**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**ý****  QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2004**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File No. 1-13603**

 

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**TE Products Pipeline Company,Limited Partnership**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                         |       | **76-0329620**                           |
|----------------------------------------------------------------------|------------|------------------------------------------|
| (State of Incorporation  or Organization)                            |       | (I.R.S. Employer  Identification Number) |
| ** **                                                           | ** ** | ** **                               |
| **2929 Allen Parkway****P.O. Box 2521****Houston, Texas 77252-2521** |
| (Address of principal executive offices,  including zip code)        |
| ** **                                                           |
| **(713) 759-3636**                                                   |
| (Registrant’s telephone number, including  area code)           |

 

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

Yes   ý   No o

 

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

 

 

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**TABLE OF CONTENTS**

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

 

i

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**PARTI.  FINANCIAL INFORMATION**

 

**Item 1.****  Financial Statements**

 

**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATEDBALANCE SHEETS**

(in thousands)

 
| ** **                                                                                                          | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                          |       | **(Unaudited)**         |       |                   |       |
| **ASSETS**                                                                                                          |       |                    |       |                   |       |
| ** **                                                                                                          |       |                    |       |                   |       |
| Current assets:                                                                                                     |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                           |       | $                       | —     |                   | $          | 188 |   |
| Accounts receivable, trade (net of  allowance for doubtful accounts of $56 and $374)                                |       | 18,167                  |       | 25,377                 |       |
| Accounts receivable, related parties                                                                                |       | 4,484                   |       | 154                    |       |
| Inventories                                                                                                         |       | 10,315                  |       | 11,186                 |       |
| Other                                                                                                               |       | 8,181                   |       | 10,230                 |       |
| Total current assets                                                                                                |       | 41,147                  |       | 47,135                 |       |
| Property, plant and equipment, at cost (net  of accumulated depreciation and amortization of $303,210 and $279,395) |       | 706,813                 |       | 682,385                |       |
| Equity investments                                                                                                  |       | 170,154                 |       | 155,861                |       |
| Other assets                                                                                                        |       | 19,909                  |       | 15,267                 |       |
| Total assets                                                                                                        |       | $                       | 938,023    |                   | $          | 900,648 |   |
|                                                                                                                |       |                    |       |                   |       |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                                                                         |       |                    |       |                   |       |
| ** **                                                                                                          |       |                    |       |                   |       |
| Current liabilities:                                                                                                |       |                    |       |                   |       |
| Accounts payable and accrued liabilities                                                                            |       | $                       | 9,790      |                   | $          | 11,518 |   |
| Accounts payable, related parties                                                                                   |       | 56,747                  |       | 12,277                 |       |
| Accrued interest                                                                                                    |       | 7,299                   |       | 15,877                 |       |
| Other accrued taxes                                                                                                 |       | 6,918                   |       | 5,732                  |       |
| Other                                                                                                               |       | 11,671                  |       | 13,983                 |       |
| Total current liabilities                                                                                           |       | 92,425                  |       | 59,387                 |       |
| Senior Notes                                                                                                        |       | 393,793                 |       | 392,164                |       |
| Note Payable, Parent Partnership                                                                                    |       | 276,698                 |       | 211,314                |       |
| Other liabilities and deferred credits                                                                              |       | 11,737                  |       | 14,995                 |       |
| Commitments and contingencies                                                                                       |       |                    |       |                   |       |
| Partners’ capital:                                                                                             |       |                    |       |                   |       |
| General partner’s interest                                                                                     |       | 2                       |       | 2                      |       |
| Limited partner’s interest                                                                                     |       | 163,368                 |       | 222,786                |       |
| Total partners’ capital                                                                                        |       | 163,370                 |       | 222,788                |       |
| Total liabilities and partners’ capital                                                                        |       | $                       | 938,023    |                   | $          | 900,648 |   |
|                                                                                                                     |            |                         |            |                        |            |  |  |  |  |

 

See accompanying Notes to Consolidated Financial Statements.

 

1

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited)**

**(in thousands)**

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating revenues:                    |       |                                  |       |                                 |       |   |   |   |   |
| Transportation – Refined products |       | $                                     | 43,386     |                                 | $          | 37,992 |   | $ | 113,294 |   | $ | 102,688 |   |
| Transportation – LPGs             |       | 16,071                                |       | 18,498                               |       | 58,572 |   | 62,676 |   |
| Other                                  |       | 7,908                                 |       | 7,251                                |       | 30,378 |   | 24,151 |   |
| Total operating revenues               |       | 67,365                                |       | 63,741                               |       | 202,244 |   | 189,515 |   |
|                                   |       |                                  |       |                                 |       |   |   |   |   |
| Costs and expenses:                    |       |                                  |       |                                 |       |   |   |   |   |
| Operating, general and administrative  |       | 32,841                                |       | 29,949                               |       | 90,718 |   | 76,275 |   |
| Operating fuel and power               |       | 8,465                                 |       | 7,762                                |       | 23,706 |   | 23,664 |   |
| Depreciation and amortization          |       | 12,756                                |       | 6,988                                |       | 30,392 |   | 20,925 |   |
| Taxes – other than income taxes   |       | 1,979                                 |       | 2,417                                |       | 7,314 |   | 7,493 |   |
| Gains on sales of assets               |       | (472                                  | )          | —                               |       | (587 | ) | — |   |
| Total costs and expenses               |       | 55,569                                |       | 47,116                               |       | 151,543 |   | 128,357 |   |
|                                   |       |                                  |       |                                 |       |   |   |   |   |
| Operating income                       |       | 11,796                                |       | 16,625                               |       | 50,701 |   | 61,158 |   |
|                                   |       |                                  |       |                                 |       |   |   |   |   |
| Interest expense – net            |       | (6,979                                | )          | (6,462                               | )          | (20,469 | ) | (20,509 | ) |
| Equity losses                          |       | (322                                  | )          | (1,437                               | )          | (2,069 | ) | (2,632 | ) |
| Other income – net                |       | 203                                   |       | 70                                   |       | 648 |   | 119 |   |
|                                   |       |                                  |       |                                 |       |   |   |   |   |
| Net income                             |       | $                                     | 4,698      |                                 | $          | 8,796 |   | $ | 28,811 |   | $ | 38,136 |   |
|                                        |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying Notes to Consolidated Financial Statements.

 

2

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                             | ** ** | **2003** |   |
| Cash flows from operating activities:                                          |       |                                 |       |   |   |
| Net income                                                                     |       | $                                    | 28,811     |   | $ | 38,136 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                  |       | 30,392                               |       | 20,925 |   |
| Losses in equity investments, net of distributions                             |       | 9,797                                |       | 2,632 |   |
| Gains on sales of assets                                                       |       | (587                                 | )          | — |   |
| Non-cash portion of interest expense                                           |       | 22                                   |       | 23 |   |
| Decrease (increase) in accounts receivable                                     |       | 7,210                                |       | (495 | ) |
| Decrease (increase) in inventories                                             |       | 871                                  |       | (404 | ) |
| Decrease in other current assets                                               |       | 2,049                                |       | 5,378 |   |
| Decrease in accounts payable and accrued  expenses                             |       | (11,237                              | )          | (13,621 | ) |
| Other                                                                          |       | 28,887                               |       | 21,237 |   |
| Net cash provided by operating activities                                      |       | 96,215                               |       | 73,811 |   |
|                                                                           |       |                                 |       |   |   |
| Cash flows from investing activities:                                          |       |                                 |       |   |   |
| Proceeds from the sales of assets                                              |       | 590                                  |       | — |   |
| Acquisition of assets                                                          |       | (1,962                               | )          | — |   |
| Investment in Mont Belvieu Storage  Partners, L.P.                             |       | (19,364                              | )          | (250 | ) |
| Acquisition of additional interest in  Centennial Pipeline LLC                 |       | —                               |       | (20,000 | ) |
| Investment in Centennial Pipeline LLC                                          |       | (1,500                               | )          | (3,000 | ) |
| Capital expenditures, net                                                      |       | (51,275                              | )          | (37,727 | ) |
| Net cash used in investing activities                                          |       | (73,511                              | )          | (60,977 | ) |
|                                                                           |       |                                 |       |   |   |
| Cash flows from financing activities:                                          |       |                                 |       |   |   |
| Proceeds from note payable, Parent Partnership                                 |       | 90,377                               |       | 80,856 |   |
| Repayments of note payable, Parent Partnership                                 |       | (24,993                              | )          | (53,638 | ) |
| Equity contribution – Parent Partnership                                  |       | —                               |       | 37,082 |   |
| Distributions paid                                                             |       | (88,276                              | )          | (77,571 | ) |
| Net cash used in financing activities                                          |       | (22,892                              | )          | (13,271 | ) |
|                                                                           |       |                                 |       |   |   |
| Net decrease in cash and cash equivalents                                      |       | (188                                 | )          | (437 | ) |
|                                                                           |       |                                 |       |   |   |
| Cash and cash equivalents at beginning of  period                              |       | 188                                  |       | 485 |   |
| Cash and cash equivalents at end of period                                     |       | $                                    | —     |   | $ | 48 |   |
|                                                                           |       |                                 |       |   |   |
| **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)                           |       | $                                    | 26,526     |   | $ | 30,928 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

3

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**TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 1.****  ORGANIZATION AND BASIS OFPRESENTATION**

 

TE Products Pipeline Company, Limited Partnership (the“Partnership”), a Delaware limited partnership, was formed in March 1990.  TEPPCO Partners, L.P. (the “ParentPartnership”) owns a 99.999% interest in us as the sole limited partner.  TEPPCO GP, Inc. (“TEPPCO GP” or “GeneralPartner”), a subsidiary of the Parent Partnership, holds a 0.001% GeneralPartner interest in us.  Texas EasternProducts Pipeline Company, LLC (the “Company”), a Delaware limited liabilitycompany, serves as the general partner of our Parent Partnership.  The Company is a wholly owned subsidiary ofDuke Energy Field Services, LLC (“DEFS”), a joint venture between Duke EnergyCorporation (“Duke Energy”) and ConocoPhillips. Duke Energy holds an interest of approximately 70% in DEFS, andConocoPhillips holds the remaining interest of approximately 30%.  TEPPCO GP, as general partner, performs allof the management and operating functions required for us in accordance withthe Agreement of Limited Partnership of TE Products Pipeline Company, LimitedPartnership (the “Partnership Agreement”). We reimburse our General Partner and the Company for all reasonabledirect and indirect expenses that they incur in managing us.

 

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

 

The accompanying unaudited consolidated financialstatements reflect all adjustments that are, in the opinion of our management,of a normal and recurring nature and necessary for a fair statement of ourfinancial position as of September 30, 2004, and the results of our operationsand cash flows for the periods presented. The results of operations for the three months and nine months endedSeptember 30, 2004, are not necessarily indicative of results of our operationsfor the full year 2004.  You should readthese interim financial statements in conjunction with our consolidatedfinancial statements and notes thereto presented in the TE Products PipelineCompany, Limited Partnership Annual Report on Form 10-K for the year endedDecember 31, 2003.  We have reclassifiedcertain amounts from prior periods to conform with thecurrent presentation.

 

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

 

At September 30, 2004, and December 31, 2003, we hadworking capital deficits of $51.3 million and $12.3 million, respectively.  Cash generated from operations and from ourParent Partnership’s credit facilities and debt and equity offerings are ourprimary sources of liquidity.  Workingcapital deficits can occur primarily due to the timing of operating cashreceipts from customers, payment of cash distributions and the payment ofnormal operating expenses and capital expenditures.  Our Parent Partnership has historically madecapital contributions, loans or otherwise provided liquidity to us as needed,but the Parent Partnership has no contractual obligation to do so.  At September 30, 2004, our Parent Partnershiphad approximately $115.0 million in available borrowing capacity under itsrevolving credit facility and agreed to cover any working capital needs, ifrequired.

 

## **New AccountingPronouncements**

 

**In December 2003,the Financial Accounting Standards Board (“FASB”) revised FASB InterpretationNo. 46, *Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51* (“FIN 46”).  FIN 46, issued by the FASB in January 2003,requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  The revised statement, FASB InterpretationNo. 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 interest entitieswill be identified and**

 

4

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**consolidated**. We adopted the new requirements detailed in FIN 46(R) as of March 31,2004.  In connection with our adoption ofFIN 46(R), we evaluated our investments in Centennial Pipeline LLC and MontBelvieu Storage Partners, L.P. and determined that these entities are notmaterially affected by our adoption of FIN 46(R), and thus we have accountedfor them as equity method investments (see Note 6. EquityInvestments).  Our adoption of FIN46(R) did not have an effect on our financial position, results of operationsor cash flows.

 

**On December 8, 2003,President Bush signed into law a bill that expands Medicare, primarily adding aprescription drug benefit for Medicare-eligible retirees starting in 2006.  We anticipate that the benefits we pay after2006 could 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, *Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003*, due toopen questions about some of the new Medicare provisions and a lack ofauthoritative accounting guidance about certain matters.  The final accounting guidance could requirechanges to previously reported information. We adopted the provisions of these FSPs in the quarter ended September30, 2004.  This regulation did not have amaterial adverse effect on our financial position, results of operations orcash flows.**

 

**In December 2003, the FASB issued a revision to Statement ofFinancial Accounting Standards (“SFAS”) No. 132, *Employers’ Disclosures about Pensions and Other Post-RetirementBenefits*.  This revisionrequired that companies provide more details about their plan assets, benefitobligations, cash flows, benefit costs and other relevant information.  A description of investment policies andstrategies and target allocation percentages, or target ranges, for these assetcategories also is required in financial statements.  Cash flows will include projections of futurebenefit payments and an estimate of contributions to be made in the next yearto fund pension and other postretirement benefit plans.  In addition to expanded annual disclosures,the FASB is requiring companies to report the various elements of pension andother postretirement benefit costs on a quarterly basis.  The guidance is effective for fiscal yearsending after December 15, 2003, and for quarters beginning after December 15,2003.  We adopted the provisions of therevised SFAS 132 effective December 31, 2003, and certain provisions regardingdisclosure of information about estimated future benefit payments in the firstquarter of 2004.**

 

**NOTE 2.  INTANGIBLE ASSETS**

 

**We account for our intangibleassets under SFAS No. 142, *Goodwill and OtherIntangible Assets*,**which wasissued by the FASB in July 2001.  SFAS142 prohibits amortization of goodwill and intangible assets with indefiniteuseful lives, and instead requires testing for impairment at leastannually.  SFAS 142 requires thatintangible assets with finite useful lives be amortized over their respectiveestimated useful lives.  If an intangibleasset has a finite useful life, but the precise length of that life is notknown, that intangible asset shall be amortized over the best estimate of itsuseful life.  At a minimum, we willassess the useful lives and residual values of all intangible assets on anannual basis to determine if adjustments are required.**

 

**The following table reflects thecomponents of amortized intangible assets, included in other assets on theconsolidated balance sheets at September 30, 2004, and December 31, 2003 (inthousands):**

 
| ** **                   | ** ** | **September 30, 2004**     | ** ** | **December 31, 2003**         | ** ** |
|------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                         |       |                       |       |                          |       |   |   |   |   |
| Amortized intangible assets: |       |                       |       |                          |       |   |   |   |   |
| Transportation agreements    |       | $                          | 1,328      |                          | $          | (244 | ) | $ | 1,328 |   | $ | (194 | ) |
|                              |            |                            |            |                               |            |  |  |  |  |  |  |  |  |

 

5

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**Amortizationexpense on intangible assets was $16,603 for each of the three month periodsended September 30, 2004 and 2003,**and $49,808 for each of the nine month periods ended September 30, 2004and 2003.

 

Estimated amortization expense on intangible assetswill be $0.1 million for each of the years ending December 31, 2004 through2008.

 

**At September 30,2004, we have $33.4 million of excess investment in our equity investment inCentennial Pipeline LLC, which was created upon formation of the company (seeNote 6.  EquityInvestments).  The excessinvestment is included in our equity investments account at September 30, 2004,and is accounted for as an intangible asset with an indefinite life.  We assess the intangible asset for impairmenton an annual basis.**

 

**NOTE3.**  PROPERTY, PLANT AND EQUIPMENT

 

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

 

**During the thirdquarter of 2004, we completed an evaluation of our marine terminal facility inthe Beaumont, Texas, area.  The facilityconsists primarily of a barge dock, a ship dock, four storage tanks and varioussegments of connecting pipelines.  Theevaluation indicated that the docks and other assets at the facility neededextensive work to continue to be commercially operational.  As a result, we performed an impairment teston the entire marine facility and recorded a $4.4 million non-cash impairmentcharge, included in depreciation and amortization expense in our consolidatedstatements of income, for the excess carrying value over the fair value of thefacility.**

 

**NOTE4.**  INTEREST RATE SWAP

 

**On October 4, 2001, we entered intoan interest rate swap agreement to hedge our exposure to changes in the fairvalue of our fixed rate 7.51% Senior Notes due 2028. We designated this swapagreement as a fair value hedge.  Theswap agreement has a notional amount of $210.0 million and matures in January2028 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 athree-month U.S. Dollar LIBOR rate, plus a spread, and receive a fixed rate ofinterest of 7.51%. During the nine months ended September 30, 2004 and 2003, werecognized reductions in interest expense of $7.5 million and $7.4 million,respectively, related to the difference between the fixed rate and the floatingrate of interest on the interest rate swap. During the quarter ended September 30, 2004, we measured the hedgeeffectiveness of this interest rate swap and noted that no gain or loss fromineffectiveness was required to be recognized. The fair value of this interest rate swap was a gain of approximately$3.9 million at September 30, 2004, and a gain of approximately $2.3 million atDecember 31, 2003.**

 

6

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**NOTE 5.  INVENTORIES**

 

Inventories are valued at the lower of cost (based onweighted average cost method) or market. The costs of inventories did not exceed market values at September 30,2004, and December 31, 2003. The major components of inventories were asfollows (in thousands):

 
| ** **             | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------|------------|-------------------------|------------|------------------------|------------|
| Refined products       |       | $                       | 2,548      |                   | $          | 6,632 |   |
| LPGs                   |       | 3,240                   |       | 517                    |       |
| Materials and supplies |       | 4,527                   |       | 4,037                  |       |
| Total                  |       | $                       | 10,315     |                   | $          | 11,186 |   |

 

**NOTE6.**  EQUITY INVESTMENTS

 

In August 2000, we entered into agreements withPanhandle Eastern Pipeline Company (“PEPL”), a former subsidiary of CMS EnergyCorporation, and Marathon Ashland Petroleum LLC (“Marathon”) to form CentennialPipeline LLC (“Centennial”).  Centennialowns an interstate refined petroleum products pipeline extending from the upperTexas Gulf Coast to central Illinois. Through February 9, 2003, each participant owned a one-third interest inCentennial.  On February 10, 2003, we andMarathon each acquired an additional 16.7% interest in Centennial from PEPL for$20.0 million each, increasing our ownership percentages in Centennial to 50%each.  During the nine months endedSeptember 30, 2004, we invested $1.5 million in Centennial, which is includedin the equity investment balance at September 30, 2004.

 

As of January 1, 2003, we and Louis Dreyfus EnergyServices, L.P. (“Louis Dreyfus”) formed Mont Belvieu Storage Partners, L.P. (“MBStorage”).  We and Louis Dreyfus each owna 50% ownership interest in MB Storage. The purpose of MB Storage is to expand services to the upper Texas GulfCoast energy marketplace by increasing pipeline throughput and the mix ofproducts handled through the existing system and establishing new receipt anddelivery connections.  MB Storage is aservice-oriented, fee-based venture with no commodity trading activity.  We operate the facilities for MBStorage.  Effective January 1, 2003, wecontributed property, plant and equipment with a net book value of $67.1million to MB Storage.  Additionally, asof the contribution date, Louis Dreyfus had invested $6.1 million for expansionprojects for MB Storage that we were required to reimburse if the originaljoint development and marketing agreement was terminated by either party.  This deferred liability was also contributedand credited to the capital account of Louis Dreyfus in MB Storage.

 

We receive the first $1.8 million per quarter (or$7.15 million on an annual basis) of MB Storage’s income before depreciationexpense, as defined in the operating agreement. Any amount of MB Storage’s annual income before depreciation expense inexcess of $7.15 million is allocated evenly between Louis Dreyfus and us.  Depreciation expense on assets eachoriginally contributed to MB Storage is allocated between Louis Dreyfus and us based on the net book value of the assetscontributed.  Depreciation expense onassets constructed or acquired by MB Storage subsequent to formation isallocated evenly between Louis Dreyfus and us. For the nine months endedSeptember 30, 2004, our sharing ratio in the earnings of MB Storage wasapproximately 72.3%.  During the ninemonths ended September 30, 2004, we contributed $19.4 million to MB Storage, ofwhich $16.5 million was used to acquire storage assets in April 2004.  During the three months and nine months endedSeptember 30, 2004, we received distributions of $2.8 million and $7.7 million,respectively, from MB Storage.  Nodistributions were received during the three months and nine months endedSeptember 30, 2003.

 

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We use the equity method of accounting to account forour investments in Centennial and MB Storage. Summarized combined financial information for Centennial and MB Storagefor the nine months ended September 30, 2004 and 2003, is presented below (inthousands):

 
| ** ** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------|------------|--------------------------------------|------------|
| ** ** | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Revenues   |       | $                                    | 44,210     |   | $ | 37,971 |   |
| Net loss   |       | (23                                  | )          | (3,246 | ) |
|            |            |                                      |            |  |  |  |  |

 

Summarized combined balance sheet data for Centennialand MB Storage as of September 30, 2004, and December 31, 2003, is presentedbelow (in thousands):

 
| ** **             | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------|------------|-------------------------|------------|------------------------|------------|
| Current assets         |       | $                       | 39,771     |                   | $          | 26,771 |   |
| Noncurrent assets      |       | 379,904                 |       | 351,241                |       |
| Current liabilities    |       | 38,297                  |       | 35,032                 |       |
| Long-term debt         |       | 140,000                 |       | 140,000                |       |
| Noncurrent liabilities |       | 19,782                  |       | 13,182                 |       |
| Partners’ capital |       | 221,596                 |       | 189,798                |       |
|                        |            |                         |            |                        |            |  |  |

 

**Our investment inCentennial includes an excess net investment amount of $33.4 million (see Note2.  Intangible Assets).  Excess investment is the amount by which ourinvestment balance exceeds our proportionate share of the net assets of theinvestment.**

 

**NOTE7.**  DEBT

 

**SeniorNotes**

 

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

 

The Senior Notes do not have sinking fundrequirements.  Interest on the SeniorNotes is payable semiannually in arrears on January 15 and July 15 of eachyear.  The Senior Notes are unsecuredobligations and rank on a parity with all of our other unsecured andunsubordinated indebtedness.  Theindenture governing the Senior Notes contains covenants, including, but notlimited to, covenants limiting the creation of liens securing indebtedness andsale and leaseback transactions. However, the indenture does not limit our ability to incur additionalindebtedness.  As of September 30, 2004,we were in compliance with the covenants of the Senior Notes.

 

We have entered into an interest rate swap agreementto hedge our exposure to changes in the fair value on a portion of the SeniorNotes discussed above (see Note 4.  Interest Rate Swap).

 

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At September 30, 2004, the estimated fair values ofthe 6.45% Senior Notes and 7.51% Senior Notes were approximately $193.8 millionand $218.2 million, respectively.  Marketprices for recent transactions and rates currently available to us for debtwith similar terms and maturities were used to estimate fair value.

 

**OtherLong Term Debt and Credit Facilities**

 

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s credit agreements.  Theinterest rates charged by the Parent Partnership include the stated interestrate of the Parent Partnership, plus a premium to cover debt issuancecosts.  The interest rate is alsodecreased or increased to cover gains and losses, respectively, on any interestrate swaps that the Parent Partnership may have in place on its respectivecredit agreements.  These creditfacilities of the Parent Partnership are described below.

 

On April 6, 2001, our Parent Partnership entered intoa $500.0 million revolving credit facility including the issuance of letters ofcredit of up to $20.0 million (“Three Year Facility”).  The interest rate was based, at our ParentPartnership’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 for theThree Year Facility 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 on January30, 2003.  On June 27, 2003, our ParentPartnership repaid the outstanding balance under the Three Year Facility withborrowings under a new credit facility, and canceled the Three Year Facility.

 

On February 20, 2002, our Parent Partnership issued$500.0 million principal amount of 7.625% Senior Notes due 2012.  The 7.625% Senior Notes were issued at adiscount of $2.2 million and are being accreted to their face value over theterm of the notes.  The Senior Notes maybe redeemed at any time at our Parent Partnership’s option with the payment ofaccrued interest and a make-whole premium determined by discounting remaininginterest and principal payments using a discount rate equal to the rate of theUnited States Treasury securities of comparable remaining maturity plus 35basis points.  The indenture governingthese 7.625% Senior Notes contains covenants, including, but not limited to,covenants limiting the creation of liens securing indebtedness and sale andleaseback transactions.  However, theindenture does not limit our Parent Partnership’s ability to incur additionalindebtedness.

 

On January 30, 2003, our Parent Partnership issued$200.0 million principal amount of 6.125% Senior Notes due 2013.  The 6.125% Senior Notes were issued at adiscount of $1.4 million and are being accreted to their face value over theterm of the notes.  The ParentPartnership used $182.0 million of the proceeds from the offering to reduce theoutstanding principal on the Three Year Facility to $250.0 million.  The balance of the net proceeds received wasused for general Parent Partnership purposes. The Senior Notes may be redeemed at any time at our Parent Partnership’soption with the payment of accrued interest and a make-whole premium determinedby discounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing the 6.125% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale and leaseback transactions.  However, the indenture does not limit theParent Partnership’s ability to incur additional indebtedness.

 

On June 27, 2003, our Parent Partnership entered intoa $550.0 million revolving credit facility with a three year term, includingthe issuance of letters of credit of up to $20.0 million (“Revolving CreditFacility”).  The interest rate is based,at our Parent Partnership’s option, on either thelender’s base rate plus a spread, or LIBOR plus a spread in effect at the timeof the borrowings.  The credit agreementfor the Revolving Credit Facility contains certain restrictive financialcovenant ratios.  Our Parent Partnershipborrowed $263.0 million under the Revolving Credit Facility and repaid theoutstanding balance of the Three Year Facility. At September 30, 2004, $325.5 million was outstanding under theRevolving Credit Facility.  At September30, 2004, our Parent Partnership was in

 

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compliancewith the covenants in this credit agreement. On October 21, 2004, our Parent Partnership amended its Revolving CreditFacility to (i) increase the facility size to $600.0 million, (ii) extend theterm to October 21, 2009, (iii) remove certain restrictive covenants, (iv)increase the available amount for the issuance of letters of credit up to$100.0 million and (v) decrease the LIBOR rate spread charged at the time ofeach borrowing.

 

As of September 30, 2004, and December 31, 2003, wehad an intercompany note payable to our Parent Partnership of $276.7 millionand $211.3 million, respectively, which represented borrowings under the ParentPartnership’s Revolving Credit Facility, 7.625% Senior Notes and 6.125% SeniorNotes. The weighted average interest rate on the note payable to the ParentPartnership at September 30, 2004, was 5.2%. At September 30, 2004, accrued interest includes $1.6 million due to theParent Partnership.  For the nine monthsended September 30, 2004 and 2003, interest costs incurred on the note payableto the Parent Partnership totaled $9.2 million and $8.8 million, respectively.

 

**NOTE8.**  QUARTERLY DISTRIBUTONS OF AVAILABLE CASH

 

We make quarterly cash distributions of all of ouravailable cash, generally defined as consolidated cash receipts lessconsolidated cash disbursements and cash reserves established by the GeneralPartner in its sole discretion.  We paydistributions of 99.999% to the Parent Partnership and 0.001% to the GeneralPartner.

 

During the nine months ended September 30, 2004 and2003, we paid cash distributions totaling $88.3 million and $77.6 million,respectively, to our Parent Partnership. On November 5, 2004, we will pay a cash distribution to our ParentPartnership of $29.7 million for the quarter ended September 30, 2004.

 

**NOTE9.**  EMPLOYEE BENEFIT PLANS

 

**Retirement Plans**

 

The Parent Partnership has adopted the TEPPCORetirement Cash Balance Plan (“TEPPCO RCBP”), which is a non-contributory,trustee-administered pension plan.  Inaddition, certain executive officers participate in the TEPPCO SupplementalBenefit Plan (“TEPPCO SBP”), which is a non-contributory, nonqualified, definedbenefit retirement plan.  The TEPPCO SBPwas established to restore benefit reductions caused by the maximum benefit limitationsthat apply to qualified plans.  Thebenefit formula for all eligible employees is a cash balance formula.  Under a cash balance formula, a planparticipant accumulates a retirement benefit based upon pay credits and currentinterest credits.  The pay credits arebased on a participant’s salary, age and service.  The Parent Partnership uses a December 31measurement date for these plans.

 

The components of net pension benefits costs allocatedto us for the TEPPCO RCBP and the TEPPCO SBP for the three months and ninemonths ended September 30, 2004 and 2003, were as follows (in thousands):

 
| ** **                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** |       |
|------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** |   |
| Service cost benefit earned during the  period |       | $                                     |  635  |                                 | $          |  540 |   | $ |  1,905 |   | $ |  1,620 |   |
| Interest cost on projected benefit  obligation |       | 120                                   |       | 87                                   |       | 360 |   | 261 |   |
| Expected return on plan assets                 |       | (157                                  | )          | (108                                 | )          | (471 | ) | (324 | ) |
| Amortization of prior service cost             |       | 2                                     |       | 2                                    |       | 6 |   | 6 |   |
| Recognized net actuarial loss                  |       | 3                                     |       | 4                                    |       | 9 |   | 12 |   |
| Net pension benefits costs                     |       | $                                     |  603  |                                 | $          |  525 |   | $ |  1,809 |   | $ |  1,575 |   |

 

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**Other Postretirement Benefits**

 

Effective January 1, 2001, the Parent Partnershipprovides certain health care and life insurance benefits for retired employeeson a contributory and non-contributory basis (“TEPPCO OPB”).  Employees become eligible for these benefitsif they meet certain age and service requirements at retirement, as defined inthe plans.  The Parent Partnershipprovides a fixed dollar contribution, which does not increase from year toyear, towards retired employee medical costs. The retiree pays all health care cost increases due to medicalinflation.  The Parent Partnership uses aDecember 31 measurement date for this plan.

 

The components of net postretirement benefits costsallocated to us for the TEPPCO OPB for the three months and nine months endedSeptember 30, 2004 and 2003, were as follows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                      | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** |   |
| Service cost benefit earned during the  period                  |       | $                                     | 29         |                                 | $          | 23 |   | $ | 87 |   | $ | 69 |   |
| Interest cost on accumulated postretirement  benefit obligation |       | 33                                    |       | 29                                   |       | 99 |   | 87 |   |
| Amortization of prior service cost                              |       | 28                                    |       | 28                                   |       | 84 |   | 84 |   |
| Net postretirement benefits costs                               |       | $                                     | 90         |                                 | $          | 80 |   | $ | 270 |   | $ | 240 |   |
|                                                                 |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

**Estimated Future Benefit Contributions**

 

**The ParentPartnership expects to contribute approximately $3.0 million to the retirementplans and other postretirement benefit plans in 2004.  We expect to be allocated a share of thesecontributions.**

 

**NOTE10.**  COMMITMENTS AND CONTINGENCIES

 

In the fall of 1999 and on December 1, 2000, theCompany and the Parent Partnership were named as defendants in two separatelawsuits in Jackson County Circuit Court, Jackson County, Indiana, styled *Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas EasternCorporation, et al.*(including the Company and the ParentPartnership) and*Gilbert Richards and Jean Richards v. TexasEastern Corporation, et al.*(including the Company and the ParentPartnership).* *Inboth cases, the plaintiffs contend, among other things, that we and otherdefendants stored and disposed of toxic and hazardous substances and hazardouswastes in a manner that caused the materials to be released into the air, soiland water.  They further contend that therelease caused damages to the plaintiffs. In their complaints, the plaintiffs allege strict liability for bothpersonal injury and property damage together with gross negligence, continuingnuisance, trespass, criminal mischief and loss of consortium. The plaintiffsare seeking compensatory, punitive and treble damages.  We have filed an answer to both complaints,denying the allegations, as well as various other motions.  In April 2004, the court granted a partialmotion for summary judgment in favor of the defendants, dismissing two of theplaintiffs’ personal injury claims in their entirety.  It is anticipated that the plaintiffs willappeal this ruling.  These cases are notcovered by insurance.  Discovery isongoing, and we are defending ourselves vigorously against the lawsuits.  The plaintiffs have not stipulated the amountof damages that they are seeking in the suits. We cannot estimate the loss, if any, associated with these pendinglawsuits.

 

On December 21, 2001, we were named as a defendant ina lawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana, styled*Rebecca L. Grisham et al. v.  TE Products Pipeline Company, Limited*

 

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*Partnership*.  In this case, the plaintiffs contend that ourpipeline, which crosses the plaintiffs’ property, leaked toxic products ontotheir property and, consequently, caused damages to them.  We have filed an answer to the plaintiffs’ petitiondenying the allegations and are defending ourselves vigorously against thelawsuit.  The plaintiffs have notstipulated the amount of damages they are seeking in the suit; however, thiscase is covered by insurance.  We do notbelieve that the outcome of this lawsuit will have a material adverse effect onour financial position, results of operations or cash flows.

 

In May 2003, the Company was named as a defendant in alawsuit styled *John R. James, et al. v. J Graves InsulationCompany, et al*. as filed in the first Judicial District Court, CaddoParish, Louisiana. There are numerous plaintiffs identified in the action that are allegedto have suffered damages as the result of alleged exposure toasbestos-containing products and materials. According to the petition and as a result of a preliminaryinvestigation, the Company believes that the only claim asserted against itresults from one individual for the period from July 1971 through June 1972,who is alleged to have worked on a facility owned by the Company’spredecessor.  This period represents asmall portion of the total alleged exposure period from January 1964 throughDecember 2001 for this individual.  Theindividual’s claims involve numerous employers and alleged job sites.  The Company has been unable to confirminvolvement by the Company or its predecessors with the alleged location, andit is uncertain at this time whether this case is covered by insurance.Discovery is planned, and the Company intends to defend itself vigorously againstthis lawsuit.  The plaintiffs have notstipulated the amount of damages that they are seeking in this suit.  We are obligated to reimburse the Company forany costs it incurs related to this lawsuit. We cannot estimate the loss, if any, associated with this pendinglawsuit.  We do not believe that theoutcome of this lawsuit will have a material adverse effect on our financialposition, results of operations or cash flows.

 

On April 2, 2003, Centennial was served with apetition in a matter styled *Adams, et al. v.Centennial Pipeline Company LLC, et al*.  This matter involves approximately 2,000plaintiffs who allege that over 200 defendants, including Centennial,generated, transported, and/or disposed of hazardous and toxic waste at twosites in Bayou Sorrell, Louisiana, an underground injection well and alandfill.  The plaintiffs allege personalinjuries, allergies, birth defects, cancer and death.  The underground injection well has been inoperation since May 1976.  Based uponcurrent 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.  Marathonhas been handling this matter for Centennial under its operating agreement withCentennial.  We have a 50% ownershipinterest in Centennial.  Based uponCentennial’s limited involvement with the disposal site, we do not believe thatthe outcome of this matter will have a material adverse effect on our financialposition, results of operations or cash flows.

 

On December 16, 2003, Centennial, the Company, theParent Partnership and other Parent Partnership entities were named asdefendants in a lawsuit in the 128th District Court of Orange County, Texas,styled *Elwood Karr et al. v. Centennial Pipeline, LLC etal*.  In this case, theplaintiffs contend that our pipeline leaked toxic substances on their property,causing them property damage.  We havefiled an answer to the plaintiffs’ petition, denying the allegations and aredefending 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 the litigation discussed above, we havebeen, in the ordinary course of business, a defendant in various lawsuits and aparty to various other legal proceedings, some of which are covered in whole orin part by insurance. We believe that the outcome of these lawsuits and otherproceedings will not individually or in the aggregate have a material adverseeffect on our consolidated financial position, results of operations or cashflows.

 

Our operations are subject to federal, state and locallaws and regulations governing the discharge of materials into the environment.Failure to comply with these laws and regulations may result in the assessmentof administrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to perform investigatoryand remedial activities.  Although webelieve our operations are in material compliance with applicable environmentallaws and regulations, risks of significant costs and liabilities are inherent

 

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inpipeline operations, and we cannot assure you that significant costs andliabilities will not be incurred. Moreover, it is possible that otherdevelopments, such as increasingly strict environmental laws and regulationsand enforcement policies thereunder, and claims for damages to property orpersons resulting from our operations, could result in substantial costs andliabilities to us.  We believe thatchanges in environmental laws and regulations will not have a material adverseeffect on our financial position, results of operations or cash flows in thenear term.

 

On March 26, 2004, an initial decision in *ARCO Products Co., et al. v. SFPP*, Docket OR96-2-000, et al.was issued by the FERC, which made several significant determinations withrespect to finding “changed circumstances” under the Energy Policy Act of 1992(“EP Act”).  The decision lists factorsthat will be considered by the FERC, which include showing a substantial changein economic circumstances, the time factor that will be reviewed, what will beconsidered the basis of the rate and a pipeline’s documentaryrequirements.  The decision largelyclarifies, but does not fully quantify, the standard required for a complainantto demonstrate that an oil pipeline’s rates are no longer subject to the rateprotection of the EP Act by demonstrating that a substantial change incircumstances has occurred since 1992 with respect to the basis of the ratesbeing challenged.  In the decision, theFERC found that a limited number of rate elements will significantly affect theeconomic basis for a pipeline company’s rates. The elements identified in the decision are volume changes, allowedtotal return and total cost of service (including major cost elements of ratebase such as tax rates and tax allowances, among others).  The FERC did reject, however, the use ofchanges in tax rate and income tax allowances as standalone factors.  The FERC further found that if a complainantcan show that a pipeline’s volumes and overall cost of service collectively reflecta significant increase in net earnings between the establishment of thechallenged rate pre-1992 and the time of the complaint, based primarily on thecombined impact of changes in volumes and changes in overall cost of service,the complainant has met its burden relative to establishing “changedcircumstances.”  It appears likely thatthe decision will be appealed.  We havenot yet determined the impact, if any, that the decision could have on ourrates if they were reviewed under the criteria of this decision.

 

On July 20, 2004, the United States Court of Appealsfor the District of Columbia Circuit issued a decision in *BP WestCoast Products, LLC v. Federal Energy Regulatory Commission and United Statesof America*, which reviewed the decisions that the FERC issued inOpinion Nos. 435, 435-A, 435-B and Clarification and Rehearing Order.  In these opinions, the FERC considered thetariffs of SFPP, L.P. (“SFPP”) and complaints and other filings by shippercustomers of SFPP.  The Court determined,in part, that SFPP, a publicly traded limited partnership, is not allowed toinclude income tax allowance in its cost-of-service analysis in thedetermination of just and reasonable rates that were not grandfathered underthe EP Act.  With respect to SFPP’s grandfatheredrates, 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 EnvironmentalQuality (“LDEQ”) issued a compliance order for environmental contamination atour Arcadia, Louisiana, facility.  In1999, our Arcadia facility and adjacent terminals were directed by theRemediation Services Division of the LDEQ to pursue remediation of thiscontamination.  At September 30, 2004, wehave an accrued liability of $0.2 million for remediation costs at our Arcadiafacility.  Effective in March 2004, weexecuted an access agreement with an adjacent industrial landowner who islocated upgradient of the Arcadia facility. This agreement enables the landowner to proceed with remediationactivities at our Arcadia facility for which it has accepted sharedresponsibility.  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, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois.  As a result of the release, we have enteredinto an Agreed Order

 

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with theState of Illinois which required us to conduct an environmentalinvestigation.  At this time, we havecomplied with the terms of the Agreed Order, and the results of theenvironmental investigation indicated there were no soil or groundwater impactsfrom the release.  We are in the processof negotiating a final settlement with the State of Illinois, and we donot expect that compliance with the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal.  Thereleased jet fuel was contained within a stormwater retention pond located onthe terminal property.  Six migratorywaterfowl were affected by the jet fuel and were subsequently euthanized by orat the request of the United States Fish and Wildlife Service (“USFWS”).  On October 1, 2004, the USFWS served us witha Notice of Violation, alleging that we violated 16 USC 703 of the MigratoryBird Treaty Act for the “take[ing] of migratory birds by illegal methods.”  Such a violation, if proven, would be amisdemeanor criminal offense; however, we deny that any such criminal violationoccurred, and we are vigorously defending our position in this matter.  We do not expect the results of this noticewill have a future material adverse effect on our financial position, results ofoperations or cash flows.

 

On July 27, 2004, wereceived notice from the United States Department of Justice (“DOJ”) of itsintent to seek a civil penalty against us related to our November 21, 2001,release of approximately 2,575 barrels of jet fuel from our 14-inch diameterpipeline located in Orange County, Texas. The DOJ, at the request of the United States Environmental ProtectionAgency, is seeking a civil penalty against us for alleged violations of theClean Water Act (“CWA”) arising out of this release.  The maximum statutory penalty calculated forthis alleged violation of the CWA is $2.8 million.  We are in discussions with the DOJ regardingthis matter, and we do not expect a civil penalty, if any, to have a materialadverse effect on our financial position, results of operations or cash flows.

 

At September 30, 2004, we have an accrued liability of$1.7 million related to various sites requiring environmental remediationactivities.  We do not expect that thecompletion of remediation programs associated with these activities will have afuture material adverse effect on our financial position, results of operationsor cash flows.

 

We regularly review our long-lived assets forimpairment in accordance with SFAS No. 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets*. At September 30, 2004, we have identified certain assets that we areassessing for recoverability resulting from recent operational changes.  We are continuing to monitor thesecircumstances; however, we do not believe that the resolution of the matterwill have a material effect on our financial condition, results of operationsor cash flows.

 

Centennial has entered into credit facilities totaling$150.0 million and, as of September 30, 2004, $150.0 million was outstandingunder those credit facilities.  Theproceeds were used to fund construction and conversion costs of Centennial’spipeline system.  We and Marathon haveeach guaranteed one half of Centennial’s debt, up to a maximum amount of $75.0million each.

 

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

 

**General**

 

You should read the following review of our financialposition and results of operations in conjunction with our ConsolidatedFinancial Statements and the notes thereto. Material period-to-period variances in the consolidated statements ofincome are discussed under “Results of Operations.”  The “Financial Condition and Liquidity”section analyzes our cash flows and financial position.  “Other Considerations” addresses trends,future plans and contingencies that are reasonably likely to materially affectour future liquidity or earnings.  TheConsolidated Financial Statements should be read in conjunction with thefinancial statements and related notes, together with our discussion andanalysis of financial position and results of operations included in our AnnualReport on Form 10-K for the year ended December 31, 2003.

 

**CriticalAccounting Policies and Estimates**

 

A summary of the significant accounting policies wehave adopted and followed in the preparation of our consolidated financialstatements is detailed in our consolidated financial statements for the yearended December 31, 2003, included in our Annual Report on Form 10-K.Certain of these accounting policies require the use of estimates.  The following estimates, in our opinion, aresubjective in nature, require the exercise of judgment and involve complexanalysis: revenue and expense accruals, including accruals for power costs and propertytaxes; environmental costs; depreciation expense and asset impairment analysisrelated to property, plant and equipment; and amortization expense and assetimpairment analysis related to intangible assets.  These estimates are based on our knowledgeand understanding of current conditions and actions we may take in thefuture.  Changes in these estimates willoccur as a result of the passage of time and the occurrence of futureevents.  Subsequent changes in theseestimates may have a significant impact on our financial condition and resultsof operations.

 

## ****ManagementOverview of the Three Months and Nine Months Ended September 30, 2004****

 

We reported net income of $4.7 million for the threemonths ended September 30, 2004, compared with net income of $8.8 million forthe three months ended September 30, 2003, and $28.8 million for the ninemonths ended September 30, 2004, compared with net income of $38.1 million forthe nine months ended September 30, 2003. ****Our results for the three months andnine months ended September 30, 2004, were impacted by higher pipelineintegrity expenses of $1.1 million and $9.1 million, respectively, and an assetimpairment charge of $4.4 million related to a marine facility in Beaumont,Texas (see Note 3.  Property,Plant and Equipment).  Thesedecreases were partially offset by increased revenues from our refined productsbusiness and the recognition of $4.1 million of deferred revenue.  We anticipate that our pipeline integrityexpenses for 2004 will be approximately $3.0 million higher than our 2003 costsas we continue to perform pipeline inspections and repairs under our integritymanagement 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 have completed system changes toreverse the flow of the pipeline segment from Shreveport, Louisiana, to ElDorado, Arkansas.  This segment is nowconfigured to permit bi-directional flow of products.  We have completed feasibility studies and arein discussions with potential customers regarding the transportation of volumesthrough the pipeline system in this area.****

 

****We are currently constructing a newrefined products 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****

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****expand********delivery capacity of refined products to theNorthwest 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 well aslow-sulfur diesel fuels, which will meet the different product specificationsof both market areas.  The project isscheduled to be completed in the first quarter of 2005.****

 

****In 2003, we increased the deliverycapability between Todhunter, Ohio, and Coshocton, Ohio, by 8,000 to 10,000barrels per day and increased storage and improved loading capability atOneonta, New York.  We are nearingcompletion of a Phase II project to further expand our delivery capacity ofliquefied petroleum gases (“LPGs”) to the Northeast by 8,000 to 10,000 barrelsper day.  The Phase II expansion includesthe construction of three pump stations between Coshocton and Greensburg,Pennsylvania, and two stations from Greensburg to Watkins Glen, New York.  Additional work on the pipeline segmentbetween Greensburg and Philadelphia, Pennsylvania, to increase delivery ratesto the Philadelphia area has been completed. Improvements are also underway at our Dubois, Pennsylvania, and Eagle,Pennsylvania, terminals.  These projectswill be completed by year-end 2004.****

 

**OurBusiness**

 

TE Products Pipeline Company, Limited Partnership, aDelaware limited partnership, was formed in March 1990.  TEPPCO Partners, L.P. (“Parent Partnership”)owns a 99.999% interest in us as the sole limited partner.  TEPPCO GP, Inc. (“TEPPCO GP” or “GeneralPartner”), a subsidiary of the Parent Partnership, holds a 0.001% GeneralPartner interest in us.  Texas EasternProducts Pipeline Company, LLC (the “Company”), a Delaware limited liabilitycompany, serves as the general partner of our Parent Partnership.  The Company is a wholly owned subsidiary ofDuke Energy Field Services, LLC (“DEFS”), a joint venture between Duke EnergyCorporation (“Duke Energy”) and ConocoPhillips. Duke Energy holds an interest of approximately 70% in DEFS, andConocoPhillips holds the remaining interest of approximately 30%.  TEPPCO GP, as general partner, performs allof our management and operating functions required in accordance with theAgreement of Limited Partnership of TE Products Pipeline Company, LimitedPartnership.  We reimburse our GeneralPartner and the Company for all reasonable direct and indirect expenses thatthey incur in managing us.

 

We operate and report in one business segment:  transportation and storage of refinedproducts, LPGs and petrochemicals. Revenues are earned from transportation and storage of refined productsand LPGs, intrastate transportation of petrochemicals, sales of product inventoryand other ancillary services.  Our twolargest operating expense items are labor and electric power.  We generally realize higher revenues duringthe first and fourth quarters of each year as our operations are somewhatseasonal.  Refined products volumes aregenerally higher during the second and third quarters because of greater demandfor gasolines during the spring and summer driving seasons. LPGs volumes aregenerally higher from November through March due to higher demand in theNortheast for propane, a major fuel for residential heating.  Our results also include our equityinvestments in Centennial Pipeline LLC (“Centennial”) and Mont Belvieu StoragePartners, L.P. (“MB Storage”) (see Note 6. Equity Investments).

 

We are one of three operating subsidiaries of ourParent Partnership.  Our ParentPartnership is managed by its general partner, the Company, which hasapproximately 1,000 employees dedicated to the operations and management of theoperating subsidiaries.  Our ParentPartnership allocates operating, general and administrative expenses to us forlegal, insurance, financial, communication and other administrative servicesbased upon the estimated level of effort devoted to our variousoperations.  We believe that the methodfor allocating corporate operating, general and administrativeexpenses to us is reasonable.

 

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**Resultsof Operations**

 

The following table presents volumes delivered and averagetariff per barrel for the three months and nine months ended September 30, 2004and 2003 (in thousands, except tariff information):

 
| ** **                       | ** ** | **Three  Months Ended  September 30,** | ** ** | **Percentage  Increase** | ** ** | **Nine  Months Ended  September 30,** | ** ** | **Percentage  Increase** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **2004**                               | ** ** | **2003**                 | ** ** | **(Decrease)**                        | ** ** | **2004**                 | ** ** | **2003** | ** ** | **(Decrease)** | ** ** |
| ** **                       | ** ** | ** **                             | ** ** | ** **               | ** ** | ** **                            | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Volumes Delivered**            |       |                                   |       |                     |       |                                  |       |                     |       |   |   |   |   |
| Refined products                 |       | 41,726                                 |       | 42,476                   |       | (2                                    | )%         | 116,184                  |       | 114,964 |   | 1 | % |
| LPGs                             |       | 9,107                                  |       | 9,146                    |       | —                                |       | 31,109                   |       | 29,678 |   | 5 | % |
| Total                            |       | 50,833                                 |       | 51,622                   |       | (2                                    | )%         | 147,293                  |       | 144,642 |   | 2 | % |
|                             |       |                                   |       |                     |       |                                  |       |                     |       |   |   |   |   |
| **Average Tariff per Barrel**    |       |                                   |       |                     |       |                                  |       |                     |       |   |   |   |   |
| Refined products                 |       | $                                      | 1.04       |                     | $          | 0.89                                  |       | 17                       | %          | $ | 0.98 |   | $ | 0.89 |   | 10 | % |
| LPGs                             |       | 1.76                                   |       | 2.02                     |       | (13                                   | )%         | 1.88                     |       | 2.11 |   | (11 | )% |
| Average system tariff per barrel |       | $                                      | 1.17       |                     | $          | 1.09                                  |       | 7                        | %          | $ | 1.17 |   | $ | 1.14 |   | 3 | % |

 

*Three Months Ended September 30, 2004 Compared with Three Months EndedSeptember 30, 2003*

 

We reportednet income of $4.7 million for the three months ended September 30, 2004,compared with net income of $8.8 million for the three months ended September30, 2003.  Net income decreased $4.1million primarily due to an increase of $8.5 million in costs and expenses andan increase of $0.5 million in interest expense – net, partially offset by anincrease of $3.7 million in operating revenues, a decrease of $1.1 million inlosses from equity investments and an increase of $0.1 million in other income– net.  We discuss the factorsinfluencing our operating performance below.

 

Revenuesfrom refined products transportation increased $5.4 million for the threemonths ended September 30, 2004, compared with the three months ended September30, 2003, primarily due to the recognition of $4.1 million of deferred revenuerelated to the expiration of two customer transportation agreements.  Under some of our transportation agreementswith customers, the contracts specify minimum monthly payments fortransportation services.  If thetransportation services for the month are not used, the unused transportationservice is recorded as deferred revenue. The contracts generally specify a subsequent period of time in which thecustomer can deliver excess products to us to recover the deferredrevenue.  During the third quarter of2004, the time limit under two transportation agreements expired without thecustomers recovering the deferred revenue. As a result, we recognized the deferred revenue as refined productsrevenues in the current period.  Thisadditional revenue increased the refined products average tariff by $0.10 perbarrel, or 11%.

 

Theremaining refined products average tariff increased 6% primarily as a result ofhigher market-based tariff rates which went into effect in May 2004 anddecreased short-haul deliveries of product received into our system fromCentennial at Creal Springs, Illinois. Prior to the construction of Centennial,deliveries on our pipeline system were limited by our pipeline capacity, andtransportation services for our customers were allocated in accordance with aproration policy.  With this incrementalpipeline capacity, our previously constrained system has expanded deliveries inmarkets both south and north of Creal Springs. In February 2003, we entered into a lease agreement with Centennial thatincreased our flexibility to deliver refined products to our market areas.  During the three months ended September 30,2004, overall refined product volumes transported decreased 2% 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.

 

Revenuesfrom LPGs transportation decreased $2.4 million for the three months endedSeptember 30, 2004, compared with the three months ended September 30, 2003,primarily due to lower deliveries of propane in the upper Midwest and Northeastmarket areas due to less favorable price differentials between Mont Belvieu andother propane storage centers combined with pipeline downtime associated with thecompletion of the Northeast

 

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capacity expansion project, partially offset by higher deliveries of isobutane toChicago area refineries and increased short-haul propane deliveries to GulfCoast petrochemical customers. The higher propane prices in 2004 also reducedthe fill of consumer storage of propane during 2004.  The LPGs average rate per barrel decreased13% from the prior year period primarily as a result of increased short-hauldeliveries during the three months ended September 30, 2004.

 

Otheroperating revenues increased $0.7 million for the three months ended September30, 2004, compared with the three months ended September 30, 2003, primarilydue to higher refined products tender deduction and loading fees.  These increases were partially offset bylower revenues from product exchanges, which are used to position product inthe Midwest market area.

 

Costs andexpenses increased $8.5 million for the three months ended September 30, 2004,compared with the three months ended September 30, 2003. The increase was madeup of a $5.8 million increase in depreciation and amortization expense, a $2.9million increase in operating, general and administrative expenses and a $0.7million increase in operating fuel and power, partially offset by a $0.4million decrease in taxes – other than income taxes and $0.5 million of netgains on the sales of assets. Depreciation expense increased from the prior year period because of a$4.4 million charge in the third quarter of 2004, resulting from the impairmentof marine assets in the Beaumont, Texas, area (see Note 3.  Property, Plant and Equipment).  Depreciation expense also increased primarilyas a result of assets placed in service during 2003 and 2004.  This increase was partially offset by anincrease in the estimated remaining life of a section of our pipeline system inthe Northeast, resulting from pipeline capital improvements made as part of ourintegrity management program.  Operating,general and administrative expenses increased primarily due to a $1.1 millionincrease in pipeline inspection and repair costs associated with our integritymanagement program, a $0.7 million increase in labor and benefits expenseprimarily related to incentive compensation plans, a $0.4 million increase inproduct losses relating to settlements with a shipper regarding jet fuel and anincrease of $0.3 million in consulting and contract services primarily relatedto compliance with the Sarbanes-Oxley Act of 2002.  Operating fuel and power expense increased$0.7 million primarily as a result of higher power rates during the 2004period.  Taxes – other than income taxesdecreased $0.4 million as a result of revisions to estimated property taxaccruals.  In addition, we recognized netgains of $0.5 million for the three months ended September 30, 2004, from thesales of various assets.

 

Net lossesfrom equity investments decreased $1.1 million for the three months endedSeptember 30, 2004, compared with the three months ended September 30, 2003, asshown below (in thousands):

 
| ** **          | ** ** | **Three Months Ended  September 30,** | ** ** | **Increase** | ** ** |
|---------------------|------------|---------------------------------------|------------|--------------|------------|
| ** **          | ** ** | **2004**                              | ** ** | **2003**     | ** ** | **(Decrease)** |   |
| Centennial          |       | $                                     | (1,839     | )            | $          | (2,964 | ) | $ | 1,125 |   |
| MB Storage          |       | 1,530                                 |       | 1,556        |       | (26 | ) |
| Other               |       | (13                                   | )          | (29          | )          | 16 |   |
| Total equity losses |       | $                                     | (322       | )            | $          | (1,437 | ) | $ | 1,115 |   |

 

Equitylosses in Centennial for the three months ended September 30, 2004, comparedwith the three months ended September 30, 2003, decreased $1.1 millionprimarily due to lower operating expenses, partially offset by a decrease intransportation revenues and volumes. Included in the equity loss for the three months ended September 30,2004, is $1.7 million of equity income relating to the settlement of certaintransmix matters recognized in previous periods.

 

Equityearnings from our 50% ownership interest in MB Storage remained virtuallyunchanged for the three months ended September 30, 2004, compared with thethree months ended September 30, 2003. In April 2004, MB Storage acquired storage assets and contracts for$33.5 million, of which we contributed $16.5 million.  Decreases in equity earnings were due toincreased amortization and depreciation expense on the acquired storage assetsand contracts, offset by increased storage revenue and rental revenue primarilyfrom the acquired contracts and lower pipeline rehabilitation expenses on theMB Storage system.

 

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Interestexpense increased $0.4 million for the three months ended September 30, 2004,compared with the three months ended September 30, 2003, primarily due tohigher outstanding debt balances under the Note Payable with our ParentPartnership.  Interest capitalizeddecreased $0.1 million for the three months ended September 30, 2004, comparedwith the three months ended September 30, 2003, as a result of lowerconstruction work-in-progress balances in 2004.

 

Other income – net increased $0.1 million for thethree months ended September 30, 2004, compared with the three months endedSeptember 30, 2003, primarily due to higher interest income earned on cashinvestments and other investing activities.

 

*Nine Months Ended September 30, 2004 Compared with Nine Months EndedSeptember 30, 2003*

 

We reportednet income of $28.8 million for the nine months ended September 30, 2004,compared with net income of $38.1 million for the nine months ended September30, 2003.  Net income decreased $9.3million primarily due to an increase of $23.2 million in costs and expense,partially offset by an increase of $12.7 million in operating revenues, adecrease of $0.6 million in losses from equity investments, a decrease of $0.1million in interest expense – net and anincrease of $0.5 million in other income – net. We discuss the factors influencing our operating performance below.

 

Revenuesfrom refined products transportation increased $10.6 million for the ninemonths ended September 30, 2004, compared with the nine months ended September30, 2003, primarily due to the recognition of $4.1 million of deferred revenue related to the expiration of twocustomer transportation agreements, an overall increase of 1% in the refinedproducts volumes delivered, primarily due to increases in motor fuel anddistillate volumes transported as a result of a strong trucking market, andhigher market-based tariff rates which went into effect in July 2003 and May2004.  These volume increases were primarilydue to deliveries of products received into our pipeline from Centennial atCreal Springs, Illinois.  Centennial hasprovided our system with additional pipeline capacity for products originatingin the U.S. Gulf Coast area.  Prior tothe construction of Centennial, deliveries on our pipelinesystem were limited by our pipeline capacity, and transportation services forour customers were allocated in accordance with a proration policy.  With this incremental pipeline capacity, ourpreviously constrained system has expanded deliveries in markets both south andnorth of Creal Springs.  In February2003, we entered into a lease agreement with Centennial that increased ourflexibility to deliver refined products to our market areas.  Volume increases were due to increased demandand market share for products supplied from the U.S. Gulf Coast into Midwestmarkets.  The refined products averagerate per barrel increased 10% from the prior year period primarily due tohigher market-based tariff rates which went into effect in July 2003 and May2004, partially offset by the impact of the Midwest origin point for barrelsreceived from Centennial, which resulted in decreased short-haul barrelstransported on our system.

 

Revenuesfrom LPGs transportation decreased $4.1 million for the nine months endedSeptember 30, 2004, compared with the nine months ended September 30, 2003, dueto lower 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 MontBelvieu propane price spiked, which resulted in our sourced propane being lesscompetitive than propane from other source points.  Also contributing to the decrease were lessfavorable price differentials between Mont Belvieu and other supply centersduring the second and third quarters of 2004. The higher propane prices in 2004 also reduced the fill of consumerstorage of propane during 2004.  Thesedecreases were partially offset by increased deliveries of isobutane to Chicagoarea refineries and increased short-haul propane deliveries to Gulf Coastpetrochemical customers.  The LPGsaverage rate per barrel decreased 11% from the prior year period primarily as aresult of increased short-haul deliveries during the nine months ended September30, 2004.

 

Otheroperating revenues increased $6.2 million for the nine months ended September30, 2004, compared with the nine months ended September 30, 2003, primarily dueto higher propane inventory fees, higher refined products tender deduction andloading fees, higher revenues from product exchanges, which are used toposition product in the Midwest market area, higher margins on productinventory sales and higher propane deliveries at our Providence, Rhode Island,import facility.

 

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Costs andexpenses increased $23.2 million for the nine months ended September 30, 2004,compared with the nine months ended September 30, 2003. The increase was madeup of a $14.5 million increase in operating, general and administrativeexpenses and a $9.5 million increase in depreciation and amortization expense,partially offset by a $0.2 million decrease in taxes – other than income taxesand $0.6 million of net gains on the sales of assets.  Operating, general and administrativeexpenses increased primarily due to a $9.1 million increase in pipeline inspectionand repair costs associated with our integrity management program, a $1.4million increase in consulting and contract services, of which $0.8 million wasrelated to compliance with the Sarbanes-Oxley Act of 2002, a $1.1 millionincrease in potential acquisition evaluation activities, a $0.9 millionincrease in rental expense from the Centennial pipeline capacity leaseagreement that we entered into in February 2003, a $0.9 million increase inrental expense primarily related to a capacity lease on another pipeline and a$0.2 million increase in environmental assessment and remediationactivities.  These increases werepartially offset by lower expenses in the 2004 period associated with thewrite-off of receivables related to customer bankruptcies and non-payments in2003.  Depreciation expense increasedfrom the prior year period because of a $4.4 million charge resulting from theimpairment of marine assets in the Beaumont area (see Note 3.  Property, Plant andEquipment).  Depreciation expensealso increased as a result of assets placed in service during 2003, partiallyoffset by an increase in the estimated remaining life of a section of ourpipeline system in the Northeast, resulting from pipeline capital improvementsmade as part of our integrity management program.  Taxes – other than income taxes decreased $0.2million as a result of adjustments in the property tax accruals.  In addition, we recognized net gains of $0.6million for the nine months ended September 30, 2004, from the sales of variousassets.

 

Net lossesfrom equity investments decreased $0.6 million for the nine months endedSeptember 30, 2004, compared with the nine months ended September 30, 2003, asshown below (in thousands):

 
| ** **          | ** ** | **Nine Months Ended  September 30,** | ** ** | **Increase** | ** ** |
|---------------------|------------|--------------------------------------|------------|--------------|------------|
| ** **          | ** ** | **2004**                             | ** ** | **2003**     | ** ** | **(Decrease)** |   |
|                |       |                                 |       |         |       |   |   |
| Centennial          |       | $                                    | (7,982     | )            | $          | (7,969 | ) | $ | (13 | ) |
| MB Storage          |       | 5,944                                |       | 5,400        |       | 544 |   |
| Other               |       | (31                                  | )          | (63          | )          | 32 |   |
| Total equity losses |       | $                                    | (2,069     | )            | $          | (2,632 | ) | $ | 563 |   |

 

Equitylosses in Centennial for the nine months ended September 30, 2004, comparedwith the nine months ended September 30, 2003, remained virtually unchanged,with increases primarily due to the acquisition of an additional 16.7% interestin Centennial on February 10, 2003, bringing our ownership interest to 50%, andan increase in operating expenses, offset by increased transportation revenuesand volumes.  Included in the equity lossfor the nine months ended September 30, 2004, is $1.7 million of equity incomerelating to the settlement of certain transmix matters recognized in previousperiods.

 

Equityearnings from our 50% ownership interest in MB Storage increased $0.5 millionfor the nine months ended September 30, 2004, compared with the nine monthsended September 30, 2003.  In April 2004,MB Storage acquired storage assets and contracts for $33.5 million, of which wecontributed $16.5 million.  The increasein equity earnings is due to increased storage revenue, shuttle revenue andrental revenue primarily from the acquired contracts and lower pipelinerehabilitation expenses on the MB Storage system, partially offset by increasedamortization and depreciation expense on storage assets and contracts acquired.

 

Interest expenseincreased $0.2 million for the nine months ended September 30, 2004, comparedwith the nine months ended September 30, 2003, primarily due to higheroutstanding debt balances under the Note Payable with our Parent Partnership.  Interest capitalized increased $0.3 millionfor the nine months ended September 30, 2004, compared with the nine monthsended September 30, 2003, as a result of higher construction work-in-progressbalances in 2004.

 

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Other income– net increased $0.5 million for the nine months ended September 30, 2004,compared with the nine months ended September 30, 2003, primarily due to higherinterest income earned on cash investments and other investing activities.

 

**FinancialCondition and Liquidity**

 

Cash flows for the nine months ended September 30,2004 and 2003, were as follows (in thousands):

 
| ** **                  | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                        |       |                                 |       |   |   |
| Cash provided by (used in): |       |                                 |       |   |   |
| Operating activities        |       | $                                    | 96,215     |   | $ | 73,811 |   |
| Investing activities        |       | (73,511                              | )          | (60,977 | ) |
| Financing activities        |       | (22,892                              | )          | (13,271 | ) |
|                             |            |                                      |            |  |  |  |  |

 

*Operating Activities*

 

Net cash from operating activities for the nine months ended September30, 2004 and 2003, was comprised of the following (in thousands):

 
| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                       |       |                                 |       |   |   |
| Net income                                 |       | $                                    | 28,811     |   | $ | 38,136 |   |
| Depreciation and amortization              |       | 30,392                               |       | 20,925 |   |
| Losses in equity investments               |       | 2,069                                |       | 2,632 |   |
| Distributions from equity investments      |       | 7,728                                |       | — |   |
| Non-cash portion of interest expense       |       | 22                                   |       | 23 |   |
| Cash provided by working capital and other |       | 27,193                               |       | 12,095 |   |
| Net cash from operating  activities        |       | $                                    | 96,215     |   | $ | 73,811 |   |

 

Cash provided by operating activities increased $22.4million for the nine months ended September 30, 2004, compared with the ninemonths ended September 30, 2003, primarily due to distributions received fromMB Storage and the timing of payments for working capital components during thenine months ended September 30, 2004, partially offset by lower net income inthe 2004 period.

 

We believe that we will continue to have adequateliquidity to fund future recurring operating and investing activities.  Our primary cash requirements consist ofnormal operating expenses, capital expenditures to sustain existing operationsand revenue generating expenditures, interest payments on our Senior Notes andon borrowings under our Parent Partnership’s credit facilities anddistributions to our Parent Partnership. Short-term cash requirements, such as operating expenses, capitalexpenditures to sustain existing operations and quarterly distributions to ourParent Partnership, are expected to be funded through operating cashflows.  Long-term cash requirements for expansion projects are expected tobe funded by several sources, including cash flows from operating activities,borrowings under our Parent Partnership’s credit facilities and the issuance byour Parent Partnership of additional equity and debt securities.  The timing of any debt or offerings by ourParent Partnership will depend on various factors, including prevailing marketconditions, interest rates and our Parent Partnership’s financial condition andcredit rating at the time.

 

At September 30, 2004, and December 31, 2003, we hadworking capital deficits of $51.3 million and $12.3 million, respectively.  Cash generated from operations and from ourParent Partnership’s credit facilities and debt and equity offerings are ourprimary sources of liquidity.  Workingcapital deficits can occur primarily due to

 

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thetiming of operating cash receipts from customers, payment of cash distributionsand the payment of normal operating expenses and capital expenditures.  We are a wholly owned subsidiary of theParent Partnership.  We expect that ourParent Partnership will make capital contributions, loans or otherwise provideliquidity to us as needed, but the Parent Partnership has no contractualobligation to do so.  We anticipate thatthe Parent Partnership will provide the necessary liquidity to protect itsinvestment in us.  At September 30, 2004,our Parent Partnership had approximately $115.0 million in available borrowingcapacity under its revolving credit facility to cover any working capitalneeds, and expects that cash flows from operating activities, the sale ofadditional debt or equity offerings will provide necessary liquidity to us.

 

*Investing Activities*

 

Cash flows used in investing activities totaled $73.5million for the nine months ended September 30, 2004, and were comprised of$51.2 million of capital expenditures, $1.5 million of cash contributions forour ownership interest in Centennial, $19.4 million of cash contributions forour ownership interest in MB Storage and $2.0 million for the acquisition ofassets acquired during the nine months ended September 30, 2004, partiallyoffset by $0.6 million in net cash proceeds from the sales of variousassets.  Cash flows used in investingactivities totaled $61.0 million for the nine months ended September 30, 2003,and were comprised of $37.7 million of capital expenditures, $20.0 million forour acquisition of an additional 16.7% interest in Centennial, $3.0 million ofcash contributions for our ownership interest in Centennial and $0.3 million ofcash contributions for our ownership interest in MB Storage.

 

*Financing Activities*

 

Cash flows used in financing activities totaled $22.9million for the nine months ended September 30, 2004, and were comprised of$88.3 million of distributions paid to our Parent Partnership and $25.0 millionof repayments on our term loan, partially offset by $90.4 million of proceedsfor our term loan.  Cash flows used infinancing activities totaled $13.3 million for the nine months ended September30, 2003, and were comprised of $77.6 million of distributions paid to ourParent Partnership and $53.6 million of repayments on our term loan, partiallyoffset by $80.9 million of proceeds for our term loan and $37.0 million incontributions from our Parent Partnership.

 

Centennial has entered into credit facilities totaling$150.0 million and, as of September 30, 2004, $150.0 million was outstandingunder those credit facilities.  Theproceeds were used to fund construction and conversion costs of Centennial’spipeline system.  We and Marathon AshlandPetroleum LLC have each guaranteed one half of Centennial’s debt, up to amaximum of $75.0 million each.

 

*Parent Partnership CreditFacilities*

 

We currently utilize debt financing available from ourParent Partnership through intercompany notes. The terms of the intercompanynotes generally match the principal and interest payment dates under the ParentPartnership’s credit agreements.  Theinterest rates charged by the Parent Partnership include the stated interestrate of the Parent Partnership, plus a premium to cover debt issuancecosts.  The interest rate is alsodecreased or increased to cover gains and losses, respectively, on any interestrate swaps that the Parent Partnership may have in place on its respectivecredit agreements.  These creditfacilities of the Parent Partnership are described below.

 

On April 6, 2001, our Parent Partnership entered intoa $500.0 million revolving credit facility including the issuance of letters ofcredit of up to $20.0 million (“Three Year Facility”).  The interest rate was based, at our ParentPartnership’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 for theThree 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.  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.

 

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On June 27, 2003, our Parent Partnership entered intoa $550.0 million revolving credit facility with a three year term, includingthe issuance of letters of credit of up to $20.0 million (“Revolving CreditFacility”).  The interest rate is based,at our Parent Partnership’s option, on either thelender’s base rate plus a spread, or LIBOR plus a spread in effect at the timeof the borrowings.  The credit agreementfor the Revolving Credit Facility contains certain restrictive financialcovenant ratios.  Our Parent Partnershipborrowed $263.0 million under the Revolving Credit Facility and repaid theoutstanding balance of the Three Year Facility. At September 30, 2004, $325.5 million was outstanding under theRevolving Credit Facility.  At September30, 2004, our Parent Partnership was in compliance with the covenants in thiscredit agreement.  On October 21, 2004,our Parent Partnership amended its Revolving Credit Facility to (i) increasethe facility size to $600.0 million, (ii) extend the term to October 21, 2009,(iii) remove certain restrictive covenants, (iv) increase the available amountfor the issuance of letters of credit up to $100.0 million and (v) decrease theLIBOR rate spread charged at the time of each borrowing.

 

On January 30, 2003, our Parent Partnership issued$200.0 million principal amount of 6.125% Senior Notes due 2013.  The 6.125% Senior Notes were issued at adiscount of $1.4 million and are being accreted to their face value over theterm of the notes.  The ParentPartnership used $182.0 million of the proceeds from the offering to reduce theoutstanding principal on the Three Year Facility to $250.0 million.  The balance of the net proceeds received wasused for general Parent Partnership purposes. The Senior Notes may be redeemed at any time at our Parent Partnership’soption with the payment of accrued interest and a make-whole premium determinedby discounting remaining interest and principal payments using a discount rateequal to the rate of the United States Treasury securities of comparableremaining maturity plus 35 basis points. The indenture governing the 6.125% Senior Notes contains covenants,including, but not limited to, covenants limiting the creation of lienssecuring indebtedness and sale and leaseback transactions.  However, the indenture does not limit theParent Partnership’s ability to incur additional indebtedness.

 

As ofSeptember 30, 2004, and December 31, 2003, we had an intercompany note payableto our Parent Partnership of $276.7 million and $211.3 million, respectively,which represented 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 September 30,2004, was 5.2%.  At September 30, 2004,accrued interest includes $1.6 million due to the Parent Partnership.  For the nine months ended September 30, 2004and 2003, interest costs incurred on the note payable to the Parent Partnershiptotaled $9.2 million and $8.8 million, respectively.

 

*Cash Distributions*

 

During the nine months ended September 30, 2004 and2003, we paid cash distributions totaling $88.3 million and $77.6 million,respectively, to our Parent Partnership. On November 5, 2004, we will pay a cash distribution to our Parent Partnershipof $29.7 million for the quarter ended September 30, 2004.

 

*Future Capital Needs andCommitments*

 

We estimate that capital expenditures, excludingacquisitions, for 2004 will be approximately $70.9 million (which includes $2.0million of capitalized interest). We expect to spend approximately $42.9million for revenue generating projects and facility improvements that willinclude the expansion of our pipelines extending from Seymour to Indianapolis,Indiana, further expansions of our Northeast pipeline system and constructionof a new truck loading terminal in Bossier City, Louisiana.  We expect to spend approximately $26.0million to sustain existing operations, including life-cycle replacements forequipment at various facilities and pipeline and tank replacements.  We continually review and evaluate potentialcapital improvements and expansions that would be complementary to our presentsystem.  These expenditures can varygreatly depending on the magnitude of our transactions.  We may finance capital expenditures throughinternally generated funds, debt, capital contributions from our ParentPartnership or any combination thereof.

 

Our debt repayment obligations consist of payments forprincipal and interest on (i) our $276.7 million principal amount due to theParent Partnership related to our share of the Parent Partnership’s RevolvingCredit Facility due in June 2006, 7.625% Senior Notes due in February 2012 and6.125% Senior Notes due in February 

 

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2013,  (ii) our $210.0 million 7.51% SeniorNotes due January 15, 2028, and (iii) our $180.0 million 6.45% Senior Notes dueJanuary 15, 2008.

 

We are also contingently liable as guarantor for thelesser of one half or $75.0 million principal amount (plus interest) ofCentennial’s borrowings.  In January2003, we entered into a pipeline capacity lease agreement with Centennial for aperiod of five years that contains a minimum throughput requirement.  During the year ended December 31, 2003, andfor the nine months ended September 30, 2004, we exceeded the minimumthroughput requirements on the lease agreement. We are also contingently liable as guarantor for $500.0 millionprincipal amount of 7.625% Senior Notes due 2012 issued in February 2002 andfor $200.0 million principal amount of 6.125% Senior Notes due 2013 issued inJanuary 2003 by our Parent Partnership.

 

During the nine months ended September 30, 2004, wecontributed $1.5 million to Centennial to cover operating needs and capitalexpenditures.  During the nine monthsended September 30, 2004, we contributed $19.4 million to MB Storage, of which$16.5 million was used to for its acquisition of storage assets in April2004.  We may be required to contributecash to Centennial during the remainder of 2004 to cover capital expenditures,acquisitions or other operating needs and to MB Storage to cover significantcapital expenditures or additional acquisitions.

 

*Off-Balance Sheet Arrangements*

 

We do not rely on off-balance sheet borrowings to fundour acquisitions. We have no off-balance sheet commitments for indebtednessother than the limited guaranty of the Centennial debt, the Parent Partnershipdebt and leases covering assets utilized in several areas of our operations.

 

*Contractual Obligations*

 

The following table summarizes our debt repayment obligations andmaterial contractual commitments as of September 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 |       | $                                              | 276.7      |   | $ | — |   | $ | 276.7 |   | $ | — |   | $ | — |   |
| 6.45% Senior Notes due 2008 (1)  |       | 180.0                                          |       | — |   | — |   | 180.0 |   | — |   |
| 7.51% Senior Notes due 2028 (1)  |       | 210.0                                          |       | — |   | — |   | — |   | 210.0 |   |
| Debt subtotal                    |       | 666.7                                          |       | — |   | 276.7 |   | 180.0 |   | 210.0 |   |
|                             |       |                                           |       |   |   |   |   |   |   |   |   |
| Operating leases                 |       | 70.7                                           |       | 12.8 |   | 22.3 |   | 12.6 |   | 23.0 |   |
| Total                            |       | $                                              | 737.4      |   | $ | 12.8 |   | $ | 299.0 |   | $ | 192.6 |   | $ | 233.0 |   |

 

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(1)          We entered into an interest rate swapagreement to hedge our exposure to changes in the fair value of our 7.51%Senior Notes due 2028.  At September30, 2004, the 7.51% Senior Notes includean adjustment to increase the fair value of the debt by $3.9 million related tothis interest rate swap agreement.  At September30, 2004, our 6.45% Senior Notes include$0.1 million of unamortized debt discount. The fair value adjustment and unamortized debt discount are excludedfrom this table.

 

We expect torepay the long-term, senior unsecured obligations and note payable to ourParent Partnership through the issuance of additional long-term seniorunsecured debt at the time the 2008 and 2028 debts mature, with proceeds fromthe dispositions of assets, cash flows from operations, contributionsfrom our Parent Partnership or any combination of the above items.

 

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*Sources of Future Capital*

 

We expect that our cash flow from operating activitieswill be adequate to fund cash distributions and capital additions necessary tosustain existing operations.  However,expansionary capital projects and acquisitions may require additional capitalcontributions from our Parent Partnership. The Parent Partnership has funded its capital commitments from operatingcash flow, borrowings under bank credit facilities, the issuance of long termdebt in capital markets and the public offering of Limited Partner Units.  We expect future capital needs will besimilarly funded.

 

Our Parent Partnership has filed with the Securitiesand Exchange Commission a universal shelf registration statement that, subjectto agreement on terms at the time of use and appropriate supplementation,allows it to issue, in one or more offerings, up to an aggregate of $2.0billion of equity securities, debt securities or a combination thereof.  At September 30, 2004, our Parent Partnershiphas $2.0 billion available under this shelf registration.

 

Our Parent Partnership’s senior unsecured debt israted BBB by Standard and Poors (“S&P”) and Baa3 by Moody’s InvestorsService (“Moody’s”).  Our seniorunsecured debt is also rated BBB by S&P and Baa3 by Moody’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.

 

**OtherConsiderations**

 

Our operations are subject to federal, state and locallaws and regulations governing the discharge of materials into the environment.Failure to comply with these laws and regulations may result in the assessmentof administrative, civil and criminal penalties, imposition of injunctionsdelaying or prohibiting certain activities and the need to performinvestigatory and remedial activities. Although we believe our operations 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 in substantialcosts and liabilities to us.  We believethat changes in environmental laws and regulations will not have a materialadverse effect on our financial position, results of operations or cash flowsin the near term.

 

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 September 30, 2004, we have an accruedliability of $0.2 million 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, weexperienced a release of 511 barrels of jet fuel from a storage tank at ourBlue Island terminal located in Cook County, Illinois.  As a result of the release, we have enteredinto an Agreed Order with the State of Illinois which required us to conduct anenvironmental investigation.  At thistime, we have complied with the terms of the Agreed Order, and the results ofthe environmental investigation indicated there were no soil or groundwaterimpacts from the release.  We are in theprocess of negotiating a final settlement with the State of Illinois, and wedo not expect that compliance with the settlement will have a future materialadverse effect on our financial position, results of operations or cash flows.

 

On July 22, 2004, weexperienced a release of approximately 12 barrels of jet fuel from a sump atour Lebanon, Ohio, terminal.  Thereleased jet fuel was contained within a stormwater retention pond located onthe

 

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terminalproperty.  Six migratory waterfowl wereaffected by the jet fuel and were subsequently euthanized by or at the requestof the United States Fish and Wildlife Service (“USFWS”).  On October 1, 2004, the USFWS served us witha Notice of Violation, alleging that we violated 16 USC 703 of the MigratoryBird Treaty Act for the “take[ing] of migratory birds by illegal methods.”  Such a violation, if proven, would be amisdemeanor criminal offense; however, we deny that any such criminal violationoccurred, and we are vigorously defending our position in this matter.  We do not expect the results of this noticewill have a future material adverse effect on our financial position, resultsof operations or cash flows.

 

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

 

At September 30, 2004, we have an accrued liability of$1.7 million related to various sites requiring environmental remediationactivities.  We do not expect that thecompletion of remediation programs associated with these activities will have afuture material adverse effect on our financial position, results of operationsor cash flows.

 

We regularly review our long-lived assets forimpairment in accordance with SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  At September 30, 2004, we have identifiedcertain assets that we are assessing for recoverability resulting from recentoperational changes.  We are continuing tomonitor these circumstances; however, we do not believe that the resolution ofthe matter will have a material effect on our financial condition, results ofoperations or cash flows.

 

*Recent Accounting Pronouncements*

 

**See discussion of new accounting pronouncementsin Note 1.  Organization and Basis ofPresentation - New Accounting Pronouncements in the accompanying consolidatedfinancial statements.**

 

**Forward-LookingStatements**

 

**The mattersdiscussed in this Report include “forward-looking statements” within themeaning of various provisions of the Securities Act of 1933 and the SecuritiesExchange Act of 1934.  All statements,other than statements of historical facts, included in this document thataddress activities, events or developments that we expect or anticipate will ormay occur 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 and growthof our business and operations, plans, references to future success, referencesto intentions as to future matters and other such matters are forward-lookingstatements.  These statements are basedon certain assumptions and analyses made by us in light of our experience andour perception of historical trends, current conditions and expected futuredevelopments as well as other factors we believe are appropriate under thecircumstances.  However, whether actual resultsand developments will conform with our expectations and predictions is subjectto a number of risks and uncertainties, including general economic, market orbusiness conditions, the opportunities (or lack thereof) that may be presentedto and pursued by us, competitive actions by other pipeline companies, changesin laws or regulations and other factors, many of which are beyond ourcontrol.  Consequently, all of theforward-looking statements made in this document are qualified by thesecautionary statements and we cannot assure you that actual results ordevelopments that we anticipate will be realized or, even if substantiallyrealized, will have the expected consequences to or effect on us or ourbusiness or operations.  For additionaldiscussion of such risks and uncertainties, see our Annual Report on Form 10-Kfor the year ended December 31, 2003, and other filings we have made with theSecurities and Exchange Commission.**

 

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**Item 3.****Quantitative andQualitative Disclosures About Market Risk**

 

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

 

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

 

At September 30, 2004, we had outstanding $180.0million principal amount of 6.45% Senior Notes due 2008 and $210.0 millionprincipal amount of 7.51% Senior Notes due 2028.  At September 30, 2004, the estimated fairvalues of the 6.45% Senior Notes and 7.51% Senior Notes were approximately$193.8 million and $218.2 million, respectively.

 

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 floatingrate of interest based on a three-month U.S. Dollar LIBOR rate, plus a spread,and receive a fixed rate of interest of 7.51%. During the nine months endedSeptember 30, 2004 and 2003, we recognized reductions in interest expense of$7.5 million and $7.4 million, respectively, related to the difference betweenthe fixed rate and the floating rate of interest on the interest rateswap.  During the quarter ended September30, 2004, we measured the hedge effectiveness of this interest rate swap andnoted that no gain or loss from ineffectiveness was required to berecognized.  The fair value of thisinterest rate swap was a gain of approximately $3.9 million at September 30,2004, and a gain of approximately $2.3 million at December 31, 2003.  Utilizing the balance of the 7.51% Senior Notesoutstanding at September 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 September 30, 2004, and December 31, 2003, wehad an intercompany note payable to our Parent Partnership of $276.7 millionand $211.3 million, respectively, which represented borrowings under the ParentPartnership’s Revolving Credit Facility, 7.625% Senior Notes and 6.125% SeniorNotes. The weighted average interest rate on the note payable to the ParentPartnership at September 30, 2004, was 5.2%. At September 30, 2004, accrued interest includes $1.6 million due to theParent Partnership.  For the nine monthsended September 30, 2004 and 2003, interest costs incurred on the note payableto the Parent Partnership totaled $9.2 million and $8.8 million, respectively.

 

**Item 4.****  Controls and Procedures**

 

The principal executive officer and principalfinancial officer of our General Partner, after evaluating the effectiveness ofour disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e) and 15d-15(e)) as of September 30, 2004, have concluded that, as ofsuch date, our disclosure controls and procedures are adequate and effective toensure that material information relating to us and our consolidatedsubsidiaries would be made known to them by others within those entities.

 

During the third quarter of 2004, there have been nochanges in our internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, those internalcontrols subsequent to the date of the evaluation.  As a result, no corrective actions wererequired or undertaken.

 

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**PART II.****  OTHER INFORMATION**

 

**Item 1.****  Legal Proceedings**

 

We have been, in the ordinary course of business, adefendant in various lawsuits and a party to various other legal proceedings,some of which are covered in whole or in part by insurance.  We believe that the outcome of these lawsuitsand other proceedings will not individually or in the aggregate have a materialadverse effect on our consolidated financial position, results of operations orcash flows.  See discussion of legalproceedings in Note 10.  Commitments andContingencies in the accompanying consolidated financial statements.

 

**Item 6.****  Exhibits and Reports 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). |
| 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                |       | Amended and  Restated Credit Agreement among TEPPCO Partners, L.P., as Borrower, SunTrust  Bank, as Administrative Agent and LC Issuing Bank and The Lenders Party                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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|   |   | Hereto, as  Lenders dated as of October 21, 2004 ($600,000,000 Revolving Facility) (Filed  as Exhibit 99.1 to Form 8-K of TEPPCO Partners, L.P. (Commission File No.  1-10403) dated as of October 21, 2004 and incorporated herein by reference). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1*  |   | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                              |
| 31.2*  |   | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                              |
| 32.1** |   | Certification  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                              |
| 32.2** |   | Certification  of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                              |

 

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* Filedherewith.

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

 

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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:  November 2,2004

 

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