TEPPCO Partners, L.P.

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TEPPCO Partners, L.P.

2929 Allen Parkway
Houston, Texas 77252
U.S.A.
Telephone: (713) 759-3636
Toll Free: (800) 877-3636
Fax: (713) 759-3957
Web site: http://www.teppco.com

Public Company
Incorporated: 1990
Employees: 1,104
Sales: $5.95 billion (2004)
Stock Exchanges: New York
Ticker Symbol: TPP
NAIC: 424710 Petroleum Bulk Stations and Terminals; 486910 Pipeline Transportation of Refined Petroleum Products; 551112 Offices of Other Holding Companies

TEPPCO Partners, L.P. is a major pipeline company, operating nearly 12,000 miles of pipeline as well as storage and related facilities that serve the downstream, midstream, and upstream segments of its industry. TEPPCO's downstream assets are located in 14 states, highlighted by a 5,500-mile pipeline that carries refined petroleum products from Texas to New England and the Mid-Atlantic. The company's midstream activities involve transporting roughly 2.5 billion cubic feet of natural gas per day through a 1,900-mile network of pipeline in Colorado, New Mexico, and Texas. On the upstream side, TEPPCO transports crude oil to destinations in Oklahoma and Texas through 3,500 miles of pipeline.

Origins

Although TEPPCO was founded in 1990, its assets enjoyed a lengthier history, constituting the core of the company's operations as it expanded during its inaugural decade. The foundation of the company was created during World War II, when the prosecution of the war effort was hampered by the attacks of German U-boats on oil tankers trying to reach the United States' eastern coast. Ships transporting oil vital to the war effort were being sunk, prompting U.S. officials to search for a safer means of transporting crude oil from fields in Texas to refineries on the East Coast. As a solution, the federal government constructed two pipelines, the two-foot diameter Big Inch Pipeline and its slightly smaller sister pipeline, the 20-inch diameter Little Big Inch, through which crude oil was delivered from Texas to destinations eastward. At the end of the war, the War Assets Administration put the Big Inch and Little Big Inch up for sale, an offering that attracted the Texas Eastern Transmission Company, the predecessor to TEPPCO. Texas Eastern paid $143 million for the two pipelines and chose to use them for a different purpose than the federal government had used them, deciding the Big Inch and the Little Big Inch would be best used as pipelines to deliver natural gas.

Senior officials at Texas Eastern soon changed their minds about how the Little Big Inch should best be used, adopting a strategy that would be employed by TEPPCO during its first years in business. In 1955, after a decade of using the 20-inch pipeline to deliver natural gas, Texas Eastern converted much of the Little Big Inch into a pipeline geared for transporting refined petroleum products, the aspect of TEPPCO's business that would form its downstream segment. In 1958, the company completed its first test shipment of refined products from Texas to the Midwest, inaugurating regular shipments of liquefied petroleum gases (LPGs) by the end of the year. Texas Eastern's shipments of LPGs was a groundbreaking event in the pipeline industry, with the first test shipments representing the longest single shipments of LPGs ever made and the first time LPGs had ever traveled through a pipeline as large as the Little Big Inch.

With its pipeline business as its core, Texas Eastern developed into a formidable competitor during the 1960s, 1970s, and 1980s. The company diversified into other areas of the energy industry and strengthened its base of operations, emerging as a pipeline company with $3.5 billion in annual sales by the end of the 1980s. Much of the expansion and diversification completed during the decades would have little bearing on TEPPCO, but the expansion of Texas Eastern's pipeline system, which occurred gradually from the 1960s through the 1980s, was relevant, giving TEPPCO, at its birth, a pipeline system significantly more robust than the one created in the wake of World War II. TEPPCO's inheritance from Texas Eastern's sprawling operations became clear at the end of the 1980s, when Texas Eastern was under siege, its assets the object of another company's fancy.

A company named The Coastal Corporation launched a hostile takeover against Texas Eastern at the end of the 1990s, but the company was saved by what the business community referred to as a "white knight." The white knight was Panhandle Eastern Corporation, which acquired Texas Eastern in the spring of 1989 to thwart the unsolicited advances of The Coastal Corporation. Not long after acquiring Texas Eastern, Panhandle began selling all of Texas Eastern's non-pipeline assets and all of its pipeline assets not related to natural gas. Panhandle only wanted Texas Eastern's more than 10,000-mile network of natural gas pipelines. Panhandle sold La Gloria Oil and Gas Co., a crude oil refinery, Petrolane Inc., a marketer of LPGs, and oil and gas reserves in the North Sea that were valued at $1.4 billion. At the end of 1989, the company announced another divestiture, stating that it planned to sell Texas Eastern's petroleum products pipeline by forming a master limited partnership (MLP) named TEPPCO Partners L.P. and spinning off the MLP in a $215 million public offering. "It's not a financial decision," an analyst explained in a December 11, 1989 interview with the Houston Business Journal, referring to the spinoff that created TEPPCO. "It's part of Panhandle's ongoing program to sell its non-strategic assets. They're selling because the history of pipeline diversification is that 90 percent have not turned out well."

Transporting Refined Petroleum in 1990

TEPPCO was formed on March 7, 1990, as an MLP, a corporate structure designed by the U.S. House of Representatives to provide tax incentives that were expected to stimulate investment. Panhandle spun off the company in a public offering so it could retain a 10 percent interest in the company, which left TEPPCO with 90 percent ownership of a 4,100-mile petroleum products pipeline system that extended from southeastern Texas to the Northeast. At its outset, TEPPCO's assets represented roughly 10 percent of what had constituted Texas Eastern's business before its piecemeal breakup by Panhandle.

Compared to its stature at the beginning of the 21st century, TEPPCO was a small company during the early 1990s. Although the company was distinguished by its ownership of one of the largest common carrier pipelines of refined petroleum products in the nation, it generated only a fraction of the revenue it collected after its first decade of business. The difference in size between 1990 and 2000 stemmed from the scope of the company's business, which was confined to the downstream sector of the petroleum industry during much of the 1990s. As a company operating exclusively in the downstream segment, TEPPCO acted as a transporter of refined products to the Midwest and of propane to the Midwest and Northeast, a role that limited its opportunities for growth. TEPPCO collected $166 million in sales in 1992, a total that eclipsed $200 million by 1995 and reached $429 million by 1998—the first year the company entered the upstream segment of the petroleum sector, a segment that included crude oil transportation, storage, gathering, and marketing activities.

TEPPCO, pressed by the need to diversify and to broaden its business scope, had acquired two crude oil fractionation (chemical separation) facilities in Colorado from Duke Energy Field Services, Inc., giving it a presence in the crude (upstream) market to complement its presence in the refined (downstream) market. The move into the upstream segment enabled TEPPCO to nearly double its sales total in 1998, a move that was buttressed by the November 1998 acquisition of Duke Energy Transport & Trading Co., which stored, transported, and marketed crude oil primarily in Texas and Oklahoma. When the financial totals for 1999 were released, the addition of upstream-related business greatly increased the company's financial stature. Sales for the year reached $1.93 billion, with $1.69 billion of the total derived from crude oil and petroleum products.

On the heels of its aggressive move into the upstream segment, TEPPCO launched a major expansion campaign, increasing its size and scope at a rapid rate. The first major acquisition of the campaign occurred in March 2000, when TEPPCO paid $318 million for assets belonging to Arco. The assets included crude oil terminal facilities in Cushing, Oklahoma, and Midland, Texas, a crude oil pipeline stretching from western Texas to Houston, and a 50 percent interest in the Seaway crude and refined products system. The Seaway assets included a crude oil pipeline connecting Freeport, Texas, and Cushing, a refined products pipeline from Pasadena, Texas, to Cushing, and a crude oil terminal in Texas City, Texas.

Company Perspectives:

We create superior value for our customers, employees, communities and unitholders through the transportation and storage of petroleum related products and by our steadfast adherence to a "first in service" strategy and through our business values.

Entering the Natural Gas Business in 2001

After strengthening both its upstream and downstream businesses, TEPPCO completed its diversification by entering the midstream segment, making the company a comprehensive player in the nation's pipeline industry. In September 2001, TEPPCO paid $360 million for Alberta Energy Co.'s subsidiary, Jonah Gas Gathering Co., which owned a system of pipeline that collected natural gas from Wyoming's Green River Basin, considered to be one of the country's most active gas basins. The acquisition included 300 miles of pipeline, five compressor stations, and 50 miles of additional pipeline under construction at the time of the transaction. When the construction was completed, the Jonah system was capable of collecting and carrying more than 700 million cubic feet of gas per day. Roughly a year after the Jonah acquisition, TEPPCO completed another significant natural gas purchase, part of nearly $1.6 billion the company spent at the dawn of the new century to bolster it market presence. The company paid $444 million to Burlington Resources Gathering Inc. to acquire the company's Val Verde Gathering System in New Mexico's San Juan Basin. The purchase included 360 miles of pipeline, 14 compressor stations, and a large amine treating station for the removal of carbon dioxide.

By the end of 2002, TEPPCO's annual revenue volume had swelled to $3.24 billion, more than 20 times the total collected a decade earlier. During this period, the company had been led by William L. Thacker, a former president of Unocal Pipeline Company. Thacker retired as chairman and chief executive officer in May 2002, making room for the promotion of Barry R. Pearl from the posts of president and chief operating officer. Under Pearl's stewardship, TEPPCO lost none of the momentum built up during Thacker's last years in charge as it pressed forward with the objective of completing between $300 million and $400 million per year in acquisitions. In 2003, the company and Louis Dreyfus Energy Services formed Mont Belvieu Storage Partners L.P. to serve Mont Belvieu, Texas, a major LPG and natural gas liquid (NGL) storage and fractionation hub for the United States, and acquired crude oil supply and transportation assets located along the upper Texas Gulf Coast, shoring up its supply and transportation capabilities.

As TEPPCO plotted its course for its second decade of business, the company held sway as a formidable competitor in the pipeline industry, having achieved much of its growth after entering the upstream and midstream market segments. The company's revenue total marched upward during the first years of Pearl's command, reaching $4.25 billion in 2003 before making a massive leap to $5.95 billion in 2004. The company's progress during the first half of 2005 provided every indication that continued expansion remained one of Pearl's priorities. In February 2005, the company announced a $122 million expansion project of the Jonah system that was expected to increase capacity to 1.5 billion cubic feet per day. The project was slated for completion by December 2005. In April 2005, the company acquired crude oil storage assets in Cushing and a 158-mile crude oil pipeline connecting Mexia, Texas, to Houston. In July 2005, TEPPCO acquired a 90-mile pipeline and storage assets capable of handling 5.8 million barrels from Texas Genco LLC. TEPPCO paid $62 million for the assets, which were intended to strengthen the company's refined products capabilities in the Houston and Texas City areas.

Principal Subsidiaries

TE Products Pipeline Company, Limited Partnership; TCTM, L.P.; TEPPCO Midstream Companies, L.P.; TEPPCO Crude Oil, L.P.

Principal Competitors

El Paso Corporation; Kinder Morgan, Inc.; The Williams Companies, Inc.

Key Dates:

1990:: TEPPCO is formed.
1998:: TEPPCO adds to its refined petroleum products capabilities by beginning to transport crude oil.
2000:: TEPPCO acquires Arco Pipe Line Co.
2001:: Jonah Gas Gathering Co. is acquired, marking TEPPCO's entry into the natural gas business.
2002:: Natural gas assets are acquired in New Mexico's San Juan Basin.
2005:: TEPPCO begins expanding its Jonah system.