UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


____________________


FORM
10-Q





þQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For
the quarterly period ended September 30, 2008





OR





 ̈TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF
1934




For
the transition period from _____ to _____.








Commission
File No. 1-10403


____________________


TEPPCO
Partners, L.P.


(Exact
name of Registrant as specified in its charter)





Delaware
            76-0291058(State
      of Other Jurisdiction of
            (I.R.S.
      Employer Identification Number)Incorporation
      or Organization)





1100
Louisiana Street, Suite 1600


Houston,
Texas 77002


(Address
of principal executive offices, including zip code)





(713)
381-3636


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  þ No
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




Large
      accelerated filer þ
            Accelerated
      Filer oNon-accelerated
      Filer o(Do not
      check if a smaller reporting company)
            Smaller
      reporting company o





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o      No
þ





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.  Limited Partner Units
outstanding as of November 3, 2008:  104,524,501








TEPPCO
PARTNERS, L.P.
   TABLE
OF CONTENTS




Page No.PART
      I.  FINANCIAL INFORMATIONItem
      1.  Financial
      StatementsUnaudited Condensed Consolidated
      Balance Sheets
                                                                1Unaudited Condensed Statements of
      Consolidated Income
                                                                2Unaudited Condensed Statements of
      Comprehensive Income
                                                                3Unaudited Condensed Statements of
      Consolidated Cash Flows
                                                                4Unaudited Condensed Statements of
      Consolidated Partners’ Capital
                                                                5Notes to Unaudited Condensed
      Consolidated Financial Statements
                                                                6Note
      1.  Partnership Organization and Basis of
      Presentation
                                                                6Note
      2.  General Accounting Policies and Related
    Matters
                                                                7Note
      3.  Accounting for Unit-Based Awards
                                                                11Note
      4.  Employee Benefit Plans
                                                                15Note
      5.  Financial Instruments
                                                                16Note
      6.  Inventories
                                                                20Note
      7.  Property, Plant and Equipment
                                                                20Note
      8.  Investments in Unconsolidated Affiliates
                                                                22Note
      9.  Acquisitions and Dispositions
                                                                25Note
      10.  Intangible Assets and Goodwill
                                                                30Note
      11.  Debt Obligations
                                                                32Note
      12.  Partners’ Capital and Distributions
                                                                36Note
      13.  Business Segments
                                                                39Note
      14.  Related Party Transactions
                                                                43Note
      15.  Earnings per Unit
                                                                46Note
      16.  Commitments and Contingencies
                                                                48Note
      17.  Supplemental Cash Flow Information
                                                                52Note
      18.  Supplemental Condensed Consolidating Financial
      Information
                                                                53Item
      2.  Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
                                                                58Cautionary Note Regarding
      Forward-Looking Statements
                                                                59Item
      3.  Quantitative and Qualitative
      Disclosures About Market Risk
                                                                86Item
      4.  Controls
      and Procedures
                                                                88PART
      II.  OTHER INFORMATIONItem
      1.  Legal
      Proceedings
                                                                89Item
      1A.  Risk
      Factors
                                                                89Item 5.  Other
      Information
                                                                91Item
      6.  Exhibits
                                                                91Signatures
                                                                94


i
 
 PART
I. FINANCIAL INFORMATION
 Item
1. Financial
Statements.
 TEPPCO
PARTNERS,  L.P.
 
 UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars
in thousands)





September
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  55
                  
                  
                  $
                  23Accounts
      receivable, trade (net of allowance for doubtful accounts
    of$1,525
      and $125)
                  
                  
                  1,715,504
                  
                  
                  
                  1,381,871Accounts
      receivable, related
      parties
                  
                  
                  6,410
                  
                  
                  
                  6,525Inventories
                  
                  
                  170,290
                  
                  
                  
                  80,299Other
                  
                  
                  78,541
                  
                  
                  
                  47,271Total
      current
      assets
                  
                  
                  1,970,800
                  
                  
                  
                  1,515,989Property, plant and equipment,
      at cost (net of accumulateddepreciation
      of $651,936 and
      $582,225)
                  
                  
                  2,372,694
                  
                  
                  
                  1,793,634Equity
      investments
                  
                  
                  1,191,377
                  
                  
                  
                  1,146,995Intangible
      assets
                  
                  
                  214,370
                  
                  
                  
                  164,681Goodwill
                  
                  
                  106,404
                  
                  
                  
                  15,506Other
      assets
                  
                  
                  129,980
                  
                  
                  
                  113,252Total
      assets
                  
                  $
                  5,985,625
                  
                  
                  $
                  4,750,057LIABILITIES
      AND PARTNERS’ CAPITALCurrent
      liabilities:Senior
      notes
                  
                  $
                  --
                  
                  
                  $
                  353,976Accounts
      payable and accrued
      liabilities
                  
                  
                  1,809,746
                  
                  
                  
                  1,413,447Accounts
      payable, related
      parties
                  
                  
                  38,940
                  
                  
                  
                  38,980Accrued
      interest
                  
                  
                  49,327
                  
                  
                  
                  35,491Other
      accrued
      taxes
                  
                  
                  29,970
                  
                  
                  
                  20,483Other
                  
                  
                  50,608
                  
                  
                  
                  84,848Total
      current
      liabilities
                  
                  
                  1,978,591
                  
                  
                  
                  1,947,225Long-term
      debt:Senior
      notes
                  
                  
                  1,714,463
                  
                  
                  
                  721,545Junior
      subordinated
      notes
                  
                  
                  299,565
                  
                  
                  
                  299,538Other
      long-term
      debt
                  
                  
                  324,717
                  
                  
                  
                  490,000Total
      long-term
      debt
                  
                  
                  2,338,745
                  
                  
                  
                  1,511,083Other
      liabilities and deferred
      credits
                  
                  
                  30,138
                  
                  
                  
                  27,122Commitments
      and contingenciesPartners’
      capital:Limited
      partners’ interests:Limited
      partner units (104,367,201 and 89,849,132 units
    outstanding)
                  
                  
                  1,788,146
                  
                  
                  
                  1,394,812Restricted
      limited partner units (157,300 and 62,400 units
    outstanding)
                  
                  
                  1,059
                  
                  
                  
                  338General
      partner’s
      interest
                  
                  
                  (100,709
                  )
                  
                  
                  (87,966
                  )Accumulated
      other comprehensive
      loss
                  
                  
                  (50,345
                  )
                  
                  
                  (42,557
                  )Total partners’
      capital
                  
                  
                  1,638,151
                  
                  
                  
                  1,264,627Total liabilities and partners’
      capital
                  
                  $
                  5,985,625
                  
                  
                  $
                  4,750,057




See Notes
to Unaudited Condensed Consolidated Financial Statements.




1
 TEPPCO
PARTNERS,  L.P.
 
 UNAUDITED
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
 (Dollars
in thousands, except per Unit amounts)





For
      the Three Months Ended
                                      
                                      
                                      For
      the Nine Months EndedSeptember
      30,
                                      
                                      
                                      September
      30,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2008
                                      
                                      
                                      2007Operating
      revenues:Sales
      of petroleum products
                                      
                                      $
                                      4,025,641
                                      
                                      
                                      $
                                      2,455,695
                                      
                                      
                                      $
                                      10,676,786
                                      
                                      
                                      $
                                      6,238,927Transportation
      – Refined products
                                      
                                      
                                      42,203
                                      
                                      
                                      
                                      48,123
                                      
                                      
                                      
                                      123,602
                                      
                                      
                                      
                                      126,976Transportation
      – LPGs
                                      
                                      
                                      16,335
                                      
                                      
                                      
                                      16,735
                                      
                                      
                                      
                                      68,589
                                      
                                      
                                      
                                      69,535Transportation
      – Crude oil
                                      
                                      
                                      15,759
                                      
                                      
                                      
                                      12,332
                                      
                                      
                                      
                                      48,491
                                      
                                      
                                      
                                      32,702Transportation
      – NGLs
                                      
                                      
                                      12,560
                                      
                                      
                                      
                                      12,023
                                      
                                      
                                      
                                      38,218
                                      
                                      
                                      
                                      34,062Transportation
      – Marine
                                      
                                      
                                      46,018
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      119,584
                                      
                                      
                                      
                                      --Gathering
      – Natural gas
                                      
                                      
                                      14,620
                                      
                                      
                                      
                                      15,429
                                      
                                      
                                      
                                      42,822
                                      
                                      
                                      
                                      46,289Other
                                      
                                      
                                      32,608
                                      
                                      
                                      
                                      20,320
                                      
                                      
                                      
                                      76,603
                                      
                                      
                                      
                                      60,031Total
      operating revenues
                                      
                                      
                                      4,205,744
                                      
                                      
                                      
                                      2,580,657
                                      
                                      
                                      
                                      11,194,695
                                      
                                      
                                      
                                      6,608,522Costs
      and expenses:Purchases
      of petroleum products
                                      
                                      
                                      3,989,484
                                      
                                      
                                      
                                      2,426,692
                                      
                                      
                                      
                                      10,571,817
                                      
                                      
                                      
                                      6,141,630Operating expense
                                      
                                      
                                      80,868
                                      
                                      
                                      
                                      45,375
                                      
                                      
                                      
                                      201,210
                                      
                                      
                                      
                                      134,458Operating
      fuel and power
                                      
                                      
                                      25,954
                                      
                                      
                                      
                                      15,060
                                      
                                      
                                      
                                      76,401
                                      
                                      
                                      
                                      45,163General
      and administrative
                                      
                                      
                                      10,846
                                      
                                      
                                      
                                      7,396
                                      
                                      
                                      
                                      30,620
                                      
                                      
                                      
                                      24,158Depreciation
      and amortization
                                      
                                      
                                      32,071
                                      
                                      
                                      
                                      26,486
                                      
                                      
                                      
                                      92,234
                                      
                                      
                                      
                                      77,735Taxes
      – other than income taxes
                                      
                                      
                                      6,662
                                      
                                      
                                      
                                      4,931
                                      
                                      
                                      
                                      19,759
                                      
                                      
                                      
                                      15,149Gains
      on sales of assets
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      (2
                                      )
                                      
                                      
                                      (1
                                      )
                                      
                                      
                                      (18,653
                                      )Total
      costs and expenses
                                      
                                      
                                      4,145,884
                                      
                                      
                                      
                                      2,525,938
                                      
                                      
                                      
                                      10,992,040
                                      
                                      
                                      
                                      6,419,640Operating
      income
                                      
                                      
                                      59,860
                                      
                                      
                                      
                                      54,719
                                      
                                      
                                      
                                      202,655
                                      
                                      
                                      
                                      188,882Other
      income (expense):Interest
      expense – net
                                      
                                      
                                      (34,301
                                      )
                                      
                                      
                                      (26,901
                                      )
                                      
                                      
                                      (105,906
                                      )
                                      
                                      
                                      (71,897
                                      )Gain
      on sale of ownership interest in Mont
                                        Belvieu
      Storage Partners, L.P.
                                      
                                      
                                      --
                                      
                                      
                                      
                                      (20
                                      )
                                      
                                      
                                      --
                                      
                                      
                                      
                                      59,628Equity
      earnings
                                      
                                      
                                      22,133
                                      
                                      
                                      
                                      19,059
                                      
                                      
                                      
                                      63,212
                                      
                                      
                                      
                                      54,856Interest
      income
                                      
                                      
                                      289
                                      
                                      
                                      
                                      454
                                      
                                      
                                      
                                      880
                                      
                                      
                                      
                                      1,241Other
      income – net
                                      
                                      
                                      106
                                      
                                      
                                      
                                      306
                                      
                                      
                                      
                                      905
                                      
                                      
                                      
                                      1,085Income
      before provision for income taxes
                                      
                                      
                                      48,087
                                      
                                      
                                      
                                      47,617
                                      
                                      
                                      
                                      161,746
                                      
                                      
                                      
                                      233,795Provision
      for income taxes
                                      
                                      
                                      1,056
                                      
                                      
                                      
                                      (14
                                      )
                                      
                                      
                                      2,894
                                      
                                      
                                      
                                      213Net
      income
                                      
                                      $
                                      47,031
                                      
                                      
                                      $
                                      47,631
                                      
                                      
                                      $
                                      158,852
                                      
                                      
                                      $
                                      233,582Net Income Allocation:Limited
      Partner’s interest in net income
                                      
                                      $
                                      39,007
                                      
                                      
                                      $
                                      39,656
                                      
                                      
                                      $
                                      132,111
                                      
                                      
                                      $
                                      195,106General
      Partner interest in net income
                                      
                                      
                                      8,024
                                      
                                      
                                      
                                      7,975
                                      
                                      
                                      
                                      26,741
                                      
                                      
                                      
                                      38,476Total
      net income allocated
                                      
                                      $
                                      47,031
                                      
                                      
                                      $
                                      47,631
                                      
                                      
                                      $
                                      158,852
                                      
                                      
                                      $
                                      233,582Basic
      and diluted net income per Limited Partner Unit
                                      
                                      $
                                      0.40
                                      
                                      
                                      $
                                      0.44
                                      
                                      
                                      $
                                      1.39
                                      
                                      
                                      $
                                      2.17Weighted
      average Limited Partner Units outstanding
                                      
                                      
                                      97,316
                                      
                                      
                                      
                                      89,868
                                      
                                      
                                      
                                      95,145
                                      
                                      
                                      
                                      89,835


See Notes
to Unaudited Condensed Consolidated Financial Statements.


2
 TEPPCO
PARTNERS,  L.P.
 
 UNAUDITED
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 (Dollars
in thousands)




For
      the Three Months Ended
                      
                      
                      For
      the Nine Months EndedSeptember
      30,
                      
                      
                      September
      30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Net
      income
                      
                      $
                      47,031
                      
                      
                      $
                      47,631
                      
                      
                      $
                      158,852
                      
                      
                      $
                      233,582Other
      comprehensive income (loss):Cash
      flow hedges:Change
      in fair values of interest rate cash flow
                        hedges
      and treasury locks
                      
                      
                      (27
                      )
                      
                      
                      (2,528
                      )
                      
                      
                      (23,254
                      )
                      
                      
                      (1,016
                      )Changes
      in fair values of crude oil cash flow
                        hedges
                      
                      
                      23,370
                      
                      
                      
                      (3,216
                      )
                      
                      
                      15,466
                      
                      
                      
                      (3,369
                      )Total
      cash flow hedges
                      
                      
                      23,343
                      
                      
                      
                      (5,744
                      )
                      
                      
                      (7,788
                      )
                      
                      
                      (4,385
                      )Total
      other comprehensive income (loss)
                      
                      
                      23,343
                      
                      
                      
                      (5,744
                      )
                      
                      
                      (7,788
                      )
                      
                      
                      (4,385
                      )Comprehensive
      income
                      
                      $
                      70,374
                      
                      
                      $
                      41,887
                      
                      
                      $
                      151,064
                      
                      
                      $
                      229,197


See Notes
to Unaudited Condensed Consolidated Financial Statements.











3
 TEPPCO
PARTNERS, L.P.
 
 UNAUDITED
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
 (Dollars
in thousands, except per Unit amounts)


For
      the Nine Months EndedSeptember
      30,2008
                  
                  
                  2007Operating
      activities:Net
      income
                  
                  $
                  158,852
                  
                  
                  $
                  233,582Adjustments
      to reconcile net income to cash provided by operating
      activities:Deferred
      income taxes
                  
                  
                  5
                  
                  
                  
                  (656
                  )Depreciation
      and amortization
                  
                  
                  92,234
                  
                  
                  
                  77,735Amortization
      of deferred compensation
                  
                  
                  1,257
                  
                  
                  
                  514Amortization
      in interest expense
                  
                  
                  1,461
                  
                  
                  
                  (2,369
                  )Earnings
      in equity investments
                  
                  
                  (63,212
                  )
                  
                  
                  (54,856
                  )Distributions
      from equity investments
                  
                  
                  119,017
                  
                  
                  
                  96,967Gains
      on sales of assets
                  
                  
                  --
                  
                  
                  
                  (18,653
                  )Gain
      on sale of ownership interest in Mont Belvieu Storage Partners,
      L.P.
                  
                  
                  --
                  
                  
                  
                  (59,628
                  )Loss
      on early extinguishment of debt
                  
                  
                  8,689
                  
                  
                  
                  --Net
      effect of changes in operating accounts
                  
                  
                  (23,434
                  )
                  
                  
                  (53,450
                  )Net
      cash provided by operating activities
                  
                  
                  294,869
                  
                  
                  
                  219,186Investing
      activities:Proceeds
      from sales of assets
                  
                  
                  --
                  
                  
                  
                  27,771Proceeds
      from sale of ownership interest
                  
                  
                  --
                  
                  
                  
                  137,326Purchase
      of assets
                  
                  
                  --
                  
                  
                  
                  (12,733
                  )Increase
      in restricted cash
                  
                  
                  --
                  
                  
                  
                  (2,877
                  )Cash
      used for business combinations
                  
                  
                  (351,866
                  )
                  
                  
                  --Investment
      in Centennial Pipeline LLC
                  
                  
                  --
                  
                  
                  
                  (11,081
                  )Investment
      in Jonah Gas Gathering Company
                  
                  
                  (94,875
                  )
                  
                  
                  (127,775
                  )Investment
      in Texas Offshore Port System
                  
                  
                  (8
                  )
                  
                  
                  --Acquisition
      of intangible assets
                  
                  
                  (317
                  )
                  
                  
                  (2,500
                  )Cash
      paid for linefill on assets owned
                  
                  
                  (11,530
                  )
                  
                  
                  (26,613
                  )Capital
      expenditures
                  
                  
                  (215,162
                  )
                  
                  
                  (164,161
                  )Net
      cash used in investing activities
                  
                  
                  (673,758
                  )
                  
                  
                  (182,643
                  )Financing
      activities:Proceeds
      from term credit facility
                  
                  
                  1,000,000
                  
                  
                  
                  --Repayments
      on term credit facility
                  
                  
                  (1,000,000
                  )
                  
                  
                  --Proceeds
      from revolving credit facility
                  
                  
                  1,852,567
                  
                  
                  
                  805,250Repayments
      on revolving credit facility
                  
                  
                  (2,017,850
                  )
                  
                  
                  (918,250
                  )Repayment
      of debt assumed in Cenac acquisition
                  
                  
                  (63,157
                  )
                  
                  
                  --Redemption
      of 7.51% TE Products Senior Notes
                  
                  
                  (181,571
                  )
                  
                  
                  --Repayment
      of 6.45% TE Products Senior Notes
                  
                  
                  (180,000
                  )
                  
                  
                  --Issuance
      of Limited Partner Units, net
                  
                  
                  271,313
                  
                  
                  
                  53Issuance
      of senior notes
                  
                  
                  996,349
                  
                  
                  
                  --Issuance
      of Junior Subordinated Notes
                  
                  
                  --
                  
                  
                  
                  299,517Debt
      issuance costs
                  
                  
                  (9,857
                  )
                  
                  
                  (3,750
                  )Settlement
      of treasury lock agreements
                  
                  
                  (52,098
                  )
                  
                  
                  1,443Payment
      for termination of interest rate swap
                  
                  
                  --
                  
                  
                  
                  (1,235
                  )Distributions
      paid
                  
                  
                  (236,775
                  )
                  
                  
                  (219,613
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  378,921
                  
                  
                  
                  (36,585
                  )Net
      change in cash and cash equivalents
                  
                  
                  32
                  
                  
                  
                  (42
                  )Cash
      and cash equivalents, January 1
                  
                  
                  23
                  
                  
                  
                  70Cash
      and cash equivalents, September 30
                  
                  $
                  55
                  
                  
                  $
                  28


See Notes
to Unaudited Condensed Consolidated Financial Statements.





4
 TEPPCO
PARTNERS, L.P.
 
 UNAUDITED
CONDENSED STATEMENTS OF CONSOLIDATED PARTNERS’ CAPITAL
 (Dollars
in thousands, except Unit amounts)










Outstanding
                
                
                
                
                
                
                
                
                AccumulatedLimited
                
                
                General
                
                
                Limited
                
                
                OtherPartner
                
                
                Partner’s
                
                
                Partners’
                
                
                ComprehensiveUnits
                
                
                Interest
                
                
                Interests
                
                
                Loss
                
                
                TotalBalance,
      December 31, 2007
                
                
                89,911,532
                
                
                $
                (87,966
                )
                
                $
                1,395,150
                
                
                $
                (42,557
                )
                
                $
                1,264,627Net income
      allocation
                
                
                --
                
                
                
                26,741
                
                
                
                132,111
                
                
                
                --
                
                
                
                158,852Issuance of units in connection
      with Cenac
                  acquisition
      on February 1, 2008
                
                
                4,854,899
                
                
                
                --
                
                
                
                186,558
                
                
                
                --
                
                
                
                186,558Limited Partner Units issued in
      connection
                  with
      Distribution Reinvestment Plan
                
                
                205,288
                
                
                
                --
                
                
                
                6,773
                
                
                
                --
                
                
                
                6,773Units
      issued in connection with Employee
                  Unit
      Purchase Plan
                
                
                16,502
                
                
                
                --
                
                
                
                570
                
                
                
                --
                
                
                
                570Issuance of restricted units
      under 2006
                  LTIP
                
                
                94,900
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --Issuance of Limited Partner
      Units, net
                
                
                9,441,380
                
                
                
                --
                
                
                
                263,970
                
                
                
                --
                
                
                
                263,970Cash
      distributions
                
                
                --
                
                
                
                (39,484
                )
                
                
                (197,291
                )
                
                
                --
                
                
                
                (236,775
                )Non-cash
      contribution
                
                
                --
                
                
                
                --
                
                
                
                474
                
                
                
                --
                
                
                
                474Amortization of equity
      awards
                
                
                --
                
                
                
                --
                
                
                
                890
                
                
                
                --
                
                
                
                890Changes in fair values of crude
      oil cash
                  flow
      hedges
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                15,466
                
                
                
                15,466Changes in fair values of
      treasury locks
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (23,254
                )
                
                
                (23,254
                )Balance,
      September 30, 2008
                
                
                104,524,501
                
                
                $
                (100,709
                )
                
                $
                1,789,205
                
                
                $
                (50,345
                )
                
                $
                1,638,151





See Notes
to Unaudited Condensed Consolidated Financial Statements.





5
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Except
per unit amounts, or as noted within the context of each footnote disclosure,
the dollar amounts presented in the tabular data within these footnote
disclosures are stated in thousands.







NOTE
1.  PARTNERSHIP ORGANIZATION AND BASIS OF PRESENTATION





Partnership
Organization





TEPPCO
Partners, L.P. (the “Partnership”), is a publicly traded Delaware limited
partnership and our limited partner units (“Units”) are listed on the New York
Stock Exchange (“NYSE”) under the ticker symbol “TPP”.  As used in
this Report, “we,” “us,” “our,” the “Partnership” and “TEPPCO” mean TEPPCO
Partners, L.P. and, where the context requires, include our
subsidiaries.




We
operate through TE Products Pipeline Company, LLC (“TE Products”), TCTM, L.P.
(“TCTM”) and TEPPCO Midstream Companies, LLC (“TEPPCO Midstream”), and beginning
February 1, 2008, through TEPPCO Marine Services, LLC (“TEPPCO Marine
Services”).  Texas Eastern Products Pipeline Company, LLC (the
“General Partner”), a Delaware limited liability company, serves as our general
partner and owns a 2% general partner interest in us.  We hold a
99.999% limited partner interest in TCTM, 99.999% membership interests in each
of TE Products and TEPPCO Midstream and a 100% membership interest in TEPPCO
Marine Services.  TEPPCO GP, Inc. (“TEPPCO GP”), our subsidiary, holds
a 0.001% general partner interest in TCTM and a 0.001% managing member interest
in each of TE Products and TEPPCO Midstream.




Through
May 6, 2007, our General Partner was owned by DFI GP Holdings L.P. (“DFIGP”), an
affiliate of EPCO, Inc. (“EPCO”), a privately held company controlled by Dan L.
Duncan.  On May 7, 2007, DFIGP sold all of the membership interests in
our General Partner, together with 4,400,000 of our Units, to Enterprise GP
Holdings L.P. (“Enterprise GP Holdings”), a publicly traded partnership, also
controlled indirectly by Dan L. Duncan. Mr. Duncan and certain of his
affiliates, including Enterprise GP Holdings and Dan Duncan LLC, a privately
held company controlled by him, control us, our General Partner and Enterprise
Products Partners L.P. (“Enterprise Products Partners”) and its affiliates,
including Duncan Energy Partners L.P. (“Duncan Energy Partners”).  As
of May 7, 2007, Enterprise GP Holdings owns and controls the 2% general partner
interest in us and has the right (through its 100% ownership of our General
Partner) to receive the incentive distribution rights associated with the
general partner interest.  Enterprise GP Holdings, DFIGP and other
entities controlled by Mr. Duncan own 16,950,130 of our Units.  Under
an amended and restated administrative services agreement (“ASA”), EPCO performs
management, administrative and operating functions required for us, and we
reimburse EPCO for all direct and indirect expenses that have been incurred in
managing us.




Basis
of Presentation




The accompanying unaudited condensed
consolidated financial statements reflect all adjustments that are, in the
opinion of our management, of a normal and recurring nature and necessary for a
fair statement of our financial position as of September 30, 2008, and the
results of our operations and cash flows for the periods
presented.  The results of operations for the three months and nine
months ended September 30, 2008, are not necessarily indicative of results of
our operations for the full year 2008.  The unaudited condensed
consolidated financial statements have been prepared pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission
(“SEC”).  Certain information and note disclosures normally included
in annual financial statements prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) have been condensed or omitted pursuant
to those rules and regulations.  You should read these interim
financial statements in conjunction with our consolidated financial statements
and notes thereto presented in the TEPPCO Partners, L.P. Annual Report on Form
10-K for the year ended December 31, 2007.





6
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





NOTE
2.  GENERAL ACCOUNTING POLICIES AND RELATED MATTERS





Business
Segments





We operate and report in four business
segments:




§
            pipeline
      transportation, marketing and storage of refined products, liquefied
      petroleum gases (“LPGs”) and petrochemicals (“Downstream
      Segment”);


§
            gathering,
      pipeline transportation, marketing and storage of crude oil and
      distribution of lubrication oils and specialty chemicals (“Upstream
      Segment”);


§
            gathering
      of natural gas, fractionation of natural gas liquids (“NGLs”) and pipeline
      transportation of NGLs (“Midstream Segment”);
  and


§
            marine
      transportation of refined products, crude oil, condensate, asphalt, heavy
      fuel oil and other heated oil products via tow boats and tank barges
      (“Marine Services Segment”).




Our
reportable segments offer different products and services and are managed
separately because each requires different business strategies (see Note
13).




Our interstate pipeline transportation
operations, including rates charged to customers, are subject to regulations
prescribed by the Federal Energy Regulatory Commission (“FERC”).  We
refer to refined products, LPGs, petrochemicals, crude oil, lubrication oils and
specialty chemicals, NGLs, natural gas, asphalt, heavy fuel oil and other heated
oil products in this Report, collectively, as “petroleum products” or
“products.”





Consolidation
Policy





Our
consolidated financial statements include our accounts and those of our
majority-owned subsidiaries in which we have a controlling financial or equity
interest, after the elimination of all intercompany accounts and
transactions.  We evaluate our financial interests in companies to
determine if they represent variable interest entities where we are the primary
beneficiary.  If such criteria are met, we consolidate the financial
statements of such businesses with those of our own.





If an
investee is organized as a limited partnership or limited liability company and
maintains separate ownership accounts, we account for our investment using the
equity method if our ownership interest is between 3% and 50% and we exercise
significant influence over the entity’s operating and financial
policies.  For all other types of investments, we apply the equity
method of accounting if our ownership interest is between 20% and 50% and we
exercise significant influence over the entity’s operating and financial
policies.  In consolidation, we eliminate our proportionate share of
profits and losses from transactions with equity method unconsolidated
affiliates to the extent such amounts are material and remain on our balance
sheet (or those of our equity method investments) in inventory or similar
accounts.  Our investments in Seaway Crude Pipeline Company (“Seaway”)
and Centennial Pipeline LLC (“Centennial”) are accounted for under the equity
method of accounting, as we own 50% ownership interests in these entities and
have 50% equal management with the other joint venture
participants.  Our investment in Texas Offshore Port System is
accounted for under the equity method of accounting, as we own a 33% ownership
interest in this entity and have equal voting rights with the other joint
venture participants.  Our investment in Jonah Gas Gathering Company
(“Jonah”) is accounted for under the equity method of accounting, as we have 50%
equal management with the other participant, even though we own an approximate
80% economic interest in the partnership.





If our ownership interest in an entity
does not provide us with either control or significant influence over the
investee, we account for the investment using the cost method.








7
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





Environmental
Expenditures





We accrue
for environmental costs that relate to existing conditions caused by past
operations, including conditions with assets we have
acquired.  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 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 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.  None of our estimated environmental remediation
liabilities are discounted to present value since the ultimate amount and timing
of cash payments for such liabilities are not readily
determinable.  Expenditures to mitigate or prevent future
environmental contamination are capitalized.





At
September 30, 2008 and December 31, 2007, our accrued liabilities for
environmental remediation projects totaled $7.1 million and $4.0 million,
respectively.  These amounts were derived from a range of reasonable
estimates based upon studies and site surveys.  Unanticipated changes
in circumstances and/or legal requirements could result in expenses being
incurred in future periods in addition to an increase in actual cash required to
remediate contamination for which we are responsible.





Estimates




The preparation of financial statements
in conformity with GAAP 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.  Although we believe these estimates are
reasonable, actual results could differ from those estimates.




Recent
Accounting Developments





The following information summarizes
recently issued accounting guidance since those reported in our Annual Report on
Form 10-K for the year ended December 31, 2007 that will or may affect our
future financial statements.





In March 2008, the Financial Accounting
Standards Board (“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 161, Disclosures
about Derivative Instruments and Hedging Activities an–amendment ofFASB Statement No.
133.  SFAS 161 changes the disclosure requirements
for financial instruments and hedging activities with the intent to provide
users of financial statements with an enhanced understanding of (i) how and why
an entity uses financial instruments, (ii) how financial instruments
and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations and
(iii) how financial instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows.  SFAS 161
requires qualitative disclosures about objectives and strategies for using
financial instruments, quantitative disclosures about fair value amounts of and
gains and losses on financial instruments and disclosures about credit
risk-related contingent features in financial instrument
agreements.  This statement has the same scope as SFAS 133, and
accordingly applies to all entities.  SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged.  This statement
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption.  SFAS 161





8
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





only
affects disclosure requirements; therefore, our adoption of this statement
effective January 1, 2009 will not impact our financial position, results of
operations or cash flows.





In March 2008, the Emerging Issues Task
Force (“EITF”), reached consensus on EITF Issue No. 07-4, Application of the Two-Class Method
under FASB Statement No. 128 to Master Limited Partnerships. This
guidance prescribes the manner in which a master limited partnership (“MLP”)
should allocate and present earnings per unit using the two-class method set
forth in SFAS No. 128, Earnings per
Share.  Under the two-class method, current period earnings are
allocated to the general partner (including any embedded incentive distribution
rights) and limited partners according to the distribution formula for available
cash set forth in the MLP’s partnership agreement.  EITF 07-4 is
effective for us on January 1, 2009.  We do not believe that EITF 07-4
will have a material impact on our earnings per unit computations and
disclosures.





In June 2008, FASB Staff Position
(“FSP”) No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
was issued.  FSP EITF 03-6-1 clarifies that unvested share-based
payment awards constitute participating securities, if such awards include
nonforfeitable rights to dividends or dividend
equivalents.  Consequently, awards that are deemed to be participating
securities must be allocated earnings in the computation of earnings per share
under the two-class method.  FSP EITF 03-6-1 is effective for us on
January 1, 2009.  We do not believe that FSP EITF 03-6-1 will have a
material impact on our earnings per unit computations and
disclosures.





In February 2008, FSP SFAS No, 157-2,
Effective Date of FASB
Statement No. 157, was issued.  FSP 157-2 defers the effective
date of SFAS 157, Fair Value
Measurements, to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years, for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually).  As allowed under FSP 157-2, we have not applied the
provisions of SFAS 157 to our nonfinancial assets and liabilities measured at
fair value, which include certain assets and liabilities acquired in business
combinations.  On January 1, 2008, we adopted the provisions of SFAS
157 that apply to financial assets and liabilities.  See Note 5 for
these fair value disclosures.  We do not expect any immediate impact
from adoption of the remaining portions of SFAS 157 on January 1,
2009.




In
light of current market conditions, the FASB has issued additional clarifying
guidance regarding the implementation of SFAS 157, particularly with respect to
financial assets that do not trade in active markets such as investments in
joint ventures.   This clarifying guidance did not result in a
change in our accounting, reporting or impairment testing for such investments.
We continue to monitor developments at the FASB and SEC for new matters and
guidance that may affect our valuation processes.


In April 2008, the FASB issued FSP No.
142-3, Determination of the
Useful Life of Intangible Assets(“FSP 142-3”),which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful lives of recognized intangible assets under SFAS No.
142, Goodwill and Other
Intangible Assets.  This change is intended to improve
consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair
value of such assets under SFAS 141(R) and other accounting
guidance.  The requirement for determining useful lives must be
applied prospectively to intangible assets acquired after January 1, 2009 and
the disclosure requirements must be applied prospectively to all intangible
assets recognized as of, and subsequent to, January 1, 2009.  We will
adopt the provisions of FSP 142-3 on January 1, 2009.





Revenue
Recognition





Our Downstream Segment revenues are
earned from pipeline transportation, marketing and storage of refined products
and LPGs, intrastate pipeline 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. Refined products terminaling revenues are recognized as
products are out-loaded.  From time to time, we buy and sell products
to balance our inventory for operational needs, and the revenues from the sale
of product inventory are recognized when the products are sold.  Our
refined products marketing activities generate revenues by purchasing refined
products from our throughput partner and establishing a margin by selling
refined products for physical delivery







9
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





through
spot and contract sales.  These marketing activities are conducted at
our Aberdeen and Boligee truck racks to independent wholesalers and retailers of
refined products.  Spot purchases and sales are generally contracted
to occur on the same day.




Our Upstream Segment revenues are
earned from gathering, pipeline transporting, marketing and storing crude oil,
and distributing lubrication oils and specialty chemicals principally in
Oklahoma, Texas, New Mexico and the Rocky Mountain region.  Revenues
are also generated from trade documentation and terminaling services, primarily
at Cushing, Oklahoma, and Midland, Texas.  Revenues are accrued at the
time title to the product sold transfers to the purchaser, which typically
occurs upon receipt of the product by the purchaser, and purchases are accrued
at the time title to the product purchased transfers to our crude oil marketing
company, TEPPCO Crude Oil, LLC (“TCO”), which typically occurs upon our receipt
of the product.  Revenues related to trade documentation and
terminaling services are recognized as services are completed.




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




Our Midstream Segment revenues are
earned from the gathering of natural gas, pipeline transportation of NGLs and
fractionation of NGLs.  Gathering revenues are recognized as natural
gas is received from the customer.  Transportation revenues are
recognized as NGLs are delivered.  Through March 31, 2008,
fractionation revenues were recognized ratably over the contract year as
products were delivered.  Beginning April 1, 2008, based upon contract
terms, fractionation revenues are recognized based upon the volume of NGLs
fractionated at a fixed rate per gallon.  We generally do not take
title to the natural gas gathered, NGLs transported or NGLs fractionated, with
the exception of inventory imbalances.  Therefore, the results of our
Midstream Segment are not directly affected by changes in the prices of natural
gas or NGLs.





Our Marine Services Segment revenues
are earned from inland and offshore transportation of refined products, crude
oil, condensate, asphalt, heavy fuel oil and other heated oil products via tow
boats and tank barges.  We also provide offshore well-testing and
other offshore services.  Our transportation services are generally
provided under term contracts (also referred to as affreightment contracts),
which are agreements with specific customers to transport cargo from within
designated operating areas at set day rates or a set fee per cargo
movement.  Most of the inland term contracts have one-year terms with
the remainder having terms of up to two years.  Substantially all of
the inland contracts have renewal options, which are exercisable subject to
agreement on rates applicable to the option terms.  Most of the
offshore service and transportation contracts have up to one-year terms with
renewal options, which are exercisable subject to agreement on rates applicable
to the option terms, or are spot contracts.  A spot contract is an
agreement with a customer to move cargo within designated operating areas for a
rate negotiated at the time the cargo movement takes place.  We do not
assume ownership of the products we transport in this segment.  As is
typical for inland and offshore affreightment contracts, the term contracts
establish set day rates but do not include revenue or volume
guarantees.  Most of the contracts include escalation provisions to
recover specific increased operating costs such as incremental increases in
labor.  The costs of fuel and other specified operational fees and
costs are directly reimbursed by the customer under most of the
contracts.




















10
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





NOTE
3.  ACCOUNTING FOR UNIT-BASED AWARDS





The following table summarizes
compensation expense by plan for the three months and nine months ended
September 30, 2008 and 2007:




For
      the Three Months Ended
                  September
      30,
                
                
                For
      the Nine Months Ended
                  September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Phantom
      Unit Plans: (1) (2)1999
      Phantom Unit Retention Plan
                
                $
                (91
                )
                
                $
                (51
                )
                
                $
                (40
                )
                
                $
                7312000
      Long Term Incentive Plan
                
                
                39
                
                
                
                (25
                )
                
                
                (135
                )
                
                
                2772005
      Phantom Unit Plan
                
                
                (32
                )
                
                
                (112
                )
                
                
                74
                
                
                
                429EPCO,
      Inc. 2006 TPP Long-Term Incentive Plan:Unit
      options
                
                
                48
                
                
                
                27
                
                
                
                111
                
                
                
                39Restricted
      units (3)
                
                
                284
                
                
                
                135
                
                
                
                671
                
                
                
                199Unit
      appreciation rights (“UARs”) (1) (2)
                
                
                (1
                )
                
                
                20
                
                
                
                3
                
                
                
                44Phantom
      units (1)
                
                
                --
                
                
                
                3
                
                
                
                8
                
                
                
                7TEPPCO
      Unit L.P.
                
                
                30
                
                
                
                --
                
                
                
                30
                
                
                
                --Compensation
      expense allocated under ASA (4)
                
                
                490
                
                
                
                357
                
                
                
                1,201
                
                
                
                710Total
      compensation expense
                
                $
                767
                
                
                $
                354
                
                
                $
                1,923
                
                
                $
                2,436


___________________________________





(1)
            These
      awards are accounted for as liability awards under the provisions of SFAS
      No. 123(R), Share-Based
      Payment(“SFAS 123(R)”).  Accruals for plan award payouts
      are based on the Unit price.


(2)
            The
      decrease in compensation expense for the three months ended September 30,
      2007 and the three months and nine months ended September 30, 2008, is
      primarily due to a decrease in the Unit price at September 30, 2007 and
      September 30, 2008, respectively, as compared to the Unit price at June
      30, 2007, June 30, 2008 and December 31, 2007,
    respectively.


(3)
            As
      used in the context of the EPCO, Inc. 2006 TPP Long-Term Incentive Plan,
      the term “restricted unit” represents a time-vested unit under SFAS
      123(R).  Such awards are non-vested until the required service
      period expires.


(4)
            Represents
      compensation expense under equity awards under other EPCO compensation
      plans allocated to us from EPCO under the ASA in connection with shared
      service employees working on our
behalf.





1999
Plan





The Texas Eastern Products Pipeline
Company, LLC 1999 Phantom Unit Retention Plan (“1999 Plan”) provides for the
issuance of phantom unit awards as incentives to key employees.  In
April 2008, 13,000 phantom units vested resulting in a cash payment of $0.4
million.  A total of 18,600 phantom units were outstanding under the
1999 Plan at September 30, 2008.  These awards cliff vest as follows:
13,000 in April 2009 and 5,600 in January 2010.  At September 30, 2008
and December 31, 2007, we had accrued liability balances of $0.5 million and
$1.0 million, respectively, for compensation related to the 1999
Plan.




2000
LTIP





The Texas Eastern Products Pipeline
Company, LLC 2000 Long Term Incentive Plan (“2000 LTIP”) provides key employees
incentives to achieve improvements in our financial performance.  On
December 31, 2007, 8,400 phantom units vested and $0.5 million was paid out to
participants in the first quarter of 2008.  At September 30, 2008, a
total of 11,300 phantom units were outstanding under the 2000 LTIP that cliff
vest on December 31, 2008 and will be paid out to participants in
2009.  At September 30, 2008 and December 31, 2007, we had accrued
liability balances of $0.3 million and $0.9 million, respectively, related to
the 2000 LTIP.








11
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





2005
Phantom Unit Plan





The Texas Eastern Products Pipeline
Company, LLC 2005 Phantom Unit Plan (“2005 Phantom Unit Plan”) provides key
employees incentives to achieve improvements in our financial
performance.  On December 31, 2007, 36,200 phantom units vested and
$1.6 million was paid out to participants in the first quarter of
2008.  At September 30, 2008, a total of 36,600 phantom units were
outstanding under the 2005 Phantom Unit Plan that cliff vest on December 31,
2008 and will be paid out to participants in 2009.  At September 30,
2008 and December 31, 2007, we had accrued liability balances of $0.8 million
and $2.6 million, respectively, for compensation related to the 2005 Phantom
Unit Plan.




2006
LTIP




The EPCO, Inc. 2006 TPP Long-Term
Incentive Plan (“2006 LTIP”) provides for awards of our Units and other rights
to our non-employee directors and to certain employees of EPCO and its
affiliates providing services to us.  Awards granted under the 2006
LTIP may be in the form of restricted units, phantom units, unit options, UARs
and distribution equivalent rights.  Subject to adjustment as provided
in the 2006 LTIP, awards with respect to up to an aggregate of 5,000,000 Units
may be granted under the 2006 LTIP.  We reimburse EPCO for the costs
allocable to 2006 LTIP awards made to employees who work in our
business.   The 2006 LTIP is effective until December 8, 2016 or,
if earlier, the time which all available Units under the 2006 LTIP have been
delivered to participants or the time of termination of the 2006 LTIP by EPCO or
the Audit, Conflicts and Governance Committee of the Board of Directors of our
General Partner (“ACG Committee”).  In May 2008, we granted 200,000
unit options and 95,900 restricted units to certain employees providing services
directly to us and 29,429 UARs to a non-executive member of the board of
directors in connection with his election to the board.  After giving
effect to outstanding unit options and restricted units at September 30, 2008,
and the forfeiture of restricted units through September 30, 2008, a total of
4,487,700 additional Units could be issued under the 2006 LTIP in the
future.





Unit
Options





The information in the following table
presents unit option activity under the 2006 LTIP for the periods
indicated:


Weighted-Weighted-
                  
                  
                  AverageAverage
                  
                  
                  RemainingNumber
                  
                  
                  Strike
      Price
                  
                  
                  Contractualof Units
                  
                  
                  (dollars/Unit)
                  
                  
                  Term
      (in years)Unit
      Options:Outstanding at December 31, 2007
      (1)
                  
                  
                  155,000
                  
                  
                  $
                  45.35
                  
                  
                  
                  --Granted during 2008
      (2)
                  
                  
                  200,000
                  
                  
                  
                  35.86
                  
                  
                  
                  --Outstanding at September 30,
      2008
                  
                  
                  355,000
                  
                  
                  $
                  40.00
                  
                  
                  
                  4.82Options
      exercisable at:September
      30,
      2008
                  
                  
                  --
                  
                  
                  $
                  --
                  
                  
                  
                  --


___________________________________





(1)
            During
      2008, previous unit option grants were amended.  The expiration
      dates of the 2007 awards were modified from May 22, 2017 to December 31,
      2012.


(2)
            The
      total grant date fair value of these awards was $0.3 million based on the
      following assumptions:  (i) expected life of the option of 4.7
      years; (ii) risk-free interest rate of 3.3%; (iii) expected distribution
      yield on Units of 7.9%; (iv) estimated forfeiture rate of 17%; and (v)
      expected Unit price volatility on Units of
  18.7%.





At September 30, 2008, total
unrecognized compensation cost related to nonvested unit options granted under
the 2006 LTIP was an estimated $0.6 million.  We expect to recognize
this cost over a weighted-average period of 3.2 years.





12
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





Restricted
Units





The following table summarizes
information regarding our restricted units for the periods
indicated:





Weighted-Average
      GrantNumber
                  
                  
                  Date
      Fair Valueof
      Units
                  
                  
                  per
      Unit (1)Restricted Units at December 31,
      2007
                  
                  
                  62,400Granted during 2008
      (2)
                  
                  
                  95,900
                  
                  
                  $
                  32.97Forfeited during
      2008
                  
                  
                  (1,000
                  )
                  
                  
                  35.86Restricted Units at September
      30, 2008
                  
                  
                  157,300


____________________________





(1)
            Determined
      by dividing the aggregate grant date fair value of awards (including an
      allowance for forfeitures) by the number of awards
  issued.


(2)
            Aggregate
      grant date fair value of restricted unit awards issued during the nine
      months ended September 30, 2008 was $2.8 million based on grant date
      market prices of our Units ranging from $34.63 to $35.86 per Unit and an
      estimated forfeiture rate of 17%.





None of our restricted units vested
during the nine months ended September 30, 2008.  At September 30,
2008, total unrecognized compensation cost related to restricted units was $4.1
million, and these costs are expected to be recognized over a weighted-average
period of 3.05 years.





Phantom
Units





At September 30, 2008, a total of 1,647
phantom units were outstanding, which have been awarded under the 2006 LTIP to
non-executive members of the board of directors.  Each phantom unit
will pay out in cash on April 30, 2011 or, if earlier, the date the director is
no longer serving on the board of directors, whether by voluntarily resignation
or otherwise.  Each participant is also entitled to cash distributions
equal to the product of the number of phantom units granted to the participant
and the per Unit cash distribution that we paid to our
unitholders.  Phantom unit awards to non-executive directors are
accounted for similar to SFAS 123(R) liability awards.





UARs





At September 30, 2008, a total of
431,377 UARs were outstanding, which have been awarded under the 2006 LTIP to
non-executive members of the board of directors and to certain employees
providing services directly to us.





Non-Executive
Members of the Board of Directors.On June 20,
2008, 29,429 UARs were awarded under the 2006 LTIP at an exercise price of
$33.98 per Unit to a non-executive member of the board of directors in
connection with his election to the board.  At September 30, 2008, a
total of 95,654 UARs, awarded to non-executive members of the board of directors
under the 2006 LTIP, were outstanding at a weighted average exercise price of
$41.82 per Unit.  The UARs will be subject to five year cliff vesting
and will vest earlier if the director dies or is removed from, or not re-elected
or appointed to, the board of directors for reasons other than his voluntary
resignation or unwillingness to serve.  When the UARs become payable,
the director will receive a payment in cash equal to the fair market value of
the Units subject to the UARs on the payment date over the fair market value of
the Units subject to the UARs on the date of grant.  UARs awarded to
non-executive directors are accounted for similar to SFAS 123(R) liability
awards.





13
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





Employees.At September 30,
2008, a total of 335,723 UARs, awarded under the 2006 LTIP to certain employees
providing services directly to us, were outstanding at an exercise price of
$45.35 per Unit.  The UARs are subject to five year cliff vesting and
are subject to forfeiture.  When the UARs become payable, the awards
will be redeemed in cash (or, in the sole discretion of the ACG Committee, Units
or a combination of cash and Units) equal to the fair market value of the Units
subject to the UARs on the payment date over the fair market value of the Units
subject to the UARs on the date of grant.  In addition, for each
calendar quarter from the grant date until the UARs become payable, each holder
will receive a cash payment equal to the product of (i) the per Unit cash
distribution paid to our unitholders during such calendar quarter less the
quarterly distribution amount in effect at the time of grant multiplied by (ii)
the number of Units subject to the UAR.  UARs awarded to employees are
accounted for as liability awards under SFAS 123(R) since the current intent is
to settle the awards in cash.





Employee
Partnership





On September 4, 2008, EPCO formed a
Delaware limited partnership, TEPPCO Unit L.P. (“TEPPCO Unit”), for which it
serves as the general partner, to serve as an incentive arrangement for certain
employees of EPCO providing services to us.  EPCO Holdings, Inc.
(“EPCO Holdings”), an affiliate of EPCO, contributed approximately $7.0 million
to TEPPCO Unit as a capital contribution with respect to its interest and was
admitted as the Class A limited partner of TEPPCO Unit.  TEPPCO Unit
purchased 241,380 Units directly from us in an unregistered transaction at the
public offering price concurrently with the closing of our September 2008 equity
offering (see Note 12).  Certain EPCO employees who perform services
for us, including the executive officers named in the Executive Compensation
section of our most recent Annual Report on Form 10-K, were issued Class B
limited partner interests and admitted as Class B limited partners of TEPPCO
Unit without any capital contribution.  The Class B limited partner
interests, which entitle the holder to participate in the appreciation in value
of our Units, are equity-based compensatory awards designed to incentivize
officers and employees of EPCO who perform services for us to enhance the
long-term value of our Units.





The Class B limited partner interests
in TEPPCO Unit that are owned by EPCO employees are subject to forfeiture if the
participating employee’s employment with EPCO and its affiliates is terminated
prior to September 4, 2013, with the customary exceptions for death, disability
or certain retirements.  The risk of forfeiture associated with the
Class B limited partner interests in TEPPCO Unit will also lapse upon certain
change of control events.





Unless otherwise agreed to by EPCO, and
a majority in interest of the Class B limited partners of TEPPCO Unit, TEPPCO
Unit will terminate at the earlier of September 4, 2013 (five years from the
date of TEPPCO Unit’s agreement of limited partnership) or a change in control
of us, our General Partner or EPCO.  Summarized below are certain
material terms regarding quarterly cash distributions by TEPPCO Unit to its
partners:





§
            Distributions
      of cash flow –Each quarter, 100% of the cash distributions received by TEPPCO
      Unit from us in that quarter will be distributed to the Class A
      limited partner until the Class A limited partner has received an amount
      equal to the Class A preferred return (as defined below), and any
      excess distributions received by TEPPCO Unit in that quarter will be
      distributed to the Class B limited partners.  The
      Class A preferred return equals the Class A capital base (as defined
      below) multiplied by a floating rate determined by EPCO, in its sole
      discretion, that will be no less than 4.5% and no greater than 5.725% per
      annum.  The Class A limited partner’s capital base equals
      the amount of any other contributions of cash or cash equivalents made by
      the Class A limited partner to TEPPCO Unit, plus any unpaid Class A
      preferred return from prior periods, less any distributions made by TEPPCO
      Unit of proceeds from the sale of Units owned by TEPPCO Unit (as described
      below).





§
            Liquidating
      Distributions –Upon liquidation of TEPPCO Unit, Units having a fair market value
      equal to the Class A limited partner capital base will be distributed
      to EPCO Holdings, plus any accrued





14
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





Class A
      preferred return for the quarter in which liquidation
      occurs.  Any remaining Units will be distributed to the
      Class B limited partners.





§
            Sale
      Proceeds –If
      TEPPCO Unit sells any Units that it beneficially owns, the sale proceeds
      will be distributed to the Class A limited partner and the
      Class B limited partners in the same manner as liquidating
      distributions described above.





Compensation expense attributable to
these awards was based on the estimated grant date fair value of each
award.  A portion of the fair value of these equity awards are
allocated to us under the ASA as a non-cash expense. We will not reimburse EPCO,
TEPPCO Unit or any of their affiliates or partners, through the ASA or
otherwise, for any expenses related to TEPPCO Unit, including the $7.0 million
contribution to TEPPCO Unit or the purchase of the unregistered Units by TEPPCO
Unit.  The grant date fair value of the Class B limited partnership
interests in TEPPCO Unit was $2.1 million.  This fair value was
estimated using the Black-Scholes option pricing model, which incorporates
various assumptions including (i) an expected life of the awards of five years,
(ii) risk-free interest rate of 2.87%, (iii) an expected distribution yield on
our Units of 7.28%, and (iv) an expected Unit price volatility for our Units of
16.42%.  At September 30, 2008, there was an estimated $1.7 million of
unrecognized compensation cost related to TEPPCO Unit.  We will
recognize our share of these costs in accordance with the ASA over a weighted
average period of 4.93 years.








NOTE
4.  EMPLOYEE BENEFIT PLANS





Retirement
Plan





The TEPPCO Retirement Cash Balance Plan
(“TEPPCO RCBP”) was a non-contributory, trustee-administered pension
plan.  The benefit formula for all eligible employees was a cash
balance formula.  Under a cash balance formula, a plan participant
accumulated a retirement benefit based upon pay credits and current interest
credits.  The pay credits were based on a participant’s salary, age
and service.  We used a December 31 measurement date for this
plan.





Effective May 31, 2005, participation
in the TEPPCO RCBP was frozen, and no new participants were eligible to be
covered by the plan after that date.  Effective June 1, 2005, EPCO
adopted the TEPPCO RCBP for the benefit of its employees providing services to
us.  Effective December 31, 2005, all plan benefits accrued were
frozen, participants received no additional pay credits after that date, and all
plan participants were 100% vested regardless of their years of
service.  The TEPPCO RCBP plan was terminated effective December 31,
2005, and plan participants had the option to receive their benefits either
through a lump sum payment in 2006 or through an annuity.  In April
2006, we received a determination letter from the Internal Revenue Service
(“IRS”) providing IRS approval of the plan termination.  For those
plan participants who elected to receive an annuity, we purchased an annuity
contract from an insurance company in which the plan participants own the
annuity, absolving us of any future obligation to the participants.





As of December 31, 2007, all benefit
obligations to plan participants have been settled.  During the first
quarter of 2008, the remaining balance of the TEPPCO RCBP was transferred to an
EPCO benefit plan.





EPCO maintains defined contribution
plans for the benefit of employees providing services to us, and we reimburse
EPCO for the cost of maintaining these plans in accordance with the ASA (see
Note 14 for additional information related to the costs and expenses allocated
to us for employee benefits).








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





NOTE
5.  FINANCIAL INSTRUMENTS





We are exposed to financial market
risks, including changes in commodity prices and interest rates.  We
do not have foreign exchange risks.  We may use financial instruments
(i.e., futures, forwards, swaps, options and other financial instruments with
similar characteristics) to mitigate the risks of certain identifiable and
anticipated transactions.  In general, the type of risks we attempt to
hedge are those related to fair values of certain debt instruments and cash
flows resulting from changes in applicable interest rates or commodity
prices.





Interest
Rate Risk Hedging Program




Our interest rate exposure results from
variable and fixed interest rate borrowings under various debt
agreements.  From time to time we utilize interest rate swaps and
similar arrangements to manage a portion of our interest rate exposure, which
allows us to convert a portion of fixed rate debt into variable rate debt or a
portion of variable rate debt into fixed rate debt.





Fair Value Hedges –
Interest Rate Swaps





In January 2006, we entered into
interest rate swap agreements with a total notional value of $200.0 million to
hedge our exposure to increases in the benchmark interest rate underlying our
variable rate revolving credit facility.  Under the swap agreements,
we paid a fixed rate of interest ranging from 4.67% to 4.695% and received a
floating rate based on the three-month U.S. Dollar LIBOR rate.  At
December 31, 2007, the fair value of these interest rate swaps was an asset of
$0.3 million.  These interest rate swaps expired in January
2008.




In October 2001, TE Products entered
into an interest rate swap agreement to hedge its exposure to changes in the
fair value of its fixed rate 7.51% Senior Notes due 2028. This swap agreement,
designated as a fair value hedge, had a notional value of $210.0 million and was
set to mature in January 2028 to match the principal and maturity of the TE
Products Senior Notes.  During the three months and nine months ended
September 30, 2007, we recognized reductions in interest expense of $0.1 million
and $0.7 million, respectively, related to the difference between the fixed rate
and the floating rate of interest on the interest rate swap.  In
September 2007, we terminated this swap agreement, resulting in a loss of $1.2
million.  This loss was deferred as an adjustment to the carrying
value of the 7.51% Senior Notes, and approximately $0.2 million of the loss was
amortized to interest expense in 2007, with the remaining $1.0 million
recognized in interest expense in January 2008 at the time the 7.51% Senior
Notes were redeemed (see Note 11).




During 2002, we entered into interest
rate swap agreements, designated as fair value hedges, to hedge our exposure to
changes in the fair value of our fixed rate 7.625% Senior Notes due
2012.  The swap agreements had a combined notional value of $500.0
million and were set to mature in 2012 to match the principal and maturity of
the underlying debt.  These swap agreements were terminated in 2002
resulting in deferred gains of $44.9 million, which are being amortized using
the effective interest method as reductions to future interest expense over the
remaining term of the 7.625% Senior Notes.  At September 30, 2008 and
December 31, 2007, the unamortized balance of the deferred gains was $19.4
million and $23.2 million, respectively.  In the event of early
extinguishment of the 7.625% Senior Notes, any remaining unamortized gains would
be recognized in the statement of consolidated income at the time of
extinguishment.




Cash Flow Hedges – Treasury
Locks




At times, we may use treasury lock
financial instruments to hedge the underlying U.S. treasury rates related to
anticipated debt incurrence.  Gains or losses on the termination of
such instruments are amortized to earnings using the effective interest method
over the estimated term of the underlying fixed-rate debt.  Each of
our treasury







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





lock
transactions was designated as a cash flow hedge under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and
interpreted.




In
October 2006 and February 2007, we entered into treasury lock agreements,
accounted for as cash flow hedges, which extended through June 2007 for a
notional value totaling $300.0 million.  In May 2007, these treasury
locks were terminated concurrent with the issuance of junior subordinated notes
(see Note 11). The termination of the treasury locks resulted in gains of $1.4
million, and these gains were recorded in accumulated other comprehensive
income.  These gains are being amortized using the effective interest
method as reductions to future interest expense over the term of the forecasted
fixed rate interest payments, which is ten years.  Over the next
twelve months, we expect to reclassify $0.1 million of accumulated other
comprehensive income that was generated by these treasury locks as a reduction
to interest expense.  In the event of early extinguishment of the
junior subordinated notes, any remaining unamortized gains would be recognized
in the statement of consolidated income at the time of
extinguishment.




In
2007, we entered into treasury locks, accounted for as cash flow hedges, which
extended through January 31, 2008 for a notional value totaling $600.0
million.  At December 31, 2007, the fair value of the treasury locks
was a liability of $25.3 million.  In January 2008, these treasury
locks were extended through April 30, 2008.  In March 2008, these
treasury locks were settled concurrently with the issuance of senior notes (see
Note 11).  The settlement of the treasury locks resulted in losses of
$52.1 million, and these losses were recorded in accumulated other comprehensive
income.  We recognized approximately $3.6 million of this loss in
interest expense as a result of interest payments hedged under the treasury
locks not occurring as forecasted.  The remaining losses are being
amortized using the effective interest method as increases to future interest
expense over the terms of the forecasted interest payments, which range from
five to ten years.  Over the next twelve months, we expect to
reclassify $5.7 million of accumulated other comprehensive loss that was
generated by these treasury locks as an increase to interest
expense.  In the event of early extinguishment of these senior notes,
any remaining unamortized losses would be recognized in the statement of
consolidated income at the time of extinguishment.




Commodity
Risk Hedging Program




We seek to maintain a position that is
substantially balanced between crude oil purchases and related sales and future
delivery obligations.  As part of our crude oil marketing business, we
enter into financial instruments such as swaps and other hedging
instruments.  The purpose of such hedging activity is to either
balance our inventory position or to lock in a profit margin.





At September 30, 2008 and December 31,
2007, we had a limited number of commodity financial instruments that were
accounted for as cash flow hedges.  The majority of these contracts
will expire during 2008, with the remainder expiring during 2009, and any
amounts remaining in accumulated other comprehensive income will be recorded in
net income upon the contract expiration.  Gains and losses on these
financial instruments are offset against corresponding gains or losses of the
hedged item and are deferred through other comprehensive income, thus minimizing
exposure to cash flow risk.  No ineffectiveness was recognized as of
September 30, 2008.  In addition, we had some commodity financial
instruments that did not qualify for hedge accounting.  These
financial instruments had a minimal impact on our earnings.  The fair
values of the open positions at September 30, 2008 and December 31, 2007 were
liabilities of $2.8 million and $18.9 million, respectively.





Adoption
of SFAS 157 – Fair Value Measurements





On January 1, 2008, we adopted the
provisions of SFAS No. 157, Fair Value Measurements,that
apply to financial assets and liabilities.  We will adopt the
provisions of SFAS 157 that apply to nonfinancial assets and liabilities on
January 1, 2009.  SFAS 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.







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





Our fair value estimates are based on
either (i) actual market data or (ii) assumptions that other market participants
would use in pricing an asset or liability.  These assumptions include
estimates of risk.  Recognized valuation techniques employ inputs such
as product prices, operating costs, discount factors and business growth
rates.   These inputs may be either readily observable,
corroborated by market data, or generally unobservable.  In developing
our estimates of fair value, we endeavor to utilize the best information
available and apply market-based data to the extent
possible.  Accordingly, we utilize valuation techniques (such as the
market approach) that maximize the use of observable inputs and minimize the use
of unobservable inputs.




SFAS 157 established a three-tier
hierarchy that classifies fair value amounts recognized or disclosed in the
financial statements based on the observability of inputs used to estimate such
fair values.  The hierarchy considers fair value amounts based on
observable inputs (Levels 1 and 2) to be more reliable and predictable than
those based primarily on unobservable inputs (Level 3). At each balance sheet
reporting date, we categorize our financial assets and liabilities using this
hierarchy.  The characteristics of fair value amounts classified
within each level of the SFAS 157 hierarchy are described as
follows:




§
            Level
      1 fair values are based on quoted prices, which are available in active
      markets for identical assets or liabilities as of the measurement
      date.  Active markets are defined as those in which transactions
      for identical assets or liabilities occur in sufficient frequency so as to
      provide pricing information on an ongoing basis (e.g., the NYSE or New
      York Mercantile Exchange).  Level 1 primarily consists of
      financial assets and liabilities such as exchange-traded financial
      instruments, publicly-traded equity securities and U.S. government
      treasury securities.




§
            Level
      2 fair values are based on pricing inputs other than quoted prices in
      active markets (as reflected in Level 1 fair values) and are either
      directly or indirectly observable as of the measurement
      date.  Level 2 fair values include instruments that are valued
      using financial models or other appropriate valuation
      methodologies.  Such financial models are primarily
      industry-standard models that consider various assumptions, including
      quoted forward prices for commodities, time value of money, volatility
      factors for stocks, and current market and contractual prices for the
      underlying instruments, as well as other relevant economic
      measures.  Substantially all of these assumptions are observable
      in the marketplace throughout the full term of the instrument, can be
      derived from observable data, or are validated by inputs other than quoted
      prices (e.g., interest rates and yield curves at commonly quoted
      intervals).  Level 2 includes non-exchange-traded instruments
      such as over-the-counter forward contracts, options, and repurchase
      agreements.




§
            Level
      3 fair values are based on unobservable inputs.  Unobservable
      inputs are used to measure fair value to the extent that observable inputs
      are not available, thereby allowing for situations in which there is
      little, if any, market activity for the asset or liability at the
      measurement date.  Unobservable inputs reflect the reporting
      entity’s own ideas about the assumptions that market participants would
      use in pricing an asset or liability (including assumptions about
      risk).  Unobservable inputs are based on the best information
      available in the circumstances, which might include the reporting entity’s
      internally-developed data.  The reporting entity must not ignore
      information about market participant assumptions that is reasonably
      available without undue cost and effort.  Level 3 inputs are
      typically used in connection with internally developed valuation
      methodologies where management makes its best estimate of an instrument’s
      fair value.  Level 3 generally includes specialized or unique
      financial instruments that are tailored to meet a customer’s specific
      needs.




The following table sets forth by level
within the fair value hierarchy our financial assets and liabilities measured on
a recurring basis at September 30, 2008.  These financial assets and
liabilities are classified in their







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





entirety
based on the lowest level of input that is significant to the fair value
measurement.  Our assessment of the significance of a particular input
to the fair value measurement requires judgment, and may affect the valuation of
the fair value assets and liabilities and their placement within the fair value
hierarchy levels.  At September 30, 2008, we had no Level 1 financial
assets and liabilities.




Level
      2
                          
                          
                          Level
      3
                          
                          
                          TotalFinancial
      assets:Commodity financial
      instruments
                          
                          $
                          24,339
                          
                          
                          $
                          1,597
                          
                          
                          $
                          25,936Total
                          
                          $
                          24,339
                          
                          
                          $
                          1,597
                          
                          
                          $
                          25,936Financial
      liabilities:Commodity financial
      instruments
                          
                          $
                          28,694
                          
                          
                          $
                          58
                          
                          
                          $
                          28,752Total
                          
                          $
                          28,694
                          
                          
                          $
                          58
                          
                          
                          $
                          28,752Net
      financial assets, Level
      3
                          
                          
                          
                          
                          
                          $
                          1,539





The determination of fair values above
associated with our commodity financial instrument portfolios are developed
using available market information and appropriate valuation techniques in
accordance with SFAS 157.




The following table sets forth a
reconciliation of changes in the fair value of our net financial assets and
liabilities classified as Level 3 in the fair value hierarchy:




NetCommodityFinancialInstrumentsBalance,
      January 1,
      2008
                                  
                                  $
                                  (394
                                  )Total gains included in net
      income
      (1)
                                  
                                  
                                  418Balance,
      March 31,
      2008
                                  
                                  $
                                  24Total losses included in net
      income
      (1)
                                  
                                  
                                  (66
                                  )Balance,
      June 30,
      2008
                                  
                                  $
                                  (42
                                  )Total gains included in net
      income
      (1)
                                  
                                  
                                  1,581Ending
      balance, September 30,
      2008
                                  
                                  $
                                  1,539


_________




(1)
            Total
      commodity financial instrument gains, recognized in revenues and included
      in net income on our statements of consolidated income, were $1.6 million
      and $1.9 million for the three months and nine months ended September 30,
      2008, respectively.






































19
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





NOTE
6.  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:


September
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007Crude
      oil
      (1)
                  
                  $
                  135,684
                  
                  
                  $
                  44,542Refined
      products and LPGs
      (2)
                  
                  
                  13,209
                  
                  
                  
                  18,616Lubrication
      oils and specialty
      chemicals
                  
                  
                  11,631
                  
                  
                  
                  9,160Materials
      and
      supplies
                  
                  
                  8,104
                  
                  
                  
                  7,178NGLs
                  
                  
                  1,662
                  
                  
                  
                  803Total
                  
                  $
                  170,290
                  
                  
                  $
                  80,299


_________________________________





(1)
            At
      September 30, 2008 and December 31, 2007, $117.7 million and $16.5
      million, respectively, of our crude oil inventory was subject to forward
      sales contracts.


(2)
            Refined
      products and LPGs inventory is managed on a combined
  basis.







Due to fluctuating commodity prices, we
recognize lower of cost or market (“LCM”) adjustments when the carrying value of
our inventories exceed their net realizable value.  These non-cash
charges are a component of costs and expenses in the period they are
recognized.  For the three months ended September 30, 2008 and for the
nine months ended September 30, 2008 and 2007, we recognized LCM adjustments of
approximately $9.3 million, $9.4 million and $0.6 million,
respectively.  For the three months ended September 30, 2007, we had
no LCM adjustments.







NOTE
7.    PROPERTY, PLANT AND EQUIPMENT





Major categories of property, plant and
equipment at September 30, 2008 and December 31, 2007, were as
follows:




EstimatedUseful
      Life
                  
                  
                  September
      30,
                  
                  
                  December
      31,In
      Years
                  
                  
                  2008
                  
                  
                  2007Plants
      and pipelines (1)
                  
                  
                  5-40(4)
                  
                  
                  $
                  1,872,107
                  
                  
                  $
                  1,810,195Underground
      and other storage facilities (2)
                  
                  
                  5-40(5)
                  
                  
                  
                  286,212
                  
                  
                  
                  254,677Transportation
      equipment (3)
                  
                  
                  5-10
                  
                  
                  
                  10,245
                  
                  
                  
                  7,780Marine
      vessels
                  
                  
                  20-30
                  
                  
                  
                  445,341
                  
                  
                  
                  --Land
      and right of way
                  
                  
                  
                  
                  
                  
                  141,547
                  
                  
                  
                  117,628Construction
      work in progress
                  
                  
                  
                  
                  
                  
                  269,178
                  
                  
                  
                  185,579Total property, plant and
      equipment
                  
                  
                  
                  
                  
                  $
                  3,024,630
                  
                  
                  $
                  2,375,859Less accumulated
      depreciation
                  
                  
                  
                  
                  
                  
                  651,936
                  
                  
                  
                  582,225Property, plant and equipment,
      net
                  
                  
                  
                  
                  
                  $
                  2,372,694
                  
                  
                  $
                  1,793,634


______________________________________________





(1)
            Plants
      and pipelines include refined products, LPGs, NGL, petrochemical, crude
      oil and natural gas pipelines; terminal loading and unloading facilities;
      office furniture and equipment; buildings, laboratory and shop equipment;
      and related assets.


(2)
            Underground
      and other storage facilities include underground product storage caverns;
      storage tanks; and other related
assets.


(3)
            Transportation
      equipment includes vehicles and similar assets used in our
      operations.





20
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





(4)
            The
      estimated useful lives of major components of this category are as
      follows:  pipelines, 20-40 years (with some equipment at 5
      years); terminal facilities, 10-40 years; office furniture and equipment,
      5-10 years; buildings 20-40 years; and laboratory and shop equipment, 5-40
      years.


(5)
            The
      estimated useful lives of major components of this category are as
      follows:  underground storage facilities, 20-40 years (with some
      components at 5 years) and storage tanks, 20-30
  years.





The following table summarizes our
depreciation expense and capitalized interest amounts for the three months and
nine months ended September 30, 2008 and 2007:





For
      the Three Months Ended
                  September
      30,
                
                
                For
      the Nine Months Ended
                  September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Depreciation
      expense (1)
                
                $
                24,414
                
                
                $
                20,542
                
                
                $
                70,261
                
                
                $
                59,914Capitalized
      interest (2)
                
                
                4,292
                
                
                
                2,010
                
                
                
                14,177
                
                
                
                8,813


________________________________________________________




(1)
            Depreciation
      expense is a component of depreciation and amortization expense as
      presented in our statements of consolidated
  income.


(2)
            Capitalized
      interest increases the carrying value of the associated asset and reduces
      interest expense during the period it is
  recorded.




Asset
Retirement Obligations





Asset retirement obligations (“AROs”)
are legal obligations associated with the retirement of a tangible long-lived
asset that results from its acquisition, construction, development or normal
operation or a combination of these factors.  We have conditional AROs
related to the retirement of the Val Verde Gas Gathering Company, L.P. (“Val
Verde”) natural gas gathering system and to structural restoration work to be
completed on leased office space that is required upon our anticipated office
lease termination.  At September 30, 2008, we have a $1.4 million
liability, which represents the fair values of these conditional
AROs.  We assigned probabilities for settlement dates and settlement
methods for use in an expected present value measurement of fair value and
recorded conditional AROs.





The following table presents
information regarding our AROs:





ARO
      liability balance, December 31,
      2007
                
                $
                1,346Liabilities
      incurred
                
                
                --Liabilities
      settled
                
                
                --Accretion
      expense
                
                
                95ARO
      liability balance, September 30,
      2008
                
                $
                1,441





Property, plant and equipment at
September 30, 2008, includes $0.5 million of asset retirement costs capitalized
as an increase in the associated long-lived asset.










21
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





NOTE
8.  INVESTMENTS IN UNCONSOLIDATED AFFILIATES





We own interests in related businesses
that are accounted for using the equity method of accounting.  These
investments are identified below by reporting business segment (see Note 13 for
a general discussion of our business segments).  The following table
presents our investments in unconsolidated affiliates as of September 30, 2008
and December 31, 2007:




Ownership
      Percentage atSeptember
      30,
                        2008
                      
                      September
      30,
                        2008
                      
                      
                      December
      31,
                        2007Downstream
      Segment:Centennial
                      
                      
                      50.0%
                      
                      $
                      73,616
                      
                      
                      $
                      78,962Other
                      
                      
                      25.0%
                      
                      
                      369
                      
                      
                      
                      362Upstream
      Segment:Seaway
                      
                      
                      50.0%
                      
                      
                      193,819
                      
                      
                      
                      188,650Texas Offshore Port
      System
                      
                      
                      33.3%
                      
                      
                      2,354
                      
                      
                      
                      --Midstream
      Segment:Jonah
                      
                      
                      80.64%
                      
                      
                      921,219
                      
                      
                      
                      879,021Total
                      
                      
                      
                      
                      $
                      1,191,377
                      
                      
                      $
                      1,146,995






The following table summarizes equity
earnings by business segment for the three months and nine months ended
September 30, 2008 and 2007:




For
      the Three Months Ended
                          September
      30,
                        
                        
                        For
      the Nine Months Ended
                          September
      30,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Equity
      earnings (losses):Downstream
    Segment
                        
                        $
                        (2,349
                        )
                        
                        $
                        (3,064
                        )
                        
                        $
                        (10,066
                        )
                        
                        $
                        (8,430
                        )Upstream
Segment
                        
                        
                        2,748
                        
                        
                        
                        1,073
                        
                        
                        
                        9,925
                        
                        
                        
                        4,310Midstream
    Segment
                        
                        
                        21,863
                        
                        
                        
                        21,056
                        
                        
                        
                        67,444
                        
                        
                        
                        62,430Intersegment
      eliminations
                        
                        
                        (129
                        )
                        
                        
                        (6
                        )
                        
                        
                        (4,091
                        )
                        
                        
                        (3,454
                        )Total
      equity earnings
                        
                        $
                        22,133
                        
                        
                        $
                        19,059
                        
                        
                        $
                        63,212
                        
                        
                        $
                        54,856





On a quarterly basis, we monitor the
underlying business fundamentals of our investments in unconsolidated affiliates
and test such investments for impairment when impairment indicators are
present.  As a result of our reviews for the third quarter 2008, no
impairment charges were required.  We have the intent and ability to
hold these investments, which are integral to our operations.





Seaway





Through one of our indirect wholly
owned subsidiaries, we own a 50% ownership interest in Seaway.  The
remaining 50% interest is owned by ConocoPhillips.  We operate and
commercially manage the Seaway assets.  Seaway owns pipelines and
terminals that carry imported, offshore and domestic onshore 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,
Texas, areas.  Seaway also has a connection to our South Texas system
that allows it to receive both onshore and offshore domestic crude oil in the
Texas Gulf Coast area for delivery to Cushing.  The Seaway Crude
Pipeline Company Partnership Agreement provides for varying participation ratios
throughout the life of Seaway.  Our sharing ratio (including the
amount of distributions we receive) of Seaway for each of the nine months ended
September 30, 2008 and 2007 was 40% of revenue and expense (and distributions)
and will remain at





22
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





that
level in the future.  During the nine months ended September 30, 2008
and 2007, we received distributions from Seaway of $7.4 million and $9.2
million, respectively.  During the nine months ended September 30,
2008 and 2007, we did not invest any funds in Seaway.





Texas
Offshore Port System





In August 2008, we, together with
Enterprise Products Partners and Oiltanking Holding Americas, Inc.
(“Oiltanking”) announced the formation of a joint venture to design, construct,
operate and own a new Texas offshore crude oil port and pipeline system to
facilitate delivery of waterborne crude oil to refining centers located along
the upper Texas Gulf Coast.  The joint venture’s primary
project, referred to as “TOPS,” includes (i) an offshore port (which will be
located approximately 36 miles from Freeport, Texas), (ii) an onshore
storage facility with approximately 3.9 million barrels of total crude oil
storage capacity, and (iii) an 85-mile pipeline system that will have the
capacity to deliver up to 1.8 million barrels per day of crude oil, that
will extend from the offshore port to a Texas City, Texas storage
facility.  TOPS is expected to begin service as early as the fourth
quarter of 2010.  The joint venture’s second and complementary
project, referred to as the Port Arthur Crude Oil Express (“PACE”) will
transport crude oil from Texas City, including crude oil from TOPS, and will
consist of a 75-mile pipeline and 1.2 million barrels of crude oil storage
capacity in the Port Arthur, Texas area.  PACE is expected to begin
service as early as the third quarter of 2010. Development of the TOPS and PACE
projects is supported by long-term contracts with affiliates of Motiva
Enterprises, LLC and Exxon Mobil Corporation, which have committed a combined
725,000 barrels per day of crude oil to the projects.





We, Enterprise Products Partners and
Oiltanking each own, through our respective subsidiaries, a one-third interest
in the joint venture.  A subsidiary of Enterprise Products Partners
acts as construction manager and will act as operator. The aggregate cost of the
TOPS and PACE projects is expected to be approximately $1.8 billion
(excluding capitalized interest), with the majority of such capital expenditures
occurring in 2009 and 2010.  We and an affiliate of Enterprise
Products Partners have each guaranteed up to approximately
$700.0 million of the capital contribution obligations of our respective
subsidiary partners in the joint venture.  At September 30, 2008, we
have a payable of $2.3 million for our investment in the joint venture, which
will be paid during the fourth quarter of 2008.





Centennial





TE Products owns a 50% ownership
interest in Centennial, and Marathon Petroleum Company LLC (“Marathon”) owns the
remaining 50% interest. Centennial owns an interstate refined petroleum products
pipeline extending from the upper Texas Gulf Coast to central
Illinois.  Marathon operates the mainline Centennial pipeline, and TE
Products operates the Beaumont origination point and the Creal Springs
terminal.  During the nine months ended September 30, 2008, we did not
invest any funds in Centennial.  During the nine months ended
September 30, 2007, we contributed $11.1 million to Centennial, of which $6.1
million was for contractual obligations that were created upon formation of
Centennial and $5.0 million was for debt service requirements.  TE
Products has received no cash distributions from Centennial since its
formation.





Jonah





Enterprise Products Partners, through
its affiliate, Enterprise Gas Processing, LLC, is our joint venture partner in
Jonah, the partnership through which we have owned our interest in the system
serving the Jonah and Pinedale fields in the greater Green River Basin in
southwestern Wyoming.  The joint venture is governed by a management
committee comprised of two representatives approved by Enterprise Products
Partners and two representatives approved by us, each with equal voting
power.  Enterprise Products Partners serves as operator.  In
June 2008, Jonah completed the Phase V expansion, which increased the combined
system capacity of the Jonah and Pinedale fields from 1.5 billion cubic feet
(“Bcf”) per day to 2.35 Bcf per day.  The expansion is expected
to





23
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





significantly
reduce system operating pressures, which is anticipated to lead to increased
production rates and ultimate reserve recoveries.  Enterprise Products
Partners managed the Phase V construction project.





From August 1, 2006 through July 2007, we and Enterprise Products Partners
equally shared the costs of the Phase V expansion, and Enterprise Products
Partners shared in the incremental cash flow resulting from the operation of
those new facilities.  During August 2007, with the completion of the
first portion of the expansion, we and Enterprise Products Partners began
sharing joint venture cash distributions and earnings based on a formula that
takes into account the capital contributions of the parties, including
expenditures by us prior to the expansion.  Based on this formula in
the partnership agreement, beginning in August 2007, our ownership interest in
Jonah was approximately 80.64%, and Enterprise Products Partners’ ownership
interest in Jonah was approximately 19.36%.  Amounts exceeding an
agreed upon base cost estimate of $415.2 million were shared 19.36% by
Enterprise Products Partners and 80.64% by us.  Our ownership interest
in Jonah is currently anticipated to remain at 80.64%.  Through
September 30, 2008, we have reimbursed Enterprise Products Partners $303.9
million ($42.3 million in 2008, $152.2 million in 2007 and $109.4 million in
2006) for our share of the Phase V cost incurred by it (including its cost of
capital incurred prior to the formation of the joint venture of $1.3
million).  At September 30, 2008 and December 31, 2007, we had
payables to Enterprise Products Partners for costs incurred of $1.3 million and
$9.9 million, respectively.




In early 2008, Jonah began an expansion
of the portion of its system serving the Pinedale field, which is expected to
increase the combined system capacity of the Jonah and Pinedale fields from 2.35
Bcf per day to approximately 2.55 Bcf per day.  This project will
include an additional 17,000 horsepower of compression at the Paradise and Bird
Canyon stations in Sublette County, Wyoming and involve construction of
approximately 52 miles of 30-inch and 24-inch diameter
pipelines.  This expansion is expected to be completed in phases, with
final completion expected in early 2009.  The total anticipated cost
of this system expansion is expected to be approximately $125.0
million.  Our share of the costs of the construction is expected to be
80.64%, and Enterprise Products Partners’ share is expected to be
19.36%.  Enterprise Products Partners is managing this construction
project.




During the nine months ended September
30, 2008 and 2007, we received distributions from Jonah of $111.6 million and
$77.3 million, respectively.  The 2007 amount included $11.6 million
of distributions declared in 2006 and paid during the first quarter of
2007.  During the nine months ended September 30, 2008 and 2007, we
invested $94.9 million and $127.8 million, respectively, in Jonah.




Summarized
Financial Information of Unconsolidated Affiliates





Summarized combined income statement
data by reporting segment for the three months and nine months ended September
30, 2008 and 2007, is presented below (on a 100% basis):


For
      the Three Months EndedSeptember
      30, 2008
                
                
                September
      30, 2007Revenues
                
                
                Operating
      Income
                
                
                Net
                  Income
      (Loss)
                
                
                Revenues
                
                
                Operating
      Income
                
                
                Net
                  IncomeDownstream
      Segment (1)
                
                $
                9,439
                
                
                $
                2,438
                
                
                $
                (212
                )
                
                $
                15,728
                
                
                $
                6,346
                
                
                $
                3,682Upstream
      Segment
                
                
                24,603
                
                
                
                11,615
                
                
                
                11,680
                
                
                
                16,802
                
                
                
                6,231
                
                
                
                6,303Midstream
      Segment
                
                
                58,662
                
                
                
                27,007
                
                
                
                27,152
                
                
                
                47,359
                
                
                
                23,223
                
                
                
                23,455







24
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)






For
      the Nine Months EndedSeptember
      30, 2008
                
                
                September
      30, 2007Revenues
                
                
                Operating
      Income
                
                
                Net
                  Income
      (Loss)
                
                
                Revenues
                
                
                Operating
      Income
                
                
                Net
                  IncomeDownstream
      Segment (1)
                
                $
                29,467
                
                
                $
                4,595
                
                
                $
                (3,484
                )
                
                $
                43,326
                
                
                $
                9,786
                
                
                $
                1,587Upstream
      Segment
                
                
                72,557
                
                
                
                37,284
                
                
                
                37,401
                
                
                
                51,443
                
                
                
                20,374
                
                
                
                20,623Midstream
      Segment
                
                
                176,979
                
                
                
                83,177
                
                
                
                83,757
                
                
                
                150,282
                
                
                
                66,766
                
                
                
                67,496


____________________________




(1)
            On
      March 1, 2007, we sold our ownership interest in Mont Belvieu Storage
      Partners, L.P. (“MB Storage”) to Louis Dreyfus Energy Services L.P.
      (“Louis Dreyfus”) (see Note 9).





Summarized combined balance sheet
information by reporting segment as of September 30, 2008 and December 31, 2007,
is presented below:




September
      30, 2008Current
                  Assets
                
                
                Noncurrent
                  Assets
                
                
                Current
      Liabilities
                
                
                Long-term
      Debt
                
                
                Noncurrent
                  Liabilities
                
                
                EquityDownstream
      Segment
                
                $
                16,394
                
                
                $
                241,707
                
                
                $
                21,806
                
                
                $
                122,350
                
                
                $
                1,748
                
                
                $
                112,197Upstream
      Segment
                
                
                43,791
                
                
                
                255,412
                
                
                
                14,015
                
                
                
                --
                
                
                
                24
                
                
                
                285,164Midstream
      Segment
                
                
                54,896
                
                
                
                1,144,252
                
                
                
                54,538
                
                
                
                --
                
                
                
                274
                
                
                
                1,144,336









December
      31, 2007Current
                  Assets
                
                
                Noncurrent
                  Assets
                
                
                Current
      Liabilities
                
                
                Long-term
      Debt
                
                
                Noncurrent
                  Liabilities
                
                
                EquityDownstream
      Segment
                
                $
                20,864
                
                
                $
                248,896
                
                
                $
                23,814
                
                
                $
                129,900
                
                
                $
                365
                
                
                $
                115,681Upstream
      Segment
                
                
                16,429
                
                
                
                251,635
                
                
                
                6,457
                
                
                
                --
                
                
                
                38
                
                
                
                261,569Midstream
      Segment
                
                
                55,396
                
                
                
                1,065,304
                
                
                
                22,545
                
                
                
                --
                
                
                
                264
                
                
                
                1,097,891








NOTE
9.  ACQUISITIONS AND DISPOSITIONS





Acquisitions





Cenac





On February 1, 2008, we, through our
subsidiary, TEPPCO Marine Services, entered the marine transportation business
for refined products, crude oil and condensate.  We acquired
transportation assets and certain intangible assets that comprised the marine
transportation business of Cenac Towing Co., Inc. (“Cenac Towing”), Cenac
Offshore, L.L.C. and Mr. Arlen B. Cenac, Jr., the sole owner of Cenac Towing
Co., Inc. and Cenac Offshore, L.L.C. (collectively, “Cenac”).  The
aggregate value of total consideration we paid or issued to complete the Cenac
acquisition was $444.7 million, which consisted of $258.1 million in cash and
4,854,899 newly issued Units.  Additionally, we assumed $63.2 million
of Cenac’s long-term debt in this transaction.  On February 1, 2008,
we repaid the $63.2 million of assumed debt in full with borrowings under our
term credit agreement (see Note 11).








25
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





The following table summarizes the
components of total consideration paid or issued in this
transaction.





Cash
      payment for Cenac
      acquisition
                    
                    $
                    256,593Fair
      value of our 4,854,899
      Units
                    
                    
                    186,558Other
      cash acquisition costs paid to third-parties
                    
                    
                    1,530Total
      consideration
                    
                    $
                    444,681





We
financed the cash portion of the consideration with borrowings under our term
credit agreement (see Note 11).  In accordance with purchase
accounting, the value of our Units issued in connection with the Cenac
acquisition was based on the average closing price of such Units immediately
prior to and on the day of February 1, 2008.  For the purpose of this
calculation, the average closing price was $38.43 per Unit.





We
acquired 42 tow boats, 89 tank barges and the economic benefit of certain
related commercial agreements.  This business serves refineries and
storage terminals along the Mississippi, Illinois and Ohio rivers, and the
Intracoastal Waterway between Texas and Florida.  These assets also
gather crude oil from production facilities and platforms along the U.S. Gulf
Coast and in the Gulf of Mexico.  This acquisition is a natural
extension of our existing assets and complements two of our core franchise
businesses:  the transportation and storage of refined products and
the gathering, transportation and storage of crude oil.





The
results of operations for the Cenac acquisition are included in our consolidated
financial statements beginning at the date of acquisition, in a newly created
business segment, Marine Services Segment.  Our fleet of acquired tow
boats and tank barges will continue to be operated by employees of Cenac under a
transitional operating agreement with TEPPCO Marine Services for a period of up
to two years following the acquisition.  These operations will remain
headquartered in Houma, Louisiana during such time.




The
purchase agreement gives us the right to repurchase the approximately 4.9
million Units issued in the transaction in connection with proposed sales
thereof by Cenac and specified related persons for 10 years.  If we or
any of our affiliates sell any of the assets acquired from Cenac Towing prior to
June 30, 2018 and recognize certain “built-in gains” for federal income tax
purposes that are allocable to Cenac Towing, we have indemnification obligations
under the purchase agreement to pay Cenac Towing an amount generally intended to
compensate for the incremental level of double taxation imposed on Cenac Towing
as a result of the sale.  The purchase agreement prohibits Cenac from
competing with our marine services business for two years or from soliciting
employees and service providers of TEPPCO Marine Services and its affiliates for
four years.  The purchase agreement contains other customary
representations, warranties, covenants and indemnification
provisions.




This acquisition was accounted for
using the purchase method of accounting and, accordingly, the cost has been
allocated to assets acquired and liabilities assumed based on estimated
preliminary fair values.  Such preliminary fair values have been
developed using recognized business valuation techniques and are subject to
change pending a final valuation analysis.  We expect to finalize the
purchase price allocation for this transaction during 2008.








26
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





The
following table summarizes estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.





Property,
      plant and
      equipment
                    
                    $
                    360,146Intangible
      assets
                    
                    
                    63,500Other
      assets
                    
                    
                    2,726Total
      assets
      acquired
                    
                    
                    426,372Long-term
      debt
                    
                    
                    (63,157
                    )Total
      liabilities
      assumed
                    
                    
                    (63,157
                    )Total
      assets acquired less liabilities assumed
                    
                    
                    363,215Total
      consideration
      given
                    
                    
                    444,681Goodwill
                    
                    $
                    81,466





The $63.5 million preliminary fair
value of acquired intangible assets represents customer relationships and
non-compete agreements.  Customer relationship intangible assets
represent the estimated economic value attributable to certain relationships
acquired in connection with the Cenac acquisition whereby (i) we acquired
information about or access to customers and now have regular contact with them
and (ii) the customers now have the ability to make direct contact with
us.  In this context, customer relationships arise from contractual
arrangements (such as transportation contracts) and through means other than
contracts, such as regular contact by sales or service
representative.  The values assigned to these intangible assets are
amortized to earnings on a straight-line basis over the expected period of
economic benefit, which ranges from 2 to 20 years.





Of the $444.7 million in consideration
we paid or issued to complete the Cenac acquisition, $81.5 million has been
assigned to goodwill.  Management attributes the value of this
goodwill to potential future benefits we expect to realize as a result of
acquiring these assets.





Since the closing date of the Cenac
acquisition was February 1, 2008, our statements of consolidated income do not
include any earnings from these assets prior to this date.  The
following table presents selected pro forma earnings information for the three
months ended September 30, 2007 and for the nine months ended September 30, 2008
and 2007 as if the Cenac acquisition had been completed on January 1, 2008 and
2007, respectively, instead of February 1, 2008.  This information was
prepared based on financial data available to us and reflects certain estimates
and assumptions made by our management.  Our pro forma financial
information is not necessarily indicative of what our consolidated financial
results would have been had the Cenac acquisition actually occurred on January
1, 2007 or 2008.




For
      the Three Months Ended September 30,
                    
                    
                    For
      the Nine Months Ended
                      September
      30,2007
                    
                    
                    2008
                    
                    
                    2007Pro
      forma earnings data:Revenues
                    
                    $
                    2,607,501
                    
                    
                    $
                    11,206,246
                    
                    
                    $
                    6,683,552Costs
      and
      expenses
                    
                    
                    2,549,614
                    
                    
                    
                    11,000,934
                    
                    
                    
                    6,488,639Operating
      income
                    
                    
                    57,887
                    
                    
                    
                    205,312
                    
                    
                    
                    194,913Net
      income
                    
                    
                    49,052
                    
                    
                    
                    160,926
                    
                    
                    
                    234,373Basic and diluted earnings per
      unit:Units
      outstanding, as
      reported
                    
                    
                    89,868
                    
                    
                    
                    95,145
                    
                    
                    
                    89,835Units
      outstanding, pro
      forma
                    
                    
                    94,723
                    
                    
                    
                    100,000
                    
                    
                    
                    94,690Basic
      and diluted earnings per unit, as reported
                    
                    $
                    0.44
                    
                    
                    $
                    1.39
                    
                    
                    $
                    2.17Basic
      and diluted earnings per unit, pro forma
                    
                    $
                    0.43
                    
                    
                    $
                    1.34
                    
                    
                    $
                    2.07










27
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





Horizon




On February 29, 2008, we expanded our
Marine Services Segment with the acquisition of marine assets from Horizon
Maritime, L.L.C. (“Horizon”), a privately-held Houston-based company and an
affiliate of Mr. Cenac for $80.8 million in cash.  We acquired 7 tow
boats, 17 tank barges, rights to two tow boats under construction and certain
related commercial and other agreements (or the associated economic
benefits).  In April 2008, we paid $3.0 million to Horizon pursuant to
the purchase agreement upon delivery of one of the tow boats under construction,
and in June 2008, we paid $3.8 million upon delivery of the second tow
boat.  The acquired vessels transport asphalt, heavy fuel oil and
other heated oil products to storage facilities and refineries along the
Mississippi, Illinois and Ohio Rivers, and the Intracoastal
Waterway.  We financed the acquisition with borrowings under our term
credit agreement.




The results of operations for the
Horizon acquisition are included in our consolidated financial statements
beginning at the date of acquisition, in our Marine Services
Segment.  This acquisition was accounted for using the purchase method
of accounting and, accordingly, the cost has been allocated to assets acquired
and liabilities assumed based on estimated preliminary fair
values.  Such preliminary fair values have been developed using
recognized business valuation techniques and are subject to change pending a
final valuation analysis.  We expect to finalize the purchase price
allocation for this transaction during 2008.  The following table
summarizes estimated fair values of the assets acquired and liabilities assumed
at the date of acquisition.




Property,
      plant and
      equipment
                        
                        $
                        71,216Intangible
      assets
                        
                        
                        6,500Other
      assets
                        
                        
                        981Total
      assets
      acquired
                        
                        
                        78,697Total
      consideration
      given
                        
                        
                        87,525Goodwill
                        
                        $
                        8,828





The $6.5 million preliminary fair value
of acquired intangible assets represents customer relationships and non-compete
agreements.  Customer relationship intangible assets represent the
estimated economic value attributable to certain relationships acquired in
connection with the Horizon acquisition whereby (i) we acquired information
about or access to customers and now have regular contact with them and (ii) the
customers now have the ability to make direct contact with us.  In
this context, customer relationships arise from contractual arrangements (such
as transportation contracts) and through means other than contracts, such as
regular contact by sales or service representative.  The values
assigned to these intangible assets are amortized to earnings on a straight-line
basis over the expected period of economic benefit, which ranges from 2 to 9
years.





Of the $87.5 million in consideration
we paid to complete the acquisition of the Horizon business, $8.8 million has
been assigned to goodwill.  Management attributes the value of this
goodwill to potential future benefits we expect to realize as a result of
acquiring these assets and further expanding our Marine Services
Segment.





Lubrication and Other Fuel Oil
Assets





On August 1, 2008, we purchased
lubrication and other fuel oil assets, located in Wyoming, from Quality
Petroleum, Inc. for approximately $7.5 million.  The assets, included
in our Upstream Segment, consist of operating inventory, buildings, land and
various equipment and the assignment of certain distributor
agreements.  We funded the purchase through borrowings under our
revolving credit facility, and we allocated the purchase price primarily to
property, plant and equipment, goodwill, inventory and intangible
assets.  We recorded $0.6 million of goodwill related to this
acquisition.





28
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)


Cavern
Assets





On July
31, 2007, we purchased assets from Duke Energy Ohio, Inc. and Ohio River Valley
Propane, LLC for approximately $6.0 million.  The assets, included in
our Downstream Segment, consist of an active 170,000 barrel LPG storage cavern,
the associated piping and related equipment and a one bay truck
rack.  These assets are located adjacent to our Todhunter facility
near Middleton, Ohio and are connected to our existing LPG
pipeline.  We funded the purchase through borrowings under our
revolving credit facility, and we allocated the purchase price to property,
plant and equipment.




Crude Oil Pipeline Assets




On September 27, 2007, we purchased
assets from Shell Pipeline Company LP for approximately $6.8
million.  The assets, included in our Upstream Segment, consist of
approximately 44 miles of pipeline in South Texas and related
equipment.  We funded the purchase through borrowings under our
revolving credit facility, and we allocated the purchase price to property,
plant and equipment.





Dispositions





MB Storage and Other Related
Assets





On March 1, 2007, TE Products sold its
49.5% ownership interest in MB Storage, its 50% ownership interest in Mont
Belvieu Venture, LLC (the general partner of MB Storage) and other related
assets to Louis Dreyfus for a total of approximately $156.1 million in cash,
which includes approximately $18.5 million for other TE Products
assets.  This sale was in compliance with the October 2006 order and
consent agreement with the Bureau of Competition of the Federal Trade Commission
(“FTC”) and was completed in accordance with the terms and conditions approved
by the FTC in February 2007.  We used the proceeds from the
transaction to partially fund our 2007 portion of the Jonah Phase V expansion
and other organic growth projects.  We recognized gains of
approximately $59.6 million and $13.2 million related to the sale of our equity
interests and other related assets of TE Products, respectively, which are
included in gain on sale of ownership interest in MB Storage and gain on the
sale of assets, respectively, in our statements of consolidated
income.




In accordance with a transition
services agreement between TE Products and Louis Dreyfus effective as of March
1, 2007, TE Products will provide certain administrative services to MB Storage
for a period of up to two years after the sale, for a fee equal to 110% of the
direct costs and expenses TE Products and its affiliates incur to provide the
transition services to MB Storage.  Payments for these services will
be made according to the terms specified in the transition services
agreement.





Other Refined Products
Assets





On January 23, 2007, we sold a 10-mile,
18-inch segment of pipeline to an affiliate of Enterprise Products Partners for
approximately $8.0 million in cash.  These assets were part of
our Downstream Segment and had a net book value of approximately $2.5
million.  The sales proceeds were used to fund construction of a
replacement pipeline in the area, in which the new pipeline provides greater
operational capability and flexibility.  We recognized a gain of
approximately $5.5 million on this transaction, which is included in gain on
sale of assets in our statements of consolidated income.







29
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





NOTE
10.  INTANGIBLE ASSETS AND GOODWILL





Intangible
Assets





The following table summarizes our
intangible assets, including excess investments, being amortized at September
30, 2008 and December 31, 2007:





September
      30, 2008
                                  
                                  
                                  December
      31, 2007Gross
      Carrying
                                    Amount
                                  
                                  
                                  Accumulated
                                    Amortization
                                  
                                  
                                  Gross
      Carrying
                                    Amount
                                  
                                  
                                  Accumulated
                                    AmortizationIntangible
      assets:Downstream
Segment:Transportation
      agreements
                                  
                                  $
                                  1,000
                                  
                                  
                                  $
                                  (395
                                  )
                                  
                                  $
                                  1,000
                                  
                                  
                                  $
                                  (358
                                  )Other
                                  
                                  
                                  5,244
                                  
                                  
                                  
                                  (652
                                  )
                                  
                                  
                                  4,927
                                  
                                  
                                  
                                  (325
                                  )Subtotal
                                  
                                  
                                  6,244
                                  
                                  
                                  
                                  (1,047
                                  )
                                  
                                  
                                  5,927
                                  
                                  
                                  
                                  (683
                                  )Upstream Segment:Transportation
      agreements
                                  
                                  
                                  888
                                  
                                  
                                  
                                  (380
                                  )
                                  
                                  
                                  888
                                  
                                  
                                  
                                  (335
                                  )Other
                                  
                                  
                                  11,255
                                  
                                  
                                  
                                  (3,492
                                  )
                                  
                                  
                                  10,005
                                  
                                  
                                  
                                  (3,046
                                  )Subtotal
                                  
                                  
                                  12,143
                                  
                                  
                                  
                                  (3,872
                                  )
                                  
                                  
                                  10,893
                                  
                                  
                                  
                                  (3,381
                                  )Midstream Segment:Gathering
      agreements
                                  
                                  
                                  239,649
                                  
                                  
                                  
                                  (121,574
                                  )
                                  
                                  
                                  239,649
                                  
                                  
                                  
                                  (107,356
                                  )Fractionation
      agreement
                                  
                                  
                                  38,000
                                  
                                  
                                  
                                  (19,950
                                  )
                                  
                                  
                                  38,000
                                  
                                  
                                  
                                  (18,525
                                  )Other
                                  
                                  
                                  306
                                  
                                  
                                  
                                  (161
                                  )
                                  
                                  
                                  306
                                  
                                  
                                  
                                  (149
                                  )Subtotal
                                  
                                  
                                  277,955
                                  
                                  
                                  
                                  (141,685
                                  )
                                  
                                  
                                  277,955
                                  
                                  
                                  
                                  (126,030
                                  )Marine Services
      Segment:Customer relationship
      intangibles
                                  
                                  
                                  51,320
                                  
                                  
                                  
                                  (2,260
                                  )
                                  
                                  
                                  --
                                  
                                  
                                  
                                  --Other
                                  
                                  
                                  18,680
                                  
                                  
                                  
                                  (3,108
                                  )
                                  
                                  
                                  --
                                  
                                  
                                  
                                  --Subtotal
                                  
                                  
                                  70,000
                                  
                                  
                                  
                                  (5,368
                                  )
                                  
                                  
                                  --
                                  
                                  
                                  
                                  --Total
      intangible
      assets
                                  
                                  
                                  366,342
                                  
                                  
                                  
                                  (151,972
                                  )
                                  
                                  
                                  294,775
                                  
                                  
                                  
                                  (130,094
                                  )Excess
      investments: (1)Downstream Segment
      (2)
                                  
                                  
                                  33,390
                                  
                                  
                                  
                                  (25,012
                                  )
                                  
                                  
                                  33,390
                                  
                                  
                                  
                                  (21,861
                                  )Upstream Segment
      (3)
                                  
                                  
                                  26,908
                                  
                                  
                                  
                                  (5,649
                                  )
                                  
                                  
                                  26,908
                                  
                                  
                                  
                                  (5,135
                                  )Midstream Segment
      (4)
                                  
                                  
                                  7,469
                                  
                                  
                                  
                                  (193
                                  )
                                  
                                  
                                  6,988
                                  
                                  
                                  
                                  (95
                                  )Subtotal
                                  
                                  
                                  67,767
                                  
                                  
                                  
                                  (30,854
                                  )
                                  
                                  
                                  67,286
                                  
                                  
                                  
                                  (27,091
                                  )Total
      intangible assets, including
                                    excess
      investments
                                  
                                  $
                                  434,109
                                  
                                  
                                  $
                                  (182,826
                                  )
                                  
                                  $
                                  362,061
                                  
                                  
                                  $
                                  (157,185
                                  )


__________________________________________





(1)
            Excess
      investments are included in “Equity Investments” in our consolidated
      balance sheets.


(2)
            Relates
      to our investment in Centennial.


(3)
            Relates
      to our investment in Seaway.


(4)
            Relates
      to our investment in Jonah.








30
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





The following table presents the
amortization expense of our intangible assets by segment for the three months
and nine months ended September 30, 2008 and 2007:







For
      the Three Months Ended
                            September
      30,
                          
                          
                          For
      the Nine Months Ended
                            September
      30,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007Intangible
      assets:Downstream Segment
                          
                          $
                          121
                          
                          
                          $
                          191
                          
                          
                          $
                          364
                          
                          
                          $
                          490Upstream Segment
                          
                          
                          192
                          
                          
                          
                          157
                          
                          
                          
                          491
                          
                          
                          
                          497Midstream Segment
                          
                          
                          5,299
                          
                          
                          
                          5,566
                          
                          
                          
                          15,655
                          
                          
                          
                          16,747Marine Services
      Segment
                          
                          
                          2,012
                          
                          
                          
                          --
                          
                          
                          
                          5,368
                          
                          
                          
                          --Subtotal
                          
                          
                          7,624
                          
                          
                          
                          5,914
                          
                          
                          
                          21,878
                          
                          
                          
                          17,734Excess
      investments: (1)Downstream Segment
                          
                          
                          1,117
                          
                          
                          
                          1,897
                          
                          
                          
                          3,151
                          
                          
                          
                          3,490Upstream Segment
                          
                          
                          171
                          
                          
                          
                          171
                          
                          
                          
                          514
                          
                          
                          
                          514Midstream Segment
                          
                          
                          33
                          
                          
                          
                          29
                          
                          
                          
                          98
                          
                          
                          
                          62Subtotal
                          
                          
                          1,321
                          
                          
                          
                          2,097
                          
                          
                          
                          3,763
                          
                          
                          
                          4,066Total
      amortization expense
                          
                          $
                          8,945
                          
                          
                          $
                          8,011
                          
                          
                          $
                          25,641
                          
                          
                          $
                          21,800


___________________________________________





(1)
            Amortization
      of excess investments is included in equity
  earnings.





The following table sets forth the
estimated amortization expense of intangible assets and the estimated
amortization expense allocated to equity earnings for the years ending December
31:





Intangible
      Assets
                    
                    
                    Excess
      Investments2008
                    
                    $
                    29,283
                    
                    
                    $
                    5,8952009
                    
                    
                    26,374
                    
                    
                    
                    4,7742010
                    
                    
                    24,516
                    
                    
                    
                    1,0312011
                    
                    
                    22,630
                    
                    
                    
                    1,0312012
                    
                    
                    17,158
                    
                    
                    
                    1,0312013
                    
                    
                    15,606
                    
                    
                    
                    1,031





Goodwill





The following table presents the
carrying amount of goodwill at September 30, 2008 and December 31, 2007, by
business segment:





September
      30,
                                    2008
                                  
                                  
                                  December
      31,
                                    2007Downstream Segment
                                  
                                  $
                                  1,339
                                  
                                  
                                  $
                                  1,339Upstream Segment
                                  
                                  
                                  14,771
                                  
                                  
                                  
                                  14,167Marine Services
      Segment
                                  
                                  
                                  90,294
                                  
                                  
                                  
                                  --Total
      goodwill
                                  
                                  $
                                  106,404
                                  
                                  
                                  $
                                  15,506








31
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)







NOTE
11.  DEBT OBLIGATIONS





The
following table summarizes the principal amounts outstanding under all of our
debt instruments at September 30, 2008 and December 31, 2007:




September
      30,
                      
                      
                      December
      31,2008
                      
                      
                      2007Short-term
      senior debt obligations:6.45%
      TE Products Senior Notes, due January 2008 (1)
                      
                      $
                      --
                      
                      
                      $
                      180,0007.51%
      TE Products Senior Notes, due January 2028 (1)
                      
                      
                      --
                      
                      
                      
                      175,000Total
      principal amount of short-term senior debt obligations
                      
                      
                      --
                      
                      
                      
                      355,000Adjustment to carrying value
      associated with hedges offair value and
      unamortized discounts (2)
                      
                      
                      --
                      
                      
                      
                      (1,024
                      )Total
      short-term senior debt obligations
                      
                      $
                      --
                      
                      
                      $
                      353,976Long-term:Senior debt obligations:
      (3)Revolving
      Credit Facility, due December 2012
                      
                      $
                      324,717
                      
                      
                      $
                      490,0007.625%
      Senior Notes, due February 2012
                      
                      
                      500,000
                      
                      
                      
                      500,0006.125%
      Senior Notes, due February 2013
                      
                      
                      200,000
                      
                      
                      
                      200,0005.90% Senior Notes,
      due April 2013
                      
                      
                      400,000
                      
                      
                      
                      --6.65% Senior Notes,
      due April 2018
                      
                      
                      350,000
                      
                      
                      
                      --7.55% Senior Notes,
      due April 2038
                      
                      
                      250,000
                      
                      
                      
                      --Total principal amount of
      long-term senior debt obligations
                      
                      
                      2,024,717
                      
                      
                      
                      1,190,0007.000%
      Junior Subordinated Notes, due June 2067 (3)
                      
                      
                      300,000
                      
                      
                      
                      300,000Total principal
      amount of long-term debt obligations
                      
                      
                      2,324,717
                      
                      
                      
                      1,490,000Adjustment to carrying value
      associated with hedges of fair value and
                        unamortized
      discounts (4)
                      
                      
                      14,028
                      
                      
                      
                      21,083Total
      long-term debt obligations
                      
                      
                      2,338,745
                      
                      
                      
                      1,511,083Total
      Debt Instruments (4)
                      
                      $
                      2,338,745
                      
                      
                      $
                      1,865,059Standby
      letters of credit outstanding (5)
                      
                      $
                      --
                      
                      
                      $
                      23,494


_________________




(1)
            In January 2008, TE Products retired all of its outstanding
      debt by repaying at maturity $180.0 million principal amount of its 6.45%
      TE Products Senior Notes due 2008 and redeeming the remaining $175.0
      million principal amount of its 7.51% TE Products Senior Notes due
      2028.  The redemption price for the 7.51% TE Products Senior
      Notes due 2028 was 103.755% (or $181.6 million, which included a $6.6
      million make-whole premium) of the principal amount plus accrued and
      unpaid interest to January 28, 2008, the date of redemption, of $0.5
      million.


(2)
            Includes
      $1.0 million related to fair value hedges and $2 thousand in unamortized
      discount.  In January 2008, with the redemption of the 7.51% TE
      Products Senior Notes, the remaining unamortized loss was recognized in
      the statement of consolidated
income.


(3)
            TE
      Products, TCTM, TEPPCO Midstream and Val Verde (collectively, the
      “Subsidiary Guarantors”) have issued full, unconditional, joint and
      several guarantees of our senior notes, junior subordinated notes and
      revolving credit facility.


(4)
            From
      time to time we enter into interest rate swap agreements to hedge our
      exposure to changes in the fair value on a portion of the debt obligations
      presented above (see Note 5).  At September 30, 2008 and
      December 31, 2007, amount includes $5.4 million and $2.1 million of
      unamortized discounts, respectively, and $19.4 million and $23.2 million
      related to fair value hedges,
respectively.


(5)
            Letters
      of credit were issued in connection with crude oil purchased during the
      respective quarter.  Payables related to these purchases of
      crude oil are generally paid during the following
  quarter.







32
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)




Revolving
Credit Facility


We have in place an unsecured revolving
credit facility (“Revolving Credit Facility”), which matures on December 12,
2012.  The Revolving Credit Facility allows us to request unlimited
one-year extensions of the maturity date, subject to lender approval and
satisfaction of certain other conditions.  In July 2008, we received
confirmations from participating lenders making effective our exercise of the
accordion feature under the facility, and increased the bank commitments
thereunder from $700.0 million to $950.0 million.  The aggregate
outstanding principal amount of swing line loans or same day borrowings
permitted under the Revolving Credit Facility is $40.0 million.  The
interest rate is based, at our option, on either the lender’s base rate, or
LIBOR rate, plus a margin, in effect at the time of the
borrowings.  The applicable margin with respect to LIBOR rate
borrowings is based on our senior unsecured non-credit enhanced long-term debt
rating issued by Standard & Poor’s Rating Services (“S&P”) and Moody’s
Investors Service, Inc. (“Moody’s”).  The Revolving Credit Facility
contains a term-out option in which we may, on the maturity date, convert the
principal balance of all revolving loans then outstanding into a non-revolving
one-year term loan.  Upon the conversion of the revolving loans to
term loans pursuant to the term-out option, the applicable LIBOR spread will
increase by 0.125% per year, and if immediately prior to such borrowing the
total outstanding revolver borrowings then outstanding exceeds 50% of the total
lender commitments, the applicable LIBOR spread with respect to borrowings will
increase by an additional 10 basis points.





During
September 2008, Lehman Brothers Bank, FSB (“Lehman”), which had a 4.05%
participation in our Revolving Credit Facility, stopped funding its commitment
following the bankruptcy filing of its parent.  Assuming that future
fundings are not received for the Lehman percentage commitment, aggregate
available capacity would be reduced by approximately $38.5 million.





The Revolving Credit Facility contains
financial covenants that require us to maintain a ratio of Consolidated Funded
Debt to Pro Forma EBITDA (as defined and calculated in the facility) of less
than 5.00 to 1.00 (and, if after giving effect to a permitted acquisition the
ratio exceeds 5.00 to 1.00, the threshold ratio will be increased to 5.50 to
1.00 for the fiscal quarter in which such acquisition occurs and the first full
fiscal quarter following such acquisition).  Other restrictive
covenants in the Revolving Credit Facility limit our ability, and the ability of
certain of our subsidiaries, to, among other things, incur certain additional
indebtedness, make distributions in excess of Available Cash (see Note 12),
incur certain liens, engage in specified transactions with affiliates and
complete mergers, acquisitions and sales of assets.  The credit
agreement restricts the amount of outstanding debt of the Jonah joint venture to
debt owing to the owners of its partnership interests and other third-party debt
in the aggregate principal amount of $50.0 million and allows for the issuance
of certain hybrid securities of up to 15% of our Consolidated Total
Capitalization (as defined therein).  In September 2008, we used
proceeds from our equity offering (see Note 12) to repay a portion of the then
outstanding balance of the Revolving Credit Facility.  At September
30, 2008, $324.7 million was outstanding under the Revolving Credit Facility at
a weighted average interest rate of 3.56%, and our available borrowing capacity
under the facility was approximately $600.0 million.  At September 30,
2008, we were in compliance with the covenants of the Revolving Credit
Facility.





Senior
Notes




On January 27, 1998, TE Products issued $180.0 million principal amount of 6.45%
Senior Notes due 2008 and $210.0 million principal amount of 7.51% Senior Notes
due 2028 (collectively the “TE Products Senior Notes”).  Interest on
the TE Products Senior Notes was payable semiannually in arrears on January 15
and July 15 of each year.  The 6.45% TE Products Senior Notes were
issued at a discount of $0.3 million and were being accreted to their face value
over the term of the notes.  The 6.45% TE Products Senior Notes due
2008 were redeemed at maturity on January 15, 2008.  The 7.51% TE
Products Senior Notes due 2028, issued at par, became redeemable at any time
after January 15, 2008, at the option of TE Products, in whole or in part, at
varying fixed annual redemption prices.  In October 2007, TE Products
repurchased $35.0 million principal amount of the 7.51% TE Products Senior Notes for $36.1 million
and accrued interest.  On January 28, 2008, TE Products redeemed the
remaining $175.0


33
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)




million
of 7.51% TE Products Senior Notes at a redemption price of 103.755% of the
principal amount plus accrued and unpaid interest at the date of
redemption.  We funded the retirement of both series of senior notes
with borrowings under our term credit agreement.





On
February 20, 2002 and January 30, 2003, we issued $500.0 million principal
amount of 7.625% Senior Notes due 2012 and $200.0 million principal amount of
6.125% Senior Notes due 2013, respectively.  These senior notes were
issued at discounts of $2.2 million and $1.4 million, respectively, and are
being accreted to their face value over the applicable term of the senior
notes.  The senior notes may be redeemed at any time at our option
with the payment of accrued interest and a make-whole premium determined by
discounting remaining interest and principal payments using a discount rate
equal to the rate of the United States Treasury securities of comparable
remaining maturity plus 35 basis points.




On March
27, 2008, we issued (i) $250.0 million principal amount of 5.90% Senior Notes
due 2013, (ii) $350.0 million principal amount of 6.65% Senior Notes due 2018,
and (iii) $400.0 million principal amount of 7.55% Senior Notes due
2038.  The senior notes were issued at discounts of $0.2 million, $1.3
million and $2.2 million, respectively, and are being accreted to their face
value over the applicable terms of the senior notes.  The senior notes
may be redeemed at any time at our option with the payment of accrued interest
and a make-whole premium determined by discounting remaining interest and
principal payments using a discount rate equal to the rate of the United States
Treasury securities of comparable remaining maturity plus 50 basis
points.




The
indentures governing our senior notes contain covenants, including, but not
limited to, covenants limiting the creation of liens securing indebtedness and
sale and leaseback transactions.  However, the indentures do not limit
our ability to incur additional indebtedness.  At September 30, 2008,
we were in compliance with the covenants of our senior notes.




Junior
Subordinated Notes





In May 2007, we issued and sold $300.0
million in principal amount of fixed/floating, unsecured, long-term subordinated
notes due June 1, 2067 (“Junior Subordinated Notes”).  Our payment
obligations under the Junior Subordinated Notes are subordinated to all of our
current and future senior indebtedness (as defined in the related
indenture).  The Subsidiary Guarantors have issued full,
unconditional, and joint and several guarantees, on a junior subordinated basis,
of payment of the principal of, premium, if any, and interest on the Junior
Subordinated Notes.




The
indenture governing the Junior Subordinated Notes does not limit our ability to
incur additional debt, including debt that ranks senior to or equally with the
Junior Subordinated Notes.  The indenture allows us to defer interest
payments on one or more occasions for up to ten consecutive years, subject to
certain conditions.  The indenture also provides that during any
period in which we defer interest payments on the Junior Subordinated Notes,
subject to certain exceptions, (i) we cannot declare or make any distributions
with respect to, or redeem, purchase or make a liquidation payment with respect
to, any of our equity securities; (ii) neither we nor the Subsidiary Guarantors
will make, and we and the Subsidiary Guarantors will cause our respective
majority-owned subsidiaries not to make, any payment of interest, principal or
premium, if any, on or repay, purchase or redeem any of our or the Subsidiary
Guarantors’ debt securities (including securities similar to the Junior
Subordinated Notes) that contractually rank equally with or junior to the Junior
Subordinated Notes or the guarantees, as applicable; and (iii) neither we nor
the Subsidiary Guarantors will make, and we and the Subsidiary Guarantors will
cause our respective majority-owned subsidiaries not to make, any payments under
a guarantee of debt securities (including under a guarantee of debt securities
that are similar to the Junior Subordinated Notes) that contractually ranks
equally with or junior to the Junior Subordinated Notes or the guarantees, as
applicable.




The Junior Subordinated Notes bear interest at a fixed annual rate of 7.000%
from May 2007 to June 1, 2017, payable semi-annually in arrears on June 1 and
December 1 of each year, commencing December 1,
2007.







34
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





After
June 1, 2017, the Junior Subordinated Notes will bear interest at a variable
annual rate equal to the 3-month LIBOR rate for the related interest period plus
2.7775%, payable quarterly in arrears on March 1, June 1, September 1 and
December 1 of each year commencing September 1, 2017.  Interest
payments may be deferred on a cumulative basis for up to ten consecutive years,
subject to certain provisions.  Deferred interest will accumulate
additional interest at the then-prevailing interest rate on the Junior
Subordinated Notes.  The Junior Subordinated Notes mature in June
2067.  The Junior Subordinated Notes are redeemable in whole or in
part prior to June 1, 2017 for a “make-whole” redemption price and thereafter at
a redemption price equal to 100% of their principal amount plus accrued
interest.  The Junior Subordinated Notes are also redeemable prior to
June 1, 2017 in whole (but not in part) upon the occurrence of certain tax or
rating agency events at specified redemption prices.  At September 30,
2008, we were in compliance with the covenants of the Junior Subordinated
Notes.




In
connection with the issuance of the Junior Subordinated Notes, we and our
Subsidiary Guarantors entered into a replacement capital covenant in favor of
holders of a designated series of senior long-term indebtedness (as provided in
the underlying documents) pursuant to which we and our Subsidiary Guarantors
agreed for the benefit of such debt holders that we would not redeem or
repurchase or otherwise satisfy, discharge or defease any of the Junior
Subordinated Notes on or before June 1, 2037, unless, subject to certain
limitations, during the 180 days prior to the date of that redemption,
repurchase, defeasance or purchase, we have or one of our subsidiaries has
received a specified amount of proceeds from the sale of qualifying securities
that have characteristics that are the same as, or more equity-like than, the
applicable characteristics of the Junior Subordinated Notes.  The
replacement capital covenant is not a term of the indenture or the Junior
Subordinated Notes.





Term
Credit Agreement





We had in place a senior unsecured term
credit agreement (“Term Credit Agreement”), with a borrowing capacity of $1.0
billion and a maturity date of December 19, 2008.  During the first
quarter of 2008, we borrowed $1.0 billion under the Term Credit Agreement to
finance the retirement of TE Products’ senior notes and the Cenac and Horizon
acquisitions and for other partnership purposes.  In March 2008, we
repaid the outstanding balance of the Term Credit Agreement with proceeds from
the issuance of senior notes and other cash on hand and terminated the
agreement.





Debt
Obligations of Unconsolidated Affiliates





We have
one unconsolidated affiliate, Centennial, with long-term debt
obligations.  The following table shows the total debt of Centennial
at September 30, 2008 (on a 100% basis) and the corresponding scheduled
maturities of such debt.




Scheduled
      Maturities of Debt2008
                    
                    $
                    2,5502009
                    
                    
                    9,9002010
                    
                    
                    9,1002011
                    
                    
                    9,0002012
                    
                    
                    8,900After
      2012
                    
                    
                    93,000Total
      scheduled maturities of
      debt
                    
                    $
                    132,450




At September
30, 2008 and December 31, 2007, Centennial’s debt obligations consisted of
$132.5 million and $140.0 million, respectively, borrowed under a master shelf
loan agreement.  Borrowings under the master shelf agreement mature in
May 2024 and are collateralized by substantially all of Centennial’s assets and
severally guaranteed by Centennial’s owners.  In January 2008, we
entered into an amended and restated guaranty agreement





35
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





(“Amended
Guaranty”) in which we, TCTM, TEPPCO Midstream and TE Products (collectively,
“TEPPCO Guarantors”) are required, on a joint and several basis, to pay 50% of
any past-due amount under Centennial’s master shelf loan agreement not paid by
Centennial (see Note 16).








NOTE
12.  PARTNERS’ CAPITAL AND DISTRIBUTIONS





Our Units represent limited partner
interests, which give the holders thereof the right to participate in
distributions and to exercise the other rights or privileges available to them
under our Partnership Agreement.  We are managed by our General
Partner.





In accordance with the Partnership
Agreement, capital accounts are maintained for our General Partner and limited
partners.  The capital account provisions of our Partnership Agreement
incorporate principles established for U.S. federal income tax purposes and are
not comparable to the equity accounts reflected under GAAP in our consolidated
financial statements.  In connection with the amendment of our
Partnership Agreement in December 2006, the General Partner’s obligation to make
capital contributions to maintain its 2% capital account was
eliminated.





Our
Partnership Agreement sets forth the calculation to be used in determining the
amount and priority of cash distributions that our limited partners and General
Partner will receive.  Net income is allocated between the General
Partner and the limited partners in the same proportion as aggregate cash
distributions made to the General Partner and the limited partners during the
period.  This is generally consistent with the manner of allocating
net income under our Partnership Agreement.  Net income determined
under our Partnership Agreement, however, incorporates principles established
for U.S. federal income tax purposes and is not comparable to net income
reflected under GAAP in our financial statements.





Equity
Offerings and Registration Statements





In general, the Partnership Agreement
authorizes us to issue an unlimited number of additional limited partner
interests and other equity securities for such consideration and on such terms
and conditions as may be established by our General Partner in its sole
discretion (subject, under certain circumstances, to the approval of our
unitholders).





In September 2008, we filed a universal
shelf registration statement with the SEC that allows us to issue an unlimited
amount of debt and equity securities and removed from registration securities
remaining under our previous universal shelf registration
statement.





On
September 9, 2008, we issued and sold in an underwritten public offering 9.2
million Units at a price to the public of $29.00 per Unit, including 1.2 million
Units sold upon exercise of the underwriters’ over-allotment option granted in
connection with the offering.  The proceeds from the offering, net of
underwriting discount and offering expenses, totaled approximately $257.0
million.  Concurrently with this offering, we sold 241,380
unregistered Units at the public offering price of $29.00 to TEPPCO Unit, an
affiliate of EPCO in which certain EPCO employees who perform services for us,
including the executive officers named in the Executive Compensation section of
our recent Annual Report on Form 10-K, were issued Class B limited partner
interests to incentivize them to enhance the long-term value of our
Units.  The net proceeds from the offering and the unregistered
issuance to TEPPCO Unit were used to reduce indebtedness under our Revolving
Credit Facility.  For additional information regarding TEPPCO Unit and
the equity-based compensatory awards issued therein, please see Note
3.





36
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





Quarterly
Distributions of Available Cash





We make
quarterly cash distributions of all of our available cash, generally defined in
our Partnership Agreement as consolidated cash receipts less consolidated cash
disbursements and cash reserves established by the General Partner in its
reasonable discretion (“Available Cash”).  Pursuant to the Partnership
Agreement, the General Partner receives incremental incentive cash distributions
when unitholders’ cash distributions exceed certain target thresholds as shown
in the following table:




GeneralUnitholders
                  
                  
                  PartnerQuarterly
      Cash Distribution per Unit:Up to Minimum Quarterly
      Distribution ($0.275 per Unit)
                  
                  
                  98%
                  
                  
                  
                  2%First Target – $0.276 per Unit up
      to $0.325 per Unit
                  
                  
                  85%
                  
                  
                  
                  15%Over First Target – Cash
      distributions greater than $0.325 per Unit
                  
                  
                  75%
                  
                  
                  
                  25%





The
following table reflects the allocation of total distributions paid during the
nine months ended September 30, 2008 and 2007.







For
      the Nine Months Ended
                              September
      30,2008
                            
                            
                            2007Limited
      Partner
      Units
                            
                            $
                            197,291
                            
                            
                            $
                            183,693General
      Partner Ownership
      Interest
                            
                            
                            4,026
                            
                            
                            
                            3,749General
      Partner
      Incentive
                            
                            
                            35,458
                            
                            
                            
                            32,171Total
      Cash Distributions
      Paid
                            
                            $
                            236,775
                            
                            
                            $
                            219,613Total
      Cash Distributions Paid Per
      Unit
                            
                            $
                            2.115
                            
                            
                            $
                            2.045





Our quarterly cash distributions for
2008 are presented in the following table:





Cash
      Distribution HistoryDistribution
      per Unit
                    
                    Record
                      Date
                    Payment
                      Date1st
      Quarter 2008
                    
                    $
                    0.7100
                    
                    Apr.
      30, 2008
                    May
      7, 20082nd
      Quarter 2008
                    
                    $
                    0.7100
                    
                    Jul.
      31, 2008
                    Aug.
      7, 20083rd
      Quarter 2008 (1)
                    
                    $
                    0.7250
                    
                    Oct.
      31, 2008
                    Nov.
      6, 2008


______________________





(1)
            The
      third quarter 2008 cash distribution totaled approximately $91.2
      million.





EPCO,
Inc. TPP Employee Unit Purchase Plan




The EPCO,
Inc. TPP Employee Unit Purchase Plan (the “Unit Purchase Plan”) provides for
discounted purchases of our Units by employees of EPCO and its
affiliates.  A maximum of 1,000,000 Units may be delivered under the
Unit Purchase Plan (subject to adjustment as provided in the
plan).  The Unit Purchase Plan is effective until December 8, 2016,
or, if earlier, at the time that all available Units under the plan have been
purchased on behalf of the participants or the time of termination of the plan
by EPCO or the Chairman or Vice Chairman of EPCO.  As of September 30,
2008, 21,009 Units have been issued to employees under this plan.








37
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





Distribution
Reinvestment Plan





Our distribution reinvestment plan
(“DRIP”) provides for the issuance of up to 10,000,000 Units.  Units
purchased through the DRIP may be acquired at a discount rating from 0% to 5%
(currently set at 5%), which will be set from time to time by us.  As
of September 30, 2008, 245,084 Units have been issued in connection with the
DRIP.





General
Partner’s Interest




At September 30, 2008 and December 31,
2007, we had deficit balances of $100.7 million and $88.0 million, respectively,
in our General Partner’s equity account. These negative balances do not
represent assets to us and do not represent obligations of the General Partner
to contribute cash or other property to us. The General Partner’s equity account
generally consists of its cumulative share of our net income less cash
distributions made to it plus capital contributions that it has made to us (see
our Statement of Consolidated Partners’ Capital for a detail of the General
Partner’s equity account).  For the nine months ended September 30,
2008, our General Partner was allocated $26.7 million (representing 16.83%) of
our net income and received $39.5 million in cash distributions.




Cash distributions that we make during
a period may exceed our net income for the period.  We make quarterly
cash distributions of all of our Available Cash, generally defined as
consolidated cash receipts less consolidated cash disbursements and cash
reserves established by the General Partner in its reasonable
discretion.  Cash distributions in excess of net income allocations
and capital contributions during previous years, resulted in a deficit in the
General Partner’s equity account at December 31, 2007 and September 30,
2008.  Future cash distributions that exceed net income will result in
an increase in the deficit balance in the General Partner’s equity
account.




According to the Partnership Agreement,
in the event of our dissolution, after satisfying our liabilities, our remaining
assets would be divided among our limited partners and the General Partner
generally in the same proportion as Available Cash but calculated on a
cumulative basis over the life of the Partnership.  If a deficit
balance still remains in the General Partner’s equity account after all
allocations are made between the partners, the General Partner would not be
required to make whole any such deficit.




Accumulated
Other Comprehensive Income (Loss)





SFAS No.
130, Reporting Comprehensive
Income requires certain items such as foreign currency translation
adjustments, gains or losses associated with pension or other postretirement
benefits, prior service costs or credits associated with pension or other
postretirement benefits, transition assets or obligations associated with
pension or other postretirement benefits and unrealized gains and losses on
certain investments in debt and equity securities to be reported in a financial
statement.  As of and for the nine months ended September 30, 2008,
the components of accumulated other comprehensive income (loss) reflected on our
consolidated balance sheet were composed of crude oil hedges and treasury
locks.  The majority of these crude oil hedges have forward positions
that expire during 2008, with the remainder expiring during
2009.  While the crude oil hedges are in effect, changes in their fair
values, to the extent the hedges are effective, are recognized in accumulated
other comprehensive income (loss) until they are recognized in net income in
future periods upon the contract expiration.  The amounts related to
settlements of treasury lock agreements are being amortized into earnings over
the terms of the respective debt (see Note 5).








38
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





The
accumulated balance of other comprehensive income (loss) is as
follows:





Balance
      at December 31,
      2007
                    
                    $
                    (42,557
                    )Changes
      in fair values of crude oil cash flow hedges
                    
                    
                    15,466Settlement of treasury
      locks
                    
                    
                    (52,098
                    )Amortization of treasury lock
      proceeds into earnings
                    
                    
                    (80
                    )Changes in fair values of treasury
      locks
                    
                    
                    25,296Ineffectiveness
      of treasury locks
                    
                    
                    42Transfer
      portion of interest payment hedged under treasury locksnot
      occurring as forecasted to earnings
                    
                    
                    3,586Balance
      at September 30,
      2008
                    
                    $
                    (50,345
                    )








NOTE
13.  BUSINESS SEGMENTS





We have
four reporting segments:




§
            Our
      Downstream Segment, which is engaged in the pipeline transportation,
      marketing and storage of refined products, LPGs and
      petrochemicals;


§
            Our
      Upstream Segment, which is engaged in the gathering, pipeline
      transportation, marketing and storage of crude oil and distribution of
      lubrication oils and specialty
chemicals;


§
            Our
      Midstream Segment, which is engaged in the gathering of natural gas,
      fractionation of NGLs and pipeline transportation of NGLs;
    and


§
            Our
      Marine Services Segment, which is engaged in the marine transportation of
      refined products, crude oil, condensate, asphalt, heavy fuel oil and other
      heated oil products via tow boats and tank
  barges.





The
amounts indicated below as “Partnership and Other” for income and expense items
(including operating income) relate primarily to intersegment eliminations from
activities among our reporting segments.  Amounts indicated below as
“Partnership and Other” for assets and capital expenditures include the
elimination of intersegment related party receivables and investment balances
among our reporting segments and assets that we hold that have not been
allocated to any of our reporting segments (including such items as corporate
furniture and fixtures, vehicles, computer hardware and software, prepaid
insurance and unamortized debt issuance costs on debt issued at the Partnership
level).




Our Downstream Segment revenues are
earned from pipeline transportation, marketing and storage of refined products
and LPGs, intrastate pipeline transportation of petrochemicals, sale of product
inventory and other ancillary services.  We generally realize higher
revenues in the Downstream Segment during the first and fourth quarters of each
year since LPGs volumes are generally higher from November through March due to
higher demand for propane, a major fuel for residential
heating.  Refined products volumes are generally higher during the
second and third quarters because of greater demand for gasolines during the
spring and summer driving seasons, although recent high gasoline prices have
moderated this trend somewhat.  The two largest operating expense
items of the Downstream Segment are labor and electric power.  Our
Downstream Segment also includes the results of operations of the northern
portion of the Dean Pipeline, which transports refinery grade propylene from
Mont Belvieu to Point Comfort, Texas.  Our Downstream Segment also
includes our equity investment in Centennial (see Note 8).





Our Upstream Segment revenues are earned from gathering, pipeline transporting,
marketing and storing crude oil and distributing lubrication oils and specialty
chemicals, principally in Oklahoma, Texas, New Mexico and the Rocky Mountain
region.  Marketing operations consist primarily of aggregating crude
oil purchased at the lease along our pipeline systems, and from third party
pipeline systems, and arranging the necessary transportation







39
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





logistics
for the ultimate sale or delivery of the crude oil to local refineries,
marketers or other end users.  Revenues are also generated from trade
documentation and terminaling services, primarily at Cushing, Oklahoma, and
Midland, Texas.  Our Upstream Segment also includes our equity
investments in Seaway and Texas Offshore Port System (see Note
8).  The Seaway system consists of large diameter pipelines that
transport crude oil from Seaway’s marine terminals on the U.S. Gulf Coast to
Cushing, Oklahoma, a crude oil distribution point for the central United States,
and to refineries in the Texas City and Houston areas.  Seaway also
has a connection to our South Texas system that allows it to receive both
onshore and offshore domestic crude oil in the Texas Gulf Coast area for
delivery to Cushing.  Texas Offshore Port System, a joint venture
between us and affiliates of Enterprise Products Partners and Oiltanking, was
formed to design, construct, operate and own a new Texas offshore crude oil port
and pipeline system.




Our
Midstream Segment revenues are earned from the gathering of coal bed methane and
conventional natural gas in the San Juan Basin in New Mexico and Colorado,
through Val Verde; transportation of NGLs from two trunkline NGL pipelines in
South Texas, two NGL pipelines in East Texas and a pipeline system from West
Texas and New Mexico to Mont Belvieu; and the fractionation of NGLs in
Colorado.  Our Midstream Segment also includes our equity investment
in Jonah (see Note 8).  Jonah, a joint venture between us and an
affiliate of Enterprise Products Partners, owns a natural gas gathering system
in the Green River Basin in southwestern Wyoming.




Our Marine Services Segment revenues
are earned from the marine transportation of refined products, crude oil,
condensate, asphalt, heavy fuel oil and other heated oil products via tow boats
and tank barges.  We entered the marine transportation business in
February 2008 with the acquisition of assets and certain intangible assets from
Cenac and Horizon on February 1, 2008 and February 29, 2008, respectively (see
Note 9).  These businesses service refineries and storage terminals
along the Mississippi, Illinois and Ohio rivers, the Intracoastal Waterway
between Texas and Florida and the Tennessee-Tombigbee Waterway
system.  These assets also gather crude oil from production facilities
and platforms along the U.S. Gulf Coast and in the Gulf of Mexico.




The
following table presents our measurement of earnings before interest expense for
the three months and nine months ended September 30, 2008 and 2007:




For
      the Three Months Ended
                      September
      30,
                    
                    
                    For
      the Nine Months Ended
                      September
      30,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Total
      operating revenues
                    
                    $
                    4,205,744
                    
                    
                    $
                    2,580,657
                    
                    
                    $
                    11,194,695
                    
                    
                    $
                    6,608,522Less:  Total
      costs and expenses
                    
                    
                    4,145,884
                    
                    
                    
                    2,525,938
                    
                    
                    
                    10,992,040
                    
                    
                    
                    6,419,640Operating
      income
                    
                    
                    59,860
                    
                    
                    
                    54,719
                    
                    
                    
                    202,655
                    
                    
                    
                    188,882Add: Gain
      on sale of ownership interest in
                      MB
      Storage
                    
                    
                    --
                    
                    
                    
                    (20
                    )
                    
                    
                    --
                    
                    
                    
                    59,628Equity earnings
                    
                    
                    22,133
                    
                    
                    
                    19,059
                    
                    
                    
                    63,212
                    
                    
                    
                    54,856Interest income
                    
                    
                    289
                    
                    
                    
                    454
                    
                    
                    
                    880
                    
                    
                    
                    1,241Other income –
net
                    
                    
                    106
                    
                    
                    
                    306
                    
                    
                    
                    905
                    
                    
                    
                    1,085Earnings
      before interest expense and provision
                      for
      income taxes
                    
                    $
                    82,388
                    
                    
                    $
                    74,518
                    
                    
                    $
                    267,652
                    
                    
                    $
                    305,692












40
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)







A
reconciliation of our earnings before interest expense and provision for income
taxes to net income for the three months and nine months ended September 30,
2008 and 2007 is as follows:




For
      the Three Months Ended
                    September
      30,
                  
                  
                  For
      the Nine Months Ended
                    September
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Earnings
      before interest expense and provision
                    for
      income
      taxes
                  
                  $
                  82,388
                  
                  
                  $
                  74,518
                  
                  
                  $
                  267,652
                  
                  
                  $
                  305,692Interest
      expense – net
                  
                  
                  (34,301
                  )
                  
                  
                  (26,901
                  )
                  
                  
                  (105,906
                  )
                  
                  
                  (71,897
                  )Income
      before provision for income taxes
                  
                  
                  48,087
                  
                  
                  
                  47,617
                  
                  
                  
                  161,746
                  
                  
                  
                  233,795Provision
      for income taxes
                  
                  
                  1,056
                  
                  
                  
                  (14
                  )
                  
                  
                  2,894
                  
                  
                  
                  213Net
      income
                  
                  $
                  47,031
                  
                  
                  $
                  47,631
                  
                  
                  $
                  158,852
                  
                  
                  $
                  233,582





The table
below includes information by segment, together with reconciliations to our
consolidated totals for the periods indicated:




Downstream
      Segment
                  
                  
                  Upstream
      Segment
                  
                  
                  Midstream
      Segment
                  
                  
                  Marine
      Services Segment
                  
                  
                  Partnership
                    and
      Other
                  
                  
                  ConsolidatedRevenues
      from third parties:Three
      months ended September 30, 2008
                  
                  $
                  94,552
                  
                  
                  $
                  4,032,177
                  
                  
                  $
                  26,934
                  
                  
                  $
                  46,018
                  
                  
                  $
                  --
                  
                  
                  $
                  4,199,681Three
      months ended September 30, 2007
                  
                  
                  83,393
                  
                  
                  
                  2,464,750
                  
                  
                  
                  27,672
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,575,815Nine
      months ended September 30, 2008
                  
                  
                  264,209
                  
                  
                  
                  10,712,443
                  
                  
                  
                  80,727
                  
                  
                  
                  119,590
                  
                  
                  
                  --
                  
                  
                  
                  11,176,969Nine
      months ended September 30, 2007
                  
                  
                  257,858
                  
                  
                  
                  6,254,605
                  
                  
                  
                  81,464
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  6,593,927Revenues
      from related parties:Three
      months ended September 30, 2008
                  
                  $
                  2,500
                  
                  
                  $
                  207
                  
                  
                  $
                  3,391
                  
                  
                  $
                  --
                  
                  
                  $
                  (35
                  )
                  
                  $
                  6,063Three
      months ended September 30, 2007
                  
                  
                  1,135
                  
                  
                  
                  281
                  
                  
                  
                  3,478
                  
                  
                  
                  --
                  
                  
                  
                  (52
                  )
                  
                  
                  4,842Nine
      months ended September 30, 2008
                  
                  
                  6,978
                  
                  
                  
                  599
                  
                  
                  
                  10,283
                  
                  
                  
                  --
                  
                  
                  
                  (134
                  )
                  
                  
                  17,726Nine
      months ended September 30, 2007
                  
                  
                  4,768
                  
                  
                  
                  749
                  
                  
                  
                  9,493
                  
                  
                  
                  --
                  
                  
                  
                  (415
                  )
                  
                  
                  14,595Intersegment
      and intrasegment revenues:Three
      months ended September 30, 2008
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --Three
      months ended September 30, 2007
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Nine
      months ended September 30, 2008
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Nine
      months ended September 30, 2007
                  
                  
                  --
                  
                  
                  
                  80
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (80
                  )
                  
                  
                  --Total
      revenues:Three
      months ended September 30, 2008
                  
                  $
                  97,052
                  
                  
                  $
                  4,032,384
                  
                  
                  $
                  30,325
                  
                  
                  $
                  46,018
                  
                  
                  $
                  (35
                  )
                  
                  $
                  4,205,744Three
      months ended September 30, 2007
                  
                  
                  84,528
                  
                  
                  
                  2,465,031
                  
                  
                  
                  31,150
                  
                  
                  
                  --
                  
                  
                  
                  (52
                  )
                  
                  
                  2,580,657Nine
      months ended September 30, 2008
                  
                  
                  271,187
                  
                  
                  
                  10,713,042
                  
                  
                  
                  91,010
                  
                  
                  
                  119,590
                  
                  
                  
                  (134
                  )
                  
                  
                  11,194,695Nine
      months ended September 30, 2007
                  
                  
                  262,626
                  
                  
                  
                  6,255,434
                  
                  
                  
                  90,957
                  
                  
                  
                  --
                  
                  
                  
                  (495
                  )
                  
                  
                  6,608,522Depreciation
      and amortization:Three
      months ended September 30, 2008
                  
                  $
                  10,736
                  
                  
                  $
                  5,096
                  
                  
                  $
                  9,982
                  
                  
                  $
                  6,257
                  
                  
                  $
                  --
                  
                  
                  $
                  32,071Three
      months ended September 30, 2007
                  
                  
                  11,282
                  
                  
                  
                  5,133
                  
                  
                  
                  10,071
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  26,486Nine
      months ended September 30, 2008
                  
                  
                  31,474
                  
                  
                  
                  14,842
                  
                  
                  
                  29,573
                  
                  
                  
                  16,345
                  
                  
                  
                  --
                  
                  
                  
                  92,234Nine
      months ended September 30, 2007
                  
                  
                  34,142
                  
                  
                  
                  13,349
                  
                  
                  
                  30,244
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  77,735












41
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)









Downstream
      Segment
                      
                      
                      Upstream
      Segment
                      
                      
                      Midstream
      Segment
                      
                      
                      Marine
      Services Segment
                      
                      
                      Partnership
                        and
      Other
                      
                      
                      ConsolidatedOperating
      income:Three
      months ended September 30, 2008
                      
                      $
                      18,671
                      
                      
                      $
                      26,903
                      
                      
                      $
                      5,803
                      
                      
                      $
                      8,354
                      
                      
                      $
                      129
                      
                      
                      $
                      59,860Three
      months ended September 30, 2007
                      
                      
                      26,646
                      
                      
                      
                      20,602
                      
                      
                      
                      7,465
                      
                      
                      
                      --
                      
                      
                      
                      6
                      
                      
                      
                      54,719Nine
      months ended September 30, 2008
                      
                      
                      70,654
                      
                      
                      
                      81,871
                      
                      
                      
                      22,467
                      
                      
                      
                      23,572
                      
                      
                      
                      4,091
                      
                      
                      
                      202,655Nine
      months ended September 30, 2007
                      
                      
                      101,533
                      
                      
                      
                      63,660
                      
                      
                      
                      20,235
                      
                      
                      
                      --
                      
                      
                      
                      3,454
                      
                      
                      
                      188,882Equity
      earnings (losses):Three
      months ended September 30, 2008
                      
                      $
                      (2,349
                      )
                      
                      $
                      2,748
                      
                      
                      $
                      21,863
                      
                      
                      $
                      --
                      
                      
                      $
                      (129
                      )
                      
                      $
                      22,133Three
      months ended September 30, 2007
                      
                      
                      (3,064
                      )
                      
                      
                      1,073
                      
                      
                      
                      21,056
                      
                      
                      
                      --
                      
                      
                      
                      (6
                      )
                      
                      
                      19,059Nine
      months ended September 30, 2008
                      
                      
                      (10,066
                      )
                      
                      
                      9,925
                      
                      
                      
                      67,444
                      
                      
                      
                      --
                      
                      
                      
                      (4,091
                      )
                      
                      
                      63,212Nine
      months ended September 30, 2007
                      
                      
                      (8,430
                      )
                      
                      
                      4,310
                      
                      
                      
                      62,430
                      
                      
                      
                      --
                      
                      
                      
                      (3,454
                      )
                      
                      
                      54,856


Earnings
      before interest expense and
                          provision
      for income taxes:Three
      months ended September 30, 2008
                        
                        $
                        16,500
                        
                        
                        $
                        29,766
                        
                        
                        $
                        27,763
                        
                        
                        $
                        8,359
                        
                        
                        $
                        --
                        
                        
                        $
                        82,388Three
      months ended September 30, 2007
                        
                        
                        24,096
                        
                        
                        
                        21,719
                        
                        
                        
                        28,703
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        74,518Nine
      months ended September 30, 2008
                        
                        
                        61,293
                        
                        
                        
                        92,539
                        
                        
                        
                        90,237
                        
                        
                        
                        23,583
                        
                        
                        
                        --
                        
                        
                        
                        267,652Nine
      months ended September 30, 2007
                        
                        
                        154,454
                        
                        
                        
                        68,114
                        
                        
                        
                        83,124
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        305,692


Segment
      assets:At
      September 30, 2008
                              
                              $
                              1,289,196
                              
                              
                              $
                              2,527,885
                              
                              
                              $
                              1,516,569
                              
                              
                              $
                              636,508
                              
                              
                              $
                              15,467
                              
                              
                              $
                              5,985,625At
      December 31, 2007
                              
                              
                              1,221,316
                              
                              
                              
                              2,084,830
                              
                              
                              
                              1,512,621
                              
                              
                              
                              --
                              
                              
                              
                              (68,710
                              )
                              
                              
                              4,750,057Capital
      expenditures:At
      September 30, 2008
                              
                              $
                              158,293
                              
                              
                              $
                              22,306
                              
                              
                              $
                              3,964
                              
                              
                              $
                              23,600
                              
                              
                              $
                              6,999
                              
                              
                              $
                              215,162At
      December 31, 2007
                              
                              
                              165,353
                              
                              
                              
                              54,583
                              
                              
                              
                              7,412
                              
                              
                              
                              --
                              
                              
                              
                              924
                              
                              
                              
                              228,272Investments
      in unconsolidated affiliates:At
      September 30, 2008
                              
                              $
                              64,888
                              
                              
                              $
                              196,173
                              
                              
                              $
                              921,219
                              
                              
                              $
                              --
                              
                              
                              $
                              9,097
                              
                              
                              $
                              1,191,377At
      December 31, 2007
                              
                              
                              79,324
                              
                              
                              
                              188,650
                              
                              
                              
                              879,021
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              1,146,995Intangible
      assets:At
      September 30, 2008
                              
                              $
                              5,197
                              
                              
                              $
                              8,271
                              
                              
                              $
                              136,270
                              
                              
                              $
                              64,632
                              
                              
                              $
                              --
                              
                              
                              $
                              214,370At
      December 31, 2007
                              
                              
                              5,244
                              
                              
                              
                              7,512
                              
                              
                              
                              151,925
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              164,681Goodwill:At
      September 30, 2008
                              
                              $
                              1,339
                              
                              
                              $
                              14,771
                              
                              
                              $
                              --
                              
                              
                              $
                              90,294
                              
                              
                              $
                              --
                              
                              
                              $
                              106,404At
      December 31, 2007
                              
                              
                              1,339
                              
                              
                              
                              14,167
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              15,506








42
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





NOTE
14. RELATED PARTY TRANSACTIONS





The
following table summarizes related party transactions for the three months and
nine months ended September 30, 2008 and 2007:





For
      the Three Months Ended
                
                
                For
      the Nine Months EndedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Revenues
      from EPCO and affiliates:Sales
      of petroleum products (1)
                
                $
                181
                
                
                $
                91
                
                
                $
                485
                
                
                $
                196Transportation
      – NGLs (2)
                
                
                3,391
                
                
                
                3,478
                
                
                
                10,182
                
                
                
                9,493Transportation
      – LPGs (3)
                
                
                1,392
                
                
                
                695
                
                
                
                4,691
                
                
                
                2,968Transportation
      – Refined products
                
                
                --
                
                
                
                61
                
                
                
                --
                
                
                
                105Other
      operating revenues (4)
                
                
                1,077
                
                
                
                301
                
                
                
                2,302
                
                
                
                1,508Revenues
      from unconsolidated affiliates:Other
      operating revenues (5)
                
                
                22
                
                
                
                216
                
                
                
                66
                
                
                
                325Related
      party revenues
                
                $
                6,063
                
                
                $
                4,842
                
                
                $
                17,726
                
                
                $
                14,595Costs
      and Expenses from EPCO and affiliates:Purchases
      of petroleum products (6)
                
                $
                51,443
                
                
                $
                17,133
                
                
                $
                101,668
                
                
                $
                40,373Operating
      expense (7)
                
                
                27,132
                
                
                
                24,126
                
                
                
                75,392
                
                
                
                72,890General
      and administrative (8)
                
                
                7,340
                
                
                
                6,568
                
                
                
                24,117
                
                
                
                19,150Costs
      and Expenses from unconsolidated affiliates:Purchases
      of petroleum products (9)
                
                
                1,845
                
                
                
                2,341
                
                
                
                5,387
                
                
                
                2,341Operating
      expense (10)
                
                
                1,122
                
                
                
                2,701
                
                
                
                5,023
                
                
                
                6,363Costs
      and Expenses from Cenac and affiliates:Operating
      expense (11)
                
                
                13,810
                
                
                
                --
                
                
                
                32,327
                
                
                
                --Related
      party expenses
                
                $
                102,692
                
                
                $
                52,869
                
                
                $
                243,914
                
                
                $
                141,117


_______________________________________





(1)
            Includes
      sales from TE Products and Lubrication Services, LLC (“LSI”) to Enterprise
      Products Partners and certain of its
  subsidiaries.


(2)
            Includes
      revenues from NGL transportation on the Chaparral and Panola NGL pipelines
      from Enterprise Products Partners and certain of its
      subsidiaries.


(3)
            Includes
      revenues from LPG transportation on the TE Products pipeline from
      Enterprise Products Partners and certain of its
    subsidiaries.


(4)
            Includes
      other operating revenues on the TE Products pipeline and the Val Verde
      system from Enterprise Products Partners and certain of its
      subsidiaries.


(5)
            Includes
      sales of petroleum products, management fees and rental revenues from
      Centennial, Jonah and Seaway.


(6)
            Includes
      TCO purchases of condensate of $46.8 million, $12.6 million, $88.3 million
      and $28.2 million from Enterprise Products Partners and certain of its
      subsidiaries for the three months and nine months ended September 30, 2008
      and 2007, respectively, and expenses related to TCO’s and LSI’s use of an
      affiliate of EPCO as a transporter.


(7)
            Includes
      operating payroll, payroll related expenses and other operating expenses,
      including reimbursements related to employee benefits and employee benefit
      plans, incurred by EPCO in managing us and our subsidiaries in accordance
      with the ASA.  Also includes insurance expense for the three
      months and nine months ended September 30, 2008 and 2007, of $2.7 million,
      $2.8 million, $7.8 million and $11.6 million, respectively, related to
      premiums paid by EPCO on our behalf. The majority of our insurance
      coverage, including property, liability, business interruption, auto and
      directors’ and officers’ liability insurance, is obtained through
      EPCO.


(8)
            Includes
      administrative payroll, payroll related expenses and other administrative
      expenses, including reimbursements related to employee benefits and
      employee benefit plans, incurred by EPCO in managing and operating us and
      our subsidiaries in accordance with the
ASA.


(9)
            Includes
      TCO purchases of petroleum products from Jonah and Seaway and pipeline
      transportation expense from Seaway.


(10)
            Includes
      rental expense and other operating
expense.





43
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





(11)
            Includes
      reimbursement for operating payroll, payroll related expenses, certain
      repairs and maintenance expenses and insurance premiums on our equipment,
      as well as payment of a $42 thousand monthly service fee and a 5% overhead
      fee charged on direct costs incurred by Cenac to operate the marine assets
      in accordance with the transitional operating agreement with
      Cenac.   In accordance with the transitional operating
      agreement, our fleet of acquired tow boats and tank barges (including
      those acquired from Horizon) are operated by employees of Cenac for a
      period of up to two years following the
  acquisition.







The
following table summarizes the related party balances at September 30, 2008 and
December 31, 2007:





September
      30,
                    2008
                  
                  
                  December
      31,
                    2007Accounts
      receivable, related parties
      (1)
                  
                  $
                  6,410
                  
                  
                  $
                  6,525Accounts
      payable, related parties
      (2)
                  
                  
                  38,940
                  
                  
                  
                  38,980


________________________________________________





(1)
            Relates
      to sales and transportation services provided to Enterprise Products
      Partners and certain of its subsidiaries and EPCO and certain of its
      affiliates and direct payroll, payroll related costs and other operational
      expenses charged to unconsolidated
affiliates.


(2)
            Relates
      to direct payroll, payroll related costs and other operational related
      charges from Enterprise Products Partners and certain of its subsidiaries,
      EPCO and certain of its affiliates and Cenac and affiliates, and
      transportation and other services provided by unconsolidated affiliates
      and advances from Seaway for operating
expenses.





We are affiliated with EPCO and other
companies controlled by Mr. Duncan, and our transactions and agreements
with them are not necessarily on an arm’s length basis.  As a result,
we cannot provide assurance that the terms and provisions of such transactions
or agreements are at least as favorable to us as we could have obtained from
unaffiliated third parties.





Relationship
with EPCO and Affiliates





We have
an extensive and ongoing relationship with EPCO and its affiliates, which
include the following significant entities:




§
            EPCO
      and its consolidated private company
  subsidiaries;


§
            Texas
      Eastern Products Pipeline Company, LLC, our General
    Partner;


§
            Enterprise
      GP Holdings, which owns and controls our General
  Partner;


§
            Enterprise
      Products Partners, which is controlled by affiliates of EPCO, including
      Enterprise GP Holdings;


§
            Duncan
      Energy Partners, which is controlled by affiliates of
  EPCO;


§
            Enterprise
      Gas Processing LLC, which is controlled by affiliates of EPCO and is our
      joint venture partner in Jonah;


§
            Enterprise
      Offshore Port System, LLC, which is controlled by affiliates of EPCO and
      is one of our joint venture partners in Texas Offshore Port System;
      and


§
            TEPPCO
      Unit (see Note 3).





Dan L.
Duncan directly owns and controls EPCO and, through Dan Duncan LLC, owns and
controls EPE Holdings, LLC, the general partner of Enterprise GP
Holdings.  Enterprise GP Holdings owns all of the membership interests
of our General Partner.  The principal business activity of our
General Partner is to act as our managing partner.  The executive
officers of our General Partner are employees of EPCO (see Note 1).





We and our General Partner are both
separate legal entities apart from each other and apart from EPCO and its other
affiliates, with assets and liabilities that are separate from those of EPCO and
its other affiliates.  EPCO and its consolidated private company
subsidiaries and affiliates depend on the cash distributions they receive from
our General Partner and other investments to fund their operations and to meet
their debt obligations.  We paid cash







44
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





distributions
to our General Partner of $39.5 million and $35.9 million during the nine months
ended September 30, 2008 and 2007, respectively.




The limited partner interests in us
that are owned or controlled by EPCO and certain of its affiliates, other than
those interests owned by Dan Duncan LLC and certain trusts affiliated with Dan
L. Duncan, are pledged as security under the credit facility of an affiliate of
EPCO.  All of the membership interests in our General Partner and the
limited partner interests in us that are owned or controlled by Enterprise GP
Holdings are pledged as security under its credit facility.  If
Enterprise GP Holdings were to default under its credit facility, its lender
banks could own our General Partner.





EPCO Administrative Services
Agreement





We do not have any
employees.  We are managed by our General Partner, and all of our
management, administrative and operating functions are performed by employees of
EPCO, pursuant to the ASA or by other service providers.  We,
Enterprise Products Partners, Duncan Energy Partners, Enterprise GP Holdings and
our respective general partners are parties to the
ASA.    The ACG Committees of each general partner have
approved the ASA.





Under the ASA, we reimburse EPCO for
all costs and expenses it incurs in providing management, administrative and
operating services for us, including compensation of employees (i.e., salaries,
medical benefits and retirement benefits) (see Note 1).  Since the
vast majority of such expenses are charged to us on an actual basis (i.e., no
mark-up or subsidy is charged or received by EPCO), we believe that such
expenses are representative of what the amounts would have been on a standalone
basis.  With respect to allocated costs, we believe that the
proportional direct allocation method employed by EPCO is reasonable and
reflective of the estimated level of costs we would have incurred on a
standalone basis.





Jonah
Joint Venture





Enterprise Products Partners (through
an affiliate) is our joint venture partner in Jonah, the partnership through
which we have owned our interest in the system serving the Jonah and Pinedale
fields. Through September 30, 2008, we have reimbursed Enterprise Products
Partners $303.9 million ($42.3 million in 2008, $152.2 million in 2007 and
$109.4 million in 2006) for our share of the Phase V cost incurred by it
(including its cost of capital incurred prior to the formation of the joint
venture of $1.3 million).  At September 30, 2008 and December 31,
2007, we had payables to Enterprise Products Partners for costs incurred of $1.3
million and $9.9 million, respectively (see Note 8).  At September 30,
2008 and December 31, 2007, we had receivables from Jonah of $4.6 million and
$6.0 million, respectively, for operating expenses.  During the nine
months ended September 30, 2008 and 2007, we received distributions from Jonah
of $111.6 million and $77.3 million, respectively.  The 2007 amount
included $11.6 million of distributions declared in 2006 and paid during the
first quarter of 2007.  During the nine months ended September 30,
2008 and 2007, Jonah paid distributions of $26.8 million and $4.0 million,
respectively, to the affiliate of Enterprise Products Partners that is our joint
venture partner.





We have agreed to indemnify Enterprise
Products Partners from any and all losses, claims, demands, suits, liability,
costs and expenses arising out of or related to breaches of our representations,
warranties, or covenants related to the formation of the Jonah joint venture,
Jonah’s ownership or operation of the Jonah-Pinedale system prior to the
effective date of the joint venture, and any environmental activity, or
violation of or liability under environmental laws arising from or related to
the condition of the Jonah-Pinedale system prior to the effective date of the
joint venture.  In general, a claim for indemnification cannot be
filed until the losses suffered by Enterprise Products Partners exceed $1.0
million, and the maximum potential amount of future payments under the indemnity
is limited to $100.0 million.  However, if certain representations or
warranties are breached, the maximum potential amount of future payments under
the indemnity is capped at $207.6 million.  All indemnity payments are
net of





45
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





insurance
recoveries that Enterprise Products Partners may receive from third-party
insurers. We carry insurance coverage that may offset any payments required
under the indemnity.  We do not expect that these indemnities will
have a material adverse effect on our financial position, results of operations
or cash flows.





Texas Offshore Port System Joint
Venture





Enterprise Products Partners (through
an affiliate) is one of our joint venture partners in Texas Offshore Port System
(see Note 8).  Through September 30, 2008, we have a payable of $2.3
million for our contribution to our investment in Texas Offshore Port System,
which will be paid in the fourth quarter of 2008.





Sale
of General Partner to Enterprise GP Holdings; Relationship with Energy Transfer
Equity





On May 7, 2007, all of the membership
interests in our General Partner, together with 4,400,000 of our Units, were
sold by DFIGP to Enterprise GP Holdings, a publicly traded partnership also
controlled indirectly by Dan L. Duncan.   As of May 7, 2007,
Enterprise GP Holdings owns and controls the 2% general partner interest in us
and has the right (through its 100% ownership of our General Partner) to receive
the incentive distribution rights associated with the general partner
interest.  Enterprise GP Holdings, DFIGP and other entities controlled
by Mr. Duncan own 16,950,130 of our Units.





Concurrently with the acquisition of
our General Partner, Enterprise GP Holdings acquired non-controlling ownership
interests, accounted for as equity method investments, in Energy Transfer
Equity, L.P. (“Energy Transfer Equity”) and LE GP, LLC, the general partner of
Energy Transfer Equity.





Other
Transactions





On
January 23, 2007, we sold a 10-mile, 18-inch segment of pipeline to an affiliate
of Enterprise Products Partners for approximately $8.0 million in
cash.  These assets were part of our Downstream Segment and had a net
book value of approximately $2.5 million.  The sales proceeds were
used to fund construction of a replacement pipeline in the area, in which the
new pipeline provides greater operational capability and
flexibility.  We recognized a gain of approximately $5.5 million on
this transaction (see Note 9).




Relationship
with Unconsolidated Affiliates





Our
significant related party revenues and expense transactions with unconsolidated
affiliates consist of management, rental and other revenues, transportation
expense related to movements on Centennial and Seaway and rental expense related
to the lease of pipeline capacity on Centennial.  For additional
information regarding our unconsolidated affiliates, see Note 8.




See
“Jonah Joint Venture” and “Texas Offshore Port System Joint Venture” within this
Note 14 for descriptions of ongoing transactions involving our Jonah and Texas
Offshore Port System joint ventures with Enterprise Products
Partners.









NOTE
15.  EARNINGS PER UNIT





Basic earnings per Unit is computed by
dividing net income or loss allocated to limited partner interests by the
weighted average number of distribution-bearing Units outstanding during a
period.  The amount of net income allocated to limited partner
interests is derived by subtracting our General Partner’s share of the net
income from net income.  Our General Partner’s percentage interest in
our net income is based on its percentage of cash distributions from Available
Cash for each period (see Note 12).  Diluted earnings per Unit is
computed by dividing net income or





46
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





loss
allocated to limited partner interests by the sum of (i) the weighted-average
number of distribution-bearing Units outstanding during a period (as used in
determining basic earnings per Unit); and (ii) the number of incremental Units
resulting from the assumed exercise of dilutive unit options outstanding during
a period (the “incremental option units”).





In a
period of net operating losses, restricted units and incremental option units
are excluded from the calculation of diluted earnings per Unit due to their
anti-dilutive effect.  The dilutive incremental option units are
calculated using the treasury stock method, which assumes that proceeds from the
exercise of all in-the-money options at the end of each period are used to
repurchase Units at an average market value during the period.  The
amount of Units remaining after the proceeds are exhausted represents the
potentially dilutive effect of the securities.  In May 2007 and 2008,
we granted 155,000 and 200,000 unit options, respectively, to employees
providing services to us (see Note 3).





The
following table shows the computation of basic and diluted earnings per Unit for
the three months and nine months ended September 30, 2008 and 2007:


For
      the Three Months Ended
                    September
      30,
                  
                  
                  For
      the Nine Months Ended
                    September
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Net
      income
                  
                  $
                  47,031
                  
                  
                  $
                  47,631
                  
                  
                  $
                  158,852
                  
                  
                  $
                  233,582General
      Partner interest in net income
                  
                  
                  17.06
                  %
                  
                  
                  16.47
                  %
                  
                  
                  16.83
                  %
                  
                  
                  16.47
                  %Earnings
      allocated to General Partner
                  
                  $
                  8,024
                  
                  
                  $
                  7,975
                  
                  
                  $
                  26,741
                  
                  
                  $
                  38,476BASIC
      EARNINGS PER UNIT:Numerator:Limited partners’ interest in
      net income
                  
                  $
                  39,007
                  
                  
                  $
                  39,656
                  
                  
                  $
                  132,111
                  
                  
                  $
                  195,106Denominator:Units
                  
                  
                  97,158
                  
                  
                  
                  89,806
                  
                  
                  
                  95,035
                  
                  
                  
                  89,805Time-vested restricted
      units
                  
                  
                  158
                  
                  
                  
                  62
                  
                  
                  
                  110
                  
                  
                  
                  30Total Weighted average Units
      outstanding
                  
                  
                  97,316
                  
                  
                  
                  89,868
                  
                  
                  
                  95,145
                  
                  
                  
                  89,835Basic earnings per
      Unit:Limited partners’ interest in
      net income
                  
                  $
                  0.40
                  
                  
                  $
                  0.44
                  
                  
                  $
                  1.39
                  
                  
                  $
                  2.17DILUTED
      EARNINGS PER UNIT:Numerator:Limited partners’ interest in
      net income
                  
                  $
                  39,007
                  
                  
                  $
                  39,656
                  
                  
                  $
                  132,111
                  
                  
                  $
                  195,106Denominator:Units
                  
                  
                  97,158
                  
                  
                  
                  89,806
                  
                  
                  
                  95,035
                  
                  
                  
                  89,805Time-vested restricted
      units
                  
                  
                  158
                  
                  
                  
                  62
                  
                  
                  
                  110
                  
                  
                  
                  30Incremental option
      units
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Total Weighted average Units
      outstanding
                  
                  
                  97,316
                  
                  
                  
                  89,868
                  
                  
                  
                  95,145
                  
                  
                  
                  89,835Diluted earnings per
      Unit:Limited partners’ interest in
      net income
                  
                  $
                  0.40
                  
                  
                  $
                  0.44
                  
                  
                  $
                  1.39
                  
                  
                  $
                  2.17





Our General Partner’s percentage
interest in our net income increases as cash distributions paid per Unit
increase, in accordance with our Partnership Agreement.  At September
30, 2008 and 2007, we had outstanding 104,524,501 and 89,868,586Units,
respectively.











47
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





NOTE
16.  COMMITMENTS AND CONTINGENCIES





Litigation





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




On September 18, 2006, Peter
Brinckerhoff, a purported unitholder of TEPPCO, filed a complaint in the Court
of Chancery of New Castle County in the State of Delaware, in his individual
capacity, as a putative class action on behalf of our other unitholders, and
derivatively on our behalf, concerning proposals made to our unitholders in our
definitive proxy statement filed with the SEC on September 11,
2006  (“Proxy Statement”) and other transactions involving us and
Enterprise Products Partners or its affiliates.  Mr. Brinckerhoff
filed an amended complaint on July 12, 2007.  The amended complaint
names as defendants the General Partner; the Board of Directors of the General
Partner; EPCO; Enterprise Products Partners and certain of its affiliates and
Dan L. Duncan.  We are named as a nominal defendant.




The amended complaint alleges, among
other things, that certain of the transactions adopted at a special meeting of
our unitholders on December 8, 2006, including a reduction of the General
Partner’s maximum percentage interest in our distributions in exchange for Units
(the “Issuance Proposal”), were unfair to our unitholders and constituted a
breach by the defendants of fiduciary duties owed to our unitholders and that
the Proxy Statement failed to provide our unitholders with all material facts
necessary for them to make an informed decision whether to vote in favor of or
against the proposals.  The amended complaint further alleges that,
since Mr. Duncan acquired control of the General Partner in 2005, the
defendants, in breach of their fiduciary duties to us and our unitholders, have
caused us to enter into certain transactions with Enterprise Products Partners
or its affiliates that were unfair to us or otherwise unfairly favored
Enterprise Products Partners or its affiliates over us.  The amended
complaint alleges that such transactions include the Jonah joint venture entered
into by us and an Enterprise Products Partners affiliate in August 2006 (citing
the fact that our ACG Committee did not obtain a fairness opinion from an
independent investment banking firm in approving the transaction), and the sale
by us to an Enterprise Products Partners’ affiliate of the Pioneer plant in
March 2006.  As more fully described in the Proxy Statement, the ACG
Committee recommended the Issuance Proposal for approval by the Board of
Directors of the General Partner.  The amended complaint also alleges
that Richard S. Snell, Michael B. Bracy and Murray H. Hutchison, constituting
the three members of the ACG Committee at the time, cannot be considered
independent because of their alleged ownership of securities in Enterprise
Products Partners and its affiliates and/or their relationships with Mr.
Duncan.




The amended complaint seeks relief (i)
awarding damages for profits and special benefits allegedly obtained by
defendants as a result of the alleged wrongdoings in the complaint; (ii)
rescinding all actions taken pursuant to the Proxy vote and (iii) awarding
plaintiff costs of the action, including fees and expenses of his attorneys and
experts.




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







48
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





Regulatory
Matters




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





We believe that our operations and
facilities are in substantial compliance with applicable environmental laws and
regulations, and that the cost of compliance with such laws and regulations will
not have a material adverse effect on our results of operations or financial
position.  We cannot ensure, however, that existing environmental
regulations will not be revised or that new regulations will not be adopted or
become applicable to us. The clear trend in environmental regulation is to place
more restrictions and limitations on activities that may be perceived to affect
the environment, and thus there can be no assurance as to the amount or timing
of future expenditures for environmental regulation compliance or remediation,
and actual future expenditures may be different from the amounts we currently
anticipate. Revised or additional regulations that result in increased
compliance costs or additional operating restrictions, particularly if those
costs are not fully recoverable from our customers, could have  a
material adverse effect on our business, financial position, results of
operations and cash flows.  At September 30, 2008 and December 31,
2007, we had accrued liabilities of $7.1 million and $4.0 million, respectively,
related to sites requiring environmental remediation activities.





In 1999, our Arcadia, Louisiana,
facility and adjacent terminals were directed by the Remediation Services
Division of the LDEQ to pursue remediation of environmental
contamination.  Effective March 2004, we executed an access agreement
with an adjacent industrial landowner who is located upgradient of the Arcadia
facility.  This agreement enables the landowner to proceed with
remediation activities at our Arcadia facility for which it has accepted shared
responsibility.  At September 30, 2008, we have an accrued liability
of $0.6 million for remediation costs at our Arcadia facility.  We do
not expect that the completion of the remediation program proposed to the LDEQ
will have a future material adverse effect on our financial position, results of
operations or cash flows.





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




The FERC, pursuant to the Interstate Commerce Act of 1887, as amended, the
Energy Policy Act of 1992 and rules and orders promulgated thereunder, regulates
the tariff rates for our interstate common carrier pipeline
operations.  To be lawful under that Act, interstate tariff rates,
terms and conditions of service must be just and reasonable and not unduly
discriminatory, and must be on file with the FERC.  In addition,
pipelines may not confer





49
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





any undue
preference upon any shipper.  Shippers may protest, and the FERC may
investigate, the lawfulness of new or changed tariff rates.  The FERC
can suspend those tariff rates for up to seven months.  It can also
require refunds of amounts collected with interest pursuant to rates that are
ultimately found to be unlawful.  The FERC and interested parties can
also challenge tariff rates that have become final and
effective.  Because of the complexity of rate making, the lawfulness
of any rate is never assured.  A successful challenge of our rates
could adversely affect our revenues.





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





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





Although our natural gas gathering
systems are generally exempt from FERC regulation under the Natural Gas Act of
1938, FERC regulation still significantly affects our natural gas gathering
business.  Our natural gas gathering operations could be adversely
affected in the future should they become subject to the application of federal
regulation of rates and services or if the states in which we operate adopt
policies imposing more onerous regulation on gathering.  Additional
rules and legislation pertaining to these matters are considered and adopted
from time to time at both state and federal levels.  We cannot predict
what effect, if any, such regulatory changes and legislation might have on our
operations or revenues.




Operating
Leases




We lease
certain property, plant and equipment under noncancelable and cancelable
operating leases.  Lease expense is charged to operating costs and
expenses on a straight line basis over the period of expected economic
benefit.  Contingent rental payments are expensed as
incurred.  Total rental expense included in operating costs and
expenses was $4.6 million, $4.0 million, $15.2 million and $17.6 million for the
three months and nine months ended September 30, 2008 and 2007,
respectively.  There have been no material changes in our operating
lease commitments since December 31, 2007.




Contractual
Obligations




In March 2008, we issued $1.0 billion
of senior notes due 2013, 2018 and 2038 (see Note 11).  Other than the
issuance of these senior notes, there have been no significant changes in our
schedule of maturities of long-term debt or other contractual obligations since
the year ended December 31, 2007.




The following table summarizes our
maturities of long-term debt obligations at September 30, 2008:




Payment
      or Settlement due by PeriodTotal
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  ThereafterMaturities
      of long-term debt (1)
                  
                  $
                  2,324,717
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  824,717
                  
                  
                  $
                  1,500,000Interest
      payments (2)
                  
                  $
                  2,692,176
                  
                  
                  $
                  154,584
                  
                  
                  $
                  151,173
                  
                  
                  $
                  151,173
                  
                  
                  $
                  132,110
                  
                  
                  $
                  97,761
                  
                  
                  $
                  2,005,375


__________________





50
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)








(1)
            We
      have long-term payment obligations under our Revolving Credit Facility,
      our senior notes and our Junior Subordinated Notes.  Amounts
      shown in the table represent our scheduled future maturities of long-term
      debt principal for the periods indicated (see Note 11 for additional
      information regarding our consolidated debt
  obligations).


(2)
            Includes
      interest payments due on our senior notes and junior subordinated notes
      and interest payments and commitment fees due on our Revolving Credit
      Facility.  The interest amount calculated on the Revolving
      Credit Facility and the junior subordinated notes is based on the
      assumption that the amount outstanding and the interest rate charged both
      remain at their current levels.





Other





Guarantees





At
September 30, 2008 and December 31, 2007, Centennial’s debt obligations
consisted of $132.5 million and $140.0 million, respectively, borrowed under a
master shelf loan agreement.  In January 2008, we entered into an
Amended Guaranty agreement with Centennial’s lenders, under which the TEPPCO
Guarantors are required, on a joint and several basis, to pay 50% of any
past-due amount under Centennial’s master shelf loan agreement not paid by
Centennial.  The Amended Guaranty also has a credit maintenance
requirement whereby we may be required to provide additional credit support in
the form of a letter of credit or pay certain fees if either of our credit
ratings from Standard & Poor’s Ratings Group and Moody’s Investors Service,
Inc. falls below investment grade levels as specified in the Amended
Guaranty.  If Centennial defaults on its debt obligations, the
estimated maximum potential amount of future payments for the TEPPCO Guarantors
and Marathon is $66.2 million each at September 30, 2008.  At
September 30, 2008, we have a liability of $9.1 million, which is based upon the
expected present value of amounts we would have to pay under the
guarantee.




TE Products, Marathon and Centennial
have also entered into a limited cash call agreement, which allows each member
to contribute cash in lieu of Centennial procuring separate insurance in the
event of a third-party liability arising from a catastrophic
event.  There is an indefinite term for the agreement and each member
is to contribute cash in proportion to its ownership interest, up to a maximum
of $50.0 million each.  As a result of the catastrophic event
guarantee, at September 30, 2008, TE Products has a liability of $3.9 million,
which is based upon the expected present value of amounts we would have to pay
under the guarantee.  If a catastrophic event were to occur and we
were required to contribute cash to Centennial, such contributions might be
covered by our insurance (net of deductible), depending upon the nature of the
catastrophic event.





One of our subsidiaries, TCO, has
entered into master equipment lease agreements with finance companies for the
use of various pieces of equipment.  Lease expense related to this
equipment is approximately $5.2 million per year.  We have guaranteed
the full and timely payment and performance of TCO’s obligations under the
agreements.  Generally, events of default would trigger our
performance under the guarantee.  The maximum potential amount of
future payments under the guarantee is not estimable, but would include base
rental payments for both current and future equipment, stipulated loss payments
in the event any equipment is stolen, damaged, or destroyed and any future
indemnity payments.  We carry insurance coverage that may offset any
payments required under the guarantees.  We do not believe that any
performance under the guarantee would have a material effect on our financial
condition, results of operations or cash flows.





Motiva Project





In December 2006, we signed an
agreement with Motiva Enterprises, LLC (“Motiva”) for us to construct and
operate a new refined products storage facility to support the expansion of
Motiva’s refinery in Port Arthur, Texas.  Under the terms of the
agreement, we are constructing a 5.4 million barrel refined products storage
facility for gasoline and distillates.  The agreement also provides
for a 15-year throughput and dedication of volume, which will commence upon
completion of the refinery expansion.  The project includes the
construction of 20 storage





51
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





tanks,
five 5.4-mile product pipelines connecting the storage facility to Motiva’s
refinery, 21,000 horsepower of pumping capacity, and distribution pipeline
connections to the Colonial, Explorer and Magtex pipelines.  The
storage and pipeline project is expected to be completed by January 1,
2010.  As a part of a separate but complementary initiative, we are
constructing an 11-mile, 20-inch pipeline to connect the new storage facility in
Port Arthur to our refined products terminal in Beaumont, Texas, which is the
primary origination facility for our mainline system.  These projects
will facilitate connections to additional markets through the Colonial, Explorer
and Magtex pipeline systems and provide the Motiva refinery with access to our
pipeline system.  The total cost of the project is expected to be
approximately $310.0 million, which includes $20.0 million for the 11-mile,
20-inch pipeline, $30.0 million of capitalized interest and $17.0 million of
mutually agreed upon scope changes requested by Motiva.  Through
September 30, 2008, we have spent approximately $89.8 million on this
construction project.  Under the terms of the agreement, if Motiva
cancels the agreement prior to the commencement date of the project, Motiva will
reimburse us the actual reasonable expenses we have incurred after the effective
date of the agreement, including both internal and external costs that would be
capitalized as a part of the project, plus a ten percent cancellation
fee.




Texas Offshore Port System
 
 We, through a subsidiary, own a
one-third interest in the Texas Offshore Port System joint
venture.  The aggregate cost of the TOPS and PACE projects is expected
to be approximately $1.8 billion (excluding capitalized interest), with the
majority of such expenditures occurring in 2009 and 2010.  We have
guaranteed up to approximately $700.0 million of the capital expenditure
obligations of our subsidiary in the joint venture.  See Note 8 for
further information.







NOTE
17.  SUPPLEMENTAL CASH FLOW INFORMATION





The following table provides
information regarding (i) the net effect of changes in our operating assets and
liabilities, (ii) non-cash investing and financing activities and (iii) cash
payments for interest for the nine months ended September 30, 2008 and
2007:





For
      the Nine Months Ended
                                September
      30,2008
                              
                              
                              2007Decrease
      (increase) in:Accounts receivable,
      trade
                              
                              $
                              (333,633
                              )
                              
                              $
                              (296,058
                              )Accounts receivable, related
      parties
                              
                              
                              222
                              
                              
                              
                              (5,556
                              )Inventories
                              
                              
                              (86,545
                              )
                              
                              
                              (61,729
                              )Other current
      assets
                              
                              
                              (15,067
                              )
                              
                              
                              (5,240
                              )Other
                              
                              
                              (25,758
                              )
                              
                              
                              (16,529
                              )Increase
      (decrease) in:Accounts payable and accrued
      expenses
                              
                              
                              411,621
                              
                              
                              
                              331,312Accounts payable, related
      parties
                              
                              
                              6,169
                              
                              
                              
                              (672
                              )Other
                              
                              
                              19,557
                              
                              
                              
                              1,022Net
      effect of changes in operating
      accounts
                              
                              $
                              (23,434
                              )
                              
                              $
                              (53,450
                              )Non-cash
      investing activities:Payable
      to Enterprise Gas Processing, LLC for spending for Phase V
                                expansion
      of Jonah Gas Gathering Company (see Note 8)
                              
                              $
                              1,323
                              
                              
                              $
                              12,968Payable to Texas Offshore Port System (see Note 8)
                              
                              $
                              2,347
                              
                              
                              $
                              --Non-cash
      financing activities:Issuance
      of Units in Cenac acquisition (see Note
      9)
                              
                              $
                              186,558
                              
                              
                              $
                              --Supplemental
      disclosure of cash flows:Cash paid for interest (net of
      amounts
      capitalized)
                              
                              $
                              81,889
                              
                              
                              $
                              73,086





We determine net cash flows provided by
operating activities using the indirect method, which adjusts net income for
items that did not affect cash.  Under GAAP, we use the accrual basis
of accounting to determine net income.  This basis requires that we
record revenue when earned and expenses when incurred.  Earned
revenues may include credit sales that have not been collected in cash and
expenses incurred that may not have been paid in cash.





52
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





The
extent to which changes in operating accounts influence net cash flows provided
by operating activities generally depends on the following:





§
            The
      timing of cash receipts from revenue transactions and cash payments for
      expense transactions near the end of each reporting
      period.   For example, if significant cash receipts are
      posted on the last day of the current reporting period, but subsequent
      payments on expense invoices are made on the first day of the next
      reporting period, net cash flows provided by operating activities will
      reflect an increase in the current reporting period that will be reduced
      as payments are made in the next
period.





§
            If
      commodity or other prices increase between reporting periods, changes in
      accounts receivable and accounts payable and accrued expenses may appear
      larger than in previous periods; however, overall levels of receivables
      and payables may still reflect normal
ranges.





§
            Additions
      to inventory for forward sales transactions or other reasons or increased
      expenditures for prepaid items would be reflected as a use of cash and
      reduce overall cash provided by operating activities in a given reporting
      period.  As these assets are charged to expense in subsequent
      periods, the expense amount is reflected as a positive change in operating
      accounts; however, there is no impact on operating cash
    flows.





In addition to the adjustments noted
above, non-cash charges in the income statement are added back to net income and
noncash credits are deducted to compute net cash flows provided by operating
activities.  Examples of noncash charges include depreciation and
amortization.








NOTE
18.  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL
INFORMATION





TE Products, TCTM, TEPPCO Midstream and
Val Verde have issued full, unconditional, and joint and several guarantees of
our senior notes, our Junior Subordinated Notes (collectively “the
Guaranteed Debt”), our Revolving Credit Facility, and prior to its termination,
our Term Credit Facility.  TE Products, TCTM, TEPPCO Midstream and Val
Verde 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.




53
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)




September
      30, 2008TEPPCO
      Partners, L.P.
                  
                  
                  Guarantor
      Subsidiaries
                  
                  
                  Non-Guarantor
      Subsidiaries
                  
                  
                  Consolidating
      Adjustments
                  
                  
                  TEPPCO
      Partners, L.P. ConsolidatedAssetsCurrent
      assets
                  
                  $
                  117,143
                  
                  
                  $
                  98,174
                  
                  
                  $
                  1,869,562
                  
                  
                  $
                  (114,079
                  )
                  
                  $
                  1,970,800Property,
      plant and equipment – net
                  
                  
                  --
                  
                  
                  
                  1,248,928
                  
                  
                  
                  1,123,766
                  
                  
                  
                  --
                  
                  
                  
                  2,372,694Equity
      investments
                  
                  
                  1,419,218
                  
                  
                  
                  1,355,230
                  
                  
                  
                  196,193
                  
                  
                  
                  (1,779,264
                  )
                  
                  
                  1,191,377Intercompany
      notes receivable
                  
                  
                  2,485,250
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (2,485,250
                  )
                  
                  
                  --Intangible
      assets
                  
                  
                  --
                  
                  
                  
                  121,886
                  
                  
                  
                  92,484
                  
                  
                  
                  --
                  
                  
                  
                  214,370Goodwill
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  106,404
                  
                  
                  
                  --
                  
                  
                  
                  106,404Other
      assets
                  
                  
                  14,673
                  
                  
                  
                  31,918
                  
                  
                  
                  83,389
                  
                  
                  
                  --
                  
                  
                  
                  129,980Total assets
                  
                  $
                  4,036,284
                  
                  
                  $
                  2,856,136
                  
                  
                  $
                  3,471,798
                  
                  
                  $
                  (4,378,593
                  )
                  
                  $
                  5,985,625Liabilities
      and partners’ capitalCurrent
      liabilities
                  
                  $
                  50,492
                  
                  
                  $
                  110,243
                  
                  
                  $
                  1,931,935
                  
                  
                  $
                  (114,079
                  )
                  
                  $
                  1,978,591Long-term
      debt
                  
                  
                  2,338,745
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,338,745Intercompany
      notes payable
                  
                  
                  --
                  
                  
                  
                  1,596,500
                  
                  
                  
                  888,750
                  
                  
                  
                  (2,485,250
                  )
                  
                  
                  --Other
      long-term liabilities
                  
                  
                  8,896
                  
                  
                  
                  18,190
                  
                  
                  
                  3,052
                  
                  
                  
                  --
                  
                  
                  
                  30,138Total
      partners’ capital
                  
                  
                  1,638,151
                  
                  
                  
                  1,131,203
                  
                  
                  
                  648,061
                  
                  
                  
                  (1,779,264
                  )
                  
                  
                  1,638,151Total liabilities and
      partners’ capital
                  
                  $
                  4,036,284
                  
                  
                  $
                  2,856,136
                  
                  
                  $
                  3,471,798
                  
                  
                  $
                  (4,378,593
                  )
                  
                  $
                  5,985,625





December
      31, 2007TEPPCO
      Partners, L.P.
                  
                  
                  Guarantor
      Subsidiaries
                  
                  
                  Non-Guarantor
      Subsidiaries
                  
                  
                  Consolidating
      Adjustments
                  
                  
                  TEPPCO
      Partners, L.P. ConsolidatedAssetsCurrent
      assets
                  
                  $
                  32,302
                  
                  
                  $
                  77,083
                  
                  
                  $
                  1,499,653
                  
                  
                  $
                  (93,049
                  )
                  
                  $
                  1,515,989Property,
      plant and equipment – net
                  
                  
                  --
                  
                  
                  
                  1,142,630
                  
                  
                  
                  651,004
                  
                  
                  
                  --
                  
                  
                  
                  1,793,634Equity
      investments
                  
                  
                  1,286,021
                  
                  
                  
                  1,347,313
                  
                  
                  
                  188,669
                  
                  
                  
                  (1,675,008
                  )
                  
                  
                  1,146,995Intercompany
      notes receivable
                  
                  
                  1,511,168
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (1,511,168
                  )
                  
                  
                  --Intangible
      assets
                  
                  
                  --
                  
                  
                  
                  136,050
                  
                  
                  
                  28,631
                  
                  
                  
                  --
                  
                  
                  
                  164,681Goodwill
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  15,506
                  
                  
                  
                  --
                  
                  
                  
                  15,506Other
      assets
                  
                  
                  8,580
                  
                  
                  
                  34,839
                  
                  
                  
                  69,895
                  
                  
                  
                  (62
                  )
                  
                  
                  113,252Total assets
                  
                  $
                  2,838,071
                  
                  
                  $
                  2,737,915
                  
                  
                  $
                  2,453,358
                  
                  
                  $
                  (3,279,287
                  )
                  
                  $
                  4,750,057Liabilities
      and partners’ capitalCurrent
      liabilities
                  
                  $
                  61,926
                  
                  
                  $
                  493,184
                  
                  
                  $
                  1,485,164
                  
                  
                  $
                  (93,049
                  )
                  
                  $
                  1,947,225Long-term
      debt
                  
                  
                  1,511,083
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1,511,083Intercompany
      notes payable
                  
                  
                  --
                  
                  
                  
                  1,006,801
                  
                  
                  
                  504,367
                  
                  
                  
                  (1,511,168
                  )
                  
                  
                  --Other
      long term liabilities
                  
                  
                  435
                  
                  
                  
                  24,466
                  
                  
                  
                  2,283
                  
                  
                  
                  (62
                  )
                  
                  
                  27,122Total
      partners’ capital
                  
                  
                  1,264,627
                  
                  
                  
                  1,213,464
                  
                  
                  
                  461,544
                  
                  
                  
                  (1,675,008
                  )
                  
                  
                  1,264,627Total liabilities and
      partners’ capital
                  
                  $
                  2,838,071
                  
                  
                  $
                  2,737,915
                  
                  
                  $
                  2,453,358
                  
                  
                  $
                  (3,279,287
                  )
                  
                  $
                  4,750,057
   54
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





For
      the Three Months Ended September 30, 2008TEPPCO
      Partners, L.P.
                
                
                Guarantor
                  Subsidiaries
                
                
                Non-Guarantor
      Subsidiaries
                
                
                Consolidating
      Adjustments
                
                
                TEPPCO
                  Partners,
      L.P. ConsolidatedOperating
      revenues
                
                $
                --
                
                
                $
                97,014
                
                
                $
                4,108,765
                
                
                $
                (35
                )
                
                $
                4,205,744Costs
      and expenses
                
                
                --
                
                
                
                76,850
                
                
                
                4,069,199
                
                
                
                (164
                )
                
                
                4,145,885Gains
      on sales of assets
                
                
                --
                
                
                
                --
                
                
                
                (1
                )
                
                
                --
                
                
                
                (1
                )Operating
      income
                
                
                --
                
                
                
                20,164
                
                
                
                39,567
                
                
                
                129
                
                
                
                59,860Interest
      expense – net
                
                
                --
                
                
                
                (18,820
                )
                
                
                (15,481
                )
                
                
                --
                
                
                
                (34,301
                )Equity
      earnings
                
                
                47,031
                
                
                
                44,318
                
                
                
                2,748
                
                
                
                (71,964
                )
                
                
                22,133Other
      income – net
                
                
                --
                
                
                
                211
                
                
                
                184
                
                
                
                --
                
                
                
                395Income
      before provision for income taxes
                
                
                47,031
                
                
                
                45,873
                
                
                
                27,018
                
                
                
                (71,835
                )
                
                
                48,087Provision
      for income taxes
                
                
                --
                
                
                
                399
                
                
                
                657
                
                
                
                --
                
                
                
                1,056Net
      income
                
                $
                47,031
                
                
                $
                45,474
                
                
                $
                26,361
                
                
                $
                (71,835
                )
                
                $
                47,031





For
      the Three Months Ended September 30, 2007TEPPCO
      Partners, L.P.
                
                
                Guarantor
                  Subsidiaries
                
                
                Non-Guarantor
      Subsidiaries
                
                
                Consolidating
      Adjustments
                
                
                TEPPCO
                  Partners,
      L.P. ConsolidatedOperating
      revenues
                
                $
                --
                
                
                $
                92,339
                
                
                $
                2,488,370
                
                
                $
                (52
                )
                
                $
                2,580,657Costs
      and
      expenses
                
                
                --
                
                
                
                69,254
                
                
                
                2,456,744
                
                
                
                (58
                )
                
                
                2,525,940Gains
      on sales of
      assets
                
                
                --
                
                
                
                (2
                )
                
                
                --
                
                
                
                --
                
                
                
                (2
                )Operating
      income
                
                
                --
                
                
                
                23,087
                
                
                
                31,626
                
                
                
                6
                
                
                
                54,719Interest
      expense –
      net
                
                
                --
                
                
                
                (20,131
                )
                
                
                (6,770
                )
                
                
                --
                
                
                
                (26,901
                )Gain
      on sale of ownership interest in MB
                  Storage
                
                
                --
                
                
                
                (20
                )
                
                
                --
                
                
                
                --
                
                
                
                (20
                )Equity
      earnings
                
                
                47,631
                
                
                
                44,180
                
                
                
                1,073
                
                
                
                (73,825
                )
                
                
                19,059Other
      income –
      net
                
                
                --
                
                
                
                615
                
                
                
                145
                
                
                
                --
                
                
                
                760Income
      before provision for income taxes
                
                
                47,631
                
                
                
                47,731
                
                
                
                26,074
                
                
                
                (73,819
                )
                
                
                47,617Provision
      for income
      taxes
                
                
                --
                
                
                
                100
                
                
                
                (114
                )
                
                
                --
                
                
                
                (14
                )Net
      income
                
                $
                47,631
                
                
                $
                47,631
                
                
                $
                26,188
                
                
                $
                (73,819
                )
                
                $
                47,631





For
      the Nine Months Ended September 30, 2008TEPPCO
      Partners, L.P.
                
                
                Guarantor
                  Subsidiaries
                
                
                Non-Guarantor
      Subsidiaries
                
                
                Consolidating
      Adjustments
                
                
                TEPPCO
                  Partners,
      L.P. ConsolidatedOperating
      revenues
                
                $
                --
                
                
                $
                288,148
                
                
                $
                10,906,681
                
                
                $
                (134
                )
                
                $
                11,194,695Costs
      and expenses
                
                
                --
                
                
                
                215,075
                
                
                
                10,781,191
                
                
                
                (4,225
                )
                
                
                10,992,041Gains
      on sales of assets
                
                
                --
                
                
                
                --
                
                
                
                (1
                )
                
                
                --
                
                
                
                (1
                )Operating
      income
                
                
                --
                
                
                
                73,073
                
                
                
                125,491
                
                
                
                4,091
                
                
                
                202,655Interest
      expense – net
                
                
                --
                
                
                
                (62,996
                )
                
                
                (42,910
                )
                
                
                --
                
                
                
                (105,906
                )Equity
      earnings
                
                
                158,852
                
                
                
                142,315
                
                
                
                9,925
                
                
                
                (247,880
                )
                
                
                63,212Other
      income – net
                
                
                --
                
                
                
                793
                
                
                
                992
                
                
                
                --
                
                
                
                1,785Income
      before provision for income taxes
                
                
                158,852
                
                
                
                153,185
                
                
                
                93,498
                
                
                
                (243,789
                )
                
                
                161,746Provision
      for income taxes
                
                
                --
                
                
                
                888
                
                
                
                2,006
                
                
                
                --
                
                
                
                2,894Net
      income
                
                $
                158,852
                
                
                $
                152,297
                
                
                $
                91,492
                
                
                $
                (243,789
                )
                
                $
                158,852
  55
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)





For
      the Nine Months Ended September 30, 2007TEPPCO
      Partners, L.P.
                
                
                Guarantor
                  Subsidiaries
                
                
                Non-Guarantor
      Subsidiaries
                
                
                Consolidating
      Adjustments
                
                
                TEPPCO
                  Partners,
      L.P. ConsolidatedOperating
      revenues
                
                $
                --
                
                
                $
                278,944
                
                
                $
                6,330,073
                
                
                $
                (495
                )
                
                $
                6,608,522Costs
      and expenses
                
                
                --
                
                
                
                202,876
                
                
                
                6,239,366
                
                
                
                (3,949
                )
                
                
                6,438,293Gains
      on sales of assets
                
                
                --
                
                
                
                (18,653
                )
                
                
                --
                
                
                
                --
                
                
                
                (18,653
                )Operating
      income
                
                
                --
                
                
                
                94,721
                
                
                
                90,707
                
                
                
                3,454
                
                
                
                188,882Interest
      expense – net
                
                
                --
                
                
                
                (51,435
                )
                
                
                (20,462
                )
                
                
                --
                
                
                
                (71,897
                )Gain
      on sale of ownership interest in MB
                  Storage
                
                
                --
                
                
                
                59,628
                
                
                
                --
                
                
                
                --
                
                
                
                59,628Equity
      earnings
                
                
                233,582
                
                
                
                128,339
                
                
                
                4,310
                
                
                
                (311,375
                )
                
                
                54,856Other
      income – net
                
                
                --
                
                
                
                1,934
                
                
                
                392
                
                
                
                --
                
                
                
                2,326Income
      before provision for income taxes
                
                
                233,582
                
                
                
                233,187
                
                
                
                74,947
                
                
                
                (307,921
                )
                
                
                233,795Provision
      for income taxes
                
                
                --
                
                
                
                (395
                )
                
                
                608
                
                
                
                --
                
                
                
                213Net
      income
                
                $
                233,582
                
                
                $
                233,582
                
                
                $
                74,339
                
                
                $
                (307,921
                )
                
                $
                233,582

















For
      the Nine Months Ended September 30, 2008TEPPCO
      Partners, L.P.
                          
                          
                          Guarantor
      Subsidiaries
                          
                          
                          Non-Guarantor
      Subsidiaries
                          
                          
                          Consolidating
      Adjustments
                          
                          
                          TEPPCO
      Partners, L.P. ConsolidatedOperating
      activities:Net
      cash from operating activities
                          
                          $
                          (805,635
                          )
                          
                          $
                          297,738
                          
                          
                          $
                          142,275
                          
                          
                          $
                          660,491
                          
                          
                          $
                          294,869Cash
      flows from investing activitiesCash
      used for business combinations
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (351,866
                          )
                          
                          
                          --
                          
                          
                          
                          (351,866
                          )Investment
      in Jonah
                          
                          
                          --
                          
                          
                          
                          (94,875
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (94,875
                          )Capital
      expenditures
                          
                          
                          --
                          
                          
                          
                          (143,690
                          )
                          
                          
                          (71,472
                          )
                          
                          
                          --
                          
                          
                          
                          (215,162
                          )Other,
      net
                          
                          
                          --
                          
                          
                          
                          (317
                          )
                          
                          
                          (11,538
                          )
                          
                          
                          --
                          
                          
                          
                          (11,855
                          )Net
      used in investing activities
                          
                          
                          --
                          
                          
                          
                          (238,882
                          )
                          
                          
                          (434,876
                          )
                          
                          
                          --
                          
                          
                          
                          (673,758
                          )Cash
      flows from financing activitiesProceeds
      from term credit facility
                          
                          
                          1,000,000
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          1,000,000Repayments
      on term credit facility
                          
                          
                          (1,000,000
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (1,000,000
                          )Proceeds
      on revolving credit facility
                          
                          
                          1,852,567
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          1,852,567Repayments
      on revolving credit facility
                          
                          
                          (2,017,850
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (2,017,850
                          )Repayment
      of debt assumed in Cenac acquisition
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (63,157
                          )
                          
                          
                          --
                          
                          
                          
                          (63,157
                          )Redemption
      of 7.51% TE Products Senior Notes
                          
                          
                          --
                          
                          
                          
                          (181,571
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (181,571
                          )Repayment
      of 6.45% TE Products Senior
                            Notes
                          
                          
                          --
                          
                          
                          
                          (180,000
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (180,000
                          )Issuance
      of Limited Partner Units, net
                          
                          
                          271,313
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          271,313Issuance
      of senior notes
                          
                          
                          996,349
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          996,349Debt
      issuance costs
                          
                          
                          (9,857
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (9,857
                          )Settlement
      of treasury lock agreements
                          
                          
                          (52,098
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (52,098
                          )Intercompany
      debt activities
                          
                          
                          --
                          
                          
                          
                          539,420
                          
                          
                          
                          436,838
                          
                          
                          
                          (976,258
                          )
                          
                          
                          --Distributions
                          
                          
                          (236,775
                          )
                          
                          
                          (236,775
                          )
                          
                          
                          (81,074
                          )
                          
                          
                          317,849
                          
                          
                          
                          (236,775
                          )Cash
      flows from financing activities
                          
                          
                          803,649
                          
                          
                          
                          (58,926
                          )
                          
                          
                          292,607
                          
                          
                          
                          (658,409
                          )
                          
                          
                          378,921Net
      change in cash and cash equivalents
                          
                          
                          (1,986
                          )
                          
                          
                          (70
                          )
                          
                          
                          6
                          
                          
                          
                          2,082
                          
                          
                          
                          32Cash
      and cash equivalents, January 1
                          
                          
                          8,147
                          
                          
                          
                          70
                          
                          
                          
                          22
                          
                          
                          
                          (8,216
                          )
                          
                          
                          23Cash
      and cash equivalents, September 30
                          
                          $
                          6,161
                          
                          
                          $
                          --
                          
                          
                          $
                          28
                          
                          
                          $
                          (6,134
                          )
                          
                          $
                          55








56
 TEPPCO
PARTNERS, L.P.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)








For
      the Nine Months Ended September 30, 2007TEPPCO
      Partners, L.P.
                          
                          
                          Guarantor
      Subsidiaries
                          
                          
                          Non-Guarantor
      Subsidiaries
                          
                          
                          Consolidating
      Adjustments
                          
                          
                          TEPPCO
      Partners, L.P. ConsolidatedOperating
      activities:Net
      cash from operating activities
                          
                          $
                          39,830
                          
                          
                          $
                          146,245
                          
                          
                          $
                          131,683
                          
                          
                          $
                          (98,572
                          )
                          
                          $
                          219,186Cash
      flows from investing activitiesProceeds
      from sales of assets
                          
                          
                          --
                          
                          
                          
                          26,541
                          
                          
                          
                          1,230
                          
                          
                          
                          --
                          
                          
                          
                          27,771Proceeds
      from sale of ownership interest
                          
                          
                          --
                          
                          
                          
                          137,326
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          137,326Purchase
      of assets
                          
                          
                          --
                          
                          
                          
                          (6,016
                          )
                          
                          
                          (6,717
                          )
                          
                          
                          --
                          
                          
                          
                          (12,733
                          )Investment
      in Centennial
                          
                          
                          --
                          
                          
                          
                          (11,081
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (11,081
                          )Investment
      in Jonah
                          
                          
                          --
                          
                          
                          
                          (127,775
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (127,775
                          )Capital
      expenditures
                          
                          
                          --
                          
                          
                          
                          (108,133
                          )
                          
                          
                          (56,028
                          )
                          
                          
                          --
                          
                          
                          
                          (164,161
                          )Other,
      net
                          
                          
                          --
                          
                          
                          
                          (16,932
                          )
                          
                          
                          (12,182
                          )
                          
                          
                          (2,876
                          )
                          
                          
                          (31,990
                          )Net
      used in investing activities
                          
                          
                          --
                          
                          
                          
                          (106,070
                          )
                          
                          
                          (73,697
                          )
                          
                          
                          (2,876
                          )
                          
                          
                          (182,643
                          )Cash
      flows from financing activitiesProceeds
      on revolving credit facility
                          
                          
                          805,250
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          805,250Repayments
      on revolving credit facility
                          
                          
                          (918,250
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (918,250
                          )Issuance
      of Limited Partner Units, net
                          
                          
                          53
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          53Issuance
      of Junior Subordinated Notes
                          
                          
                          299,517
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          299,517Debt
      issuance costs
                          
                          
                          (3,750
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (3,750
                          )Intercompany
      debt activities
                          
                          
                          --
                          
                          
                          
                          180,910
                          
                          
                          
                          5,607
                          
                          
                          
                          (186,517
                          )
                          
                          
                          --Distributions
                          
                          
                          (219,613
                          )
                          
                          
                          (219,613
                          )
                          
                          
                          (63,637
                          )
                          
                          
                          283,250
                          
                          
                          
                          (219,613
                          )Other,
      net
                          
                          
                          1,390
                          
                          
                          
                          (1,236
                          )
                          
                          
                          2
                          
                          
                          
                          52
                          
                          
                          
                          208Cash
      flows from financing activities
                          
                          
                          (35,403
                          )
                          
                          
                          (39,939
                          )
                          
                          
                          (58,028
                          )
                          
                          
                          96,785
                          
                          
                          
                          (36,585
                          )Net
      change in cash and cash equivalents
                          
                          
                          4,427
                          
                          
                          
                          236
                          
                          
                          
                          (42
                          )
                          
                          
                          (4,663
                          )
                          
                          
                          (42
                          )Cash
      and cash equivalents, January 1
                          
                          
                          10,975
                          
                          
                          
                          --
                          
                          
                          
                          70
                          
                          
                          
                          (10,975
                          )
                          
                          
                          70Cash
      and cash equivalents, September 30
                          
                          $
                          15,402
                          
                          
                          $
                          236
                          
                          
                          $
                          28
                          
                          
                          $
                          (15,638
                          )
                          
                          $
                          28














57





Item
2.  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.





For
the three months and nine months ended September 30, 2008 and 2007





The
following information should be read in conjunction with our unaudited condensed
consolidated financial statements and accompanying notes included in this
report.  The following information and such unaudited condensed
consolidated financial statements should be read in conjunction with the
financial statements and related notes, together with our discussion and
analysis of financial position and results of operations included in our Annual
Report on Form 10-K for the year ended December 31, 2007.  Our
discussion and analysis includes the following:





§
            Key
      References Used in this Quarterly
Report.


§
            Cautionary
      Note Regarding Forward-Looking
Statements.


§
            Overview
      of Critical Accounting Policies and
Estimates.


§
            Overview
      of Business.


§
            Recent
      Developments – Discusses recent developments during the quarter ended
      September 30, 2008.


§
            Results
      of Operations – Discusses material period-to-period variances in the
      statements of consolidated income.


§
            Financial
      Condition and Liquidity – Analyzes cash flows and financial
      position.


§
            Other
      Considerations – Addresses available sources of liquidity, and certain
      trends, future plans and
contingencies.


§
            Recent
      Accounting Pronouncements.





As
generally used in the energy industry and in this discussion, the identified
terms have the following meanings:








/d
            = per
  dayBBtus
            = billion British
      Thermal unitsBcf
            = billion cubic
      feetMMBtus
            = million British
      Thermal unitsMMcf
            = million cubic
      feetMcf
            = thousand cubic
      feetMMBbls
            = million
      barrels





Our
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”).




Key
References Used in this Quarterly Report




Unless
the context requires otherwise, references to “we,” “us,” “our,” the “Partnership” or “TEPPCO” are intended to mean
the business and operations of TEPPCO Partners, L.P. and its consolidated
subsidiaries.




References
to “TE Products,”
“TCTM,” “TEPPCO Midstream” and “TEPPCO Marine Services”mean
TE Products Pipeline Company, LLC, TCTM, L.P., TEPPCO Midstream Companies, LLC
and TEPPCO Marine Services, LLC, our subsidiaries.




References
to “General Partner”
mean Texas Eastern Products Pipeline Company, LLC, which is the general partner
of TEPPCO and owned by Enterprise GP Holdings L.P., a publicly traded
partnership, controlled indirectly by EPCO, Inc.




References
to “Enterprise GP
Holdings” mean Enterprise GP Holdings L.P., a publicly traded partnership
that owns our General Partner and Enterprise Products GP, LLC, the general
partner of Enterprise Products Partners L.P.







58





References
to “Enterprise Products
Partners” mean Enterprise Products Partners L.P., and its consolidated
subsidiaries, a publicly traded Delaware limited partnership, which is an
affiliate of ours.




References
to “EPCO” mean EPCO,
Inc., a privately-held company that is affiliated with our General
Partner.  Dan L. Duncan is the Group Co-Chairman and controlling
shareholder of EPCO.




Cautionary
Note Regarding Forward-Looking Statements





The
matters discussed in this Quarterly Report on Form 10-Q (this “Report”) include
“forward-looking statements.”  All statements that express belief,
expectation, estimates or intentions, as well as those that are not statements
of historical facts are forward-looking statements.  The words
“proposed”, “anticipate”, “potential”, “may”, “will”, “could”, “should”,
“expect”, “estimate”, “believe”, “intend”, “plan”, “seek” and similar
expressions are intended to identify forward-looking
statements.  Without limiting the broader description of
forward-looking statements above, we specifically note that statements included
in this document that address activities, events or developments that we expect
or anticipate will or may occur in the future, including such things as future
distributions, estimated future capital expenditures (including the amount and
nature thereof), business strategy and measures to implement strategy,
competitive strengths, goals, expansion and growth of our business and
operations,  anticipated outcome of various legal and regulatory
proceedings, plans, references to future success or events, anticipated market
or industry developments, references to intentions as to future matters and
other such matters are forward-looking statements.  These statements
are based on certain assumptions and analyses made by us in light of our
experience and our perception of historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
under the circumstances.  While we believe our expectations reflected
in these forward-looking statements are reasonable, whether actual results and
developments will conform with our expectations and predictions is subject to a
number of risks and uncertainties, including general economic, market or
business conditions, the opportunities (or lack thereof) that may be presented
to and pursued by us, competitive actions by other pipeline or energy
transportation companies, changes in laws or regulations and other factors, many
of which are beyond our control.  For example, the demand for refined
products is dependent upon the price, prevailing economic conditions and
demographic changes in the markets served, trucking and railroad freight,
agricultural usage and military usage; the demand for propane is sensitive to
the weather and prevailing economic conditions; the demand for petrochemicals is
dependent upon prices for products produced from petrochemicals; the demand for
crude oil and petroleum products is dependent upon the price of crude oil and
the products produced from the refining of crude oil; the demand for natural gas
is dependent upon the price of natural gas and the locations in which natural
gas is drilled; and the demand for marine transportation services is dependent
upon the demand for products and prevailing economic
conditions.  Further, the success of our new marine services business
is dependent upon, among other things, our ability to effectively assimilate and
provide for the operation of that business, maintain key personnel and customer
relationships and obtain favorable contract renewals.We are also subject to
regulatory factors such as the amounts we are allowed to charge our customers
for the services we provide on our regulated pipeline systems and the cost and
ability of complying with government regulations of the marine transportation
industry.  Consequently, all of the forward-looking statements made in
this document are qualified by these cautionary statements, and we cannot assure
you that actual results or developments that we anticipate will be realized or,
even if substantially realized, will have the expected consequences to or effect
on us or our business or operations.  Also note that we provide
additional cautionary discussion of risks and uncertainties under the captions
“Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this Report and in our Annual Report on
Form 10-K for the year ended December 31, 2007.




The forward-looking statements
contained in this Report speak only as of the date hereof.  Except as
required by the federal and state securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or any other reason.  All
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
or referred to in this Report and in our future periodic reports filed with the
U.S. Securities and Exchange Commission (“SEC”).  In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in
this Report may not occur.





59





Overview
of Critical Accounting Policies and Estimates





A summary of the significant accounting
policies we have adopted and followed in the preparation of our consolidated
financial statements is included in our Annual Report on Form 10-K for the
year ended December 31, 2007.  Certain of these accounting policies
require the use of estimates.  As more fully described therein, the
following estimates, in our opinion, are subjective in nature, require the
exercise of judgment and involve complex analysis: revenue and expense accruals,
including accruals for power costs, property taxes and crude oil margins;
reserves for environmental matters; depreciation methods and estimated useful
lives of property, plant and equipment; and goodwill and intangible
assets.  These estimates are based on our knowledge and understanding
of current conditions and actions we may take in the future.  Changes
in these estimates will occur as a result of the passage of time and the
occurrence of future events.  Subsequent changes in these estimates
may have a significant impact on our financial position, results of operations
and cash flows.





Overview
of Business





Certain factors are key to our
operations.  These include the safe, reliable and efficient operation
of the pipelines and facilities that we own or operate while meeting the
regulations that govern the operation of our assets and the costs associated
with such regulations.  We operate and report in four business
segments:





§
            Our
      Downstream Segment, which is engaged in the pipeline transportation,
      marketing and storage of refined products, liquefied petroleum gases
      (“LPGs”) and petrochemicals;


§
            Our
      Upstream Segment, which is engaged in the gathering, pipeline
      transportation, marketing and storage of crude oil and distribution of
      lubrication oils and specialty
chemicals;


§
            Our
      Midstream Segment, which is engaged in the gathering of natural gas,
      pipeline transportation of natural gas liquids (“NGLs”) and fractionation
      of NGLs; and


§
            Our
      Marine Services Segment, which is engaged in the marine transportation of
      refined products, crude oil, condensate, asphalt, heavy fuel oil and other
      heated oil products via tow boats and tank
  barges.





Please
refer to Item 7.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Overview of Business in our Annual Report
on Form 10-K for the year ended December 31, 2007 for an overview of how
revenues are earned in each segment and other factors affecting the results and
financial position of our businesses.





As part of our growth strategy, we
engage from time to time in discussions with potential sellers and strategic
partners regarding the possible purchase of assets, pursuit of joint ventures or
other expansion opportunities that complement our principal lines of
business.  These potential expansion opportunities consist of both
smaller transactions, as well as larger transactions that could have a material
impact on our capital structure and operating results.  We cannot
predict the likelihood of completing, or the timing of, any such
transactions.





Recent
Developments





Texas
Offshore Port System Joint Venture





In August 2008, we, together with
Enterprise Products Partners and Oiltanking Holding Americas, Inc.
(“Oiltanking”) announced the formation of a joint venture to design, construct,
operate and own a new Texas offshore crude oil port and pipeline system to
facilitate delivery of waterborne crude oil to refining centers located along
the upper Texas Gulf Coast.  The joint venture’s primary
project, referred to as “TOPS,” includes (i) an offshore port (which will be
located approximately 36 miles from Freeport, Texas), (ii) an onshore
storage facility with approximately 3.9 million barrels of total crude oil
storage capacity, and (iii) an 85-mile pipeline system that will have the
capacity to deliver up to 1.8 million barrels per day of crude oil, that
will extend from the offshore port to a Texas City, Texas storage
facility.  TOPS is expected to begin service as early as the fourth
quarter of 2010.  The joint venture’s second and complementary
project, referred to as the Port Arthur Crude Oil Express (“PACE”) will
transport crude oil from Texas City, including crude oil from TOPS, and will
consist of a 75-mile pipeline and





60





1.2
million barrels of crude oil storage capacity in the Port Arthur, Texas
area.  PACE is expected to begin service as early as the third quarter
of 2010. Development of the TOPS and PACE projects is supported by long-term
contracts with affiliates of Motiva Enterprises, LLC and Exxon Mobil
Corporation, which have committed a combined 725,000 barrels per day of
crude oil to the projects.





We, Enterprise Products Partners and
Oiltanking each own, through our respective subsidiaries, a one-third interest
in the joint venture.  A subsidiary of Enterprise Products Partners
acts as construction manager and will act as operator. The aggregate cost of the
TOPS and PACE projects is expected to be approximately $1.8 billion
(excluding capitalized interest), with the majority of such capital expenditures
occurring in 2009 and 2010.  We and an affiliate of Enterprise
Products Partners have each guaranteed up to approximately
$700.0 million of the capital contribution obligations of our respective
subsidiary partners in the joint venture.  At September 30, 2008, we
have a payable of $2.3 million for our investment in the joint venture, which
will be paid during the fourth quarter of 2008.





The joint venture is an integral part
of our strategic plan for growing the Partnership.  Demand for the
project is being driven by planned and expected refinery expansions along the
U.S. Gulf Coast, expected increased shipping traffic and operating limitations
of ship channels.  Further, the joint venture complements our
5.4 million barrel refined products storage facility currently under
construction in Port Arthur to support the expansion of Motiva Enterprises,
LLC’s nearby refinery, which is expected to double its existing capacity in
2010.





Equity
Offering and Registration Statement





In September 2008, we filed a universal
shelf registration statement with the SEC that allows us to issue an unlimited
amount of debt and equity securities and removed from registration securities
remaining under our previous universal shelf registration
statement.





On
September 9, 2008, we issued and sold in an underwritten public offering 9.2
million Units at a price to the public of $29.00 per Unit, including 1.2 million
Units sold upon exercise of the underwriters’ over-allotment option granted in
connection with the offering.  The proceeds from the offering, net of
underwriting discount and offering expenses, totaled approximately $257.0
million.  Concurrently with this offering, we sold 241,380
unregistered Units at the public offering price of $29.00 to TEPPCO Unit L.P.
(“TEPPCO Unit”), an affiliate of EPCO in which certain EPCO employees who
perform services for us, including the executive officers named in the Executive
Compensation section of our most recent Annual Report on Form 10-K, were issued
Class B limited partner interests to incentivize them to enhance the long-term
value of our Units.  The net proceeds from the offering and the
unregistered issuance to TEPPCO Unit were used to reduce indebtedness under our
revolving credit facility.  For additional information regarding
TEPPCO Unit and the equity-based compensatory awards issued therein, please see
Note 3 in the Notes to Unaudited Condensed Consolidated Financial
Statements.





Expansion
of Inland Waterway Distribution Network





In August
2008, we commenced operations at our new 500,000 barrel Boligee refined products
terminal in Greene County, Alabama.  Located along the Tennessee
Tombigbee waterway, the facility provides gasoline, diesel and ethanol storage
capabilities and provides for direct access to most U.S. Gulf Coast refining
centers through an interconnect with the Colonial pipeline
system.  Additionally, the intermodal terminal offers truck and marine
transportation options and future rail capabilities.  The facility
will also serve as an origination point for refined products delivered to our
130,000 barrel terminal in Aberdeen, Mississippi.





Acquisition
of Lubrication and Other Fuel Oil Assets




On August 1, 2008, we purchased
lubrication and other fuel oil assets, located in Wyoming, from Quality
Petroleum, Inc. (“Quality Petroleum”) for approximately $7.5
million.  The assets, included in our Upstream Segment, consist of
operating inventory, buildings, land and various equipment and the assignment of
certain distributor agreements.  We funded the purchase through
borrowings under our revolving credit facility.  For





61





additional
information regarding this acquisition, see Note 9 in the Notes to Unaudited
Condensed Consolidated Financial Statements.





Results
of Operations




The following table summarizes
financial information by business segment for the three months and nine months
ended September 30, 2008 and 2007 (in thousands):





For
      the Three Months Ended
                    September
      30,
                  
                  
                  For
      the Nine Months Ended
                    September
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Operating
      revenues:Downstream
    Segment
                  
                  $
                  97,052
                  
                  
                  $
                  84,528
                  
                  
                  $
                  271,187
                  
                  
                  $
                  262,626Upstream
Segment
                  
                  
                  4,032,384
                  
                  
                  
                  2,465,031
                  
                  
                  
                  10,713,042
                  
                  
                  
                  6,255,434Midstream
    Segment
                  
                  
                  30,325
                  
                  
                  
                  31,150
                  
                  
                  
                  91,010
                  
                  
                  
                  90,957Marine Services
      Segment
                  
                  
                  46,018
                  
                  
                  
                  --
                  
                  
                  
                  119,590
                  
                  
                  
                  --Intersegment
      eliminations
                  
                  
                  (35
                  )
                  
                  
                  (52
                  )
                  
                  
                  (134
                  )
                  
                  
                  (495
                  )Total
      operating revenues
                  
                  
                  4,205,744
                  
                  
                  
                  2,580,657
                  
                  
                  
                  11,194,695
                  
                  
                  
                  6,608,522Operating
      income:Downstream
    Segment
                  
                  
                  18,671
                  
                  
                  
                  26,646
                  
                  
                  
                  70,654
                  
                  
                  
                  101,533Upstream
Segment
                  
                  
                  26,903
                  
                  
                  
                  20,602
                  
                  
                  
                  81,871
                  
                  
                  
                  63,660Midstream
    Segment
                  
                  
                  5,803
                  
                  
                  
                  7,465
                  
                  
                  
                  22,467
                  
                  
                  
                  20,235Marine Services
      Segment
                  
                  
                  8,354
                  
                  
                  
                  --
                  
                  
                  
                  23,572
                  
                  
                  
                  --Intersegment
      eliminations
                  
                  
                  129
                  
                  
                  
                  6
                  
                  
                  
                  4,091
                  
                  
                  
                  3,454Total
      operating income
                  
                  
                  59,860
                  
                  
                  
                  54,719
                  
                  
                  
                  202,655
                  
                  
                  
                  188,882Equity
      earnings (losses):Downstream
      Segment
                  
                  
                  (2,349
                  )
                  
                  
                  (3,064
                  )
                  
                  
                  (10,066
                  )
                  
                  
                  (8,430
                  )Upstream
      Segment
                  
                  
                  2,748
                  
                  
                  
                  1,073
                  
                  
                  
                  9,925
                  
                  
                  
                  4,310Midstream
    Segment
                  
                  
                  21,863
                  
                  
                  
                  21,056
                  
                  
                  
                  67,444
                  
                  
                  
                  62,430Intersegment
      eliminations
                  
                  
                  (129
                  )
                  
                  
                  (6
                  )
                  
                  
                  (4,091
                  )
                  
                  
                  (3,454
                  )Total
      equity earnings
                  
                  
                  22,133
                  
                  
                  
                  19,059
                  
                  
                  
                  63,212
                  
                  
                  
                  54,856Earnings
      before interest:(1)Downstream
      Segment
                  
                  
                  16,500
                  
                  
                  
                  24,096
                  
                  
                  
                  61,293
                  
                  
                  
                  154,454Upstream
      Segment
                  
                  
                  29,766
                  
                  
                  
                  21,719
                  
                  
                  
                  92,539
                  
                  
                  
                  68,114Midstream
    Segment
                  
                  
                  27,763
                  
                  
                  
                  28,703
                  
                  
                  
                  90,237
                  
                  
                  
                  83,124Marine Services
      Segment
                  
                  
                  8,359
                  
                  
                  
                  --
                  
                  
                  
                  23,583
                  
                  
                  
                  --Interest
      expense
                  
                  
                  (38,593
                  )
                  
                  
                  (28,911
                  )
                  
                  
                  (120,083
                  )
                  
                  
                  (80,710
                  )Interest
      capitalized
                  
                  
                  4,292
                  
                  
                  
                  2,010
                  
                  
                  
                  14,177
                  
                  
                  
                  8,813Income before provision for
      income taxes
                  
                  
                  48,087
                  
                  
                  
                  47,617
                  
                  
                  
                  161,746
                  
                  
                  
                  233,795Provision
      for income taxes
                  
                  
                  1,056
                  
                  
                  
                  (14
                  )
                  
                  
                  2,894
                  
                  
                  
                  213Net
      income
                  
                  $
                  47,031
                  
                  
                  $
                  47,631
                  
                  
                  $
                  158,852
                  
                  
                  $
                  233,582


___________________________





(1)
            See
      Note 13 in the Notes to Unaudited Condensed Consolidated Financial
      Statements for a reconciliation of earnings before interest to net
      income.





Below is an analysis of the results of
operations, including reasons for material changes in results, by each of our
operating segments.








62





Downstream
Segment





The following table provides financial
information for the Downstream Segment for the three months and nine months
ended September 30, 2008 and 2007 (in thousands):





For
      the Three Months Ended
                  
                  
                  
                  
                  
                  For
      the Nine Months EndedSeptember
      30,
                  
                  
                  Increase
                  
                  
                  September
      30,
                  
                  
                  Increase2008
                  
                  
                  2007
                  
                  
                  (Decrease)
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  (Decrease)Operating
      revenues:Sales
      of petroleum products
                  
                  $
                  12,964
                  
                  
                  $
                  5,600
                  
                  
                  $
                  7,364
                  
                  
                  $
                  21,271
                  
                  
                  $
                  24,379
                  
                  
                  $
                  (3,108
                  )Transportation
      – Refined products
                  
                  
                  42,203
                  
                  
                  
                  48,123
                  
                  
                  
                  (5,920
                  )
                  
                  
                  123,602
                  
                  
                  
                  126,976
                  
                  
                  
                  (3,374
                  )Transportation
      – LPGs
                  
                  
                  16,335
                  
                  
                  
                  16,735
                  
                  
                  
                  (400
                  )
                  
                  
                  68,589
                  
                  
                  
                  69,535
                  
                  
                  
                  (946
                  )Other
                  
                  
                  25,550
                  
                  
                  
                  14,070
                  
                  
                  
                  11,480
                  
                  
                  
                  57,725
                  
                  
                  
                  41,736
                  
                  
                  
                  15,989Total
      operating revenues
                  
                  
                  97,052
                  
                  
                  
                  84,528
                  
                  
                  
                  12,524
                  
                  
                  
                  271,187
                  
                  
                  
                  262,626
                  
                  
                  
                  8,561Costs
      and expenses:Purchases
      of petroleum products
                  
                  
                  12,873
                  
                  
                  
                  5,465
                  
                  
                  
                  7,408
                  
                  
                  
                  21,089
                  
                  
                  
                  24,170
                  
                  
                  
                  (3,081
                  )Operating
      expense
                  
                  
                  38,230
                  
                  
                  
                  25,165
                  
                  
                  
                  13,065
                  
                  
                  
                  95,558
                  
                  
                  
                  71,459
                  
                  
                  
                  24,099Operating
      fuel and power
                  
                  
                  8,830
                  
                  
                  
                  9,438
                  
                  
                  
                  (608
                  )
                  
                  
                  29,806
                  
                  
                  
                  29,255
                  
                  
                  
                  551General
      and administrative
                  
                  
                  4,212
                  
                  
                  
                  3,953
                  
                  
                  
                  259
                  
                  
                  
                  12,375
                  
                  
                  
                  12,272
                  
                  
                  
                  103Depreciation
      and amortization
                  
                  
                  10,736
                  
                  
                  
                  11,282
                  
                  
                  
                  (546
                  )
                  
                  
                  31,474
                  
                  
                  
                  34,142
                  
                  
                  
                  (2,668
                  )Taxes
      – other than income taxes
                  
                  
                  3,500
                  
                  
                  
                  2,581
                  
                  
                  
                  919
                  
                  
                  
                  10,231
                  
                  
                  
                  8,448
                  
                  
                  
                  1,783Gains
      on sales of assets
                  
                  
                  --
                  
                  
                  
                  (2
                  )
                  
                  
                  2
                  
                  
                  
                  --
                  
                  
                  
                  (18,653
                  )
                  
                  
                  18,653Total
      costs and expenses
                  
                  
                  78,381
                  
                  
                  
                  57,882
                  
                  
                  
                  20,499
                  
                  
                  
                  200,533
                  
                  
                  
                  161,093
                  
                  
                  
                  39,440Operating
      income
                  
                  
                  18,671
                  
                  
                  
                  26,646
                  
                  
                  
                  (7,975
                  )
                  
                  
                  70,654
                  
                  
                  
                  101,533
                  
                  
                  
                  (30,879
                  )Gain
      on sale of ownership interest
                    In
      Mont Belvieu StoragePartners,
      L.P. (“MB Storage”)
                  
                  
                  --
                  
                  
                  
                  (20
                  )
                  
                  
                  20
                  
                  
                  
                  --
                  
                  
                  
                  59,628
                  
                  
                  
                  (59,628
                  )Equity
      losses
                  
                  
                  (2,349
                  )
                  
                  
                  (3,064
                  )
                  
                  
                  715
                  
                  
                  
                  (10,066
                  )
                  
                  
                  (8,430
                  )
                  
                  
                  (1,636
                  )Interest
      income
                  
                  
                  170
                  
                  
                  
                  231
                  
                  
                  
                  (61
                  )
                  
                  
                  498
                  
                  
                  
                  662
                  
                  
                  
                  (164
                  )Other
      income – net
                  
                  
                  8
                  
                  
                  
                  303
                  
                  
                  
                  (295
                  )
                  
                  
                  207
                  
                  
                  
                  1,061
                  
                  
                  
                  (854
                  )Earnings
      before interest
                  
                  $
                  16,500
                  
                  
                  $
                  24,096
                  
                  
                  $
                  (7,596
                  )
                  
                  $
                  61,293
                  
                  
                  $
                  154,454
                  
                  
                  $
                  (93,161
                  )





The
following table presents volumes delivered in barrels and average tariff per
barrel for the three months and nine months ended September 30, 2008 and 2007
(in thousands, except tariff information):





For
      the Three Months Ended
                  
                  
                  Percentage
                  
                  
                  For
      the Nine Months Ended
                  
                  
                  PercentageSeptember
      30,
                  
                  
                  Increase
                  
                  
                  September 30,
                  
                  
                  Increase2008
                  
                  
                  2007
                  
                  
                  (Decrease)
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  (Decrease)Volumes
      Delivered:Refined
      products (1)
                  
                  
                  41,162
                  
                  
                  
                  48,947
                  
                  
                  
                  (16
                  %)
                  
                  
                  121,574
                  
                  
                  
                  129,623
                  
                  
                  
                  (6
                  %)LPGs
                  
                  
                  6,725
                  
                  
                  
                  7,080
                  
                  
                  
                  (5
                  %)
                  
                  
                  26,263
                  
                  
                  
                  29,567
                  
                  
                  
                  (11
                  %)Total
                  
                  
                  47,887
                  
                  
                  
                  56,027
                  
                  
                  
                  (15
                  %)
                  
                  
                  147,837
                  
                  
                  
                  159,190
                  
                  
                  
                  (7
                  %)Average
      Tariff per Barrel:Refined
      products
                  
                  $
                  1.03
                  
                  
                  $
                  0.98
                  
                  
                  
                  5
                  %
                  
                  $
                  1.02
                  
                  
                  $
                  0.98
                  
                  
                  
                  4
                  %LPGs
                  
                  
                  2.43
                  
                  
                  
                  2.36
                  
                  
                  
                  3
                  %
                  
                  
                  2.61
                  
                  
                  
                  2.27
                  
                  
                  
                  15
                  %Average
      system tariff per barrel
                  
                  
                  1.22
                  
                  
                  
                  1.16
                  
                  
                  
                  5
                  %
                  
                  
                  1.30
                  
                  
                  
                  1.23
                  
                  
                  
                  6
                  %


_________________________________




(1)
            Includes
      7,355 and 10,001 barrels and 20,600 and 26,660 barrels delivered via the
      Centennial Pipeline during the three months and nine months ended
      September 30, 2008 and 2007,
respectively.





63





We
generally realize higher revenues in the Downstream Segment during the first and
fourth quarters of each year since LPGs volumes are generally higher from
November through March due to higher demand for propane, a major fuel for
residential heating, and due to the demand for normal butane, which is used for
the blending of gasoline.  Refined products volumes are generally
higher during the second and third quarters because of greater demand for
gasolines during the spring and summer driving seasons, although recent high
gasoline prices have moderated this trend somewhat.  Our Downstream
Segment also includes the results of operations of the northern portion of the
Dean Pipeline, which transports refinery grade propylene from Mont Belvieu to
Point Comfort, Texas.





Three
Months Ended September 30, 2008 Compared with Three Months Ended September 30,
2007





We
conduct distribution and marketing operations and terminaling services for our
throughput partner at our Aberdeen, Mississippi and Boligee, Alabama
terminals.  We also purchase petroleum products from our
throughput partner that we in turn sell through spot and contract sales at our
Aberdeen and Boligee truck racks to independent wholesalers and retailers
of refined products.  Sales and purchases related to these petroleum
products marketing activities increased $7.4 million each for the three months
ended September 30, 2008, compared with the three months ended September 30,
2007.  The increases in purchases and sales were primarily a result of
the start-up at the Boligee terminal in August 2008 and the completion of
unplanned maintenance on storage tanks at the Aberdeen terminal during the
quarter, which had been ongoing since the first quarter of 2008.





Revenues from refined products
transportation decreased $5.9 million for the three months ended September 30,
2008, compared with the three months ended September 30, 2007, primarily due a
16% decrease in refined products volumes delivered, partially offset by a 5%
increase in the average tariff per barrel.  Volume decreases were
primarily due to product supply disruptions resulting from downtime at several
refineries along the upper Texas Gulf Coast following Hurricanes Gustav and Ike,
reduced demand for transportation fuels due to high prices and higher than usual
demand from the Gulf Coast in the 2007 period due to Midwest refinery
downtime.  The refined products average tariff per barrel increased 5%
primarily due to tariff increases that went into effect on April 1 and July 1,
2008.





In August and September 2008, the U.S.
Gulf Coast was impacted by Hurricanes Gustav and Ike,
respectively.  These hurricanes resulted in a reduction in
availability of product for shipment due to refinery shutdowns in preparation
for the storms and reduced pipeline capacity due to electric power outages in
the wake of the storms.  While it is difficult to accurately measure
the lost revenues as a result of the hurricanes, we estimate that the third
quarter 2008 revenues of our Downstream Segment were reduced by approximately
$3.0 million.





Revenues from LPGs transportation
decreased $0.4 million for the three months ended September 30, 2008, compared
to the three months ended September 30, 2007, primarily due to a 5% decrease in
transportation volumes delivered, partially offset by a 3% increase in the
average tariff per barrel.  Isobutane transportation volumes were
lower in the 2008 period due to reduced demand resulting from a refinery
turnaround and unplanned refinery disruptions in the Midwest.  Propane
transportation volumes were lower in the 2008 period compared to the prior year
period due to the negative demand impact of high prices.  The LPGs
average rate per barrel increased 3% due to a July 2008 tariff increase
partially offset by an increased proportion of shorter haul deliveries to the
Midwest market areas as compared to the Northeast market areas.





Other operating revenues increased
$11.5 million for the three months ended September 30, 2008, compared with the
three months ended September 30, 2007, primarily due to an $11.1 million
increase in product inventory sales in connection with an exchange contract
modification and a $0.4 million increase in upsystem product exchange
revenue.  Periodic inventory sales and purchases occur to balance
product grades within the pipeline system as part of routine pipeline
operations.  These increased revenues from product inventory sales
were partially offset by a lower of cost or market adjustment to reduce the
value of remaining product inventory to market values at September 30, 2008, as
discussed below.




64




Costs
and expenses increased $20.5 million for the three months ended September 30,
2008, compared with the three months ended September 30,
2007.  Purchases of petroleum products, discussed above, increased
$7.4 million, compared with the prior year period.  Operating expenses
increased $13.1 million primarily due to a $7.7 million lower of cost or market
(“LCM”) adjustment on inventory (see Note 6 in the Notes to the Unaudited Condensed
Consolidated Financial Statements), a $6.5 million increase in pipeline
operating and maintenance costs primarily related to periodic tank maintenance
requirements pursuant to recommended industry practices outlined in American
Petroleum Institute (“API”) 653 in the 2008 period and other repairs and
maintenance on various sections of pipeline, a $0.4 million increase in expenses
related to pipeline tariffs for terminal deliveries and a $0.3 million decrease
in product measurement gains.  These increases in operating expenses
were partially offset by a $0.8 million decrease in transportation expense
related to movements on Centennial and a $0.8 million decrease in pipeline
rental expense on a third party pipeline.  Operating fuel and power
decreased $0.6 million primarily due to lower mainline transportation
volumes.  General and administrative expenses increased $0.3 million
primarily due to higher labor and benefits expense and higher legal
expenses.  Depreciation and amortization expense decreased $0.5
million primarily due to asset retirements in 2007, partially offset by assets
placed into service in the 2008 period.  Taxes – other than income
taxes increased $0.9 million primarily due to true-ups of property tax accruals
and a higher asset base.





Net losses from equity investments
decreased for the three months ended September 30, 2008, compared with the three
months ended September 30, 2007, as shown below (in thousands):





For
      the Three MonthsEnded
      September 30,
                  
                  
                  Increase2008
                  
                  
                  2007
                  
                  
                  (Decrease)Centennial
                  
                  $
                  (2,369
                  )
                  
                  $
                  (2,800
                  )
                  
                  $
                  431MB
      Storage
                  
                  
                  --
                  
                  
                  
                  (279
                  )
                  
                  
                  279Other
                  
                  
                  20
                  
                  
                  
                  15
                  
                  
                  
                  5Total
      equity
      losses
                  
                  $
                  (2,349
                  )
                  
                  $
                  (3,064
                  )
                  
                  $
                  715





Equity losses in Centennial decreased
$0.4 million for the three months ended September 30, 2008, compared with the
three months ended September 30, 2007, primarily due to lower operating expenses
and lower amortization expense related to our excess investment in Centennial as
a result of lower volumes, partially offset by lower transportation revenues,
resulting from reduced demand for transportation of refined products from the
U.S. Gulf Coast to the mid-continent and the effects of Hurricane Ike which
resulted in a combination of system downtime and reduced availability of supply
due to delayed refinery startups after the storm.  Volumes on
Centennial averaged 105,700 barrels per day during the three months ended
September 30, 2008, compared with 180,800 barrels per day during the three
months ended September 30, 2007.





Due to the sale of MB Storage on March
1, 2007 to Louis Dreyfus Energy Services L.P. (“Louis Dreyfus”) (see Note 9 in
the Notes to Unaudited Condensed Consolidated Financial Statements), there were
no equity losses in MB Storage for the three months ended September 30, 2008,
compared with $0.3 million in losses for the three months ended September 30,
2007.  During the third quarter of 2007, we recorded $0.3 million of
expense relating to post closing adjustments associated with the March 1, 2007
sale of TE Products’ interest in MB Storage.





Other income – net decreased $0.3
million for the three months ended September 30, 2008, compared with the three
months ended September 30, 2007, due to the receipt of various right-of-way
payments in 2007.





Nine
Months Ended September 30, 2008 Compared with Nine Months Ended September 30,
2007





Sales and
purchases related to petroleum products marketing activities each decreased $3.1
million for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007.  The decreases in purchases and sales
were primarily a result of unplanned maintenance on storage tanks at the
Aberdeen terminal during the nine months ended September 30, 2008, partially
offset by the start-up of the Boligee terminal in August 2008.




65




Revenues from refined products
transportation decreased $3.4 million for the nine months ended September 30,
2008, compared with the nine months ended September 30, 2007, primarily due to a
6% decrease in refined products delivered, partially offset by a 4% increase in
the average tariff per barrel.  The refined products volume decreases
were primarily due to lower distillate volumes resulting from product supply
disruptions from downtime at several
refineries along the upper Texas Gulf Coast following Hurricanes Gustav and Ike,
as discussed above, and higher than usual demand from the Gulf Coast in the 2007
period due to Midwest refinery turnarounds.  These decreases were
partially offset by increased jet fuel deliveries and higher tariffs from
rate increases that went into effect in April and July
2008.  Additionally, revenues were increased by the recognition of
$2.1 million of deferred revenue in the second quarter of 2008 related to time
limit expirations under two transportation agreements without the customers
recovering the deferred revenue.





Revenues from LPG transportation
decreased $0.9 million for the nine months ended September 30, 2008, compared
with the nine months ended September 30, 2007, primarily due to lower isobutane
deliveries in the Midwest and decreased propane deliveries in the Northeast
market areas as a result of high product prices and warmer weather during the
first quarter of 2008.  LPG transportation volumes in the 2007 period
include approximately 2.2 million barrels related to short-haul propane
movements on a pipeline that was sold on March 1, 2007 to Louis Dreyfus. 
The LPGs average rate per barrel increased 15% from the prior year period
primarily as a result of decreased short-haul deliveries due to the pipeline
sale and a July 2008 tariff increase.





Other operating revenues increased
$16.0 million for the nine months ended September 30, 2008, compared with the
nine months ended September 30, 2007, primarily due to an $11.1 million increase
in product inventory sales in connection with an exchange contract modification,
a $2.3 million increase in refined products excess inventory revenue, a $1.3
million increase in refined products terminaling revenue and a $0.7 million
increase in upsystem product exchange revenue.





Costs and expenses increased $39.4
million for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007.  Purchases of petroleum products,
discussed above, decreased $3.1 million, compared with the prior year
period.  Operating expenses increased $24.1 million primarily due to a
$16.0 million increase in pipeline operating and maintenance costs principally
related to periodic tank maintenance requirements in the 2008 period and other
repairs and maintenance expenses on various pipeline segments, a $7.7 million
LCM adjustment on inventory (see Note 6 in the Notes to Unaudited Condensed
Consolidated Financial Statements), a $2.4 million write-off of project costs, a
$1.1 million increase in environmental assessments and remediation costs and a
$0.6 million increase in labor and benefits expense.  These increases
in operating expenses were partially offset by a $1.1 million decrease in
insurance premiums, a $1.0 million decrease in transportation expense related to
movements on Centennial and a $0.7 million decrease in pipeline inspection and
repair costs associated with our integrity management
program.  Operating fuel and power increased $0.6 million primarily
due to higher power rates as a result of the increased cost of fuel and true-ups
of power accruals.  General and administrative expenses increased $0.1
million primarily due to higher labor and benefits expense partially offset by
lower consulting and contract services.  Depreciation and amortization
expense decreased $2.7 million primarily due to asset retirements in 2007,
partially offset by assets placed into service in the 2008
period.  Taxes – other than income taxes increased $1.8 million
primarily due to true-ups of property tax accruals and a higher asset
base.  During the nine months ended September 30, 2007, we recognized
a net gain of $18.7 million from the sales of various assets in the Downstream
Segment to Enterprise Products Partners and Louis Dreyfus (see Note 9 in the
Notes to Unaudited Condensed Consolidated Financial Statements).











66





Net losses from equity investments
increased for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007, as shown below (in thousands):





For
      the Nine MonthsEnded
      September 30,
                  
                  
                  Increase2008
                  
                  
                  2007
                  
                  
                  (Decrease)Centennial
                  
                  $
                  (10,122
                  )
                  
                  $
                  (9,549
                  )
                  
                  $
                  (573
                  )MB
      Storage
                  
                  
                  --
                  
                  
                  
                  1,089
                  
                  
                  
                  (1,089
                  )Other
                  
                  
                  56
                  
                  
                  
                  30
                  
                  
                  
                  26Total
      equity
      losses
                  
                  $
                  (10,066
                  )
                  
                  $
                  (8,430
                  )
                  
                  $
                  (1,636
                  )





Equity losses in Centennial increased
$0.6 million for the nine months ended September 30, 2008, compared with the
nine months ended September 30, 2007, primarily due to lower transportation
volumes primarily from the effects of Hurricane Ike, as discussed above,
partially offset by lower operating expenses.  Volumes on Centennial
averaged 115,000 barrels per day during the nine months ended September 30,
2008, compared with 146,000 barrels per day during the nine months ended
September 30, 2007.





Due to the sale of MB Storage on March
1, 2007 to Louis Dreyfus (see Note 9 in the Notes to Unaudited Condensed
Consolidated Financial Statements), there were no equity earnings in MB Storage
for the nine months ended September 30, 2008, compared with $1.1 million in
earnings for the nine months ended September 30, 2007.    On
March 1, 2007, TE Products sold its 49.5% ownership interest in MB Storage and
its 50% ownership interest in Mont Belvieu Venture, LLC (the general partner of
MB Storage) to Louis Dreyfus for approximately $137.6 million in cash (see Note
9 in the Notes to Unaudited Condensed Consolidated Financial
Statements).  We recognized a gain of approximately $59.6 million
related to the sale of our equity interests, which is included in gain on sale
of ownership interest in MB Storage in our statements of consolidated
income.





Other income – net decreased $0.9
million for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007, due to the receipt of various right-of-way
payments in 2007.








67





Upstream
Segment




The following table provides financial
information for the Upstream Segment for the three months and nine months ended
September 30, 2008 and 2007 (in thousands):





For
      the Three Months Ended
                
                
                
                
                
                For
      the Nine Months EndedSeptember
      30,
                
                
                Increase
                
                
                September
      30,
                
                
                Increase2008
                
                
                2007
                
                
                (Decrease)
                
                
                2008
                
                
                2007
                
                
                (Decrease)Operating
      revenues: (1)Sales
      of petroleum products (2)
                
                $
                4,012,714
                
                
                $
                2,450,147
                
                
                $
                1,562,567
                
                
                $
                10,655,650
                
                
                $
                6,215,043
                
                
                $
                4,440,607Transportation
      – Crude oil
                
                
                15,759
                
                
                
                12,332
                
                
                
                3,427
                
                
                
                48,491
                
                
                
                32,702
                
                
                
                15,789Other
                
                
                3,911
                
                
                
                2,552
                
                
                
                1,359
                
                
                
                8,901
                
                
                
                7,689
                
                
                
                1,212Total
      operating revenues
                
                
                4,032,384
                
                
                
                2,465,031
                
                
                
                1,567,353
                
                
                
                10,713,042
                
                
                
                6,255,434
                
                
                
                4,457,608Costs
      and expenses: (1)Purchases
      of petroleum products (2)
                
                
                3,976,775
                
                
                
                2,421,285
                
                
                
                1,555,490
                
                
                
                10,554,953
                
                
                
                6,121,329
                
                
                
                4,433,624Operating
      expense
                
                
                17,693
                
                
                
                13,146
                
                
                
                4,547
                
                
                
                43,738
                
                
                
                41,984
                
                
                
                1,754Operating
      fuel and power
                
                
                2,089
                
                
                
                1,671
                
                
                
                418
                
                
                
                5,680
                
                
                
                5,371
                
                
                
                309General
      and administrative
                
                
                2,133
                
                
                
                1,593
                
                
                
                540
                
                
                
                6,604
                
                
                
                5,191
                
                
                
                1,413Depreciation
      and amortization
                
                
                5,096
                
                
                
                5,133
                
                
                
                (37
                )
                
                
                14,842
                
                
                
                13,349
                
                
                
                1,493Taxes
      – other than income taxes.
                
                
                1,696
                
                
                
                1,601
                
                
                
                95
                
                
                
                5,355
                
                
                
                4,550
                
                
                
                805Gains
      on sales of assets.
                
                
                (1
                )
                
                
                --
                
                
                
                (1
                )
                
                
                (1
                )
                
                
                --
                
                
                
                (1
                )Total
      costs and expenses
                
                
                4,005,481
                
                
                
                2,444,429
                
                
                
                1,561,052
                
                
                
                10,631,171
                
                
                
                6,191,774
                
                
                
                4,439,397Operating
      income
                
                
                26,903
                
                
                
                20,602
                
                
                
                6,301
                
                
                
                81,871
                
                
                
                63,660
                
                
                
                18,211Equity
      earnings
                
                
                2,748
                
                
                
                1,073
                
                
                
                1,675
                
                
                
                9,925
                
                
                
                4,310
                
                
                
                5,615Interest
      income
                
                
                17
                
                
                
                41
                
                
                
                (24
                )
                
                
                45
                
                
                
                120
                
                
                
                (75
                )Other
      income – net
                
                
                98
                
                
                
                3
                
                
                
                95
                
                
                
                698
                
                
                
                24
                
                
                
                674Earnings
      before interest
                
                $
                29,766
                
                
                $
                21,719
                
                
                $
                8,047
                
                
                $
                92,539
                
                
                $
                68,114
                
                
                $
                24,425


_________________________________


(1)
            Amounts
      in this table are presented after elimination of intercompany
      transactions, including sales and purchases of petroleum
      products.


(2)
            Petroleum
      products include crude oil, lubrication oils and specialty
      chemicals.





Information presented in the
following table includes the margin of the Upstream Segment, which may be viewed
as a non-GAAP (Generally Accepted Accounting Principles) financial measure under
the rules of the SEC.  We calculate the margin of the Upstream Segment
as revenues generated from the sale of crude oil and lubrication oil, and
transportation of crude oil, less the costs of purchases of crude oil and
lubrication oil, in each case, prior to the elimination of intercompany sales,
revenues and purchases between wholly-owned subsidiaries.  We believe
that margin is a more meaningful measure of financial performance than sales and
purchases of crude oil and lubrication oil due to the significant fluctuations
in sales and purchases caused by variations in the level of volumes marketed and
prices for products marketed.  Additionally, we use margin internally
to evaluate the financial performance of the Upstream Segment because it
excludes expenses that are not directly related to the marketing and sales
activities being evaluated.  Margin and volume information for the
three months and nine months ended September 30, 2008 and 2007 is presented
below (in thousands, except per barrel and per gallon amounts):





68








For
      the Three Months Ended
                
                
                Percentage
                
                
                For
      the Nine Months Ended
                
                
                PercentageSeptember
      30,
                
                
                Increase
                
                
                September
      30,
                
                
                Increase2008
                
                
                2007
                
                
                (Decrease)
                
                
                2008
                
                
                2007
                
                
                (Decrease)Margins:
      (1)Crude
      oil marketing
                
                $
                17,161
                
                
                $
                15,305
                
                
                
                12
                %
                
                $
                53,060
                
                
                $
                55,690
                
                
                
                (5
                %)Lubrication
      oil sales
                
                
                4,184
                
                
                
                2,267
                
                
                
                85
                %
                
                
                9,938
                
                
                
                6,496
                
                
                
                53
                %Revenues:
      (1)Crude
      oil transportation
                
                
                25,587
                
                
                
                20,072
                
                
                
                27
                %
                
                
                73,047
                
                
                
                53,886
                
                
                
                36
                %Crude
      oil terminaling
                
                
                4,766
                
                
                
                3,550
                
                
                
                34
                %
                
                
                13,143
                
                
                
                10,344
                
                
                
                27
                %Total
      margins/revenues
                
                $
                51,698
                
                
                $
                41,194
                
                
                
                25
                %
                
                $
                149,188
                
                
                $
                126,416
                
                
                
                18
                %Total
      barrels/gallons:Crude
      oil marketing (barrels) (1)
                
                
                67,087
                
                
                
                59,788
                
                
                
                12
                %
                
                
                186,285
                
                
                
                173,792
                
                
                
                7
                %Lubrication
      oil volume (gallons)
                
                
                6,255
                
                
                
                3,971
                
                
                
                58
                %
                
                
                14,055
                
                
                
                11,321
                
                
                
                24
                %Crude
      oil transportation (barrels)
                
                
                26,460
                
                
                
                24,899
                
                
                
                6
                %
                
                
                83,670
                
                
                
                71,214
                
                
                
                17
                %Crude
      oil terminaling (barrels)
                
                
                41,705
                
                
                
                31,804
                
                
                
                31
                %
                
                
                114,564
                
                
                
                103,003
                
                
                
                11
                %Margin
      per barrel or gallon:Crude
      oil marketing (per barrel) (1)
                
                $
                0.256
                
                
                $
                0.256
                
                
                
                --
                
                
                $
                0.285
                
                
                $
                0.320
                
                
                
                (11
                %)Lubrication
      oil margin (per gallon)
                
                
                0.669
                
                
                
                0.571
                
                
                
                17
                %
                
                
                0.707
                
                
                
                0.574
                
                
                
                23
                %Average
      tariff per barrel:Crude
      oil transportation
                
                $
                0.967
                
                
                $
                0.806
                
                
                
                20
                %
                
                $
                0.873
                
                
                $
                0.757
                
                
                
                15
                %Crude
      oil terminaling
                
                
                0.114
                
                
                
                0.112
                
                
                
                2
                %
                
                
                0.115
                
                
                
                0.100
                
                
                
                14
                %


__________________________________





(1)
            Amounts
      in this table are presented prior to the eliminations of intercompany
      sales, revenues and purchases between TEPPCO Crude Oil, LLC (“TCO”) and
      TEPPCO Crude Pipeline, LLC (“TCPL”), both of which are our wholly-owned
      subsidiaries.  TCO is a significant shipper on
      TCPL.  Crude oil marketing volumes also include inter-region
      transfers, which are transfers among TCO’s various geographically managed
      regions.





The following table reconciles the
Upstream Segment margin to operating income using the information presented in
the statements of consolidated income and the Upstream Segment financial
information on the preceding page (in thousands):





For
      the Three Months Ended
                
                
                For
      the Nine Months EndedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Sales
      of petroleum products
                
                $
                4,012,714
                
                
                $
                2,450,147
                
                
                $
                10,655,650
                
                
                $
                6,215,043Transportation
      – Crude
      oil
                
                
                15,759
                
                
                
                12,332
                
                
                
                48,491
                
                
                
                32,702Less:  Purchases
      of petroleum products
                
                
                (3,976,775
                )
                
                
                (2,421,285
                )
                
                
                (10,554,953
                )
                
                
                (6,121,329
                )Total
      margins/revenues
                
                
                51,698
                
                
                
                41,194
                
                
                
                149,188
                
                
                
                126,416Other
      operating
      revenues
                
                
                3,911
                
                
                
                2,552
                
                
                
                8,901
                
                
                
                7,689Net
      operating
      revenues
                
                
                55,609
                
                
                
                43,746
                
                
                
                158,089
                
                
                
                134,105Operating
      expense
                
                
                17,693
                
                
                
                13,146
                
                
                
                43,738
                
                
                
                41,984Operating
      fuel and
      power
                
                
                2,089
                
                
                
                1,671
                
                
                
                5,680
                
                
                
                5,371General
      and administrative expense
                
                
                2,133
                
                
                
                1,593
                
                
                
                6,604
                
                
                
                5,191Depreciation
      and amortization
                
                
                5,096
                
                
                
                5,133
                
                
                
                14,842
                
                
                
                13,349Taxes
      – other than income taxes
                
                
                1,696
                
                
                
                1,601
                
                
                
                5,355
                
                
                
                4,550Gains
      on sales of
      assets
                
                
                (1
                )
                
                
                --
                
                
                
                (1
                )
                
                
                --Operating
      income
                
                $
                26,903
                
                
                $
                20,602
                
                
                $
                81,871
                
                
                $
                63,660








69





Three
Months Ended September 30, 2008 Compared with Three Months Ended September 30,
2007





Sales of petroleum products and
purchases of petroleum products increased $1,562.6 million and $1,555.5 million,
respectively, for the three months ended September 30, 2008, compared with the
three months ended September 30, 2007.  Operating income increased
$6.3 million for the three months ended September 30, 2008, compared with the
three months ended September 30, 2007.  The increases in sales and
purchases were primarily a result of a 12% increase in volumes marketed related
to the completion of organic growth projects, primarily on our West Texas system
and increases in the price of crude oil.  The average New York
Mercantile Exchange (“NYMEX”) price of crude oil was $118.22 per barrel for the
three months ended September 30, 2008, compared with $75.15 per barrel for the
three months ended September 30, 2007.  Increased overall volumes
transported and marketed, partially offset by increased costs and expenses
discussed below, were the primary factors resulting in an increase in operating
income.




Crude oil marketing margin increased
$1.9 million, primarily due to increased volumes marketed and a $1.0 million
increase in unrealized gains relating to marking crude oil grade and location
swap contracts to current market value, partially offset by increased
transportation costs, including higher fuel costs.  Lubrication oil
sales margin increased $1.9 million on higher volumes primarily due to increased
sales of higher margin specialty chemicals and additional margin resulting from
the acquisition of Quality Petroleum on August 1, 2008 (see Note 9 in the Notes
to Unaudited Condensed Consolidated Financial Statements).  Crude oil
transportation revenues (prior to intercompany eliminations) increased $5.5
million and the average tariff per barrel increased 20% primarily due to higher
transportation volumes on most of our crude oil gathering systems and increases
in the tariff rates on certain systems in the third and fourth quarters of 2007
and in July 2008.  Increased transportation revenues on our Red River
and South Texas systems resulted from movements on higher tariff
segments.  Additionally, the completion of organic growth projects on
our West Texas and South Texas systems increased transportation revenues and
volumes on those systems.  Our South Texas system benefitted from
increased volumes coming into the system from U.S. Gulf of Mexico production and
our West Texas system volumes increased due to higher truck and lease gathering
volumes.  Our Basin system volumes decreased due to decreased
long-haul transportation from West Texas to Cushing, Oklahoma.  Crude
oil terminaling revenues increased $1.2 million as a result of increased
pumpover volumes at Cushing, partially offset by decreased volumes at Midland,
Texas, due to crude oil market conditions.  Terminaling volumes
increased 31% primarily due to the completion of three tanks in September 2007,
the completion of a tank in August 2008 and as a result of a draw down in
inventory at Cushing in September 2008 because several mid-continent and Midwest
refiners were unable to obtain U.S. Gulf of Mexico crude oil
supply.




Other operating revenues increased $1.4
million for the three months ended September 30, 2008, compared with the three
months ended September 30, 2007, primarily due to $0.9 million of other
operating revenues resulting from the Quality Petroleum acquisition on August 1,
2008 and due to higher revenues from documentation and other services to support
customers’ trading activity at Midland and Cushing.




Costs and expenses increased $1,561.1
million for the three months ended September 30, 2008, compared with the three
months ended September 30, 2007.  Purchases of petroleum products,
discussed above, increased $1,555.5 million compared with the prior year
period.  Operating expenses increased $4.5 million from the prior year
period, primarily due to a $3.7 million increase in pipeline operating and
maintenance expenses primarily related to periodic tank maintenance requirements
pursuant to API 653 in the 2008 period, $1.1 million of expense related to
initial project development costs for Texas Offshore Port System, a $0.7 million
increase in labor and benefits expense, a $0.6 million increase in pipeline
inspection and repair costs associated with our integrity management program and
a $0.4 million LCM adjustment, partially offset by a $1.9 million decrease in
product measurement losses. Operating fuel and power increased $0.4 million
primarily as a result of higher fuel costs and higher transportation
volumes.  General and administrative expenses increased $0.5 million,
primarily due to higher legal expenses.  Depreciation and amortization
expense and taxes – other than income remained relatively unchanged between
periods.




Equity earnings from our investment in
Seaway increased $1.7 million for the three months ended September 30, 2008,
compared with the three months ended September 30, 2007.  Our sharing
ratio of the revenue





70





and
expense of Seaway for 2008 and 2007 is 40% (see Note 8 in the Notes to Unaudited
Condensed Consolidated Financial Statements).  Equity earnings from
our investment in Seaway increased primarily due to increased transportation
revenues from volumes transported on a spot basis, which are transported at
higher tariff rates, and an increase in long-haul transportation volumes
compared to the prior year period as a result of the unexpected temporary
shutdown of several regional refineries for maintenance and repairs in the 2007
period.  These increases were partially offset by a decrease in
transportation volumes resulting from downtime of the long-haul system and the
Texas City terminal resulting from Hurricane Ike and increased pipeline
operating and maintenance expenses, including expenses of $0.4 million for
repairs and maintenance resulting from Hurricane Ike.  Long-haul
volumes on Seaway averaged 192,636 barrels per day during the three months ended
September 30, 2008, compared with 103,740 barrels per day during the three
months ended September 30, 2007.  For further information on
distributions from Seaway, see Note 8 in the Notes to Unaudited Condensed
Consolidated Financial Statements.





Nine Months Ended September 30, 2008
Compared with Nine Months Ended September 30, 2007





Sales of petroleum products and
purchases of petroleum products increased $4,440.6 million and $4,433.6 million,
respectively, for the nine months ended September 30, 2008, compared with the
nine months ended September 30, 2007.  Operating income increased
$18.2 million for the nine months ended September 30, 2008, compared with the
nine months ended September 30, 2007.  The increases in sales and
purchases were primarily a result of increased volumes marketed and increases in
the price of crude oil.  The average NYMEX price of crude oil was
$113.28 per barrel for the nine months ended September 30, 2008, compared with
$66.15 per barrel for the nine months ended September 30,
2007.  Increased volumes transported and marketed, partially offset by
increased costs and expenses discussed below, were the primary factors resulting
in an increase in operating income.




Crude oil marketing margin decreased
$2.6 million, primarily due to increased transportation costs, including
increased fuel costs, partially offset by increased volumes marketed and a $0.7
million increase in unrealized gains relating to marking crude oil grade and
location swap contracts to current market value.  Lubrication oil
sales margin increased $3.4 million on higher volumes primarily due to increased
sales of higher margin specialty chemicals and additional margin resulting from
the acquisition of Quality Petroleum on August 1, 2008.  Crude oil
transportation revenues (prior to intercompany eliminations) increased $19.2
million primarily due to higher transportation volumes on most of our crude oil
gathering systems and increases in the tariff rates on certain systems in 2007
and in July 2008.  Increased transportation revenues on our Red River,
South Texas and Basin systems resulted from movements on higher tariff
segments.  Additionally, the completion of organic growth projects on
our West Texas and South Texas systems increased transportation revenues and
volumes on those systems.  Crude oil terminaling revenues increased
$2.8 million as a result of increased pumpover volumes at Cushing, partially
offset by decreased volumes at Midland due to crude oil market
conditions.  Terminaling volumes increased 11% primarily due to the
completion of three tanks in September 2007, the completion of a tank in August
2008 and as a result of a draw down in inventory at Cushing in September 2008
because several mid-continent and Midwest refiners were unable to obtain U.S.
Gulf of Mexico crude oil supply.




Other operating revenues
increased $1.2 million for the three months ended September 30, 2008, compared
with the three months ended September 30, 2007, primarily due to $0.9 million of
other operating revenues resulting from the Quality Petroleum acquisition on
August 1, 2008 and due to higher revenues from documentation and other services
to support customers’ trading activity at Midland and Cushing.




Costs and expenses increased $4,439.4
million for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007.  Purchases of petroleum products,
discussed above, increased $4,433.6 million compared with the prior year
period.  Operating expenses increased $1.8 million from the prior year
period, primarily due to a $7.5 million increase in pipeline operating and
maintenance expenses primarily related to periodic tank maintenance
requirements,  $1.1 million of expense related to initial project
development costs for Texas Offshore Port System and a $0.4 million increase in
pipeline inspection and repair costs associated with our integrity management
program, partially offset by a $5.7 million decrease in product measurement
losses, a $0.7 million decrease in insurance premiums and a $0.4 million
decrease in labor and benefits expense.  Operating fuel and power
increased $0.3 million primarily as a result of higher fuel costs and higher
transportation volumes.





71





General
and administrative expenses increased $1.4 million, primarily due to a $0.5
million write-off of project costs, a $0.5 million increase in labor and
benefits expense and a $0.3 million increase in professional services and
supplies expense.  Depreciation and amortization expense increased
$1.5 million primarily due to assets placed into service in
2007.  Taxes – other than income taxes increased $0.8 million due to
increases in property tax accruals and a higher property asset base in
2008.





Equity earnings from our investment
in Seaway increased $5.6 million for the nine months ended September 30, 2008,
compared with the nine months ended September 30, 2007.  Equity
earnings from our investment in Seaway increased primarily due to increased
transportation revenues from volumes transported on a spot basis, which are
transported at higher tariff rates, and an increase in long-haul transportation
volumes compared to the prior year period as a result of the unexpected
temporary shutdown of several regional refineries for maintenance and repairs in
the 2007 period. These increases were partially offset by a decrease in
transportation volumes resulting from the effects of Hurricane Ike as discussed
above.  Increased pipeline operating and maintenance expenses,
including expenses of $0.4 million of repairs and maintenance resulting from
Hurricane Ike, were partially offset by lower product measurement
losses.  Long-haul volumes on Seaway averaged 191,941 barrels per day
during the nine months ended September 30, 2008, compared with 136,394 barrels
per day during the nine months ended September 30, 2007.





Other income – net increased $0.7
million for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007, primarily due to the receipt of $0.6 million of
royalty income.





Midstream
Segment





The following table provides financial
information for the Midstream Segment for the three months and nine months ended
September 30, 2008 and 2007 (in thousands):





For
      the Three Months Ended
                            
                            
                            
                            
                            
                            For
      the Nine Months EndedSeptember 30,
                            
                            
                            Increase
                            
                            
                            September
      30,
                            
                            
                            Increase2008
                            
                            
                            2007
                            
                            
                            (Decrease)
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            (Decrease)Operating
      revenues: (1)Gathering
      – Natural gas – Val Verde
                            
                            $
                            14,620
                            
                            
                            $
                            15,429
                            
                            
                            $
                            (809
                            )
                            
                            $
                            42,822
                            
                            
                            $
                            46,289
                            
                            
                            $
                            (3,467
                            )Transportation
      – NGLs (1)
                            
                            
                            12,560
                            
                            
                            
                            12,023
                            
                            
                            
                            537
                            
                            
                            
                            38,218
                            
                            
                            
                            34,062
                            
                            
                            
                            4,156Other
                            
                            
                            3,145
                            
                            
                            
                            3,698
                            
                            
                            
                            (553
                            )
                            
                            
                            9,970
                            
                            
                            
                            10,606
                            
                            
                            
                            (636
                            )Total
      operating revenues
                            
                            
                            30,325
                            
                            
                            
                            31,150
                            
                            
                            
                            (825
                            )
                            
                            
                            91,010
                            
                            
                            
                            90,957
                            
                            
                            
                            53Costs
      and expenses:Operating
      expense
                            
                            
                            6,746
                            
                            
                            
                            7,064
                            
                            
                            
                            (318
                            )
                            
                            
                            16,120
                            
                            
                            
                            21,095
                            
                            
                            
                            (4,975
                            )Operating
      fuel and power
                            
                            
                            4,838
                            
                            
                            
                            3,951
                            
                            
                            
                            887
                            
                            
                            
                            12,999
                            
                            
                            
                            10,537
                            
                            
                            
                            2,462General
      and administrative expense
                            
                            
                            2,196
                            
                            
                            
                            1,850
                            
                            
                            
                            346
                            
                            
                            
                            7,522
                            
                            
                            
                            6,695
                            
                            
                            
                            827Depreciation
      and amortization
                            
                            
                            9,982
                            
                            
                            
                            10,071
                            
                            
                            
                            (89
                            )
                            
                            
                            29,573
                            
                            
                            
                            30,244
                            
                            
                            
                            (671
                            )Taxes
      – other than income taxes
                            
                            
                            760
                            
                            
                            
                            749
                            
                            
                            
                            11
                            
                            
                            
                            2,329
                            
                            
                            
                            2,151
                            
                            
                            
                            178Total
      costs and expenses
                            
                            
                            24,522
                            
                            
                            
                            23,685
                            
                            
                            
                            837
                            
                            
                            
                            68,543
                            
                            
                            
                            70,722
                            
                            
                            
                            (2,179
                            )Operating
      income
                            
                            
                            5,803
                            
                            
                            
                            7,465
                            
                            
                            
                            (1,662
                            )
                            
                            
                            22,467
                            
                            
                            
                            20,235
                            
                            
                            
                            2,232Equity
      earnings – Jonah
                            
                            
                            21,863
                            
                            
                            
                            21,056
                            
                            
                            
                            807
                            
                            
                            
                            67,444
                            
                            
                            
                            62,430
                            
                            
                            
                            5,014Interest
      income
                            
                            
                            97
                            
                            
                            
                            182
                            
                            
                            
                            (85
                            )
                            
                            
                            326
                            
                            
                            
                            459
                            
                            
                            
                            (133
                            )Other
      income – net
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --Earnings
      before interest
                            
                            $
                            27,763
                            
                            
                            $
                            28,703
                            
                            
                            $
                            (940
                            )
                            
                            $
                            90,237
                            
                            
                            $
                            83,124
                            
                            
                            $
                            7,113


______________________________





(1)
            Includes
      transportation revenue from Enterprise Products Partners of $3.4 million,
      $3.5 million, $10.2 million and $13.2 million for the three months and
      nine months ended September 30, 2008 and 2007,
    respectively.











72





The following table presents volume and
average rate information for the three months and nine months ended September
30, 2008 and 2007 (in thousands, except average fee and average rate amounts and
as otherwise indicated):




For
      the Three Months Ended
                
                
                Percentage
                
                
                For
      the Nine Months Ended
                
                
                PercentageSeptember
      30,
                
                
                Increase
                
                
                September
      30,
                
                
                Increase2008
                
                
                2007
                
                
                (Decrease)
                
                
                2008
                
                
                2007
                
                
                (Decrease)Gathering
      – Natural Gas – Jonah: (1)MMcf
                
                
                184,093
                
                
                
                151,845
                
                
                
                21
                %
                
                
                524,668
                
                
                
                424,304
                
                
                
                24
                %BBtus
                
                
                202,536
                
                
                
                167,498
                
                
                
                21
                %
                
                
                579,687
                
                
                
                467,808
                
                
                
                24
                %Average
      fee per MMcf
                
                $
                0.250
                
                
                $
                0.239
                
                
                
                5
                %
                
                $
                0.255
                
                
                $
                0.230
                
                
                
                11
                %Average
      fee per MMBtu
                
                $
                0.228
                
                
                $
                0.216
                
                
                
                5
                %
                
                $
                0.231
                
                
                $
                0.209
                
                
                
                11
                %Gathering
      – Natural Gas – Val Verde: (1)MMcf
                
                
                43,927
                
                
                
                44,225
                
                
                
                (1
                %)
                
                
                123,731
                
                
                
                131,279
                
                
                
                (6
                %)BBtu
                
                
                39,437
                
                
                
                39,311
                
                
                
                --
                
                
                
                110,419
                
                
                
                116,408
                
                
                
                (5
                %)Average
      fee per MMcf
                
                $
                0.333
                
                
                $
                0.349
                
                
                
                (5
                %)
                
                $
                0.346
                
                
                $
                0.353
                
                
                
                (2
                %)Average
      fee per MMBtu
                
                $
                0.371
                
                
                $
                0.392
                
                
                
                (5
                %)
                
                $
                0.388
                
                
                $
                0.398
                
                
                
                (2
                %)Transportation
      – NGLs:Transportation
      barrels
                
                
                14,564
                
                
                
                16,612
                
                
                
                (12
                %)
                
                
                47,085
                
                
                
                47,455
                
                
                
                (1
                %)Lease
      barrels (2)
                
                
                2,528
                
                
                
                3,702
                
                
                
                (32
                %)
                
                
                8,421
                
                
                
                9,370
                
                
                
                (10
                %)Average
      rate per barrel
                
                $
                0.810
                
                
                $
                0.683
                
                
                
                19
                %
                
                $
                0.763
                
                
                $
                0.683
                
                
                
                12
                %Natural
      Gas Sales – Jonah:BBtu
                
                
                1,092
                
                
                
                3,931
                
                
                
                (72
                %)
                
                
                3,934
                
                
                
                11,978
                
                
                
                (67
                %)Average
      fee per MMBtu
                
                $
                5.88
                
                
                $
                3.01
                
                
                
                95
                %
                
                $
                7.06
                
                
                $
                4.28
                
                
                
                65
                %Fractionation
      – NGLs:Barrels
                
                
                1,036
                
                
                
                1,044
                
                
                
                (1
                %)
                
                
                3,180
                
                
                
                3,097
                
                
                
                3
                %Average
      rate per barrel
                
                $
                1.785
                
                
                $
                1.781
                
                
                
                --
                
                
                $
                1.742
                
                
                $
                1.776
                
                
                
                (2
                %)Sales
      – Condensate – Jonah: (3)Barrels
                
                
                1.9
                
                
                
                0.9
                
                
                
                111
                %
                
                
                62.3
                
                
                
                70.6
                
                
                
                (12
                %)Average
      rate per barrel
                
                $
                105.56
                
                
                $
                67.34
                
                
                
                57
                %
                
                $
                84.07
                
                
                $
                54.76
                
                
                
                54
                %


____________________





(1)
            The
      majority of volumes in Val Verde’s contracts are measured in MMcf, while
      the majority of volumes in Jonah’s contracts are measured in
      MMBtu.  Both measures are shown for each asset for comparability
      purposes.


(2)
            Revenues
      associated with capacity leases are classified as other operating revenues
      in our statements of consolidated
income.


(3)
            All
      of Jonah’s condensate volumes are sold to
TCO.





Three
Months Ended September 30, 2008 Compared with Three Months Ended September 30,
2007





Natural gas gathering revenues from the
Val Verde system decreased $0.8 million, and volumes gathered decreased 0.3 Bcf
for the three months ended September 30, 2008, compared with the three months
ended September 30, 2007, primarily due to the natural decline of coal bed
methane production in the fields in which the Val Verde gathering system
operates.  For the three months ended September 30, 2008, Val Verde’s
gathering volumes averaged 478 MMcf per day, compared with 481 MMcf per day for
the three months ended September 30, 2007.  Val Verde’s average
natural gas gathering fees decreased 5% primarily due to higher volumes from a
third party natural gas connection that has lower rates and lower gathering
volumes, partially offset by annual rate escalations.




Revenues from the transportation of
NGLs increased $0.5 million for the three months ended September 30, 2008,
compared with the three months ended September 30, 2007, primarily due to an
increase in the average rate on the Chaparral Pipeline as a result of
transporting a higher percentage of long-haul volumes on the pipeline and
an







73





increase
in the average rate on the Panola Pipeline, partially offset by lower
transportation volumes due to the unexpected reduction of deliveries on the
Chaparral and Panola Pipelines resulting from the effects of Hurricane
Ike.




Other operating revenues decreased $0.6
million for the three months ended September 30, 2008, compared with the three
months ended September 30, 2007, primarily due to decreases on the Chaparral and
Panola Pipelines as a result of decreased revenues and volumes from pipeline
capacity leases.  Volumes transported under pipeline capacity leases
decreased 32% during the three months ended September 30, 2008, compared with
the three months ended September 30, 2007, due to customers shipping less NGLs
under the capacity lease agreements and due to the effects of Hurricane Ike, as
discussed above.





Costs and expenses increased $0.8
million for the three months ended September 30, 2008, compared with the three
months ended September 30, 2007.  Operating expenses decreased $0.3
million from the prior year period, primarily due to a $1.0 million decrease as
a result of lower product measurement losses, a $0.4 million decrease in
pipeline inspection and repair costs associated with our integrity management
program and a $0.4 million decrease in insurance premiums, partially offset by a
$1.2 million LCM adjustment.  Operating fuel and power increased $0.9
million primarily due to higher power costs on the Chaparral
Pipeline.  General and administrative expenses increased $0.3 million
due to higher professional services expense.  Depreciation and
amortization expense and taxes – other than income taxes remained relatively
unchanged between periods.





Equity earnings from our investment
in Jonah increased $0.8 million for the three months ended September 30, 2008,
compared with the three months ended September 30, 2007, primarily due to an
increase in natural gas gathering revenues, partially offset by a $3.5 million
increase in operating, general and administrative expenses and a $3.0 million
increase in depreciation and amortization expense.  For the three
months ended September 30, 2008, our sharing in the earnings of Jonah was
80.64%, compared with 84.18% in the prior year period, as a result of certain
milestones provided for in the joint venture agreement being reached in the
construction of the Phase V expansion (see Note 8 in the Notes to Unaudited
Condensed Consolidated Financial Statements).  Jonah’s depreciation
and amortization expense increased $3.0 million primarily relating to the Phase
V expansion being placed in service.  Jonah’s natural gas gathering
revenues increased $9.8 million and gathering volumes increased 32.2 Bcf
primarily as a result of the completion of the Phase V expansion, partially
offset by a decrease in gathering volumes resulting from the temporary shutdown
of a connecting pipeline system for maintenance.  For the three months
ended September 30, 2008 and 2007, Jonah’s gathering volumes averaged
approximately 2.0 Bcf per day and 1.7 Bcf per day, respectively.





The decrease in Jonah’s natural gas
sales volumes for the three months ended September 30, 2008, compared with the
prior year period, was primarily a result of certain shippers selling gas
themselves, rather than through Jonah.  The increase in Jonah’s
natural gas sales average fee per MMBtu was primarily a result of higher market
prices in the 2008 period.   As a result of lower gathering
system pressures, more condensate was being removed at the wellhead and sold by
producers, instead of being gathered by Jonah, resulting in a decrease in
Jonah’s condensate sales volumes from the prior year period.  The
increase in Jonah’s average condensate rate per barrel was primarily a result of
higher market prices in the current period compared with the three months ended
September 30, 2007.





Nine Months Ended September 30, 2008
Compared with Nine Months Ended September 30, 2007





Natural gas gathering revenues from the
Val Verde system decreased $3.5 million, and volumes gathered decreased 7.5 Bcf
for the nine months ended September 30, 2008, compared with the nine months
ended September 30, 2007, primarily due to lower production as a result of more
severe winter weather during the first quarter of 2008 and the natural decline
of coal bed methane production in the fields in which the Val Verde gathering
system operates.  For the nine months ended September 30, 2008, Val
Verde’s gathering volumes averaged 452 MMcf per day, compared with 481 MMcf per
day for the nine months ended September 30, 2007.  Val Verde’s average
natural gas gathering fees decreased 2% primarily due to higher volumes from a
third party natural gas connection that has lower rates and lower gathering
volumes, partially offset by annual rate escalations.







74





Revenues from the transportation of
NGLs increased $4.2 million for the nine months ended September 30, 2008,
compared with the nine months ended September 30, 2007, primarily due to an
increase in the average rate on the Chaparral Pipeline as a result of
transporting a higher percentage of long-haul volumes on the system and an
increase in the average rate on the Panola Pipeline, partially offset by lower
transportation volumes due to the unexpected reduction of deliveries on the
Chaparral and Panola Pipelines resulting from the effects of Hurricane Ike, as
discussed above.




Other
operating revenues decreased $0.6 million for the nine months ended September
30, 2008, compared with the nine months ended September 30, 2007, primarily due
to decreases on the Chaparral and Panola Pipelines as a result of decreased
revenues and volumes from pipeline capacity leases.  Volumes
transported under pipeline capacity leases decreased 10% during the nine months
ended September 30, 2008, compared with the nine months ended September 30,
2007, due to customers shipping less NGLs under the capacity lease agreements
and due to the effects of Hurricane Ike.





Costs and expenses decreased $2.2
million for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007.  Operating expenses decreased $5.0
million from the prior year period, primarily due to a $4.5 million decrease as
a result of lower product measurement losses, a $2.3 million decrease in
insurance premiums, a $1.4 million decrease in pipeline inspection and repair
costs associated with our integrity management program and a $0.7 million
decrease in labor and benefits expense, partially offset by a $2.5 million
increase in pipeline operating and maintenance expenses and $1.3 million in LCM
adjustments.  Operating fuel and power increased $2.5 million
primarily due to higher power costs on the Chaparral
Pipeline.  General and administrative expenses increased $0.8 million
primarily due to higher labor and benefits expense and higher professional
services expense.  Depreciation and amortization expense decreased
$0.7 million primarily due to a decrease in amortization expense on Val Verde as
a result of a decrease in volumes on contracts which are included in intangible
assets and amortized under the units-of-production method.  Taxes –
other than income taxes increased $0.2 million primarily due to true-ups of
property tax accruals.





Equity earnings from our investment
in Jonah increased $5.0 million for the nine months ended September 30, 2008,
compared with the nine months ended September 30, 2007.  Earnings
increased primarily due to a $36.4 million increase in natural gas gathering
revenues and an increase in volumes from the completion of the Phase V
expansion, partially offset by an $11.6 million increase in depreciation and
amortization expense primarily relating to portions of the Phase V expansion
being placed in service as they were completed and a $3.2 million increase in
operating, general and administrative expenses.  For the nine months
ended September 30, 2008 and 2007, Jonah’s gathering volumes averaged
approximately 1.9 Bcf per day and 1.5 Bcf per day, respectively, and total
volumes gathered increased 100.3 Bcf.  For the nine months ended
September 30, 2008, our sharing in the earnings of Jonah was 80.64%, compared
with 93.26% in the prior year period, as a result of certain milestones provided
for in the joint venture agreement being reached in the construction of the
Phase V expansion (see Note 8 in the Notes to Unaudited Condensed Consolidated
Financial Statements).





The decrease in Jonah’s natural gas
sales volumes for the nine months ended September 30, 2008, compared with the
prior year period, was primarily a result of certain shippers selling gas
themselves, rather than through Jonah.  The increase in Jonah’s
natural gas sales average fee per MMBtu was primarily a result of higher market
prices in the 2008 period.  As a result of lower gathering system
pressures, more condensate was being removed at the wellhead and sold by
producers, instead of being gathered by Jonah, resulting in a decrease in
Jonah’s condensate sales volumes from the prior year period.  The
increase in Jonah’s average condensate rate per barrel was primarily a result of
higher market prices in the current period compared with the nine months ended
September 30, 2007.





Marine
Services Segment





We conduct business in our Marine
Services Segment through TEPPCO Marine Services.  Demand for our
marine transportation services is driven primarily by demand for refined
products, crude oil and other hydrocarbon-based products in the areas in which
we operate.  We generate revenue in this segment primarily by
charging





75





customers
for the inland and offshore transportation and distribution of their products
utilizing our 113 tank barges and 51 tow boats.  We also provide
offshore well-testing and other offshore services.  Approximately 6 of
our tow boats and 8 of our tank barges are dedicated to offshore
activities.   We do not assume ownership of the products we
transport in this segment.





Our transportation services are
generally provided under term contracts (also referred to as affreightment
contracts), which are agreements with specific customers to transport cargo from
within designated operating areas at set day rates or a set fee per cargo
movement.  Most of the inland term contracts have one-year terms with
the remainder having terms of up to two years.  Substantially all of
the inland contracts have renewal options, which are exercisable subject to
agreement on rates applicable to the option terms.  Since our
acquisition of Cenac and Horizon (see Note 9 in the Notes to Unaudited Condensed
Consolidated Financial Statements), as the customer contracts become subject to
annual renewal, we have obtained renewals of substantially all contracts at
increased day rates.  Most of the offshore service and transportation
contracts have up to one-year terms with renewal options, which are exercisable
subject to agreement on rates applicable to the option terms, or are spot
contracts.  A spot contract is an agreement with a customer to move
cargo within designated operating areas for a rate negotiated at the time the
cargo movement takes place.





As is typical for inland and offshore
affreightment contracts, the term contracts establish set day rates but do not
include revenue or volume guarantees.  Most of the contracts include
escalation provisions to recover specific increased operating costs such as
incremental increases in labor.  The costs of fuel and other specified
operational fees and costs are directly reimbursed by the customer under most of
the contracts.  We are responsible for the remaining operating costs,
such as equipment maintenance costs, various inspection costs, the cost of
maintaining insurance coverage on the vessels under these contracts, and for
other operating costs under our other contracts that do not contain such
reimbursement or escalation provisions.





The following table provides financial
information for the Marine Services Segment for the three months and nine months
ended September 30, 2008 and 2007 (in thousands):





For
      the Three Months Ended
                
                
                
                
                
                For
      the Nine Months EndedSeptember
      30,
                
                
                Increase
                
                
                September
      30,
                
                
                Increase2008
                
                
                2007
                
                
                (Decrease)
                
                
                2008
                
                
                2007
                
                
                (Decrease)Operating
      revenues:Transportation
      – Marine
                
                $
                46,018
                
                
                $
                --
                
                
                $
                46,018
                
                
                $
                119,584
                
                
                $
                --
                
                
                $
                119,584Other
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                6
                
                
                
                --
                
                
                
                6Total
      operating revenues
                
                
                46,018
                
                
                
                --
                
                
                
                46,018
                
                
                
                119,590
                
                
                
                --
                
                
                
                119,590Costs
      and expenses:Operating
      expense
                
                
                18,199
                
                
                
                --
                
                
                
                18,199
                
                
                
                45,794
                
                
                
                --
                
                
                
                45,794Operating
      fuel and power
                
                
                10,197
                
                
                
                --
                
                
                
                10,197
                
                
                
                27,916
                
                
                
                --
                
                
                
                27,916General
      and administrative
                
                
                2,305
                
                
                
                --
                
                
                
                2,305
                
                
                
                4,119
                
                
                
                --
                
                
                
                4,119Depreciation
      and amortization
                
                
                6,257
                
                
                
                --
                
                
                
                6,257
                
                
                
                16,345
                
                
                
                --
                
                
                
                16,345Taxes
      – other than income taxes
                
                
                706
                
                
                
                --
                
                
                
                706
                
                
                
                1,844
                
                
                
                --
                
                
                
                1,844Total
      costs and expenses
                
                
                37,664
                
                
                
                --
                
                
                
                37,664
                
                
                
                96,018
                
                
                
                --
                
                
                
                96,018Operating
      income
                
                
                8,354
                
                
                
                --
                
                
                
                8,354
                
                
                
                23,572
                
                
                
                --
                
                
                
                23,572Interest
      income
                
                
                5
                
                
                
                --
                
                
                
                5
                
                
                
                11
                
                
                
                --
                
                
                
                11Earnings
      before interest
                
                $
                8,359
                
                
                $
                --
                
                
                $
                8,359
                
                
                $
                23,583
                
                
                $
                --
                
                
                $
                23,583





Three
Months Ended September 30, 2008 Compared with Three Months Ended September 30,
2007





Revenues from marine transportation
were $46.0 million for the three months ended September 30, 2008, of which $41.6
million related to inland transportation services and $4.4 million related to
offshore transportation and





76





well-testing
services.  Inland and offshore transportation service revenue included
$11.2 million and $0.4 million, respectively, of reimbursements for the cost of
fuel and other specified operational fees reimbursed by
customers.  Revenues were primarily influenced by rates on term
contracts along with industry demand, high utilization rates of tank barges and
reimbursements of costs of fuel and other specified operational fees that are
recovered under most of the transportation contracts.





Costs and expenses were $37.7 million
for the three months ended September 30, 2008.  Operating expenses
were $18.2 million, consisting primarily of $9.2 million of payments under the
transitional operating agreement for vessel personnel salaries, related employee
benefits and other expenses, $2.7 million of tow boat and tank barge maintenance
expenses, $2.2 million in operating supplies and expenses, $1.8 million for
third-party services, and $0.7 million in insurance premiums.  Under
the transitional operating agreement, we reimburse Cenac for personnel salaries
and related employee benefit expenses, certain repairs and maintenance expenses
and insurance premiums on our equipment, as well as payment of a monthly service
fee.  Operating fuel and power was $10.2 million relating to diesel
fuel consumed under the term contracts, under which substantially all fuel costs
are directly reimbursed by the customer to recover the cost of
fuel.  General and administrative expenses were $2.3 million,
consisting primarily of a $1.3 million write-off of receivables as a result of a
customer bankruptcy and the remainder being the monthly service fee and overhead
fees that we paid to Cenac under the transitional operating
agreement.  Depreciation and amortization expense was $6.3 million,
consisting of $4.3 million of depreciation expense on tow boats and tank barges
and $2.0 million of amortization expense related to customer relationship
intangible assets, non-compete agreements and other intangible assets acquired
in the Cenac and Horizon acquisitions.  Taxes – other than income
taxes was $0.7 million and related primarily to payroll taxes.





Nine
Months Ended September 30, 2008 Compared with Nine Months Ended September 30,
2007





Revenues from marine transportation
were $119.6 million for the nine months ended September 30, 2008, of which
$101.9 million related to inland transportation services and $17.7 million
related to offshore transportation  and well-testing
services.   Inland and offshore transportation service revenue
included $30.2 million and $1.7 million, respectively, of reimbursements for the
cost of fuel and other specified operational fees reimbursed by
customers.  Revenues were primarily influenced by rates on term
contracts along with industry demand, high utilization rates of tank barges and
reimbursements of costs of fuel and other specified operational fees that are
recovered under most of the transportation contracts.





Costs and expenses were $96.0 million
for the nine months ended September 30, 2008.  Operating expenses were
$45.8 million, consisting primarily of $25.6 million of payments under the
transitional operating agreement for vessel personnel salaries, related employee
benefits and other expenses, $6.2 million for third-party services, $5.7 million
of tow boat and tank barge maintenance expenses, $5.1 million in operating
supplies and expenses, and $1.9 million in insurance
premiums.  Operating fuel and power was $27.9 million relating to
diesel fuel consumed under the term contracts, under which substantially all
fuel costs are directly reimbursed by the customer to recover the cost of
fuel.  General and administrative expenses were $4.1 million,
consisting primarily of $2.8 million related to the monthly service fee and
overhead fees that we paid to Cenac under the transitional operating agreement
and a $1.3 million write-off of receivables as a result of a customer
bankruptcy.  Depreciation and amortization expense was $16.3 million,
consisting of $11.0 million of depreciation expense on tow boats and tank barges
and $5.3 million of amortization expense related to customer relationship
intangible assets, non-compete agreements and other intangible assets acquired
in the Cenac and Horizon acquisitions.  Taxes – other than income
taxes was $1.8 million and related primarily to payroll taxes.








77





Interest
Expense and Capitalized Interest





Three
Months Ended September 30, 2008 Compared with Three Months Ended September 30,
2007





Interest expense increased $9.7 million
for the three months ended September 30, 2008, compared with the three months
ended September 30, 2007, primarily due to higher outstanding borrowings in the
2008 period, partially offset by lower short-term floating interest rates in the
2008 period.





Capitalized interest (included in
interest expense, net in our statements of consolidated income) increased $2.3
million for the three months ended September 30, 2008, compared with the three
months ended September 30, 2007, primarily due to higher construction
work-in-progress balances in the 2008 period as compared to the 2007
period.





Nine
Months Ended September 30, 2008 Compared with Nine Months Ended September 30,
2007





Interest expense increased $39.4
million for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007, primarily due to higher outstanding borrowings
in the 2008 period and $8.7 million in interest expense recognized upon the
redemption of the 7.51% TE Products Senior Notes on January 28,
2008.  Of the $8.7 million of expense, $6.6 million related to a
make-whole premium paid with the redemption of the senior notes (see Note 11 in
the Notes to Unaudited Condensed Consolidated Financial Statements), $1.0
million related to the remaining unamortized interest rate swap loss that had
been deferred as an adjustment to the carrying value of the senior notes (see
Note 5 in the Notes to Unaudited Condensed Consolidated Financial Statements)
and $1.1 million related to unamortized debt issuance costs on the senior
notes.  Additionally, the increase in interest expense was due to $3.6
million of interest expense in the 2008 period resulting from interest payments
hedged under treasury locks not occurring as forecasted (see Note 5 in the Notes
to Unaudited Condensed Consolidated Financial Statements).  These
increases were partially offset by lower short-term floating interest rates in
the 2008 period.





Capitalized interest (included in
interest expense, net in our statements of consolidated income) increased $5.4
million for the nine months ended September 30, 2008, compared with the nine
months ended September 30, 2007, primarily due to higher construction
work-in-progress balances in the 2008 period as compared to the 2007
period.





Income
Taxes – Revised Texas Franchise Tax





Provision for income taxes is
applicable to our state tax obligations under the Revised Texas Franchise Tax
enacted in May 2006.  At September 30, 2008 and December 31, 2007, we
had current tax liabilities of $2.3 million and $1.2 million, respectively, and
deferred tax assets of less than $0.1 million and less than $0.1 million,
respectively.  During the three months and nine months ended September
30, 2008 and 2007, we recorded increases in current income tax liabilities of
$1.1 million, less than $0.1 million, $2.9 million and $0.9 million,
respectively.  During the nine months ended September 30, 2007, we
recorded a $0.7 million reduction to deferred tax liability.  The
offsetting net charges to deferred tax expense and income tax expense are shown
on our statements of consolidated income as provision for income
taxes.




Financial
Condition and Liquidity




Cash generated from operations,
borrowings under our credit facilities and debt and equity offerings are our
primary sources of liquidity.  At September 30, 2008 and December 31,
2007, we had working capital deficits of $7.8 million and $431.2 million,
respectively.  Of the $431.2 million deficit at December 31, 2007,
$354.0 million related to the classification of the TE Products’ Senior Notes as
short-term (see Note 11 in the Notes to Unaudited Condensed Consolidated
Financial Statements and Credit Facilities below).  At September 30,
2008, we had approximately $600.0 million in available borrowing capacity under
our variable rate revolving credit facility to cover any working capital needs
(see Note 11 in the Notes to Unaudited Condensed Consolidated
Financial





78





Statements
and Credit Facilities below).  Cash flows for the nine months ended
September 30, 2008 and 2007 were as follows (in thousands):





For
      the Nine Months EndedSeptember
      30,2008
                
                
                2007Cash
      provided by (used in):Operating
      activities
                
                $
                294,869
                
                
                $
                219,186Investing
      activities
                
                
                (673,758
                )
                
                
                (182,643
                )Financing
      activities
                
                
                378,921
                
                
                
                (36,585
                )





Operating
Activities





Net cash flow provided by operating
activities was $294.9 million for the nine months ended September 30, 2008
compared to $219.2 million for the nine months ended September 30,
2007.  The following were the principal factors resulting in the $75.7
million increase in net cash flows provided by operating
activities:




§
            Cash
      flow from operating activities increased due to the timing of cash
      receipts and cash disbursements related to working capital
      components.





§
            Cash
      distributions received from unconsolidated affiliates increased $22.0
      million. Distributions from our equity investment in Jonah increased $34.2
      million primarily due to increased revenues and volumes generated from
      completion of the Phase V expansion.  Distributions received
      from our equity investment in Seaway decreased $1.8 million primarily due
      to its operating cash requirements.   In the 2007 period,
      we received distributions from our equity investment in MB Storage of
      $10.4 million.  We sold our interest in MB Storage on March 1,
      2007.





§
            Cash
      paid for interest, net of amounts capitalized, increased $8.8 million
      period-to-period primarily due to the increase in debt outstanding,
      including higher outstanding balances on our variable rate revolving
      credit facility.  Excluding the effects of hedging activities
      and interest capitalized during the year ended December 31, 2008, we
      expect interest payments on our fixed rate senior notes and junior
      subordinated notes for 2008 to be approximately $123.1
      million.  We expect to make our interest payments with cash
      flows from operating activities.





Investing
Activities




Net cash flow used in investing
activities was $673.8 million for the nine months ended September 30, 2008
compared to $182.6 million for the nine months ended September 30,
2007.  The following were the principal factors resulting in the
$491.2 million increase in net cash flows used in investing
activities:




§
            Cash
      used for business combinations was $351.9 million during the nine months
      ended September 30, 2008, of which $258.1 million was for the Cenac
      acquisition, $87.5 million was for the Horizon acquisition and $6.3
      million was for the Quality Petroleum acquisition in August 2008 (see Note
      9 in the Notes to Unaudited Condensed Consolidated Financial
      Statements).




§
            Capital
      expenditures increased $51.0 million primarily due to an increase in
      organic growth projects period-to-period and higher spending to sustain
      existing operations, including pipeline integrity (see “Other
      Considerations – Future Capital Needs and Commitments”
      below).  Cash paid for linefill on assets owned decreased $15.1
      million period-to-period primarily due to the timing of completion of
      organic growth projects in our Upstream
Segment.




§
            Proceeds
      from the sales of assets and ownership interests during the nine months
      ended September 30, 2007 were $165.1 million, which includes $137.3
      million from the sale of TE Products’
ownership







79





interests
      in MB Storage and its general partner and $18.5 million for the sale of
      other Downstream Segment assets, all to Louis Dreyfus on March 1, 2007;
      $8.0 million for the sale of Downstream Segment assets to Enterprise
      Products Partners in January 2007 (see Note 9 in the Notes to Unaudited
      Condensed Consolidated Financial Statements) and $1.3 million for the sale
      of various Upstream Segment assets in the third quarter of
      2007.




§
            Investments
      in unconsolidated affiliates decreased $44.0 million, which includes an
      $11.1 million decrease in contributions to Centennial and a $32.9 million
      decrease in contributions to Jonah primarily related to timing of capital
      expenditures on its Phase V expansion.  During the nine months
      ended September 30, 2007, TE Products contributed $11.1 million to
      Centennial, of which $6.1 million was for contractual obligations that
      were created upon formation of Centennial and $5.0 million was for debt
      service requirements.




§
            Cash
      paid for the acquisition of assets for the nine months ended September 30,
      2007 was $12.7 million, of which $6.0 million was for Downstream Segment
      assets and $6.7 million was for Upstream Segment
  assets.




§
            During
      the nine months ended September 30, 2008 and 2007, we paid $0.3 million
      and $2.5 million, respectively, related to customer reimbursable
      commitments.





§
            At
      September 30, 2007, we had restricted cash of $2.9 million related to a
      U.S. Department of Justice penalty that was subsequently paid in the
      fourth quarter of 2007.





Financing
Activities




Cash flows provided by financing
activities totaled $378.9 million for the nine months ended September 30, 2008,
compared to cash flows used in financing activities of $36.6 million for the
nine months ended September 30, 2007.  The following were the
principal factors resulting in the $415.5 million increase in cash provided by
financing activities:





§
            During
      the nine months ended September 30, 2008, we used $1.0 billion of proceeds
      from our term credit agreement (i) to fund the cash portion of our Cenac
      and Horizon acquisitions, (ii) to fund the redemption of our 7.51% TE
      Products Senior Notes in January 2008 and the repayment of our 6.45% TE
      Products Senior Notes, which matured in January 2008, (iii) to repay $63.2
      million of debt assumed in the Cenac acquisition, and (iv) for other
      general partnership purposes.  We used the proceeds from the
      issuance of senior notes in March 2008 to repay the outstanding balance of
      $1.0 billion under the term credit agreement (see Note 11 in the Notes to
      Unaudited Condensed Consolidated Financial Statements).  Debt
      issuance costs paid during the nine months ended September 30, 2008 were
      $9.9 million.





§
            We
      received $295.8 million from the issuance in May 2007 of our 7.000% junior
      subordinated notes due September 2067 (net of debt issuance costs of $3.8
      million) (see Note 11 in the Notes to Unaudited Condensed Consolidated
      Financial Statements).





§
            Net
      repayments under our revolving credit facility increased $52.3
      million.





§
            We
      paid $52.1 million to settle treasury locks in March 2008 (see Note 5 in
      the Notes to Unaudited Condensed Consolidated Financial Statements) upon
      the issuance of senior notes.  We received $1.4 million in
      proceeds from the termination of treasury locks in May 2007, and we paid
      $1.2 million for the termination of an interest rate swap in September
      2007.





§
            Cash
      distributions to our partners increased $17.2 million period-to-period due
      to an increase in the number of Units outstanding and an increase in our
      quarterly cash distribution rate per Unit.  We
    paid





80





cash
      distributions of $236.8 million ($2.115 per Unit) and $219.6 million
      ($2.045 per Unit) during the nine months ended September 30, 2008 and
      2007, respectively.  Additionally, we declared a cash
      distribution of $0.725 per Unit for the quarter ended September 30,
      2008.  We paid the distribution of $91.2 million on November 6,
      2008 to unitholders of record on October 31,
  2008.





§
            We
      received $257.0 million in net proceeds from an underwritten equity
      offering in September 2008 from the public issuance of 9.2 million Units
      (see Note 12 in the Notes to Unaudited Condensed Consolidated Financial
      Statements) and $7.0 million from the sale of 241,380 unregistered Units
      to TEPPCO Unit (see Note 3 in the Notes to Unaudited Condensed
      Consolidated Financial Statements).





§
            Net
      proceeds from to the issuance of Units to employees under the employee
      unit purchase plan and the issuance of Units in connection with our
      distribution reinvestment plan (“DRIP”) were $7.3 million for the nine
      months ended September 30, 2008, compared to $0.1 million for the nine
      months ended September 30, 2007 (see Note 12 in the Notes to Unaudited
      Condensed Consolidated Financial
Statements).





Other
Considerations





Equity
Offering and Registration Statement





In September 2008, we filed a universal
shelf registration statement with the SEC that allows us to issue an unlimited
amount of debt and equity securities and removed from registration securities
remaining under our previous universal shelf registration
statement.





On
September 9, 2008, we issued and sold in an underwritten public offering 9.2
million Units at a price to the public of $29.00 per Unit, including 1.2 million
Units sold upon exercise of the underwriters’ over-allotment option granted in
connection with the offering.  The proceeds from the offering, net of
underwriting discount and offering expenses, totaled approximately $257.0
million.  Concurrently with this offering, we sold 241,380
unregistered Units at the public offering price of $29.00 to TEPPCO Unit (see
“Recent Developments” above).   The net proceeds from the
offering and the unregistered issuance to TEPPCO Unit were used to reduce
indebtedness under our revolving credit facility.





We also
have on file with the SEC a registration statement registering the issuance
of up to 10,000,000 Units in connection with our DRIP.  The DRIP
provides unitholders of record and beneficial owners of our Units a voluntary
means by which they can increase the number of Units they own by reinvesting the
quarterly cash distributions they would otherwise receive into the purchase of
additional Units of our Partnership.  As of September 30, 2008,
245,084 Units have been issued since the implementation of the DRIP,
generating $7.3 million in net proceeds that we used for general partnership
purposes.  In November 2008, affiliates of EPCO reinvested $3.3
million in Units issued under the DRIP.





Credit
Facilities





We have in place an unsecured revolving
credit facility, including the issuance of letters of credit (“Revolving Credit
Facility”), which matures on December 12, 2012.  The Revolving Credit
Facility allows us to request unlimited one-year extensions of the maturity
date, subject to lender approval and satisfaction of certain other
conditions.  In July 2008, we received confirmations from
participating lenders making effective our exercise of the accordion feature
under the facility, and increased the bank commitments thereunder from $700.0
million to $950.0 million.  The aggregate outstanding principal amount
of swing line loans or same day borrowings permitted under the Revolving Credit
Facility is $40.0 million.  The interest rate is based, at our option,
on either the lender’s base rate, or LIBOR rate, plus a margin, in effect at the
time of the borrowings.  At September 30, 2008, $324.7 million was
outstanding under the Revolving Credit Facility at a weighted average interest
rate of 3.56%, leaving





81





approximately
$600.0 million in available borrowing capacity.  At September 30,
2008, we were in compliance with the covenants of the Revolving Credit
Facility.





During
September 2008, Lehman Brothers Bank, FSB (“Lehman”), which had a 4.05%
participation in our Revolving Credit Facility, stopped funding its commitment
following the bankruptcy filing of its parent.  Assuming that future
fundings are not received for the Lehman percentage commitment, aggregate
available capacity would be reduced by approximately $38.5 million.





We had in place a senior unsecured term
credit agreement (“Term Credit Agreement”), with a borrowing capacity of $1.0
billion and a maturity date of December 19, 2008.  During the first
quarter of 2008, we borrowed $1.0 billion to finance the retirement of TE
Products’ senior notes, the cash portion of our Cenac and Horizon acquisitions
and other partnership purposes.  In March 2008, we repaid the
outstanding balance with proceeds from the issuance of senior notes and other
cash on hand and terminated the credit agreement.





See Note 11 in the Notes to Unaudited
Condensed Consolidated Financial Statements for further information on these
credit facilities.





Senior
Notes





On March 27, 2008, we issued and sold
in an underwritten public offering (i) $250.0 million principal amount of 5.90%
Senior Notes due 2013, (ii) $350.0 million principal amount of 6.65% Senior
Notes due 2018, and (iii) $400.0 million principal amount of 7.55% Senior Notes
due 2038.  The proceeds of this offering were used to repay borrowings
outstanding under our Term Credit Agreement, which was terminated in March 2008
(see Note 11 in the Notes to Unaudited Condensed Consolidated Financial
Statements).  The Senior Notes were issued at discounts of $0.2
million, $1.3 million and $2.2 million, respectively, and are being accreted to
their face value over the applicable terms of the senior notes.  The
senior notes may be redeemed at any time at our option with the payment of
accrued interest and a make-whole premium determined by discounting remaining
interest and principal payments using a discount rate equal to the rate of the
United States Treasury securities of comparable remaining maturity plus 50 basis
points.  The indentures governing our senior notes contain covenants,
including, but not limited to, covenants limiting the creation of liens securing
indebtedness and sale and leaseback transactions.  However, the
indentures do not limit our ability to incur additional
indebtedness.  At September 30, 2008, we were in compliance with the
covenants of these senior notes.





Retirement
of TE Products Senior Notes





In January 2008, TE Products retired
all of its outstanding debt by repaying at maturity $180.0 million principal
amount of its 6.45% TE Products Senior Notes due 2008 and redeeming the
remaining $175.0 million principal amount of its 7.51% TE Products Senior Notes
due 2028.  The redemption price for the 7.51% TE Products Senior Notes
due 2028 was 103.755% of the principal amount plus accrued and unpaid interest
to January 28, 2008, the date of redemption.  We funded the retirement
of the TE Products debt with borrowings under our Term Credit
Agreement.  For further information, please see Note 11 in the Notes
to Unaudited Condensed Consolidated Financial Statements.





Future
Capital Needs and Commitments





We estimate that capital expenditures,
excluding acquisitions and joint venture contributions, for 2008 will be in the
range of $310.0 million to $330.0 million (including approximately $14.0 million
of capitalized interest).  Excluding capitalized interest, we expect
to spend in the range of $233.0 million to $253.0 million for revenue generating
projects, which includes $133.0 million for our expected spending on the Motiva
project.  We expect to spend approximately $53.0 million to sustain
existing operations (including $19.0 million for pipeline integrity) including
life-cycle replacements for equipment at various facilities and pipeline and
tank replacements among all of our business segments.  We expect to
spend approximately $10.0 million to improve operational efficiencies and reduce
costs among all of our business segments.





82





Additionally, we expect to invest
approximately $132.0 million (including approximately $5.0 million of
capitalized interest) in our Jonah joint venture during 2008 for the completion
of the Phase V expansion and additional facilities to expand the Pinedale field
production.   We expect to invest approximately $42.0 million in
2008 as our net contribution to our Texas Offshore Port System joint venture for
preliminary project costs.





During the remainder of 2008, TE
Products may be required to contribute cash to Centennial to cover capital
expenditures, debt service requirements or other operating needs.  We
continually review and evaluate potential capital improvements and expansions
that would be complementary to our present business operations.  These
expenditures can vary greatly depending on the magnitude of our
transactions.  We may finance capital expenditures through internally
generated funds, debt or the issuance of additional equity.





Liquidity
Outlook




Our primary cash requirements consist
of (i) ordinary course operating uses, such as operating expenses, capital
expenditures to sustain existing operations, interest payments on our
outstanding debt and distributions to our unitholders and General Partner, (ii)
growth expenditures, such as capital expenditures for revenue generating
activities (such as for Jonah and Texas Offshore Port System), and acquisitions
of new assets or businesses and (iii) repayment of principal on our long-term
debt.  Our ordinary course operating cash requirements for 2008 are
expected to be funded through our cash flows from operating
activities.  We expect cash requirements for growth expenditures and
long-term debt repayments will be funded by a combination of several sources,
including cash flows from operating activities, borrowings under credit
facilities, joint venture distributions, the issuance of additional equity and
debt securities, and the possible disposition of assets.  See Note 11
in the Notes to Unaudited Condensed Consolidated Financial
Statements.
  Our ability to maintain adequate
liquidity depends on our ability to have continued access to the financial
markets and continue to generate cash from operations, both of which are subject
to a number of factors, including prevailing market conditions, the possibility
of a prolonged economic slowdown and general competitive, legislative,
regulatory and other market factors that are beyond our control.  See
Item 1A, Part II.  Risk Factors.
  Recent
volatility in the global capital markets has resulted in a significant increase
in the costs of incremental debt and equity capital.  We expect that
the current cost of capital should trend lower in the coming months as
coordinated government-led funding programs are implemented
worldwide.  As the capital markets begin to recover, we believe that
we will have sufficient access to debt and equity capital to support our
expected growth expenditures.  In addition, we have the flexibility to
reprioritize certain planned growth projects.  Our disciplined
approach to funding capital spending and other partnership needs, combined with
sufficient trade credit to operate our businesses efficiently and available
credit under our Revolving Credit Facility, should provide us with a solid
foundation to meet our anticipated liquidity and capital resource
requirements.


Off-Balance
Sheet Arrangements




We do not rely on off-balance sheet
borrowings to fund our acquisitions.  We have no material off-balance
sheet commitments for indebtedness other than the limited guaranty of Centennial
debt and the limited guarantee of Centennial catastrophic events as discussed
below.  In addition, we have entered into various operating leases
covering assets utilized in several areas of our operations.




At September 30, 2008 and December 31,
2007, Centennial’s debt obligations consisted of $132.5 million and $140.0
million, respectively, borrowed under a master shelf loan
agreement.  In January 2008, we entered into an amended and restated
guaranty agreement (“Amended Guaranty”) with Centennial’s lenders, under which
we, TE Products, TEPPCO Midstream and TCTM (collectively, the “TEPPCO
Guarantors”) are required, on a joint and several basis, to pay 50% of any
past-due amount under Centennial’s master shelf loan agreement not paid by
Centennial.  The Amended Guaranty also has a credit maintenance
requirement whereby we may be required to provide additional credit support in
the form of a letter of credit or pay certain fees if either of our credit
ratings from







83





Standard
& Poor’s Ratings Group (“S&P”) and Moody’s Investors Service, Inc.
(“Moody’s”) falls below investment grade levels as specified in the Amended
Guaranty.  If Centennial defaults on its debt obligations, the
estimated maximum potential amount of future payments for the TEPPCO Guarantors
and Marathon Petroleum Company LLC (“Marathon”) is $66.2 million each at
September 30, 2008.  At September 30, 2008, we have a liability of
$9.1 million, which is based upon the expected present value of amounts we would
have to pay under the guarantee.




TE Products, Marathon and Centennial
have also entered into a limited cash call agreement, which allows each member
to contribute cash in lieu of Centennial procuring separate insurance in the
event of a third-party liability arising from a catastrophic
event.  There is an indefinite term for the agreement and each member
is to contribute cash in proportion to its ownership interest, up to a maximum
of $50.0 million each.  As a result of the catastrophic event
guarantee, at September 30, 2008, TE Products has a liability of $3.9 million,
which is based upon the expected present value of amounts we would have to pay
under the guarantee.  If a catastrophic event were to occur and we
were required to contribute cash to Centennial, such contributions might be
covered by our insurance (net of deductible), depending upon the nature of the
catastrophic event.




One of our subsidiaries, TCO, has
entered into master equipment lease agreements with finance companies for the
use of various pieces of equipment.  Lease expense related to this
equipment is approximately $5.2 million per year.  We have guaranteed
the full and timely payment and performance of TCO’s obligations under the
agreements.  Generally, events of default would trigger our
performance under the guarantee.  The maximum potential amount of
future payments under the guarantee is not estimable, but would include base
rental payments for both current and future equipment, stipulated loss payments
in the event any equipment is stolen, damaged, or destroyed and any future
indemnity payments.  We carry insurance coverage that may offset any
payments required under the guarantees.  We do not believe that any
performance under the guarantee would have a material effect on our financial
condition, results of operations or cash flows.




Contractual
Obligations




We lease
certain property, plant and equipment under noncancelable and cancelable
operating leases.  Lease expense is charged to operating costs and
expenses on a straight line basis over the period of expected economic
benefit.  Contingent rental payments are expensed as
incurred.  Total rental expense included in operating costs and
expenses was $4.6 million, $4.0 million, $15.2 million and $17.6 million for the
three months and nine months ended September 30, 2008 and 2007,
respectively.  There have been no material changes in our operating
lease commitments since December 31, 2007.




In March 2008, we issued $1.0 billion
of senior notes due in 2013, 2018 and 2038 (see Note 11 in the Notes to
Unaudited Condensed Consolidated Financial Statements).  Other than
the issuance of these senior notes and the expected contributions in 2008 to the
Texas Offshore Port System joint venture discussed above, there have been no
significant changes in our schedule of maturities of long-term debt or other
contractual obligations since the year ended December 31, 2007.










84





The following table summarizes our debt
repayment obligations as of September 30, 2008 (in thousands):





Amount
      of Commitment Expiration Per PeriodTotal
                
                
                Less
      than 1
                  Year
                
                
                1-3
      Years
                
                
                4-5
      Years
                
                
                After
      5 YearsRevolving
      Credit Facility, due 2012
                
                $
                324,717
                
                
                $
                --
                
                
                $
                --
                
                
                $
                324,717
                
                
                $
                --7.625%
      Senior Notes due 2012 (1)
                
                
                500,000
                
                
                
                --
                
                
                
                --
                
                
                
                500,000
                
                
                
                --6.125%
      Senior Notes due 2013 (1)
                
                
                200,000
                
                
                
                --
                
                
                
                --
                
                
                
                200,000
                
                
                
                --5.90%
      Senior Notes, due 2013 (1)
                
                
                250,000
                
                
                
                --
                
                
                
                --
                
                
                
                250,000
                
                
                
                --6.65%
      Senior Notes, due 2018 (1)
                
                
                350,000
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                350,0007.55%
      Senior Notes, due 2038 (1)
                
                
                400,000
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                400,0007.00%
      Junior Subordinated Notes due 2067 (1)
                
                
                300,000
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                300,000Interest
      payments (2)
                
                
                2,692,176
                
                
                
                154,584
                
                
                
                302,346
                
                
                
                229,871
                
                
                
                2,005,375Total
                
                $
                5,016,893
                
                
                $
                154,584
                
                
                $
                302,346
                
                
                $
                1,504,588
                
                
                $
                3,055,375


___________________________




(1)
            At
      September 30, 2008, the 7.625% Senior Notes includes a deferred gain of
      $19.4 million, net of amortization, from interest rate swap terminations
      (see Note 5 in the Notes to Unaudited Condensed Consolidated Financial
      Statements).  At September 30, 2008, our senior notes and our
      junior subordinated notes include an aggregate of $5.4 million of
      unamortized debt discounts.  The deferred gain and the
      unamortized debt discounts are excluded from this
  table.


(2)
            Includes
      interest payments due on our senior notes and junior subordinated notes
      and interest payments and commitment fees due on our Revolving Credit
      Facility. The interest amounts calculated on the Revolving Credit Facility
      and the junior subordinated notes are based on the assumption that the
      amounts outstanding and the interest rates charged both remain at their
      current levels.







Summary
of Related Party Transactions




The following table summarizes our
revenue and expense transactions with related parties for the three months and
nine months ended September 30, 2008 and 2007 (in thousands):





For
      the Three Months Ended
                
                
                For
      the Nine Months EndedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Revenues
      from EPCO and affiliates:Sales
      of petroleum products
                
                $
                181
                
                
                $
                91
                
                
                $
                485
                
                
                $
                196Transportation
      – NGLs
                
                
                3,391
                
                
                
                3,478
                
                
                
                10,182
                
                
                
                9,493Transportation
      – LPGs
                
                
                1,392
                
                
                
                695
                
                
                
                4,691
                
                
                
                2,968Transportation
      – Refined products
                
                
                --
                
                
                
                61
                
                
                
                --
                
                
                
                105Other
      operating revenues
                
                
                1,077
                
                
                
                301
                
                
                
                2,302
                
                
                
                1,508Revenues
      from unconsolidated affiliates:Other
      operating revenues
                
                
                22
                
                
                
                216
                
                
                
                66
                
                
                
                325Related
      party revenues
                
                $
                6,063
                
                
                $
                4,842
                
                
                $
                17,726
                
                
                $
                14,595Costs
      and Expenses from EPCO and affiliates:Purchases
      of petroleum products
                
                $
                51,443
                
                
                $
                17,133
                
                
                $
                101,668
                
                
                $
                40,373Operating
      expense
                
                
                27,132
                
                
                
                24,126
                
                
                
                75,392
                
                
                
                72,890General
      and administrative
                
                
                7,340
                
                
                
                6,568
                
                
                
                24,117
                
                
                
                19,150Costs
      and Expenses from unconsolidated affiliates:Purchases
      of petroleum products
                
                
                1,845
                
                
                
                2,341
                
                
                
                5,387
                
                
                
                2,341Operating
      expense
                
                
                1,122
                
                
                
                2,701
                
                
                
                5,023
                
                
                
                6,363Costs
      and Expenses from Cenac and affiliates:Operating
      expense
                
                
                13,810
                
                
                
                --
                
                
                
                32,327
                
                
                
                --Related
      party expenses
                
                $
                102,692
                
                
                $
                52,869
                
                
                $
                243,914
                
                
                $
                141,117








85





For additional
information regarding our related party transactions, see Note 14 in the Notes
to Unaudited Condensed Consolidated Financial Statements.





Credit
Ratings




Our debt securities are rated BBB- by
S&P, Baa3 by Moody’s and BBB- by Fitch Ratings, all with stable
outlooks.  Such ratings reflect only the view of the rating agency and
should not be interpreted as a recommendation to buy, sell or hold our
securities.  These ratings may be revised or withdrawn at any time by
the agencies at their discretion.  Based upon the characteristics of
the fixed/floating unsecured junior subordinated notes that we issued in May
2007, Moody’s and S&P each assigned 50% equity treatment to these
notes.  Fitch Ratings assigned 75% equity treatment to these
notes.





Recent
Accounting Pronouncements





On
January 1, 2008, we adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 157, Fair Value Measurements, that
apply to financial assets and liabilities.  SFAS 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at a specified
measurement date. See Note 5 in the Notes to Unaudited Condensed Consolidated
Financial Statements for information regarding fair value disclosures pertaining
to our financial assets and liabilities.





See
discussion of new accounting pronouncements in Note 2 in the Notes to Unaudited
Condensed Consolidated Financial Statements.








Item
3.  Quantitative and
Qualitative Disclosures About Market Risk.





We are exposed to financial market
risks, including changes in commodity prices and interest rates.  We
do not have foreign exchange risks.  We may use financial instruments
(i.e., futures, forwards, swaps, options and other financial instruments with
similar characteristics) to mitigate the risks of certain identifiable and
anticipated transactions.  In general, the type of risks we attempt to
hedge are those related to fair values of certain debt instruments and cash
flows resulting from changes in applicable interest rates or commodity
prices.  Our Risk Management Committee has established policies to
monitor and control these market risks.  The Risk Management Committee
is comprised, in part, of senior executives of our General
Partner.  For additional discussion of our exposure to market risks,
please refer to “Item 7A.  Quantitative and Qualitative Disclosures
About Market Risk” in our Annual Report on Form 10-K for the year ended December
31, 2007.





We routinely review our outstanding
financial instruments in light of current market conditions.  If
market conditions warrant, some financial instruments may be closed out in
advance of their contractual settlement dates, resulting in the realization of
income or loss depending on the specific hedging criteria.  When this
occurs, we may enter into a new financial instrument to reestablish the hedge to
which the closed instrument relates.





Commodity
Risk Hedging Program




We seek to maintain a position that is
substantially balanced between crude oil purchases and related sales and future
delivery obligations.  We take the normal purchase and normal sale
exclusion in accordance with 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, where permitted.




As part of our crude oil marketing
business, we enter into financial instruments such as swaps and other hedging
instruments.  Generally, we elect hedge accounting where permitted
under SFAS 133.  The terms of these contracts are typically one year
or less.  The purpose of such hedging activity is to either balance
our inventory position or lock in a profit margin.  For financial
instruments where hedge accounting is elected, the effective portion of changes
in fair value are recorded in other comprehensive income and reclassified into
earnings as such







86





transactions
affect earnings.  For financial instruments where hedge accounting is
not elected, we mark these transactions to market and the changes in the fair
value are recognized in current earnings.  This results in some
financial statement variability during quarterly periods.




At September 30, 2008, we had a limited
number of commodity financial instruments that were accounted for as cash flow
hedges.  The majority of these contracts will expire during 2008, with
the remainder expiring during 2009, and any amounts remaining in accumulated
other comprehensive income will be recorded in net income upon the contract
expiration.  Gains and losses on these financial instruments are
offset against corresponding gains or losses of the hedged item and are deferred
through other comprehensive income, thus minimizing exposure to cash flow
risk.  No ineffectiveness was recognized as of September 30,
2008.  In addition, we had some commodity financial instruments that
did not qualify for hedge accounting.  These financial instruments had
a minimal impact on our earnings.  The fair value of the open
positions at September 30, 2008 was a liability of $2.8 million.




The following table shows the effect of
hypothetical price movements on the estimated fair value (“FV”) of this
portfolio at the dates indicated (in thousands):




Scenario
                  Resulting
      Classification
                  
                  December
      31,
                    2007
                  
                  
                  September
      30,
                    2008
                  
                  
                  October
      21,
                    2008FV
      assuming no change in underlying commodity prices
                  Asset
      (Liability)
                  
                  $
                  (18,897
                  )
                  
                  $
                  (2,816
                  )
                  
                  $
                  2,540FV
      assuming 10% increase in underlying commodity prices
                  Asset
      (Liability)
                  
                  
                  (33,606
                  )
                  
                  
                  (4,660
                  )
                  
                  
                  1,227FV
      assuming 10% decrease in underlying commodity prices
                  Asset
      (Liability)
                  
                  
                  (4,188
                  )
                  
                  
                  (972
                  )
                  
                  
                  3,853





The fair value of the open positions
was based upon both quoted market prices obtained from NYMEX and from other
sources such as reporting services, industry publications, brokers and
marketers.  The fair values were determined based upon the differences
by month between the fixed contract price and the relevant forward price curve,
the volumes for the applicable month and applicable discount rate.




Interest
Rate Risk Hedging Program




From time to time we 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.  Interest rate swaps that manage our cash flow risk reduce
our exposure to increases in the benchmark interest rates underlying variable
rate debt.  Interest rate swaps that manage our fair value risks are
intended to reduce our exposure to changes in the fair value of the fixed rate
debt.  Interest rate swap agreements involve the periodic exchange of
payments without the exchange of the notional value upon which the payments are
based.  The related amount payable to or receivable from
counterparties is included as an adjustment to accrued interest.




Interest
Rate Swap Expirations and Terminations.  In January 2006, we
entered into interest rate swap agreements with a total notional value of $200.0
million to hedge our exposure to increases in the benchmark interest rate
underlying our variable rate Revolving Credit Facility.  Under the
swap agreements, we paid a fixed rate of interest ranging from 4.67% to 4.695%
and received a floating rate based on the three-month U.S. Dollar LIBOR
rate.  At December 31, 2007, the fair value of these interest rate
swaps was an asset of $0.3 million.  These interest rate swaps expired
in January 2008.




In October 2001, TE Products entered
into an interest rate swap agreement to hedge its exposure to changes in the
fair value of its fixed rate 7.51% Senior Notes due 2028. This swap agreement,
designated as a fair value hedge, had a notional value of $210.0 million and was
set to mature in January 2028 to match the principal and maturity of the TE
Products Senior Notes.  During the three months and nine months ended
September 30, 2007, we recognized reductions in interest expense of $0.1 million
and $0.7 million, respectively, related to the difference between the fixed rate
and the floating rate of interest on the interest rate swap.  In
September 2007, we terminated this swap agreement, resulting in a loss of $1.2
million.  This loss was deferred as an adjustment to the carrying
value of the 7.51% Senior Notes, and approximately $0.2 million of the loss was
amortized to interest expense in 2007,







87





with the
remaining $1.0 million recognized in interest expense in January 2008 at the
time the 7.51% Senior Notes were redeemed.




Treasury
Locks.  At times, we may use treasury lock financial
instruments to hedge the underlying U.S. treasury rates related to anticipated
debt incurrence.  Gains or losses on the termination of such
instruments are amortized to earnings using the effective interest method over
the estimated term of the underlying fixed-rate debt.  Each of our
treasury lock transactions was designated as a cash flow hedge under SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended and
interpreted.




In 2007,
we entered into treasury locks, accounted for as cash flow hedges, that extended
through January 31, 2008 for a notional value totaling $600.0
million.  At December 31, 2007, the fair value of the treasury locks
was a liability of $25.3 million.  In January 2008, these treasury
locks were extended through April 30, 2008.  In March 2008, these
treasury locks were settled concurrently with the issuance of senior notes (see
Note 11 in the Notes to Unaudited Condensed Consolidated Financial
Statements).  The settlement of the treasury locks resulted in losses
of $52.1 million, and these losses were recorded in accumulated other
comprehensive income.  We recognized approximately $3.6 million of
this loss in interest expense as a result of interest payments hedged under the
treasury locks not occurring as forecasted.  The remaining losses are
being amortized using the effective interest method as increases to future
interest expense over the terms of the forecasted interest payments, which range
from five to ten years.  Over the next twelve months, we expect to
reclassify $5.7 million of accumulated other comprehensive loss that was
generated by these treasury locks as an increase to interest
expense.  In the event of early extinguishment of these senior notes,
any remaining unamortized losses would be recognized in the statement of
consolidated income at the time of extinguishment.




Fair
Value Information





On January 1, 2008, we adopted the
provisions of SFAS 157 that apply to financial assets and
liabilities.  SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at a specified measurement
date.  See Note 5 in the Notes to Unaudited Condensed Consolidated
Financial Statements for information regarding fair value disclosures pertaining
to our financial assets and liabilities.








Item
4.  Controls and
Procedures.





As of the end of the period covered by
this Report, our management carried out an evaluation, with the participation of
our principal executive officer (the “CEO”) and our principal financial officer
(the “CFO”), of the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.  Based
on those evaluations, as of the end of the period covered by this Report, the
CEO and CFO concluded:





(i)
            that
      our disclosure controls and procedures are designed to ensure that
      information required to be disclosed by us in the reports that we file or
      submit under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s
      rules and forms, and that such information is accumulated and communicated
      to our management, including the CEO and CFO, as appropriate to allow
      timely decisions regarding required disclosure;
  and





(ii)
            that
      our disclosure controls and procedures are
  effective.





Changes in Internal Control over
Financial Reporting





Other than as discussed under “TEPPCO
Marine Services Transactions” below, there has been no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) during the third quarter of 2008 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.





88





TEPPCO Marine Services
Transactions





On February 1, 2008, we acquired
transportation assets and certain intangible assets that comprised the marine
transportation business of Cenac Towing Co., Inc., Cenac Offshore, L.L.C. and
Mr. Arlen B. Cenac, Jr. (collectively, “Cenac”), the sole owner of Cenac Towing
Co., Inc. and Cenac Offshore, L.L.C.  On February 29, 2008, we
purchased marine assets from Horizon Maritime, L.L.C. (“Horizon”), a
privately-held Houston-based company and an affiliate of Mr.
Cenac.  These purchases were recorded using purchase
accounting.  In recording the TEPPCO Marine Services purchase
transactions, we followed our normal accounting procedures and internal
controls.





The Office of the Chief Accountant of
the SEC has issued guidance regarding the reporting of internal control over
financial reporting in connection with a material acquisition.  This
guidance was reiterated in September 2007 to affirm that management may omit an
assessment of an acquired business’ internal control over financial reporting
from management’s assessment of internal control over financial reporting for a
period not to exceed one year.





We plan to exclude the operations
acquired from Cenac and Horizon from the scope of our Sarbanes-Oxley Section 404
report on internal control over financial reporting for the year ended December
31, 2008.  We are in the process of implementing our internal control
structure over the operations we acquired from Cenac and Horizon.  We
expect this effort to be completed in late 2008 or early 2009.





The certifications of our General
Partner’s CEO and CFO required under Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002 have been included as exhibits to this Report.








PART
II.  OTHER INFORMATION





Item
1.  Legal
Proceedings.





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.  See discussion of legal proceedings in Note 16 in the
Notes to Unaudited Condensed Consolidated Financial Statements under the
headings “– Litigation” and “– Regulatory Matters,” which is incorporated into
this item by reference.








Item
1A.  Risk
Factors.





Security holders and potential
investors in our securities should carefully consider the risk factors set forth
below and the risk factors set forth in our Annual Report on Form 10-K for the
year ended December 31, 2007, and in our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008 in addition to other information in such Reports
and this Report.  We have identified these risk factors as important
factors that could cause our actual results to differ materially from those
contained in any written or oral forward-looking statements made by us or on our
behalf.





Our business
involves many hazards and operational risks, some of which may not be fully
covered by insurance. If a significant accident or event occurs that is not
fully insured, our operations and financial results could be adversely
affected.





Our operations are subject to the many
hazards inherent in the offshore and marine transportation and terminaling of
refined products, LPGs, NGLs, petrochemicals and crude oil and in the gathering,
compressing, and treating of natural gas, including ruptures, leaks, fires,
spills, severe weather and other disasters.  These risks could result
in substantial losses due to personal injury or loss of life, severe damage to
and destruction of property and equipment and pollution or other environmental
damage and may result in curtailment or suspension of our related
operations.





89





EPCO
maintains insurance coverage on land-based and marine operations on our behalf,
although insurance will not cover many types of hazards that might occur,
including certain environmental accidents, and if covered we may still have
responsibility for any applicable deductibles.  As a result of market
conditions, premiums and deductibles for certain insurance policies can increase
substantially, and in some instances, certain insurance may become unavailable
or available only for reduced amounts of coverage.  For example,
changes in the insurance markets resulting from the terrorist attacks on
September 11, 2001 and the hurricanes of 2005 made it more difficult for us to
obtain certain types of coverage.  Hurricanes occurring in 2008 and
the recent global financial crisis may negatively impact insurance carriers and
affect our ability to obtain coverage.As a result, EPCO may
not be able to renew existing insurance policies on our behalf or procure other
desirable insurance on commercially reasonable terms, if at all.  If
we were to incur a significant liability for which we were not fully insured, it
could have a material adverse effect on our financial position and results of
operations.  In addition, the proceeds of any such insurance may not
be paid in a timely manner and may be insufficient if such an event were to
occur.





OurTexasOffshorePortSystemjoint venture is
subject to various business, operational and regulatory risks and may not be
successful.





The Texas Offshore Port System joint
venture is expected to represent an important component of our Upstream Segment,
requiring an estimated $600.0 million in capital contributions from us through
2011.  We and each of the other joint venture partners own a one-third
interest in the joint venture, and a subsidiary of Enterprise Products Partners
acts as construction manager and will act as operator.  Accordingly,
we will not have full control over the ongoing operational
decisions.  If we were unable to make a required capital contribution
in Texas Offshore Port System, whether due to our inability to access capital
markets or otherwise, our interest could be diluted, and we could suffer other
adverse consequences.  Further, if we or one of our joint venture
partners were unable to make required contributions, the other partners may need
to raise and contribute capital above their estimated share in order to complete
the project, which capital may not be accessible on economical
terms.





A variety
of factors outside our control, such as weather, natural disasters, the
fluctuating costs of steel and other raw materials and difficulties or
inabilities in obtaining rights-of-way, permits or other regulatory approvals,
as well as performance by third-party contractors, may result in increased costs
or delays in construction.  The offshore terminal will require
approval by the U.S. Coast Guard and issuance of a Deepwater Port License,
while the onshore pipeline and storage facilities will be subject to review by
the U.S. Environmental Protection Agency, Army Corps of Engineers and
Department of Transportation.  Obtaining such approvals is a time
consuming process; for example, we estimate that the Deepwater Port License
could take two years to obtain without delays.  The joint venture is
also subject to various hazards inherent in the construction and operation of an
offshore crude oil port and pipeline system, including damage to the ports,
pipelines and related facilities caused by hurricanes and other inclement
weather, inadvertent damage from third parties, leaks, operator error,
litigation, environmental pollution and risk related to operating in a marine
environment.  Cost overruns, construction delays or other hazards
inherent in the construction and operation of such a facility, whatever the
cause, could have a material adverse effect on the success of the our joint
venture project or on our business, results of operations, financial condition
and prospects.





The
current challenges in the credit markets may have impacts on our business and
financial condition that we currently cannot predict.




The current challenges in the credit
markets have had, and may continue to have, an impact on our business and our
financial condition.  We may face significant challenges if conditions
in the financial markets do not improve.  Our ability to access the
capital markets may be severely restricted at a time when we would like, or
need, to do so, which could have an adverse impact on our ability to meet our
capital commitments and flexibility to react to changing economic and business
conditions.  In addition to Lehman, the credit crisis could have a
negative impact on our remaining lenders or our customers, causing them to fail
to meet their obligations to us.  Additionally, our business
depends on activity and expenditure levels in the energy industry, which
are





90





directly
correlated to energy prices.  Any of these factors could lead to
reduced usage of our pipelines and energy logistics services, which could have a
material negative impact on our revenues and prospects.
  Item
5.  Other
Information.
  Amendment
to Partnership Agreement
 
 On November 6, 2008, our General
Partner amended our agreement of limited partnership to amend Section 6.7(i) to
clarify and to provide that any amendment of Section 6.7 shall not impair an
indemnitee’s right to receive expense advancement, in addition to
indemnification, from us otherwise provided for under the partnership
agreement.  In addition, the member of Texas Eastern Products Pipeline
Company, LLC, our General Partner, amended its limited liability company
agreement to make a similar change.
 
 A copy of the amendments to our
partnership agreement and the General Partner’s limited liability company
agreement are attached hereto as Exhibit 3.5 and Exhibit 3.6, respectively, and
are incorporated by reference herein.




Item
6.  Exhibits.





Exhibit


Number                                Description





3.1
            Certificate
      of Limited Partnership of TEPPCO Partners, L.P. (Filed as Exhibit 3.2 to
      the Registration Statement of TEPPCO Partners, L.P. (Commission File No.
      33-32203) and incorporated herein by
reference).


3.2
            Fourth
      Amended and Restated Agreement of Limited Partnership of TEPPCO Partners,
      L.P., dated December 8, 2006 (Filed as Exhibit 3 to the Current Report on
      Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) filed on
      December 13, 2006).


3.3
            Amended
      and Restated Limited Liability Company Agreement of Texas Eastern Products
      Pipeline Company, LLC (Filed as Exhibit 3 to the Current Report on Form
      8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) filed on May
      10, 2007 and incorporated herein by
reference).


3.4
            First
      Amendment to Fourth Amended and Restated Partnership Agreement of TEPPCO
      Partners, L.P. dated as of December 27, 2007 (Filed as Exhibit 3.1 to
      Current Report on Form 8-K of TEPPCO Partners, L.P. (Commission File No.
      1-10403) filed December 28, 2007 and incorporated herein by
      reference).


3.5*
            Amendment
      No. 2 to the Fourth Amended and Restated Agreement of Limited Partnership
      of TEPPCO Partners, L.P. dated as of November 6,
  2008.


3.6*
            First
      Amendment to the Amended and Restated Limited Liability Company Agreement
      of Texas Eastern Products Pipeline Company, LLC, dated as of November 6,
      2008.


4.1
            Form
      of Certificate representing Limited Partner Units (Filed as Exhibit 4.1 to
      the Registration Statement of TEPPCO Partners, L.P. (Commission File No.
      33-32203) and incorporated herein by
reference).


4.2
            Indenture
      between TEPPCO Partners, L.P., as issuer, TE Products Pipeline Company,
      Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. and
      Jonah Gas Gathering Company, as subsidiary guarantors, and First Union
      National Bank, NA, as trustee, dated as of February 20, 2002 (Filed as
      Exhibit 99.2 to Form 8-K of TEPPCO Partners, L.P. (Commission File No.
      1-10403) dated as of February 20, 2002 and incorporated herein by
      reference).


4.3
            First
      Supplemental Indenture between TEPPCO Partners, L.P., as issuer, TE
      Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO
      Midstream Companies, L.P. and Jonah Gas Gathering Company, as subsidiary
      guarantors, and First Union National Bank, NA, as trustee, dated as of
      February 20, 2002 (Filed as Exhibit 99.3 to Form 8-K of TEPPCO Partners,
      L.P. (Commission File No. 1-10403) dated as of February 20, 2002 and
      incorporated herein by reference).


4.4
            Second
      Supplemental Indenture, dated as of September 27, 2002, among TEPPCO
      Partners, L.P., as issuer, TE Products Pipeline Company, Limited
      Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P., and Jonah Gas
      Gathering Company, as Initial Subsidiary Guarantors, and Val Verde Gas
      Gathering Company, L.P., as New Subsidiary Guarantor, and Wachovia Bank,
      National Association, formerly known as First Union National Bank, as
      trustee (Filed as Exhibit 4.6 to Form 10-Q of TEPPCO Partners, L.P.
      (Commission File No. 1-10403) for the quarter ended September 30, 2002 and
      incorporated herein by reference).


4.5
            Third
      Supplemental Indenture among TEPPCO Partners, L.P. as issuer, 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. as




91
  Subsidiary
      Guarantors, and Wachovia Bank, National Association, as trustee, dated as
      of January 30, 2003 (Filed as Exhibit 4.7 to Form 10-K of TEPPCO Partners,
      L.P. (Commission File No. 1-10403) for the year ended December 31, 2002
      and incorporated herein by
reference).


4.6
            Full
      Release of Guarantee dated as of July 31, 2006 by Wachovia Bank, National
      Association, as trustee, in favor of Jonah Gas Gathering Company (Filed as
      Exhibit 4.8 to Form 10-Q of TEPPCO Partners, L.P. (Commission File No.
      1-10403) for the quarter ended September 30, 2006 and incorporated herein
      by reference).


4.7
            Indenture,
      dated as of May 14, 2007, by and among TEPPCO Partners, L.P., as
      issuer, TE Products Pipeline Company, Limited Partnership, TCTM, L.P.,
      TEPPCO Midstream Companies, L.P. and Val Verde Gas Gathering Company,
      L.P., as subsidiary guarantors, and The Bank of New York Trust Company,
      N.A., as trustee (Filed as Exhibit 99.1 to the Current Report on Form 8-K
      of TEPPCO Partners, L.P. (Commission File No. 1-10403) filed on May 15,
      2007 and incorporated herein by
reference).


4.8
            First
      Supplemental Indenture, dated as of May 18, 2007, by and among TEPPCO
      Partners, L.P., as issuer, TE Products Pipeline Company, Limited
      Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. and Val Verde
      Gas Gathering Company, L.P., as subsidiary guarantors, and The Bank of New
      York Trust Company, N.A., as trustee (Filed as Exhibit 4.2 to the Current
      Report on Form 8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403)
      filed on May 18, 2007 and incorporated herein by
    reference).


4.9
            Second
      Supplemental Indenture, dated as of September 30, 2007, by and among
      TEPPCO Partners, L.P., as issuer, TE Products Pipeline Company, Limited
      Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. , Val Verde Gas
      Gathering Company, L.P., TE Products Pipeline Company, LLC and TEPPCO
      Midstream Companies, LLC, as subsidiary guarantors, and The Bank of New
      York Trust Company, N.A., as trustee (Filed as Exhibit 4.2 to the Current
      Report on Form 8-K of TE Products Pipeline Company, LLC (Commission File
      No. 1-13603) filed on July 6, 2007 and incorporated herein by
      reference).


4.10
            Fourth
      Supplemental Indenture, dated as of September 30, 2007, by and among
      TEPPCO Partners, L.P., as issuer, TE Products Pipeline Company, Limited
      Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P., Val Verde Gas
      Gathering Company, L.P., TE Products Pipeline Company, LLC and TEPPCO
      Midstream Companies, LLC, as subsidiary guarantors, and U.S. Bank National
      Association, as trustee (Filed as Exhibit 4.3 to the Current Report on
      Form 8-K of TE Products Pipeline Company, LLC (Commission File No.
      1-13603) filed on July 6, 2007 and incorporated herein by
      reference).


4.11
            Fifth
      Supplemental Indenture, dated as of March 27, 2008, by and among TEPPCO
      Partners, L.P., as issuer, TE Products Pipeline Company, LLC, TCTM, L.P.,
      TEPPCO Midstream Companies, LLC, and Val Verde Gathering Company, L.P., as
      subsidiary guarantors, and U.S. Bank National Association, as trustee
      (Filed as Exhibit 4.11 to Form 10-Q of TEPPCO Partners, L.P. (Commission
      File No. 1-10403) for the quarter ended March 31, 2008 and incorporated
      herein by reference).


4.12
            Sixth
      Supplemental Indenture, dated as of March 27, 2008, by and among TEPPCO
      Partners, L.P., as issuer, TE Products Pipeline Company, LLC, TCTM, L.P.,
      TEPPCO Midstream Companies, LLC and Val Verde Gas Gathering Company, L.P.,
      as subsidiary guarantors, and U.S. Bank National Association, as trustee
      (Filed as Exhibit 4.12 to Form 10-Q of TEPPCO Partners, L.P. (Commission
      File No. 1-10403) for the quarter ended March 31, 2008 and incorporated
      herein by reference).


4.13
            Seventh
      Supplemental Indenture, dated as of March 27, 2008, by and among TEPPCO
      Partners, L.P., as issuer, TE Products Pipeline Company, LLC, TCTM, L.P.,
      TEPPCO Midstream Companies, LLC and Val Verde Gas Gathering Company, L.P.,
      as subsidiary guarantors, and U.S. Bank National Association, as trustee
      (Filed as Exhibit 4.13 to Form




92
 10-Q
      of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter
      ended March 31, 2008 and incorporated herein by
  reference).


10.1
            Sixth
      Amendment to Amended and Restated Credit Agreement, dated as of July 1,
      2008, by and among TEPPCO Partners, L.P., the Borrower, the several banks
      and other financial institutions party thereto and SunTrust Bank, as the
      Administrative Agent for the Lenders (Filed as Exhibit 10.1 to Form 10-Q
      of TEPPCO Partners, L.P. (Commission File No. 1-10403) for the quarter
      ended June 30, 2008 and incorporated herein by
  reference).


10.2*
            Supplement
      and Joinder Agreement dated as of July 17, 2008 of the Amended and
      Restated Credit Agreement dated as of October 21, 2005, among TEPPCO
      Partners, L.P., as Borrower, the banks and other financial institutions
      party thereto and SunTrust Bank, as the Administrative Agent for the
      Lenders.


10.3
            Partnership
      Agreement of Texas Offshore Port System, dated as of August 14, 2008
      (Filed as Exhibit 10.1 to Current Report on Form 8-K of TEPPCO Partners,
      L.P. (Commission File No. 1-10403) filed on August 20, 2008 and
      incorporated herein by reference).


10.4+
            Unit
      Purchase Agreement dated September 4, 2008 by and between TEPPCO Unit L.P.
      and TEPPCO Partners, L.P. (Filed as Exhibit 10.1 to Current Report on Form
      8-K of TEPPCO Partners, L.P. (Commission File No. 1-10403) filed on
      September 9, 2008 and incorporated herein by
  reference).


10.5+
            Agreement
      of Limited Partnership of TEPPCO Unit L.P., dated September 4, 2008 (Filed
      as Exhibit 10.2 to Current Report on Form 8-K of TEPPCO Partners, L.P.
      (Commission File No. 1-10403) filed on September 9, 2008 and incorporated
      herein by reference).


10.6+*
            Form
      of Distribution Equivalent Rights Grant of Texas Eastern Products Pipeline
      Company, LLC, under the EPCO, Inc. 2006 TPP Long-Term Incentive
      Plan.


12.1*
            Statement
      of Computation of Ratio of Earnings to Fixed
  Charges.


31.1*
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.


31.2*
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.


32.1**
            Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.


32.2**
            Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.


_________________________





*  Filed
herewith.


**
Furnished herewith pursuant to Item 601(b)-(32) of Regulation S-K.


+
A management contract or compensation plan or arrangement.











93





SIGNATURES





Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.





TEPPCO
Partners, L.P.





Date:  November
      7, 2008
            By:  /s/   JERRY
      E. THOMPSON
              Jerry
      E. Thompson,
              President
      and Chief Executive Officer of
              Texas
      Eastern Products Pipeline Company, LLC, General PartnerDate:  November
      7, 2008
            By:  /s/   WILLIAM
      G. MANIAS
              William
      G. Manias,
              Vice
      President and Chief Financial Officer of
              Texas
      Eastern Products Pipeline Company, LLC, General
  Partner








94