UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

DUKE ENERGY FIELD SERVICES, LLC

See Notes to Consolidated Financial Statements.

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     For derivatives designated as a cash flow hedge ofor a recognized asset, liability or firm commitment (fairfair value hedges); as a hedge, of a forecasted transaction or future cash flows (cash flow hedges); or as a normal purchase or sale contract.

     For hedge contracts, the Company formally assesses, both at the inception of the hedge contract’s inception and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in fair values or cash flows of hedged items. The Company currently excludes the time value of the options when assessing hedge effectiveness.

     When available, quoted market prices or prices obtained through external sources are used to verify a contract’s fair value. For contracts with a delivery location or duration for which quoted market prices are not available, fair value is determined based on pricing models developed primarily from historical and expected correlations with quoted market prices.

     Values are adjusted to reflect the credit risk inherent in the transaction as well as the potential impact of liquidating the open positions held in an orderly manner over a reasonable time period under current conditions. Changes in market priceprices and management estimates directly affect the estimated fair value of these contracts. Accordingly, it is reasonably possible that such estimates may change in the near term.

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     Commodity Trading and Marketing — A favorable or unfavorable price movement of any derivative contract held for trading and marketing purposes is reported as Trading and Marketing Net Marginmarketing net margin in the Consolidated Statements of Operations. An offsetting amount is recorded in the Consolidated Balance Sheets as Unrealized Gainsgains or Unrealized Lossesunrealized losses on Tradingmark-to-market and Hedging Transactions.hedging transactions. When a contract is settled,the contractual delivery period occurs, the realized gain or loss is reclassified to a receivable or payable account. Settlement has no revenue presentation effect on the Consolidated Statements of Operations.

     See the “New Accounting Standards” section below for a discussion of the implications of EITF Issue 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities,” on the accounting for trading activities subsequent to October 25, 2002.

     Commodity Cash Flow Hedges — The fair value of a derivative designated as a cash flow hedge is recorded in the Consolidated Balance Sheets as Unrealized gains or unrealized losses on mark-to-market and hedging transactions. The effective portion of the change in fair value of a derivative designated and qualified as a cash flow hedge is includedrecorded in the Consolidated Balance Sheets as Accumulated Other Comprehensive Income (Loss)other comprehensive income (“AOCI”) until earnings are affected by. During the period in which the hedged item. Settlementtransaction occurs, amounts of cash flow hedgesin AOCI associated with the hedged transaction are removed from AOCI and recorded inreclassified to the Consolidated Statements of Operations in the same accounts as the item being hedged. The Company discontinues hedge accounting prospectively when it is determined that the derivative no longer qualifies as an effective hedge, or when it is no longer probable that the hedged transaction will occur. When hedge accounting is discontinued because the derivative no longer qualifies as an effective hedge, the derivative continues to be carried on the Consolidated Balance Sheets at its fair value, withvalue; however, subsequent changes in its fair value are recognized in current-periodcurrent period earnings. Gains and losses related to discontinued hedges that were previously accumulated in AOCI will remain in AOCI until earnings are affected by the hedged item,transaction occurs, unless it is no longer probable that

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the hedged transaction will occur, in which case, the gains and losses that were accumulated in AOCI will be immediately recognized in current-periodcurrent period earnings. At March 31, 2004 and December 31, 2003, $28 million and $29 million, respectively, of losses related to cash flow hedges were deferred in AOCI.

     Commodity Fair Value Hedges — Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge are included in the Consolidated Statements of Operations as Sales of Natural Gasnatural gas and Petroleum Productspetroleum products and Purchases of Natural Gasnatural gas and Petroleum Products,petroleum products, as appropriate.appropriate, and are included in the Consolidated Balance Sheets as Unrealized gains or losses on mark-to-market and hedging transactions. Changes in the fair value of the physical portion of a fair value hedge (i.e., the hedged item) are recorded in the Consolidated Statements of Operations in the same accounts as the changes in the fair value of the derivative, with offsetting amounts in the Consolidated Balance Sheets as Other Current Assets,current assets, Other Noncurrent Assets,noncurrent assets, Other Current Liabilities,current liabilities or Other Long Term Liabilities,long term liabilities, as appropriate.

     Interest Rate Fair Value Hedges — The Company periodically enters into interest rate swaps to convert some of its fixed-rate long term debt to floating-rate long term debt. Hedged items in fair value hedges are marked to marketmarked-to-market with the respective derivative instruments. Accordingly, the Company’s hedged fixed-rate debt is carried at fair value. The terms of the outstanding swapswaps match those of the associated debt which permits the assumption of no ineffectiveness, as defined by SFAS No. 133. As such, for the life of the swapswaps, no ineffectiveness will be recognized.

     Income TaxesDistributions –— TheUnder the terms of the Company’s Limited Liability Company Agreement (the “LLC Agreement”), the Company is required to make quarterly distributions to Duke Energy and ConocoPhillips based on allocated taxable income. The distributions areLLC Agreement, as amended, provides for taxable income to be allocated in accordance with Internal Revenue Code Section 704(c). This Code Section accounts for the variation between the adjusted tax basis and the fair market value of assets contributed to the joint venture. The distribution is based on the highest taxable income allocated to either member, with the other member receiving a proportionate amount to maintain the ownership capital accounts at 69.7% for Duke Energy and 30.3% for ConocoPhillips. As of March 31, 2004, distributions payable of $11 million were included in Other current liabilities in the Consolidated Balance Sheets. This amount was based on estimated annual taxable income allocated to the members according to their respective ownership percentages and was paid in April 2004.

     In 2003, the Company’s board of directors approved a plan to consider the payment of a quarterly dividend to Duke Energy and ConocoPhillips. The board of directors may consider net income, cash flow or any other criteria deemed appropriate for determining the amount of the quarterly dividend to be paid. The LLC Agreement restricts making distributions, which would include these dividends, except with the approval of both members. During the quarter ended March 31, 2004, with the approval of both members, the Company paid a dividend of $50 million to the members allocated in accordance with their respective ownership percentages.

     Stock-Based Compensation— Under Duke Energy’s 1998 Long Term Incentive Plan, stock options for Duke Energy’s common stock may be granted to the Company’s key employees. The Company accounts for stock-based compensation using the intrinsic value recognition and measurement principles of Accounting Principles Board (APB)(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25).” Under this method, any compensation cost is measured as the quoted market price of stock at the date of the grant less the amount an employee must pay to acquire the stock. Since the exercise price for all options granted under those plansthe plan was equal to the market value of the underlying common stock on the date of grant, no compensation cost is recognized in the accompanying Consolidated Statements of Operations. Restricted stock grants and phantom stock awards and stock-based performance awards are recorded over the required vesting period as compensation cost, based on the market value on the date of grant. (See Note 7Performance awards are recorded over the required vesting period as compensation costs, based on the market value on the date of the balance sheet.

     The following table shows what earnings available for pro forma disclosures usingmembers’ interest would have been if the Company had applied the fair value accounting method.)recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to all stock-based compensation awards and reflects the provisions of SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.”

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     Accumulated Other Comprehensive Income (Loss) —The components of and changes in accumulated other comprehensive income (loss) are as follows:

     Cumulative Effect of Changes in Accounting PrinciplesChange— The Company adopted the provisions of EITF Issue 02-03 (“EITF 02-03”), “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and for Contracts Involved in Energy Trading and Risk Management Activities,” that required new non-derivative energy trading contracts entered into after October 25, 2002 to be accounted for under the accrual accounting basis. Non-derivative energy trading contracts recorded in the Consolidated Balance Sheet as of January 1, 2003 that existed at October 25, 2002 and inventories that were recorded at fair values were adjusted to historical cost via a cumulative effect adjustment of $5 million as a reduction to earnings in the first quarter of 2003.

     The Company adopted the provisions of SFAS No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations” onObligations,” as of January 1, 2003.2003 which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In accordance with the transition provisions of SFAS No. 143, the Company recorded asset retirement liabilities and a cumulative-effectcumulative effect adjustment of $17.4$18 million as a reduction to earnings in earnings. In addition, in accordance with the EITF’s October 2002 consensus on Issue No. 02-03, on January 1, 2003, the Company decreased its inventories from fair value to historical cost and recorded a $5.4 million cumulative-effect adjustment as a reduction in earnings.first quarter of 2003.

     New Accounting Standards— In May 2003, the FASB issued SFAS No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 improves the accounting forrequires that certain financial instruments that under previous guidance, issuers could accountpreviously be accounted for as equity. SFAS No. 150 requires that those instrumentsequity, be classified as liabilities in statements of financial position.the consolidated balance sheets and initially recorded at fair value. In addition to its requirements for the classification and measurement of financial instruments in its scope, SFAS No. 150 also requires disclosures about the nature and terms of the financial instruments and about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable.instruments. The provisions of SFAS No. 150 are effective for all financial instruments entered into or modified after May 31, 2003, and are otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently assessing SFAS No. 150 but does not anticipate that it will have a material impactUpon adoption on its consolidated results of operations, cash flows or financial position.

     In AprilJuly 1, 2003, the FASB issued SFAS No. 149, “AmendmentCompany reclassified its preferred members’ interest, which are mandatorily redeemable, of Statement 133$200 million from mezzanine equity to long term debt and prospectively classified accrued or paid distributions on Derivative Instruments and Hedging Activities”these securities, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embeddedhad previously been classified as dividends, as interest expense. During 2003, the Company redeemed the remaining $200 million of these securities in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies the discussion around initial net investment, clarifies when a derivative contains a financing component, and amends the definition of an underlying to conform it to language used in FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” In addition, SFAS No. 149 also incorporates certain of the Derivative Implementation Group Implementation Issues. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance should be applied to hedging relationships on a prospective basis. The Company is currently assessing SFAS No. 149 but does not anticipate that it will have a material impact on its consolidated results of operations, cash flows or financial position.cash.

     In January 2003, the FASB issued Interpretation No. 46 (FIN 46)(“FIN 46”), “Consolidation of Variable Interest Entities.”Entities” which requires the primary beneficiary of a variable interest entity’s activities to consolidate the variable interest

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entity. FIN 46 requires an entity to consolidatedefines a variable interest entity if itas an entity in which the equity investors do not have substantive voting rights and there is not sufficient equity at risk for the primary beneficiary of the variable interest entity’s activities.entity to finance its activities without additional subordinated financial support. The primary beneficiary is the party that absorbs a majority of the expected losses and/or receives a majority of the expected residual returns or both, fromof the variable interest entity’s activities. In December 2003, the FASB issued FIN 46R, which supercedes and amends certain provisions of FIN 46. While FIN 46R retains many of the concepts and provisions of FIN 46, isit also provides additional guidance related to the application of FIN 46, provides for certain additional scope exceptions, and incorporates several FASB Staff Positions issued related to the application of FIN 46.

     The provisions of FIN 46 are immediately applicable immediately to variable interest entities created, or interests in variable interest entities obtained, after January 31, 2003.2003 and the provisions of FIN 46R are required to be applied to such entities by the end of the first reporting period ending after March 15, 2004 (March 31, 2004 for the Company). For those variable interest entities created, or interests in variable interest entities obtained, on or before January 31, 2003, FIN 46 or FIN 46R is required to be applied into special-purpose entities by the end of the first fiscal year or interimreporting period beginningending after JuneDecember 15, 2003.2003 (December 31, 2003 for calendar-year entities) and is required to be applied to all other non-special purpose entities by the end of the first reporting period ending after March 15, 2004 (March 31, 2004 for calendar-year entities). FIN 46 and FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date it is first applied, or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 and FIN 46R also requiresrequire certain disclosures of an entity’s relationship with variable interest entities.

     The Company shares ownership interests with other industry partners in a variety of different partnership and joint venture entities in order to share the risks and rewards of ownership in certain gas and NGL plant and pipeline assets. The Company doeshas not provide supplemental financial support to these entities, other than the debt guarantees discussed in Note 9. In general, these entities are structured such that the voting and equity interests in these entities are consistent with the allocation of the entities’ profits and losses. The Company is continuing the process of examining all of its ownership interests to determine the necessary disclosures and procedures for complying with FIN 46. At this point, the Company does not anticipate that these entities will qualify asidentified any material variable interest entities created, or interests in variable entities obtained, after January 31, 2003 which require consolidation or disclosure under FIN 46. However, inThe Company consolidated one entity, previously accounted for under the event that it is determined that any such entities are variable interest

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entities,equity method of accounting, on January 1, 2004 under the Company believes that it would not be the primary beneficiary of such entities and thus the consolidation provisions of FIN 46 would not apply. For all46R. This entity, which is a substantive entity, had total assets of these partnership and joint venture entities, the Company believes that its maximum exposure to loss would be equal to its investment in these entities plus its potential obligations under its guarantees of unconsolidated debt. At March 31, 2003, the Company’s total investment in, plus the value of any guaranteed debt for entities that may reasonably possibly be determined to be variable interest entities, was approximately $169 million.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for 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 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure-only provisions of SFAS No. 148$92 million as of December 31, 2002.January 1, 2004. Adoption of the new standardFIN 46R had no material effect on the Company’s consolidated results of operations, cash flows or financial position.

     In November 2002,July 2003, the EITF reached consensus in EITF Issue No. 03-11 (“EITF 03-11”), “Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB issued InterpretationStatement No. 45, “Guarantor’s133, Accounting for Derivative Instruments and Disclosure RequirementsHedging Activities, and Not Held for Guarantees, Including Indirect GuaranteesTrading Purposes,” that determining whether realized gains and losses on derivative contracts not held for trading purposes should be reported on a net or gross basis is a matter of Indebtedness of Others,” which elaboratesjudgment that depends on the disclosures torelevant facts and circumstances. In analyzing the facts and circumstances, EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” and Opinion No. 29, “Accounting for Nonmonetary Transactions,” should be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantorconsidered. EITF 03-11 is required to recognize, at the inceptioneffective for transactions or arrangements entered into after September 30, 2003. The adoption of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted the initial recognition and measurement provisions of Interpretation No. 45 effective January 1, 2003. Adoption of the new interpretationEITF 03-11 had no material effect on the Company’s consolidated results of operations, cash flows or financial position.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The Company adopted the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

     In June 2002,May 2003, the EITF reached a partial consensus onin EITF Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.01-08 (“EITF 01-08”), “Determining Whether an Arrangement Contains a Lease,” The EITF concluded that, effective for periods ending after July 15, 2002, mark-to-market gains and losses on energy trading contracts (including those to be physically settled) must be shown on a net basis inclarify the Consolidated Statementsrequirements of Operations. The Company had previously chosen to report certain of its energy trading contracts on a gross basis, as sales in operating revenues and the associated costs recorded as purchases in costs and expenses, in accordance with prevailing industry practice.

     In October 2002, the EITF, as part of their further deliberations on Issue No. 02-03, rescinded the consensus reached in Issue No. 98-10. As a result, all energy trading contracts that do not meet the definition of a derivative under SFAS No. 133, and trading inventories that previously had been recorded at fair values, must now be recorded at the lower of cost or market and are reported onidentifying whether an accrual basis resulting in the recognition of earnings or losses at the time of contract settlement or termination. New non-derivative energy trading contracts entered into after October 25, 2002arrangement should be accounted for under the accrual accounting basis. Non-derivative energy trading contracts on the Consolidated Balance Sheet as of January 1, 2003 that existed at October 25, 2002 and inventories that were recorded at fair values have been adjusted to the lower of historical cost or market via a cumulative-effect adjustment of $5.4 million as a reduction to 2003 earnings. In connection withlease at its inception. The guidance in the consensus reached on Issue No. 02-03,is designed to mandate reporting revenue as rental or leasing income that otherwise would be reported as part of product sales or service revenue. EITF 01-08 requires both parties to an arrangement to determine whether a service contract or similar arrangement is or includes a lease within the FASB staff observed that, effective July 1, 2002, an entity should not recognize unrealized gains or losses

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at the inception of a derivative instrument unless the fair value of that instrument is evidenced by quoted market prices or current market transactions.

     In October 2002, the EITF also reached a consensus on Issue No. 02-03 that, effective for periods beginning after December 15, 2002, all gains and losses on all derivative instruments held for trading purposes should be shown on a net basis in the income statement. Gains and losses on non-derivative energy trading contracts should similarly be presented on a gross or net basis in connection with the guidance in Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Upon application of this presentation, comparative financial statements for prior periods are required to be reclassified to conform to the consensus other than for energy trading contracts that were shown on a net basis under Issue No. 98-10. Accordingly, for the quarter ended March 31, 2003, only derivative instruments that are held for trading purposes and are accounted for under mark-to-market accounting are included in trading and marketing net margin on the Consolidated Statements of Operations. For the quarter ended March 31, 2002, trading and marketing net margin also includes the net margin on non-derivative energy trading contracts (primarily gas storage inventories and the related physical purchases and sales) that no longer qualify for net presentation after the rescission of Issue No. 98-10. The new gross versus net revenue presentation requirements had no impact on operating income or net income.

     In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability increases due to the passage of time based on the time value of money until the obligation is settled. The Company adopted the provisionsscope of SFAS No. 143 as of January13, “Accounting for Leases.” The consensus is to be applied prospectively to arrangements agreed to, modified, or acquired in business combinations in fiscal periods beginning on July 1, 2003. In accordance withThe adoption of EITF 01-08 had no material effect on the transition provisionsCompany’s consolidated results of SFAS No. 143, the Company recorded a cumulative-effect adjustment of $17.4 million as a reduction in 2003 earnings.operations, cash flows or financial position.

     Reclassifications— Certain prior period amounts have been reclassified in the Consolidated Financial Statements and notes thereto to conform to the current period presentation. Included in the reclassified amounts are increases in both Sales of natural gas and petroleum products and in Purchases of natural gas and petroleum products in the amount of approximately $236 million for the quarter ended March 31, 2003. This reclassification resulted from intersegment trading activities being eliminated twice from the Consolidated Statements of Operations in the quarter ended March 31, 2003. Management has concluded that these reclassifications are not material to the fair presentation of the Company’s financial statements.

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3. Acquisitions and Dispositions

     In the first quarter of 2004, the Company sold gas gathering and processing plant assets in West Texas to a third party purchaser for a sales price of approximately $62 million. These assets comprised a component of the Company for purposes of reporting discontinued operations. All prior period operations have been revised to reflect these assets as discontinued operations.

     In the second quarter of 2003, the Company sold gathering, transmission and processing assets to two separate buyers for a combined sales price of approximately $90 million. These assets comprised a component of the Company for purposes of reporting discontinued operations. All prior period operations have been revised to reflect these assets as discontinued operations.

     The following table sets forth selected financial information associated with the assets discussed above which are accounted for as discontinued operations:

     3.4. Derivative Instruments, Hedging Activities and Credit and Risk

Commodity price risk— The Company’s principal operations of gathering, processing, transportation, marketing and trading and storage of natural gas, and the accompanying operations of fractionation, transportation, trading and marketing of NGLs create commodity price risk exposure due to market fluctuations in commodity prices, primarily with respect to the prices of NGLs, natural gas and crude oil. As an owner and operator of natural gas processing and other midstream assets, the Company has an inherent exposure to market variables and commodity price risk. The amount and type of price risk is dependent on the underlying natural gas contracts entered into to purchase and process raw gas. Risk is also dependent on the types and mechanisms for sales of natural gas and natural gas liquid products produced, processed, transported or stored.

Energy trading (market) risk— Certain of the Company’s subsidiaries are engaged in the business of trading energy related products and services including managing purchase and sales portfolios, storage contracts and facilities, and transportation commitments for products. These energy trading operations are exposed to market variables and commodity price risk with respect to these products and services, and may enter into physical contracts and financial instruments with the objective of realizing a positive margin from the purchase and sale of commodity-based instruments.

Corporate economic risks— The Company enters into debt arrangements that are exposed to market risks related to changes in interest rates. The Company periodically uses interest rate lock agreements and interest rate swaps to hedge interest rate risk associated with new debt issuances. The Company’s primary goals include (1) maintaining an appropriate ratio of fixed-rate debt to total debt for the Company’s debt rating; (2) reducing volatility

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of earnings resulting from interest rate fluctuations; and (3) locking in attractive interest rates based on historical rates.

Counterparty risks —The Company sells various commodities (i.e., natural gas, NGLs and crude oil) to a variety of customers. The natural gas customers include local utilities, industrial consumers, independent power producers and merchant energy trading organizations. The NGLs customers range from large, multi-national petrochemical and refining companies to small regional retail propane distributors. Substantially all of the Company’s NGLs sales are made at market-based prices, including approximately 40% of NGLs production that is committed to ConocoPhillips and Chevron Phillips Chemical LLC, under a contract with a primary term that expires on December 31, 2014. This concentration of credit risk may affect the Company’s overall credit risk in that these customers may be similarly affected by changes in economic, regulatory or other factors. On transactions where the Company is exposed to credit risk, the Company analyzes the counterparties’ financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of these limits on an ongoing basis. The corporate credit policy prescribes the use of master collateral agreements to mitigate credit exposure. The collateral agreements provide for a counterparty to post cash or letters of credit for exposure in excess of the established threshold. The threshold amount represents an open credit limit, determined in accordance with the corporate credit policy. The collateral agreements also provide that the failure to post collateral is sufficient cause to terminate a contract and liquidate all positions.

     Physical forward contracts and financial derivatives are generally cash settled at the expiration of the contract term. These transactions are generally subject to specific credit provisions within the contracts that would allow the seller, at its discretion, to suspend deliveries, cancel agreements or continue deliveries to the buyer after the buyer provides security for payment satisfactory to the seller.

     Commodity cash flow hedges —The Company uses cash flow hedges, as specifically defined by SFAS No. 133, to reduce the potential negative impact that commodity price changes could have on the Company’s earnings and its ability to adequately plan for cash needed for debt service, dividends, capital expenditures and tax distributions. The Company’s primary corporate hedging goals include maintaining minimum cash flows to fund debt service, dividends, production replacement capital, maintenance capital projects and tax distributions; and retaining a high percentage of potential upside relating to price increases of NGLs.

     The Company uses natural gas, crude oil and NGLNGLs swaps and options to hedge the impact of market fluctuations in the priceprices of NGLs, natural gas and other energy-related products. For the three months ended March 31, 2004 and 2003, the Company recognized a net lossrecognition in the Consolidated Statements of $39.5Operations of the cumulative changes in the fair value of these hedge instruments reduced revenues by $19 million and $40 million, respectively. For the three months ended March 31, 2004 and 2003, the gains or losses representing the ineffective portion of which a $2.2 million gain represented the total ineffectiveness of allCompany’s’ cash flow hedges and a $41.7 million loss represented the total derivative settlements.were not material. No derivative gains or losses were reclassified from OCIAOCI to current period earnings as a result of the discontinuance of cash flow hedges related to certainany forecasted transactions that are not probable of occurring.

     Gains and losses on derivative contracts that are reclassified from accumulated OCIAOCI to current period earnings are included in the line item in which the hedged item is recorded. As of March 31, 2003, $51.52004, $28 million of the deferred net losses on derivative instruments accumulated in OCIAOCI are expected to be reclassified into earnings duringthrough the next 12 monthsend of 2004 as the hedgehedged transactions occur; however, due to the volatility of the commodities markets, the corresponding value in OCIAOCI is subject to change prior to its reclassification into earnings. The maximumremaining term over which the Company is currently hedging its exposure to the variability of future cash flows is three years.through the end of 2004.

     Commodity fair value hedges— The Company uses fair value hedges to hedge exposure to changes in the fair value of an asset or a liability (or an identified portion thereof) that is attributable to price risk. The Company hedgesmay hedge producer price locks (fixed price gas purchases) and market locks (fixed price gas sales) to reduce the Company’s exposure to fixed price risk via swapping out the fixed price risk for a floating price position (New York Mercantile Exchange or index based).

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     For the three months ended March 31, 2003,2004, the gains or losses representing the ineffective portion of the Company’s fair value hedges were not significant.material. All components of each derivative’s gain or loss are included in

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the assessment of hedge effectiveness, unless otherwise noted. The Company did not have any firm commitments that no longer qualified as fair value hedge items and therefore, did not recognize an associated gain or loss.

     Interest rate fair value hedgehedges— In October 2001, the Company entered into an interest rate swap to convert the fixed interest rate$250 million of $250.0 million offixed-rate debt securities that were issued in August 2000 to floating rate debt. The interest rate fair value hedge is at a floating rate based on a six-month London Interbank Offered Rate (“LIBOR”), which is re-priced semiannually through 2005. In August 2003, the Company entered into two additional interest rate swaps to convert $100 million of fixed-rate debt securities issued on August 16, 2000 to floating rate debt. These interest rate fair value hedges are also at a floating rate based on six-month LIBOR, which is re-priced semiannually through 2030. The swap meetsswaps meet conditions which permit the assumption of no ineffectiveness, as defined by SFAS No. 133. As such, for the life of the swapswaps no ineffectiveness will be recognized. As of March 31, 2003,2004, the fair value of the interest rate swap of $12.8swaps was a $17 million wasasset, which is included in the Consolidated Balance Sheets as Unrealized Gainsgains or Losseslosses on Tradingmark-to-market and Hedging Transactionshedging transactions with an offset to the underlying debt included in Long Term Debt.term debt.

     Commodity Derivatives — Trading and Marketing— The trading and marketing of energy related products and services exposes the Company to the fluctuations in the market values of traded instruments. The Company manages its traded instrumenttrading and marketing portfolio with strict policies which limit exposure to market risk and require daily reporting to management of potential financial exposure. These policies include statistical risk tolerance limits using historical price movements to calculate a daily earnings at risk measurement.

4.5. Asset Retirement Obligations

SFAS No. 143,“Accounting for Asset Retirement Obligations.”In June 2001, the FASB issued SFAS No. 143 which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. The Company’s asset retirement obligations relate primarily to the retirement of certain gathering pipelines and processing facilities, obligations related to right-of-way agreements and contractual leases for land use.

     SFAS No. 143 requires thatThe following table summarizes changes in the fair value of a liability for an asset retirement obligation be recognizedfor the quarters ended March 31, 2004 and 2003, respectively.

6. Goodwill and Other Intangibles

     The changes in the period in which it is incurred, if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability increases due to the passage of time based on the time value of money until the obligation is settled.

     The Company identified certain assets as having an indeterminate life in accordance with SFAS No. 143, which do not trigger a requirement to establish a fair value for future retirement obligations associated with such assets. These assets include certain pipelines, processing plants and distribution facilities. A liability for these asset retirement obligations will be recorded if and when a future retirement obligation is identified.

     SFAS No. 143 was effective for fiscal years beginning after June 15, 2002, and was adopted by the Company on January 1, 2003. At January 1, 2003, the implementation of SFAS No. 143 resulted in a net increase in total assets of $25.1 million, consisting of an increase in net property, plant and equipment. Liabilities increased by $42.5 million, which represents the establishment of an asset retirement obligation liability. A cumulative-effect of a change in accounting principle adjustment of $17.4 million was recorded in the first quarter of 2003, as a reduction in earnings.

     The following table shows the asset retirement obligation liability as though SFAS No. 143 had been in effect for the prior three years.

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     The asset retirement obligation is adjusted each quarter for any liabilities incurred or settled during the period, accretion expense and any revisions made to the estimated cash flows. The reconciliation of the asset retirement obligationgoodwill for the three months ended March 31, 2004 are as follows:

     There were no impairments of goodwill for the quarter ended March 31, 2004.

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     The gross carrying amount and accumulated amortization for commodity sales and purchases contracts are as follows:

     During each of the quarters ended March 31, 2004 and 2003, the Company recorded amortization expense associated with commodity sales and purchases contracts of $3 million. The average remaining amortization period for these contracts is shown in6.8 years. Estimated amortization for these contracts for the following table.

5.7. Financing

     Credit Facility with Financial Institutions —On March 28, 2003,26, 2004, the Company entered into a new credit facility (the “New Facility”“Facility”). The New Facility replaces the credit facility that matured on March 28, 2003.26, 2004. The New Facility is used to support the Company’s commercial paper program and for working capital and other general corporate purposes. The New Facility matures on March 26, 2004, however;25, 2005; however, any outstanding loansborrowings under the New Facility at maturity may, at the Company’s option, be converted to a one-year term loan. The New Facility is a $350.0$250 million revolving credit facility, all of which $100.0 million can be used for letters of credit. The New Facility requires the Company to maintain at all times a debt to total capitalization ratio of less than or equal to 53%; and maintain at the end of each fiscal quarter an interest coverage ratio (defined to be the ratio of adjusted EBITDA, as defined by the Facility, for the four most recent quarters to interest expense for the same period) of at least 2.5 to 1 (see Note 8 for definition of EBITDA);(adjusted EBITDA, is defined by the Facility, to be earnings before interest, taxes and contains certain restrictions applicable to dividendsdepreciation and amortization and other payments to the Company’s members.adjustments). The New Facility bears interest at a rate equal to, at the Company’s option and based on the Company’s current debt rating, either (1) LIBOR plus 1.25%1.125% per year or (2) the higher of (a) the JP Morgan Chase Bank prime rate plus 0.125% per year and (b) the Federal Funds rate plus 0.50%0.625% per year. At March 31, 2003,2004, there were no borrowings or letters of credit drawn against the New Facility.

     On March 28, 2003, the Company also entered into a $100.0$100 million funded short-term loan with Bank One, NAa bank (the “Short-Term Loan”). The Short-Term Loan iswas used for working capital and other general corporate purposes. The Short-Term Loan matures oncontained an original maturity of September 30, 2003, but was repaid by August 2003 with funds generated from asset sales and mayoperations.

     On November 3, 2003, the Company executed a $32 million irrevocable standby letter of credit expiring on May 15, 2004 to be prepaid at any time. The Short-Term Loan hasused to secure transaction exposure with a counterparty. As of March 31, 2004, this letter of credit was still in effect.

Preferred Financing –Upon adoption of SFAS 150 on July 1, 2003, the same financial covenants as the New Facility. The Short-Term Loan bearsCompany reclassified its preferred members’ interest, at a rate equalwhich are mandatorily redeemable securities, of $200 million from mezzanine equity to at the Company’s option, either (1) LIBOR plus 1.35% per year or (2) the higher of (a) the Bank One, NA prime rate and (b) the Federal Funds rate plus 0.50% per year. The Company’s management believes our cash flows and the New Facility will be adequate to meet our liquidity needslong term debt. During 2003, subsequent to the maturity of the Short-Term Loan. As such,reclassification, the Company does not plan to refinanceredeemed the Short-Term Loan when it matures.remaining $200 million. Beginning on July 1, 2003, accrued or paid distributions previously classified as dividends on the preferred members’ interest are prospectively classified as interest expense in the Consolidated Statements of Operations.

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8. Commitments and Contingent Liabilities

     Litigation— The midstream natural gas industry has seen a number of class action lawsuits involving royalty disputes, mismeasurement and mispayment allegations. Although the industry has seen these types of cases before, they were typically brought by a single plaintiff or small group of plaintiffs. A number of these cases are now being brought as class actions. The Company and its subsidiaries are currently named as defendants in some of these cases. Management believes the Company and its subsidiaries have meritorious defenses to these cases, and therefore will continue to defend them vigorously. However, these class actions can be costly and time consuming to defend. Management believes that, the final disposition ofbased on currently known information, these proceedings will not have a material adverse effect on the consolidated results of operations, or financial position or cash flows of the Company.

     On September 18, 2001, General Gas Company, LP (“GGC”) filed a lawsuit against the Company claiming damages for breach of contract under a Gas Purchase and Processing Agreement.Insurance— The Company then filed counterclaims against GGCcarries insurance coverage, with an affiliate of Duke Energy, that management believes is consistent with companies engaged in similar commercial operations with similar type properties. The Company’s insurance coverage includes (1) commercial general public liability insurance for liabilities arising to third parties for bodily injury and property damage resulting from our operations; (2) workers’ compensation liability coverage to required statutory limits; (3) automobile liability insurance for all owned, non-owned and hired vehicles covering liabilities to third parties for bodily injury and property damage, and (4) property insurance covering the replacement value of all real and personal property damage, excluding electric transmission and distribution lines, including damages arising from boiler and machinery breakdowns, earthquake, flood damage and business interruption/extra expense. All coverages are subject to certain deductibles, terms and conditions common for companies with similar types of operations.

     The Company also maintains excess liability insurance coverage above the established primary limits for commercial general liability and automobile liability insurance. Limits, terms, conditions and deductibles are comparable to those carried by other energy companies of similar size. The cost of the Company’s general insurance coverages continued to fluctuate over the past year reflecting the changing conditions of the insurance markets.

Environmental- The operation of pipelines, plants and other facilities for gathering, transporting, processing, treating, or storing natural gas, NGLs and other products is subject to stringent and complex laws and regulations pertaining to health, safety and the environment. As an owner or operator of these facilities, we must comply with United States and Canadian laws and regulations at the federal, state and local levels that relate to air and water quality, hazardous and solid waste management and disposal, and other environmental matters. The cost of planning, designing, constructing and operating pipelines, plants, and other facilities must incorporate compliance with environmental laws and regulations and safety standards. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and potentially criminal enforcement measures, including citizen suits, which can include the assessment of monetary penalties, the imposition of remedial requirements, the issuance of injunctions or restrictions on related contract issues.operation. Management believes that, based on currently known information, compliance with these laws and regulations will not have a material adverse effect on the consolidated results of operations, financial position or cash flows of the Company.

Severance Program— On January 28,October 30, 2003, the Company entered intocommunicated a Compromisecompany-wide voluntary and Settlement Agreement whereby the Company agreedinvoluntary severance program to acquire GGC for $16.5 million, payable in equal installments over three years, beginning on the settlement date. The Compromise and Settlement Agreement

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settles all claims between the parties. As a resultits employees to reduce approximately 6% of the CompromiseCompany’s workforce. The plan was completed on December 8, 2003 and Settlement Agreement,includes the Company capitalized $6.2reduction of 160 employees over the period of December 2003 to June 2004. The severance liability that was recorded in the fourth quarter of 2003 was $6 million associated with acquired gas supply contracts, recorded a charge to natural gas purchasesat December 31, 2003. Approximately $4 million of $8.1 million and a $0.9 million charge to other current liabilitiesthe accrued severance payouts were paid in the first quarter of 2003.

7. Stock-Based Compensation

     The2004. Included in General and administrative expense in the Consolidated Statement of Operations during the first quarter of 2004, the Company accounts for its stock-based compensation arrangements under the intrinsic value recognitionexpensed an additional $1 million related to this severance program, and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and the FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25).” Since the exercise price for all stock options granted under those plans was equal to the market value of the underlying common stock on the date of grant, no compensation costany remaining expense, which is not considered significant, will be recognized in the accompanying Consolidated Statementssecond quarter of Operations. Restricted stock grants, phantom stock awards and Company performance awards are recorded over2004, the required vesting period as compensation cost, based on the market value on the date of the grant. The following disclosures reflect the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.”remaining future service period.

     The following table shows what earnings available for members’ interest would have been if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to all stock-based compensation awards.

9. Business Segments

     The Company operates in two principal business segments as follows:segments:

     (1) natural gas gathering, processing, transportation and storage, from which the Company generates revenues primarily by providing services such as compression, treatment,gathering, treating, processing, transportation of residue gas, storage and trading and marketing (the “Natural Gas Segment”), and

     (2) NGLs fractionation, transportation, marketing and trading, from which the Company generates revenues from transportation fees, market center fractionation and storage, and (2) NGL fractionation, transportation,the marketing and trading.trading of NGLs (the “NGLs Segment”).

     Intersegment activity is primarily related to the sale of NGLs from the Natural Gas Segment to the NGLs Segment at market based transfer prices.

     These segments are monitored separately by management for performance against its internal forecast and are consistent with the Company’s internal financial reporting. These segments have been identified based on the differing products and services, regulatory environment and the expertise required for these operations. Margin earnings before interest, taxes, depreciation and amortization (“EBITDA”) and earnings before interest and taxes (“EBIT”) are theis a performance measures usedmeasure utilized by management to monitor the business of each segment. The accounting policies for the segments are the same as those described in Note 2. Foreign operations are not material and are therefore not separately identified.

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     The following table sets forth the Company’s segment information.

     Three months ended March 31, 2004 (millions):