EXHIBIT 99.3

CONSOLIDATED FINANCIAL STATEMENTS
OF TEPPCO PARTNERS, L.P.

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE

<Table>
<Caption>
PAGE

Financial Statements:

Independent Auditors' Report.................................................................... F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001.................................... F-3

Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000.......... F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000...... F-5

Consolidated Statements of Partners' Capital for the years ended December 31, 2002,

2001 and 2000................................................................................ F-6

Notes to Consolidated Financial Statements....................................................... F-7

Supplemental Schedule:

Independent Auditors' Report on Consolidated Financial Statement Schedule....................... S-1

Schedule II - Valuation and Qualifying Accounts and Reserves.................................... S-2
</Table>

F-1

INDEPENDENT AUDITORS' REPORT

To the Partners of
TEPPCO Partners, L.P.:

We have audited the accompanying consolidated balance sheets of TEPPCO
Partners, L.P. as of December 31, 2002 and 2001, and the related consolidated
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 2002. 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 TEPPCO
Partners, L.P. as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.

As described in Note 2 to the consolidated financial statements, as of
January 1, 2001, the Partnership changed its method of accounting for derivative
instruments and hedging activities and, effective January 1, 2002, adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.

KPMG LLP

Houston, Texas
January 22, 2003, except as
to Note 22, which is as of
February 10, 2003

F-2

TEPPCO PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<Table>
<Caption>
DECEMBER 31,
-------------------------------
2002 2001
------------- --------------

ASSETS
Current assets:
Cash and cash equivalents................................................ $ 30,968 $ 25,479
Accounts receivable, trade............................................... 276,450 221,541
Accounts receivable, related party....................................... 4,313 4,310
Inventories.............................................................. 17,166 17,243
Other.................................................................... 31,670 14,907
------------- --------------
Total current assets............................................... 360,567 283,480
------------- --------------
Property, plant and equipment, at cost (Net of accumulated depreciation
and amortization of $338,746 and $290,248)............................... 1,587,824 1,180,461
Equity investments......................................................... 284,705 292,224
Intangible assets.......................................................... 465,374 251,487
Goodwill................................................................... 16,944 16,669
Other assets............................................................... 55,228 41,027
------------- --------------
Total assets....................................................... $ 2,770,642 $ 2,065,348
============= ==============
</Table>

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
Notes payable.......................................................... $ -- $ 360,000
Accounts payable and accrued liabilities................................. 261,080 228,075
Accounts payable, general partner........................................ 6,619 22,680
Accrued interest......................................................... 29,726 15,649
Other accrued taxes...................................................... 11,260 8,888
Other.................................................................... 58,098 33,550
------------- --------------
Total current liabilities.......................................... 366,783 668,842
------------- --------------
Senior Notes............................................................... 945,692 375,184
Other long-term debt....................................................... 432,000 340,658
Other liabilities and deferred credits..................................... 30,962 31,853
Redeemable Class B Units held by related party............................. 103,363 105,630
Commitments and contingencies
Partners' capital:
Accumulated other comprehensive loss..................................... (20,055) (20,324)
General partner's interest............................................... 12,770 13,190
Limited partners' interests.............................................. 899,127 550,315
------------- --------------
Total partners' capital............................................ 891,842 543,181
------------- --------------
Total liabilities and partners' capital............................ $ 2,770,642 $ 2,065,348
============= ==============
</Table>

See accompanying Notes to Consolidated Financial Statements.

F-3

TEPPCO PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)

<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2002 2001 2000
------------ ------------ ------------

Operating revenues:
Sales of crude oil and petroleum products....................... $ 2,823,800 $ 3,219,816 $ 2,821,943
Transportation - Refined products............................... 123,476 139,315 119,331
Transportation - LPGs........................................... 74,577 77,823 73,896
Transportation - Crude oil...................................... 27,414 24,223 17,524
Transportation - NGLs........................................... 38,870 20,702 7,009
Gathering - Natural gas........................................ 90,053 8,824 --
Mont Belvieu operations......................................... 15,238 14,116 13,334
Other........................................................... 48,735 51,594 34,904
------------ ------------ ------------
Total operating revenues.................................. 3,242,163 3,556,413 3,087,941
------------ ------------ ------------

Costs and expenses:
Purchases of crude oil and petroleum products................... 2,772,328 3,172,805 2,793,643
Operating, general and administrative........................... 158,753 135,253 104,918
Operating fuel and power........................................ 36,814 36,575 34,655
Depreciation and amortization................................... 86,032 45,899 35,163
Taxes - other than income taxes................................. 17,989 14,090 10,576
------------ ------------ ------------
Total costs and expenses.................................. 3,071,916 3,404,622 2,978,955
------------ ------------ ------------

Operating income.......................................... 170,247 151,791 108,986

Interest expense.................................................. (70,537) (66,057) (48,982)
Interest capitalized.............................................. 4,345 4,000 4,559
Equity earnings................................................... 11,980 17,398 12,214
Other income - net................................................ 1,827 2,799 1,388
------------ ------------ ------------
Income before minority interest .......................... 117,862 109,931 78,165
Minority interest................................................. -- (800) (789)
------------ ------------ ------------
Net income................................................ $ 117,862 $ 109,131 $ 77,376
============ ============ ============

Net Income Allocation:
Limited Partner Unitholders....................................... 81,238 76,986 56,091
Class B Unitholder................................................ 6,943 8,642 7,385
General Partner................................................... 29,681 23,503 13,900
------------ ------------ ------------
Total net income allocated................................ $ 117,862 $ 109,131 $ 77,376
============ ============ ============

Basic and diluted net income per Limited
Partner and Class B Unit........................................ $ 1.79 $ 2.18 $ 1.89
============ ============ ============

Weighted average Limited Partner and Class B
Units outstanding............................................... 49,202 39,258 33,594
</Table>

See accompanying Notes to Consolidated Financial Statements.

F-4

TEPPCO PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------

Cash flows from operating activities:
Net income .............................................................. $ 117,862 $ 109,131 $ 77,376
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ......................................... 86,032 45,899 35,163
Earnings in equity investments, net of distributions .................. 18,401 14,377 (10,084)
Non-cash portion of interest expense .................................. 4,916 4,053 2,218
Decrease (increase) in accounts receivable ............................ (54,909) 81,190 (90,006)
Decrease (increase) in inventories .................................... 77 7,541 (7,567)
Decrease (increase) in other current assets ........................... (16,263) (8,082) 1,165
Increase (decrease) in accounts payable and accrued expenses........... 73,294 (71,757) 106,662
Other ................................................................. 5,507 (13,204) (6,882)
---------- ---------- ----------
Net cash provided by operating activities ........................ 234,917 169,148 108,045
---------- ---------- ----------

Cash flows from investing activities:
Proceeds from the sale of assets ........................................ 3,380 1,300 --
Proceeds from cash investments .......................................... -- 4,236 3,475
Purchases of cash investments ........................................... -- -- (2,000)
Purchase of ARCO assets ................................................. -- (11,000) (322,640)
Purchase of Val Verde Gathering System .................................. (444,150) -- --
Purchase of Jonah Gas Gathering Company ................................. (7,319) (359,834) --
Purchase of Chaparral NGL System ........................................ (132,372) -- --
Purchase of crude oil assets ............................................ -- (20,000) (99,508)
Investment in Centennial Pipeline LLC ................................... (10,882) (64,953) (5,040)
Capital expenditures .................................................... (133,372) (107,614) (68,481)
---------- ---------- ----------
Net cash used in investing activities ............................ (724,715) (557,865) (494,194)
---------- ---------- ----------

Cash flows from financing activities:
Proceeds from term and revolving credit facilities ...................... 675,000 546,148 552,000
Repayments on term and revolving credit facilities ...................... (943,659) (291,490) (172,000)
Issuance of Senior Notes ................................................ 497,805 -- --
Debt issuance costs ..................................................... (7,025) (2,601) (7,074)
Proceeds from termination of interest rate swaps ........................ 44,896 -- --
Issuance of Limited Partner Units, net .................................. 372,506 234,660 88,158
General partner's contributions ......................................... 7,617 4,795 1,799
Distributions paid ...................................................... (151,853) (104,412) (82,231)
---------- ---------- ----------
Net cash provided by financing activities ........................ 495,287 387,100 380,652
---------- ---------- ----------

Net increase (decrease) in cash and cash equivalents ...................... 5,489 (1,617) (5,497)

Cash and cash equivalents at beginning of period .......................... 25,479 27,096 32,593
---------- ---------- ----------
Cash and cash equivalents at end of period ................................ $ 30,968 $ 25,479 $ 27,096
========== ========== ==========

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid during the year (net of capitalized interest) ............. $ 48,908 $ 61,458 $ 36,793
</Table>

See accompanying Notes to Consolidated Financial Statements.

F-5

TEPPCO PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS, EXCEPT UNIT AMOUNTS)

<Table>
<Caption>
OUTSTANDING ACCUMULATED
LIMITED GENERAL LIMITED OTHER
PARTNER PARTNER'S PARTNERS' COMPREHENSIVE
UNITS INTEREST INTERESTS LOSS TOTAL
----------- ----------- ----------- -------------- -----------

Partners' capital at December 31, 1999 ..... 29,000,000 $ 657 $ 229,110 $ -- $ 229,767
Capital contributions .................... -- 890 -- -- 890
Issuance of Limited Partner Units, net ... 3,700,000 -- 88,158 -- 88,158
2000 net income allocation ............... -- 13,900 56,091 -- 69,991
2000 cash distributions .................. -- (13,623) (59,943) -- (73,566)
Option exercises, net of Unit
repurchases .......................... -- -- (183) -- (183)
----------- ----------- ----------- ----------- -----------

Partners' capital at December 31, 2000 ..... 32,700,000 1,824 313,233 -- 315,057
Capital contributions .................... -- 4,795 -- -- 4,795
Issuance of Limited Partner Units, net ... 7,750,000 -- 234,660 -- 234,660
Minority interest restructured ........... -- 4,598 -- -- 4,598
Cumulative effect of accounting change ... -- -- -- (10,103) (10,103)
Net loss on cash flow hedges ............. -- -- -- (10,221) (10,221)
2001 net income allocation ............... -- 23,503 76,986 -- 100,489
2001 cash distributions .................. -- (21,530) (73,961) -- (95,491)
Option exercises, net of Unit
repurchases .......................... -- -- (603) -- (603)
----------- ----------- ----------- ----------- -----------

Partners' capital at December 31, 2001 ..... 40,450,000 13,190 550,315 (20,324) 543,181
Capital contributions .................... -- 7,568 -- -- 7,568
Issuance of Limited Partner Units, net ... 13,260,000 -- 370,108 -- 370,108
Net gain on cash flow hedges ............. -- -- -- 269 269
2002 net income allocation ............... -- 29,681 81,238 -- 110,919
2002 cash distributions .................. -- (37,718) (104,932) -- (142,650)
Issuance of Limited Partner Units upon
exercise of options .................. 99,597 49 2,398 -- 2,447
----------- ----------- ----------- ----------- -----------

Partners' capital at December 31, 2002 ..... 53,809,597 $ 12,770 $ 899,127 $ (20,055) $ 891,842
=========== =========== =========== =========== ===========
</Table>

See accompanying Notes to Consolidated Financial Statements.

F-6

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. PARTNERSHIP ORGANIZATION

TEPPCO Partners, L.P. (the "Partnership"), a Delaware limited
partnership, is a master limited partnership formed in March 1990. We operate
through TE Products Pipeline Company, Limited Partnership ("TE Products"), TCTM,
L.P. ("TCTM") and TEPPCO Midstream Companies, L.P. ("TEPPCO Midstream").
Collectively, TE Products, TCTM and TEPPCO Midstream are referred to as the
"Operating Partnerships." Texas Eastern Products Pipeline Company, LLC (the
"Company" or "General Partner"), a Delaware limited liability company, serves as
our general partner and owns a 2% general partner interest in us. The General
Partner is a wholly owned subsidiary of Duke Energy Field Services, LLC
("DEFS"), a joint venture between Duke Energy Corporation ("Duke Energy") and
ConocoPhillips. Duke Energy holds an approximate 70% interest in DEFS, and
ConocoPhillips holds the remaining 30%. The Company, as general partner,
performs all management and operating functions required for us, except for the
management and operations of certain of the TEPPCO Midstream assets that are
managed by DEFS on our behalf. We reimburse the General Partner for all
reasonable direct and indirect expenses incurred in managing us.

As used in this Report, "we," "us," "our," and the "Partnership" means
TEPPCO Partners, L.P. and, where the context requires, includes our
subsidiaries.

On July 26, 2001, the Company restructured its general partner
ownership of the Operating Partnerships to cause them to be indirectly wholly
owned by us. TEPPCO GP, Inc. ("TEPPCO GP"), our subsidiary, succeeded the
Company as general partner of the Operating Partnerships. All remaining partner
interests in the Operating Partnerships not already owned by us were transferred
to us. In exchange for this contribution, the Company's interest as our general
partner 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 us and the Operating Partnerships. As a
result, we hold a 99.999% limited partner interest in the Operating Partnerships
and TEPPCO GP holds a 0.001% general partner interest. This reorganization was
undertaken to simplify required financial reporting by the Operating
Partnerships when the Operating Partnerships issue guarantees of our debt.

At formation in 1990, we completed an initial public offering of
26,500,000 Units representing Limited Partner Interests ("Limited Partner
Units") at $10.00 per Unit. In connection with our formation, the Company
received 2,500,000 Deferred Participation Interests ("DPIs"). Effective April 1,
1994, the DPIs began participating in distributions of cash and allocations of
profit and loss in a manner identical to Limited Partner Units and are treated
as Limited Partner Units for purposes of this Report. 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 our Partnership Agreement, we have
registered the resale by Duke Energy of such Limited Partner Units with the
Securities and Exchange Commission. As of December 31, 2002, no such Limited
Partner Units had been sold by Duke Energy.

At December 31, 2002 and 2001, we had outstanding 53,809,597 and
40,450,000 Limited Partner Units and 3,916,547 and 3,916,547 Class B Limited
Partner Units ("Class B Units"), respectively. All of the Class B Units were
issued to Duke Energy in connection with an acquisition of assets initially
acquired in the Upstream Segment in 1998. 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. We have 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 us at 95.5% of the 20-day average
market closing price of the Limited Partner Units, as determined under our
Partnership Agreement. As a result of this option, we have not included the
Class B Units in partners' capital at December 31, 2002 and 2001. Collectively,
the Limited Partner Units and Class B Units are referred to as "Units."

F-7

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We follow the following significant accounting policies in the
preparation of our consolidated financial statements.

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The financial statements include our accounts on a consolidated basis.
The Company's 1% general partner interest in the Operating Partnerships, prior
to July 26, 2001, is accounted for as a minority interest. We have eliminated
all significant intercompany items in consolidation. We have reclassified
certain amounts from prior periods to conform with the current presentation.

USE OF ESTIMATES

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

ENVIRONMENTAL EXPENDITURES

We accrue 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. We monitor the
balance of accrued undiscounted environmental liabilities on a regular basis. We
record liabilities for environmental costs at a specific site when our 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 our 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

We operate and report in three business segments: transportation and
storage of refined products, liquefied petroleum gases ("LPGs") and
petrochemicals ("Downstream Segment"); gathering, transportation, marketing and
storage of crude oil; and distribution of lubrication oils and specialty
chemicals ("Upstream Segment"); and gathering of natural gas, fractionation of
natural gas liquids ("NGLs") and transportation of NGLs ("Midstream Segment").
Our reportable segments offer different products and services and are managed
separately because each requires different business strategies.

F-8

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

pipelines, which was previously reflected as part of the Upstream Segment, was
also transferred to the Midstream Segment. We have adjusted our period-to-period
comparisons to conform with the current presentation.

Our interstate transportation operations, including rates charged to
customers, are subject to regulations prescribed by the Federal Energy
Regulatory Commission ("FERC"). Refined products, LPGs, petrochemicals, crude
oil, NGLs and natural gas are referred to in this Report, collectively, as
"petroleum products" or "products."

REVENUE RECOGNITION

Our Downstream Segment revenues are earned from transportation and
storage of refined products and LPGs, storage and short-haul transportation of
LPGs at the Mont Belvieu complex, intrastate transportation of petrochemicals,
sale of product inventory and other ancillary services. Transportation revenues
are recognized as products are delivered to customers. Storage revenues are
recognized upon receipt of products into storage and upon performance of storage
services. Terminaling revenues are recognized as products are out-loaded.
Revenues from the sale of product inventory are recognized when the products are
sold.

Our Upstream Segment revenues are earned from gathering,
transportation, marketing and storage of crude oil, and distribution of
lubrication oils and specialty chemicals principally in Oklahoma, Texas and the
Rocky Mountain region. Revenues are also generated from trade documentation and
pumpover services, primarily at Cushing, Oklahoma, and Midland, Texas (effective
July 20, 2000). Revenues are accrued at the time title to the product sold
transfers to the purchaser, which typically occurs upon receipt of the product
by the purchaser, and purchases are accrued at the time title to the product
purchased transfers to our crude oil marketing company, TEPPCO Crude Oil, L.P.,
which typically occurs upon our receipt of the product. Revenues related to
trade documentation and pumpover fees are recognized as services are completed.

Except for crude oil purchased from time to time as inventory, our
policy is to purchase only crude oil for which we have a market to sell and to
structure sales contracts so that crude oil price fluctuations do not materially
affect the margin received. As we purchase crude oil, we establish a margin by
selling crude oil for physical delivery to third party users or by entering into
a future delivery obligation. Through these transactions, we seek to maintain a
position that is balanced between crude oil purchases and sales and future
delivery obligations. However, certain basis risks (the risk that price
relationships between delivery points, classes of products or delivery periods
will change) cannot be completely hedged.

Our Midstream Segment revenues are derived from the gathering of
natural gas, fractionation of NGLs and transportation of NGLs. Gathering and
transportation revenues are recognized as natural gas or NGLs are delivered to
customers. Revenues are also earned from the sale of condensate liquid extracted
from the natural gas stream to an Upstream marketing affiliate. Fractionation
revenues are recognized ratably over the contract year as products are delivered
to DEFS. We do not take title to the natural gas gathered, NGLs transported or
NGLs fractionated, therefore, the results of our Midstream Segment are not
directly affected by changes in the prices of natural gas or NGLs.

NATURAL GAS IMBALANCES

Gas imbalances occur when gas producers (customers) deliver more or
less actual natural gas gathering volumes to our gathering systems than they
originally nominated. Actual deliveries are different from nominated volumes due
to fluctuations in gas production at the wellhead. If the customers supply more
natural gas gathering volumes than they nominated, the Val Verde Gathering
System ("Val Verde") and the Jonah Gas Gathering System ("Jonah") record a
payable for the amount due to customers and also record a receivable for the
same amount due from connecting pipeline transporters or shippers. If the
customers supply less natural gas gathering volumes than

F-9

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

they nominated, the Val Verde and the Jonah systems record a receivable
reflecting the amount due from customers and a payable for the same amount due
to connecting pipeline transporters or shippers.

Quantities of natural gas over or under delivered related to imbalance
agreements are recorded monthly using then current index prices. These
imbalances are settled with cash or deliveries of natural gas. Gains are
recorded when gas volumes owed (receivables) are settled by gas producers at a
later date during a period of increasing prices, or if Val Verde and Jonah
settle payables at later date during a period of falling prices. Losses are
recorded if these processes are reversed.

USE OF DERIVATIVES

We account for derivative financial instruments in accordance with
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. For derivative instruments designated as
cash flow hedges, changes in fair value, to the extent the hedge is effective,
are recognized in other comprehensive income until the hedged item is recognized
in earnings. Hedge effectiveness is measured at least quarterly based on the
relative cumulative changes in fair value between the derivative contract and
the hedged item over time. Any change in fair value resulting from
ineffectiveness, as defined by SFAS 133, is recognized immediately in earnings.

We have utilized and expect to continue to utilize interest rate swap
agreements to hedge a portion of our cash flow and fair value risks. Interest
rate swap agreements are used to manage the fixed and floating interest rate mix
of our total debt portfolio and overall cost of borrowing. The interest rate
swap related to our cash flow risk is intended to reduce our exposure to
increases in the benchmark interest rates underlying our variable rate revolving
credit facility. The interest rate swaps related to our fair value risks are
intended to reduce our exposure to changes in the fair value of our fixed rate
Senior Notes. The interest rate swap agreements involve the periodic exchange of
payments without the exchange of the notional amount upon which the payments are
based. The related amount payable to or receivable from counterparties is
included as an adjustment to accrued interest.

By using interest rate swap agreements to hedge exposures to changes in
interest rates and the fair value of fixed rate Senior Notes, we are exposed 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 us, which creates credit
risk for us. When the fair value of a derivative contract is negative, we owe
the counterparty and, therefore, we do not possess credit risk. We minimize 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. We manage
market risk associated with interest rate contracts by establishing and
monitoring parameters that limit the type and degree of market risk that may be
undertaken.

We adopted SFAS 133 at January 1, 2001, which resulted in the
recognition of approximately $10.1 million of derivative liabilities, $4.1
million of which were current liabilities and $6.0 million of which were
noncurrent liabilities, and $10.1 million of hedging losses included in
accumulated other comprehensive income, a component of partners' capital, as the
cumulative effect of the change in accounting. The hedging losses included in
accumulated other comprehensive loss are transferred to earnings as the
forecasted transactions actually occur. Amounts determined as of January 1,
2001, were based on the market quote of our interest swap agreement in place at
the time of adoption.

F-10

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

INVENTORIES

Inventories consist primarily of petroleum products and crude oil which
are valued at the lower of cost (weighted average cost method) or market. Our
Downstream Segment 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

We record property, plant and equipment at its acquisition cost.
Additions to property, plant and equipment, including major replacements or
betterments, are recorded at cost. We charge replacements and renewals of minor
items of property that do not materially increase values or extend useful lives
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).

We evaluate impairment of long-lived assets in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of, and
effective January 1, 2002, SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. 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 the carrying amount 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.

CAPITALIZATION OF INTEREST

We capitalize 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 5.11%, 6.46% and 7.45% for the years ended December 31, 2002,
2001 and 2000, respectively. During the years ended December 31, 2002, 2001 and
2000, the amount of interest capitalized was $4.3 million, $4.0 million and $4.6
million, respectively.

INTANGIBLE ASSETS

Intangible assets at December 31, 2002, consist primarily of production
contracts assumed in the acquisition of Jonah on September 30, 2001, and the
acquisition of Val Verde on June 30, 2002, and the fractionation agreement with
DEFS.

In connection with the acquisitions of Jonah and Val Verde, we assumed
contracts that dedicate future production from natural gas wells in the Green
River Basin in Wyoming, and we assumed fixed-term contracts with customers that
transport coal bed methane ("CBM") from the Fruitland Coal Formation of the San
Juan Basin in New Mexico and Colorado, respectively (see Note 5. Acquisitions).
The value assigned to intangible assets relates to contracts with customers that
are for either a fixed term or which dedicate total future lease production. The
value assigned to intangible assets is amortized on a unit of production basis,
based upon the actual throughput of the system over the expected total
throughput for the lives of the contracts. The amortization of the Jonah and Val
Verde systems are expected to average approximately 16 years and 20 years,
respectively. On a quarterly basis, we update production estimates of the
natural gas wells and evaluate the remaining expected useful life of the
contract

F-11

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

assets. At December 31, 2002, the unamortized balance of the Jonah and Val Verde
production contracts were $205.2 million and $228.6 million, respectively.

In connection with the purchase of the fractionation facilities in
1998, we entered into a fractionation agreement with DEFS. The fractionation
agreement is being amortized over a period of 20 years, which is the term of the
agreement with DEFS. At December 31, 2002, the unamortized balance of this
agreement was $29.0 million (see Note 7. Related Party Transactions.)

GOODWILL

Goodwill represents the excess of purchase price over fair value of net
assets acquired and is presented on the consolidated balance sheets net of
accumulated amortization. We account for goodwill under SFAS No. 142, Goodwill
and Other Intangible Assets which was issued by the Financial Accounting
Standards Board ("FASB") in July 2001 (see Note 3. Goodwill and Other Intangible
Assets). 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. Beginning January 1,
2002, effective with the adoption of SFAS 142, we no longer record amortization
expense related to goodwill or amortization expense related to the excess
investment on our equity investment (equity method goodwill).

INCOME TAXES

We are a limited partnership. As such, we are not a taxable entity for
federal and state income tax purposes and do not directly pay federal and state
income tax. Our taxable income or loss, which may vary substantially from the
net income or net loss we report in our consolidated statements of income, is
includable in the federal and state income tax returns of each unitholder.
Accordingly, no recognition has been given to federal income taxes for our
operations. The aggregate difference in the basis of our net assets for
financial and tax reporting purposes cannot be readily determined as we do not
have access to information about each unitholders' tax attributes in the
Partnership.

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.

NET INCOME PER UNIT

Basic net income per Unit is computed by dividing net income, after
deduction of the General Partner's interest, by the weighted average number of
Limited Partner and Class B Units outstanding (a total of 49.2 million Units,
39.3 million Units and 33.6 million Units for the years ended December 31, 2002,
2001 and 2000, respectively). The General Partner's percentage interest in net
income is based on its percentage of cash distributions from Available Cash for
each year (see Note 13. Quarterly Distributions of Available Cash). The General
Partner was allocated $29.7 million (representing 25.18%) of net income for the
year ended December 31, 2002, $23.5 million (representing 21.54%) of net income
for the year ended December 31, 2001, and $13.9 million (representing 17.96%) of
net income for the year ended December 31, 2000. The General Partner's
percentage interest in our net income increases as cash distributions paid per
Unit increases.

Diluted net income per Unit is similar to the computation of basic net
income per Unit above, except that the denominator was increased to include the
dilutive effect of outstanding Unit options by application of the

F-12

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

treasury stock method. For the years ended December 31, 2002, 2001 and 2000, the
denominator was increased by 32,053 Units, 41,864 Units and 20,926 Units,
respectively.

UNIT OPTION PLAN

We have not granted options for any periods presented. For options
outstanding under the 1994 Long Term Incentive Plan (see Note 14. Unit-Based
Compensation), we followed the intrinsic value method of accounting for
recognizing stock-based compensation expense. Under this method, we record no
compensation expense for unit options granted when the exercise price of the
options granted is equal to, or greater than, the market price of our Limited
Partner Units on the date of the grant.

In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation
- - Transition and Disclosure was issued. SFAS 148 amends SFAS No. 123, Accounting
for Stock-Based Compensation, and provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002, and
are included in Note 14. Unit-Based Compensation.

The following table summarizes pro forma net income and net income per
Unit for the years ended December 31, 2002, 2001 and 2000 assuming we had used
the fair value method of accounting for our unit option plan (in thousands,
except per Unit amounts):

<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
------------ ------------ ------------

Net income:
Reported net income ......................................... $ 117,862 $ 109,131 $ 77,376
Deduct: Total unit-based employee compensation expense
determined under fair value based method for all awards ... (6) (118) (201)
------------ ------------ ------------
Pro forma net income .................................... $ 117,856 $ 109,013 $ 77,175
============ ============ ============

Pro forma net income allocation:
Limited Partner Unitholders ................................. $ 81,234 $ 76,902 $ 55,945
Class B Unitholder .......................................... 6,943 8,633 7,366
General Partner ............................................. 29,679 23,478 13,864
------------ ------------ ------------
Total pro forma net income allocated .................... $ 117,856 $ 109,013 $ 77,175
============ ============ ============

Basic and diluted net income per Limited
Partner and Class B Unit:
As reported ................................................. $ 1.79 $ 2.18 $ 1.89
Deduct: Total unit-based employee compensation expense
determined under fair value based method for all awards ... -- -- (0.01)
------------ ------------ ------------
Pro forma net income per Unit ........................... $ 1.79 $ 2.18 $ 1.88
============ ============ ============
</Table>

For purposes of determining compensation costs using the provisions of
SFAS 123, the fair value of option grants was determined using the Black-Scholes
option-valuation model. The key input variables used in valuing the options were
as follows: average risk-free interest rate based on five- and 10-year Treasury
bonds - 4.7%; Unit price volatility - 23%; dividend yield - 7.6%; and estimated
option lives - six years.

F-13

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 requires us
to record the fair value of an asset retirement obligation as a liability in the
period in which we incur a legal obligation for the retirement of tangible
long-lived assets. A corresponding asset is also recorded and depreciated over
the life of the asset. After the initial measurement of the asset retirement
obligation, the liability will be adjusted at the end of each reporting period
to reflect changes in the estimated future cash flows underlying the obligation.
We will adopt SFAS 143 effective January 1, 2003. Determination of any amounts
to be recognized upon adoption is based upon numerous estimates and assumptions,
including future retirement costs, future inflation rates and the
credit-adjusted risk-free interest rates.

The Downstream Segment assets consist primarily of a pipeline system
and a series of storage facilities that originate along the upper Texas Gulf
Coast and extend through the Midwest and northeastern United States. We
transport refined products, LPGs and petrochemicals through the pipeline system.
These products are primarily received in the south end of the system and stored
and/or transported to various points along the system per customer nominations.
The Upstream Segment's operations include purchasing crude oil from producers at
the wellhead and providing delivery, storage and other services to its
customers. The properties in the Upstream Segment consist of interstate trunk
pipelines, pump stations, trucking facilities, storage tanks and various
gathering systems primarily in Texas and Oklahoma. The Midstream Segment gathers
natural gas from producers and transports natural gas and NGLs on its pipeline
systems, primarily in Texas, Wyoming, New Mexico and Colorado. The Midstream
Segment also owns and operates two NGL fractionating facilities in Colorado.

The fair value of the asset retirement obligations for our trunk and
interstate pipelines and our surface facilities cannot be reasonably estimated,
as future dismantlement and removal dates are indeterminate. We will record such
asset retirement obligations in the period in which we determine the settlement
dates of the retirement obligations. Other assets in which future operating
lives may be determinable include our gathering assets in our Midstream and
Upstream Segments. However, our rights-of-way agreements, in general, do not
require us to remove pipe or otherwise perform restoration upon taking the
pipelines permanently out of service. We are continuing to evaluate the effect
of SFAS 143 on our Midstream and Upstream gathering assets, but we do not
currently anticipate that the adoption of SFAS 143 will have a material impact
on our financial position, results of operations or cash flows.

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. We adopted SFAS 144 effective January 1, 2002. The adoption of SFAS 144
did not have a material effect on our financial position, results of operations
or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 eliminates the requirement to classify gains and losses
from the extinguishment of indebtedness as extraordinary, requires certain lease
modifications to be treated the same as a sale-leaseback transaction, and makes
other non-substantive technical corrections to existing pronouncements. SFAS 145
is effective for fiscal years beginning after May 15, 2002, with earlier
adoption encouraged. We are required to adopt SFAS 145 effective January 1,
2003. We do not believe that the adoption of SFAS 145 will have a material
effect on our financial position, results of operations or cash flows.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
requires recognition of a liability for a cost associated with an exit or
disposal activity

F-14

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

when the liability is incurred, as opposed to when the entity commits to an exit
plan under EITF No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We do not believe that
the adoption of SFAS 146 will have a material effect on our financial position,
results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS 148 amends SFAS No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on the
reported results. The provisions of SFAS 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of SFAS
148 did not affect our financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), which addresses the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees. FIN 45 requires
the guarantor to recognize a liability for the non-contingent component of the
guarantee, which is the obligation to stand ready to perform in the event that
specified triggering events or conditions occur. The initial measurement of this
liability is the fair value of the guarantee at inception. The recognition of
the liability is required even it is not probable that payments will be required
under the guarantee or if the guarantee was issued with a premium payment or as
part of a transaction with multiple elements. We have adopted the disclosure
requirements of FIN 45 (see Note 17. Commitments and Contingencies) and will
apply the recognition and measurement provisions for all guarantees entered into
or modified after December 31, 2002. To date, we have not entered into or
modified guarantees pursuant to the provisions of FIN 45.

In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51
("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
We are required to apply FIN 46 to all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, we are required to apply FIN 46 on July 1,
2003. We do not believe FIN 46 will have a significant impact on our financial
position, results of operations or cash flows.

NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. 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.

Beginning January 1, 2002, effective with the adoption of SFAS 142, we
no longer record amortization expense related to goodwill or amortization
expense related to the excess investment on our equity investment in Seaway
Crude Pipeline Company (see Note 6. Equity Investments). The following table
presents our results on a comparable basis, as if we had not recorded
amortization expense of goodwill or amortization expense of our excess
investment in Seaway Crude Pipeline Company for the years ended December 31,
2002, 2001 and 2000 (in thousands, except per Unit amounts):

F-15

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

YEARS ENDED DECEMBER 31,
----------------------------------------------
2002 2001 2000
------------ ------------ ------------

Net income:
Reported net income ............................... $ 117,862 $ 109,131 $ 77,376
Amortization of goodwill and excess investment .... -- 2,396 767
------------ ------------ ------------
Adjusted net income ............................. $ 117,862 $ 111,527 $ 78,143
============ ============ ============

Net income allocation:
Limited Partner Unitholders ....................... $ 81,238 $ 78,676 $ 56,647
Class B Unitholder ................................ 6,943 8,832 7,458
General Partner ................................... 29,681 24,019 14,038
------------ ------------ ------------
Total net income allocated ...................... $ 117,862 $ 111,527 $ 78,143
============ ============ ============

Basic and diluted net income per Limited
Partner and Class B Unit:
As reported ....................................... $ 1.79 $ 2.18 $ 1.89
Amortization of goodwill and excess investment .... -- 0.05 0.02
------------ ------------ ------------
Adjusted net income per Unit .................... $ 1.79 $ 2.23 $ 1.91
============ ============ ============
</Table>

Upon the adoption of SFAS 142, we were required to reassess the useful
lives and residual values of all intangible assets acquired, and make necessary
amortization period adjustments by the end of the first interim period after
adoption. We completed this analysis during the year ended December 31, 2002,
resulting in no change to the amortization period for our intangible assets. We
will continue to reassess the useful lives and residual values of all intangible
assets on an annual basis.

In connection with the transitional goodwill impairment evaluation
required by SFAS 142, we were required to perform an assessment of whether there
was an indication that goodwill was impaired as of the date of adoption. We
accomplished this by identifying our reporting units and determining the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. We then determined the fair value of each reporting
unit and compared it to the carrying value of the reporting unit. We completed
this analysis during the second quarter of 2002, resulting in no transitional
impairment loss. We will continue to compare the fair value of each reporting
unit to the carrying value on an annual basis to determine if an impairment loss
has occurred.

At December 31, 2002, we had $16.9 million of unamortized goodwill and
$25.5 million of excess investment in our equity investment (equity method
goodwill). We completed an impairment analysis of the excess investment in our
equity investment during the year ended December 31, 2002, and we noted no
indication of impairment. The excess investment is included in our equity
investments account at December 31, 2002. The following table presents the
carrying amount of goodwill and excess investment at December 31, 2002, by
business segment (in thousands):

<Table>
<Caption>
DOWNSTREAM MIDSTREAM UPSTREAM SEGMENTS
SEGMENT SEGMENT SEGMENT TOTAL
------------ ------------ ------------ ------------

Goodwill...................... $ -- $ 2,777 $ 14,167 $ 16,944
Equity method goodwill........ -- -- 25,502 25,502
</Table>

F-16

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table reflects the components of amortized intangible
assets, excluding goodwill (in thousands):

DECEMBER 31, 2002 DECEMBER 31, 2001
-----------------------------------------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- -------------- -------------- --------------

Amortized intangible assets:
Fractionation agreement.................. $ 38,000 $ (9,025) $ 38,000 $ (7,125)
Natural gas transportation contracts..... 462,449 (28,710) 222,800 (3,275)
Other.................................... 3,745 (1,085) 1,458 (371)
-------------- -------------- -------------- --------------
Total................................. $ 504,194 $ (38,820) $ 262,258 $ (10,771)
============== ============== ============== ==============
</Table>

Excluding goodwill, amortization expense on intangible assets was $27.9
million, $5.5 million and $2.0 million for the years ended December 31, 2002,
2001 and 2000, respectively.

The following table sets forth the estimated amortization expense on
intangible assets for the years ending December 31 (in thousands):

<Table>

2003................................................... $ 50,799
2004................................................... 52,384
2005................................................... 52,657
2006................................................... 47,153
2007................................................... 42,174
</Table>

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

We have entered into an interest rate swap agreement to hedge our
exposure to increases in the benchmark interest rate underlying our variable
rate revolving credit facility. The term of the interest rate swap matches the
maturity of the credit facility. We designated this swap agreement, which hedges
exposure to variability in expected future cash flows attributed to changes in
interest rates, as a cash flow hedge. The swap agreement is based on a notional
amount of $250.0 million. Under the swap agreement, we pay a fixed rate of
interest of 6.955% and receive a floating rate based on a three month U.S.
Dollar LIBOR rate. Since this swap is designated as a cash flow hedge, the
changes in fair value, to the extent the swap is effective, are recognized in
other comprehensive income until the hedged interest costs are recognized in
earnings. During the years ended December 31, 2002, and 2001, we recognized
increases in interest expense of $12.9 million and $6.8 million, respectively,
related to the difference between the fixed rate and the floating rate of
interest on the interest rate swap. During the year ended December 31, 2002, we
measured the hedge effectiveness of this interest rate swap and noted that no
gain or loss from ineffectiveness was required to be recognized. The fair value
of the interest rate swap agreement was a loss of approximately $20.1 million
and $20.3 million at December 31, 2002, and 2001, respectively. We anticipate
that approximately $13.5 million of the fair value will be transferred into
earnings over the next twelve months.

On October 4, 2001, our TE Products subsidiary entered into an interest
rate swap agreement to hedge its exposure to changes in the fair value of its
fixed rate 7.51% Senior Notes due 2028. We designated this swap agreement as a
fair value hedge. The swap agreement has a notional amount of $210.0 million and
matures in January 2028 to match the principal and maturity of the TE Products
Senior Notes. Under the swap agreement, TE Products pays a floating rate 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 years ended December 31, 2002, and 2001,
we recognized reductions in interest expense of $8.6 million and $1.8 million,
respectively, related to the difference between the fixed rate and the floating
rate of interest on the interest rate swap. During the year ended December 31,
2002, we measured the hedge effectiveness of this interest rate swap and noted
that no gain or loss from ineffectiveness was required to be

F-17

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

recognized. The fair value of this interest rate swap agreement was a gain of
approximately $13.6 million at December 31, 2002, and a loss of approximately
$14.6 million at December 31, 2001.

On February 20, 2002, we entered into interest rate swap agreements to
hedge our exposure to changes in the fair value of our fixed rate 7.625% Senior
Notes due 2012. We designated these swap agreements as fair value hedges. The
swap agreements had a combined notional amount of $500.0 million and matured in
2012 to match the principal and maturity of the Senior Notes. Under the swap
agreements, we paid a floating rate based on a six month U.S. Dollar LIBOR rate,
plus a spread, and received a fixed rate of interest of 7.625%. On July 16,
2002, we terminated these interest rate swap agreements. Upon termination, the
fair value of the interest rate swap agreements was $25.8 million. From
inception of the swap agreements on February 20, 2002, through the termination
on July 16, 2002, $7.8 million had been recognized as a reduction to interest
expense. The remaining gain of approximately $18.0 million has been deferred as
an adjustment to the carrying value of the Senior Notes and is being amortized
using the effective interest method as a reduction to future interest expense
over the remaining term of the Senior Notes. In the event of early
extinguishment of the Senior Notes, any remaining unamortized gain would be
recognized in the consolidated statement of income at the time of
extinguishment.

Additionally, on July 16, 2002, we entered into new interest rate swap
agreements to hedge our exposure to changes in the fair value of our $500.0
million principal amount of 7.625% fixed rate Senior Notes due 2012. We
designated these swap agreements as fair value hedges. The swap agreements had a
combined notional amount of $500.0 million and matured in 2012 to match the
principal and maturity of the Senior Notes. Under these swap agreements, we paid
a floating rate based on a six month U.S. Dollar LIBOR rate, plus a spread,
which increased by approximately 50 basis points from the previous swap
agreements, and received a fixed rate of interest of 7.625%. On December 12,
2002, we terminated these interest rate swap agreements. Upon termination, the
fair value of the interest rate swap agreements was $33.5 million. From
inception of the swap agreements on July 16, 2002, through the termination on
December 12, 2002, $6.6 million had been recognized as a reduction to interest
expense. The remaining gain of approximately $26.9 million has been deferred as
an adjustment to the carrying value of the Senior Notes and is being amortized
using the effective interest method as a reduction to future interest expense
over the remaining term of the Senior Notes. In the event of early
extinguishment of the Senior Notes, any remaining unamortized gain would be
recognized in the consolidated statement of income at the time of
extinguishment.

NOTE 5. ACQUISITIONS

On July 20, 2000, we completed an acquisition of ARCO Pipe Line Company
("ARCO"), a wholly owned subsidiary of Atlantic Richfield Company, for $322.6
million, which included $4.1 million of acquisition related costs other than the
purchase price. The purchased assets included ARCO's 50% ownership interest in
Seaway Crude Pipeline Company ("Seaway"), which owns a pipeline that carries
mostly imported crude oil from a marine terminal at Freeport, Texas, to Cushing,
Oklahoma, and from a marine terminal at Texas City, Texas, to refineries in the
Texas City and Houston areas. We assumed ARCO's role as operator of this
pipeline. We also acquired: (i) ARCO's crude oil terminal facilities in Cushing
and Midland, Texas, including the line transfer and pumpover business at each
location; (ii) an undivided ownership interest in both the Rancho Pipeline, a
crude oil pipeline from West Texas to Houston, and the Basin Pipeline, a crude
oil pipeline running from Jal, New Mexico, through Midland to Cushing, both of
which are operated by another joint owner; and (iii) the receipt and delivery
pipelines known as the West Texas Trunk System, which is located around the
Midland terminal. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of the acquisition are included in the
consolidated financial statements from July 20, 2000.

In October 2000, we received a settlement notice from Atlantic
Richfield Company for payment of a net aggregate amount of approximately $12.9
million in post-closing adjustments related to the purchase of ARCO. A large
portion of the requested adjustment related to an indemnity for payment of
accrued income taxes. In August 2001, we reached a settlement with Atlantic
Richfield Company of $11.0 million for the post-closing adjustments.

F-18

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

We recorded the settlement as an increase to the purchase price of ARCO. We paid
the settlement amount to Atlantic Richfield Company on October 15, 2001.

On December 31, 2000, we completed an acquisition of pipeline assets
from DEFS for $91.7 million, which included $0.7 million of acquisition related
costs. The purchase included two natural gas liquids pipelines in East Texas:
the Panola Pipeline, a pipeline from Carthage, Texas, to Mont Belvieu, Texas,
and the San Jacinto Pipeline, a pipeline from Carthage to Longview, Texas. We
also assumed a lease of a condensate pipeline from Carthage to Marshall, Texas.
All three pipelines originate at DEFS' East Texas Plant Complex in Panola
County, Texas. We accounted for the acquisition of these assets under the
purchase method of accounting.

On September 30, 2001, our subsidiaries completed the purchase of Jonah
from Alberta Energy Company for $359.8 million. The acquisition served as our
entry into the natural gas gathering industry. We recognized goodwill on the
purchase of approximately $2.8 million. We accounted for the acquisition under
the purchase method of accounting. Accordingly, the results of the acquisition
are included in the consolidated financial statements from September 30, 2001.
We paid an additional $7.3 million on February 4, 2002, for final purchase
adjustments related primarily to construction projects in progress at the time
of closing. Under a contractual agreement, DEFS manages and operates Jonah on
our behalf.

The following table allocates the estimated fair value of Jonah assets
acquired on September 30, 2001, and includes the additional purchase adjustment
paid on February 4, 2002 (in thousands):

<Table>

Property, plant and equipment .............................. $ 141,835
Intangible assets (primarily gas transportation contracts) . 222,800
Goodwill ................................................... 2,777
Other ...................................................... 147
------------
Total assets ........................................... 367,559
============

Total liabilities assumed .................................. (489)
------------
Net assets acquired .................................... $ 367,070
============
</Table>

The value assigned to intangible assets relates to contracts with
customers that are for either a fixed term or which dedicate total future lease
production. We are amortizing the value assigned to intangible assets on a unit
of production basis, based upon the actual throughput of the system over the
expected total throughput for the contracts (averaging approximately 16 years).

On March 1, 2002, we completed the purchase of the Chaparral NGL system
("Chaparral") for $132.4 million from Diamond-Koch II, L.P. and Diamond-Koch
III, L.P., including acquisition related costs of approximately $0.4 million. We
funded the purchase by a drawdown of our $500.0 million revolving credit
facility (see Note 10. Debt). Chaparral is an NGL pipeline system that extends
from West Texas and New Mexico to Mont Belvieu. The pipeline delivers NGLs to
fractionators and to our existing storage in Mont Belvieu. Under a contractual
agreement, DEFS manages and operates these assets on our behalf. We accounted
for the acquisition of these assets under the purchase method of accounting. We
allocated the purchase price to property, plant and equipment. Accordingly, the
results of the acquisition are included in the consolidated financial statements
from March 1, 2002.

On June 30, 2002, we completed the purchase of Val Verde for $444.2
million from Burlington Resources Gathering Inc., a subsidiary of Burlington
Resources Inc., including acquisition related costs of approximately $1.2
million. We funded the purchase by drawing down $168.0 million under our $500.0
million revolving credit facility, $72.0 million under our 364-day revolving
credit facility, and $200.0 million under a six-month term loan with SunTrust
Bank (see Note 10. Debt). The remaining purchase price was funded through
working capital sources of cash. The Val Verde system gathers CBM from the
Fruitland Coal Formation of the San Juan Basin in

F-19

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

New Mexico and Colorado. The system is one of the largest CBM gathering and
treating facilities in the United States. Under a contractual agreement, DEFS
manages and operates Val Verde on our behalf. We accounted for the acquisition
of these assets under the purchase method of accounting. Accordingly, the
results of the acquisition are included in the consolidated financial statements
from June 30, 2002.

The following table allocates the estimated fair value of the Val Verde
assets acquired on June 30, 2002 (in thousands):

<Table>

Property, plant and equipment ................................. $ 205,146
Intangible assets (primarily gas transportation contracts) .... 239,649
-------------
Total assets ................................................ 444,795
=============

Total liabilities assumed ..................................... (645)
-------------
Net assets acquired ......................................... $ 444,150
=============
</Table>

The value assigned to intangible assets relates to fixed-term contracts
with customers. We are amortizing the value assigned to intangible assets on a
unit of production basis, based upon the actual throughput of the system over
the expected total throughput for the contracts (averaging approximately 20
years).

The following table presents our unaudited pro forma results as though
the acquisitions of Jonah and Val Verde occurred at the beginning of 2001 or
2002 (in thousands, except per Unit amounts). The unaudited pro forma results
give effect to certain pro forma adjustments including depreciation and
amortization expense adjustments of property, plant and equipment and intangible
assets based upon the purchase price allocations, interest expense related to
financing the acquisitions, amortization of debt issue costs and the removal of
income tax effects in historical results of operations. The pro forma results do
not include operating efficiencies or revenue growth from historical results.

<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
----------------------------------
2002 2001
------------ ------------

Revenues....................................................... $ 3,279,948 $ 3,659,496
Operating income............................................... 181,717 179,600
Net income..................................................... 130,335 119,286
Basic and diluted net income per
Limited Partner and Class B Unit........................... $ 1.70 $ 2.00
</Table>

The summarized pro forma information has been prepared for comparative
purposes only. It is not intended to be indicative of the actual operating
results that would have occurred had the acquisitions been consummated at the
beginning of 2001 or 2002, or the results which may be attained in the future.

NOTE 6. EQUITY INVESTMENTS

The acquisition of the ARCO assets in July 2000 included ARCO's 50%
ownership interest in Seaway, which owns a pipeline that carries mostly imported
crude oil from a marine terminal at Freeport, Texas, to Cushing, Oklahoma, and
from a marine terminal at Texas City, Texas, to refineries in the Texas City and
Houston areas. Seaway is a partnership between a subsidiary of TCTM, TEPPCO
Seaway, L.P. ("TEPPCO Seaway"), and ConocoPhillips. TCTM purchased the 50%
ownership interest in Seaway on July 20, 2000, and transferred the investment to
TEPPCO Seaway. The Seaway Crude Pipeline Company Partnership Agreement provides
for varying participation ratios throughout the life of the Seaway partnership.
From July 20, 2000, through May 2002, TEPPCO Seaway received 80% of revenue and
expense of Seaway. From June 2002 through May 2006, TEPPCO Seaway will receive
60% of revenue and expense of Seaway. Thereafter, the sharing ratio becomes 40%
of revenue and

F-20

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

expense to TEPPCO Seaway. For the year ended December 31, 2002, our portion of
equity earnings on a pro-rated basis averaged approximately 67%.

In August 2000, TE Products entered into agreements with Panhandle
Eastern Pipeline Company ("PEPL"), a subsidiary of CMS Energy Corporation, and
Marathon Ashland Petroleum LLC ("Marathon") to form Centennial Pipeline LLC
("Centennial"). Centennial owns an interstate refined petroleum products
pipeline extending from the upper Texas Gulf Coast to Illinois. Through December
31, 2002, each participant owned a one-third interest in Centennial. During the
years ended December 31, 2002 and 2001, we contributed approximately $10.9
million and $70.0 million, respectively, for our investment in Centennial. These
amounts are included in the equity investment balance at December 31, 2002 and
2001.

We use the equity method of accounting to report our investments in
Seaway and Centennial. Summarized combined income statement data for Seaway and
Centennial for the years ended December 31, 2002, and 2001, is presented below
(in thousands):

<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
-----------------------------
2002 2001
---------- ----------

Revenues.................................... $ 83,237 $ 55,719
Net income.................................. 5,389 26,218
</Table>

Summarized combined balance sheet data for Seaway and Centennial as of
December 31, 2002, and 2001, is presented below (in thousands):

<Table>
<Caption>
DECEMBER 31,
-----------------------------
2002 2001
---------- ----------

Current assets.............................. $ 32,528 $ 57,368
Noncurrent assets........................... 551,324 528,835
Current liabilities......................... 28,681 31,308
Long-term debt.............................. 140,000 128,000
Noncurrent liabilities...................... 14,875 --
Partners' capital........................... 400,296 426,895
</Table>

Our investment in Seaway at December 31, 2002, and 2001, includes an
excess net investment amount of $25.5 million. Excess investment is the amount
by which our investment balance exceeds our proportionate share of the net
assets of the investment. Prior to January 1, 2002, and our adoption of SFAS
142, we were amortizing the excess investment in Seaway using the straight-line
method over 20 years.

NOTE 7. RELATED PARTY TRANSACTIONS

We have no employees and are managed by the Company, a wholly owned
subsidiary of DEFS. Duke Energy holds an approximate 70% interest in DEFS and
ConocoPhillips holds the remaining 30%. According to the Partnership Agreements,
the Company is entitled to reimbursement of all direct and indirect expenses
related to our business activities (see Note 1. Partnership Organization).

For the years ended December 31, 2002, 2001, and 2000, direct expenses
incurred by the Company of $69.6 million, $68.2 million and $50.4 million,
respectively, were charged to us by DEFS. Substantially all such costs were
related to payroll and payroll related expenses. For the years ended December
31, 2002, 2001, and 2000, expenses for administrative services and overhead
allocated to us by Duke Energy and its affiliates were $0.8 million, $0.6
million and $0.8 million, respectively.

F-21

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Effective with the purchase of the fractionation facilities on March
31, 1998, TEPPCO Colorado, LLC ("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, $7.4 million and $7.5 million for
the years ended December 31, 2002, 2001 and 2000, 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 $0.9 million for the years ended December 31,
2002, 2001 and 2000, respectively.

Included with crude oil assets purchased from DEFS effective November
1, 1998, was the Wilcox NGL Pipeline located along the Texas Gulf Coast. The
Wilcox NGL Pipeline transports NGLs for DEFS from two of their processing plants
and is currently supported by a throughput agreement with DEFS through 2005. The
fees paid to us by DEFS under the agreement totaled $1.2 million, $1.2 million
and $1.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The Panola Pipeline and San Jacinto Pipeline were purchased on
December 31, 2000, from DEFS for $91.7 million. These pipelines originate at
DEFS' East Texas Plant Complex in Panola County, Texas. For the years ended
December 31, 2002 and 2001, revenues recognized included $12.0 million and $13.9
million, respectively, from a subsidiary of DEFS for NGL transportation fees on
the Panola and San Jacinto Pipelines.

On July 20, 2000, we, through TCTM, acquired a 50% ownership interest
in Seaway. ConocoPhillips owns the remaining 50% interest in Seaway. TEPPCO
Crude Pipeline, L.P. is the operator of this pipeline. During the years ended
December 31, 2002, 2001 and 2000, we billed Seaway $7.1 million, $7.0 million
and $2.9 million, respectively, for direct payroll and payroll related expenses
for operating Seaway. Additionally, during the years ended December 31, 2002,
2001 and 2000, we billed Seaway $2.1 million, $2.1 million and $0.9 million,
respectively, for indirect management fees for operating Seaway.

Effective May 2001, we entered into an agreement with DEFS to commit
sole utilization of our Providence terminal to DEFS. We operate the terminal and
provide propane loading services to DEFS. During the years ended December 31,
2002 and 2001, revenues of $2.3 million and $1.5 million from DEFS,
respectively, were recognized pursuant to this agreement.

On September 30, 2001, we completed the acquisition of Jonah. The Jonah
assets are managed and operated by employees of DEFS under a contractual
agreement under which DEFS is reimbursed for its actual costs. During the years
ended December 31, 2002, and 2001, we recognized $3.3 million and $0.6 million,
respectively, of expense related to the management of the Jonah assets by DEFS.

On March 1, 2002, we completed the acquisition of the Chaparral NGL
system. The Chaparral assets are managed and operated by employees of DEFS under
a contractual agreement under which DEFS is reimbursed for its actual costs.
During the year ended December 31, 2002, we recognized $1.7 million of expenses
related to the management of the Chaparral assets by DEFS.

On June 30, 2002, we completed the acquisition of Val Verde. The Val
Verde assets are managed and operated by employees of DEFS under a contractual
agreement under which DEFS is reimbursed for its actual costs. During the year
ended December 31, 2002, we recognized $1.2 million of expenses related to the
management of the Val Verde assets by DEFS.

In August 2000, TE Products entered into agreements with PEPL and
Marathon to form Centennial (see Note 6. Equity Investments). At December 31,
2002, TE Products had a one-third ownership interest in Centennial. TE Products
has entered into a management agreement with Centennial to operate Centennial's
terminal at Creal Springs and pipeline connection in Beaumont, Texas. For the
year ended December 31, 2002, we recognized management fees of $0.2 million from
Centennial, and actual operating expenses billed to Centennial were $0.3

F-22

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

million. TE Products also has a joint tariff with Centennial to deliver products
at TE Products' locations using Centennial's pipeline as part of the delivery
route to connecting carriers. TE Products, as the delivering pipeline, invoices
the shippers for the entire delivery rate, records only the net rate
attributable to it as transportation revenues and records a liability for the
amounts due to Centennial for its share of the tariff. At December 31, 2002, we
have a payable balance of $1.0 million to Centennial for its share of the joint
tariff deliveries. In addition, TE Products performs ongoing construction
services for Centennial and bills Centennial for labor and other costs to
perform the construction. At December 31, 2002, TE Products has a receivable of
$1.9 million due from Centennial for reimbursement of construction services
provided to Centennial.

NOTE 8. 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 (in
thousands):

<Table>
<Caption>
DECEMBER 31,
-----------------------------
2002 2001
------------ ------------

Crude oil.................................. $ -- $ 3,783
Gasolines.................................. 4,700 4,548
Propane.................................... -- 1,096
Butanes.................................... 1,991 1,431
Transmix................................... 2,526 878
Other products............................. 3,836 1,988
Materials and supplies..................... 4,113 3,519
------------ -----------
Total............................... $ 17,166 $ 17,243
============ ===========
</Table>

The costs of inventories did not exceed market values at December 31,
2002 and 2001.

NOTE 9. PROPERTY, PLANT AND EQUIPMENT

Major categories of property, plant and equipment were as follows (in
thousands):

<Table>
<Caption>
DECEMBER 31,
-----------------------------
2002 2001
------------- ------------

Land and right of way............................................. $ 106,279 $ 92,664
Line pipe and fittings...................... ..................... 1,090,848 822,332
Storage tanks..................................................... 143,740 130,461
Buildings and improvements........................................ 20,408 15,131
Machinery and equipment........................................... 463,049 252,393
Construction work in progress..................................... 102,246 157,728
------------- ------------
Total property, plant and equipment........................ $ 1,926,570 $ 1,470,709
Less accumulated depreciation and amortization............. 338,746 290,248
------------- ------------
Net property, plant and equipment........................ $ 1,587,824 $ 1,180,461
============= ============
</Table>

Depreciation expense on property, plant and equipment was $56.0
million, $39.5 million and $33.0 million for the years ended December 31, 2002,
2001 and 2000, respectively.

F-23

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 10. LONG TERM DEBT

SENIOR NOTES

On January 27, 1998, TE Products completed the issuance of $180.0
million principal amount of 6.45% Senior Notes due 2008, and $210.0 million
principal amount of 7.51% Senior Notes due 2028 (collectively the "TE Products
Senior Notes"). The 6.45% TE Products Senior Notes were issued at a discount of
$0.3 million and are being accreted to their face value over the term of the
notes. The 6.45% TE Products Senior Notes due 2008 are not subject to redemption
prior to January 15, 2008. The 7.51% TE Products Senior Notes due 2028, issued
at par, may be redeemed at any time after January 15, 2008, at the option of TE
Products, in whole or in part, at a premium.

The TE Products Senior Notes do not have sinking fund requirements.
Interest on the TE Products Senior Notes is payable semiannually in arrears on
January 15 and July 15 of each year. The TE Products Senior Notes are unsecured
obligations of TE Products and rank on a parity with all other unsecured and
unsubordinated indebtedness of TE Products. The indenture governing the TE
Products Senior Notes contains covenants, including, but not limited to,
covenants limiting the creation of liens securing indebtedness and sale and
leaseback transactions. However, the indenture does not limit our ability to
incur additional indebtedness. As of December 31, 2002, TE Products was in
compliance with the covenants of the TE Products Senior Notes.

On February 20, 2002, we received $494.6 million in net proceeds, after
underwriting discount, from the issuance of $500.0 million principal amount of
7.625% Senior Notes due 2012. The 7.625% Senior Notes were issued at a discount
of $2.2 million and are being accreted to their face value over the term of the
notes. We used the proceeds from the offering to reduce a portion of the
outstanding balances of our credit facilities, including those issued in
connection with the acquisition of Jonah. The Senior Notes may be redeemed at
any time at our option with the payment of accrued interest and a make-whole
premium determined by discounting remaining interest and principal payments
using a discount rate equal to the rate of the United States Treasury securities
of comparable remaining maturity plus 35 basis points. The indenture governing
our 7.625% Senior Notes contains covenants, including, but not limited to,
covenants limiting the creation of liens securing indebtedness and sale and
leaseback transactions. However, the indenture does not limit our ability to
incur additional indebtedness. As of December 31, 2002, we were in compliance
with the covenants of these Senior Notes.

At December 31, 2002 and 2001, the estimated fair value of the Senior
Notes was approximately $914.9 million and $362.0 million, respectively. Market
prices for recent transactions and rates currently available to us for debt with
similar terms and maturities were used to estimate fair value.

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

OTHER LONG TERM DEBT AND CREDIT FACILITIES

On July 14, 2000, we entered into a $75.0 million term loan and a
$475.0 million revolving credit facility ("Three Year Facility"). On July 21,
2000, we borrowed $75.0 million under the term loan and $340.0 million under the
Three Year Facility. The funds were used to finance the acquisition of the ARCO
assets (see Note 5. Acquisitions) and to refinance existing bank credit
facilities, other than the Senior Notes. The term loan was repaid from proceeds
received from the issuance of additional Limited Partner Units on October 25,
2000. On April 6, 2001, the Three Year Facility was amended to provide for
revolving borrowings of up to $500.0 million for a period of three years
including the issuance of letters of credit of up to $20.0 million. The interest
rate is based, at our option, on either the lender's base rate plus a spread, or
LIBOR plus a spread in effect at the time of the borrowings. The credit
agreement for the Three Year Facility contains restrictive financial covenants
that require us to maintain a minimum level of partners' capital as well as
maximum debt-to-EBITDA (earnings before interest expense, income

F-24

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

tax expense and depreciation and amortization expense) and minimum fixed charge
coverage ratios. On February 20, 2002, we repaid $115.7 million of the then
outstanding balance of the Three Year Facility with proceeds from the issuance
of our 7.625% Senior Notes. On March 1, 2002, we borrowed $132.0 million under
the Three Year Facility to finance the acquisition of the Chaparral NGL system.
On March 22, 2002, we repaid a portion of the Three Year Facility with proceeds
we received from the issuance of additional Limited Partner Units (see Note 11.
Partners' Capital). To facilitate our financing of a portion of the purchase
price of the Val Verde assets, on June 27, 2002, the Three Year Facility was
amended to increase the maximum permitted debt-to-EBITDA ratio covenant to allow
us to incur additional indebtedness. For the twelve month period ending June 30,
2002, the maximum permitted ratio was 5.5-to-1 on a pro forma basis. For the
twelve month period ending September 30, 2002, the maximum permitted ratio was
5.0-to-1 on a pro forma basis. At December 31, 2002, the maximum permitted
debt-to-EBITDA ratio under our revolving credit facility returned to its
pre-amendment level of 4.5-to-1. We then drew down the existing capacity of the
Three Year Facility and acquired the Val Verde assets. During the fourth quarter
of 2002, we repaid $68.0 million of the outstanding balance of the Three Year
Facility with proceeds from our November 2002 equity offering (see Note 11.
Partners' Capital) and proceeds from the termination of our interest rate swaps
(see Note 4. Derivative Financial Instruments). At December 31, 2002, $432.0
million was outstanding under the Three Year Facility at a weighted average
interest rate of 2.5%. As of December 31, 2002, we were in compliance with the
covenants contained in this credit agreement.

We have entered into an interest rate swap agreement to hedge our
exposure to increases in interest rates on the Three Year Facility discussed
above. See Note 4. Derivative Financial Instruments.

SHORT TERM CREDIT FACILITIES

On April 6, 2001, we entered into a 364-day, $200.0 million revolving
credit agreement ("Short-term Revolver"). The interest rate is based, at our
option, on either the lender's base rate plus a spread, or LIBOR plus a spread
in effect at the time of the borrowings. The credit agreement contains
restrictive financial covenants that require us to maintain a minimum level of
partners' capital as well as maximum debt-to-EBITDA and minimum fixed charge
coverage ratios. On March 28, 2002, the Short-term Revolver was extended for an
additional period of 364 days, ending in March 2003. To facilitate our financing
of a portion of the purchase price of the Val Verde assets, on June 27, 2002,
the Short-term Revolver was amended to increase the maximum permitted
debt-to-EBITDA ratio covenant to allow us to incur additional indebtedness. For
the twelve month period ending June 30, 2002, the maximum permitted ratio was
5.5-to-1 on a pro forma basis. For the twelve month period ending September 30,
2002, the maximum permitted ratio was 5.0-to-1 on a pro forma basis. At December
31, 2002, the maximum permitted debt-to-EBITDA ratio under our revolving credit
facility returned to its pre-amendment level of 4.5-to-1. We then drew down
$72.0 million under the Short-term Revolver. In the fourth quarter of 2002, we
repaid the existing amounts outstanding under the Short-term Revolver with
proceeds we received from the issuance of Limited Partner Units in November and
December 2002. At December 31, 2002, no amounts were outstanding under the
Short-term Revolver. As of December 31, 2002, we were in compliance with the
covenants contained in this credit agreement. In February 2003, we gave notice
that we will not renew the Short-term Revolver. As a result, the facility will
expire on March 27, 2003.

On September 28, 2001, we entered into a $400.0 million credit facility
with SunTrust Bank ("Bridge Facility") payable in June 2002. We borrowed $360.0
million under the Bridge Facility to acquire the Jonah assets (see Note 5.
Acquisitions). During the fourth quarter of 2001, we repaid $160.0 million of
the outstanding principal from proceeds received from the issuance of Limited
Partner Units in November 2001. On February 5, 2002, we drew down an additional
$15.0 million under the Bridge Facility. On February 20, 2002, we repaid the
outstanding balance of the Bridge Facility of $215.0 million with proceeds from
the issuance of the 7.625% Senior Notes and canceled the facility.

On June 27, 2002, we entered into a $200.0 million six-month term loan
with SunTrust Bank ("Six-Month Term Loan") payable in December 2002. We borrowed
$200.0 million under the Six-Month Term Loan to acquire

F-25

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

the Val Verde assets (see Note 5. Acquisitions). The interest rate was based, at
our option, on either the lender's base rate plus a spread, or LIBOR plus a
spread in effect at the time of the borrowings. The credit agreement contained
restrictive financial covenants that required us to maintain a minimum level of
partners' capital as well as maximum debt-to-EBITDA and minimum fixed charge
coverage ratios. On July 11, 2002, we repaid $90.0 million of the outstanding
principal from proceeds primarily received from the issuance of Limited Partner
Units in July 2002. On September 10, 2002, we repaid the remaining outstanding
balance of $110.0 million with proceeds received from the issuance of Limited
Partner Units in September 2002 (see Note 11. Partners' Capital), and canceled
the facility.

The following table summarizes the principal amounts outstanding under
our credit facilities as of December 31, 2002 and 2001 (in thousands):

<Table>
<Caption>
DECEMBER 31,
------------------------------------
2002 2001
---------------- ----------------

Short Term Credit Facilities:
Short-term Revolver, due March 2003...................... $ -- $ 160,000
Bridge Facility, due June 2002........................... -- 200,000
---------------- ----------------
Total Short Term Credit Facilities.................... $ -- $ 360,000
================ ================

Long Term Credit Facilities:
Three Year Facility, due April 2004...................... $ 432,000 $ 340,658
6.45% TE Products Senior Notes, due January 2008......... 179,845 179,814
7.51% TE Products Senior Notes, due January 2028......... 210,000 210,000
7.625% Senior Notes, due February 2012................... 497,995 --
---------------- ----------------
Total borrowings...................................... 1,319,840 730,472

Adjustment to carrying value associated with hedges of
fair value............................................ 57,852 (14,630)
---------------- ----------------
Total Long Term Credit Facilities.................. $ 1,377,692 $ 715,842
================ ================
</Table>

NOTE 11. PARTNERS' CAPITAL

On February 6, 2001, we sold in an underwritten public offering 2.0
million Limited Partner Units at $25.50 per Unit. The proceeds from the
offering, net of underwriting discount, totaled approximately $48.7 million and
were used to reduce borrowings under the Three Year Facility. On March 6, 2001,
250,000 Units were sold upon exercise of the underwriters' over-allotment option
granted in connection with the offering on February 6, 2001. Proceeds from that
sale totaled $6.1 million and were used for general purposes.

On November 14, 2001, we sold in an underwritten public offering 5.5
million Limited Partner Units at $34.25 per Unit. The proceeds from the
offering, net of underwriting discount, totaled approximately $180.3 million and
were used to repay $160.0 million under the Bridge Facility that was used to
fund the Jonah acquisition. The remaining proceeds were used to finance
contributions to Centennial and for other capital expenditures.

On March 22, 2002, we sold in an underwritten public offering 1.92
million Limited Partner Units at $31.18 per Unit. The proceeds from the
offering, net of underwriting discount, totaled approximately $57.3 million and
were used to repay $50.0 million of the outstanding balance on the Three Year
Facility, with the remaining amount being used for general purposes.

On July 11, 2002, we sold in an underwritten public offering 3.0
million Limited Partner Units at $30.15 per Unit. The proceeds from the
offering, net of underwriting discount, totaled approximately $86.6 million and
were used to reduce borrowings under our Six-Month Term Loan. On August 14,
2002, 175,000 Units were sold

F-26

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

upon exercise of the underwriters' over-allotment option granted in connection
with the offering on July 11, 2002. Proceeds from that sale totaled $5.1 million
and were used for general purposes.

On September 6, 2002, we sold in an underwritten public offering 3.8
million Limited Partner Units at $29.72 per Unit. The proceeds from the
offering, net of underwriting discount, totaled approximately $108.1 million and
were used to reduce borrowings under our Six-Month Term Loan. On September 19,
2002, 570,000 Units were sold upon exercise of the underwriters' over-allotment
option granted in connection with the offering on September 6, 2002. Proceeds
from that sale totaled $16.2 million and were used to reduce borrowings under
our Short-term Revolver.

On November 7, 2002, we sold in an underwritten public offering 3.3
million Limited Partner Units at $26.83 per Unit. The proceeds from the
offering, net of underwriting discount, totaled approximately $84.8 million and
were used to reduce borrowings under our Short-term Revolver and Three Year
Facility. On December 4, 2002, 495,000 Units were sold upon exercise of the
underwriters' over-allotment option granted in connection with the offering on
November 7, 2002. Proceeds from that sale totaled $12.7 million and were used to
reduce borrowings under our Short-term Revolver and Three Year Facility.

NOTE 12. CONCENTRATIONS OF CREDIT RISK

Our primary market areas are located in the Northeast, Midwest and
Southwest regions of the United States. We have 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 our overall credit risk in that the customers may be similarly
affected by changes in economic, regulatory or other factors. We thoroughly
analyze our customers' historical and future credit positions prior to extending
credit. We manage our 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.

For the years ended December 31, 2002, 2001 and 2000, we had one
customer from the Upstream Segment, Valero Energy Corp., which accounted for
16%, 14% and 12%, respectively, of our total consolidated revenues.

The carrying amount of cash and cash equivalents, accounts receivable,
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 13. QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

We make quarterly cash distributions of all of our Available Cash,
generally defined as consolidated cash receipts less consolidated cash
disbursements and cash reserves established by the General Partner in its sole
discretion. Pursuant to the Partnership Agreement, the Company receives
incremental incentive cash distributions when cash distributions exceed certain
target thresholds as follows:

<Table>
<Caption>
GENERAL
UNITHOLDERS PARTNER
------------- -----------

Quarterly Cash Distribution per Unit:
Up to Minimum Quarterly Distribution ($0.275 per Unit)................. 98% 2%
First Target - $0.276 per Unit up to $0.325 per Unit................... 85% 15%
Second Target - $0.326 per Unit up to $0.45 per Unit................... 75% 25%
Over Second Target - Cash distributions greater than $0.45 per Unit.... 50% 50%
</Table>

F-27

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table reflects the allocation of total distributions paid
for the years ended December 31, 2002, 2001 and 2000 (in thousands, except per
Unit amounts).

<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
----------- ----------- -----------

Limited Partner Units........................................ $ 104,932 $ 73,961 $ 59,943
General Partner Ownership Interest........................... 2,329 1,273 685
General Partner Incentive.................................... 35,389 20,257 12,938
----------- ----------- ----------
Total Partners' Capital Cash Distributions............... 142,650 95,491 73,566
Class B Units................................................ 9,204 8,421 7,833
Minority Interest............................................ -- 500 832
----------- ----------- ----------
Total Cash Distributions Paid............................ $ 151,854 $ 104,412 $ 82,231
=========== =========== ==========
Total Cash Distributions Paid Per Unit....................... $ 2.35 $ 2.15 $ 2.00
=========== =========== ==========
</Table>

On February 7, 2003, we paid a cash distribution of $0.60 per Limited
Partner Unit and Class B Unit for the quarter ended December 31, 2002. The
fourth quarter 2002 cash distribution totaled $46.5 million.

NOTE 14. UNIT-BASED COMPENSATION

1994 LONG TERM INCENTIVE PLAN

During 1994, the Company adopted the Texas Eastern Products Pipeline
Company 1994 Long Term Incentive Plan ("1994 LTIP"). The 1994 LTIP provides
certain key employees with an incentive award whereby a participant is granted
an option to purchase Limited Partner Units. These same employees are also
granted a stipulated number of Performance Units, the cash value of which may be
used to pay for the exercise of the respective Limited Partner Unit options
awarded. Under the provisions of the 1994 LTIP, no more than one million options
and two million Performance Units may be granted.

When our calendar year earnings per unit (exclusive of certain special
items) exceeds a stated threshold, each participant receives a credit to their
respective Performance Unit account equal to the earnings per unit excess
multiplied by the number of Performance Units awarded. The balance in the
Performance Unit account may be used to offset the cost of exercising 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. We accrue compensation expense for the Performance Units
awarded annually based upon the terms of the plan discussed above.

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:

<Table>
<Caption>
PERFORMANCE EARNINGS EXPIRATION
UNITS THRESHOLD YEAR
------------- -------------- --------------

Performance Unit Grants:
1994........................................... 80,000 $ 1.00 2006
1995 .......................................... 70,000 $ 1.25 2007
1997........................................... 11,100 $ 1.875 2009
</Table>

F-28

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

Limited Partner Unit Options:
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................................ (2,800) -- $25.25
Became exercisable....................... -- 81,669 $25.25 - $25.69
Exercised................................ (98,376) (98,376) $13.81 - $25.69
------------ ----------------
Outstanding at December 31, 2001............ 189,688 143,822 $13.81 - $25.69
Forfeited................................ -- -- $25.25
Became exercisable....................... -- 45,866 $25.25
Exercised................................ (99,597) (99,597) $13.81 - $25.69
------------ ----------------
Outstanding at December 31, 2002............ 90,091 90,091 $13.81 - $25.69
============ ================
</Table>

We have not granted options for any periods presented. For options
outstanding, we followed 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 our Limited Partner Units on the date of grant.
Accordingly, we recognized no compensation expense 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 $5,570, $118,820 and $202,634 during the years ended December
31, 2002, 2001 and 2000, 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.

<Table>

Risk-free interest rate................................ 4.7%
Dividend yield......................................... 7.6%
Unit price volatility.................................. 23%
Expected option lives.................................. 6 years
</Table>

1999 AND 2002 PHANTOM UNIT PLANS

Effective September 1, 1999, the Company adopted the Texas Eastern
Products Pipeline Company, LLC 1999 Phantom Unit Retention Plan ("1999 PURP").
Effective June 1, 2002 the Company adopted the Texas Eastern Products Pipeline
Company, LLC 2002 Phantom Unit Retention Plan ("2002 PURP"). The 1999 PURP and
the 2002 PURP provide key employees with incentive awards whereby a participant
is granted phantom units. These phantom units are automatically redeemed for
cash based on the vested portion of the fair market value of the phantom units
at stated redemption dates. The fair market value of each phantom unit is equal
to the closing price of a Limited Partnership Unit as reported on the New York
Stock Exchange on the redemption date.

Under the agreement for the phantom units, each participant will vest
10% of the number of phantom units initially granted under his or her award at
the end of each of the first four years and will vest the final 60% at the end
of the fifth year. Each participant is required to redeem their units as they
vest. They are also entitled to quarterly cash distributions equal to the
product of the number of phantom units outstanding for the participant and the

F-29

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

amount of the cash distribution that we paid per unit to Limited Partner
Unitholders. A total of 58,800 phantom units have been granted under the 1999
PURP, of which 30,330 remain outstanding at December 31, 2002. A total of 71,400
phantom units have been granted under the 2002 PURP, of which all 71,400 remain
outstanding at December 31, 2002. We accrue compensation expense annually based
upon the terms of the 1999 PURP and 2002 PURP discussed above.

2000 LONG TERM INCENTIVE PLAN

Effective January 1, 2000, the General Partner established the Texas
Eastern Products Pipeline Company, LLC 2000 Long Term Incentive Plan ("2000
LTIP") to provide key employees incentives to achieve improvements in our
financial performance. Generally, upon the close of a three-year performance
period, if the participant is then still an employee of the General Partner, the
participant will receive a cash payment in an amount equal to (1) the applicable
performance percentage specified in the award multiplied by (2) the number of
phantom Limited Partner Units granted under the award multiplied by (3) the
average of the closing prices of a Limited Partner Unit over the ten consecutive
trading days immediately preceding the last day of the performance period.
Generally, a participant's performance percentage is based upon the improvement
of our Economic Value Added during a three-year performance period over the
Economic Value Added during the three-year period immediately preceding the
performance period. The performance percentage may not exceed 150%. If a
participant incurs a separation from service during the performance period due
to death, disability or retirement (as such terms are defined in the 2000 LTIP),
the participant will be entitled to receive a cash payment in an amount equal to
the amount computed as described above multiplied by a fraction, the numerator
of which is the number of days that have elapsed during the performance period
prior to the participant's separation from service and the denominator of which
is the number of days in the performance period. At December 31, 2002, phantom
Limited Partner Units outstanding were 22,300, 24,013 and 18,425 for awards
granted in 2002, 2001 and 2000, respectively.

Economic Value Added means our average annual EBITDA for the
performance period minus the product of our average asset base and our cost of
capital for the performance period. For purposes of the 2000 LTIP for plan years
2000 through 2002, EBITDA means our earnings before net interest expense,
depreciation and amortization and our proportional interest in EBITDA of our
joint ventures as presented in our consolidated financial statements prepared in
accordance with generally accepted accounting principles, except that in its
discretion the Compensation Committee of the General Partner may exclude gains
or losses from extraordinary, unusual or non-recurring items. Average asset base
means the quarterly average, during the performance period, of our gross value
of property, plant and equipment, plus products and crude oil linefill and the
gross value of intangibles and equity investments. Our cost of capital is
approved by the Committee at the date of award grant.

In addition to the payment described above, during the performance
period, the General Partner will pay to the Participant the amount of cash
distributions that we would have paid to our Unitholders had the participant
been the owner of the number of Limited Partner Units equal to the number of
phantom Limited Partner Units granted to the participant under this award. The
maximum potential payout under the 2000 LTIP is 150% of phantom units awarded.
We accrue compensation expense annually based upon the terms of the 2000 LTIP
discussed above.

F-30

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 15. OPERATING LEASES

We utilize leased assets in several areas of our operations. Total
rental expense during the years ended December 31, 2002, 2001 and 2000 was $14.2
million, $10.8 million and $10.7 million, respectively. The following table sets
forth our minimum rental payments under our various operating leases for the
years ending December 31 (in thousands):

<Table>

2003...................................... $ 9,479
2004...................................... 8,903
2005...................................... 8,102
2006...................................... 6,035
2007...................................... 1,820
Thereafter................................ 1,068
----------
$ 35,407
==========
</Table>

NOTE 16. 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.

The components of net pension benefits costs for the TEPPCO RCBP and
the TEPPCO SBP for the years ended December 31, 2002, 2001 and 2000, and for the
Duke Energy RCBP and the Duke Energy ECBP for the year ended December 31, 2000
were as follows (in thousands):

<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------

Service cost benefit earned during the year........... $ 2,925 $ 2,419 $ 2,054
Interest cost on projected benefit obligation......... 315 129 782
Expected return on plan assets........................ (390) (166) (663)
Amortization of prior service cost.................... 7 8 --
Amortization of net transition liability.............. -- -- 4
Recognized net actuarial loss ........................ 12 -- --
---------- ---------- ---------
Net pension benefits costs........................ $ 2,869 $ 2,390 $ 2,177
========== ========== =========
</Table>

F-31

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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 for the Duke Energy
OPB for the year ended December 31, 2000, and for the TEPPCO OPB for the years
ended December 31, 2002 and 2001, were as follows (in thousands):

<Table>
<Caption>
2002 2001 2000
---------- --------- ---------

Service cost benefit earned during the year...................... $ 115 $ 99 $ 39
Interest cost on accumulated postretirement benefit obligation... 119 113 134
Expected return on plan assets................................... -- -- (85)
Amortization of prior service cost............................... 126 126 (96)
Amortization of net transition liability......................... -- -- 54
---------- --------- ---------
Net postretirement benefits costs........................... $ 360 $ 338 $ 46
========== ========= =========
</Table>

The weighted average assumptions used in the actuarial computations for
the retirement plans and other postretirement benefit plans for the years ended
December 31, 2002 and 2001 are as follows:

<Table>
<Caption>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------

Discount rate........................................ 6.75% 7.25% 6.75% 7.25%
Increase in compensation levels...................... 5.00% 5.06% -- --
Expected long-term rate of return on plan assets..... 9.00% 9.00% -- --
</Table>

F-32

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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, 2002 and 2001 (in thousands):

<Table>
<Caption>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------- ------------------------
2002 2001 2002 2001
----------- --------- ---------- ---------

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............ $ 3,786 $ 1,518 $ 1,781 $ --
Service cost....................................... 2,925 2,419 115 99
Interest cost...................................... 315 129 118 113
Plan amendments.................................... -- 62 -- 1,508
Actuarial (gain)/loss.............................. 711 (136) 1 57
Retiree contributions.............................. -- -- 29 9
Benefits paid...................................... (159) (206) (43) (5)
----------- --------- ---------- ---------
Benefit obligation at end of year.................. $ 7,578 $ 3,786 $ 2,001 $ 1,781
=========== ========= ========== =========

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year..... $ 3,959 $ -- $ -- $ --
Actual return on plan assets....................... (99) (37) -- --
Retiree contributions.............................. -- -- 29 9
Employer contributions............................. 3,119 4,202 14 (4)
Benefits paid...................................... (159) (206) (43) (5)
----------- --------- ---------- ---------
Fair value of plan assets at end of year........... $ 6,820 $ 3,959 $ -- $ --
=========== ========= ========== =========

RECONCILIATION OF FUNDED STATUS
Funded status...................................... $ (758) $ 173 $ (2,001) $ (1,781)
Unrecognized prior service cost.................... 47 54 1,255 1,381
Unrecognized actuarial loss........................ 1,255 68 58 57
----------- --------- ---------- ---------
Net amount recognized.............................. $ 544 $ 295 $ (688) $ (343)
=========== ========= ========== =========
</Table>

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

OTHER PLANS

DEFS also sponsors an employee savings plan, which covers substantially
all employees. Plan contributions on behalf of the Company of $2.8 million, $3.1
million and $2.2 million were expensed during the years ended December 31, 2002,
2001 and 2000, respectively.

NOTE 17. COMMITMENTS AND CONTINGENCIES

In the fall of 1999 and on December 1, 2000, the General Partner and
the Partnership were named as defendants in two separate lawsuits in Jackson
County Circuit Court, Jackson County, Indiana, styled Ryan E. McCleery and
Marcia S. McCleery, et. al. v. Texas Eastern Corporation, et. al. (including the
General Partner and Partnership) and Gilbert Richards and Jean Richards v. Texas
Eastern Corporation, et. al. (including the General Partner and Partnership). In
both cases, the plaintiffs contend, among other things, that we and other
defendants stored and disposed of toxic and hazardous substances and hazardous
wastes in a manner that caused the materials to be released into the air, soil
and water. They further contend that the release caused damages to the
plaintiffs. In

F-33

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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. We have filed an answer to both
complaints, denying the allegations, as well as various other motions. These
cases are not covered by insurance. Discovery is ongoing, and we are defending
ourselves vigorously against the lawsuits. The plaintiffs have not stipulated
the amount of damages that they are seeking in the suit. We cannot estimate the
loss, if any, associated with these pending lawsuits.

On December 21, 2001, TE Products was named as a defendant in a lawsuit
in the 10th Judicial District, Natchitoches Parish, Louisiana, styled Rebecca L.
Grisham et. al. v. TE Products Pipeline Company, Limited Partnership. In this
case, the plaintiffs contend that our pipeline, which crosses the plaintiff's
property, leaked toxic products onto the plaintiff's property. The plaintiffs
further contend that this leak caused damages to the plaintiffs. We have 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. We are
defending ourselves vigorously against the lawsuit. We cannot estimate the
damages, if any, associated with this pending lawsuit; however, this case is
covered by insurance.

On April 19, 2002, we, through our subsidiary TEPPCO Crude Oil, L.P.,
filed a declaratory judgment action in the U.S. District Court for the Western
District of Oklahoma against D.R.D. Environmental Services, Inc. ("D.R.D.")
seeking resolution of billing and other contractual disputes regarding potential
overcharges for environmental remediation services provided by D.R.D. On May 28,
2002, D.R.D. filed a counterclaim for alleged breach of contract in the amount
of $2,243,525, and for unspecified damages for alleged tortious interference
with D.R.D.'s contractual relations with DEFS. We have denied the counterclaims.
Discovery is ongoing. If D.R.D. should be successful, management believes that a
substantial portion of the $2,243,525 breach of contract claim will be covered
under an indemnity from DEFS. We cannot predict the outcome of the litigation
against us; however, we are defending ourselves vigorously against the
counterclaim. We do not believe that the outcome of this lawsuit will have a
material adverse effect on our financial position, results of operations or cash
flows.

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

In February 2002, a producer on the Jonah system sent a letter to
Alberta Energy Company implying that as a result of our acquisition of the Jonah
system, it may have a right to acquire all or a portion of the assets comprising
the Jonah system pursuant to an alleged right of first refusal in a gas
gathering agreement between the producer and Jonah. Subsidiaries of Alberta
Energy Company have agreed to indemnify us against losses resulting from any
breach of representations concerning the absence of third party rights in
connection with our acquisition of the entity that owns the Jonah system. We
believe that we have adequate legal defenses if the producer should assert a
claim, and we also believe that no right of first refusal on any of the
underlying Jonah system assets has been triggered.

Our operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment. 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 we believe our operations are in material
compliance with applicable environmental laws and regulations, risks of
significant costs and liabilities are inherent in pipeline operations, and we
cannot assure you 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 our operations, could
result in substantial costs and liabilities to us. We believe that changes in
environmental laws and regulations will not have a material adverse effect on
our financial position, results of operations or cash flows in the near term.

F-34

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In 1994, we entered into an Agreed Order with the Indiana Department of
Environmental Management ("IDEM") that resulted in the implementation of a
remediation program for groundwater contamination attributable to our operations
at the Seymour, Indiana, terminal. In 1999, the IDEM approved a Feasibility
Study, which includes our proposed remediation program. We expect the IDEM to
issue a Record of Decision formally approving the remediation program. After the
Record of Decision is issued, we will enter into a subsequent Agreed Order for
the continued operation and maintenance of the remediation program. We have an
accrued liability of $0.4 million at December 31, 2002, for future remediation
costs at the Seymour terminal. We do not expect that the completion of the
remediation program will have a future material adverse effect on our financial
position, results of operations or cash flows.

In 1994, the Louisiana Department of Environmental Quality ("LDEQ")
issued a compliance order for environmental contamination at our Arcadia,
Louisiana, facility. This contamination may be attributable to our operations,
as well as adjacent petroleum terminals operated by other companies. In 1999,
our Arcadia facility and adjacent terminals were directed by the Remediation
Services Division of the LDEQ to pursue remediation of this containment phase.
At December 31, 2002, we have an accrued liability of $0.2 million for
remediation costs at our Arcadia facility. We do not expect that the completion
of the remediation program that we have proposed will have a future material
adverse effect on our financial position, results of operations or cash flows.

At December 31, 2002, we have an accrued liability of $5.6 million and
a receivable of $4.2 million from DEFS related to various TCTM sites requiring
environmental remediation activities. The receivable is based on a contractual
indemnity obligation we received in connection with our acquisition of assets
from a DEFS affiliate in November 1998. The indemnity relates to future
environmental remediation activities attributable to operations of these assets
prior to our acquisition. Under this indemnity obligation, we are responsible
for the first $3.0 million in specified environmental liabilities, and DEFS is
responsible for those environmental liabilities in excess of $3.0 million, up to
a maximum amount of $25.0 million. The majority of the receivable from DEFS
relates to remediation activities at the Velma crude oil site in Stephens
County, Oklahoma. The accrued liability balance at December 31, 2002, also
includes an accrual of $2.3 million related to the Shelby crude oil site in
Stephens County, Oklahoma. At December 31, 2002, it is uncertain if these costs
related to Shelby are covered under the indemnity obligation from DEFS. We are
currently in discussions with DEFS regarding these matters. We do not expect
that the completion of remediation programs associated with TCTM activities will
have a future material adverse effect on our financial position, results of
operations or cash flows.

Centennial entered into credit facilities totaling $150.0 million, and
as of December 31, 2002, $150.0 million was outstanding under those credit
facilities. The proceeds were used to fund construction and conversion costs of
its pipeline system. Each of the participants in Centennial, including TE
Products, originally guaranteed one-third of Centennial's debt up to a maximum
amount of $50.0 million. During the third quarter of 2002, PEPL, one of the
participants in Centennial, was downgraded by Moody's and Standard & Poors to
below investment grade, which resulted in PEPL being in default under its
portion of the Centennial guaranty. Effective September 27, 2002, TE Products
and Marathon increased their guaranteed amounts to one-half of the debt of
Centennial, up to a maximum amount of $75.0 million each, to avoid a default on
the Centennial debt. As compensation to TE Products and Marathon for providing
their additional guarantees, PEPL was required to pay interest at a rate of 4%
per annum to each of TE Products and Marathon on the portion of the additional
guaranty that each has provided for PEPL.

In February 2000, we entered into a joint marketing and development
alliance with Louis Dreyfus Plastics Corporation, now known as Louis Dreyfus
Energy Services, L.P. ("Louis Dreyfus"), in which our Mont Belvieu LPGs storage
and transportation shuttle system services were jointly marketed by Louis
Dreyfus and TE Products. The purpose of the alliance was to expand 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 alliance was a service-oriented, fee-based
venture with no commodity trading activity. TE Products operated the facilities
for the alliance. Under the alliance, Louis Dreyfus invested $6.1 million for
expansion projects at Mont Belvieu. The alliance also stipulated that if certain
earnings thresholds were achieved, a

F-35

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

partnership between TE Products and Louis Dreyfus was to be created effective
January 1, 2003. All terms and earnings thresholds have been met; therefore, we
will be contributing our Mont Belvieu assets to the newly formed partnership.
The economic terms of the partnership are the same as those under the joint
development and marketing alliance. TE Products will continue to operate the
facilities for the partnership. The net book value of the Mont Belvieu assets
that we are contributing to the partnership is approximately $68.2 million. Our
interest in the partnership will be accounted for as an equity investment.

Rates of interstate refined petroleum products and crude oil pipeline
companies, like us, are currently regulated by the FERC primarily through an
index methodology, which allows a pipeline to change its rates based on the
change from year to year in the Producer Price Index for finished goods ("PPI
Index"). Effective as of February 24, 2003, FERC Order on Remand modified the
PPI Index from PPI - 1% to PPI. In the alternative, interstate refined petroleum
products and crude 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 refined petroleum products and crude
oil pipeline companies that the rate is acceptable ("Settlement Rates").

On May 11, 1999, TE Products 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 TE Products Market-Based Rates in certain markets and set for hearing
TE Products' application for Market-Based Rates in certain destination markets
and origin markets. After the matter was set for hearing, TE Products 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, TE Products recognized
approximately $1.7 million of previously deferred transportation revenue in the
second quarter of 2001. As a part of the settlement, TE Products withdrew the
application for Market-Based Rates to the Little Rock, Arkansas, and Arcadia and
Shreveport-Arcadia, Louisiana, destination markets, which are currently subject
to the PPI Index. As a result, we made refunds of approximately $1.0 million in
the third quarter of 2001 for those destination markets.

Substantially all of the petroleum products that we transport and store
are owned by our customers. At December 31, 2002, TCTM and TE Products had
approximately 2.7 million barrels and 17.4 million barrels, respectively, of
products in their custody that was owned by customers. We are obligated for the
transportation, storage and delivery of such products on behalf of our
customers. We maintain insurance adequate to cover product losses through
circumstances beyond our control.

NOTE 18. SEGMENT DATA

We have three reporting segments: transportation and storage of refined
products, LPGs and petrochemicals, which operates as the Downstream Segment;
gathering, transportation, marketing and storage of crude oil, and distribution
of lubrication oils and specialty chemicals, which operates as the Upstream
Segment; and gathering of natural gas, fractionation of NGLs and transportation
of NGLs, which operates as the Midstream Segment. The amounts indicated below as
"Partnership and Other" relate primarily to intercompany eliminations and assets
that we hold that have not been allocated to any of our reporting segments.

Effective January 1, 2002, we realigned our three business segments to
reflect our entry into the natural gas gathering business and the expanded scope
of NGLs operations. We transferred the fractionation of NGLs, which was
previously reflected as part of the Downstream Segment, to the Midstream
Segment. The operation of NGL pipelines, which was previously reflected as part
of the Upstream Segment, was also transferred to the Midstream Segment. We have
adjusted our period-to-period comparisons to conform with the current
presentation.

Our Downstream Segment includes the interstate transportation, storage
and terminaling of petroleum products and LPGs and intrastate transportation of
petrochemicals. Revenues are earned from transportation and

F-36

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

storage of refined products and LPGs, storage and short-haul shuttle
transportation of LPGs at the Mont Belvieu complex, intrastate transportation of
petrochemicals, sale of product inventory and other ancillary services. Our
Downstream Segment's pipeline system extends from southeast Texas through the
central and midwestern United States to the northeastern United States, and is
one of the largest pipeline common carriers of refined petroleum products and
LPGs in the United States. Our Downstream Segment also includes our equity
investment in Centennial.

Our Upstream Segment includes the gathering, transportation, marketing
and storage of crude oil and distribution of lubrication oils and specialty
chemicals, principally in Oklahoma, Texas and the Rocky Mountain region. Our
Upstream Segment also includes the equity earnings from our investment in
Seaway. Seaway is a large diameter pipeline that transports crude oil from the
U.S. Gulf Coast to Cushing, Oklahoma, a central crude oil distribution point for
the Central United States.

Our Midstream Segment includes the fractionation of NGLs in Colorado;
the ownership and operation of two trunkline NGL pipelines in South Texas and
two NGL pipelines in East Texas; and the gathering of natural gas in the Green
River Basin in southwestern Wyoming, through Jonah, which was acquired by our
subsidiaries on September 30, 2001. This segment also includes Chaparral, which
we acquired on March 1, 2002. Chaparral is an NGL pipeline system that extends
from West Texas and New Mexico to Mont Belvieu. The pipeline delivers NGLs to
fractionators and to our existing storage in Mont Belvieu. On June 30, 2002, we
acquired the Val Verde system, which gathers CBM from the Fruitland Coal
Formation of the San Juan Basin in New Mexico and Colorado, and is one of the
largest CBM gathering and treating facilities in the United States. The results
of operations of the Jonah, Chaparral, and Val Verde acquisitions are included
in periods subsequent to September 30, 2001, March 1, 2002, and June 30, 2002,
respectively (See Note 5. Acquisitions).

The tables below include financial information by reporting segment for
the years ended December 31, 2002, 2001 and 2000 (in thousands):.

<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------------------------------
DOWNSTREAM UPSTREAM MIDSTREAM SEGMENTS PARTNERSHIP
SEGMENT SEGMENT SEGMENT TOTAL AND OTHER CONSOLIDATED
---------- ----------- ---------- ----------- ----------- --------------

Revenues...................... $ 243,538 $ 2,861,700 $ 138,922 $ 3,244,160 $ (1,997) $ 3,242,163
Operating expenses,
including power............ 130,324 2,824,106 33,451 2,987,881 (1,997) 2,985,884
Depreciation and
amortization expense....... 30,116 11,186 44,730 86,032 -- 86,032
---------- ----------- ---------- ----------- ----------- --------------
Operating income........... 83,098 26,408 60,741 170,247 -- 170,247
Equity earnings............... (6,815) 18,795 -- 11,980 -- 11,980
Other income, net............. 832 1,532 269 2,633 (806) 1,827
---------- ----------- ---------- ----------- ----------- --------------
Earnings before interest... $ 77,115 $ 46,735 $ 61,010 $ 184,860 $ (806) $ 184,054
========== =========== ========== =========== =========== ==============
</Table>

F-37

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------------------------------------------
DOWNSTREAM UPSTREAM MIDSTREAM SEGMENTS PARTNERSHIP
SEGMENT SEGMENT SEGMENT TOTAL AND OTHER CONSOLIDATED
----------- ----------- ---------- ------------- ------------ ------------

Revenues ..................... $ 264,233 $ 3,255,260 $ 37,242 $ 3,556,735 $ (322) $ 3,556,413
Operating expenses,
including power ........... 119,858 3,227,705 11,482 3,359,045 (322) 3,358,723
Depreciation and
amortization expense ...... 26,699 9,263 9,937 45,099 -- 45,899
----------- ----------- ---------- ------------ ------------ ------------
Operating income .......... 117,676 18,292 15,823 151,791 -- 151,791
Equity earnings .............. (1,149) 18,547 -- 17,398 -- 17,398
Other income, net ............ 1,537 1,188 74 2,799 -- 2,799
----------- ----------- ---------- ------------ ------------ ------------
Earnings before interest... $ 118,064 $ 38,027 $ 15,897 $ 171,988 $ -- $ 171,988
=========== =========== ========== ============ ============ ============

<Caption>
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------- --------------------------------
DOWNSTREAM UPSTREAM MIDSTREAM SEGMENTS PARTNERSHIP
SEGMENT SEGMENT SEGMENT TOTAL AND OTHER CONSOLIDATED
----------- ----------- ---------- ------------ ------------ ------------

Revenues...................... $ 229,234 $ 2,844,245 $ 14,462 $ 3,087,941 $ -- $ 3,087,941
Operating expenses,
including power............ 118,065 2,823,304 2,423 2,943,792 -- 2,943,792
Depreciation and
amortization expense....... 25,728 6,282 3,153 35,163 -- 35,163
----------- ----------- ---------- ------------ ------------ ------------
Operating income........... 85,441 14,659 8,886 108,986 -- 108,986
Equity earnings............... -- 12,214 -- 12,214 -- 12,214
Other income, net............. 1,651 (500) 237 1,388 -- 1,388
----------- ----------- ---------- ------------ ------------ ------------
Earnings before interest... $ 87,092 $ 26,373 $ 9,123 $ 122,588 $ -- $ 122,588
=========== =========== ========== ============ ============ ============
</Table>

The following table provides the total assets for each segment as of
December 31, 2002, 2001 and 2000 (in thousands):

<Table>
<Caption>
DOWNSTREAM UPSTREAM MIDSTREAM SEGMENTS PARTNERSHIP
SEGMENT SEGMENT SEGMENT TOTAL AND OTHER CONSOLIDATED
----------- ----------- ------------ ------------ ----------- --------------

2002....................... $ 883,450 $ $ 1,174,010 $ 2,782,320 $ (11,678) $ 2,770.672

2001....................... 844,036 541,195 2,080,165 (14,817) 2,065,348

2000....................... 714,233 156,662 1,623,476 (666) 1,622,810
</Table>

The following table reconciles the segments total to consolidated net
income (in thousands):

<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------------
2002 2001 2000
------------ ------------ ------------

Earnings before interest.................................. $ 184,054 $ 171,988 $ 122,588
Interest expense.......................................... (70,537) (66,057) (48,982)
Interest capitalized...................................... 4,345 4,000 4,559
Minority interest......................................... -- (800) (789)
------------ ------------ ------------
Net income............................................ $ 117,862 $ 109,131 $ 77,376
============ ============ ============
</Table>

F-38

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 19. COMPREHENSIVE INCOME

SFAS No. 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. As of and for the years ended December 31,
2002 and 2001, the components of comprehensive income were due to the interest
rate swap related to our variable rate revolving credit facility, which is
designated as a cash flow hedge. Changes in the fair value of the cash flow
hedge, to the extent the hedge is effective, are recognized in other
comprehensive income until the hedge interest costs are recognized in earnings.
The table below reconciles reported net income to total comprehensive income for
the years ended December 31, 2002, 2001 and 2000 (in thousands).

YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
----------- ----------- ----------

Net income......................................................... $ 117,862 $ 109,131 $ 77,376
Cumulative effect attributable to adoption of SFAS 133............. -- (10,103) --
Net income (loss) on cash flow hedge............................... 269 (10,221) --
----------- ----------- ----------
Total comprehensive income..................................... $ 118,131 $ 88,807 $ 77,376
=========== =========== ==========
</Table>

The accumulated balance of other comprehensive loss related to cash
flow hedges is as follows (in thousands):

Balance at December 31, 2000....................................... $ --
Cumulative effect of accounting change........................... (10,103)
Net loss on cash flow hedge..................................... (10,221)
Balance at December 31, 2001....................................... $ (20,324)
Net income on cash flow hedge................................... 269
---------------
Balance at December 31, 2002....................................... $ (20,055)
===============
</Table>

NOTE 20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In connection with our issuance of Senior Notes on February 20, 2002,
TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream
Companies, L.P. and Jonah Gas Gathering Company, our significant operating
subsidiaries, issued unconditional guarantees of our debt securities. Effective
with the acquisition of the Val Verde assets on June 30, 2002, our subsidiary,
Val Verde Gas Gathering Company, L.P. also became a significant operating
subsidiary and issued unconditional guarantees of our debt securities. The
guarantees are full, unconditional, and joint and several. TE Products Pipeline
Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P.,
Jonah Gas Gathering Company and Val Verde Gas Gathering Company, L.P. are
collectively referred to as the "Guarantor Subsidiaries."

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

F-39

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<Table>
<Caption>
DECEMBER 31, 2002
---------------------------------------------------------------------------
TEPPCO
TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P.
PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------ ------------- ------------- -------------
(IN THOUSANDS)

Assets
Current assets ................................ $ 241 $ 92,798 $ 286,379 $ (18,851) $ 360,567
Property, plant and equipment - net ........... -- 1,128,803 459,021 -- 1,587,824
Equity investments ............................ 1,011,935 846,991 211,229 (1,785,450) 284,705
Intercompany notes receivable ................. 986,852 -- -- (986,852) --
Intangible assets ............................. -- 434,941 30,433 -- 465,374
Other assets .................................. 6,200 31,135 34,837 -- 72,172
---------- ---------- ---------- ------------ ----------
Total assets ............................... $2,005,228 $2,534,668 $1,021,899 $ (2,791,153) $2,770,642
========== ========== ========== ============ ==========
Liabilities and partners' capital
Current liabilities ........................... $ 30,715 $ 123,169 $ 272,538 $ (59,639) $ 366,783
Long-term debt ................................ 974,264 403,428 -- -- 1,377,692
Intercompany notes payable .................... -- 508,652 437,411 (946,063) --
Other long term liabilities and minority
interest ................................... 6,523 24,230 209 -- 30,962
Redeemable Class B Units held by related
party ...................................... 103,363 -- -- -- 103,363
Total partners' capital ....................... 890,363 1,475,189 311,741 (1,785,451) 891,842
---------- ---------- ---------- ------------ ----------
Total liabilities and partners' capital .... $2,005,228 $2,534,668 $1,021,899 $ (2,791,153) $2,770,642
========== ========== ========== ============ ==========

</Table>

Assets
Current assets ................................ $ 3,100 $ 59,730 $ 223,345 $ (2,695) $ 283,480
Property, plant and equipment - net ........... -- 849,978 330,483 -- 1,180,461
Equity investments ............................ 669,370 309,080 222,815 (909,041) 292,224
Intercompany notes receivable ................. 700,564 11,269 7,404 (719,237) --
Intangible assets ............................. -- 219,525 31,962 -- 251,487
Other assets .................................. 3,853 24,923 33,424 (4,504) 57,696
----------- ----------- ----------- ----------- -----------
Total assets ............................... $ 1,376,887 $ 1,474,505 $ 849,433 $(1,635,477) $ 2,065,348
=========== =========== =========== =========== ===========
Liabilities and partners' capital
Current liabilities ........................... $ 367,094 $ 361,547 $ 310,476 $ (370,275) $ 668,842
Long-term debt ................................ 340,658 375,184 -- -- 715,842
Intercompany notes payable .................... -- 45,410 294,801 (340,211) --
Other long term liabilities and minority
interest ................................... -- 22,994 231 8,628 31,853
Redeemable Class B Units held by related
party ...................................... 105,630 -- -- -- 105,630
Total partners' capital ....................... 563,505 669,370 243,925 (933,619) 543,181
----------- ----------- ----------- ----------- -----------
Total liabilities and partners' capital .... $ 1,376,887 $ 1,474,505 $ 849,433 $(1,635,477) $ 2,065,348
=========== =========== =========== =========== ===========
</Table>

F-40

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------------------------------------
TEPPCO
TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P.
PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------ ------------- ------------- -------------
(IN THOUSANDS)

Operating revenues .................... $ -- $ 336,045 $ 2,908,115 $ (1,997) $ 3,242,163
Costs and expenses .................... -- 216,552 2,857,361 (1,997) 3,071,916
----------- ----------- ----------- ----------- -----------
Operating income ................... -- 119,493 50,754 -- 170,247
----------- ----------- ----------- ----------- -----------
Interest expense - net ................ (51,947) (40,651) -26,347 52,753 (66,192)
Equity earnings ....................... 117,862 59,428 18,795 (184,105) 11,980
Other income - net .................... 51,947 967 1,666 (52,753) 1,827
----------- ----------- ----------- ----------- -----------
Net income ......................... $ 117,862 $ 139,237 $ 44,868 $ (184,105) $ 117,862
=========== =========== =========== =========== ===========

</Table>

<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------------------------------------
TEPPCO
TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P.
PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------ ------------- ------------- -------------
(IN THOUSANDS)

Operating revenues .................... $ -- $ 273,379 $ 3,283,356 $ (322) $ 3,556,413
Costs and expenses .................... -- 152,558 3,252,386 (322) 3,404,622
----------- ----------- ----------- ----------- -----------
Operating income ................... -- 120,821 30,970 -- 151,791
----------- ----------- ----------- ----------- -----------
Interest expense - net ................ (40,143) (30,605) (31,452) 40,143 (62,057)
Equity earnings ....................... 109,131 18,178 18,547 (128,458) 17,398
Other income - net .................... 40,143 1,537 1,262 (40,143) 2,799
----------- ----------- ----------- ----------- -----------
Income before minority interest .... 109,131 109,931 19,327 (128,458) 109,931
Minority interest ..................... -- -- -- (800) (800)
----------- ----------- ----------- ----------- -----------
Net income ......................... $ 109,131 $ 109,931 $ 19,327 $ (129,258) $ 109,131
=========== =========== =========== =========== ===========

</Table>

<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------------
TEPPCO
TEPPCO GUARANTOR NON-GUARANTOR CONSOLIDATING PARTNERS, L.P.
PARTNERS, L.P. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ------------ ------------- ------------- -------------
(IN THOUSANDS)

Operating revenues .................... $ -- $ 229,234 $ 2,858,707 $ -- $ 3,087,941
Costs and expenses .................... -- 143,793 2,835,162 -- 2,978,955
----------- ----------- ----------- ----------- -----------
Operating income ...................... -- 85,441 23,545 -- 108,986
----------- ----------- ----------- ----------- -----------
Interest expense - net ................ (17,773) (27,529) (16,894) 17,773 (44,423)
Equity earnings ....................... 77,376 18,602 12,214 (95,978) 12,214
Other income - net .................... 17,773 1,651 (263) (17,773) 1,388
----------- ----------- ----------- ----------- -----------
Income before minority interest ....... 77,376 78,165 18,602 (95,978) 78,165
Minority interest ..................... -- -- -- (789) (789)
----------- ----------- ----------- ----------- -----------
Net income ............................ $ 77,376 $ 78,165 $ 18,602 $ (96,767) $ 77,376
=========== =========== =========== =========== ===========
</Table>

F-41

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Cash flows from operating activities
Net income .................................. $ 117,862 $ 139,237 $ 44,869 $ (184,106) $ 117,862
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization .......... -- 66,175 19,857 -- 86,032
Earnings in equity investments,
net of distributions ................. 33,994 (2,496) 11,586 (24,683) 18,401
Changes in assets and liabilities
and other ............................ (269,102) 48,638 40,253 192,833 12,622
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities .... (117,246) 251,554 116,565 (15,956) 234,917
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities ......... (378,039) (1,150,967) (253,879) 1,058,170 (724,715)
Cash flows from financing activities ......... 495,285 904,006 138,210 (1,042,214) 495,287
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents .......................... -- 4,593 896 -- 5,489
Cash and cash equivalents at beginning
of period ................................. -- 3,654 21,825 -- 25,479
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period ................................. $ -- $ 8,247 $ 22,721 $ -- $ 30,968
=========== =========== =========== =========== ===========
</Table>

Cash flows from operating activities
Net income ................................. $ 109,131 $ 109,931 $ 19,327 $ (129,258) $ 109,131
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization .......... -- 31,226 14,673 -- 45,899
Earnings in equity investments,
net of distributions .................. (5,219) 10,131 13,417 (3,952) 14,377
Changes in assets and liabilities
and other ............................. 2,874 16,850 (20,783) 800 (259)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities .... 106,786 168,138 26,634 (132,410) 169,148
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities ......... (498,711) (514,178) (43,687) 498,711 (557,865)
Cash flows from financing activities ......... 391,925 340,529 20,947 (366,301) 387,100
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents .......................... -- (5,511) 3,894 -- (1,617)
Cash and cash equivalents at beginning
of period ................................. -- 9,166 17,930 -- 27,096
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period ................................. $ -- $ 3,655 $ 21,824 $ -- $ 25,479
=========== =========== =========== =========== ===========
</Table>

F-42

TEPPCO PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Cash flows from operating activities
Net income ................................. $ 77,376 $ 78,165 $ 18,602 ($ 96,767) $ 77,376
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization .......... -- 25,728 9,435 -- 35,163
Earnings in equity investments,
net of distributions .................. 4,025 (1,962) (10,260) (1,887) (10,084)
Changes in assets and liabilities
and other ............................. 7,242 1,046 845 (3,543) 5,590
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities .... 88,643 102,977 18,622 (102,197) 108,045
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities ......... (535,048) (67,225) (434,113) 542,192 (494,194)
Cash flows from financing activities ......... 446,405 (42,870) 417,112 (439,995) 380,652
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ......................... -- (7,118) 1,621 -- (5,497)
Cash and cash equivalents at beginning
of period ................................ -- 16,284 16,309 -- 32,593
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period ................................ $ -- $ 9,166 $ 17,930 $ -- $ 27,096
=========== =========== =========== =========== ===========
</Table>

NOTE 21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (1)

<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)

2002 (2)
Operating revenues ...................... $ 631,137 $ 888,329 $ 880,804 $ 841,893
Operating income ........................ 37,586 37,356 47,087 48,218
Net income .............................. 26,808 24,377 32,093 34,584

Basic and Diluted income per Limited .... $ 0.46 $ 0.39 $ 0.48 $ 0.46
Partner and Class B Unit (2)

2001 (3)
Operating revenues ...................... $ 785,235 $1,073,682 $ 990,816 $ 706,680
Operating income ........................ 36,465 53,247 27,352 34,727
Net income .............................. 25,735 43,038 19,092 21,266
Basic income per Limited ................ $ 0.55 $ 0.90 $ 0.35 $ 0.40
Partner and Class B Unit (3)
Diluted income per Limited .............. $ 0.55 $ 0.89 $ 0.35 $ 0.40
Partner and Class B Unit (3)
</Table>

- ---------

(1) Certain reclassifications have been made to the quarterly information
to conform with the current presentation.

(2) Per Unit calculation includes 2,000,000 Limited Partner Units issued in
February 2001, 250,000 Limited Partner Units issued in March 2001, and
5,500,000 Limited Partner Units issued in November 2001.

F-43

TEPPCO PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

(3) Per Unit calculation includes 1,920,000 Limited Partner Units issued in
March 2002, 3,175,000 Limited Partner Units issued in July and August
2002, 4,370,000 Limited Partner Units issued in September 2002,
3,300,000 Limited Partner Units issued in November 2002, 495,000<<
Limited Partner Units issued in December 2002, and 99,597 Limited
Partner Units issued through the exercise of Unit options in 2002.

NOTE 22. SUBSEQUENT EVENTS

On January 30, 2003, we received $197.3 million in net proceeds, after
underwriting discount, from the issuance of $200.0 million principal amount of
6.125% Senior Notes due 2013. The 6.125% Senior Notes were issued at a discount
of $1.4 million and will be accreted to their face value over the term of the
notes. We used $182.0 million of the proceeds from the offering to reduce the
outstanding principal on the Three Year Facility to $250.0 million. The balance
of the proceeds of $15.3 million was used for general purposes. The Senior Notes
may be redeemed at any time at our option with the payment of accrued interest
and a make-whole premium determined by discounting remaining interest and
principal payments using a discount rate equal to the rate of the United States
Treasury securities of comparable remaining maturity plus 35 basis points. The
indenture governing our 6.125% Senior Notes contains covenants, including, but
not limited to, covenants limiting the creation of liens securing indebtedness
and sale and leaseback transactions. However, the indenture does not limit our
ability to incur additional indebtedness. Our Guarantor Subsidiaries issued
unconditional guarantees of these Senior Notes (see Note 20. Supplemental
Condensed Consolidating Financial Information).

In January 2003, TE Products entered into a pipeline capacity lease
agreement with Centennial for a period of five years. On February 10, 2003, TE
Products acquired an additional interest in Centennial from PEPL for $20.0
million, increasing its percentage ownership in Centennial to 50%. Upon closing
of the acquisition, TE Products and Marathon each own a 50% ownership interest
in Centennial. In connection with the acquisition of the additional interest in
Centennial, the guaranty agreement between TE Products, Marathon and PEPL was
terminated. TE Products' guaranty of up to a maximum of $75.0 million of
Centennial's debt remains in effect.

F-44

INDEPENDENT AUDITORS' REPORT ON CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE

To the Partners of TEPPCO Partners, L.P.:

Under date of January 22, 2003, except as to note 22 which is as of
February 10, 2003, we reported on the consolidated balance sheets of TEPPCO
Partners, L.P. as of December 31, 2002 and 2001, and the related consolidated
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 2002. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule. This consolidated financial
statement schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the consolidated financial statement
schedule based on our audits.

In our opinion, the consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

KPMG LLP

Houston, Texas
January 22, 2003

S-1

SCHEDULE II
TEPPCO PARTNERS, L.P.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS)

<Table>
<Caption>
BALANCE AT ADDITIONS CHARGED TO
BEGINNING OF RELATED TO COSTS AND DEDUCTIONS AND BALANCE AT
OF PERIOD ACQUISITIONS EXPENSES OTHER END OF PERIOD
------------ ------------- ------------ -------------- -------------

ENVIRONMENTAL RESERVE:

Year Ended December 31, 2000.................... $ (5,089) $ -- $ (497) $ 1,938 $ (3,648)

Year Ended December 31, 2001.................... (3,648) (300) (8,691) 6,205 (6,434)

Year Ended December 31, 2002.................... (6,434) -- (5,785) 4,526 (7,693)

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Year Ended December 31, 2000.................... $ -- $ -- $ -- $ -- $ --

Year Ended December 31, 2001.................... -- -- (4,422) -- (4,422)

Year Ended December 31, 2002.................... (4,422) -- (325) 139 (4,608)
</Table>

S-2