UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

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

For the transition period from                      to                     .

TEPPCO Partners, L.P.

Delaware (State of Other Jurisdiction of		76-0291058 (I.R.S. Employer Identification Number)
Incorporation or Organization)

(713) 381-3636
(Registrant’s telephone number, including area code)

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 þ      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ      Accelerated Filer o      Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o      No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Limited Partner Units outstanding as of August 3, 2007: 89,867,229

 

 

TEPPCO PARTNERS, L.P.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
		Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)			1
Statements of Consolidated Income and Comprehensive Income For the Three Months and Six Months Ended June 30, 2007 and 2006 (unaudited)			2
Statements of Consolidated Cash Flows For the Six Months Ended June 30, 2007 and 2006 (unaudited)			4
Statement of Consolidated Partners’ Capital For the Six Months Ended June 30, 2007 (unaudited)			5
Notes to the Consolidated Financial Statements (unaudited)			6
Note 1. Partnership Organization			6
Note 2. General Accounting Policies and Related Matters			7
Note 3. Accounting for Unit-Based Awards			10
Note 4. Employee Benefit Plans			13
Note 5. Financial Instruments – Interest Rate Swaps			14
Note 6. Inventories			15
Note 7. Property, Plant and Equipment			16
Note 8. Investments in Unconsolidated Affiliates			16
Note 9. Dispositions and Discontinued Operations			20
Note 10. Intangible Assets and Goodwill			22
Note 11. Debt Obligations			24
Note 12. Partners’ Capital and Distributions			27
Note 13. Business Segments			30
Note 14. Related Party Transactions			34
Note 15. Earnings per Unit			38
Note 16. Commitments and Contingencies			39
Note 17. Supplemental Cash Flow Information			45
Note 18. Supplemental Condensed Consolidating Financial Information			45
Note 19. Subsequent Events			50
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			51
Cautionary Note Regarding Forward-Looking Statements			52
Item 3. Quantitative and Qualitative Disclosures About Market Risk			74
Item 4. Controls and Procedures			76
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			77
Item 1A. Risk Factors			77
Item 5. Other Information			79
Item 6. Exhibits			79
Signatures			83
Fourth Amendment to Amended and Restated Credit Agreement
Form of Phantom Unit Grant for Directors
Company Agreement
Assignment, Assumption and Amendment No.2 to Guaranty Agreement
Statement of Computation of Ratio of Earnings to Fixed Charges
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TEPPCO PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)

		June 30,				December 31,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	22			$	70
Accounts receivable, trade (net of allowance for doubtful accounts of $110 and $100)			927,575				852,816
Accounts receivable, related parties			1,974				11,788
Inventories			93,379				72,193
Other			37,533				29,843
Total current assets			1,060,483				966,710
Property, plant and equipment, at cost (net of accumulated depreciation and amortization of $542,676 and $509,889)			1,703,597				1,642,095
Equity investments			1,059,921				1,039,710
Intangible assets			176,090				185,410
Goodwill			15,506				15,506
Other assets			92,399				72,661
Total assets		$	4,107,996			$	3,922,092
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable and accrued liabilities		$	958,121			$	855,306
Accounts payable, related parties			67,027				34,461
Accrued interest			37,164				35,523
Other accrued taxes			16,576				14,482
Other			27,478				36,776
Total current liabilities			1,106,366				976,548
Long-term debt:
Senior notes			1,104,459				1,113,287
Junior subordinated notes			299,521				—
Other long-term debt			200,000				490,000
Total long-term debt			1,603,980				1,603,287
Deferred tax liability			—				652
Other liabilities and deferred credits			35,818				19,461
Other liabilities, related party			—				1,814
Commitments and contingencies
Partners’ capital:
Limited partners’ interests:
Limited partner units (89,804,829 and 89,804,829 units outstanding)			1,438,887				1,405,559
Restricted limited partner units (62,400 and 0 units outstanding)			63				—
General partner’s interest			(78,869	)			(85,655	)
Accumulated other comprehensive income			1,751				426
Total partners’ capital			1,361,832				1,320,330
Total liabilities and partners’ capital		$	4,107,996			$	3,922,092

See Notes to Unaudited Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Operating revenues:
Sales of petroleum products		$	1,933,104			$	2,287,266			$	3,783,232			$	4,683,612
Transportation – Refined products			41,718				39,443				78,853				71,242
Transportation – LPGs			16,747				13,354				52,800				42,775
Transportation – Crude oil			9,580				10,544				20,370				19,467
Transportation – NGLs			11,098				10,738				22,039				21,391
Gathering – Natural gas			15,452				41,459				30,860				82,834
Other			21,737				22,248				39,711				40,100
Total operating revenues			2,049,436				2,425,052				4,027,865				4,961,421
Costs and expenses:
Purchases of petroleum products			1,900,944				2,254,756				3,714,938				4,625,796
Operating expense			43,917				55,275				89,083				101,778
Operating fuel and power			14,829				12,987				30,103				27,284
General and administrative			8,164				9,158				16,762				18,359
Depreciation and amortization			25,880				28,676				51,249				57,433
Taxes – other than income taxes			4,975				6,048				10,218				11,359
Gains on sales of assets			(2	)			(18	)			(18,651	)			(1,396	)
Total costs and expenses			1,998,707				2,366,882				3,893,702				4,840,613
Operating income			50,729				58,170				134,163				120,808
Other income (expense):
Interest expense – net			(22,785	)			(19,198	)			(44,996	)			(40,341	)
Gain on sale of ownership interest in Mont Belvieu Storage Partners, L.P.			(189	)			—				59,648				—
Equity earnings			19,234				2,674				35,797				3,663
Interest income			445				184				787				656
Other income – net			535				270				779				697
Income before provision for income taxes			47,969				42,100				186,178				85,483
Provision for income taxes			209				514				227				514
Income from continuing operations			47,760				41,586				185,951				84,969
Income (loss) from discontinued operations			—				(110	)			—				1,497
Gain on sale of discontinued operations			—				(12	)			—				17,872
Discontinued operations			—				(122	)			—				19,369
Net income		$	47,760			$	41,464			$	185,951			$	104,338
Changes in fair values of interest rate cash flow hedges			1,295				—				1,512				—
Changes in fair values of crude oil cash flow hedges			(513	)			(509	)			(153	)			(273	)
Comprehensive income		$	48,542			$	40,955			$	187,310			$	104,065

TEPPCO PARTNERS, L.P.

STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME — (Continued)
(Unaudited)
(Dollars in thousands, except per Unit amounts)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Net Income Allocation:
Limited Partner Unitholders:
Income from continuing operations		$	39,926			$	29,360			$	155,450			$	59,988
Income (loss) from discontinued operations			—				(86	)			—				13,674
Total Limited Partner Unitholders net income allocation			39,926				29,274				155,450				73,662
General Partner:
Income from continuing operations			7,834				12,226				30,501				24,981
Income (loss) from discontinued operations			—				(36	)			—				5,695
Total General Partner net income allocation			7,834				12,190				30,501				30,676
Total net income allocated		$	47,760			$	41,464			$	185,951			$	104,338
Basic and diluted net income per Limited Partner Unit:
Continuing operations		$	0.44			$	0.42			$	1.73			$	0.85
Discontinued operations			—				—				—				0.20
Basic and diluted net income per Limited Partner Unit		$	0.44			$	0.42			$	1.73			$	1.05
Weighted average Limited Partner Units outstanding			89,832				69,964				89,819				69,964

See Notes to Unaudited Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

STATEMENTS OF CONSOLIDATED CASH FLOWS

		For the Six Months Ended
		June 30,
		2007				2006
Operating activities:
Net income		$	185,951			$	104,338
Adjustments to reconcile net income to cash provided by continuing operating activities:
Income from discontinued operations			—				(19,369	)
Deferred income taxes			(654	)			514
Depreciation and amortization			51,249				57,433
Amortization of deferred compensation			202				—
Earnings in equity investments			(35,797	)			(3,663	)
Distributions from equity investments			68,159				16,297
Gains on sales of assets			(18,651	)			(1,396	)
Gain on sale of ownership interest in Mont Belvieu Storage Partners, L.P.			(59,648	)			—
Non-cash portion of interest expense			591				840
Net effect of changes in operating accounts			7,731				(13,460	)
Net cash provided by continuing operating activities			199,133				141,534
Net cash provided by discontinued operations			—				1,521
Net cash provided by operating activities			199,133				143,055
Investing activities:
Proceeds from sales of assets			26,538				39,750
Proceeds from sale of ownership interest			137,606				—
Investment in Mont Belvieu Storage Partners, L.P.			—				(1,720	)
Investment in Centennial Pipeline LLC			(11,081	)			(2,500	)
Investment in Jonah Gas Gathering Company			(86,153	)			—
Capitalized costs incurred to develop identifiable intangible assets			(2,500	)			—
Cash paid for linefill on assets owned			(15,095	)			(1,371	)
Capital expenditures			(109,876	)			(82,463	)
Net cash used in investing activities			(60,561	)			(48,304	)
Financing activities:
Proceeds from revolving credit facility			405,850				305,550
Repayments on revolving credit facility			(695,850	)			(266,450	)
Issuance of Junior Subordinated Notes			299,517				—
Debt issuance costs			(3,750	)			—
Proceeds from termination of treasury locks			1,589				—
Distributions paid			(145,976	)			(133,785	)
Net cash used in financing activities			(138,620	)			(94,685	)
Net change in cash and cash equivalents			(48	)			66
Cash and cash equivalents, January 1			70				119
Cash and cash equivalents, June 30		$	22			$	185

See Notes to Unaudited Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

STATEMENT OF CONSOLIDATED PARTNERS’ CAPITAL

(Dollars in thousands, except Unit amounts)

		Outstanding												Accumulated
		Limited				General				Limited				Other
		Partner				Partner’s				Partners’				Comprehensive
		Units				Interest				Interests				Income				Total
Balance, December 31, 2006			89,804,829			$	(85,655	)		$	1,405,559			$	426			$	1,320,330
Net income allocation			—				30,501				155,450				—				185,951
Issuance of restricted Units under 2006 LTIP			62,400				—				—				—				—
Cash distributions			—				(23,841	)			(122,135	)			—				(145,976	)
Noncash contribution			—				126				—				—				126
Amortization of equity awards			—				—				76				—				76
Changes in fair values of crude oil cash flow hedges			—				—				—				(153	)			(153	)
Changes in fair values of interest rate cash flow hedges			—				—				—				1,512				1,512
Pension benefit SFAS No. 158 adjustment			—				—				—				(34	)			(34	)
Balance, June 30, 2007			89,867,229			$	(78,869	)		$	1,438,950			$	1,751			$	1,361,832

See Notes to Unaudited Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. PARTNERSHIP ORGANIZATION

Partnership Organization

          TEPPCO Partners, L.P. (the “Partnership”), is a publicly traded Delaware limited partnership and our limited partner units are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “TPP”. As used in this Report, “we,” “us,” “our,” the “Partnership” and “TEPPCO” mean TEPPCO Partners, L.P. and, where the context requires, include our subsidiaries. At formation in March 1990, we completed an initial public offering of 26,500,000 units representing limited partner interests (“Limited Partner Units”) at $10.00 per Limited Partner Unit (“Unit”).

          Through June 29, 2007, we operated through TE Products Pipeline Company, Limited Partnership, TCTM, L.P. (“TCTM”) and TEPPCO Midstream Companies, L.P. On June 30, 2007, TE Products Pipeline Company, Limited Partnership and TEPPCO Midstream Companies, L.P. converted into Texas limited partnerships and immediately thereafter merged into newly-formed Texas limited liability companies that had no business operations prior to the merger. The resulting limited liability companies are called TE Products Pipeline Company, LLC (“TE Products”) and TEPPCO Midstream Companies, LLC (“TEPPCO Midstream”). As of June 30, 2007, we operate through TE Products, TCTM and TEPPCO Midstream. Collectively, TE Products, TCTM and TEPPCO Midstream are referred to as the “Operating Companies.” Texas Eastern Products Pipeline Company, LLC (the “General Partner”), a Delaware limited liability company, serves as our general partner and owns a 2% general partner interest in us. We hold a 99.999% limited partner interest in TCTM and TEPPCO GP, Inc. (“TEPPCO GP”), a wholly owned subsidiary, holds a 0.001% general partner interest in TCTM. We and TEPPCO GP hold 99.999% and 0.001% membership interests, respectively, in TE Products and TEPPCO Midstream.

          Through May 6, 2007, our General Partner was owned by DFI GP Holdings L.P. (“DFI”), an affiliate of EPCO, Inc. (“EPCO”), a privately held company controlled by Dan L. Duncan. On May 7, 2007, DFI sold all of the membership interests in our General Partner to Enterprise GP Holdings L.P. (“Enterprise GP Holdings”), a publicly traded partnership, also controlled indirectly by EPCO. Mr. Duncan and certain of his affiliates, including EPCO, Enterprise GP Holdings and Dan Duncan LLC, a privately held company controlled by him, control us, our General Partner and Enterprise Products Partners L.P. (“Enterprise”) and its affiliates, including Duncan Energy Partners L.P. As of May 7, 2007, Enterprise GP Holdings owns and controls the 2% general partner interest in us and has the right to receive the incentive distribution rights associated with the general partner interest. Enterprise GP Holdings, DFI and other entities controlled by Mr. Duncan own 16,691,550 of our Units. Under an amended and restated administrative services agreement (“ASA”), EPCO performs all management, administrative and operating functions required for us, and we reimburse EPCO for all direct and indirect expenses that have been incurred in managing us.

Basis of Presentation

          The accompanying unaudited consolidated financial statements reflect all adjustments that are, in the opinion of our management, of a normal and recurring nature and necessary for a fair statement of our financial position as of June 30, 2007, and the results of our operations and cash flows for the periods presented. The results of operations for the three months and six months ended June 30, 2007, are not necessarily indicative of results of our operations for the full year 2007. You should read these interim financial statements in conjunction with our consolidated financial statements and notes thereto presented in the TEPPCO Partners, L.P. Annual Report on Form 10-K for the year ended December 31, 2006.

          Except per Unit amounts, or as noted within the context of each footnote disclosure, the dollar amounts presented in the tabular data within these footnote disclosures are stated in thousands of dollars.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

NOTE 2. GENERAL ACCOUNTING POLICIES AND RELATED MATTERS

Business Segments

          We operate and report in three business segments: transportation, marketing and storage of refined products, liquefied petroleum gases (“LPGs”) and petrochemicals (“Downstream Segment”); gathering, transportation, marketing and storage of crude oil and distribution of lubrication oils and specialty chemicals (“Upstream Segment”); and gathering of natural gas, fractionation of natural gas liquids (“NGLs”) and transportation of NGLs (“Midstream Segment”). Our reportable segments offer different products and services and are managed separately because each requires different business strategies.

          Our interstate transportation operations, including rates charged to customers, are subject to regulations prescribed by the Federal Energy Regulatory Commission (“FERC”). We refer to refined products, LPGs, petrochemicals, crude oil, NGLs and natural gas in this Report, collectively, as “petroleum products” or “products.”

Estimates

          The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Although we believe these estimates are reasonable, actual results could differ from those estimates.

Income Taxes

          Provision for income taxes is applicable to our state tax obligations under the Texas Margin Tax enacted in May 2006. For the six months ended June 30, 2007, we recorded a $0.9 million current tax liability and a $0.7 million reduction to deferred tax liability. The offsetting net charge consisting of a reduction to deferred tax expense of $0.7 million and an increase in current income tax expense of $0.9 million is shown on our statements of consolidated income for the six months ended June 30, 2007 as provision for income taxes.

Net Income Per Unit

          Basic net income per Unit is computed by dividing net income or loss, after deduction of the General Partner’s interest, by the weighted average number of distribution-bearing Units outstanding during a period. The General Partner’s percentage interest in our net income is based on its percentage of cash distributions from Available Cash for each period (see Note 12). Diluted net income per Unit is computed by dividing net income or loss, after deduction of the General Partner’s interest, by the sum of (i) the weighted average number of distribution-bearing Units outstanding during a period (as used in determining basic earnings per Unit); and (ii) the number of incremental Units resulting from the assumed exercise of dilutive Unit options outstanding during a period (the “incremental option units”) (see Note 15).

          In a period of net operating losses, restricted Units and incremental option units are excluded from the calculation of diluted earnings per Unit due to their antidilutive effect. The dilutive incremental option units are calculated using the treasury stock method, which assumes that proceeds from the exercise of all in-the-money options at the end of each period are used to repurchase Units at an average market value during the period. The amount of Units remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

          The General Partner’s percentage interest in our net income increases as cash distributions paid per Unit increase above specified levels, in accordance with our Partnership Agreement. On December 8, 2006, our Partnership Agreement was amended and restated, and our General partner’s maximum percentage interest in our quarterly distributions was reduced from 50% to 25% in exchange for 14.1 million Units. References in this Report to our “Partnership Agreement” are to our partnership agreement in effect from time to time.

Recent Accounting Developments

          In June 2006, the Emerging Issues Task Force (“EITF”) reached consensus in EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). The accounting guidance permits companies to elect to present on either a gross or net basis sales and other taxes that are imposed on and concurrent with individual revenue-producing transactions between a seller and a customer. The gross basis includes the taxes in revenues and costs; the net basis excludes the taxes from revenues. The accounting guidance does not apply to tax systems that are based on gross receipts or total revenues. EITF 06-3 requires companies to disclose their policy for presenting the taxes and disclose any amounts presented on a gross basis if those amounts are significant. The guidance in EITF 06-3 is effective January 1, 2007. As a matter of policy, we report such taxes on a net basis. The adoption of EITF 06-3 did not have a material effect on our financial position, results of operations or cash flows.

          In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with FIN 48 is a two-step process. First, an enterprise must determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority, including resolution of any related appeals or litigation processes, based solely on the technical merits of the position. Second, a tax position that meets the more likely than not recognition threshold is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, and we were required to adopt FIN 48 as of January 1, 2007. All of our tax positions have met the more likely than not threshold for recognition and no measurement adjustments were made to the financial statements as a result of the adoption of FIN 48. The adoption of FIN 48 did not have a material effect on our financial position, results of operations or cash flows.

          In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. SFAS 157 emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements and the effect of certain of the measurements on earnings (or changes in net assets) for the period. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and we are required to adopt SFAS 157 as of January 1, 2008. We believe that the adoption of SFAS 157 will not have a material effect on our financial position, results of operations or cash flows.

          In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115. SFAS 159 permits entities to choose

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in net income. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the company elects for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We believe the adoption of SFAS 159 will not have a material effect on our financial position, results of operations or cash flows.

Revenue Recognition

          Our Downstream Segment revenues are earned from transportation, marketing and storage of refined products and LPGs, intrastate transportation of petrochemicals, sale of product inventory and other ancillary services. Transportation revenues are recognized as products are delivered to customers. Storage revenues are recognized upon receipt of products into storage and upon performance of storage services. Terminaling revenues are recognized as products are out-loaded. Revenues from the sale of product inventory are recognized when the products are sold. Our refined products marketing activities generate revenues by purchasing refined products from our throughput partners and establishing a margin by selling refined products for physical delivery through spot sales at the Aberdeen truck rack to independent wholesalers and retailers of refined products. These purchases and sales are generally contracted to occur on the same day.

          Our Upstream Segment revenues are earned from gathering, transporting, marketing and storing crude oil, and distributing lubrication oils and specialty chemicals principally in Oklahoma, Texas, New Mexico and the Rocky Mountain region. Revenues are also generated from trade documentation and pumpover services, primarily at Cushing, Oklahoma, and Midland, Texas. Revenues are accrued at the time title to the product sold transfers to the purchaser, which typically occurs upon receipt of the product by the purchaser, and purchases are accrued at the time title to the product purchased transfers to our crude oil marketing company, TEPPCO Crude Oil, LLC (“TCO”), which typically occurs upon our receipt of the product. Revenues related to trade documentation and pumpover fees are recognized as services are completed.

          Except for crude oil purchased from time to time as inventory required for operations, our policy is to purchase only crude oil for which we have a market to sell and to structure sales contracts so that crude oil price fluctuations do not materially affect the margin received. As we purchase crude oil, we establish a margin by selling crude oil for physical delivery to third party users or by entering into a future delivery obligation. Through these transactions, we seek to maintain a position that is balanced between crude oil purchases and sales and future delivery obligations. However, commodity price risks cannot be completely hedged.

          On April 1, 2006, we adopted EITF 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty, which resulted in crude oil inventory purchases and sales under buy/sell transactions, which were previously recorded as gross purchases and sales, to be treated as inventory exchanges in our statements of consolidated income. EITF 04-13 reduced gross revenues and purchases, but did not have a material effect on our financial position, results of operations or cash flows. Under the consensus reached in EITF 04-13, buy/sell transactions are reported as non-monetary exchanges and consequently not presented on a gross basis in our statements of consolidated income. Implementation of EITF 04-13 reduced revenues and purchases of petroleum products on our statements of consolidated income by approximately $699.7 million and $1,084.7 million for the three months and six months ended June 30, 2007, respectively, and $313.7 million for the three months and six months ended June 30, 2006. The revenues and purchases of petroleum products associated with buy/sell transactions that are reported on a gross basis in our statement of consolidated income in the six months ended June 30, 2006 are approximately $275.4 million. Under the provisions of the consensus, retroactive restatement of buy/sell transactions reported in prior periods was not permitted.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

          Our Midstream Segment revenues are earned from the gathering of natural gas, transportation of NGLs and fractionation of NGLs. Gathering revenues are recognized as natural gas is received from the customer. Transportation revenues are recognized as NGLs are delivered. Fractionation revenues are recognized ratably over the contract year as products are delivered. We generally do not take title to the natural gas gathered, NGLs transported or NGLs fractionated, with the exception of inventory imbalances. Therefore, the results of our Midstream Segment are not directly affected by changes in the prices of natural gas or NGLs.

NOTE 3. ACCOUNTING FOR UNIT-BASED AWARDS

          We account for unit-based awards under the EPCO, Inc. 2006 TPP Long-Term Incentive Plan (“2006 LTIP”) using SFAS No. 123(R), Share-Based Payment. SFAS 123(R) requires us to recognize compensation expense related to unit-based awards based on the fair value of the awards at grant date. The fair value of a unit-based award is estimated using the Black-Scholes option pricing model. Under SFAS 123(R), the fair value of an award is amortized to earnings on a straight-line basis over the requisite service or vesting period. We account for awards under our 1999 Phantom Unit Retention Plan, our 2000 Long Term Incentive Plan and our 2005 Phantom Unit Plan as liability awards under the provisions of SFAS 123(R). For a discussion of the EPCO, Inc. TPP Employee Unit Purchase Plan, see Note 12.

1999 Phantom Unit Retention Plan

          Effective January 1, 1999, the General Partner adopted the Texas Eastern Products Pipeline Company, LLC 1999 Phantom Unit Retention Plan (“1999 Plan”) to provide key employees with incentive awards whereby a participant is granted phantom units. These phantom units are automatically redeemed for cash based on the vested portion of the fair market value of the phantom units at stated redemption dates. The fair market value of each phantom unit is equal to the closing price of a Unit as reported on the NYSE on the redemption date. Each participant is also entitled to quarterly cash distributions equal to the product of the number of phantom units outstanding for the participant and the amount of the cash distribution that we paid per Unit to our unitholders.

          We accrue compensation expense annually based upon the terms of the 1999 Plan. A total of 31,600 phantom units remain outstanding at June 30, 2007, of which 13,000 vest April 11, 2008, 13,000 vest April 11, 2009 and 5,600 vest January 1, 2010. Compensation expense related to the 1999 Plan was $0.3 million and $0.2 million for the three months ended June 30, 2007 and 2006, respectively, and $0.8 million and $0.2 million for the six months ended June 30, 2007 and 2006, respectively. At June 30, 2007 and December 31, 2006, we had accrued liability balances of $1.0 million and $0.8 million, respectively, for compensation related to the 1999 Plan.

2000 Long Term Incentive Plan

          Effective January 1, 2000, our General Partner established the Texas Eastern Products Pipeline Company, LLC 2000 Long Term Incentive Plan (“2000 LTIP”) to provide key employees incentives to achieve improvements in our financial performance. Generally, upon the close of a three-year performance period, if the participant is then still an employee of EPCO, the participant will receive a cash payment calculated in accordance with the terms of the 2000 LTIP, which are based on: (i) the applicable performance percentage specified in the award, (ii) the number of phantom units granted under the award and (iii) the average of the closing prices of a Unit over the ten consecutive trading days immediately preceding the last day of the performance period.

          In addition to the payment described above, during the performance period, the General Partner will pay to the participant the amount of cash distributions that we would have paid to our unitholders had the participant been the owner of the number of Units equal to the number of phantom units granted to the participant under this award.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

We accrue compensation expense annually based upon the terms of the 2000 LTIP. At June 30, 2007, phantom units outstanding under the 2000 LTIP were 11,300 and 8,400 for awards granted for the years ended December 31, 2006 and 2005, respectively. Compensation expense related to the 2000 LTIP was $0.1 million for each of the three months ended June 30, 2007 and 2006, and $0.3 million for each of the six months ended June 30, 2007 and 2006. At June 30, 2007 and December 31, 2006, we had accrued liability balances of $0.9 million and $0.6 million, respectively, for compensation related to the 2000 LTIP.

2005 Phantom Unit Plan

          Effective January 1, 2005, our General Partner adopted the Texas Eastern Products Pipeline Company, LLC 2005 Phantom Unit Plan (“2005 Phantom Unit Plan”) to provide key employees incentives to achieve improvements in our financial performance. Generally, upon the close of a three-year performance period, if the participant is then still an employee of EPCO, the participant will receive a cash payment calculated in accordance with the terms of the 2005 Phantom Unit Plan, which are based on: (i) the grantee’s vested percentage, (ii) the number of phantom units granted under the award and (iii) the average of the closing prices of a Unit over the ten consecutive trading days immediately preceding the last day of the performance period. At June 30, 2007, phantom units outstanding for awards granted for the years ended December 31, 2006 and 2005, were 38,200 and 39,000, respectively.

          In addition to the payment described above, during the performance period, the General Partner will pay to the participant the amount of cash distributions that we would have paid to our unitholders had the participant been the owner of the number of Units equal to the number of phantom units granted to the participant under this award. We accrue compensation expense annually based upon the terms of the 2005 Phantom Unit Plan. Compensation expense related to the 2005 Phantom Unit Plan was $0.3 million and $0.1 million for the three months ended June 30, 2007 and 2006, respectively, and $0.5 million for each of the six months ended June 30, 2007 and 2006. At June 30, 2007 and December 31, 2006, we had accrued liability balances of $2.2 million and $1.6 million, respectively, for compensation related to the 2005 Phantom Unit Plan.

EPCO, Inc. 2006 TPP Long-Term Incentive Plan

          At a special meeting of our unitholders on December 8, 2006, our unitholders approved the 2006 LTIP, which provides for awards of our Units and other rights to our non-employee directors and to employees of EPCO and its affiliates providing services to us. Awards under the 2006 LTIP may be granted in the form of restricted units, phantom units, unit options, unit appreciation rights and distribution equivalent rights. The exercise price of unit options or unit appreciation rights awarded to participants is determined by the Audit, Conflicts and Governance Committee of the board of directors of our General Partner (“ACG Committee”) (at its discretion) at the date of grant and may be no less than the fair market value of the option award as of the date of grant. The 2006 LTIP is administered by the ACG Committee. Subject to adjustment as provided in the 2006 LTIP, awards with respect to up to an aggregate of 5,000,000 Units may be granted under the 2006 LTIP. We reimburse EPCO for the costs allocable to 2006 LTIP awards made to employees who work in our business. On April 30, 2007 and May 2, 2007, the non-employee directors of our General Partner were awarded 1,647 phantom units which payout in 2011 and 66,225 unit appreciation rights, which vest in 2012. On May 22, 2007, we granted 155,000 Unit options, 62,900 restricted Units and 338,479 unit appreciation rights to our employees, which vest in 2011, 2011 and 2012, respectively.

          The 2006 LTIP may be amended or terminated at any time by the board of directors of EPCO, which is the indirect parent company of our General Partner, or the ACG Committee; however, any material amendment, such as a material increase in the number of Units available under the plan or a change in the types of awards available under the plan, would require the approval of at least 50% of our unitholders. The ACG Committee is also

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

authorized to make adjustments in the terms and conditions of, and the criteria included in awards under the 2006 LTIP in specified circumstances. The 2006 LTIP is effective until December 8, 2016 or, if earlier, the time which all available Units under the 2006 LTIP have been delivered to participants or the time of termination of the 2006 LTIP by EPCO or the ACG Committee. After giving effect to outstanding Unit options and restricted Units at June 30, 2007, a total of 4,782,600 additional Units could be issued under the 2006 LTIP.

     Unit Options

          The information in the following table presents Unit option activity under the 2006 LTIP for the periods indicated:

										Weighted-
						Weighted-				Average
						Average				Remaining
		Number				Strike Price				Contractual
		of Units				(dollars/unit)				Term (in years)
Unit Options:
Outstanding at December 31, 2006			—			$	—				—
Granted (1)			155,000				45.35
Outstanding at June 30, 2007			155,000			$	45.35				9.9
Options exercisable at:
June 30, 2007			—			$	—				—

          We recognized $0.01 million of compensation expense associated with Unit options during the three months and six months ended June 30, 2007. At June 30, 2007, total unrecognized compensation cost related to nonvested Unit options granted under the 2006 LTIP was an estimated $0.4 million. We expect to recognize this cost over a weighted-average period of 3.9 years.

     Restricted Units

          The following table summarizes information regarding our restricted Units for the periods indicated:

						Weighted-
						Average Grant
		Number				Date Fair Value
		of Units				Per Unit (1)
Restricted Units at December 31, 2006			—
Granted (2)			62,900			$	37.64
Forfeited			(500	)			45.35
Restricted Units at June 30, 2007			62,400			$	37.64

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

          None of our restricted Units vested during the six months ended June 30, 2007. During the three months and six months ended June 30, 2007, we recognized $0.1 million of compensation expense in connection with restricted Units. At June 30, 2007, total unrecognized compensation cost related to restricted Units was $2.3 million, and these costs are expected to be recognized over a weighted-average period of 3.9 years.

     Unit Appreciation Rights and Phantom Units

          On April 30, 2007, the non-executive members of the board of directors were each awarded 549 phantom units under the 2006 LTIP. Each phantom unit will pay out in cash on April 30, 2011 or, if earlier, the date the director is no longer serving on the board, whether by voluntarily resignation or otherwise, and at such time each such phantom unit will receive the amount of cash distributions that we would have paid to our unitholders had the participant been the owner of the number of Units equal to the number of phantom units granted to the participant under this award. Phantom unit awards to non-employee directors are accounted for similar to SFAS 123(R) liability awards. We recognized a nominal amount of expense related to the phantom units during the three months and six months ended June 30, 2007.

          On May 2, 2007, the non-executive members of the board of directors were each awarded 22,075 unit appreciation rights under the 2006 LTIP. The unit appreciation rights will be subject to five year cliff vesting and will vest earlier if the director dies or is removed from, or not re-elected or appointed to, the board for reasons other than his voluntary resignation or unwillingness to serve. When the unit appreciation rights become payable, the director will receive a payment in cash (or, in the sole discretion of the ACG Committee, Units or a combination of cash and Units) equal to the fair market value of the Units subject to the unit appreciation rights on the payment date over the fair market value of the Units subject to the unit appreciation rights on the date of grant.

          On May 22, 2007, we awarded 338,479 unit appreciation rights to our employees. The unit appreciation rights are subject to five year cliff vesting and are subject to forfeiture. When the unit appreciation rights become payable, the awards will be redeemed in cash (or, in the sole discretion of the ACG Committee, Units or a combination of cash and Units) equal to the fair market value of the Units on the payment date over the fair market value of the Units on the date of grant. Unit appreciation rights awarded to employees are accounted for as liability awards under SFAS 123(R) since the current intent is to cash-settle the awards. Unit appreciation rights awarded to non-employee directors are accounted for similar to SFAS 123(R) liability awards. We recognized $0.02 million of compensation expense associated with the unit appreciation rights during the three months and six months ended June 30, 2007.

NOTE 4. EMPLOYEE BENEFIT PLANS

          The TEPPCO Retirement Cash Balance Plan (“TEPPCO RCBP”) was a non-contributory, trustee-administered pension plan. The benefit formula for all eligible employees was a cash balance formula. Under a cash balance formula, a plan participant accumulated a retirement benefit based upon pay credits and current interest credits. The pay credits were based on a participant’s salary, age and service. We used a December 31 measurement date for this plan.

          Effective May 31, 2005, participation in the TEPPCO RCBP was frozen, and no new participants were eligible to be covered by the plan after that date. Effective June 1, 2005, EPCO adopted the TEPPCO RCBP for the benefit of its employees providing services to us. Effective December 31, 2005, all plan benefits accrued were frozen, participants received no additional pay credits after that date, and all plan participants were 100% vested regardless of their years of service. The TEPPCO RCBP plan was terminated effective December 31, 2005, and plan participants had the option to receive their benefits either through a lump sum payment in 2006 or through an

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

annuity. In April 2006, we received a determination letter from the Internal Revenue Service (“IRS”) providing IRS approval of the plan termination. For those plan participants who elected to receive an annuity, we purchased an annuity contract from an insurance company in which the plan participants own the annuity, absolving us of any future obligation to the participants.

          In the fourth quarter of 2006, we recorded settlement charges of approximately $3.5 million in accordance with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, relating to the TEPPCO RCBP for any existing unrecognized losses upon the plan termination and final distribution of the assets to the plan participants. At June 30, 2007, $0.3 million of the TEPPCO RCBP plan assets had not been distributed to plan participants. We do not expect to make further contributions to the TEPPCO RCBP in 2007.

          EPCO maintains a 401(k) plan for the benefit of employees providing services to us, and we reimburse EPCO for the cost of maintaining this plan in accordance with the ASA.

NOTE 5. FINANCIAL INSTRUMENTS – INTEREST RATE SWAPS

          In October 2001, TE Products entered into an interest rate swap agreement to hedge its exposure to changes in the fair value of its fixed rate 7.51% Senior Notes due 2028. We designated this swap agreement as a fair value hedge. The swap agreement has a notional amount of $210.0 million and matures in January 2028 to match the principal and maturity of the TE Products Senior Notes. Under the swap agreement, TE Products pays a floating rate of interest based on a three-month U.S. Dollar LIBOR rate, plus a spread of 147 basis points, and receives a fixed rate of interest of 7.51%. During the six months ended June 30, 2007 and 2006, we recognized reductions in interest expense of $0.6 million and $1.2 million, respectively, related to the difference between the fixed rate and the floating rate of interest on the interest rate swap. During the quarters ended June 30, 2007 and 2006, we reviewed the hedge effectiveness of this interest rate swap and noted that no gain or loss from ineffectiveness was required to be recognized. The fair values of this interest rate swap were liabilities of approximately $9.3 million and $2.6 million at June 30, 2007 and December 31, 2006, respectively.

          During 2002, we entered into interest rate swap agreements, designated as fair value hedges, to hedge our exposure to changes in the fair value of our fixed rate 7.625% Senior Notes due 2012. The swap agreements had a combined notional amount of $500.0 million and matured in 2012 to match the principal and maturity of the 7.625% Senior Notes. Under the swap agreements, we paid a floating rate of interest based on a U.S. Dollar LIBOR rate, plus a spread, and received a fixed rate of interest of 7.625%. These swap agreements were later terminated in 2002 resulting in gains of $44.9 million. The gains realized from the swap terminations have been deferred as adjustments to the carrying value of the 7.625% Senior Notes and are being amortized using the effective interest method as reductions to future interest expense over the remaining term of the 7.625% Senior Notes. At June 30, 2007, the unamortized balance of the deferred gains was $25.6 million. In the event of early extinguishment of the 7.625% Senior Notes, any remaining unamortized gains would be recognized in the consolidated statement of income at the time of extinguishment.

          On January 20, 2006, we entered into interest rate swap agreements with a total notional amount of $200.0 million to hedge our exposure to increases in the benchmark interest rate underlying our variable rate revolving credit facility. These interest rate swaps mature in January 2008. Under the swap agreements, we pay a fixed rate of interest ranging from 4.67% to 4.695% and receive a floating rate based on a three-month U.S. Dollar LIBOR rate. In the third quarter of 2006, these swaps were designated as cash flow hedges. For the period from January 20, 2006 through the date these swaps were designated as cash flow hedges, changes in the fair value of the swaps were recognized in earnings, which resulted in a $2.2 million reduction to interest expense. While these interest rate swaps remain in effect, future changes in the fair value of the cash flow hedges, to the extent the swaps

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

are effective, will be recognized in other comprehensive income until the hedged interest costs are recognized in earnings. At June 30, 2007 and December 31, 2006, the fair values of these interest rate swaps were assets of $1.0 million and $1.4 million, respectively. These interest rate swaps were de-designated as cash flow hedges on June 30, 2007.

          In October 2006 and February 2007, we executed a series of treasury rate lock agreements that extended through June 2007 for a notional amount totaling $300.0 million. These agreements, which were derivative instruments, were designated as cash flow hedges to offset our exposure to increases in the underlying U.S. Treasury benchmark rate that was used to establish the fixed interest rate for debt that we issued in May 2007. In May 2007, these treasury locks were terminated concurrent with the issuance of junior subordinated notes (see Note 11). The termination of the treasury locks resulted in gains of $1.4 million and was recorded in other comprehensive income. These gains are being amortized using the effective interest method as reductions to future interest expense over the fixed rate term of the junior subordinated notes, which is ten years. The weighted average rate under the treasury lock agreements was approximately 4.6%. The actual coupon rate of the debt issuance was comprised of the underlying U.S. Treasury benchmark rate, plus a credit spread premium for our debt security. In the event of early extinguishment of the junior subordinated notes, any remaining unamortized gains would be recognized in the consolidated statement of income at the time of extinguishment.

          In June 2007, we executed a forward treasury rate lock agreement that extends through January 31, 2008 for a notional amount of $50.0 million. This agreement, which is a derivative instrument, has been designated as a cash flow hedge to offset our exposure to increases in the underlying U.S. Treasury benchmark rate that is expected to be used to establish the fixed interest rate for debt that we expect to incur in 2008. The rate under the treasury lock agreement was 5.112%. The actual coupon rate of the expected debt will be comprised of the underlying U.S. Treasury benchmark rate, plus a credit spread premium at the date of issuance. At June 30, 2007, the fair value of the treasury lock was a liability of $0.2 million. To the extent effective, gains and losses on the value of the treasury lock will be deferred until the forecasted debt is issued and will be amortized to earnings over the life of the debt. No ineffectiveness was recognized as of June 30, 2007.

NOTE 6. INVENTORIES

          Inventories are valued at the lower of cost (based on weighted average cost method) or market. The costs of inventories did not exceed market values at June 30, 2007 and December 31, 2006. The major components of inventories were as follows:

		June 30,				December 31,
		2007				2006
Crude oil (1)		$	64,110			$	49,312
Refined products and LPGs (2)			14,403				7,636
Lubrication oils and specialty chemicals			7,836				7,500
Materials and supplies			6,760				7,029
Other			270				716
Total		$	93,379			$	72,193

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

          Major categories of property, plant and equipment at June 30, 2007 and December 31, 2006, were as follows:

		Estimated
		Useful Life				June 30,				December 31,
		In Years				2007				2006
Land and right of way			20-40			$	134,273			$	128,791
Line pipe and fittings			20-40				1,213,715				1,218,226
Storage tanks			20-40				210,191				196,306
Buildings and improvements			5-40	(1)			64,164				58,973
Machinery and equipment			5-40	(2)			381,943				346,868
Construction work in progress							241,987				202,820
Total property, plant and equipment						$	2,246,273			$	2,151,984
Less accumulated depreciation and amortization							542,676				509,889
Net property, plant and equipment						$	1,703,597			$	1,642,095

          Depreciation expense on property, plant and equipment was $20.0 million and $20.7 million for the three months ended June 30, 2007 and 2006, respectively, and $39.4 million and $41.4 million for the six months ended June 30, 2007 and 2006, respectively. We capitalized $6.8 million and $6.4 million of interest in connection with capital projects during the six months ended June 30, 2007 and 2006, respectively.

NOTE 8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

          We use the equity method of accounting to account for our investments in unconsolidated affiliates. These investments are identified below by reporting business segment (see Note 13 for a general discussion of our business segments). The following table presents our investments in unconsolidated affiliates as of June 30, 2007 and December 31, 2006:

		Ownership				Investments in unconsolidated
		Percentage at				affiliates at
		June 30,				June 30,				December 31,
		2007				2007				2006
Downstream Segment:
Centennial Pipeline LLC (“Centennial”)			50.0	%		$	80,687			$	62,321
MB Storage (1)			—				—				85,626
Other			25.0	%			383				369
Upstream Segment:
Seaway Crude Pipeline Company (“Seaway”)			50.0	%			192,233				195,584
Midstream Segment:
Jonah Gas Gathering Company (“Jonah”)			95.3	%			786,618				695,810
Total						$	1,059,921			$	1,039,710

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

          The following table summarizes equity earnings (losses) by business segment for the three months and six months ended June 30, 2007 and 2006:

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Equity earnings (losses):
Downstream Segment		$	(3,879	)		$	(2,366	)		$	(5,366	)		$	(3,632	)
Upstream Segment			1,448				5,040				3,237				7,295
Midstream Segment			21,665				—				37,926				—
Total equity earnings		$	19,234			$	2,674			$	35,797			$	3,663

Seaway

          Through one of our indirect wholly owned subsidiaries, we own a 50% ownership interest in Seaway. The remaining 50% interest is owned by ConocoPhillips. We operate and commercially manage the Seaway assets. Seaway owns pipelines that carry imported, offshore and domestic onshore crude oil from a marine terminal at Freeport, Texas, to Cushing, Oklahoma, and from a marine terminal at Texas City, Texas, to refineries in the Texas City and Houston, Texas, areas. The Seaway Crude Pipeline Company Partnership Agreement provides for varying participation ratios throughout the life of Seaway. Our sharing ratio (including the amount of distributions we receive) changed from 60% to 40% on March 12, 2006, and as such, our share of revenue and expense of Seaway was 47% for 2006. Thereafter, we receive 40% of revenue and expense (and distributions) of Seaway. During the six months ended June 30, 2007 and 2006, we received distributions from Seaway of $7.4 million and $8.5 million, respectively. During the six months ended June 30, 2007 and 2006, we did not invest any additional funds in Seaway.

Centennial

          TE Products owns a 50% ownership interest in Centennial, and Marathon Petroleum Company LLC (“Marathon”) owns the remaining 50% interest. Centennial owns an interstate refined petroleum products pipeline extending from the upper Texas Gulf Coast to central Illinois. During the six months ended June 30, 2007, TE Products contributed $11.1 million to Centennial, of which $6.1 million was for contractual obligations that were created upon formation of Centennial and $5.0 million was for debt service requirements. During the six months ended June 30, 2006, TE Products contributed $2.5 million to Centennial. TE Products has received no cash distributions from Centennial since its formation.

MB Storage

          Through February 28, 2007, TE Products owned a 49.5% ownership interest in MB Storage and a 50% ownership interest in Mont Belvieu Venture, LLC (the general partner of MB Storage), and Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”) owned the remaining interests. On March 1, 2007, TE Products sold its ownership interests in MB Storage and its general partner to Louis Dreyfus (see Note 9). MB Storage owns storage capacity at the Mont Belvieu fractionation and storage complex and a short haul transportation shuttle system that ties Mont Belvieu, Texas, to the upper Texas Gulf Coast energy marketplace. MB Storage is a service-oriented, fee-based venture serving the fractionation, refining and petrochemical industries with substantial capacity and flexibility for

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

the transportation, terminaling and storage of NGLs, LPGs and refined products. TE Products operated the facilities for MB Storage through February 28, 2007.

          For the year ended December 31, 2006, TE Products received the first $1.7 million per quarter (or $6.78 million on an annual basis) of MB Storage’s income before depreciation expense, as defined in the Agreement of Limited Partnership of MB Storage. Any amount of MB Storage’s 2006 income before depreciation expense in excess of $6.78 million was allocated evenly between TE Products and Louis Dreyfus. Depreciation expense on assets each party originally contributed to MB Storage was allocated between TE Products and Louis Dreyfus based on the net book value of the assets contributed. Depreciation expense on assets constructed or acquired by MB Storage subsequent to formation was allocated evenly between TE Products and Louis Dreyfus. For the period from January 1, 2007 through February 28, 2007 and for the six months ended June 30, 2006, TE Products’ sharing ratio in the earnings of MB Storage was approximately 56.0% and 61.4%, respectively. During the period from January 1, 2007 through February 28, 2007, TE Products received distributions from MB Storage of $10.4 million, and made no contributions to MB Storage. During the six months ended June 30, 2006, TE Products received distributions from MB Storage of $7.8 million and contributed $1.7 million to MB Storage.

Jonah

          On August 1, 2006, Enterprise, through its affiliate, Enterprise Gas Processing, LLC, became our joint venture partner by acquiring an interest in Jonah, the partnership through which we have owned our interest in the Jonah system. Prior to entering into the Jonah joint venture, Enterprise had managed the construction of the Phase V expansion and funded the initial costs under a letter of intent we entered into in February 2006. In connection with the joint venture arrangement, we and Enterprise plan to continue the Phase V expansion, which is expected to increase the system capacity of the Jonah system from 1.5 billion cubic feet (“Bcf”) per day to approximately 2.3 Bcf per day and to significantly reduce system operating pressures, which is anticipated to lead to increased production rates and ultimate reserve recoveries. The first portion of the expansion, which is expected to increase the system gathering capacity to approximately 2.0 Bcf per day, was completed in July 2007. The second portion of the expansion is expected to be completed during the first quarter of 2008. We expect to reimburse Enterprise for our share of the Phase V expansion costs. To the extent the costs exceed an agreed upon base cost estimate of $415.2 million, we and Enterprise will each pay our respective ownership share (approximately 80% and 20%, respectively) of the expansion costs that exceed the agreed upon base cost estimate.

           Enterprise manages the Phase V construction project. From August 1, 2006, we and Enterprise have equally shared the costs of the Phase V expansion. Through June 30, 2007, we have reimbursed Enterprise $180.5 million for 50% of the Phase V cost incurred by it (including its cost of capital of $1.3 million). At June 30, 2007, we had a payable to Enterprise for costs incurred of $10.9 million. During the fourth quarter of 2006, certain sections of new Phase V expansion pipe were commissioned and placed in service. Since December 2006, Enterprise has shared in the incremental cash flow resulting from the operation of those new facilities. After subsequent construction milestones are achieved, we and Enterprise will share partnership cash distributions and earnings based on a formula that takes into account the capital contributions of the parties, including expenditures by us prior to the expansion. Based on this formula in the partnership agreement, we will ultimately retain ownership of an approximate 80% interest in Jonah, with Enterprise owning the remaining 20% and serving as operator, with further costs and cash distributions being allocated based on such ownership interests. At June 30, 2007, our ownership interest in Jonah and our sharing ratio in the earnings of Jonah was 95.3%. During the six months ended June 30, 2007, we received distributions from Jonah of $50.4 million, which included $11.6 million of distributions declared in 2006 and paid during the first quarter of 2007. During the six months ended June 30, 2007, we contributed $86.2 million to Jonah. The joint venture is governed by a management committee comprised of two representatives approved by Enterprise and two representatives approved by us, each with equal voting power. The formation of the joint venture was reviewed and recommended for approval by the ACG Committee.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Summarized Financial Information of Unconsolidated Affiliates

          Summarized combined income statement data by reporting segment for the three months and six months ended June 30, 2007 and 2006, is presented below (on a 100% basis):

		For the Three Months Ended
		June 30, 2007												June 30, 2006
						Operating				Net								Operating				Net
		Revenues				Income				Income (Loss)				Revenues				Income				Income (Loss)
Downstream Segment (1)		$	11,735			$	1,687			$	(1,080	)		$	16,828			$	1,268			$	(1,550	)
Upstream Segment			16,471				6,308				6,386				27,319				12,291				12,351
Midstream Segment (2)			46,399				23,531				23,872				—				—				—
		For the Six Months Ended
		June 30, 2007												June 30, 2006
						Operating				Net								Operating				Net
		Revenues				Income				Income				Revenues				Income				Income (Loss)
Downstream Segment (1)		$	28,150			$	5,791			$	273			$	33,900			$	4,237			$	(1,258	)
Upstream Segment			34,641				14,143				14,320				48,882				18,975				19,100
Midstream Segment (2)			102,923				43,543				44,041				—				—				—

          Summarized combined balance sheet information by reporting segment as of June 30, 2007 and December 31, 2006, is presented below:

		June 30, 2007
		Current				Noncurrent				Current								Noncurrent				Partners’
		Assets				Assets				Liabilities				Long-term Debt				Liabilities				Capital
Downstream Segment (1)		$	16,787			$	253,250			$	16,637			$	135,000			$	7,179			$	111,221
Upstream Segment			21,770				252,439				7,383				—				26				266,800
Midstream Segment			40,750				948,958				17,697				—				203				971,808
		December 31, 2006
		Current				Noncurrent				Current								Noncurrent				Partners’
		Assets				Assets				Liabilities				Long-term Debt				Liabilities				Capital
Downstream Segment		$	36,735			$	359,156			$	40,959			$	140,000			$	5,971			$	208,961
Upstream Segment			21,506				256,634				6,704				—				84				271,352
Midstream Segment			33,963				800,591				25,113				—				191				809,250

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

NOTE 9. DISPOSITIONS AND DISCONTINUED OPERATIONS

Dispositions

     MB Storage

          On March 1, 2007, TE Products sold its 49.5% ownership interest in MB Storage, its 50% ownership interest in Mont Belvieu Venture, LLC (the general partner of MB Storage) and other related assets to Louis Dreyfus for a total of approximately $156.1 million in cash, which includes approximately $18.5 million for other TE Products assets. This sale was in compliance with the October 2006 order and consent agreement with the Bureau of Competition of the Federal Trade Commission (“FTC”) and was completed in accordance with the terms and conditions approved by the FTC in February 2007. We expect to use the proceeds from the transaction to partially fund our 2007 portion of the Jonah Phase V expansion and other recently announced organic growth projects. We recognized gains of approximately $59.6 million and $13.2 million related to the sale of our equity interests and other related assets of TE Products, respectively, which are included in gain on sale of ownership interest in MB Storage and gain on the sale of assets, respectively, in our statements of consolidated income.

          In accordance with a transition services agreement between TE Products and Louis Dreyfus effective as of March 1, 2007, TE Products will provide certain administrative services to MB Storage for a period of up to two years after the sale, for a fee equal to 110% of the direct costs and expenses TE Products and its affiliates incur to provide the transition services to MB Storage. Payments for these services will be made according to the terms specified in the transition services agreement.

     Other Refined Products Assets

          On January 23, 2007, we sold a 10-mile, 18-inch segment of pipeline to an affiliate of Enterprise for approximately $8.0 million in cash. These assets were part of our Downstream Segment and had a net book value of approximately $2.5 million. The sales proceeds were used to fund construction of a replacement pipeline in the area, in which the new pipeline provides greater operational capability and flexibility. We recognized a gain of approximately $5.5 million on this transaction, which is included in gain on sale of assets in our statements of consolidated income.

Discontinued operations

     Pioneer Plant

          On March 31, 2006, we sold our ownership interest in the Pioneer silica gel natural gas processing plant located near Opal, Wyoming, together with Jonah’s rights to process natural gas originating from the Jonah and Pinedale fields, located in southwest Wyoming, to an affiliate of Enterprise for $38.0 million in cash. The Pioneer plant was not an integral part of our Midstream Segment operations, and natural gas processing is not a core business for us. We have no continuing involvement in the operations or results of this plant. This transaction was reviewed and recommended for approval by the ACG Committee and a fairness opinion was rendered by an investment banking firm. The sales proceeds were used to fund organic growth projects, retire debt and for other general partnership purposes. The carrying value of the Pioneer plant at March 31, 2006, prior to the sale, was $19.7 million. Costs associated with the completion of the transaction were approximately $0.4 million.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

          Condensed statements of income for the Pioneer plant, which is classified as discontinued operations, for the three months and six months ended June 30, 2006, are presented below:

		For the Three Months				For the Six Months
		Ended June 30,				Ended June 30,
		2006				2006
Operating revenues:
Sales of petroleum products		$	18			$	3,828
Other			11				932
Total operating revenues			29				4,760
Costs and expenses:
Purchases of petroleum products			139				3,000
Operating expense			—				182
Depreciation and amortization			—				51
Taxes – other than income taxes			—				30
Total costs and expenses			139				3,263
Income (loss) from discontinued operations		$	(110	)		$	1,497

          Net cash provided by discontinued operations for the six months ended June 30, 2006, are presented below:

		For the Six Months
		Ended June 30,
		2006
Cash flows from discontinued operations:
Net income		$	19,369
Depreciation and amortization			51
Gain on sale of Pioneer plant			(17,872	)
Increase in inventories			(27	)
Net cash provided by discontinued operations		$	1,521

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

NOTE 10. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

          The following table reflects the components of intangible assets, including excess investments, being amortized at June 30, 2007 and December 31, 2006:

		June 30, 2007								December 31, 2006
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Intangible assets:
Gathering and transportation agreements		$	241,537			$	(97,400	)		$	241,537			$	(87,121	)
Fractionation agreement			38,000				(17,575	)			38,000				(16,625	)
Other			14,810				(3,282	)			12,310				(2,691	)
Subtotal			294,347				(118,257	)			291,847				(106,437	)
Excess investments:
Centennial Pipeline LLC			33,390				(18,172	)			33,390				(16,579	)
Seaway Crude Pipeline Company			26,908				(4,793	)			26,908				(4,450	)
Jonah Gas Gathering Company			3,949				(33	)			2,924				—
Subtotal			64,247				(22,998	)			63,222				(21,029	)
Total intangible assets		$	358,594			$	(141,255	)		$	355,069			$	(127,466	)

          SFAS 142 requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives. If an intangible asset has a finite useful life, but the precise length of that life is not known, that intangible asset shall be amortized over the best estimate of its useful life. At a minimum, we will assess the useful lives and residual values of all intangible assets on an annual basis to determine if adjustments are required. Amortization expense on intangible assets was $5.9 million and $8.0 million for the three months ended June 30, 2007 and 2006, respectively, and $11.8 million and $16.0 million for the six months ended June 30, 2007 and 2006, respectively. Amortization expense on excess investments included in equity earnings was $1.2 million and $1.2 million for the three months ended June 30, 2007 and 2006, respectively, and $2.0 million and $2.1 million for the six months ended June 30, 2007 and 2006, respectively.

          The values assigned to our intangible assets for natural gas gathering contracts on the Val Verde Gas Gathering Company, L.P. (“Val Verde”) system are amortized on a unit-of-production basis, based upon the actual throughput of the systems compared to the expected total throughput for the lives of the contracts. From time to time, we may obtain limited production forecasts and updated throughput estimates from some of the producers on the system, and as a result, we evaluate the remaining expected useful lives of the contract assets based on the best available information. Revisions to these estimates may occur as additional production information is made available to us.

          The values assigned to our fractionation agreement and other intangible assets are generally amortized on a straight-line basis. Our fractionation agreement is being amortized over its contract period of 20 years. The amortization periods for our other intangible assets, which include non-compete and other agreements, range from 3 years to 15 years. The value of $8.5 million assigned to our crude supply and transportation intangible customer contracts is being amortized on a unit-of-production basis.

          The value assigned to our excess investment in Centennial was created upon its formation. Approximately $30.0 million is related to a contract and is being amortized on a unit-of-production basis based upon the volumes transported under the contract compared to the guaranteed total throughput of the contract over a 10-year life. The

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

remaining $3.4 million is related to a pipeline and is being amortized on a straight-line basis over the life of the pipeline, which is 35 years. The value assigned to our excess investment in Seaway was created upon acquisition of our 50% ownership interest in 2000. We are amortizing the excess investment in Seaway on a straight-line basis over a 39-year life related primarily to the life of the pipeline. The value assigned to our excess investment in Jonah was created as a result of interest capitalized on the construction of Jonah’s Phase V expansion. We will continue to capitalize interest on the construction of the expansion of the Jonah system until the construction is completed and placed into service. As portions of the expansion are placed into service, we will amortize the excess investment in Jonah on a straight-line basis over the life of the assets constructed.

          The following table sets forth the estimated amortization expense of intangible assets and the estimated amortization expense allocated to equity earnings for the years ending December 31:

		Intangible Assets				Excess Investments
2007		$	23,426			$	4,428
2008			21,164				4,546
2009			18,553				4,752
2010			18,534				3,546
2011			18,526				844

Goodwill

          Goodwill represents the excess of purchase price over fair value of net assets acquired. We account for goodwill under SFAS No. 142, Goodwill and Other Intangible Assets, which was issued by the FASB in July 2001. SFAS 142 prohibits amortization of goodwill, but instead requires testing for impairment at least annually. We test goodwill for impairment annually at December 31.

          To perform an impairment test of goodwill, we have identified our reporting units and have determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill, to those reporting units. We then determine the fair value of each reporting unit and compare it to the carrying value of the reporting unit. We will continue to compare the fair value of each reporting unit to its carrying value on an annual basis to determine if an impairment loss has occurred. There have been no goodwill impairment losses recorded since the adoption of SFAS 142.

          The following table presents the carrying amount of goodwill at both June 30, 2007 and December 31, 2006, by business segment:

		Downstream				Midstream				Upstream				Segments
		Segment				Segment				Segment				Total
Goodwill		$	1,339			$	—			$	14,167			$	15,506

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

NOTE 11. DEBT OBLIGATIONS

          The following table summarizes the principal amounts outstanding under all of our debt instruments at June 30, 2007 and December 31, 2006:

		June 30,				December 31,
		2007				2006
Senior debt obligations:
Revolving Credit Facility, due December 2011		$	200,000			$	490,000
6.45% TE Products Senior Notes, due January 2008 (1)			179,983				179,968
7.625% Senior Notes, due February 2012			498,976				498,866
6.125% Senior Notes, due February 2013			199,202				199,130
7.51% TE Products Senior Notes, due January 2028			210,000				210,000
Total senior debt obligations			1,288,161				1,577,964
7.000% Junior Subordinated Notes, due June 2067			299,521				—
Total borrowings			1,587,682				1,577,964
Adjustment to carrying value associated with hedges of fair value swaps			16,298				25,323
Total Debt Instruments (1)		$	1,603,980			$	1,603,287

Revolving Credit Facility

          We have in place a $700.0 million unsecured revolving credit facility, including the issuance of letters of credit (“Revolving Credit Facility”), which matures on December 13, 2011. We may request up to two one-year extensions of the maturity date, subject to lender approval and satisfaction of certain other conditions. Commitments under the credit facility may be increased up to a maximum of $850.0 million upon our request, subject to lender approval and the satisfaction of certain other conditions. The interest rate is based, at our option, on either the lender’s base rate plus a spread, or LIBOR plus a spread in effect at the time of the borrowings. Financial covenants in the Revolving Credit Facility require that we maintain a ratio of Consolidated Funded Debt to Pro Forma EBITDA (as defined and calculated in the facility) of less than 4.75 to 1.00 (subject to adjustment for specified acquisitions) and a ratio of EBITDA to Interest Expense (as defined and calculated in the facility) of at least 3.00 to 1.00, in each case with respect to specified twelve month periods. Other restrictive covenants in the Revolving Credit Facility limit our ability to, among other things, incur additional indebtedness, make distributions in excess of Available Cash (see Note 12), incur liens, engage in specified transactions with affiliates and complete mergers, acquisitions and sales of assets. The credit agreement restricts the amount of outstanding debt of the Jonah joint venture to debt owing to the owners of its partnership interests and other third-party debt in the principal aggregate amount of $50.0 million and allows for the issuance of certain hybrid securities of up to 15% of our Consolidated Total Capitalization (as defined therein). In May 2007, we repaid approximately $295.0 million of the then outstanding balance of the Revolving Credit Facility with proceeds received from the issuance of junior subordinated notes. At June 30, 2007, $200.0 million was outstanding under the Revolving Credit Facility at a weighted average interest rate of 5.86%. At June 30, 2007, we were in compliance with the covenants of the Revolving Credit Facility.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Senior Notes

          On January 27, 1998, TE Products issued $180.0 million principal amount of 6.45% Senior Notes due 2008, and $210.0 million principal amount of 7.51% Senior Notes due 2028 (collectively the “TE Products Senior Notes”). The 6.45% TE Products Senior Notes were issued at a discount of $0.3 million and are being accreted to their face value over the term of the notes. The 6.45% TE Products Senior Notes due 2008 may not be redeemed prior to their maturity on January 15, 2008. The 7.51% TE Products Senior Notes due 2028, issued at par, may be redeemed at any time after January 15, 2008, at the option of TE Products, in whole or in part, at the following redemption prices (expressed in percentages of the principal amount) during the twelve months beginning January 15 of the years indicated:

		Redemption								Redemption
Year		Price				Year				Price
2008			103.755	%			2013				101.878	%
2009			103.380	%			2014				101.502	%
2010			103.004	%			2015				101.127	%
2011			102.629	%			2016				100.751	%
2012			102.253	%			2017				100.376	%

and thereafter at 100% of the principal amount, together in each case with accrued interest at the redemption date.

          The TE Products Senior Notes do not have sinking fund requirements. Interest on the TE Products Senior Notes is payable semiannually in arrears on January 15 and July 15 of each year. The TE Products Senior Notes are unsecured obligations of TE Products and rank pari passu with all other unsecured and unsubordinated indebtedness of TE Products. The indenture governing the TE Products Senior Notes contains covenants, including, but not limited to, covenants limiting the creation of liens securing indebtedness and sale and leaseback transactions. However, the indenture does not limit our ability to incur additional indebtedness. At June 30, 2007, TE Products was in compliance with the covenants of the TE Products Senior Notes.

          On February 20, 2002, we issued $500.0 million principal amount of 7.625% Senior Notes due 2012. The 7.625% Senior Notes were issued at a discount of $2.2 million and are being accreted to their face value over the term of the notes. The Senior Notes may be redeemed at any time at our option with the payment of accrued interest and a make-whole premium determined by discounting remaining interest and principal payments using a discount rate equal to the rate of the United States Treasury securities of comparable remaining maturity plus 35 basis points. The indenture governing our 7.625% Senior Notes contains covenants, including, but not limited to, covenants limiting the creation of liens securing indebtedness and sale and leaseback transactions. However, the indenture does not limit our ability to incur additional indebtedness. At June 30, 2007, we were in compliance with the covenants of these Senior Notes.

          On January 30, 2003, we issued $200.0 million principal amount of 6.125% Senior Notes due 2013. The 6.125% Senior Notes were issued at a discount of $1.4 million and are being accreted to their face value over the term of the notes. The Senior Notes may be redeemed at any time at our option with the payment of accrued interest and a make-whole premium determined by discounting remaining interest and principal payments using a discount rate equal to the rate of the United States Treasury securities of comparable remaining maturity plus 35 basis points. The indenture governing our 6.125% Senior Notes contains covenants, including, but not limited to, covenants limiting the creation of liens securing indebtedness and sale and leaseback transactions. However, the indenture does not limit our ability to incur additional indebtedness. At June 30, 2007, we were in compliance with the covenants of these Senior Notes.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Junior Subordinated Notes

          In May 2007, we issued and sold $300.0 million in principal amount of fixed/floating, unsecured, long-term subordinated notes due June 1, 2067 (“Junior Subordinated Notes”). We used the proceeds from this subordinated debt to temporarily reduce borrowings outstanding under our Revolving Credit Facility and for general partnership purposes. Our payment obligations under the Junior Subordinated Notes are subordinated to all of our current and future senior indebtedness (as defined in the related indenture). TE Products, TEPPCO Midstream, TCTM and Val Verde (collectively, the “Subsidiary Guarantors”) have jointly and severally guaranteed, on a junior subordinated basis, payment of the principal of, premium, if any, and interest on the Junior Subordinated Notes.

          The indenture governing the Junior Subordinated Notes does not limit our ability to incur additional debt, including debt that ranks senior to or equally with the Junior Subordinated Notes. The indenture allows us to defer interest payments on one or more occasions for up to ten consecutive years, subject to certain conditions. The indenture also provides that during any period in which we defer interest payments on the Junior Subordinated Notes, subject to certain exceptions, (i) we cannot declare or make any distributions with respect to, or redeem, purchase or make a liquidation payment with respect to, any of our equity securities; (ii) neither we nor the Subsidiary Guarantors will make, and we and the Subsidiary Guarantors will cause our respective majority-owned subsidiaries not to make, any payment of interest, principal or premium, if any, on or repay, purchase or redeem any of our or the Subsidiary Guarantors’ debt securities (including securities similar to the Junior Subordinated Notes) that contractually rank equally with or junior to the Junior Subordinated Notes or the guarantees, as applicable; and (iii) neither we nor the Subsidiary Guarantors will make, and we and the Subsidiary Guarantors will cause our respective majority-owned subsidiaries not to make, any payments under a guarantee of debt securities (including under a guarantee of debt securities that are similar to the Junior Subordinated Notes) that contractually ranks equally with or junior to the Junior Subordinated Notes or the guarantees, as applicable.

          The Junior Subordinated Notes bear interest at a fixed annual rate of 7.000% from May 2007 to June 1, 2017, payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2007. After June 1, 2017, the Junior Subordinated Notes will bear interest at a variable annual rate equal to the 3-month LIBOR rate for the related interest period plus 2.7775%, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year commencing September 1, 2017. Interest payments may be deferred on a cumulative basis for up to ten consecutive years, subject to certain provisions. Deferred interest will accumulate additional interest at the then-prevailing interest rate on the Junior Subordinated Notes. The Junior Subordinated Notes mature in June 2067. The Junior Subordinated Notes are redeemable in whole or in part prior to June 1, 2017 for a “make-whole” redemption price and thereafter at a redemption price equal to 100% of their principal amount plus accrued interest. The Junior Subordinated Notes are also redeemable prior to June 1, 2017 in whole (but not in part) upon the occurrence of certain tax or rating agency events at specified redemption prices.

          In connection with the issuance of the Junior Subordinated Notes, we and our Subsidiary Guarantors entered into a replacement capital covenant in favor of holders of a designated series of senior long-term indebtedness (as provided in the underlying documents) pursuant to which we and our Subsidiary Guarantors agreed for the benefit of such debt holders that we would not redeem or repurchase or otherwise satisfy, discharge or defease any of the Junior Subordinated Notes on or before June 1, 2037, unless, subject to certain limitations, during the 180 days prior to the date of that redemption, repurchase, defeasance or purchase, we have or one of our subsidiaries has received a specified amount of proceeds from the sale of qualifying securities that have characteristics that are the same as, or more equity-like than, the applicable characteristics of the Junior Subordinated Notes. The replacement capital covenant is not a term of the indenture or the Junior Subordinated Notes.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Fair Values

          The following table summarizes the estimated fair values of the Senior Notes and Junior Subordinated Notes at June 30, 2007 and December 31, 2006:

						Fair Value
						June 30,				December 31,
		Face Value				2007				2006
6.45% TE Products Senior Notes, due January 2008		$	180,000			$	180,630			$	181,641
7.625% Senior Notes, due February 2012			500,000				532,902				537,067
6.125% Senior Notes, due February 2013			200,000				199,697				201,610
7.51% TE Products Senior Notes, due January 2028			210,000				218,762				221,471
7.000% Junior Subordinated Notes, due June 2067			300,000				286,045				—

          We have entered into interest rate swap agreements to hedge our exposure to changes in the fair value on a portion of the debt obligations discussed above (see Note 5).

Letter of Credit

          At June 30, 2007, we had outstanding a $15.3 million standby letter of credit in connection with crude oil purchased during the second quarter of 2007. The payable related to these purchases of crude oil is expected to be paid during the third quarter of 2007.

NOTE 12. PARTNERS’ CAPITAL AND DISTRIBUTIONS

Quarterly Distributions of Available Cash

          We make quarterly cash distributions of all of our available cash, generally defined in our Partnership Agreement as consolidated cash receipts less consolidated cash disbursements and cash reserves established by the General Partner in its reasonable discretion (“Available Cash”). Pursuant to the Partnership Agreement, the General Partner receives incremental incentive cash distributions when unitholders’ cash distributions exceed certain target thresholds as follows:

						General
		Unitholders				Partner
Quarterly Cash Distribution per Unit:
Up to Minimum Quarterly Distribution ($0.275 per Unit)			98	%			2	%
First Target – $0.276 per Unit up to $0.325 per Unit			85	%			15	%
Over First Target – Cash distributions greater than $0.325 per Unit			75	%			25	%

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

          The following table reflects the allocation of total distributions paid during the six months ended June 30, 2007 and 2006. The amounts for the six months ended June 30, 2007 take into account our issuance of 5.75 million Units in July 2006.

		For the Six Months Ended
		June 30,
		2007				2006
Limited Partner Units (1)		$	122,135			$	94,451
General Partner Ownership Interest			2,493				1,928
General Partner Incentive			21,348				37,406
Total Cash Distributions Paid		$	145,976			$	133,785
Total Cash Distributions Paid Per Unit		$	1.360			$	1.350

          On August 7, 2007, we will pay a cash distribution of $0.685 per Unit for the quarter ended June 30, 2007. The second quarter 2007 cash distribution will total approximately $73.6 million.

EPCO, Inc. TPP Employee Unit Purchase Plan

          At a special meeting of our unitholders on December 8, 2006, our unitholders approved the EPCO, Inc. TPP Employee Unit Purchase Plan (the “Unit Purchase Plan”), which provides for discounted purchases of our Units by employees of EPCO and its affiliates. Generally, any employee who (1) has been employed by EPCO or any of its designated affiliates for three consecutive months, (2) is a regular, active and full time employee and (3) is scheduled to work at least 30 hours per week is eligible to participate in the Unit Purchase Plan, provided that employees covered by collective bargaining agreements (unless otherwise specified therein) and 5% owners of us, EPCO or any affiliate are not eligible to participate.

          A maximum of 1,000,000 Units may be delivered under the Unit Purchase Plan (subject to adjustment as provided in the plan). Units to be delivered under the plan may be acquired by the custodian of the plan in the open market or directly from us, EPCO, any of EPCO’s affiliates or any other person; however, it is generally intended that Units are to be acquired from us. Eligible employees may elect to have a designated whole percentage (ranging from 1% to 10%) of their eligible compensation for each pay period withheld for the purchase of Units under the plan. EPCO and its affiliated employers will periodically remit to the custodian the withheld amounts, together with an additional amount by which EPCO will bear approximately 10% of the cost of the Units for the benefit of the participants. Unit purchases will be made following three month purchase periods over which the withheld amounts are to be accumulated. We reimburse EPCO for all such costs allocated to employees who work in our business.

          The plan is administered by a committee appointed by the Chairman or Vice Chairman of EPCO. The Unit Purchase Plan may be amended or terminated at any time by the board of directors of EPCO, or the Chairman of the Board or Vice Chairman of the Board of EPCO; however, any material amendment, such as a material increase in the number of Units available under the plan or an increase in the employee discount amount, would also require the approval of at least 50% of our unitholders. The Unit Purchase Plan is effective until December 8, 2016, or, if earlier, at the time that all available Units under the plan have been purchased on behalf of the participants or the time of termination of the plan by EPCO or the Chairman or Vice Chairman of EPCO. As of June 30, 2007, no Units have been issued to employees under this plan.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

General Partner’s Interest

          At June 30, 2007 and December 31, 2006, we had deficit balances of $78.9 million and $85.7 million, respectively, in our General Partner’s equity account. These negative balances do not represent assets to us and do not represent obligations of the General Partner to contribute cash or other property to us. The General Partner’s equity account generally consists of its cumulative share of our net income less cash distributions made to it plus capital contributions that it has made to us (see our Statement of Consolidated Partners’ Capital for a detail of the General Partner’s equity account). For the six months ended June 30, 2007, our General Partner was allocated $30.5 million (representing 16.4%) of our net income and received $23.8 million in cash distributions.

          Capital Accounts, as defined under our Partnership Agreement, are maintained for our General Partner and our limited partners. The Capital Account provisions of our Partnership Agreement incorporate principles established for U.S. federal income tax purposes and are not comparable to the equity accounts reflected under accounting principles generally accepted in the United States in our financial statements. In connection with the amendment of our Partnership Agreement, the General Partner’s obligation to make capital contributions to maintain its 2% capital account was eliminated.

          Net income is allocated between the General Partner and the limited partners in the same proportion as aggregate cash distributions made to the General Partner and the limited partners during the period. This is generally consistent with the manner of allocating net income under our Partnership Agreement. Net income determined under our Partnership Agreement, however, incorporates principles established for U.S. federal income tax purposes and is not comparable to net income reflected under accounting principles generally accepted in the United States in our financial statements.

          Cash distributions that we make during a period may exceed our net income for the period. We make quarterly cash distributions of all of our Available Cash, generally defined as consolidated cash receipts less consolidated cash disbursements and cash reserves established by the General Partner in its reasonable discretion. Cash distributions in excess of net income allocations and capital contributions during previous years, resulted in a deficit in the General Partner’s equity account at December 31, 2006 and June 30, 2007. Future cash distributions that exceed net income will result in an increase in the deficit balance in the General Partner’s equity account.

          According to the Partnership Agreement, in the event of our dissolution, after satisfying our liabilities, our remaining assets would be divided among our limited partners and the General Partner generally in the same proportion as Available Cash but calculated on a cumulative basis over the life of the Partnership. If a deficit balance still remains in the General Partner’s equity account after all allocations are made between the partners, the General Partner would not be required to make whole any such deficit.

Accumulated Other Comprehensive Income

          SFAS No. 130, Reporting Comprehensive Income requires certain items such as foreign currency translation adjustments, gains or losses associated with pension or other postretirement benefits, prior service costs or credits associated with pension or other postretirement benefits, transition assets or obligations associated with pension or other postretirement benefits and unrealized gains and losses on certain investments in debt and equity securities to be reported in a financial statement. As of and for the six months ended June 30, 2007, the components of accumulated other comprehensive income reflected on our consolidated balance sheet was composed of crude oil hedges, interest rate swaps and unrecognized losses associated with the TEPPCO RCBP. The series of crude oil hedges have forward positions throughout 2007 and 2008, the last of which ends in January 2009. While the crude oil hedges are in effect, changes in their fair values, to the extent the hedges are effective, are recognized in accumulated other comprehensive income until they are recognized in net income in future periods. The interest

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

rate swaps mature in January 2008, are related to our variable rate Revolving Credit Facility and are designated as cash flow hedges beginning in the third quarter of 2006. These interest rate swaps were de-designated as cash flow hedges on June 30, 2007 (see Note 5).

          The accumulated balance of other comprehensive income related to our cash flow hedges and unrecognized losses associated with our pension benefits is as follows:

Balance at December 31, 2006		$	426
Changes in fair values of interest rate cash flow hedges			1,512
Changes in fair values of crude oil cash flow hedges			(153	)
Pension benefit SFAS No. 158 adjustment			(34	)
Balance at June 30, 2007		$	1,751

NOTE 13. BUSINESS SEGMENTS

          We have three reporting segments:

	•		Our Downstream Segment, which is engaged in the transportation, marketing and storage of refined products, LPGs and petrochemicals;
	•		Our Upstream Segment, which is engaged in the gathering, transportation, marketing and storage of crude oil and distribution of lubrication oils and specialty chemicals; and
	•		Our Midstream Segment, which is engaged in the gathering of natural gas, fractionation of NGLs and transportation of NGLs.

          The amounts indicated below as “Partnership and Other” relate primarily to intersegment eliminations and assets that we hold that have not been allocated to any of our reporting segments.

          Our Downstream Segment revenues are earned from transportation, marketing and storage of refined products and LPGs, intrastate transportation of petrochemicals, sale of product inventory and other ancillary services. We generally realize higher revenues in the Downstream Segment during the first and fourth quarters of each year since these operations are somewhat seasonal. Refined products volumes are generally higher during the second and third quarters because of greater demand for gasolines during the spring and summer driving seasons. LPGs volumes are generally higher from November through March due to higher demand for propane, a major fuel for residential heating. The two largest operating expense items of the Downstream Segment are labor and electric power. Our Downstream Segment also includes the results of operations of the northern portion of the Dean Pipeline, which transports refinery grade propylene from Mont Belvieu to Point Comfort, Texas. Our Downstream Segment also includes our equity investments in MB Storage, which we sold on March 1, 2007 (see Note 9), and in Centennial (see Note 8).

          Our Upstream Segment revenues are earned from gathering, transporting, marketing and storing crude oil and distributing lubrication oils and specialty chemicals, principally in Oklahoma, Texas, New Mexico and the Rocky Mountain region. Marketing operations consist primarily of aggregating purchased crude oil along our pipeline systems, or from third party pipeline systems, and arranging the necessary transportation logistics for the ultimate sale or delivery of the crude oil to local refineries, marketers or other end users. Revenues are also generated from trade documentation and pumpover services, primarily at Cushing, Oklahoma, and Midland, Texas. Our Upstream Segment also includes our equity investment in Seaway (see Note 8). Seaway consists of large diameter pipelines that transport crude oil from Seaway’s marine terminals on the U.S. Gulf Coast to Cushing,

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Oklahoma, a crude oil distribution point for the central United States, and to refineries in the Texas City and Houston areas.

          Our Midstream Segment revenues are earned from the gathering of coal bed methane and conventional natural gas in the San Juan Basin in New Mexico and Colorado, through Val Verde; transportation of NGLs from two trunkline NGL pipelines in South Texas, two NGL pipelines in East Texas and a pipeline system (Chaparral) from West Texas and New Mexico to Mont Belvieu; and the fractionation of NGLs in Colorado. Our Midstream Segment also includes our equity investment in Jonah (see Note 8). Jonah, which is a joint venture between us and an affiliate of Enterprise, owns a natural gas gathering system in the Green River Basin in southwestern Wyoming. Prior to August 1, 2006, when Jonah was wholly-owned by us, operating results for Jonah were included in the consolidated Midstream Segment operating results. Effective August 1, 2006, we entered into the joint venture with Enterprise’s affiliate, upon which Jonah was deconsolidated, and its operating results since August 1, 2006, have been accounted for under the equity method of accounting. Operating results of the Pioneer plant, which we sold to an Enterprise affiliate in March 2006, are shown as discontinued operations for the three months and six months ended June 30, 2006.

          The tables below include financial information by reporting segment for the three months and six months ended June 30, 2007 and 2006:

		For the Three Months Ended June 30, 2007
		Downstream				Upstream				Midstream				Segments				Partnership
		Segment				Segment				Segment				Total				and Other				Consolidated
Sales of petroleum products		$	9,403			$	1,923,865			$	—			$	1,933,268			$	(164	)		$	1,933,104
Operating revenues			73,777				12,121				30,434				116,332				—				116,332
Purchases of petroleum products			9,311				1,892,878				—				1,902,189				(1,245	)			1,900,944
Operating expenses, including power and taxes – other than income taxes			36,955				16,449				10,316				63,720				1				63,721
General and administrative expenses			4,244				1,770				2,150				8,164				—				8,164
Depreciation and amortization expense			11,724				4,148				10,008				25,880				—				25,880
Gains on sales of assets			—				(2	)			—				(2	)			—				(2	)
Operating income			20,946				20,743				7,960				49,649				1,080				50,729
Gain on sale of ownership interest in MB Storage			(189	)			—				—				(189	)			—				(189	)
Equity (losses) earnings			(3,879	)			1,448				22,745				20,314				(1,080	)			19,234
Interest income			229				50				166				445				—				445
Other income (expense), net			529				7				(1	)			535				—				535
Earnings before interest expense, provision for income taxes and discontinued operations		$	17,636			$	22,248			$	30,870			$	70,754			$	—			$	70,754