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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-31095

Duke Energy Field Services, LLC

Registrant’s telephone number, including area code
303-595-3331
Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Limited Liability Company Member Interests
(Title of class)

     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. [X]

     Indicate by check mark whether the registrant is an accelerated filer as defined by Rule 12b-2 of the Act. Yes [   ] No[X]

     As of March 17, 2003, 69.7% of the registrant’s outstanding member interests is beneficially owned by Duke Energy Corporation and 30.3% is beneficially owned by ConocoPhillips. The aggregate market value of the voting and non-voting member interests held by non-affiliates of the registrant computed by reference to the price at which the member interests were last sold, or the average bid and asked price for such member interests, as of the last business day of the registrant’s most recently completed fiscal quarter was $0.

Documents incorporated by reference:
None

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DUKE ENERGY FIELD SERVICES, LLC
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002

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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

     Our reports, filings and other public announcements may from time to time contain statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words, such as “may,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “potential,” “plan,” “forecast” and other similar words.

     All statements that are not statements of historical facts, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.

     These forward-looking statements reflect our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors, many of which are outside our control. Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks. Known risks include, but are not limited to, the following:

	•		our ability to access the debt and equity markets, which will depend on general market conditions and the credit ratings for our debt obligations;
	•		our use of derivative financial instruments to hedge commodity and interest rate risks;
	•		the level of creditworthiness of counterparties to transactions;
	•		the amount of collateral required to be posted from time to time in our transactions;
	•		changes in laws and regulations, particularly with regard to taxes, safety and protection of the environment or the increased regulation of the gathering and processing industry;
	•		the timing and extent of changes in commodity prices, interest rates, foreign currency exchange rates and demand for our services;
	•		weather and other natural phenomena;
	•		industry changes, including the impact of consolidations, and changes in competition;
	•		our ability to obtain required approvals for construction or modernization of gathering and processing facilities, and the timing of production from such facilities, which are dependent on the issuance by federal, state and municipal governments, or agencies thereof, of building, environmental and other permits, the availability of specialized contractors and work force and prices of and demand for products;
	•		the extent of success in connecting natural gas supplies to gathering and processing systems;
	•		the effect of accounting policies issued periodically by accounting standard-setting bodies; and
	•		general economic conditions.

     In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I.

ITEM 1. Business.

     Duke Energy Field Services, LLC is a company formed in 1999 that holds to the extent that it existed at the time, the combined North American midstream natural gas gathering, processing, marketing and natural gas liquids (“NGL”) business of Duke Energy Corporation (“Duke Energy”) and Phillips Petroleum Company (“Phillips”) prior to its merger with Conoco Inc. (“ConocoPhillips”). References to ConocoPhillips, for periods prior to the merger of Conoco Inc. and Phillips, are references to Phillips. The transaction in which those businesses were combined is referred to in this Form 10-K as the “Combination.” Our limited liability company agreement limits the scope of our business to the midstream natural gas industry in the United States and Canada, the marketing of NGLs in Mexico and the transportation, marketing and storage of other petroleum products, unless otherwise approved by our Board of Directors.

     Unless the context otherwise requires, descriptions of assets, operations and results in this Form 10-K give effect to the Combination and related transactions, the transfer to us of additional midstream natural gas assets acquired by Duke Energy or ConocoPhillips prior to the Combination and the transfer to us of the general partner of TEPPCO Partners, L.P., all of which are described in more detail under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In this Form 10-K, the terms “the Company,” “we,” “us” and “our” refer to Duke Energy Field Services, LLC and our subsidiaries, giving effect to the Combination and related transactions.

     From a financial reporting perspective, we are the successor to Duke Energy’s North American midstream natural gas business that existed at the time of the Combination. The subsidiaries of Duke Energy that conducted this business were contributed to us immediately prior to the Combination. For periods prior to the Combination, Duke Energy Field Services and these subsidiaries of Duke Energy are collectively referred to herein as the “Predecessor Company.”

     We are a Delaware limited liability company, and we were formed on December 15, 1999. Our principal executive offices are located at 370 17th Street, Suite 900, Denver, Colorado 80202. Our telephone number is 303-595-3331 and our internet website is www.defs.com.

Our Business

     The midstream natural gas industry is the link between exploration and production of raw natural gas and the delivery of its components to end-use markets. We operate in the two principal segments of the midstream natural gas industry:

	•		natural gas gathering, compression, treating, processing, transportation, trading and marketing and storage (“Natural Gas Segment”); and
	•		NGL fractionation, transportation, marketing and trading (“NGL Segment”).

     We believe that we are one of the largest gatherers of raw natural gas, based on wellhead volume, in North America. We are the largest producer, and we believe that we are one of the largest marketers, of NGLs in North America. In 2002:

	•		we handled an average of approximately 8.3 trillion British thermal units (“Btus”) per day of raw natural gas;
	•		we produced an average of approximately 392,000 barrels per day of NGLs;
	•		we marketed and traded an average of approximately 576,000 barrels per day of NGLs; and
	•		we marketed an average of approximately 2.6 trillion Btus per day of natural gas.

     We gather raw natural gas through gathering systems located in seven major natural gas producing regions: Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, Onshore Gulf of Mexico, Rocky Mountains, Offshore Gulf of Mexico and Western Canada. At December 31, 2002, our gathering systems consisted of approximately 60,000 miles of gathering and transmission pipe, with approximately 35,000 active receipt points.

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     Our natural gas processing operations involve the separation of raw natural gas gathered both by our gathering systems and by third party systems into NGLs and residue gas. We process the raw natural gas at our 60 owned and operated plants and at 11 third party operated facilities in which we hold an equity interest.

     The NGLs separated from the raw natural gas by our processing operations are either sold and transported as NGL raw mix or further separated through a process known as fractionation into their individual components (ethane, propane, butanes and natural gasoline) and then sold as components. We fractionate NGL raw mix at our 11 owned and operated fractionators and at four third party operated fractionators located on the Gulf Coast in which we hold an equity interest.

     We sell NGLs to a variety of customers ranging from large, multi-national petrochemical and refining companies to small regional retail propane distributors. Substantially all of our NGL sales are made at market-based prices, including approximately 40% of our NGL production that is committed to ConocoPhillips and Chevron Phillips Chemical Company LLC under an existing contract which expires December 31, 2014. In addition, we use trading and storage to manage our price risk and provide additional services to our customers. (See “Natural Gas Liquids Transportation, Fractionation and Marketing” in this section.)

     The residue gas that results from our processing is sold at market-based prices to marketers and end-users, including large industrial customers and natural gas and electric utilities serving individual consumers. We market residue gas directly or through our wholly-owned gas marketing company. We also store residue gas at our 7.5 billion cubic foot natural gas storage facility.

     On March 31, 2000, we combined the gas gathering, processing, marketing and NGLs businesses of Duke Energy and ConocoPhillips that existed at that time. In connection with the Combination, Duke Energy and ConocoPhillips transferred to us all of their respective interests in their subsidiaries that conducted their midstream natural gas business. Concurrent with the Combination, on March 31, 2000, we obtained by transfer from Duke Energy ownership of the general partner of TEPPCO Partners, L.P. (“TEPPCO”), a publicly traded master limited partnership which owns and operates a network of pipelines and storage and terminal facilities for refined products, liquefied petroleum gases, petrochemicals, natural gas and crude oil. The general partner is responsible for the management and operations of TEPPCO. We believe that our ownership of the general partner of TEPPCO improves our business position in the gathering and transportation sectors of the midstream natural gas industry and provides additional flexibility in pursuing our disciplined acquisition strategy by providing an alternative acquisition vehicle.

     Duke Energy and ConocoPhillips are currently having discussions regarding possible changes to DEFS ownership. Member interests in DEFS are currently held 69.7% by Duke Energy and 30.3% by ConocoPhillips. As a result of the merger between Conoco Inc. (“Conoco”) and Phillips Petroleum Company that created ConocoPhillips, ConocoPhillips owns the midstream natural gas assets that were formerly owned by Conoco. Duke Energy and ConocoPhillips are currently discussing the possible contribution by ConocoPhillips of certain of these assets to DEFS. There is no certainty that these discussions will lead to a transaction in which ConocoPhillips would contribute these assets to DEFS or what the terms of such a transaction might be.

     A discussion of the current business and operations of each of our segments follows the description of our business strategy. For further discussion of these segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For financial information concerning our business segments, see Note 17, “Business Segments,” of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.

Our Business Strategy

     We are one of the largest gatherers of raw natural gas, based on wellhead volume, in North America. We are the largest producer and one of the largest marketers of NGLs in North America. Our limited liability company agreement limits the scope of our business to the midstream natural gas industry in the United States and Canada, the marketing of NGLs in Mexico, and the transportation, marketing and storage of other petroleum products, unless otherwise approved by our board of directors. We have significant midstream natural gas operations in five of the largest natural gas producing regions in North America. In the current economic environment, we are pursuing the following strategies:

•

Size and focus of our existing operations. Our size, scope and concentration of our assets in our regions of operation provide for opportunities to acquire additional supplies of raw natural gas. Our significant market presence and asset base generally provide us opportunities to use our economies of scale to be the low cost provider in connecting new raw natural gas supplies and providing value chain gathering and processing services. In addition, we believe our size and geographic diversity allow us to benefit from the growth of natural gas production in multiple regions while mitigating the adverse effects from a downturn in any one region.

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	•		Increase our presence in each aspect of the midstream business. We are active in each significant aspect of the midstream natural gas value chain, including raw natural gas gathering, processing and transportation, NGL fractionation, and NGL and residue gas transportation and marketing. Each link in the value chain provides us with an opportunity to earn incremental income from the raw natural gas that we gather and from the NGLs and residue gas that we produce.
	•		Increase our presence in high growth production areas. We intend to use our strategic asset base in North America and our leading position in the midstream natural gas industry as a platform for future growth. We plan to increase our operations by following a disciplined acquisition strategy, and by expanding existing infrastructure and constructing new gathering lines and processing facilities.
	•		Further streamline our low-cost structure. Our economies of scale, operating efficiency and resulting low cost structure enhance our ability to attract new raw natural gas supplies and generate current income. The low-cost provider in any region can more readily attract new raw natural gas volumes by offering more competitive terms to producers. We believe that we have a complementary base of assets from which to further extract operating efficiencies and cost reductions, while continuing to provide superior customer service. In addition, we continue to optimize our existing assets by looking at potential plant consolidation, reviewing our contract structure and ensuring reliability in our plant operations.

Natural Gas Gathering, Processing, Transportation, Marketing and Storage

Overview

     At December 31, 2002, our raw natural gas gathering and processing operations consisted of:

	•		approximately 60,000 miles of gathering and transmission pipe, with connections to approximately 35,000 active receipt points; and
	•		60 owned and operated processing plants and ownership interests in 11 additional third party operated plants, with a combined processing capacity of approximately 8.0 billion cubic feet per day.

     In 2002, we gathered, processed and/or transported approximately 8.3 trillion Btus per day of raw natural gas. As a result of new connections resulting from both increased drilling and released raw natural gas, we connected approximately 1,600 additional receipt points in 2002.

     Our raw natural gas gathering and processing operations are located in 11 contiguous states in the United States and two provinces in Western Canada. We provide services in the following key North American natural gas and oil producing regions: Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, Onshore Gulf of Mexico, Rocky Mountains, Offshore Gulf of Mexico and Western Canada. We have a significant presence in the first five of these producing regions. According to Hart Downstream Energy Services “Gas Processors Report” dated November 18, 2002, we are the largest NGL producer in North America.

     Raw Natural Gas Supply Arrangements. Typically, we take ownership, control or custody of raw natural gas at the wellhead. The producer may dedicate to us the raw natural gas produced from designated oil and natural gas leases for a specific term. The term for dedicated gas can range from 30 days to life of lease. We obtain access to raw natural gas and provide our midstream natural gas service principally under three types of processing contracts: percentage-of-proceeds contracts, fee-based contracts and keep-whole and wellhead-purchase contracts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Effects of Our Raw Natural Gas Supply Arrangements” for a description of these types of contracts.

     Raw Natural Gas Gathering. We receive raw natural gas from a diverse group of producers under contracts with varying durations to provide a stable supply of raw natural gas through our processing plants. A significant portion of the raw natural gas that is processed by us is produced by large producers, including ConocoPhillips, Anadarko Petroleum, Exxon Mobil, EOG Resources, and Dominion, which together account for approximately 20% of our processed raw natural gas.

     We continually seek new supplies of raw natural gas, both to offset natural declines in production from connected wells and to increase throughput volume. We obtain new well connections in our operating areas by contracting for production from new wells or by obtaining raw natural gas that has been released from other third party gathering systems. Producers may switch raw natural gas from one gathering system to another to obtain better commercial terms, conditions and service levels.

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     We believe our significant asset base and scope of our operations provide us with significant opportunities to add released raw natural gas to our systems. In addition, we have significant processing capacity in the Offshore Gulf of Mexico and Rocky Mountain regions, which contain significant quantities of proved natural gas reserves. We also have a presence in other potential high-growth areas such as the Western Canadian Sedimentary Basin.

     Gathering systems are operated at design pressures that will maximize the total throughput from all connected wells. On gathering systems where it is economically feasible, we operate at a relatively low pressure, which can allow us to offer a significant benefit to producers. Specifically, lower pressure gathering systems allow wells, which produce at progressively lower field pressures as they age, to remain connected to gathering systems and continue to produce for longer periods of time. As the pressure of a well declines, it becomes increasingly more difficult to deliver the remaining production in the ground against a higher pressure that exists in the connecting gathering system. Field compression is typically used to lower the pressure of a gathering system. If field compression is not installed, then the remaining production in the ground will not be produced because it cannot overcome the higher gathering system pressure. In contrast, if field compression is installed, then a well can continue delivering production that otherwise would not be produced. Our field compression systems provide the flexibility of connecting a high pressure well to the downstream side of the compressor even though the well is producing at a pressure greater than the upstream side. As the well ages and the pressure naturally declines, the well can be reconnected to the upstream, low pressure side of the compressor and continue to produce. By maintaining low pressure systems with field compression units, we believe that the wells connected to our systems are able to produce longer and at higher volumes before disconnection is required.

     Raw Natural Gas Processing. Most of our natural gas gathering systems feed into our natural gas processing plants. Our processing plants received an average of approximately 6.5 trillion Btus per day of raw natural gas and produced an average of 392,000 barrels per day of NGLs during 2002.

     Our natural gas processing operations involve the extraction of NGLs from raw natural gas, and, at certain facilities, the fractionation of NGLs into their individual components (ethane, propane, butanes and natural gasoline). We sell NGLs produced by our processing operations to a variety of customers ranging from large, multi-national petrochemical and refining companies, including one of our owners, ConocoPhillips, to small, regional retail propane distributors. At four of our Mid-Continent facilities the element helium is isolated from the raw gas stream and sold to industrial gas companies.

     We also remove off-quality crude oil, nitrogen, hydrogen sulfide, carbon dioxide and brine from the raw natural gas stream. The nitrogen and carbon dioxide are released into the atmosphere, and the crude oil and brine are accumulated and stored temporarily at field compressors or at various plants. The brine is transported to licensed disposal wells owned either by us or by third parties. The crude oil is sold in the off-quality crude oil market.

     Residue Gas Marketing. In addition to our gathering and processing activities, we are involved in the purchase and sale of residue gas, directly or through our wholly owned gas marketing company and our affiliates. Our gas marketing efforts involve supplying the residue gas demands of end-user customers that are physically attached to our pipeline systems, supplying the gas processing requirements associated with our keep-whole processing agreements and selling gas into downstream pipelines. We are focused on extracting the highest possible value for the residue gas that results from our processing and transportation operations.

     Our gas trading and marketing activities are supported by our ownership of the Spindletop storage facility and various intrastate pipelines which give us access to market centers/hubs such as Waha, Texas; Katy, Texas and the Houston Ship Channel. We undertake these activities through the use of fixed forward sales, basis and spread trades, storage opportunities, put/call options, term contracts and spot market trading. We believe there are additional opportunities to grow our services to our customer base.

     Our Spindletop storage facility plays an important role in our ability to act as a full-service natural gas trader and marketer. We lease over half of the facility’s capacity to our customers, and we use the balance to manage relatively constant natural gas supply volumes with uneven demand levels, provide “backup” service to our customers and support our trading activities.

     The natural gas marketing industry is a highly competitive commodity business. We provide a full range of natural gas marketing services in conjunction with the gathering, processing and transportation services we offer on our facilities, which allows us to use our asset infrastructure to enhance our revenues across each aspect of the midstream natural gas value chain.

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Regions of Operations

     Our operations cover substantially all of the major natural gas producing regions in the United States, as well as portions of Western Canada. Our geographic diversity reduces the impact of regional price fluctuations and regional changes in drilling activity.

     Our raw natural gas gathering and processing assets are managed in line with the seven geographic regions in which we operate. The following table provides information concerning the raw natural gas gathering systems and processing plants owned or operated by us at December 31, 2002.

     Our key suppliers of raw natural gas in these seven regions include major integrated oil companies, independent oil and gas producers, intrastate pipeline companies and natural gas marketing companies. Our principal competitors in this segment of our business consist of major integrated oil companies, independent oil and gas producers, independent oil and gas gatherers, and interstate and intrastate pipeline companies.

     Regional Strategies. Continued raw natural gas supply is key to our success. Maintaining our raw natural gas supply enables us to maintain throughput volumes and asset utilization throughout our entire midstream natural gas value chain. As we develop our regional strategies, we evaluate the nature of the opportunity that a particular region presents. The attributes that we evaluate include the nature of the gas reserves and production profile, existing midstream infrastructure including capacity and capabilities, the regulatory environment, the characteristics of the competition and the competitive position of our assets and capabilities. In a general sense, we employ one or more of the strategies described below:

	•		Growth - in regions where production is expected to grow significantly and/or there is a need for additional gathering and processing infrastructure, we plan to expand our gathering and processing assets by following a disciplined acquisition strategy, by expanding existing infrastructure and by constructing new gathering lines and processing facilities.
	•		Consolidation - in regions that include mature producing basins with flat to declining production or that have excess gathering and processing capacity, we seek opportunities to efficiently consolidate the existing asset base to increase utilization and operating efficiencies and realize economies of scale.
	•		Opportunistic - in regions where production growth is not primarily generated by new exploration drilling activity, we intend to optimize our existing assets and selectively expand certain facilities or construct new facilities to seize opportunities to increase our throughput. These regions are generally experiencing stable to increasing production through the application of new drilling technologies like 3-D seismic, horizontal drilling and improved well completion techniques. The application of new technologies is causing the drilling of additional wells in areas of existing production and recompletions of existing wells which create additional opportunities to add new gas supplies.

     In each region, we plan to apply both our broad overall business strategy and the strategy uniquely suited to each region. We believe this plan will yield balanced growth initiatives, including new construction in certain high growth areas, expansion of existing

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systems, combined with efficiency improvements and/or asset consolidation. We also plan to rationalize assets and redeploy capital to higher value opportunities.

     A description of our operations, key suppliers and principal competitors in each region is set forth below:

     Permian Basin. Our facilities in this region are located in West Texas and Southeast New Mexico. We own majority interests in, and we are the operator of, 17 natural gas processing plants in this region. In addition, we own minority interests in two other natural gas processing plants that are operated by others. Our natural gas processing plants are strategically located to access Permian Basin production. Our plants have processing capacity net to our interest of 1.4 billion cubic feet of raw natural gas per day. Operations in this region are primarily focused on gathering, processing and marketing of natural gas and NGLs. We offer low, intermediate and high pressure gathering services, and processing and treating services for both sweet and sour gas production. Three of our processing facilities provide fractionation services. Residue gas sales are enhanced by access to the Waha Hub where multiple pipeline interconnects source gas for virtually every market in the United States. Our older facilities have been modernized to improve product recoveries, and some of our plants include facilities for the production of sulfur. During 2002, these plants operated at an overall 81% capacity utilization rate. On average, the raw natural gas from West Texas and Southeast New Mexico contains approximately 4.0 gallons of NGLs per thousand cubic feet.

     As we generally pursue a consolidation strategy in this region, our assets will allow us to compete for new gas supplies in most major fields and benefit from the increases in drilling and production from technological advances. In addition, our ability to redirect gas between several processing plants allows us to maximize utilization of our processing capacity in this region.

     Our key suppliers in this region include ExxonMobil, Occidental, Anadarko Petroleum, ConocoPhillips, Dominion Resources, Chevron-Texaco, and Yates Petroleum. Our principal competitors in this region include Dynegy, Sid Richardson, ConocoPhillips, Western Gas Resources, BP, El Paso Energy Partners, Marathon and Chevron-Texaco.

     Mid-Continent. Our facilities in this region are located in Oklahoma, Kansas, the Texas Panhandle and four counties in Southeast Colorado. In this region, we own and are the operator of 13 natural gas processing plants. We also own a minority interest in one other natural gas processing plant that is operated by a third party. We gather and process raw natural gas primarily from the Arkoma, Ardmore, and Anadarko Basins, including the prolific Hugoton and Panhandle fields. Our plants have processing capacity net to our interest of 2.0 billion cubic feet of raw natural gas per day. During 2002, our plants operated at an overall 82% capacity utilization rate. On average, the raw natural gas from this region contains 4.1 gallons of NGLs per thousand cubic feet.

     We also produce approximately 25% of the United States’ domestic supply of helium from our Mid-Continent facilities. Annual growth in demand for helium over the past five years has been approximately 8% per year. Because of its unique characteristics and use as an industrial gas, we expect demand for helium to grow well into the future.

     Existing production in the Mid-Continent region is typically from mature fields with shallow decline profiles that will provide our plants with a dependable source of raw natural gas over a long term. With the development of improved exploration and production techniques such as 3-D seismic and horizontal drilling over the past several years, additional reserves have become economically producible in this region. We hold large acreage dedication positions with various producers who have developed programs to add substantially to their reserve base. The infrastructure of our plants and gathering facilities is uniquely positioned to pursue our consolidation strategy in this region.

     Our key suppliers in this region include ConocoPhillips, OXY USA, Dominion Resources, EOG Resources, Marathon Oil Company, Chesapeake Energy Corporation, Apache Corporation and Anadarko Petroleum. Our principal competitors in this region include Oneok Field Services, Enogex Inc., CMS Field Services, Pioneer, Enbridge, and BP.

     East Texas-Austin Chalk-North Louisiana. Our facilities in this region are located in East Texas, North Louisiana and the Austin Chalk formation of East Central Texas and Central Louisiana. We own majority interests in and are the operator of six natural gas processing plants in this region. Our plants have processing capacity net to our interest of 1.2 billion cubic feet of raw natural gas per day. During 2002, these plants operated at an overall 74% capacity utilization rate.

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     Our East Texas operations are centered around our East Texas Complex, located near Carthage, Texas. This plant complex is the third largest raw natural gas processing facility in the continental United States, based on liquids recovery, and currently produces approximately 38,000 barrels per day of NGLs. The plant is connected to and processes raw natural gas from our own gathering systems as well as from several third party gathering systems, including those owned by Gulf South, Anadarko Petroleum and American Central. Most of the raw natural gas processed at the complex is contracted under percent-of-proceeds agreements with an average remaining term of approximately five years. The complex is adjacent to our Carthage Hub, which delivers residue gas to interconnects with 12 interstate and intrastate pipelines. The Carthage Hub, with an aggregate delivery capacity of 1.5 billion cubic feet per day, acts as a key exchange point for the purchase and sale of residue gas.

     In the Austin Chalk area, where we provide essential low pressure gathering and compression services, infill drilling and recompletion activity continue to offset the lower decline rates of this mature production area. Given the maturity of this area, consolidation of our own facilities and/or consolidation with other gathering and processing companies could occur. In the Eastern Chalk area (Brookeland and Masters Creek), consolidation of the gas processing facilities was completed in July 2002. Gas prices are supporting new drilling activity, which has reduced decline rates. Volume declines in the near term, however, are expected to continue. Additional improvements in technology or sustained higher gas prices could significantly increase activity and reserve recovery in either of these two areas.

     In North Louisiana, we gather and process or gather and transport over 420 billion Btus per day. We operate one of the largest intrastate pipelines in Louisiana, the PELICO System, which delivers gas to industrial customers and electric generators within the state and also makes deliveries to six interstate pipelines at or near the Perryville Hub.

     Our key suppliers in this region include Anadarko Petroleum, Devon Energy and ConocoPhillips. Our principal competitors in this region include Gulf South, El Paso Energy Partners and Energy Transfer.

     Onshore Gulf of Mexico. Our facilities in this region are located in South Texas and the Southeastern portions of the Texas Gulf Coast. We own a 100% interest in and are the operator of seven natural gas processing plants and the Spindletop gas storage facility in this region. In addition, we own a minority interest in one natural gas processing plant that is operated by another entity. Our plants have processing capacity net to our interest of 1.1 billion cubic feet of raw natural gas per day. During 2002, the plants in this region ran at an overall 80% capacity utilization rate.

     Our Spindletop natural gas storage facility is located near Beaumont, Texas and has current working natural gas capacity of 7.5 billion cubic feet, plus expansion potential of up to an additional ten billion cubic feet. We currently have approximately 3.75 billion cubic feet of the available storage capacity under lease with third parties with expiration terms out to July 2003. This high deliverability storage facility interconnects with 10 interstate and intrastate pipelines and is positioned to meet the hourly demand needs of the natural gas-fired electric generation marketplace, currently the fastest growing demand segment of the natural gas industry.

     To achieve growth in our Onshore Gulf of Mexico region, we intend to fully integrate our acquired assets and use the diversity of our current asset base to provide value-added services to our broad customer base. We will also seek additional opportunities to participate in the anticipated growth in supply from this region.

     Our key suppliers in this region include Apache Corporation, United Oil and Minerals and El Paso Production Company. Our principal competitors in this region include El Paso Field Services, Kinder Morgan and Houston Pipe Line Company.

     Rocky Mountains. Our facilities in this region are located in the DJ Basin of Northern Colorado, the Greater Green River Basin and Overthrust Belt areas of Southwest Wyoming and Northeast Utah. We own a 100% interest in and are the operator of nine natural gas processing plants in this region. Our plants have processing capacity of 475 million cubic feet of raw natural gas per day. During 2002, our plants in this region operated at an overall 70% capacity utilization rate.

     The Rocky Mountains region has well placed assets with strong competitive positions in areas that are expected to benefit from increased drilling activity, providing us with a platform for growth. In this region, we expect to achieve growth through our existing assets, strategic acquisitions and development of new facilities. In addition, we intend to pursue an opportunistic strategy in areas of the region where new technologies and recovery methods are being employed.

     Our key suppliers in the region include Patina Oil & Gas, BP, Kerr McGee and Anadarko Petroleum. Our principal competitors in this region include Kerr McGee, Williams Field Services and Western Gas Resources.

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     Offshore Gulf of Mexico. Our facilities in this region are located along the Gulf Coast areas of Louisiana, Mississippi and Alabama. We own an average 48% interest in and are the operator of two natural gas processing plants in this region. In addition, we own a 51% interest in one natural gas processing plant and minority interests in five other natural gas processing plants, all of which are operated by other entities. The plants have processing capacity net to our interest of 1.3 billion cubic feet of raw natural gas per day. During 2002, our plants in this region operated at an overall 49% capacity utilization rate. All of these plants straddle offshore pipeline systems delivering a lower NGL content gas stream than that of our onshore gathering systems.

     In addition, we own a 71.8% interest in Dauphin Island Gathering Partners (“Dauphin Island”), a partnership which owns and operates an offshore gathering and transmission system. Dauphin Island has attractive market outlets, including deliveries to Texas Eastern Transmission (“TETCO”), Gulfstream Natural Gas System, Transco, Gulf South, and Florida Gas Transmission for re-delivery to the Southeast, Mid-Atlantic, Northeast and New England natural gas markets. Dauphin Island’s leased capacity on TETCO’s pipeline provides us with a means to cross the Mississippi River to deliver or receive production from the Venice, Louisiana natural gas hub area. Further, the Main Pass Oil Gathering Company system, in which we own a 33.3% interest, also has access to a variety of shallow-water and deep-water oil production platforms and dual market outlets into Shell’s Delta terminal as well as Chevron-Texaco’s Cypress terminal.

     On May 31, 2002, we acquired 33.3% of the outstanding membership interests in Discovery Producer Services, LLC (“DPS”). The DPS assets, which were primarily constructed in 1997, extend from deepwater offshore Louisiana to onshore delivery points approximately 30 miles south of New Orleans. DPS owns and operates a 600 million cubic feet per day (MMcf/d) interstate pipeline, including a 30-inch mainline that extends to the edge of the outer continental shelf, a condensate handling facility, a 600 MMcf/d cryogenic gas processing plant, a 42,000 barrels per day fractionator, 400 MMcf/d of deepwater gathering laterals and a fixed-leg platform at Grand Isle 115 to host deepwater developments.

     We believe that the Offshore Gulf of Mexico production area will be one of the most active regions for new drilling in the United States. Our strategic plan for this region is to connect new facilities to our existing base so that we can realize new offshore development opportunities. Our existing assets in the eastern Gulf of Mexico are positioned to access new and ongoing production developments. Based on our broad range of assets in the region, we intend to capture incremental margins along the natural gas value chain.

     Our key suppliers in the Offshore Gulf of Mexico region include El Paso Production Company, ExxonMobil, Dominion Resources and AGIP. Our principal competitors in this region include BP Pipelines, Shell Gas Transmission, Williams Field Services and El Paso Field Services.

     Western Canada. We own interests in seven natural gas processing plants in Western Canada and operate six of these plants. These facilities are located in northeastern British Columbia, the Peace River Arch area of northwestern Alberta and the central foothills area of Alberta. In total, the facilities in this region have processing capacity net to our interest of 543 million cubic feet of raw sour natural gas per day. Over 900 miles of gathering systems and 100,000 horsepower of compression support these facilities. During 2002, our processing plants in this area operated at an overall 66% capacity utilization rate. Our processing facilities in this area are new, with the majority having been constructed since 1995. Our processing arrangements are primarily fee-based, providing an income stream that is not directly subject to fluctuations in commodity prices. Our foreign operations in Canada are subject to risks inherent in transactions involving foreign currencies.

     The Peace River Arch area continues to be an active drilling area with land widely held among several large and small producers. Multiple residue gas market outlets can be accessed from our facilities through connections to TransCanada’s NOVA system, the Westcoast system into British Columbia and the Alliance Pipeline.

     We believe that significant growth opportunities exist in this region. We anticipate that producers in this area may follow the lead of United States producers and divest their midstream assets over the next few years. We are positioned to capitalize on this fundamental shift in the Canadian natural gas processing industry and plan to expand our position in Alberta and British Columbia through additional acquisitions and greenfield projects.

     Our key suppliers in this region include Burlington Resources Canada Ltd., Canadian Natural Resources Ltd., Alberta Energy Company and Devon Energy Canada. Our principal competitors in the area include Gibson Gas Processing Ltd., BP Amoco, Petro Canada and Keyspan Energy.

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Natural Gas Liquids Transportation, Fractionation, Marketing and Trading

Overview

     We market our NGLs and provide marketing services to third party NGL producers and sales customers in significant NGL production and market centers in the United States. In 2002, we marketed and traded approximately 576,000 barrels per day of NGLs, of which approximately 63% was production for our own account, ranking us as one of the largest NGL marketers in the country.

     Our NGL services include plant tailgate purchases, transportation, fractionation, flexible pricing options, price risk management and product-in-kind agreements. Our primary NGL operations are located in close proximity to our gathering and processing assets in each of the regions in which we operate, other than Western Canada.

     In 2001, we acquired five propane rail terminals and constructed one in the northeastern United States, establishing us as a prominent wholesale purchaser and seller of propane in the Northeast. Marketing propane from these rail terminals, along with volume from TEPPCO’s Providence, Rhode Island import facility, accounts for approximately 23,000 barrels per day of wholesale business.

     We possess a large asset base of NGL fractionators and pipelines that are used to provide value-added services to our refining, chemical, industrial, retail and wholesale propane-marketing customers. We intend to capture premium value in local markets while maintaining a low cost structure by maximizing facility utilization at our 11 owned and operated fractionators, including two at the Mont Belvieu market center, and ten pipeline systems. Our current total fractionation capacity is approximately 177,000 barrels per day.

Strategy

     Our strategy is to utilize the size, scope and reliability of supply from our raw natural gas processing operations and apply our knowledge of NGL market dynamics to make additional investments in NGL infrastructure. Our interconnected natural gas processing operations provide us with an opportunity to capture fee-based investment opportunities in certain NGL assets, including pipelines, fractionators and terminals. In conjunction with this investment strategy and as an enhancement to the margin generation from our NGL assets, we also intend to focus on the following areas: producer services, local sales and fractionation, market hub fractionation, transportation and market center trading and storage, each of which is discussed briefly below.

     Customer Services. We plan to continue to expand our services to customers, including producers and end users, principally in the areas of price risk management and marketing of their products. Over the last several years, we have expanded our supply base significantly beyond our own equity production by providing a long term market for third party NGLs at competitive prices.

     Local Sales and Fractionation. We will seek opportunities to maximize the value of our product by continuing to expand local sales. We have fractionation capabilities at 11 of our owned and operated raw natural gas processing plants, and at two raw natural gas processing plants in which we own minority interests and which are operated by others. Our ability to fractionate NGLs at regional processing plants provides us with direct access to local NGL markets.

     Market Hub Fractionation. We will continue to focus on optimizing our product slate from our two Mont Belvieu, Texas market center fractionators, the Mont Belvieu I and Enterprise Products fractionators, where we have a combined owned capacity of 57,000 barrels per day. The control of products from these fractionators complements our market center trading activity.

     Transportation. We will seek additional opportunities to invest in NGL pipelines and secure favorable third party transportation arrangements. We use company owned NGL pipelines to transport approximately 49,500 barrels per day of our total NGL pipeline volumes, providing transportation to market center fractionation hubs or to end use markets. We also are a significant shipper on third party pipelines in the Rocky Mountains, East Texas, Mid-Continent and Permian Basin producing regions and, as a result, receive the benefit of incentive rates on many of our NGL shipments.

     Market Center Trading and Storage. We use trading and storage at the Mont Belvieu, Texas and Conway, Kansas NGL market centers to manage our price risk and provide additional services to our customers. We undertake these activities through the use of fixed forward sales, basis and spread trades, storage opportunities, put/call options, term contracts and spot market trading. We believe there are additional opportunities to grow our price risk management services with our customer base.

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     Wholesale Propane Marketing. We continue to expand our propane wholesale marketing activity into areas where asset infrastructure exists. We currently utilize rail, pipeline and waterborne import facility assets to transport propane to market. Propane wholesale marketing involves the purchase of propane from both our Natural Gas Segment and third party producers for delivery and sale to wholesale and end use customers. Additionally, we provide our wholesale customers price risk products such as fixed price and option contracts to mitigate the seasonal price fluctuations of propane.

Key Suppliers and Competition

     The marketing of NGLs is a highly competitive business that involves integrated oil and natural gas companies, midstream gathering and processing companies, trading houses, international liquid propane gas producers and refining and chemical companies. There is competition to source NGLs from plant operators for movement through pipeline networks and fractionation facilities as well as to supply large consumers such as multi-state propane, refining and chemical companies with their NGL needs. Our largest suppliers are our own processing plants and Oneok, Koch, ConocoPhillips and RME Petroleum Co. Our largest sales customers are Chevron Phillips Chemical Company, ConocoPhillips, Dow Hydrocarbons and Eastman Chemical which accounted for approximately 19%, 13%, 5%, and 3%, respectively, of our total NGL transportation, fractionation and marketing revenues in 2002. Our principal competitors in the marketing of NGLs are Enterprise Products, Koch, Dynegy and Louis Dreyfus. In 2002, we marketed and traded an average of approximately 576,000 barrels per day, or approximately 25% of the available domestic supply, which includes gas plant production, refinery plant production and imports.

TEPPCO

     On March 31, 2000, we obtained by transfer from Duke Energy, ownership of the general partner of TEPPCO, a publicly traded master limited partnership. TEPPCO operates in three principal areas:

	•		refined products, liquefied petroleum gases and petrochemicals transportation (Downstream Segment);
	•		crude oil gathering, transportation and marketing (Upstream Segment); and
	•		natural gas gathering, NGLs transportation and NGLs fractionation (Midstream Segment).

     TEPPCO’s Downstream Segment is one of the largest pipeline common carriers of refined petroleum products and liquefied petroleum gases in the United States. This system is comprised of an approximate 4,300 mile products pipeline system, extending from southeast Texas through central and midwest states to the northeast United States and is the only pipeline system that transports liquefied petroleum gases to the northeast United States from the Texas Gulf Coast. Its operations include the interstate transportation, storage and terminaling of petroleum products; short-haul shuttle transportation of liquefied petroleum gas at its Mont Belvieu, Texas complex; and other ancillary services. TEPPCO’s Downstream Segment owns and operates three petrochemical pipelines in Texas between Mont Belvieu and Port Arthur. As of February 10, 2003, TEPPCO’s Downstream Segment also owns a 50% interest in Centennial Pipeline LLC (“Centennial”). Marathon Ashland Petroleum LLC owns the other 50% interest. Centennial owns and operates an interstate refined petroleum products pipeline extending from the upper Texas Gulf Coast to Illinois.

     TEPPCO’s Upstream Segment owns and operates approximately 2,600 miles of crude oil trunk line and gathering pipelines, primarily in Texas and Oklahoma. It also owns a 50% interest in Seaway Crude Pipeline Company, or Seaway, which owns an approximately 500 mile, large diameter crude oil pipeline that transports primarily imported crude oil from the Texas Gulf Coast to the mid-continent and midwest refining sectors. ConocoPhillips owns the remaining interest in Seaway. In addition, TEPPCO’s Upstream Segment owns crude oil storage tanks at Cushing, Oklahoma and Midland, Texas, and interests in two crude oil pipelines operating in New Mexico, Oklahoma and Texas.

     TEPPCO’s Midstream Segment owns and operates approximately 650 miles of NGLs pipelines located along the Texas Gulf Coast and two fractionators in Colorado. In September 2001, TEPPCO’s Midstream Segment acquired Jonah Gas Gathering Company, which gathers natural gas in the Green River Basin in southwestern Wyoming. The Jonah natural gas gathering system consists of approximately 350 miles of pipelines. Natural gas gathered on the Jonah system is delivered to several interstate pipeline systems that provide access to a number of West Coast, Rocky Mountain and midwest markets. On March 1, 2002, TEPPCO’s Midstream Segment expanded its NGLs operations with the acquisition of the Chaparral and Quanah pipelines, which consist of a combined 970 miles of gathering and trunk pipelines extending from southeastern New Mexico and West Texas to Mont Belvieu, Texas. On June 30, 2002, TEPPCO’s Midstream Segment acquired the Val Verde coal seam gas gathering system from a subsidiary of Burlington Resources Inc. The Val Verde gathering system consists of 360 miles of pipeline, 14 compressor stations and a large amine treating facility for

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the removal of carbon dioxide. The system has a pipeline capacity of approximately one billion cubic feet of gas per day. The Val Verde gathering system gathers coal seam gas from the Fruitland Coal Formation of the San Juan Basin in New Mexico. The system is one of the largest coal seam gas gathering and treating facilities in the United States. Certain of the assets of TEPPCO’s Midstream Segment are operated and commercially managed by us under agreements with TEPPCO.

     We believe that our ownership of the general partnership interest of TEPPCO improves our business position in the gathering and transportation sector of the midstream natural gas industry and provides us additional flexibility in pursuing our disciplined acquisition strategy by providing an alternative acquisition vehicle.

     The general partner of TEPPCO manages and directs TEPPCO under the TEPPCO partnership agreement and the partnership agreements of its operating partnerships. Under these partnership agreements, the general partner of TEPPCO is reimbursed for all direct and indirect expenses it incurs and payments it makes on behalf of TEPPCO.

     TEPPCO makes quarterly cash distributions of its available cash, which consists generally of all cash receipts less disbursements and cash reserves necessary for working capital, anticipated capital expenditures and contingencies and debt payments, the amounts of which are determined by the general partner of TEPPCO.

     The partnership agreements provide for incentive distributions payable to the general partner of TEPPCO out of TEPPCO’s available cash in the event quarterly distributions to its unitholders exceed certain specified targets. In general, subject to certain limitations, if a quarterly distribution exceeds a target of $.275 per limited partner unit, the general partner of TEPPCO will receive incentive distributions equal to:

	•		15% of that portion of the distribution per limited partner unit which exceeds the minimum quarterly distribution amount of $.275 but is not more than $.325, plus
	•		25% of that portion of the quarterly distribution per limited partner unit which exceeds $.325 but is not more than $.45, plus
	•		50% of that portion of the quarterly distribution per limited partner unit which exceeds $.45.

     At TEPPCO’s 2002 per unit distribution level, the general partner received approximately 25% of the cash distributed by TEPPCO to its partners, which consisted of 23% from the incentive cash distribution and 2% from the general partner interest. During 2002, total cash distributions to the general partner of TEPPCO were $37.7 million. Also during 2002, equity contributions of $7.6 million were paid by the general partner to TEPPCO.

Natural Gas Suppliers

     We purchase substantially all of our raw natural gas from producers under varying term contracts. Typically, we take ownership of raw natural gas at the wellhead, settling payments with producers on terms set forth in the applicable contracts. These producers range in size from small independent owners and operators to large integrated oil companies, such as ConocoPhillips, our largest single supplier. No single producer accounted for more than 10% of our natural gas throughput in 2002. Each producer often dedicates to us the raw natural gas produced from designated oil and natural gas leases for a specific term. The term for dedicated gas can range from 30 days to life of lease. We consider our relationships with our many producers to be good. For a description of the types of contracts we have entered into with our suppliers, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Effects of Our Raw Natural Gas Supply Arrangements.”

Competition

     We face strong competition in acquiring raw natural gas supplies. Our competitors in obtaining additional gas supplies and in gathering and processing raw natural gas include:

	•		major integrated oil companies;
	•		major interstate and intrastate pipelines or their affiliates;
	•		independent oil and gas producers;

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	•		other large raw natural gas gatherers that gather, process and market natural gas and/or NGLs; and
	•		a relatively large number of smaller raw natural gas gatherers of varying financial resources and experience.

     Competition for raw natural gas supplies is concentrated in geographic regions based upon the location of gathering systems and processing plants. Although we are one of the largest gatherers and processors in most of the geographic regions in which we operate, most producers in these areas have alternate gathering and processing facilities available to them. In addition, producers have other alternatives, such as building their own gathering facilities or in some cases selling their raw natural gas supplies without processing. Competition for raw natural gas supplies in these regions is primarily based on:

	•		the reputation, efficiency and reliability of the gatherer/processor, including the operating pressure of the gathering system;
	•		the availability of gathering and transportation;