<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
        [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                         COMMISSION FILE NUMBER 1-10403
 
                             TEPPCO PARTNERS, L.P.
 
             (Exact name of Registrant as specified in its charter)
 
<TABLE>
<C>                                             <C>
                   DELAWARE                                          76-0291058
   (State of Incorporation or Organization)            (I.R.S. Employer Identification Number)
</TABLE>
 
                               2929 ALLEN PARKWAY
                                 P.O. BOX 2521
                           HOUSTON, TEXAS 77252-2521
          (Address of principal executive offices, including zip code)
 
                                 (713) 759-3636
              (Registrant's telephone number, including area code)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
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<CAPTION>
                                                              NAME OF EACH EXCHANGE ON
             TITLE OF EACH CLASS                                  WHICH REGISTERED
             -------------------                              ------------------------
<C>                                             <C>
 Units representing Limited Partner Interests                  New York Stock Exchange
</TABLE>
 
        Securities registered pursuant to Section 12(g) of the Act: NONE
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]
 
     At February 13, 1997 the aggregate market value of the registrant's Units
held by non-affiliates was $589,029,671, which was computed using the average of
the high and low sales prices of the Units on February 13, 1997.
 
     Units outstanding as of February 13, 1997: 14,500,000.
 
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                               TABLE OF CONTENTS
 
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                                                                           PAGE
                                                                           ----
<S>           <C>                                                          <C>
                                    PART I
ITEMS 1 & 2.  Business and Properties.....................................   1
ITEM  3.      Legal Proceedings...........................................   9
ITEM  4.      Submission of Matters to a Vote of Security Holders.........  10
 
                                    PART II
ITEM  5.      Market for Registrant's Units and Related Unitholder
                Matters...................................................  10
ITEM  6.      Selected Financial Data.....................................  11
ITEM  7.      Management's Discussion and Analysis of Financial Condition
                and Results of Operations.................................  12
ITEM  8.      Financial Statements and Supplementary Data.................  17
ITEM  9.      Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure..................................  17
 
                                   PART III
ITEM 10.      Directors and Executive Officers of the Registrant..........  17
ITEM 11.      Executive Compensation......................................  19
ITEM 12.      Security Ownership of Certain Beneficial Owners and
                Management................................................  23
ITEM 13.      Certain Relationships and Related Transactions..............  24
 
                                    PART IV
ITEM 14.      Exhibits, Financial Statement Schedules and Reports on Form
                8-K.......................................................  25
</TABLE>
 
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<PAGE>   3
 
                                     PART I
 
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
 
GENERAL
 
     TEPPCO Partners, L.P. is a Delaware limited partnership that was formed on
March 7, 1990 to own and operate through TE Products Pipeline Company, Limited
Partnership (collectively the "Partnership"), the refined petroleum products and
liquefied petroleum gases (LPGs) pipeline business of Texas Eastern Products
Pipeline Company and Subsidiary Companies (the "Company" or "General Partner"),
a Delaware corporation. The Company, a wholly owned subsidiary of PanEnergy Corp
(PanEnergy), is the general partner of the Partnership.
 
     The Company, as general partner, performs all management and operating
functions required for the Partnership pursuant to the Agreements of Limited
Partnership of TEPPCO Partners, L.P. and TE Products Pipeline Company, Limited
Partnership (the "Partnership Agreements"). The Company owns an effective
combined 2% general partner's interest in the Partnership. In connection with
the Partnership formation, the Company received 1,250,000 Deferred Participation
Interests (DPIs), which represents an effective 8.45% limited partner interest
in the Partnership. Effective April 1, 1994, the DPIs began participating in
distributions of cash and allocations of profit and loss. As of December 31,
1996, 94% of the DPIs have been converted into an equal number of Units, and the
balance of such DPIs may be converted immediately prior to the sale of the DPIs
by the Company. Pursuant to its Partnership Agreement, the Partnership has
registered the resale of such Units with the Securities and Exchange Commission.
Such Units may be sold from time to time on the New York Stock Exchange or
otherwise at prices and terms then prevailing or in negotiated transactions. As
of December 31, 1996, no such Units had been sold by the Company.
 
     The Partnership is one of the largest pipeline common carriers of refined
petroleum products and LPGs in the United States. The Partnership owns and
operates an approximate 4,300-mile pipeline system (together with the receiving,
storage and terminaling facilities mentioned below, the "Pipeline System" or
"Pipeline" or "System") extending from southeast Texas through the central and
midwestern United States to the northeastern United States. The Pipeline System
includes delivery terminals along the Pipeline for outloading product to other
pipelines, tank trucks, rail cars or barges, as well as substantial storage
capacity at Mont Belvieu, Texas, the largest LPGs storage complex in the United
States, and at other locations. The Partnership also owns two marine receiving
terminals, one near Beaumont, Texas, and the other at Providence, Rhode Island.
The Providence terminal is not physically connected to the Pipeline. As an
interstate common carrier, the Pipeline System offers interstate transportation
services, pursuant to tariffs filed with the Federal Energy Regulatory
Commission (FERC), to any shipper of refined petroleum products and LPGs who
requests such services, provided that the products tendered for transportation
satisfy the conditions and specifications contained in the applicable tariff. In
addition to the revenues received by the Pipeline System from its interstate
tariffs, it also receives revenues from the shuttling of LPGs between refinery
and petrochemical facilities on the upper Texas Gulf Coast and ancillary
transportation, storage and marketing services at key points along the System.
Substantially all the petroleum products transported and stored in the Pipeline
System are owned by the Partnership's customers. Petroleum products are received
at terminals located principally on the southern end of the Pipeline System,
stored, scheduled into the Pipeline in accordance with customer nominations and
shipped to delivery terminals for ultimate delivery to the final distributor
(e.g., gas stations and retail propane distribution centers) or to other
pipelines. Pipelines are generally the lowest cost method for intermediate and
long-haul overland transportation of petroleum products. The Pipeline System is
the only pipeline that transports LPGs to the Northeast.
 
OPERATIONS
 
     The Partnership conducts business and owns properties located in 12 states.
Products are transported in liquid form from the upper Texas Gulf Coast through
two parallel underground pipelines that extend to Seymour, Indiana. From
Seymour, segments of the Pipeline System extend to the Chicago, Illinois; Lima,
 
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<PAGE>   4
 
Ohio; Selkirk, New York; and Philadelphia, Pennsylvania, areas. The Pipeline
System east of Todhunter, Ohio, is dedicated solely to LPGs transportation and
storage services.
 
     The Pipeline System includes 31 storage facilities with an aggregate
storage capacity of 13 million barrels of refined petroleum products and 38
million barrels of LPGs, including storage capacity leased to outside parties,
as well as 21 product delivery terminals. In addition, the Pipeline System makes
deliveries to terminals and storage facilities owned by third parties.
 
     The Pipeline System's operations include truck delivery terminals for both
refined products and LPGs. Transportation to end users from the terminals is
conducted principally by trucking operations owned or contracted for by the
Partnership's customers. The costs associated with transporting products from a
loading terminal to end users limit the markets that can be economically served
by any terminal. Certain refined petroleum products are also received from and
delivered into ships and barges at the Partnership's marine terminal near
Beaumont, Texas and into barges at the Partnership's terminal at Helena,
Arkansas. Also, the Pipeline System's operations include rail delivery
facilities for LPGs at various locations. The Partnership receives LPGs from
ocean-going tankers owned by others at its Providence, Rhode Island, terminal.
 
PIPELINE SYSTEM
 
     The Pipeline System is comprised of a 20-inch diameter line extending in a
generally northeasterly direction from Baytown, Texas (located approximately 30
miles east of Houston), to a point in southwest Ohio near Lebanon and Todhunter.
A second line, which also originates at Baytown, is 16 inches in diameter until
it reaches Beaumont, Texas, at which point it reduces to a 14-inch diameter
line. This second line extends along the same path as the 20-inch diameter line
to the Pipeline System's terminal in El Dorado, Arkansas, before continuing as a
16-inch diameter line to Seymour, Indiana. The Pipeline System also has smaller
diameter lines that extend laterally from El Dorado to Helena and Arkansas City,
Arkansas, from Tyler, Texas, to El Dorado and from McRae, Arkansas, to West
Memphis, Arkansas. The lines from El Dorado to Helena and Arkansas City have
10-inch diameters. The line from Tyler to El Dorado varies in diameter from 8
inches to 10 inches. The line from McRae to West Memphis has a 12-inch diameter.
The Pipeline System also includes a 14-inch diameter line from Seymour, Indiana,
to Chicago, Illinois, and a 10-inch diameter line running from Lebanon to Lima,
Ohio. This 10-inch diameter pipeline connects to the Buckeye Pipe Line Company
system that serves, among others, markets in Michigan and eastern Ohio. Also,
the Pipeline System has a 6-inch diameter pipeline connection to the Greater
Cincinnati/Northern Kentucky International Airport and a 8-inch diameter
pipeline connection to the Houston Intercontinental Airport. In addition, there
are numerous smaller diameter lines associated with the gathering and
distribution system.
 
     The Pipeline System continues eastward from Todhunter, Ohio, to Greensburg,
Pennsylvania, at which point it branches into two segments, one ending in
Selkirk, New York (near Albany), and the other ending at Marcus Hook,
Pennsylvania (near Philadelphia). The Pipeline east of Todhunter and ending in
Selkirk is an 8-inch diameter line, whereas the line starting at Greensburg and
ending at Marcus Hook varies in diameter from 6 inches to 8 inches. East of
Todhunter, Ohio, the Partnership transports only LPGs through the Pipeline.
 
     The Pipeline System has been constructed and is in general compliance with
applicable federal, state and local laws and regulations, and accepted industry
standards and practices. The Partnership performs regular maintenance on all the
facilities of the Pipeline System and has an ongoing process of inspecting
segments of the Pipeline System and making repairs and replacements when
necessary or appropriate. In addition, the Partnership conducts periodic air
patrols of the Pipeline System to monitor pipeline integrity and third-party
right of way encroachments.
 
TITLE TO PROPERTIES
 
     The Partnership believes it has satisfactory title to all of its assets.
Although such properties are subject to liabilities in certain cases, such as
customary interests generally contracted in connection with acquisition of the
properties, liens for taxes not yet due, easements, restrictions, and other
minor encumbrances, the Partnership believes none of such burdens materially
detracts from the value of such properties or from the
 
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<PAGE>   5
 
Partnership's interest therein or will materially interfere with their use in
the operation of the Partnership's business. Substantially all of the property,
plant and equipment of the Partnership is subject to a mortgage. See Note 7 of
the Notes to Consolidated Financial Statements of the Partnership included
elsewhere in this report.
 
MAJOR BUSINESS SECTOR MARKETS
 
     The Pipeline System's major operations are the transportation, storage and
terminaling of refined petroleum products and LPGs along its mainline system,
and the storage and short-haul transportation of LPGs associated with its Mont
Belvieu operations. Product deliveries, in millions of barrels (MMBbls) on a
regional basis, over the last three years were as follows:
 
<TABLE>
<CAPTION>
                                                            PRODUCT DELIVERIES (MMBbls)
                                                              YEARS ENDED DECEMBER 31,
                                                            ----------------------------
                                                             1996       1995       1994
                                                            ------     ------     ------
<S>                                                         <C>        <C>        <C>
Refined Products Transportation:
  Central(1)..............................................    66.9       60.6       56.2
  Midwest(2)..............................................    28.7       29.3       26.1
  Ohio and Kentucky.......................................    19.7       20.3       25.0
                                                             -----      -----      -----
          Subtotal........................................   115.3      110.2      107.3
                                                             -----      -----      -----
LPGs Mainline Transportation:
  Central, Midwest and Kentucky(1)(2).....................    24.6       23.3       20.0
  Ohio and Northeast(3)...................................    17.0       15.0       16.6
                                                             -----      -----      -----
          Subtotal........................................    41.6       38.3       36.6
                                                             -----      -----      -----
Mont Belvieu Operations:
  LPGs....................................................    22.5       30.1       28.7
                                                             -----      -----      -----
          Total Product Deliveries........................   179.4      178.6      172.6
                                                             =====      =====      =====
</TABLE>
 
---------------
 
(1) Arkansas, Louisiana, Missouri and Texas.
 
(2) Illinois and Indiana.
 
(3) New York and Pennsylvania.
 
     The mix of products delivered varies seasonally, with gasoline demand
generally stronger in the spring and summer months and LPGs demand generally
stronger in the fall and winter months. Weather and economic conditions in the
geographic areas served by the Pipeline System also affect the demand for and
the mix of the products delivered.
 
                                        3
<PAGE>   6
 
     Refined products and LPGs deliveries over the last three years were as
follows:
 
<TABLE>
<CAPTION>
                                                            PRODUCT DELIVERIES (MMBbls)
                                                              YEARS ENDED DECEMBER 31,
                                                            ----------------------------
                                                             1996       1995       1994
                                                            ------     ------     ------
<S>                                                         <C>        <C>        <C>
Refined Products Transportation:
  Gasoline................................................    65.4       64.1       67.3
  Jet Fuels...............................................    20.7       18.1       14.9
  Middle Distillates(1)...................................    23.2       22.4       23.3
  MTBE/Toluene............................................     6.0        5.6        1.8
                                                             -----      -----      -----
          Subtotal........................................   115.3      110.2      107.3
                                                             -----      -----      -----
LPGs Mainline Transportation:
  Propane.................................................    35.2       29.1       28.9
  Butanes.................................................     6.4        9.2        7.7
                                                             -----      -----      -----
          Subtotal........................................    41.6       38.3       36.6
                                                             -----      -----      -----
Mont Belvieu Operations:
  LPGs....................................................    22.5       30.1       28.7
                                                             -----      -----      -----
          Total Product Deliveries........................   179.4      178.6      172.6
                                                             =====      =====      =====
</TABLE>
 
---------------
 
(1) Primarily diesel fuel, heating oil and other middle distillates.
 
  Refined Petroleum Products Transportation
 
     The Pipeline System transports refined petroleum products from the upper
Texas Gulf Coast, eastern Texas and southern Arkansas to the Central and Midwest
regions of the United States with deliveries in Texas, Louisiana, Arkansas,
Missouri, Illinois, Kentucky, Indiana and Ohio. At these points, refined
petroleum products are delivered to Partnership-owned terminals, connecting
pipelines and customer-owned terminals. The volume of refined petroleum products
transported by the Pipeline System is directly affected by the demand for such
products in the geographic regions the System serves. Such market demand varies
based upon the different end uses to which the refined products deliveries are
applied. Demand for gasoline, which accounts for a substantial portion of the
volume of refined products transported through the Pipeline System, depends upon
price, prevailing economic conditions and demographic changes in the markets
served. Demand for refined products used in agricultural operations is affected
by weather conditions, government policy and crop prices. Demand for jet fuel
depends upon prevailing economic conditions and military usage.
 
     Effective January 1, 1995, the Clean Air Act Amendments of 1990 mandated
the use of reformulated gasolines in nine metropolitan areas of the United
States, including the Houston and Chicago areas served by the Partnership's
System. A portion of the reformulated and oxygenated gasolines includes methyl
tertiary butyl ether (MTBE) as a major blending component. The Partnership has
invested in modifications to the System needed to allow the Partnership to
achieve increased revenues from the transportation and storage of MTBE as well
as other blending components used in the production of reformulated gasolines.
 
  LPGs Mainline Transportation
 
     The Pipeline System transports LPGs from the upper Texas Gulf Coast to the
Central, Midwest and Northeast regions of the United States. The Pipeline System
east of Todhunter, Ohio, is devoted solely to the transportation of LPGs. Since
LPGs demand is generally stronger in the winter months, the Pipeline System
often operates near capacity during such time. Propane deliveries are generally
sensitive to the weather and meaningful year-to-year variations have occurred
and will likely continue to occur.
 
     The Partnership's ability to serve markets in the Northeast is enhanced by
its propane import terminal at Providence, Rhode Island. This facility includes
a 400,000-barrel refrigerated storage tank along with ship unloading and truck
loading facilities. Although the terminal is operated by the Partnership, the
utilization of the terminal is committed by contract to a major propane marketer
through May 2001.
 
                                        4
<PAGE>   7
 
  Mont Belvieu LPGs Storage and Pipeline Shuttle
 
     A key aspect of the Pipeline System's LPGs business is its storage and
pipeline asset base in the Mont Belvieu, Texas, complex serving the
fractionation, refining and petrochemical industries. The complex is the largest
of its kind in the United States and provides substantial capacity and
flexibility in the transportation, terminaling and storage of natural gas
liquids, LPGs and olefins.
 
     The Partnership has 33 million barrels of LPGs storage capacity, including
storage capacity leased to outside parties, at the Mont Belvieu complex. The
Partnership's Mont Belvieu short-haul transportation shuttle system, consisting
of a complex system of pipelines and interconnects, ties Mont Belvieu to
virtually every refinery and petrochemical facility on the upper Texas Gulf
Coast.
 
  Product Sales and Other
 
     The Partnership also derives revenue from the sale of product inventory,
terminaling activities and other ancillary services associated with the
transportation and storage of refined petroleum products and LPGs.
 
CUSTOMERS
 
     The Pipeline System's customers for the transportation of refined petroleum
products include major integrated oil companies, independent oil companies and
wholesalers. End markets for these deliveries are primarily (i) retail service
stations, (ii) truckstops, (iii) agricultural enterprises, (iv) refineries (for
MTBE and other blendstocks) and, (v) military and commercial jet fuel users.
 
     Propane shippers include wholesalers and retailers who, in turn, sell to
commercial, industrial, agricultural and residential heating customers, as well
as utilities who use propane as a fuel source. Refineries constitute the
Partnership's major customers for butane and isobutane, which are used as a
blendstock for gasolines and as a feedstock for alkylation units, respectively.
 
     At December 31, 1996, the Pipeline System had approximately 165 customers.
Transportation revenues (and percentage of total revenues) attributable to the
top 10 shippers were $81 million (38%), $77 million (38%), and $74 million (37%)
for the years ended December 31, 1996, 1995 and 1994, respectively. During 1996
and 1995, no single customer accounted for greater than 10% of total revenues.
During 1994, billings to Marathon Oil Company, a major integrated oil company,
accounted for approximately 10% of the Partnership's total revenues. Loss of a
business relationship with a significant customer could have an adverse affect
on the consolidated financial position and results of operations of the
Partnership.
 
COMPETITION
 
     The Pipeline System conducts operations without the benefit of exclusive
franchises from government entities. Interstate common carrier transportation
services are provided through the System pursuant to tariffs filed with the
FERC.
 
     Because pipelines are generally the lowest cost method for intermediate and
long-haul overland movement of refined petroleum products and LPGs, the Pipeline
System's most significant competitors (other than indigenous production in its
markets) are pipelines in the areas where the Pipeline System delivers products.
Competition among common carrier pipelines is based primarily on transportation
charges, quality of customer service and proximity to end users. The General
Partner believes the Partnership is competitive with other pipelines serving the
same markets; however, comparison of different pipelines is difficult due to
varying product mix and operations.
 
     Trucks, barges and railroads competitively deliver products in some of the
areas served by the Pipeline System. Trucking costs, however, render that mode
of transportation less competitive for longer hauls or larger volumes. Barge
fees for the transportation of refined products are generally lower than the
Partnership's tariffs. The Partnership faces competition from rail movements of
LPGs in several geographic areas. The most significant area is the Northeast,
where rail movements of propane from Sarnia, Canada, compete with propane moved
on the Pipeline System.
 
                                        5
<PAGE>   8
 
CAPITAL EXPENDITURES
 
     Capital expenditures by the Partnership were $51.3 million for the year
ended December 31, 1996. This amount includes capitalized interest of $1.4
million. Approximately $37.8 million was used for revenue-generating projects
and $12.1 million for system integrity projects and for sustaining existing
operations. Revenue-generating projects included $18.7 million of expenditures
to provide additional capacity from a refinery near Shreveport, Louisiana, which
included the replacement of approximately 54 miles of an 8-inch diameter line
with a 10-inch diameter line between Shreveport and El Dorado, Arkansas.
Revenue-generating projects also included $11.9 million of spending to increase
mainline capacity by 50,000 barrels per day between El Dorado and Seymour,
Indiana. An additional $4.3 million of 1996 spending was used to complete
facilities required to deliver jet fuel to the United States Air Force Base near
Little Rock, Arkansas, which became operational in June 1996.
 
     The Partnership estimates that capital expenditures for 1997 will be
approximately $33.8 million. Approximately $9.0 million is expected to used for
revenue-generating projects including $5.3 million to be used to complete the
capacity expansion between Shreveport and El Dorado as well as the mainline
expansion to serve the Midwest market area. An additional $2.0 million is
projected to be spent to connect the pipeline system to Colonial Pipeline
Company's pipeline at Beaumont, Texas. The remaining capital expenditures during
1997 will primarily be used for life-cycle replacements and to upgrade current
facilities. The Partnership revises capital spending periodically in response to
changes in cash flows and operations.
 
REGULATION
 
     The Partnership's interstate common carrier pipeline operations are subject
to rate regulation by the FERC under the Interstate Commerce Act (ICA), the
Energy Policy Act of 1992 (Act) and rules and orders promulgated pursuant
thereto. FERC regulation requires that interstate oil pipeline rates be posted
publicly and that these rates be "just and reasonable" and nondiscriminatory.
 
     Rates of interstate oil pipeline companies, like the Partnership, are
currently regulated by FERC primarily through an index methodology, whereby a
pipeline is allowed to change its rates based on the change from year-to-year in
the Producer Price Index for finished goods less 1% (PPI Index). In the
alternative, an interstate oil pipeline company is allowed to support rate
filings by using a cost-of-service methodology, competitive market showings, or
agreements between shippers and the oil pipeline company that the rate is
acceptable.
 
     In a June 1995 decision, the FERC disallowed the inclusion of imputed
income taxes in the cost-of-service tariff filing of Lakehead Pipeline Company,
Limited Partnership (Lakehead), an unrelated oil pipeline limited partnership.
The FERC's decision held that Lakehead was entitled to include an income tax
allowance in its cost-of-service for income attributable to corporate partners
but not on income attributable to individual partners. In 1996, Lakehead reached
an agreement with its shippers on all contested rates and has withdrawn its
appeal of the June 1995 decision. The FERC's decision does not impact the
Partnership's current rates and rate structure.
 
ENVIRONMENTAL MATTERS
 
     The operations of the Partnership are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Partnership believes the operations of the Pipeline System are in material
compliance with applicable environmental regulations, risks of significant costs
and liabilities are inherent in pipeline operations, and there can be no
assurance that significant costs and liabilities will not be incurred. Moreover,
it is possible that other developments, such as increasingly strict
environmental laws and regulations and enforcement policies thereunder, and
claims for damages to property or persons resulting from the operations of the
Pipeline System, could result in substantial costs and liabilities to the
Partnership.
 
                                        6
<PAGE>   9
 
  Water
 
     The Federal Water Pollution Control Act of 1972, as renamed and amended as
the Clean Water Act (CWA), imposes strict controls against the discharge of oil
and its derivatives into navigable waters. The CWA provides penalties for any
discharges of petroleum products in reportable quantities and imposes
substantial potential liability for the costs of removing an oil or hazardous
substance spill. State laws for the control of water pollution also provide
varying civil and criminal penalties and liabilities in the case of a release of
petroleum or its derivatives in surface waters or into the groundwater. Spill
prevention control and countermeasure requirements of federal laws require
appropriate containment berms and similar structures to help prevent the
contamination of navigable waters in the event of a petroleum tank spill,
rupture or leak.
 
     Contamination resulting from spills or release of refined petroleum
products is an inherent risk within the petroleum pipeline industry. To the
extent that groundwater contamination requiring remediation exists along the
Pipeline System as a result of past operations, the Partnership believes any
such contamination could be controlled or remedied without having a material
adverse effect on the financial condition of the Partnership, but such costs are
site specific, and there can be no assurance that the effect will not be
material in the aggregate.
 
     The primary federal law for oil spill liability is the Oil Pollution Act of
1990 (OPA), which addresses three principal areas of oil
pollution -- prevention, containment and cleanup, and liability. It applies to
vessels, offshore platforms, and onshore facilities, including terminals,
pipelines and transfer facilities. In order to handle, store or transport oil,
shore facilities were required to file oil spill response plans with the
appropriate agency being either the United States Coast Guard, the United States
Department of Transportation Office of Pipeline Safety (OPS) or the
Environmental Protection Agency (EPA). The Texas Oil Spill Prevention and
Response Act of 1991 (OSPRA), which also regulates the unauthorized discharge of
oil from vessels and facilities, is designed to complement OPA. In order to
conduct business, the owner of a regulated facility must obtain a discharge
prevention and response certificate under OSPRA. Under OPA and OSPRA,
responsible parties for a regulated facility from which oil is discharged may be
liable for removal costs and natural resources damages. The General Partner
believes that the Partnership is in material compliance with regulations
pursuant to OPA and OSPRA.
 
     The EPA has adopted regulations that require the Partnership to have
permits in order to discharge certain storm water run-off. Storm water discharge
permits may also be required by certain states in which the Partnership
operates. Such permits may require the Partnership to monitor and sample the
effluent. The General Partner believes that the Partnership is in material
compliance with effluent limitations at existing facilities.
 
  Air Emissions
 
     The operations of the Partnership are subject to the federal Clean Air Act
and comparable state and local statutes. The Clean Air Act Amendments of 1990
(the "Clean Air Act") will require most industrial operations in the United
States to incur future capital expenditures in order to meet the air emission
control standards that are to be developed and implemented by the EPA and state
environmental agencies during the next decade. Pursuant to the Clean Air Act,
any Partnership facilities that emit volatile organic compounds or nitrogen
oxides and are located in ozone non-attainment areas will face increasingly
stringent regulations, including requirements that certain sources install the
reasonably available control technology. The EPA is also required to promulgate
new regulations governing the emissions of hazardous air pollutants. Some of the
Partnership's facilities are included within the categories of hazardous air
pollutant sources which will be affected by these regulations.
 
     The Clean Air Act also introduced the new concept of federal operating
permits for major sources of air emissions. Under this program, one federal
operating permit (a "Title V" permit) will be issued. The permit will act as an
umbrella that includes all other federal, state and local preconstruction and/or
operating permit provisions, emission standards, grandfathered rates, and
recordkeeping, reporting, and monitoring requirements in a single document. The
federal operating permit will be the tool that the public and regulatory
agencies use to review and enforce a site's compliance with all aspects of clean
air regulation at the federal,
 
                                        7
<PAGE>   10
 
state and local level. The Partnership expects approximately ten of its
facilities to apply for and obtain these federal operating permits in the next
two years.
 
  Solid Waste
 
     The Partnership generates hazardous and non-hazardous solid wastes that are
subject to requirements of the federal Resource Conservation and Recovery Act
(RCRA) and comparable state statutes. Amendments to RCRA have required the EPA
to promulgate regulations banning the land disposal of all hazardous wastes
unless the wastes meet certain treatment standards or the land-disposal method
meets certain waste containment criteria. In 1990, the EPA issued the Toxicity
Characteristic Leaching Procedure, which substantially expanded the number of
materials defined as hazardous waste. Certain wastewater and other wastes
generated from the Partnership's business activities previously classified as
nonhazardous are now classified as hazardous due to the presence of dissolved
aromatic compounds. The Partnership has utilized waste minimization and
recycling processes and has installed pre-treatment facilities to reduce the
volume of its hazardous waste. The Partnership is currently permitted to utilize
five regional on-site waste water treatment facilities. Operating expenses of
these facilities have not had a material adverse effect on the financial
position or results of operations of the Partnership.
 
  Superfund
 
     The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as "Superfund," imposes liability, without regard to fault
or the legality of the original act, on certain classes of persons who
contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of a facility and companies that
disposed or arranged for the disposal of the hazardous substances found at a
facility. CERCLA also authorizes the EPA and, in some instances, third parties
to take actions in response to threats to the public health or the environment
and to seek to recover from the responsible classes of persons the costs they
incur. In the course of its ordinary operations, the Pipeline System generates
wastes that may fall within CERCLA's definition of a "hazardous substance."
Should a disposal facility previously used by the Partnership require clean up
in the future, the Partnership may be responsible under CERCLA for all or part
of the costs required to clean up sites at which such wastes have been disposed.
 
  Other Environmental Proceedings
 
     The Indiana Department of Environmental Management (IDEM) has approved a
remedial investigation phase II sampling plan for the Partnership's Seymour,
Indiana, terminal. The phase II sampling plan is part of the Agreed Order
entered into between the Partnership and IDEM that will ultimately result in a
remediation program for any on-site and off-site environmental problems
attributable to the Partnership's operations at Seymour. In the opinion of the
General Partner, the completion of the remediation program to be proposed by the
Partnership, if such program is approved by IDEM, will not have a material
adverse impact on the Partnership.
 
     The Partnership received a compliance order from the Louisiana Department
of Environmental Quality (DEQ) during 1994 relative to potential environmental
contamination at the Partnership's Arcadia, Louisiana facility, which may be
attributable to the operations of the Partnership and surrounding petroleum
terminals of other companies. The Partnership has finalized a negotiated
Compliance Order with DEQ that will allow the Partnership to continue with a
remediation plan similar to the one previously agreed to by DEQ and implemented
by the Company. In the opinion of the General Partner, the completion of the
remediation program being proposed by the Partnership will not have a future
material adverse impact on the Partnership.
 
SAFETY REGULATION
 
     The Partnership is subject to regulation by the United States Department of
Transportation (DOT) under the Hazardous Liquid Pipeline Safety Act of 1979
(HLPSA) and comparable state statutes relating to the design, installation,
testing, construction, operation, replacement and management of its pipeline
facilities.
 
                                        8
<PAGE>   11
 
HLPSA covers petroleum and petroleum products and requires any entity that owns
or operates pipeline facilities to comply with such regulations, to permit
access to and copying of records and to make certain reports and provide
information as required by the Secretary of Transportation. The Partnership
believes it is in material compliance with HLPSA requirements.
 
     The Partnership is also subject to the requirements of the federal
Occupational Safety and Health Act (OSHA) and comparable state statutes. The
Partnership believes it is in material compliance with OSHA and state
requirements, including general industry standards, recordkeeping requirements
and monitoring of occupational exposure to benzene.
 
     The OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the federal Superfund Amendment and
Reauthorization Act, and comparable state statutes require the Partnership to
organize and disclose information about the hazardous materials used in its
operations. Certain parts of this information must be reported to employees,
state and local governmental authorities, and local citizens upon request. In
general, the Partnership expects to increase its expenditures during the next
decade to comply with higher industry and regulatory safety standards such as
those described above. Such expenditures cannot be accurately estimated at this
time, although the General Partner does not believe that they will have a future
material adverse impact on the Partnership.
 
     The Partnership is subject to OSHA Process Safety Management (PSM)
regulations which are designed to prevent or minimize the consequences of
catastrophic releases of toxic, reactive, flammable, or explosive chemicals.
These regulations apply to any process which involves a chemical at or above the
specified thresholds; or any process which involves a flammable liquid or gas,
as defined in the regulations, stored on site in one location, in a quantity of
10,000 pounds or more. The Partnership utilizes certain covered processes and
maintains storage of LPG in pressurized tanks, caverns and wells in excess of
10,000 pounds at various locations. Flammable liquids stored in atmospheric
tanks below their normal boiling point without benefit of chilling or
refrigeration are exempt. The Partnership believes it is in material compliance
with the PSM regulations.
 
EMPLOYEES
 
     The Partnership does not have any employees, officers or directors. The
General Partner is responsible for the management of the Partnership. As of
December 31, 1996, the General Partner had 516 employees.
 
ITEM 3. LEGAL PROCEEDINGS
 
TOXIC TORT LITIGATION -- SEYMOUR, INDIANA
 
     The Company has been involved in eight lawsuits, filed in 1988 and 1989, in
the United States District Court for the Southern District of Indiana, New
Albany Division, claiming various injuries to the health and property of persons
living near the Partnership's Seymour, Indiana, terminal. During 1995, the
Partnership recorded $6.4 million in provisions related in part to the
settlement of the Seymour cases. Between December 1995 and April 1996, the
Partnership settled the Seymour cases at amounts approximating those accrued at
December 31, 1995.
 
OTHER LITIGATION
 
     In addition to the litigation discussed above, the Partnership has been, in
the ordinary course of business, a defendant in various other lawsuits and a
party to various other legal proceedings, some of which are covered in whole or
in part by insurance. The General Partner believes that the outcome of such
lawsuits and other proceedings will not individually or in the aggregate have a
material adverse effect on the Partnership's financial condition, operations or
cash flows.
 
     For information regarding certain legal proceedings brought by the EPA and
by a state agency to which the Partnership is a party, see Items 1 and 2,
"Business and Properties -- Environmental Matters -- Other Environmental
Proceedings."
 
                                        9
<PAGE>   12
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     NONE
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS
 
     The Units of the Partnership are listed and traded on the New York Stock
Exchange under the symbol TPP. The high and low trading prices of the Units in
1996 and 1995, respectively, as reported in the Southwest edition of The Wall
Street Journal, were as follows:
 
<TABLE>
<CAPTION>
                                                               1996                        1995
                                                      ----------------------      ----------------------
                      QUARTER                           HIGH          LOW           HIGH          LOW
                      -------                           ----          ---           ----          ---
<S>                                                   <C>           <C>           <C>           <C>
First...............................................    $37 7/8       $34 1/4       $29           $25 1/4
Second..............................................     38 1/4        34 5/8        31 3/4        27 7/8
Third...............................................     40 3/8        37            33 1/2        30 1/4
Fourth..............................................     42 1/8        38 1/8        37 1/4        32 1/4
</TABLE>
 
     Based on the information received from its transfer agent and from
brokers/nominees, the Company estimates the number of beneficial Unitholders of
the Partnership as of February 13, 1997 to be approximately 22,040.
 
     The quarterly cash distributions applicable to 1995 and 1996 were as
follows:
 
<TABLE>
<CAPTION>
                                                                               AMOUNT
             RECORD DATE                           PAYMENT DATE               PER UNIT
             -----------                           ------------               --------
<S>                                    <C>                                    <C>
April 28, 1995.......................  May 12, 1995.........................   $0.65
July 31, 1995........................  August 11, 1995......................    0.65
October 31, 1995.....................  November 10, 1995....................    0.70
January 31, 1996.....................  February 9, 1996.....................    0.70
April 30, 1996.......................  May 10, 1996.........................    0.70
July 31, 1996........................  August 9, 1996.......................    0.75
October 31, 1996.....................  November 8, 1996.....................    0.75
January 31, 1997.....................  February 7, 1997.....................    0.75
</TABLE>
 
     The Partnership makes quarterly cash distributions of its Available Cash,
as defined by the Partnership Agreements. Available Cash consists generally of
all cash receipts less cash disbursements and cash reserves necessary for
working capital, anticipated capital expenditures and contingencies the General
Partner deems appropriate and necessary.
 
     The Partnership is a publicly traded master limited partnership that is not
subject to federal income tax. Instead, Unitholders are required to report their
allocable share of the Partnership's income, gain, loss, deduction and credit,
regardless of whether the Partnership makes distributions.
 
     Distributions of cash by the Partnership to a Unitholder will not result in
taxable gain or income except to the extent the aggregate amount distributed
exceeds the tax basis of the Units held by the Unitholder.
 
                                       10
<PAGE>   13
 
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
 
     The following tables set forth, for the periods and at the dates indicated,
selected consolidated financial and operating data for the Partnership. The
financial data was derived from the consolidated financial statements of the
Partnership and should be read in conjunction with the Partnership's audited
consolidated financial statements included in the Index to Financial Statements
on page F-1 of this report. See also Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                          ----------------------------------------------------
                                            1996       1995       1994       1993       1992
                                          --------   --------   --------   --------   --------
                                          (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS AND OPERATING
                                                                 DATA)
<S>                                       <C>        <C>        <C>        <C>        <C>
INCOME STATEMENT DATA:
  Operating revenues:
     Transportation -- Refined
       products.........................  $ 98,641   $ 96,190   $ 89,442   $ 75,144   $ 70,041
     Transportation -- LPGs.............    80,219     70,576     73,458     74,270     61,385
     Gain on sale of inventory..........     3,674      4,115        966      1,848      2,524
     Mont Belvieu operations............    11,811     13,570     12,290     12,611     13,144
     Other..............................    21,680     19,265     21,146     19,761     19,128
                                          --------   --------   --------   --------   --------
          Total operating revenues......   216,025    203,716    197,302    183,634    166,222
  Operating expenses....................   105,182    103,938     94,337     88,257     83,693
  Depreciation and amortization.........    23,409     23,286     23,063     23,485     23,535
                                          --------   --------   --------   --------   --------
  Operating income......................    87,434     76,492     79,902     71,892     58,994
  Interest expense -- net...............   (33,534)   (34,987)   (36,076)   (36,242)   (36,600)
  Other income -- net...................     4,748      5,212      2,714      1,502      2,462
                                          --------   --------   --------   --------   --------
  Income before cumulative effect of
     accounting change..................    58,648     46,717     46,540     37,152     24,856
  Cumulative effect of accounting
     change, net of minority
     interest(1)........................        --         --         --       (949)        --
                                          --------   --------   --------   --------   --------
  Net income............................  $ 58,648   $ 46,717   $ 46,540   $ 36,203   $ 24,856
                                          ========   ========   ========   ========   ========
  Income per Unit:
     Before cumulative effect of
       accounting change................  $   3.79   $   3.08   $   3.13   $   2.54   $   1.70
     Cumulative effect of accounting
       change(1)........................        --         --         --      (0.07)        --
                                          --------   --------   --------   --------   --------
     Net income per Unit................  $   3.79   $   3.08   $   3.13   $   2.47   $   1.70
                                          ========   ========   ========   ========   ========
     Distributions paid per Unit........  $   2.90   $   2.65   $   2.37   $   2.22   $   2.20
                                          ========   ========   ========   ========   ========
BALANCE SHEET DATA (AT PERIOD END):
  Property, plant and
     equipment -- net...................  $561,068   $533,470   $540,577   $543,613   $552,238
  Total assets..........................   671,241    669,915    665,331    655,138    652,182
  Long-term debt (net of current
     maturities)........................   326,512    339,512    349,512    356,512    361,512
  Partners' capital.....................   290,311    276,381    269,599    257,428    250,978
CASH FLOW DATA:
  Net cash from operations..............  $ 86,121   $ 78,456   $ 70,082   $ 60,989   $ 54,977
  Capital expenditures..................   (51,264)   (25,967)   (20,826)   (16,240)   (25,102)
  Investments -- net....................     4,148      6,527    (41,776)        --         --
  Distributions.........................   (45,174)   (40,342)   (34,720)   (30,056)   (29,745)
  Principal payment, First Mortgage
     Notes..............................   (10,000)    (7,000)    (5,000)    (4,000)        --
OPERATING DATA:
  Volumes delivered (thousands of Bbls)
     Refined products...................   115,262    110,234    107,271     90,712     87,616
     LPGs...............................    41,640     38,237     36,636     38,813     34,821
     Mont Belvieu operations............    22,522     30,148     28,695     22,035     28,482
                                          --------   --------   --------   --------   --------
          Total.........................   179,424    178,619    172,602    151,560    150,919
                                          ========   ========   ========   ========   ========
  Average system tariff ($/Bbl)
     Refined products...................  $   0.86   $   0.87   $   0.83   $   0.83   $   0.80
     LPGs...............................      1.93       1.85       2.01       1.91       1.76
</TABLE>
 
---------------
 
(1) See Note 12 of the Notes to Consolidated Financial Statements included
    elsewhere in this report.
 
                                       11
<PAGE>   14
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
GENERAL
 
     The Partnership's operations consist of the transportation, storage and
terminaling of petroleum products. Operations are somewhat seasonal with higher
revenues generally realized during the first and fourth quarters of each year.
Refined products volumes are generally higher during the second and third
quarters because of greater demand for gasolines during the spring and summer
driving seasons. LPGs volumes are generally higher from November through March
due to higher demand in the Northeast for propane, a major fuel for residential
heating.
 
     The Partnership's revenues are derived from the transportation of refined
products and LPGs, the storage and short-haul shuttle transportation of LPGs at
the Mont Belvieu, Texas complex, sale of product inventory and other ancillary
services. Labor and electric power costs comprise the two largest operating
expense items of the Partnership.
 
     The following information is provided to facilitate increased understanding
of the 1996, 1995 and 1994 consolidated financial statements and accompanying
notes of the Partnership included in the Index to Financial Statements on page
F-1 of this report. Material period-to-period variances in the consolidated
statements of income are discussed under "Results of Operations." The "Financial
Condition and Liquidity" section analyzes cash flows and financial position.
Discussion included in "Other Matters" addresses key trends, future plans and
contingencies. Throughout these discussions, management addresses items that are
reasonably likely to materially affect future liquidity or earnings.
 
RESULTS OF OPERATIONS
 
     Volume and average tariff information for 1996, 1995 and 1994 is presented
below:
 
<TABLE>
<CAPTION>
                                                                              PERCENTAGE
                                                                               INCREASE
                                                 YEARS ENDED DECEMBER 31,     (DECREASE)
                                                ---------------------------   -----------
                                                 1996      1995      1994     1996   1995
                                                -------   -------   -------   ----   ----
                                                        (IN THOUSANDS OF BARRELS)
<S>                                             <C>       <C>       <C>       <C>    <C>
Volumes Delivered
  Refined products............................  115,262   110,234   107,271     5%    3%
  LPGs........................................   41,640    38,237    36,636     9%    4%
  Mont Belvieu operations.....................   22,522    30,148    28,695   (25%)   5%
                                                -------   -------   -------   ----   ---
          Total...............................  179,424   178,619   172,602     --    3%
                                                =======   =======   =======   ====   ===
Average Tariff per Barrel
  Refined products............................    $0.86     $0.87     $0.83    (1%)   5%
  LPGs........................................     1.93      1.85      2.01     4%   (8%)
  Mont Belvieu operations.....................     0.17      0.15      0.14    13%    7%
          Average system tariff per barrel....    $1.02     $0.96     $0.97     6%   (1%)
                                                =======   =======   =======   ====   ===
</TABLE>
 
  1996 Compared to 1995
 
     Net income for the year ended December 31, 1996 increased 25% to $58.6
million, compared with net income of $46.7 million for the year ended December
31, 1995. Net income for 1995 included $7.4 million of charges for the
settlement of certain litigation and remediation costs at the Partnership's
Seymour, Indiana, terminal. Excluding such charges, net income for 1996 would
have increased by $4.5 million, or 8%. The increase in net income for 1996
resulted from a $12.3 million increase in operating revenues, a $0.9 million
decrease in interest expense and a $0.5 million increase in interest
capitalized. These increases for 1996 were partially offset by a $1.4 million
increase in costs and expenses.
 
     Operating revenues for the year ended 1996 increased 6% to $216.0 million
from $203.7 million for the year ended 1995. This $12.3 million increase
resulted from a $9.6 million increase in LPGs transportation revenues, a $2.5
million increase in refined products transportation revenues and a $2.4 million
increase in
 
                                       12
<PAGE>   15
 
other operating revenues. These increases were partially offset by a $1.8
million decrease in revenues generated from Mont Belvieu operations and a $0.4
million decrease in product inventory sales.
 
     Refined products transportation revenues increased $2.5 million for the
year ended December 31, 1996, compared with the prior year, as a result of the
5% increase in volumes delivered. Jet fuel deliveries increased to 20.7 million
barrels due to the completion of the pipeline connection to the United States
Air Force Base near Little Rock, Arkansas, in June 1996, as well as higher
demand from commercial airlines in the Midwest. Motor fuel deliveries also
increased during 1996 as a result of higher demand in the Central and Midwest
market areas. These increases were partially offset by lower deliveries of MTBE,
reformulated gasoline and gasoline blendstocks in the Chicago area, coupled with
lower feedstock demand along the upper Texas Gulf Coast.
 
     LPGs transportation revenues increased $9.6 million, or 14%, for the year
ended December 31, 1996, compared with the prior year, due to the 9% increase in
volumes delivered and the 4% increase in the LPGs average tariff per barrel.
Propane deliveries increased to a record 35.2 million barrels as a result of
colder winter weather during the first and second quarters of 1996, lower
inventory supplies and favorable price differentials. The increase in propane
deliveries was partially offset by a 2.8 million barrel decrease in butane
deliveries attributable to increased Canadian supply imported into the Midwest,
higher Gulf Coast prices and the shut-down of a refinery in the Northeast that
was supplied by the pipeline system. This refinery is expected to begin
operations again during 1997. The 4% increase in the LPGs average tariff per
barrel during 1996 resulted from increased long-haul propane deliveries in the
upper Midwest and Northeast, coupled with lower deliveries along the upper Texas
Gulf Coast.
 
     Revenues generated from Mont Belvieu operations decreased $1.8 million
during 1996, compared with the prior year, due to decreased storage revenue and
lower terminaling fees on butane received into the system. Additionally, shuttle
deliveries decreased 25% from the prior year due primarily to low butane and
propane inventory supplies and lower petrochemical demand for propane along the
upper Texas Gulf Coast. The Mont Belvieu operations average tariff per barrel
for shuttle deliveries increased to $0.17 per barrel in 1996, due to a lower
percentage of contract deliveries, which generally carry lower tariffs.
 
     Gains on the sale of inventory decreased $0.4 million during 1996, compared
with the prior year, as a result of lower volumes of product sold in 1996.
 
     Other operating revenues increased $2.4 million during the year ended
December 31, 1996, compared with 1995, due to higher propane imports at the
Partnership's marine terminal at Providence, Rhode Island, increased LPGs
terminaling fees and increased revenues resulting from greater volumes marketed
between customers at the Mont Belvieu complex.
 
     Costs and expenses increased $1.4 million during the year ended December
31, 1996, compared with the prior year, due primarily to a $1.1 million increase
in taxes -- other than income taxes, and a $0.1 million increase in operating,
general and administrative expenses. The increase in taxes -- other than income,
was attributable to a $0.9 million adjustment recorded during 1995 related to
the reclassification of the Partnership as a non-utility for Ohio property
taxes. Operating, general and administrative expenses increased in 1996 as a
result of higher throughput-related expenses including higher mainline power
costs, increased usage of propane odorant and gasoline additives, and expenses
for external barges utilized during the fourth quarter of 1996. Additionally,
expenses were higher during 1996 due to increased system maintenance, coupled
with increased labor and benefits costs. These increases were largely offset by
$7.4 million of charges during 1995 related to the settlement of certain claims
and environmental remediation costs at the Partnership's Seymour, Indiana,
terminal.
 
     Interest expense decreased $0.9 million during the year ended December 31,
1996, compared with 1995, due to the $10.0 million principal payment on the
First Mortgage Notes in March 1996. Interest capitalized increased $0.5 million
over the prior year as a result of increased capital spending during 1996.
 
                                       13
<PAGE>   16
 
  1995 Compared to 1994
 
     Net income for the year ended December 31, 1995 totaled $46.7 million,
compared with net income of $46.5 million for the year ended December 31, 1994.
Net income for 1995 included $7.4 million of charges for the settlement of
certain litigation and remediation costs at the Partnership's Seymour, Indiana,
terminal. Excluding the charges, net income would have been $54.1 million, a 16%
increase from 1994.
 
     Operating revenues for the year ended 1995 increased 3% to $203.7 million
from $197.3 million for the year ended 1994. This $6.4 million increase resulted
from a $6.8 million increase in refined products transportation revenues, a $3.1
million increase in product inventory sales and a $1.3 million increase in
revenues generated from Mont Belvieu operations. These increases were partially
offset by a $2.9 million decrease in LPGs transportation revenues and a $1.9
million decrease in other operating revenues.
 
     The $6.8 million, or 8%, increase in refined products transportation
revenues for the year ended December 31, 1995, compared with the prior year, was
due primarily to increased deliveries of jet fuel, MTBE and natural gasoline,
partially offset by lower deliveries of motor fuel. The increase in jet fuel
deliveries resulted from higher demand at airports served by the Partnership as
well as the full year impact of the completion of a pipeline connection to the
Houston Intercontinental Airport in July 1994. Deliveries of MTBE increased
during 1995 due primarily to contract deliveries to the Midwest, which commenced
during the first quarter of 1995, and increased short-haul deliveries resulting
from the completion of a vapor recovery unit at the Partnership's marine
terminal near Beaumont, Texas. The increase in natural gasoline deliveries was
attributable to increased demand for use as a feedstock in the refining process
as well as new supply contracts with Midwest refiners. The decrease in motor
fuel deliveries was primarily due to higher local supply in the Partnership's
Midwest market area. The increase in the average system tariff per barrel was
primarily due to the general rate increase, averaging 4%, for refined products
effective December 1, 1994.
 
     The $2.9 million decrease in LPGs transportation revenues for the year
ended December 31, 1995, compared with the prior year, resulted from a $5.6
million decrease in propane transportation revenue, partially offset by a $2.7
million increase in butane transportation revenue. Propane transportation
revenue decreased 9% from 1994 due primarily to warmer than normal weather in
the upper Midwest and Northeast during the first quarter of 1995, partially
offset by a return of colder weather in these regions during the fourth quarter
of 1995. The increase in butane revenue resulted primarily from higher demand
for use in gasoline blending and favorable price differentials in the Midwest.
The increase in total LPGs volumes delivered was primarily attributable to
higher petrochemical demand for propane along the upper Texas Gulf Coast and
higher mainline butane volumes. The increase in propane deliveries along the
upper Texas Gulf Coast and lower long-haul propane deliveries resulted in a
lower LPGs average tariff per barrel during 1995.
 
     Revenues generated from Mont Belvieu operations increased during 1995,
compared with the prior year, as a result of increased demand for shuttle
deliveries of propane and butane along the upper Texas Gulf Coast, coupled with
increased receipt charges on butane received for storage.
 
     Other operating revenues decreased $1.9 million during the year ended
December 31, 1995, compared with 1994, due to lower propane imports at the
Partnership's marine terminal at Providence, Rhode Island, lower receipts of
gasoline at the Partnership's marine terminal near Beaumont, Texas, and lower
revenue generated from MTBE storage services. These decreases were partially
offset by higher revenue earned from terminaling operations along the pipeline
system.
 
     The increase in gain on sale of product inventory for the year ended
December 31, 1995, compared with the prior year, was due to higher volumes of
product inventory sold, coupled with higher margins.
 
     Costs and expenses increased $9.8 million during the year ended December
31, 1995, compared with the prior year, due primarily to a $11.2 million
increase in operating, general and administrative expenses, partially offset by
a $1.6 million decrease in taxes -- other than income taxes. Operating, general
and administrative expenses included $7.4 million of charges related to the
settlement of certain claims and environmental remediation costs at the
Partnership's Seymour, Indiana, terminal during 1995. The additional increase in
operating, general and administrative expenses was due primarily to higher
outside services related to increased maintenance projects and environmental
remediation activities at certain Partnership facilities,
 
                                       14
<PAGE>   17
 
higher premiums for insurance and increased volume-related power costs,
partially offset by lower external leased storage costs. The decrease in
taxes -- other than income taxes resulted from lower property taxes due
primarily to a reclassification of the Partnership as a non-utility in Ohio.
 
     Interest expense decreased during the year ended December 31, 1995,
compared with 1994, due to the $7.0 million principal payment on the First
Mortgage Notes in March 1995.
 
     Other income increased during the year ended December 31, 1995, compared
with the 1994, primarily from higher interest income earned on investments.
 
FINANCIAL CONDITION AND LIQUIDITY
 
     Net cash from operations for the year ended December 31, 1996, totaled
$86.1 million, comprised of $82.1 million of income before charges for
depreciation and amortization and $4.0 million from changes in other operating
assets and liabilities. This compares with cash flows from operations of $78.5
million for the year ended 1995, which was comprised of $70.0 million of income
before charges for depreciation and amortization and $8.5 million of cash
provided by other working capital changes. The $7.6 million increase in cash
provided by operations in 1996 reflects higher income earned in 1996, partially
offset by higher cash payments for accrued expenses in 1996. Net cash from
operations for the year ended December 31, 1994 totaled $70.1 million, which was
comprised of $69.6 million of income before charges for depreciation and
amortization and $0.5 million from working capital sources of cash. Net cash
from operations include interest payments related to the First Mortgage Notes
(the Notes) of $34.7 million, $35.5 million and $36.1 million for each of the
years ended 1996, 1995 and 1994, respectively.
 
     The Partnership routinely invests excess cash in liquid investments as part
of its cash management program. Investments of cash in discounted commercial
paper and Eurodollar time deposits with original maturities at date of purchase
of 90 days or less are included in cash and cash equivalents. Short-term
investments of cash consist of investment-grade corporate notes with maturities
during 1997. Long-term investments are comprised of investment-grade corporate
notes with varying maturities between 1998 and 2001. Interest income earned on
all investments is included in cash from operations. Cash flows from investing
activities included proceeds from investments of $18.6 million, $69.0 million
and $23.8 million for each of the years ended 1996, 1995 and 1994, respectively.
Cash flows from investing activities also included additional investments of
$14.4 million, $62.4 million and $65.5 million for each of the years ended 1996,
1995 and 1994, respectively.
 
     Capital expenditures totaled $51.3 million for the year ended December 31,
1996, compared with capital expenditures of $26.0 million for the year ended
December 31, 1995. The increase in 1996 reflects higher spending for
revenue-generating projects that included the replacement of approximately 54
miles of an 8-inch diameter line with a 10-inch diameter line between
Shreveport, Louisiana, and El Dorado, Arkansas; pipeline modifications to
increase mainline capacity by 50,000 barrels per day between El Dorado and
Seymour, Indiana; and the completion of facilities required to deliver jet fuel
to the United States Air Force Base near Little Rock, Arkansas, which became
operational in June 1996. Capital expenditures for 1994 totaled $20.8 million.
Capital expenditures for system integrity projects and for sustaining existing
operations totaled $12.1 million, $16.1 million and $11.9 million for each of
the years ended 1996, 1995 and 1994, respectively.
 
     During 1995 and 1994, the Partnership received $9.8 million and $0.2
million, respectively, in insurance proceeds related to the failure of a LPGs
storage cavern in Ohio during April 1993. Pursuant to the agreements relating to
the Notes, these proceeds were held in a trust account and were invested in
discounted commercial paper. The proceeds and interest income were released by
the trustee during August 1996 after storage and capacity modifications were
completed along the pipeline system to replace the reduced storage capacity of
the failed storage cavern in Ohio.
 
     The Partnership paid cash distributions of $45.2 million ($2.90 per Unit),
$40.3 million ($2.65 per Unit) and $34.7 million ($2.37 per Unit) for each of
the years ended 1996, 1995 and 1994, respectively. Distributions reflect the
conversion of the DPIs (discussed below), effective with the quarterly payment
on May 13, 1994. On January 17, 1997, the Partnership declared a cash
distribution of $0.75 per Unit for the
 
                                       15
<PAGE>   18
 
quarter ended December 31, 1996. The distribution was paid on February 7, 1997,
to Unitholders of record on January 31, 1997.
 
     In connection with the formation of the Partnership in 1990, the Company
received 1,250,000 DPIs, which represent an effective 8.45% limited partner
interest in the Partnership. Effective April 1, 1994, the DPIs began
participating in distributions of cash and allocations of profit and loss
because Available Cash (constituting Cash From Operations) for the preceding two
successive quarters was sufficient to distribute not less than the Minimum
Quarterly Distribution ($0.55 per Unit) with respect to all Units outstanding at
the applicable record date plus the DPIs. The DPIs began receiving cash
distributions effective with the quarterly payment on May 13, 1994.
 
     The Notes, which are secured by a mortgage on substantially all property,
plant and equipment of the Partnership, require annual principal payments
through March 2010. Cash and cash equivalents were reduced by principal payments
related to the Notes of $10.0 million, $7.0 million and $5.0 million on March 7
1996, 1995 and 1994, respectively. At December 31, 1996, the current maturities
of the Notes were $13.0 million. The agreements relating to the Notes limit the
amount of cash distributions that can be paid by TE Products Pipeline Company,
Limited Partnership to TEPPCO Partners, L.P. Such restriction is not anticipated
to preclude the Partnership from making quarterly distributions to Unitholders
of at least $0.75 per Unit during 1997.
 
OTHER MATTERS
 
     The Partnership has begun construction to connect the pipeline system to
Colonial Pipeline Company's (Colonial) pipeline at Beaumont, Texas. The
connection will relieve origin constraints of refined products to the mainline
system, allowing additional capacity created by the Midwest expansion project to
be fully utilized. Construction of the connection and related facilities is
expected to be completed during the second quarter of 1997. The Partnership has
entered into a 10-year capacity lease with Colonial, commencing the month
following completion of construction, whereby the Partnership has guaranteed a
minimum monthly throughput rate for the new connection.
 
     The operations of the Partnership are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Partnership believes the operations of the pipeline system are in material
compliance with applicable environmental regulations, risks of significant costs
and liabilities are inherent in pipeline operations, and there can be no
assurance that significant costs and liabilities will not be incurred. Moreover,
it is possible that other developments, such as increasingly strict
environmental laws and regulations and enforcement policies thereunder, and
claims for damages to property or persons resulting from the operations of the
pipeline system, could result in substantial costs and liabilities to the
Partnership. The Partnership does not anticipate that changes in environmental
laws and regulations will have a material adverse effect on its financial
position, operations or cash flows in the near term.
 
     The IDEM has approved a remedial investigation phase II sampling plan for
the Partnership's Seymour, Indiana, terminal. The phase II sampling plan is part
of the Agreed Order entered into between the Partnership and IDEM that will
ultimately result in a remediation program for any on-site and off-site
environmental problems attributable to the Partnership's operations at Seymour.
In the opinion of the General Partner, the completion of the remediation program
to be proposed by the Partnership, if such program is approved by IDEM, will not
have a material adverse impact on the Partnership.
 
     During the first quarter of 1997 the Partnership received approximately
$1.0 million in insurance proceeds for the replacement value of a 20-inch
diameter auxiliary pipeline at the Red River in central Louisiana. The auxiliary
line was damaged in December 1994 and was subsequently removed from service. In
accordance with FERC accounting methodology, the insurance proceeds were charged
to accumulated depreciation, and no gain was recognized.
 
     The Partnership periodically enters into futures contracts to hedge its
exposure to price risk on product inventory transactions. Recognized gains and
losses related to futures contracts which qualify as hedges are recognized in
income when the related inventory transactions are completed. Gains and losses
related to
 
                                       16
<PAGE>   19
 
futures contracts, which have been insignificant, are reported as a component of
product inventory in the consolidated balance sheet until recognized as income.
At December 31, 1996, there were no outstanding futures contracts.
 
     Effective January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," with no impact to the
Partnership's consolidated financial statements. Assets were grouped and
evaluated based on the ability to identify their respective cash flows.
 
     In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS 123, "Accounting for Stock-Based Compensation." This standard addresses the
timing and measurement of stock-based compensation expense. The Partnership has
elected to retain the approach of Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock issued to Employees," (the intrinsic value method) for
recognizing stock-based expense in the consolidated financial statements. The
Partnership adopted SFAS 123 in 1996 with respect to the disclosure requirements
set forth therein for companies retaining the intrinsic value approach of APB
No. 25. See Note 10 of the Notes to Consolidated Financial Statements of the
Partnership included elsewhere in this report.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The consolidated financial statements of the Partnership, together with the
independent auditors' report thereon of KPMG Peat Marwick LLP, appears on pages
F-2 through F-15 of this report. See Index to Financial Statements on page F-1
of this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     NONE
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The Partnership does not have directors or officers. Set forth below is
certain information concerning the directors and executive officers of the
General Partner. All directors of the General Partner are elected annually by
PanEnergy. All officers serve at the discretion of the directors.
 
     Dennis Hendrix, age 57, was elected a director of the General Partner in
1990 and Chairman of the Board in January 1995. Mr. Hendrix previously was
Chairman of the Board from November 1990 until October 1991. He also serves as
chairman of the Compensation Committee. Mr. Hendrix is Chairman of the Board of
PanEnergy. Prior to joining PanEnergy in November 1990, Mr. Hendrix served as
Chief Executive Officer of Texas Eastern Corporation (TEC) from 1987 until TEC
was acquired by PanEnergy in 1989. Mr. Hendrix is a director of TECO Energy,
Inc.
 
     William L. Thacker, age 51, was elected President and Chief Operating
Officer on September 1, 1992, and Chief Executive Officer on January 17, 1994,
and is a director of the General Partner. Prior to joining the Company, Mr.
Thacker was President of Unocal Pipeline Company from 1986 until 1992.
 
     George L. Mazanec, age 60, is a director of the General Partner, having
been elected in 1990. Mr. Mazanec is Vice Chairman of the Board of PanEnergy. He
joined TEC in 1987 as Senior Vice President, Gas Pipelines. Mr. Mazanec is a
director of the Associated Electric and Gas Insurance Services, National Fuel
Gas Supply Corporation and Northern Trust Bank of Texas.
 
     Paul M. Anderson, age 51, is a director of the General Partner, having been
elected in March 1991. Mr. Anderson was elected President of PanEnergy in 1993
and Chief Executive Officer in April 1995 and is a director of PanEnergy. Mr.
Anderson joined PanEnergy in 1991 as group Vice President and President of
PanEnergy Pipe Line Company. Prior to joining PanEnergy, Mr. Anderson served as
Vice President, Finance,
 
                                       17
<PAGE>   20
 
and Chief Financial Officer for Inland Steel Industries, Inc. from 1990 to 1991.
Mr. Anderson is a director of Temple-Inland, Inc., and Kerr-McGee Corporation.
 
     Donald H. Anderson, age 48, was elected a director of the General Partner
in January 1996. Mr. Anderson is a director and chairman of the board, president
and chief executive officer of PanEnergy Services, Inc. He joined PanEnergy upon
its acquisition of PanEnergy Natural Gas Corporation in 1994. Mr. Anderson was
formerly president of PanEnergy Natural Gas Corporation from 1989 to 1994 and
vice president from 1983 to 1989.
 
     Carl D. Clay, age 64, is a director of the General Partner and a member of
the Compensation and Audit Committees. He was elected a director in January
1995. Mr. Clay served as an advisor to the Company pursuant to a personal
contract from August 1996 through December 31, 1996. Mr. Clay retired from
Marathon Oil Company in 1994 after 33 years during which he served as director
of transportation and logistics and president of Marathon Pipe Line Company.
 
     Derrill Cody, age 58, is a director of the General Partner, having been
elected in 1989. He is the Chairman of the Audit Committee and serves on the
Compensation Committee of the General Partner. Mr. Cody is presently of counsel
to McKinney, Stringer & Webster, P.C., which represents PanEnergy in certain
matters. He is also an advisor to PanEnergy pursuant to a personal contract. Mr.
Cody served as Chief Executive Officer of Texas Eastern Gas Pipeline Company
from 1987 to 1989. Mr. Cody is also a director of Barrett Resources Corporation.
 
     John P. DesBarres, age 57, is a director of the General Partner, having
been elected in May 1995. He is a member of the Compensation and Audit
Committees. Mr. DesBarres was formerly chairman, president and chief executive
officer of Transco Energy Company from 1992 to 1995. He joined Transco in 1991
as president and chief executive officer. Prior to joining Transco, Mr.
DesBarres served as chairman, president and chief executive officer for Santa Fe
Pacific Pipelines, Inc. from 1988 to 1991.
 
     Leander W. Jennings, age 68, is a director of the General Partner and a
member of the Compensation and Audit Committees, having been elected in 1990.
Mr. Jennings is president of Jennings & Associates, a Chicago-based consulting
firm. He is also a director of Alberto Culver Corporation, A.O. Smith Company,
Inc., Fruit of The Loom and Prime Capital Corporation. Mr. Jennings was
previously with the accounting firm of KPMG Peat Marwick LLP from 1963 to 1985.
 
     Charles H. Leonard, age 48, is Senior Vice President, Chief Financial
Officer and Treasurer of the General Partner. Mr. Leonard joined the Company in
1988 as Vice President and Controller. In November 1989, he was elected Vice
President and Chief Financial Officer. He was elected Senior Vice President in
March 1990, and Treasurer in October 1996.
 
     James C. Ruth, age 49, is Vice President and General Counsel of the General
Partner, having been elected in 1991. He also serves as Assistant Secretary,
having been elected in 1992. Mr. Ruth was Vice President and Assistant General
Counsel of the General Partner from 1989 to 1991.
 
     Thomas R. Harper, age 56, is Vice President, Product Transportation and
Refined Products Marketing, of the General Partner. Mr. Harper joined the
Company in 1987 as Director of Product Transportation, and was elected to his
present position in 1988.
 
     David L. Langley, age 49, is Vice President, Business Development and LPG
Services, of the General Partner. Mr. Langley has been with the Company in
various managerial positions since 1975 and was elected Vice President, LPG
Business Center, in 1988. He was elected to his current position in 1990.
 
     O. Horton Cunningham, age 48, is Vice President, Technical Services, of the
General Partner, having been elected in October 1996. Mr. Cunningham served as
Vice President, Operations, from 1990 until October 1996. Mr. Cunningham joined
the Company in 1987 as Manager of Environmental Affairs and was promoted to
Director of Safety and Environmental Affairs in 1988 and Director of Engineering
and Compliance in 1989.
 
                                       18
<PAGE>   21
 
     Ernest P. Hagan, age 52, is Vice President, Operations, of the General
Partner, having been elected in October 1996. Mr. Hagan was previously Director
of Engineering and Right-of-Way from 1994 until October 1996, and from 1986
until 1994 he was Region Manager of the Southwest Region. Mr. Hagan joined the
Company in 1971.
 
     James W. Hart, Jr., age 61, is Vice President of the General Partner,
having been elected in 1989. Mr. Hart is also Vice President, Public Affairs, of
PanEnergy. He joined PanEnergy in 1988 and has 31 years of experience in energy
industry public affairs.
 
     Based on information furnished to the Company and written representation
that no other reports were required, to the Company's knowledge, all applicable
Section 16(a) filing requirements were complied with during the year ended
December 31, 1996.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The officers of the General Partner manage and operate the Partnership's
business. The Partnership does not directly employ any of the persons
responsible for managing or operating the Partnership's operations, but instead
reimburses the General Partner for the services of such persons.
 
     Directors of the General Partner who are not officers or employees of
either the Company or PanEnergy receive a stipend of $15,000 per annum, $750 for
attendance at each meeting of the Board of Directors, $750 for attendance at
each meeting of a committee of the Board of Directors and reimbursement of
expenses incurred in connection with attendance at a meeting of the Board of
Directors or a committee of the Board of Directors. Each outside director who
serves as chairman of a committee of the Board of Directors receives an
additional stipend of $2,000 per annum. Mr. Clay was compensated $1,400 pursuant
to the terms of the personal contract discussed in Item 10 above.
 
     Messrs. Thacker, Hendrix, Mazanec, P. M. Anderson and D. H. Anderson were
not compensated for their services as directors, and it is not anticipated that
any compensation for service as a director will be paid in the future to
directors who are full-time employees of PanEnergy, the General Partner or any
of their affiliates.
 
                                       19
<PAGE>   22
 
     The following table reflects cash compensation paid or accrued by the
General Partner for the years ended December 31, 1996, 1995 and 1994, with
respect to its Chief Executive Officer and the executive officers (collectively,
the "Named Officers").
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                           LONG TERM COMPENSATION
                                                                        -----------------------------
                                                                           AWARDS          PAYOUTS
                               ANNUAL COMPENSATION          OTHER       -------------   -------------
                            --------------------------      ANNUAL       SECURITIES       LTICP AND      ALL OTHER
         NAME AND                               BONUS    COMPENSATION    UNDERLYING       1994 LTIP     COMPENSATION
    PRINCIPAL POSITION      YEAR   SALARY($)   ($)(1)       ($)(2)      OPTIONS(#)(3)   PAYOUTS($)(4)      ($)(5)
    ------------------      ----   ---------   -------   ------------   -------------   -------------   ------------
<S>                         <C>    <C>         <C>       <C>            <C>             <C>             <C>
William L. Thacker........  1996    224,667    107,500      79,988             --          113,447         19,723
  President and Chief       1995    216,667    108,200      61,319             --           71,000         19,291
  Executive Officer         1994    208,458     97,900      34,163         20,000           22,400         16,052
Charles H. Leonard........  1996    142,958     54,800      35,691             --           16,094         12,780
  Senior Vice President,    1995    140,042     55,400      28,437          7,000               --         12,435
  Chief Financial Officer   1994    136,750     49,700      21,352             --           75,750         11,904
  and Treasurer
James C. Ruth.............  1996    130,417     48,600      39,994             --           20,052         13,506
  Vice President and        1995    126,742     48,400      30,659          7,000               --         13,326
  General Counsel           1994    123,242     47,300      17,081             --           60,600         12,660
O. Horton Cunningham......  1996    126,000     45,300      37,495             --           23,597         11,052
  Vice President            1995    121,450     46,000      28,743          7,000               --         10,555
                            1994    117,125     42,100      16,014             --           56,813         10,071
David L. Langley .........  1996    123,750     47,800      23,997             --           20,080         12,000
  Vice President            1995    119,508     46,500      18,396          7,000               --         11,759
                            1994    114,833     43,800      10,249             --           36,360         10,935
Thomas R. Harper..........  1996    123,125     46,500      23,997             --           14,370         13,339
  Vice President            1995    118,542     45,800      18,396          7,000               --         12,999
                            1994    113,717     44,400      10,249             --           36,360         10,874
Ernest P. Hagan (6).......  1996     29,375      6,525          --             --               --          2,257
  Vice President            1995         --         --          --             --               --             --
                            1994         --         --          --             --               --             --
</TABLE>
 
---------------
 
(1) Amounts represent bonuses accrued during the year under the Management
    Incentive Compensation Plan (MICP). Payments under the MICP were made in the
    subsequent year.
 
(2) Amounts shown for 1996, 1995 and 1994 are for quarterly distribution
    equivalents under the terms of the Company's Long Term Incentive
    Compensation Plan (LTICP).
 
(3) Amounts represent awards pursuant to the Texas Eastern Products Pipeline
    Company 1994 Long Term Incentive Plan (1994 LTIP). See "Compensation
    Pursuant to General Partner Plans" for further discussion of the 1994 LTIP.
 
(4) Amounts in 1996 and 1995 represent the value of redemptions under the 1995
    amendment to the LTICP and credits earned to Performance Unit accounts and
    options exercised under the terms of 1994 LTIP. Also, for Mr. Thacker in
    1996, 1995 and 1994, amounts include crediting of phantom units awarded in a
    prior year under the terms of the LTICP. Amounts in 1994 for Messrs.
    Leonard, Ruth, Cunningham, Langley and Harper represent the value of the
    final credit under the terms of the LTICP.
 
(5) Includes amounts contributed by the Company for the Named Officers under the
    Employees' Savings Plan of PanEnergy (ESP) and under the PanEnergy Key
    Executive Deferred Compensation Plan, an unfunded, defined contribution plan
    that allows eligible employees to elect deferral of base salary and bonus,
    and receive matching Company contributions, whenever and to the extent that
    their participation in the ESP is limited by provisions of the Internal
    Revenue Code, and the imputed value of premiums paid by the Company for
    insurance on the Named Officers' lives.
 
(6) Mr. Hagan was named Vice President, Operations, effective October 1, 1996.
    Amounts represent compensation for the period October 1, 1996, through
    December 31, 1996.
 
                                       20
<PAGE>   23
 
EXECUTIVE EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
 
     On September 1, 1992, William L. Thacker, Jr. and the Company entered into
an employment agreement, which set a minimum base salary of $190,000 per year.
The Company may terminate the employment agreement for cause, death or
disability. In addition, the Company or Mr. Thacker may terminate the agreement
upon written notice. Additionally, the Company granted 8,000 phantom units with
distribution equivalents pursuant to the LTICP discussed below. Mr. Thacker
participates in other Company sponsored benefit plans on the same basis as other
senior executives of the Company.
 
COMPENSATION PURSUANT TO GENERAL PARTNER PLANS
 
  Management Incentive Compensation Plan
 
     The General Partner has established the MICP, which provides for the
payment of additional cash compensation to participants if certain Partnership
performance and personal objectives are met each year. The Compensation
Committee (the "Committee") determines at the beginning of each year which
employees are eligible to become participants in the MICP. Each participant is
assigned a target award by the Committee. Such target award determines the
additional compensation to be paid if all Partnership performance and personal
objectives are met and all Minimum Quarterly Distributions have been made for
the year. The amount of the awards may range from 10% to 56% of a participant's
base salary. Awards are paid as soon as practicable following approval by the
Committee after the close of a year.
 
  Long Term Incentive Compensation Plan
 
     The LTICP provides key employees with an incentive award based upon the
grant of phantom units. The LTICP is administered by the Committee, which has
sole and absolute discretion to determine the amount of an award. The credit of
phantom units under the terms of the LTICP is contingent upon all cash
distributions being made to the Unitholders and the General Partner. The
Committee may also establish performance targets for crediting of phantom units.
The award consists of phantom units with a total market value, as of the date of
the award, that may not exceed 100% of the base salary of a participant. The
phantom units are credited to each participant at the rate of 10% per year
beginning on the first anniversary date of the award. A final credit of 60% of
the phantom units awarded will occur on the fifth anniversary date of the award.
The phantom units may be redeemed by a participant at any time following credit
to a participant in accordance with terms and conditions prescribed by the
Committee. The redemption price of the phantom units is based on the market
value of a Unit as of the date of redemption. In the event of a change of
control, all phantom units awarded to a participant will be redeemed. Each
participant also receives a quarterly distribution equivalent in cash based upon
a percentage of the distributions to the General Partner for such quarter. In
1995, the LTICP was amended to require annual redemptions, effective January 1,
1996, of 20% of the phantom units previously credited to each participant. See
Item 13, "Certain Relationships and Related Transactions."
 
  1994 Long Term Incentive Plan
 
     The 1994 LTIP provides key employees with an incentive award whereby a
participant is granted an option to purchase Units together with a stipulated
number of Performance Units. Each Performance Unit creates a credit to a
participant's Performance Unit account when earnings exceed a threshold, which
was $2.00 per Unit and $2.50 per Unit for the awards made in 1994 and 1995,
respectively. No awards were granted during 1996. When earnings for a calendar
year (exclusive of certain special items) exceed the threshold, the excess
amount is credited to the participant's Performance Unit account. The balance in
the account may be used to exercise Unit options granted in connection with the
Performance Units or may be withdrawn two years after the underlying options
expire, usually 10 years from the date of grant. Under the agreement for such
Unit options, the options become exercisable in equal installments over periods
of one, two, and three years from the date of the grant. Options may also be
exercised by normal means once vesting requirements are met.
 
                                       21
<PAGE>   24
 
     The following table provides information concerning the unit options
exercised by each of the Named Executive Officers during 1996 and the value of
unexercised unit options to the Named Executive Officers as of December 31,
1996. The value assigned to each unexercised, "in the money" option is based on
the positive spread between the exercise price of such option and the fair
market value of a Unit on December 31, 1996. The fair market value is the
average of the high and low prices of a Unit on that date as reported in the
Southwest edition of The Wall Street Journal. In assessing the value, it should
be kept in mind that no matter what theoretical value is placed on an option on
a particular date, its ultimate value will be dependent on the market value of
the Partnership's Unit price at a future date. The future value will depend in
part on the efforts of the Named Executive Officers to foster the future success
of the Partnership for the benefit of all Unitholders.
 
            AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND
                            FY-END OPTION/SAR VALUES
 
<TABLE>
<CAPTION>
                                                                                     VALUE OF
                                                                                   UNEXERCISED
                                                        NUMBER OF SECURITIES       IN-THE MONEY
                                                       UNDERLYING UNEXERCISED      OPTIONS/SARS
                          SHARES                       OPTIONS/SARS AT FY-END     AT FY-END ($)
                       ACQUIRED ON        VALUE           (#) EXERCISABLE/         EXERCISABLE/
        NAME           EXERCISE (#)    REALIZED ($)       UNEXERCISABLE(1)        UNEXERCISABLE
        ----           ------------    ------------    ----------------------    ----------------
<S>                    <C>             <C>             <C>                       <C>
Mr. Thacker(2).......      3,691         $24,291            8,081/6,667          $105,558/$87,088
Mr. Leonard(3).......        253         $ 1,934            2,080/4,667           $29,380/$65,921
Mr. Ruth(3)..........        528         $ 4,036            1,805/4,667           $25,496/$65,921
Mr. Cunningham(3)....      1,065         $ 8,141            1,268/4,667           $17,911/$65,921
Mr. Langley(3).......      1,000         $ 7,644            1,333/4,667           $18,829/$65,921
Mr. Harper(3)........        253         $ 1,934            2,080/4,667           $29,380/$65,921
</TABLE>
 
---------------
 
(1) Future exercisability of currently unexercisable options depends on the
    grantee remaining employed by the Company throughout the vesting period of
    the options, subject to provisions applicable at retirement, death, or total
    disability.
 
(2) On January 17, 1994, Mr. Thacker was granted options to purchase 20,000
    Units under the terms of the 1994 LTIP at an exercise price of $28.6875 per
    Unit, which was the fair market value of a Unit on the date of grant. Mr.
    Thacker also received 40,000 Performance Units (see discussion above).
 
(3) On January 16, 1995, Messrs. Leonard, Ruth, Cunningham, Langley and Harper
    were each granted options to purchase 7,000 Units under the terms of the
    1994 LTIP at an exercise price of $27.625 per unit, which was the fair
    market value of a Unit on the date of grant. Messrs. Leonard, Ruth,
    Cunningham, Langley and Harper also received 7,000 Performance Units (see
    discussion above).
 
  1995 Employee Incentive Compensation Plan
 
     The General Partner has adopted the 1995 Employee Incentive Compensation
Plan (1995 EICP), which provides an award of incentive units to all employees
who are not eligible to participate in the MICP. The 1995 EICP is administered
by the Committee, which maintains an incentive award account for each
participant. Each participant is eligible for an annual award of up to 300
incentive units, depending on the level of earnings achieved by the Partnership
each year, which generally entitles such participant to receive a credit equal
to the quarterly distribution that such participant would have received had the
participant been the owner of Units. Payment of the credits is contingent upon
the participant remaining in the employment of the General Partner during the
year in which the incentive units are outstanding. Awards to participants are
paid in cash following the close of each year in an amount equal to the credits
in the participant's incentive award account with respect to such year.
 
                                       22
<PAGE>   25
 
PENSION PLAN
 
     Officers of the Company are participants in PanEnergy Corp Retirement Plan
(PanEnergy Retirement Plan). The PanEnergy Retirement Plan provides benefits
expressed in the form of a single life annuity commencing at normal retirement
date (age 65 or, if later, the fifth anniversary of participation in the
PanEnergy Retirement Plan) based on a benefit formula that, in part, uses final
five-year average pay, which considers the regular compensation of the
participant, including overtime payments, bonus payments and some other forms of
deferred compensation.
 
     Qualified retirement plan benefits may be subject to statutory limitations
if the participant receives compensation in excess of a maximum amount, is
covered by other qualified plans, if benefits are paid before social security
retirement age, if the participant has less than 10 years of plan participation
or if benefits are paid in a more valuable form than a single life annuity.
Benefits are not reduced by the amount of any social security payments received
by the participant. When qualified plan benefits are limited by statute, non-
qualified plans restore certain benefits for participants covered by the
non-qualified plans to a level which would have been available if such statutory
limits did not exist.
 
     The table below shows the estimated annual benefits payable at age 65 under
the qualified and non-qualified retirement plans at various levels of final
average compensation and assuming various years of benefit accrual service
(dollars in thousands):
 
<TABLE>
<CAPTION>
                                                              YEARS OF SERVICE
                                                       -------------------------------
                                                       15     20     25     30     35
                                                       ---   ----   ----   ----   ----
<S>                                                    <C>   <C>    <C>    <C>    <C>
$175.................................................  $41   $ 53   $ 68   $ 84   $ 95
 200.................................................   46     61     77     92    108
 225.................................................   53     69     88    105    123
 250.................................................   59     77     98    117    137
 300.................................................   70     93    117    140    164
 400.................................................   94    125    157    188    220
</TABLE>
 
     The years of benefit accrual service for the Named Officers, are as
follows: William L. Thacker, 4; Charles H. Leonard, 8; James C. Ruth, 26; O.
Horton Cunningham, 9; David L. Langley, 26; Thomas R. Harper, 9; and Ernest P.
Hagan, 26. The covered compensation is the sum of the salary from the current
year and bonus from the previous year reported in the Summary Compensation Table
on page 20.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  (a) Security Ownership of Certain Beneficial Owners
 
     The Company owns 1,250,000 Units, representing 8.62% of the Units
outstanding as of February 13, 1997 (an effective 8.45% limited partner interest
in the Partnership).
 
                                       23
<PAGE>   26
 
  (b) Security Ownership of Management
 
     The following table sets forth certain information, as of February 13,
1997, concerning the beneficial ownership of Units by each director and Named
Officers of the General Partner and by all directors and officers of the General
Partner as a group. Such information is based on data furnished by the persons
named. Based on information furnished to the General Partner by such persons, no
director or officer of the General Partner owned beneficially, as of February
13, 1997, more than 1% of the Units outstanding at that date.
 
<TABLE>
<CAPTION>
                                                              NUMBER OF
                            NAME                              UNITS(1)
                            ----                              ---------
<S>                                                           <C>
Donald H. Anderson..........................................       --
Paul M. Anderson............................................    2,000
Carl D. Clay(2).............................................    1,600
Derrill Cody................................................    7,000
John P. DesBarres...........................................   10,000
Dennis Hendrix..............................................   14,500
Leander W. Jennings.........................................    1,500
George L. Mazanec(3)........................................    2,000
William L. Thacker..........................................    6,752
Charles H. Leonard..........................................    1,903
James C. Ruth...............................................      628
O. Horton Cunningham(4).....................................    2,768
David L. Langley............................................    7,000
Thomas R. Harper............................................      669
Ernest P. Hagan.............................................    6,000
All directors and officers (consisting of 19 people,
  including those named above)..............................   67,420
</TABLE>
 
---------------
 
(1) Unless otherwise indicated, the persons named above have sole voting and
    investment power over the Units reported.
 
(2) Includes 900 Units in wife's name.
 
(3) Includes 1,000 Units in wife's name.
 
(4) Includes 100 Units in daughter's name.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The Partnership is managed and controlled by the General Partner pursuant
to the Partnership Agreements. Under the Partnership Agreements, the General
Partner is reimbursed for all direct and indirect expenses it incurs or payments
it makes on behalf of the Partnership. These expenses include salaries, fees and
other compensation and benefit expenses of employees, officers and directors,
insurance, data processing, other administrative or overhead expenses and all
other expenses necessary or appropriate to conduct the Partnership's business.
The costs allocated to the Partnership by the General Partner for administrative
services and overhead totaled $2.6 million in 1996.
 
     The Partnership Agreements provide for incentive distributions payable to
the General Partner out of the Partnership's Available Cash (as defined in the
Partnership Agreements) in the event quarterly distributions to Unitholders
exceed certain specified targets. In general, subject to certain limitations, if
a quarterly distribution exceeds a target of $0.55 per Unit, the General Partner
will receive incentive distributions equal to (i) 15% of that portion of the
distribution per Unit which exceeds the minimum quarterly distribution amount of
$0.55 but is not more than $0.65, plus (ii) 25% of that portion of the quarterly
distribution per Unit which exceeds $0.65 but is not more than $0.90, plus (iii)
50% of that portion of the quarterly distribution per Unit which exceeds $0.90.
During 1996, incentive distributions paid to the General Partner totaled $2.3
million.
 
     In connection with the formation of the Partnership in 1990, the Company
received 1,250,000 DPIs, which represent an effective 8.45% limited partner
interest in the Partnership. Effective April 1, 1994, the DPIs began
participating in distributions of cash and allocations of profit and loss. As of
December 31, 1996,
 
                                       24
<PAGE>   27
 
94% of the DPIs have been converted into an equal number of Units, and the
balance of such DPIs may be converted immediately prior to the sale of the DPIs
by the Company. Pursuant to its Partnership Agreement, the Partnership has
registered the resale of such Units with the Securities and Exchange Commission.
Such Units may be sold from time to time on the New York Stock Exchange or
otherwise at prices and terms then prevailing or in negotiated transactions. As
of December 31, 1996, no such Units had been sold by the Company.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) The following documents are filed as a part of this Report:
 
        (1) Financial Statements: See Index to Financial Statements on page F-1
            of this report for financial statements filed as part of this
            report.
 
        (2) Financial Statement Schedules: None
 
        (3) Exhibits.
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           3.1           -- Certificate of Limited Partnership of the Partnership
                            (Filed as Exhibit 3.2 to the Partnership's Registration
                            Statement (Commission File No. 33-32203) and incorporated
                            herein by reference).
           4.1           -- Form of Certificate representing Units (Filed as Exhibit
                            4.1 to the Partnership's Registration Statement
                            (Commission File No. 33-32203) and incorporated herein by
                            reference).
           4.2           -- Agreement of Limited Partnership of TEPPCO Partners,
                            L.P., dated March 7, 1990 (Filed as Exhibit 4(a) to Form
                            10-Q of TEPPCO Partners, L.P. (Commission File No.
                            1-10403) for the quarter ended March 31, 1990 and
                            incorporated herein by reference).
           4.3           -- Note Agreement, 9.60% Series A and 10.20% Series B First
                            Mortgage Notes, dated February 28, 1990 (Filed as Exhibit
                            4(b) to Form 10-Q of TEPPCO Partners, L.P. (Commission
                            File No. 1-10403) for the quarter ended March 31, 1990
                            and incorporated herein by reference).
           4.4           -- Amendment to Note Agreement, dated June 1, 1994, 9.60%
                            Series A and 10.20% Series B First Mortgage Notes (Filed
                            as Exhibit 4 to Form 10-Q of TEPPCO Partners L.P.
                            (Commission File No. 1-10403) for the quarter ended June
                            30, 1994 and incorporated herein by reference).
           4.5           -- Amendment to Note Agreement, dated February 24, 1995,
                            9.60% Series A and 10.20% Series B First Mortgage Notes
                            (Filed as Exhibit 4.5 to Form 10-K of TEPPCO Partners,
                            L.P. (Commission File No. 1-10403) for the year ended
                            December 31, 1994 and incorporated herein by reference).
          10.1           -- Agreement of Limited Partnership of TE Products Pipeline
                            Company, Limited Partnership, dated March 7, 1990 (Filed
                            as Exhibit 28 to Form 10-Q of TEPPCO Partners, L.P.
                            (Commission File No. 1-10403) for the quarter ended March
                            31, 1990 and incorporated herein by reference).
          10.2           -- Assignment and Assumption Agreement, dated March 24,
                            1988, between Texas Eastern Transmission Corporation and
                            the Company (Filed as Exhibit 10.8 to the Partnership's
                            Registration Statement (Commission File No. 33-32203) and
                            incorporated herein by reference).
</TABLE>
 
                                       25
<PAGE>   28
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          10.3           -- Texas Eastern Products Pipeline Company 1995 Employee
                            Incentive Compensation Plan executed on April 18, 1995
                            (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners,
                            L.P. (Commission File 1-10403) for the quarter ended June
                            30, 1995 and incorporated herein by reference).
          10.4           -- Agreement Regarding Environmental Indemnities and Certain
                            Assets. (Filed as Exhibit 10.5 to the Partnership's Form
                            10-K (Commission File No. 1-10403) for the year ended
                            December 31, 1990 and incorporated herein by reference).
          10.5           -- Texas Eastern Products Pipeline Company Management
                            Incentive Compensation Plan executed on January 30, 1992
                            (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners,
                            L.P. (Commission File No. 1-10403) for the quarter ended
                            March 31, 1992 and incorporated herein by reference).
          10.6           -- Texas Eastern Products Pipeline Company Long-Term
                            Incentive Compensation Plan executed on October 31, 1990.
                            (Filed as Exhibit 10.9 to the Partnership's Form 10-K
                            (Commission File No. 1-10403) for the year ended December
                            31, 1990 and incorporated herein by reference).
          10.7           -- Form of Amendment to Texas Eastern Products Pipeline
                            Company Long-Term Incentive Compensation Plan. (Filed as
                            Exhibit 10.7 to the Partnership's Form 10-K (Commission
                            File No. 1-10403) for the year ended December 31, 1995
                            and incorporated herein by reference).
          10.8           -- Employees' Savings Plan of Panhandle Eastern Corporation
                            and Participating Affiliates (Effective January 1, 1991).
                            (Filed as Exhibit 10.10 to the Partnership's Form 10-K
                            (Commission File No. 1-10403) for the year ended December
                            31, 1990 and incorporated herein by reference).
          10.9           -- Retirement Income Plan of Panhandle Eastern Corporation
                            and Participating Affiliates (Effective January 1, 1991).
                            (Filed as Exhibit 10.11 to the Partnership's Form 10-K
                            (Commission File No. 1-10403) for the year ended December
                            31, 1990 and incorporated herein by reference).
          10.10          -- Panhandle Eastern Corporation -- Executive Benefit
                            Equalization Plan as amended November 29, 1989; effective
                            January 1, 1990 (Filed as Exhibit 10.05 to Form 10-K of
                            Panhandle (Commission File No. 1-8157) for the year ended
                            December 31, 1989 and incorporated herein by reference).
          10.11          -- Employment Agreement with William L. Thacker, Jr. (Filed
                            as Exhibit 10 to Form 10-Q of TEPPCO Partners, L.P.
                            (Commission File No. 1-10403) for the quarter ended
                            September 30, 1992 and incorporated herein by reference).
          10.12          -- Texas Eastern Products Pipeline Company 1994 Long Term
                            Incentive Plan executed on March 8, 1994 (Filed as
                            Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P.
                            (Commission File 1-10403) for the quarter ended March 31,
                            1994 and incorporated herein by reference).
          10.13          -- Panhandle Eastern Corporation Key Executive Deferred
                            Compensation Plan established effective January 1, 1994
                            (Filed as Exhibit 10.2 to Form 10-Q of TEPPCO Partners,
                            L.P. (Commission File 1-10403) for the quarter ended
                            March 31, 1994 and incorporated herein by reference).
</TABLE>
 
                                       26
<PAGE>   29
 
<TABLE>
<C>                       <S>
           22.1           -- Subsidiaries of the Partnership (Filed as Exhibit 22.1 to the Partnership's Registra-
                             tion Statement (Commission File No. 33-32203) and incorporated herein by reference).
          *23             -- Consent of KPMG Peat Marwick LLP
          *24             -- Powers of Attorney.
          *27             -- Financial Data Schedule as of and for the year ended December 31, 1996.
</TABLE>
 
---------------
 
* Filed herewith.
 
     (b) Reports on Form 8-K filed during the quarter ended December 31, 1996:
NONE
 
                                       27
<PAGE>   30
 
                                   SIGNATURES
 
     TEPPCO Partners, L.P., pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                                   TEPPCO PARTNERS, L.P.
                                            ------------------------------------
                                                        (Registrant)
                                              (A Delaware Limited Partnership)
 
                                            By: Texas Eastern Products Pipeline
                                              Company as General Partner
 
                                            By:        CHARLES H. LEONARD
                                              ----------------------------------
                                                     Charles H. Leonard,
                                                 Senior Vice President, Chief
                                                           Financial
                                                    Officer and Treasurer
 
DATED: February 21, 1997
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                            <C>
 
                   DENNIS HENDRIX*                     Chairman of the Board of       February 21, 1997
-----------------------------------------------------    Directors of Texas Eastern
                   Dennis Hendrix                        Products Pipeline Company
 
                 WILLIAM L. THACKER*                   President and Chief Executive  February 21, 1997
-----------------------------------------------------    Officer and Director of
                 William L. Thacker                      Texas Eastern Products
                                                         Pipeline Company
 
                 CHARLES H. LEONARD                    Senior Vice President, Chief   February 21, 1997
-----------------------------------------------------    Financial Officer and
                 Charles H. Leonard                      Treasurer of Texas Eastern
                                                         Products Pipeline Company
                                                         (Principal Accounting and
                                                         Financial Officer)
 
                 DONALD H. ANDERSON*                   Director of Texas Eastern      February 21, 1997
-----------------------------------------------------    Products Pipeline Company
                 Donald H. Anderson
 
                  PAUL M. ANDERSON*                    Director of Texas Eastern      February 21, 1997
-----------------------------------------------------    Products Pipeline Company
                  Paul M. Anderson
 
                    CARL D. CLAY*                      Director of Texas Eastern      February 21, 1997
-----------------------------------------------------    Products Pipeline Company
                    Carl D. Clay
 
                    DERRILL CODY*                      Director of Texas Eastern      February 21, 1997
-----------------------------------------------------    Products Pipeline Company
                    Derrill Cody
 
                  JOHN P. DESBARRES*                   Director of Texas Eastern      February 21, 1997
-----------------------------------------------------    Products Pipeline Company
                  John P. DesBarres
 
                 LEANDER W. JENNINGS*                  Director of Texas Eastern      February 21, 1997
-----------------------------------------------------    Products Pipeline Company
                 Leander W. Jennings
 
                  GEORGE L. MAZANEC*                   Director of Texas Eastern      February 21, 1997
-----------------------------------------------------    Products Pipeline Company
                  George L. Mazanec
 
* Signed on behalf of the Registrant and each of these persons:
 
               By: CHARLES H. LEONARD
  -------------------------------------------------
       (Charles H. Leonard, Attorney-in-Fact)
</TABLE>
 
                                       28
<PAGE>   31
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                            OF TEPPCO PARTNERS, L.P.
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
 
Independent Auditors' Report................................  F-2
 
Consolidated Balance Sheets as of December 31, 1996 and
  1995......................................................  F-3
 
Consolidated Statements of Income for the years ended
  December 31, 1996, 1995 and 1994..........................  F-4
 
Consolidated Statements of Cash Flows for the years ended
  December 31, 1996, 1995 and 1994..........................  F-5
 
Consolidated Statements of Partners' Capital for the years
  ended December 31, 1996,
  1995 and 1994.............................................  F-6
 
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
                                       F-1
<PAGE>   32
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Partners of
TEPPCO Partners, L.P.:
 
     We have audited the consolidated financial statements of TEPPCO Partners,
L.P. as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TEPPCO
Partners, L.P. as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
 
                                            KPMG PEAT MARWICK LLP
 
Houston, Texas
January 17, 1997
 
                                       F-2
<PAGE>   33
 
                             TEPPCO PARTNERS, L.P.
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1996        1995
                                                              --------    --------
<S>                                                           <C>         <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 34,047    $ 39,663
  Short-term investments....................................    24,085      18,587
  Accounts receivable, trade................................    18,326      20,031
  Inventories...............................................    18,914      22,911
  Other.....................................................     3,371       3,145
                                                              --------    --------
          Total current assets..............................    98,743     104,337
                                                              --------    --------
Property, plant and equipment, at cost (Net of accumulated
  depreciation and amortization of $149,597 and $128,927)...   561,068     533,470
Investments.................................................     6,936      16,672
Restricted investments held in trust........................        --      10,553
Other assets................................................     4,494       4,883
                                                              --------    --------
          Total assets......................................  $671,241    $669,915
                                                              ========    ========
 
                        LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
  Current maturities, First Mortgage Notes..................  $ 13,000    $ 10,000
  Accounts payable and accrued liabilities..................     8,300      12,224
  Accounts payable, general partner.........................     3,007       3,001
  Accrued interest..........................................    10,930      11,232
  Other accrued taxes.......................................     5,455       5,353
  Other.....................................................     6,861       6,221
                                                              --------    --------
          Total current liabilities.........................    47,553      48,031
                                                              --------    --------
First Mortgage Notes........................................   326,512     339,512
Other liabilities and deferred credits......................     3,902       3,170
Minority interest...........................................     2,963       2,821
Partners' capital:
  General partner's interest................................     4,616       3,561
  Limited partners' interests...............................   285,695     272,820
                                                              --------    --------
          Total partners' capital...........................   290,311     276,381
                                                              --------    --------
Commitments and contingencies
          Total liabilities and partners' capital...........  $671,241    $669,915
                                                              ========    ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-3
<PAGE>   34
 
                             TEPPCO PARTNERS, L.P.
 
                       CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                1996        1995        1994
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
Operating revenues:
  Transportation -- Refined products........................  $ 98,641    $ 96,190    $ 89,442
  Transportation -- LPGs....................................    80,219      70,576      73,458
  Gain on sale of inventory.................................     3,674       4,115         966
  Mont Belvieu operations...................................    11,811      13,570      12,290
  Other.....................................................    21,680      19,265      21,146
                                                              --------    --------    --------
          Total operating revenues..........................   216,025     203,716     197,302
                                                              --------    --------    --------
Costs and expenses:
  Operating, general and administrative.....................    96,541      96,419      85,197
  Depreciation and amortization.............................    23,409      23,286      23,063
  Taxes -- other than income taxes..........................     8,641       7,519       9,140
                                                              --------    --------    --------
          Total costs and expenses..........................   128,591     127,224     117,400
                                                              --------    --------    --------
          Operating income..................................    87,434      76,492      79,902
Interest expense, First Mortgage Notes......................   (34,922)    (35,844)    (36,491)
Interest capitalized........................................     1,388         857         415
Other income -- net.........................................     5,346       5,689       3,189
                                                              --------    --------    --------
          Income before minority interest...................    59,246      47,194      47,015
Minority interest...........................................      (598)       (477)       (475)
                                                              --------    --------    --------
          Net income........................................  $ 58,648    $ 46,717    $ 46,540
                                                              ========    ========    ========
          Net income per Unit...............................  $   3.79    $   3.08    $   3.13
                                                              ========    ========    ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-4
<PAGE>   35
 
                             TEPPCO PARTNERS, L.P.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                1996        1995        1994
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
  Net income................................................  $ 58,648    $ 46,717    $ 46,540
  Adjustments to reconcile net income to cash provided by
     operating activities:
     Depreciation and amortization..........................    23,409      23,286      23,063
     Decrease (increase) in accounts receivable.............     1,705      (2,051)        (45)
     Decrease (increase) in inventories.....................     3,997       5,483      (3,028)
     Increase in other current assets.......................      (226)       (878)       (920)
     Increase (decrease) in accounts payable and accrued
       expenses.............................................    (3,478)      4,276       2,118
     Other..................................................     2,066       1,623       2,354
                                                              --------    --------    --------
          Net cash provided by operating activities.........    86,121      78,456      70,082
                                                              --------    --------    --------
Cash flows from investing activities:
  Proceeds from investments.................................    18,584      68,963      23,753
  Investments...............................................   (14,436)    (62,436)    (65,529)
  Insurance proceeds related to cavern loss.................        --       9,750         225
  Restricted investments designated for property
     additions..............................................    10,553     (10,328)       (225)
  Capital expenditures......................................   (51,264)    (25,967)    (20,826)
                                                              --------    --------    --------
          Net cash used in investing activities.............   (36,563)    (20,018)    (62,602)
                                                              --------    --------    --------
Cash flows from financing activities:
  Principal payment, First Mortgage Notes...................   (10,000)     (7,000)     (5,000)
  Distributions.............................................   (45,174)    (40,342)    (34,720)
                                                              --------    --------    --------
          Net cash used in financing activities.............   (55,174)    (47,342)    (39,720)
                                                              --------    --------    --------
Net increase (decrease) in cash and cash equivalents........    (5,616)     11,096     (32,240)
Cash and cash equivalents at beginning of year..............    39,663      28,567      60,807
                                                              --------    --------    --------
Cash and cash equivalents at end of year....................  $ 34,047    $ 39,663    $ 28,567
                                                              ========    ========    ========
Supplemental disclosure of cash flows:
  Interest paid during the year (net of capitalized
     interest)..............................................  $ 33,278    $ 34,625    $ 35,643
                                                              ========    ========    ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-5
<PAGE>   36
 
                             TEPPCO PARTNERS, L.P.
 
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                             GENERAL            LIMITED
                                                            PARTNER'S          PARTNERS'
                                                            INTEREST           INTERESTS         TOTAL
                                                          -------------      -------------      --------
<S>                                                       <C>                <C>                <C>
Partners' capital at December 31, 1993..................     $ 2,576           $254,852         $257,428
  1994 net income allocation............................       1,094             45,446           46,540
  1994 cash distributions...............................        (717)           (33,652)         (34,369)
                                                             -------           --------         --------
Partners' capital at December 31, 1994..................       2,953            266,646          269,599
  1995 net income allocation............................       2,118             44,599           46,717
  1995 cash distributions...............................      (1,510)           (38,425)         (39,935)
                                                             -------           --------         --------
Partners' capital at December 31, 1995..................       3,561            272,820          276,381
  1996 net income allocation............................       3,723             54,925           58,648
  1996 cash distributions...............................      (2,668)           (42,050)         (44,718)
                                                             -------           --------         --------
Partners' capital at December 31, 1996..................     $ 4,616           $285,695         $290,311
                                                             =======           ========         ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       F-6
<PAGE>   37
 
                             TEPPCO PARTNERS, L.P.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. PARTNERSHIP ORGANIZATION
 
     TEPPCO Partners, L.P. is a Delaware limited partnership which operates
through TE Products Pipeline Company, Limited Partnership, a Delaware limited
partnership (collectively the "Partnership"), in which TEPPCO Partners, L.P.
holds a 99% interest as the sole limited partner. Texas Eastern Products
Pipeline Company and Subsidiary Companies (the "Company"), a wholly owned
subsidiary of PanEnergy Corp (PanEnergy), is the general partner of the
Partnership and has agreed not to voluntarily withdraw as the general partner of
the Partnership, subject to certain limited exceptions, prior to January 1,
2000.
 
     The Company, as general partner, performs all management and operating
functions required for the Partnership pursuant to the Agreements of Limited
Partnership of TEPPCO Partners, L.P. and TE Products Pipeline Company, Limited
Partnership (the "Partnership Agreements"). The general partner is reimbursed by
the Partnership for all reasonable direct and indirect expenses incurred in
managing the Partnership.
 
     During 1990, the Partnership completed an initial public offering of
13,250,000 Units representing Limited Partner Interests (Units) at $20 per Unit.
In connection with the formation of the Partnership, the Company received
1,250,000 Deferred Participation Interests (DPIs), which represent an effective
8.45% limited partner interest in the Partnership. Effective April 1, 1994, the
DPIs began participating in distributions of cash and allocations of profit and
loss. As of December 31, 1996, 94% of the DPIs have been converted into an equal
number of Units, and the balance of such DPIs may be converted immediately prior
to the sale of the DPIs by the Company. Pursuant to its Partnership Agreement,
the Partnership has registered the resale of such Units with the Securities and
Exchange Commission. Such Units may be sold from time to time on the New York
Stock Exchange or otherwise at prices and terms then prevailing or in negotiated
transactions. As of December 31, 1996, no such Units had been sold by the
Company.
 
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
     The financial statements include the accounts of the Partnership on a
consolidated basis. The Company's 1% general partner interest in TE Products
Pipeline Company, Limited Partnership, is accounted for as a minority interest.
All significant intercompany items have been eliminated in consolidation.
Certain amounts from prior years have been reclassified to conform to current
presentation.
 
ACCOUNTING POLICY CHANGES
 
     Effective January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," with no impact to the
Partnership's consolidated financial statements. Assets were grouped and
evaluated based on the ability to identify their respective cash flows.
 
     In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS 123, "Accounting for Stock-Based Compensation." This standard allows a
company to adopt a fair value based method of accounting for its stock-based
compensation plans and addresses the timing and measurement of stock-based
compensation expense. The Partnership has elected to retain the approach of
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock issued
to Employees," (the intrinsic value method) for recognizing stock-based expense
in the consolidated financial statements. The Partnership adopted SFAS 123 in
1996 with respect to the disclosure requirements set forth therein for companies
retaining the intrinsic value approach of APB No. 25 (see Note 10).
 
                                       F-7
<PAGE>   38
 
                             TEPPCO PARTNERS, L.P.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
BUSINESS SEGMENT
 
     The Partnership has one business segment: the transportation, storage and
terminaling of refined petroleum products and liquefied petroleum gases (LPGs).
Refined petroleum products and LPGs are referred to herein, collectively, as
"petroleum products" or "products." The Partnership's interstate transportation
operations, including rates charged to customers, are subject to the regulations
prescribed by the Federal Energy Regulatory Commission (FERC).
 
REVENUE RECOGNITION
 
     Substantially all revenues are derived from interstate and intrastate
transportation, storage and terminaling of petroleum products. Transportation
revenues are recognized as products are delivered to customers. Storage revenues
are recognized upon receipt of products into storage and upon performance of
storage services. Terminaling revenues are recognized as products are
out-loaded. Revenues from the sale of product inventory are recognized net of
product cost when the products are sold. No single customer accounted for
greater than 10% of total revenues during the years ended 1996 and 1995. During
1994, billings to Marathon Oil Company, a major integrated oil company,
accounted for approximately 10% of the Partnership's total revenues.
 
INVENTORIES
 
     Inventories consist primarily of petroleum products and are valued at the
lower of cost (weighted average cost method) or market. The Partnership acquires
and disposes of various products under exchange agreements. Receivables and
payables arising from these transactions are usually satisfied with products
rather than cash. The net balances of exchange receivables and payables are
valued at weighted average cost and included in inventories.
 
     The Partnership periodically enters into futures contracts to hedge its
exposure to price risk on product inventory transactions. Recognized gains and
losses related to futures contracts which qualify as hedges are recognized in
income when the related inventory transactions are completed. Gains and losses
related to futures contracts, which have been insignificant, are reported as a
component of product inventory in the consolidated balance sheet until
recognized as income. At December 31, 1996, there were no outstanding futures
contracts.
 
PROPERTY, PLANT AND EQUIPMENT
 
     Additions to property, plant and equipment, including major replacements or
betterments, are recorded at cost. Replacements and renewals of minor items of
property are charged to maintenance expense. Depreciation expense is computed on
the straight-line method using rates based upon expected useful lives of various
classes of assets (ranging from 2% to 20% per annum).
 
     Upon sale or retirement of depreciable properties, cost less salvage is
normally charged to accumulated depreciation, and no gain or loss is recognized.
 
                                       F-8
<PAGE>   39
 
                             TEPPCO PARTNERS, L.P.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
CAPITALIZATION OF INTEREST
 
     In connection with the construction of facilities regulated by the FERC,
interest is capitalized in accordance with a FERC-established method. The rate
used to capitalize interest on borrowed funds was 10.07%, 10.06% and 10.05% for
1996, 1995 and 1994, respectively.
 
INCOME TAXES
 
     The Partnership is a limited partnership. As a result, the Partnership's
income or loss for federal income tax purposes is included in the tax return of
the individual partners, and may vary substantially from income or loss reported
for financial reporting purposes. Accordingly, no recognition has been given to
federal income taxes for the Partnership's operations. At December 31, 1996 and
1995, the Partnership's reported amount of net assets for financial reporting
purposes exceeded its tax basis by approximately $222 million and $220 million,
respectively.
 
CASH FLOWS
 
     For purposes of reporting cash flows, all liquid investments with
maturities at date of purchase of 90-days or less are considered cash
equivalents.
 
NET INCOME PER UNIT
 
     Net income per Unit is computed by dividing net income, after deduction of
the general partner's interest, by the weighted average number of Units
outstanding (a total of 14.5 million Units for 1996, 1995 and 1994). The general
partner's percentage interest in net income is based on its percentage of cash
distributions from Available Cash for each year (see Note 9). The general
partner was allocated 6.35%, 4.53% and 2.35% of net income for each of the years
ended 1996, 1995 and 1994, respectively.
 
NOTE 3. RELATED PARTY TRANSACTIONS
 
     The Partnership has no employees and is managed by the Company. Pursuant to
the Partnership Agreements, the Company is entitled to reimbursement of all
direct and indirect expenses related to business activities of the Partnership
(see Note 1).
 
     For 1996, 1995 and 1994, direct expenses incurred by the general partner in
the amount of $36.0 million, $34.0 million and $33.3 million, respectively, were
charged to the Partnership. Substantially all such costs related to payroll and
payroll related expenses, which included $1.9 million, $1.8 million and $1.3
million of expense for incentive compensation plans for each of the years ended
December 31, 1996, 1995 and 1994, respectively.
 
     For 1996, 1995 and 1994, expenses for administrative service and overhead
allocated to the Partnership by the general partner (including PanEnergy and its
affiliates) amounted to $2.6 million, $2.5 million and $2.8 million,
respectively. Such costs included general and administrative costs related to
business activities of the Partnership.
 
NOTE 4. INVESTMENTS
 
SHORT-TERM INVESTMENTS
 
     The Partnership routinely invests cash in liquid short-term investments as
part of its cash management program. Investments with maturities at date of
purchase of 90-days or less are considered cash and cash equivalents. All
short-term investments are classified as held-to-maturity securities and are
stated at amortized cost. At December 31, 1996, short-term investments consisted
of $24.1 million of investment-grade corporate notes, which mature in 1997. The
aggregate fair value of such securities approximates amortized
 
                                       F-9
<PAGE>   40
 
                             TEPPCO PARTNERS, L.P.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
cost at December 31, 1996. At December 31, 1995, the Partnership had $4.9
million invested in discounted commercial paper with original maturities in
excess of 90-days and less than one-year. Investments in discounted commercial
paper are stated at amortized cost, which approximates fair value. In addition,
short-term investments at December 31, 1995 included $13.7 million of
investment-grade corporate notes, which matured in 1996. The aggregate fair
value and unrealized gain for such securities was $13.8 million and $0.1
million, respectively, at December 31, 1995.
 
LONG-TERM INVESTMENTS
 
     At December 31, 1996 and 1995, the Partnership had $6.9 million and $16.7
million, respectively, invested in investment-grade corporate notes, which have
varying maturities until 2001. These securities are classified as
held-to-maturity securities and are stated at amortized cost. At December 31,
1996, the aggregate fair value and unrealized gain for these securities was $7.0
million and $0.1 million, respectively. At December 31, 1995, the aggregate fair
value and unrealized gain for these securities was $17.1 million and $0.4
million, respectively.
 
NOTE 5. INVENTORIES
 
     Inventories are valued at the lower of cost (based on weighted average cost
method) or market. The major components of inventories were as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1996       1995
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Gasolines...................................................  $ 3,232    $ 4,582
Propane.....................................................    6,550      6,624
Butanes.....................................................    4,023      6,868
Fuel oils...................................................       --        548
Other products..............................................    2,021      1,440
Materials and supplies......................................    3,088      2,849
                                                              -------    -------
          Total.............................................  $18,914    $22,911
                                                              =======    =======
</TABLE>
 
     The costs of inventories were lower than market at December 31, 1996 and
1995.
 
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
 
     Major categories of property, plant and equipment were as follows:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1996        1995
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Land and right of way.......................................  $ 33,445    $ 33,281
Line pipe and fittings......................................   418,096     414,977
Storage tanks...............................................    89,047      86,350
Buildings and improvements..................................     5,510       5,136
Machinery and equipment.....................................   114,757     106,746
Construction work in progress...............................    49,810      15,907
                                                              --------    --------
          Total property, plant and equipment...............  $710,665    $662,397
          Less accumulated depreciation and amortization....   149,597     128,927
                                                              --------    --------
            Net property, plant and equipment...............  $561,068    $533,470
                                                              ========    ========
</TABLE>
 
                                      F-10
<PAGE>   41
 
                             TEPPCO PARTNERS, L.P.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 7. LONG TERM DEBT
 
FIRST MORTGAGE NOTES
 
     In connection with its formation, TE Products Pipeline Company, Limited
Partnership (the "Operating Partnership") issued First Mortgage Notes (the
"Notes") in two series. The outstanding amounts related to the Notes (excluding
current maturities) consist of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1996        1995
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Series A 9.60%, due March 7, 2000...........................  $ 61,000    $ 74,000
Series B 10.20%, due March 7, 2010..........................   265,512     265,512
                                                              --------    --------
                                                              $326,512    $339,512
                                                              ========    ========
</TABLE>
 
     The Notes are secured by a mortgage on substantially all of the property,
plant and equipment of the Partnership. The weighted average interest rate of
the Notes at December 31, 1996 was 10.07%. The Partnership is permitted to
optionally prepay the Notes, in whole or in part, at a premium. Interest on the
Notes is payable semiannually on each March 7 and September 7 until retirement
of the Notes. The Series A First Mortgage Notes have varying mandatory annual
principal payments through March 7, 2000. The Series B First Mortgage Notes have
mandatory annual principal payments at par of $26.55 million beginning March 7,
2001 through March 7, 2010. Total annual principal payments related to the Notes
for the next five years is as follows (in thousands):
 
<TABLE>
<S>                                                           <C>
1997........................................................  $ 13,000
1998........................................................    17,000
1999........................................................    22,000
2000........................................................    22,000
2001........................................................    26,551
                                                              --------
                                                              $100,551
                                                              ========
</TABLE>
 
     The Note Agreement contains various restrictive covenants applicable to the
Partnership, including prohibition on working capital borrowings in excess of
$35 million (to be increased annually by inflation, if any, subject to a maximum
of $50 million), restrictions on certain other indebtedness and restrictions on
certain liens, mergers, sales of assets and investments. Under the Note
Agreements, the Operating Partnership is permitted to make cash distributions to
TEPPCO Partners, L.P. not more frequently than quarterly in an amount not to
exceed Available Cash (as defined in Note 9) for the immediately preceding
calendar quarter. For this purpose, Available Cash for any calendar quarter (for
distribution in the next succeeding calendar quarter, respectively) shall
reflect a reserve equal to 50% of the interest and principal amounts to be paid
on the Notes and other indebtedness secured by the mortgaged property in the
next succeeding calendar quarter. Such restriction is not anticipated to
preclude the Partnership from making quarterly distributions of at least $0.75
per Unit during 1997. In addition, the Operating Partnership is prohibited from
making any distribution to TEPPCO Partners, L.P. if an event of default exists
or would exist upon making such distribution or if a default exists in the
payment of interest. Should an event of default on the Notes occur, the holders
of the Notes may foreclose upon the mortgaged property. In addition to customary
events of default, it is an event of default under the Note Agreements if any
change of the general partner occurs (other than to an affiliate of the Company)
which is not approved by a majority in principal amount of the Note holders.
 
     At December 31, 1996 and 1995, the estimated fair value of the Notes
(including current maturities) was approximately $406.1 million and $449.8
million, respectively. Market prices for recent transactions and rates
 
                                      F-11
<PAGE>   42
 
                             TEPPCO PARTNERS, L.P.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
currently available to the Partnership for debt with similar terms and
maturities were used to estimate fair value.
 
NOTE 8. CONCENTRATIONS OF CREDIT RISK
 
     The Partnership's primary market areas are located in the Northeast,
Midwest and Southwest regions of the United States. The Partnership has a
concentration of trade receivable balances due from major integrated oil
companies, independent oil companies and other pipelines and wholesalers. These
concentrations of customers may affect the Partnership's overall credit risk in
that the customers may be similarly affected by changes in economic, regulatory
or other factors. Trade receivables are generally not collateralized; however,
the Partnership's customers' historical and future credit positions are
thoroughly analyzed prior to extending credit (see Note 2).
 
NOTE 9. QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
 
     The Partnership makes quarterly cash distributions of all of its Available
Cash, generally defined as consolidated cash receipts less consolidated cash
disbursements and cash reserves established by the general partner in its sole
discretion or as required by the terms of the Notes. Generally, distributions
are made 98% to the Unitholders pro rata and 2% to the general partner until
there has been distributed with respect to each Unit an amount equal to the
Minimum Quarterly Distribution ($0.55 per Unit) for each quarter. The Company
receives incremental incentive distributions of 15%, 25% and 50% on quarterly
distributions of Available Cash that exceed, $0.55, $0.65 and $0.90 per Unit,
respectively. During 1996, 1995 and 1994, incentive distributions paid to the
Company totaled $2.3 million, $1.1 million and $0.4 million, respectively.
 
     For the year ended December 31, 1996, cash distributions totaled $45.2
million, resulting from cash distributions of $0.70 per Unit in February and
May, and $0.75 per Unit in August and November. On February 7, 1997, the
Partnership paid the fourth quarter 1996 distribution of $0.75 per Unit. The
distribution increase in August 1996 reflects the Partnership's success in
improving income and cash flow levels.
 
     For the year ended December 31, 1995, cash distributions totaled $40.3
million, resulting from cash distributions of $0.65 per Unit in February, May
and August, and $0.70 per Unit in November. During 1994, the Partnership paid
cash distributions of $34.7 million, resulting from quarterly distributions of
$0.57 per Unit in February, and $0.60 per Unit in May, August and November.
Additionally, the DPIs began participating in distributions of cash effective
with the quarterly distribution paid in May 1994 (see Note 1).
 
NOTE 10. STOCK OPTION PLAN
 
     During 1994, the Company adopted the Texas Eastern Products Pipeline
Company 1994 Long Term Incentive Plan (1994 LTIP). The 1994 LTIP provides key
employees with an incentive award whereby a participant is granted an option to
purchase Units together with a stipulated number of Performance Units. Under the
provisions of the 1994 LTIP, no more than one million options and two million
Performance Units may be granted. Each Performance Unit creates a credit to a
participant's Performance Unit account when earnings exceed a threshold, which
was $2.50 per Unit and $2.00 per Unit for the awards made in 1995 and 1994,
respectively. Grants during 1995 and 1994 included 35,000 and 40,000 Performance
Units, respectively. No Performance Units were granted during 1996. When
earnings for a calendar year (exclusive of certain special items) exceed the
threshold, the excess amount is credited to the participant's Performance Unit
account. The balance in the account may be used to exercise Unit options granted
in connection with the Performance Units or may be withdrawn two years after the
underlying options expire, usually 10 years from the date of grant. Under the
agreement for such Unit options, the options become exercisable in equal
installments over periods of one, two, and three years from the date of the
grant. Options may also be exercised
 
                                      F-12
<PAGE>   43
 
                             TEPPCO PARTNERS, L.P.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
by normal means once vesting requirements are met. A summary of Unit options
granted under the terms of the 1994 LTIP is presented below:
 
<TABLE>
<CAPTION>
                                                                          WEIGHTED
                                                                          AVERAGE
                                                              UNITS    EXERCISE PRICE
                                                              ------   --------------
<S>                                                           <C>      <C>
Outstanding at December 31, 1993............................      --            --
  Granted...................................................  20,000      $28.6875
  Exercised.................................................      --            --
                                                              ------
Outstanding at December 31, 1994............................  20,000      $28.6875
  Granted...................................................  35,000      $27.6250
  Exercised.................................................  (1,561)     $28.6875
                                                              ------
Outstanding at December 31, 1995............................  53,439      $27.9916
  Granted...................................................      --            --
  Exercised.................................................  (6,790)     $28.2026
                                                              ------
Outstanding at December 31, 1996............................  46,649      $27.9609
                                                              ======
Exercisable at December 31, 1994............................      --            --
Exercisable at December 31, 1995............................   5,105      $28.6875
Exercisable at December 31, 1996............................  16,647      $28.1407
</TABLE>
 
     As discussed in Note 2, in October 1995 the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation," which allows a company to adopt a
fair value based method of accounting for its stock-based compensation plans.
The Partnership has elected to retain the intrinsic value method of APB No. 25
for recognizing stock-based expense. The exercise price of all options awarded
under the 1994 LTIP equaled the market price of the Partnership's Units on the
date of grant. Accordingly, no compensation expense was recognized at the date
of grant. Had compensation expense been determined consistent with SFAS 123,
compensation expense for the awards granted in 1995 would have totaled $31,158
during 1996 and $29,875 during 1995; and would not have changed net income per
Unit as reported.
 
     For purposes of determining compensation costs using the provisions of SFAS
123, the fair value of 1995 option grants were determined using the
Black-Scholes option-valuation model. The key input variables used in valuing
the options were: risk-free interest rate based on 5-year Treasury
strips -- 7.8%; dividend yield -- 8.4%; Unit price volatility -- 18%; expected
option lives -- five years.
 
NOTE 11. LEASES
 
     The Partnership utilizes leased assets in several areas of its operations.
Total rental expense during 1996, 1995 and 1994 was $2.5 million, $2.6 million,
and $2.9 million, respectively. The minimum rental payments under the
Partnership's various operating leases for the years 1997 through 2001 are $3.6
million, $3.9 million, $3.7 million, $3.4 million and $3.1 million,
respectively. Thereafter, payments aggregate $9.3 million through 2007.
 
     The Partnership has begun construction to connect the pipeline system to
Colonial Pipeline Company's (Colonial) pipeline at Beaumont, Texas. Construction
of the connection and related facilities is expected to be completed during the
second quarter of 1997. The Partnership has entered into a 10-year capacity
lease with Colonial, commencing the month following completion of construction,
whereby the Partnership has guaranteed a minimum monthly throughput rate for the
new connection. The minimum lease payments related to this agreement are
included in the amounts disclosed above.
 
                                      F-13
<PAGE>   44
 
                             TEPPCO PARTNERS, L.P.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 12. EMPLOYEE BENEFITS
 
PENSION BENEFITS
 
     The Company's employees are included with other affiliates of PanEnergy in
a noncontributory, trustee-administered pension plan. The plan provides pension
benefits to officers and employees of PanEnergy and its subsidiaries. These
benefits are generally based on the employee's years of service and highest
average earnings during a specific period. PanEnergy's policy is to fund amounts
as necessary on an actuarial basis to provide assets sufficient to meet the
benefits to be paid to plan members. Pension expense allocated to the
Partnership for 1996, 1995 and 1994 was $1.9 million, $1.5 million and $1.6
million, respectively. The Partnership reimburses the Company for pension
expense on a monthly basis. The significant assumptions affecting pension
expense include: (i) a discount rate of 7.5% at December 31, 1996 (7.5% at
December 31, 1995 and 8.5% at December 31, 1994); (ii) rates of increase in
compensation levels of 5% for all periods; and (iii) expected long-term rates of
return on plan assets of 9.5% for all periods.
 
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
 
     The Company's employees are included with other affiliates of PanEnergy in
contributory and noncontributory, trustee-administered plans that provide
certain health care and life insurance benefits for retired employees.
Substantially all of the Company's employees may become eligible for these
benefits if they reach retirement age while working for the Company and have
attained 10 years of specified service. The Partnership reimburses the Company
for postretirement benefits cost on a monthly basis. The components of net
postretirement benefits cost for the years ended December 31, 1996, 1995 and
1994 were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                1996          1995          1994
                                                             ----------    ----------    ----------
<S>                                                          <C>           <C>           <C>
Service cost...............................................    $ 240          $169          $211
Interest cost..............................................      506           476           430
Expected return on plan assets.............................     (126)          (74)          (33)
Amortization of transition obligation......................      205           201           210
                                                               -----          ----          ----
Net postretirement benefits cost...........................    $ 825          $772          $818
                                                               =====          ====          ====
</TABLE>
 
     The transition obligation resulted from the implementation of accrual
accounting for such benefits and is being amortized over approximately 20 years,
commencing in 1993. The weighted average discount rate used in determining the
transition obligation was 7.5%. The assumed health care cost trend rate for
medical costs is 7.0% for 1996. The health care cost trend rate is expected to
decrease, with a 5.5% ultimate trend rate expected to be achieved by 1999. The
health care cost trend rate assumption has a significant effect on the amounts
reported. For example, a 1% increase in the assumed health care cost trend rates
in each future year would increase the transition obligation for the medical
plan by $450,000 as of December 31, 1996, and the annual aggregate of the
service and interest cost components of net postretirement benefits cost by
$26,000.
 
POSTEMPLOYMENT BENEFITS
 
     The Partnership accrues expense for certain benefits provided to former or
inactive employees after employment but before retirement. During 1996, 1995 and
1994, the Partnership recorded $0.2 million, $0.1 million and $0.5 million,
respectively, of expense for such benefits.
 
                                      F-14
<PAGE>   45
 
                             TEPPCO PARTNERS, L.P.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 13. CONTINGENCIES
 
     The Partnership is involved in various claims and legal proceedings
incidental to its business. In the opinion of management, these claims and legal
proceedings will not have a material adverse effect on the Partnership's
consolidated financial position or results of operations.
 
     The operations of the Partnership are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Partnership believes the operations of the pipeline system are in material
compliance with applicable environmental regulations, risks of significant costs
and liabilities are inherent in pipeline operations, and there can be no
assurance that significant costs and liabilities will not be incurred. Moreover,
it is possible that other developments, such as increasingly strict
environmental laws and regulations and enforcement policies thereunder, and
claims for damages to property or persons resulting from the operations of the
pipeline system, could result in substantial costs and liabilities to the
Partnership. The Partnership does not anticipate that changes in environmental
laws and regulations will have a material adverse effect on its financial
position, operations or cash flows in the near term.
 
     The Indiana Department of Environmental Management (IDEM) has approved a
remedial investigation phase II sampling plan for the Partnership's Seymour,
Indiana, terminal. The phase II sampling plan is part of the Agreed Order
entered into between the Partnership and IDEM that will ultimately result in a
remediation program for any on-site and off-site environmental problems
attributable to the Partnership's operations at Seymour. In the opinion of the
general partner, the completion of the remediation program to be proposed by the
Partnership, if such program is approved by IDEM, will not have a material
adverse impact on the Partnership.
 
     Substantially all of the petroleum products transported and stored by the
Partnership are owned by the Partnership's customers. At December 31, 1996, the
Partnership had approximately 14.8 million barrels of products in its custody
owned by customers. The Partnership is obligated for the transportation, storage
and delivery of such products on behalf of its customers. The Partnership
maintains insurance adequate to cover product losses through circumstances
beyond its control.
 
NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                          FIRST      SECOND     THIRD      FOURTH
                                                         QUARTER    QUARTER    QUARTER    QUARTER
                                                         --------   --------   --------   --------
                                                          (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S>                                                      <C>        <C>        <C>        <C>
1996
Operating revenues.....................................   $58,849    $48,946    $49,528    $58,702
Operating income.......................................    27,536     17,497     17,449     24,952
Net income.............................................    20,126     10,304     10,392     17,826
Net income per Unit....................................   $  1.32    $  0.67    $  0.65    $  1.15
 
1995(1)
Operating revenues.....................................   $53,177    $46,468    $46,290    $57,781
Operating income.......................................    24,516     16,583     13,708     21,685
Net income.............................................    16,928      9,167      6,401     14,221
Net income per Unit....................................   $  1.12    $  0.61    $  0.43    $  0.92
</TABLE>
 
---------------
 
(1) The third and fourth quarters of 1995 include special charges of $4.5
    million ($0.30 per Unit) and $2.9 million ($0.19 per Unit), respectively,
    related to the settlement of certain claims and environmental remediation
    costs at the Partnership's Seymour, Indiana, terminal.
 
                                      F-15
<PAGE>   46
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           3.1           -- Certificate of Limited Partnership of the Partnership
                            (Filed as Exhibit 3.2 to the Partnership's Registration
                            Statement (Commission File No. 33-32203) and incorporated
                            herein by reference).
           4.1           -- Form of Certificate representing Units (Filed as Exhibit
                            4.1 to the Partnership's Registration Statement
                            (Commission File No. 33-32203) and incorporated herein by
                            reference).
           4.2           -- Agreement of Limited Partnership of TEPPCO Partners,
                            L.P., dated March 7, 1990 (Filed as Exhibit 4(a) to Form
                            10-Q of TEPPCO Partners, L.P. (Commission File No.
                            1-10403) for the quarter ended March 31, 1990 and
                            incorporated herein by reference).
           4.3           -- Note Agreement, 9.60% Series A and 10.20% Series B First
                            Mortgage Notes, dated February 28, 1990 (Filed as Exhibit
                            4(b) to Form 10-Q of TEPPCO Partners, L.P. (Commission
                            File No. 1-10403) for the quarter ended March 31, 1990
                            and incorporated herein by reference).
           4.4           -- Amendment to Note Agreement, dated June 1, 1994, 9.60%
                            Series A and 10.20% Series B First Mortgage Notes (Filed
                            as Exhibit 4 to Form 10-Q of TEPPCO Partners L.P.
                            (Commission File No. 1-10403) for the quarter ended June
                            30, 1994 and incorporated herein by reference).
           4.5           -- Amendment to Note Agreement, dated February 24, 1995,
                            9.60% Series A and 10.20% Series B First Mortgage Notes
                            (Filed as Exhibit 4.5 to Form 10-K of TEPPCO Partners,
                            L.P. (Commission File No. 1-10403) for the year ended
                            December 31, 1994 and incorporated herein by reference).
          10.1           -- Agreement of Limited Partnership of TE Products Pipeline
                            Company, Limited Partnership, dated March 7, 1990 (Filed
                            as Exhibit 28 to Form 10-Q of TEPPCO Partners, L.P.
                            (Commission File No. 1-10403) for the quarter ended March
                            31, 1990 and incorporated herein by reference).
          10.2           -- Assignment and Assumption Agreement, dated March 24,
                            1988, between Texas Eastern Transmission Corporation and
                            the Company (Filed as Exhibit 10.8 to the Partnership's
                            Registration Statement (Commission File No. 33-32203) and
                            incorporated herein by reference).
          10.3           -- Texas Eastern Products Pipeline Company 1995 Employee
                            Incentive Compensation Plan executed on April 18, 1995
                            (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners,
                            L.P. (Commission File 1-10403) for the quarter ended June
                            30, 1995 and incorporated herein by reference).
          10.4           -- Agreement Regarding Environmental Indemnities and Certain
                            Assets. (Filed as Exhibit 10.5 to the Partnership's Form
                            10-K (Commission File No. 1-10403) for the year ended
                            December 31, 1990 and incorporated herein by reference).
          10.5           -- Texas Eastern Products Pipeline Company Management
                            Incentive Compensation Plan executed on January 30, 1992
                            (Filed as Exhibit 10 to Form 10-Q of TEPPCO Partners,
                            L.P. (Commission File No. 1-10403) for the quarter ended
                            March 31, 1992 and incorporated herein by reference).
          10.6           -- Texas Eastern Products Pipeline Company Long-Term
                            Incentive Compensation Plan executed on October 31, 1990.
                            (Filed as Exhibit 10.9 to the Partnership's Form 10-K
                            (Commission File No. 1-10403) for the year ended December
                            31, 1990 and incorporated herein by reference).
</TABLE>
<PAGE>   47
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          10.7           -- Form of Amendment to Texas Eastern Products Pipeline
                            Company Long-Term Incentive Compensation Plan. (Filed as
                            Exhibit 10.7 to the Partnership's Form 10-K (Commission
                            File No. 1-10403) for the year ended December 31, 1995
                            and incorporated herein by reference).
          10.8           -- Employees' Savings Plan of Panhandle Eastern Corporation
                            and Participating Affiliates (Effective January 1, 1991).
                            (Filed as Exhibit 10.10 to the Partnership's Form 10-K
                            (Commission File No. 1-10403) for the year ended December
                            31, 1990 and incorporated herein by reference).
          10.9           -- Retirement Income Plan of Panhandle Eastern Corporation
                            and Participating Affiliates (Effective January 1, 1991).
                            (Filed as Exhibit 10.11 to the Partnership's Form 10-K
                            (Commission File No. 1-10403) for the year ended December
                            31, 1990 and incorporated herein by reference).
          10.10          -- Panhandle Eastern Corporation -- Executive Benefit
                            Equalization Plan as amended November 29, 1989; effective
                            January 1, 1990 (Filed as Exhibit 10.05 to Form 10-K of
                            Panhandle (Commission File No. 1-8157) for the year ended
                            December 31, 1989 and incorporated herein by reference).
          10.11          -- Employment Agreement with William L. Thacker, Jr. (Filed
                            as Exhibit 10 to Form 10-Q of TEPPCO Partners, L.P.
                            (Commission File No. 1-10403) for the quarter ended
                            September 30, 1992 and incorporated herein by reference).
          10.12          -- Texas Eastern Products Pipeline Company 1994 Long Term
                            Incentive Plan executed on March 8, 1994 (Filed as
                            Exhibit 10.1 to Form 10-Q of TEPPCO Partners, L.P.
                            (Commission File 1-10403) for the quarter ended March 31,
                            1994 and incorporated herein by reference).
          10.13          -- Panhandle Eastern Corporation Key Executive Deferred
                            Compensation Plan established effective January 1, 1994
                            (Filed as Exhibit 10.2 to Form 10-Q of TEPPCO Partners,
                            L.P. (Commission File 1-10403) for the quarter ended
                            March 31, 1994 and incorporated herein by reference).
          22.1           -- Subsidiaries of the Partnership (Filed as Exhibit 22.1 to
                            the Partnership's Registration Statement (Commission File
                            No. 33-32203) and incorporated herein by reference).
         *23             -- Consent of KPMG Peat Marwick LLP
         *24             -- Powers of Attorney.
         *27             -- Financial Data Schedule as of and for the year ended
                            December 31, 1996.
</TABLE>
 
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* Filed herewith.