10-Q 1 h89773e10-q.txt TEPPCO PARTNERS LP - QUARTER ENDED JUNE 30, 2001 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2001 COMMISSION FILE NO. 1-10403 TEPPCO PARTNERS, L.P. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0291058 (STATE OF INCORPORATION (I.R.S. EMPLOYER OR ORGANIZATION) IDENTIFICATION NUMBER) 2929 ALLEN PARKWAY P.O. BOX 2521 HOUSTON, TEXAS 77252-2521 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (713) 759-3636 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TEPPCO PARTNERS, L.P. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ................................ $ 12,801 $ 27,096 Accounts receivable, trade ............................... 306,574 303,394 Inventories .............................................. 37,942 24,784 Other .................................................... 9,651 8,123 ------------ ------------ Total current assets .................................. 366,968 363,397 ------------ ------------ Property, plant and equipment, at cost (Net of accumulated depreciation and amortization of $269,154 and $251,165)... 982,707 949,705 Equity investments ......................................... 262,333 241,648 Intangible assets .......................................... 46,632 38,388 Other assets ............................................... 36,514 29,672 ------------ ------------ Total assets .......................................... $ 1,695,154 $ 1,622,810 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable and accrued liabilities ................. $ 292,371 $ 293,720 Accounts payable, general partner ........................ 8,619 6,637 Accrued interest ......................................... 15,289 18,633 Other accrued taxes ...................................... 10,882 10,501 Other .................................................... 33,530 28,780 ------------ ------------ Total current liabilities ............................. 360,691 358,271 ------------ ------------ Senior Notes ............................................... 389,799 389,784 Other long-term debt ....................................... 438,000 446,000 Other liabilities and deferred credits ..................... 11,282 3,991 Minority interest .......................................... 5,065 4,296 Redeemable Class B Units held by related party ............. 106,969 105,411 Partners' capital: General partner's interest ............................... 6,160 1,824 Limited partners' interests .............................. 381,906 313,233 Accumulated other comprehensive loss ..................... (4,718) -- ------------ ------------ Total partners' capital ............................... 383,348 315,057 ------------ ------------ Total liabilities and partners' capital ............... $ 1,695,154 $ 1,622,810 ============ ============

See accompanying Notes to Consolidated Financial Statements. 2 3 TEPPCO PARTNERS, L.P. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)

THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Operating revenues: Sales of crude oil and petroleum products ...... $ 978,803 $ 689,643 $ 1,686,284 $ 1,372,428 Transportation - Refined products .............. 51,406 32,685 77,587 60,715 Transportation - LPGs ......................... 13,506 10,367 38,505 33,484 Transportation - crude oil and NGLs ............ 11,408 3,773 22,317 7,902 Mont Belvieu operations ........................ 2,997 2,883 5,894 7,354 Other - net .................................... 15,562 8,353 28,330 16,513 ------------ ------------ ------------ ------------ Total operating revenues ..................... 1,073,682 747,704 1,858,917 1,498,396 ------------ ------------ ------------ ------------ Costs and expenses: Purchases of crude oil and petroleum products .. 965,919 682,891 1,664,495 1,360,304 Operating, general and administrative .......... 29,955 25,334 57,905 49,568 Operating fuel and power ....................... 10,207 8,326 18,821 15,839 Depreciation and amortization .................. 10,857 8,339 20,764 16,586 Taxes - other than income taxes ................ 3,675 2,663 7,557 5,181 ------------ ------------ ------------ ------------ Total costs and expenses ..................... 1,020,613 727,553 1,769,542 1,447,478 ------------ ------------ ------------ ------------ Operating income ............................. 53,069 20,151 89,375 50,918 Interest expense ................................. (15,392) (8,548) (31,686) (16,982) Interest capitalized ............................. 590 1,255 935 2,265 Equity earnings .................................. 4,419 -- 9,625 -- Other income - net ............................... 793 850 1,227 1,632 ------------ ------------ ------------ ------------ Income before minority interest .............. 43,479 13,708 69,476 37,833 Minority interest ................................ (441) (138) (703) (382) ------------ ------------ ------------ ------------ Net income ................................... $ 43,038 $ 13,570 $ 68,773 $ 37,451 ============ ============ ============ ============ Net Income Allocation: Limited Partner Unitholders ...................... $ 31,311 $ 9,963 $ 49,922 $ 27,496 Class B Unitholder ............................... 3,478 1,346 5,670 3,714 General Partner .................................. 8,249 2,261 13,181 6,241 ------------ ------------ ------------ ------------ Total net income allocated ................... $ 43,038 $ 13,570 $ 68,773 $ 37,451 ============ ============ ============ ============ Basic net income per Limited Partner and Class B Unit ............................... $ 0.90 $ 0.35 $ 1.45 $ 0.95 ============ ============ ============ ============ Diluted net income per Limited Partner and Class B Unit ........................... $ 0.89 $ 0.35 $ 1.45 $ 0.95 ============ ============ ============ ============ Weighted average Limited Partner and Class B Units outstanding ............................. 38,867 32,917 38,380 32,917

See accompanying Notes to Consolidated Financial Statements. 3 4 TEPPCO PARTNERS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2001 2000 ---------- ---------- Cash flows from operating activities: Net income ....................................................... $ 68,773 $ 37,451 Depreciation and amortization .................................... 20,764 16,586 Earnings in equity investments, net of distributions ............. 4,457 (95) Noncash portion of interest expense .............................. 1,356 177 Increase in accounts receivable, trade ........................... (3,843) (28,580) Decrease (increase) in inventories ............................... (13,158) 6,027 Decrease (increase) in other current assets ...................... (843) 1,044 Increase (decrease) in accounts payable and accrued expenses ..... (13,515) 32,574 Other ............................................................ (2,459) (703) ---------- ---------- Net cash provided by operating activities ...................... 61,532 64,481 ---------- ---------- Cash flows from investing activities: Proceeds from cash investments ................................... 3,236 1,475 Purchases of cash investments .................................... -- (2,000) Purchase of crude oil assets ..................................... (20,000) -- Proceeds from the sale of assets ................................. 1,300 -- Investment in Centennial Pipeline Company ........................ (25,142) -- Capital expenditures ............................................. (33,398) (39,147) ---------- ---------- Net cash used in investing activities .......................... (74,004) (39,672) ---------- ---------- Cash flows from financing activities: Proceeds from term loan and revolving credit facility ............ 33,000 20,000 Repayment on revolving credit facility ........................... (41,000) -- Proceeds form the issuance of Limited Partner Units, net ......... 54,588 -- General Partner contributions .................................... 1,114 -- Distributions .................................................... (49,524) (38,256) ---------- ---------- Net cash used in financing activities .......................... (1,822) (18,256) ---------- ---------- Net increase (decrease) in cash and cash equivalents ............... (14,294) 6,553 Cash and cash equivalents at beginning of period ................... 27,095 32,593 ---------- ---------- Cash and cash equivalents at end of period ......................... $ 12,801 $ 39,146 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS: Interest paid during the period (net of capitalized interest) .... $ 32,230 $ 14,090 ========== ==========

See accompanying Notes to Consolidated Financial Statements. 4 5 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION TEPPCO Partners, L.P. (the "Partnership"), a Delaware limited partnership, was formed in March 1990. The Partnership operates through TE Products Pipeline Company, Limited Partnership (the "Downstream Segment") and TCTM, L.P. (the "Upstream Segment"). Collectively the Downstream Segment and the Upstream Segment are referred to as "the Operating Partnerships." As of June 30, 2001, the Partnership owned a 99% interest as the sole limited partner in both the Downstream Segment and Upstream Segment. Texas Eastern Products Pipeline Company, LLC (the "Company" or "General Partner"), a Delaware limited liability company, serves as the general partner of the Partnership with a 2% general partner interest. The General Partner is a wholly owned subsidiary of Duke Energy Field Services, LP ("DEFS"), a joint venture between Duke Energy Corporation ("Duke Energy") and Phillips Petroleum Company. Duke Energy holds a majority interest in DEFS. On July 26, 2001, the Company restructured its general partner ownership of the Operating Partnerships to cause them to be wholly-owned by the Partnership. TEPPCO GP, Inc. ("TEPPCO GP"), a subsidiary of the Partnership, succeeded the Company as general partner of the Operating Partnerships. All remaining partner interests in the Operating Partnerships not already owned by the Partnership were transferred to the Partnership. In exchange for this contribution, the Company's interest as general partner of the Partnership was increased to 2%. The increased percentage is the economic equivalent to the aggregate interest that the Company had prior to the restructuring through its combined interests in the Partnership and the Operating Partnerships. As a result, the Partnership holds a 99.999% limited partner interest in the Operating Partnerships and TEPPCO GP holds a .001% general partner interest. References herein to the "General Partner" refer to the Company prior to the restructuring and to TEPPCO GP thereafter. The Company, as general partner, performs all management and operating functions required for the Partnership pursuant to the Agreements of Limited Partnership of TEPPCO Partners, L.P., TE Products Pipeline Company, Limited Partnership and TCTM, L.P. (the "Partnership Agreements"). The General Partner is reimbursed by the Partnership for all reasonable direct and indirect expenses incurred in managing the Partnership. The accompanying unaudited consolidated financial statements reflect all adjustments, which are, in the opinion of management, of a normal and recurring nature and necessary for a fair statement of the financial position of the Partnership as of June 30, 2001, and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2001, are not necessarily indicative of results of operations for the full year 2001. The interim financial statements should be read in conjunction with the Partnership's 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, 2000. Certain amounts from prior periods have been reclassified to conform to current presentation. The Partnership operates in two segments: refined products and liquefied petroleum gases ("LPGs") transportation (Downstream Segment); and crude oil and natural gas liquids ("NGLs") transportation and marketing (Upstream Segment). The Partnership's reportable segments offer different products and services and are managed separately because each requires different business strategies. The Upstream Segment was acquired as a unit in November 1998, and the management at the time of the acquisition was retained. The Partnership's interstate transportation operations, including rates charged to customers, are subject to regulations prescribed by the Federal Energy Regulatory Commission ("FERC"). Refined products, LPGs, crude oil and NGLs are referred to herein, collectively, as "petroleum products" or "products." 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 Limited Partner Units and Class B Units outstanding (a total of 38.4 5 6 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) million Units for the six months ended June 30, 2001, and 32.9 million Units for the six months ended June 30, 2000). The General Partner's percentage interest in net income is based on its percentage of cash distributions from Available Cash for each period (see Note 7. Quarterly Distributions of Available Cash). The General Partner was allocated $13.2 million (representing 19.17%) and $6.2 million (representing 16.66%) of net income for the six months ended June 30, 2001, and 2000, respectively. The General Partner's percentage interest in net income increased for the six months ended June 30, 2001, compared to the corresponding period of 2000, as a result of the increased quarterly distribution to $0.525 per Unit from $0.500 per Unit in the third quarter of 2000. Diluted net income per Unit is similar to the computation of basic net income per Unit above, except that the denominator was increased to include the dilutive effect of outstanding Unit options by application of the treasury stock method. For the quarters ended June 30, 2001 and 2000, the denominator was increased by 44,559 Units and 19,746 Units, respectively. For the six months ended June 30, 2001 and 2000, the denominator was increased by 36,021 Units and 14,333 Units, respectively. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133. This statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded at fair value and included in the balance sheet as assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception of a derivative. Special accounting for derivatives qualifying as fair value hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of income. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness, as defined by SFAS 133, is recognized immediately in earnings. Adoption of SFAS 133 at January 1, 2001 resulted in the recognition of $10.1 million of derivative liabilities, $4.1 million of which are included in current liabilities and $6.0 million of which are included in other noncurrent liabilities on the Partnership's balance sheet, and $10.1 million of hedging losses included in accumulated other comprehensive loss, a component of Partners' capital, as the cumulative effect of the change in accounting principle. The hedging losses included in accumulated other comprehensive loss will be transferred to earnings as the forecasted transactions actually occur. Approximately $4.1 million of the loss included in accumulated other comprehensive loss as of January 1, 2001 is anticipated to be transferred into earnings over the next twelve months. The cumulative effect of the accounting change had no effect on the Partnership's net income or its earnings per Unit amounts for the six months ended June 30, 2001. Amounts were determined as of January 1, 2001 based on quoted market values, the Partnership's portfolio of derivative instruments, and the Partnership's measurement of hedge effectiveness. From time to time, the Partnership has utilized and expects to continue to utilize derivative financial instruments with respect to a portion of its interest rate risks and its crude oil marketing activities to achieve a more predictable cash flow by reducing its exposure to interest rate and crude oil price fluctuations. These transactions generally are swaps and forwards and are entered into with major financial institutions or commodities trading institutions. Derivative financial instruments used in the Partnership's Upstream Segment are intended to reduce the Partnership's exposure to fluctuations in the market price of crude oil, while derivative financial instruments related to the Partnership's interest rate risks are intended to reduce the Partnership's exposure to increases in the 6 7 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) benchmark interest rates underlying the Partnership's variable rate revolving credit facility. Through December 31, 2000, gains and losses from financial instruments used in the Partnership's Upstream Segment have been recognized in revenues for the periods to which the derivative financial instruments relate, and gains and losses from its interest rate financial instruments have been recognized in interest expense for the periods to which the derivative financial instrument relate. As of June 30, 2001, the Upstream Segment had open positions on speculative option and futures contracts. During the six months ended June 30, 2001, a gain of $3,500 was recognized on such contracts. Also as of June 30, 2001, the Partnership had in place an interest rate swap agreement to hedge its exposure to increases in the benchmark interest rate underlying its variable rate revolving credit facilities. The swap agreement is based on a notional amount of $250 million. Under the swap agreement, the Partnership pays a fixed rate of interest of 6.955% and receives a floating rate based on a three month USD LIBOR rate. The interest rate swap is designated as a cash flow hedge, therefore, the changes in fair value, to the extent the swap is effective, are recognized in other comprehensive income until the hedged interest costs are recognized in earnings. During the six month period ended June 30, 2001, the Partnership recognized $2.2 million in losses, included in interest expense, on the interest rate swap attributable to interest costs occurring in 2001. No gain or loss from ineffectiveness was required to be recognized. The fair value of the interest rate swap agreement was a loss of approximately $13.2 million at June 30, 2001. Approximately $4.8 million (inclusive of the $4.1 million related to the cumulative effect of the accounting change not yet recognized) of such amount is anticipated to be transferred into earnings over the next twelve months. During 2001, the Partnership executed treasury rate lock agreements with a combined notional amount of $400 million to hedge its exposure to increases in the treasury rate that will be used to establish the fixed interest rate for the debt offering that is probable to occur in the third quarter of 2001. Under the treasury rate lock agreements, the Partnership pays a fixed rate of interest, and receives a floating rate based on the three month treasury rate. The treasury rate locks are designated as cash flow hedges, therefore, the changes in fair value, to the extent the treasury rate locks are effective, are recognized in other comprehensive income until the actual debt offering occurs. Upon completion of the debt offering, the realized gain or loss on the treasury rate locks will be amortized out of accumulated other comprehensive income into interest expense over the life of the debt obligation. During April 2001, a treasury lock with a notional amount of $200 million was terminated with a realized gain of $1.1 million. The realized gain was recorded as a component of accumulated other comprehensive income. As of June 30, 2001, a notional amount of $200 million remained outstanding. The fair value of the outstanding treasury rate locks was a gain of approximately $7.4 million at June 30, 2001. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations and specifies that certain acquired intangible assets be reported apart from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS 142 requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives. The Partnership will adopt SFAS 141 immediately, and SFAS 142 effective January 1, 2002. At June 30, 2001, the Partnership had $14.6 million of unamortized goodwill. Amortization expense related to goodwill was $0.1 million and $0.6 million for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. The Partnership has not determined the impact of adopting SFAS 142 at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 7 8 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 3. ACQUISITIONS On July 20, 2000, the Partnership completed an acquisition of ARCO Pipe Line Company ("ARCO"), a wholly owned subsidiary of Atlantic Richfield Company, for $322.6 million, which included $4.1 million of acquisition related costs. The purchase included ARCO's 50-percent ownership interest in Seaway Crude Pipeline Company ("Seaway"), which owns a pipeline that carries 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 Houston areas. The Partnership assumed ARCO's role as operator of this pipeline. The Partnership also acquired: (i) ARCO's crude oil terminal facilities in Cushing and Midland, Texas, including the line transfer and pumpover business at each location; (ii) an undivided ownership interest in both the Rancho Pipeline, a crude oil pipeline from West Texas to Houston, and the Basin Pipeline, a crude oil pipeline running from Jal, New Mexico, through Midland to Cushing, both of which are operated by another joint owner; and (iii) the receipt and delivery pipelines known as the West Texas Trunk System, which is located around the Midland terminal. The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of the acquisition are included in the consolidated statements of income from July 20, 2000. The following table presents the unaudited pro forma results of the Partnership as though the acquisition of ARCO occurred at the beginning of 2000 (in thousands, except per Unit amounts).

QUARTER ENDED SIX MONTHS JUNE 30, ENDED JUNE 30, 2000 2000 ---------------- ---------------- Revenues .................................... $ 754,922 $ 1,513,119 Net Income .................................. 12,779 35,081 Basic and diluted net income per Limited Partner and Class B Unit ................ $ 0.33 $ 0.89

NOTE 4. INVENTORIES Inventories are carried at the lower of cost (based on weighted average cost method) or market. The major components of inventories were as follows (in thousands):

JUNE 30, DECEMBER 31, 2001 2000 ------------ ------------ Crude oil .................... $ 26,285 $ 14,635 Gasolines .................... 929 3,795 Propane ...................... 726 -- Butanes ...................... 1,870 267 Fuel oil ..................... 203 82 Other products ............... 4,003 2,693 Materials and supplies ....... 3,926 3,312 ------------ ------------ Total .............. $ 37,942 $ 24,784 ============ ============

The costs of inventories did not exceed market values at June 30, 2001, and December 31, 2000. NOTE 5. EQUITY INVESTMENTS Seaway is a partnership between the Upstream Segment and Phillips Petroleum Company ("Phillips"). The Upstream Segment purchased its 50-percent ownership interest in Seaway on July 20, 2000 (see Note 3. Acquisitions). The Seaway Crude Pipeline Company Partnership Agreement provides for varying participation 8 9 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) ratios throughout the life of the Seaway Partnership. From July 20, 2000, through May 2002, the Upstream Segment receives 80% of revenue and expense of Seaway. From June 2002 until May 2006, the Upstream Segment receives 60% of revenue and expense of Seaway. Thereafter, the sharing ratio becomes 40% of revenue and expense to the Upstream Segment. The Partnership uses the equity method of accounting for its investment in Seaway. Summarized financial information for Seaway as of and for the six months ended June 30, 2001 is presented below (in thousands): Current assets................................................ $ 36,610 Non current assets............................................ 279,439 Current liabilities........................................... 6,005 Partners' capital............................................. 310,044 Revenues...................................................... 35,315 Net income.................................................... 16,193 NOTE 6. LONG TERM DEBT SENIOR NOTES On January 27, 1998, the Downstream Segment completed the issuance of $180 million principal amount of 6.45% Senior Notes due 2008, and $210 million principal amount of 7.51% Senior Notes due 2028 (collectively the "Senior Notes"). The 6.45% Senior Notes due 2008 are not subject to redemption prior to January 15, 2008. The 7.51% Senior Notes due 2028 may be redeemed at any time after January 15, 2008, at the option of the Downstream Segment, in whole or in part, at a premium. The Senior Notes do not have sinking fund requirements. Interest on the Senior Notes is payable semiannually in arrears on January 15 and July 15 of each year. The Senior Notes are unsecured obligations of the Downstream Segment and will rank on a parity with all other unsecured and unsubordinated indebtedness of the Downstream Segment. The indenture governing the 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 the Partnership's ability to incur additional indebtedness. OTHER LONG TERM DEBT AND CREDIT FACILITIES On July 14, 2000, the Partnership entered into a $75 million term loan and a $475 million revolving credit facility. On July 21, 2000, the Partnership borrowed $75 million under the term loan and $340 million under the revolving credit facility. The funds were used to finance the acquisition of the ARCO assets (see Note 3. Acquisitions) and to refinance existing credit facilities, other than the Senior Notes. The term loan was repaid from proceeds received from the issuance of additional Limited Partner Units on October 25, 2000. On April 6, 2001, the Partnership's $475 million revolving credit agreement was amended to permit borrowings up to $500 million and to allow for letters of credit up to $20 million. The term of the revised credit agreement was extended to April 6, 2004. Additionally, on April 6, 2001, the Partnership entered into a 364-day, $200 million revolving credit agreement. The interest rate is based on the Partnership's option of either the lender's base rate plus a spread, or LIBOR plus a spread in effect at the time of the borrowings. The credit agreements contain restrictive financial covenants that require the Partnership to maintain a minimum level of partners' capital as well as maximum debt-to-EBITDA (earnings before interest expense, income tax expense and depreciation and amortization expense) and minimum fixed charge coverage ratios. At June 30, 2001, $438 million was outstanding under the revolving credit facility at a weighted average interest rate of 4.9%. 9 10 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) On July 21, 2000, the Partnership entered into a three year swap agreement to hedge its exposure on the variable rate credit facilities. On April 6, 2001 the swap agreement was extended until April 6, 2004 to match the maturity of the variable rate credit facility above. The swap agreement is based on a notional amount of $250 million. Under the swap agreement, the Partnership pays a fixed rate of interest of 6.955% and receives a floating rate based on a three month USD LIBOR rate. NOTE 7. QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH The Partnership makes quarterly cash distributions of all of its Available Cash, generally defined as consolidated cash receipts less consolidated cash disbursements and cash reserves established by the General Partner in its sole discretion. Pursuant to the Partnership Agreement, the Company receives incremental incentive cash distributions on the portion that cash distributions on a per Unit basis 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% Second Target - $0.326 per Unit up to $0.45 per Unit ................... 75% 25% Over Second Target - Cash distributions greater than $0.45 per Unit .... 50% 50%

The following table reflects the allocation of total distributions paid for the six month periods ended June 30, 2001 and 2000 (in thousands, except per Unit amounts).

SIX MONTHS ENDED JUNE 30, --------------------------- 2001 2000 -------- -------- Limited Partner Units ............................... $ 35,516 $ 28,275 1% General Partner Interest ......................... 400 324 General Partner Incentive ........................... 8,996 5,452 -------- -------- Total Partners' Capital Cash Distributions .... 44,912 34,051 Class B Units ....................................... 4,112 3,819 Minority Interest ................................... 500 386 -------- -------- Total Cash Distributions Paid ................. $ 49,524 $ 38,256 ======== ======== Total Cash Distributions Paid Per Unit .............. $ 1.050 $ 0.975 ======== ========

On July 20, 2001, the Partnership declared a cash distribution of $0.525 per Limited Partner Unit and Class B Unit for the quarter ended June 30, 2001. The distribution was paid on August 6, 2001, to Unitholders of record on July 31, 2001. NOTE 8. SEGMENT DATA The Partnership operates in two segments: refined products and LPGs transportation, which operates through the Downstream Segment; and crude oil and NGLs transportation and marketing, which operates through the Upstream Segment. The amounts included as "Partnership and Other" relate primarily to intercompany eliminations and assets held by the Partnership that have not been allocated to the Operating Partnerships. 10 11 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) The Downstream Segment is involved in the interstate transportation, storage and terminaling of petroleum products and LPGs, intrastate transportation of petrochemicals and the fractionation of NGLs. Revenues are derived from the transportation of refined products and LPGs, the storage and short-haul shuttle transportation of LPGs at the Mont Belvieu, Texas, complex, sale of product inventory and other ancillary services. The Downstream Segment is one of the largest pipeline common carriers of refined petroleum products and LPGs in the United States. The Partnership owns and operates a pipeline system extending from southeast Texas through the central and midwestern United States to the northeastern United States. The Upstream Segment gathers, stores, transports and markets crude oil principally in Oklahoma, Texas and the Rocky Mountain region; operates two trunkline NGL pipelines in South Texas and two NGL pipelines in East Texas; and distributes lube oils and specialty chemicals to industrial and commercial accounts. On July 20, 2000, the Partnership completed its acquisition of assets from ARCO (see Note 3. Acquisitions). The acquisition was accounted for under the purchase method of accounting. The results of the acquisition have been included in the Upstream Segment since the purchase on July 20, 2000. The table below includes interim financial information by business segment for the interim periods ended June 30, 2001 and 2000 (in thousands): 11 12 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED)

THREE MONTHS ENDED JUNE 30, 2001 THREE MONTHS ENDED JUNE 30, 2000 -------------------------------------------- -------------------------------------------- DOWNSTREAM UPSTREAM DOWNSTREAM UPSTREAM SEGMENT SEGMENT CONSOLIDATED SEGMENT SEGMENT CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ Unaffiliated revenues ........... $ 80,458 $ 993,224 $ 1,073,682 $ 54,288 $ 693,416 $ 747,704 Operating expenses, including power ..................... 30,755 979,001 1,009,756 30,215 688,999 719,214 Depreciation and amortization expense ................... 7,207 3,650 10,857 6,874 1,465 8,339 ------------ ------------ ------------ ------------ ------------ ------------ Operating income .......... 42,496 10,573 53,069 17,199 2,952 20,151 Interest expense, net ........... (8,027) (6,775) (14,802) (7,167) (126) (7,293) Equity earnings ................. (339) 4,758 4,419 -- -- -- Other income, net ............... 57 295 352 573 139 712 ------------ ------------ ------------ ------------ ------------ ------------ Net income ................ $ 34,187 $ 8,851 $ 43,038 $ 10,605 $ 2,965 $ 13,570 ============ ============ ============ ============ ============ ============

SIX MONTHS ENDED JUNE 30, 2001 SIX MONTHS ENDED JUNE 30, 2000 -------------------------------------------- -------------------------------------------- DOWNSTREAM UPSTREAM DOWNSTREAM UPSTREAM SEGMENT SEGMENT CONSOLIDATED SEGMENT SEGMENT CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ Unaffiliated revenues ........... $ 144,563 $ 1,714,354 $ 1,858,917 $ 118,066 $ 1,380,330 $ 1,498,396 Operating expenses, including power ..................... 58,321 1,690,457 1,748,778 58,872 1,372,020 1,430,892 Depreciation and amortization expense ................... 14,384 6,380 20,764 13,657 2,929 16,586 ------------ ------------ ------------ ------------ ------------ ------------ Operating income .......... 71,858 17,517 89,375 45,537 5,381 50,918 Interest expense, net ........... (16,362) (14,389) (30,751) (14,477) (240) (14,717) Equity earnings ................. (339) 9,964 9,625 -- -- -- Other income, net ............... 169 355 524 966 284 1,250 ------------ ------------ ------------ ------------ ------------ ------------ Net income ................ $ 55,326 $ 13,447 $ 68,773 $ 32,026 $ 5,425 $ 37,451 ============ ============ ============ ============ ============ ============

AS OF JUNE 30, 2001 --------------------------------------------------------- DOWNSTREAM UPSTREAM PARTNERSHIP SEGMENT SEGMENT AND OTHER CONSOLIDATED ------------ ------------ ------------ ------------ Total assets .................... $ 778,313 $ 910,190 $ 6,651 $ 1,695,154 Accounts receivable, trade ...... 25,805 280,769 -- 306,574 Accounts payable and accrued liabilities ............... $ 10,855 $ 281,516 $ -- $ 292,371

AS OF JUNE 30, 2000 ---------------------------------------------------------- DOWNSTREAM UPSTREAM PARTNERSHIP SEGMENT SEGMENT AND OTHER CONSOLIDATED ------------ ------------ ------------ ------------ Total assets .................... $ 748,412 $ 347,841 $ (2,354) $ 1,093,899 Accounts receivable, trade ...... 20,369 213,977 -- 234,346 Accounts payable and accrued liabilities ............... $ 9,984 $ 221,873 $ -- $ 231,857

12 13 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 9. CONTINGENCIES In the fall of 1999 and on December 1, 2000, the Company and the Partnership were named as defendants in two separate lawsuits in Jackson County Circuit Court, Jackson County, Indiana, in Ryan E. McCleery and Marcia S. McCleery, et al. v. Texas Eastern Corporation, et al. (including the Company and Partnership) and Gilbert Richards and Jean Richards v. Texas Eastern Corporation, et. al. In both cases plaintiffs contend, among other things, that the Company 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 Complaints, 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. The Company has filed an Answer to both complaints, denying the allegations, as well as various other motions. These cases are in the early stages of discovery and are not covered by insurance. The Company is defending itself vigorously against the lawsuits. The Partnership cannot estimate the loss, if any, associated with these pending lawsuits. The Partnership is involved in various other claims and legal proceedings incidental to its business. In the opinion of management, these claims and legal proceedings will not have a material adverse effect on the Partnership's consolidated financial position, results of operations or cash flows. The operations of the Partnership are subject to federal, state and local laws and regulations relating to protection of the environment. Although the Partnership believes its operations are in material compliance with applicable environmental regulations, risks of significant costs and liabilities are inherent in pipeline operations, and there can be no assurance that significant costs and liabilities will not be incurred. Moreover, it is possible that other developments, such as increasingly strict environmental laws and regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the pipeline system, could result in substantial costs and liabilities to the Partnership. The Partnership does not anticipate that changes in environmental laws and regulations will have a material adverse effect on its financial position, results of operations or cash flows in the near term. The Partnership and the Indiana Department of Environmental Management ("IDEM") have entered into an Agreed Order that will ultimately result in a remediation program for any on-site and off-site groundwater contamination attributable to the Partnership's operations at the Seymour, Indiana, terminal. A Feasibility Study, which includes the Partnership's proposed remediation program, has been approved by IDEM. IDEM is expected to issue a Record of Decision formally approving the remediation program. After the Record of Decision has been issued, the Partnership will enter into an Agreed Order for the continued operation and maintenance of the program. The Partnership has accrued $0.4 million at June 30, 2001 for future costs of the remediation program for the Seymour terminal. In the opinion of the Company, the completion of the remediation program will not have a material adverse impact on the Partnership's financial condition, results of operations or liquidity. The Partnership received a compliance order from the Louisiana Department of Environmental Quality ("DEQ") during 1994 relative to potential environmental contamination at the Partnership's Arcadia, Louisiana facility, which may be attributable to the operations of the Partnership and adjacent petroleum terminals of other companies. The Partnership and all adjacent terminals have been assigned to the Groundwater Division of DEQ, in which a consolidated plan will be developed. The Partnership has finalized a negotiated Compliance Order with DEQ that will allow the Partnership to continue with a remediation plan similar to the one previously agreed to by DEQ and implemented by the Company. In the opinion of the General Partner, the completion of the remediation program being proposed by the Partnership will not have a future material adverse impact on the Partnership. 13 14 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) On October 16, 2000 the Partnership received a settlement notice from Atlantic Richfield Company for payment of a net aggregate amount of approximately $12.9 million in post-closing adjustments related to the purchase of ARCO. A large portion of the requested adjustment relates to Atlantic Richfield Company's indemnity for payment of accrued income taxes. In August 2001, the Partnership and Atlantic Richfield Company reached a settlement of $11.0 million for the post-closing adjustments. The Partnership has accrued the amount of the settlement as an adjustment to the purchase price of ARCO. Substantially all of the petroleum products transported and stored by the Partnership are owned by the Partnership's customers. At June 30, 2001, the Partnership had approximately 20.9 million barrels of products in its custody owned by customers. The Partnership is obligated for the transportation, storage and delivery of such products on behalf of its customers. The Partnership maintains insurance adequate to cover product losses through circumstances beyond its control. NOTE 10. COMPREHENSIVE INCOME The table below reconciles reported net income to total comprehensive income for the six months ended June 30, 2001 (in thousands). Net income ....................................... $ 68,773 Cumulative effect attributable to adoption of SFAS 133 (see Note 2. New Accounting Pronouncements) ............................. (10,103) Hedge accounting for derivative instruments ...... 5,385 --------- Total comprehensive income ................... $ 64,055 ========= The accumulated balance of other comprehensive loss related to cash flow hedges is as follows (in thousands): Balance at December 31, 2000 ..................... $ -- Cumulative effect of accounting change ........... (10,103) Net gain on cash flow hedges ..................... 3,142 Reclassification adjustments ..................... 2,243 -------- Balance at June 30, 2001 ......................... $ (4,718) ======== NOTE 11. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION In connection with the Partnership's filing of a shelf registration statement on Form S-3 with the Securities and Exchange Commission on July 27, 2001, TE Products Pipeline Company, Limited Partnership and TCTM, L.P., the Partnership's sole first-tier operating subsidiaries (the "Guarantor Subsidiaries"), may issue unconditional guarantees of senior or subordinated debt securities of the Partnership in the event that the Partnership issues such securities from time to time under the registration statement. If issued, the guarantees will be full, unconditional and joint and several. In July 2001, the Partnership restructured the ownership of the general partner interests in these first-tier operating subsidiaries to cause them to be wholly-owned by the Partnership. For purposes of the following consolidating information, the Partnership's and Guarantor Subsidiaries' investments in their respective subsidiaries are accounted for by the equity method of accounting. 14 15 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED)

TEPPCO TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P. JUNE 30, 2001 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------- -------------- -------------- -------------- -------------- -------------- (IN THOUSANDS) Assets Current assets ........................... $ 2,740 $ 40,769 $ 324,296 $ (837) $ 366,968 Property, plant and equipment - net ...... -- 653,929 328,778 -- 982,707 Equity investments ....................... 494,996 284,373 232,020 (749,056) 262,333 Intercompany notes receivable ............ 435,191 -- -- (435,191) -- Other assets ............................. 5,543 13,966 62,884 753 83,146 -------------- -------------- -------------- -------------- -------------- Total assets .......................... $ 938,470 $ 993,037 $ 947,978 $ (1,184,331) $ 1,695,154 ============== ============== ============== ============== ============== Liabilities and partners' capital Current liabilities ...................... $ 4,355 $ 45,370 $ 315,685 $ (4,719) $ 360,691 Long term debt ........................... 438,000 389,799 -- -- 827,799 Intercompany notes payable ............... -- 54,960 380,231 (435,191) -- Other long term liabilities and minority interest ...................... -- 2,853 -- 13,494 16,347 Redeemable Class B Units held by related party .......................... -- -- -- 106,969 106,969 Total partners' capital .................. 496,115 500,055 252,062 (864,884) 383,348 -------------- -------------- -------------- -------------- -------------- Total liabilities and partners' capital .......................... $ 938,470 $ 993,037 $ 947,978 $ (1,184,331) $ 1,695,154 ============== ============== ============== ============== ==============

TEPPCO TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P. DECEMBER 31, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ----------------- -------------- -------------- -------------- -------------- -------------- (IN THOUSANDS) Assets Current assets ............................ $ 6,083 $ 52,773 $ 315,488 $ (10,947) $ 363,397 Property, plant and equipment - net ....... -- 640,657 309,048 -- 949,705 Equity investments ........................ 420,433 202,811 236,232 (617,828) 241,648 Intercompany notes receivable ............. 441,836 -- -- (441,836) -- Other assets .............................. 5,322 15,385 48,475 (1,122) 68,060 -------------- -------------- -------------- -------------- -------------- Total assets ........................... $ 873,674 $ 911,626 $ 909,243 $ (1,071,733) $ 1,622,810 ============== ============== ============== ============== ============== Liabilities and Partners' Capital Current liabilities ....................... $ 7,206 $ 45,085 $ 318,049 $ (12,069) $ 358,271 Long term debt ............................ 446,000 389,784 -- -- 835,784 Intercompany notes payable ................ -- 48,037 393,799 (441,836) -- Other long term liabilities and minority interest ....................... -- 3,991 -- 4,296 8,287 Redeemable Class B Units held by related party ........................... 105,411 -- -- -- 105,411 Total partners' capital ................... 315,057 424,729 197,395 (622,124) 315,057 -------------- -------------- -------------- -------------- -------------- Total liabilities and partners' capital ........................... $ 873,674 $ 911,626 $ 909,243 $ (1,071,733) $ 1,622,810 ============== ============== ============== ============== ==============

15 16 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED)

TEPPCO TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P. THREE MONTHS ENDED JUNE 30, 2001 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------------------------- -------------- -------------- -------------- -------------- -------------- (IN THOUSANDS) Operating revenues .......................... $ -- $ 78,546 $ 995,136 $ -- $ 1,073,682 Costs and expenses .......................... -- 37,233 983,380 -- 1,020,613 -------------- -------------- -------------- -------------- -------------- Operating income .......................... -- 41,313 11,756 -- 53,069 -------------- -------------- -------------- -------------- -------------- Interest expense - net ...................... (8,431) (7,355) (7,447) 8,431 (14,802) Equity earnings ............................. 43,038 9,132 4,758 (52,509) 4,419 Other income - net .......................... 8,431 389 404 (8,431) 793 -------------- -------------- -------------- -------------- -------------- Income before minority interest ........... 43,038 43,479 9,471 (52,509) 43,479 Minority interest ........................... -- -- -- (441) (441) -------------- -------------- -------------- -------------- -------------- Net income ................................ $ 43,038 $ 43,479 $ 9,471 $ (52,950) $ 43,038 ============== ============== ============== ============== ==============

TEPPCO TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P. THREE MONTHS ENDED JUNE 30, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------------------------- -------------- -------------- -------------- -------------- -------------- (IN THOUSANDS) Operating revenues .......................... $ -- $ 52,368 $ 695,336 $ -- $ 747,704 Costs and expenses .......................... -- 36,364 691,189 -- 727,553 -------------- -------------- -------------- -------------- -------------- Operating income .......................... -- 16,004 4,147 -- 20,151 -------------- -------------- -------------- -------------- -------------- Interest expense - net ...................... -- (6,537) (756) -- (7,293) Equity earnings ............................. 13,570 3,592 -- (17,162) -- Other income - net .......................... -- 649 201 -- 850 -------------- -------------- -------------- -------------- -------------- Income before minority interest ........... 13,570 13,708 3,592 (17,162) 13,708 Minority interest ........................... -- -- -- (138) (138) -------------- -------------- -------------- -------------- -------------- Net income ................................ $ 13,570 $ 13,708 $ 3,592 $ (17,300) $ 13,570 ============== ============== ============== ============== ==============

TEPPCO TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P. SIX MONTHS ENDED JUNE 30, 2001 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------------------------------ -------------- -------------- -------------- -------------- -------------- (IN THOUSANDS) Operating revenues .......................... $ -- $ 140,847 $ 1,718,070 $ -- $ 1,858,917 Costs and expenses .......................... -- 71,253 1,698,289 -- 1,769,542 -------------- -------------- -------------- -------------- -------------- Operating income .......................... -- 69,594 19,781 -- 89,375 -------------- -------------- -------------- -------------- -------------- Interest expense - net ...................... (17,803) (14,979) (15,772) 17,803 (30,751) Equity earnings ............................. 68,773 14,180 9,964 (83,292) 9,625 Other income - net .......................... 17,803 681 546 (17,803) 1,227 -------------- -------------- -------------- -------------- -------------- Income before minority interest ........... 68,773 69,476 14,519 (83,292) 69,476 Minority interest ........................... -- -- -- (703) (703) -------------- -------------- -------------- -------------- -------------- Net income ................................ $ 68,773 $ 69,476 $ 14,519 $ (83,995) $ 68,773 ============== ============== ============== ============== ==============

16 17 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED)

TEPPCO TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P. SIX MONTHS ENDED JUNE 30, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------------------------------ -------------- -------------- -------------- -------------- -------------- (IN THOUSANDS) Operating revenues .......................... $ -- $ 114,323 $ 1,384,073 $ -- $ 1,498,396 Costs and expenses .......................... -- 71,084 1,376,394 -- 1,447,478 -------------- -------------- -------------- -------------- -------------- Operating income .......................... -- 43,239 7,679 -- 50,918 -------------- -------------- -------------- -------------- -------------- Interest expense - net ...................... -- (13,216) (1,501) -- (14,717) Equity earnings ............................. 37,451 6,581 -- (44,032) -- Other income - net .......................... -- 1,229 403 -- 1,632 -------------- -------------- -------------- -------------- -------------- Income before minority interest ........... 37,451 37,833 6,581 (44,032) 37,833 Minority interest ........................... -- -- -- (382) (382) -------------- -------------- -------------- -------------- -------------- Net income ................................ $ 37,451 $ 37,833 $ 6,581 $ (44,414) $ 37,451 ============== ============== ============== ============== ==============

TEPPCO TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P. SIX MONTHS ENDED JUNE 30, 2001 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------------------------------ -------------- -------------- -------------- -------------- -------------- (IN THOUSANDS) Cash flows from operating activities Net Income ................................ $ 68,773 $ 69,476 $ 14,518 $ (83,994) $ 68,773 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......... -- 13,376 7,388 -- 20,764 Equity earnings, net of distributions ....................... (19,750) 1,279 4,212 18,716 4,457 Changes in assets and liabilities and other .......................... 1 (1,792) (31,373) 702 (32,462) -------------- -------------- -------------- -------------- -------------- Net cash provided by operating activities ... 49,024 82,339 (5,255) (64,576) 61,532 -------------- -------------- -------------- -------------- -------------- Cash flows from investing activities ........ (47,139) (48,554) (25,450) 47,139 (74,004) Cash flows from financing activities ........ (1,885) (42,951) 25,577 17,437 (1,822) -------------- -------------- -------------- -------------- -------------- Net decrease in cash and cash equivalents ... -- (9,166) (5,128) -- (14,294) Cash and cash equivalents at beginning of period .................................... -- 9,166 17,929 -- 27,095 -------------- -------------- -------------- -------------- -------------- Cash and cash equivalents at end of period .. $ -- $ -- $ 12,801 $ -- $ 12,801 ============== ============== ============== ============== ==============

17 18 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED)

TEPPCO TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P. SIX MONTHS ENDED JUNE 30, 2000 PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------------------------------ -------------- -------------- -------------- -------------- -------------- (IN THOUSANDS) Cash flows from operating activities Net Income ................................ $ 37,451 $ 37,833 $ 6,581 $ (44,414) $ 37,451 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......... -- 12,649 3,937 -- 16,586 Equity earnings, net of distributions ....................... 419 2,876 -- (3,390) (95) Changes in assets and liabilities and other .......................... -- 8,557 1,600 382 10,539 -------------- -------------- -------------- -------------- -------------- Net cash provided by operating activities ... 37,870 61,915 12,118 (47,422) 64,481 -------------- -------------- -------------- -------------- -------------- Cash flows from investing activities ........ -- (33,215) (6,457) -- (39,672) Cash flows from financing activities ........ (37,870) (18,256) (9,552) 47,422 (18,256) -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents ............................... -- 10,444 (3,891) -- 6,553 Cash and cash equivalents at beginning of period .................................... -- 16,284 16,309 -- 32,593 -------------- -------------- -------------- -------------- -------------- Cash and cash equivalents at end of period .. $ -- $ 26,728 $ 12,418 $ -- $ 39,146 ============== ============== ============== ============== ==============

18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following information is provided to facilitate increased understanding of the 2001 and 2000 interim consolidated financial statements and accompanying notes presented in Item 1. Material period-to-period variances in the consolidated statements of income are discussed under "Results of Operations." The "Financial Condition and Liquidity" section analyzes cash flows and financial position. Discussion included in "Other Matters" addresses key trends, future plans and contingencies. Throughout these discussions, management addresses items known to it that are reasonably likely to materially affect future liquidity or earnings. Through its ownership of the Downstream Segment and the Upstream Segment, the Partnership operates in two segments: refined products and LPGs transportation, and crude oil and NGLs transportation and marketing. The Partnership's reportable segments offer different products and services and are managed separately because each requires different business strategies. The Downstream Segment is involved in the interstate transportation, storage and terminaling of petroleum products and LPGs, intrastate transportation of petrochemicals and the fractionation of NGLs. Revenues are derived from the transportation of refined products and LPGs, the storage and short-haul shuttle transportation of LPGs at the Mont Belvieu, Texas, complex, sale of product inventory and other ancillary services. Labor and electric power costs comprise the two largest operating expense items of the Downstream Segment. Higher natural gas prices increase the cost of electricity used to power pump stations on the Pipeline System. Operations are somewhat seasonal with higher revenues generally realized during the first and fourth quarters of each year. Refined products volumes are generally higher during the second and third quarters because of greater demand for gasolines during the spring and summer driving seasons. LPGs volumes are generally higher from November through March due to higher demand in the Northeast for propane, a major fuel for residential heating. The Upstream Segment is involved in the transportation, aggregation and marketing of crude oil and NGLs; and the distribution of lube oils and specialty chemicals. Revenues are earned from the gathering, storage, transportation and marketing of crude oil and NGLs; and the distribution of lube oils and specialty chemicals principally in Oklahoma, Texas and the Rocky Mountain region. Marketing operations consist primarily of purchasing and aggregating crude oil along its own and third party gathering and pipeline systems and arranging the necessary logistics for the ultimate sale of crude oil to local refineries, marketers or other end users. On July 20, 2000, the Partnership completed an acquisition of assets from ARCO for $322.6 million, which included $4.1 million of acquisition related costs. The purchase included ARCO's 50-percent ownership interest in Seaway. The Partnership assumed ARCO's role as operator of this pipeline. The Company also acquired ARCO's crude oil terminal facilities in Cushing and Midland, Texas, including the line transfer and pumpover business at each location, an undivided ownership interest in both the Rancho Pipeline and the Basin Pipeline, both of which are operated by another joint owner and the receipt and delivery pipelines known as the West Texas Trunk System, located around the Midland terminal. The transaction was accounted for under the purchase method for accounting purposes. The results of operations of assets acquired have been included in the Upstream Segment since the purchase on July 20, 2000. 19 20 RESULTS OF OPERATIONS Summarized below is financial data by business segment (in thousands):

QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 2001 2000 ---------- ---------- ----------- ----------- Operating revenues: Downstream Segment ............ $ 80,458 $ 54,288 $ 144,563 $ 118,066 Upstream Segment .............. 993,224 693,416 1,714,354 1,380,330 ---------- ---------- ---------- ---------- Total operating revenues ... 1,073,682 747,704 1,858,917 1,498,396 ---------- ---------- ---------- ---------- Operating income: Downstream Segment ............ 42,496 17,199 71,858 45,537 Upstream Segment .............. 10,573 2,952 17,517 5,381 ---------- ---------- ---------- ---------- Total operating income ..... 53,069 20,151 89,375 50,918 ---------- ---------- ---------- ---------- Net income: Downstream Segment ............ 34,187 10,605 55,326 32,026 Upstream Segment .............. 8,851 2,965 13,447 5,425 ---------- ---------- ---------- ---------- Total net income ............ $ 43,038 $ 13,570 $ 68,773 $ 37,451 ---------- ---------- ---------- ----------

For the quarter ended June 30, 2001, the Partnership reported net income of $43.0 million, compared with net income of $13.6 million for the 2000 second quarter. The $29.4 million increase in net income resulted from a $23.6 million increase in net income provided by the Downstream Segment and a $5.8 million increase in net income provided by the Upstream Segment. The increase in net income by the Downstream Segment was comprised of a $26.2 million increase in operating revenues, partially offset by a $0.9 million increase in costs and expenses, a $0.9 million increase in interest expense (net of capitalized interest), a $0.3 million decrease in other income - net, and $0.3 million in equity losses. The increase in net income by the Upstream Segment was comprised of a $13.8 million increase in margin, $3.0 million in other operating revenues, and $4.8 million of equity earnings of Seaway, partially offset by a $9.2 million increase in costs and expenses (excluding purchases of crude oil and petroleum products) and a $6.6 million increase in interest expense. For the six months ended June 30, 2001, the Partnership reported net income of $68.8 million, compared with net income of $37.5 million for the corresponding period in 2000. The $31.3 million increase in income resulted from a $23.3 million increase in net income provided by the Downstream Segment and a $8.0 million increase in net income provided by the Upstream Segment. The increase in net income by the Downstream Segment was primarily due to a $26.5 million increase in operating revenues, partially offset by a $1.9 million increase in interest expense (net of capitalized interest), a $0.6 million decrease in other income - net, $0.3 million in equity losses, and a $0.2 million increase in costs and expenses. The increase in net income by the Upstream Segment was primarily due to a $24.1 million increase in margin, $5.8 million in other operating revenues, and $10.0 million of equity earnings of Seaway, partially offset by a $17.7 million increase in costs and expenses (excluding purchases of crude oil and petroleum products) and a $14.2 million increase in interest expense. 20 21 RESULTS OF OPERATIONS - (CONTINUED) DOWNSTREAM SEGMENT Volume and average rate information for 2001 and 2000 is presented below:

QUARTER ENDED SIX MONTHS ENDED JUNE 30, PERCENTAGE JUNE 30, PERCENTAGE -------------------------- INCREASE -------------------------- INCREASE 2001 2000 (DECREASE) 2001 2000 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT AVERAGE RATE INFORMATION) VOLUMES DELIVERED Refined products ...................... 33,360 35,113 (5)% 60,548 64,726 (6)% LPGs .................................. 6,907 6,634 4% 18,558 18,327 1% Mont Belvieu operations ............... 4,571 6,576 (30)% 10,836 13,648 (21)% ---------- ---------- ---------- ---------- ---------- ---------- Total ............................. 44,838 48,323 (7)% 89,942 96,701 (7)% ========== ========== ========== ========== ========== ========== AVERAGE RATE PER BARREL Refined products ...................... $ 0.97(a) $ 0.93 4% $ 0.97(a) $ 0.94 3% LPGs .................................. 1.96 1.56 26% 2.07 1.83 13% Mont Belvieu operations ............... 0.18 0.14 29% 0.17 0.15 13% Average system rate per barrel .... $ 1.04 $ 0.91 14% $ 1.10 $ 1.00 10% ========== ========== ========== ========== ========== ==========

(a) Net of $18.9 million received from Pennzoil-Quaker State Company for canceled transportation agreement. Refined products transportation revenues increased $18.7 million for the quarter ended June 30, 2001, compared with the prior-year quarter, due primarily to revenue recognized from a cash settlement received from a canceled transportation agreement with Pennzoil-Quaker State Company ("Pennzoil") and the recognition of $1.7 million of previously deferred revenue related to the approval of the market based rates during the second quarter of 2001. The net revenue increase related to the settlement was approximately $17.2 million during the second quarter of 2001. Refined products volumes delivered during the second quarter of 2001 decreased 5% from the prior year quarter, due primarily to decreased jet fuel volumes delivered attributable to reduced air travel demand and the expiration of contract deliveries of methyl tertiary butyl ether ("MTBE") at the Partnership's marine terminal near Beaumont, Texas, in April 2001. These decreases were partially offset by increased motor fuel deliveries due to favorable differentials. The increase in the refined products average rate per barrel from the prior-year quarter resulted primarily from the recognition of previously deferred transportation revenue related to the approval of market based rates. LPGs transportation revenues increased $3.1 million for the quarter ended June 30, 2001, compared with the second quarter of 2000, due primarily to increased deliveries of propane in the upper Midwest and Northeast market areas attributable to strong demand, favorable price differentials, and early summer fill programs by customers. Additionally, butane deliveries to the Chicago market area increased due to favorable price differentials. These increases were partially offset by decreased short-haul deliveries of propane due to operational problems at a petrochemical facility on the upper Texas Gulf Coast that is served by the Partnership. The LPGs average rate per barrel increased 26% from the prior-year quarter as a result of an increased percentage of long-haul deliveries during the second quarter of 2001. Revenues generated from Mont Belvieu operations increased $0.1 million during the quarter ended June 30, 2001, compared with the second quarter of 2000, as a result of increased brine receipts and service revenue, which was partially offset by decreased contract storage revenue. Mont Belvieu shuttle volumes delivered decreased 30% during the second quarter of 2001, compared with the second quarter of 2000, due to reduced petrochemical demand. The Mont Belvieu average rate per barrel increased during the second quarter of 2001 as a result of reduced contract shuttle deliveries, which generally carry lower rates. Other operating revenues increased $4.2 million during the quarter ended June 30, 2001, compared with the prior year quarter, due primarily to contract petrochemical delivery revenue, which started during the fourth quarter 21 22 RESULTS OF OPERATIONS - (CONTINUED) of 2000, and increased product sales. These increases were partially offset by decreased propane deliveries from the Partnership's Providence, Rhode Island, import facility. Costs and expenses increased $0.9 million for the quarter ended June 30, 2001, compared with the second quarter of 2000, primarily due to a $1.2 million increase in operating fuel and power expense and a $0.3 million increase in depreciation and amortization expense, partially offset by a $0.4 million decrease in taxes - other than income taxes, and a $0.2 million decrease in operating, general and administrative expenses. Operating fuel and power expense increased as a result of higher power rates from electric utilities. The increase in depreciation expense from the prior year second quarter resulted from assets placed in service during the later part of 2000. The decrease in taxes - other than income taxes resulted from actual property taxes being lower than previously estimated. Operating, general and administrative expenses decreased due to lower labor costs, lower insurance expense and decreased throughput-related rental expense on volumes received through the connection with Colonial Pipeline at Beaumont, Texas, partially offset by increased environmental remediation expenses and increased pipeline measurement losses. Interest expense increased $0.2 million during the quarter ended June 30, 2001, compared with the second quarter of 2000, as a result of borrowings under the Sun Trust credit facilities. Interest capitalized decreased $0.7 million during the quarter ended June 30, 2001, compared with the corresponding prior year period, as a result of the completion of the petrochemical pipelines from Mont Belvieu, Texas, to Port Arthur, Texas, during the fourth quarter of 2000. Net loss from equity investments totaled $0.3 million during the quarter ended June 30, 2001 due to pre-operating expenses of Centennial Pipeline and net losses on Transport 4. Other income - net decreased $0.3 million during the quarter ended June 30, 2001, compared with the second quarter of 2000, due primarily to lower interest income earned on cash investments. For the six months ended June 30, 2001, refined products transportation revenues increased $16.9 million, due primarily to revenue recognized on the canceled transportation agreement with Pennzoil and the recognition of $1.7 million of previously deferred revenue related to the approval of the market based rates during the second quarter of 2001, partially offset by a 6% decrease in refined products volumes delivered. The net revenue increase related to the settlement was approximately $17.2 million during the six months ended June 30, 2001. Jet fuel volumes delivered to the Midwest market areas decreased 13% due to reduced air travel demand and a pilot strike during the second quarter of 2001. Deliveries of MTBE decreased as a result of the expiration of contract deliveries to the Partnership's marine terminal near Beaumont, Texas, in April 2001. Motor fuel volumes delivered decreased 5% as a result of lower demand in the Midwest market areas and a local refinery expansion in the West Memphis, Arkansas, market area. The refined products average rate per barrel increased 3% from the prior-year period due primarily to the recognition of revenue related to the market based rates discussed previously. LPGs transportation revenues increased $5.0 million for the six months ended June 30, 2001, compared with the corresponding period in 2000, due primarily to increased deliveries of propane in the Midwest and Northeast market areas attributable to colder weather in the Northeast during the first quarter of 2001, favorable price differentials and early summer fill programs by customers. Additionally, butane deliveries to the Chicago market area increased due to favorable price differentials. These increases were partially offset by decreased short-haul deliveries of propane as a result of operational problems at a petrochemical facility on the upper Texas Gulf Coast that is served by the Partnership. The LPGs average rate per barrel increased 13% from the prior-year period as a result of an increased percentage of long-haul deliveries to the upper Midwest and Northeast market areas. Revenues generated from Mont Belvieu operations decreased $1.5 million during the six months ended June 30, 2001, compared with the six months ended June 30, 2000, as a result of decreased contract storage revenue, partially offset by increased brine receipts and service revenue. Mont Belvieu shuttle deliveries decreased during the six months ended June 30, 2001, compared with the corresponding period in 2000, due to reduced petrochemical demand. The Mont Belvieu average rate per barrel increased for the six months as a result of reduced contract deliveries which generally carry lower rates. 22 23 RESULTS OF OPERATIONS - (CONTINUED) Other operating revenues increased $6.1 million during the six months ended June 30, 2001, compared with the corresponding period in 2000, due primarily to contract petrochemical delivery revenue, which started during the fourth quarter of 2000, increased deliveries from the Partnership's Providence, Rhode Island, import facility in the first quarter of 2001, and increased product sales. Costs and expenses increased $0.2 million for the six months ended June 30, 2001, compared with the corresponding period in 2000, primarily due to a $2.0 million increase in operating fuel and power expense and a $0.7 million increase in depreciation and amortization expense, partially offset by a $2.6 million decrease in operating, general and administrative expenses. Operating fuel and power expense increased as a result of higher rates charged by electric utilities. The increase in depreciation expense from the prior year period was a result of assets placed in service during the later part of 2000. Operating, general and administrative expenses decreased primarily as a result of a March 2000 write-off of project evaluation costs related to the proposed pipeline construction from Beaumont, Texas, to Little Rock, Arkansas, decreased labor costs and decreased throughput-related rental expense on volumes received through the connection with Colonial Pipeline at Beaumont, Texas. Interest expense increased $0.6 million during the six months ended June 30, 2001, compared with the six months ended June 30, 2000, as a result of borrowings under the Sun Trust credit facilities. Interest capitalized decreased $1.3 million during the six months ended June 30, 2001, compared with the corresponding prior year period, as a result of the completion of the petrochemical pipelines from Mont Belvieu, Texas, to Port Arthur, Texas, during the fourth quarter of 2000. Net loss from equity investments totaled $0.3 million during the six months ended June 30, 2001 due to pre-operating expenses of Centennial Pipeline and net losses on Transport 4. Other income - net decreased $0.6 million during the six months ended June 30, 2001, compared with the first six months of 2000, due primarily to lower interest income earned on cash investments. 23 24 RESULTS OF OPERATIONS - (CONTINUED) UPSTREAM SEGMENT Margin of the Upstream Segment is calculated as revenues generated from the sale of crude oil and lubrication oil, and transportation of crude oil and NGLs, less the costs of purchases of crude oil and lubrication oil. Margin is a more meaningful measure of financial performance than operating revenues and operating expenses due to the significant fluctuations in revenues and expenses caused by variations in the level of marketing activity and prices for products marketed. Margin and volume information for 2001 and 2000 is presented below (in thousands, except per barrel and per gallon amounts):

QUARTER ENDED SIX MONTHS ENDED JUNE 30, PERCENTAGE JUNE 30, PERCENTAGE ----------------------- INCREASE ----------------------- INCREASE 2001 2000 (DECREASE) 2001 2000 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT AVERAGE RATE INFORMATION) Margins: Crude oil transportation ............ $ 8,921 $ 4,861 84% $ 17,046 $ 9,727 75% Crude oil marketing ................. 2,804 3,338 (16)% 5,657 5,588 1% Crude oil terminaling ............... 2,546 -- -- 4,674 -- -- NGL transportation .................. 5,565 1,580 252% 10,441 3,340 213% Lubrication oil sales ............... 984 746 32% 2,118 1,371 54% Seaway Crude Intercompany ........... 3,472 -- -- 4,170 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total margin ...................... $ 24,292 $ 10,525 131% $ 44,106 $ 20,026 120% ========== ========== ========== ========== ========== ========== Total barrels: Crude oil transportation ........... 21,851 8,961 144% 37,596 17,728 112% Crude oil marketing ................ 44,026 26,167 68% 72,451 52,148 39% Crude oil terminaling .............. 32,460 -- -- 57,122 -- -- NGL transportation ................. 5,436 1,206 351% 10,198 2,438 318% Lubrication oil volume (total gallons) .... 2,134 1,296 65% 4,389 3,568 23% Margin per barrel: Crude oil transportation ........... $ 0.408 $ 0.543 (25)% $ 0.453 $ 0.549 (17)% Crude oil marketing ................ 0.064 0.128 (50)% 0.078 0.107 (27)% Crude oil terminaling .............. 0.078 -- -- 0.082 -- -- NGL transportation ................. 1.024 1.311 (22)% 1.024 1.370 (25)% Lubrication oil margin (per gallon) ....... 0.461 0.576 (20)% 0.483 0.385 25%

Margin increased $13.8 million during the second quarter of 2001, compared with the second quarter of 2000. The increase was comprised of a $4.1 million increase in crude oil transportation; a $4.0 million increase in NGL transportation; $3.5 million in Seaway Crude intercompany transportation; $2.5 million in crude oil terminaling attributable to pumpover fees charged at Midland, Texas, and Cushing, Oklahoma, related to the ARCO assets acquired in July 2000; and a $0.2 million increase in lubrication oil sales; partially offset by a $0.5 million decrease in crude oil marketing margin. The increase in crude oil transportation margin was primarily due to $2.0 million contributed by the ARCO assets acquired, a $1.7 million increase from higher volume on the Red River system, which benefited from pipeline assets acquired from Ultramar Diamond Shamrock Corporation ("UDS") on March 1, 2001, and increased regional production, and a $0.4 million increase on the South Texas system attributable to increased regional production. The increase in NGL transportation margin was primarily due to $3.7 million contributed from the Panola system acquired on December 31, 2000, and a $0.3 million increase in margin related to increased volumes on the Dean and Wilcox pipeline systems in South Texas. Margin contributed from lubrication 24 25 RESULTS OF OPERATIONS - (CONTINUED) oil sales increased $0.2 million due to increased volumes. The decrease in crude oil marketing margin resulted from less favorable pricing spreads in the second quarter of 2001, compared with the prior quarter. Other operating revenue of the Upstream Segment increased $3.0 million attributable to revenue from documentation and other services to support customer's trading activity at Midland, Texas, and Cushing, Oklahoma. Such revenues were added to the Partnership's business on July 20, 2000, with the acquired ARCO assets. Costs and expenses, excluding expenses associated with purchases of crude oil and petroleum products, increased $9.2 million during the quarter ended June 30, 2001, compared with the prior year quarter, comprised of a $4.8 million increase in operating, general and administrative expenses, a $2.2 million increase in depreciation and amortization expense, a $1.5 million increase in taxes - other than income taxes, and a $0.7 million increase in operating fuel and power expense. The increase in operating, general and administrative expenses was primarily attributable to operating expenses of the acquired assets, increased labor related costs and increased general and administrative supplies and services expense. The increases in depreciation and amortization expense, taxes - other than income taxes, and operating fuel and power expense were primarily attributable to assets acquired. Interest expense increased $6.6 million for the quarter ended June 30, 2001, compared with the prior year quarter, primarily due to interest expense on the term loan and revolving credit facilities used to finance the acquisition of acquired assets. Margin increased $24.1 million during the six months ended June 30, 2001, compared with the corresponding period in 2000. The increase was primarily comprised of a $7.3 million increase in crude oil transportation; a $7.1 million increase in NGL transportation; $4.7 million in crude oil terminaling attributable to pumpover fees charged at Midland, Texas, and Cushing, Oklahoma, related to the ARCO assets acquired in July 2000; $4.2 million attributable to Seaway Crude intercompany transportation; and a $0.7 million increase in lubrication oil sales. The increase in crude oil transportation margin was primarily due to $4.0 million contributed by the ARCO assets acquired, and a $2.8 million increase from higher volume on the Red River and South Texas systems, which benefited from increased regional production, and pipeline assets acquired from UDS on March 1, 2001. The increase in NGL transportation margin was primarily due to $7.3 million contributed from the Panola system acquired on December 31, 2000, partially offset by a $0.2 million decrease in margin related to the Dean and Wilcox pipeline systems in South Texas. Margin contributed from lubrication oil sales increased $0.7 million due primarily to increased volumes and increased rates on the margin realized per gallon. Other operating revenue of the Upstream Segment increased $5.8 million attributable to revenue from documentation and other services to support customer's trading activity at Midland, Texas, and Cushing, Oklahoma. Such revenues were added to the Partnership's business on July 20, 2000, with the acquired ARCO assets. Costs and expenses, excluding expenses associated with purchases of crude oil and petroleum products, increased $17.7 million during the six months ended June 30, 2001, compared with the corresponding prior year period, comprised of a $11.0 million increase in operating, general and administrative expenses, a $3.5 million increase in depreciation and amortization expense, a $2.3 million increase in taxes - other than income taxes, and a $0.9 million increase in operating fuel and power expense. The increase in operating, general and administrative expenses was primarily attributable to operating expenses of the acquired assets, increased labor related costs and increased general and administrative supplies and services expense. The increases in depreciation and amortization expense, taxes - other than income taxes, and operating fuel and power expense were primarily attributable to assets acquired. Net income of the Upstream Segment for the three-month and six-month periods ended June 30, 2001 included $4.8 million and $10.0 million, respectively, of equity earnings in Seaway Crude Pipeline Company, which was added to the Partnership's business on July 20, 2000, with the acquired ARCO assets. 25 26 RESULTS OF OPERATIONS - (CONTINUED) Interest expense increased $14.1 million for the six months ended June 30, 2001, compared with the prior year period, primarily due to interest expense on the term loan and revolving credit facilities used to finance the acquisition of acquired assets. FINANCIAL CONDITION AND LIQUIDITY Net cash from operations for the six months ended June 30, 2001, totaled $61.5 million, comprised of $89.5 million of income before charges for depreciation and amortization, partially offset by $28.0 million of cash used for working capital changes. This compares with cash flows from operations of $64.5 million for the corresponding period in 2000, comprised of $54.0 million of income before charges for depreciation and amortization, and $10.5 million of cash provided by working capital changes. The decrease in cash from working capital changes during the six-month period ended June 30, 2001, as compared to the corresponding period in 2000, resulted primarily from crude oil marketing activity and higher inventory balances at June 30, 2001. Net cash from operations for the six months ended June 30, 2001 and 2000, included interest payments of $33.2 million and $16.4 million, respectively. Cash flows used in investing activities during the first six months of 2001 was comprised of $33.4 million of capital expenditures, $25.1 million of cash contributions for the Partnership's interest in the Centennial Pipeline, LLC ("Centennial") joint venture, and $20.0 million for the purchase of crude oil assets from UDS on March 1, 2001. These uses of cash were partially offset by $3.2 million received on matured cash investments and $1.3 million of cash received from the sale of vehicles. Cash flows used in investing activities during the first six months of 2000 was comprised of $39.1 million of capital expenditures and $2.0 million of additional cash investments. These decreases of cash were partially offset by $1.5 million of proceeds from investment maturities. In August 2000, the Partnership announced the execution of definitive agreements with CMS Energy Corporation and Marathon Ashland Petroleum LLC to form Centennial. Centennial will own and operate an interstate refined petroleum products pipeline extending from the upper Texas Gulf Coast to Illinois. Each participant will own a one-third interest in Centennial. Centennial will build a 74-mile, 24-inch diameter pipeline connecting the Downstream Segment's facility in Beaumont, Texas, with the start of an existing 720-mile, 26-inch diameter pipeline extending from Longville, Louisiana, to Bourbon, Illinois. The pipeline will intersect the Downstream Segment's existing mainline near Creal Springs, Illinois, where a new two million barrel refined petroleum products storage terminal will be built. The Partnership expects to contribute approximately $70 million for its one-third interest in Centennial. The Partnership expects to fund its contribution through borrowings under its credit facilities. The Partnership estimates that capital expenditures, excluding acquisitions, for 2001 will be approximately $97 million (which includes $3 million of capitalized interest). Approximately $49 million is expected to be used to expand the Partnership's capacity to support the receipt connection point with Centennial at Beaumont, Texas, and delivery location at Creal Springs, Illinois. Approximately one-half of the remaining amount is expected to be used for revenue-generating projects, with the remaining amount to be used for life-cycle replacements and upgrading current facilities. On July 14, 2000, the Partnership entered into a $75 million term loan and a $475 million revolving credit facility. On July 21, 2000, the Partnership borrowed $75 million under the term loan and $340 million under the revolving credit facility. The funds were used to finance the acquisition of the ARCO assets (see Note 3. Acquisitions) and to refinance existing credit facilities, other than the Senior Notes. The term loan was repaid from proceeds received from the issuance of additional Limited Partner Units on October 25, 2000. On April 6, 2001, the Partnership's $475 million revolving credit agreement was amended to permit borrowings up to $500 million and to allow for letters of credit up to $20 million. The term of the revised credit agreement was extended to April 6, 2004. Additionally, on April 6, 2001, the Partnership entered into a 364-day, $200 million revolving credit agreement. The interest rate is based on the Partnership's option of either the lender's base rate plus a spread, or LIBOR plus a spread in effect at the time of the borrowings. The credit agreements contain restrictive financial covenants that require the Partnership to maintain a minimum level of partners' capital as well as maximum debt-to-EBITDA (earnings before interest expense, income tax expense and depreciation and amortization expense) and minimum 26 27 FINANCIAL CONDITION AND LIQUIDITY - (CONTINUED) fixed charge coverage ratios. At June 30, 2001, $438 million was outstanding under the revolving credit facility at a weighted average interest rate of 4.9%. On July 21, 2000, the Partnership entered into a three year swap agreement to hedge its exposure on the variable rate credit facilities. On April 6, 2001 the swap agreement was extended until April 6, 2004 to match the maturity of the variable rate credit facility above. The swap agreement is based on a notional amount of $250 million. Under the swap agreement, the Partnership pays a fixed rate of interest of 6.955% and receives a floating rate based on a three month USD LIBOR rate. During 2001, the Partnership executed treasury rate lock agreements with a combined notional amount of $400 million to hedge its exposure to increases in the treasury rate that will be used to establish the fixed interest rate for the debt offering that is probable to occur in the third quarter of 2001. Under the treasury rate lock agreements, the Partnership pays a fixed rate of interest, and receives a floating rate based on the three month treasury rate. The treasury rate locks are designated as cash flow hedges, therefore, the changes in fair value, to the extent the treasury rate locks are effective, are recognized in other comprehensive income until the actual debt offering occurs. Upon completion of the debt offering, the realized gain or loss on the treasury rate locks will be amortized out of accumulated other comprehensive income into interest expense over the life of the debt obligation. During April 2001, a treasury lock with a notional amount of $200 million was terminated with a realized gain of $1.1 million being included in accumulated other comprehensive income. As of June 30, 2001, a notional amount of $200 million remained outstanding. The fair value of the outstanding treasury rate locks was a gain of approximately $7.4 million at June 30, 2001. The Partnership paid the first quarter 2001 cash distribution of $25.5 million ($0.525 per Limited Partner Unit and Class B Unit) on May 4, 2001. On July 20, 2001, the Partnership declared a cash distribution of $0.525 per Limited Partner Unit and Class B Unit for the quarter ended June 30, 2001. The distribution was paid on August 6, 2001 to Unitholders of record on July 31, 2001. OTHER MATTERS The operations of the Partnership are subject to federal, state and local laws and regulations relating to protection of the environment. Although the Partnership believes its operations are in material compliance with applicable environmental regulations, risks of significant costs and liabilities are inherent in pipeline operations, and there can be no assurance that significant costs and liabilities will not be incurred. Moreover, it is possible that other developments, such as increasingly strict environmental laws and regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the pipeline system, could result in substantial costs and liabilities to the Partnership. The Partnership does not anticipate that changes in environmental laws and regulations will have a material adverse effect on its financial position, results of operations or cash flows in the near term. The Partnership and the Indiana Department of Environmental Management ("IDEM") have entered into an Agreed Order that will ultimately result in a remediation program for any on-site and off-site groundwater contamination attributable to the Partnership's operations at the Seymour, Indiana, terminal. A Feasibility Study, which includes the Partnership's proposed remediation program, has been approved by IDEM. IDEM is expected to issue a Record of Decision formally approving the remediation program. After the Record of Decision has been issued, the Partnership will enter into an Agreed Order for the continued operation and maintenance of the program. The Partnership has accrued $0.4 million at June 30, 2001 for future costs of the remediation program for the Seymour terminal. In the opinion of the Company, the completion of the remediation program will not have a material adverse impact on the Partnership's financial condition, results of operations or liquidity. The Partnership received a compliance order from the Louisiana Department of Environmental Quality ("DEQ") during 1994 relative to potential environmental contamination at the Partnership's Arcadia, Louisiana facility, which may be attributable to the operations of the Partnership and adjacent petroleum terminals of other 27 28 OTHER MATTERS - (CONTINUED) companies. The Partnership and all adjacent terminals have been assigned to the Groundwater Division of DEQ, in which a consolidated plan will be developed. The Partnership has finalized a negotiated Compliance Order with DEQ that will allow the Partnership to continue with a remediation plan similar to the one previously agreed to by DEQ and implemented by the Company. In the opinion of the General Partner, the completion of the remediation program being proposed by the Partnership will not have a future material adverse impact on the Partnership. On May 11, 1999, the Downstream Segment filed an application with the FERC requesting permission to charge market-based rates for substantially all refined products transportation tariffs. Along with its application for market-based rates, the Downstream Segment filed a petition for waiver pending the FERC's determination on its application for market-based rates, of the requirements that would otherwise have been imposed by the FERC's regulations requiring the Downstream Segment to reduce its rates in conformity with the PPI Index. On June 30, 1999, the FERC granted the waiver stating that the Downstream Segment would be required to make refunds, with interest, of all amounts collected under rates in excess of the PPI Index ceiling level after July 1, 1999, if the Downstream Segment's application for market-based rates was ultimately denied. On July 31, 2000, the FERC issued an order granting the Downstream Segment market-based rates in certain markets and set for hearing the Downstream Segment's application for market-based rates in the Little Rock, Arkansas; Shreveport-Arcadia, Louisiana; Cincinnati-Dayton, Ohio; and Memphis, Tennessee, destination markets and the Shreveport, Louisiana, origin market. After the matter was set for hearing, the Downstream Segment and the protesting shippers entered into a settlement agreement resolving their respective differences. On April 25, 2001, the FERC issued an order approving the offer of settlement. As a result of the settlement, the Downstream Segment recognized approximately $1.7 million of previously deferred transportation revenue in the second quarter of 2001. Also, the Downstream Segment withdrew the application for market-based rates to the Little Rock, Arkansas, destination market and the Arcadia, Louisiana, destination in the Shreveport-Arcadia, Louisiana, destination market. The Partnership will make appropriate refunds of approximately $1.0 million in the third quarter of 2001. On October 16, 2000 the Partnership received a settlement notice from Atlantic Richfield Company for payment of a net aggregate amount of approximately $12.9 million in post-closing adjustments related to the purchase of ARCO. A large portion of the requested adjustment relates to Atlantic Richfield Company's indemnity for payment of accrued income taxes. In August 2001, the Partnership and Atlantic Richfield Company reached a settlement of $11.0 million for the post-closing adjustments. The Partnership has accrued the amount of the settlement as an adjustment to the purchase price of ARCO. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations and specifies that certain acquired intangible assets be reported apart from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS 142 requires that intangible assets with definite useful lives be amortized over their respective useful lives. The Partnership will adopt SFAS 141 immediately, and SFAS 142 effective January 1, 2002. At June 30, 2001, the Partnership had $14.6 million of unamortized goodwill. Amortization expense related to goodwill was $0.1 million and $0.6 million for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. The Partnership has not determined the impact of adopting SFAS 142 at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. The matters discussed herein include "forward-looking statements" within the meaning of various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this document that address activities, events or developments that the Partnership expects or anticipates will or may occur in the future, including such things as estimated future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Partnership's business and operations, plans, references to future success, references to intentions as to future matters and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Partnership in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate under the circumstances. However, whether actual results and developments will conform with the Partnership's expectations and predictions is subject to a number of risks and uncertainties, including general economic, market or business conditions, the opportunities (or lack thereof) that may be presented to and pursued by the Partnership, competitive actions by other pipeline companies, changes in laws or regulations, and other factors, many of which are beyond the control of the Partnership. Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements and there can be no assurance that actual results or developments anticipated by the Partnership will be realized or, even if substantially realized, that they will have the expected consequences to or effect on the Partnership or its business or operations. For additional discussion of such risks and uncertainties, see TEPPCO Partners, L.P.'s 2000 Annual Report on Form 10-K and other filings made by the Partnership with the Securities and Exchange Commission. 28 29 OTHER MATTERS - (CONTINUED) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership may be exposed to market risk through changes in commodity prices and interest rates as discussed below. The Partnership has no foreign exchange risks. Risk management policies have been established by the Risk Management Committee to monitor and control these market risks. The Risk Management Committee is comprised of senior executives of the Company. At June 30, 2001, the Downstream Segment had outstanding $180 million principal amount of 6.45% Senior Notes due 2008, and $210 million principal amount of 7.51% Senior Notes due 2028 (collectively the "Senior Notes"). At June 30, 2001, the estimated fair value of the Senior Notes was approximately $374 million. From time to time, the Partnership has utilized and expects to continue to utilize derivative financial instruments with respect to a portion of its interest rate risks and its crude oil marketing activities to achieve a more predictable cash flow by reducing its exposure to interest rate and crude oil price fluctuations. These transactions generally are swaps and forwards and are entered into with major financial institutions or commodities trading institutions. Derivative financial instruments used in the Partnership's Upstream Segment are intended to reduce the Partnership's exposure to fluctuations in the market price of crude oil, while derivative financial instruments related to the Partnership's interest rate risks are intended to reduce the Partnership's exposure to increases in the benchmark interest rates underlying the Partnership's variable rate revolving credit facility. Through December 31, 2000, gains and losses from financial instruments used in the Partnership's Upstream Segment have been recognized in revenues for the periods to which the derivative financial instruments relate, and gains and losses from its interest rate financial instruments have been recognized in interest expense for the periods to which the derivative financial instrument relate. Adoption of SFAS 133 at January 1, 2001 resulted in the recognition of $10.1 million of derivative liabilities, $4.1 million of which are included in current liabilities and $6.0 million of which are included in other noncurrent liabilities on the Partnership's balance sheet, and $10.1 million of hedging losses included in accumulated other comprehensive loss, a component of Partners' capital, as the cumulative effect of the change in accounting principle. The hedging losses included in accumulated other comprehensive loss will be transferred to earnings as the forecasted transactions actually occur. Approximately $4.1 million of the loss included in accumulated other comprehensive loss as of January 1, 2001 is anticipated to be transferred into earnings over the next twelve months. The cumulative effect of the accounting change had no effect on the Partnership's net income or its earnings per Unit amounts for the six months ended June 30, 2001. Amounts were determined as of January 1, 2001 based on quoted market values, the Partnership's portfolio of derivative instruments, and the Partnership's measurement of hedge effectiveness. As of June 30, 2001, the Upstream Segment had open positions on speculative option and futures contracts. During the six months ended June 30, 2001, a gain of $3,500 was recognized on such contracts. Also as of June 30, 2001, the Partnership had in place an interest rate swap agreement to hedge its exposure to increases in the benchmark interest rate underlying its variable rate revolving credit facilities. The swap agreement is based on a notional amount of $250 million. Under the swap agreement, the Partnership pays a fixed rate of interest of 6.955% and receives a floating rate based on a three month USD LIBOR rate. The interest rate swap is designated as a cash flow hedge, therefore, the changes in fair value, to the extent the swap is effective, are recognized in other comprehensive income until the hedged interest costs are recognized in earnings. During the six month period ended June 30, 2001, the Partnership recognized $2.2 million in losses, included in interest expense, on the interest rate swap attributable to interest costs occurring in 2001. No gain or loss from ineffectiveness was required to be recognized. The fair value of the interest rate swap agreement was a loss of approximately $13.2 million at June 30, 2001. Approximately $4.8 million (inclusive of the $4.1 million related to the cumulative effect of the accounting change not yet recognized) of such amount is anticipated to be transferred into earnings over the next twelve months. 29 30 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - (CONTINUED) During 2001, the Partnership executed treasury rate lock agreements with a combined notional amount of $400 million to hedge its exposure to increases in the treasury rate that will be used to establish the fixed interest rate for the debt offering that is probable to occur in the third quarter of 2001. Under the treasury rate lock agreements, the Partnership pays a fixed rate of interest, and receives a floating rate based on the three month treasury rate. The treasury rate locks are designated as cash flow hedges, therefore, the changes in fair value, to the extent the treasury rate locks are effective, are recognized in other comprehensive income until the actual debt offering occurs. Upon completion of the debt offering, the realized gain or loss on the treasury rate locks will be amortized out of accumulated other comprehensive income into interest expense over the life of the debt obligation. During April 2001, a treasury lock with a notional amount of $200 million was terminated with a realized gain of $1.1 million. The realized gain was recorded as a component of accumulated other comprehensive income. As of June 30, 2001, a notional amount of $200 million remained outstanding. The fair value of the outstanding treasury rate locks was a gain of approximately $7.4 million at June 30, 2001. 30 31 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: Exhibit Number Description 3.1 Certificate of Limited Partnership of the Partnership (Filed as Exhibit 3.2 to the Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203) and incorporated herein by reference). 3.2 Certificate of Formation of TEPPCO Colorado, LLC (Filed as Exhibit 3.2 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1998 and incorporated herein by reference). 3.3 Second Amended and Restated Agreement of Limited Partnership of TEPPCO Partners, L.P., dated November 30, 1998 (Filed as Exhibit 3.3 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 3.4 Amended and Restated Agreement of Limited Partnership of TE Products Pipeline Company, Limited Partnership, effective July 21, 1998 (Filed as Exhibit 3.2 to Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated July 21, 1998 and incorporated herein by reference). 3.5 Agreement of Limited Partnership of TCTM, L.P., dated November 30, 1998 (Filed as Exhibit 3.5 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 3.6* Contribution, Assignment and Amendment Agreement among TEPPCO Partners, L.P., TE Products Pipeline Company, Limited Partnership, TCTM, L.P., Texas Eastern Products Pipeline Company, LLC, and TEPPCO GP, Inc., dated July 26, 2001. 4.1 Form of Certificate representing Limited Partner Units (Filed as Exhibit 4.1 to the Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203) and incorporated herein by reference). 4.2 Form of Indenture between TE Products Pipeline Company, Limited Partnership and The Bank of New York, as Trustee, dated as of January 27, 1998 (Filed as Exhibit 4.3 to TE Products Pipeline Company, Limited Partnership's Registration Statement on Form S-3 (Commission File No. 333-38473) and incorporated herein by reference). 4.3 Form of Certificate representing Class B Units (Filed as Exhibit 4.3 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 10.1 Assignment and Assumption Agreement, dated March 24, 1988, between Texas Eastern Transmission Corporation and the Company (Filed as Exhibit 10.8 to the Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203) and incorporated herein by reference). 10.2+ Texas Eastern Products Pipeline Company 1997 Employee Incentive Compensation Plan executed on July 14, 1997 (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1997 and incorporated herein by reference). 10.3 Agreement Regarding Environmental Indemnities and Certain Assets (Filed as Exhibit 10.5 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1990 and incorporated herein by reference). 10.4+ Texas Eastern Products Pipeline Company Management Incentive Compensation Plan executed on January 30, 1992 (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1992 and incorporated herein by reference). 31 32 10.5+ Texas Eastern Products Pipeline Company Long-Term Incentive Compensation Plan executed on October 31, 1990 (Filed as Exhibit 10.9 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1990 and incorporated herein by reference). 10.6+ Form of Amendment to Texas Eastern Products Pipeline Company Long-Term Incentive Compensation Plan (Filed as Exhibit 10.7 to the Partnership's Form 10-K (Commission File No. 1-10403) for the year ended December 31, 1995 and incorporated herein by reference). 10.7+ Duke Energy Corporation Executive Savings Plan (Filed as Exhibit 10.7 to the Partnership's Form 10-K (Commission File No. 1-10403) for the year ended December 31, 1999 and incorporated herein by reference). 10.8+ Duke Energy Corporation Executive Cash Balance Plan (Filed as Exhibit 10.8 to the Partnership's Form 10-K (Commission File No. 1-10403) for the year ended December 31, 1999 and incorporated herein by reference). 10.9+ Duke Energy Corporation Retirement Benefit Equalization Plan (Filed as Exhibit 10.9 to the Partnership's Form 10-K (Commission File No. 1-10403) for the year ended December 31, 1999 and incorporated herein by reference). 10.10+ Employment Agreement with William L. Thacker, Jr. (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1992 and incorporated herein by reference). 10.11+ Texas Eastern Products Pipeline Company 1994 Long Term Incentive Plan executed on March 8, 1994 (Filed as Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1994 and incorporated herein by reference). 10.12+ Texas Eastern Products Pipeline Company 1994 Long Term Incentive Plan, Amendment 1, effective January 16, 1995 (Filed as Exhibit 10.12 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended June 30, 1999 and incorporated herein by reference). 10.13 Asset Purchase Agreement between Duke Energy Field Services, Inc. and TEPPCO Colorado, LLC, dated March 31, 1998 (Filed as Exhibit 10.14 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1998 and incorporated herein by reference). 10.14 Contribution Agreement between Duke Energy Transport and Trading Company and TEPPCO Partners, L.P., dated October 15, 1998 (Filed as Exhibit 10.16 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 10.15 Guaranty Agreement by Duke Energy Natural Gas Corporation for the benefit of TEPPCO Partners, L.P., dated November 30, 1998, effective November 1, 1998 (Filed as Exhibit 10.17 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 10.16 Letter Agreement regarding Payment Guarantees of Certain Obligations of TCTM, L.P. between Duke Capital Corporation and TCTM, L.P., dated November 30, 1998 (Filed as Exhibit 10.19 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 10.17+ Form of Employment Agreement between the Company and Ernest P. Hagan, Thomas R. Harper, David L. Langley, Charles H. Leonard and James C. Ruth, dated December 1, 1998 (Filed as Exhibit 10.20 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 32 33 EXHIBITS AND REPORTS ON FORM 8-K - (CONTINUED) 10.18 Agreement Between Owner and Contractor between TE Products Pipeline Company, Limited Partnership and Eagleton Engineering Company, dated February 4, 1999 (Filed as Exhibit 10.21 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1999 and incorporated herein by reference). 10.19 Services and Transportation Agreement between TE Products Pipeline Company, Limited Partnership and Fina Oil and Chemical Company, BASF Corporation and BASF Fina Petrochemical Limited Partnership, dated February 9, 1999 (Filed as Exhibit 10.22 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1999 and incorporated herein by reference). 10.20 Call Option Agreement, dated February 9, 1999 (Filed as Exhibit 10.23 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1999 and incorporated herein by reference). 10.21+ Texas Eastern Products Pipeline Company Retention Incentive Compensation Plan, effective January 1, 1999 (Filed as Exhibit 10.24 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1999 and incorporated herein by reference). 10.22+ Form of Employment and Non-Compete Agreement between the Company and J. Michael Cockrell effective January 1, 1999 (Filed as Exhibit 10.29 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1999 and incorporated herein by reference). 10.23+ Texas Eastern Products Pipeline Company Non-employee Directors Unit Accumulation Plan, effective April 1, 1999 (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1999 and incorporated herein by reference). 10.24+ Texas Eastern Products Pipeline Company Non-employee Directors Deferred Compensation Plan, effective November 1, 1999 (Filed as Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1999 and incorporated herein by reference). 10.25+ Texas Eastern Products Pipeline Company Phantom Unit Retention Plan, effective August 25, 1999 (Filed as Exhibit 10.32 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1999 and incorporated herein by reference). 10.26 Credit Agreement between TEPPCO Partners, L.P., SunTrust Bank, and Certain Lenders, dated July 14, 2000 (Filed as Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended June 30, 2000 and incorporated herein by reference). 10.27 Amended and Restated Purchase Agreement By and Between Atlantic Richfield Company and Texas Eastern Products Pipeline Company With Respect to the Sale of ARCO Pipe Line Company, dated as of May 10, 2000. (Filed as Exhibit 2.1 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 2000 and incorporated herein by reference). 10.28+ Texas Eastern Products Pipeline Company, LLC 2000 Long Term Incentive Plan, Amendment and Restatement, effective January 1, 2000 (Filed as Exhibit 10.28 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 2000 and incorporated herein by reference). 10.29+ TEPPCO Supplemental Benefit Plan, effective April 1, 2000 (Filed as Exhibit 10.29 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 2000 and incorporated herein by reference). 10.30+ Employment Agreement with Barry R. Pearl (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 2001 and incorporated herein by reference). 10.31 Amended and Restated Credit Agreement among TEPPCO Partners, L. P. as Borrower, SunTrust Bank as Administrative Agent and LC Issuing Bank, and Certain Lenders, dated as of April 6, 2001 ($500,000,000 Revolving Facility) (Filed as Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 2001 and incorporated herein by reference). 33 34 EXHIBITS AND REPORTS ON FORM 8-K - (CONTINUED) 10.32 Credit Agreement among TEPPCO Partners, L. P. as Borrower, SunTrust Bank as Administrative Agent, and Certain Lenders, dated as of April 6, 2001 ($200,000,000 Revolving Facility) (Filed as Exhibit 10.32 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 2001 and incorporated herein by reference). 12.1* Statement of Computation of Ratio of Earnings to Fixed Charges. 22.1 Subsidiaries of the Partnership (Filed as Exhibit 22.1 to the Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203) and incorporated herein by reference). ---------- * Filed herewith. + A management contract or compensation plan or arrangement. (b) Reports on Form 8-K filed during the quarter ended June 30, 2001: A report on Form 8-K was filed on April 23, 2001, pursuant to Item 5 of such form. A report on Form 8-K was filed on May 9, 2001, pursuant to Item 5 of such form. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned duly authorized officer and principal financial officer. TEPPCO Partners, L.P. (Registrant) By: Texas Eastern Products Pipeline Company, LLC, as General Partner /s/ WILLIAM L. THACKER ---------------------- William L. Thacker Chief Executive Officer /s/ CHARLES H. LEONARD ---------------------- Charles H. Leonard Senior Vice President, Chief Financial Officer and Treasurer Date: August 10, 2001 34 35 INDEX TO EXHIBITS

EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Certificate of Limited Partnership of the Partnership (Filed as Exhibit 3.2 to the Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203) and incorporated herein by reference). 3.2 Certificate of Formation of TEPPCO Colorado, LLC (Filed as Exhibit 3.2 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1998 and incorporated herein by reference). 3.3 Second Amended and Restated Agreement of Limited Partnership of TEPPCO Partners, L.P., dated November 30, 1998 (Filed as Exhibit 3.3 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 3.4 Amended and Restated Agreement of Limited Partnership of TE Products Pipeline Company, Limited Partnership, effective July 21, 1998 (Filed as Exhibit 3.2 to Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) dated July 21, 1998 and incorporated herein by reference). 3.5 Agreement of Limited Partnership of TCTM, L.P., dated November 30, 1998 (Filed as Exhibit 3.5 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 3.6* Contribution, Assignment and Amendment Agreement among TEPPCO Partners, L.P., TE Products Pipeline Company, Limited Partnership, TCTM, L.P., Texas Eastern Products Pipeline Company, LLC, and TEPPCO GP, Inc., dated July 26, 2001. 4.1 Form of Certificate representing Limited Partner Units (Filed as Exhibit 4.1 to the Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203) and incorporated herein by reference). 4.2 Form of Indenture between TE Products Pipeline Company, Limited Partnership and The Bank of New York, as Trustee, dated as of January 27, 1998 (Filed as Exhibit 4.3 to TE Products Pipeline Company, Limited Partnership's Registration Statement on Form S-3 (Commission File No. 333-38473) and incorporated herein by reference). 4.3 Form of Certificate representing Class B Units (Filed as Exhibit 4.3 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 10.1 Assignment and Assumption Agreement, dated March 24, 1988, between Texas Eastern Transmission Corporation and the Company (Filed as Exhibit 10.8 to the Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203) and incorporated herein by reference). 10.2+ Texas Eastern Products Pipeline Company 1997 Employee Incentive Compensation Plan executed on July 14, 1997 (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1997 and incorporated herein by reference). 10.3 Agreement Regarding Environmental Indemnities and Certain Assets (Filed as Exhibit 10.5 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1990 and incorporated herein by reference).

36 10.4+ Texas Eastern Products Pipeline Company Management Incentive Compensation Plan executed on January 30, 1992 (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1992 and incorporated herein by reference). 10.5+ Texas Eastern Products Pipeline Company Long-Term Incentive Compensation Plan executed on October 31, 1990 (Filed as Exhibit 10.9 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1990 and incorporated herein by reference). 10.6+ Form of Amendment to Texas Eastern Products Pipeline Company Long-Term Incentive Compensation Plan (Filed as Exhibit 10.7 to the Partnership's Form 10-K (Commission File No. 1-10403) for the year ended December 31, 1995 and incorporated herein by reference). 10.7+ Duke Energy Corporation Executive Savings Plan (Filed as Exhibit 10.7 to the Partnership's Form 10-K (Commission File No. 1-10403) for the year ended December 31, 1999 and incorporated herein by reference). 10.8+ Duke Energy Corporation Executive Cash Balance Plan (Filed as Exhibit 10.8 to the Partnership's Form 10-K (Commission File No. 1-10403) for the year ended December 31, 1999 and incorporated herein by reference). 10.9+ Duke Energy Corporation Retirement Benefit Equalization Plan (Filed as Exhibit 10.9 to the Partnership's Form 10-K (Commission File No. 1-10403) for the year ended December 31, 1999 and incorporated herein by reference). 10.10+ Employment Agreement with William L. Thacker, Jr. (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1992 and incorporated herein by reference). 10.11+ Texas Eastern Products Pipeline Company 1994 Long Term Incentive Plan executed on March 8, 1994 (Filed as Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1994 and incorporated herein by reference). 10.12+ Texas Eastern Products Pipeline Company 1994 Long Term Incentive Plan, Amendment 1, effective January 16, 1995 (Filed as Exhibit 10.12 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended June 30, 1999 and incorporated herein by reference). 10.13 Asset Purchase Agreement between Duke Energy Field Services, Inc. and TEPPCO Colorado, LLC, dated March 31, 1998 (Filed as Exhibit 10.14 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1998 and incorporated herein by reference). 10.14 Contribution Agreement between Duke Energy Transport and Trading Company and TEPPCO Partners, L.P., dated October 15, 1998 (Filed as Exhibit 10.16 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 10.15 Guaranty Agreement by Duke Energy Natural Gas Corporation for the benefit of TEPPCO Partners, L.P., dated November 30, 1998, effective November 1, 1998 (Filed as Exhibit 10.17 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 10.16 Letter Agreement regarding Payment Guarantees of Certain Obligations of TCTM, L.P. between Duke Capital Corporation and TCTM, L.P., dated November 30, 1998 (Filed as Exhibit 10.19 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 10.17+ Form of Employment Agreement between the Company and Ernest P. Hagan, Thomas R. Harper, David L. Langley, Charles H. Leonard and James C. Ruth, dated December 1, 1998 (Filed as Exhibit 10.20 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 1998 and incorporated herein by reference). 37 10.18 Agreement Between Owner and Contractor between TE Products Pipeline Company, Limited Partnership and Eagleton Engineering Company, dated February 4, 1999 (Filed as Exhibit 10.21 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1999 and incorporated herein by reference). 10.19 Services and Transportation Agreement between TE Products Pipeline Company, Limited Partnership and Fina Oil and Chemical Company, BASF Corporation and BASF Fina Petrochemical Limited Partnership, dated February 9, 1999 (Filed as Exhibit 10.22 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1999 and incorporated herein by reference). 10.20 Call Option Agreement, dated February 9, 1999 (Filed as Exhibit 10.23 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1999 and incorporated herein by reference). 10.21+ Texas Eastern Products Pipeline Company Retention Incentive Compensation Plan, effective January 1, 1999 (Filed as Exhibit 10.24 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 1999 and incorporated herein by reference). 10.22+ Form of Employment and Non-Compete Agreement between the Company and J. Michael Cockrell effective January 1, 1999 (Filed as Exhibit 10.29 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1999 and incorporated herein by reference). 10.23+ Texas Eastern Products Pipeline Company Non-employee Directors Unit Accumulation Plan, effective April 1, 1999 (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1999 and incorporated herein by reference). 10.24+ Texas Eastern Products Pipeline Company Non-employee Directors Deferred Compensation Plan, effective November 1, 1999 (Filed as Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1999 and incorporated herein by reference). 10.25+ Texas Eastern Products Pipeline Company Phantom Unit Retention Plan, effective August 25, 1999 (Filed as Exhibit 10.32 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended September 30, 1999 and incorporated herein by reference). 10.26 Credit Agreement between TEPPCO Partners, L.P., SunTrust Bank, and Certain Lenders, dated July 14, 2000 (Filed as Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended June 30, 2000 and incorporated herein by reference). 10.27 Amended and Restated Purchase Agreement By and Between Atlantic Richfield Company and Texas Eastern Products Pipeline Company With Respect to the Sale of ARCO Pipe Line Company, dated as of May 10, 2000. (Filed as Exhibit 2.1 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 2000 and incorporated herein by reference). 10.28+ Texas Eastern Products Pipeline Company, LLC 2000 Long Term Incentive Plan, Amendment and Restatement, effective January 1, 2000 (Filed as Exhibit 10.28 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 2000 and incorporated herein by reference). 10.29+ TEPPCO Supplemental Benefit Plan, effective April 1, 2000 (Filed as Exhibit 10.29 to Form 10-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the year ended December 31, 2000 and incorporated herein by reference). 38 10.30+ Employment Agreement with Barry R. Pearl (Filed as Exhibit 10.30 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 2001 and incorporated herein by reference). 10.31 Amended and Restated Credit Agreement among TEPPCO Partners, L. P. as Borrower, SunTrust Bank as Administrative Agent and LC Issuing Bank, and Certain Lenders, dated as of April 6, 2001 ($500,000,000 Revolving Facility) (Filed as Exhibit 10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 2001 and incorporated herein by reference). 10.32 Credit Agreement among TEPPCO Partners, L. P. as Borrower, SunTrust Bank as Administrative Agent, and Certain Lenders, dated as of April 6, 2001 ($200,000,000 Revolving Facility) (Filed as Exhibit 10.32 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended March 31, 2001 and incorporated herein by reference). 12.1* Statement of Computation of Ratio of Earnings to Fixed Charges. 22.1 Subsidiaries of the Partnership (Filed as Exhibit 22.1 to the Registration Statement of TEPPCO Partners, L.P. (Commission File No. 33-32203) and incorporated herein by reference). ---------- * Filed herewith. + A management contract or compensation plan or arrangement.