10-Q 1 e10-q.txt TEPPCO PARTNERS, L.P. - DATED JUNE 30, 2000 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, 2000 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, 2000 1999 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents .................................. $ 39,146 $ 32,593 Short-term investments ..................................... 1,013 1,475 Accounts receivable, trade ................................. 234,346 205,766 Inventories ................................................ 10,739 16,766 Other ...................................................... 5,365 6,409 ------------ ------------ Total current assets .................................... 290,609 263,009 ------------ ------------ Property, plant and equipment, at cost (Net of accumulated depreciation and amortization of $235,319 and $220,467) .... 744,437 720,919 Investments .................................................. 6,227 5,242 Intangible assets ............................................ 33,969 34,926 Other assets ................................................. 18,657 17,277 ------------ ------------ Total assets ............................................ $ 1,093,899 $ 1,041,373 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable and accrued liabilities ................... $ 231,857 $ 201,660 Accounts payable, general partner .......................... 7,796 4,741 Accrued interest ........................................... 13,605 13,297 Other accrued taxes ........................................ 8,778 8,822 Other ...................................................... 14,030 14,972 ------------ ------------ Total current liabilities ............................... 276,066 243,492 ------------ ------------ Senior Notes ................................................. 389,768 389,753 Other long-term debt ......................................... 86,000 66,000 Other liabilities and deferred credits ....................... 3,581 3,073 Minority interest ............................................ 3,425 3,429 Redeemable Class B Units held by related party ............... 105,754 105,859 Partners' capital: General partner's interest ................................... 1,122 657 Limited partners' interests .................................. 228,183 229,110 ------------ ------------ Total partners' capital ................................. 229,305 229,767 ------------ ------------ Total liabilities and partners' capital ................. $ 1,093,899 $ 1,041,373 ============ ============

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, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Operating revenues: Sales of crude oil and petroleum products .......... $ 689,643 $ 398,156 $ 1,372,428 $ 620,530 Transportation - Refined products .................. 32,685 33,353 60,715 58,949 Transportation - LPGs .............................. 10,367 10,094 33,484 36,689 Transportation - Crude oil and NGLs ................ 3,773 2,970 7,902 5,536 Mont Belvieu operations ............................ 2,883 3,358 7,354 6,255 Other - Net ........................................ 8,353 7,420 16,513 13,482 ------------ ------------ ------------ ------------ Total operating revenues ......................... 747,704 455,351 1,498,396 741,441 ------------ ------------ ------------ ------------ Costs and expenses: Purchases of crude oil and petroleum products ...... 682,891 391,333 1,360,304 608,030 Operating, general and administrative .............. 25,334 24,090 49,568 45,303 Operating fuel and power ........................... 8,326 8,094 15,839 14,987 Depreciation and amortization ...................... 8,339 8,154 16,586 16,293 Taxes - other than income taxes .................... 2,663 2,664 5,181 5,343 ------------ ------------ ------------ ------------ Total costs and expenses ......................... 727,553 434,335 1,447,478 689,956 ------------ ------------ ------------ ------------ Operating income ................................. 20,151 21,016 50,918 51,485 Interest expense ..................................... (8,548) (7,780) (16,982) (15,322) Interest capitalized ................................. 1,255 347 2,265 489 Other income - net ................................... 850 590 1,632 1,131 ------------ ------------ ------------ ------------ Income before minority interest .................. 13,708 14,173 37,833 37,783 Minority interest .................................... (138) (144) (382) (382) ------------ ------------ ------------ ------------ Net Income ....................................... $ 13,570 $ 14,029 $ 37,451 $ 37,401 ============ ============ ============ ============ Net Income Allocation: Limited Partner Unitholders .......................... $ 9,963 $ 11,102 $ 27,496 $ 29,598 Class B Unitholder ................................... 1,346 1,428 3,714 3,997 General Partner ...................................... 2,261 1,499 6,241 3,806 ------------ ------------ ------------ ------------ Total net income allocated ....................... $ 13,570 $ 14,029 $ 37,451 $ 37,401 ============ ============ ============ ============ Basic and diluted net income per Limited Partner and Class B Unit: .............................. $ 0.35 $ 0.38 $ 0.95 $ 1.02 ============ ============ ============ ============ Weighted average Limited Partner and Class B Units outstanding ....................................... 32,917 32,917 32,917 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, 2000 1999 ---------- ---------- Cash flows from operating activities: Net income ..................................................................... $ 37,451 $ 37,401 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ................................................. 16,586 16,293 Equity in (income) loss of affiliate .......................................... (95) 149 Increase in accounts receivable, trade ........................................ (28,580) (39,808) Decrease (increase) in inventories ............................................ 6,027 (1,083) Decrease (increase) in other current assets ................................... 1,044 (49) Increase in accounts payable and accrued expenses ............................. 32,574 33,562 Other ......................................................................... (526) (1,081) ---------- ---------- Net cash provided by operating activities ................................... 64,481 45,384 ---------- ---------- Cash flows from investing activities: Proceeds from cash investments ................................................ 1,475 3,840 Purchases of cash investments ................................................. (2,000) (2,235) Purchase of crude oil system .................................................. -- (2,250) Capital expenditures .......................................................... (39,147) (40,313) ---------- ---------- Net cash used in investing activities ....................................... (39,672) (40,958) ---------- ---------- Cash flows from financing activities: Proceeds from term loan ....................................................... 20,000 25,000 Proceeds from revolving credit agreement ...................................... -- 5,000 Distributions ................................................................. (38,256) (32,649) ---------- ---------- Net cash used in financing activities ....................................... (18,256) (2,649) ---------- ---------- Net increase in cash and cash equivalents ....................................... 6,553 1,777 Cash and cash equivalents at beginning of period ................................ 32,593 47,423 ---------- ---------- Cash and cash equivalents at end of period ...................................... $ 39,146 $ 49,200 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS: Interest paid during the period (net of capitalized interest) ................... $ 14,090 $ 14,455 ========== ==========

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 "Products OLP") and TCTM, L.P. (the "Crude Oil OLP"). Collectively the Products OLP and the Crude Oil OLP are referred to as "the Operating Partnerships." The Partnership owns a 99% interest as the sole limited partner interest in both the Products OLP and the Crude Oil OLP. On March 31, 2000, Texas Eastern Products Pipeline Company, a Delaware corporation and general partner of the Partnership and the Operating Partnerships, was reorganized into Texas Eastern Products Pipeline Company, LLC (the "Company" or "General Partner"), a Delaware limited liability company. Additionally on March 31, 2000, Duke Energy Corporation ("Duke Energy"), contributed its ownership of the General Partner to Duke Energy Field Services, LLC ("DEFS"). DEFS is a joint venture between Duke Energy and Phillips Petroleum Company. Duke Energy holds a majority interest in DEFS. The Company owns a 1% general partner interest in the Partnership and 1% general partner interest in each Operating Partnership. 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, 2000, and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2000, are not necessarily indicative of results of operations for the full year 2000. 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, 1999. Certain amounts from the prior year have been reclassified to conform to current presentation. The Partnership operates in two business segments: refined products and liquefied petroleum gases ("LPGs") transportation, and crude oil and natural gas liquids ("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 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 32,916,547 Units as of June 30, 2000 and 1999). 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 6. Cash Distributions). The General Partner was allocated $6.2 million (representing 16.66%) and $3.8 million (representing 10.18%) of net income for the six months ended June 30, 2000, and 1999, respectively. 5 6 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 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, 2000 and 1999, the denominator was increased by 19,746 Units and 27,963 Units, respectively. For the six months ended June 30, 2000 and 1999, the denominator was increased by 14,333 Units and 25,242 Units, respectively. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards for and disclosures of derivative instruments and hedging activities. In July 1999, the FASB issued SFAS No. 137 to delay the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Partnership expects to adopt this standard, as amended, effective January 1, 2001. The Partnership has not determined the impact of this statement on its financial condition and results of operations. NOTE 3. INVESTMENTS SHORT-TERM INVESTMENTS The Partnership routinely invests cash in liquid short-term investments as part of its cash management program. Investments with maturities at date of purchase of 90 days or less are considered cash equivalents. At June 30, 2000, short-term investments included $1.0 million of investment-grade corporate notes, which mature within one year. All short-term investments are classified as held-to-maturity securities and are stated at amortized cost. The aggregate fair value of such securities approximates amortized cost at June 30, 2000. LONG-TERM INVESTMENTS At June 30, 2000, the Partnership had $6.2 million invested in investment-grade corporate notes, which have varying maturities through 2004. These securities are classified as held-to-maturity securities and are stated at amortized cost. The aggregate fair value of such securities approximates amortized cost at June 30, 2000. 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, 2000 1999 ---------- ---------- Gasolines .................. $ 500 $ 3,270 Propane .................... 51 223 Butanes .................... 1,474 605 Fuel oil ................... 544 386 Crude oil .................. 3,691 6,627 Other products ............. 927 2,301 Materials and supplies ..... 3,552 3,354 ---------- ---------- Total ............ $ 10,739 $ 16,766 ========== ==========

The costs of inventories were lower than market at June 30, 2000, and December 31, 1999. 6 7 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 5. LONG TERM DEBT SENIOR NOTES On January 27, 1998, the Products OLP 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 Products OLP, 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 Products OLP and will rank on a parity with all other unsecured and unsubordinated indebtedness of the Products OLP. The indenture governing the Senior Notes contains covenants, including, but not limited to, covenants limiting (i) the creation of liens securing indebtedness and (ii) 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 In connection with the purchase of fractionation assets from DEFS as of March 31, 1998, TEPPCO Colorado received a $38 million bank loan from SunTrust Bank ("SunTrust"). The interest rate on this loan is 6.53%, which is payable quarterly. The original maturity date was April 21, 2001. This loan was refinanced by the Partnership on July 21, 2000, through the credit facility discussed below. Accordingly, the principal amount was included in other long-term debt at June 30, 2000, as the Partnership had the intent and ability to refinance such balance at June 30, 2000. On May 17, 1999, the Products OLP entered into a five-year $75 million term loan agreement to finance construction of three new pipelines between the Partnership's terminal in Mont Belvieu, Texas and Port Arthur, Texas. The loan agreement has a term of five years. SunTrust is the administrator of the loan. At June 30, 2000, $45 million was outstanding under the term loan agreement. This loan was refinanced by the Partnership on July 21, 2000, through the credit facility discussed below. On May 17, 1999, the Products OLP entered into a five-year $25 million revolving credit agreement and TEPPCO Crude Oil, LLC ("TCO") entered into a three-year $30 million revolving credit agreement. SunTrust is the administrative agent on both revolving credit agreements. The interest rate on both agreements is based on the borrower's option of either SunTrust's prime rate, the federal funds rate or LIBOR rate in effect at the time of the borrowings and is payable quarterly. The Products OLP has not made any borrowings under this revolving credit facility. TCO had a $3 million principal amount outstanding under its revolving credit agreement as of June 30, 2000, which was refinanced on July 21, 2000, through the credit facility discussed below. Both of the credit facilities were terminated in connection with the refinancing on July 21, 2000. 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 assets from ARCO (see Note. 9 Current Developments) and to refinance existing credit facilities, other than the Senior Notes. The term loan has a eighteen month maturity and the revolving facility has a three year maturity. The interest rate for the credit agreements is based on the Partnership's option of either SunTrust's prime rate, the federal funds rate or LIBOR rate in effect at the time of the borrowings and is adjusted monthly, bimonthly, quarterly or semi-annually. The credit agreements 7 8 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) contain restrictive financial covenants that require the Partnership to maintain a minimum level of partners' capital as well as debt-to-earnings, interest coverage and capital expenditure coverage ratios. On July 21, 2000, the Partnership entered into a three year swap agreement to hedge its exposure on the variable rate credit facilities. The swap agreement is based on a notional amount of $250 million. Under the swap agreement, the Partnership will pay a fixed rate of interest of 7.17% and will receive a floating rate based on a three month USD LIBOR rate. NOTE 6. CASH DISTRIBUTIONS 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 period ended June 30, 2000 and 1999 (in thousands, except per Unit amounts).

SIX MONTHS ENDED JUNE 30, ------------------------ 2000 1999 ---------- ---------- Limited Partner Units .............................. $ 28,275 $ 26,100 1% General Partner Interest ........................ 324 293 General Partner Incentive .......................... 5,452 2,996 ---------- ---------- Total Partners' Capital Cash Distributions ... 34,051 29,389 Class B Units ...................................... 3,819 2,931 Minority Interest .................................. 386 329 ---------- ---------- Total Cash Distributions Paid ................ $ 38,256 $ 32,649 ========== ========== Total Cash Distributions Paid Per Unit ............. $ 0.975 $ 0.900 ========== ==========

The above table includes the fourth quarter 1998 pro rata cash distribution paid on February 5, 1999, to the Class B Limited Partner Units for the 61-day period from the issuance on November 1, 1998. On July 17, 2000, the Partnership declared a cash distribution of $0.50 per Limited Partner Unit and Class B Unit for the quarter ended June 30, 2000. The distribution was paid on August 4, 2000, to Unitholders of record on July 31, 2000. NOTE 7. SEGMENT DATA The Partnership operates in two industry segments: refined products and LPGs transportation, which operates through the Products OLP; and crude oil and NGLs transportation and marketing, which operates through the Crude Oil OLP. 8 9 TEPPCO PARTNERS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) Operations of the Products OLP consist of interstate transportation, storage and terminaling of petroleum products; short-haul shuttle transportation of LPGs at the Mont Belvieu, Texas complex; sale of product inventory; fractionation of natural gas liquids and other ancillary services. The Products OLP is one of the largest pipeline common carriers of refined petroleum products and LPGs in the United States. The Partnership owns and operates an approximate 4,300-mile pipeline system extending from southeast Texas through the central and midwestern United States to the northeastern United States. The Crude Oil OLP 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 distributes lube oils and specialty chemicals to industrial and commercial accounts. The Crude Oil OLP's gathering, transportation and storage assets include approximately 2,400 miles of pipeline and 1.6 million barrels of storage. The below table includes interim financial information by business segment for the interim periods ended June 30, 2000 and 1999 (in thousands):

THREE MONTHS ENDED JUNE 30, 2000 THREE MONTHS ENDED JUNE 30, 1999 ------------------------------------------ ------------------------------------------ PRODUCTS CRUDE OIL PRODUCTS CRUDE OIL OLP OLP CONSOLIDATED OLP OLP CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ Unaffiliated revenues .......... $ 54,288 $ 693,416 $ 747,704 $ 54,225 $ 401,126 $ 455,351 Operating expenses, including power ....................... 30,215 688,999 719,214 28,854 397,327 426,181 Depreciation and amortization expense ..................... 6,874 1,465 8,339 6,770 1,384 8,154 ------------ ------------ ------------ ------------ ------------ ------------ Operating income ............ 17,199 2,952 20,151 18,601 2,415 21,016 Interest expense, net .......... (7,167) (126) (7,293) (7,417) (16) (7,433) Other income, net .............. 573 139 712 386 60 446 ------------ ------------ ------------ ------------ ------------ ------------ Net income .................. $ 10,605 $ 2,965 $ 13,570 $ 11,570 $ 2,459 $ 14,029 ============ ============ ============ ============ ============ ============

SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999 ------------------------------------------ ------------------------------------------ PRODUCTS CRUDE OIL PRODUCTS CRUDE OIL OLP OLP CONSOLIDATED OLP OLP CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ Unaffiliated revenues .......... $ 118,066 $ 1,380,330 $ 1,498,396 $ 115,375 $ 626,066 $ 741,441 Operating expenses, including power ............. 58,872 1,372,020 1,430,892 55,043 618,620 673,663 Depreciation and amortization expense ........ 13,657 2,929 16,586 13,533 2,760 16,293 ------------ ------------ ------------ ------------ ------------ ------------ Operating income ............ 45,537 5,381 50,918 46,799 4,686 51,485 Interest expense, net .......... (14,477) (240) (14,717) (14,811) (22) (14,833) Other income, net .............. 966 284 1,250 574 175 749 ------------ ------------ ------------ ------------ ------------ ------------ Net income .................. $ 32,026 $ 5,425 $ 37,451 $ 32,562 $ 4,839 $ 37,401 ============ ============ ============ ============ ============ ============

AS OF JUNE 30, 2000 AS OF JUNE 30, 1999 ------------------------------------------ ------------------------------------------ PRODUCTS CRUDE OIL PRODUCTS CRUDE OIL OLP OLP CONSOLIDATED OLP OLP CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ Identifiable assets ............ $ 746,058 $ 347,841 $ 1,093,899 $ 721,373 $ 262,144 $ 983,517 Accounts receivable, trade ..... 20,369 213,977 234,346 16,783 136,566 153,349 Accounts payable and accrued liabilities ......... $ 9,984 $ 221,873 $ 231,857 $ 6,740 $ 139,947 $ 146,687

9 10 NOTE 8. CONTINGENCIES In the fall of 1999, the Company and the Partnership were named as defendants in a lawsuit 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), 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 Complaint, the plaintiffs allege strict liability for both personal injury and property damage together with gross negligence, continuing nuisance, trespass, criminal mischief and loss of consortium. The plaintiffs are seeking compensatory, punitive and treble damages. The Company has filed an Answer to the Complaint, denying the allegations, as well as various other motions. This case is in the early stages of discovery and is not covered by insurance. The Company is defending itself vigorously against this lawsuit. The Partnership cannot estimate the loss, if any, associated with this pending lawsuit. 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, 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 $0.9 million at June 30, 2000 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. Tariff rates of interstate oil pipeline companies are currently regulated by the FERC, primarily through an index methodology, whereby a pipeline company is allowed to change its rates based on the change from year to year in the Producer Price Index for finished goods less 1% ("PPI Index"). In the alternative, interstate oil pipeline companies may elect to support rate filings by using a cost-of-service methodology, competitive market showings ("Market Based Rates") or agreements between shippers and the oil pipeline company that the rate is acceptable ("Settlement Rates"). In May 1999, the Products OLP filed an application with the FERC to charge Market Based Rates for substantially all refined products transportation tariffs. Such application is currently under review by the FERC. The FERC approved a request of the Products OLP waiving the requirement to adjust refined products 10 11 transportation tariffs pursuant to the PPI Index while its Market Based Rates application is under review. Under the PPI Index, refined products transportation rates in effect on June 30, 1999 would have been reduced by approximately 1.83% effective July 1, 1999. If any portion of the Market Based Rates application is denied by the FERC, the Products OLP has agreed to refund, with interest, amounts collected after June 30, 1999, under the tariff rates in excess of the PPI Index. As a result of the refund obligation potential, the Partnership has deferred all revenue recognition of rates charged in excess of the PPI Index. At June 30, 2000, the amount deferred for possible rate refunds, including interest, totaled approximately $1.6 million. In July 1999, certain shippers filed protests with the FERC on the Products OLP's application for Market Based Rates in four destination markets. The Partnership believes it will prevail in a competitive market determination in those destination markets under protest. Substantially all of the petroleum products transported and stored by the Partnership are owned by the Partnership's customers. At June 30, 2000, the Partnership had approximately 17.1 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 9. CURRENT DEVELOPMENTS On July 21, 2000, the Company completed its previously announced acquisition of certain assets of ARCO Pipe Line Company ("ARCO"), a wholly owned subsidiary of Atlantic Richfield Company, for $318.5 million. The purchase included ARCO's 50-percent ownership interest in Seaway Pipeline Company's ("Seaway") 500-mile, 30-inch diameter pipeline that carries mostly imported crude oil from a marine terminal at Freeport, Texas, to Cushing, Oklahoma. The line has a capacity of 350,000 barrels per day. The Partnership assumed ARCO's role as operator of this pipeline. The Company 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 400-mile, 24-inch diameter, crude oil pipeline from West Texas to Houston, and the Basin Pipeline, a 416-mile, 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 transaction will be accounted for under the purchase method for accounting purposes. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS1GENERAL The following information is provided to facilitate increased understanding of the 2000 and 1999 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 that are reasonably likely to materially affect future liquidity or earnings. Through its ownership of the Products OLP and the Crude Oil OLP, the Partnership operates in two industry 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 Products OLP segment is involved in the transportation, storage and terminaling of petroleum products 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 Products OLP. 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 Crude Oil OLP 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 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. RESULTS OF OPERATIONS Summarized below is financial data by business segment (in thousands):

QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------- ------------------------- 2000 1999 2000 1999 ---------- ---------- ----------- ----------- Operating revenues: Refined Products and LPGs Transportation ......... $ 54,288 $ 54,225 $ 118,066 $ 115,375 Crude Oil and NGLs Transportation and Marketing .. 693,416 401,126 1,380,330 626,066 ---------- ---------- ---------- ---------- Total operating revenues ...................... 747,704 455,351 1,498,396 741,441 ---------- ---------- ---------- ---------- Operating income: Refined Products and LPGs Transportation .......... 17,199 18,601 45,537 46,799 Crude Oil and NGLs Transportation and Marketing ... 2,952 2,415 5,381 4,686 ---------- ---------- ---------- ---------- Total operating income ........................ 20,151 21,016 50,918 51,485 ---------- ---------- ---------- ---------- Net income: Refined Products and LPGs Transportation ......... 10,605 11,570 32,026 32,562 Crude Oil and NGLs Transportation and Marketing .. 2,965 2,459 5,425 4,839 ---------- ---------- ---------- ---------- Total net income ............................... $ 13,570 $ 14,029 $ 37,451 $ 37,401 ---------- ---------- ---------- ----------

12 13 RESULTS OF OPERATIONS - (CONTINUED) Net income for the quarter ended June 30, 2000, was $13.6 million, compared with net income of $14.0 million for the 1999 second quarter. The decrease in net income resulted from a $1.0 million decrease of net income by the refined products and LPGs transportation segment, partially offset by a $0.5 million increase of net income by the crude oil and NGLs transportation and marketing segment. The decrease in net income of the refined products and LPGs transportation segment was primarily due to a $1.5 million increase in total costs and expenses, partially offset by a $0.3 million decrease in interest expense (net of capitalized interest) and a $0.2 million increase in other income - net. The increase in net income of the crude oil and NGLs transportation and marketing segment was primarily due to a $0.7 million increase in margin, partially offset by a $0.2 million increase in total costs and expenses, excluding expenses associated with purchases of crude oil and petroleum products. For the six months ended June 30, 2000, the Partnership reported net income of $37.5 million, compared with net income of $37.4 million for the first six months of 1999. Net income by the crude oil and NGLs transportation and marketing segment increased $0.6 million, which was partially offset by a $0.5 million decrease of net income by the refined products and LPGs transportation segment. The increase in net income by the crude oil and NGLs transportation and marketing segment was primarily due to a $2.0 million increase in margin, partially offset by a $1.3 million increase in total costs and expenses, excluding expenses associated with purchases of crude oil and petroleum products. The decrease in net income by the refined products and LPGs transportation segment was primarily due to a $4.0 million increase in total costs and expenses, partially offset by a $2.7 million increase in operating revenues, a $0.3 million decrease in interest expense (net of capitalized interest) and a $0.4 million increase in other income - net. See discussion below of factors affecting net income for the comparative periods by business segment. REFINED PRODUCTS AND LPGS TRANSPORTATION SEGMENT Volume and average tariff information for 2000 and 1999 is presented below:

QUARTER ENDED SIX MONTHS ENDED JUNE 30, PERCENTAGE JUNE 30, PERCENTAGE ------------------------ INCREASE ------------------------ INCREASE 2000 1999 (DECREASE) 2000 1999 (DECREASE) --------- ---------- ---------- --------- ---------- ----------- VOLUMES DELIVERED (in thousands of barrels) Refined products ........... 35,113 35,818 (2)% 64,726 63,973 1% LPGs ....................... 6,634 6,367 4% 18,327 19,539 (6)% Mont Belvieu operations .... 6,576 5,882 12% 13,648 12,767 7% --------- ---------- ---------- --------- ---------- ----------- Total .................... 48,323 48,067 1% 96,701 96,279 -- ========= ========== ========== ========= ========== =========== AVERAGE TARIFF PER BARREL Refined products ........... $ 0.93(a) $ 0.93 -- $ 0.94(a) $ 0.92 2% LPGs ....................... 1.56 1.59 (2)% 1.83 1.88 (3)% Mont Belvieu operations .... 0.14 0.15 (7)% 0.15 0.16 (6)% --------- ---------- ---------- --------- ---------- ----------- Average system tariff per barrel ................. $ 0.91 $ 0.92 (1)% $ 1.00 $ 1.01 (1)% ========= ========== ========== ========= ========== ===========

(a) Net of amounts deferred related to potential refund obligation. Refined products transportation revenues decreased $0.7 million for the quarter ended June 30, 2000, compared with the prior-year quarter, due to a 2% decrease in total refined products volumes delivered. Motor fuel volumes delivered decreased 7% as a result of lower Gulf Coast supply and increased competing refinery production in the south central markets of Louisiana and Arkansas. Additionally, natural gasoline volumes delivered decreased 6% from the 1999 second quarter as a result of unfavorable blending economics for Midwest area refineries. These decreases were partially offset by a 9% increase in jet fuel volumes delivered due primarily to increased demand in the Chicago market, favorable Gulf Coast price differentials and lower competing pipeline supply into the Chicago market. The refined products average tariff per barrel reflects the 1.83% general tariff reduction pursuant to the Producer Price Index for finished goods less 1% ("PPI Index"), effective July 1, 1999. The 13 14 RESULTS OF OPERATIONS - (CONTINUED) Partnership deferred recognition of approximately $0.4 million of revenue during the second quarter of 2000 with respect to potential refund obligations for rates charged in excess of the PPI Index. See further discussion regarding Market Based Rates included in "Other Matters." The general tariff reduction was offset by the increased percentage of long-haul jet fuel deliveries. LPGs transportation revenues increased $0.3 million for the quarter ended June 30, 2000, compared with the second quarter of 1999, due primarily to increased deliveries of isobutane to Midwest area refineries as a result of favorable Gulf Coast price differentials. Short haul propane deliveries along the upper Texas Gulf Coast increased 14% as a result of increased petrochemical demand. The decrease in the average tariff per barrel resulted from the increased percentage of short-haul deliveries during the second quarter of 2000. Revenues generated from Mont Belvieu operations decreased $0.5 million during the quarter ended June 30, 2000, compared with the second quarter of 1999, primarily due to timing of revenue recognition on storage contracts. Other operating revenues increased $0.9 million during the quarter ended June 30, 2000, compared with the prior year quarter, due primarily to a $0.5 million increase on gains realized from product sales attributable to higher market prices in 2000, a $0.3 million increase related to higher amounts of butane received for summer storage, and increased refined products terminaling revenue. These increases were partially offset by decreased refined products rental revenue. For the six months ended June 30, 2000, refined products transportation revenues increased $1.8 million, or 3%, compared with the corresponding period in 1999. Continued strong jet fuel demand and favorable Gulf Coast differentials resulted in a 11% increase in jet fuel volumes delivered. The increase in jet fuel deliveries was partially offset by the decrease in motor fuel deliveries during the second quarter noted above, which was partially offset by higher motor fuel volumes delivered during the first quarter of 2000 as a result of lower Midwest refinery production. The Partnership deferred recognition of approximately $0.8 million of revenue during the six months ended June 30, 2000 with respect to potential refund obligations for rates charged in excess of the PPI Index. The increase in the refined products average tariff per barrel resulted primarily from a higher percentage of long-haul deliveries in the upper Midwest market areas. LPGs transportation revenues decreased $3.2 million during the six months ended June 30, 2000, compared with the same period in 1999, due primarily to lower propane volumes delivered. Propane deliveries in Midwest and Northeast market areas decreased 18% and 7%, respectively, from the prior year as a result of warmer winter weather during the first quarter of 2000. These decreases were partially offset by a 13% increase in propane deliveries along the upper Texas Gulf Coast as a result of increased petrochemical demand. The decrease in the average tariff per barrel resulted from the decreased percentage of longer-haul propane deliveries to the Midwest and Northeast market areas, coupled with the increase in Gulf Coast propane deliveries during 2000. Revenues generated from Mont Belvieu operations increased $1.1 million for the six months ended June 30, 2000, compared with the corresponding period in 1999, due primarily to increased contract storage revenue. During the six months ended June 30, 2000, other operating revenues increased $3.0 million, as compared to the same period in 1999, due primarily to a $2.5 million increase on gains realized from product sales attributable to higher market prices in 2000. Also contributing to the increase were increased refined products terminaling revenue and higher amounts of butane received for summer storage. Partially offsetting these increases were decreased refined products rental revenue. Costs and expenses increased $1.5 million for the quarter ended June 30, 2000, compared with the second quarter of 1999, primarily due to a $1.2 million increase in operating, general and administrative expenses and a $0.2 million increase in operating fuel and power expense. The increase in operating, general and administrative 14 15 RESULTS OF OPERATIONS - (CONTINUED) expenses was attributable to a $0.7 million increase in labor and benefit costs, a $0.6 million increase in general and administrative consulting and legal services, and a $0.2 million volume-related increase in lease cost associated with higher product receipts through the connection with Colonial Pipeline at Beaumont, Texas. These increases were partially offset by a $0.3 million decrease in supplies and materials expense. Costs and expenses increased $4.0 million for the six months ended June 30, 2000, compared with the same period in 1999, due to a $3.2 million increase in operating, general and administrative expenses and a $0.9 million increase in operating fuel and power expense. The increase in operating, general and administrative expenses was primarily attributable to $0.9 million of expense recognized in the first quarter of 2000 to write-off project evaluation costs, increased labor and benefit costs, and increased contract labor and consulting services. The write-off of project evaluation costs resulted from the announcement in March 2000 of the Partnership's abandonment of its plan to construct a pipeline from Beaumont, Texas, to Little Rock, Arkansas, in favor of participation in the Centennial Pipeline ("Centennial") joint venture with CMS Energy Corporation and Marathon Ashland Petroleum LLC. Each partner in the Centennial joint venture will own a one-third interest in a 790-mile pipeline system from the Texas Gulf Cost to the Midwest. The increase in operating fuel and power expense resulted from increased refined products transportation volumes delivered, which generally require more power to transport than LPGs volumes. Interest expense increased $0.7 million during the quarter and $1.4 million during the six months ended June 30, 2000, compared with the corresponding prior year periods, due to interest expense on the SunTrust term loan to finance construction of the pipelines between Mont Belvieu and Port Arthur, Texas. The increase in interest expense was offset by increased interest cost capitalized of $0.9 million during the quarter and $1.8 million during the six months ended June 30, 2000, compared with the corresponding prior year periods, as a result of higher balances associated with construction in progress of the pipelines between Mont Belvieu and Port Arthur. Other income - net increased during both the quarter and six months ended June 30, 2000, compared with the corresponding periods in 1999, due to gains on the sale of right-of-way easements during the second quarter of 2000, coupled with increased interest income earned on cash investments. 15 16 RESULTS OF OPERATIONS - (CONTINUED) CRUDE OIL AND NGLS TRANSPORTATION AND MARKETING SEGMENT Margin of the Crude Oil OLP is calculated as revenues generated from crude oil and lube oil sales and crude oil and NGLs transportation less the cost of crude oil and lube oil purchases. Margin is a more meaningful measure of financial performance than operating revenues and operating expenses due to the significant fluctuations in revenues and expense that may occur with changes in the level of marketing activity and the underlying price of crude oil and lube oils. Margin and volume information is presented below:

QUARTER ENDED SIX MONTHS ENDED JUNE 30, PERCENTAGE JUNE 30, PERCENTAGE ----------------------- INCREASE ----------------------- INCREASE 2000 1999 (DECREASE) 2000 1999 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- Margins (dollars in thousands) Crude oil transportation ....... $ 4,861 $ 4,653 4% $ 9,727 $ 8,950 9% Crude oil marketing ............ 3,338 2,993 12% 5,588 4,989 12% NGL transportation ............. 1,580 1,556 2% 3,340 2,962 13% Lubrication oil sales .......... 746 591 26% 1,371 1,135 21% ---------- ---------- ---------- ---------- ---------- ---------- Total margin ................. $ 10,525 $ 9,793 7% $ 20,026 $ 18,036 11% ========== ========== ========== ========== ========== ========== Barrels per day: Crude oil transportation ........ 98,468 94,397 4% 97,409 92,508 5% Crude oil marketing ............. 287,547 253,213 14% 286,525 246,229 16% NGL transportation .............. 13,250 13,205 -- 13,394 12,054 11% Lubrication oil volume (total gallons) ................... 1,295,596 2,150,415 (40)% 3,567,720 4,109,331 (13)% Margin per barrel: Crude oil transportation ........ $ 0.543 $ 0.542 -- $ 0.549 $ 0.535 3% Crude oil marketing ............. $ 0.128 $ 0.130 (2)% $ 0.107 $ 0.112 (4)% NGL transportation .............. $ 1.311 $ 1.295 1% $ 1.370 $ 1.358 1% Lubrication oil margin (per gallon) ...................... $ 0.576 $ 0.275 109% $ 0.385 $ 0.276 39%

Margin increased $0.7 million during the second quarter of 2000, compared with the second quarter of 1999, comprised of a $0.3 million increase in crude oil marketing activity, a $0.2 million increase in crude oil transportation, and a $0.2 million increase in lubrication oil sales. The increase in crude oil marketing margin resulted from the 14% increase in volumes marketed and gains realized on volumes held in third party pipeline systems. The increase in crude oil transportation margin was primarily attributable to increased volume on the South Texas system which benefited from higher crude oil market prices. The increase in lubrication oil sales and margin resulted from increased volumes of lube products sold, which carry a higher margin. Total lubrication oil volumes decreased 40% from the prior year second quarter due primarily to the discontinuation of fuel oil sales, effective April 2000, as a result of lower margins realized on such products. Costs and expenses, excluding expenses associated with purchases of crude oil and petroleum products, increased $0.2 million for the quarter ended June 30, 2000, compared with the second quarter of 1999, as a result of a $0.1 million increase in operating, general, and administrative expenses and a $0.1 million increase in charges for depreciation and amortization. The increase in operating, general, and administrative expenses resulted primarily from increased labor and benefit costs, partially offset by decreased pipeline maintenance costs. The increase in depreciation and amortization expense was due to capital additions. 16 17 RESULTS OF OPERATIONS - (CONTINUED) Margin increased $2.0 million during the six months ended June 30, 2000, compared with the corresponding period of 1999, comprised of a $0.8 million increase in crude oil transportation, a $0.6 million increase in crude oil marketing, a $0.4 million increase in NGL transportation, and a $0.2 million increase in lubrication oil sales. The increase in crude oil transportation margin was attributable to increased volumes on the South Texas system coupled with higher transportation rates. The increase in crude oil marketing margin resulted from increased volumes marketed. The increase in NGL transportation margin was primarily due to higher prices on loss allowance barrels received on the Dean Pipeline. The increase in lubrication oil sales margin resulted from the reasons described in the second quarter noted above. Costs and expenses, excluding expenses associated with purchases of crude oil and petroleum products, increased $1.3 million for the six months ended June 30, 2000, compared with the corresponding period of 1999, as a result of a $1.1 million increase in operating, general, and administrative expenses and a $0.2 million increase in charges for depreciation and amortization. The increase in operating, general, and administrative expenses resulted primarily from increased labor and benefit costs, increased telecommunication costs and increased consulting charges. The increase in depreciation and amortization expense resulted from capital additions placed in service. FINANCIAL CONDITION AND LIQUIDITY Net cash from operations for the six-month period ended June 30, 2000, totaled $64.5 million, comprised of $54.0 million of income before charges for depreciation and amortization and $10.5 million of cash provided by working capital changes. This compares with cash flows from operations of $45.4 million for the corresponding period in 1999, which was comprised of $53.7 million of income before charges for depreciation and amortization, partially offset by $8.3 million of cash used for working capital changes. The increase of cash from working capital changes during the six-month period ended June 30, 2000, as compared with the same period in 1999, resulted primarily from timing of payments related to crude oil marketing activity and lower inventory balances at June 30, 2000. Net cash from operations for the six months ended June 30, 2000 and 1999, included interest payments related to the Senior Notes and term loans of $16.4 million and $14.9 million, respectively. 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. Cash flows used in investing activities during the first six months of 1999 included $40.3 million of capital expenditures, $2.3 million for the purchase of a 125-mile crude oil system in Southeast Texas, and $2.2 million of additional cash investments. These decreases of cash were offset by $3.8 million of proceeds from maturities of cash investments. During the first six months of 2000 and 1999, capital expenditures included $23.2 million and $28.0 million, respectively, for construction of three new pipelines between the Partnership's terminal in Mont Belvieu, Texas and Port Arthur, Texas. The project includes three 12-inch diameter common-carrier pipelines and associated facilities. Each pipeline will be approximately 70 miles in length. Upon completion, the new pipelines will transport ethylene, propylene and natural gasoline. The anticipated completion date is the fourth quarter of 2000. The Partnership has entered into an agreement for turnkey construction of the pipelines and related facilities and has separately entered into agreements for guaranteed throughput commitments. The cost of this project is expected to total approximately $74.5 million. The Partnership estimates that capital expenditures for 2000 will total approximately $139 million (including capitalized interest of $4 million). Such amount excludes the Partnership's acquisition of certain assets from ARCO as described below. Approximately $30 million is expected to be used to complete construction of the three new pipelines between Mont Belvieu and Port Arthur and approximately $10 million will be used to replace seven pipelines under the Houston Ship Channel as required by the United States Army Corp of Engineers for the deepening of the channel. Approximately $77 million of planned expenditures are expected to be used in revenue-generating projects, including pipeline acquisitions and construction; with the remaining $18 million being used for life-cycle replacements and upgrading current facilities. Capital expenditures may be financed through internally generated funds, external debt or the issuance of additional limited partner Units. 17 18 FINANCIAL CONDITION AND LIQUIDITY - (CONTINUED) The Partnership paid cash distributions of $38.3 million ($0.975 per Limited Partner Unit and Class B Unit) during the six months ended June 30, 2000. Additionally, on July 17, 2000, the Partnership declared a cash distribution of $0.50 per Limited Partner Unit and Class B Unit. The distribution was paid on August 4, 2000 to Unitholders of record on July 31, 2000. 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 the operations of the Pipeline System 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, 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 $0.9 million at June 30, 2000, 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. Tariff rates of interstate oil pipeline companies are currently regulated by the FERC, primarily through an index methodology, whereby a pipeline company is allowed to change its rates based on the change from year to year in the Producer Price Index for finished goods less 1% ("PPI Index"). In the alternative, interstate oil pipeline companies may elect to support rate filings by using a cost-of-service methodology, competitive market showings ("Market Based Rates") or agreements between shippers and the oil pipeline company that the rate is acceptable ("Settlement Rates"). In May 1999, the Products OLP filed an application with the FERC to charge Market Based Rates for substantially all refined products transportation tariffs. Such application is currently under review by the FERC. The FERC approved a request of the Products OLP waiving the requirement to adjust refined products transportation tariffs pursuant to the PPI Index while its Market Based Rates application is under review. Under the PPI Index, refined products transportation rates in effect on June 30, 1999 would have been reduced by approximately 1.83% effective July 1, 1999. If any portion of the Market Based Rates application is denied by the FERC, the Products OLP has agreed to refund, with interest, amounts collected after June 30, 1999, under the tariff rates in excess of the PPI Index. As a result of the refund obligation potential, the Partnership has deferred all revenue recognition of rates charged in excess of the PPI Index. At June 30, 2000, the amount deferred for possible rate refunds, including interest, totaled approximately $1.6 million. In July 1999, certain shippers filed protests with the FERC on the Products OLP's application for Market Based Rates in four destination markets. The Partnership believes it will prevail in a competitive market determination in those destination markets under protest. 18 19 OTHER MATTERS - (CONTINUED) Effective July 1, 1999, the Products OLP established Settlement Rates with certain shippers of LPGs under which the rates in effect on June 30, 1999, would not be adjusted for a period of either two or three years. Other LPGs transportation tariff rates were reduced pursuant to the PPI Index (approximately 1.83%), effective July 1, 1999. Effective July 1, 1999, the Products OLP canceled its tariff for deliveries of MTBE into the Chicago market area reflecting reduced demand for transportation of MTBE into such area. The MTBE tariffs were canceled with the consent of MTBE shippers and resulted in increased pipeline capacity and tankage available for other products. In February 2000, the Partnership and Louis Dreyfus Plastics Corporation ("Louis Dreyfus") announced a joint development alliance whereby the Partnership's Mont Belvieu petroleum liquids storage and transportation shuttle system services will be marketed by Louis Dreyfus. The alliance will expand services to the upper Texas Gulf Coast energy marketplace. The alliance is a service-oriented, fee-based venture with no commodity trading. In March 2000, the Partnership, CMS Energy Corporation and Marathon Ashland Petroleum LLC announced an agreement to form a limited liability company that will own and operate an interstate refined petroleum products pipeline extending from the upper Texas Gulf Coast to Illinois. Each of the companies will own a one-third interest in the limited liability company. The Partnership's participation in this joint venture is in lieu of its previously announced expansion plan to construct a new pipeline from Beaumont, Texas, to Little Rock, Arkansas. The Partnership recognized $0.9 million of expense in March 2000 to write-off project evaluation costs related to the abandoned construction plan. The limited liability company will build a 70-mile, 24-inch diameter pipeline connecting the Partnership'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, which has been named Centennial Pipeline, will pass through portions of Texas, Louisiana, Arkansas, Mississippi, Tennessee, Kentucky and Illinois. CMS Panhandle Pipe Line Companies, which owns the existing 720-mile pipeline, has made a filing with the FERC to take the line out of natural gas service as part of the regulatory process. Conversion of the pipeline to refined products service is expected to be completed by the end of 2001. The Centennial Pipeline will intersect the Partnership's existing mainline near Lick Creek, Illinois, where a new two million barrel refined petroleum products storage terminal will be built. On July 21, 2000, the Company completed its previously announced acquisition of certain assets of ARCO Pipe Line Company ("ARCO"), a wholly owned subsidiary of Atlantic Richfield Company, for $318.5 million. The purchase included ARCO's 50-percent ownership interest in Seaway Pipeline Company's ("Seaway") 500-mile, 30-inch diameter pipeline that carries mostly imported crude oil from a marine terminal at Freeport, Texas, to Cushing, Oklahoma. The line has a capacity of 350,000 barrels per day. The Partnership assumed ARCO's role as operator of this pipeline. The Company 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 400-mile, 24-inch diameter, crude oil pipeline from West Texas to Houston, and the Basin Pipeline, a 416-mile, 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 transaction will be accounted for under the purchase method for accounting purposes. 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 assets from ARCO and to repay principal and interest on existing credit facilities, other than the Senior Notes (see Note 5. Long Term Debt). The term loan has a eighteen month maturity and the revolving facility has a three year maturity. The interest rate for the credit agreements is based on the Partnership's option of either SunTrust's prime rate, the federal funds rate or LIBOR rate in effect at the time of the borrowings and is adjusted monthly, bimonthly, quarterly or semi-annually. 19 20 OTHER MATTERS - (CONTINUED) The credit agreements contain restrictive financial covenants that require the Partnership to maintain a minimum level of partners' capital as well as debt-to-earnings, interest coverage and capital expenditure coverage ratios. 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 1999 Annual Report on Form 10-K. 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. The Partnership mitigates exposure to commodity price fluctuations by maintaining a balanced position between crude oil purchases and sales. As a hedging strategy to manage crude oil price fluctuations, the Partnership enters into futures contracts on the New York Mercantile Exchange, and makes limited use of other derivative instruments. However, certain basis risks (the risk that price relationships between delivery points, classes of products or delivery periods will change) cannot be completely hedged or eliminated. It is the Partnership's general policy not to acquire crude oil futures contracts or other derivative products for the purpose of speculating on price changes, however, the Partnership may take limited speculative positions to capitalize on crude oil price fluctuations. Any contracts held for trading purposes or speculative positions are accounted for using the mark-to-market method. Under this methodology, contracts are adjusted to market value, and the gains and losses are recognized in current period income. 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 Partnership. Market risks associated with commodity derivatives were not material at June 30, 2000. At June 30, 2000, the Products OLP 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"). Additionally, the Products OLP had a $38 million bank loan outstanding from SunTrust Bank. The SunTrust loan bears interest at a fixed rate of 6.53% and is payable in full in April 2001. At June 30, 2000, the estimated fair value of the Senior Notes and the SunTrust loan was approximately $363.5 million and $37.7 million, respectively. At June 30, 2000, the Products OLP had $45.0 million outstanding under a variable interest rate term loan and the Crude Oil OLP had $3.0 million outstanding under its revolving credit agreement. The interest rates for these credit facilities are based on the borrower's option of either SunTrust Bank's prime rate, the federal funds rate 20 21 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (CONTINUED) or LIBOR rate in effect at the time of the borrowings and is adjusted monthly, bimonthly, quarterly or semi-annually. Utilizing the balances of variable interest rate debt outstanding at June 30, 2000, and assuming market interest rates increase 100 basis points, the potential annual increase in interest expense is approximately $0.5 million. On July 14, 2000, the Partnership entered into a $75 million term loan and a $475 million revolving credit facility. Under these credit facilities, the Partnership refinanced all outstanding amounts related to fixed rate and variable rate credit facilities, other than the Senior Notes, on July 21, 2000. The interest rate under the new credit facilities is based on the borrower's option of either SunTrust Bank's prime rate, the federal funds rate or LIBOR rate in effect at the time of the borrowings and is adjusted monthly, bimonthly, quarterly or semi-annually. On July 21, 2000, the Partnership entered into a three year swap agreement to partially hedge its exposure on the new variable rate credit facilities. The swap agreement is based on a notional amount of $250 million. Under the swap agreement, the Partnership will pay a fixed rate of interest of 7.17% and will receive a floating rate based on a three month USD LIBOR rate. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: Exhibit Number Description ------ ----------- 2.1 Amended and Restated Purchase Agreement By and Between Atlantic Richfield Company and Texas Eastern Products Pipeline Company With Respect to the Sale of ARCO Pipeline Company, dated as of May 10, 2000. 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 3.3 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). 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). 21 22 EXHIBITS AND REPORTS ON FORM 8-K - (CONTINUED) 4.3 Form of Certificate representing Class B Units (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). 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). 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). 22 23 10.14 Credit Agreement between TEPPCO Colorado, LLC, SunTrust Bank, Atlanta, and Certain Lenders, dated April 21, 1998 (Filed as Exhibit 10.15 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). 10.15 First Amendment to Credit Agreement between TEPPCO Colorado, LLC, SunTrust Bank, Atlanta, and Certain Lenders, effective June 29, 1998 (Filed as Exhibit 10.15 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended June 30, 1998 and incorporated herein by reference). 10.16 Contribution Agreement between Duke Energy Transport and Trading Company and TEPPCO Partners, L.P., dated October 15, 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). 10.17 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 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). 10.18 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 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). 10.19 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 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). 10.20 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). 10.21 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). 10.22 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). 10.23 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). 10.24 Credit Agreement between TE Products Pipeline Company, Limited Partnership, SunTrust Bank, Atlanta, and Certain Lenders, dated May 17, 1999 (Filed as Exhibit 10.26 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). 10.25 Credit Agreement between TEPPCO Crude Oil, LLC, SunTrust Bank, Atlanta, and Certain Lenders, dated May 17, 1999 (Filed as Exhibit 10.27 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). 10.26 Second Amendment to Credit Agreement between TEPPCO Colorado, LLC, SunTrust Bank, Atlanta, and Certain Lenders, effective May 17, 1999 (Filed as Exhibit 10.28 to 23 24 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). 10.27 Form of Employment and Non-Compete Agreement between the Company and Samuel N. Brown, J. Michael Cockrell, William S. Dickey, and Sharon S. Stratton 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). 10.28 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). 10.29 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). 10.30 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). *10.31 Credit Agreement between TEPPCO Partners, L.P., SunTrust Bank, and Certain Lenders, dated July 14, 2000. 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). *27 Financial Data Schedule as of and for the six months ended June 30, 2000. * Filed herewith. (b) Reports on Form 8-K filed during the quarter ended June 30, 2000: None. Items 1, 2, 3, 4 and 5 of Part II were not applicable and have been omitted. SIGNATURE 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 General Partner /s/ CHARLES H. LEONARD ---------------------- Charles H. Leonard Senior Vice President, Chief Financial Officer and Treasurer Date: August 10, 2000 24 25 EXHIBIT INDEX

Exhibit Number Description ------ ----------- 2.1 Amended and Restated Purchase Agreement By and Between Atlantic Richfield Company and Texas Eastern Products Pipeline Company With Respect to the Sale of ARCO Pipeline Company, dated as of May 10, 2000. 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 3.3 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). 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).

26 EXHIBITS AND REPORTS ON FORM 8-K - (CONTINUED) 4.3 Form of Certificate representing Class B Units (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). 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). 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). 27 10.14 Credit Agreement between TEPPCO Colorado, LLC, SunTrust Bank, Atlanta, and Certain Lenders, dated April 21, 1998 (Filed as Exhibit 10.15 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). 10.15 First Amendment to Credit Agreement between TEPPCO Colorado, LLC, SunTrust Bank, Atlanta, and Certain Lenders, effective June 29, 1998 (Filed as Exhibit 10.15 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter ended June 30, 1998 and incorporated herein by reference). 10.16 Contribution Agreement between Duke Energy Transport and Trading Company and TEPPCO Partners, L.P., dated October 15, 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). 10.17 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 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). 10.18 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 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). 10.19 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 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). 10.20 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). 10.21 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). 10.22 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). 10.23 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). 10.24 Credit Agreement between TE Products Pipeline Company, Limited Partnership, SunTrust Bank, Atlanta, and Certain Lenders, dated May 17, 1999 (Filed as Exhibit 10.26 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). 10.25 Credit Agreement between TEPPCO Crude Oil, LLC, SunTrust Bank, Atlanta, and Certain Lenders, dated May 17, 1999 (Filed as Exhibit 10.27 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). 10.26 Second Amendment to Credit Agreement between TEPPCO Colorado, LLC, SunTrust Bank, Atlanta, and Certain Lenders, effective May 17, 1999 (Filed as Exhibit 10.28 to 28 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). 10.27 Form of Employment and Non-Compete Agreement between the Company and Samuel N. Brown, J. Michael Cockrell, William S. Dickey, and Sharon S. Stratton 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). 10.28 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). 10.29 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). 10.30 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). *10.31 Credit Agreement between TEPPCO Partners, L.P., SunTrust Bank, and Certain Lenders, dated July 14, 2000. 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). *27 Financial Data Schedule as of and for the six months ended June 30, 2000. ---------- * Filed herewith.