TE PRODUCTS PIPELINE CO LP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER 1-13603

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP
(Exact name of Registrant as specified in its charter)

DELAWARE 76-0329620
(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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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6.45% Senior Notes, due January 15, 2008 New York Stock Exchange
7.51% Senior Notes, due January 15, 2008 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

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 twelve 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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Documents Incorporated by Reference: NONE

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TABLE OF CONTENTS

PART I

ITEMS 1. Business and Properties.......................................................................1
AND 2.
ITEM 3. Legal Proceedings............................................................................12
ITEM 4. Submission of Matters to a Vote of Security Holders..........................................12

PART II

ITEM 5. Market for Registrants Common Equity and Related Partnership Interest Matters................13
ITEM 6. Selected Financial Data......................................................................13
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........14
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks..................................24
ITEM 8. Financial Statements and Supplementary Data..................................................24
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........24

PART III

ITEM 10. Directors and Executive Officers of the Registrant...........................................25
ITEM 11. Executive Compensation.......................................................................25
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...............................25
ITEM 13. Certain Relationships and Related Transactions...............................................25

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................26

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ITEMS 1 AND 2. BUSINESS AND PROPERTIES

GENERAL

TE Products Pipeline Company, Limited Partnership (the "Partnership"),
a Delaware limited partnership, was formed in March 1990. TEPPCO Partners, L.P.
(the "Parent Partnership") owns a 99.999% interest as the sole limited partner.
TEPPCO GP, Inc. ("TEPPCO GP" or "General Partner"), a subsidiary of the Parent
Partnership, holds a 0.001% general partner interest in the Partnership. Texas
Eastern Products Pipeline Company, LLC (the "Company"), a Delaware limited
liability company, serves as the general partner of the Parent Partnership. The
Company is a wholly-owned subsidiary of Duke Energy Field Services ("DEFS"), a
joint venture between Duke Energy Corporation ("Duke Energy") and Phillips
Petroleum Company ("Phillips"). Duke Energy holds an approximate 70% interest in
DEFS and Phillips holds the remaining 30%. TEPPCO GP, as general partner,
performs all management and operating functions required for the Partnership
according to the Agreement of Limited Partnership of TE Products Pipeline
Company, Limited Partnership ("the Partnership Agreement"). The General Partner
and the Company are reimbursed by the Partnership for all reasonable direct and
indirect expenses incurred in managing the Partnership.

On July 26, 2001, the Company restructured its general partner
ownership of the Partnership to cause it to be wholly-owned by the Parent
Partnership. TEPPCO GP succeeded the Company as general partner of the
Partnership. All remaining partner interests in the Partnership not already
owned by the Parent Partnership were transferred to the Parent Partnership. In
exchange for this contribution, the Company's interest as general partner of the
Parent Partnership was increased to 2%. The increased percentage is the economic
equivalent of the aggregate interest that the Company had prior to the
restructuring through its combined interests in the Parent Partnership and the
Partnership. As a result, the Parent Partnership holds a 99.999% limited partner
interest in the Partnership and TEPPCO GP holds a 0.001% general partner
interest. References in this Report to the "General Partner" refer to the
Company prior to the restructuring and to TEPPCO GP, Inc. thereafter. This
reorganization was undertaken to simplify required financial reporting by the
Partnership when guarantees of Parent Partnership debt are issued by the
Partnership.

The Partnership operates and reports in one business segment:
transportation, storage and terminaling of refined products, liquefied petroleum
gases ("LPGs") and petrochemicals. 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 and LPGs are referred to in this Report, collectively, as "petroleum
products" or "products."

The Partnership's strategy is to expand and improve service in its
current markets, maintain the integrity of its pipeline systems and pursue a
growth strategy that is balanced between internal projects and targeted
acquisitions. The Partnership intends to leverage the advantages inherent in its
pipeline systems to maintain its status as the incremental provider of choice in
its market area. The Partnership also intends to grow by acquiring assets, from
both third parties and affiliates, which complement existing businesses or to
establish new core businesses. The Company routinely evaluates opportunities to
acquire assets and businesses that will complement existing operations with a
view to increasing earnings and cash available for distribution. Additional
acquisitions may be funded with cash flow from operations, borrowings and
capital contributions from the Parent Partnership and the issuance of debt in
the capital markets.

OPERATIONS

The Partnership conducts business, owns and operates properties located
in 13 states. These operations consist of interstate transportation, storage and
terminaling of petroleum products; short-haul shuttle transportation of LPGs at
the Mont Belvieu, Texas complex; intrastate transportation of petrochemicals;
fractionation of natural gas liquids and other ancillary services.

As an interstate common carrier, the Partnership's pipeline offers
interstate transportation services, pursuant to tariffs filed with the FERC, to
any shipper of refined petroleum products and LPGs who requests such

1

services, provided that the products tendered for transportation satisfy the
conditions and specifications contained in the applicable tariff. In addition to
the revenues received by the pipeline system from its interstate tariffs, it
also receives revenues from the shuttling of LPGs between refinery and
petrochemical facilities on the upper Texas Gulf Coast and ancillary
transportation, storage and marketing services at key points along the pipeline
system. Substantially all the petroleum products transported and stored in the
pipeline system are owned by the Partnership's customers. Petroleum products are
received at terminals located principally on the southern end of the pipeline
system, stored, scheduled into the pipeline in accordance with customer
nominations and shipped to delivery terminals for ultimate delivery to the final
distributor (including gas stations and retail propane distribution centers) or
to other pipelines. Pipelines are generally the lowest cost method for
intermediate and long-haul overland transportation of petroleum products. The
Partnership's pipeline system is the only pipeline that transports LPGs to the
Northeast.

The Partnership depends in large part on the level of demand for
refined petroleum products and LPGs in the geographic locations served by it and
the ability and willingness of customers having access to the pipeline system to
supply such demand. The Partnership cannot predict the impact of future fuel
conservation measures, alternate fuel requirements, governmental regulation,
technological advances in fuel economy and energy-generation devices, all of
which could reduce the demand for refined petroleum products and LPGs in the
areas served by the Partnership.

The following table lists the material properties and investments of
and ownership percentages in the Partnership assets as of December 31, 2001:

PARTNERSHIP
OWNERSHIP
-----------

Refined products and LPGs pipeline.............................. 100%
Mont Belvieu LPGs storage and pipeline shuttle.................. 100%
Mont Belvieu to Port Arthur, Texas, petrochemical pipelines..... 100%
Centennial Pipeline (1)......................................... 33%

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(1) Accounted for as an equity investment.

CENTENNIAL PIPELINE JOINT VENTURE

In August 2000, the Partnership entered into agreements with CMS Energy
Corporation and Marathon Ashland Petroleum LLC to form a pipeline joint venture,
Centennial Pipeline, LLC ("Centennial"). Centennial owns and operates an
interstate refined petroleum products pipeline extending from the upper Texas
Gulf Coast to Illinois. Each participant owns a one-third interest in
Centennial. Centennial constructed a 74-mile, 24-inch diameter pipeline
connecting the Partnership's facility in Beaumont, Texas, with an existing
720-mile, 26-inch diameter pipeline extending from Longville, Louisiana, to
Bourbon, Illinois. The Centennial pipeline intersects the Partnership's existing
mainline pipeline near Creal Springs, Illinois, where Centennial has constructed
a new two million barrel refined petroleum products storage terminal. The
Partnership's interest is not subject to any encumbrances from mortgages or
other secured debt. Centennial has unsecured debt, one third of which, up to $50
million in principal, is guaranteed by each owner, including the Partnership. As
of December 31, 2001, the Partnership has contributed approximately $70 million
for its one-third interest in Centennial. The Partnership expects to contribute
an additional $4.9 million to Centennial in 2002. Centennial commenced
operations in the first quarter of 2002.

REFINED PRODUCTS AND LPGS PIPELINE SYSTEM

The Partnership 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 4,500-mile pipeline system (together with the
receiving, storage and terminaling facilities mentioned below, the "Pipeline
System") extending from southeast Texas through the central and midwestern
United States to the northeastern United States. The Pipeline System includes
delivery terminals for outloading product to other pipelines, tank trucks, rail
cars or barges, as well as

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substantial storage capacity at Mont Belvieu, Texas, the largest LPGs storage
complex in the United States, and at other locations. The Partnership also owns
two marine receiving terminals, one near Beaumont, Texas, and the other at
Providence, Rhode Island. The Providence terminal is not physically connected to
the Pipeline System. The Pipeline System also includes three 12-inch diameter
common-carrier petrochemical pipelines between Mont Belvieu and Port Arthur,
Texas, each approximately 70 miles in length.

All properties comprising the Pipeline System are wholly-owned by the
Partnership and none are subject to any encumbrances from mortgages or other
secured debt.

Products are transported in liquid form from the upper Texas Gulf Coast
through two parallel underground pipelines that extend to Seymour, Indiana. From
Seymour, segments of the Pipeline System extend to the Chicago, Illinois; Lima,
Ohio; Selkirk, New York; and Philadelphia, Pennsylvania, areas. The Pipeline
System east of Todhunter, Ohio, is dedicated solely to LPGs transportation and
storage services.

The Pipeline System includes 30 storage facilities with an aggregate
storage capacity of 13 million barrels of refined petroleum products and 38
million barrels of LPGs, including storage capacity leased to outside parties.
The Pipeline System makes deliveries to customers at 53 locations including 18
owned truck racks, rail car facilities and marine facilities. Deliveries to
other pipelines occur at various facilities owned by the Partnership or by third
parties.

The Pipeline System is comprised of a 20-inch diameter line extending
in a generally northeasterly direction from Baytown, Texas (located
approximately 30 miles east of Houston), to a point in southwest Ohio near
Lebanon and Todhunter. A second line, which also originates at Baytown, is 16
inches in diameter until it reaches Beaumont, Texas, at which point it reduces
to a 14-inch diameter line. This second line extends along the same path as the
20-inch diameter line to the Pipeline System's terminal in El Dorado, Arkansas,
before continuing as a 16-inch diameter line to Seymour, Indiana. The Pipeline
System also has smaller diameter lines that extend laterally from El Dorado to
Helena, Arkansas, from Tyler, Texas, to El Dorado and from McRae, Arkansas, to
West Memphis, Arkansas. The line from El Dorado to Helena has a 10-inch
diameter. The line from Tyler to El Dorado varies in diameter from 8 inches to
10 inches. The line from McRae to West Memphis has a 12-inch diameter. The
Pipeline System also includes a 14-inch diameter line from Seymour to Chicago,
Illinois, and a 10-inch diameter line running from Lebanon to Lima, Ohio. This
10-inch diameter pipeline connects to the Buckeye Pipe Line Company system that
serves, among others, markets in Michigan and eastern Ohio. Also, the Pipeline
System has a 6-inch diameter pipeline connection to the Greater
Cincinnati/Northern Kentucky International Airport and an 8-inch diameter
pipeline connection to the George Bush Intercontinental Airport in Houston. In
addition, there are numerous smaller diameter lines associated with the
gathering and distribution system.

The Pipeline System continues eastward from Todhunter, Ohio, to
Greensburg, Pennsylvania, at which point it branches into two segments, one
ending in Selkirk, New York (near Albany), and the other ending at Marcus Hook,
Pennsylvania (near Philadelphia). The Pipeline System east of Todhunter and
ending in Selkirk is an 8-inch diameter line, whereas the line starting at
Greensburg and ending at Marcus Hook varies in diameter from 6 inches to 8
inches.

The Partnership also owns three 12-inch diameter common-carrier
petrochemical pipelines between Mont Belvieu and Port Arthur, Texas, which were
completed in the fourth quarter of 2000. Each of these pipelines is
approximately 70 miles in length. The pipelines transport ethylene, propylene
and natural gasoline. The Partnership entered into a 20-year agreement with a
major petrochemical producer for guaranteed throughput commitments. During the
year ended December 31, 2001, and the two month period ended December 31, 2000,
the Partnership recognized $10.7 million and $1.8 million, respectively, of
revenue under the throughput and deficiency contract. The Partnership began
transporting product through these pipelines in September 2001.

The Partnership believes that the Pipeline System is in compliance with
applicable federal, state and local laws and regulations, and accepted industry
standards and practices. The Partnership performs regular maintenance on all the
facilities of the Pipeline System and has an ongoing process of inspecting
segments of the Pipeline System and making repairs and replacements when
necessary or appropriate. In addition, the Partnership conducts periodic air
patrols of the Pipeline System to monitor pipeline integrity and third-party
right of way encroachments.

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MAJOR MARKETS AND SERVICES

The Partnership's major operations are the transportation, storage and
terminaling of refined petroleum products and LPGs along its mainline system,
and the storage and short-haul transportation of LPGs associated with its Mont
Belvieu LPG operations. Product deliveries, in millions of barrels (MMBbls) on a
regional basis, over the last three years were as follows:

PRODUCT DELIVERIES (MMBBLS)
YEARS ENDED DECEMBER 31,
----------------------------
2001 2000 1999
------ ------ ------

Refined Products Mainline Transportation:
Central (1) ............................... 62.0 63.4 67.7
Midwest (2) ............................... 37.4 36.7 37.9
Ohio and Kentucky ......................... 23.5 28.0 27.0
------ ------ ------
Subtotal ............................ 122.9 128.1 132.6
------ ------ ------
LPGs Mainline Transportation:
Central, Midwest and Kentucky (1)(2) ...... 23.8 23.4 22.9
Ohio and Northeast (3) .................... 16.2 16.2 14.7
------ ------ ------
Subtotal ............................ 40.0 39.6 37.6
------ ------ ------
Total Mainline Transportation ....... 162.9 167.7 170.2
------ ------ ------
Mont Belvieu Operations:
LPGs ...................................... 23.1 27.2 28.5
------ ------ ------
Total Product Deliveries ............ 186.0 194.9 198.7
====== ====== ======

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(1) Arkansas, Louisiana, Missouri and Texas.

(2) Illinois and Indiana.

(3) New York and Pennsylvania.

The mix of products delivered varies seasonally. Gasoline demand is
generally stronger in the spring and summer months and LPGs demand is generally
stronger in the fall and winter months. Weather and economic conditions in the
geographic areas served by the Pipeline System also affect the demand for, and
the mix of, the products delivered.

Refined products and LPGs deliveries over the last three years were as
follows:

PRODUCT DELIVERIES (MMBBLS)
YEARS ENDED DECEMBER 31,
----------------------------
2001 2000 1999
------ ------ ------

Refined Products Mainline Transportation:
Gasoline ................................. 68.2 67.8 71.6
Jet Fuels ................................ 25.4 28.1 26.9
Middle Distillates (1) ................... 28.1 26.6 28.4
MTBE(2)/Toluene .......................... 1.2 5.6 5.7
------ ------ ------
Subtotal ............................ 122.9 128.1 132.6
------ ------ ------
LPGs Mainline Transportation:
Propane .................................. 32.8 33.1 30.8
Butanes .................................. 7.2 6.5 6.8
------ ------ ------
Subtotal ............................ 40.0 39.6 37.6
------ ------ ------
Total Mainline Transportation ....... 162.9 167.7 170.2
------ ------ ------
Mont Belvieu Operations:
LPGs ..................................... 23.1 27.2 28.5
------ ------ ------
Total Product Deliveries ........... 186.0 194.9 198.7
====== ====== ======

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(1) Primarily diesel fuel, heating oil and other middle distillates.

(2) Methyl tertiary butyl ether, a fuels additive, the use of which has
largely been discontinued.

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Refined Products Mainline Transportation

The Pipeline System transports refined petroleum products from the
upper Texas Gulf Coast, eastern Texas and southern Arkansas to the Central and
Midwest regions of the United States with deliveries in Texas, Louisiana,
Arkansas, Missouri, Illinois, Kentucky, Indiana and Ohio. At these points,
refined petroleum products are delivered to terminals owned by the Partnership,
connecting pipelines and customer-owned terminals. The Partnership canceled its
tariff for deliveries of MTBE into the Chicago market area on July 1, 1999, and
canceled contract deliveries of MTBE at its marine terminal near Beaumont,
Texas, effective April 22, 2001. The Partnership no longer transports MTBE
through the Pipeline System.

The volume of refined petroleum products transported by the Pipeline
System is directly affected by the demand for such products in the geographic
regions the system serves. This market demand varies based upon the different
end uses to which the refined products deliveries are applied. Demand for
gasoline, which accounts for a substantial portion of the volume of refined
products transported through the Pipeline System, depends upon price, prevailing
economic conditions and demographic changes in the markets served. Demand for
refined products used in agricultural operations is affected by weather
conditions, government policy and crop prices. Demand for jet fuel depends upon
prevailing economic conditions and military usage.

Market prices for refined petroleum products affect the demand in the
markets served by the Partnership. Therefore, quantities and mix of products
transported may vary. Transportation tariffs of refined petroleum products vary
among specific product types. As a result, market price volatility may affect
transportation revenues from period to period.

LPGs Mainline Transportation

The Pipeline System transports LPGs from the upper Texas Gulf Coast to
the Central, Midwest and Northeast regions of the United States. The Pipeline
System east of Todhunter, Ohio, is devoted solely to the transportation of LPGs.
Since LPGs demand is generally stronger in the winter months, the Pipeline
System often operates at or near capacity during such time. Propane deliveries
are generally sensitive to the weather and meaningful year-to-year variations
have occurred and will likely continue to occur.

The Partnership's ability to serve markets in the Northeast is enhanced
by its propane import terminal at Providence, Rhode Island. This facility
includes a 400,000-barrel refrigerated storage tank along with ship unloading
and truck loading facilities. Effective May 2001, the Partnership entered into
an agreement with DEFS to commit sole utilization of the Providence terminal to
DEFS. The terminal is operated by the Partnership. During the year ended
December 31, 2001, DEFS paid the Partnership $1.5 million pursuant to this
agreement.

Mont Belvieu LPGs Storage and Pipeline Shuttle

A key aspect of the Pipeline System's LPGs business is its storage and
pipeline asset base in the Mont Belvieu complex serving the fractionation,
refining and petrochemical industries. The complex is the largest of its kind in
the United States and provides substantial capacity and flexibility in the
transportation, terminaling and storage of NGLs, LPGs, petrochemicals and
olefins.

The Partnership has approximately 36 million barrels of LPGs storage
capacity, including storage capacity leased to outside parties, at the Mont
Belvieu complex. This includes a Mont Belvieu short-haul transportation shuttle
system, consisting of a complex system of pipelines and interconnects, that ties
Mont Belvieu to virtually every refinery and petrochemical facility on the upper
Texas Gulf Coast.

In February 2000, the Partnership and Louis Dreyfus Plastics
Corporation ("Louis Dreyfus") announced a joint marketing and development
alliance. The Partnership's Mont Belvieu LPGs storage and transportation shuttle
system services are jointly marketed by Louis Dreyfus and the Partnership. The
purpose of the alliance is to expand

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services to the upper Texas Gulf Coast energy marketplace by increasing pipeline
throughput and the mix of products handled through the existing system and
establishing new receipt and delivery connections. The Partnership operates the
facilities for the alliance. The alliance is a service-oriented, fee-based
venture with no commodity trading activity. Under the alliance, Louis Dreyfus
has invested $4.4 million for expansion projects at Mont Belvieu. The
Partnership is required to reimburse this amount to Louis Dreyfus if the
alliance is terminated by either Louis Dreyfus or the Partnership.

Other Operating Revenues

The Partnership also derives revenue from terminaling activities, other
ancillary services associated with the transportation and storage of refined
petroleum products and LPGs, and the fractionation of NGLs. From time to time,
the Partnership sells excess product inventory.

CUSTOMERS

The Partnership's customers for the transportation of refined petroleum
products include major integrated oil companies, independent oil companies, the
airline industry and wholesalers. End markets for these deliveries are primarily
retail service stations, truck stops, agricultural enterprises, refineries, and
military and commercial jet fuel users.

Propane customers include wholesalers and retailers who, in turn, sell
to commercial, industrial, agricultural and residential heating customers, as
well as utilities who use propane as a fuel source. Refineries constitute the
Partnership's major customers for butane and isobutane, which are used as a
blend stock for gasolines and as a feed stock for alkylation units,
respectively.

At December 31, 2001, the Partnership had approximately 140 customers.
Transportation revenues (and percentage of total revenues) attributable to the
top 10 customers were $109 million (40%), $102 million (43%) and $105 million
(46%), for the years ended December 31, 2001, 2000 and 1999, respectively.
During 2001, no single customer accounted for 10% or more of the Partnership's
revenues.

COMPETITION

The Pipeline System conducts operations without the benefit of
exclusive franchises from government entities. Interstate common carrier
transportation services are provided through the system pursuant to tariffs
filed with the FERC.

Because pipelines are generally the lowest cost method for intermediate
and long-haul overland movement of refined petroleum products and LPGs, the
Pipeline System's most significant competitors (other than indigenous production
in its markets) are pipelines in the areas where the Pipeline System delivers
products. Competition among common carrier pipelines is based primarily on
transportation charges, quality of customer service and proximity to end users.
The Partnership believes the Pipeline System is competitive with other pipelines
serving the same markets; however, comparison of different pipelines is
difficult due to varying product mix and operations.

Trucks, barges and railroads competitively deliver products in some of
the areas served by the Pipeline System. Trucking costs, however, render that
mode of transportation less competitive for longer hauls or larger volumes.
Barge fees for the transportation of refined products are generally lower than
the Partnership's tariffs. The Partnership faces competition from rail movements
of LPGs from Sarnia, Ontario, Canada, and waterborne imports into New Hampshire.

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TITLE TO PROPERTIES

The Partnership believes it has satisfactory title to all of its
assets. The properties are subject to liabilities in certain cases, such as
customary interests generally contracted in connection with acquisition of the
properties, liens for taxes not yet due, easements, restrictions, and other
minor encumbrances. The Partnership believes none of these liabilities
materially affects the value of its properties or the Partnership's interest
therein or will materially interfere with its use in the operation of the
Partnership's business.

CAPITAL EXPENDITURES

Capital expenditures, excluding acquisitions, by the Partnership
totaled $81.4 million for the year ended December 31, 2001. Revenue generating
projects include those projects which expand service into new markets or expand
capacity into current markets. Maintenance capital spending includes projects
required by regulatory agencies or required life-cycle replacements. System
upgrade projects improve operational efficiencies or reduce cost. The
Partnership capitalizes interest costs incurred during the period that
construction is in progress. The following table identifies capital expenditures
for the year ended 2001 (in millions):

Revenue generating..................... $ 62.2
Maintenance capital.................... 12.7
System upgrades........................ 3.0
Capitalized interest................... 3.5
--------
Total.............................. $ 81.4
========

Revenue generating capital spending by the Partnership included $35.5
million used to expand the Partnership's capacity to support the receipt
connection point at Beaumont, Texas, and delivery location at Creal Springs,
Illinois, with Centennial and $17.4 million used to construct connections and
related facilities for the petrochemical pipelines at Mont Belvieu.

The Partnership estimates that capital expenditures, excluding
acquisitions, for 2002 will be approximately $48 million (which includes $3
million of capitalized interest). Approximately $15 million is expected to be
used for revenue generating projects. Approximately $19 million is expected to
be used for maintenance capital spending and approximately $11 million for
system upgrade projects. Revenue generating projects will include the completion
of facilities to support the receipt and delivery locations with Centennial and
other projects to expand service capabilities of the Partnership. Approximately
$4.9 million of maintenance capital spending is expected to be used for pipeline
rehabilitation projects to comply with regulations enacted by the United States
Department of Transportation Office of Pipeline Safety ("OPS"). The Partnership
continually reviews and evaluates potential capital improvements and expansions
that would be complementary to its present system. These expenditures can vary
greatly depending on the magnitude of these transactions by the Partnership.
Capital expenditures may be financed through internally generated funds, debt or
capital contributions from the Parent Partnership.

REGULATION

The Partnership's interstate common carrier pipeline operations are
subject to rate regulation by the FERC under the Interstate Commerce Act
("ICA"), the Energy Policy Act of 1992 ("Act") and rules and orders promulgated
pursuant thereto. FERC regulation requires that interstate oil pipeline rates be
posted publicly and that these rates be "just and reasonable" and
nondiscriminatory.

Rates of interstate oil pipeline companies, like the Partnership, are
currently regulated by the FERC primarily through an index methodology, whereby
a pipeline 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").

7

On May 11, 1999, the Partnership filed an application with the FERC
requesting permission to charge Market-Based Rates for substantially all refined
products transportation tariffs. On July 31, 2000, the FERC issued an order
granting the Partnership Market-Based Rates in certain markets and set for
hearing the Partnership's application for Market-Based Rates in certain
destination markets and origin markets. After the matter was set for hearing,
the Partnership and the protesting shippers entered into a settlement agreement
resolving their respective differences. On April 25, 2001, the FERC issued an
order approving the offer of settlement. As a result of the settlement, the
Partnership recognized approximately $1.7 million of previously deferred
transportation revenue in the second quarter of 2001. As a part of the
settlement, the Partnership withdrew the application for Market-Based Rates to
the Little Rock, Arkansas, Arcadia and Shreveport-Arcadia, Louisiana,
destination markets, which are currently subject to the PPI Index. As a result,
the Partnership made refunds of approximately $1.0 million in the third quarter
of 2001 for those destination markets.

Effective July 1, 1999, the Partnership 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.

In a 1995 decision involving an unrelated oil pipeline limited
partnership, the FERC partially disallowed the inclusion of income taxes in that
partnership's cost of service. In another FERC proceeding involving a different
oil pipeline limited partnership, the FERC held that the oil pipeline limited
partnership may not claim an income tax allowance for income attributable to
non-corporate limited partners, both individuals and other entities. These FERC
decisions do not affect the Partnership's current rates and rate structure
because the Partnership does not use the cost of service methodology to support
its rates. However, the FERC decisions might become relevant to the Partnership
should it (i) elect in the future to use the cost-of-service methodology or (ii)
be required to use such methodology to defend initial rates or its indexed rates
against a shipper protest alleging that an indexed rate increase substantially
exceeds actual cost increases. Should such circumstances arise, there can be no
assurance with respect to the effect of such precedents on the Partnership's
rates in view of the uncertainties involved in this issue.

ENVIRONMENTAL MATTERS

The operations of the Partnership are subject to federal, state and
local laws and regulations governing the discharge of materials into the
environment otherwise relating to environmental protection. Failure to comply
with these laws and regulations may result in the assessment of administrative,
civil, and criminal penalties, imposition of injunctions delaying or prohibiting
certain activities, and the need to perform investigatory and remedial
activities. Although the Partnership believes its operations are in material
compliance with applicable environmental laws and 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 its operations, could
result in substantial costs and liabilities to the Partnership. The Partnership
does not anticipate that changes in environmental laws and regulations will have
a material adverse effect on its financial position, results of operations or
cash flows in the near term.

Water

The Federal Water Pollution Control Act of 1972, as renamed and amended
as the Clean Water Act ("CWA"), and analogous state laws impose strict controls
against the discharge of oil and its derivatives into navigable waters. The CWA
provides penalties for any discharges of petroleum products in reportable
quantities and imposes substantial potential liability for the costs of removing
petroleum or other hazardous substances. State laws for the control of water
pollution also provide varying civil and criminal penalties and liabilities in
the case of a release of petroleum or its derivatives in navigable waters or
into groundwater. Spill prevention control and countermeasure requirements of
federal laws require appropriate containment berms and similar structures to
help prevent a petroleum tank release from impacting navigable waters.

8

Contamination resulting from spills or releases of refined petroleum
products is an inherent risk within the petroleum pipeline industry. To the
extent that groundwater contamination requiring remediation exists along its
pipeline systems as a result of past operations, the Partnership believes any
such contamination could be controlled or remedied without having a material
adverse effect on the financial condition of the Partnership, but such costs are
site specific, and there can be no assurance that the effect will not be
material in the aggregate.

The primary federal law for oil spill liability is the Oil Pollution
Act of 1990 ("OPA"), which addresses three principal areas of oil pollution --
prevention, containment and cleanup, and liability. OPA applies to vessels,
offshore platforms, and onshore facilities, including terminals, pipelines and
transfer facilities. In order to handle, store or transport oil, shore
facilities are required to file oil spill response plans with the appropriate
federal agency being either the United States Coast Guard, the United States
Department of Transportation Office of Pipeline Safety or the Environmental
Protection Agency ("EPA"). Numerous states have enacted laws similar to OPA.
Under OPA and similar state laws, responsible parties for a regulated facility
from which oil is discharged may be liable for removal costs and natural
resource damages.

The EPA has adopted regulations that require the Partnership to have
permits in order to discharge certain storm water run-off. Storm water discharge
permits may also be required by certain states in which the Partnership
operates. Such permits may require the Partnership to monitor and sample the
storm water run-off.

Air Emissions

The operations of the Partnership are subject to the federal Clean Air
Act (the "Clean Air Act") and comparable state laws. Amendments to the Clean Air
Act, as well as recent or soon to be adopted changes to state implementation
plans for controlling air emissions in regional, non-attainment areas may
require operations of the Partnership to incur future capital expenditures in
connection with the addition or modification of existing air emission control
equipment and strategies. In addition, some of the Partnership's facilities are
included within the categories of hazardous air pollutant sources, which are
subject to increasing regulation under the Clean Air Act. The Clean Air Act
requires federal operating permits for major sources of air emissions. Under
this program, one federal operating permit (a "Title V" permit) is issued. The
permit acts as an umbrella that includes other federal, state and local
preconstruction and/or operating permit provisions, emission standards,
grandfathered rates, and record keeping, reporting, and monitoring requirements
in a single document. The federal operating permit is the tool that the public
and regulatory agencies use to review and enforce a site's compliance with all
aspects of clean air regulation at the federal, state and local level. The
Partnership has completed applications for the facilities for which these
regulations apply.

Risk Management Plans

The Partnership is subject to the EPA's Risk Management Plan ("RMP")
regulations at certain locations. This regulation is intended to work with the
Occupational Safety and Health Act ("OSHA") Process Safety Management regulation
(see "Safety Regulation" following) to minimize the offsite consequences of
catastrophic releases. The regulation requires a regulated source, in excess of
threshold quantities, develop and implement a risk management program that
includes a five-year accident history, an offsite consequence analyses, a
prevention program and an emergency response program. The Partnership believes
the operating expenses of the RMP regulations will not have a material adverse
effect on the Partnership's financial position, results of operations or cash
flows.

Solid Waste

The Partnership generates hazardous and non-hazardous solid wastes that
are subject to requirements of the federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes. Amendments to RCRA required the EPA
to promulgate regulations banning the land disposal of all hazardous wastes
unless the wastes meet

9

certain treatment standards or the land-disposal method meets certain waste
containment criteria. From time to time, the EPA considers the adoption of
stricter disposal standards for non-hazardous wastes, including crude oil and
gas wastes. The adoption of such stricter standards for non-hazardous wastes, or
any future re-designation of non-hazardous wastes as hazardous wastes will
likely increase the operating expenses of the Partnership as well as the
industry in general. The Partnership utilizes waste minimization and recycling
processes to reduce the volume of its waste. The Partnership currently has one
permitted on-site waste water treatment facility. Operating expenses of this
facility has not had a material adverse effect on the financial position,
results of operations or cash flows of the Partnership.

Superfund

The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons who
contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of a facility where a release
occurred and companies that disposed or arranged for the disposal of the
hazardous substances found at a facility. Under CERCLA, these persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources, and for the costs of certain health studies. CERCLA also
authorizes the EPA and, in some instances, third parties to take actions in
response to threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they incur. It is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by hazardous substances or
other pollutants released into the environment. In the course of its ordinary
operations, the Partnership's pipeline system generates wastes that may fall
within CERCLA's definition of a "hazardous substance." In the event a disposal
facility previously used by the Partnership requires clean up in the future, the
Partnership may be responsible under CERCLA for all or part of the costs
required to clean up sites at which such wastes have been disposed.

In December 1999, the Company was notified by the EPA of potential
liability for alleged waste disposal at Container Recycling, Inc., located in
Kansas City, Kansas. The Company was also asked to respond to an EPA Information
Request. The Company's response to the information request has been filed with
the EPA Region VII office. Based on information the Company has received from
the EPA, as well as through its internal investigations, the Company is pursuing
dismissal from this matter.

Other Environmental Proceedings

In 1994, the Partnership and the Indiana Department of Environmental
Management ("IDEM") entered into an Agreed Order that resulted in the
implementation of a remediation program for groundwater contamination
attributable to the Partnership's operations at the Seymour, Indiana, terminal.
A Feasibility Study, which includes the Partnership's proposed remediation
program, was approved by IDEM in 1999. IDEM is expected to issue a Record of
Decision formally approving the remediation program. After the Record of
Decision is issued, the Partnership will enter into a subsequent Agreed Order
for the continued operation and maintenance of the remediation program. The
Partnership has an accrued liability of $0.6 million at December 31, 2001, for
future remediation costs at the Seymour terminal. The Partnership believes that
the completion of the remediation program will not have a future material
adverse effect on its financial position, results of operations or cash flows.

In 1994, the Partnership was issued a compliance order from the
Louisiana Department of Environmental Quality ("LDEQ") relative to environmental
contamination at the Partnership's Arcadia, Louisiana, facility. This
contamination may be attributable to the operations of the Partnership, as well
as adjacent petroleum terminals operated by other companies. In 1999, the
Partnership's Arcadia facility and the adjacent terminals were directed by the
Remediation Services Division of the LDEQ to pursue remediation of this
containment phase. The Partnership believes that the completion of the
remediation program that is proposed by the Partnership will not have a future
material adverse effect on its financial position, results of operations or cash
flows.

10

SAFETY REGULATION

The Partnership is subject to regulation by the United States
Department of Transportation ("DOT") under the Accountable Pipeline and Safety
Partnership Act of 1996, sometimes referred to as the Hazardous Liquid Pipeline
Safety Act ("HLPSA"), and comparable state statutes relating to the design,
installation, testing, construction, operation, replacement and management of
its pipeline facilities. The HLPSA covers petroleum and petroleum products and
requires any entity that owns or operates pipeline facilities to comply with
such regulations, to permit access to and copying of records and to make certain
reports and provide information as required by the Secretary of Transportation.
It is anticipated that the HLPSA will be reauthorized in 2002.

The Partnership is subject to the OPS regulation requiring
qualification of pipeline personnel. The regulation requires pipeline operators
to develop and maintain a written qualification program for individuals
performing covered tasks on pipeline facilities. The intent of this regulation
is to ensure a qualified work force and to reduce the probability and
consequence of incidents caused by human error. The regulation establishes
qualification requirements for individuals performing covered tasks, and amends
certain training requirements in existing regulations. A written qualification
program was completed in April 2001, and individuals performing a covered task
must be qualified by October 2002.

The Partnership is also subject to the OPS Integrity Management
regulations which specifies how companies with greater than 500 miles of
pipeline should assess, evaluate, validate and maintain the integrity of
pipeline segments that, in the event of a release, could impact High Consequence
Areas ("HCA"). HCA are defined as highly populated areas, unusually sensitive
environmental areas and commercially navigable waterways. The regulation
requires an Integrity Management Program ("IMP") be developed that utilizes
internal pipeline inspection, pressure testing, or other equally effective means
to assess the integrity of HCA pipeline segments. The regulation also requires
periodic review of HCA pipeline segments to ensure adequate preventative and
mitigative measures exist and that companies take prompt action to address
integrity issues raised by the assessment and analysis. In compliance with these
OPS regulations, the Partnership has identified its HCA pipeline segments and
will develop an IMP by March 31, 2002. The regulations require that initial HCA
baseline integrity assessments are conducted within seven years, with all
subsequent assessments conducted on a five-year cycle. The Partnership will
evaluate each pipeline segment's integrity by analyzing available information
and develop a range of potential impacts resulting from a release to a HCA. The
Partnership is currently developing cost estimates related to its baseline
integrity assessments.

The Partnership is also subject to the requirements of the federal OSHA
and comparable state statutes. The Partnership believes it is in material
compliance with OSHA and state requirements, including general industry
standards, record keeping requirements and monitoring of occupational exposures.

The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the federal Superfund Amendment and
Reauthorization Act, and comparable state statutes require the Partnership to
organize and disclose information about the hazardous materials used in its
operations. Certain parts of this information must be reported to employees,
state and local governmental authorities, and local citizens upon request. The
Partnership is subject to OSHA Process Safety Management ("PSM") regulations,
which are designed to prevent or minimize the consequences of catastrophic
releases of toxic, reactive, flammable or explosive chemicals. These regulations
apply to any process which involves a chemical at or above the specified
thresholds; or any process which involves a flammable liquid or gas, as defined
in the regulations, stored on-site in one location, in a quantity of 10,000
pounds or more. The Partnership utilizes certain covered processes and maintains
storage of LPGs in pressurized tanks, caverns and wells, in excess of 10,000
pounds at various locations. Flammable liquids stored in atmospheric tanks below
their normal boiling point without benefit of chilling or refrigeration are
exempt. The Partnership believes it is in material compliance with the PSM
regulations.

In general, the General Partner expects to increase the expenditures of
the Partnership during the next decade to comply with stricter industry and
regulatory safety standards such as those described above. While such
expenditures cannot be accurately estimated at this time, the Partnership does
not believe that they will have a future material adverse effect on its
financial position, results of operations or cash flows.

11

EMPLOYEES

The Partnership does not have any employees, officers or directors. The
General Partner is responsible for the management of the Partnership. As of
December 31, 2001, the General Partner had 919 employees. Certain employees of
the General Partner may devote all or a portion of their time to the
Partnership.

ITEM 3. LEGAL PROCEEDINGS

TOXIC TORT LITIGATION - SEYMOUR, INDIANA

In the fall of 1999 and on December 1, 2000, the Company and the
Partnership were named as defendants in two separate lawsuits in Jackson County
Circuit Court, Jackson County, Indiana, in Ryan E. McCleery and Marcia S.
McCleery, et. al. v. Texas Eastern Corporation, et. al. (including the Company
and Partnership) and Gilbert Richards and Jean Richards v. Texas Eastern
Corporation, et. al. (including the Company and Partnership). In both cases, the
plaintiffs contend, among other things, that the Company and other defendants
stored and disposed of toxic and hazardous substances and hazardous wastes in a
manner that caused the materials to be released into the air, soil and water.
They further contend that the release caused damages to the plaintiffs. In their
complaints, the plaintiffs allege strict liability for both personal injury and
property damage together with gross negligence, continuing nuisance, trespass,
criminal mischief and loss of consortium. The plaintiffs are seeking
compensatory, punitive and treble damages. The Company has filed an answer to
both complaints, denying the allegations, as well as various other motions.
These cases are in the early stages of discovery and are not covered by
insurance. The Company is defending itself vigorously against the lawsuits. The
plaintiffs have not stipulated the amount of damages they are seeking in the
suit. The Partnership cannot estimate the loss, if any, associated with these
pending lawsuits.

OTHER LITIGATION

On December 21, 2001, the Partnership was named as a defendant in a
lawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana in Rebecca
L. Grisham et. al. v. TE Products Pipeline Company, Limited Partnership. In this
case, the plaintiffs contend that the defendant's pipeline, which crosses the
plaintiff's property, leaked toxic products onto the plaintiff's property. The
plaintiffs further contend that this leak caused damages to the plaintiffs. The
Partnership has filed an answer to the plaintiff's petition denying the
allegations. The plaintiffs have not stipulated the amount of damages they are
seeking in the suit. The Partnership is defending itself vigorously against the
lawsuit. The Partnership cannot estimate the damages, if any, associated with
this pending lawsuit, however, this case is covered by insurance.

In addition to the litigation discussed above, the Partnership has
been, in the ordinary course of business, a defendant in various lawsuits and a
party to various other legal proceedings, some of which are covered in whole or
in part by insurance. The General Partner believes that the outcome of such
lawsuits and other proceedings will not individually or in the aggregate have a
material adverse effect on the Partnership's consolidated financial position,
results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED PARTNERSHIP INTEREST
MATTERS

TEPPCO Partners, L.P. owns a 99.999% interest as the sole limited
partner interest and TEPPCO GP, Inc. owns a 0.001% general partner interest in
the Partnership. There is no established public trading market for the
Partnership ownership interests.

The Partnership makes periodic distributions of its available cash to
its partners. Available cash consists generally of all cash receipts less cash
disbursements and cash reserves necessary for working capital, anticipated
capital expenditures and contingencies the General Partner deems appropriate and
necessary.

The Partnership is a limited partnership that is not subject to federal
income tax. Instead, the partners are required to report their allocable share
of the Partnership's income, gain, loss, deduction and credit, regardless of
whether the Partnership makes distributions.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth, for the periods and at the dates
indicated, selected consolidated financial and operating data for the
Partnership. The financial data was derived from the consolidated financial
statements of the Partnership and should be read in conjunction with the
Partnership's audited consolidated financial statements included in the Index to
Financial Statements on page F-1 of this report. See also Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

- ------------------

(1) Extraordinary item reflects the loss related to the early extinguishment
of the First Mortgage Notes on January 27, 1998.

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The following information is provided to facilitate increased
understanding of the 2001, 2000 and 1999 consolidated financial statements and
accompanying notes of the Partnership listed in the Index to Financial
Statements on page F-1 of this Report. Accounting policies that are among the
most critical to the portrayal of the Partnership's financial condition and
results of operations are discussed under "Critical Accounting Policies."
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 condition. Discussion included in
"Other Considerations" addresses trends, future plans and contingencies that are
reasonably likely to materially affect future liquidity or earnings.

The Partnership operates and reports in one business segment:
transportation, storage and terminaling of petroleum products and LPGs,
intrastate transportation of petrochemicals and the fractionation of NGLs.
Revenues are derived from the transportation of refined products and LPGs, the
storage and short-haul shuttle transportation of LPGs at the Mont Belvieu
complex, intrastate transportation of petrochemicals, fractionation of NGLs,
sale of product inventory and other ancillary services. Labor and electric power
costs comprise the two largest operating expense items of the Partnership.
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.

CRITICAL ACCOUNTING POLICIES

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Changes in these estimates could materially affect the
financial position, results of operations or cash flows.

Environmental Costs

The Partnership accrues for environmental costs that relate to existing
conditions caused by past operations. Environmental costs include initial site
surveys and environmental studies of potentially contaminated sites, costs for
remediation and restoration of sites determined to be contaminated and ongoing
monitoring costs, as well as fines, damages and other costs, when estimable. The
balance of accrued undiscounted environmental liabilities are monitored on a
regular basis by management. Liabilities for environmental costs at a specific
site are initially recorded when the Partnership's liability for such costs,
including direct internal and legal costs, is probable and a reasonable estimate
of the associated costs can be made. Adjustments to initial estimates are
recorded, from time to time, to reflect changing circumstances and estimates
based upon additional information developed in subsequent periods. Estimates of
the Partnership's ultimate liabilities associated with environmental costs are
particularly difficult to make with certainty due to the number of variables
involved, including the early stage of investigation at certain sites, the
lengthy time frames required to complete remediation alternatives available and
the evolving nature of environmental laws and regulations. For information
concerning environmental regulation and environmental costs and contingencies,
see Items 1 and 2. Business and Properties - "Environmental Matters" in this
Report.

14

Property, Plant and Equipment

Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of requires that an entity review long-lived assets, including
property, plant and equipment, whenever events occur that indicate that the book
value of an asset may not be recoverable in the future. In August 2001, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS
121, but retains its fundamental provisions for reorganizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale. During the second quarter of 2001, Pennzoil-Quaker State
Company ("Pennzoil") sold its Shreveport, Louisiana, refinery and canceled
refined products production. Pennzoil and the Partnership negotiated a
settlement of $18.9 million to terminate a long-term transportation agreement
from the Shreveport origin point on the Pipeline System. Under the
transportation agreement, Pennzoil had a throughput commitment of 25,000 barrels
per day. The Partnership is pursuing various alternatives related to the reduced
receipt volumes including making system changes to allow for bi-directional
product flow to make deliveries into the Shreveport market area. The Partnership
has evaluated the impact of the contract termination on the pipeline segment
from Shreveport to El Dorado, Arkansas, in accordance with SFAS 144. The
evaluation did not result in an impairment of the carrying value of the related
transportation assets. The termination payment was recorded as refined products
transportation revenue in 2001. However, if alternative revenue sources are not
realized on this pipeline segment, an impairment may be recorded, which could
have a material adverse effect on the Partnership's financial position, results
of operations or cash flows.

RESULTS OF OPERATIONS

Volume and average tariff information for 2001, 2000 and 1999 is
presented below:

PERCENTAGE
INCREASE
YEARS ENDED DECEMBER 31, (DECREASE)
-------------------------------- -----------------
2001 2000 1999 2001 2000
-------- -------- -------- ------ ------
(IN THOUSANDS, EXCEPT TARIFF INFORMATION)

Volumes Delivered
Refined products ........................ 122,947 128,151 132,642 (4%) (3%)
LPGs .................................... 39,957 39,633 37,575 1% 5%
Mont Belvieu operations ................. 23,122 27,159 28,535 (15%) (5%)
-------- -------- -------- ------ ------
Total ................................. 186,026 194,943 198,752 (5%) (2%)
======== ======== ======== ====== ======

Average Tariff per Barrel

Refined products ........................ $ 0.98(1) $ 0.93 $ 0.93 5% --
LPGs .................................... 1.95 1.86 1.80 5% 3%
Mont Belvieu operations ................. 0.18 0.16 0.16 13% --
Average system tariff per barrel ...... $ 1.09 $ 1.01 $ 0.98 8% 3%
======== ======== ======== ====== ======

- ---------------------

(1) Excludes $18.9 million received from Pennzoil for canceled transportation
agreement discussed below.

2001 Compared to 2000

For the year ended 2001, the Partnership reported net income of $92.7
million, compared with net income of $61.3 million for the year ended 2000. The
$31.4 million increase in net income was primarily due to a $34.9 million
increase in operating revenues and a $1.7 million decrease in interest expense,
partially offset by a $2.8 million increase in costs and expenses, $1.1 million
in losses from equity investments, a $1.0 million decrease in capitalized
interest and a $0.3 million decrease in other income - net. Factors influencing
these variances are described below.

15

Refined products transportation revenues increased $20.0 million for
the year ended 2001, compared with 2000, primarily due to $18.9 million of
revenue recognized on the canceled transportation agreement with Pennzoil and
the recognition of $1.7 million of previously deferred revenue related to the
approval of Market-Based Rates during the second quarter of 2001. See further
discussion regarding these factors included in "Other Considerations." These
increases were partially offset by a 4% decrease in refined products volumes
delivered. Deliveries of MTBE decreased 4.3 million barrels as a result of the
expiration of contract deliveries to the Partnership's marine terminal near
Beaumont, Texas, in April 2001. As a result of the contract expiration, the
Partnership no longer transports MTBE through its Pipeline System. Jet fuel
volumes decreased 2.7 million barrels, or 10%, due to reduced air travel demand
in the Midwest market areas. The total refined products volume decrease was
partially offset by increased distillate demand in the South-Central market
areas and increased distillate deliveries at a third-party terminal in Houston,
Texas. The refined products average rate per barrel increased 5% from the
prior-year period primarily due to an increased percentage of long-haul volumes
delivered in 2001.

LPGs transportation revenues increased $3.9 million for the year ended
2001, compared with 2000, primarily due to increased propane deliveries in the
Midwest that resulted from favorable price differentials of Gulf Coast propane
compared with competing Midwest supply sources. Additionally, increased
feedstock demand resulted in higher deliveries of isobutane in the Chicago
market area. Short-haul deliveries of propane along the upper Texas Gulf Coast
decreased 29% from the prior year due to lower petrochemical feedstock demand
and operational problems at a petrochemical facility served by the Partnership.
The LPGs average rate per barrel increased 5% from the prior year as a result of
an increased percentage of long-haul deliveries to the upper Midwest market
areas.

Revenues generated from Mont Belvieu operations increased $0.8 million
during the year ended 2001, compared with 2000, as a result of increased loading
fees, brine service revenue and butane segregation charges, partially offset by
lower contract storage revenue. Mont Belvieu shuttle deliveries decreased 15%
during the year ended 2001, compared with 2000, due to reduced propane and
butane demand for petrochemical feedstock along the upper Texas Gulf Coast. The
Mont Belvieu average rate per barrel increased in 2001 as a result of increased
non-contract deliveries, which generally carry higher rates.

Other operating revenues increased $10.2 million during the year ended
2001, compared with 2000, primarily due to an $8.9 million increase in contract
petrochemical delivery revenue, which started during the fourth quarter of 2000,
increased refined products loading fees, increased propane deliveries at the
Providence, Rhode Island, import facility and increased gains on product sales.
These increases were partially offset by losses incurred as a result of
exchanging products at different geographic points of delivery to position
product in the Midwest market area.

Costs and expenses increased $2.8 million for the year ended 2001,
compared with 2000, comprised of a $2.1 million increase in operating, general
and administrative expenses, a $1.2 million increase in operating fuel and power
expense and a $1.0 million increase in depreciation and amortization expense,
partially offset by a $1.5 million decrease in taxes - other than income taxes.
The increase in operating, general and administrative expenses was primarily due
to increased employee benefit costs, increased supplies and services and
environmental remediation expenses, partially offset by the March 2000 write-off
of project evaluation costs related to the proposed pipeline construction from
Beaumont, Texas, to Little Rock, Arkansas, and decreased product measurement
losses. Operating fuel and power expense increased as a result of higher rates
charged by electric utilities and increased long-haul volumes delivered. The
increase in depreciation expense from the prior year period resulted from assets
placed in service during the fourth quarter of 2000. The decrease in taxes -
other than income taxes resulted from actual property taxes being lower than
previously estimated.

Interest expense decreased $1.7 million during the year ended 2001,
compared with 2000, as a result of lower interest rates on borrowings under the
variable-rate credit facilities and the favorable impact of the
fixed-to-floating interest rate swap on the Senior Notes, effective October 4,
2001. Interest capitalized decreased $1.0 million during the year ended 2001,
compared with 2000, as a result of the completion of the petrochemical pipelines
from Mont Belvieu to Port Arthur, Texas, during the fourth quarter of 2000.

Net loss from equity investments totaled $1.1 million during the year
ended 2001 due primarily to pre-operating expenses of Centennial. Other income -
net decreased $0.3 million during the year ended 2001, compared with 2000, due
primarily to lower interest income earned on cash investments.

16

The Partnership is dependent in large part on the demand for refined
petroleum products in the markets served by its pipelines. Reductions in that
demand adversely affect the pipeline business of the Partnership. Market demand
varies based upon the different end uses of the refined products shipped by the
Partnership. Demand for gasoline, which has in recent years accounted for
approximately one-half of the Partnership's refined products transportation
revenues, depends upon price, prevailing economic conditions and demographic
changes in the markets served by the Partnership. Weather conditions,
governmental policy and crop prices affect the demand for refined products used
in agricultural operations. Demand for jet fuel, which has in recent years
accounted for almost one-quarter of the Partnership's refined products revenues,
depends on prevailing economic conditions and military usage. Propane deliveries
are generally sensitive to the weather and meaningful year-to-year variances
have occurred and will likely continue to occur.

2000 Compared to 1999

For the year ended 2000, net income of the Partnership decreased $0.5
million compared with 1999 primarily due to a $5.8 million increase in costs and
expenses and a $3.8 million increase in interest expense, partially offset by a
$6.4 million increase in operating revenues and a $2.4 million increase in
capitalized interest. Factors influencing these variances are described below.

Refined products transportation revenues decreased $3.7 million for the
year ended 2000, compared with 1999, as a result of a 3% decrease in total
refined products volumes delivered. Motor fuel volumes delivered decreased by
2.5 million barrels and distillate volumes delivered decreased by 1.8 million
barrels due primarily to a local refinery expansion in the West Memphis market
and unfavorable price differentials in the Midwest market area. Natural gasoline
volumes delivered declined 1.3 million barrels due primarily to the expiration
of a contract in late 1999 for deliveries to the Chicago area, along with
unfavorable processing and blending economics in the Chicago market area. These
decreases were primarily offset by a 1.2 million barrel increase in jet fuel
volumes delivered due to continued strong demand in the Chicago market area and
at the Cincinnati airport that is supplied by the Partnership. The Partnership
deferred recognition of approximately $1.5 million of revenue during the year
ended 2000, with respect to potential refund obligations for rates charged in
excess of the PPI Index while its application for Market-Based Rates was under
review by the FERC.

LPGs transportation revenues increased $6.2 million for the year ended
2000, compared with 1999, due to a 5% increase in volumes delivered and a 3%
increase in the average LPGs tariff per barrel. Colder winter weather during the
first and fourth quarters of 2000, coupled with lower customer storage levels
contributed to a 1.2 million barrel increase in propane volumes delivered in the
Northeast market area and a 0.9 million barrel increase in propane volumes
delivered in the Midwest market area. Increased refinery demand in the Northeast
market area resulted in a 0.2 million barrel increase in butane volumes
delivered. The larger percentage of long-haul deliveries during 2000 resulted in
a 3% increase in the average LPGs tariff per barrel.

Revenues generated from Mont Belvieu operations increased $0.5 million
for the year 2000, compared with 1999, primarily due to increased brine handling
fees and higher storage revenue.

Other operating revenues increased $3.4 million during the year ended
2000, compared with 1999, primarily due to $1.8 million of deficiency revenue
recognized in the fourth quarter of 2000 related to the beginning of a 20-year
contract for petrochemical deliveries at Port Arthur, and a $0.5 million
increase in gains on the sale of product inventory attributable to higher market
prices in 2000. The additional increases resulted from increased refined
products terminaling revenue and increased custody transfer services at Mont
Belvieu facilities.

Costs and expenses of the Partnership increased $5.8 million during the
year ended 2000, compared with 1999, due to a $2.9 million increase in
operating, general and administrative expenses, a $2.3 million increase in
operating fuel and power expense and a $0.6 million increase in depreciation and
amortization charges. 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, a $2.3 million
increase in general and administrative supplies and services, a $1.5 million
increase in legal services, a $1.0 million increase in pipeline operations and
maintenance expenses, a $0.7 million increase in labor related expenses and a
$0.3 million increase in product measurement losses. 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 to
Little Rock in favor of

17

participation in the Centennial joint venture. These increases in operating,
general and administrative expenses were partially offset by a $3.9 million
decrease in expenses associated with Year 2000 activities incurred in 1999. The
increase in operating fuel and power expense from the prior year resulted
primarily from higher fuel prices charged by electric utilities in 2000.
Depreciation and amortization expense increased as a result of $0.3 million in
depreciation expense related to the completion of the petrochemical pipelines
and other capital additions placed in service throughout 2000.

Interest expense increased $3.8 million during the year ended 2000,
compared with 1999, as a result of borrowings under a term loan to finance
construction of the petrochemical pipelines between Mont Belvieu and Port
Arthur. Additionally, amortization of debt issue costs increased $0.8 million
during the year ended 2000. The increase in interest expense was offset by
increased interest capitalized of $2.4 million during the year ended 2000, as a
result of higher balances associated with construction of the petrochemical
pipelines.

Other income - net increased $0.2 million during the year ended 2000,
compared with 1999, as a result of gains on the sale of right-of-way easements
during the second quarter of 2000, coupled with increased interest income earned
on cash investments in 2000.

FINANCIAL CONDITION AND LIQUIDITY

Net cash from operations for the year ended 2001 totaled $119.6
million, and was comprised of $121.4 million of income before charges for
depreciation and amortization, and $1.8 million of cash used for working capital
changes. Net cash from operations for the year ended 2000 totaled $93.5 million,
and was comprised of $89.1 million of income before charges for depreciation and
amortization and $4.4 million of cash provided by working capital changes. Net
cash from operations for the year ended 1999 totaled $89.8 million, and was
comprised of $89.0 million of income before charges for depreciation and
amortization and $0.8 million of cash provided by working capital changes. Net
cash from operations for the years ended 2001, 2000, and 1999 included interest
payments of $31.0 million, $29.0 million, and $28.6 million, respectively.

Cash flows used in investing activities totaled $142.1 million during
the year ended 2001, and was comprised $81.4 million of capital expenditures and
$65.0 million of cash contributions for the Partnership's interest in the
Centennial joint venture. These uses of cash were partially offset by $4.2
million received on matured cash investments. Cash flows used in investing
activities totaled $60.1 million during the year ended 2000, and was comprised
of $56.5 million of capital expenditures, $5.0 million of cash contributions for
the Partnership's interest in the Centennial joint venture, partially offset by
$1.5 million of net proceeds received from cash investments. Cash flows used in
investing activities totaled $66.3 million for the year ended 1999, and included
$69.3 million of capital expenditures, offset by net proceeds from cash
investments of $3.0 million.

In August 2000, the Partnership entered into agreements with CMS Energy
Corporation and Marathon Ashland Petroleum LLC to form Centennial. The
Partnership has contributed approximately $65.0 million and $5.0 million during
the years ended 2001 and 2000, respectively, for its one-third interest in
Centennial. The Partnership expects to contribute an additional $4.9 million to
Centennial in 2002. Centennial commenced operations in the first quarter of
2002.

Centennial has entered into credit facilities totaling $150 million.
The proceeds were used to fund construction and conversion costs of its pipeline
system. As of December 31, 2001, Centennial had borrowed $128 million under its
credit facility. The Partnership has guaranteed one-third of the debt of
Centennial up to a maximum amount of $50 million.

On February 20, 2002, the Parent Partnership issued $500 million
principal amount of 7.625% Senior Notes due 2012. The Partnership and the Parent
Partnership's other significant operating subsidiaries, which include TCTM,
L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company, issued
guarantees of this debt. The guarantees are full, unconditional and joint and
several. The proceeds from the offering were used to reduce the outstanding
balances of the Parent Partnership's credit facilities.

18

Parent Partnership Credit Facilities

The Partnership currently utilizes debt financing available from the
Parent Partnership through intercompany notes. The terms of the intercompany
notes generally match the principal and interest payment dates under the Parent
Partnership's credit agreements. The interest rates charged by the Parent
Partnership include the stated interest rate of the Parent Partnership, plus a
premium to cover debt issuance costs. The interest rate is also decreased or
increased to cover gains and losses, respectively, on any interest rate swaps
that the Parent Partnership may have in place on the respective credit
agreements. These credit facilities of the Parent Partnership are described
below.

In July 2000, the Parent Partnership entered into a $75 million term
loan and a $475 million revolving credit facility ("Three Year Facility") and
borrowed $75 million and $340 million, respectively, to refinance existing bank
credit facilities and to finance the acquisition of assets from ARCO Pipe Line
Company, a wholly-owned subsidiary of Atlantic Richfield Company for $322.6
million. The acquired assets are held through TCTM, L.P., a 99.999% owned entity
of the Parent Partnership. The term loan was repaid by the Parent Partnership on
October 25, 2000. In April 2001, the Three Year Facility was amended to provide
for revolving borrowings of up to $500 million including the issuance of letters
of credit of up to $20 million. The term of the revised Three Year Facility was
extended to April 6, 2004. The interest rate is based on the Parent
Partnership's option of either the lender's base rate plus a spread, or LIBOR
plus a spread in effect at the time of the borrowings. The credit agreement for
the Three Year Facility contains restrictive financial covenants that require
the Parent Partnership to maintain a minimum level of partners' capital as well
as maximum debt-to-EBITDA (earnings before interest expense, income tax expense
and depreciation and amortization expense) and minimum fixed charge coverage
ratios.

In April 2001, the Parent Partnership entered into a 364-day, $200
million revolving credit agreement ("Short-term Revolver"). The interest rate is
based on the Parent Partnership's option of either the lender's base rate plus a
spread, or LIBOR plus a spread in effect at the time of the borrowings. The
credit agreement contains restrictive financial covenants that require the
Parent Partnership to maintain a minimum level of partners' capital as well as
maximum debt-to-EBITDA and minimum fixed charge coverage ratios. The Parent
Partnership has requested an extension of the Short-term Revolver for an
additional period of 364 days, commencing on the current termination date in
April 2002. Extension of the Short-term Revolver is expected prior to the
termination date.

On September 28, 2001, the Three Year Facility and the Short-term
Revolver were amended to extend to December 31, 2001, the time period for the
maximum debt-to-EBITDA ratio covenant to allow for the additional debt incurred
by the Parent Partnership for the acquisition of Jonah Gas Gathering Company
("Jonah") from Alberta Energy Corporation for $359.8 million. The Jonah assets
are held through TEPPCO Midstream, L.P., a 99.999% owned entity of the Parent
Partnership. On November 13, 2001, the Three Year Facility and the Short-term
Revolver were further amended to require prepayment of outstanding borrowings
only upon the receipt of net cash proceeds from asset dispositions or from
insurance proceeds in accordance with the terms of the respective agreements. At
such time, certain lenders under the agreements elected to withdraw from the
facilities, and the available borrowing capacities were reduced.

At December 31, 2001 and 2000, the Partnership had an intercompany note
payable of $149.8 million and $79.8 million, respectively, payable to the Parent
Partnership. At December 31, 2001, $80.8 million, included in current
liabilities, related to borrowings by the Partnership under the Parent
Partnership's Short-term Revolver described above. The Partnership's long-term
portions at December 31, 2001 and 2000, totaled $69.0 million and $79.8 million,
respectively, and represent borrowings by the Partnership under the Parent
Partnership's Three Year Facility described above. The interest rate on the note
payable, Parent Partnership at December 31, 2001 and 2000, was 5.05% and 10.3%,
respectively. At December 31, 2001 and 2000, accrued interest includes $0.4
million and $1.4 million, respectively, due the Parent Partnership. For the
years ended December 31, 2001 and 2000, interest costs incurred on the note
payable, Parent Partnership totaled $7.8 million and $3.9 million, respectively.
At December 31, 2001 and 2000, the carrying value of the intercompany note
payable to the Parent Partnership approximated its fair value.

19

Senior Notes

On January 27, 1998, the Partnership 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 were issued at a discount and are being accreted
to their face value over the term of the 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, issued at par, may be redeemed at any time after January 15, 2008, at
the option of the Partnership, 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 Partnership and
rank on a parity with all other unsecured and unsubordinated indebtedness of the
Partnership.

In 2001, the Partnership entered into an interest rate hedge agreement
with a notional amount and expiration related to a portion of its Senior Notes,
as more fully described in Item 7A, "Quantitative and Qualitative Disclosures
About Market Risk."

Cash Distributions

For the years ended December 31, 2001, 2000 and 1999, cash
distributions totaled $80.9 million, $70.8 million, and $61.6 million,
respectively. The distribution increases reflect the Partnership's success in
improving cash flow levels. On February 8, 2002, the Partnership paid a cash
distribution of $22.9 million for the quarter ended December 31, 2001.

Future Capital Needs and Commitments

Capital expenditures for the year ended December 31, 2001, and
estimated capital expenditures, excluding acquisitions, for 2002 are described
in Items 1 and 2, Business and Properties under the caption "Capital
Expenditures." The Partnership continually reviews and evaluates potential
acquisitions, capital improvements and expansions and, to a more limited extent,
joint venture opportunities that would be complementary to its present business
segments. Should the Partnership elect to pursue any of these transactions, the
Partnership will likely need additional capital to fund the purchase price and
other capital improvements. These expenditures can vary greatly depending on the
magnitude of these transactions by the Partnership.

The Partnership's debt repayment obligations consist of payments for
principal and interest on (i) Senior Notes, $180 million principal amount due
January 15, 2008, and $210 million principal amount due January 15, 2028, and
(ii) $69.0 million principal amount due to the Parent Partnership related to the
Partnership's share of the Parent Partnership's Three Year Facility, due in
April 2004. Repayment of the long-term, senior unsecured obligations is expected
to be repaid through issuance of additional long-term senior unsecured debt at
the time the 2008 and 2028 debt matures, proceeds from dispositions of assets,
or any combination of the above items.

The Partnership is also contingently liable as guarantor for the lesser
of one-third or $50 million principal amount (plus interest) of the joint
venture borrowings of Centennial. The Partnership expects to contribute an
additional $4.9 million to Centennial in 2002. The Partnership is also
contingently liable as guarantor for $500 million 7.625% Senior Notes due 2012
issued in February 2002 by the Parent Partnership. The Partnership does not rely
on off-balance sheet borrowings to fund its acquisitions. Other than the
guarantee of Centennial debt, the Parent Partnership debt and leases covering
assets utilized in several areas of its operations, the Partnership has no
off-balance sheet commitments for indebtedness.

20

The following table summarizes the material contractual obligations of
the Partnership as of December 31, 2001 (in millions).

AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------

LESS THAN AFTER 5
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
------- --------- --------- --------- -------

Note payable, Parent Partnership ....... $ 149.8 $ 80.8 $ 69.0 $ -- $ --
6.45% Senior Notes due 2008 ............ 180.0 -- -- -- 180.0
7.51% Senior Notes due 2028 ............ 210.0 -- -- -- 210.0
Centennial cash contributions .......... 4.9 4.9 -- -- --
Operating leases ....................... 23.4 5.3 9.6 7.9 0.6
------- ------- ------- ------- -------
Total ................................ $ 568.1 $ 91.0 $ 78.6 $ 7.9 $ 390.6
======= ======= ======= ======= =======

Sources of Future Capital

The Partnership expects that its cash flow from operating activities
will be adequate to fund cash distributions and capital additions necessary to
maintain existing operations. However, expansionary capital projects and
acquisitions may require additional capital contributions from the Parent
Partnership. During the years ended December 31, 2001 and 2000, capital
contributions by the Parent Partnership totaled $24.0 million and $16.2 million,
respectively. No capital contributions were made by the Parent Partnership in
1999. The Parent Partnership has funded its capital commitments from operating
cash flow, borrowings under bank credit facilities, the issuance of long term
debt in capital markets and public offering of Limited Partner Units. The
Partnership expects future capital needs would be similarly funded.

On February 11, 2002, Moody's Investors Service assigned the Parent
Partnership a senior unsecured debt rating, including the rating on its 7.625%
Senior Notes, of Baa2 and confirmed the Baa2 senior unsecured rating of the
Partnership. Both ratings were given with negative outlooks due primarily to
Moody's concerns about current debt levels resulting from financing of the
Parent Partnership's recent acquisitions. Moody's indicated they may lower the
Parent Partnership's ratings if the Parent Partnership is not successful in
reducing its debt to target levels where the Parent Partnership's debt-to-EBITDA
ratio would be below 4 to 1. Generally, a subsidiary's credit rating will not be
higher than its parent. The Parent Partnership is evaluating alternatives to
lowering its debt-to-EBITDA ratio. Reductions in the Parent Partnership's credit
ratings could increase the debt financing costs and possibly reduce the
availability of financing to both the Partnership and the Parent Partnership. A
rating reflects only the view of a rating agency and is not a recommendation to
buy, sell or hold any indebtedness. Any rating can be revised upward or downward
or withdrawn at any time by a rating agency if it decides that the circumstances
warrant such a change.

OTHER CONSIDERATIONS

Credit Risks

Risks of nonpayment and nonperformance by customers are a major
consideration in the Partnership's businesses. The credit procedures and
policies of the Partnership may not fully eliminate customer credit risk.

Terrorist Threats

On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scale. Since the September 11 attacks, the United
States government has issued warnings that energy assets, specifically the
nation's pipeline infrastructure, could be a future target of terrorist
organizations. These developments have subjected the Partnership's operations to
increased risks. Any terrorist attack on the Partnership's facilities,

21

customers' facilities and, in some cases, those of other pipelines, could have a
material adverse effect on the Partnership's business. The Partnership has
increased security initiatives and is working with various governmental agencies
to minimize risks associated with additional terrorist attacks.

Environmental

The operations of the Partnership are subject to federal, state and
local laws and regulations relating to protection of the environment. Although
the Partnership believes its operations are in material compliance with
applicable environmental regulations, risks of significant costs and liabilities
are inherent in pipeline operations, and there can be no assurance that
significant costs and liabilities will not be incurred. Moreover, it is possible
that other developments, such as increasingly strict environmental laws and
regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations of the pipeline system, could
result in substantial costs and liabilities to the Partnership. The Partnership
does not anticipate that changes in environmental laws and regulations will have
a material adverse effect on its financial position, results of operations or
cash flows in the near term.

In 1994, the Partnership and the IDEM entered into an Agreed Order that
resulted in the implementation of a remediation program for groundwater
contamination attributable to the Partnership's operations at the Seymour,
Indiana, terminal. A Feasibility Study, which includes the Partnership's
proposed remediation program, was approved by IDEM in 1999. IDEM is expected to
issue a Record of Decision formally approving the remediation program. After the
Record of Decision is issued, the Partnership will enter into a subsequent
Agreed Order for the continued operation and maintenance of the remediation
program. The Partnership has an accrued liability of $0.6 million on December
31, 2001, for future remediation costs at the Seymour terminal. The Partnership
believes that the completion of the remediation program will not have a future
material adverse effect on its financial position, results of operations or cash
flows.

In 1994, the Partnership was issued a compliance order from the LDEQ
relative to environmental contamination at the Partnership's Arcadia, Louisiana,
facility. This contamination may be attributable to the operations of the
Partnership, as well as adjacent petroleum terminals operated by other
companies. In 1999, the Partnership's Arcadia facility and adjacent terminals
were directed by the Remediation Services Division of the LDEQ to pursue
remediation of this containment phase. The Partnership believes that the
completion of the remediation program that is proposed by the Partnership will
not have a future material adverse effect on its financial position, results of
operations or cash flows.

Market-Based Rates

On May 11, 1999, the Partnership filed an application with the FERC
requesting permission to charge Market-Based Rates for substantially all refined
products transportation tariffs. On July 31, 2000, the FERC issued an order
granting the Partnership Market-Based Rates in certain markets and set for
hearing the Partnership's application for Market-Based Rates in certain
destination markets and origin markets. After the matter was set for hearing,
the Partnership and the protesting shippers entered into a settlement agreement
resolving their respective differences. On April 25, 2001, the FERC issued an
order approving the offer of settlement. As a result of the settlement, the
Partnership recognized approximately $1.7 million of previously deferred
transportation revenue in the second quarter of 2001. As a part of the
settlement, the Partnership withdrew the application for Market-Based Rates to
the Little Rock, Arkansas, Arcadia and Shreveport-Arcadia, Louisiana,
destination markets, which are currently subject to the PPI Index. As a result,
the Partnership made refunds of approximately $1.0 million in the third quarter
of 2001 for those destination markets.

22

New Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the
purchase method of accounting be used for all business combinations and
specifies that certain acquired intangible assets be reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. SFAS 142 requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives. The Partnership adopted
SFAS 141 during 2001, and SFAS 142 effective January 1, 2002. The adoption of
SFAS 141 and SFAS 142 did not have a material effect on the financial position,
results of operations or cash flows of the Partnership.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires the Partnership to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that results from the acquisition, construction, development and/or
normal use of the assets. The Partnership also records a corresponding asset,
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Partnership is
required to adopt SFAS 143 effective January 1, 2003.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS No. 121,
Accounting for Long-Lived Assets and For Long-Lived Assets to be Disposed Of,
but retains its fundamental provisions for reorganizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale. The Partnership was required to adopt SFAS 144 effective January 1,
2002. The adoption of SFAS 144 did not have a material effect on the financial
position, results of operations or cash flows of the Partnership.

Disclosures About Effects of Transactions with Related Parties

The Partnership has no employees and is managed by TEPPCO GP, a
wholly-owned subsidiary of the Parent Partnership. The Parent Partnership is
managed by the Company, which is a wholly-owned subsidiary of DEFS. Duke Energy
holds an approximate 70% interest in DEFS and Phillips holds the remaining 30%.
See Item 10, Directors and Executive Officers of the Registrant and Item 13,
Certain Relationships and Related Transactions for discussion regarding
transactions between the Partnership, the Parent Partnership, DEFS, Duke Energy
and Phillips.

FORWARD-LOOKING STATEMENTS

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

23

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Partnership may be exposed to market risk through changes in
commodity prices and interest rates as discussed below. The Partnership has no
foreign exchange risks. Risk management policies have been established for the
Partnership by the Company's Risk Management Committee to monitor and control
these market risks. The Risk Management Committee is comprised, in part, of
senior executives of the Company.

The Partnership has utilized and expects to continue to utilize
derivative financial instruments with respect to a portion of its interest rate
and fair value risks. These transactions generally are swaps and are entered
into with major financial institutions. The derivative financial instrument
related to the Partnership's fair value risks is intended to reduce the
Partnership's exposure to changes in the fair value of the fixed rate Senior
Notes resulting from changes in interest rates. Gains and losses from its
interest rate financial instruments have been recognized in interest expense for
the periods to which the derivative financial instrument relate.

At December 31, 2001 and 2000, the Partnership had an intercompany note
payable of $149.8 million and $79.8 million, respectively, payable to the Parent
Partnership. At December 31, 2001, $80.8 million, included in current
liabilities, related to borrowings by the Partnership under the Parent
Partnership's Short-term Revolver. The Partnership's long-term portions at
December 31, 2001 and 2000, totaled $69.0 million and $79.8 million,
respectively, and represent borrowings by the Partnership under the Parent
Partnership's Three Year Facility. The interest rate on the note payable, Parent
Partnership at December 31, 2001 and 2000, was 5.05% and 10.3%, respectively. At
December 31, 2001 and 2000, accrued interest includes $0.4 million and $1.4
million, respectively, due the Parent Partnership. For the years ended December
31, 2001 and 2000, interest costs incurred on the note payable, Parent
Partnership totaled $7.8 million and $3.9 million, respectively. At December 31,
2001 and 2000, the carrying value of the intercompany note payable to the Parent
Partnership approximated its fair value.

As of December 31, 2001, the Partnership had in place an interest rate
swap agreement to hedge its exposure to changes in the fair value of its fixed
rate 7.51% Senior Notes due 2028. The swap agreement has a notional amount of
$210 million and matures in January 2028 to match the principal and maturity of
the Senior Notes. Under the swap agreement, the Partnership pays a floating rate
based on a three month U.S. Dollar LIBOR rate, plus a spread, and receives a
fixed rate of interest of 7.51%. During the year ended December 31, 2001, the
Partnership recognized a gain of $1.8 million, included as a component of
interest expense, on the interest rate swap. No gain or loss from
ineffectiveness was required to be recognized.

At December 31, 2001, the Partnership had outstanding $180 million
principal amount of 6.45% Senior Notes due 2008. At December 31, 2001, the
estimated fair value was approximately $172 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Partnership, together with
the independent auditors' report thereon of KPMG LLP, begin on page F-1 of this
Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

24

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Partnership does not have employees, officers or directors and is
managed by the General Partner, a wholly-owned subsidiary of the Parent
Partnership. The directors and officers of the General Partner are appointed
annually by the Parent Partnership by action of the board of directors of the
Company. The directors of the General Partner, TEPPCO GP, Inc., are William L.
Thacker, Barry R. Pearl and Charles H. Leonard. The Executive Officers of the
General Partner are also Executive Officers of the Company. Information
concerning the Executive Officers of the General Partner and the Company is
contained in Item 10 of the Parent Partnership Annual Report on Form 10-K for
the Year Ended December 31, 2001 (the "Parent Partnership Form 10-K"), and is
incorporated by reference in this Report.

ITEM 11. EXECUTIVE COMPENSATION

The Partnership does not have any employees, officers or directors. The
General Partner manages and operates the Partnership's business. The Executive
Officers of the General Partner are employees of the Company. Certain employees
of the General Partner may devote all or a portion of their time to the
Partnership. The Partnership reimburses the Company for the services of such
persons. The information contained in Item 11 of the Parent Partnership Form
10-K is incorporated by reference in this Report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Parent Partnership owns a 99.999% interest as the sole limited
partner interest and the General Partner owns a 0.001% general partner interest
in the Partnership. Information identifying security ownership of the Parent
Partnership is contained in Item 12 of the Parent Partnership Form 10-K and is
incorporated by reference in this Report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MANAGEMENT OF THE PARTNERSHIP

The Partnership has no employees and is managed by TEPPCO GP, a
wholly-owned subsidiary of the Parent Partnership. The Parent Partnership is
managed by the Company, which is a wholly-owned subsidiary of DEFS. Duke Energy
holds an approximate 70% interest in DEFS and Phillips holds the remaining 30%.
According to the Partnership Agreement, the General Partner and the Company are
entitled to reimbursement of all direct and indirect expenses related to
business activities of the Partnership.

For the years ended December 31, 2001, 2000, and 1999, direct expenses
incurred by the Company in the amount of $41.3 million, $39.6 million, and $38.8
million, respectively, were charged to the Partnership. Substantially all such
costs were related to payroll and payroll related expenses. For the years ended
December 31, 2001, 2000, and 1999, expenses for administrative service and
overhead allocated to the Partnership by Duke Energy and its affiliates amounted
to $0.5 million, $0.8 million, and $1.8 million, respectively.

TRANSACTIONS WITH DEFS

Effective with the purchase of the fractionation facilities on March
31, 1998, TEPPCO Colorado, LLC ("TEPPCO Colorado"), a wholly-owned subsidiary of
the Partnership, and DEFS entered into a 20-year Fractionation Agreement, under
which TEPPCO Colorado receives a variable fee for all fractionated volumes
delivered to DEFS. Revenues recognized from the fractionation facilities totaled
$7.4 million, $7.5 million and $7.3 million for the years ended December 31,
2001, 2000 and 1999, respectively. TEPPCO Colorado and DEFS also entered into an
Operation and Maintenance Agreement, whereby DEFS operates and maintains the
fractionation

25

facilities. For these services, TEPPCO Colorado pays DEFS a set volumetric rate
for all fractionated volumes delivered to DEFS. Expenses related to the
Operation and Maintenance Agreement totaled $0.9 million, $0.9 million and $0.8
million for the years ended December 31, 2001, 2000 and 1999, respectively.

Effective May 2001, the Partnership entered into an agreement with DEFS
to commit sole utilization of the Providence terminal to DEFS. The terminal is
operated by the Partnership. During the year ended December 31, 2001, DEFS paid
the Partnership $1.5 million pursuant to this agreement.

INTERESTS OF DUKE ENERGY IN THE PARENT PARTNERSHIP

In addition to its indirect ownership of the Company through its
approximately 70% interest in DEFS, Duke Energy also holds, through wholly-owned
subsidiaries, Limited Partner Units and Class B Units of the Parent Partnership.

In connection with the formation of the Parent Partnership in 1990, the
Company received 2,500,000 Deferred Partnership Interests ("DPIs"). Effective
April 1, 1994, all DPIs began participating in distributions of cash and
allocations of profit and loss in a manner identical to Limited Partner Units
and were converted into an equal number of Limited Partner Units. These Limited
Partner Units were assigned to Duke Energy when ownership of the Company was
transferred from Duke Energy to DEFS in 2000. Pursuant to its Partnership
Agreement, the Parent Partnership has registered the resale by Duke Energy of
such Limited Partner Units with the Securities and Exchange Commission. As of
December 31, 2001, no such Limited Partner Units had been sold by Duke Energy.

At December 31, 2001, Duke Energy also held 3,916,547 Class B Units of
the Parent Partnership. The Class B Units share in income and distributions on
the same basis as the Limited Partner Units, but they are not listed on the New
York Stock Exchange. The Class B Units may be converted into Limited Partner
Units upon approval by the unitholders of the Parent Partnership. The Company
has the option to seek approval for the conversion of the Class B Units into
Limited Partner Units; however, if the conversion is denied, Duke Energy, as
holder of the Class B Units, will have the right to sell them to the Parent
Partnership at 95.5% of the then current market price of the Limited Partner
Units.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this Report:

(1) Financial Statements: See Index to Financial Statements on
part page F-1 of this Report for financial statements filed
as of this Report.

(2) Financial Statement Schedules: None

(3) Exhibits:

Exhibit
Number Description
------ -----------

4.1 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

10.1+ 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).

10.2 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).

10.3+ 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).

10.4+ 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).

10.5+ 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).

10.6+ Duke Energy Corporation Executive Savings Plan (Filed as
Exhibit 10.7 to Form 10-K of TEPPCO Partners, L.P. (Commission
File No. 1-10403) for the year ended December 31, 1999 and
incorporated herein by reference).

10.7+ Duke Energy Corporation Executive Cash Balance Plan (Filed as
Exhibit 10.8 to Form 10-K of TEPPCO Partners, L.P. (Commission
File No. 1-10403) for the year ended December 31, 1999 and
incorporated herein by reference).

10.8+ Duke Energy Corporation Retirement Benefit Equalization Plan
(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,
1999 and incorporated herein by reference).

10.9+ 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).

10.10+ 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).

10.11+ 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).

10.12 Asset Purchase Agreement between Duke Energy Field Services,
Inc. and TEPPCO Colorado, LLC, dated March 31, 1998 (Filed as
Exhibit 10.14 to Form 10-Q of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the quarter ended March 31,
1998 and incorporated herein by reference).

10.13+ Form of Employment Agreement between the Company and Thomas R.
Harper, David L. Langley, Charles H. Leonard, James C. Ruth,
John N. Goodpasture, Leonard W. Mallett, Stephen W. Russell,
David E. Owen, and Barbara A. Carroll (Filed as Exhibit 10.20
to Form 10-K of TEPPCO Partners, L.P. (Commission File No.
1-10403) for the year ended December 31, 1998 and incorporated
herein by reference).

10.14+ Employment Agreement with Barry R. Pearl (Filed as Exhibit
10.30 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended March 31, 2001 and
incorporated herein by reference).

10.15 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).

27

10.16 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).

10.17 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).

10.18 Credit Agreement between TEPPCO Partners, L.P., SunTrust Bank,
and Certain Lenders, dated July 14, 2000 (Filed as Exhibit
10.31 to Form 10-Q of TEPPCO Partners, L.P. (Commission File
No. 1-10403) for the quarter ended June 30, 2000 and
incorporated herein by reference).

10.19+ Texas Eastern Products Pipeline Company, LLC 2000 Long Term
Incentive Plan, Amendment and Restatement, Effective January
1, 2000 (Filed as Exhibit 10.28 to Form 10-K of TEPPCO
Partners, L.P. (Commission File No. 1-10403) for the year
ended December 31, 2000 and incorporated herein by reference).

10.20+ TEPPCO Supplemental Benefit Plan, effective April 1, 2000
(Filed as Exhibit 10.29 to Form 10-K of TEPPCO Partners, L.P.
(Commission File No. 1-10403) for the year ended December 31,
2000 and incorporated herein by reference).

10.21+ Second Amended and Restated Agreement of Limited Partnership
of TE Products Pipeline Company, Limited Partnership,
effective September 30, 2001 (Filed as Exhibit 3.8 to Form
10-Q of TEPPCO Partners, L.P. (Commission File No. 1-10403)
for the quarter ended September 30, 2001, and incorporated
herein by reference).

-------------------------

+ A management contract or compensation plan or arrangement.

(b) Reports on Form 8-K filed during the quarter ended December 31,
2001:

None.

28

SIGNATURES

TE Products Pipeline Company, Limited Partnership, pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

TE Products Pipeline Company, Limited Partnership
-------------------------------------------------
(Registrant)
(A Delaware Limited Partnership)

By: TEPPCO GP, Inc.,
as General Partner

By: /s/ WILLIAM L. THACKER
----------------------
William L. Thacker,
Chief Executive Officer and Director

By: /s/ BARRY R. PEARL
------------------
Barry R. Pearl,
President, Chief Operating
Officer and Director

By: /s/ CHARLES H. LEONARD
----------------------
Charles H. Leonard,
Senior Vice President,
Chief Financial Officer, Treasurer,
Assistant Secretary and Director

Dated: March 26, 2002

29

CONSOLIDATED FINANCIAL STATEMENTS
OF TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

INDEX TO FINANCIAL STATEMENTS

F-1

INDEPENDENT AUDITORS' REPORT

To the Partners of
TE Products Pipeline Company, Limited Partnership:

We have audited the accompanying consolidated balance sheets of TE
Products Pipeline Company, Limited Partnership as of December 31, 2001 and 2000,
and the related consolidated statements of income, cash flows and partners'
capital for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TE Products
Pipeline Company, Limited Partnership as of December 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

KPMG LLP

Houston, Texas
January 17, 2002

F-2

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31,
----------------------
2001 2000
--------- ---------

ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 6,727 $ 15,702
Accounts receivable, trade ............................................. 22,816 26,182
Accounts receivable, related party ..................................... 7,386 --
Inventories ............................................................ 10,617 8,011
Other .................................................................. 11,069 4,220
--------- ---------
Total current assets ............................................. 58,615 54,115
--------- ---------
Property, plant and equipment, at cost (Net of accumulated depreciation
and amortization of $264,037 and $237,858).............................. 698,803 642,381
Equity investments ....................................................... 69,409 5,416
Intangible assets ........................................................ 31,099 33,014
Advances to Parent Partnership ........................................... 3,993 5,195
Other assets ............................................................. 17,915 15,386
--------- ---------
Total assets ..................................................... $ 879,834 $ 755,507
========= =========

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Note payable, Parent Partnership ....................................... $ 80,806 $ --
Accounts payable and accrued liabilities ............................... 18,994 12,177
Accounts payable, Texas Eastern Products Pipeline Company, LLC ......... 12,466 5,053
Accrued interest ....................................................... 12,977 13,947
Other accrued taxes .................................................... 5,647 6,565
Other .................................................................. 11,677 9,319
--------- ---------
Total current liabilities ........................................ 142,567 47,061
--------- ---------
Senior Notes ............................................................. 389,814 389,783
Note payable, Parent Partnership ......................................... 68,976 79,757
Other liabilities and deferred credits ................................... 8,365 3,991
Commitments and contingencies
Partners' capital:
General partner's interest ............................................. 3 2,383
Limited partner's interest ............................................. 270,109 232,532
--------- ---------
Total partners' capital .......................................... 270,112 234,915
--------- ---------
Total liabilities and partners' capital .......................... $ 879,834 $ 755,507
========= =========

See accompanying Notes to Consolidated Financial Statements.

F-3

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
--------- --------- ---------

Operating revenues:
Transportation -- refined products ...... $ 139,315 $ 119,331 $ 123,004
Transportation -- LPGs .................. 77,823 73,896 67,701
Mont Belvieu operations ................. 14,116 13,334 12,849
Other ................................... 40,373 30,126 26,716
--------- --------- ---------
Total operating revenues .......... 271,627 236,687 230,270
--------- --------- ---------

Costs and expenses:
Operating, general and administrative ... 79,150 77,041 74,124
Operating fuel and power ................ 33,401 32,200 29,864
Depreciation and amortization ........... 28,714 27,743 27,109
Taxes -- other than income taxes ........ 8,185 9,704 9,780
--------- --------- ---------
Total costs and expenses .......... 149,450 146,688 140,877
--------- --------- ---------
Operating income .................. 122,177 89,999 89,393
Interest expense .......................... (33,480) (35,132) (31,345)
Interest capitalized ...................... 3,537 4,559 2,133
Equity earnings ........................... (1,149) -- --
Other income -- net ....................... 1,611 1,888 1,671
--------- --------- ---------
Net income ........................ $ 92,696 $ 61,314 $ 61,852
========= ========= =========

See accompanying Notes to Consolidated Financial Statements.

F-4

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See accompanying Notes to Consolidated Financial Statements.

F-5

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)

GENERAL LIMITED
PARTNER'S PARTNER'S
INTEREST INTEREST TOTAL
--------- ---------- ---------

Partners' capital at December 31, 1998 ................ $ 2,306 $ 225,834 $ 228,140
1999 net income allocation .......................... 625 61,227 61,852
1999 cash distributions ............................. (622) (60,986) (61,608)
Option exercises, net of Unit repurchases ........... -- (155) (155)
-------- --------- ---------
Partners' capital at December 31, 1999 ................ 2,309 225,920 228,229
2000 net income allocation .......................... 619 60,695 61,314
2000 cash distributions ............................. (714) (70,053) (70,767)
Capital contributions ............................... 169 16,155 16,324
Option exercises, net of Unit repurchases ........... -- (185) (185)
-------- --------- ---------
Partners' capital at December 31, 2000 ................ 2,383 232,532 234,915
Ownership restructuring ............................. (2,601) 2,601 --
2001 net income allocation .......................... 614 92,082 92,696
2001 cash distributions ............................. (394) (80,520) (80,914)
Capital contributions ............................... 1 24,025 24,026
Option exercises, net of Unit repurchases ........... -- (611) (611)
-------- --------- ---------
Partners' capital at December 31, 2001 ................ $ 3 $ 270,109 $ 270,112
======== ========= =========

See accompanying Notes to Consolidated Financial Statements.

F-6

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. PARTNERSHIP ORGANIZATION

TE Products Pipeline Company, Limited Partnership (the "Partnership"),
a Delaware limited partnership, was formed in March 1990. TEPPCO Partners, L.P.
(the "Parent Partnership") owns a 99.999% interest as the sole limited partner.
TEPPCO GP, Inc. ("TEPPCO GP" or "General Partner"), a subsidiary of the Parent
Partnership, holds a 0.001% general partner interest in the Partnership. Texas
Eastern Products Pipeline Company, LLC (the "Company"), a Delaware limited
liability company, serves as the general partner of the Parent Partnership. The
Company is a wholly-owned subsidiary of Duke Energy Field Services ("DEFS"), a
joint venture between Duke Energy Corporation ("Duke Energy") and Phillips
Petroleum Company ("Phillips"). Duke Energy holds an approximate 70% interest in
DEFS and Phillips holds the remaining 30%. TEPPCO GP, as general partner,
performs all management and operating functions required for the Partnership
according to the Agreement of Limited Partnership of TE Products Pipeline
Company, Limited Partnership ("the Partnership Agreement"). The General Partner
and the Company are reimbursed by the Partnership for all reasonable direct and
indirect expenses incurred in managing the Partnership.

On July 26, 2001, the Company restructured its general partner
ownership of the Partnership to cause it to be wholly-owned by the Parent
Partnership. TEPPCO GP succeeded the Company as general partner of the
Partnership. All remaining partner interests in the Partnership not already
owned by the Parent Partnership were transferred to the Parent Partnership. In
exchange for this contribution, the Company's interest as general partner of the
Parent Partnership was increased to 2%. The increased percentage is the economic
equivalent of the aggregate interest that the Company had prior to the
restructuring through its combined interests in the Parent Partnership and the
Partnership. As a result, the Parent Partnership holds a 99.999% limited partner
interest in the Partnership and TEPPCO GP holds a 0.001% general partner
interest. References in this Report to the "General Partner" refer to the
Company prior to the restructuring and to TEPPCO GP, Inc. thereafter. This
reorganization was undertaken to simplify required financial reporting by the
Partnership when guarantees of Parent Partnership debt are issued by the
Partnership.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The financial statements include the accounts of the Partnership and
TEPPCO Colorado, LLC ("TEPPCO Colorado") on a consolidated basis. All
significant intercompany items have been eliminated in consolidation. Certain
amounts from prior years have been reclassified to conform to current
presentation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

F-7

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ENVIRONMENTAL EXPENDITURES

The Partnership accrues for environmental costs that relate to existing
conditions caused by past operations. Environmental costs include initial site
surveys and environmental studies of potentially contaminated sites, costs for
remediation and restoration of sites determined to be contaminated and ongoing
monitoring costs, as well as fines, damages and other costs, when estimable. The
balance of accrued undiscounted environmental liabilities are monitored on a
regular basis by management. Liabilities for environmental costs at a specific
site are initially recorded when the Partnership's liability for such costs,
including direct internal and legal costs, is probable and a reasonable estimate
of the associated costs can be made. Adjustments to initial estimates are
recorded, from time to time, to reflect changing circumstances and estimates
based upon additional information developed in subsequent periods. Estimates of
the Partnership's ultimate liabilities associated with environmental costs are
particularly difficult to make with certainty due to the number of variables
involved, including the early stage of investigation at certain sites, the
lengthy time frames required to complete remediation alternatives available and
the evolving nature of environmental laws and regulations.

BUSINESS SEGMENTS

The Partnership reports and operates in one business segment:
transportation, storage and terminaling of refined products, liquefied petroleum
gases ("LPGs") and petrochemicals. 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 and LPGs are referred to herein, collectively, as "petroleum products"
or "products."

REVENUE RECOGNITION

Revenues of the Partnership are derived from interstate and intrastate
transportation of petroleum products, storage and terminaling of petroleum
products, intrastate transportation of petrochemicals, fractionation of natural
gas liquids and other ancillary services. Transportation revenues are recognized
as products are delivered to customers. Storage revenues are recognized upon
receipt of products into storage and upon performance of storage services.
Terminaling revenues are recognized as products are out-loaded. Revenues from
the sale of product inventory are recognized when the products are sold.
Fractionation revenues are recognized ratably over the contract year as products
are delivered to DEFS.

USE OF DERIVATIVES

Effective January 1, 2001, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. These statements establish accounting and reporting standards
requiring that derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet at fair value as
either assets or liabilities. The accounting for changes in the fair value of a
derivative instrument depends on the intended use of the derivative and the
resulting designation, which is established at the inception of a derivative.
Special accounting for derivatives qualifying as fair value hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the statement of income. Hedge effectiveness is measured at least quarterly
based on the relative cumulative changes in fair value between the derivative
contract and the hedged item over time. Any change in fair value resulting from
ineffectiveness, as defined by SFAS 133, is recognized immediately in earnings.
The adoption of SFAS 133 and SFAS 138 had no impact on the Partnership.

F-8

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As of December 31, 2001, the Partnership had in place an interest rate
swap agreement to hedge its exposure to changes in the fair value of its fixed
rate 7.51% Senior Notes due 2028. The Partnership has designated this swap
agreement, which hedges exposure to changes in the fair value of the Senior
Notes, as a fair value hedge. The swap agreement has a notional amount of $210
million and matures in January 2028 to match the principal and maturity of the
Senior Notes. Under the swap agreement, the Partnership pays a floating rate
based on a three month U.S. Dollar LIBOR rate, plus a spread, and receives a
fixed rate of interest of 7.51%. Since this swap is designated as a fair value
hedge, the changes in fair value are recognized in current earnings. During the
year ended December 31, 2001, the Partnership recognized a gain of $1.8 million,
included as a component of interest expense, on the interest rate swap. No gain
or loss from ineffectiveness was required to be recognized.

By using derivative financial instruments to hedge exposures to changes
in the fair value of fixed rate Senior Notes, the Partnership exposes itself to
credit risk and market risk. Credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the fair value of a
derivative contract is positive, the counterparty owes the Partnership, which
creates credit risk for the Partnership. When the fair value of a derivative
contract is negative, the Partnership owes the counterparty and, therefore, it
does not possess credit risk. The Partnership minimizes the credit risk in
derivative instruments by entering into transactions with major financial
institutions. Market risk is the adverse effect on the value of a financial
instrument that results from a change in interest rates. The market risk
associated with interest-rate contracts is managed by establishing and
monitoring parameters that limit the type and degree of market risk that may be
undertaken.

INVENTORIES

Inventories consist primarily of petroleum products which are valued at
the lower of cost (weighted average cost method) or market. The Partnership
acquires and disposes of various products under exchange agreements. Receivables
and payables arising from these transactions are usually satisfied with products
rather than cash. The net balances of exchange receivables and payables are
valued at weighted average cost and included in inventories.

PROPERTY, PLANT AND EQUIPMENT

Additions to property, plant and equipment, including major
replacements or betterments, are recorded at cost. Replacements and renewals of
minor items of property are charged to maintenance expense. Depreciation expense
is computed on the straight-line method using rates based upon expected useful
lives of various classes of assets (ranging from 2% to 20% per annum). Upon sale
or retirement of properties regulated by the FERC, cost less salvage is normally
charged to accumulated depreciation, and no gain or loss is recognized.

Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.

F-9

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

CAPITALIZATION OF INTEREST

The Partnership capitalizes interest on borrowed funds related to
capital projects only for periods that activities are in progress to bring these
projects to their intended use. The weighted average rate used to capitalize
interest on borrowed funds was 6.36%, 7.45% and 7.01% for 2001, 2000 and 1999,
respectively. During the years ended December 31, 2001, 2000 and 1999, the
amount of interest capitalized was $3.5 million, $4.6 million and $2.1 million,
respectively.

INTANGIBLE ASSETS

Intangible assets at December 31, 2001, consist primarily of the
fractionation agreement with DEFS. The fractionation agreement with DEFS was
entered into in 1998 and is being amortized over a period of 20 years. At
December 31, 2001, the unamortized balance of this agreement was $30.9 million.
(See Note 3. Related Party Transactions.)

INCOME TAXES

The Partnership is a limited partnership. As a result, the
Partnership's income or loss for federal income tax purposes is included in the
tax return of the individual partners, and may vary substantially from income or
loss reported for financial reporting purposes. Accordingly, no recognition has
been given to federal income taxes for the Partnership's operations.

CASH FLOWS

For purposes of reporting cash flows, all liquid investments with
maturities at date of purchase of 90-days or less are considered cash
equivalents.

UNIT OPTION PLAN

The Partnership follows the intrinsic value based method of accounting
for its stock-based compensation plans (see Note 10. Unit Option Plan). Under
this method, the Partnership records no compensation expense for unit options
granted when the exercise price of options granted is equal to the fair market
value of the Limited Partner Units on the date of grant.

COMPREHENSIVE INCOME

SFAS 130, Reporting Comprehensive Income requires certain items such as
foreign currency translation adjustments, minimum pension liability adjustments
and unrealized gains and losses on certain investments to be reported in a
financial statement. For the years ended December 31, 2001, 2000, and 1999, the
Partnership's comprehensive income equaled its reported net income.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS 141 requires that the purchase method of accounting be
used for all business combinations and specifies that certain acquired
intangible assets be reported apart from goodwill. SFAS 142 requires that
goodwill and intangible assets

F-10

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. SFAS 142 requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives.
At December 31, 2001, the Partnership had no unamortized goodwill. The
Partnership adopted SFAS 141 during 2001, and SFAS 142 effective January 1,
2002. The adoption of SFAS 141 and 142 did not have a material effect on the
financial position, results of operations or cash flows of the Partnership.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires the Partnership to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that results from the acquisition, construction, development and/or
normal use of the assets. The Partnership also records a corresponding asset,
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Partnership is
required to adopt SFAS 143 effective January 1, 2003.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS No. 121,
Accounting for Long-Lived Assets and For Long-Lived Assets to be Disposed Of,
but retains its fundamental provisions for reorganizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale. The Partnership was required to adopt SFAS 144 effective January 1,
2002. The adoption of SFAS 144 did not have a material effect on the financial
position, results of operations or cash flows of the Partnership.

NOTE 3. RELATED PARTY TRANSACTIONS

The Partnership has no employees and is managed by TEPPCO GP, a
wholly-owned subsidiary of the Parent Partnership. The Parent Partnership is
managed by the Company, which is a wholly-owned subsidiary of DEFS. Duke Energy
holds an approximate 70% interest in DEFS and Phillips holds the remaining 30%.
According to the Partnership Agreement, the General Partner and the Company are
entitled to reimbursement of all direct and indirect expenses related to
business activities of the Partnership (see Note 1. Partnership Organization).

For the years ended December 31, 2001, 2000, and 1999, direct expenses
incurred by the General Partner and the Company in the amount of $41.3 million,
$39.6 million, and $38.8 million, respectively, were charged to the Partnership.
Substantially all such costs were related to payroll and payroll related
expenses. For the years ended December 31, 2001, 2000, and 1999, expenses for
administrative service and overhead allocated to the Partnership by the Company
(including Duke Energy and its affiliates) amounted to $0.5 million, $0.8
million, and $1.8 million, respectively.

Effective with the purchase of the fractionation facilities on March
31, 1998, TEPPCO Colorado and DEFS entered into a 20-year Fractionation
Agreement, under which TEPPCO Colorado receives a variable fee for all
fractionated volumes delivered to DEFS. Revenues recognized from the
fractionation facilities totaled $7.4 million, $7.5 million and $7.3 million for
the years ended December 31, 2001, 2000 and 1999, respectively. TEPPCO Colorado
and DEFS also entered into an Operation and Maintenance Agreement, whereby DEFS
operates and maintains the fractionation facilities. For these services, TEPPCO
Colorado pays DEFS a set volumetric rate for all fractionated volumes delivered
to DEFS. Expenses related to the Operation and Maintenance Agreement totaled
$0.9 million, $0.9 million and $0.8 million for the years ended December 31,
2001, 2000 and 1999, respectively.

F-11

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Effective May 2001, the Partnership entered into an agreement with DEFS
to commit sole utilization of the Providence terminal to DEFS. The terminal is
operated by the Partnership. During the year ended December 31, 2001, DEFS paid
the Partnership $1.5 million pursuant to this agreement.

NOTE 4. EQUITY INVESTMENTS

In August 2000, the Partnership entered into agreements with CMS Energy
Corporation and Marathon Ashland Petroleum LLC to form Centennial Pipeline, LLC
("Centennial"). Centennial owns and operates an interstate refined petroleum
products pipeline extending from the upper Texas Gulf Coast to Illinois. Each
participant owns a one-third interest in Centennial. During 2001 and 2000, the
Partnership contributed approximately $65.0 million and $5.0 million,
respectively, for its investment in Centennial. Such amounts are included in the
equity investment balance at December 31, 2001 and 2000.

The Partnership uses the equity method of accounting for its investment
in Centennial. Summarized financial information for Centennial as of and for the
year ended December 31, 2001, is presented below (in thousands):

Current assets ............................ $ 26,849
Noncurrent assets.......................... 253,792
Current liabilities........................ 23,405
Long-term debt............................. 128,000
Partners' capital.......................... 129,236
Net loss................................... (3,077)

NOTE 5. INVENTORIES

Inventories are valued at the lower of cost (based on weighted average
cost method) or market. The major components of inventories were as follows:

DECEMBER 31,
-----------------------
2001 2000
-------- -------
(IN THOUSANDS)

Gasolines.................................... $ 4,548 $ 3,795
Propane...................................... 1,096 --
Butanes...................................... 1,431 267
Other products............................... 23 637
Materials and supplies....................... 3,519 3,312
-------- -------
Total............................. $ 10,617 $ 8,011
======== =======

The costs of inventories did not exceed market values at December 31,
2001 and 2000.

F-12

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 6. PROPERTY, PLANT AND EQUIPMENT

Major categories of property, plant and equipment were as follows:

DECEMBER 31,
-------------------------
2001 2000
--------- ---------
(IN THOUSANDS)

Land and right of way...................................... $ 33,838 $ 33,838
Line pipe and fittings..................................... 537,176 526,431
Storage tanks.............................................. 106,001 102,343
Buildings and improvements................................. 8,547 7,652
Machinery and equipment.................................... 183,053 161,697
Construction work in progress.............................. 94,225 48,278
--------- ---------
Total property, plant and equipment................. $ 962,840 $ 880,239
Less accumulated depreciation and amortization...... 264,037 237,858
--------- ---------
Net property, plant and equipment................ $ 698,803 $ 642,381
========= =========

Depreciation expense on property, plant and equipment was $26.8
million, $25.8 million and $25.2 million for the years ended December 31, 2001,
2000 and 1999, respectively.

NOTE 7. LONG TERM DEBT

SENIOR NOTES

On January 27, 1998, the Partnership 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 were issued at a discount and are being accreted
to their face value over the term of the 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, issued at par, may be redeemed at any time after January 15, 2008, at
the option of the Partnership, 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 Partnership and
rank on a parity with all other unsecured and unsubordinated indebtedness of the
Partnership. The indenture governing the Senior Notes contains covenants,
including, but not limited to, covenants limiting the creation of liens securing
indebtedness and sale and leaseback transactions. However, the indenture does
not limit the Partnership's ability to incur additional indebtedness. As of
December 31, 2001, the Partnership was in compliance with the covenants of the
Senior Notes.

On October 4, 2001, the Partnership entered into an interest rate swap
agreement to hedge its exposure to changes in the fair value of its $210 million
principal amount of 7.51% fixed rate Senior Notes. The swap agreement has a
notional amount of $210 million and matures in January 2028 to match the
principal and maturity of the Senior Notes. Under the swap agreement, the
Partnership pays a floating rate based on a three month U.S. Dollar LIBOR rate,
plus a spread, and receives a fixed rate of interest of 7.51%.

F-13

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

At December 31, 2001 and 2000, the estimated fair value of the Senior
Notes was approximately $362 million and $385 million, respectively. Market
prices for recent transactions and rates currently available to the Partnership
for debt with similar terms and maturities were used to estimate fair value.

OTHER LONG TERM DEBT AND CREDIT FACILITIES

In connection with the purchase of the fractionation assets from DEFS
as of March 31, 1998, TEPPCO Colorado received a $38 million bank loan. The
interest rate on this loan was 6.53%, which was 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.

On May 17, 1999, the Partnership 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. This loan
was refinanced by the Partnership on July 21, 2000, through the credit facility
discussed below.

On May 17, 1999, the Partnership entered into a five-year $25 million
revolving credit agreement. The credit facility was terminated in connection
with the refinancing on July 21, 2000 discussed below. The Partnership did not
make any borrowings under this revolving credit facility.

The Partnership currently utilizes debt financing available from the
Parent Partnership through intercompany notes. The terms of the intercompany
notes generally match the principal and interest payment dates under the Parent
Partnership's credit agreements. The interest rates charged by the Parent
Partnership include the stated interest rate of the Parent Partnership, plus a
premium to cover debt issuance costs. The interest rate is also decreased or
increased to cover gains and losses, respectively, on any interest rate swaps
that the Parent Partnership may have in place on the respective credit
agreements. These credit facilities of the Parent Partnership are described
below.

In July 2000, the Parent Partnership entered into a $75 million term
loan and a $475 million revolving credit facility ("Three Year Facility") and
borrowed $75 million and $340 million, respectively, to refinance existing bank
credit facilities and to finance the acquisition of assets from ARCO Pipe Line
Company, a wholly-owned subsidiary of Atlantic Richfield Company for $322.6
million. The acquired assets are held through TCTM, L.P., a 99.999% owned entity
of the Parent Partnership. The term loan was repaid by the Parent Partnership on
October 25, 2000. In April 2001, the Three Year Facility was amended to provide
for revolving borrowings of up to $500 million including the issuance of letters
of credit of up to $20 million. The term of the revised Three Year Facility was
extended to April 6, 2004. The interest rate is based on the Parent
Partnership's option of either the lender's base rate plus a spread, or LIBOR
plus a spread in effect at the time of the borrowings. The credit agreement for
the Three Year Facility contains restrictive financial covenants that require
the Parent Partnership to maintain a minimum level of partners' capital as well
as maximum debt-to-EBITDA (earnings before interest expense, income tax expense
and depreciation and amortization expense) and minimum fixed charge coverage
ratios.

In April 2001, the Parent Partnership entered into a 364-day, $200
million revolving credit agreement ("Short-term Revolver"). The interest rate is
based on the Parent Partnership's option of either the lender's base rate plus a
spread, or LIBOR plus a spread in effect at the time of the borrowings. The
credit agreement contains restrictive financial covenants that require the
Parent Partnership to maintain a minimum level of partners' capital as well as
maximum debt-to-EBITDA and minimum fixed charge coverage ratios. The Parent
Partnership has requested an extension of the Short-term Revolver for an
additional period of 364 days, commencing on the current termination date in
April 2002. Extension of the Short-term Revolver is expected prior to the
termination date.

F-14

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

On September 28, 2001, the Three Year Facility and the Short-term
Revolver were amended to extend to December 31, 2001, the time period for the
maximum debt-to-EBITDA ratio covenant to allow for the additional debt incurred
by the Parent Partnership for the acquisition of Jonah Gas Gathering Company
("Jonah") from Alberta Energy Corporation for $359.8 million. The Jonah assets
are held through TEPPCO Midstream, L.P., a 99.999% owned entity of the Parent
Partnership. On November 13, 2001, the Three Year Facility and the Short-term
Revolver were further amended to require prepayment of outstanding borrowings
only upon the receipt of net cash proceeds from asset dispositions or from
insurance proceeds in accordance with the terms of the respective agreements. At
such time, certain lenders under the agreements elected to withdraw from the
facilities, and the available borrowing capacities were reduced.

At December 31, 2001 and 2000, the Partnership had an intercompany note
payable of $149.8 million and $79.8 million, respectively, payable to the Parent
Partnership. At December 31, 2001, $80.8 million, included in current
liabilities, related to borrowings by the Partnership under the Parent
Partnership's Short-term Revolver described above. The Partnership's long-term
portions at December 31, 2001 and 2000, totaled $69.0 million and $79.8 million,
respectively, and represent borrowings by the Partnership under the Parent
Partnership's Three Year Facility described above. The interest rate on the note
payable, Parent Partnership at December 31, 2001 and 2000, was 5.05% and 10.3%,
respectively. At December 31, 2001 and 2000, accrued interest includes $0.4
million and $1.4 million, respectively, due the Parent Partnership. For the
years ended December 31, 2001 and 2000, interest costs incurred on the note
payable, Parent Partnership totaled $7.8 million and $3.9 million, respectively.
At December 31, 2001 and 2000, the carrying value of the intercompany note
payable to the Parent Partnership approximated its fair value.

NOTE 8. CONCENTRATIONS OF CREDIT RISK

The Partnership's primary market areas are located in the Northeast,
Midwest and Southwest regions of the United States. The Partnership has a
concentration of trade receivable balances due from major integrated oil
companies, independent oil companies and other pipelines and wholesalers. These
concentrations of customers may affect the Partnership's overall credit risk in
that the customers may be similarly affected by changes in economic, regulatory
or other factors. The Partnership's customers' historical and future credit
positions are thoroughly analyzed prior to extending credit. The Partnership
manages its exposure to credit risk through credit analysis, credit approvals,
credit limits and monitoring procedures, and for certain transactions may
utilize letters of credit, prepayments and guarantees.

The carrying amount of cash and cash equivalents, accounts receivable,
trade, inventories, other current assets, accounts payable and accrued
liabilities, other current liabilities and notes payable approximates their fair
value due to their short-term nature.

NOTE 9. QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

The Partnership makes quarterly cash distributions of all of its
available cash, generally defined as consolidated cash receipts less
consolidated cash disbursements and cash reserves established by the general
partner in its sole discretion. Prior to the restructuring of the General
Partner interest on July 26, 2001, distributions were paid 98.9899% to the
Parent Partnership and 1.0101% to the Company. Subsequent to July 26, 2001,
distributions are made 99.999% to the Parent Partnership and 0.001% to the
General Partner.

F-15

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

For the years ended December 31, 2001, 2000 and 1999, cash
distributions totaled $80.9 million, $70.8 million, and $61.6 million,
respectively. The distribution increases reflect the Partnership's success in
improving cash flow levels. On February 8, 2002, the Partnership paid a cash
distribution of $22.9 million for the quarter ended December 31, 2001.

NOTE 10. UNIT OPTION PLAN

During 1994, the Company adopted the Texas Eastern Products Pipeline
Company 1994 Long Term Incentive Plan ("1994 LTIP"). The 1994 LTIP provides key
employees with an incentive award whereby a participant is granted an option to
purchase Limited Partner Units together with a stipulated number of Performance
Units. Under the provisions of the 1994 LTIP, no more than one million options
and two million Performance Units may be granted. Each Performance Unit creates
a credit to a participant's Performance Unit account when earnings of the Parent
Partnership exceed a threshold. When earnings of the Parent Partnership for a
calendar year (exclusive of certain special items) exceed the threshold, the
excess amount is credited to the participant's Performance Unit account. The
balance in the account may be used to exercise Limited Partner Unit options
granted in connection with the Performance Units or may be withdrawn two years
after the underlying options expire, usually 10 years from the date of grant.
Under the agreement for such Limited Partner Unit options, the options become
exercisable in equal installments over periods of one, two, and three years from
the date of the grant. Options may also be exercised by normal means once
vesting requirements are met. A summary of Performance Units and Limited Partner
Unit options granted under the terms of the 1994 LTIP is presented below:

OPTIONS OPTIONS EXERCISE
OUTSTANDING EXERCISABLE RANGE
----------- ----------- ---------------

Limited Partner Unit Options:
Outstanding at December 31, 1998......... 190,796 72,359 $13.81 - $21.66
Granted............................... 162,000 -- $25.25
Became exercisable.................... -- 40,737 $21.66 - $25.69
Exercised............................. (14,000) (14,000) $13.81 - $14.34
-------- --------
Outstanding at December 31, 1999......... 338,796 99,096 $13.81 - $25.69
Forfeited............................. (28,000) (4,000) $25.25 - $25.69
Became exercisable.................... -- 85,365 $21.66 - $25.69
Exercised............................. (19,932) (19,932) $13.81 - $14.34
-------- --------
Outstanding at December 31, 2000......... 290,864 160,529 $13.81 - $25.69
Forfeited............................. (10,666) -- $25.25
Became exercisable.................... -- 81,669 $25.25 - $25.69
Exercised............................. (98,376) (98,376) $13.81 - $25.69
-------- --------
Outstanding at December 31, 2001......... 181,822 143,822 $13.81 - $25.69
======== ========

As discussed in Note 2, the Partnership uses the intrinsic value method
for recognizing stock-based compensation expense. The exercise price of all
options awarded under the 1994 LTIP equaled the market price of the Parent
Partnership's Limited Partner Units on the date of grant. Accordingly, no

F-16

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

compensation expense was recognized at the date of grant. Had compensation
expense been determined consistent with SFAS No. 123, Accounting for Stock-Based
Compensation, compensation expense related to option grants would have totaled
$226,152, $202,634 and $99,076 during 1999, 2000 and 2001, respectively. The
disclosures as required by SFAS 123 are not representative of the effects on pro
forma net income for future years as options vest over several years and
additional awards may be granted in subsequent years.

For purposes of determining compensation costs using the provisions of
SFAS 123, the fair value of 1999 option grants were determined using the
Black-Scholes option-valuation model. The key input variables used in valuing
the options were:

NOTE 11. LEASES

The Partnership utilizes leased assets in several areas of its
operations. Total rental expense during 2001, 2000, and 1999 was $7.1 million,
$6.3 million and $6.0 million, respectively. The minimum rental payments under
the Partnership's various operating leases for the years 2002 through 2006 are
$5.3 million, $5.0 million, $4.6 million, $4.3 million and $3.6 million,
respectively. Thereafter, payments aggregate $0.6 million through 2007.

NOTE 12. EMPLOYEE BENEFITS

RETIREMENT PLANS

Prior to the transfer of the General Partner interest from Duke Energy
to DEFS on April 1, 2000, the Company's employees participated in the Duke
Energy Retirement Cash Balance Plan ("Duke Energy RCBP"), which is a
noncontributory, trustee-administered pension plan. In addition, certain
executive officers participated in the Duke Energy Executive Cash Balance Plan
("Duke Energy ECBP"), which is a noncontributory, nonqualified, defined benefit
retirement plan. The Duke Energy ECBP was established to restore benefit
reductions caused by the maximum benefit limitations that apply to qualified
plans. Effective January 1, 1999, the benefit formula for all eligible employees
was a cash balance formula. Under a cash balance formula, a plan participant
accumulates a retirement benefit based upon pay credits and current interest
credits. The pay credits are based on a participant's salary, age, and service.
As part of the change in ownership, the Company is no longer responsible for the
funding of the liabilities associated with these plans.

Effective April 1, 2000, the Company adopted the TEPPCO Retirement Cash
Balance Plan ("TEPPCO RCBP") and the TEPPCO Supplemental Benefit Plan ("TEPPCO
SBP"). The benefits and provisions of these plans are substantially identical to
the Duke Energy RCBP and the Duke Energy ECBP previously in effect prior to
April 1, 2000.

F-17

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The components of net pension benefits costs allocated to the
Partnership for the TEPPCO RCBP and the TEPPCO SBP for the years ended December
31, 2001 and 2000, and for the Duke Energy RCBP and the Duke Energy ECBP for the
years ended December 31, 2000 and 1999 were as follows (in thousands):

2001 2000 1999
------- ------- -------

Service cost benefit earned during the year...... $ 1,833 $ 1,630 $ 1,408
Interest cost on projected benefit obligation.... 100 764 2,622
Expected return on plan assets................... (128) (640) (2,170)
Amortization of prior service cost............... 8 -- --
Amortization of net transition liability......... -- 4 17
Recognized net actuarial loss ................... -- -- 286
------- ------- -------
Net pension benefits costs................... $ 1,813 $ 1,758 $ 2,163
======= ======= =======

OTHER POSTRETIREMENT BENEFITS

Prior to April 1, 2000, the Company's employees were provided with
certain health care and life insurance benefits for retired employees on a
contributory and non-contributory basis through Duke Energy ("Duke Energy OPB").
Employees became eligible for these benefits if they had met certain age and
service requirements at retirement, as defined in the plans. As part of the
change in ownership, the Company is no longer responsible for the funding of the
liabilities associated with these plans. Effective January 1, 2001, the Company
provided its own plan for health care benefits for retired employees ("TEPPCO
OPB").

The Company provides a fixed dollar contribution towards retired
employee medical costs. The fixed dollar contribution does not increase from
year to year. The retiree pays all health care cost increases due to medical
inflation.

The components of net postretirement benefits cost allocated to the
Partnership for the Duke Energy OPB for the years ended December 31, 2000 and
1999, and for the TEPPCO OPB for the year ended December 31, 2001, were as
follows (in thousands):

F-18

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The weighted average assumptions used in the actuarial computations for
the retirement plans and other postretirement benefit plans for the years ended
December 31, 2001 and 2000 are as follows:

The following table sets forth the Company's pension and other
postretirement benefits changes in benefit obligation, fair value of plan assets
and funded status as of December 31, 2001 and 2000.

OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------ ----------------------
2001 2000 2001 2000(1)
--------- --------- --------- -------

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............ $ 1,144 $ -- $ -- $ --
Service cost....................................... 1,833 1,144 72 --
Interest cost...................................... 100 (1) 100 --
Plan amendments.................................... 62 -- 1,336 --
Actuarial (gain)/loss.............................. (88) 1 52 --
Retiree contributions.............................. -- -- 7 --
Benefits paid...................................... (151) -- (4) --
--------- --------- --------- ------
Benefit obligation at end of year.................. $ 2,900 $ 1,144 $ 1,563 $ --
========= ========= ========= ======

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year..... $ -- $ -- $ -- $ --
Actual return on plan assets....................... (29) -- -- --
Retiree contributions.............................. -- -- 7 --
Employer contributions............................. 3,221 -- (3) --
Benefits paid...................................... (151) -- (4) --
--------- --------- --------- ------
Fair value of plan assets at end of year........... $ 3,041 $ -- $ -- $ --
========= ========= ========= ======

RECONCILIATION OF FUNDED STATUS
Funded status...................................... $ 141 $ (1,144) $ (1,563) $ --
Unrecognized prior service cost.................... 54 -- 1,224 --
Unrecognized actuarial loss........................ 69 -- 52 --
--------- --------- --------- ------
Net amount recognized.............................. $ 264 $ (1,144) $ (287) $ --
========= ========= ========= ======

- ----------------------

(1) The TEPPCO OPB became effective on January 1, 2001.

F-19

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

OTHER PLANS

Duke Energy also sponsors an employee savings plan, which covers
substantially all employees. Plan contributions on behalf of the Company of $2.1
million, $1.6 million and $1.6 million were expensed in 2001, 2000 and 1999,
respectively.

NOTE 13. COMMITMENTS AND CONTINGENCIES

In the fall of 1999 and on December 1, 2000, the Company and the
Partnership were named as defendants in two separate lawsuits in Jackson County
Circuit Court, Jackson County, Indiana, in Ryan E. McCleery and Marcia S.
McCleery, et. al. v. Texas Eastern Corporation, et. al. (including the Company
and Partnership) and Gilbert Richards and Jean Richards v. Texas Eastern
Corporation, et. al. (including the Company and Partnership). In both cases, the
plaintiffs contend, among other things, that the Company and other defendants
stored and disposed of toxic and hazardous substances and hazardous wastes in a
manner that caused the materials to be released into the air, soil and water.
They further contend that the release caused damages to the plaintiffs. In their
complaints, the plaintiffs allege strict liability for both personal injury and
property damage together with gross negligence, continuing nuisance, trespass,
criminal mischief and loss of consortium. The plaintiffs are seeking
compensatory, punitive and treble damages. The Company has filed an answer to
both complaints, denying the allegations, as well as various other motions.
These cases are in the early stages of discovery and are not covered by
insurance. The Company is defending itself vigorously against the lawsuits. The
plaintiffs have not stipulated the amount of damages that they are seeking in
the suit. The Partnership cannot estimate the loss, if any, associated with
these pending lawsuits.

On December 21, 2001, the Partnership was named as a defendant in a
lawsuit in the 10th Judicial District, Natchitoches Parish, Louisiana, in
Rebecca L. Grisham et. al. v. TE Products Pipeline Company, Limited Partnership.
In this case, the plaintiffs contend that the defendant's pipeline, which
crosses the plaintiff's property, leaked toxic products onto the plaintiff's
property. The plaintiffs further contend that this leak caused damages to the
plaintiffs. The Partnership has filed an answer to the plaintiff's petition
denying the allegations. The plaintiffs have not stipulated the amount of
damages they are seeking in the suit. The Partnership is defending itself
vigorously against the lawsuit. The Partnership cannot estimate the damages, if
any, associated with this pending lawsuit, however, this case is covered by
insurance.

In addition to the litigation discussed above, the Partnership has
been, in the ordinary course of business, a defendant in various lawsuits and a
party to various other legal proceedings, some of which are covered in whole or
in part by insurance. The Partnership believes that the outcome of such lawsuits
and other proceedings will not individually or in the aggregate have a material
adverse effect on its consolidated financial position, results of operations or
cash flows.

The operations of the Partnership are subject to federal, state and
local laws and regulations governing the discharge of materials into the
environment otherwise relating to environmental protection. Failure to comply
with these laws and regulations may result in the assessment of administrative,
civil, and criminal penalties, imposition of injunctions delaying or prohibiting
certain activities, and the need to perform investigatory and remedial
activities. Although the Partnership believes its operations are in material
compliance with applicable environmental laws and 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 its operations, could
result in substantial costs and liabilities to the Partnership. The Partnership
does not anticipate that changes in environmental laws and regulations will have
a material adverse effect on its financial position, results of operations or
cash flows in the near term.

F-20

TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In 1994, the Partnership and the Indiana Department of Environmental
Management ("IDEM") entered into an Agreed Order that resulted in the
implementation of a remediation program for groundwater contamination
attributable to the Partnership's operations at the Seymour, Indiana, terminal.
A Feasibility Study, which includes the Partnership's proposed remediation
program, was approved by IDEM in 1999. IDEM is expected to issue a Record of
Decision formally approving the remediation program. After the Record of
Decision is issued, the Partnership will enter into a subsequent Agreed Order
for the continued operation and maintenance of the remediation program. The
Partnership has an accrued liability of $0.6 million at December 31, 2001, for
future remediation costs at the Seymour terminal. The Partnership believes that
the completion of the remediation program will not have a material adverse
effect on its financial position, results of operations or cash flows.

In 1994, the Partnership was issued a compliance order from the
Louisiana Department of Environmental Quality ("LDEQ") relative to environmental
contamination at the Partnership's Arcadia, Louisiana, facility. This
contamination may be attributable to the operations of the Partnership, as well
as adjacent petroleum terminals operated by other companies. In 1999, the
Partnership's Arcadia facility and the adjacent terminals were directed by the
Remediation Services Division of the LDEQ to pursue remediation of this
containment phase. The Partnership believes that the completion of the
remediation program that is proposed by the Partnership will not have a future
material adverse effect on its financial position, results of operations or cash
flows.

Rates of interstate oil pipeline companies, like the Partnership, are
currently regulated by the FERC, primarily through an index methodology, whereby
a pipeline 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").

On May 11, 1999, the Partnership filed an application with the FERC
requesting permission to charge Market-Based Rates for substantially all refined
products transportation tariffs. On July 31, 2000, the FERC issued an order
granting the Partnership Market-Based Rates in certain markets and set for
hearing the Partnership's application for Market-Based Rates in certain
destination markets and origin markets. After the matter was set for hearing,
the Partnership and the protesting shippers entered into a settlement agreement
resolving their respective differences. On April 25, 2001, the FERC issued an
order approving the offer of settlement. As a result of the settlement, the
Partnership recognized approximately $1.7 million of previously deferred
transportation revenue in the second quarter of 2001. As a part of the
settlement, the Partnership withdrew the application for Market-Based Rates to
the Little Rock, Arkansas, Arcadia and Shreveport-Arcadia, Louisiana,
destination markets, which are currently subject to the PPI Index. As a result,
the Partnership made refunds of approximately $1.0 million in the third quarter
of 2001 for those destination markets.

Centennial has entered into credit facilities totaling $150 million.
The proceeds were used to fund construction and conversion costs of its pipeline
system. The Partnership has guaranteed one-third of the debt of Centennial up to
a maximum amount of $50 million.

Substantially all of the petroleum products transported and stored by
the Partnership are owned by the Partnership's customers. At December 31, 2001,
the Partnership had approximately 19.7 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.

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TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

NOTE 15. SUBSEQUENT EVENT

On February 20, 2002, the Parent Partnership issued $500 million
principal amount of 7.625% Senior Notes due 2012. The Partnership and the Parent
Partnership's other significant operating subsidiaries, which include TCTM,
L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company, issued
guarantees of this debt. The guarantees are full, unconditional and joint and
several. The proceeds from the offering were used to reduce the outstanding
balances of the Parent Partnership's credit facilities.

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