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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003.

For the transition period from ________ to ________.

Commission file number: 1-14323

ENTERPRISE PRODUCTS PARTNERS L.P.
(Exact name of Registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None.

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

Yes [X]    No [ ]

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

Yes [X]    No [ ]

        The aggregate market value of the common units of Enterprise Products Partners L.P. (“EPD”) held by non-affiliates at June 30, 2003, based on the closing price of such equity securities in the daily composite list for transactions on the New York Stock Exchange on June 30, 2003, was approximately $1.1 billion. This figure assumes that Duncan Family 1998 Trust, Duncan Family 2000 Trust, EPOLP 1999 Grantor Trust, Shell US Gas & Power LLC, and the directors and executive officers of Enterprise Products GP, LLC (the “General Partner”) are affiliates of EPD.

        There were 214,561,604 common units and 4,413,549 Class B special units of EPD outstanding at February 20, 2004.

ENTERPRISE PRODUCTS PARTNERS L.P.
TABLE OF CONTENTS

Glossary

        The following abbreviations, acronyms or terms used in this Form 10-K are defined below:

PART I

ITEMS 1 AND 2.  BUSINESS AND PROPERTIES.

General

        We are a leading North American midstream energy company providing a wide range of services to producers and consumers of natural gas and natural gas liquids, or NGLs. We were formed as a limited partnership in 1998 (NYSE symbol, “EPD”) and conduct all of our business through our wholly-owned subsidiary, Enterprise Products Operating L.P. and its subsidiaries and joint ventures. Our General Partner, Enterprise Products GP, LLC, owns a 2% interest in us.

        We do not have any employees. All of our management, administrative and operating functions are performed by employees of EPCO, our ultimate parent company, pursuant to the Administrative Services Agreement. For a discussion of the Administrative Services Agreement, please read Item 13 of this annual report. Unless the context requires otherwise, references to “we,” “us,” “our,” “the Company” or “Enterprise” are intended to mean the consolidated business and operations of Enterprise Products Partners L.P. Our principal executive offices are located at 2727 North Loop West, Houston, Texas 77008 and our telephone number is (713) 880-6500.

        We provide a full range of services to customers and generate predominately fee-based net cash flow from multiple sources along our natural gas and NGL system of assets. NGLs are used by the petrochemical and refining industries to produce plastics, motor gasoline and other industrial and consumer products and also are used as residential and industrial fuels. Our midstream energy services include the:

        In addition to our strategic position in the Gulf of Mexico, we have access to major natural gas and NGL supply basins throughout the United States and Canada, including the Rocky Mountains, the San Juan and Permian basins, the Mid-Continent region and, through third-party pipeline connections, north into Canada’s Western Sedimentary basin. Our asset platform in the Gulf Coast region of the United States, combined with our Mid-America and Seminole pipeline systems, create the only integrated natural gas and NGL transportation, fractionation, processing, storage and import/export network in North America.

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Business Strategy

        Our business strategy is to:

Recent Events

        On December 15, 2003, we and certain of our affiliates, El Paso Corporation and certain of its affiliates (“El Paso”), and GulfTerra Energy Partners, L.P. (“GulfTerra”) and certain of its affiliates entered into a series of agreements under which GulfTerra would merge with one of our subsidiaries, with GulfTerra surviving the merger and becoming a wholly-owned subsidiary of the Company. Formed in 1993, GulfTerra is a publicly traded limited partnership (NYSE symbol, “GTM”) that manages a balanced, diversified portfolio of interests and assets relating to the midstream energy sector. Prior to December 15, 2003, El Paso was the majority owner of GulfTerra’s general partner and owns a 31.8% limited partner interest in GulfTerra. GulfTerra’s principal executive offices are located at 4 East Greenway Plaza, Houston, Texas 77046 and its phone number is (832) 676-4853.

        In general, GulfTerra’s business lines include:

        GulfTerra is one of the largest natural gas gatherers, based on miles of pipeline, in the prolific natural gas supply regions offshore in the Gulf of Mexico and onshore in Texas and in the San Juan Basin, which covers a significant portion of the four contiguous corners of Arizona, Colorado, New Mexico and Utah. These regions, especially the deepwater regions of the Gulf of Mexico, one of the United States’ fastest growing oil and natural gas producing regions, offer GulfTerra significant growth potential through the acquisition and construction of pipelines, platforms, processing and storage facilities and other energy infrastructure.

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        The proposed merger is a three-step process outlined as follows:

        Our preliminary estimate of the total consideration for Steps One, Two and Three we would pay or grant is approximately $3.9 billion. For a period of three years following the closing of the proposed merger, El Paso will provide support services to GulfTerra similar to those provided by El Paso prior to the closing of the merger. GulfTerra will reimburse El Paso for 110% of its direct costs of such services (excluding any overhead costs). El Paso will make transition support payments to us in annual amounts of $18 million, $15 million and $12 million for the first, second and third years of such period, respectively, payable in 12 equal monthly installments for each such year. These transition support payments are included in our preliminary estimate of total consideration.

        We are working to complete the merger as soon as possible. A number of conditions must be satisfied before we can complete the merger, including approval by the unitholders of both the Company and GulfTerra and the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1974. While we cannot predict if and when all of the conditions to the merger will be satisfied, we expect to complete the merger in the second half of 2004.

        To review a copy of the merger agreement and related transaction documents, please read our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2003.

Cautionary Statement Regarding Forward-Looking Information and Risk Factors

        This annual report contains various forward-looking statements and information that are based on our beliefs and those of our General Partner, as well as assumptions made by us and information currently available to us. When used in this document, words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “could,” “believe,” “may” and similar expressions and statements regarding our plans and objectives for future operations, are intended to identify forward-looking statements. Although we and our General Partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we nor our General Partner can give any assurances that such expectations will prove to be correct. Such statements are subject to a

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variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. You should not put undue reliance on any forward-looking statements. When considering forward-looking statements, please read our summarized “Risk Factors” below.

Risk Factors

        Among the key risk factors that may have a direct impact on our results of operations and financial condition are:

Risks Related to the Merger and the Related Transactions

        Integration of the two previously independent companies will be a complex, time consuming and costly process. Failure to timely and successfully integrate these companies may have a material adverse effect on the combined company’s business, financial condition and results of operations. The difficulties of combining the companies will present challenges to the combined company’s management, including:

        The combined company will also be exposed to other risks that are commonly associated with transactions similar to the merger, such as unanticipated liabilities and costs, some of which may be material, and diversion of management’s attention. As a result, the anticipated benefits of the merger may not be realized fully, if at all. We and GulfTerra could be required to divest significant assets to complete the merger.

        We cannot complete the merger until the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired or terminated. Under the terms of the merger agreement, we are required to divest the assets we previously acquired from GulfTerra that are subject to an FTC consent decree (including our interests in the Manta Ray, Nautilus, Nemo and Stingray pipelines). GulfTerra is required to divest any assets required by the FTC to the extent such divestitures are recommended by us and we are required to divest any assets required by the FTC to the extent such divestitures, together with all required GulfTerra divestitures (but excluding the FTC consent decree assets), do not exceed $150 million. In addition, if such divestitures required by the FTC exceed $150 million, we and (with our consent) GulfTerra have the right to comply with such divestiture requirements to consummate the merger.

        Divestitures of assets can be time consuming and may delay completion of the proposed merger. Because there may be a limited number of potential buyers for the assets subject to divestiture and because potential buyers will likely be aware of the circumstances of the sale, these assets could be sold at prices lower than their fair market value or the prices we or GulfTerra paid for these assets. These asset divestitures could also significantly reduce the value of the combined company, eliminate potential cost savings opportunities or lessen the anticipated benefits of the merger.

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Risks Related to the Combined Company’s Leverage

        As of December 31, 2003, we had approximately $2.1 billion of consolidated debt. As of the same date, GulfTerra had approximately $1.8 billion of consolidated debt. As a result, the consolidated balance sheet of the combined company will have significant leverage. The amount of the combined company’s debt could have several important effects on its future operations, including, among other things:

        Our public debt indentures currently do not limit the amount of future indebtedness that we can create, incur, assume or guarantee. Our revolving credit facilities and the merger agreement, however, restrict our ability to incur additional debt, though any debt we may incur in compliance with these restrictions may still be substantial. Likewise, GulfTerra’s public debt indentures, its revolving credit facility and the merger agreement restrict its ability to incur additional debt; however, any debt that it may incur in compliance with these restrictions may still be substantial. The incurrence of additional debt by GulfTerra or us could exacerbate any risks associated with the liquidity of the combined company.

        Our and GulfTerra’s revolving credit facilities and indentures for public debt contain conventional financial covenants and other restrictions. A breach of any of these restrictions by us or GulfTerra, as applicable, could permit the lenders to declare all amounts outstanding under those debt agreements to be immediately due and payable and, in the case of the credit facilities, to terminate all commitments to extend further credit.

        The combined company’s ability to access the capital markets to raise capital on favorable terms may be affected by the combined company’s debt level, the amount of its debt maturing in the next several years and current maturities, and by adverse market conditions resulting from, among other things, general economic conditions, contingencies and uncertainties that are difficult to predict and impossible to control. If the combined company is unable to access the capital markets on favorable terms in the future, it might be forced to seek extensions for some of its short-term securities or to refinance some of its debt obligations through bank credit, as opposed to long-term public debt securities or equity securities. The price and terms upon which the combined company might receive such extensions or additional bank credit, if at all, could be more onerous than those contained in existing debt agreements. Any such arrangements could, in turn, increase the risk that the combined company’s leverage may adversely affect its future financial and operating flexibility and its ability to pay cash distributions at expected rates.

        The closing of the merger will constitute a “change of control” under GulfTerra’s indentures for its senior notes and senior subordinated notes. As a result, GulfTerra will be obligated to offer to purchase each holder’s notes at 101% of their principal amount, plus accrued interest. GulfTerra will also be obligated to offer to purchase each holder’s senior notes at 101% of their principal amount, plus accrued interest, unless, among other things, the change of control (1) does not result in a ratings downgrade of the GulfTerra senior notes by either Moody’s Investors Service or Standard & Poor’s no later than 30 days after the change of control has occurred and (2) less

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than $250 million in aggregate principal amount of the GulfTerra senior subordinated notes are repurchased in response to the same change of control. GulfTerra currently has $250 million aggregate principal amount of senior notes outstanding and $886 million aggregate principal amount of senior subordinated notes outstanding.

        In connection with completion of the merger, GulfTerra or the combined company will need to make an offer to repurchase these notes, or GulfTerra may seek to amend the indentures to waive the repurchase obligation or otherwise refinance its senior and senior subordinated notes. If GulfTerra or the combined company makes an offer to repurchase the notes, it is possible that holders of a large amount of GulfTerra’s notes may exercise their repurchase right, in which case the combined company would be required to raise significant funds in the short term to fulfill GulfTerra’s repurchase obligations. If GulfTerra were unable to meet its repurchase obligations, it would result in an event of default under GulfTerra’s indentures, which would trigger an event of default under GulfTerra’s revolving credit facility and senior secured term loan facility.

        In addition to the combined company’s exposure to commodity prices, the combined company will have significant exposure to increases in interest rates. As of December 31, 2003, we had approximately $2.1 billion of consolidated debt, of which $1.7 billion was at a fixed interest rate and $410 million was at a variable interest rate. Since January 1, 2004, we have entered into interest rate swap transactions that have effectively converted $250 million of our variable interest rate debt to fixed interest rate debt. For additional information regarding our interest rate hedging activities, please read Item 7A of this annual report on Form 10-K. Our merger with GulfTerra will result in a significant increase in our consolidated debt, some of which will be at variable interest rates. As a result, the combined company’s results of operations, and its cash flows, could be materially adversely affected by significant increases in interest rates.

Risks Related to the Combined Company’s Business

        The combined company will operate predominantly in the midstream energy sector, which includes gathering, transporting, processing, fractionating and storing natural gas, NGLs and crude oil. As such, the combined company’s results of operations, cash flows and financial position may be adversely affected by changes in the prices of these hydrocarbon products and by changes in the relative price levels among these hydrocarbon products. In general terms, the prices of natural gas, NGLs, crude oil and other hydrocarbon products are subject to fluctuations in response to changes in supply, market uncertainty and a variety of additional factors that are impossible to control. These factors include:

        The profitability of the combined company’s NGL and natural gas processing operations will depend upon the difference between NGL product prices and natural gas prices. A reduction in the difference between NGL product prices and natural gas prices may result in reduced demand for fractionation, processing, NGL storage and NGL transportation services and, thus, may adversely affect the combined company’s results of operations and cash flows from these activities. In addition, the combined company’s natural gas processing activities will be exposed to commodity price risk associated with the relative price of NGLs to natural gas under its “keepwhole” natural gas processing contracts and, within defined limits, under its “margin-band” natural gas processing contract with Shell. Under these types of agreements, the combined company will take title to NGLs that it extracts from the

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natural gas stream and will be obligated to pay market value, based on natural gas prices, for the energy extracted from the natural gas stream. When prices for natural gas increase, the cost to the combined company of making these “keepwhole” payments will increase, and, where NGL prices do not experience a commensurate increase, the combined company will realize lower margins from these transactions. As a result, changes in prices for natural gas compared to NGLs could have an adverse affect on the results of operations, cash flows and financial position of the combined company.

        The combined company will also be exposed to natural gas and NGL commodity price risk under natural gas processing and gathering and NGL fractionation contracts that provide for the combined company’s fee to be calculated based on a regional natural gas or NGL price index or to be paid in-kind by taking title to natural gas or NGLs. For example, over 95% of the volumes handled by GulfTerra’s San Juan gathering system are fee-based arrangements, 80% of which are calculated as a percentage of a regional natural gas price index. A decrease in natural gas and NGL prices can result in lower margins from these activities, which may adversely affect the combined company’s results of operations, cash flows and financial position.

        The combined company’s profitability could be materially impacted by a decline in the volume of natural gas, NGLs and crude oil transported, gathered or processed at its facilities. A material decrease in natural gas or crude oil production or crude oil refining, as a result of depressed commodity prices, a decrease in the exploration and development activities or otherwise, could result in a decline in the volume of natural gas, NGLs and crude oil handled by the combined company’s facilities.

        The crude oil, natural gas and NGLs available to the combined company’s facilities will be derived from reserves produced from existing wells, which reserves naturally decline over time. To offset this natural decline, the combined company’s facilities will need access to additional reserves. Additionally, some of the combined company’s facilities will be dependent on reserves that are expected to be produced from newly discovered properties that are currently being developed.

        Exploration and development of new oil and natural gas reserves is capital intensive, particularly offshore in the Gulf of Mexico. Many economic and business factors are out of the combined company’s control and can adversely affect the decision by producers to explore for and develop new reserves. These factors include relatively low oil and natural gas prices, cost and availability of equipment, regulatory changes, capital budget limitations or the lack of available capital. For example, a sustained decline in the price of natural gas and crude oil could result in a decrease in natural gas and crude oil exploration and development activities in the regions where the combined company’s facilities are located. This could result in a decrease in volumes to the combined company’s offshore platforms, natural gas processing plants, natural gas, crude oil and NGL pipelines, and NGL fractionators which would have an adverse affect on the combined company’s results from operations, cash flows and financial position. Additional reserves, if discovered, may not be developed in the near future or at all.

        A reduction in demand for NGL products by the petrochemical, refining or heating industries, whether because of general economic conditions, reduced demand by consumers for the end products made with NGL products, increased competition from petroleum-based products due to pricing differences, adverse weather conditions, government regulations affecting prices and production levels of natural gas or the content of motor gasoline or other reasons, could adversely affect the combined company’s results of operations, cash flows and financial position. For example:

        Ethane. A reduction in the demand for ethylene may reduce demand for ethane. Also, if natural gas prices increase significantly in relation to ethane prices, it may be more profitable for natural gas producers to leave the ethane in the natural gas stream to be burned as fuel than to extract the ethane from the mixed NGL stream for sale.

        Propane. The demand for propane as a heating fuel is significantly affected by weather conditions. Unusually warm winters could cause the demand for propane to decline significantly and could cause a significant decline in the volumes of propane that the combined company transports.

        Isobutane. Any reduction in demand for motor gasoline additives may reduce demand for isobutane. During periods in which the difference in market prices between isobutane and normal butane is low or inventory values are high relative to current prices for normal butane or isobutane, the combined company’s operating margin from selling isobutane could be reduced.

        Propylene. Any downturn in the domestic or international economy could cause reduced demand for propylene, which could cause a reduction in the volumes of propylene that the combined company produces and expose the combined company’s investment in inventories of propane/propylene mix to pricing risk due to requirements for short-term price discounts in the spot or short-term propylene markets.

        Even if reserves exist in the areas accessed by the combined company’s facilities and are ultimately produced, the combined company may not be chosen by the producers in these areas to gather, transport, process, fractionate, store or otherwise handle the hydrocarbons that are produced. The combined company will compete with others, including producers of oil and natural gas, for any such production on the basis of many factors, including:

        The combined company’s ability to successfully execute its growth strategy is partially dependent upon making accretive acquisitions. As a result, from time to time, the combined company may evaluate and acquire assets and businesses that it believes complement its existing operations. Similar to the risks associated with integrating our operations with GulfTerra’s operations, the combined company may be unable to integrate successfully businesses it acquires in the future. The combined company may incur substantial expenses or encounter delays or other problems in connection with its growth strategy that could negatively impact its results of operations. Moreover, acquisitions and business expansions involve numerous risks, including:

        If consummated, any acquisition or investment would also likely result in the incurrence of indebtedness and contingent liabilities and an increase in interest expense and depreciation, depletion and amortization expenses. As a result, the combined company’s capitalization and results of operations may change significantly following an acquisition. A substantial increase in the combined company’s indebtedness and contingent liabilities could have a material adverse effect on its business.

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        GulfTerra is engaged in several capital expansion projects and “greenfield” projects for which significant capital has been expended, and the combined company’s operating cash flow from a particular project may not increase immediately following its completion. For instance, if the combined company builds a new pipeline or platform or expands an existing facility, the design, construction, development and installation may occur over an extended period of time and the combined company may not receive any material increase in operating cash flow from that project until after it is placed in service. If the combined company experiences unanticipated or extended delays in generating operating cash flow from these projects, then it may need to reduce or reprioritize its capital budget, sell non-core assets, access the capital markets or decrease distributions to unitholders to meet its capital requirements.

        The combined company may have significant expenditures for the development, construction or other acquisition of energy infrastructure assets, including some construction and development projects with significant technological challenges. For example, underwater operations, especially those in water depths in excess of 600 feet, are very costly and involve much more uncertainty and risk, and if a problem occurs, the solution, if one exists, may be very costly and time consuming. Accordingly, there is an increase in the frequency and amount of cost overruns related to underwater operations, especially in depths in excess of 600 feet. The combined company may not be able to complete its projects, whether in deep water or otherwise, at the costs currently estimated.

        The strategy of the combined company includes growth through the development and acquisition of a wide range of midstream and other energy infrastructure assets while maintaining a strong balance sheet. This strategy includes constructing and acquiring additional assets and businesses to enhance the combined company’s ability to compete effectively and diversify its asset portfolio, thereby providing more stable cash flow. Both companies regularly consider and enter into discussions regarding, and are currently contemplating, potential joint ventures, stand-alone projects or other transactions that they believe will present opportunities to realize synergies, expand their respective roles in the energy infrastructure business and increase their respective market positions.

        The combined company may need new capital to finance the future development and acquisition of assets and businesses. Limitations on the combined company’s access to capital may impair its ability to execute this strategy. Costly capital may limit the combined company’s ability to develop or acquire accretive assets. This strategy may require substantial capital, and the combined company may not be able to raise the necessary funds on satisfactory terms, if at all.

        In addition, both companies are experiencing increased competition for the assets they purchase or contemplate purchasing. Increased competition for a limited pool of assets could result in the combined company not being the successful bidder more often or the combined company’s acquiring assets at a higher relative price than that which they have paid historically. Either occurrence would limit the combined company’s ability to fully execute its growth strategy. The combined company’s ability to execute its growth strategy may impact the market price of its securities.

        We have recorded $82.4 million of goodwill on our consolidated balance sheet as of December 31, 2003. Based upon our preliminary analysis, we anticipate recording approximately $2 billion of goodwill upon completion of the merger, but that estimate is subject to change. Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately measurable intangible net assets. Generally accepted accounting principles will require the combined company to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. If the combined company were to

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determine that any of its remaining balance of goodwill was impaired, it would be required to take an immediate charge to earnings with a correlative effect on unitholders’ equity.

        We and GulfTerra historically have sought to limit a portion of the adverse effects resulting from changes in oil and natural gas commodity prices and interest rates by using financial derivative instruments and other hedging mechanisms from time to time. To the extent that the combined company hedges its commodity price and interest rate exposures, it will forego the benefits it would otherwise experience if commodity prices or interest rates were to change in its favor. In addition, even though monitored by management, hedging activities can result in losses. Such losses could occur under various circumstances, including if a counterparty does not perform its obligations under the hedge arrangement, the hedge is imperfect, or hedging policies and procedures are not followed.

        We and GulfTerra participate in several substantial joint ventures, and that participation will continue after the merger. Due to the nature of joint ventures, each participant in each of these joint ventures has made substantial investments in the joint venture and, accordingly, has required that the relevant organizational documents contain certain features designed to provide each participant with the opportunity to participate in the management of the joint venture and to protect its investment in that joint venture, as well as any other assets which may be substantially dependent on or otherwise affected by the activities of that joint venture. These participation and protective features include a corporate governance structure that requires at least a majority in interest vote to authorize many basic activities and requires a greater voting interest (sometimes up to 100%) to authorize more significant activities. Examples of these more significant activities are large expenditures or contractual commitments, the construction or acquisition of assets, borrowing money or otherwise raising capital, transactions with affiliates of a joint venture participant, litigation and transactions not in the ordinary course of business, among others. Thus, without the concurrence of joint venture participants with enough voting interests, the combined company may be unable to cause any of its joint ventures to take or not to take certain actions, even though those actions may be in the best interest of the particular joint venture or the combined company.

        In addition, each joint venture’s charter documents typically vest in its management committee sole discretion regarding the occurrence and amount of distributions. Some of the joint ventures in which the combined company will participate have separate credit arrangements that contain various restrictive covenants. Among other things, those covenants may limit or restrict the joint venture’s ability to make distributions to the combined company under certain circumstances. Accordingly, the combined company’s joint ventures may, following the merger, be unable to make distributions to the combined company at current levels or at all.

        Moreover, the combined company cannot be certain that any of the joint venture owners will not sell, transfer or otherwise modify their ownership interest in a joint venture, whether in a transaction involving third parties and/or the other joint venture owners. Any such transaction could result in the combined company partnering with different or additional parties.

        Like us and GulfTerra, the combined company will be a holding company with no business operations. The only significant asset of the combined company will be the equity interests it owns in its subsidiaries and joint ventures. As a result, the combined company will depend upon the earnings and cash flow of its subsidiaries and joint ventures and the distribution of that cash to the combined company in order to meet the combined company’s obligations and to allow it to make distributions to its unitholders.

        GulfTerra is party to senior and senior subordinated note indentures under which approximately $1.1 billion in principal amount of debt securities was outstanding as of December 31, 2003. These indentures restrict

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GulfTerra’s and its subsidiaries’ ability to make cash distributions. If GulfTerra and the combined company are not able to effect amendments to these indentures or refinance the senior and senior subordinated notes, then these restrictions could significantly limit GulfTerra’s ability to distribute cash to us after the merger.

        Some of the combined company’s operations will involve risks of personal injury, property damage and environmental damage, which could curtail the combined company’s operations and otherwise adversely affect its cash flow. For example, natural gas facilities operate at high pressures, sometimes in excess of 1,100 pounds per square inch. The combined company also will operate oil and natural gas facilities located underwater in the Gulf of Mexico, which can involve complexities, such as extreme water pressure. Virtually all of the combined company’s operations will be exposed to the elements, including hurricanes, tornadoes, storms, floods and earthquakes.

        If one or more facilities that are owned by the combined company or that deliver oil, natural gas or other products to the combined company are damaged by severe weather or any other disaster, accident, catastrophe or event, the combined company’s operations could be significantly interrupted. Similar interruptions could result from damage to production or other facilities that supply the combined company’s facilities or other stoppages arising from factors beyond its control. These interruptions might involve significant damage to people, property or the environment, and repairs might take from a week or less for a minor incident to six months or more for a major interruption. Additionally, some of the storage contracts that the combined company will be a party to will obligate it to indemnify its customers for any damage or injury occurring during the period in which the customers’ natural gas is in its possession. Any event that interrupts the fees generated by the combined company’s energy infrastructure assets, or which causes it to make significant expenditures not covered by insurance, could reduce the combined company’s cash available for paying its interest obligations as well as unitholder distributions and, accordingly, adversely affect the market price of the combined company’s securities.

        We expect that the combined company will maintain adequate insurance coverages, although it will not cover many types of interruptions that might occur. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, the combined company may not be able to renew its existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. In particular, we have been informed by our insurance carrier that upon renewal of our policy in April 2004, MTBE related claims may be excluded from the scope of our insurance coverage. See “ – Regulation and Environmental Matters – Impact of Clean Air Act’s oxygenated fuels programs on our BEF investment,” beginning on page 42 of this annual report. If the combined company were to incur a significant liability for which it was not fully insured, it could have a material adverse effect on the combined company’s financial position. In addition, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur.

        Since the September 11, 2001 terrorist attacks on the United States, the United States government has issued warnings that energy assets, including our nation’s pipeline infrastructure, may be the future target of terrorist organizations. Any terrorist attack on the combined company’s facilities, those of its customers and, in some cases, those of other pipelines, could have a material adverse effect on the combined company’s business. An escalation of political tensions in the Middle East and elsewhere could result in increased volatility in the world’s energy markets and result in a material adverse effect on the combined company’s business.

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Risks Related to Our Common Units as a Result of Our Partnership Structure

        Following the merger and subject to NYSE rules, we may issue an unlimited number of limited partner interests of any type (to parties other than our affiliates) without the approval of our unitholders. Our partnership agreement does not give our common unitholders the right to approve its issuance of equity securities ranking equal or junior to the common units. The issuance of additional common units or other equity securities of equal rank will have the following effects:

        Because distributions on our common units are dependent on the amount of cash we generate, distributions may fluctuate based on our performance. We cannot guarantee that we will continue to pay distributions at the current level each quarter. The actual amount of cash that is available to be distributed each quarter will depend upon numerous factors, some of which are beyond our control and the control of our general partner. These factors include but are not limited to the following:

        In addition, you should be aware that our ability to pay the minimum quarterly distribution each quarter depends primarily on our cash flow, including cash flow from financial reserves, working capital borrowings and, after the merger, distributions from GulfTerra and its unconsolidated affiliates, and not solely on profitability, which is affected by non-cash items. As a result, we may make cash distributions during periods when we record losses and we may not make distributions during periods when we record net income.

        Unlike a corporation, our partnership agreement requires us to make quarterly distributions to our unitholders of all available cash reduced by any amounts of reserves for commitments and contingencies, including capital and operating costs and debt service requirements. The value of our units and other limited partner interests may decrease in direct correlation with decreases in the amount we distribute per unit. Accordingly, if we experience a liquidity problem in the future, we may not be able to issue more equity to recapitalize.

        Prior to making any distribution on our units, we will reimburse our general partner and its affiliates, including officers and directors of our general partner, for expenses they incur on our behalf. The reimbursement of expenses could adversely affect our ability to pay cash distributions to holders of our units. Our general partner has

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sole discretion to determine the amount of these expenses. In addition, our general partner and its affiliates may provide other services to us for which we will be charged fees as determined by our general partner.

        The directors and officers of our general partner and its affiliates have duties to manage the general partner in a manner that is beneficial to the general partner’s members. At the same time, our general partner has duties to manage our partnership in a manner that is beneficial to us. Therefore, our general partner’s duties to us may conflict with the duties of its officers and directors to the general partner’s members. Such conflicts may include, among others, the following:

        Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not elect our general partner or its directors and will have no right to elect our general partner or its directors on an annual or other continuing basis.

        Furthermore, if unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner may not be removed except upon the vote of the holders of at least 66.7% of our outstanding units voting together as a single class. Because affiliates of our general partner own more than one-third of our outstanding units, our general partner currently cannot be removed without the consent of our general partner and its affiliates.

        Unitholders’ voting rights are further restricted by our partnership agreement provision stating that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our unitholders’ ability to influence the manner or direction of our management.

        As a result of these provisions, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

        Under Delaware law, common unitholders could be held liable for our obligations to the same extent as a general partner if a court determined that the right of limited partners to remove our general partner or to take other action under our partnership agreement constituted participation in the “control” of our business.

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        Under Delaware law, our general partner generally has unlimited liability for the obligations of our partnership, such as our debts and environmental liabilities, except for those contractual obligations of our partnership that are expressly made without recourse to our general partner.

        In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that, under some circumstances, a limited partner may be liable to us for the amount of a distribution for a period of three years from the date of the distribution.

        Sales of a substantial number of our common units in the public market could cause the market price of our common units to decline. Immediately after the merger occurs, we currently estimate a total of approximately 320 million of our common units (including those which may be issued upon unitholder approval and the conversion of the 4,413,549 of our Class B special units) will be outstanding. Shell owns 41,000,000 of our common units, representing approximately 19.1% of our outstanding common units at February 20, 2004, has publicly announced its intention to reduce its holdings of our common units on an orderly schedule over a period of years, taking into account market conditions. Under a registration rights agreement, we are obligated, subject to certain limitations and conditions, to register the common units held by Shell for resale. Sales of a substantial number of these common units in the trading markets, whether in a single transaction or series of transactions, or the possibility that these sales may occur, could reduce the market price of our outstanding common units. In addition, these sales, or the possibility that these sales may occur, could make it more difficult for us to sell its common units in the future.

        While it is anticipated that no gain or loss will be recognized by our unitholders as a result of the merger (except with respect to a net decrease in a unitholder’s share of nonrecourse liabilities discussed below), no ruling has been or will be requested from the Internal Revenue Service, or IRS, with respect to the tax consequences of the merger. Instead, we are relying on the opinions of our counsel as to the tax consequences of the merger, and counsel’s conclusions may not be sustained if challenged by the IRS.

        As a result of the merger, our common unitholder’s share of nonrecourse liabilities will be recalculated. Each of our unitholders will be treated as receiving a deemed cash distribution equal to the excess, if any, of such unitholder’s share of nonrecourse liabilities immediately before the merger and such unitholder’s share of nonrecourse liabilities immediately following the merger. If the amount of the deemed cash distribution received by a common unitholder exceeds the unitholder’s basis in its partnership interest, such unitholder will recognize gain in an amount equal to such excess. The application of the rules governing the allocation of nonrecourse liabilities in the context of the merger is complex and subject to uncertainty. While we have agreed to apply these rules, to the extent permissible, in a manner that minimizes the amount of any net decrease in the amount of debt allocable to our unitholders, there can be no assurance that there will not be a net decrease in the amount of nonrecourse liabilities allocable to our common unitholder as a result of the merger.

        The anticipated after-tax economic benefit of owning our common units depends largely on us being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other matter affecting our partnership.

        If we were classified as a corporation for federal income tax purposes, we would pay federal income tax on our income at the corporate tax rate, which is currently a maximum of 35%, and we likely would pay state taxes as well. Distributions to you would generally be taxed again to you as corporate distributions, and no income, gains,

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losses or deductions would flow through to you. Because a tax would be imposed upon us as a corporation, the cash available for distribution to you would be substantially reduced. Therefore, our treatment as a corporation would result in a material reduction in the after-tax return to you, likely causing a substantial reduction in the value of our common units.

        A change in current law or a change in our business could cause us to be taxed as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, then the minimum quarterly distribution and the target distribution levels will be decreased to reflect that impact on us.

        We have not requested a ruling from the IRS with respect to any matter affecting our partnership. The IRS may adopt positions that differ from the conclusions of our counsel or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not concur with our counsel’s conclusions or the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In addition, the costs of any contest with the IRS, principally legal, accounting and related fees, will be borne indirectly by our unitholders and our general partner.

        Our common unitholders are required to pay federal income taxes and, in some cases, state, local and foreign income taxes on their share of our taxable income even if they do not receive any cash distributions from us. They may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from their share of our taxable income.

        If you sell our common units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those common units. Prior distributions to you in excess of the total net taxable income you were allocated for a common unit, which decreased your tax basis in that common unit, will, in effect, become taxable income to you if the common unit is sold at a price greater than your tax basis in that common unit, even if the price you receive is less than your original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to you. Should the IRS successfully contest some positions we take, you could recognize more gain on the sale of your units than would be the case under those positions without the benefit of decreased income in prior years. Also, if you sell units, you may incur a tax liability in excess of the amount of cash you receive from the sale.

        Ownership of common units by tax-exempt entities, such as individual retirement accounts (known as IRAs), regulated investment companies (known as mutual funds) and foreign persons raises issues unique to them. For example, virtually all of our income allocated to unitholders who are organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to them. Very little of our income will be qualifying income to a regulated investment company or mutual fund. Distributions to foreign persons will be reduced by withholding taxes at the highest effective U.S. federal income tax rate for individuals, and foreign persons will be required to file federal income tax returns and pay tax on their share of our taxable income.

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        We are registered with the IRS as a “tax shelter.” Our tax shelter registration number is 990610007. The tax laws require that some types of entities, including some partnerships, register as “tax shelters” in response to the perception that they claim tax benefits that may be unwarranted. As a result, we may be audited by the IRS and tax adjustments could be made. Any unitholder owning less than a 1% profits interest in us has very limited rights to participate in the income tax audit process. Further, any adjustments in our tax returns will lead to adjustments in our unitholders’ tax returns and may lead to audits of our unitholders’ tax returns and adjustments of items unrelated to us. You will bear the cost of any expense incurred in connection with an examination of your personal tax return and indirectly bear a portion of the cost of an audit of us.

        Because we cannot match transferors and transferees of our common units, we adopt depreciation and amortization positions that may not conform with all aspects of applicable Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to a common unitholder. It also could affect the timing of these tax benefits or the amount of gain from a sale of our common units and could have a negative impact on the value of our common units or result in audit adjustments to our common unitholder’s tax returns.

        In addition to federal income taxes, our common unitholders will likely be subject to other taxes, including state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property and in which they do not reside. Our common unitholders may be required to file state and local income tax returns and pay state and local income taxes in many or all of the jurisdictions in which we do business or own property. Further, our common unitholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of the unitholder to file all United States federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of ownership of our common units.

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THE COMPANY’S OPERATIONS

        We have five reportable business (or operating) segments: Pipelines, Fractionation, Processing, Octane Enhancement and Other. Pipelines consists of NGL, petrochemical and natural gas pipeline systems, storage and import/export terminal services. Fractionation primarily includes NGL fractionation, isomerization and propylene fractionation. Processing includes our natural gas processing business and related NGL marketing activities. Octane Enhancement represents our investment in a facility that produces motor gasoline additives to enhance octane (currently producing MTBE). The Other business segment consists of fee-based marketing services and various operational support activities.

        For additional information regarding our business segments including revenues, gross operating margin (a non-GAAP financial measure) and assets, please read Note 20 of the Notes to Consolidated Financial Statements including under Item 8 of this annual report.

PIPELINES

        We own or have interests in approximately 14,200 miles of NGL, petrochemical and natural gas transportation and distribution pipelines, which are classified under our Pipelines business segment. This segment also includes our storage and import/export terminalling businesses.

NGL and petrochemical pipelines

        Our NGL and petrochemical pipelines transport mixed NGLs and other hydrocarbons to fractionation plants, distribute and collect NGL products and propylene to and from petrochemical plants and refineries and deliver propane to customers along the Dixie pipeline and certain sections of the Mid-America Pipeline System. Our pipelines provide transportation services to customers on a fee basis. Therefore, the results of operations for this business are generally dependent upon the volume of product transported and the level of fees charged to customers (including our NGL and petrochemical marketing activities, which are eliminated in consolidation). Typically, our NGL and petrochemical pipelines do not take title to the products they transport; rather, the shipper retains title and the associated commodity price risk.

        In the markets we serve, we compete with a number of intrastate and interstate liquids pipeline companies (including those affiliated with major oil, petrochemical and gas companies) and barge, rail and truck fleet operators. In general, our NGL and petrochemical pipelines compete with these entities in terms of transportation rates and service. We believe that our pipeline systems offer significant flexibility in rendering transportation services for our customers due to the large number of receipt and delivery points that we can offer to them.

        Taken as a whole, this business area has not exhibited a significant degree of seasonality. However, propane transportation volumes are generally higher in the October through March timeframe due to increased use of propane for heating in the upper Midwest and southeastern United States. Conversely, mixed NGL transportation volumes are generally lower during the winter months as traditionally higher natural gas prices negatively affect NGL extraction economics at natural gas processing plants connected to the pipelines. In addition, volumes on the Lou-Tex NGL pipeline are generally higher during the April through September period due to gasoline blending activities at refineries in anticipation of the summer driving season.

        The following table summarizes our NGL and petrochemical pipeline transportation and distribution networks at December 31, 2003. Our ownership interest in each pipeline is held either directly through a consolidated subsidiary or indirectly through a company in which we have an investment accounted for under the equity method. For additional information regarding our equity method investments, please read Note 7 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

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        Mid-America Pipeline System. The Mid-America Pipeline System (or “Mid-America”) is a regulated 7,226-mile NGL pipeline system consisting of three NGL pipelines: the 2,548-mile Rocky Mountain pipeline, the 2,740-mile Conway North pipeline, and the 1,938-mile Conway South pipeline. The Mid-America system crosses thirteen states: Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Kansas, Missouri, Nebraska, Iowa, Illinois, Minnesota and Wisconsin. We have operated this system since February 2003.

        The Rocky Mountain pipeline transports mixed NGLs from the Rocky Mountain Overthrust and San Juan Basin areas to the Hobbs hub located on the Texas-New Mexico border. The Conway North segment links the large NGL hub at Conway, Kansas to refineries and propane markets in the upper Midwest. In addition, the Conway North segment has access to NGL supplies from Canada’s Western Sedimentary basin through third-party pipeline connections. The Conway South pipeline connects the Conway hub with Kansas refineries and transports mixed NGLs from Conway, Kansas to the Hobbs hub (with interconnections to the Seminole Pipeline System at the Hobbs hub). We also own fifteen unregulated propane terminals that are an integral part of the Mid-America system.

        Approximately 60% of the volumes transported on the Mid-America system are mixed NGLs originating from natural gas processing plants located in the Permian Basin in West Texas, the Hugoton Basin of southwestern Kansas, the San Juan Basin of northwest New Mexico, and the Green River Basin of southwestern Wyoming. The remaining volumes are generally purity NGL products originating from NGL fractionators in the mid-continent areas of Kansas, Oklahoma, and Texas, as well as deliveries from Canada.

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        Dixie. The Dixie pipeline is a regulated 1,301-mile propane pipeline system extending from Mont Belvieu, Texas and Louisiana to markets in the southeastern United States. Propane supplies transported on this system primarily originate from southeast Texas, southern Louisiana and Mississippi. We currently estimate that Dixie transports approximately 50% of the propane requirements in the markets it serves. An affiliate of ConocoPhillips operates the pipeline.

        Seminole. Seminole is a regulated 1,281-mile pipeline that transports mixed NGLs and NGL products from the Hobbs hub on the Texas-New Mexico border and the Permian Basin area to Mont Belvieu, Texas. The Seminole pipeline is interconnected with the Mid-America system at the Hobbs hub. The primary source of throughput for Seminole is the volume originating from the Mid-America system. In general, volumes transported by Seminole are ultimately used by petrochemical plants that manufacture various products in southeast Texas. We have operated this pipeline since February 2003.

        Louisiana Pipeline System. The Louisiana Pipeline System is a 655-mile network of nine NGL pipelines located in Louisiana. This system transports mixed NGLs and NGL products originating in southern Louisiana and Texas and serves a variety of customers including major refineries and petrochemical companies along the Mississippi River corridor in southern Louisiana. This system also provides transportation services for our natural gas processing plants, NGL fractionators and other facilities located in Louisiana. We operate all but 43 miles of this system.

        Promix. The Promix pipeline is a 410-mile NGL gathering pipeline that gathers mixed NGLs from 12 natural gas processing plants in Louisiana for delivery to the Promix NGL fractionator. This pipeline is an integral part of the Promix NGL fractionation facility. For additional information regarding the Promix NGL fractionation facility, please read “Fractionation – NGL Fractionation – Promix” beginning on page 28 of this annual report.

        Lou-Tex Propylene. The Lou-Tex Propylene pipeline consists of a 291-mile pipeline used to transport propylene from Sorrento, Louisiana to Mont Belvieu, Texas. Currently, this pipeline is used to transport chemical grade propylene for third parties from production facilities in Louisiana to customers in Texas. This system also includes storage facilities and a 28-mile NGL pipeline. We operate this system.

        Lou-Tex NGL. The Lou-Tex NGL pipeline system consists of a 206-mile NGL pipeline used to provide transportation services for NGL products and refinery grade propylene between the Louisiana and Texas markets. We also use this pipeline to transport mixed NGLs from certain of our Louisiana gas processing plants to our Mont Belvieu NGL fractionation facility. We operate this pipeline.

        HSC. The HSC pipeline system is a collection of NGL and petrochemical pipelines aggregating 175 miles in length extending from our Houston Ship Channel import/export terminal facility to Mont Belvieu, Texas. These pipelines are used to deliver NGL products to third-party petrochemical plants and refineries as well as to deliver feedstocks to our Mont Belvieu facilities. This system is also used to transport MTBE produced by BEF to delivery locations along the Houston Ship Channel. We operate this system.

        Tri-States, Belle Rose and Wilprise. We have ownership interests in the Tri-States, Belle Rose and Wilprise NGL pipelines, which supply mixed NGLs to the BRF, Norco and Promix NGL fractionators. The mixed NGLs transported on these systems originate from gas processing facilities located along the Mississippi, Alabama and Louisiana Gulf Coast.

        The Tri-States pipeline is a l69-mile NGL pipeline that extends from Mobile Bay, Alabama to near Kenner, Louisiana and is operated by BP. The Belle Rose pipeline is a 48-mile NGL pipeline operated by us that extends from the interconnect with the Tri-States pipeline near Kenner, Louisiana to the Promix NGL fractionator. The Wilprise pipeline is a 30-mile NGL pipeline that extends from the interconnect with the Tri-States pipeline near Kenner, Louisiana to Sorrento, Louisiana. We have operated the Wilprise pipeline since February 2003.

        Chunchula. The Chunchula pipeline system is a 143-mile NGL pipeline extending from the Alabama-Florida border to our storage facilities in Petal, Mississippi for further distribution. We operate this pipeline.

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        Lake Charles/Bayport. The Lake Charles/Bayport pipeline system is comprised of two pipelines: a 77-mile system used (in combination with a pipeline owned and operated by ExxonMobil) to distribute polymer grade propylene from Mont Belvieu, Texas to polypropylene plants in Lake Charles, Louisiana and Bayport, Texas; and approximately 10 miles of related polymer grade propylene pipelines located in the La Porte, Texas area. We operate this system.

        Port Neches Pipeline. The Port Neches Pipeline is a 70-mile pipeline system operated by us, which is used to transport high-purity isobutane from Mont Belvieu, Texas to Port Neches, Texas. We acquired this system in March 2003.

        Sabine Propylene. The Sabine Propylene pipeline system is a 21-mile pipeline used to transport polymer grade propylene from third-party plant facilities in Port Arthur, Texas to a connection with our Lake Charles pipeline. We operate this pipeline.

        La Porte. The La Porte pipeline is a 17-mile pipeline used to distribute polymer grade propylene from Mont Belvieu, Texas to La Porte, Texas. We operate this pipeline, which is an integral part of our Mont Belvieu propylene fractionation activities. For additional information regarding our Mont Belvieu propylene fractionation activities, please read “Fractionation – Propylene Fractionation – Mont Belvieu” beginning on page 31 of this annual report.

        NGL and petrochemical pipeline utilization

        The maximum number of barrels that these systems can transport per day depends upon the operating balance achieved at a given time between various segments of the system. Because the balance is dependent upon the mix of products to be shipped and the demand levels at the various delivery points, the exact capacity of the systems cannot be stated. As shown in the following table, the utilization rates of our principal NGL and petrochemical pipelines are measured in terms of throughput (in MBPD, on a net basis).

        When compared to 2002, throughput rates for certain of our NGL pipelines in 2003 were lower due to a combination of (i) decreased demand for NGLs by the petrochemical industry and (ii) lower NGL extraction rates at domestic natural gas processing facilities. Volumes recorded for the Mid-America and Seminole systems were particularly affected by lower NGL extraction rates by natural gas processing facilities located in the Rocky Mountains. For a general discussion of year-to-year changes in the Pipelines segment, please read “Management’s

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Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” beginning on page 51 of this annual report.

Natural gas pipelines

        Our natural gas pipeline systems provide for the gathering, transmission and storage of natural gas from both onshore and offshore Louisiana developments. Typically, these systems receive natural gas from producers, other pipelines or shippers through system interconnects and redeliver the natural gas at other points throughout the system. Generally, natural gas pipeline transportation agreements generate revenue for these systems based on a transportation fee per unit of volume (generally in MMBtus) transported. Natural gas pipelines (such as our Acadian Gas System) may also gather and purchase natural gas from producers and suppliers and resell such natural gas to customers such as electric utility companies, local natural gas distribution companies and industrial customers. Our Acadian Gas subsidiary is exposed to commodity price risk to the extent it takes title to natural gas volumes through certain of its contracts. In general, the Gulf of Mexico systems in which we own an equity interest do not take title to the natural gas volumes that they transport; rather, the shipper retains title and the associated commodity price risk.

        Within their market area, our onshore systems compete with other natural gas pipeline companies on the basis of price (in terms of transportation rates and/or natural gas selling prices), service and flexibility. Our competitive position within the onshore market is positively affected by our longstanding relationships with customers and the limited number of delivery pipelines connected (or capable of being connected) to the customers we serve. Our Gulf of Mexico offshore pipelines compete with other offshore systems primarily on the basis of transportation rates and service. These pipelines are strategically situated to gather a substantial volume of the natural gas production in the offshore Louisiana area from both continental shelf and deepwater developments.

        Our onshore Louisiana pipelines have historically experienced slightly higher throughput rates during the winter and summer months. During the winter, natural gas consumption by residential and industrial users for heating is greater due to the decline in temperatures. During the summer, natural gas consumption by gas-fired electrical generation facilities is greater due to an increase in air conditioning demand. The offshore natural gas pipelines exhibit little to no effects of seasonality; however, these systems may be affected by weather events such as hurricanes and tropical storms in the Gulf of Mexico.

        Our onshore and offshore systems are affected by natural gas exploration and production activities. If these exploration and production activities decline due to (i) the inability of producers to find economically viable reserves; (ii) a weakened domestic economy which lowers natural gas demand; or (iii) natural depletion of the oil and gas fields to which they are connected, then throughput volumes on these pipelines will decline, thereby affecting our earnings from these assets. We actively seek to offset the loss of volumes due to natural depletion by adding connections to new customers and fields.

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        The following table summarizes our natural gas pipeline transportation and distribution networks at December 31, 2003. Our ownership interest in each pipeline is held either directly through a consolidated subsidiary or indirectly through a company in which we have an investment accounted for under the equity or cost method. For additional information regarding our equity or cost method investments, please read Note 7 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Acadian Gas System. The Acadian Gas System is a 1,042-mile pipeline system consisting of three natural gas pipelines that we operate: the 577-mile Cypress pipeline, 438-mile Acadian pipeline, and the 27-mile Evangeline pipeline. This system is involved in the purchase, sale, transportation and storage of natural gas in Louisiana. We also lease a natural gas storage facility with approximately 3 Bcf of capacity that is an integral part of this system.

        The Acadian Gas System links supplies of natural gas from Gulf of Mexico production (through connections with offshore pipelines) and various onshore developments to industrial, electric and local gas distribution customers primarily located in Louisiana. In addition, this system has interconnects with twelve interstate and four intrastate pipeline companies and a bi-directional interconnect with the U.S. natural gas marketplace at the Henry Hub. In general, the natural gas transported by the Acadian Gas System originates from onshore Louisiana sources and offshore Gulf of Mexico production areas.

        Stingray. The Stingray pipeline is a 379-mile, regulated natural gas pipeline system that transports natural gas and condensate from certain production areas located in the Gulf of Mexico offshore Louisiana to onshore transmission systems located in south Louisiana. This system includes a natural gas dehydration facility connected to the onshore terminus of the pipeline in south Louisiana. Shell is the operator of this pipeline and related dehydration facility.

        Currently, natural gas transported by the Stingray pipeline originates from the High Island, Vermilion, Garden Banks and East and West Cameron production areas of the Gulf of Mexico. We expect that natural depletion of these fields will be partially offset by the addition of natural gas volumes from the Gunnison development, which began production during the fourth quarter of 2003.

        VESCO. The VESCO pipeline is a 260-mile, regulated natural gas pipeline system associated with the Venice natural gas processing plant in Louisiana. This pipeline is an integral part of the natural gas processing

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operations of VESCO. For additional information regarding VESCO, please read “ –Processing” beginning on page 32 of this annual report.

        Manta Ray. The Manta Ray system comprises approximately 235 miles of unregulated natural gas pipelines and related equipment located in the Gulf of Mexico offshore Louisiana. The primary sources of throughput for the Manta Ray system are the Green Canyon, Ship Shoal, South Timbalier, Grand Isle and Ewing Bank areas of the Gulf of Mexico offshore Louisiana. We expect that natural depletion of these fields will be partially offset by the addition of volumes from the Southern Green Canyon development, which is forecast to begin production in late 2004. Shell operates this system.

        Nautilus. The Nautilus system comprises 101 miles of regulated pipelines located in the Gulf of Mexico offshore Louisiana. Currently, the primary source of natural gas throughput for the Nautilus system is production from the Manta Ray system through its interconnection in the Ship Shoal 207 area of the Gulf of Mexico offshore Louisiana. Shell is the administrative agent and Marathon the operator for this system.

        Nemo. The Nemo pipeline is a 24-mile pipeline that transports natural gas volumes from Shell’s Green Canyon development to an interconnect with Manta Ray. Shell operates this system.

        Natural gas pipeline utilization

        The maximum amount of natural gas that these systems can transport per day depends upon the operating balance achieved at a given time between various segments of each system. Because the balance is dependent upon the mix of products to be shipped and the demand levels at the various delivery points, the exact capacity of a system cannot be practically determined. In light of the complex, interconnected nature of the pipeline networks and the varying diameter of pipe used and pressure employed, the utilization rates of our principal natural gas pipeline systems are measured in BBtus per day of natural gas transported. As shown in the following table, the utilization rates of our principal natural gas pipelines are measured in terms of throughput (in BBtus per day, on a net basis).

        NGL and Petrochemical Storage

        Our NGL and petrochemical storage facilities are integral parts of our pipeline operations. In general, our underground storage wells are used to store mixed NGLs, NGL products and petrochemical products for customers and ourselves. The profitability of our storage operations is primarily dependent upon the volume of material stored and the level of fees charged.

        Our principal storage operations are primarily determined by the operational requirements of our customers in the petrochemical industry. We usually experience an increase in the demand for storage services during the spring and summer months due to increased feedstock storage requirements for motor gasoline production and a decrease during the fall and winter months when propane inventories are being drawn down for heating needs.

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        The following table summarizes the practical (or useable) capacity of the storage assets we utilize and our ownership of such practical capacity by state at December 31, 2003.

        Our primary storage facilities are located at Mont Belvieu, Texas. We own and operate 90.5 MMBbls of practical storage capacity at Mont Belvieu. We also own storage facilities located at Breaux Bridge, Napoleonville, Sorrento and Venice, Louisiana having a practical capacity of 32.5 MMBbls. Our Mississippi storage assets are comprised of facilities located at or near Petal and Hattiesburg having a practical capacity of 12 MMBbls. Of the facilities located in Louisiana and Mississippi, we operate those located in Breaux Bridge and Napoleonville, Louisiana and Petal, Mississippi. Affiliates of Dynegy and Shell operate the remaining facilities. In connection with our Mid-America and Seminole pipeline systems, we own 20 underground NGL and petrochemical storage wells located in four states. The Mid-America and Seminole storage facilities have a practical storage capacity of 4.5 MMBbls.

        Our storage wells allow us to optimize throughput on our pipeline systems and maintain operational efficiency. When used in conjunction with our processing plant operations, storage wells allow us to mix various batches of feedstock and maintain both a sufficient supply and stable composition of feedstock to our fractionation facilities. At times, we provide some of our processing customers with short-term storage services (typically 30 days or less) at nominal fees when they cannot take immediate delivery of products. Segment revenues include fees charged to our NGL and petrochemical marketing activities for their use of the storage facilities. These intersegment revenues and expenses are eliminated in consolidation.

        We also store products for customers in our wells for a fee. The amount of storage capacity available for this type of storage activity varies daily depending on our processing requirements. Our competitors in this area are other storage and pipeline companies such as TEPPCO and Dynegy. Major oil and gas companies such as Exxon Mobil and ConocoPhillips occasionally use their proprietary storage assets in this role, thereby entering into competition with us and other providers. We compete with other service providers primarily in terms of the fees charged, pipeline connections and dependability. We believe that the integrated nature of our processing, pipeline and import/export operations provide our storage customers access to a competitively priced, flexible and dependable network of assets.

Import and Export Facilities

        Houston Ship Channel Import/Export Terminal. We lease and operate an NGL import facility located on the Houston Ship Channel that enables NGL tankers to be offloaded at their maximum unloading rate of 10,000 barrels per hour, thus minimizing the amount of time that a tanker is idle and increasing the number of vessels that can be offloaded. This facility is primarily used to offload volumes bound for our facilities in Mont Belvieu. Import volumes are usually at their highest levels from April through September of each year due to lower international demand and pricing for NGLs relative to domestic levels in those months. Typically, our import cargoes originate from North Africa and North Sea production areas.

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        In addition, we own an NGL export facility located at the same terminal as our import facility. Our export facility includes an NGL products chiller and related equipment used for loading refrigerated marine tankers for third-party exporters. Our export facility can load vessels with refrigerated propane and butane at rates up to 5,000 barrels per hour. In general, export cargoes shipped from this facility are destined for Mexico, Central and South America, Europe and the Far East (Japan, Korea and China). Export volumes are generally higher during the winter months due to increased propane exports.

        Dynegy and Dow own facilities that are the primary competitors of our NGL import facility. Our primary competitors in the NGL export services market are Dynegy and ChevronTexaco. Both the import and export operations compete with third-party operations primarily in terms of service, such as the ability to quickly load or offload vessels. Our competitive position is enhanced because our extensive storage and pipeline assets at Mont Belvieu allow us to load and offload ships very efficiently. The profitability of import and export activities primarily depends upon the quantities loaded and offloaded and the fees we charge associated with each activity.

        OTC Propylene Export Facility. We own and operate an above-ground polymer grade propylene storage and export facility located in Seabrook, Texas (“OTC”). This facility can load vessels of polymer grade propylene at rates up to 5,000 barrels per hour. OTC’s primary competitor is an export operation owned by ChevronTexaco located on the Houston Ship Channel. OTC’s operations are an integral part of our Mont Belvieu propylene fractionation business, the assets and earnings of which (including those of OTC) are accounted for as part of our Fractionation segment. For additional information regarding OTC, please read Note 4 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Due to the timing and logistics of ship and barge loading and offloading activities, we measure utilization in terms of volumes loaded and offloaded through our import/export facilities. The following table shows the volume for each facility over the last three years (in MBPD, on a net basis):

GulfTerra GP

        In December 2003, we purchased a 50% interest in GulfTerra Energy Company, L.L.C. (“GulfTerra GP”), which owns a 1.0% general partner interest in GulfTerra. We purchased this interest from El Paso for $425 million on December 15, 2003. Our purchase of this interest is Step One of our proposed merger with GulfTerra. GulfTerra owns or has interests in a variety of midstream energy assets located in the U.S. Gulf Coast region including natural gas pipelines, NGL pipelines, NGL fractionation facilities, natural gas and NGL storage facilities and offshore platforms. For additional information regarding GulfTerra and the proposed merger, please read “– Recent Events” beginning on page 2 of this annual report.

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FRACTIONATION

        We own or have interests in six NGL fractionators, an isomerization facility and four propylene fractionation plants, which are classified under our Fractionation business segment.

NGL Fractionation

        NGL fractionation facilities separate mixed NGL streams into discrete NGL products: ethane, propane, isobutane, normal butane and natural gasoline. Ethane is primarily used in the petrochemical industry as feedstock for ethylene production, one of the basic building blocks for a wide range of plastics and other chemical products. Propane is used both as a petrochemical feedstock in the production of ethylene and propylene and as a heating, engine and industrial fuel. Isobutane is fractionated from mixed butane (a mixed stream of normal butane and isobutane) or produced from normal butane through the process of isomerization, principally for use in refinery alkylation to enhance the octane content of motor gasoline, in the production of MTBE, and in the production of propylene oxide. Normal butane is used as a petrochemical feedstock in the production of ethylene and butadiene (a key ingredient of synthetic rubber), as a blendstock for motor gasoline and to derive isobutane through isomerization. Natural gasoline, a mixture of pentanes and heavier hydrocarbons, is primarily used as a blendstock for motor gasoline or as a petrochemical feedstock.

        The three principal sources of mixed NGLs fractionated in the United States are (1) domestic gas processing plants, (2) domestic crude oil refineries and (3) imports of butane and propane mixtures. When produced at the wellhead, natural gas consists of a mixture of hydrocarbons that must be processed to remove NGLs and impurities to render the gas suitable for pipeline transportation. Gas processing plants are located near the production areas and separate pipeline quality natural gas (principally methane) from mixed NGLs and other components. After being extracted from natural gas, mixed NGLs are typically transported to a centralized facility for fractionation. Recoveries of mixed NGLs by gas processing plants represent the largest source of volumes processed by our NGL fractionators and are generally governed by pipeline quality specification for natural gas and the degree to which NGL prices exceed the cost (principally that of natural gas as a feedstock and as a fuel) of separating the mixed NGLs from the natural gas stream. When operating and extraction costs of gas processing plants are higher than the incremental value of the NGL products that would be received by NGL extraction, the recovery levels of certain NGL products such as ethane may be reduced. This leads to a reduction in volumes available for NGL fractionation. The increase or decrease in NGL recovery levels is a primary factor behind changes in gross fractionation volumes.

        Crude oil and condensate production also contain varying amounts of NGLs, which are removed during the refining process and are either fractionated by the refiners themselves or delivered to third-party NGL fractionation facilities like those owned by us. The mixed NGLs delivered from domestic gas processing plants and crude oil refineries to our NGL fractionation facilities are typically transported by NGL pipelines and, to a lesser extent, by railcar and truck. We also take delivery of mixed NGL imports through our Houston Ship Channel import terminal, which is connected to our Mont Belvieu complex via pipeline.

        Based upon industry data, we believe that sufficient volumes of mixed NGLs, especially those originating from Gulf Coast gas processing plants, will be available for fractionation in the foreseeable future. These gas processing plants are expected to benefit from anticipated increases in natural gas production from emerging deepwater developments in the Gulf of Mexico offshore Louisiana. Deepwater natural gas production has historically had a higher concentration of NGLs than continental shelf or domestic land-based production along the Gulf Coast. In addition, through connections with our Mid-America and Seminole pipeline systems, our Mont Belvieu NGL fractionator has access to NGLs from additional major supply basins in North America, including the Rocky Mountain Overthrust and San Juan Basin NGL production areas. Lastly, significant volumes of mixed NGLs are contractually committed to our NGL fractionation facilities by joint owners and third-party customers.

        The majority of our NGL fractionation facilities process mixed NGL streams for third-party customers and our NGL marketing activities under fee-based arrangements. These fees (typically in cents per gallon) are subject to adjustment for changes in certain fractionation expenses, including natural gas fuel costs. At our Norco facility, we perform fractionation services for certain customers under percent-of-liquids contracts whereby we retain a percentage of the NGLs we fractionate for them as our payment. The results of operations of our NGL fractionation

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business are dependent upon the volume of mixed NGLs fractionated and either the level of fractionation fees charged (under fee-based contracts) or the value of NGLs received (under percent-of-liquids arrangements). We are exposed to fluctuations in NGL prices to the extent we fractionate volumes for customers under percent-of-liquids arrangements. Our tolling (or fee-based) customers generally retain title to the NGLs that we process for them. Overall, the NGL fractionation business exhibits little to no seasonal variation.

        Although competition for NGL fractionation services is primarily based on the fractionation fee, the ability of an NGL fractionator to obtain mixed NGLs and distribute NGL products is also an important competitive factor and is a function of the existence of the necessary pipeline and storage infrastructure. NGL fractionators connected to extensive transportation and distribution systems such as ours have direct access to larger markets than those with less extensive connections. We compete with a number of NGL fractionators in Texas, Louisiana and Kansas. Our Mont Belvieu NGL fractionator competes directly with three local facilities having an estimated combined processing capacity of 440 MBPD and indirectly with two other Texas facilities having a combined processing capacity of 210 MBPD. In addition, our facilities compete on a more limited basis with facilities in Kansas and several facilities in Louisiana. Finally, we also compete with a number of producers who operate small NGL fractionators at individual field processing facilities.

        The following table summarizes our NGL fractionation assets at December 31, 2003. Our ownership interest in each NGL fractionator is held either directly through a consolidated subsidiary or indirectly through a company in which we have an investment accounted for under the equity or cost method. For additional information regarding our equity method investments, please read Note 7 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        We idled our Toca-Western and Petal NGL fractionators during 2003 for economic reasons. The Toca-Western facility was decommissioned in August 2003 and its volumes redirected to our Norco NGL fractionator. Rerouting the mixed NGLs that were processed at Toca-Western to Norco allowed us to utilize spare capacity at our larger Norco facility resulting in incremental cost-savings from a more efficient use of our assets. The Petal NGL fractionation facility was decommissioned in December 2003 after management decided that this facility did not fit into our long-range plans due to poor economics of continued operations at the site. Volumes historically processed at Petal have been redirected to either our Mont Belvieu or Norco facilities. The total plant capacity of the Toca-Western and Petal NGL fractionators was 14 MBPD and 7 MBPD, respectively.

        We continue to own the Toca-Western and Petal NGL fractionator assets, which are recorded at their respective fair values. In anticipation of the closure of Toca-Western, we recorded this facility at a minimal fair value when it was acquired in 2002; thus, the closure had no material impact on recorded asset values. The decommissioning of the Petal NGL fractionator resulted in an asset impairment charge of $1.2 million during the fourth quarter of 2003.

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        Mont Belvieu. We operate one of the largest NGL fractionation facilities in the United States with a gross processing capacity of 210 MBPD. Our facility is located at Mont Belvieu, Texas, which is a key hub of the domestic and international NGL industry. This hub is adjacent to the largest concentration of refineries and petrochemical plants in North America and is located on a large naturally occurring salt dome that provides for the underground storage of significant quantities of NGLs.

        Our Mont Belvieu facility fractionates mixed NGLs from several major NGL supply basins in North America including the Mid-Continent, Permian Basin, San Juan Basin, Rocky Mountain Overthrust, East Texas and the U.S. Gulf Coast. Our Mont Belvieu NGL fractionation facility is supported by long-term fractionation agreements with Burlington Resources, Duke and Texaco (which accounted for 93 MBPD of net volume in 2003). Additionally, we have negotiated a ten-year fractionation contract with Williams that will bring 40 MBPD of processing volume to the facility beginning in October 2004.

        Promix. We operate and own a 33.3% interest in Promix, which owns a 145 MBPD NGL fractionation facility located near Napoleonville, Louisiana. Promix includes a 410-mile mixed NGL gathering system connected to twelve gas processing plants, five NGL salt dome storage wells and a barge loading facility. Promix also receives mixed NGLs from natural gas processing plants on the Mississippi and Alabama Gulf Coast through a connection with the Belle Rose and Tri-States pipelines.

        Norco. We own and operate an NGL fractionation facility at Norco, Louisiana. The Norco facility receives mixed NGLs via pipeline from the Yscloskey and Toca natural gas processing plants in Louisiana and from other natural gas processing plants and refineries via pipelines and has a gross capacity of 75 MBPD. During 2003, long-term percent-of-liquids contracts exclusive to this facility accounted for approximately 29 MBPD of processing volume.

        BRF. We operate and own a 32.2% interest in BRF, which owns a 60 MBPD NGL fractionation facility and related pipeline transportation assets located near Baton Rouge, Louisiana. The BRF facility processes mixed NGLs provided by the co-owners of the facility (Williams, BP and Exxon Mobil) from production areas in Alabama, Mississippi and southern Louisiana including offshore Gulf of Mexico areas.

        VESCO. As a result of our VESCO investment, we own a 13.1% interest in a 36 MBPD NGL fractionator located in Plaquemines Parish, Louisiana. This NGL fractionator is an integral part of the natural gas processing operations of VESCO. For additional information regarding VESCO, please read “ – Processing” beginning on page 32 of this annual report.

        Tebone. We operate and own a 31.3% interest in a 30 MBPD NGL fractionation facility located in Ascension Parish, Louisiana. The Tebone NGL fractionation facility was built in the 1960s and receives NGLs from the North Terrebonne gas processing plant.

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        NGL fractionator utilization

        The following table shows net fractionation volumes and capacity (in MBPD) and the corresponding overall utilization rates of our NGL fractionation facilities for the last three years. Net capacity amounts have been adjusted for the timing of acquisitions and facility closures.

Isomerization

        Our commercial isomerization units convert normal butane into mixed butane, which is subsequently fractionated into normal butane, isobutane and high purity isobutane. The demand for commercial isomerization services depends upon the industry’s requirements for high purity isobutane and isobutane in excess of naturally occurring isobutane produced from NGL fractionation and refinery operations. Isobutane demand is marginally higher in the spring and summer months due to the demand for isobutane-based fuel additives in the production of motor gasoline. The results of operation of this business are generally dependent upon the volume of normal and mixed butanes processed and the level of toll processing fees charged to customers. The principal uses of isobutane are for alkylate used in the production of motor gasoline, propylene oxide and in the production of MTBE and iso-octane.

        Customers utilizing the services provided by these facilities include third parties, BEF and our Processing segment’s NGL marketing activities. Our larger third-party toll processing customers generally operate under long-term contracts in which they supply normal butane feedstock and pay us toll processing fees based on the volume of isobutane produced. These facilities also produce high purity grade isobutane under toll processing agreements to meet BEF’s feedstock requirements. The isomerization facilities are also used by our Processing segment’s NGL marketing activities to convert normal and/or mixed butanes into isobutane in order to satisfy isobutane sales contracts. The intersegment tolling revenues we record for these services in our isomerization business and the corresponding expense to our NGL marketing activities are eliminated in consolidation. During 2003, 17 MBPD of isobutane production was attributable to our NGL marketing activities, 10 MBPD to BEF-related contracts, with the balance related to various toll processing arrangements.

        Our isomerization business includes three butamer reactor units and eight associated DIBs located in Mont Belvieu, Texas, which comprise the largest commercial isomerization complex in the United States. These facilities have an average combined production capacity of 116 MBPD of isobutane. We own the isomerization facilities with the exception of one of the butamer reactor units, which we control through a lease. We operate the facilities.

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        The following table shows isobutane production and capacity (both in MBPD) and overall utilization of the Mont Belvieu facility for the last three years:

        In the isomerization market, we compete primarily with facilities located in Kansas, Louisiana and New Mexico. Competitive factors affecting this business include the level of toll processing fees charged, the quality of isobutane that can be produced and access to pipeline and storage infrastructure. We believe that our isomerization facilities benefit from the integrated nature of our Mont Belvieu complex with its extensive connections to pipeline and storage assets.

Propylene Fractionation

        In general, propylene fractionation plants separate refinery grade propylene (a mixture of propane and propylene) into either polymer grade propylene or chemical grade propylene along with by-products of propane and mixed butane. Polymer grade propylene can also be produced from chemical grade propylene feedstock. Chemical grade propylene is also a by-product of olefin (ethylene) production. Approximately 50% of the demand for polymer grade propylene is attributable to polypropylene, which has a variety of end uses, including packaging film, fiber for carpets and upholstery and molded plastic parts for appliance, automotive, houseware and medical products. Chemical grade propylene is a basic petrochemical used in plastics, synthetic fibers and foams. Overall, the propylene fractionation business exhibits little seasonality.

        We compete with numerous producers of polymer grade propylene, which include many of the major refiners on the Gulf Coast. Generally, the propylene fractionation business competes in terms of the level of toll processing fees charged and access to pipeline and storage infrastructure. Our propylene fractionation units have been designed to be energy cost efficient which allows us to be competitive in terms of processing fees. In addition, our facilities are connected to extensive pipeline transportation and storage facilities, which provide our customers with operational flexibility. Our petrochemical marketing activities encounter competition from fully integrated oil companies and various petrochemical companies. Each of our petrochemical marketing competitors have varying levels of financial and personnel resources and competition generally revolves around price, service, logistics and location issues.

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        The following table summarizes our propylene fractionation assets and ownership at December 31, 2003. Our ownership interest in each propylene fractionation facility is held either directly through a consolidated subsidiary or indirectly through a company in which we have an investment accounted for under the equity method. For additional information regarding our equity method investments, please read Note 7 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Mont Belvieu. We operate three polymer grade propylene fractionation facilities (Splitters I, II and III) in Mont Belvieu, Texas having a combined net capacity of 58 MBPD. Results of operations for our polymer grade propylene plants are generally dependent upon toll processing arrangements and petrochemical marketing activities. Under toll processing arrangements, we are paid fees based on the volume of refinery grade propylene used to produce polymer grade propylene. .

        As part of the petrochemical marketing activities associated with Splitters I, II, and III, we have several long-term polymer grade propylene sales agreements, the largest of which is with an affiliate of Shell. To meet our petrochemical marketing obligations, we have entered into several long-term agreements to purchase refinery grade propylene. To limit the exposure of our petrochemical marketing activities to price risk, we attempt to match the timing and price of our feedstock purchases with those of the sales of end products. During 2003, 11 MBPD of our net polymer grade propylene production was associated with toll processing operations with the balance attributable to petrochemical marketing activities.

        At December 31, 2003, approximately 75% of the feedstock requirements of these facilities were under long-term supply contracts, with the remaining 25% being met through spot market purchases. The majority of the feedstock volumes originate from refineries along the Gulf Coast and in the Mid-Continent regions of North America. We can unload barges carrying refinery grade propylene using our import terminal located on the Houston Ship Channel. In addition, we can receive supplies of refinery grade propylene through our Mont Belvieu truck and rail unloading facility and from refineries and other producers connected to our HSC pipeline and Lou-Tex NGL systems and from other third party pipelines. In turn, polymer grade propylene is transported to customers by truck or pipeline. We can also export volumes of polymer grade propylene using our OTC facility.

        BRPC. We operate and own a 30.0% interest in BRPC, which owns a 23 MBPD chemical grade propylene production facility located near Baton Rouge, Louisiana. This unit, located across the Mississippi River from Exxon Mobil’s refinery and chemical plant, fractionates refinery grade propylene produced by Exxon Mobil into chemical grade propylene for a toll-processing fee. The results of operation of BRPC depend upon the volume of refinery grade propylene processed and the level of fees we charge Exxon Mobil.

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        The following table shows net fractionation volumes and capacity (in MBPD) and the corresponding overall utilization rates of our propylene fractionation facilities for the last three years. Net capacity amounts have been adjusted for the timing of acquisitions.

PROCESSING

        The Processing segment consists of our natural gas processing business and related NGL marketing activities. At the core of our natural gas processing business are twelve processing plants located on the Louisiana and Mississippi Gulf Coast with a total natural gas processing capacity of 11.56 Bcf/d. The following table lists our natural gas processing plants, gross and net processing capacities and our ownership interest in each facility at December 31, 2003.

        Our natural gas processing facilities are primarily straddle plants situated on mainline natural gas pipelines that bring unprocessed natural gas production from the Gulf of Mexico onshore. These facilities allow us to extract NGLs from a raw natural gas stream which enable the natural gas to meet pipeline quality specifications. After extraction, we typically transport the mixed NGLs to a centralized facility for fractionation into purity NGL products such as ethane, propane, normal butane, isobutane and natural gasoline. The purity NGL products can then be used in our NGL marketing activities to meet contractual requirements or sold on spot and forward markets. We believe

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that natural gas and its associated NGL production from the Gulf of Mexico will significantly increase in the coming years as a result of advances in seismic and deepwater development technologies and continued capital spending for exploration and production by major oil and natural gas companies.

        In general, we provide natural gas processing services under three types of arrangements: margin-band/keepwhole contracts, percent-of-liquids contracts and fee-based contracts. The key features of each type of contract are described below:

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        In general, keepwhole and percent-of-liquids contracts give us the right (but not the obligation) to process natural gas for a producer; thus, we are protected from processing at an economic loss during times when the sum of our costs exceeds the value of the mixed NGLs we would take ownership of. Generally, our natural gas processing agreements have terms ranging from month-to-month to life of the producing lease. Intermediate terms of one to ten years are also common.

        Due to the increase in natural gas prices relative to NGL prices in recent years, there is an industry trend that new gas processing contracts on the U.S. Gulf Coast are being structured as either percent-of-liquids arrangements, fee-based arrangements or hybrid arrangements. A hybrid arrangement typically calls for the processor to provide processing services under a percent-of-liquids arrangement with the producer having the processing election. If the producer elects to not process under the percent-of-liquids arrangement, the processor has the option to process the gas under a keepwhole arrangement. If the processor elects to not exercise its option to process under a keepwhole arrangement, the gas is processed under a fee-based arrangement. We believe that providing natural gas processing services under these types of arrangements significantly reduces the risk and inherent fluctuation in our gross operating margin from natural gas processing caused by changes in natural gas and NGL prices.

        The following table shows our net natural gas processing volumes and the corresponding overall utilization rates of our net natural gas processing capacity for each of the last three years. The table also shows our equity NGL production for each of the last three years. Equity NGL production is defined as the volume of mixed NGLs extracted by the gas plants to which we take title under the terms of processing agreements or as a result of plant ownership interests.

        As noted previously, under certain processing arrangements, we take title to a portion of the mixed NGLs that are extracted by our natural gas processing plants. Once this mixed NGL volume is fractionated into purity NGL products (ethane, propane, normal butane, isobutane and natural gasoline), we use them to meet contractual requirements or sell them on spot and forward markets as part of our NGL marketing activities. As part of these marketing activities, we have a number of isobutane sales contracts. To fulfill our obligations under these sales contracts, we can purchase isobutane on the open market for resale, sell isobutane from our inventory or pay our

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isomerization business (which is part of the Fractionation segment) a toll processing fee to process our inventories of imported or domestically-sourced normal and mixed butanes into isobutane. The intersegment expense and revenue recorded as a result of utilizing the services of our isomerization business are eliminated in consolidation.

        In support of its commercial goals, our NGL marketing activities within this segment rely on inventories of mixed NGLs and purity NGL products. These inventories are the result of accumulated equity NGL production volumes, imports and other spot and contract purchases. Our inventories of ethane, propane and normal butane are typically higher in summer months as each are in higher demand and at higher price levels during winter months. Isobutane and natural gasoline inventories are generally stable throughout the year. Our inventory cycle begins in late-February to mid-March (the seasonal low point); builds through September; remains level until early December; before being drawn down through winter until the seasonal low is reached again.

        To the extent that we are obligated under our margin-band/keepwhole gas processing contracts to pay market value for or replace the PTR extracted from the natural gas stream, we are exposed to various risks, primarily that of commodity price fluctuations. The prices of natural gas and NGLs are subject to fluctuations in response to changes in supply, market uncertainty and a variety of additional factors that are beyond our control. Periodically, we attempt to mitigate these risks through the use of commodity financial instruments.

        Some of our exposure to commodity price risk is mitigated because natural gas with a high content of NGLs must be processed in order to meet pipeline quality specifications and to be suitable for ultimate consumption. To the extent that natural gas is not processed and does not meet pipeline quality specifications, this unprocessed natural gas and its associated crude oil production may be subject to being shut-in (i.e., not produced). Therefore, producers are motivated to reach contractual arrangements that are acceptable to gas processors in order for gas processing services to be available on a continuous basis (e.g., through contracts that do not expose the processors to natural gas price fluctuations). During periods of extreme commodity price fluctuations, we generally have the right under margin band/keepwhole arrangements to withhold processing services from a customer should we and the producer be unsuccessful in reaching acceptable contractual arrangements.

        Our gas processing business and NGL marketing activities encounter competition from fully integrated oil companies, intrastate pipeline companies, major interstate pipeline companies and their non-regulated affiliates, and independent processors. Each of our competitors has varying levels of financial and personnel resources and competition generally revolves around price, service and location issues. Our integrated system affords us flexibility in meeting our customers’ needs. While many companies participate in the gas processing business, few have a presence in significant downstream activities such as NGL fractionation and transportation, import/export services and NGL marketing as we do. Our competitive and/or leading strategic position and sizeable presence in these downstream businesses allows us to extract incremental value while offering our customers enhanced services, including comprehensive service packages.

        At December 31, 2003, our NGL marketing activities utilize a fleet of approximately 670 railcars, the majority of which are under short and long-term leases. These railcars are used to deliver feedstocks to our facilities and to transport NGL products throughout the United States. We have rail loading/unloading facilities at Mont Belvieu, Texas; Breaux Bridge, Louisiana; Sorrento, Louisiana and Petal, Mississippi. These facilities service both our rail shipments and those of our customers.

        This segment includes our 13.1% investment in VESCO, which owns an integrated complex comprised of the Venice gas processing plant, a fractionation facility, storage assets and gas gathering pipelines in the Gulf of Mexico. In addition, we own four NGL terminals (primarily in propane service) located in Bakersfield and Rocklin, California; Reno, Nevada and Albertville, Alabama that have an aggregate storage capacity of 0.1 million barrels of NGLs.

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OCTANE ENHANCEMENT

        At December 31, 2003, we owned a 66.7% interest in BEF, which owns a facility that currently produces MTBE, a motor gasoline additive that increases octane and is used in reformulated motor gasoline. We operate the facility, which is located within our Mont Belvieu complex. On September 30, 2003, we purchased an additional 33.3% interest in this facility. As a result of this acquisition, BEF became a majority-owned consolidated subsidiary of ours. Sun owns the remaining 33.3% in BEF.

        The production of MTBE is primarily driven by oxygenated fuel programs enacted under the federal Clean Air Act Amendments of 1990. In recent years, MTBE has been detected in water supplies. The major source of ground water contamination appears to be leaks from underground storage tanks. As a result of environmental concerns, several states have enacted legislation to ban or significantly limit the use of MTBE in motor gasoline within their jurisdictions. In addition, federal legislation has been drafted to ban MTBE and replace the oxygenate with renewable fuels such as ethanol. Although numerous resulting legal actions have been filed against motor gasoline and MTBE producers, BEF has not been named in any MTBE legal action to date. For additional information regarding the impact of environmental regulation on BEF, please read “ – Regulation and Environmental Matters – Impact of the Clean Air Act’s oxygenated fuels programs on our BEF investment” beginning on page 42 of this annual report.

        As a result of these developments, we are currently in the process of modifying the facility to also produce iso-octane, a motor gasoline octane enhancement additive derived from isobutane. We expect iso-octane to be in demand by refiners to replace the amount of octane that is lost as a result of MTBE being eliminated as a motor gasoline blendstock. The modification project is expected to be completed during the third quarter of 2004 at a total cost of approximately $30 million. The facility will continue to produce MTBE as market conditions warrant and will be capable of producing either MTBE or iso-octane once the plant modifications are complete. Depending on the outcome of various factors (including pending federal legislation) the facility may be further modified in the future to produce alkylate.

        As noted above, domestic MTBE demand is primarily linked to reformulated motor gasoline requirements in certain urban areas of the United States designated as carbon monoxide and ozone non-attainment areas by the federal Clean Air Act Amendments of 1990. Motor gasoline demand in turn is affected by many factors, including the price of motor gasoline (which is generally dependent upon crude oil prices) and overall economic conditions. Sun is obligated to purchase all of BEF’s MTBE production at spot-market related prices through September 2004. Sun uses the MTBE it purchases from BEF to either (i) satisfy its own reformulated gasoline blending requirements in the eastern United States markets it serves, or (ii) as a commodity offered for resale to others.

        BEF is exposed to commodity price risk due to the market-pricing provisions of the Sun agreement. Historically, MTBE prices are stronger during the April to September period of each year, which corresponds with the summer driving season. Future MTBE prices will be influenced by the timing and extent of federal and state legislation to ban or limit the use of MTBE.

        BEF manufactures MTBE using feedstocks of methanol and high-purity isobutane. The methanol feedstock used by BEF is purchased from third parties and transported to Mont Belvieu using our HSC pipeline. BEF’s methanol supply can originate from a variety of domestic and foreign producers, including those located in Venezuela, Chile, New Zealand and the Caribbean. BEF’s high-purity isobutane requirements are met using production from our Mont Belvieu isomerization units. Lastly, BEF’s MTBE production is transported to a location on the Houston Ship Channel for delivery to Sun using our HSC pipeline.

        As a result of declining domestic demand and a prolonged period of weak MTBE production economics, several of BEF’s competitors announced their withdrawal from the marketplace during 2003. Due to the deteriorating business environment and outlook and the completion of its preliminary engineering studies regarding conversion alternatives, BEF evaluated the carrying value of its long-lived assets for impairment during the third quarter of 2003. This review indicated that the carrying value of its long-lived assets exceeded their collective fair value, which resulted in a non-cash asset impairment charge of $67.5 million. Our share of this loss was $22.5 million and is recorded as a component of “Equity in income (loss) of unconsolidated affiliates” in our Statements of Consolidated Operations and Comprehensive Income for the year ended December 31, 2003.

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        BEF’s assets were written down to fair value using fair value analysis, which was determined by independent appraisers using present value techniques. The impaired assets principally represent the plant facility and other assets associated with MTBE production. The fair value analysis incorporates future courses of action being taken (or contemplated to be taken) by BEF management, including modification of the facility to produce iso-octane and alkylate. If the underlying assumptions in the fair value analysis change resulting in the present value of expected future cash flows being less than the new carrying value of the facility, additional impairment charges may result in the future.

        The following table shows MTBE production volumes and capacity (in MBPD) and the corresponding overall utilization rates of the BEF facility for the last three years. Net capacity for 2003 has been adjusted for our acquisition of the additional 33.3% interest in the facility.

OTHER

        This operating segment is comprised of fee-based marketing services and unallocated costs of engineering services, construction equipment rentals and computer network services that support our operations and business activities. For a small number of clients, we perform NGL marketing services for which we charge a commission. The clients we serve are primarily located in the states of Washington, California and Illinois. Commissions are generally based on either a percentage of the final sales price negotiated on behalf of the client or on a fixed fee per gallon basis. During 2003, our fee-based marketing services handled approximately 35 MBPD of various NGL products with the period of highest activity occurring during the summer months. The principal elements of competition in this business are price and quality of service.

EMPLOYEES

        We do not have any employees. EPCO employs most of the persons necessary for the operation of our business. At December 31, 2003, EPCO had approximately 1,325 employees involved in the management and operations of our business, none of whom where members of a union. We fully reimburse EPCO for the costs of approximately 1,220 of these employees, with the remainder of this group covered under the fixed-fee payments we made under the Administrative Services Agreement prior to January 1, 2004 (for a detailed discussion of the Administrative Services Agreement, please read Item 13 of this annual report). In addition to EPCO employees, we have engaged approximately 125 contract maintenance and other personnel who support our operations.

MAJOR CUSTOMERS

        Our revenues are derived from a wide customer base. Our largest customer, Shell, accounted for 5.5%, 7.9% and 10.6% of consolidated revenues in 2003, 2002 and 2001, respectively.

REGULATION AND ENVIRONMENTAL MATTERS

Regulation of our interstate common carrier liquids pipelines

        Our Mid-America, Seminole, Chunchula, Lou-Tex Propylene, Lou-Tex NGL, Propylene and Sabine pipelines and certain pipelines in which we own equity interests (Dixie, Tri-States, Wilprise and Belle Rose), along with certain pipelines of the Louisiana Pipeline System, are interstate common carrier liquids pipelines subject to regulation by the Federal Energy Regulatory Commission (“FERC”) under the October 1, 1977 version of the Interstate Commerce Act (“ICA”).

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        As interstate common carriers, these pipelines provide service to any shipper who requests transportation services, provided that products tendered for transportation satisfy the conditions and specifications contained in the applicable tariff. The ICA requires us to maintain tariffs on file with the FERC that set forth the rates we charge for providing transportation services on our interstate common carrier pipelines as well as the rules and regulations governing these services.

        The ICA gives the FERC authority to regulate the rates we charge for service on the interstate common carrier pipelines. The ICA requires, among other things, that such rates be “just and reasonable” and nondiscriminatory. The ICA permits interested persons to challenge proposed new or changed rates and authorizes the FERC to suspend the effectiveness of such rates for a period of up to seven months and to investigate such rates. If, upon completion of an investigation, the FERC finds that the new or changed rate is unlawful, it is authorized to require the carrier to refund the revenues in excess of the prior tariff during the term of the investigation. The FERC may also investigate, upon complaint or on its own motion, rates that are already in effect and may order a carrier to change its rates prospectively. Upon an appropriate showing, a shipper may obtain reparations for damages sustained for a period of up to two years prior to the filing of a complaint.

        On October 24, 1992, Congress passed the Energy Policy Act of 1992 (“Energy Policy Act”). The Energy Policy Act deemed petroleum pipeline rates that were in effect during any of the twelve months preceding enactment that had not been subject to complaint, protest or investigation to be just and reasonable under the ICA (i.e., “grandfathered”). The Energy Policy Act also limited the circumstances under which a complaint can be made against such grandfathered rates. In order to challenge grandfathered rates, a party would have to show that it was previously contractually barred from challenging the rates, or that the economic circumstances of the oil pipeline that were a basis for the rate or the nature of the service underlying the rate had substantially changed or that the rate was unduly discriminatory or preferential. At present these provisions and the circumstances under which a grandfathered rate may be successfully challenged have received only limited attention from the FERC, causing a degree of uncertainty as to their application and scope. However, two cases involving SFPP, L.P. (“SFPP”), un unrelated interstate common carrier oil pipeline, that are pending before the U.S. Court of Appeals for the District of Columbia Circuit and the FERC may resolve some of that uncertainty. Portions of the Mid-America, Seminole, Chunchula and Propylene pipelines and portions of the Louisiana Pipeline System are covered by the grandfathering provisions of the Energy Policy Act.

        The Energy Policy Act required the FERC to issue rules establishing a simplified and generally applicable ratemaking methodology for petroleum pipelines, and to streamline procedures in petroleum pipeline proceedings. The FERC responded to this mandate by issuing Order No. 561, which, among other things, adopted an indexing rate methodology for petroleum pipelines. Under the regulations, which became effective January 1, 1995, petroleum pipelines are able to change their rates within prescribed ceiling levels that are tied to an inflation index. Rate increases made within the ceiling levels will be subject to protest, but such protests must show that the portion of the rate increase resulting from application of the index is substantially in excess of the pipeline’s increase in costs. If the indexing methodology results in a reduced ceiling level that is lower than a pipeline’s filed rate, Order No. 561 requires the pipeline to reduce its rate to comply with the lower ceiling. Under Order No. 561, a pipeline must as a general rule utilize the indexing methodology to change its rates. The FERC, however, retained cost-of-service ratemaking, market-based rates, and settlement as alternatives to the indexing approach. These alternatives may be used in certain specified circumstances.

        We believe that the rates charged for transportation services on the interstate pipelines we own or have an interest in are just and reasonable under the ICA. As discussed above, however, because of the uncertainty related to the application of the Energy Policy Act’s grandfathering provisions as well as the uncertainty related to the FERC’s indexing methodology, we cannot predict what rates we will be allowed to charge in the future for service on our interstate common carrier pipelines. Furthermore, because rates charged for transportation services must be competitive with those charged by other transporters, the rates set forth in our tariffs will be determined based on competitive factors in addition to regulatory considerations.

        In a 1995 decision involving Lakehead Pipe Line Company (“Lakehead”), an unrelated pipeline limited partnership, the FERC partially disallowed the inclusion of income taxes in that partnership’s cost of service. Subsequent appeals of these rulings were resolved by settlement and were not adjudicated. In a separate proceeding involving SFPP, the FERC held that the limited partnership may not claim an income tax allowance for income

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attributable to non-corporate partners, both individuals and other entities. As noted above, SFPP and other parties to the proceeding have appealed the FERC’s order to the U.S. Court of Appeals for the District of Columbia Circuit where the case is now pending. The effect of the FERC’s policy stated in the Lakehead proceeding (and the results of the ongoing SFPP litigation regarding that policy) on us is uncertain. Our current rates are established using the indexing method and/or grandfather provisions. It is possible that a party might challenge our grandfathered rates (set when the assets were held by our corporate predecessor). While it is not possible to predict the likelihood that such a challenge would succeed at the FERC, if such a challenge were to be raised and succeed, application of the Lakehead decision and related rulings would reduce our permissible income tax allowance in any cost-of-service based rate, to the extent income tax is attributed to limited partnership interests held by individual partners rather than corporations.

Regulation of our interstate natural gas pipelines

        The Stingray and Nautilus natural gas pipeline systems are regulated by the FERC under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. Each system operates under separate FERC-approved tariffs that establish rates, terms and conditions under which each system provides services to its customers. In addition, the FERC’s authority over natural gas companies that provide natural gas pipeline transportation or storage services in interstate commerce includes the certification and construction of new facilities; the extension or abandonment of services and facilities; the maintenance of accounts and records; the acquisition and disposition of facilities; the initiation and discontinuation of services; and various other matters. As noted above, the Stingray and Nautilus systems have tariffs established through FERC filings that have a variety of terms and conditions, each of which affect the operations of each system and its ability to recover fees for the services it provides. Generally, changes to these fees or terms can only be implemented upon approval by the FERC.

        Commencing in 1992, the FERC issued Order No. 636 and subsequent orders (collectively, “Order No. 636”), which require interstate pipelines to provide transportation and storage services separate, or “unbundled,” from the pipelines’ sales of gas. Also, Order No. 636 requires pipelines to provide open-access transportation and storage services on a basis that is equal for all shippers. The FERC has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. The courts have largely affirmed the significant features of Order No. 636 and numerous related orders pertaining to the individual pipelines, although the FERC continues to review and modify its open access regulations.

        In 2000, the FERC issued Order No. 637 and subsequent orders (collectively, “Order No. 637”), which imposed a number of additional reforms designed to enhance competition in natural gas markets. Among other things, Order No. 637 effected changes in FERC regulations relating to scheduling procedures, capacity segmentation, pipeline penalties, rights of first refusal and information reporting. In April of 2002, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision that either upheld or declared premature for review most major aspects of Order No. 637. Order No. 637 required interstate natural gas pipelines to implement the policies mandated by the Order through individual compliance filings. The FERC has now ruled on a number of the individual compliance filings, although its decisions in such proceedings remain subject to the outcome of pending rehearing requests and possible court appeals. We cannot predict whether and to what extent FERC’s market reforms will survive judicial review and, if so, whether the FERC’s actions will achieve the goal of increasing competition in markets in which our natural gas is sold. However, we do not believe that the operations of Nautilus and Stingray (or our other pipeline and storage operations which are indirectly affected by the extent and nature of FERC’s jurisdiction over activities in interstate commerce) will be affected in any materially different way than other companies with whom we compete.

        In addition to its jurisdiction over Stingray and Nautilus under the Natural Gas Act and the Natural Gas Policy Act, the FERC also has jurisdiction over Stingray and Nautilus, as well as Manta Ray and Nemo, under the Outer Continental Shelf Lands Act (“OCSLA”). The OCSLA requires that all pipelines operating on or across the outer continental shelf provide open-access, non-discriminatory transportation service on their systems. The U.S. Court of Appeals for the District of Columbia Circuit recently upheld a lower court’s rejection of FERC’s attempt to implement regulations pertaining to “gas service providers” operating on the outer continental shelf. We cannot predict what further action FERC will take under its OCSLA authority.

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        In November 2003, the FERC issued final rules governing the standards of conduct between transmission providers and their energy affiliates that apply to interstate natural gas pipelines and public utilities. The rules became effective on February 9, 2004, and on or before that date, each transmission provider was required to file with the FERC a plan and schedule for implementing the new rules. The rules substantially modify the scope of the FERC’s previous standards of conduct regulations by broadening the definition of “affiliates” covered by the standards of conduct to include “energy affiliates.” The rules make each transmission provider responsible for ensuring complete separation of certain functions between itself and its “energy affiliates” and for compliance with specific information disclosure prohibitions. The rules require that transmission providers conduct training for all employees regarding the scope and content of the rules, and hire or designate a chief compliance officer who is responsible for employee training and answering employee questions regarding the new rules and coordinating audits and investigations with FERC staff, as well as ensuring that the transmission provider complies with the standards of conduct. The rules prohibit employees of a transmission provider from using any third party, affiliate or employee of an affiliate as a conduit for sharing information that is prohibited under the rules from disclosure to energy affiliates. By June 1,2004, each transmission provider must comply with the standards of conduct and post procedures on its website that will enable the FERC to determine whether the transmission provider is in compliance with the new rules. Many aspects of the rules are the subject of requests for rehearing currently pending before the FERC. We cannot predict the ultimate outcome of this proceeding. We do not believe that implementation of the final rules will affect us in any materially different way than other companies with whom we compete.

        Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue.

Regulation of our intrastate common carrier liquids and natural gas pipelines

        Certain portions of the Louisiana Pipeline System and the majority of the Acadian Gas natural gas pipeline systems are intrastate common carrier pipelines that are subject to various Louisiana state laws and regulations that affect the rates we charge and the terms of service. Intrastate movements of products on the Seminole, Mid-America, Belle Rose and certain pipelines of the Louisiana Pipeline System are provided by them as intrastate common carriers that are subject to various other state laws and regulations that affect the rates we charge and the terms of service.

Other state and local regulation of our operations

        Our business activities are subject to various state and local laws and regulations, as well as orders of regulatory bodies pursuant thereto, governing a wide variety of matters, including marketing, production, pricing, community right-to-know, protection of the environment, safety and other matters.

General environmental matters

        Our operations are subject to federal, state and local laws and regulations relating to the release of pollutants into the environment or otherwise relating to protection of the environment. We believe that our operations and facilities have all required permits and are in general compliance with applicable environmental regulations. However, risks of process upsets, accidental releases or spills are associated with our operations, and there can be no assurance that significant costs and liabilities will not be incurred, including those related to claims for damage to property and persons.

        The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, such as discharges of pollutants, generation and disposal of wastes and the production, use and handling of chemical substances. The usual remedy for failure to comply with these laws and regulations is the assessment of administrative, civil and, in some cases, criminal penalties or, in rare cases, injunctions. We believe that the cost of compliance with environmental laws and regulations will not have a significant effect on our results of operations or financial position. However, it is possible that the costs of compliance with environmental laws and regulations will continue to increase, and there can be no assurance as to the amount or timing of future expenditures for environmental compliance or remediation, and actual future expenditures may be different from the amounts

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currently anticipated. In the event of future increases in cost, we may be unable to pass these increases on to customers. We will attempt to anticipate future regulatory requirements that might be imposed and plan accordingly in order to remain in compliance with changing environmental laws and regulations and to minimize the costs of such compliance.

        We currently own or lease, and have in the past owned or leased, properties that have been used over the years for NGL processing, treatment, transportation and storage and for oil and natural gas exploration and production activities. Solid waste disposal practices within the NGL industry and other oil and natural gas related industries have improved over the years with the passage and implementation of various environmental laws and regulations. Nevertheless, a possibility exists that hydrocarbons and other solid wastes may have been disposed of or otherwise released on various properties that we own or lease or have owned or leased during the operating history of those facilities. In addition, a small number of these properties may have been operated by third parties over whom we had no control as to such entities’ handling of hydrocarbons or other wastes and the manner in which such substances may have been disposed of or released. State and federal laws applicable to oil and natural gas wastes and properties have gradually become more strict; and, pursuant to such laws and regulations, we could be required to remove or remediate previously disposed wastes or property contamination, including groundwater contamination. We do not believe that there presently exists significant surface or subsurface contamination of our properties by hydrocarbons or other solid wastes.

        We generate both hazardous and nonhazardous solid wastes which are subject to requirements of the Federal Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes. From time to time, the EPA has considered making changes in nonhazardous waste standards that would result in stricter disposal requirements for such wastes. Furthermore, it is possible that some wastes currently classified as nonhazardous may be designated as hazardous in the future, resulting in wastes being subject to more rigorous and costly disposal requirements. Such changes in the regulations may result in our incurring additional capital expenditures or operating expenses.

Potential impact of the Superfund law on our operations

        The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the “Superfund” law, and similar state laws, impose liability without regard to fault or the legality of the original conduct, on certain classes of persons, including the owner or operator of a site and companies that disposed or arranged for the disposal of hazardous substances found at the site. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible parties the costs they incur. We may generate “hazardous substances” in the course of our normal business operations. As such, we may be responsible under CERCLA for all or part of the costs required to clean up sites at which such wastes have been disposed; however, we have not been notified of any potential responsibility for cleanup costs under CERCLA.

General impact of the Clean Air Act on our operations

        Our operations are subject to the Clean Air Act and comparable state statutes. Amendments to the Clean Air Act were adopted in 1990 and contain provisions that may result in the imposition of certain pollution control requirements with respect to air emissions from our pipelines and processing and storage facilities. For example, the Mont Belvieu processing and storage facilities are located in the Houston-Galveston ozone non-attainment area, which is categorized as a “severe” area and, therefore, is subject to more restrictive regulations for the issuance of air permits for new or modified facilities. The Houston-Galveston area is among ten areas of the country in this “severe” category. One of the other consequences of this non-attainment status is the potential imposition of lower limits on emissions of certain pollutants, particularly oxides of nitrogen which are produced through combustion, such as in the gas turbines at the Mont Belvieu complex.

        Regulations imposing more strict air emissions requirements on existing facilities in the Houston-Galveston area were issued in December 2000. These regulations may have required extensive redesign and modification of our Mont Belvieu facilities to achieve the air emissions reductions needed for federal Clean Air Act compliance. The technical practicality and economic reasonableness of these regulations were challenged under state law in litigation filed on January 19, 2001 against the predecessor of the Texas Commission on Environmental Quality

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(“TCEQ”) and its principal officials in the District Court of Travis County, Texas, by a coalition of major Houston-Galveston area industries that included us. This litigation was stayed by a settlement under which the TCEQ agreed to reassess the December 2000 rules in light of certain scientific studies of the sources and mechanisms of air pollution in the Houston-Galveston area that were undertaken during the summer of 2001.

        As a result of these studies, the TCEQ promulgated new rules on December 13, 2002 that require less restrictive nitrogen oxide reductions for certain industrial sources in the Houston-Galveston area, including some of those we operate, than were required under the December 2000 rules. The December 2002 rules, however, require additional controls on sources of emissions defined as highly reactive volatile organic compounds, a class of chemicals that includes certain types of hydrocarbons handled at our facilities in the Houston-Galveston area. We believe that the result of the new rules will be to decrease our projected capital outlays and operating costs for air pollution control in the Houston-Galveston area compared to what would have been required under the December 2000 rules. There is no guarantee that the EPA will approve the new rules as part of the state implementation plan for the Houston-Galveston area, and there may be additional legal challenges to the new rules, either of which could result in additional rulemaking that could affect our operations.

        As a result of our evaluation of the December 2002 rules, however, we expect that expenditures for air emissions reduction projects will be spread over several years, and we believe that adequate liquidity and capital resources will exist for us to undertake them. We have budgeted capital funds in 2004 to continue making modifications begun in 2002 to certain Mont Belvieu facilities that will result in air emission reductions. The methods employed to achieve these reductions will be compatible with whatever regulatory requirements are eventually put in place.

        Failure to comply with air statutes or the implementing regulations may lead to the assessment of administrative, civil or criminal penalties, and/or result in the limitation or cessation of construction or operation of certain air emission sources. We believe our operations are in substantial compliance with applicable air requirements.

Impact of the Clean Air Act’s oxygenated fuels programs on our BEF investment

        We have a 66.7% ownership in BEF, which owns a facility currently producing MTBE. The production of MTBE is driven primarily by oxygenated fuels programs established under the federal Clean Air Amendments of 1990 and other legislation. In 1999 the governor of California ordered the phase-out of MTBE in California based on allegations by several public advocacy and protest groups that MTBE contaminates water supplies, causes health problems and has not been as beneficial in reducing air pollution as originally contemplated. A number of lawsuits have been filed by municipalities and other water suppliers against a number of manufacturers of reformulated gasoline containing MTBE, although generally such suits have not named manufacturers of MTBE as defendants, and there have been no such lawsuits filed against BEF. It is possible, however, that MTBE manufacturers such as BEF could ultimately be added as defendants in such lawsuits or in new lawsuits. While we believe that we currently have adequate insurance to cover any adverse consequences resulting from our production of MTBE, we have been informed by our insurance carrier that upon renewal of our policy in April 2004, MTBE related claims may be excluded from the scope of our insurance coverage.

        California’s complete ban on the use of MTBE in motor gasoline went into effect on January 1, 2004. New York and Connecticut also banned MTBE effective January 1, 2004. At least sixteen other states have enacted bans on MTBE, and Congress is also contemplating a federal ban on MTBE. In 2003, the House approved an energy bill that in part would have banned the use of MTBE beginning in 2014 and require the use of ethanol as a substitute for MTBE; this legislation was not enacted into law. Similar legislation is expected to be considered again in the second session of the current Congress, but the outlook for passage is uncertain.

        Several refiners have taken an early initiative to phase out the production of MTBE in response to this legislative pressure and the possibility of additional groundwater contamination lawsuits. If MTBE is further banned or if its use is more significantly limited, the revenue BEF derives from MTBE production would be reduced or eliminated, which in turn would affect the earnings we record from BEF in our Octane Enhancement segment. Also, to the extent isobutane is used as a feedstock in the production of MTBE and this demand is reduced or eliminated due to bans on the use of MTBE, the revenues we record in our Fractionation segment for

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isomerization services and in our Processing segment for sales of isobutane could be unfavorably impacted. However, isobutane would continue to be needed as a feedstock to the extent that alkylate or iso-octane replaces MTBE.

        In view of the uncertainty surrounding the long term prospects for MTBE, in 2003 we announced plans to modify the BEF facility to add the capacity to produce iso-octane, a motor gasoline octane enhancement additive which is also derived from isobutane and is expected to be sought by refiners to replace the amount of octane that is lost as a result of MTBE being eliminated as a motor gasoline blendstock. We expect these modifications to be completed in the third quarter of 2004. We also continue to study the prospects for converting the BEF facility to the production of alkylate, another additive to increase octane in motor gasoline derived from isobutane. To the extent the BEF facility is used to produce iso-octane or alkylate, it would continue this facility’s demand for isobutane and, thus, help offset the loss of MTBE-related revenues we record in our Fractionation segment for isomerization services and in our Processing segment for sales of isobutane.

        Legislation introduced in the U.S. Senate in 2003, as part of the energy bill, would have eliminated the Clean Air Act’s oxygenate requirement in order to facilitate the elimination of MTBE in fuel by a certain date, while protecting the fuel alcohol market (primarily ethanol) through a renewable fuels mandate. Energy legislation introduced in the U.S. House of Representatives would have, among other things, protected manufacturers by prohibiting lawsuits based on allegations that MTBE is a defective product. The Energy legislation proposed by both the Senate and the House also included language authorizing (but not appropriating) conversion assistance to MTBE manufacturers such as BEF. The amount of potential conversion assistance was increased in both versions over the levels established in similar legislation in 2002. Neither of these pieces of legislation was enacted into law. The outlook for the second session of the current Congress is uncertain, and no assurance can be given as to whether or not the federal government or additional states will ultimately adopt legislation to remove the use of MTBE from their clean fuels programs or to provide liability protection for MTBE manufacturers.

Impact of the Clean Water Act on our operations

        The Federal Water Pollution Control Act, also known as the Clean Water Act, and similar state laws regulate potential discharges of contaminants into federal and state waters. Regulations pursuant to these laws require companies that discharge into federal and state waters to obtain National Pollutant Discharge Elimination System (“NPDES”) and/or state permits authorizing these discharges. These laws provide penalties for releases of unauthorized contaminants into the water and impose substantial liability for the costs of removing spills from such waters. In addition, the Clean Water Act and analogous state laws require that individual permits or coverage under general permits be obtained by covered facilities for discharges of stormwater runoff. The Clean Water Act also requires operators of facilities with underground or above ground oil storage capacity in excess of certain prescribed amounts to prepare and implement spill prevention, control and countermeasure (“SPCC”) plans. We believe that our operations are in substantial compliance with such laws and regulations.

Impact of environmental regulation on our underground storage operations

        We currently own and operate underground storage caverns that have been created in naturally occurring salt formations in Texas, Oklahoma, Louisiana and Mississippi. We also own and operate underground storage caverns that have been created in subsurface limestone formations in Iowa and Nebraska. These storage caverns are used to store natural gas, NGLs, NGL products and various petrochemicals. Surface brine pits and brine disposal wells are used in the operation of the storage caverns. All of these facilities are subject to strict environmental regulation such as that provided by the Texas Natural Resources Code for those storage facilities situated in Texas and similar statutes in the other states in which such facilities are located. Regulations implemented under such statutes address the operation, maintenance and/or abandonment of such underground storage facilities, pits and disposal wells, and require that permits be obtained. Failure to comply with the governing statutes or the implementing regulations may lead to the assessment of administrative, civil or criminal penalties. We believe that our salt dome storage operations, including the caverns, brine pits and brine disposal wells, are in substantial compliance with applicable statutes.

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Safety regulation issues

        Our NGL, petrochemical and gas pipelines are subject to the pipeline safety program established by the 1996 federal Pipeline Safety Act and its implementing regulations. The U.S. Department of Transportation, through the Office of Pipeline Safety (“OPS”), is responsible for developing, issuing and enforcing regulations relating to the design, construction, inspection, testing, operation, replacement and management of natural gas and hazardous liquid pipelines. In 2001 OPS issued safety regulations containing requirements for the development of integrity management programs for oil pipelines (which includes NGL and petrochemical pipelines such as ours) in certain “high consequence areas”. High consequence areas include but are not limited to high population areas, environmentally sensitive locations, and areas containing drinking water supplies. In connection with these regulations, we developed a Pipeline Integrity Management Program and, by the end of 2002, had identified the segments of our liquids pipelines that were located in such areas. The regulations stipulate that a pipeline company must assess the condition of its pipelines in such areas and perform any necessary repairs. We are required to evaluate at least 50% of our identified pipeline mileage in such high consequence areas by the end of 2004 with the balance completed before April 2008. After this initial testing is complete, the identified pipeline segments must be reassessed every five years thereafter.

        On November 15, 2002, Congress passed the Pipeline Safety Improvement Act, which contains requirements for the development of integrity management programs on gas pipelines located in certain “high consequence areas,” and effective February 14, 2004, OPS adopted regulations to implement this statute. The new regulations require gas pipeline operators to develop by December 17, 2004, integrity management programs for gas transmission pipelines that could impact high consequence areas in the event of a failure. We anticipate that our implementation of the gas pipeline regulations will proceed on a timely basis.

        During 2003, we spent approximately $10 million to comply with these new regulations, of which $4.5 million was expensed. During each of the years 2004 through 2008, our cash outlays for this program are expected to be in the range of $12 million to $23 million. At present, we expect that approximately 85% of these future expenditures will be recorded as operating expenses within our Pipelines segment.

        The workplaces associated with our company-operated processing, storage and pipeline facilities are subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) and comparable state statutes. We believe that our facilities are in substantial compliance with OSHA requirements, including general industry standards, record keeping requirements and monitoring of occupational exposure to regulated substances.

        In general, we expect expenditures associated with industry and regulatory safety standards (such as those described above) will increase in the future. Although such expenditures cannot be accurately estimated at this time, we believe that such expenditures will not have a significant effect on our operations.

TITLE TO PROPERTIES

        Our real property holdings fall into two basic categories: (1) parcels that we own in fee, such as the land at the Mont Belvieu complex and (2) parcels in which our interest derives from leases, easements, rights-of-way, permits or licenses from landowners or governmental authorities permitting the use of such land for our operations. The fee sites upon which our major facilities are located have been owned by us or our predecessors in title for many years without any material challenge known to us relating to title to the land upon which the assets are located, and we believe that we have satisfactory title to such fee sites. We have no knowledge of any challenge to the underlying fee title of any material lease, easement, right-of-way or license held by us or to our title to any material lease, easement, right-of-way, permit or license, and we believe that we have satisfactory title to all of our material leases, easements, rights-of-way and licenses.

OUR SEC REPORTING

        As an accelerated filer, we electronically file certain documents with the SEC. We file annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K (as appropriate); along with any related amendments and supplements thereto. From time-to-time, we may also file registration and related statements pertaining to equity or debt offerings. You may read and copy any materials we file with the SEC at the SEC’s

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Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

        We provide electronic access to our periodic and current reports on our Internet website, www.epplp.com. These reports are available on our website as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the SEC. You may also contact our investor relations department at 713-880-6500 for paper copies of these reports free of charge.

ITEM 3.  LEGAL PROCEEDINGS.

        On occasion, we are named as a defendant in litigation relating to our normal business operations. Although we are insured against various business risks to the extent we believe it is prudent, there is no assurance that the nature and amount of such insurance will be adequate, in every case, to indemnify us against liabilities arising from future legal proceedings as a result of our ordinary business activity. We are aware of no significant litigation, pending or threatened, that may have a significant adverse effect on our financial position or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        There were no matters submitted to a vote of our unitholders during the fourth quarter of 2003.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
              UNITHOLDER MATTERS.

Market information and cash distributions

        Our common units are traded on the NYSE under the symbol “EPD.” The following table sets forth, for the periods indicated, the high and low closing sales price ranges for the common units, as reported on the NYSE Composite Transaction Tape, and the amount, record date and payment date of the quarterly cash distributions paid per common unit.

        The quarterly cash distribution amounts shown in the table above correspond to cash flows for the quarters indicated. The actual cash distributions (i.e., payments to our limited partners) occur within 45 days after the end of such quarter. Although the payment of such quarterly distributions is not guaranteed, we expect to continue to pay comparable cash distributions in the future. We have agreed in the merger agreement with GulfTerra, subject to the terms of our partnership agreement, to increase the quarterly cash distribution for the quarterly distribution date immediately following the closing of the merger to at least $0.395 per unit, or $1.58 per common unit on an annualized basis.

        As of February 24, 2004, there were 39,642 beneficial owners of our common units, which includes an estimated 351 unitholders of record.

Issuance of Class B special units in December 2003

        On December 17, 2003, we sold 4,413,549 Class B special units to an affiliate of EPCO, for $100 million in a private transaction that was exempt from the registration requirements of the Securities Act of 1933, pursuant to Section 4(2) thereof. The purchase price for the Class B special units was $22.6575 per unit, representing a 5% discount from the $23.85 closing price of our common units on the NYSE on December 16, 2003. The 5% discount was consistent with the 5% discount available to all our unitholders under our distribution reinvestment plan. The Class B special units have rights identical to our common units with respect to distributions and other matters. However, the Class B special units do not have voting rights and are not deemed to be outstanding for purposes of determining whether a quorum is present or whether the approval of the requisite number of holders of our units has been obtained. The Class B special units are convertible into common units on a one-for-one basis upon the receipt of approval of holders of not less than a majority of our common units (not including for this purpose the Class B special units) present and entitled to vote at a meeting of our common unitholders or by the holders of a majority of our common units (not including for this purpose the Class B

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special units) pursuant to written consents. We will request that our common unitholders approve the conversion of all of the Class B special units into common units at the special meeting that will be held to approve our merger with GulfTerra.

Common Units Authorized for Issuance Under Equity Compensation Plans

        Please read information included under Item 12 of this annual report, regarding securities authorized for issuance under equity compensation plans.

Repurchase of Common Units during 2003

        We did not repurchase any of our common units during 2003. Previously, on December 23, 1998, we announced a common unit repurchase program whereby we, together with certain affiliates, intended to repurchase up to 2,000,000 of our common units for the purpose of granting options to management and key employees (amount adjusted for the two-for-one unit split in May 2002). As of December 31, 2003, we and our affiliates are authorized to repurchase up to 618,400 additional common units under this repurchase program. Common units repurchased under this program are classified as treasury units.

ITEM 6.  SELECTED FINANCIAL DATA.

        The following table sets forth for the periods and at the dates indicated, selected historical financial data for our partnership. The selected historical financial data as of and for each of the five years in the period ended December 31, 2003 have been derived from the audited financial statements for the periods indicated. This information should be read in conjunction with our audited financial statements for such periods included under Item 8 of this annual report. In addition, information regarding our results of operations and capital resources and liquidity can be found under Item 7 of this annual report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

        The dollar amounts presented in the table below, except per unit data, are in thousands. Additionally, certain reclassifications have been made to prior years financial statements to conform to the current year presentation.

Enterprise Products Partners L.P. and Subsidiaries, Consolidated

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        The following information is provided to highlight significant trends and other information regarding our historical operating results, financial position and other financial data. Each section below represents a footnote to the preceding table.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS.

        We are a publicly traded limited partnership (NYSE symbol, “EPD”) that was formed in April 1998 to acquire, own, and operate all of the NGL processing and distribution assets of Enterprise Products Company, or EPCO. We conduct all of our business through our wholly owned subsidiary, Enterprise Products Operating L.P., our “Operating Partnership” and its subsidiaries and joint ventures. Our general partner, Enterprise Products GP, LLC, owns a 2.0% interest in us. Unless the context requires otherwise, references to “we,” “us,” “our” or the “Company” are intended to mean the consolidated business and operations of Enterprise Products Partners L.P., which includes Enterprise Products Operating L.P. and its subsidiaries.

        The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes included under Item 8 of this annual report. In addition, the reader should review “Cautionary Statement Regarding Forward-Looking Information and Risk Factors” under Item 1 of this annual report for information regarding forward-looking statements made in this discussion and certain risks inherent in our business. Other risks involved in our business are discussed under “Quantitative and Qualitative Disclosures about Market Risk” included under Item 7A of this annual report. Additionally, please see Part III, Item 13 for a discussion of related-party matters, including our relationship with Shell.

RECENT DEVELOPMENTS

        On December 15, 2003, we and certain of our affiliates, El Paso Corporation and certain of its affiliates (“El Paso”), and GulfTerra Energy Partners, L.P. (“GulfTerra”) and certain of its affiliates entered into a series of agreements under which one of our wholly-owned subsidiaries and GulfTerra would merge, with GulfTerra surviving the merger and becoming wholly-owned by us. Formed in 1993, GulfTerra is a publicly traded limited partnership (NYSE symbol, “GTM”) that manages a balanced, diversified portfolio of interests and assets relating to the midstream energy sector. Prior to December 15, 2003, El Paso was majority owner of GulfTerra’s general partner and owns a 31.8% limited partner interest in GulfTerra.

        In general, GulfTerra’s business lines include:

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        GulfTerra is one of the largest natural gas gatherers, based on miles of pipeline, in the prolific natural gas supply regions offshore in the Gulf of Mexico and onshore in Texas and in the San Juan Basin, which includes a significant portion of the four contiguous corners of Arizona, Colorado, New Mexico and Utah. These regions, especially the deepwater regions of the Gulf of Mexico, which is one of the United States’ fastest growing oil and natural gas producing regions, offer GulfTerra significant growth potential through the acquisition and construction of pipelines, platforms, processing and storage facilities and other energy infrastructure.

        Our preliminary estimate of the total consideration for Steps One, Two and Three we would pay or grant is approximately $3.9 billion. For a period of three years following the closing of the proposed merger, El Paso will

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provide support services to GulfTerra similar to those provided by El Paso prior to the closing of the merger. GulfTerra will reimburse El Paso for 110% of its direct costs of such services (excluding any overhead costs). El Paso will make transition support payments to us in annual amounts of $18 million, $15 million and $12 million for the first, second and third years of such period, respectively, payable in 12 equal monthly installments for each such year. These transition support payments are included in our preliminary estimate of total consideration.

        We are working to complete the merger as soon as possible. A number of conditions must be satisfied before we can complete the merger, including approval by the unitholders of both the Company and GulfTerra and the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1974. While we cannot predict if and when all of the conditions to the merger will be satisfied, we expect to complete the merger in the second half of 2004.

        To review a copy of the merger agreement and related transaction documents, please read our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2003.

OUR RESULTS OF OPERATIONS

        We have five reportable business (or operating) segments: Pipelines, Fractionation, Processing, Octane Enhancement and Other. Pipelines consists of NGL, petrochemical and natural gas pipeline systems, storage and import/export terminal services. Fractionation primarily includes NGL fractionation, isomerization and propylene fractionation. Processing includes our natural gas processing business and related NGL marketing activities. Octane Enhancement represents our investment in a facility that produces motor gasoline additives to enhance octane (currently producing MTBE). The Other business segment consists of fee-based marketing services and various operational support activities.

        We evaluate segment performance based on the non-GAAP financial measure of gross operating margin. Gross operating margin (either in total or by individual segment) is an important performance measure of the core profitability of our operations. This measure forms the basis of our internal financial reporting and is used by senior management in deciding how to allocate capital resources among business segments. We believe that investors benefit from having access to the same financial measures that our management uses in evaluating segment results. The GAAP measure most directly comparable to total segment gross operating margin is operating income. Our non-GAAP financial measure of total segment gross operating margin should not be considered as an alternative to GAAP operating income.

        We define total segment gross operating margin as operating income before: (1) depreciation and amortization expense; (2) operating lease expenses for which we do not have the payment obligation; (3) gains and losses on the sale of assets; and (4) selling, general and administrative expenses. Gross operating margin is exclusive of other income and expense transactions, provision for income taxes, minority interest and extraordinary charges. Gross operating margin by segment is calculated by subtracting segment operating costs and expenses (net of the adjustments noted above) from segment revenues, with both segment totals before the elimination of intercompany transactions. In accordance with GAAP, intercompany accounts and transactions are eliminated in consolidation.

        We include equity earnings from unconsolidated affiliates in our measurement of segment gross operating margin. Our equity investments with industry partners are a vital component of our business strategy. They are a means by which we conduct our operations to align our interests with those of our customers, which may be a supplier of raw materials or a consumer of finished products. This method of operation also enables us to achieve favorable economies of scale relative to the level of investment and business risk assumed versus what we could accomplish on a stand-alone basis. Many of these businesses perform supporting or complementary roles to our other business operations. For additional information regarding our business segments, please read Note 20 of our Notes to Unaudited Consolidated Financial Statements included under Item 8 of this annual report.

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        The following table summarizes our consolidated revenues, costs and expenses, equity in income (loss) of unconsolidated affiliates and operating income for the periods indicated (dollars in thousands):

        The following table reconciles consolidated operating income to our measurement of total segment gross operating margin for the periods indicated (dollars in thousands):

        EPCO subleases to us certain equipment located at our Mont Belvieu facility and 100 railroad tankcars for $1 dollar per year. These subleases (the “retained lease expense” in the previous table) are part of the EPCO Agreement (now referred to as the “Administrative Services Agreement”) that we executed with EPCO in connection with our formation in 1998. EPCO holds these items pursuant to operating leases for which it has retained the corresponding cash lease payment obligation. Operating costs and expenses (as shown in the Statements of Consolidated Operations and Comprehensive Income) treat the lease payments being made by EPCO as a non-cash related party operating expense, with the offset to Partners’ Equity on the Consolidated Balance Sheets recorded as a general contribution to the Company. Apart from the partnership interests we granted to EPCO at our formation, EPCO does not receive any additional ownership rights as a result of its contribution to us of the retained leases. In addition, EPCO has assigned to us the purchase options associated with these leases. For additional information regarding the Administrative Services Agreement and the retained leases, please read Item 13 of this annual report.

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        Our gross operating margin amounts by segment were as follows for the periods indicated (dollars in thousands):

        Our significant pipeline throughput, plant production and processing volumetric data were as follows for the periods indicated (on a net basis, taking into account our ownership interests):

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        Product and Commodity Price Information

        The following table illustrates selected average quarterly industry index prices for natural gas, crude oil, selected NGL and petrochemical products and indicative gas processing gross spreads since the beginning of 2001:

        Year ended December 31, 2003 compared to year ended December 31, 2002

        Revenues for 2003 increased $1.8 billion over those recorded during 2002. Likewise, costs and expenses increased $1.7 billion over those of 2002. The increase in revenues and costs and expenses is primarily due to higher product sales and purchase prices and the financial results of business acquisitions, both of which offset the effect of lower volumes at some of our pipelines and facilities. In addition, costs and expenses for 2002 includes a $51.3 million loss related to commodity hedging activities.

        In general, higher market prices result in increased revenues from our various marketing activities; however, these same higher prices also increase our cost of sales within these activities as feedstock and other purchase prices rise. In addition, higher natural gas market prices during 2003 increased energy-related costs for many of our businesses versus the same period in 2002. The weighted-average market price of NGLs was 57 CPG

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during 2003 versus 41 CPG during 2002. The market price of natural gas averaged $5.38 per MMBtu during 2003 versus $3.22 per MMBtu during 2002.

        When compared to 2002, volumes at some of our downstream pipelines and facilities were lower due to a combination of (i) decreased demand for NGLs, principally ethane, by the ethylene segment of the petrochemical industry (the “ethylene industry”) and (ii) lower NGL extraction rates at domestic gas processing facilities. The most significant determinant of the relative economic value of NGLs is demand by the ethylene industry for use in manufacturing plastics and chemicals. During 2003, this industry operated at lower utilization rates when compared to 2002 primarily due to a recession in the domestic manufacturing sector. Also during 2003, as a result of the higher relative cost of NGLs to crude-based alternatives such as naphtha, the ethylene industry utilized crude-based feedstock alternatives in greater quantities than during 2002. The resulting weaker demand for NGLs by this industry limited the ability of NGL producers to sell at higher product prices, which in turn resulted in decreased NGL extraction rates during 2003. For information regarding our outlook for NGL demand by the petrochemical industry, please read “– Our results of operations – General outlook for 2004.”

        Equity earnings from unconsolidated affiliates decreased $49.2 million year-to-year primarily due to a $36.4 million decrease in equity earnings from BEF. The $36.4 million decrease in equity earnings from BEF is primarily due to a $22.5 million asset impairment charge we recorded during the third quarter of 2003; increased facility downtime during 2003 for maintenance and economic reasons; and an overall decrease in MTBE sales margins. In addition to lower earnings from BEF, approximately $4.8 million of the overall decrease in equity earnings is due to a rate case settlement recorded by Starfish in 2002.

        As a result of items noted in the previous paragraphs, operating income for 2003 increased $53.8 million from that posted during 2002. Total segment gross operating margin increased $78.1 million year-to-year due to the same general reasons underlying the increase in operating income. Operating income includes costs such as depreciation and amortization and selling, general and administrative expenses that are excluded from the non-GAAP financial measure of total segment gross operating margin.

        The following information highlights the significant year-to-year variances in gross operating margin by business segment:

        Pipelines. Gross operating margin from our Pipelines segment was $282.9 million for 2003 compared to $214.9 million during 2002. On an energy-equivalent basis, net pipeline throughput was 1,615 MBPD during the 2003 period versus 1,668 MBPD during the 2002 period. The increase in gross operating margin was primarily due to our acquisition of Mid-America and Seminole. These two systems earned gross operating margin of $156.3 million during 2003 on aggregate net volumes of 774 MBPD. Since we acquired interests in these systems at the end of July 2002, the 2002 period includes $81.1 million in gross operating margin for August through December 2002. When compared to their historical operating rates, net pipeline transportation volumes on the Mid-America and Seminole systems recorded for 2003 were lower than those reported by these systems for the full year of 2002 primarily due to decreased demand for NGLs, principally ethane, by the ethylene industry and lower NGL extraction rates at regional gas processing facilities.

        Excluding the contributions of Mid-America and Seminole, gross operating margin for the Pipelines segment was $126.6 million for 2003 versus $133.8 million for 2002. On an energy-equivalent basis (excluding Mid-America and Seminole), net pipeline throughput volumes increased to 841 MBPD during 2003 from 825 MBPD during the 2002 period. An increase in gross operating margins from our Houston Ship Channel NGL import terminal (and related HSC pipeline), the Lou-Tex NGL and Lou-Tex Propylene pipelines and our recently acquired Port Neches Pipeline partially offset a net decline in our other Gulf Coast area pipeline operations (due in part to lower NGL extraction rates at regional gas processing facilities and demand for NGLs by industry); a $4.8 million decrease in equity earnings from Starfish related to the settlement of a rate case in 2002; and a $4.1 million decrease in gross operating margins from our NGL and petrochemical storage operations due in part to higher energy-related costs and net charges associated with the measurement of liquids volumes held in storage. The 16 MBPD increase in net volumes was primarily due to higher throughput rates at our NGL import terminal (and related HSC pipeline).

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        Fractionation. Gross operating margin from our Fractionation segment was $132.8 million for 2003 compared to $129.0 million for 2002. Gross operating margin from NGL fractionation improved $10.6 million year-to-year. Net NGL fractionation volumes decreased to 227 MBPD during 2003 from 235 MBPD during 2002. The increase in NGL fractionation gross operating margin is primarily due to (i) mixed NGL measurement gains we recognized during 2003 at our Mont Belvieu facility and (ii) higher percent-of-liquids revenues during 2003 at Norco attributable to the general increase in NGL prices, both of which more than offset a decline in gross operating margin from our other NGL fractionation facilities generally due to lower volumes and higher energy-related costs. The decrease in NGL fractionation volumes period-to-period was primarily due to lower NGL extraction rates at gas processing facilities and reduced demand for NGLs by the petrochemical industry.

        Gross operating margin from propylene fractionation declined $9.2 million year-to-year primarily due to lower petrochemical marketing margins resulting from higher feedstock and energy-related operating costs. Net propylene fractionation volumes were 57 MBPD for 2003 compared to 55 MBPD during 2002.

        Gross operating margin from isomerization increased $4.5 million year-to-year. Isomerization volumes were 77 MBPD during the 2003 period compared to 84 MBPD during the 2002 period. The increase in gross operating margin from isomerization was generally attributable to higher isomerization fees and by-product revenues, which were partially offset by lower volumes and higher energy-related operating costs.

        Processing. Gross operating margin from our Processing segment was $30.3 million for 2003 compared to a gross operating margin loss of $17.6 million in 2002. Our results for 2002 include $51.3 million in commodity hedging losses, the underlying strategies of which were discontinued in 2002. Our commodity hedging results for 2003 were a loss of $0.2 million.

        Equity NGL production at our gas processing plants averaged 56 MBPD during 2003 compared to 73 MBPD during 2002. The decrease in equity NGL production year-to-year was largely attributable to reduced demand for NGLs, principally ethane, by the ethylene industry and higher natural gas prices relative to NGL prices, which caused most natural gas processors to minimize the amount of NGLs extracted at their facilities. To meet the natural gas processing needs of Shell (our largest natural gas processing customer) in this challenging business environment, we renegotiated certain provisions of the 20-year Shell natural gas processing agreement during the first quarter of 2003. For a general discussion of this amendment, please read “Related party transactions – Relationship with Shell” included under Item 13 of this annual report.

        During 2003, we renegotiated a number of our natural gas processing contracts. In general, our objective has been to convert our traditional keepwhole arrangements to either margin-band/keepwhole contracts (such as the Shell agreement referenced in the preceding paragraph), percent-of-liquids contracts or fee-based contracts. The goal of these renegotiations is to minimize our direct exposure to the volatility of natural gas prices, especially to the extent it increases the PTR cost we would pay under traditional keepwhole arrangements to the point that processing natural gas to extract NGLs becomes uneconomical for us. When NGL extraction is uneconomical, NGLs are left in the natural gas stream to the extent allowed while keeping the natural gas in compliance with pipeline quality specifications; thus reducing the amount of NGLs available for downstream activities such as pipeline transportation and NGL fractionation. For an additional discussion of our current natural gas processing contract mix and an explanation of the various types of contracts we use, please read “The Company’s Operations – Processing” included under Item 1 of this annual report.

        Octane enhancement. Our equity and consolidated earnings from BEF were a loss of $32.7 million for 2003 compared to equity income of $8.6 million during 2002. Net MTBE production from this facility decreased to 4 MBPD during 2003 versus 5 MBPD during 2002. The $41.3 million decrease in equity earnings is primarily due to a $22.5 million impairment charge we recorded during the third quarter of 2003 for our share of an impairment charge recorded by BEF; increased downtime during 2003 for maintenance and economic reasons; and an overall decrease in MTBE sales margins.

        BEF owns a facility that currently produces MTBE, a motor gasoline additive that enhances octane and is used in reformulated gasoline. The production of MTBE is primarily driven by oxygenated fuel programs enacted under the federal Clean Air Act Amendments of 1990. As a result of environmental concerns, several states have enacted legislation to ban or significantly limit the use of MTBE in motor gasoline within their jurisdictions. In

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addition, federal legislation has been drafted to ban MTBE and replace the oxygenate with renewable fuels such as ethanol.

        As a result of declining domestic demand and a prolonged period of weak MTBE production economics, several of BEF’s competitors have announced their withdrawal from the marketplace. Due to the deteriorating business environment and outlook and the completion of its preliminary engineering studies regarding conversion alternatives, BEF evaluated the carrying value of its long-lived assets for impairment during the third quarter of 2003. This review indicated that the carrying value of its long-lived assets exceeded their collective fair value, which resulted in BEF recording a non-cash impairment charge of $67.5 million.

        BEF’s assets were written down during the third quarter of 2003 to fair value, which was determined by independent appraisers using present value techniques. The impaired assets principally represent the plant facility and other assets associated with MTBE production. The fair value analysis incorporates future courses of action being taken (or contemplated to be taken) by BEF management, including the production of iso-octane and alkylate. If the underlying assumptions in the fair value analysis change, resulting in the present value of expected future cash flows being less than the new carrying value of the facility, additional impairment charges may result in the future.

        BEF is currently in the process of preparing detailed engineering plans to modify the facility to iso-octane production. The facility will continue to produce MTBE as market conditions warrant and will be capable of producing either MTBE or iso-octane once the plant modifications are complete. Depending on the outcome of various factors (including pending federal legislation) the facility may be further modified to produce alkylate.

        Upon our acquisition of an additional 33.3% partnership interest in BEF, it became a majority-owned consolidated subsidiary of ours on September 30, 2003. Historically, BEF was accounted for as an equity-method unconsolidated affiliate. Its results will continue to be reported under our Octane Enhancement segment. For information regarding uncertainties surrounding our investment in BEF, please read “ – Other Items -Uncertainties regarding our investment in facilities that produce MTBE.”

        Selling, general and administrative costs. These expenses were $37.6 million for 2003 compared to $42.9 million during 2002. The 2002 period includes approximately $10.0 million that we paid to Williams for transition services associated with our acquisition of Mid-America and Seminole compared to $2.0 million paid in 2003 for these services. These payments ceased in February 2003 when we began operating these two pipeline systems.

        Interest expense. Interest expense increased to $140.8 million during 2003 from $101.6 million in 2002. The increase is primarily due to additional debt we incurred as a result of business acquisitions. Our weighted-average debt principal outstanding was $2.0 billion during 2003 compared to $1.8 billion during 2002.

        Interest expense for 2003 includes $11.3 million of loan cost amortization related to the 364-Day Term Loan, which was incurred in July 2002 and fully repaid in February 2003. For additional information regarding our debt obligations and changes in our debt obligations since December 31, 2002, please read “ – Our liquidity and capital resources – Our debt obligations.”

        Year ended December 31, 2002 compared to year ended December 31, 2001

        Revenues for 2002 increased $430.4 million over those for 2001. The increase is primarily due to the financial results of acquired businesses during 2002 such as the purchase of Mid-America and Seminole from Williams and propylene fractionation and NGL and petrochemical storage assets from Diamond-Koch. Costs and expenses increased $533.4 million year-to-year primarily due to the addition of costs and expenses of acquired businesses and an unfavorable change in results from our commodity hedging activities. Operating income decreased $93.1 million and gross operating margin decreased $43.6 million primarily as a result of such changes.

        Pipelines. Gross operating margin from our Pipelines segment was $214.9 million for 2002 compared to $96.6 million for 2001. On an energy-equivalent basis, net pipeline throughput volume for 2002 was 1,668 MBPD compared to 809 MBPD during 2001. Our acquisition of the Mid-America and Seminole NGL pipelines in July 2002 accounted for $81.1 million of the improvement in segment gross operating margin and 843 MBPD of the increase in throughput rates. Gross operating margin from our Mont Belvieu storage businesses improved $17.9

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million in 2002 primarily due to the acquisition of Diamond-Koch’s storage business in January 2002. Another $10.5 million of the improvement in year-to-year gross operating margin was caused by the inclusion of a full year’s results of operations from Acadian Gas in 2002, whereas 2001 included only nine months. We acquired Acadian Gas in April 2001.

        Fractionation. Gross operating margin from our Fractionation segment was $129.0 million for 2002 compared to $118.6 million for 2001. We expanded our propylene fractionation business in February 2002 with the acquisition of Splitter III from Diamond-Koch. Our propylene fractionation volumes increased to 55 MBPD during 2002 from 31 MBPD during 2001. Gross operating margin from these businesses increased $22.6 million year-to-year. Splitter III accounted for 25 MBPD of the increase in volumes and $24.7 million of the increase in gross operating margin. Our isomerization business posted a $4.6 million decrease in gross operating margin for 2002 when compared to 2001. Isomerization volumes increased to 84 MBPD during 2002 versus 80 MBPD during 2001. The positive effect of the higher isomerization volumes was offset by a decrease in isomerization revenues. Certain of our isomerization fees are indexed to historical natural gas prices (which were higher in 2001 relative to 2002).

        Lastly, gross operating margin from our NGL fractionation businesses decreased $8.1 million in 2002 when compared to 2001. NGL fractionation volumes increased to 235 MBPD during 2002 from 204 MBPD during 2001. The year-to-year decrease in NGL fractionation gross operating margin is primarily due to lower revenues from our Mont Belvieu NGL fractionation facility caused by strong competition at this industry hub, partially offset by the addition of earnings from the Toca-Western facility we acquired in June 2002. Of the 31 MBPD increase in NGL fractionation volumes, 14 MBPD is due to our purchase of an additional 12.5% interest in the Mont Belvieu facility and 9 MBPD is due to the acquisition of Toca-Western.

        Processing. Gross operating margin from our Processing segment was a loss of $17.6 million for 2002 compared to income of $155.0 million for 2001. Of the $172.6 million change in gross operating margin, $152.6 million is due to a decrease in results from our commodity hedging activities. We recorded a loss of $51.3 million from these activities during 2002 versus income of $101.3 million during 2001. Also, gross operating margin from NGL marketing activities included in this segment benefited from unusually strong demand for propane and isobutane during early and mid-2001 which did not repeat during 2002. The year-to-year net decline in commodity hedging results and earnings from our NGL marketing activities was partially offset by a favorable decrease in NGL inventory valuation adjustments. Also, gross operating margin for 2001 includes the $10.6 million expense we recorded related to amounts owed to us by Enron, which filed for bankruptcy in December 2001. Our equity NGL production was 73 MBPD during 2002 versus 63 MBPD during 2001. The 10 MBPD increase in equity NGL production rates is primarily due to improved gas processing conditions.

        As noted above, the $152.6 million decrease in commodity hedging results was the primary reason for the year-to-year decline in gross operating margin from this segment. In order to manage the risks associated with our Processing segment, we may enter into short-term, highly liquid commodity financial instruments to hedge our exposure to price risks associated with natural gas, NGL production and inventories, firm commitments and certain anticipated transactions. We have employed various hedging strategies to mitigate the effects of fluctuating commodity prices (primarily NGL and natural gas prices) on our earnings from Processing segment businesses.

        Beginning in late 2000 and extending through March 2002, a large number of our commodity hedging transactions were based on the historical relationship between natural gas prices and NGL prices. This type of hedging strategy utilized the forward sale of natural gas at a fixed-price with the expected margin on the settlement of the position offsetting or mitigating changes in the anticipated margins on NGL marketing activities and the market values of our equity NGL production. Throughout 2001, this strategy proved very successful (as the price of natural gas declined relative to our fixed positions) and was responsible for most of the $101.3 million in commodity hedging income we recorded during 2001.

        In late March 2002, the effectiveness of this strategy was reduced due to an unexpected rapid increase in natural gas prices whereby the loss in the value of our fixed-price natural gas financial instruments was not offset by increased gas processing margins. Due to the inherent uncertainty surrounding natural gas prices at the time, we decided that it was prudent to exit this strategy, and we did so by late April 2002. The increased ineffectiveness of this strategy is the primary reason for the $51.3 million in commodity hedging losses recorded during 2002. A

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variety of factors influence whether or not our hedging strategies are successful. For additional information regarding our financial instrument portfolios, please read Item 7A of this report.

        Octane Enhancement. Our equity earnings from BEF were $8.6 million for 2002 compared to $5.7 million for 2001. The improvement is primarily due to increased MTBE production attributable to lower maintenance downtime. On a gross basis, BEF’s MTBE production increased to 15 MBPD during 2002 compared to 14 MBPD during 2001.

        Other. Gross operating margin from this segment decreased $2.6 million year-to-year primarily due to an increase in information technology-related facility support costs.

        Selling, general and administrative expenses. These expenses increased to $42.9 million during 2002 compared to $30.3 million during 2001. The increase is primarily due to the additional staff and resources needed to support our expansion activities resulting from acquisitions and other business development. The majority of the additional costs for 2002 are attributable to amounts we paid Williams for transition services associated with our acquisition of Mid-America and Seminole.

        Interest expense. Interest expense increased to $101.6 million during 2002 compared to $52.5 million during 2001. The increase is primarily due to debt obligations we incurred as a result of business acquisitions and investments in inventory. Of the $49.1 million increase in interest expense, $21.4 million is attributable to the debt incurred to finance the Mid-America and Seminole acquisitions. In addition, income from our interest rate hedging activities (which is recorded as a reduction in interest expense) decreased $12.3 million in 2002 when compared to 2001. The change in interest rate hedging results is primarily due to certain elections by counterparties during 2001 to terminate interest rate hedging agreements.

        General outlook for 2004

        We expect our business to be affected by the following key trends and events during 2004. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our expectations may vary materially from actual results.

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OUR LIQUIDITY AND CAPITAL RESOURCES

        General

        Our primary cash requirements, in addition to normal operating expenses and debt service, are for capital expenditures (both sustaining and expansion-related), business acquisitions and distributions to our partners. We expect to fund our short-term needs for such items as operating expenses and sustaining capital expenditures with operating cash flows. Capital expenditures for long-term needs resulting from internal growth projects and business acquisitions are expected to be funded by a variety of sources including (either separately or in combination) cash flows from operating activities, borrowings under commercial bank credit facilities, the issuance of additional partnership equity and public or private placement debt. We expect to fund cash distributions to partners primarily with operating cash flows. Our debt service requirements are expected to be funded by operating cash flows and/or refinancing arrangements.

        As noted above, certain of our liquidity and capital resource requirements are fulfilled by borrowings made under debt agreements and/or proceeds from the issuance of additional partnership equity. At December 31, 2003, we had approximately $2.1 billion in principal outstanding under various debt agreements. On that date, total borrowing capacity under our revolving commercial bank credit facilities was $500 million of which $315 million was unused. For additional information regarding our debt, please read “ – Our debt obligations.”

        In February 2001, we filed a universal shelf registration with the SEC covering the issuance of up to $500 million of partnership equity or public debt obligations. In October 2002, we sold 9,800,000 common units under this shelf registration statement which generated $182.5 million of cash to us (including related capital contributions from our General Partner). In January 2003, we sold an additional 14,662,500 common units under this shelf registration which generated $258.1 million of cash to us (including related capital contributions from our General Partner). We used the cash generated by these equity offerings to reduce debt outstanding under our 364-Day Term Loan and for working capital purposes. Also, in January and February 2003, we issued Senior Notes C ($350 million principal amount) and Senior Notes D ($500 million principal amount), respectively. For information regarding our application of cash obtained through these debt offerings, please read “ – Our debt obligations.”

        In January 2003, we filed a new $1.5 billion universal shelf registration statement with the SEC covering the issuance of an unallocated amount of partnership equity or public debt obligations (separately or in combination). In June 2003, we sold 11,960,000 common units under this shelf registration statement, which generated $261.1 million of cash to us (including related capital contributions from our General Partner). We used the cash generated by this equity offering to reduce debt outstanding under our revolving credit facilities. As a result of meeting certain financial tests, the Subordination Period (as defined in our partnership agreement), with respect to our subordinated units, ended on August 1, 2003. With the expiration of the Subordination Period, we may prudently issue an unlimited number of units for general partnership purposes.

        In July 2003, we filed a registration statement with the SEC covering our Distribution Reinvestment Plan (the “DRP”). The DRP provides unitholders of record and beneficial owners of our common units a voluntary means by which they can increase the number of common units they own by reinvesting the quarterly cash distributions they would otherwise receive in the purchase of additional common units. Currently, the registration statement covers the issuance of up to 5,000,000 common units under the DRP. As a result of reinvestment proceeds from our limited partners under the DRP, our General Partner will be required to make cash capital contributions to us in order to maintain its ownership interest. We expect to use the cash generated from this reinvestment program for general partnership purposes.

        Initial reinvestments under the DRP occurred in August 2003. For all of 2003, we issued 2,883,803 common units in connection with the DRP and received proceeds of approximately $60.3 million. EPCO’s reinvestment accounted for approximately $55.0 million of the $60.3 million reinvested during 2003. To support our growth objectives and financial flexibility, EPCO has announced that it expects to reinvest under the DRP an additional $140 million of its cash distributions from the first quarter of 2004 through the first quarter of 2005. As a result, we are preparing to increase the number of common units that can be issued under the DRP to approximately 15,000,000 common units.

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        In December 2003, we sold 4,413,549 Class B special units to an affiliate of EPCO for $100 million in a private transaction. Our General Partner contributed approximately $2 million in connection with this offering in order to maintain its ownership interest. We used the net proceeds from this offering to repay $100 million of the debt we incurred to finance our December 2003 purchase of a 50% interest in GulfTerra GP and the remainder for general partnership purposes.

        If deemed necessary, we believe that additional financing arrangements can be obtained on reasonable terms. Furthermore, we believe that maintenance of our investment grade credit ratings combined with a continued ready access to debt and equity capital at reasonable rates and sufficient trade credit to operate our businesses efficiently provide a solid foundation to meet our long and short-term liquidity and capital resource requirements.

        The following discussions highlight significant year-to-year comparisons in consolidated operating, investing and financing cash flows:

        Operating cash flows primarily reflect net income adjusted for depreciation and amortization, equity earnings and cash distributions from unconsolidated affiliates, fluctuations in the fair value of financial instruments and changes in operating accounts. The net effect of changes in operating accounts is generally the result of timing of sales and purchases near the end of each period. Cash flow from operations is primarily based on earnings from our business activities. As a result, these cash flows are exposed to certain risks. The products that we process, sell or transport are principally used as feedstocks in petrochemical manufacturing, in the production of motor gasoline and as fuel for residential, agricultural and commercial heating. Reduced demand for our products or services by industrial customers, whether because of general economic conditions, reduced demand for the end products made with our products, increased competition from petroleum-based products due to pricing differences or other reasons, could have a negative impact on our earnings and thus the availability of cash from operating activities. Other risks include fluctuations in NGL and energy prices, competitive practices in the midstream energy industry and the impact of operational and systems risks. For a more complete discussion of these and other risk factors pertinent to our business, please read “Cautionary Statement Regarding Forward-Looking Information and Risk Factors” included under Item 1 of this annual report.

        Year ended December 31, 2003 compared to year ended December 31, 2002

        Operating cash flows. Cash flow from operating activities was an inflow of $424.7 million during 2003 compared to an inflow of $329.8 million during 2002. As shown in the preceding table, cash flow before the net effect of changes in operating accounts was an inflow of $303.8 million during 2003 versus $237.1 million during 2002. We believe that cash flow from operating activities before the net effect of changes in operating accounts is an important measure of our ability to generate core cash flows from our assets and other investments. The $66.7 million increase in this element of our cash flows is primarily due to:

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        The $33.5 million increase in depreciation and amortization is primarily due to additional businesses acquired since the first quarter of 2002. The net effect of changes in operating accounts is generally the result of timing of cash receipts from sales and cash payments for inventory, purchases and other expenses near the end of each period. For additional information regarding changes in operating accounts, please read Note 17 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Investing cash flows. During 2003, we used $657.0 million in cash for investing activities compared to $1.7 billion during 2002. We used $37.3 million and $1.6 billion for business acquisitions during 2003 and 2002, respectively. The 2002 period reflects our acquisition of interests in the Mid-America and Seminole pipelines from Williams and propylene fractionation and NGL and petrochemical storage assets from Diamond-Koch. The 2003 period includes only minor acquisitions, specifically the Port Neches pipeline and additional interests in EPIK, BEF, Wilprise and OTC.

        Investments in and advances to unconsolidated affiliates increased to $471.9 million during 2003 compared to $13.7 million during 2002. The 2003 period includes our payment of $425 million to El Paso for a 50% ownership interest in the general partner of GulfTerra in December 2003. The remaining $33.2 million year-to-year increase is primarily due to funding our share of the expansion projects of our Gulf of Mexico natural gas pipeline investments and our purchase of an additional interest in Tri-States.

        Our capital expenditures were $145.9 million during 2003 versus $72.1 million during 2002. The $73.8 million increase in capital expenditures is primarily due to expansions of our Norco NGL fractionator and Neptune gas processing facility.

        Financing cash flows. Our financing activities were a cash inflow of $248.9 million during 2003 compared to an inflow of $1.3 billion during 2002. During 2003, we made net payments on our debt obligations of $106.8 million. Our borrowings during 2003 include the issuance of Senior Notes C ($350 million in principal amount), Senior Notes D ($500 million in principal amount) and the $425 million borrowing under the Interim Term Loan (to purchase a 50% interest in the general partner of GulfTerra). Our repayments during 2003 include the use of proceeds from equity offerings completed in January, June, August and December. The 2002 period primarily reflects borrowings to fund the Mid-America and Seminole acquisitions and those of Diamond-Koch’s propylene fractionation business.

        Proceeds from our common unit and Class B special unit equity offerings during 2003 totaled $675.7 million, which includes our General Partner’s related $7.8 million contribution to us. Our General Partner also contributed $5.9 million to our Operating Partnership in connection with these offerings. Distributions to our partners and minority interests increased to $318.0 million during 2003 from $218.2 million during 2002. The $99.8 million increase in distributions to partners is primarily due to increases in both the declared quarterly distribution rates and the number of units eligible for distributions.

        Year ended December 31, 2002 compared to year ended December 31, 2001

        Operating cash flows. Cash flow from operating activities was an inflow of $329.8 million during 2002 compared to $283.3 million during 2001. As shown in the preceding table, cash flow before changes in operating accounts was an inflow of $237.1 million during 2002 versus $320.5 million during 2001. The $83.4 million year-to-year decrease in this element of our cash flows is primarily due to net hedging losses in 2002 versus net hedging income in 2001 offset by increased distributions from unconsolidated affiliates and earnings from businesses we acquired during 2002. The $43.0 million increase in depreciation and amortization is primarily due to businesses we acquired during 2002. Changes in operating accounts are generally the result of timing of cash receipts from sales and cash payments for inventory, purchases and other expenses near the end of each period. For additional information regarding changes in operating accounts, please read Note 17 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

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        Investing cash flows. During 2002, we used $1.7 billion in cash for investing activities compared to $491.2 million during 2001. Fiscal 2002 reflects $1.6 billion of business acquisitions including $1.2 billion paid to acquire Mid-America and Seminole and $368.7 million paid to acquire Diamond-Koch’s Mont Belvieu, Texas propylene fractionation and NGL and petrochemical storage businesses. Fiscal 2001 includes $113.0 million paid to acquire equity interests in four Gulf of Mexico natural gas pipelines from El Paso and $225.7 million paid to acquire Acadian Gas from Shell. During 2002, our capital expenditures were $72.1 million compared to $149.9 million during 2001. The majority of capital expenditures made during both periods were for projects within our Pipelines segment.

        Financing cash flows. Our financing activities generated $1.3 billion in cash inflows during 2002 compared to $279.5 million during 2001. Our net borrowings were $1.3 billion in 2002 versus $449.7 million in 2001. The increase in borrowings is primarily due to acquisitions, particularly the $1.2 billion paid for Mid-America and Seminole and the $239.0 million for Diamond-Koch’s propylene fractionation business. The borrowing shown for 2001 reflects the issuance of our Senior Notes B, which was primarily used to finance the acquisition of Acadian Gas, Starfish, Neptune and Nemo.

        Financing activities also reflect the net proceeds and related General Partner contributions from our October 2002 issuance of 9,800,000 new common units. Net proceeds from the sale of the common units were $182.5 million. This amount includes the General Partner’s aggregate contribution to us and our Operating Partnership of $3.7 million to maintain its combined 2% general partner interest. Cash distributions to our partners and minority interests increased $52.2 million year-to-year primarily due to increases in both the declared quarterly distribution rates and the number of units eligible for distributions. The number of units eligible for distributions was higher in 2002 due to the conversion of 19.0 million of Shell’s Class A special units to an equal number of common units in August 2002 and our issuance of the 9.8 million new common units in October 2002. Debt issuance costs increased $16.2 million year-to-year primarily due to the $15.0 million in fees we paid to lenders in July 2002 associated with the short-term financing of the Mid-America and Seminole acquisitions.

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        Our debt obligations

        Our debt consisted of the following at the dates indicated:

        For scheduled future maturities of long-term debt at December 31, 2003, please read “ – Our contractual obligations.”

        Parent-subsidiary guarantor relationships

        We act as guarantor of all of our Operating Partnership’s consolidated debt obligations, with the exception of the Seminole Notes. If the Operating Partnership were to default on any debt we guarantee, we would be

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responsible for full repayment of that obligation. The Seminole Notes are unsecured obligations of Seminole Pipeline Company (of which we own an effective 78.4% of its capital stock).

        General description of debt

        The following is a summary of the significant aspects of our debt obligations at December 31, 2003.

        Interim Term Loan. In December 2003, our Operating Partnership entered into a $225 million acquisition-related term loan to partially finance our $425 million purchase from El Paso of a 50% membership interest in GulfTerra GP. The maturity date of this term loan is the earlier of September 2004 or the date our proposed merger with GulfTerra is completed. The Operating Partnership’s borrowings under this agreement are unsecured general obligations that are non-recourse to our General Partner. We have guaranteed repayment of amounts due under this term loan through an unsecured guarantee.

        As defined by the agreement, variable interest rates charged under this facility generally bear interest at either, at our election, (1) the greater of (a) the Prime Rate or (b) the Federal Funds Effective Rate plus ½% or (2) a Eurodollar rate. Whichever base rate we select, the rate is increased by an appropriate applicable margin (as defined in the loan agreement). For information regarding variable-interest rates paid under this term loan agreement, please read “ – Information regarding variable-interest rates paid.”

        This term loan agreement contains various covenants related to our ability to incur certain indebtedness; grant certain liens; enter into certain merger or consolidation transactions; and make certain investments. The loan agreement also requires us to satisfy certain financial covenants at the end of each fiscal quarter. If an event of default (as defined in the agreement) occurs, the Operating Partnership will be prohibited from making distributions to us, which would impair our ability to make distributions to our partners. As defined in the agreement, we must maintain a specified level of consolidated net worth and certain financial ratios. We were in compliance with these covenants at December 31, 2003.

        364-Day Revolving Credit Facility. In October 2003, our Operating Partnership entered into new 364-day revolving credit agreement that contained essentially the same terms as our November 2002 364-Day revolving credit agreement that expired in November 2003. The stand-alone borrowing capacity under the new revolving credit facility is $230 million with the maturity date for any amount outstanding being October 2004. We have the option to convert any revolving credit balance outstanding at maturity to a one-year term loan (due October 2005) in accordance with the terms of the credit agreement. The Operating Partnership’s borrowings under this agreement are unsecured general obligations that are non-recourse to our General Partner. We have guaranteed repayment of amounts due under this term loan through an unsecured guarantee.

        As defined by the agreement, variable interest rates charged under this facility generally bear interest at either, at our election, (1) the greater of (a) the Prime Rate or (b) the Federal Funds Effective Rate plus ½% or (2) a Eurodollar rate. Whichever base rate we select, the rate is increased by an appropriate applicable margin (as defined within the loan agreement). We elect the basis of the interest rate at the time of each borrowing. For information regarding variable-interest rates paid under this revolving credit agreement, please read “ – Information regarding variable-interest rates paid.”

        This revolving credit agreement contains various covenants similar to those of our Interim Term Loan (please refer to our discussion regarding restrictive covenants of the Interim Term Loan within this “General description of debt” section). We were in compliance with these covenants at December 31, 2003.

        Multi-Year Revolving Credit Facility. In November 2002, our Operating Partnership entered into a five-year revolving credit facility that includes a sublimit of $75 million for standby letters of credit. Currently, the stand-alone borrowing capacity under this revolving credit facility is $270 million. The Operating Partnership’s borrowings under this agreement are unsecured general obligations that are non-recourse to our General Partner. We have guaranteed repayment of amounts due under this term loan through an unsecured guarantee.

        As defined by the agreement, variable interest rates charged under this facility generally bear interest at either, at our election, (1) the greater of (a) the Prime Rate or (b) the Federal Funds Effective Rate plus ½% or (2) a

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Eurodollar rate plus an applicable margin or (3) a Competitive Bid Rate. We elect the basis of the interest rate at the time of each borrowing. For information regarding variable-interest rates paid under this revolving credit agreement, please read “ – Information regarding variable-interest rates paid.”

        This revolving credit agreement contains various covenants similar to those of our Interim Term Loan (please refer to our discussion regarding restrictive covenants of the Interim Term Loan within this “General description of debt” section). We were in compliance with these covenants at December 31, 2003.

        Senior Notes A, B, C and D. These fixed-rate notes are an unsecured obligation of our Operating Partnership and rank equally with its existing and future unsecured and unsubordinated indebtedness. They are senior to any future subordinated indebtedness. The Operating Partnership’s borrowings under these notes are non-recourse to our General Partner. We have guaranteed repayment of amounts due under these notes through an unsecured and unsubordinated guarantee. These notes are subject to make-whole redemption rights and were issued under an indenture containing certain covenants. These covenants restrict our ability, with certain exceptions, to incur debt secured by liens and engage in sale and leaseback transactions. We were in compliance with these covenants at December 31, 2003.

        In January 2003, we issued $350 million in principal amount of 6.375% fixed-rate senior notes due February 2013 (“Senior Notes C”), from which we received net proceeds before offering expenses of approximately $347.7 million. These private placement notes were sold at face value with no discount or premium. We used the proceeds from this offering to repay a portion of the indebtedness outstanding under the 364-Day Term Loan that we incurred to finance the Mid-America and Seminole acquisitions. In May 2003, we exchanged 100% of the private placement Senior Notes C for publicly registered Senior Notes C.

        In February 2003, we issued $500 million in principal amount of 6.875% fixed-rate senior notes due March 2033 (“Senior Notes D”), from which we received net proceeds before offering expenses of approximately $489.8 million. These private placement notes were sold at 98.842% of their face amount. We used $421.4 million from this offering to repay the remaining principal balance outstanding under the 364-Day Term Loan. In addition, we applied $60.0 million of the proceeds to reduce the balance outstanding under the 364-Day Revolving Credit Facility. The remaining proceeds were used for working capital purposes. In July 2003, we exchanged 100% of the private placement Senior Notes D for publicly registered Senior Notes D.

        Repayment of 364-Day Term Loan

        In July 2002, our Operating Partnership entered into the $1.2 billion senior unsecured 364-Day Term Loan to fund the acquisition of interests in the Mid-America and Seminole pipelines. We used $178.5 million of the $182.5 million in proceeds from our October 2002 equity offering to partially repay this loan. We also used $252.8 million of the $258.1 million in proceeds from the January 2003 equity offering, $347.0 million of the $347.7 million in proceeds from our issuance of Senior Notes C and $421.4 million in proceeds from our issuance of Senior Notes D to fully repay the 364-Day Term Loan in February 2003.

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        Information regarding variable-interest rates paid

        The following table shows the range of interest rates paid and weighted-average interest rate paid on our variable-rate debt obligations during 2003.

Credit ratings

        Our current senior unsecured credit ratings are Baa2 as rated by Moody’s Investor Services and BBB- as rated by Standard and Poor’s, both are investment grade. On December 15, 2003 as the result of our execution of definitive agreements with GulfTerra and El Paso to merge with GulfTerra, Moody’s put our rating under review for possible downgrade and Standard and Poor’s placed our rating on credit watch with negative implications. Both debt rating agencies will be reviewing the credit attributes and the risk profile of the merged partnership as well as the execution risk of the permanent financing of the proposed merger.

        On November 26, 2003, our senior unsecured credit rating as rated by Standard and Poor’s was lowered from BBB to BBB- with a negative outlook. Standard and Poor’s indicated that the negative outlook reflected their concern that the rebound in NGL demand was temporary and that weak demand could return in 2004. Standard and Poor’s also indicated that our rating was subject to downgrade if our financial performance in 2004 was less than the then current expectations. Standard and Poor’s cited concerns regarding our financial performance during the second and third quarters of 2003 and the sustainability of increased NGL demand by the petrochemical industry during 2004. Standard and Poor’s indicated that it was also evaluating what effect, if any, that EPCO’s purchase of Shell’s interest in our General Partner might have on our overall credit quality.

        We believe that the maintenance of an investment grade credit rating is important in managing our liquidity and capital resource requirements. We maintain regular communications with these ratings agencies, each of which independently judges our creditworthiness based on a variety of quantitative and qualitative factors.

Capital spending forecasts

        At December 31, 2003, we had $4.0 million in estimated outstanding purchase commitments attributable to capital projects, practically all of which were related to the construction of assets that will be recorded as property, plant and equipment. During 2004, we expect capital spending on internal growth projects to approximate $87 million, of which $42 million is projected to be spent on projects within our Pipelines segment and approximately $30 million on the conversion of the MTBE facility to dual use MTBE and iso-octane production. We expect to invest approximately $8 million in the projects of our unconsolidated affiliates during 2004, of which $6 million is attributable to projects of our Gulf of Mexico natural gas pipeline investments.

        EPCO subleases to us all of the equipment it holds pursuant to operating leases relating to an isomerization unit, a deisobutanizer tower, a cogeneration unit and approximately 100 railcars for one dollar per year and has assigned to us its purchase option under such leases (the “retained leases”). EPCO remains liable for the lease payments associated with these items. We have notified the original lessor of the isomerization unit of our intent to exercise the purchase option assigned to us. Under the terms of the lease agreement for the isomerization unit, we have the option to purchase the equipment at the lesser of fair value or $23.1 million.

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        Pipeline Integrity Management Program

        Our NGL, petrochemical and gas pipelines are subject to the pipeline safety program established by the 1996 federal Pipeline Safety Act and its implementing regulations. The U.S. Department of Transportation, through the Office of Pipeline Safety (“OPS”), is responsible for developing, issuing and enforcing regulations relating to the design, construction, inspection, testing, operation, replacement and management of natural gas and hazardous liquid pipelines. In 2001 OPS issued safety regulations containing requirements for the development of integrity management programs for oil pipelines (which includes NGL and petrochemical pipelines such as ours) in certain “high consequence areas.” High consequence areas include but are not limited to high population areas, environmentally sensitive locations, and areas containing drinking water supplies. In connection with these regulations, we developed a Pipeline Integrity Management Program and, by the end of 2002, had identified the segments of our liquids pipelines that were located in such areas. The regulations stipulate that a pipeline company must assess the condition of its pipelines in such areas and perform any necessary repairs. We are required to evaluate at least 50% of our identified pipeline mileage in such high consequence areas by the end of 2004 with the balance completed before April 2008. After this initial testing is complete, the identified pipeline segments must be reassessed every five years thereafter.

        On November 15, 2002, Congress passed the Pipeline Safety Improvement Act, which contains requirements for the development of integrity management programs on gas pipelines located in certain “high consequence areas,” and effective February 14, 2004, OPS adopted regulations to implement this statute. The new regulations require gas pipeline operators to develop by December 17, 2004, integrity management programs for gas transmission pipelines that could impact high consequence areas in the event of a failure. We anticipate that our implementation of the gas pipeline regulations will proceed on a timely basis.

        During 2003, we spent approximately $10 million to comply with these new regulations, of which $4.5 million was expensed. During each of the years 2004 through 2008, our cash outlays for this program are expected to be in the range of $12 million to $23 million. At present, we expect that approximately 85% of these future expenditures will be recorded as operating expenses within our Pipelines segment.

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OUR CONTRACTUAL OBLIGATIONS

        The following table summarizes our contractual obligations at December 31, 2003 (dollars in thousands):

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        The operating lease commitments shown in the preceding table exclude the non-cash related party expense associated with various equipment leases contributed to us by EPCO at our formation for which EPCO has retained the liability (the “retained leases”). The retained leases are accounted for as operating leases by EPCO. EPCO’s minimum future rental payments under these leases are $12.1 million in 2004, $2.1 million for each of the years 2005 through 2008, $0.7 million for each of the years 2009 through 2015 and $0.3 million for 2016.

        EPCO has assigned to us the purchase options associated with the retained leases. We notified the lessor of the isomerization unit associated with the retained leases of our intent to exercise the purchase option relating to this equipment in 2004. Under the terms of the lease agreement for the isomerization unit, we have the option to purchase the equipment at the lesser of fair value or $23.1 million. Should we decide to exercise all of the remaining purchase options associated with the retained leases (which are at fair value), up to an additional $2.8 million would be payable in 2004, $2.3 million in 2008 and $3.1 million in 2016. For additional information regarding the retained leases, please read Item 13 of this annual report on Form 10-K.

RECENT ACCOUNTING DEVELOPMENTS

        SFAS No. 143, “Accounting for Asset Retirement Obligations.” We adopted this standard as of January 1, 2003. This statement establishes accounting standards for the recognition and measurement of an asset retirement obligation (“ARO”) liability and the associated asset retirement cost. Our adoption of this standard had no material impact on our financial statements. For a discussion regarding our implementation of this new standard, please read Notes 1 and 6 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”  We adopted provisions of this standard as of January 1, 2003. This statement revised accounting guidance related to the extinguishment of debt and accounting for certain lease transactions. It also amended other accounting literature to clarify its meaning, applicability and to make various technical corrections. Our adoption of this standard has had no material impact on our financial statements.

        SFAS No. 146, “Accounting for Costs Associated with Exit and Disposal Activities.” We adopted this standard as of January 1, 2003. This statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of an entity’s commitment to an exit or disposal plan. Our adoption of this standard has had no material impact on our financial statements.

        SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” We adopted this standard as of December 31, 2002. This statement provides alternative methods of transition from a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” in both annual and interim financial statements. We have provided the information required by this statement in Note 1 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report. Apart from this additional footnote disclosure, our adoption of this standard has had no material impact on our financial statements.

        SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” We adopted SFAS No. 149 on a prospective basis as of July 1, 2003. This statement amends and clarifies accounting guidance for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. Our adoption of this standard has had no material impact on our financial statements.

        SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” We adopted this standard on July 1, 2003. This standard establishes classification and measurement standards for financial instruments with characteristics of both liabilities and equity. It requires an issuer of such financial instruments to reclassify the instrument from equity to a liability or an asset. Our adoption of this standard has had no material impact on our financial statements.

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        FIN 45, “Guarantor’s Accounting and Disclosure Requirement from Guarantees, Including Indirect Guarantees of Indebtedness of Others.” We implemented this FASB interpretation as of December 31, 2002. This interpretation of SFAS No. 5, 57 and 107, and rescission of FASB Interpretation No. 34 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. We have provided the information required by this interpretation in Note 9 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report. Our implementation of this interpretation has had no material impact on our financial statements.

        FIN 46, “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51.” This interpretation of ARB No. 51 addresses requirements for accounting consolidation of a variable interest entity (“VIE”) with its primary beneficiary. In general, if an equity owner of a VIE meets certain criteria defined within FIN 46, the assets, liabilities and results of the activities of the VIE should be included in the consolidated financial statements of the owner. Our adoption of FIN 46 (as amended by FIN46R) in 2003 has had no material effect on our financial statements.

OUR CRITICAL ACCOUNTING POLICIES

        In our financial reporting process, we employ methods, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. These methods, estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Investors should be aware that actual results could differ from these estimates should the underlying assumptions prove to be incorrect. The following describes the estimation risk in each of these significant financial statement items:

        Depreciation methods and estimated useful lives of property, plant and equipment

        Property, plant and equipment is recorded at cost and is depreciated using the straight-line method over the asset’s estimated useful life. Our plants, pipelines and storage facilities have estimated useful lives of five to 35 years. Our miscellaneous transportation equipment have estimated useful lives of three to 10 years. Depreciation is the systematic and rational allocation of an asset’s cost, less its residual value (if any), to the periods it benefits. Straight-line depreciation results in depreciation expense being incurred evenly over the life of the asset. The determination of an asset’s estimated useful life must take a number of factors into consideration, including technological change, normal depreciation and actual physical usage. If any of these assumptions subsequently change, the estimated useful life of the asset could change and result in an increase or decrease in depreciation expense. At December 31, 2003 and 2002, the net book value of our property, plant and equipment was $3.0 billion and $2.8 billion, respectively. We recorded $101.0 million and $72.5 million in depreciation expense during 2003 and 2002, respectively. For additional information regarding our property, plant and equipment, please read Notes 1 and 6 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Impairment charges and underlying estimated fair values

        If we determine that an asset’s undepreciated cost may not be recoverable due to impairment of the asset, then we are required to take a charge against earnings. Long-lived assets with recorded values that are not expected to be recovered through future expected cash flows are written-down to their estimated fair values. An asset is tested for impairment when events or circumstances indicate that its carrying value may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the existing asset. Our estimates of such undiscounted cash flows are based on a number of assumptions including anticipated margins and volumes; estimated useful life of the asset or asset group; and salvage values. If we initially determine that an asset’s carrying value is recoverable through such undiscounted estimated cash flows and later revise these assumptions and determine that the opposite is true, we would be required to ascertain the fair value of the facility, which might ultimately result in an impairment charge being recorded.

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        If the carrying value of an asset exceeds the sum of its undiscounted expected cash flows, an impairment loss equal to the amount that the carrying value exceeds the fair value of the asset is recognized. The quoted market price of an asset on an active exchange or similar venue is the best determinant of fair value. However, in many instances, quoted market prices in such markets are not available. In those instances, the estimate of fair value is based on the best information available, including prices for similar assets and the results of using other valuation techniques (including present value techniques).

        Since most of our plant and other fixed and intangible assets are not traded in an active market, we generally rely on the use of present value techniques when determining the fair value of such assets for the purpose of impairment testing. These techniques incorporate our best available information and assumptions regarding future cash flows, alternative courses of action, probabilities of such courses of action occurring and discount rates. To the extent that any of these underlying assumptions prove incorrect, we may be required to take additional impairment charges in the future.

        Due to a deteriorating business environment and outlook and the completion of its preliminary engineering studies regarding conversion alternatives, BEF evaluated the carrying value of its long-lived assets for impairment during the third quarter of 2003. This review indicated that the carrying value of BEF’s long-lived assets exceeded their collective fair value, which resulted in a non-cash impairment charge of $67.5 million. Our share of this loss is $22.5 million and is recorded as a component of “Equity in income (loss) of unconsolidated affiliates” in our Statements of Consolidated Operations and Comprehensive Income for the three and nine months ended September 30, 2003. Our historical equity (and in the future, consolidated) earnings from BEF are classified under the Octane Enhancement business segment. For additional information regarding this impairment charge, please read Note 7 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Amortization methods and estimated useful lives of qualifying intangible assets

        The specific, identifiable intangible assets of a business enterprise depend largely upon the nature of its operations. Potential intangible assets include intellectual property such as technology, patents, trademarks and trade names, customer contracts and relationships, and non-compete agreements, as well as other intangible assets. The approach to the valuation of each intangible asset will vary depending upon the nature of the asset, the business in which it is utilized, and the economic returns it is generating or is expected to generate.

        Our recorded intangible assets primarily include the estimated value assigned to certain contract-based assets representing the rights we own arising from contractual agreements. A contract-based intangible with a finite useful life is amortized over its estimated useful life, which is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the entity. It is based on an analysis of all pertinent factors including (1) the expected use of the asset by the entity, (2) the expected useful life of related assets (i.e., fractionation facility, storage well, etc.), (3) any legal, regulatory or contractual provisions, including renewal or extension periods that would not cause substantial costs or modifications to existing agreements, (4) the effects of obsolescence, demand, competition, and other economic factors and (5) the level of maintenance required to obtain the expected future cash flows.

        If the underlying assumption(s) governing the amortization of an intangible asset were later determined to have significantly changed (either favorably or unfavorably), then we may be required to adjust the amortization period of such asset to reflect any new estimate of its useful life. Such a change would increase or decrease the annual amortization charge associated with the asset at that time. During 2002, we did not find it necessary to adjust the estimated useful life or amortization period of any of our intangible assets.

        Should any of the underlying assumptions indicate that the value of the intangible asset might be impaired, we may be required to reduce the carrying value and subsequent useful life of the asset. Any such write-down of the value and unfavorable change in the useful life (i.e., amortization period) of an intangible asset would increase operating costs and expenses at that time.

        At December 31, 2003 and 2002, the carrying value of our intangible asset portfolio was $268.9 million and $277.7 million, respectively. We did not recognize any impairment losses related to our intangible assets during

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2003 or 2002. For additional information regarding our intangible assets, please read Notes 1 and 8 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Methods we employ to measure the fair value of goodwill

        Our goodwill is attributable to the excess of the purchase price over the fair value of assets acquired and is primarily comprised of the $73.6 million associated with the purchase of propylene fractionation assets from Diamond-Koch in February 2002. Since our adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002, our goodwill amounts are no longer amortized. Instead, goodwill is tested annually at a reporting unit level, and goodwill is tested more frequently if certain circumstances indicate it is more likely than not that the fair value of goodwill is below its carrying amount. If such indicators are present (i.e., loss of a significant customer, economic obsolescence of plant assets, etc.), then the fair value of the reporting unit, including its related goodwill, is calculated and compared to its combined book value. Currently, our goodwill is primarily recorded as part of the Fractionation operating segment (based on the assets to which the goodwill relates).

        If the fair value of the reporting unit exceeds its book value, then goodwill is not considered impaired and no adjustment to earnings would be required. Should the fair value of the reporting unit (including its goodwill) be less than its book value, a charge to earnings would be recorded to adjust goodwill to its implied fair value.

        At December 31, 2003 and 2002, the carrying value of our goodwill was $82.4 million and $81.5 million, respectively. For additional information regarding our goodwill, please read Notes 1 and 8 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Our investment in Dixie and GulfTerra GP exceeded our share of the historical cost of the underlying net assets of such entities (“excess cost”). The excess cost of these investments is reflected in our investments in and advances to unconsolidated affiliates for these entities. The excess cost of Dixie and GulfTerra includes amounts attributable to goodwill. Equity method investments are evaluated for impairment whenever events or changes in circumstances indicate that there is a loss in value of the investment which is other than a temporary decline. For additional information regarding our excess cost amounts, please read Notes 1 and 7 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        For Dixie, the amount attributable to goodwill at December 31, 2003 was $9.2 million. For GulfTerra GP, the amount attributable to goodwill at December 31, 2003 was estimated at $328.2 million. The goodwill amount for GulfTerra GP represents our preliminary allocation of the purchase price pending completion of a fair value analysis which is expected to be completed during the second half of 2004. To the extent that our preliminary allocation of the excess cost of GulfTerra GP is ultimately attributed to depreciable or amortizable assets, our equity earnings from GulfTerra will be reduced from what it otherwise would be.

        The table below shows the potential decrease in equity earnings from GulfTerra GP if certain amounts of the $328.2 million of excess cost preliminarily attributable to goodwill were ultimately assigned to fixed or intangible assets. For purposes of calculating this sensitivity, we have applied the straight-line method of cost allocation (i.e. depreciation or amortization) over an estimated useful life of 20-years to various fair values.

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        Our revenue recognition policies

        In general, we recognize revenue from our customers when all of the following criteria are met: (i) firm contracts are in place, (ii) delivery has occurred or services have been rendered, (iii) pricing is fixed and determinable and (iv) collectibility is reasonably assured. When contracts settle (i.e., either physical delivery of product has taken place or the services designated in the contract have been performed), we determine if an allowance is necessary and record it accordingly. Historically, the consolidated revenues we recorded were not materially based on estimates. However, as SEC regulations require us to submit financial information on increasingly accelerated timeframes, our use of estimates will increase. We believe the assumptions underlying any revenue estimates that we might use will not prove to be materially different from actual amounts due to our development and implementation of a fully integrated volume management system that is inclusive of operational activities through financial accounting.

        For additional information regarding our revenue recognition policies, please read Note 3 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        Mark-to-market accounting for certain financial instruments

        Our earnings are also affected by use of the mark-to-market method of accounting for certain financial instruments. We use short-term, highly liquid financial instruments such as swaps, forwards and other contracts to manage price risks associated with inventories, firm commitments and certain anticipated transactions, primarily within our Processing segment. The use of mark-to-market accounting for financial instruments may cause our non-cash earnings to fluctuate based upon changes in underlying indexes, primarily those related to commodity prices. Fair value for the financial instruments we employ is determined using price data from highly liquid markets such as the NYMEX commodity exchange.

        During 2002, we recognized a loss of $51.3 million from our commodity hedging activities. Of this loss, $5.6 million was attributable to the change in fair value of the portfolio between December 31, 2001 and December 31, 2002. In March 2002, the effectiveness of our primary commodity hedging strategy deteriorated due to an unexpected rapid increase in natural gas prices; therefore, the loss in value of our fixed-price natural gas financial instruments was not offset by increased gas processing margins. We exited the strategy underlying this loss in 2002.

        During 2003, we utilized a limited number of commodity financial instruments from which we recorded a loss of $0.6 million. The fair value of open positions at December 31, 2003 was a nominal receivable amount. For additional information regarding our commodity financial instruments, please read Note 18 of the Notes to Consolidated Financial Statements included under Item 8 of this annual report.

        For additional information regarding our use of financial instruments to manage risk and the earnings sensitivity of these instruments to changes in underlying commodity prices, please read the Processing segment discussions under “ – Our results of operations” and also read Item 7A of this annual report.

        Additional information regarding our financial statements can be found in our Notes to Consolidated Financial Statements included under Item 8 of this annual report.

RELATED PARTY TRANSACTIONS

        Relationship with EPCO and its affiliates

        We have an extensive and ongoing relationship with EPCO. EPCO is controlled by Dan L. Duncan, who is also a director (and Chairman of the Board of Directors) of our General Partner. In addition, the remaining executive and other officers of our General Partner are employees of EPCO, including O.S. Andras who is our Chief Executive Officer and a director of the General Partner. For a listing of our directors and executive officers, please read Item 10 of this annual report.

        Mr. Duncan owns 50.4% of the voting stock of EPCO and, accordingly, exercises sole voting and dispositive power with respect to the common units and Class B special units held by EPCO. The remaining shares

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of EPCO capital stock are held primarily by trusts for the benefit of members of Mr. Duncan’s family. In addition, EPCO and Dan Duncan LLC, together, own 100% of our General Partner, which in turn owns a 2% general partner interest in us. In addition, trust affiliates of EPCO (the 1998 Trust and 2000 Trust) owned 4,478,236 of our common units at February 20, 2004. Collectively, EPCO, Dan L. Duncan, the 1998 Trust and the 2000 Trust owned 54.6% of our partnership interests at February 20, 2004.

        The principal business activity of the General Partner is to act as our managing partner. We have no employees. All of our management, administrative and operating functions are performed by employees of EPCO pursuant to the Administrative Services Agreement. We reimburse EPCO for the costs associated with employees who work on our behalf. We have entered into an agreement with EPCO to provide trucking services to us for the transportation of NGLs and other products. In addition, we buy from and sell NGL products to EPCO’s Canadian affiliate. During 2003, our related party revenues from EPCO were $4.2 million and our related party expenses with EPCO were $177.6 million.

        For additional information regarding our relationship with EPCO, please read Item 13 of this annual report.

        Relationship with Shell