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 September 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 Incorporation or Organization)		76-0291058 (I.R.S. Employer Identification Number)

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 November 5, 2007: 89,868,586

 

 

TEPPCO PARTNERS, L.P.

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets			1
Unaudited Condensed Statements of Consolidated Income and Comprehensive Income			2
Unaudited Condensed Statements of Consolidated Cash Flows			4
Unaudited Condensed Statements of Consolidated Partners’ Capital			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Note 1. Partnership Organization and Basis of Presentation			6
Note 2. General Accounting Policies and Related Matters			7
Note 3. Accounting for Unit-Based Awards			10
Note 4. Employee Benefit Plans			14
Note 5. Financial Instruments			14
Note 6. Inventories			16
Note 7. Property, Plant and Equipment			17
Note 8. Investments in Unconsolidated Affiliates			18
Note 9. Acquisitions, Dispositions and Discontinued Operations			21
Note 10. Intangible Assets and Goodwill			23
Note 11. Debt Obligations			25
Note 12. Partners’ Capital and Distributions			28
Note 13. Business Segments			32
Note 14. Related Party Transactions			36
Note 15. Earnings per Unit			39
Note 16. Commitments and Contingencies			41
Note 17. Supplemental Cash Flow Information			47
Note 18. Supplemental Condensed Consolidating Financial Information			47
Note 19. Subsequent Events			52
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			53
Cautionary Note Regarding Forward-Looking Statements			54
Item 3. Quantitative and Qualitative Disclosures About Market Risk			78
Item 4. Controls and Procedures			81
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			81
Item 1A. Risk Factors			81
Item 6. Exhibits			82
Signatures			84
Form of TPP Employee Restricted Unit Grant
Form of TPP Employee Option Grant
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

 i

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TEPPCO PARTNERS, L.P.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

		September 30,				December 31,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	28			$	70
Restricted cash			2,877				—
Accounts receivable, trade (net of allowance for doubtful accounts of $118 and $100)			1,148,874				852,816
Accounts receivable, related parties			5,883				11,788
Inventories			133,773				72,193
Other			39,141				29,843
Total current assets			1,330,576				966,710
Property, plant and equipment, at cost (net of accumulated depreciation of $562,076 and $509,889)			1,750,284				1,642,095
Equity investments			1,097,431				1,039,710
Intangible assets			170,176				185,410
Goodwill			15,506				15,506
Other assets			103,364				72,661
Total assets		$	4,467,337			$	3,922,092
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable and accrued liabilities		$	1,204,066			$	855,306
Accounts payable, related parties			38,023				34,461
Accrued interest			23,292				35,523
Other accrued taxes			19,784				14,482
Other			37,960				36,776
Total current liabilities			1,323,125				976,548
Long-term debt:
Senior notes			1,111,431				1,113,287
Junior subordinated notes			299,530				—
Other long-term debt			377,000				490,000
Total long-term debt			1,787,961				1,603,287
Deferred tax liability			—				652
Other liabilities and deferred credits			25,790				19,461
Other liabilities, related party			—				1,814
Commitments and contingencies
Partners’ capital:
Limited partners’ interests:
Limited partner units (89,806,186 and 89,804,829 units outstanding)			1,417,346				1,405,559
Restricted limited partner units (62,400 and 0 units outstanding)			207				—
General partner’s interest			(83,099	)			(85,655	)
Accumulated other comprehensive (loss) income			(3,993	)			426
Total partners’ capital			1,330,461				1,320,330
Total liabilities and partners’ capital		$	4,467,337			$	3,922,092

See Notes to Unaudited Condensed Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED INCOME
AND COMPREHENSIVE INCOME
(Dollars in thousands)

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Operating revenues:
Sales of petroleum products		$	2,455,695			$	2,446,671			$	6,238,927			$	7,130,283
Transportation – Refined products			48,123				42,067				126,976				113,309
Transportation – LPGs			16,735				16,877				69,535				59,652
Transportation – Crude oil			12,332				9,567				32,702				29,034
Transportation – NGLs			12,023				10,971				34,062				32,362
Gathering – Natural gas			15,429				25,022				46,289				107,856
Other			20,320				18,870				60,031				58,970
Total operating revenues			2,580,657				2,570,045				6,608,522				7,531,466
Costs and expenses:
Purchases of petroleum products			2,426,692				2,417,636				6,141,630				7,043,432
Operating expense			45,375				49,237				134,458				151,015
Operating fuel and power			15,060				15,478				45,163				42,762
General and administrative			7,396				6,994				24,158				25,353
Depreciation and amortization			26,486				26,250				77,735				83,683
Taxes – other than income taxes			4,931				2,625				15,149				13,984
Gains on sales of assets			(2	)			(14	)			(18,653	)			(1,410	)
Total costs and expenses			2,525,938				2,518,206				6,419,640				7,358,819
Operating income			54,719				51,839				188,882				172,647
Other income (expense):
Interest expense – net			(26,901	)			(23,181	)			(71,897	)			(63,522	)
Gain on sale of ownership interest in Mont Belvieu Storage Partners, L.P.			(20	)			—				59,628				—
Equity earnings			19,059				11,567				54,856				15,230
Interest income			454				1,012				1,241				1,668
Other income – net			306				51				1,085				748
Income before provision for income taxes			47,617				41,288				233,795				126,771
Provision for income taxes			(14	)			143				213				657
Income from continuing operations			47,631				41,145				233,582				126,114
Income from discontinued operations			—				—				—				1,497
Gain on sale of discontinued operations			—				—				—				17,872
Discontinued operations			—				—				—				19,369
Net income		$	47,631			$	41,145			$	233,582			$	145,483
Changes in fair values of interest rate cash flow hedges and treasury locks			(2,528	)			(584	)			(1,016	)			(584	)
Changes in fair values of crude oil cash flow hedges			(3,216	)			507				(3,369	)			234
Comprehensive income		$	41,887			$	41,068			$	229,197			$	145,133

TEPPCO PARTNERS, L.P.

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

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net Income Allocation:
Limited Partner Unitholders:
Income from continuing operations		$	39,656			$	29,047			$	195,106			$	89,035
Income from discontinued operations			—				—				—				13,674
Total Limited Partner Unitholders net income allocation			39,656				29,047				195,106				102,709
General Partner:
Income from continuing operations			7,975				12,098				38,476				37,079
Income from discontinued operations			—				—				—				5,695
Total General Partner net income allocation			7,975				12,098				38,476				42,774
Total net income allocated		$	47,631			$	41,145			$	233,582			$	145,483
Basic and diluted net income per Limited Partner Unit:
Continuing operations		$	0.44			$	0.39			$	2.17			$	1.24
Discontinued operations			—				—				—				0.19
Basic and diluted net income per Limited Partner Unit		$	0.44			$	0.39			$	2.17			$	1.43
Weighted average limited partner units outstanding			89,868				75,360				89,835				71,782

See Notes to Unaudited Condensed Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)

		For the Nine Months Ended
		September 30,
		2007				2006
Operating activities:
Net income		$	233,582			$	145,483
Adjustments to reconcile net income to cash provided by continuing operating activities:
Income from discontinued operations			—				(19,369	)
Deferred income taxes			(656	)			657
Depreciation and amortization			77,735				83,683
Amortization of deferred compensation			514				—
Earnings in equity investments			(54,856	)			(15,230	)
Distributions from equity investments			96,967				26,546
Gains on sales of assets			(18,653	)			(1,410	)
Gain on sale of ownership interest in Mont Belvieu Storage Partners, L.P.			(59,628	)			—
Non-cash portion of interest expense			906				1,241
Net effect of changes in operating accounts			(56,725	)			9,412
Net cash provided by continuing operating activities			219,186				231,013
Net cash provided by discontinued operations			—				1,521
Net cash provided by operating activities			219,186				232,534
Investing activities:
Proceeds from sales of assets			27,771				39,750
Proceeds from sale of ownership interest			137,326				—
Purchase of assets			(12,733	)			(10,975	)
Increase in restricted cash			(2,877	)			—
Investment in Mont Belvieu Storage Partners, L.P.			—				(4,168	)
Investment in Centennial Pipeline LLC			(11,081	)			(2,500	)
Investment in Jonah Gas Gathering Company			(127,775	)			(65,342	)
Capitalized costs incurred to develop identifiable intangible assets			(2,500	)			—
Cash paid for linefill on assets owned			(26,613	)			(5,640	)
Capital expenditures			(164,161	)			(125,684	)
Net cash used in investing activities			(182,643	)			(174,559	)
Financing activities:
Proceeds from revolving credit facility			805,250				509,750
Repayments on revolving credit facility			(918,250	)			(556,650	)
Issuance of Limited Partner Units, net			53				195,072
Issuance of Junior Subordinated Notes			299,517				—
Debt issuance costs			(3,750	)			—
Proceeds from termination of treasury locks			1,443				—
Payment for termination of interest rate swap			(1,235	)			—
Distributions paid			(219,613	)			(206,176	)
Net cash used in financing activities			(36,585	)			(58,004	)
Net change in cash and cash equivalents			(42	)			(29	)
Cash and cash equivalents, January 1			70				119
Cash and cash equivalents, September 30		$	28			$	90

See Notes to Unaudited Condensed Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

UNAUDITED CONDENSED STATEMENTS 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 (Loss)				Total
Balance, December 31, 2006			89,804,829			$	(85,655	)		$	1,405,559			$	426			$	1,320,330
Net income allocation			—				38,476				195,106				—				233,582
Issuance of restricted units under 2006 LTIP			62,400				—				—				—				—
Units issued in connection with Employee Unit Purchase Plan			1,357				—				53				—				53
Cash distributions			—				(35,920	)			(183,693	)			—				(219,613	)
Non-cash contribution			—				—				276				—				276
Amortization of equity awards			—				—				252				—				252
Changes in fair values of crude oil cash flow hedges			—				—				—				(3,369	)			(3,369	)
Changes in fair values of interest rate cash flow hedges and treasury locks			—				—				—				(1,016	)			(1,016	)
Pension benefit SFAS No. 158 adjustment			—				—				—				(34	)			(34	)
Balance, September 30, 2007			89,868,586			$	(83,099	)		$	1,417,553			$	(3,993	)		$	1,330,461

See Notes to Unaudited Condensed Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. PARTNERSHIP ORGANIZATION AND BASIS OF PRESENTATION

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, each of TE Products Pipeline Company, Limited Partnership and TEPPCO Midstream Companies, L.P. separately converted into Texas limited partnerships and immediately thereafter each merged into separate 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 Products Partners”) 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 (through its 100% ownership of our General Partner) 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 condensed 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 September 30, 2007, and the results of our operations and cash flows for the periods presented. The results of operations for the three months and nine months ended September 30, 2007, are not necessarily indicative of results of our operations for the full year 2007. The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. You should read these interim financial statements in

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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 GAAP 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

     We are organized as a pass-through entity for income tax purposes. As a result, our partners are responsible for federal income taxes on their share of our taxable income. For the three months and nine months ended September 30, 2007 and 2006, our provision for income taxes is applicable to our state tax obligations under the Revised Texas Franchise Tax enacted in May 2006. At September 30, 2007, we had a current tax liability of $0.9 million, while at December 31, 2006, we had a deferred tax liability of $0.7 million. During the three months and nine months ended September 30, 2007, we recorded a reduction to deferred tax expense of $0 and $0.7 million, respectively, and an increase in current income tax expense of less than $0.1 million and $0.9 million, respectively, shown on our statements of consolidated income for the three months and nine months ended September 30, 2007 as provision for income taxes. During the three months and nine months ended September 30, 2006, we recorded deferred tax expense of approximately $0.1 million and $0.7 million, respectively.

     In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, we must recognize the tax effects of any uncertain tax positions we may adopt, if the position taken by us is more likely than not sustainable. If a tax position meets such criteria, the tax effect to be recognized by us would be the largest amount of benefit with more than a 50% chance of being realized upon settlement. This guidance was effective January 1, 2007, and our adoption of this guidance had no material impact on our financial position, results of operations or cash flows.

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 anti-dilutive 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.

     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 September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP 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.

     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 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 comparisons 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 are currently evaluating this statement and have not yet determined the impact of such on our financial statements.

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Cash

     Restricted cash represents amounts held by us for the settlement of a United States Department of Justice (“DOJ”) civil penalty related to the release of product. See Note 16 for additional information.

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 Emerging Issues Task Force (“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 $751.3 million and $1,836.0 million for the three months and nine months ended September 30, 2007, respectively, and $460.7 million and $774.4 million for the three months and nine months ended September 30, 2006, respectively. 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 period from January 1, 2006 through March 31, 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.

     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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 in accordance with 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 restricted unit awards is based on the market price of the underlying Units on the date of grant. The fair value of other unit-based awards is estimated using the Black-Scholes option pricing model. Under SFAS 123(R), the fair value of a unit-based award is amortized to earnings on a straight-line basis over the requisite service or vesting period for unit-based awards. Compensation for liability awards is recognized over the requisite service or vesting period of an award based on the fair market value of the award remeasured at each reporting period. Liability awards will be settled in cash upon vesting. We accrue compensation expense based upon the terms of each plan. For a discussion of the EPCO, Inc. TPP Employee Unit Purchase Plan, see Note 12.

     The following table summarizes compensation expense by plan for the three months and nine months ended September 30, 2007 and 2006:

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Phantom Unit Plans (1) (2):
1999 Phantom Unit Retention Plan		$	(51	)		$	374			$	731			$	555
2000 Long Term Incentive Plan			(25	)			115				277				434
2005 Phantom Unit Plan			(112	)			343				429				846
EPCO, Inc. 2006 TPP Long-Term Incentive Plan:
Unit options			27				—				39				—
Restricted units			135				—				199				—
Unit appreciation rights (“UARs”) (2)			20				—				44				—
Phantom units (2)			3				—				7				—
Compensation expense allocated under ASA (3)			357				53				710				119
Total compensation expense		$	354			$	885			$	2,436			$	1,954

1999 Plan

     The Texas Eastern Products Pipeline Company, LLC 1999 Phantom Unit Retention Plan (“1999 Plan”) provides for the issuance of phantom unit awards as incentives to key employees. These liability awards are automatically redeemed for cash based on the vested portion of the fair market value of the phantom units at redemption dates in each award. The fair market value of each phantom unit award is equal to the closing price of a Unit on the NYSE on the redemption date. Each participant is required to redeem their phantom units as they vest.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Each participant is also entitled to cash distributions equal to the product of the number of phantom units outstanding for the participant and the per Unit cash distribution that we paid to our unitholders.

     A total of 31,600 phantom units were outstanding under the 1999 Plan at September 30, 2007. These awards vest as follows: 13,000 in April 2008; 13,000 in April 2009; and 5,600 in January 2010. At September 30, 2007 and December 31, 2006, we had accrued liability balances of $0.9 million and $0.8 million, respectively, for compensation related to the 1999 Plan.

2000 LTIP

     The Texas Eastern Products Pipeline Company, LLC 2000 Long Term Incentive Plan (“2000 LTIP”) provides key employees incentives to achieve improvements in our financial performance. Generally, upon the close of a three-year performance period, if the participant is still an employee of EPCO, the participant will receive a cash payment equal to (i) the applicable “performance percentage” as specified in the award multiplied by (ii) the number of phantom units granted under the award multiplied by (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, during the performance period, each participant is entitled to cash distributions equal to the product of the number of phantom units outstanding for the participant and the per Unit cash distribution that we paid to our unitholders.

     At September 30, 2007, a total of 19,700 phantom units were outstanding under the 2000 LTIP, of which 8,400 vest in 2008 and 11,300 vest in 2009. At September 30, 2007 and December 31, 2006, we had accrued liability balances of $0.8 million and $0.6 million, respectively, for compensation related to the 2000 LTIP.

2005 Phantom Unit Plan

     The Texas Eastern Products Pipeline Company, LLC 2005 Phantom Unit Plan (“2005 Phantom Unit Plan”) provides key employees incentives to achieve improvements in our financial performance. Generally, upon the close of a three-year performance period, if the participant is still an employee of EPCO, the participant will receive a cash payment equal to (i) the applicable “performance percentage” as specified in the award multiplied by (ii) the number of phantom units granted under the award multiplied by (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. The terms of the 2005 Phantom Unit Plan are similar to our 2000 LTIP (see preceding section) except that the performance percentage referenced in each award is based upon an improvement in EBITDA (as defined in the plan) during a given three-year performance period over EBITDA for the three-year period preceding the performance period. In addition, during the performance period, each participant is entitled to cash distributions equal to the product of the number of phantom units outstanding for the participant and the per Unit cash distribution that we paid to our unitholders.

     At September 30, 2007, a total of 76,000 phantom units were outstanding under the 2005 Phantom Unit Plan, of which 37,800 vest in 2008 and 38,200 vest in 2009. At September 30, 2007 and December 31, 2006, we had accrued liability balances of $2.1 million and $1.6 million, respectively, for compensation related to the 2005 Phantom Unit Plan.

2006 LTIP

     At a special meeting of our unitholders on December 8, 2006, our unitholders approved the EPCO, Inc. 2006 TPP Long-Term Incentive Plan (“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, UARs and distribution

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

equivalent rights. The exercise price of unit options or UARs 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 UARs, which vest in 2012, respectively. On May 22, 2007, 155,000 unit options, 62,900 restricted units and 338,479 UARs were granted 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 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 September 30, 2007, and the forfeiture of restricted units through September 30, 2007, a total of 4,782,600 additional Units could be issued under the 2006 LTIP in the future.

     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 September 30, 2007			155,000			$	45.35				9.65
Options exercisable at:
September 30, 2007			—			$	—				—

          At September 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 3.64 years.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     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	)			37.64
Restricted Units at September 30, 2007			62,400				37.64

     None of our restricted units vested during the nine months ended September 30, 2007. At September 30, 2007, total unrecognized compensation cost related to restricted units was $2.2 million, and these costs are expected to be recognized over a weighted-average period of 3.64 years.

     Phantom Units and UARs

     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 (“Payment Date”). In addition, for each calendar quarter from the grant date until the Payment Date, each non-executive director will receive a cash payment within such calendar quarter equal to the product of (i) the per Unit cash distributions paid to our unitholders during such calendar quarter, if any, multiplied by (ii) the number of phantom units subject to their grant. Phantom unit awards to non-employee directors are accounted for similar to SFAS 123(R) liability awards.

     On May 2, 2007, the non-executive members of the board of directors were each awarded 22,075 UARs under the 2006 LTIP. The UARs 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 UARs 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 UARs on the payment date over the fair market value of the Units subject to the UARs on the date of grant. UARs awarded to non-executive directors are accounted for similar to SFAS 123(R) liability awards.

     On May 22, 2007, 338,479 UARs were granted to our employees under the 2006 LTIP. The UARs are subject to five year cliff vesting and are subject to forfeiture. When the UARs 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. UARs awarded to employees are accounted for as liability awards under SFAS 123(R) since the current intent is to cash-settle the awards.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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 September 30, 2007, $0.1 million of the TEPPCO RCBP plan assets had not been distributed to plan participants. We do not expect to make any 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

     We are exposed to financial market risks, including changes in crude oil commodity prices and interest rates. We do not have foreign exchange risks. We may use financial instruments (i.e., futures, forwards, swaps, options and other financial instruments with similar characteristics) to mitigate the risks of certain identifiable and anticipated transactions. In general, the type of risks we attempt to hedge are those related to fair values of certain debt instruments and cash flows resulting from changes in applicable interest rates or commodity prices. As a matter of policy, we do not use financial instruments for speculative (e.g. “trading”) purposes.

Interest Rate Risk Hedging Program

     Our interest rate exposure results from variable and fixed interest rate borrowings under various debt agreements. We manage a portion of our interest rate exposure by utilizing interest rate swaps and similar arrangements, which allow us to convert a portion of fixed rate debt into variable rate debt or a portion of variable rate debt into fixed rate debt.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Interest Rate Swaps

     We utilize interest rate swap agreements to manage our cost of borrowing. The following table summarizes our interest rate swaps outstanding at September 30, 2007.

Period Covered by

Termination Date of

Hedged Debt

Number of Swaps

Swaps

Swaps

Rate Swaps

Notional Value

Revolving Credit Facility, due Dec. 2011

4

Jan. 2006 to Jan. 2008

Jan. 2008

Swapped 5.36% floating rate for fixed rate ranging from 4.67% to 4.695% (1)

$200.0 million

          Interest Rate Swap Terminations. 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. This swap agreement, designated as a fair value hedge, had a notional amount of $210.0 million and was set to mature in January 2028 to match the principal and maturity of the TE Products Senior Notes. Under the swap agreement, TE Products paid a floating rate of interest based on a three-month U.S. Dollar LIBOR rate, plus a spread of 147 basis points, and received a fixed rate of interest of 7.51%. In September 2007, we terminated this swap agreement resulting in a loss of $1.2 million. This loss has been deferred as an adjustment to the carrying value of the 7.51% Senior Notes and is being amortized using the effective interest method as an increase to future interest expense over the remaining term of the 7.51% Senior Notes. In the event of early extinguishment of the 7.51% Senior Notes, any remaining unamortized loss would be recognized in the statement of consolidated income at the time of extinguishment. During the three months and nine months ended September 30, 2007 and 2006, we recognized reductions in interest expense of $0.1 million, $0.2 million, $0.7 million and $1.5 million, respectively, related to the difference between the fixed rate and the floating rate of interest on the interest rate swap. The fair value of this interest rate swap was a liability of approximately $2.6 million at December 31, 2006.

     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 were set to mature in 2012 to match the principal and maturity of the underlying debt. These swap agreements were terminated in 2002 resulting in deferred gains of $44.9 million, which 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 September 30, 2007 and December 31, 2006, the unamortized balance of the deferred gains was $24.4 million and $26.8 million, respectively. In the event of early extinguishment of the 7.625% Senior Notes, any remaining unamortized gains would be recognized in the statement of consolidated income at the time of extinguishment.

     Treasury Locks

     We utilize treasury locks to hedge the underlying U.S. treasury rate related to our anticipated issuances of debt. In October 2006 and February 2007, we entered into treasury locks, accounted for as cash flow hedges, that extended through June 2007 for a notional amount totaling $300.0 million. 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 these gains were 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. In the event of early extinguishment of the junior

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

subordinated notes, any remaining unamortized gains would be recognized in the statement of consolidated income at the time of extinguishment.

     In mid 2007, we entered into treasury locks that extend through January 31, 2008 for a notional amount totaling $400.0 million. These instruments have been designated as cash flow hedges to offset our exposure to increases in the underlying U.S. Treasury benchmark rates that are expected to be used to establish the fixed interest rate for debt that we expect to incur in 2008. The weighted average rate under the treasury lock agreements was approximately 4.56%. 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 September 30, 2007, the fair value of the treasury locks was a liability of $2.6 million. To the extent effective, gains and losses on the value of the treasury locks 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 September 30, 2007.

Commodity Risk Hedging Program

     We seek to maintain a position that is substantially balanced between crude oil purchases and related sales and future delivery obligations. As part of our crude oil marketing business, we enter into financial instruments such as swaps and other hedging instruments. The purpose of such hedging activity is to either balance our inventory position or to lock in a profit margin and, as such, the financial instruments do not expose us to significant market risk.

     At September 30, 2007 and December 31, 2006, we had a limited number of commodity derivatives that were accounted for as cash flow hedges. These financial instruments had a minimal impact on our earnings. The fair value of these open positions at September 30, 2007 and December 31, 2006 was a liability of $2.7 million and an asset of $0.7 million, respectively.

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 September 30, 2007 and December 31, 2006. The major components of inventories were as follows:

		September 30,				December 31,
		2007				2006
Crude oil (1)		$	87,539			$	49,312
Refined products and LPGs (2)			27,414				7,636
Lubrication oils and specialty chemicals			7,914				7,500
Materials and supplies			7,337				7,029
NGLs			3,569				716
Total		$	133,773			$	72,193

     Due to fluctuating commodity prices in the crude oil, refined products and LPG industries, we recognize lower of cost or market (“LCM”) adjustments when the carrying value of our inventories exceed their net realizable value. These non-cash charges are a component of costs and expenses in the period they are recognized. For the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

three months ended September 30, 2007, we had no LCM adjustments. For the three months ended September 30, 2006, and for the nine months ended September 30, 2007 and 2006, we recognized LCM adjustments of approximately $0.3 million, $0.6 million and $0.3 million, respectively.

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

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

		Estimated
		Useful Life				September 30,				December 31,
		In Years				2007				2006
Plants and pipelines (1)			5-40	(4)		$	1,763,665			$	1,615,867
Underground and other storage facilities (2)			5-40	(5)			243,911				196,306
Transportation equipment (3)			5-10				5,746				8,200
Land and right of way							138,018				128,791
Construction work in progress							161,020				202,820
Total property, plant and equipment						$	2,312,360			$	2,151,984
Less accumulated depreciation							562,076				509,889
Property, plant and equipment, net						$	1,750,284			$	1,642,095

     The following table summarizes our depreciation expense and capitalized interest amounts for the three months and nine months ended September 30, 2007 and 2006:

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Depreciation expense (1)		$	20,572			$	19,564			$	60,001			$	61,015
Capitalized interest (2)			2,010				1,703				8,813				8,120

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

     We own interests in related businesses that are accounted for using the equity method of accounting. 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 September 30, 2007 and December 31, 2006:

		Ownership				Investments in unconsolidated
		Percentage at				affiliates at
		September 30,				September 30,
		2007				2007				December 31, 2006
Downstream Segment:
Centennial Pipeline LLC (“Centennial”)			50.0	%		$	80,428			$	62,321
MB Storage (1)			—				—				85,626
Other			25.0	%			348				369
Upstream Segment:
Seaway Crude Pipeline Company (“Seaway”)			50.0	%			192,214				195,584
Midstream Segment:
Jonah Gas Gathering Company (“Jonah”)			80.64	%			824,441				695,810
Total						$	1,097,431			$	1,039,710

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

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Equity earnings (losses):
Downstream Segment		$	(3,064	)		$	(2,949	)		$	(8,430	)		$	(6,581	)
Upstream Segment			1,073				2,962				4,310				10,257
Midstream Segment			21,056				11,563				62,430				11,563
Intersegment eliminations			(6	)			(9	)			(3,454	)			(9	)
Total equity earnings		$	19,059			$	11,567			$	54,856			$	15,230

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 and terminals that carry imported, offshore and domestic onshore crude oil from a marine terminal at Freeport, Texas, to Cushing, Oklahoma, from a marine terminal at Texas City, Texas, to refineries in the Texas City and Houston, Texas, areas and from a connection that allows Seaway to receive both onshore and offshore domestic crude oil in the Texas Gulf Coast area for delivery to Cushing. 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 nine months ended September 30, 2007 and 2006, we received distributions from Seaway of $9.2 million and $15.3 million, respectively. During the nine months ended September 30, 2007 and 2006, we did not invest any additional funds in Seaway.

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 nine months ended September 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 nine months ended September 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 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 period from January 1, 2007 through February 28, 2007 and for the nine months ended September 30, 2006, TE Products’ sharing ratio in the earnings of MB Storage was approximately 67.7% and 63.8%, 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 nine months ended September 30, 2006, TE Products received distributions from MB Storage of $11.2 million and contributed $4.2 million to MB Storage.

Jonah

     On August 1, 2006, Enterprise Products Partners, 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. The joint venture is governed by a management committee comprised of two representatives approved by Enterprise Products Partners and two representatives approved by us, each with equal voting power. The formation of the joint venture was reviewed and recommended for approval by our ACG Committee. Prior to entering into the Jonah joint venture, Enterprise Products Partners 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 Products Partners 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 increased 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. Enterprise Products Partners manages the Phase V construction project.

     We expect to reimburse Enterprise Products Partners 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 Products Partners will each pay our respective ownership share (approximately 80% and 20%, respectively) of the expansion costs that exceed the agreed upon base cost estimate. From August 1, 2006 through July 2007, we and Enterprise Products Partners equally shared the costs of the Phase V expansion, and Enterprise Products Partners shared in the

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

incremental cash flow resulting from the operation of those new facilities. During August 2007, with the completion of a construction milestone (as defined in the partnership agreement), we and Enterprise Products Partners began sharing 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, at September 30, 2007, our ownership interest in Jonah was approximately 80.64%, and Enterprise Products Partners’ ownership interest in Jonah was approximately 19.36%. Our ownership interest in Jonah is anticipated to remain at 80.64% in the future. Enterprise Products Partners serves as operator of Jonah, with further costs and cash distributions being allocated based on such ownership interests.

     Through September 30, 2007, we have reimbursed Enterprise Products Partners $213.3 million for our share of the Phase V cost incurred by it (including its cost of capital incurred prior to the formation of the joint venture of $1.3 million). At September 30, 2007, we had a payable to Enterprise Products Partners for costs incurred of $13.0 million. During the nine months ended September 30, 2007, we received distributions from Jonah of $77.3 million, which included $11.6 million of distributions declared in 2006 and paid during the first quarter of 2007. During the nine months ended September 30, 2007, we invested $127.8 million in Jonah.

Summarized Financial Information of Unconsolidated Affiliates

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

		For the Three Months Ended
		September 30, 2007												September 30, 2006
										Net												Net
		Revenues				Operating Income				Income				Revenues				Operating Income				Income (Loss)
Downstream Segment (1)		$	15,728			$	6,346			$	3,682			$	19,065			$	1,585			$	(1,125	)
Upstream Segment			16,802				6,231				6,303				20,895				9,164				9,313
Midstream Segment (2)			47,359				23,223				23,455				44,956				18,573				16,529

		For the Nine Months Ended
		September 30, 2007												September 30, 2006
						Operating				Net								Operating				Net
		Revenues				Income				Income				Revenues				Income				Income (Loss)
Downstream Segment (1)		$	43,326			$	9,768			$	1,587			$	52,965			$	5,820			$	(2,383	)
Upstream Segment			51,443				20,374				20,623				69,777				28,138				28,413
Midstream Segment (2)			150,282				66,766				67,496				111,657				71,030				65,853

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

		September 30, 2007
		Current				Noncurrent												Noncurrent				Partners’
		Assets				Assets				Current Liabilities				Long-term Debt				Liabilities				Capital
Downstream Segment (1)		$	24,497			$	250,978			$	20,686			$	132,450			$	7,436			$	114,903
Upstream Segment			25,417				251,814				8,591				—				38				268,602
Midstream Segment			45,301				1,008,811				21,815				—				258				1,032,039

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		December 31, 2006
		Current				Noncurrent												Noncurrent				Partners’
		Assets				Assets				Current 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

NOTE 9. ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS

Acquisitions

     On July 31, 2007, we purchased assets from Duke Energy Ohio, Inc. and Ohio River Valley Propane, LLC for approximately $6.0 million. The assets, included in our Downstream Segment, consist of an active 170,000 barrel LPG storage cavern, the associated piping and related equipment and a one bay truck rack. These assets are located adjacent to our Todhunter facility near Middleton, Ohio and are connected to our existing LPG pipeline. We funded the purchase through borrowings under our revolving credit facility, and we allocated the purchase price to property, plant and equipment.

     On September 27, 2007, we purchased assets from Shell Pipeline Company LP for approximately $6.8 million. The assets, included in our Upstream Segment, consist of approximately 44 miles of pipeline in South Texas and related equipment. We funded the purchase through borrowings under our revolving credit facility, and we allocated the purchase price to property, plant and equipment.

Dispositions

     MB Storage and Other Related Assets

     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 $155.8 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 used the proceeds from the transaction to partially fund our 2007 portion of the Jonah Phase V expansion and other 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.

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Other Refined Products Assets

     On January 23, 2007, we sold a 10-mile, 18-inch segment of pipeline to an affiliate of Enterprise Products Partners 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 Products Partners 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.

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

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

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

		For the Nine Months
		Ended September 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

NOTE 10. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

     The following table summarizes our intangible assets, including excess investments, being amortized at September 30, 2007 and December 31, 2006:

		September 30, 2007								December 31, 2006
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Intangible assets:
Downstream Segment:
Transportation agreements		$	1,000			$	(346	)		$	1,000			$	(308	)
Other			4,474				(530	)			1,974				(78	)
Subtotal			5,474				(876	)			2,974				(386	)
Upstream Segment:
Transportation agreements			888				(321	)			888				(276	)
Other			10,030				(2,931	)			10,030				(2,479	)
Subtotal			10,918				(3,252	)			10,918				(2,755	)
Midstream Segment:
Gathering agreements			239,649				(101,848	)			239,649				(86,537	)
Fractionation agreement			38,000				(18,050	)			38,000				(16,625	)
Other			306				(145	)			306				(134	)
Subtotal			277,955				(120,043	)			277,955				(103,296	)
Total intangible assets			294,347				(124,171	)			291,847				(106,437	)
Excess investments: (1)
Downstream Segment (2)			33,390				(20,069	)			33,390				(16,579	)
Upstream Segment (3)			26,908				(4,964	)			26,908				(4,450	)
Midstream Segment (4)			5,660				(62	)			2,924				—
Subtotal			65,958				(25,095	)			63,222				(21,029	)
Total intangible assets, including excess investments		$	360,305			$	(149,266	)		$	355,069			$	(127,466	)

TEPPCO PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The following table presents the amortization expense of our intangible assets by segment for the three months and nine months ended September 30, 2007 and 2006:

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Intangible assets:
Downstream Segment		$	191			$	12			$	490			$	(31	)
Upstream Segment			157				184				497				545
Midstream Segment			5,566				6,490				16,747				22,154
Subtotal			5,914				6,686				17,734				22,668
Excess investments: (1)
Downstream Segment			1,897				1,027				3,490				2,731
Upstream Segment			171				173				514				518
Midstream Segment			29				—				62				—
Subtotal			2,097				1,200				4,066				3,249
Total amortization expense		$	8,011			$	7,886			$	21,800			$	25,917