor of the defendants, dismissing two of the plaintiffs’ personal injuryclaims in their entirety.  It isanticipated that the plaintiffs will appeal this ruling.  These cases are not covered by insurance.  Discovery is ongoing, and we are defendingourselves vigorously against the lawsuits. The plaintiffs have not stipulated the amount of damages that they areseeking in the suits.  We cannotestimate the loss, if any, associated with these pending lawsuits.

 

OnDecember 21, 2001, we were named as a defendant in a lawsuit in the 10thJudicial District, Natchitoches Parish, Louisiana, styled *Rebecca L. Grisham et al. v.  TE Products Pipeline Company, LimitedPartnership*.  In this case,the plaintiffs contend that our pipeline, which crosses the plaintiffs’property, leaked toxic products onto their property and, consequently, causeddamages to them.  We have filed ananswer to the plaintiffs’ petition denying the allegations and are defendingourselves vigorously against the lawsuit. The plaintiffs have not stipulated the amount of damages they areseeking in the suit; however, this case is covered by insurance.  We do not believe that the outcome of thislawsuit will have a material adverse effect on our financial position, resultsof operations or cash flows.

 

 In May 2003, the Company was named as adefendant in a lawsuit styled *John R. James, et al. v. J Graves Insulation Company,et al*. as filed in the first Judicial District Court, Caddo Parish,Louisiana.  There are numerousplaintiffs identified in the action that are alleged to have suffered damagesas the result of alleged exposure to asbestos-containing products andmaterials.  According to the petitionand as a result of a preliminary investigation, the Company believes that theonly claim asserted against it results from one individual for the period fromJuly 1971 through June 1972, who is alleged to have worked on afacility owned by the Company’s predecessor. This period represents a small portion of the total alleged exposureperiod from January 1964 through December 2001 for thisindividual.  The individual’s claimsinvolve numerous employers and alleged job sites.  The Company has been unable to confirm involvement by the Companyor its predecessors 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.  The plaintiffs have not stipulated theamount of damages that they are seeking in this suit.  We are obligated to reimburse the Company for any costs it incursrelated to this lawsuit.  We cannotestimate the loss, if any, associated with this pending lawsuit.  We do not believe that the outcome of thislawsuit will have a material adverse effect on our financial position, resultsof operations or cash flows.

 

On April 2,2003, Centennial was served with a petition in a matter styled *Adams, etal. v. Centennial Pipeline Company LLC, et al*.  This matter involves approximately 2,000plaintiffs who allege that over 200

 

11

----

 

defendants, including Centennial, generated, transported, and/ordisposed of hazardous and toxic waste at two sites in Bayou Sorrell, Louisiana,an underground injection well and a landfill. The plaintiffs allege personal injuries, allergies, birth defects,cancer and death.  The undergroundinjection well has been in operation since May 1976.  Based upon current information, Centennial appears to be a *de minimis*contributor, having used the disposal site during the two month time period ofDecember 2001 to January 2002. Marathon has been handling this matter for Centennial under itsoperating agreement with Centennial.  Wehave a 50% ownership interest in Centennial. Based upon Centennial’s limited involvement with the disposal site, wedo not believe that the outcome of this matter will have a material adverseeffect on our financial position, results of operations or cash flows.

 

OnDecember 16, 2003, Centennial, the Company, the Parent Partnership andother Parent Partnership entities were named as defendants in a lawsuit in the128th District Court of Orange County, Texas, styled *Elwood Karr et al. v. CentennialPipeline, LLC et al*.  In thiscase, the plaintiffs contend that our pipeline leaked toxic substances on theirproperty, causing them property damage. We have filed an answer to the plaintiffs’ petition, denying theallegations and are defending ourselves vigorously against this lawsuit.  This case is covered by insurance.  We do not believe that the outcome of thislawsuit will have a material adverse effect on our financial position, resultsof operations or cash flows.

 

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

 

Our operations aresubject to federal, state and local laws and regulations governing thedischarge of materials into the environment. Failure to comply with these lawsand regulations may result in the assessment of administrative, civil andcriminal penalties, imposition of injunctions delaying or prohibiting certainactivities and the need to perform investigatory and remedial activities.  Although we believe our operations are inmaterial compliance with applicable environmental laws and regulations, risksof significant costs and liabilities are inherent in pipeline operations, andwe cannot assure you that significant costs and liabilities will not beincurred. Moreover, it is possible that other developments, such asincreasingly strict environmental laws and regulations and enforcement policiesthereunder, and claims for damages to property or persons resulting from ouroperations, could result in substantial costs and liabilities to us.  We believe that changes in environmentallaws and regulations will not have a material adverse effect on our financialposition, results of operations or cash flows in the near term.

 

On March 26,2004, an initial decision in *ARCO Products Co., et al. v. SFPP*, DocketOR96-2-000, et al. was issued by the FERC, which made several significantdeterminations with respect to finding “changed circumstances” under the EnergyPolicy Act of 1992 (“EP Act”).  Thedecision lists factors that will be considered by the FERC, which includeshowing a substantial change in economic circumstances, the time factor thatwill be reviewed, what will be considered the basis of the rate and apipeline’s documentary requirements. 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 that a limited number of rate elementswill significantly affect the economic basis for a pipeline company’srates.  The elements identified in thedecision are volume changes, allowed total return and total cost of service(including major cost elements of rate base such as tax rates and taxallowances, among others).  The FERC didreject, however, the use of changes in tax rate and income tax allowances asstandalone factors.  The FERC furtherfound that if a complainant can show that a pipeline’s volumes and overall costof service collectively reflect a significant increase in net earnings betweenthe establishment of the challenged rate pre-1992 and the time of thecomplaint, based primarily on the combined impact of changes in volumes andchanges in overall cost of service, the complainant has met its burden relativeto establishing “changed circumstances.” It appears likely that the decision will be appealed.  We have not yet determined the impact, ifany, that the decision could have on our rates if they were reviewed under thecriteria of this decision.

 

12

----

 

On July 20,2004, the United States Court of Appeals for the District of Columbia Circuitissued a decision in *BP West Coast Products, LLC v. Federal EnergyRegulatory Commission and United States of America*, which reviewedthe decisions that the FERC issued in Opinion Nos. 435, 435-A, 435-B andClarification and Rehearing Order.  Inthese opinions, the FERC considered the tariffs of SFPP, L.P. (“SFPP”) andcomplaints and other filings by shipper customers of SFPP.  The Court determined, in part, that SFPP, apublicly traded limited partnership, is not allowed to include income taxallowance in its cost-of-service analysis in the determination of just andreasonable rates that were not grandfathered under the EP Act.  With respect to SFPP’s grandfathered rates,the Court remanded to the FERC for further review, in light of the Court’sholding on income tax allowance, of the FERC’s determination that changes inthe FERC’s tax allowance policy do not constitute “substantially changedcircumstances” under the EP Act.  TheCourt’s decision on income tax allowance does not affect our current rates andrate structure because our rates are not based on the cost-of-servicemethodology.  However, the Court’sdecision might 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 against a shipper complaint.

 

In 1994, the Louisiana Department of Environmental Quality (“LDEQ”)issued a compliance order for environmental contamination at our Arcadia,Louisiana, facility.  In 1999, ourArcadia facility and adjacent terminals were directed by the RemediationServices Division of the LDEQ to pursue remediation of this contamination.  At June 30, 2004, we have an accrued liability of $0.3million for remediation costs at our Arcadia facility.  Effective in March 2004, we executed anaccess agreement with an adjacent industrial landowner who is locatedupgradient of the Arcadia facility. This agreement enables the landowner to proceed with remediationactivities at our Arcadia facility for which it has accepted sharedresponsibility.  We do not expect thatthe completion of the remediation program proposed to the LDEQ will have afuture material adverse effect on our financial position, results of operationsor cash flows.

 

On March 17, 2003, we experienced a release of 511 barrels of jetfuel from a storage tank at our Blue Island terminal located in Cook County,Illinois.  As a result of the release,we have entered into an Agreed Order with the State of Illinois.  We are complying with the Agreed Order andare in the process of negotiating a final settlement with the State ofIllinois.  We do not expect thatcompliance with the Agreed Order or the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

At June 30,2004, we have an accrued liability of $2.0 million related to various sitesrequiring environmental remediation activities.  We do not expect that the completion of remediation programsassociated with these activities will have a future material adverse effect onour financial position, results of operations or cash flows.

 

We regularlyreview our long-lived assets for impairment in accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  At June 30, 2004, we have identifiedcertain assets that we are assessing for recoverability resulting from recentoperational changes.  We are continuingto monitor these circumstances surrounding the assets; however, we do not believethat the resolution of the matter will have a material effect on our financialcondition, results of operations or cash flows.

 

Centennial enteredinto credit facilities totaling $150.0 million and, as of June 30, 2004,$150.0 million was outstanding under those credit facilities.  The proceeds were used to fund constructionand conversion costs of Centennial’s pipeline system.  We and Marathon have each guaranteed one half of Centennial’sdebt, up to a maximum amount of $75.0 million each.

 

13

----

 

**Item2.  Management’s Discussion and Analys****is of Financial Condition and Results of Operations**

 

**General**

 

You should readthe following review of our financial position and results of operations inconjunction with our Consolidated Financial Statements and the notesthereto.  Material period-to-periodvariances in the consolidated statements of income are discussed under “Resultsof Operations.”  The “FinancialCondition and Liquidity” section analyzes our cash flows and financialposition.  “Other Considerations”addresses trends, future plans and contingencies that are reasonably likely tomaterially affect our future liquidity or earnings.  The Consolidated Financial Statements should be read inconjunction with the financial statements and related notes, together with ourdiscussion and analysis of financial position and results of operationsincluded in our Annual Report on Form 10-K for the year ended December 31,2003.

 

**Critical Accounting Policies andEstimates**

 

A summary of thesignificant accounting policies we have adopted and followed in the preparationof our consolidated financial statements is detailed in our consolidatedfinancial statements for the year ended December 31, 2003, included in ourAnnual Report on Form 10-K. Certain of these accounting policies requirethe use of estimates.  The followingestimates, in our opinion, are subjective in nature, require the exercise ofjudgment and involve complex analysis: revenue and expense accruals, includingaccruals for power costs, property taxes, environmental costs and property,plant and equipment.  These estimatesare based on our knowledge and understanding of current conditions and actionswe may take in the future.  Changes inthese estimates will occur as a result of the passage of time and theoccurrence of future events.  Subsequentchanges in these estimates may have a significant impact on our financialcondition and results of operations.

 

**Management Overview of the Six Months EndedJune 30, 2004**

 

We reported net income of $24.1 million forthe six months ended June 30, 2004, compared with net income of $29.3 millionfor the six months ended June 30, 2003, and $6.9 million for the three monthsended June 30, 2004, compared with net income of $8.8 million for the threemonths ended June 30, 2003.  Our resultsfor the three months and six months ended June 30, 2004, were impacted byhigher pipeline integrity costs of $2.6 million and $8.0 million, respectively,which essentially offset increased revenues from both our refined products and propanebusinesses.  We anticipate that ourpipeline integrity costs for 2004 will be approximately $3.0 million to $5.0million higher than our 2003 costs as we continue to perform pipelinemaintenance under our integrity management program.

 

We are focused onopportunities, challenges and risks that are inherent in our business.  These include the safe, reliable andefficient operation of the pipelines and facilities that we own or operatewhile meeting increased regulations that govern the operation of our assets andthe costs associated with such regulations. We are also focused on our continued growth through expansion of theassets that we own and through acquisition of assets that complement ourcurrent operations.  We remain confidentthat our current strategy and focus will provide continued growth in earningsand cash distributions.  These growthopportunities include continued development of refined products and propanemarket opportunities, including pipeline and terminal expansions.

 

We are continuing to pursue a plan to makesystem changes to allow for bi-directional flow and deliveries into theShreveport, Louisiana market area.  Wehave completed feasibility studies and are in discussions with potentialcustomers regarding the transportation of volumes through the pipeline systemin this area.  Engineering design workis currently under way to reverse the flow of the pipeline segment fromShreveport to El Dorado, Arkansas.  Theproject is scheduled to be completed by the end of 2004.

 

We are planning to build a new refinedproducts truck loading terminal in Bossier City, Louisiana.  The facility will include six storage tanksand a fully automated two-bay truck loading rack.  The terminal will expand delivery capacity of refined products tothe Northwest Louisiana and East Texas markets by more than 20,000 barrels perday.  The facility will increase thedelivery of branded and unbranded premium and regular gasoline, as

14

----

 

well as low-sulfur dieselfuels, which will meet the different product specifications of both marketareas.  The project is scheduled to becompleted in the first quarter of 2005.

 

We have begun a Phase II project to furtherexpand our delivery capacity of liquefied petroleum gases (“LPGs”) to theNortheast by 8,000 to 10,000 barrels per day. In 2003, we increased the delivery capability between Todhunter, Ohio,and Coshocton, Ohio, by 8,000 to 10,000 barrels per day and increased storageand improved loading capability at Oneonta, New York.  The Phase II expansion includes the construction of three pumpstations between Coshocton and Greensburg, Pennsylvania, and two stations fromGreensburg to Watkins Glen, New York. Additional work on the pipeline segment between Greensburg andPhiladelphia, Pennsylvania, will increase delivery rates to the Philadelphiaarea.  Improvements will also be made atour Dubois, Pennsylvania, and Eagle, Pennsylvania, terminals.  The project is scheduled to be completed inthe fourth quarter of 2004.

 

**Our Business**

 

TE ProductsPipeline Company, Limited Partnership, a Delaware limited partnership, wasformed in March 1990.  TEPPCOPartners, L.P. (“Parent Partnership”) owns a 99.999% interest in us as the solelimited partner.  TEPPCO GP, Inc.(“TEPPCO GP” or “General Partner”), a subsidiary of the Parent Partnership,holds a 0.001% General Partner interest in us. Texas Eastern Products Pipeline Company, LLC (the “Company”), a Delawarelimited liability company, serves as the general partner of our ParentPartnership.  The Company is a whollyowned subsidiary of Duke Energy Field Services, LLC (“DEFS”), a joint venturebetween Duke Energy Corporation (“Duke Energy”) and ConocoPhillips.  Duke Energy holds an interest ofapproximately 70% in DEFS, and ConocoPhillips holds the remaining interest ofapproximately 30%.  TEPPCO GP, asgeneral partner, performs all of our management and operating functionsrequired in accordance with the Agreement of Limited Partnership of TE ProductsPipeline Company, Limited Partnership. We reimburse our General Partner and the Company for all reasonabledirect and indirect expenses that they incur in managing us.

 

We operate andreport in one business segment: transportation and storage of refined products, LPGs and petrochemicals.  Revenues are earned from transportation andstorage of refined products and LPGs, intrastate transportation ofpetrochemicals, sales of product inventory and other ancillary services.  Our two largest operating expense items arelabor and electric power.  We generallyrealize higher revenues during the first and fourth quarters of each year asour operations are somewhat seasonal. Refined products volumes are generally higher during the second andthird quarters because of greater demand for gasolines during the spring andsummer driving seasons. LPGs volumes are generally higher fromNovember through March due to higher demand in the Northeast forpropane, a major fuel for residential heating. Our results also include our equity investments in Centennial PipelineLLC (“Centennial”) and Mont Belvieu Storage Partners, L.P. (“MB Storage”) (seeNote 5.  Equity Investments).

 

We are one ofthree operating subsidiaries of our Parent Partnership.  Our Parent Partnership is managed by itsgeneral partner, the Company, which has approximately 1,000 employees dedicatedto the operations and management of the operating subsidiaries.  Our Parent Partnership allocates operating,general and administrative expenses to us for legal, insurance, financial,communication and other administrative services based upon the estimated levelof effort devoted to our various operations. We believe that the method for allocating corporate operating, generaland administrative expenses to us is reasonable.

 

15

----

 

**Results of Operations**

 

The following tablepresents volumes delivered and average tariff per barrel for the three monthsand six months ended June 30, 2004 and 2003 (in thousands, except tariffinformation):

 
|                             |   | **Three Months  Ended  June 30,** |   | **Percentage  Increase** |   | **Six Months  Ended  June 30,** |   | **Percentage  Increase** |   |
|----------------------------------|--------|----------------------------------------|--------|--------------------------|--------|--------------------------------------|--------|--------------------------|--------|
|                             |   | **2004**                               |   | **2003**                 |   | **(Decrease)**                       |   | **2004**                 |   | **2003** |   | **(Decrease)** |   |
|                             |   |                                   |   |                     |   |                                 |   |                     |   |   |   |   |   |
| **Volumes Delivered**            |   |                                   |   |                     |   |                                 |   |                     |   |   |   |   |   |
| Refined products                 |   | 41,936                                 |   | 42,256                   |   | (1)%                                 |   | 74,458                   |   | 72,488 |   | 3% |   |
| LPGs                             |   | 8,794                                  |   | 6,832                    |   | 29%                                  |   | 22,002                   |   | 20,532 |   | 7% |   |
| Total                            |   | 50,730                                 |   | 49,088                   |   | 3%                                   |   | 96,460                   |   | 93,020 |   | 4% |   |
|                             |   |                                   |   |                     |   |                                 |   |                     |   |   |   |   |   |
| **Average Tariff per  Barrel**   |   |                                   |   |                     |   |                                 |   |                     |   |   |   |   |   |
| Refined products                 |   | $                                      | 0.93   |                     | $      | 0.89                                 |   | 5%                       |   | $ | 0.94 |   | $ | 0.89 |   | 6% |   |
| LPGs                             |   | 1.56                                   |   | 1.96                     |   | (20)%                                |   | 1.93                     |   | 2.15 |   | (10)% |   |
| Average system tariff per barrel |   | $                                      | 1.04   |                     | $      | 1.04                                 |   | —                   |   | $ | 1.17 |   | $ | 1.17 |   | — |   |

 

*ThreeMonths Ended June 30, 2004 Compared with Three Months Ended June 30,2003*

 

We reported netincome of $6.9 million for the three months ended June 30, 2004, comparedwith net income of $8.8 million for the three months ended June 30,2003.  Net income decreased $1.9 millionprimarily due to an increase of $4.5 million in costs and expenses and adecrease of $0.6 million in equity earnings, partially offset by an increase of$2.4 million in operating revenues, a decrease of $0.7 million in interestexpense – net and an increase of $0.1 million in other income – net.  We discuss the factors influencing ouroperating performance below.

 

Revenues fromrefined products transportation increased $1.1 million for the three monthsended June 30, 2004, compared with the three months ended June 30,2003, primarily due to an increase in distillate volumes transported as aresult of a strong trucking market.  Forthe three months ended June 30, 2004, the refined products average tariffincreased 5% from the prior year period primarily due to higher market-basedtariff rates which went into effect in July 2003, and decreased short-hauldeliveries of product received into our system from Centennial at CrealSprings, Illinois.  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 pipeline capacity, our previouslyconstrained system has expanded deliveries in markets both south and north ofCreal Springs.  In February 2003,we entered into a lease agreement with Centennial that increased ourflexibility to deliver refined products to our market areas.  During the three months ended June 30,2004, overall refined product volumes transported decreased primarily due tolower short-haul volumes received into our system from Centennial, partiallyoffset by increased demand and market share for products supplied from the U.S.Gulf Coast into Midwest markets.

 

Revenues from LPGstransportation increased $0.4 million for the three months ended June 30,2004, compared with the three months ended June 30, 2003, primarily due tohigher deliveries of isobutane to Chicago area refineries and increasedshort-haul propane deliveries to Gulf Coast petrochemical customers, partiallyoffset by lower deliveries of propane in the upper Midwest and Northeast marketareas attributable to the impact of high propane prices and low inventories atMont Belvieu during the second quarter of 2004.  The LPGs average rate per barrel decreased 20% from the prioryear period primarily as a result of increased short-haul deliveries during thethree months ended June 30, 2004.

 

Other operatingrevenues increased $0.9 million for the three months ended June 30, 2004,compared with the three months ended June 30, 2003, primarily due tohigher margins on product inventory sales, higher refined products tenderdeduction fees and higher propane deliveries at our Providence, Rhode Islandimport facility.  These increases werepartially offset by lower revenues from product exchanges, which are used toposition product in the Midwest market area.

 

16

----

 

Costs and expensesincreased $4.5 million for the three months ended June 30, 2004, comparedwith the three months ended June 30, 2003.  The increase was made up of a $2.9 million increase in operating,general and administrative expenses, a $2.1 million increase in depreciationand amortization expense and a $0.1 million increase in taxes – other thanincome taxes, partially offset by a $0.6 million decrease in operating fuel andpower.  Operating, general andadministrative expenses increased primarily due to a $2.6 million increase inpipeline integrity management expenses associated with our integrity managementprogram, a $0.8 million increase in rental expense from the Centennial pipelinecapacity lease agreement that we entered into in February 2003, and anincrease in consulting and contract services primarily related to compliancewith the Sarbanes-Oxley Act of 2002. These increases were partially offset by lower labor costs and decreasedgeneral and administrative supplies expense, and lower expenses in the 2004period associated with the write-off of receivables related to customerbankruptcies and other customer non-payments in 2003.  Depreciation expense increased from the prior year period becauseof assets placed in service during 2003, partially offset by an increase in theestimated remaining life of a section of our pipeline system in theNortheast, as a result of pipeline improvements made as part of our integritymanagement program.  Taxes – other thanincome taxes increased as a result of higher property balances.  Operating fuel and power expense decreasedprimarily as a result of a more efficient use of our transportation assets,partially offset by increased mainline throughput.

 

Net losses fromequity investments increased $0.6 million for the three months endedJune 30, 2004, compared with the three months ended June 30, 2003, asshown below (in thousands):

 
|                           |   | **Three  Months Ended  June 30,** |   | **Increase  (Decrease)** |   |
|--------------------------------|--------|----------------------------------------|--------|--------------------------|--------|
|                           |   | **2004**                               |   | **2003**                 |   |
|                           |   |                                   |   |                     |   |   |   |
| Centennial                     |   | $                                      | (2,286 | )                        | $      | (1,827 | ) | $ | (459 | ) |
| MB Storage                     |   | 1,785                                  |   | 1,899                    |   | (114 | ) |
| Other                          |   | (8                                     | )      | (8                       | )      | — |   |
| Total equity earnings (losses) |   | $                                      | (509   | )                        | $      | 64 |   | $ | (573 | ) |

 

Equity losses inCentennial increased primarily due to higher operating expenses, partiallyoffset by an increase in transportation volumes on Centennial.  Equity earnings from our 50% ownershipinterest in MB Storage decreased $0.1 million for the three months endedJune 30, 2004, compared with the three months ended June 30,2003.  In April 2004, MB Storageacquired storage assets and contracts for $33.5 million, of which wecontributed $16.5 million.  The decreasein equity earnings was due to increased amortization and depreciation expenseon the acquired storage assets and contracts, partially offset by increasedstorage revenue, shuttle revenue and rental revenue primarily from the acquiredcontracts and lower pipeline rehabilitation expenses on the MB Storage system.

 

Interest expensedecreased $0.5 million for the three months ended June 30, 2004, comparedwith the three months ended June 30, 2003, primarily due to lowerallocations of interest expense from the Parent Partnership, partially offsetby higher debt balances The Parent Partnership had lower interest expenseprimarily due to a higher percentage of variable interest rate debt during thethree months ended June 30, 2004, that carried a lower rate of interest ascompared to fixed interest rate debt. The higher percentage of variable interest rate debt resulted from theexpiration of an interest rate swap in April 2004.  Interest capitalized increased $0.2 millionfor the three months ended June 30, 2004, compared with the three monthsended June 30, 2003, as a result of increased balances of constructionwork-in-progress.

 

Other income – netincreased $0.1 million for the three months ended June 30, 2004, comparedwith the three months ended June 30, 2003, primarily due to higherinterest income earned on cash investments.

 

17

----

 

*Six Months Ended June 30, 2004Compared with Six Months Ended June 30, 2003*

 

We reported netincome of $24.1 million for the six months ended June 30, 2004, comparedwith net income of $29.3 million for the six months ended June 30,2003.  Net income decreased $5.2 millionprimarily due to an increase of $14.7 million in costs and expenses and adecrease of $0.6 million in equity earnings, partially offset by an increase of$9.1 million in operating revenues, a decrease of $0.6 million in interestexpense – net and an increase of $0.4 million in other income – net.  We discuss the factors influencing ouroperating performance below.

 

Revenues fromrefined products transportation increased $5.2 million for the six months endedJune 30, 2004, compared with the six months ended June 30, 2003, dueto an overall increase of 3% in the refined products volumes delivered,primarily due to increases in motor fuel and distillate volumes transported asa result of a strong trucking market. These increases were primarily due to deliveries of products receivedinto our pipeline from Centennial at Creal Springs, Illinois.  Centennial has provided our system withadditional pipeline capacity for products originating in the U.S. Gulf Coastarea.  Prior to the construction ofCentennial, deliveries on our pipeline system were limited by our pipelinecapacity, and transportation services for our customers were allocated inaccordance with a proration policy. With this incremental pipeline capacity, our previously constrainedsystem has expanded deliveries in markets both south and north of CrealSprings.  In February 2003, weentered into a lease agreement with Centennial that increased our flexibilityto deliver refined products to our market areas.  Volume increases were due to increased demand and market sharefor products supplied from the U.S. Gulf Coast into Midwest markets.  The refined products average rate per barrelincreased 6% from the prior year period primarily due to higher market-basedtariff rates which went into effect in July 2003, partially offset by theimpact of the Midwest origin point for barrels received from Centennial, whichresulted in decreased short-haul barrels transported on our system.

 

Revenues from LPGstransportation decreased $1.7 million for the six months ended June 30,2004, compared with the six months ended June 30, 2003, primarily due tolower deliveries of propane in the upper Midwest and Northeast market areasattributable to warmer weather during the first three months of 2004.  Additionally, in late February 2004,the Mont Belvieu propane price spiked, which resulted in our sourced propanebeing less competitive than propane from other source points.  This decrease was partially offset byincreased deliveries of isobutane to Chicago area refineries and increasedshort-haul propane deliveries to Gulf Coast petrochemical customers.  The LPGs average rate per barrel decreased10% from the prior year period primarily as a result of increased short-hauldeliveries during the six months ended June 30, 2004.

 

Other operatingrevenues increased $5.6 million for the six months ended June 30, 2004,compared with the six months ended June 30, 2003, primarily due to higherpropane inventory fees, higher refined products tender deduction fees, highermargins on product inventory sales and higher propane deliveries at ourProvidence, Rhode Island import facility.

 

Costs and expensesincreased $14.7 million for the six months ended June 30, 2004, comparedwith the six months ended June 30, 2003. The increase was made up of an $11.4 million increase in operating,general and administrative expenses, a $3.7 million increase in depreciationand amortization expense and a $0.3 million increase in taxes – other thanincome taxes, partially offset by a $0.7 million decrease in operating fuel andpower.  Operating, general andadministrative expenses increased primarily due to an $8.0 million increase inpipeline integrity management expenses associated with our integrity managementprogram, a $1.7 million increase in rental expense from the Centennial pipelinecapacity lease agreement that we entered into in February 2003, a $2.1million increase in consulting and contract services primarily related tocompliance with the Sarbanes-Oxley Act of 2002 and acquisition relatedactivities, and a $0.4 million increase in environmental assessment andremediation activities, partially offset by lower labor costs and decreasedgeneral and administrative supplies expense, and lower expenses in the 2004period associated with the write-off of receivables related to customerbankruptcies and other customer non-payments in 2003.  Depreciation expense increased from the prior year period becauseof assets placed in service during 2003, partially offset by an increase in theestimated remaining life of a section of our pipeline system in theNortheast, as a result of pipeline improvements made as part of our integritymanagement program.  Taxes – other thanincome taxes increased as a result of higher property balances.  Operating

 

18

----

 

fuel and power expense decreased primarily as a result of a moreefficient use of our transportation assets, partially offset by increasedmainline throughput.

 

Net losses fromequity investments increased $0.6 million for the six months endedJune 30, 2004, compared with the six months ended June 30, 2003, asshown below (in thousands):

 
|                |   | **Six Months  Ended  June 30,** |   | **Increase  (Decrease)** |   |
|---------------------|--------|--------------------------------------|--------|--------------------------|--------|
|                |   | **2004**                             |   | **2003**                 |   |   |
|                |   |                                 |   |                     |   |   |   |
| Centennial          |   | $                                    | (6,143 | )                        | $      | (5,005 | ) | $ | (1,138 | ) |
| MB Storage          |   | 4,414                                |   | 3,844                    |   | 570 |   |
| Other               |   | (18                                  | )      | (34                      | )      | 16 |   |
| Total equity losses |   | $                                    | (1,747 | )                        | $      | (1,195 | ) | $ | (552 | ) |

 

Equity losses inCentennial increased primarily due to the acquisition of an additional 16.7%interest in Centennial on February 10, 2003, bringing our ownershipinterest to 50%, and higher operating expenses, partially offset by an increasein transportation volumes on Centennial. Equity earnings from our 50% ownership interest in MB Storage increased$0.6 million for the six months ended June 30, 2004, compared with the sixmonths ended June 30, 2003.  InApril 2004, MB Storage acquired storage assets and contracts for $33.5million, of which we contributed $16.5 million.  The increase in equity earnings is due to increased storagerevenue, shuttle revenue and rental revenue primarily from the acquiredcontracts and lower pipeline rehabilitation expenses on the MB Storage system,partially offset by increased amortization and depreciation expense on storageassets and contracts acquired.

 

Interest expensedecreased $0.2 million for the six months ended June 30, 2004, comparedwith the six months ended June 30, 2003, primarily due to lowerallocations of interest expense from the Parent Partnership, partially offsetby higher debt balances.  The ParentPartnership had lower interest expense primarily due to a higher percentage ofvariable interest rate debt during the three months ended June 30, 2004,that carried a lower rate of interest as compared to fixed interest ratedebt.  The higher percentage of variableinterest rate debt resulted from the expiration of an interest rate swap inApril 2004.  Interest capitalizedincreased $0.4 million for the six months ended June 30, 2004, comparedwith the six months ended June 30, 2003, as a result of increased balancesof construction work-in-progress.

 

Other income – netincreased $0.4 million for the six months ended June 30, 2004, comparedwith the six months ended June 30, 2003, primarily due to higher interestincome earned on cash investments.

 

**Financial Condition and Liquidity**

 

Cash flows for the six months ended June 30, 2004 and 2003, wereas follows (in thousands):

 
|                        |   | **Six Months  Ended  June 30,** |   |
|-----------------------------|--------|--------------------------------------|--------|
|                        |   | **2004**                             |   | **2003** |   |
|                        |   |                                 |   |   |   |
| Cash provided by (used in): |   |                                 |   |   |   |
| Operating activities        |   | $                                    | 68,273 |   | $ | 62,741 |   |
| Investing activities        |   | (45,330                              | )      | (46,053 | ) |
| Financing  activities       |   | (23,131                              | )      | (12,448 | ) |
|                             |        |                                      |        |  |  |  |  |

 

19

----

 

 

*OperatingActivities*

 

Net cash fromoperating activities for the six months ended June 30, 2004 and 2003, wascomprised of the following (in thousands):

 
|                                   |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------|--------|--------------------------------------|--------|
|                                   |   | **2004**                             |   | **2003** |   |
|                                   |   |                                 |   |   |   |
| Net income                             |   | $                                    | 24,113 |   | $ | 29,340 |   |
| Depreciation and amortization          |   | 17,636                               |   | 13,937 |   |
| Losses in equity investments           |   | 1,747                                |   | 1,195 |   |
| Distributions from equity investments  |   | 4,950                                |   | — |   |
| Non-cash portion of interest expense   |   | 15                                   |   | 16 |   |
| Cash used in working capital and other |   | 19,812                               |   | 18,253 |   |
| Net cash from  operating activities    |   | $                                    | 68,273 |   | $ | 62,741 |   |

 

Cash provided byoperating activities increased $5.5 million for the six months endedJune 30, 2004, compared with the six months ended June 30, 2003,primarily due to distributions received from MB Storage and the timing ofpayments for working capital components during the six months ended June 30,2004.

 

We believe that wewill continue to have adequate liquidity to fund future recurring operating andinvesting activities.  Our primary cashrequirements consist of normal operating expenses, capital expenditures to sustainexisting operations and revenue generating expenditures, interest payments onour Senior Notes and on borrowings under our Parent Partnership’s creditfacilities and distributions to our Parent Partnership.  Short-term cash requirements, such asoperating expenses, capital expenditures to sustain existing operations andquarterly distributions to our Parent Partnership, are expected to be fundedthrough operating cash flows.  Long-term cash requirements for expansionprojects are expected to be funded by several sources, including cash flowsfrom operating activities, borrowings under our Parent Partnership’s creditfacilities and the issuance by our Parent Partnership of additional equity anddebt securities.  The timing of any debtor offerings by our Parent Partnership will depend on various factors,including prevailing market conditions, interest rates and our ParentPartnership’s financial condition and credit rating at the time.

 

At June 30,2004, and December 31, 2003, we had working capital deficits of $39.6million and $12.3 million, respectively. Cash generated from operations and from our Parent Partnership’s creditfacilities and debt and equity offerings are our primary sources ofliquidity.  Working capital deficits canoccur primarily due to the timing of operating cash receipts from customers,payment of cash distributions and the payment of normal operating expenses andcapital expenditures.  We are a whollyowned subsidiary of the Parent Partnership. We expect that our Parent Partnership will make capital contributions,loans or otherwise provide liquidity to us as needed, but the ParentPartnership has no contractual obligation to do so.  We anticipate that the Parent Partnership will provide thenecessary liquidity to protect its investment in us.  At June 30, 2004, our Parent Partnership had $290.0 millionin available borrowing capacity under its revolving credit facility to coverany working capital needs, and expects that cash flows from operatingactivities, the sale of additional debt or equity offerings will providenecessary liquidity to us.

 

*InvestingActivities*

 

Cash flows used ininvesting activities totaled $45.3 million for the six months endedJune 30, 2004, and were comprised of $24.6 million of capitalexpenditures, $17.2 million of cash contributions for our ownership interest inMB Storage, $2.0 million for the acquisition of assets and $1.5 million of cashcontributions for our ownership interest in Centennial.  Cash flows used in investing activities totaled$46.1 million for the six months ended June 30, 2003, and were comprisedof $25.1 million of capital expenditures, $20.0 million for our acquisition ofthe additional interest in Centennial on February 10, 2003, and $1.0million of cash contributions for our ownership interest in Centennial.

 

20

----

 

*FinancingActivities*

 

Cash flows used infinancing activities totaled $23.1 million for the six months endedJune 30, 2004, and were comprised of $58.6 million of distributions paidto our Parent Partnership and $34.6 million of repayments on our term loan,partially offset by $70.1 million of proceeds for our term loan.  Cash flows used in financing activitiestotaled $12.4 million for the six months ended June 30, 2003, and werecomprised of $51.2 million of distributions paid to our Parent Partnership and$20.5 million of repayments on our term loan, partially offset by $57.4 millionof proceeds for our term loan and $1.9 million in contributions from our ParentPartnership.

 

Centennial entered intocredit facilities totaling $150.0 million and, as of June 30, 2004, $150.0million was outstanding under those credit facilities.  The proceeds were used to fund constructionand conversion costs of Centennial’s pipeline system.  We and Marathon Ashland Petroleum LLC have each guaranteed onehalf of Centennial’s debt, up to a maximum of $75.0 million each.

 

*ParentPartnership Credit Facilities*

 

We currentlyutilize debt financing available from our Parent Partnership throughintercompany notes. The terms of the intercompany notes generally match theprincipal and interest payment dates under the Parent Partnership’s creditagreements.  The interest rates chargedby the Parent Partnership include the stated interest rate of the ParentPartnership, plus a premium to cover debt issuance costs.  The interest rate is also decreased orincreased to cover gains and losses, respectively, on any interest rate swapsthat the Parent Partnership may have in place on its respective creditagreements.  These credit facilities ofthe Parent Partnership are described below.

 

On April 6,2001, our Parent Partnership entered into a $500.0 million revolving creditfacility including the issuance of letters of credit of up to $20.0 million(“Three Year Facility”).  The interest ratewas based, at our Parent Partnership’s option, on either the lender’s base rateplus a spread, or LIBOR plus a spread in effect at the time of theborrowings.  The credit agreement forthe Three Year Facility contained certain restrictive financial covenantratios.  During the first quarter of2003, our Parent Partnership repaid $182.0 million of the outstanding balanceof the Three Year Facility with proceeds from the issuance of its 6.125% SeniorNotes on January 30, 2003.  OnJune 27, 2003, our Parent Partnership repaid the outstanding balance underthe Three Year Facility with borrowings under a new credit facility andcanceled the Three Year Facility.

 

On June 27,2003, our Parent Partnership entered into a $550.0 million revolving creditfacility with a three year term, including the issuance of letters of credit ofup to $20.0 million (“Revolving Credit Facility”).  The interest rate is based, at our Parent Partnership’s option,on either the lender’s base rate plus a spread, or LIBOR plus a spread ineffect at the time of the borrowings. The credit agreement for the Revolving Credit Facility contains certainrestrictive financial covenant ratios. Our Parent Partnership borrowed $263.0 million under the RevolvingCredit Facility and repaid the outstanding balance of the Three YearFacility.  At June 30, 2004, $260.0million was outstanding under the Revolving Credit Facility.

 

OnJanuary 30, 2003, our Parent Partnership issued $200.0 million principalamount of 6.125% Senior Notes due 2013. The 6.125% Senior Notes were issued at a discount of $1.4 million andare being accreted to their face value over the term of the notes.  The Parent Partnership used $182.0 millionof the proceeds from the offering to reduce the outstanding principal on theThree Year Facility to $250.0 million. The balance of the net proceeds received was used for general ParentPartnership purposes.  The Senior Notesmay be redeemed at any time at our Parent Partnership’s option with the paymentof accrued interest and a make-whole premium determined by discountingremaining interest and principal payments using a discount rate equal to therate of the United States Treasury securities of comparable remaining maturityplus 35 basis points.  The indenturegoverning the 6.125% 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 the Parent Partnership’s abilityto incur additional indebtedness.

 

As of June 30, 2004,and December 31, 2003, we had an intercompany note payable to our ParentPartnership of $246.8 million and $211.3 million, respectively, whichrepresented borrowings under the Parent

 

21

----

 

Partnership’s RevolvingCredit Facility, 7.625% Senior Notes and 6.125% Senior Notes. The weightedaverage interest rate on the note payable to the Parent Partnership atJune 30, 2004, was 5.2%.  AtJune 30, 2004, accrued interest includes $4.1 million due to the ParentPartnership.  For the six months endedJune 30, 2004 and 2003, interest costs incurred on the note payable to theParent Partnership totaled $6.1 million and $6.0 million, respectively.

 

*CashDistributions*

 

During the six monthsended June 30, 2004 and 2003, we paid cash distributions totaling $58.6million and $51.2 million, respectively, to our Parent Partnership.  On August 6, 2004, we will pay a cashdistribution to our Parent Partnership of $29.7 million for the quarter endedJune 30, 2004.

 

*FutureCapital Needs and Commitments*

 

We estimate thatcapital expenditures, excluding acquisitions, for 2004 will be approximately$78.7 million (which includes $2.0 million of capitalized interest). We expectto spend approximately $54.4 million for revenue generating projects andfacility improvements that will include the expansion of our pipelinesextending from Seymour to Indianapolis, Indiana, further expansions of ourNortheast pipeline system and construction of a new truck loading terminal inBossier City, Louisiana.  We expect tospend approximately $22.3 million of capital costs to sustain existingoperations, including life-cycle replacements for equipment at variousfacilities and pipeline and tank replacements. We continually review and evaluate potential capital improvements andexpansions that would be complementary to our present system.  These expenditures can vary greatlydepending on the magnitude of our transactions.  We may finance capital expenditures through internally generatedfunds, debt, capital contributions from our Parent Partnership or anycombination thereof.

 

Our debt repaymentobligations consist of payments for principal and interest on (i) our $246.8million principal amount due to the Parent Partnership related to our share ofthe Parent Partnership’s Revolving Credit Facility due in June 2006,7.625% Senior Notes due in February 2012 and 6.125% Senior Notes due inFebruary 2013, (ii) our $210.0 million 7.51% Senior Notes due January 15,2028, and (iii) our $180.0 million 6.45% Senior Notes due January 15,2008.

 

We are alsocontingently liable as guarantor for the lesser of one half or $75.0 millionprincipal amount (plus interest) of Centennial’s borrowings.  In January 2003, we entered into apipeline capacity lease agreement with Centennial for a period of five yearsthat contains a minimum throughput requirement.  During the year ended December 31, 2003, and for the sixmonths ended June 30, 2004, we exceeded the minimum throughputrequirements on the lease agreement.  Weare also contingently liable as guarantor for $500.0 million principal amountof 7.625% Senior Notes due 2012 issued in February 2002 and for $200.0million principal amount of 6.125% Senior Notes due 2013 issued inJanuary 2003 by our Parent Partnership.

 

During the sixmonths ended June 30, 2004, we contributed $1.5 million to Centennial tocover operating needs and capital expenditures.  During the six months ended June 30, 2004, we contributed$17.2 million to MB Storage, of which $16.5 million was used to for itsacquisition of storage assets in April 2004.  We may be required to contribute cash to Centennial during theremainder of 2004 to cover capital expenditures, acquisitions or otheroperating needs and to MB Storage to cover significant capital expenditures oradditional acquisitions.

 

*Off-BalanceSheet Arrangements*

 

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

 

22

----

 

*Contractual Obligations*

 

The followingtable summarizes our debt repayment obligations and material contractualcommitments as of June 30, 2004 (in millions):

 
|                             |   | **Amount of  Commitment Expiration Per Period** |   |
|----------------------------------|--------|-------------------------------------------------|--------|
|                             |   | **Total**                                       |   | **Less than  1 Year** |   | **1-3 Years** |   | **3-5 Years** |   | **More than  5 Years** |   |
|                             |   |                                            |   |   |   |   |   |   |   |   |   |
| Note payable, Parent Partnership |   | $                                               | 246.8  |   | $ | — |   | $ | 246.8 |   | $ | — |   | $ | — |   |
| 6.45% Senior Notes due 2008 (1)  |   | 180.0                                           |   | — |   | — |   | 180.0 |   | — |   |
| 7.51% Senior Notes due 2028 (1)  |   | 210.0                                           |   | — |   | — |   | — |   | 210.0 |   |
| Debt subtotal                    |   | 636.8                                           |   | — |   | 246.8 |   | 180.0 |   | 210.0 |   |
|                             |   |                                            |   |   |   |   |   |   |   |   |   |
| Operating leases                 |   | 49.8                                            |   | 11.6 |   | 20.1 |   | 8.5 |   | 9.6 |   |
|                             |   |                                            |   |   |   |   |   |   |   |   |   |
| Total                            |   | $                                               | 686.6  |   | $ | 11.6 |   | $ | 266.9 |   | $ | 188.5 |   | $ | 219.6 |   |

 

----

(1)          We entered into an interest rate swap agreement to hedge our exposure tochanges in the fair value of our 7.51% Senior Notes due 2028.  At June 30, 2004, the 7.51% Senior Notes include anadjustment to decrease the fair value of the debt by $2.9 million related tothis interest rate swap agreement.  At June 30, 2004, our 6.45% Senior Notes include $3.0million of unamortized debt discount. The fair value adjustment and unamortized debt discount are excludedfrom this table.

 

We expect to repay the long-term, senior unsecured obligations and notepayable to our Parent Partnership through the issuance of additional long-termsenior unsecured debt at the time the 2008 and 2028 debts mature, with proceedsfrom the dispositions of assets, cash flows from operations, contributions fromour Parent Partnership or any combination of the above items.

 

*Sources of Future Capital*

 

We expect that ourcash flow from operating activities will be adequate to fund cash distributionsand capital additions necessary to sustain existing operations.  However, expansionary capital projects andacquisitions may require additional capital contributions from our ParentPartnership.  The Parent Partnership hasfunded its capital commitments from operating cash flow, borrowings under bankcredit facilities, the issuance of long term debt in capital markets and thepublic offering of Limited Partner Units. We expect future capital needs will be similarly funded.

 

Our ParentPartnership has filed with the Securities and Exchange Commission a universalshelf registration statement that, subject to effectiveness, agreement on termsat the time of use and appropriate supplementation, allows it to issue, in oneor more offerings, up to an aggregate of $2.0 billion of equity securities,debt securities or a combination thereof. At June 30, 2004, our Parent Partnership has $2.0 billion remainingunder this shelf registration.

 

Our Parent Partnership’ssenior unsecured debt is rated BBB by Standard and Poors (“S&P”) and Baa3by Moody’s Investors Service (“Moody’s”). Our senior unsecured debt is also rated BBB by S&P and Baa3 byMoody’s.  Both ratings are stable.  A rating reflects only the view of a ratingagency and is not a recommendation to buy, sell or hold any indebtedness.  Any rating can be revised upward or downwardor withdrawn at any time by a rating agency if it determines that thecircumstances warrant such a change.

 

**Other Considerations**

 

Our operations aresubject to federal, state and local laws and regulations governing thedischarge of materials into the environment. Failure to comply with these lawsand regulations may result in the assessment of

 

23

----

 

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

 

In 1994, the Louisiana Department of Environmental Quality (“LDEQ”)issued a compliance order for environmental contamination at our Arcadia,Louisiana, facility.  In 1999, ourArcadia facility and adjacent terminals were directed by the RemediationServices Division of the LDEQ to pursue remediation of this contamination.  At June 30, 2004, we have an accrued liability of $0.3million for remediation costs at our Arcadia facility.  Effective in March 2004, we executed anaccess agreement with an adjacent industrial landowner who is locatedupgradient of the Arcadia facility.  Thisagreement enables the landowner to proceed with remediation activities at ourArcadia facility for which it has accepted shared responsibility.  We do not expect that the completion of theremediation program proposed to the LDEQ will have a future material adverseeffect on our financial position, results of operations or cash flows.

 

On March 17, 2003, we experienced a release of 511 barrels of jetfuel from a storage tank at our Blue Island terminal located in Cook County,Illinois.  As a result of the release,we have entered into an Agreed Order with the State of Illinois.  We are complying with the Agreed Order andare in the process of negotiating a final settlement with the State ofIllinois.  We do not expect thatcompliance with the Agreed Order or the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

At June 30,2004, we have an accrued liability of $2.0 million related to various sitesrequiring environmental remediation activities.  We do not expect that the completion of remediation programsassociated with these activities will have a future material adverse effect onour financial position, results of operations or cash flows.

 

We regularlyreview our long-lived assets for impairment in accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  At June 30, 2004, we have identifiedcertain assets that we are assessing for recoverability resulting from recentoperational changes.  We are continuingto monitor these circumstances surrounding the assets; however, we do notbelieve that the resolution of the matter will have a material effect on ourfinancial condition, results of operations or cash flows.

 

*RecentAccounting Pronouncements*

 

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

 

**Forward-LookingStatements**

 

The matters discussedherein include “forward-looking statements” within the meaning of variousprovisions of the Securities Act of 1933 and the Securities Exchange Act of1934.  All statements, other thanstatements of historical facts, included in this document that addressactivities, events or developments that we expect or anticipate will or mayoccur in the future, including such things as estimated future capitalexpenditures (including the amount and nature thereof), business strategy andmeasures to implement strategy, competitive strengths, goals, expansion andgrowth of our business and operations, plans, references to future success,references to intentions as to future matters and other such matters areforward-looking statements.  Thesestatements are based on certain assumptions and analyses made by us in light ofour experience and our perception of historical trends, current conditions andexpected future developments as well as other factors we believe areappropriate under the circumstances. However, whether actual results and developments will conform with ourexpectations and predictions is subject to a number of risks and uncertainties,including general economic, market or business

 

24

----

 

conditions, theopportunities (or lack thereof) that may be presented to and pursued by us,competitive actions by other pipeline companies, changes in laws orregulations, and other factors, many of which are beyond our control.  Consequently, all of the forward-lookingstatements made in this document are qualified by these cautionary statementsand we cannot assure you that actual results or developments that we anticipatewill be realized or, even if substantially realized, that they will have theexpected consequences to or effect on us or our business or operations.  For additional discussion of such risks anduncertainties, see our Annual Report on Form 10-K for the year endedDecember 31, 2003, and other filings we have made with the Securities andExchange Commission.

 

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

We may be exposedto market risk through changes in commodity prices and interest rates.  We do not have foreign exchange risks.  Our Risk Management Committee hasestablished policies to monitor and control these market risks. The RiskManagement Committee is comprised, in part, of senior executives of theCompany.

 

We have utilizedand expect to continue to utilize interest rate swap agreements to hedge aportion of our fair value risks. Interest rate swap agreements are used to manage the fixed interest ratemix of our debt portfolio and overall cost of borrowing.  The interest rate swap related to our fairvalue risk is intended to reduce our exposure to changes in the fair value ofour fixed rate Senior Notes.  Theinterest rate swap agreement involves the periodic exchange of payments withoutthe exchange of the notional amount upon which the payments are based. Therelated amount payable to or receivable from counterparties is included as anadjustment to accrued interest.

 

At June 30,2004, we had outstanding $180.0 million principal amount of 6.45% Senior Notesdue 2008 and $210.0 million principal amount of 7.51% Senior Notes due2028.  At June 30, 2004, theestimated fair values of the 6.45% Senior Notes and 7.51% Senior Notes wereapproximately $185.5 million and $211.7 million, respectively.

 

On October 4,2001, we entered into an interest rate swap agreement to hedge our exposure tochanges in the fair value of our fixed rate 7.51% Senior Notes due 2028. Wedesignated this swap agreement as a fair value hedge.  The swap agreement has a notional amount of $210.0 million andmatures in January 2028 to match the principal and maturity of our 7.51%Senior Notes.  Under the swap agreement,we pay a floating rate of interest based on a three-month U.S. Dollar LIBORrate, plus a spread, and receive a fixed rate of interest of 7.51%. During thesix months ended June 30, 2004 and 2003, we recognized reductions ininterest expense of $5.1 million and $4.9 million, respectively, related to thedifference between the fixed rate and the floating rate of interest on theinterest rate swap.  During the quarterended June 30, 2004, we measured the hedge effectiveness of this interestrate swap and noted that no gain or loss from ineffectiveness was required tobe recognized.  The fair value of thisinterest rate swap was a loss of approximately $2.9 million at June 30,2004, and a gain of approximately $2.3 million at December 31, 2003.  Utilizing the balance of the 7.51% SeniorNotes outstanding at June 30, 2004, and including the effects of hedgingactivities, assuming market interest rates increase 100 basis points, thepotential annual increase in interest expense is $2.1 million.

 

As of June 30, 2004,and December 31, 2003, we had an intercompany note payable to our ParentPartnership of $246.8 million and $211.3 million, respectively, whichrepresented borrowings under the Parent Partnership’s Revolving CreditFacility, 7.625% Senior Notes and 6.125% Senior Notes. The weighted averageinterest rate on the note payable to the Parent Partnership at June 30,2004, was 5.2%.  At June 30, 2004,accrued interest includes $4.1 million due to the Parent Partnership.  For the six months ended June 30, 2004and 2003, interest costs incurred on the note payable to the Parent Partnershiptotaled $6.1 million and $6.0 million, respectively.

 

**Item4.  Controls and Procedures**

** **

The principalexecutive officer and principal financial officer of the Company, afterevaluating the effectiveness of our disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30,2004, have concluded that, as of such date, our disclosure controls andprocedures are adequate and

 

25

----

 

effective to ensure that material information relating to us and ourconsolidated subsidiaries would be made known to them by others within thoseentities.

 

During the secondquarter of 2004, there have been no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, those internal controls subsequent to the date of theevaluation.  As a result, no correctiveactions were required or undertaken.

 

**PART II.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

We have been, in theordinary course of business, a defendant in various lawsuits and a party tovarious other legal proceedings, some of which are covered in whole or in partby insurance.  We believe that the outcomeof 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 legal proceedings in Note 9.  Commitments and Contingencies in the accompanying consolidatedfinancial statements.

 

**Item 6.  Exhibits andReports on Form 8-K****.**

 

(a)                                  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). |

 

26

----

 
| 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+  |   | Duke Energy Corporation Executive Savings Plan  (Filed as Exhibit 10.7 to Form 10-K of TEPPCO Partners, L.P. (Commission File  No. 1-10403) for the year ended December 31, 1999 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                  |
| 10.2+  |   | Duke Energy Corporation Executive Cash Balance Plan  (Filed as Exhibit 10.8 to Form 10-K of TEPPCO Partners, L.P. (Commission File  No. 1-10403) for the year ended December 31, 1999 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                             |
| 10.3+  |   | Duke Energy Corporation Retirement Benefit  Equalization Plan (Filed as Exhibit 10.9 to Form 10-K of TEPPCO Partners,  L.P. (Commission File No. 1-10403) for the year ended December 31, 1999  and incorporated herein by reference).                                                                                                                                                                                                                                                                                                    |
| 10.4+  |   | Texas Eastern Products Pipeline Company 1994 Long  Term Incentive Plan executed on March 8, 1994 (Filed as Exhibit 10.1 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended March 31, 1994 and incorporated herein by reference).                                                                                                                                                                                                                                                            |
| 10.5+  |   | Texas Eastern Products Pipeline Company 1994 Long  Term Incentive Plan, Amendment 1, effective January 16, 1995 (Filed as  Exhibit 10.12 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the quarter ended June 30, 1999 and incorporated herein by  reference).                                                                                                                                                                                                                                            |
| 10.6+  |   | Texas Eastern Products Pipeline Company Non-employee  Directors Unit Accumulation Plan, effective April 1, 1999 (Filed as  Exhibit 10.30 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the quarter ended September 30, 1999 and incorporated  herein by reference).                                                                                                                                                                                                                                       |
| 10.7+  |   | Texas Eastern Products Pipeline Company Non-employee  Directors Deferred Compensation Plan, effective November 1, 1999 (Filed  as Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the quarter ended September 30, 1999 and incorporated  herein by reference).                                                                                                                                                                                                                                |
| 10.8+  |   | Texas Eastern Products Pipeline Company Phantom Unit  Retention Plan, effective August 25, 1999 (Filed as Exhibit 10.32 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended September 30, 1999 and incorporated herein by reference).                                                                                                                                                                                                                                                        |
| 10.9+  |   | Form of Employment Agreement between the Company and  Thomas R. Harper, Charles H. Leonard, James C. Ruth, John N. Goodpasture,  Leonard W. Mallett, Stephen W. Russell, David E. Owen, and Barbara A. Carroll  (Filed as Exhibit 10.20 to Form 10-K of TEPPCO Partners, L.P. (Commission  File No. 1-10403) for the year ended December 31, 1998 and incorporated  herein by reference).                                                                                                                                                 |
| 10.10+ |   | Employment  Agreement with Barry R. Pearl (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended  March 31, 2001 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Services and  Transportation Agreement between TE Products Pipeline Company, Limited  Partnership and Fina Oil and Chemical Company, BASF Corporation and BASF Fina  Petrochemical Limited Partnership, dated February 9, 1999 (Filed as  Exhibit 10.22 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.  1-10403) for the quarter ended March 31, 1999 and incorporated herein by  reference).                                                                                                                            |
| 10.12  |   | Call Option Agreement, dated February 9, 1999  (Filed as Exhibit 10.23 to Form 10-Q of TEPPCO Partners, L.P. (Commission File  No. 1-10403) for the quarter ended March 31, 1999 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                             |

 

27

----

 
| 10.13+ |   | Texas Eastern Products Pipeline Company, LLC 2000  Long Term Incentive Plan, Amendment and Restatement, effective  January 1, 2000 (Filed as Exhibit 10.28 to Form 10-K of TEPPCO Partners,  L.P. (Commission File No. 1-10403) for the year ended December 31, 2000  and incorporated herein by reference).                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14+ |   | TEPPCO Supplemental Benefit Plan, effective April 1,  2000 (Filed as Exhibit 10.29 to Form 10-K of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the year ended December 31, 2000 and  incorporated herein by reference).                                                                                                                                                                                                                                                  |
| 10.15  |   | Contribution, Assignment and Amendment Agreement  among TEPPCO Partners, L.P., TE Products Pipeline Company, Limited  Partnership, TCTM, L.P., Texas Eastern Products Pipeline Company, LLC, and  TEPPCO GP, Inc., dated July 26, 2001 (Filed as Exhibit 3.6 to Form 10-Q  of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended  June 30, 2001 and incorporated herein by reference).                                                                         |
| 10.16  |   | Certificate of Formation of TEPPCO Colorado, LLC  (Filed as Exhibit 3.2 to Form 10-Q of TEPPCO Partners, L.P. (Commission File  No. 1-10403) for the quarter ended March 31, 1998 and incorporated  herein by reference).                                                                                                                                                                                                                                                                  |
| 10.17  |   | Amended and Restated Credit Agreement among TEPPCO  Partners, L.P. as Borrower, SunTrust Bank as Administrative Agent and LC  Issuing Bank, and Certain Lenders, dated as of April 6, 2001  ($500,000,000 Revolving Facility) (Filed as Exhibit 10.31 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended  March 31, 2001 and incorporated herein by reference).                                                                               |
| 10.18  |   | Credit Agreement among TEPPCO Partners, L.P. as  Borrower, SunTrust Bank as Administrative Agent, and Certain Lenders, dated  as of April 6, 2001 ($200,000,000 Revolving Facility) (Filed as Exhibit  10.32 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for  the quarter ended March 31, 2001 and incorporated herein by reference).                                                                                                                         |
| 10.19  |   | Amendment 1, dated as of September 28, 2001, to  the Amended and Restated Credit Agreement among TEPPCO Partners, L.P. as  Borrower, SunTrust Bank as Administrative Agent and LC Issuing Bank, and  Certain Lenders, dated as of April 6, 2001 ($500,000,000 Revolving  Facility) (Filed as Exhibit 10.33 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).                 |
| 10.20  |   | Amendment 1, dated as of September 28, 2001, to  the Credit Agreement among TEPPCO Partners, L.P. as Borrower, SunTrust Bank  as Administrative Agent, and Certain Lenders, dated as of April 6, 2001  ($200,000,000 Revolving Facility) (Filed as Exhibit 10.34 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).                                                           |
| 10.21  |   | Amendment and Restatement, dated as of  November 13, 2001, to the Credit Agreement among TEPPCO Partners, L.P.  as Borrower, SunTrust Bank as Administrative Agent, and Certain Lenders,  dated as of April 6, 2001 ($200,000,000 Revolving Facility) (Filed as  Exhibit 10.35 to Form 10-K of TEPPCO Partners, L.P (Commission File No.  1-10403) for the year ended December 31, 2001 and incorporated herein by  reference).                                                  |
| 10.22  |   | Second Amendment and Restatement, dated as of  November 13, 2001, to the Amended and Restated Credit Agreement amount  TEPPCO Partners, L.P. as Borrower, SunTrust Bank as Administrative Agent and  LC Issuing Bank, and Certain Lenders, dated as of April 6, 2001  ($500,000,000 Revolving Facility) (Filed as Exhibit 10.36 to Form 10-K of  TEPPCO Partners, L.P (Commission File No. 1-10403) for the year ended  December 31, 2001 and incorporated herein by reference). |
| 10.23  |   | Credit Agreement among TEPPCO Partners, L.P. as  Borrower, SunTrust Bank as Administrative Agent and Certain Lenders, as  Lenders dated as of March 28, 2002 ($200,000,000 Revolving Credit  Facility) (Filed as Exhibit 10.44 to Form 10-Q of TEPPCO Partners, L.P.  (Commission File No. 1-10403) for the three months ended March 31, 2002  and incorporated herein by reference).                                                                                                 |

 

28

----

 
| 10.24  |   | Amended and Restated Credit Agreement among TEPPCO  Partners, L.P. as Borrower, SunTrust Bank, as Administrative Agent and LC  Issuing Bank and Certain Lenders, as Lenders dated as of March 28, 2002  ($500,000,000 Revolving Facility) (Filed as Exhibit 10.45 to Form 10-Q of  TEPPCO Partners, L.P. (Commission File No. 1-10403) for the three months  ended March 31, 2002 and incorporated herein by reference).         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25  |   | Amendment, dated as of June 27, 2002 to the  Amended and Restated Credit Agreement among TEPPCO Partners, L.P., as  Borrower, SunTrust Bank, as Administrative Agent, and Certain Lenders, dated  as of March 28, 2002 ($500,000,000 Revolving Credit Facility) (Filed as  Exhibit 99.3 to Form 8-K of TEPPCO Partners, L.P. (Commission File No.  1-10403) dated as of July 2, 2002 and incorporated herein by reference). |
| 10.26  |   | Amendment 1, dated as of June 27, 2002 to the Credit  Agreement among TEPPCO Partners, L.P., as Borrower, SunTrust Bank, as  Administrative Agent and Certain Lenders, dated as of March 28, 2002  ($200,000,000 Revolving Credit Facility) (Filed as Exhibit 99.4 to Form 8-K  of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated as of  July 2, 2002 and incorporated herein by reference).                     |
| 10.27+ |   | Texas Eastern Products Pipeline Company, LLC 2002  Phantom Unit Retention Plan, effective June 1, 2002 (Filed as Exhibit  10.49 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).                                                                                                                                                 |
| 10.28+ |   | Amended and Restated TEPPCO Supplemental Benefit  Plan, effective November 1, 2002 (Filed as Exhibit 10.44 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).                                                                                                                                                                    |
| 10.29+ |   | Texas Eastern Products Pipeline Company, LLC 2000  Long Term Incentive Plan, Second Amendment and Restatement, effective  January 1, 2003 (Filed as Exhibit 10.45 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).                                                                                                             |
| 10.30+ |   | Amended and Restated Texas Eastern Products Pipeline  Company, LLC Management Incentive Compensation Plan, effective  January 1, 2003 (Filed as Exhibit 10.46 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).                                                                                                                 |
| 10.31+ |   | Amended and Restated TEPPCO Retirement Cash Balance  Plan, effective January 1, 2002 (Filed as Exhibit 10.47 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).                                                                                                                                                                  |
| 10.32  |   | Formation  Agreement between Panhandle Eastern Pipe Line Company and Marathon Ashland  Petroleum LLC and TE Products Pipeline Company, Limited Partnership, dated as  of August 10, 2000 (Filed as Exhibit 10.48 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).                                                              |
| 10.33  |   | Amended and  Restated Limited Liability Company Agreement of Centennial Pipeline LLC dated  as of August 10, 2000 (Filed as Exhibit 10.49 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).                                                                                                                                     |
| 10.34  |   | Guaranty  Agreement, dated as of September 27, 2002, between TE Products Pipeline  Company, Limited Partnership and Marathon Ashland Petroleum LLC for Note  Agreements of Centennial Pipeline LLC (Filed as Exhibit 10.50 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).                                                    |
| 10.35  |   | LLC Membership  Interest Purchase Agreement By and Between CMS Panhandle Holdings, LLC, As  Seller and Marathon Ashland Petroleum LLC and TE Products Pipeline Company,  Limited Partnership, Severally as Buyers, dated February 10, 2003 (Filed  as Exhibit 10.51 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).           |
| 10.36  |   | Joint  Development Agreement between TE Products Pipeline Company, Limited  Partnership and Louis Dreyfus Plastics Corporation dated February 10,  2000 (Filed as                                                                                                                                                                                                                                                                     |

 

29

----

 
|   |   | Exhibit 10.52 to  Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the  quarter ended March 31, 2003, and incorporated herein by reference).                                                                                                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.37  |   | Credit Agreement  among TEPPCO Partners, L.P. as Borrower, SunTrust Bank as Administrative  Agent and LC Issuing Bank and The Lenders Party Hereto, as Lenders, dated as  of June 27, 2003 ($550,000,000 Revolving Facility) (Filed as Exhibit  10.52 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for  the quarter ended June 30, 2003, and incorporated herein by reference). |
| 10.38  |   | Agreement of  Limited Partnership of Mont Belvieu Storage Partners, L.P. dated effective  January 21, 2003. (Filed as Exhibit 10.53 to Form 10-Q of TEPPCO  Partners, L.P. (Commission File No. 1-10403) for the quarter ended  September 30, 2003, and incorporated herein by reference).                                                                                                             |
| 10.39  |   | Letter of  Agreement Clarifying Rights and Obligations of the Parties Under the Mont  Belvieu Storage Partners, L.P., Partnership Agreement and the Mont Belvieu  Venture, LLC, LLC Agreement, dated October 13, 2003. (Filed as Exhibit  10.54 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for  the quarter ended September 30, 2003, 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.                                                                                                                                                                                                                                                                                                       |

 

----

|   | * Filed  herewith.                                                     |
|--------|------------------------------------------------------------------------|
|   | ** Furnished  herewith pursuant to Item 601(b)-(32) of Regulation S-K. |
|   | + A management contract or compensation plan or arrangement.           |

 

(b)         Reports on Form 8-K filed with or furnished tothe Securities and Exchange Commission during the quarter ended June 30,2004:

 

A Report on Form 8-K was filed onJune 7, 2004, including as an exhibit the audited balance sheet of TexasEastern Products Pipeline Company, LLC, as of December 31, 2003.

 

30

----

 

**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                            | TE Products  Pipeline Company, Limited Partnership |                    |
|---------------------------------|----------------------------------------------------|-------------------------|
|                            | (Registrant)                                       |                    |
|                            | (A Delaware Limited Partnership)                   |                    |
|                            |                                               |
|                            |                                               |
|                            | By:                                                |  TEPPCO GP,  Inc., |
|                            | as General  Partner                                |
|                            |                                               |
|                            |                                               |
|                            | By:                                                | /s/ BARRY R.  PEARL     |   |
|                            | Barry R. Pearl,                                    |                    |
|                            | President, Chief Executive                         |                    |
|                            | Officer and Director                               |                    |
|                            |                                               |
|                            |                                               |
|                            | By:                                                | /s/ CHARLES H.  LEONARD |   |
|                            | Charles H. Leonard,                                |                    |
|                            | Senior Vice President, Chief Financial             |                    |
|                            | Officer and Director                               |                    |
|                            |                                               |
| Date:  August 4, 2004 |                                               |
|                                 |                                                    |                         |  |  |  |  |

 

31

----