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 March 31, 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 May 3, 2007: 89,804,829

 

 

TEPPCO PARTNERS, L.P.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006 (unaudited)			1
Statements of Consolidated Income and Comprehensive Income For the Three Months Ended March 31, 2007 and 2006 (unaudited)			2
Statements of Consolidated Cash Flows For the Three Months Ended March 31, 2007 and 2006 (unaudited)			4
Statement of Consolidated Partners’ Capital For the Three Months Ended March 31, 2007 (unaudited)			5
Notes to the Consolidated Financial Statements (unaudited)			6
Note 1. Organization and Basis of Presentation			6
Note 2. Recent Accounting Developments			8
Note 3. Employee Benefit Plans			9
Note 4. Financial Instruments – Interest Rate Swaps			10
Note 5. Inventories			11
Note 6. Investments in Unconsolidated Affiliates			11
Note 7. Dispositions and Discontinued Operations			14
Note 8. Goodwill and Other Intangible Assets			16
Note 9. Debt Obligations			18
Note 10. Partners’ Capital and Distributions			20
Note 11. Business Segments			22
Note 12. Related Party Transactions			25
Note 13. Earnings per Unit			27
Note 14. Commitments and Contingencies			28
Note 15. Supplemental Cash Flow Information			34
Note 16. Supplemental Condensed Consolidating Financial Information			34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Cautionary Note Regarding Forward-Looking Statements			39
Item 3. Quantitative and Qualitative Disclosures About Market Risk			57
Item 4. Controls and Procedures			59
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			60
Item 1A. Risk Factors			60
Item 6. Exhibits			60
Signatures			63
Form of Option Grant
Form of TPP Unit Appreciation Right Grant
Form of Restricted Unit Grant
Form of Phantom Unit 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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TEPPCO PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)

		March 31,				December 31,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	71			$	70
Accounts receivable, trade (net of allowance for doubtful accounts of $103 and $100)			776,570				852,816
Accounts receivable, related parties			11,046				11,788
Inventories			63,834				72,193
Other			29,065				29,843
Total current assets			880,586				966,710
Property, plant and equipment, at cost (net of accumulated depreciation and amortization of $526,533 and $509,889)			1,650,547				1,642,095
Equity investments			997,559				1,039,710
Intangible assets			179,499				185,410
Goodwill			15,506				15,506
Other assets			73,253				72,661
Total assets		$	3,796,950			$	3,922,092
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable and accrued liabilities		$	780,131			$	855,306
Accounts payable, related parties			45,451				34,461
Accrued interest			15,667				35,523
Other accrued taxes			13,649				14,482
Other			23,735				36,776
Total current liabilities			878,633				976,548
Senior notes			1,112,802				1,113,287
Other long-term debt			399,500				490,000
Deferred tax liability			10				652
Other liabilities and deferred credits			19,330				19,461
Other liabilities, related party			—				1,814
Commitments and contingencies
Partners’ capital:
Accumulated other comprehensive income			969				426
General partner’s interest			(74,759	)			(85,655	)
Limited partners’ interests			1,460,465				1,405,559
Total partners’ capital			1,386,675				1,320,330
Total liabilities and partners’ capital		$	3,796,950			$	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
		March 31,
		2007				2006
Operating revenues:
Sales of petroleum products		$	1,850,128			$	2,396,346
Transportation – Refined products			37,135				31,799
Transportation – LPGs			36,053				29,421
Transportation – Crude oil			10,790				8,923
Transportation – NGLs			10,941				10,653
Gathering – Natural gas			15,408				41,375
Other			17,974				17,852
Total operating revenues			1,978,429				2,536,369
Costs and expenses:
Purchases of petroleum products			1,813,994				2,371,040
Operating expense			45,166				46,503
Operating fuel and power			15,274				14,297
General and administrative			8,598				9,201
Depreciation and amortization			25,369				28,757
Taxes – other than income taxes			5,243				5,311
Gains on sales of assets			(18,649	)			(1,378	)
Total costs and expenses			1,894,995				2,473,731
Operating income			83,434				62,638
Other income (expense):
Interest expense – net			(22,211	)			(21,143	)
Gain on sale of ownership interest in Mont Belvieu Storage Partners, L.P.			59,837				—
Equity earnings			16,563				989
Interest income			342				472
Other income – net			244				427
Income before provision for income taxes			138,209				43,383
Provision for income taxes			18				—
Income from continuing operations			138,191				43,383
Income from discontinued operations			—				1,607
Gain on sale of discontinued operations			—				17,884
Discontinued operations			—				19,491
Net income		$	138,191			$	62,874
Changes in fair values of interest rate cash flow hedges			217				1,671
Changes in fair values of crude oil cash flow hedges			360				236
Pension benefit SFAS No. 158 adjustment			(34	)			—
Comprehensive income		$	138,734			$	64,781

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
		March 31,
		2007				2006
Net Income Allocation:
Limited Partner Unitholders:
Income from continuing operations		$	115,524			$	30,628
Income from discontinued operations			—				13,760
Total Limited Partner Unitholders net income allocation			115,524				44,388
General Partner:
Income from continuing operations			22,667				12,755
Income from discontinued operations			—				5,731
Total General Partner net income allocation			22,667				18,486
Total net income allocated		$	138,191			$	62,874
Basic and diluted net income per Limited Partner Unit:
Continuing operations		$	1.29			$	0.43
Discontinued operations			—				0.20
Basic and diluted net income per Limited Partner Unit		$	1.29			$	0.63
Weighted average Limited Partner Units outstanding			89,805				69,964

See Notes to Unaudited Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in thousands)

		For the Three Months Ended
		March 31,
		2007				2006
Operating activities:
Net income		$	138,191			$	62,874
Adjustments to reconcile net income to cash provided by continuing operating activities:
Income from discontinued operations			—				(19,491	)
Deferred income taxes			(642	)			—
Depreciation and amortization			25,369				28,757
Earnings in equity investments			(16,563	)			(989	)
Distributions from equity investments			40,304				16,297
Gains on sales of assets			(18,649	)			(1,378	)
Gain on sale of ownership interest in Mont Belvieu Storage Partners, L.P.			(59,837	)			—
Non-cash portion of interest expense			294				443
Net effect of changes in operating accounts			(39,736	)			(49,420	)
Net cash provided by continuing operating activities			68,731				37,093
Net cash provided by discontinued operations			—				1,631
Net cash provided by operating activities			68,731				38,724
Investing activities:
Proceeds from sales of assets and ownership interest			165,266				39,030
Investment in Mont Belvieu Storage Partners, L.P.			—				(1,720	)
Investment in Centennial Pipeline LLC			(6,081	)			—
Investment in Jonah Gas Gathering Company			(30,942	)			—
Capital expenditures			(34,084	)			(38,272	)
Net cash provided by (used in) investing activities			94,159				(962	)
Financing activities:
Proceeds from revolving credit facility			235,000				187,700
Repayments on revolving credit facility			(325,500	)			(158,600	)
Distributions paid			(72,389	)			(66,892	)
Net cash used in financing activities			(162,889	)			(37,792	)
Net change in cash and cash equivalents			1				(30	)
Cash and cash equivalents, January 1			70				119
Cash and cash equivalents, March 31		$	71			$	89

See Notes to Unaudited Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

STATEMENT OF CONSOLIDATED PARTNERS’ CAPITAL
(Unaudited)
(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			—				22,667				115,524				—				138,191
Cash distributions			—				(11,771	)			(60,618	)			—				(72,389	)
Changes in fair values of crude oil cash flow hedges			—				—				—				360				360
Changes in fair values of interest rate cash flow hedges			—				—				—				217				217
Pension benefit SFAS No. 158 adjustment			—				—				—				(34	)			(34	)
Balance, March 31, 2007			89,804,829			$	(74,759	)		$	1,460,465			$	969			$	1,386,675

See Notes to Unaudited Consolidated Financial Statements.

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

     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 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”).

     We were formed in March 1990, and we operate through TE Products Pipeline Company, Limited Partnership (“TE Products”), TCTM, L.P. (“TCTM”) and TEPPCO Midstream Companies, L.P. (“TEPPCO Midstream”). Collectively, TE Products, TCTM and TEPPCO Midstream are referred to as the “Operating Partnerships.” Texas Eastern Products Pipeline Company, LLC (“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 the Operating Partnerships and TEPPCO GP, Inc., a wholly owned subsidiary, holds a 0.001% general partner interest.

     Our General Partner is owned by DFI GP Holdings L.P. (“DFI”), an affiliate of EPCO, Inc. (“EPCO”), a privately held company controlled by Dan L. Duncan. Mr. Duncan and his affiliates, including EPCO, DFI and Dan Duncan LLC, privately held companies controlled by him, control us, our General Partner and Enterprise Products Partners L.P. (“Enterprise”) and its affiliates, including Enterprise GP Holdings L.P. and Duncan Energy Partners L.P. DFI 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. 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.

     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 March 31, 2007, and the results of our operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 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. We have reclassified certain amounts from prior periods to conform to the current presentation.

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.

TEPPCO PARTNERS, L.P.

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

     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.”

Dollar Amounts

     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.

Income Taxes

     Provision for income taxes is applicable to our state tax obligations under the Texas Margin Tax enacted in May 2006. For the three months ended March 31, 2007, we recorded a $0.7 million current tax liability and a $0.6 million reduction to deferred tax liability. The offsetting net charge consisting of a reduction to deferred tax expense of $0.6 million and an increase in current income tax expense of $0.7 million is shown on our statement of consolidated income for the three months ended March 31, 2007 as provision for income taxes.

Net Income Per Unit

     Basic net income per Unit is computed by dividing net income, after deduction of the General Partner’s interest, by the weighted average number of Units outstanding (a total of 89.8 million Units and 70.0 million Units for the three months ended March 31, 2007 and 2006, respectively). 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 10). The General Partner was allocated $22.7 million (representing 16.4%) of net income for the three months ended March 31, 2007 and $18.5 million (representing 29.4%) of net income for the three months ended March 31, 2006.

     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.

     Diluted net income per Unit equaled basic net income per Unit for each of the three months ended March 31, 2007 and 2006, as there were no dilutive instruments outstanding.

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

TEPPCO PARTNERS, L.P.

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

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, L.P. (“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, 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 statement of consolidated income by approximately $385.0 million for the three months ended March 31, 2007. 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 for the three months ended 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 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 2. RECENT ACCOUNTING DEVELOPMENTS

     In June 2006, the 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.

TEPPCO PARTNERS, L.P.

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

     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 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.

NOTE 3. 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.

     On May 27, 2005, the TEPPCO RCBP was amended. 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.

TEPPCO PARTNERS, L.P.

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

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. Additional settlement charges will be recorded as the distribution of assets are made to plan participants. At March 31, 2007, $0.4 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 4. 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 three months ended March 31, 2007 and 2006, we recognized reductions in interest expense of $0.3 million and $0.7 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 March 31, 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 $2.0 million and $2.6 million at March 31, 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 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 Senior Notes and are being amortized using the effective interest method as reductions to future interest expense over the remaining term of the Senior Notes. At March 31, 2007, the unamortized balance of the deferred gains was $26.8 million. In the event of early extinguishment of the Senior Notes, any remaining unamortized gains would be recognized in the statement of consolidated 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

TEPPCO PARTNERS, L.P.

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

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 are effective, will be recognized in other comprehensive income until the hedged interest costs are recognized in earnings. At March 31, 2007 and December 31, 2006, the fair values of these interest rate swaps were assets of $1.1 million and $1.4 million, respectively.

     In October 2006 and February 2007, we executed a series of treasury rate lock agreements that extend through June 2007 for a notional amount totaling $300.0 million. These agreements, which are derivative instruments, have been designated as cash flow hedges 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 2007. The weighted average rate under the treasury lock agreements was approximately 4.6%. The actual coupon rate of the expected debt issuance will be comprised of the underlying U.S. Treasury benchmark rate, plus a credit spread premium for our debt security. At March 31, 2007 and December 31, 2006, the fair values of these treasury locks were assets of $0.2 million and less than $0.1 million, respectively. 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 required to be recorded as of March 31, 2007.

NOTE 5. 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 March 31, 2007, and December 31, 2006. The major components of inventories were as follows:

		March 31,				December 31,
		2007				2006
Crude oil (1)		$	42,098			$	49,312
Refined products and LPGs (2)			7,226				7,636
Lubrication oils and specialty chemicals			7,545				7,500
Materials and supplies			6,965				7,029
Other			—				716
Total		$	63,834			$	72,193

NOTE 6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

Seaway

     Through one of our indirect wholly owned subsidiaries, we own a 50% ownership interest in Seaway Crude Pipeline Company (“Seaway”). The remaining 50% interest is owned by ConocoPhillips. We operate the Seaway assets. Seaway owns pipelines that carry mostly imported 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

TEPPCO PARTNERS, L.P.

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

Houston, Texas, areas. The Seaway Crude Pipeline Company Partnership Agreement provides for varying participation ratios throughout the life of Seaway. The 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 three months ended March 31, 2007 and 2006, we received distributions from Seaway of $3.8 million and $8.5 million, respectively. During the three months ended March 31, 2007 and 2006, we did not invest any additional funds in Seaway.

Centennial

     TE Products owns a 50% ownership interest in Centennial Pipeline LLC (“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 three months ended March 31, 2007, TE Products contributed $6.1 million to Centennial for contractual obligations that were created upon formation of Centennial. During the three months ended March 31, 2006, TE Products did not invest any additional funds in 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 Mont Belvieu Storage Partners, L.P. (“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 7). 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 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 three months ended March 31, 2006, TE Products’ sharing ratio in the earnings of MB Storage was approximately 55.9% and 57.9%, 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 three months ended March 31, 2006, TE Products received distributions from MB Storage of $7.8 million and contributed $1.7 million to MB Storage.

TEPPCO PARTNERS, L.P.

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

Summarized Financial Information for Seaway, Centennial and MB Storage

     We use the equity method of accounting to account for our investments in Seaway, Centennial and MB Storage. Summarized combined financial information for Seaway and Centennial for the three months ended March 31, 2007 and for MB Storage for the period from January 1, 2007 through February 28, 2007, and for Seaway, Centennial and MB Storage for the three months ended March 31, 2006, is presented below:

		For the Three Months Ended
		March 31,
		2007				2006
Revenues		$	34,585			$	38,635
Net income			9,287				7,041

     Summarized combined balance sheet information for Seaway and Centennial as of March 31, 2007, and for Seaway, Centennial and MB Storage as of December 31, 2006, is presented below:

		March 31,				December 31,
		2007				2006
Current assets		$	34,219			$	58,241
Noncurrent assets			510,482				615,790
Current liabilities			29,552				37,663
Long-term debt			137,500				150,000
Noncurrent liabilities			6,742				6,055
Partners’ capital			370,907				480,313

Jonah

     On August 1, 2006, Enterprise, through its affiliate, Enterprise Gas Processing, LLC, became our joint venture partner by acquiring an interest in Jonah Gas Gathering Company (“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, is scheduled to be completed in mid-2007. The second portion of the expansion is expected to be completed by the end of 2007. 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 March 31, 2007, we have reimbursed Enterprise $139.3 million for 50% of the Phase V cost incurred by it (including its cost of capital of $1.3 million). At March 31, 2007, we had a payable to Enterprise for costs incurred of $14.9 million. During November 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

TEPPCO PARTNERS, L.P.

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

remaining 20% and serving as operator, with further costs and cash distributions being allocated based on such ownership interests. At March 31, 2007, our ownership interest in Jonah was 82.7%, and for the three months ended March 31, 2007, our sharing ratio in the earnings of Jonah was 95.2%. During the three months ended March 31, 2007, we received distributions from Jonah of $26.1 million, which included $11.6 million of distributions declared in 2006 and paid during the first quarter of 2007. During the three months ended March 31, 2007, we contributed $30.9 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 Audit, Conflicts and Governance Committee of the Board of Directors of our General Partner (“ACG Committee”).

     Summarized financial information for Jonah for the three months ended March 31, 2007, is presented below:

Revenues		$	56,524
Net income			20,169

     Summarized balance sheet information for Jonah as of March 31, 2007 and December 31, 2006, is presented below:

		March 31,				December 31,
		2007				2006
Current assets		$	49,362			$	33,963
Noncurrent assets			868,992				800,591
Current liabilities			31,467				25,113
Noncurrent liabilities			195				191
Partners’ capital			886,692				809,250

NOTE 7. DISPOSITIONS AND DISCONTINUED OPERATIONS

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 $157.2 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 $59.8 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 CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

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.

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.

     A condensed statement of income for the Pioneer plant, which is classified as discontinued operations, for the three months ended March 31, 2006, is presented below:

		For the Three Months
		Ended March 31,
		2006
Operating revenues:
Sales of petroleum products		$	3,810
Other			921
Total operating revenues			4,731
Costs and expenses:
Purchases of petroleum products			2,861
Operating expense			182
Depreciation and amortization			51
Taxes – other than income taxes			30
Total costs and expenses			3,124
Income from discontinued operations		$	1,607

TEPPCO PARTNERS, L.P.

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

     Net cash provided by discontinued operations for the three months ended March 31, 2006, are presented below:

		For the Three Months
		Ended March 31,
		2006
Cash flows from discontinued operations:
Net income		$	19,491
Depreciation and amortization			51
Gain on sale of Pioneer plant			(17,884	)
Increase in inventories			(27	)
Net cash provided by discontinued operations		$	1,631

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

     Goodwill represents the excess of purchase price over fair value of net assets acquired and is presented on the consolidated balance sheets net of accumulated amortization. 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 March 31, 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)

Other Intangible Assets

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

		March 31, 2007								December 31, 2006
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Intangible assets:
Gathering and transportation agreements		$	241,537			$	(92,279	)		$	241,537			$	(87,121	)
Fractionation agreement			38,000				(17,100	)			38,000				(16,625	)
Other			12,310				(2,969	)			12,310				(2,691	)
Subtotal			291,847				(112,348	)			291,847				(106,437	)
Excess investments:
Centennial Pipeline LLC			33,390				(17,196	)			33,390				(16,579	)
Seaway Crude Pipeline Company			26,908				(4,621	)			26,908				(4,450	)
Jonah Gas Gathering Company			3,949				(19	)			2,924				—
Subtotal			64,247				(21,836	)			63,222				(21,029	)
Total intangible assets		$	356,094			$	(134,184	)		$	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 March 31, 2007 and 2006, respectively. Amortization expense on excess investments included in equity earnings was $0.8 million and $0.9 million for the three months ended March 31, 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 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

TEPPCO PARTNERS, L.P.

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

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		$	23,135			$	4,498
2008			20,664				4,621
2009			18,053				4,827
2010			18,034				3,621
2011			18,026				919

NOTE 9. DEBT OBLIGATIONS

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

		March 31,				December 31,
		2007				2006
Revolving Credit Facility, due December 2011		$	399,500			$	490,000
6.45% TE Products Senior Notes, due January 2008 (1)			179,976				179,968
7.625% Senior Notes, due February 2012			498,921				498,866
6.125% Senior Notes, due February 2013			199,166				199,130
7.51% TE Products Senior Notes, due January 2028			210,000				210,000
Total borrowings			1,487,563				1,577,964
Adjustment to carrying value associated with hedges of fair value swaps			24,739				25,323
Total Debt Instruments (1)		$	1,512,302			$	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

TEPPCO PARTNERS, L.P.

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

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 10), 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). At March 31, 2007, $399.5 million was outstanding under the Revolving Credit Facility at a weighted average interest rate of 5.94%. At March 31, 2007, we were in compliance with the covenants of the Revolving Credit Facility.

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 March 31, 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

TEPPCO PARTNERS, L.P.

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

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 March 31, 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 March 31, 2007, we were in compliance with the covenants of these Senior Notes.

     The following table summarizes the estimated fair values of the Senior Notes at March 31, 2007, and December 31, 2006:

						Fair Value
						March 31,				December 31,
		Face Value				2007				2006
6.45% TE Products Senior Notes, due January 2008		$	180,000			$	181,080			$	181,641
7.625% Senior Notes, due February 2012			500,000				541,589				537,067
6.125% Senior Notes, due February 2013			200,000				203,100				201,610
7.51% TE Products Senior Notes, due January 2028			210,000				219,450				221,471

     We have entered into interest rate swap agreements to hedge our exposure to changes in the fair value on a portion of the Senior Notes discussed above (see Note 4).

Letter of Credit

     At March 31, 2007, we had outstanding a $9.1 million standby letter of credit in connection with crude oil purchased during the first quarter of 2007. The payable related to these purchases of crude oil is expected to be paid during the second quarter of 2007.

NOTE 10. 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 three months ended March 31, 2007 and 2006. The amounts for the three months ended March 31, 2007 take into account our issuance of 5.75 million Units in July 2006.

		For the Three Months Ended
		March 31,
		2007				2006
Limited Partner Units (1)		$	60,618			$	47,224
General Partner Ownership Interest			1,237				964
General Partner Incentive			10,534				18,704
Total Cash Distributions Paid		$	72,389			$	66,892
Total Cash Distributions Paid Per Unit		$	0.675			$	0.675

     On May 7, 2007, we will pay a cash distribution of $0.685 per Unit for the quarter ended March 31, 2007. The first quarter 2007 cash distribution will total approximately $73.6 million.

General Partner’s Interest

     At March 31, 2007 and December 31, 2006, we had deficit balances of $74.8 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 three months ended March 31, 2007, our General Partner was allocated $22.7 million (representing 16.4%) of our net income and received $11.8 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 March 31, 2007. Future cash distributions that exceed net income will result in an increase in the deficit balance in the General Partner’s equity account.

TEPPCO PARTNERS, L.P.

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

     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 three months ended March 31, 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 crude oil hedges mature in 2007. 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 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.

     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			217
Changes in fair values of crude oil cash flow hedges			360
Pension benefit SFAS No. 158 adjustment			(34	)
Balance at March 31, 2007		$	969

NOTE 11. 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.

TEPPCO PARTNERS, L.P.

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

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 7), and in Centennial (see Note 6).

     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 6). Seaway consists of large diameter pipelines that transport crude oil from Seaway’s marine terminals on the U.S. Gulf Coast to Cushing, 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 6). 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 ended March 31, 2006.

TEPPCO PARTNERS, L.P.

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

     The tables below include financial information by reporting segment for the three months ended March 31, 2007 and 2006:

		For the Three Months Ended March 31, 2007
		Downstream				Upstream				Midstream				Segments				Partnership
		Segment				Segment				Segment				Total				and Other				Consolidated
Sales of petroleum products		$	9,376			$	1,841,031			$	—			$	1,850,407			$	(279	)		$	1,850,128
Operating revenues			85,542				13,386				29,373				128,301				—				128,301
Purchases of petroleum products			9,394				1,807,166				—				1,816,560				(2,566	)			1,813,994
Operating expenses, including power and taxes – other than income taxes			35,023				19,038				11,703				65,764				(81	)			65,683
General and administrative expenses			4,075				1,828				2,695				8,598				—				8,598
Depreciation and amortization expense			11,136				4,068				10,165				25,369				—				25,369
Gains on sales of assets			(18,651	)			2				—				(18,649	)			—				(18,649	)
Operating income			53,941				22,315				4,810				81,066				2,368				83,434
Gain on sale of ownership interest in MB Storage			59,837				—				—				59,837				—				59,837
Equity (losses) earnings			(1,487	)			1,789				18,629				18,931				(2,368	)			16,563
Interest income			202				29				111				342				—				342
Other income, net			229				14				1				244				—				244
Earnings before interest expense, provision for income taxes and discontinued operations		$	112,722			$	24,147			$	23,551			$	160,420			$	—			$	160,420

		For the Three Months Ended March 31, 2006
		Downstream				Upstream				Midstream				Segments				Partnership
		Segment				Segment				Segment				Total				and Other				Consolidated
Sales of petroleum products (1)		$	—			$	2,400,436			$	—			$	2,400,436			$	(4,090	)		$	2,396,346
Operating revenues			74,067				11,146				56,377				141,590				(1,567	)			140,023
Purchases of petroleum products (1).			—				2,376,396				—				2,376,396				(5,356	)			2,371,040
Operating expenses, including power and taxes – other than income taxes			35,402				16,802				14,208				66,412				(301	)			66,111
General and administrative expenses			5,094				1,807				2,300				9,201				—				9,201
Depreciation and amortization expense			10,297				3,271				15,189				28,757				—				28,757
Gains on sales of assets			(7	)			—				(1,371	)			(1,378	)			—				(1,378	)
Operating income			23,281				13,306				26,051				62,638				—				62,638
Equity (losses) earnings			(1,266	)			2,255				—				989				—				989
Interest income			396				—				76				472				—				472
Other income, net			383				44				—				427				—				427
Earnings before interest expense, provision for income taxes and discontinued operations		$	22,794			$	15,605			$	26,127			$	64,526			$	—			$	64,526

TEPPCO PARTNERS, L.P.

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

     The following table provides the total assets, capital expenditures and significant non-cash investing activities for each segment as of and for the periods ended March 31, 2007 and December 31, 2006:

		Downstream				Upstream				Midstream				Segments				Partnership
		Segment				Segment				Segment				Total				and Other				Consolidated
March 31, 2007:
Total assets		$	1,091,234			$	1,422,182			$	1,365,792			$	3,879,208			$	(82,258	)		$	3,796,950
Capital expenditures			17,797				13,590				2,107				33,494				590				34,084
Non-cash investing activities			—				—				14,935				14,935				—				14,935
December 31, 2006:
Total assets		$	1,160,929			$	1,504,699			$	1,335,502			$	4,001,130			$	(79,038	)		$	3,922,092
Capital expenditures			75,344				48,351				42,929				166,624				3,422				170,046
Non-cash investing activities			—				—				581,341				581,341				—				581,341

     The following table reconciles the segment data from the tables above to consolidated net income for the three months ended March 31, 2007 and 2006:

		For the Three Months Ended
		March 31,
		2007				2006
Earnings before interest expense, provision for income taxes and discontinued operations		$	160,420			$	64,526
Interest expense – net			(22,211	)			(21,143	)
Income before provision for income taxes			138,209				43,383
Provision for income taxes			18				—
Income from continuing operations			138,191				43,383
Discontinued operations			—				19,491
Net income		$	138,191			$	62,874

NOTE 12. RELATED PARTY TRANSACTIONS

EPCO and Affiliates

     We do not have any employees. We are managed by our General Partner, and all of our management, administrative and operating functions are performed by employees of EPCO, pursuant to the ASA. We reimburse EPCO for the allocated costs of its employees who perform operating functions for us and for costs related to its other management and administrative employees (see Note 1).

TEPPCO PARTNERS, L.P.

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

     The following table summarizes the related party transactions with EPCO and affiliates for the three months ended March 31, 2007 and 2006:

		For the Three Months Ended
		March 31,
		2007				2006
Revenues from EPCO and affiliates:
Sales of petroleum products (1)		$	355			$	22
Transportation – NGLs (2)			2,810				1,712
Transportation – LPGs (3)			1,606				1,723
Other operating revenues (4)			306				37
Costs and Expenses from EPCO and affiliates:
Payroll, administrative and other (5) (6)			31,351				31,210
Purchases of petroleum products (7)			8,784				5,707

     The following table summarizes the related party balances with EPCO and affiliates at March 31, 2007 and December 31, 2006:

		March 31,				December 31,
		2007				2006
Accounts receivable, related parties (1)		$	245			$	272
Gas imbalance receivable			—				1,278
Insurance reimbursement receivable			1,426				1,426
Accounts payable, related parties (2)			44,911				26,350
Deferred revenue, related parties			—				252
Other liabilities, related party (3)			—				1,814

TEPPCO PARTNERS, L.P.

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

Sale of 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.

Jonah Joint Venture

     On August 1, 2006, Enterprise (through an affiliate) became our joint venture partner by acquiring an interest in Jonah, the partnership through which we have owned our interest in the Jonah system. Through March, 31, 2007, we have reimbursed Enterprise $139.3 million for 50% of the Phase V cost incurred by it (including its cost of capital of $1.3 million). At March 31, 2007, we had a payable to Enterprise for costs incurred of $14.9 million (see Note 6). At March 31, 2007, we had a receivable from Jonah of $9.5 million for payroll and related expenses.

     In conjunction with the formation of the joint venture, we have agreed to indemnify Enterprise from any and all losses, claims, demands, suits, liability, costs and expenses arising out of or related to breaches of our representations, warranties, or covenants related to the formation of the Jonah joint venture, Jonah’s ownership or operation of the Jonah system prior to the effective date of the joint venture, and any environmental activity, or violation of or liability under environmental laws arising from or related to the condition of the Jonah system prior to the effective date of the joint venture. In general, a claim for indemnification cannot be filed until the losses suffered by Enterprise exceed $1.0 million, and the maximum potential amount of future payments under the indemnity is limited to $100.0 million. However, if certain representations or warranties are breached, the maximum potential amount of future payments under the indemnity is capped at $207.6 million. All indemnity payments are net of insurance recoveries that Enterprise may receive from third-party insurers. We carry insurance coverage that may offset any payments required under the indemnity. We do not expect that these indemnities will have a material adverse effect on our financial position, results of operations or cash flows.

Other Transactions

     On January 23, 2007, we sold a 10-mile, 18-inch segment of pipeline to an affiliate of Enterprise for approximately $8.0 million. 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 (see Note 7).

NOTE 13. EARNINGS PER UNIT

     Basic earnings per Unit is computed by dividing net income or loss allocated to limited partner interest by the weighted average number of Units outstanding during a period. We currently have no dilutive securities outstanding. The amount of net income allocated to limited partner interest is derived by subtracting our General Partner’s share of the net income from total net income.

TEPPCO PARTNERS, L.P.

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

     The following table shows the allocation of net income to our General Partner for the three months ended March 31, 2007 and 2006:

		For Three Months Ended
		March 31,
		2007				2006
Income from continuing operations		$	138,191			$	43,383
Discontinued operations			—				19,491
Net income			138,191				62,874
General Partner interest in net income			16.4	%			29.4	%
Earnings allocated to General Partner:
Income from continuing operations		$	22,667			$	12,755
Discontinued operations			—				5,731
Net income allocated			22,667				18,486
BASIC AND DILUTED EARNINGS PER UNIT:
Numerator:
Income from continuing operations		$	115,524			$	30,628
Discontinued operations			—				13,760
Limited partners’ interest in net income			115,524				44,388
Denominator:
Weighted average Units outstanding			89,805				69,964
Basic and diluted earnings per Unit:
Continuing operations		$	1.29			$	0.43
Discontinued operations			—				0.20
Limited partners’ interest in net income		$	1.29			$	0.63

     Our General Partner’s percentage interest in our net income increases as cash distributions paid per Unit increase, in accordance with our Partnership Agreement. At March 31, 2007 and 2006, we had outstanding 89,804,829 and 69,963,554 Units, respectively.

NOTE 14. COMMITMENTS AND CONTINGENCIES

Litigation

     In the fall of 1999, the General Partner and TE Products were named as defendants in a lawsuit in Jackson County Circuit Court, Jackson County, Indiana, styled Ryan E. McCleery and Marcia S. McCleery, et al. and Michael and Linda Robson, et al. v. Texas Eastern Corporation, et al. In the lawsuit, the plaintiffs contend, among other things, that we and other defendants stored and disposed of toxic and hazardous substances and hazardous wastes in a manner that caused the materials to be released into the air, soil and water. They further contend that the release caused damages to the plaintiffs. In their complaint, the plaintiffs allege strict liability for both personal injury and property damage together with gross negligence, continuing nuisance, trespass, criminal mischief and loss of consortium. The plaintiffs are seeking compensatory, punitive and treble damages. On March 18, 2005, we entered into Release and Settlement Agreements with the McCleery plaintiffs dismissing all of these plaintiffs’ claims on terms that did not have a material adverse effect on our financial position, results of operations or cash flows. Although we did not settle with all plaintiffs and we therefore remain named parties in the Michael

TEPPCO PARTNERS, L.P.

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

and Linda Robson, et al. v. Texas Eastern Corporation, et al. action, a co-defendant has agreed, by Cooperative Defense Agreement, to fund the defense. In a trial verdict rendered April 26, 2007, the plaintiffs in this case were awarded no damages from TE Products, and $0.2 million from the co-defendant. It is uncertain whether the plaintiffs will appeal. Consequently, we do not believe that the outcome of these remaining claims will have a material adverse effect on our financial position, results of operations or cash flows.

     On December 21, 2001, TE Products was named as a defendant in a lawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana, styled Rebecca L. Grisham et al. v. TE Products Pipeline Company, Limited Partnership. In this case, the plaintiffs contend that our pipeline, which crosses the plaintiffs’ property, leaked toxic products onto their property and, consequently caused damages to them. We have filed an answer to the plaintiffs’ petition denying the allegations, and we are defending ourselves vigorously against the lawsuit. The plaintiffs assert damages attributable to the remediation of the property of approximately $1.4 million. This case has been stayed pending the completion of remediation pursuant to the Louisiana Department of Environmental Quality (“LDEQ”) requirements. We do not believe that the outcome of this lawsuit will have a material adverse effect on our financial position, results of operations or cash flows.

     In 1991, we were named as a defendant in a matter styled Jimmy R. Green, et al. v. Cities Service Refinery, et al. as filed in the 26^th Judicial District Court of Bossier Parish, Louisiana. The plaintiffs in this matter reside or formerly resided on land that was once the site of a refinery owned by one of our co-defendants. The former refinery is located near our Bossier City facility. Plaintiffs have claimed personal injuries and property damage arising from alleged contamination of the refinery property. The plaintiffs have recently pursued certification as a class and have significantly increased their demand to approximately $175.0 million. We have never owned any interest in the refinery property made the basis of this action, and we do not believe that we contributed to any alleged contamination of this property. While we cannot predict the ultimate outcome, we do not believe that the outcome of this lawsuit will have a material adverse effect on our financial position, results of operations or cash flows.

     On September 18, 2006, Peter Brinckerhoff, a purported unitholder of TEPPCO, filed a complaint in the Court of Chancery of New Castle County in the State of Delaware, in his individual capacity, as a putative class action on behalf of our other unitholders, and derivatively on our behalf, concerning proposals made to our unitholders in our definitive proxy statement filed with the SEC on September 11, 2006 (“Proxy Statement”) and other transactions involving us and Enterprise or its affiliates. The complaint names as defendants the General Partner; the Board of Directors of the General Partner; the parent companies of the General Partner, including EPCO; Enterprise and certain of its affiliates; and Dan L. Duncan. We are named as a nominal defendant.

     The complaint alleges, among other things, that certain of the transactions proposed in the Proxy Statement, including a proposal to reduce the General Partner’s maximum percentage interest in our distributions in exchange for Units (the “Issuance Proposal”), are unfair to our unitholders and constitute a breach by the defendants of fiduciary duties owed to our unitholders and that the Proxy Statement failed to provide our unitholders with all material facts necessary for them to make an informed decision whether to vote in favor of or against the proposals. The complaint further alleges that, since Mr. Duncan acquired control of the General Partner in 2005, the defendants, in breach of their fiduciary duties to us and our unitholders, have caused us to enter into certain transactions with Enterprise or its affiliates that are unfair to us or otherwise unfairly favored Enterprise or its affiliates over us. The complaint alleges that such transactions include the Jonah joint venture entered into by us and an Enterprise affiliate in August 2006 (citing the fact that our ACG Committee did not obtain a fairness opinion from an independent investment banking firm in approving the transaction), the sale by us to an Enterprise affiliate of the Pioneer plant in March 2006 and the divestiture of our interest in MB Storage in connection with an investigation by the FTC. As more fully described in the Proxy Statement, the ACG Committee recommended the Issuance Proposal for approval by the Board of Directors of the General Partner. The complaint also alleges that Richard S. Snell, Michael B. Bracy and Murray H. Hutchison, constituting the three members of the ACG

TEPPCO PARTNERS, L.P.

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

Committee, cannot be considered independent because of their alleged ownership of securities in Enterprise and its affiliates and their relationships with Mr. Duncan.

     The complaint seeks relief (i) rescinding transactions in the complaint that have been consummated or awarding rescissory damages in respect thereof, including the divestiture of our interest in MB Storage; (ii) awarding damages for profits and special benefits allegedly obtained by defendants as a result of the alleged wrongdoings in the complaint; and (iii) awarding plaintiff costs of the action, including fees and expenses of his attorneys and experts.

     On September 22, 2006, the plaintiff in the action filed a motion to expedite the proceedings, requesting the Court to schedule a hearing on plaintiff’s motion for a preliminary injunction to enjoin the defendants from proceeding with the special meeting of unitholders. On September 26, 2006, the defendants advised the Court that we would provide to our unitholders specified supplemental disclosures, which were included in the Form 8-K and supplemental proxy materials we filed with the SEC on October 5, 2006. The special meeting was convened on December 8, 2006, at which our unitholders approved all of the proposals. In light of the foregoing, we believe that the plaintiff’s grounds for seeking relief by requiring us to issue a proxy statement that corrects the alleged misstatements and omissions in the Proxy Statement and enjoining the special meeting are moot. On November 17, 2006, the defendants (other than us, the nominal defendant) moved to dismiss the complaint. While we cannot predict the ultimate outcome, we do not believe that the outcome of this lawsuit will have a material adverse effect on our financial position, results of operations or cash flows.

     In addition to the proceedings discussed above, we have been, in the ordinary course of business, a defendant in various lawsuits and a party to various other legal proceedings, some of which are covered in whole or in part by insurance. We believe that the outcome of these lawsuits and other proceedings will not individually or in the aggregate have a future material adverse effect on our consolidated financial position, results of operations or cash flows.

Regulatory Matters

     Our pipelines and other facilities are subject to multiple environmental obligations and potential liabilities under a variety of federal, state and local laws and regulations. These include, without limitation: the Comprehensive Environmental Response, Compensation, and Liability Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Federal Water Pollution Control Act or the Clean Water Act; the Oil Pollution Act; and analogous state and local laws and regulations. Such laws and regulations affect many aspects of our present and future operations, and generally require us to obtain and comply with a wide variety of environmental registrations, licenses, permits, inspections and other approvals, with respect to air emissions, water quality, wastewater discharges, and solid and hazardous waste management. Failure to comply with these requirements may expose us to fines, penalties and/or interruptions in our operations that could influence our results of operations. If an accidental leak, spill or release of hazardous substances occurs at any facilities that we own, operate or otherwise use, or where we send materials for treatment or disposal, we could be held jointly and severally liable for all resulting liabilities, including investigation, remedial and clean-up costs. Likewise, we could be required to remove or remediate previously disposed wastes or property contamination, including groundwater contamination. Any or all of this could materially affect our results of operations and cash flows.

     We believe that our operations and facilities are in substantial compliance with applicable environmental laws and regulations, and that the cost of compliance with such laws and regulations will not have a material adverse effect on our results of operations or financial position. We cannot ensure, however, that existing environmental regulations will not be revised or that new regulations will not be adopted or become applicable to us. The clear trend in environmental regulation is to place more restrictions and limitations on activities that may be perceived to affect the environment, and thus there can be no assurance as to the amount or timing of future

TEPPCO PARTNERS, L.P.

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

expenditures for environmental regulation compliance or remediation, and actual future expenditures may be different from the amounts we currently anticipate. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our business, financial position, results of operations and cash flows. At March 31, 2007 and December 31, 2006, we have an accrued liability of $1.9 million and $1.8 million, respectively, related to sites requiring environmental remediation activities.

     In 1994, the LDEQ issued a compliance order for environmental contamination at our Arcadia, Louisiana, facility. In 1999, our Arcadia facility and adjacent terminals were directed by the Remediation Services Division of the LDEQ to pursue remediation of this contamination. Effective March 2004, we executed an access agreement with an adjacent industrial landowner who is located upgradient of the Arcadia facility. This agreement enables the landowner to proceed with remediation activities at our Arcadia facility for which it has accepted shared responsibility. At March 31, 2007, we have an accrued liability of $0.1 million for remediation costs at our Arcadia facility. We do not expect that the completion of the remediation program proposed to the LDEQ will have a future material adverse effect on our financial position, results of operations or cash flows.

     On July 27, 2004, we received notice from the United States Department of Justice (“DOJ”) of its intent to seek a civil penalty against us related to our November 21, 2001, release of approximately 2,575 barrels of jet fuel from our 14-inch diameter pipeline located in Orange County, Texas. The DOJ, at the request of the Environmental Protection Agency, is seeking a civil penalty against us for alleged violations of the Clean Water Act (“CWA”) arising out of this release, as well as three smaller spills at other locations in 2004 and 2005. We have agreed with the DOJ on a proposed penalty of $2.9 million, along with our commitment to implement additional spill prevention measures, and expect to finalize the settlement in the second quarter of 2007. We do not expect this settlement to have a material adverse effect on our financial position, results of operations or cash flows.

     One of the spills encompassed in our current settlement discussion with the DOJ involved a 37,450-gallon release from Seaway on May 13, 2005 at Colbert, Oklahoma. This release was remediated under the supervision of the Oklahoma Corporation Commission, but resulted in claims by neighboring landowners that have been settled for approximately $0.7 million. In addition, the release resulted in a Corrective Action Order by the U.S. Department of Transportation. Among other requirements of this Order, we were required to reduce the operating pressure of Seaway by 20% until completion of required corrective actions. The corrective actions were completed and on June 1, 2006, we increased the operating pressure of Seaway back to 100%. We have a 50% ownership interest in Seaway, and any settlement should be covered by our insurance. We do not expect the completion of our obligations relating to the Colbert release to have a material adverse effect on our financial position, results of operations or cash flows.

     On September 18, 2005, a propane release and fire occurred at our Todhunter facility, near Middletown, Ohio. The incident resulted in the death of one of our employees; there were no other injuries. Repairs to the impacted facilities have been completed. On March 17, 2006, we received a citation from the Occupational Safety and Health Administration (“OSHA”) arising out of this incident, with a penalty of $0.1 million. The settlement of this citation did not have a material adverse effect on our financial position, results of operations or cash flows.

     We are also in negotiations with the U.S. Department of Transportation with respect to a notice of probable violation that we received on April 25, 2005, for alleged violations of pipeline safety regulations at our Todhunter facility, with a proposed $0.4 million civil penalty. We responded on June 30, 2005, by admitting certain of the alleged violations, contesting others and requesting a reduction in the proposed civil penalty. We do not expect any settlement, fine or penalty to have a material adverse effect on our financial position, results of operations or cash flows.

TEPPCO PARTNERS, L.P.

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

     The FERC, pursuant to the Interstate Commerce Act of 1887, as amended, the Energy Policy Act of 1992 and rules and orders promulgated thereunder, regulates the tariff rates for our interstate common carrier pipeline operations. To be lawful under that Act, interstate tariff rates, terms and conditions of service must be just and reasonable and not unduly discriminatory, and must be on file with FERC. In addition, pipelines may not confer any undue preference upon any shipper. Shippers may protest, and the FERC may investigate, the lawfulness of new or changed tariff rates. The FERC can suspend those tariff rates for up to seven months. It can also require refunds of amounts collected with interest pursuant to rates that are ultimately found to be unlawful. The FERC and interested parties can also challenge tariff rates that have become final and effective. Because of the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of our rates could adversely affect our revenues.

     The FERC uses prescribed rate methodologies for approving regulated tariff rates for transporting crude oil and refined products. Our interstate tariff rates are either market-based or derived in accordance with the FERC’s indexing methodology, which currently allows a pipeline to increase its rates by a percentage linked to the producer price index for finished goods. These methodologies may limit our ability to set rates based on our actual costs or may delay the use of rates reflecting increased costs. Changes in the FERC’s approved methodology for approving rates could adversely affect us. Adverse decisions by the FERC in approving our regulated rates could adversely affect our cash flow.

     The intrastate liquids pipeline transportation services we provide are subject to various state laws and regulations that apply to the rates we charge and the terms and conditions of the services we offer. Although state regulation typically is less onerous than FERC regulation, the rates we charge and the provision of our services may be subject to challenge.

     Although our natural gas gathering systems are generally exempt from FERC regulation under the Natural Gas Act of 1938, FERC regulation still significantly affects our natural gas gathering business. In recent years, the FERC has pursued pro-competition policies in its regulation of interstate natural gas pipelines. If the FERC does not continue this approach, it could have an adverse effect on the rates we are able to charge in the future. In addition, our natural gas gathering operations could be adversely affected in the future should they become subject to the application of federal regulation of rates and services. Additional rules and legislation pertaining to these matters are considered and adopted from time to time. We cannot predict what effect, if any, such regulatory changes and legislation might have on our operations, but we could be required to incur additional capital expenditures.

Contractual Obligations

     There have been no significant changes in our schedule of maturities of long-term debt or other contractual obligations since those reported in our Annual Report on Form 10-K for the year ended December 31, 2006.

Other

     Centennial entered into credit facilities totaling $150.0 million, and as of March 31, 2007, $150.0 million was outstanding under those credit facilities, of which $10.0 million matured and was repaid in April 2007, and $140.0 million has a final maturity in April 2024. TE Products and Marathon have each guaranteed one-half of the repayment of Centennial’s outstanding debt balance (plus interest) under these credit facilities. If Centennial defaults on its outstanding balance, the estimated maximum potential amount of future payments for TE Products and Marathon is $75.0 million each at March 31, 2007. Provisions included in the $140.0 million Centennial credit facility required that certain financial metrics be achieved and for the guarantees to be removed by May 2007. It is not projected that these metrics will be achieved, and we expect to amend the provisions of the Centennial debt

TEPPCO PARTNERS, L.P.

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

agreements in the second quarter of 2007 to require the guarantees to remain throughout the life of the debt. As a result of the guarantee, TE Products recorded an obligation of $0.1 million, which represents the present value of the estimated amount we would have to pay under the guarantee.

     TE Products, Marathon and Centennial have entered into a limited cash call agreement, which allows each member to contribute cash in lieu of Centennial procuring separate insurance in the event of a third-party liability arising from a catastrophic event. There is an indefinite term for the agreement and each member is to contribute cash in proportion to its ownership interest, up to a maximum of $50.0 million each. As a result of the catastrophic event guarantee, TE Products recorded a $4.4 million obligation, which represents the present value of the estimated amount that we would have to pay under the guarantee. If a catastrophic event were to occur and we were required to contribute cash to Centennial, contributions exceeding our deductible might be covered by our insurance, depending upon the nature of the catastrophic event.

     One of our subsidiaries, TCO, has entered into master equipment lease agreements with finance companies for the use of various equipment. We have guaranteed the full and timely payment and performance of TCO’s obligations under the agreements. Generally, events of default would trigger our performance under the guarantee. The maximum potential amount of future payments under the guarantee is not estimable, but would include base rental payments for both current and future equipment, stipulated loss payments in the event any equipment is stolen, damaged, or destroyed and any future indemnity payments. We carry insurance coverage that may offset any payments required under the guarantees. We do not believe that any performance under the guarantee would have a material effect on our financial condition, results of operations or cash flows.

     On February 24, 2005, the General Partner was acquired from Duke Energy Field Services, LLC by DFI. The General Partner owns a 2% general partner interest in us and is our general partner. On March 11, 2005, the Bureau of Competition of the FTC delivered written notice to DFI’s legal advisor that it was conducting a non-public investigation to determine whether DFI’s acquisition of our General Partner may substantially lessen competition or violate other provisions of federal antitrust laws. We and our General Partner cooperated fully with this investigation.

     On October 31, 2006, an FTC order and consent agreement ending its investigation became final. The order required the divestiture of our equity interest in MB Storage, its general partner and certain related assets to one or more FTC-approved buyers in a manner approved by the FTC and subject to its final approval. The order contained no minimum price for the divestiture and required that we provide the acquirer or acquirers the opportunity to hire employees who spend more than 10% of their time working on the divested assets. The order also imposed specified operational, reporting and consent requirements on us including, among other things, in the event that we acquire interests in or operate salt dome storage facilities for NGLs in specified areas. The FTC approved a buyer and sale terms for our equity interests and certain related assets, and we closed on such sale on March 1, 2007 (see Note 7).

     On December 19, 2006, we announced that we had signed an agreement with Motiva Enterprises, LLC (“Motiva”) for us to construct and operate a new refined products storage facility to support the proposed expansion of Motiva’s refinery in Port Arthur, Texas. Under the terms of the agreement, we will construct a 5.4 million barrel refined products storage facility for gasoline and distillates. The agreement also provides for a 15-year throughput and dedication of volume, which will commence upon completion of the refinery expansion. The project includes the construction of 20 storage tanks, five 3.5-mile product pipelines connecting the storage facility to Motiva’s refinery, 15,000 horsepower of pumping capacity, and distribution pipeline connections to the Colonial, Explorer and Magtex pipelines. The storage and pipeline project is expected to be completed by January 1, 2010. As a part of a separate but complementary initiative, we will construct an 11-mile, 20-inch pipeline to connect the new storage facility in Port Arthur to our refined products terminal in Beaumont, Texas, which is the primary origination

TEPPCO PARTNERS, L.P.

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

facility for our mainline system. These projects will facilitate connections to additional markets through the Colonial, Explorer and Magtex pipeline systems and provide the Motiva refinery with access to our pipeline system. The total cost of the project is expected to be approximately $240.0 million, including $20.0 million for the 11-mile, 20-inch pipeline. By providing access to several major outbound refined product pipeline systems, shippers should have enhanced flexibility and new transportation options. Under the terms of the agreement, if Motiva cancels the agreement prior to the commencement date of the project, Motiva will reimburse us the actual reasonable expenses we have incurred after the effective date of the agreement, including both internal and external costs that would be capitalized as a part of the project. If the cancellation were to occur in 2007, Motiva would also pay costs incurred to date plus a five percent cancellation fee, with the fee increasing to ten percent after 2007.

NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION

     The following table provides information regarding (i) the net effect of changes in our operating assets and liabilities, (ii) non-cash investing activities and (iii) cash payments for interest for the three months ended March 31, 2007 and 2006:

		For the Three Months Ended
		March 31,
		2007				2006
Decrease (increase) in:
Accounts receivable, trade		$	76,246			$	(171,920	)
Accounts receivable, related parties			(10,774	)			2,397
Inventories			8,359				(17,488	)
Other current assets			778				11,187
Other			(4,181	)			(3,421	)
Increase (decrease) in:
Accounts payable and accrued expenses			(111,763	)			134,962
Accounts payable, related parties			4,789				(5,639	)
Other			(3,190	)			502
Net effect of changes in operating accounts		$	(39,736	)		$	(49,420	)
Non-cash investing activities:
Payable to Enterprise Gas Processing, LLC for spending for Phase V expansion of Jonah Gas Gathering Company		$	14,935			$	—
Supplemental disclosure of cash flows:
Cash paid for interest (net of amounts capitalized)		$	42,947			$	38,450

NOTE 16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

     TE Products, TCTM, TEPPCO Midstream and Val Verde have issued full, unconditional, and joint and several guarantees of our Senior Notes and our Revolving Credit Facility (collectively “the Guaranteed Debt”). In addition, during the 2006 period presented below and extending through July 31, 2006, Jonah also had provided the same guarantees of our Guaranteed Debt. Effective August 1, 2006, Enterprise, through its affiliate, Enterprise Gas Processing, LLC, became our joint venture partner by acquiring an interest in Jonah (see Note 6). Jonah was released as a guarantor of the Guaranteed Debt, effective upon the formation of the joint venture. For periods prior to August 1, 2006, TE Products, TCTM, TEPPCO Midstream, Jonah and Val Verde are collectively referred to as

TEPPCO PARTNERS, L.P.

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

the “Guarantor Subsidiaries” and for periods after August 1, 2006, references to “Guarantor Subsidiaries” exclude Jonah.

     The following supplemental condensed consolidating financial information reflects our separate accounts, the combined accounts of the Guarantor Subsidiaries, the combined accounts of our other non-guarantor subsidiaries, the combined consolidating adjustments and eliminations and our consolidated accounts for the dates and periods indicated. For purposes of the following consolidating information, our investments in our subsidiaries and the Guarantor Subsidiaries’ investments in their subsidiaries are accounted for under the equity method of accounting.

		March 31, 2007
																		TEPPCO
		TEPPCO				Guarantor				Non-Guarantor				Consolidating				Partners, L.P.
		Partners, L.P.				Subsidiaries				Subsidiaries				Adjustments				Consolidated
Assets
Current assets		$	13,086			$	58,379			$	894,973			$	(85,852	)		$	880,586
Property, plant and equipment – net			—				1,044,636				605,911				—				1,650,547
Equity investments			1,385,734				1,252,280				194,047				(1,834,502	)			997,559
Intercompany notes receivable			1,123,773				—				—				(1,123,773	)			—
Intangible assets			—				148,663				30,836				—				179,499
Other assets			5,174				23,336				60,255				(6	)			88,759
Total assets		$	2,527,767			$	2,527,294			$	1,786,022			$	(3,044,133	)		$	3,796,950
Liabilities and partners’ capital
Current liabilities		$	17,400			$	153,367			$	793,718			$	(85,852	)		$	878,633
Long-term debt			1,124,375				387,927				—				—				1,512,302
Intercompany notes payable			—				607,624				516,149				(1,123,773	)			—
Other long-term liabilities			419				16,889				2,038				(6	)			19,340
Total partners’ capital			1,385,573				1,361,487				474,117				(1,834,502	)			1,386,675
Total liabilities and partners’ capital		$	2,527,767			$	2,527,294			$	1,786,022			$	(3,044,133	)		$	3,796,950