EOTT ENERGY LLC - 10-Q Quarterly Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2003

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

Commission File Number 000-50195

EOTT ENERGY LLC
(Exact name of registrant as specified in its charter)

Delaware 76-0424520
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2000 West Sam Houston Parkway South,
Suite 400
Houston, Texas 77042
(Address of principal executive offices) (Zip Code)

(713) 993-5200
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate by checkmark whether the registrant has filed all documents
and reports to be filed by Section 12, 13, 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [X] No [ ]

The number of limited liability company units outstanding as of August
8, 2003 was 12,328,468.

EOTT ENERGY LLC

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Unit Amounts)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial
statements.

1

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Unit Amounts)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial
statements.

2

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial
statements.

3

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial
statements.

4

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS'/PARTNERS' CAPITAL
(In Thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial
statements.

5

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

We are a Delaware limited liability company that was formed on November
14, 2002 as EOTT Energy LLC ("EOTT LLC") in anticipation of assuming and
continuing the business formerly directly owned by EOTT Energy Partners, L.P.
(the "MLP"), which, as described in Note 2 below, filed for Chapter 11
reorganization with its wholly owned subsidiaries on October 8, 2002. We emerged
from bankruptcy and EOTT LLC became the successor registrant to the MLP on March
1, 2003, the effective date of the Third Amended Joint Chapter 11 Plan of
Reorganization, as supplemented ("Restructuring Plan"). We operate principally
through four affiliated operating limited partnerships, EOTT Energy Operating
Limited Partnership, EOTT Energy Canada Limited Partnership, EOTT Energy
Pipeline Limited Partnership, and EOTT Energy Liquids L.P., each of which is a
Delaware limited partnership. In 1999, EOTT Energy Finance Corp. was formed in
connection with a debt offering to facilitate certain investors' ability to
purchase our 11% senior notes. In 2001, we formed EOTT Energy General Partner,
L.L.C., which serves as the general partner for our four affiliated operating
limited partnerships. Until our emergence from bankruptcy, EOTT Energy Corp.
(the "General Partner"), a Delaware corporation and a wholly-owned subsidiary of
Enron Corp. ("Enron"), served as the general partner of the MLP and owned an
approximate 1.98% general partner interest in the MLP. The General Partner also
filed for bankruptcy on October 21, 2002. Unless the context otherwise requires,
the terms "we" and "EOTT" refer to EOTT Energy LLC and our four affiliated
operating limited partnerships, EOTT Energy Finance Corp., and EOTT Energy
General Partner, L.L.C. (the "Subsidiary Entities"), and for periods prior to
our emergence from bankruptcy in March 2003, "we" and "EOTT" refer to EOTT
Energy Partners, L.P. and its sole general partner, EOTT Energy Corp., as well
as the Subsidiary Entities.

The financial statements presented herein have been prepared by EOTT in
accordance with generally accepted accounting principles in the United States
and the rules and regulations of the Securities and Exchange Commission. Interim
results are not necessarily indicative of results for a full year. The financial
information included herein has been prepared without audit. The condensed
consolidated balance sheet at December 31, 2002 has been derived from, but does
not include all the disclosures contained in the audited financial statements
for the year ended December 31, 2002. In the opinion of management, all of these
unaudited statements include all adjustments and accruals consisting only of
normal recurring adjustments, except for those relating to fresh start reporting
which are more fully discussed below, which are necessary for a fair
presentation of the results of the interim periods reported herein. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and accompanying notes included in our
Annual Report on Form 10-K for the year ended December 31, 2002.

As a result of the application of fresh start reporting under the
American Institute of Certified Public Accountants Statement of Position No.
90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," as of February 28, 2003 (the date chosen for accounting
purposes), EOTT's financial results for the six months ended June 30, 2003
include two different bases of accounting and accordingly, the financial
condition, operating results and cash flows of the Successor Company and the
Predecessor Company have been separately disclosed. For a further discussion of
fresh start reporting, see Note 3. For purposes of these financial statements,
references to the "Predecessor Company" are references to EOTT for periods
through February 28, 2003 (the last day of the calendar month in which EOTT
emerged from bankruptcy) and references to the "Successor Company" are
references to EOTT for periods subsequent to February 28, 2003. The Successor
Company's financial statements are not comparable to the Predecessor Company's
financial statements. See further discussion in Note 3.

As a limited liability company, we are generally treated like a
partnership for federal income tax purposes and like a corporation with limited
liability for state law and other non-tax purposes. In other words, for federal
income tax purposes, we do not pay tax on our income or gain, nor are we
entitled to a deduction for our losses, but such gains or losses are allocated
to each member in accordance with the member's interest in us and the member
will be responsible for paying the income tax applicable to such membership
interest. Our taxable income or loss, which may vary substantially from the net
income or net loss we report in our

6

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

consolidated statement of operations, is includable in the federal income tax
returns of our members. The aggregate difference in the basis of our net assets
for financial and tax reporting purposes cannot be readily determined as we do
not have access to information about each member's tax attributes in EOTT. Under
our Limited Liability Company Agreement (the "LLC Agreement"), the Board may,
but is not required, to make distributions to each interest holder, and in any
event, our exit credit facilities do not permit us to make any cash
distributions so long as we have any indebtedness or other obligations
outstanding under the exit credit facilities. Similar to a corporation, members
do not share our liability. Under our LLC Agreement, members are also entitled
to certain information about us and to vote for directors and on certain other
matters. The holders of the majority of outstanding units have the right to vote
on mergers and the election or removal of directors. The holders of two-thirds
of the units have the right to approve additional issuances of equity and
certain amendments to the LLC Agreement. Members are not entitled to participate
in our management directly, but participate indirectly through the election of
our directors.

Certain reclassifications have been made to prior period amounts to
conform with the current period presentation.

2. BANKRUPTCY PROCEEDINGS AND RESTRUCTURING PLAN

On October 8, 2002, the MLP and the Subsidiary Entities filed
pre-negotiated voluntary petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code (the "EOTT Bankruptcy"). The filing was made in
the United States Bankruptcy Court for the Southern District of Texas, Corpus
Christi Division (the "EOTT Bankruptcy Court"). Additionally, the General
Partner filed a voluntary petition for reorganization under Chapter 11 on
October 21, 2002 in the EOTT Bankruptcy Court in order to join in the voluntary,
pre-negotiated Restructuring Plan. On October 24, 2002, the EOTT Bankruptcy
Court administratively consolidated, for distribution purposes, the General
Partner's bankruptcy filing with the previously filed cases. We operated as
debtors-in-possession under the Bankruptcy Code, which means we continued to
remain in possession of our assets and properties and continued our day-to-day
operations. The EOTT Bankruptcy Court confirmed our Restructuring Plan on
February 18, 2003, and it became effective March 1, 2003.

We entered into an agreement, dated October 7, 2002, with Enron,
Standard Chartered Bank ("Standard Chartered"), Standard Chartered Trade
Services Corporation ("SCTS"), Lehman Commercial Paper Inc. ("Lehman
Commercial") and holders of approximately 66% of the outstanding principal
amount of our 11% senior notes (the "Restructuring Agreement"). Under this
Restructuring Agreement, Enron, Standard Chartered, SCTS, Lehman Commercial and
approximately 66% of our 11% senior note holders agreed to vote in favor of the
Restructuring Plan, and to refrain from taking actions not in support of the
Restructuring Plan.

The Restructuring Plan, however, was subject to the approval of the
EOTT Bankruptcy Court, and the settlement agreement with Enron was subject to
the additional approval of the United States Bankruptcy Court for the Southern
District of New York (the "Enron Bankruptcy Court"), where Enron and certain of
its affiliates filed for Chapter 11 bankruptcy protection. The EOTT Bankruptcy
Court approved the settlement agreement with Enron on November 22, 2002, and the
Enron Bankruptcy Court approved the settlement agreement on December 5, 2002.
The major provisions of the Restructuring Plan, which became effective March 1,
2003, are as follows:

o Enron has no further affiliation with us. The General Partner
will be liquidated as soon as reasonably possible with no
material effect to EOTT.

o We consummated the settlement agreement with Enron effective
December 31, 2002.

o EOTT was converted to a limited liability company structure
and EOTT LLC became the successor registrant to the MLP. The
MLP was merged into EOTT Energy Operating Limited Partnership.
EOTT LLC manages the current operating limited partnerships.

7

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

o We are now managed by a seven-member Board of Directors. One
of the directors is the chief executive officer of EOTT LLC,
and the remaining six directors were selected by the former
senior noteholders who signed the Restructuring Agreement.

o We cancelled our outstanding $235 million of 11% senior
unsecured notes. Our former senior unsecured noteholders and
holders of allowed general unsecured claims will receive a pro
rata share of $104 million of 9% senior unsecured notes and a
pro rata share of 11,947,820 limited liability company units
of EOTT LLC representing 97% of the newly issued units. The
$104 million senior unsecured notes and the 11,947,820 units
have been issued to the Bank of New York, the depositary
agent, but have not been distributed to our creditors as of
June 30, 2003. The $104 million senior unsecured notes and
11,947,820 units are deemed to be issued and outstanding for
purposes of these financial statements. See further discussion
in Note 6 and Note 9.

o We cancelled the MLP's publicly traded common units, and the
former holders of the MLP's common units received 369,520
limited liability company units of EOTT LLC, representing 3%
of newly issued units, and 957,981 warrants to purchase an
additional 7% of the new units. We cancelled the MLP's
subordinated units and additional partnership interests. See
Note 6.

o We are authorized and the board has approved the development
of a management incentive plan. The incentive plan reserves
1.2 million of EOTT LLC's authorized units for issuance to
certain key employees and directors.

o We closed exit credit facilities with Standard Chartered,
SCTS, Lehman Brothers Inc. ("Lehman"), and other lenders on
February 28, 2003. The Term Loan Agreement and Letter of
Credit Agreement under these facilities each have a term of 18
months post-bankruptcy under substantially the same terms as
the debtor in possession facilities discussed in Note 9, with
the inclusion of certain additional financial covenants. The
inventory repurchase and trade receivables financing
arrangements with SCTS under these exit credit facilities each
have an initial term of 6 months. We plan to extend these
arrangements by the end of August 2003 for an additional 12
months if we are unable to exercise other options currently
being evaluated. Such extension would be subject to the
payment of extension fees in the amount of 1% per annum of the
maximum commitment under these arrangements and an increase in
the interest rate from LIBOR plus 3% to LIBOR plus 7%. See
further discussion in Note 9.

As a result of the confirmation of our Restructuring Plan, the
following liabilities that were deemed subject to compromise were either
discharged by the EOTT Bankruptcy Court or retained as ongoing obligations of
the Successor Company. Estimated liabilities subject to compromise at December
31, 2002 were as follows (in thousands):

11% Senior Notes ................................................. $235,000
Interest payable - 11% Senior Notes .............................. 13,481
Accounts payable and suspense payable ............................ 34,876
Allowed claims for environmental settlements and contingencies ... 7,970
Other ............................................................ 1,500
--------
Total .................................................. $292,827
========

8

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following reorganization items and net gain on discharge of debt,
which were specifically related to the EOTT Bankruptcy, were recorded during the
two months ended February 28, 2003, (in thousands):

Reorganization items - legal and professional fees ... $ (7,330)
Net gain on discharge of 11% senior notes,
related accrued interest and other debt (1) .......... $ 131,560

(1) The gain on discharge of debt was recorded net of the 9% senior notes
and limited liability company units issued to the creditors upon
emergence from bankruptcy.

3. FRESH START REPORTING

As previously discussed, the unaudited condensed consolidated financial
statements reflect the adoption of fresh start reporting required by SOP 90-7
for periods subsequent to EOTT's emergence from bankruptcy. In accordance with
the principles of fresh start reporting, EOTT has adjusted its assets and
liabilities to their fair values as of February 28, 2003. The net effect of the
fresh start reporting adjustments was a loss of $56.8 million, which is
reflected in the results of operations of the Predecessor Company for the two
months ended February 28, 2003.

The enterprise value of EOTT on the effective date of the Restructuring
Plan was determined to be approximately $363 million. The enterprise value was
determined with the assistance of a third party financial advisor using
discounted cash flow, comparable transaction and capital market comparison
analyses, adjusted for the actual working capital as of the effective date of
the Restructuring Plan. The discounted cash flow analyses were based upon five
year projected financial results, including an assumption for terminal values
using cash flow multiples, discounted at EOTT's estimated post-restructuring
weighted-average cost of capital.

Pursuant to SOP 90-7, the reorganization value of EOTT on the effective
date of the Restructuring Plan was determined to be approximately $856 million,
which represented the enterprise value plus the fair value of current
liabilities exclusive of funded debt on February 28, 2003. We have allocated the
reorganization value as of February 28, 2003 to tangible and identifiable
intangible assets in conformity with SFAS No. 141, "Business Combinations",
using discounted cash flow and replacement cost valuation analyses, and
liabilities, including debt, were recorded at their net present values.
Independent third-party valuation specialists were used to determine the
allocation of the reorganization value to our tangible and identifiable
intangible assets and to determine the fair value of our long-term liabilities.

The valuations were based on a number of estimates and assumptions,
which are inherently subject to significant uncertainties and contingencies
beyond our control. Accordingly, there can be no assurance that the valuations
will be realized, and actual results could vary significantly. The determination
of the fair values is complete.

The effects of the reorganization pursuant to the Restructuring Plan
and the application of fresh start reporting on the Predecessor Company's
consolidated balance sheet as of February 28, 2003 are as follows:

9

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Notes:

(a) Liabilities subject to compromise have been adjusted to
reflect the settlement of the claims and discharge of the 11%
senior notes and related accrued interest in connection with
the Restructuring Plan. See further discussion in Note 2.

(b) To reclassify current and long-term amounts due to taxing
authorities for accrued but unpaid ad valorem taxes in
connection with the Restructuring Plan.

(c) To reflect the refinancing on a long term basis of amounts
outstanding under the DIP Financing Facilities.

(d) To reflect the issuance of 9% senior unsecured notes (face
amount of $104 million) to all former senior noteholders and
general unsecured creditors with allowed claims in connection
with the Restructuring Plan, recorded at fair value.

(e) To reflect the cancellation of the additional partnership
interests in connection with the Restructuring Plan.

(f) To reflect the issuance of limited liability company units
pursuant to the Restructuring Plan and the net gain on
extinguishment of debt.

(g) To adjust inventory to fair value.

(h) To reflect the elimination of deferred turnaround costs, which
are included in the fair value of property, plant and
equipment of the Successor Company.

10

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(i) To adjust property, plant, and equipment to fair value.

(j) To reflect the elimination of goodwill resulting from the fair
value allocation.

(k) To reflect the Enron and Big Warrior notes at fair value.

4. PROPERTY, PLANT AND EQUIPMENT

As discussed in Note 3, property, plant and equipment was adjusted to
fair value due to the adoption of fresh start reporting as required by SOP 90-7.
The components of gross property, plant and equipment and accumulated
depreciation at June 30, 2003 and December 31, 2002 are as follows (in
thousands):

The deteriorating business and regulatory climate for MTBE is
continuing to adversely affect our Liquids Operations. During the six months
ended June 30, 2003, the Liquids Operations had an operating loss of $ 13.6
million. In connection with the development of our exit strategy from
bankruptcy, the Liquids Operations were identified as non-strategic. Since our
emergence from bankruptcy, we have been evaluating our options with regard to
the future use of these assets. The options under consideration include
continued operation, potential sale to a third party, modification of certain
assets to produce alternative products or a partial or complete shutdown of the
Morgan's Point Facilities at some point in the future. We are currently engaged
in discussions with a third party regarding a possible sale of the Liquids
Operations. If an agreement can be reached, closing of the sale would likely
occur no earlier than the fourth quarter of 2003. No assurances can be provided,
however, that an agreement will be reached and that the Liquids Operations will
be sold to a third party. Should the current discussions regarding a possible
disposition of the Liquids Operations be unsuccessful, we will need to reassess
our remaining options with regard to the future use of these assets. In
addition, should the current business and regulatory climate for MTBE continue,
it is possible that a partial or complete shutdown of the Morgan's Point
Facilities would be necessary.

The amounts we will ultimately realize could differ materially from the
amounts recorded in the consolidated financial statements. Therefore, additional
non-cash impairments of our long-lived assets could be possible in the near
term. As of June 30, 2003, the aggregate net carrying value of the long-lived
assets of the Liquids Operations was $35.4 million.

5. DISCONTINUED OPERATIONS

Effective June 25, 2003, we signed a definitive agreement to sell all
of the assets comprising our natural gas gathering, processing, natural gas
liquids fractionation, storage and related trucking and distribution facilities
located on the West Coast. A sale of these assets to a third party has been one
of the options considered by us since we emerged from bankruptcy. The sales
price for the assets exclusive of inventory is $10.1 million. The proceeds from
the sale of the West Coast natural gas liquids assets could be increased by up
to $1.4 million depending on the operating results of the West Coast natural gas
liquids assets during the

11

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

twelve month period following closing. The closing is subject to customary terms
and conditions, but is expected to occur on or before August 31, 2003.

Revenues and net income for the West Coast natural gas liquids
assets for the three and four months ended June 30, 2003, the two months ended
February 28, 2003, and the three months and six months ended June 30, 2002 are
shown below (in thousands). We did not allocate any interest expense to the
discontinued operations for any of the periods presented below.

The income from discontinued operations for the three months ended June
30, 2003 includes a loss on disposal of $0.2 million. At December 31, 2002, we
recorded an impairment charge of $22.9 million to reflect these assets at their
estimated fair values at December 31, 2002.

The West Coast natural gas liquids operations were historically
presented in the West Coast operating segment.

6. CAPITAL

Prior to the confirmation of the Restructuring Plan, EOTT had
18,476,011 common units, 9,000,000 subordinated units and $9,318,213 of
additional partnership interests outstanding. As contemplated by the
Restructuring Plan, the common and subordinated units and the additional
partnership interests were cancelled on March 1, 2003.

As part of the Restructuring Plan, 14,475,321 new limited liability
company units ("LLC units") were authorized. Holders of common units received
369,520 LLC units and 957,981 warrants to purchase additional LLC units. The
warrants have a five-year term, a strike price of $12.50, are exercisable after
June 30, 2003 and have an estimated fair value of $0.01 per warrant as of the
effective date of the Restructuring Plan. Holders of EOTT's former 11% senior
notes and general unsecured creditors with allowed claims will receive their pro
rata allocation of 11,947,820 LLC units. The 11,947,820 LLC units have been
issued to the Bank of New York, the depositary agent, and therefore, are deemed
to be issued and outstanding for purposes of these financial statements. The
allocation of the 11,947,820 LLC units cannot be determined until the precise
amount of each allowed claim is determined. We expect the depositary agent to
distribute the majority of the LLC units by the end of August 2003 and the final
allocation of units is expected to be completed by December 2003. Until the
final allocation is made, we will not know how many units each of our
unitholders is entitled to vote. If necessary, for any matters requiring
unitholder approval, our intention is to instruct the depositary agent to vote
the units issued to it as may be authorized by a vote of the Board of Directors
in accordance with our LLC Agreement. Additionally, 1.2 million LLC units have
been reserved for a management incentive plan for issuance to certain key
employees and directors and the board has approved the development of a plan,
which process is underway.

The LLC units and the warrants were issued pursuant to an exemption
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act") and applicable state law, pursuant to the exemptions
afforded under Section 1145, Title 11 of the U.S. Bankruptcy Code. The LLC units
and the warrants have been registered pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act") pursuant to Section 12(g) and we are
therefore a reporting company under the Exchange Act.

12

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Neither the LLC units nor the warrants are traded on any national exchange or
pursuant to an automated quotation system administered by the National
Association of Securities Dealers ("NASD").

The LLC units issued pursuant to the Restructuring Plan are subject to
the terms of a Registration Rights Agreement effective March 1, 2003. Following
completion of the audit of our financial statements for the year ending December
31, 2003, any holders of 10% or more of the securities eligible for registration
under the terms of the Registration Rights Agreement will be entitled to demand
registration of their LLC units, subject to certain conditions. The Registration
Rights Agreement also provides for customary piggyback registration rights
entitling holders of LLC units to include their units in any registration in
which we may engage, subject to certain conditions. We will be required to pay
all registration expenses in connection with any such registrations.

The LLC units are subject to the terms of an LLC Agreement, which
currently, among other things, restricts the issuance of additional equity
interests in the LLC without the approval of holders of at least two-thirds of
the outstanding units.

7. EARNINGS PER UNIT

Basic earnings per unit includes the weighted average impact of
outstanding units of EOTT (i.e., it excludes unit equivalents). Diluted earnings
per unit considers the impact of all potentially dilutive securities.

Successor Company

Basic and diluted net income (loss) per unit for the Successor Company
is a $0.93 loss and a $1.47 loss for the three and four months ended June 30,
2003, respectively. The warrants outstanding were determined to be antidilutive
during the periods. Basic and diluted net loss per unit from continuing
operations is $0.97 and $1.53 for the three and four months ended June 30, 2003,
respectively. Basic and diluted net income per unit from discontinued operations
is $0.04 and $0.06 for the three and four months ended June 30, 2003,
respectively.

Predecessor Company

Total and per unit information related to income (loss) from continuing
operations, discontinued operations the cumulative effect of an accounting
change and net income (loss) for the Predecessor Company is shown in the tables
below. All amounts exclude amounts allocated to the General Partner (in
thousands, except per unit amounts):

13

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Net income (loss), excluding the approximate two percent General
Partner interest, has been apportioned to each class of unitholder
based on the ownership of total units outstanding in accordance with
the Partnership Agreement. Net losses are not allocated to the common
and subordinated unitholders to the extent that such allocations would
cause a deficit capital account balance or increase any existing
deficit capital account balance. Any remaining losses are allocated to
the General Partner as a result of the balances in the capital
accounts of the common and subordinated unitholders. Effective with
the fourth quarter of 2002, all losses were being allocated to the
General Partner. The disproportionate allocation of 2002 net losses
among the unitholders and the General Partner was recouped during the
two months ended February 28, 2003.

(2) The diluted earnings (loss) per unit calculation assumes the
conversion of subordinated units into common units.

(3) Earnings (loss) per unit from discontinued operations has been
determined based on the difference between the amount of net income
(loss) allocated to each class of unitholder and the amount of income
(loss) from continuing operations allocated to each class of
unitholder. Earnings (loss) per unit for the two months ended February
28, 2003, have been impacted by the disproportionate allocation of
income and losses discussed above.

8. DERIVATIVES AND HEDGING ACTIVITIES

We utilize derivative instruments to minimize our exposure to commodity
price fluctuations. Generally, as we purchase lease crude oil at prevailing
market prices, we enter into corresponding sales transactions involving either
physical deliveries of crude oil to third parties or a sale of futures contracts
on the NYMEX. Price risk management strategies, including those involving price
hedges using NYMEX futures contracts, are very important in managing our
commodity price risk. Such hedging techniques require resources for managing
both future positions and physical inventories. We effect transactions both in
the futures and physical markets in order to deliver the crude oil to its
highest value location or otherwise to maximize the value of the crude oil we
control. Throughout the process, we seek to maintain a substantially balanced
risk position at all times. We do have certain risks that cannot be completely
hedged such as basis risks (the risk that price relationships between delivery
points, grades of crude oil or delivery periods will change) and the risk that
transportation costs will change.

Effective January 1, 2001, we began reporting derivative activities in
accordance with Statement of Financial Accounts Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging

14

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Activities," as amended. SFAS No. 133 requires that derivative instruments be
recorded in the balance sheet as either assets or liabilities measured at fair
value. Under SFAS No. 133, we are required to "mark-to-fair value" all of our
derivative instruments at the end of each reporting period. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Qualifying criteria
include, among other requirements, that we formally designate, document, and
assess the effectiveness of the hedging instrument as they are established and
at the end of each reporting period. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results from the hedged
item in the income statement. Changes in the fair value of derivatives
designated as cash flow hedges are deferred to Other Comprehensive Income (Loss)
("OCI"), a component of Members' Capital, and reclassified into earnings when
the associated hedged transaction affects earnings. Deferral of derivative gains
and losses through OCI is limited to the portion of the change in fair value of
the derivative instrument which effectively hedges the associated hedged
transaction; ineffective portions are recognized currently in earnings. The
ineffective portions of our hedged transactions were not material to our
earnings for the quarter ended June 30, 2003. Realized derivative gains and
losses are included in Operating Revenue in our Statement of Operations.

Beginning in the quarter ended June 30, 2003, we designated certain of our
derivative instruments as cash flow hedges of forecasted transactions. These
hedges were for a maximum of two-months and had no material effect on our OCI or
earnings for the quarter ended June 30, 2003. SFAS No. 133 requires that any
cash flow hedges, for which it is probable that the original forecasted
transactions will not occur by the end of the originally specified time period,
be discontinued and reclassified into earnings, and that such reclassifications
be recorded and separately disclosed. We had no such reclassifications for the
quarter ended June 30, 2003. All unrealized derivative gains and losses included
in accumulated other comprehensive income (loss) at June 30, 2003 are expected
to be reclassified to net income (loss) within the next twelve months.

9. CREDIT RESOURCES

Summary of Debtor in Possession ("DIP") Financing

On October 18, 2002, we entered into agreements with Standard Chartered,
SCTS, Lehman and other lending institutions for $575 million in DIP financing
facilities. The DIP facilities provided (i) $500 million of credit and financing
facilities through Standard Chartered and SCTS, which included up to $325
million for letters of credit and $175 million of inventory repurchase/accounts
receivable financing through SCTS, and (ii) $75 million of term loans through
Lehman and other lending institutions. The credit facilities were subject to a
borrowing base and were secured by a first-priority lien on all, or
substantially all, of our real and personal property. As of February 28, 2003,
we had outstanding approximately $313.1 million of letters of credit, $125.0
million of inventory repurchase/accounts receivable financing, and $75 million
of term loans. The DIP financing facilities contained certain restrictive
covenants that, among other things, limited distributions, other debt, and
certain asset sales. On February 28, 2003, the DIP financing facilities were
refinanced by the same institutions as we emerged from bankruptcy. The following
discussion provides an overview of our post-bankruptcy debt.

Summary of Exit Credit Facilities, Senior Notes, and Other Debt

EOTT LLC's emergence from bankruptcy as of March 1, 2003, was financed
through a combination of exit credit facilities, senior notes and other debt
associated with settlement of claims during our bankruptcy proceedings. The
table below provides a summary of these financing arrangements as of June 30,
2003.

15

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF FINANCING ARRANGEMENTS
(IN MILLIONS)

* $50 million of this commitment is unavailable ten days each month.

** We plan to extend these arrangements by the end of August 2003 for an
additional 12 months if we are unable to exercise other options currently
being evaluated. Such an extension would be subject to the payment of
extension fees of 1% and an increase in the interest rate from LIBOR plus
3% to LIBOR plus 7%.

*** These notes were adjusted to fair value pursuant to the adoption of fresh
start reporting required by SOP 90-7.

The following is a summary of our debt maturities at June 30, 2003 (in
millions):

(1) We plan to extend these arrangements by the end of August 2003 if we are
unable to exercise other options currently being evaluated. Such an
extension would be subject to the payment of extension fees of 1% and an
increase in the interest rate from LIBOR plus 3% to LIBOR plus 7%.

Exit Credit Facilities

On February 11, 2003, we entered into our exit credit facilities with the
same lenders and under substantially the same terms in the DIP financing
facilities. These new facilities were effective March 1, 2003 and $2.9 million
of facility and extension fees were paid in connection with these new
facilities. Such fees are being amortized as interest expense over the terms of
the facilities.

16

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Letter of Credit Facility

The Letter of Credit Facility with Standard Chartered provides $325 million
of financing until August 30, 2004 and is subject to defined borrowing base
limitations. The borrowing base is (as of the date of determination) the sum of
cash equivalents, specified percentages of eligible receivables, deliveries,
fixed assets, inventory, margin deposits and undrawn product purchase letters of
credit, minus (i) first purchase crude payables, other priority claims,
aggregate net amounts payable by the borrowers under certain hedging contracts
and certain eligible receivables arising from future crude oil obligations, (ii)
the principal amount of loans outstanding and any accrued and unpaid fees and
expenses under the Term Loans, and (iii) all outstanding amounts under the
Amended and Restated Commodity Repurchase Agreement and the Amended and Restated
Receivables Purchase Agreement ("SCTS Purchase Agreements"). Pursuant to a
scheduled advance rate reduction, effective July 1, 2003, the specified
percentages of eligible receivables and fixed assets in the borrowing base were
reduced. The impact of this reduction at July 31, 2003 was to lower our
borrowing base by approximately $17 million. Standard Chartered has the right to
reduce these same percentages in the borrowing base at October 31, 2003.

The Letter of Credit Facility required an upfront facility fee of $1.25
million that was paid at closing. An additional reduction fee of $2.5 million
will be payable on March 29, 2004, if Standard Chartered's exposure is not
reduced to $200 million or less by that date. Letter of credit fees range from
2.25% to 2.75% per annum depending on usage. The commitment fee is 0.5% per
annum of the unused portion of the Letter of Credit Facility. Additionally, we
agreed to a fronting fee, which is the greater of 0.25% per annum times the face
amount of the letter of credit or $250. An annual arrangement fee of 1% per
annum times the average daily maximum facility amount, as defined in the Letter
of Credit Facility, is payable on a monthly basis.

The exit credit facilities also include the following financial covenants
that we must adhere to on a monthly basis:

o Minimum Consolidated EBIDA. Starting with the month ended May 31,
2003, we must maintain a minimum, rolling cumulative four-month total
of consolidated Earnings Before Interest, Depreciation and
Amortization, subject to certain adjustments, as defined ("EBIDA").
For the four-month period ended May 31, 2003, we were required to have
consolidated EBIDA of $750,000. Thereafter, the requirement increases
monthly until it reaches $17 million for the four-month period ended
September 30, 2004. Prior to May 31, 2003, we were only required to
maintain positive consolidated EBIDA.

o Minimum Consolidated Tangible Net Worth. At the end of each month,
from March 31, 2003 to December 31, 2003, we are required to maintain
a minimum consolidated tangible net worth, subject to certain
adjustments, as defined ("Minimum Consolidated Tangible Net Worth"),
of $8.5 million. From January 31, 2004 to September 30, 2004, we are
required to maintain a Minimum Consolidated Tangible Net Worth of $10
million.

o Interest Coverage. We are required to maintain a minimum ratio of
consolidated EBIDA to cash interest expense over rolling consecutive
four-month periods. For the four-month period ended May 31, 2003, the
ratio must be at least 0.07 to 1.00. Thereafter, the ratio increases
monthly until it reaches 1.40 to 1.0 for the four-month period ended
June 30, 2004. Thereafter the ratio requirement decreases monthly to a
level of 1.21 to 1.0 for the four-month period ended September 30,
2004.

o Current Ratio. We must maintain a ratio of consolidated current
assets, subject to certain adjustments, to consolidated current
liabilities less funded debt, as defined, of 0.90 to 1.00 for the term
of the exit credit facilities.

For purposes of determining the financial information used in the financial
covenants set forth above, we are required to exclude all items directly
attributable to our Liquids Assets and the West Coast natural gas liquids

17

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

assets ("Designated Assets") for the first five months ended May 31, 2003 and to
make "permitted adjustments" (changes due to fresh start reporting, income and
expenses attributable to the Designated Assets during the first five months
ended May 31, 2003, changes due to the cumulative affect of changes in GAAP,
which are approved by the bank, and gains or losses from the sales of assets or
Designated Assets), as defined.

In addition, there are certain restrictive covenants that, among other
things, limit other debt, certain asset sales, mergers and change in control
transactions. Additionally, the exit credit facilities prohibit us from making
any distributions, or purchases, acquisitions, redemptions or retirement of our
LLC units so long as we have any indebtedness, liabilities or other obligations
outstanding to Standard Chartered, SCTS, Lehman, or any other lenders under
these facilities.

SCTS Purchase Agreements

We have an agreement with SCTS similar to our pre-bankruptcy inventory
repurchase agreement, which provides for the financing of purchases of crude oil
inventory utilizing a forward commodity repurchase agreement ("Commodity
Repurchase Agreement"). The maximum commitment under the Commodity Repurchase
Agreement is $75 million. It required an upfront facility fee of approximately
$378,000 and carries an interest rate of LIBOR plus 3%. The Commodity Repurchase
Agreement has an initial term of six months to August 30, 2003, at which time we
have the option to extend for an additional twelve months. If we are unable to
exercise other options currently being evaluated by the end of August 2003, we
plan to extend the maturity date which will require the payment of an extension
fee of $750,000 and the interest rate will increase to LIBOR plus 7%. As a
result of our intent and ability to extend the maturity, the amount outstanding
has been classified as long-term in the June 30, 2003 Condensed Consolidated
Balance Sheet.

In addition, we also have an agreement with SCTS similar to our
pre-bankruptcy trade receivables agreement, which provides for the financing of
up to an aggregate amount of $100 million of certain trade receivables ("Trade
Receivables Agreement") outstanding at any one time. The discount fee is LIBOR
plus 3% and an upfront facility fee of approximately $504,000 was paid. The
Trade Receivables Agreement has an initial term of six months to August 30,
2003, at which time we have the option to extend for an additional twelve
months. If we are unable to exercise other options currently being evaluated by
the end of August 2003, we plan to extend the maturity date which will require
the payment of an extension fee of $1 million and the interest rate will
increase to LIBOR plus 7%.

Term Loan Agreement

We entered into an agreement with Lehman, as Term Lender Agent, and other
lenders (collectively, "Term Lenders"), which provides for term loans in the
aggregate amount of $75 million (the "Term Loans"). The Term Loans mature on
August 30, 2004.

The financing included two term notes. The Tier-A Term Note is for $50
million with a 9% per annum interest rate. The Tier-B Term Note is for $25
million with a 10% per annum interest rate. Interest is payable monthly on both
notes. An upfront fee of $750,000 was paid and we agreed to pay a deferred
financing fee in the aggregate amount of $2 million on the maturity date of the
Term Loans. This latter fee was fully accrued as of February 28, 2003.

The Term Loans are collateralized and have certain repayment priorities
with respect to collateral proceeds pursuant to the Intercreditor and Security
Agreement that is discussed below. Under the Term Loan Agreement, term loan debt
outstanding is subject to a borrowing base as defined in the Letter of Credit
Agreement. Further, the Term Loan Agreement contains financial covenants that
mirror those outlined above in the discussion of the Letter of Credit Facility.

18

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Intercreditor and Security Agreement

In connection with the Letter of Credit Facility, the Term Loans and the
SCTS Purchase Agreements, we entered into the Intercreditor and Security
Agreement ("Intercreditor Agreement") with Standard Chartered, Lehman, SCTS and
various other secured parties ("Secured Parties"). This agreement provides for
the sharing of collateral among the Secured Parties and prioritizes the
application of collateral proceeds which provides for repayment of the Tier-A
Term Note and the Standard Chartered letter of credit exposure above $300
million prior to other secured obligations.

In addition, to the extent that drawings are made on any letters of credit,
Standard Chartered, as collateral agent, may distribute funds from our debt
service payment account to itself (as letter of credit issuer agent on behalf of
the letter of credit issuer) as needed to allow EOTT LLC to reimburse Standard
Chartered, as letter of credit issuer, for such drawings.

Senior Notes

On October 1, 1999, we issued to the public $235 million of 11% senior
notes. The senior notes were due October 1, 2009, and interest was paid
semiannually on April 1 and October 1. The senior notes were fully and
unconditionally guaranteed by all of our operating limited partnerships but were
otherwise unsecured. On October 1, 2002, we did not make the interest payment of
$12.9 million on our $235 million 11% senior notes. These notes were cancelled
effective March 1, 2003 as a result of our Restructuring Plan and the holders of
these notes, along with our general unsecured creditors with allowed claims,
will receive a pro rata share of $104 million of 9% senior unsecured notes, plus
new EOTT LLC units.

EOTT LLC Senior Notes 2010

In February 2003, we issued $104 million of 9% senior unsecured notes to
the Bank of New York, as depositary agent, which will be subsequently allocated
by the depositary agent to former holders of the 11% senior notes described
above and our general unsecured creditors with allowed claims. However, the
exact pro rata allocation of the senior notes cannot be determined until the
precise amount of each allowed claim is determined. This process is underway in
the EOTT Bankruptcy Court as part of our Restructuring Plan. We expect the Bank
of New York, as depositary agent, to distribute the majority of the senior
unsecured notes by the end of August 2003 and the final allocation of notes is
expected to be completed by December 2003. The senior notes are due in March
2010, and interest will be paid semiannually on September 1 and March 1 with the
first payment on September 1, 2003. Under the terms of the indenture governing
our senior notes, we are allowed to pay interest payments in kind by issuing
additional senior notes on the first two interest payment dates. If we make
payments in kind, we must make the payments as if interest were being charged at
10% per annum instead of 9% per annum. We may not optionally redeem the notes.
The notes are subject to mandatory redemption or sinking fund payments if we
sell assets and use the money for certain purposes or if we have a change of
control. Provisions of the indenture could limit additional borrowings, sale and
lease back transactions, affiliate transactions, purchases of our own equity,
payments on debt subordinated to the senior notes, distributions to members,
certain merger, consolidation or change in control transactions, or sale of
assets if certain financial performance ratios are not met.

Enron Note and Big Warrior Note

In connection with our settlement with Enron as part of the Restructuring
Plan, we executed a $6.2 million note payable to Enron ("Enron Note") that is
guaranteed by our subsidiaries. The Enron Note is secured by an irrevocable
letter of credit and bears interest at 10% per annum. Interest is paid
semiannually on April 1 and October 1, beginning on April 1, 2003 and we are
allowed to pay interest payments in kind on the first two interest payment
dates. Principal payments of $1 million are payable in October 2003 and October
2004 with the remaining principal balance due in October 2005.

19

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In connection with a settlement with Big Warrior Corporation ("Big
Warrior") during our bankruptcy, we executed a $2.7 million note payable to Big
Warrior, which is secured by a second lien position in one of our Mississippi
pipelines. The four-year note is payable in quarterly installments which began
June 1, 2003 based on a seven-year amortization schedule, at an interest rate of
6% per annum. A final balloon payment is due March 1, 2007. Effective July 31,
2003, Farallon Capital Partners, L.P. ("Farallon") and Tinicum Partners, L.P.
("Tinicum") purchased this note from Big Warrior. Farallon and Tinicum are Term
Lenders and holders of allowed claims, which will allow them to receive a pro
rata allocation of our 9% senior unsecured notes and LLC units from the
depositary agent.

Ad Valorem Tax Liability

In conjunction with our Restructuring Plan, we agreed to pay accrued but
unpaid ad valorem taxes over six years from the effective date of our
Restructuring Plan. This debt bears interest at 6% with principal and interest
payments due quarterly. The first payment was made on June 1, 2003.

General

We anticipate that our cash requirements, including sustaining capital
expenditures for the foreseeable future, will be funded primarily from cash on
hand, cash generated from operations, and our exit credit facilities, including
the inventory repurchase agreement and receivables purchase agreement discussed
above.

Our ability to obtain letters of credit to support our purchases of crude
oil and feedstocks is fundamental to our crude oil gathering and marketing
activities and Liquids Operations. As a result of the Enron bankruptcy filing
and our subsequent bankruptcy filing, our trade creditors have been less willing
to extend credit to us on an unsecured basis and we have had to significantly
reduce our marketing activities due to the amount of credit support available to
us under our credit facilities. Although we emerged from bankruptcy on March 1,
2003, we remain highly leveraged with substantial financing costs. Therefore, we
can give no assurance that in the event of continuing high crude oil prices we
will not be required to further reduce or restrict our gathering and marketing
activities because of continuing limitations on our ability to obtain credit
support and financing for our working capital needs.

Our ability to fund our liquidity and working capital requirements through
available cash, cash generated from operations and our exit credit facilities is
based on our ability to successfully implement our Restructuring Plan. Any
material decrease in our financial strength may make it difficult to meet our
debt covenants and, therefore, adversely affect our ability to fund our working
capital needs and obtain letters of credit, or may increase the cost thereof.
Additionally, we can give no assurance that our lenders will renew our
facilities when they mature on August 30, 2004.

Our ability to meet financial covenants in the future may be affected by
events beyond our control. While we currently expect to be in compliance with
the covenants going forward, there can be no assurance that we will be in
compliance with the covenants in the future or that we will be able to obtain
amendments to the exit credit facilities, if needed.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases. There was no significant change in our commitments
related to operating leases as a result of the bankruptcy.

Litigation. We are, in the ordinary course of business, a defendant in
various lawsuits, some of which are covered in whole or in part by insurance. We
believe that the ultimate resolution of litigation, individually and in the
aggregate, will not have a materially adverse impact on our financial position
or results of operations. Generally, as a result of our bankruptcy, all pending
litigation against us was stayed while we continued our business operations as
debtors-in-possession. Several litigation claims were settled during the

20

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

course of the bankruptcy proceedings or are still being negotiated post
confirmation. Additionally, we agreed to lift the stay as to certain proceedings
we permitted to continue. How each matter was or is being handled is set forth
in the summary of each case. For matters where the parties negotiated a
settlement during our bankruptcy proceedings, the settlement amount was recorded
at December 31, 2002 as an allowed general unsecured claim in "Other income
(expense)" in the Consolidated Statement of Operations. In connection with our
Restructuring Plan, general unsecured creditors with allowed claims will receive
a pro rata share of $104 million of 9% senior unsecured notes and a pro rata
share of 11,947,820 EOTT LLC units. See Notes 6 and 9. Prior to and since the
commencement of our bankruptcy proceedings, various legal actions arose in the
ordinary course of business, the most significant of which are discussed below.

Assessment for Crude Oil Production Tax from the Comptroller of Public
Accounts, State of Texas. We received a letter from the Comptroller's Office
dated October 9, 1998, assessing us for severance taxes the Comptroller's Office
alleges are due based on a difference the Comptroller's Office believes exists
between the market value of crude oil and the value reported on our crude oil
tax report for the period of September 1, 1994 through December 31, 1997. The
letter states that the action, based on a desk audit of our crude oil production
reports, is partly to preserve the statute of limitations where crude oil
severance tax may not have been paid on the true market price of the crude oil.
The letter further states that the Comptroller's position is similar to claims
made in several lawsuits, including a royalty suit brought by the State of
Texas, in which the Partnership was a defendant. The amount of the assessment,
including penalty and interest, is approximately $1.1 million. We believe we
should be without liability in this or related matters. There had been no action
on this matter since early 1999. During our bankruptcy, the Comptroller's office
filed a claim in our bankruptcy proceedings but subsequently withdrew their
claim. We sent a letter to the Comptroller's Office notifying them that we
believe the original assessment has been withdrawn due to the withdrawal of
their claim in our bankruptcy proceedings. We did not receive any further
communications from the Comptroller's office disputing EOTT's assessment set out
in the letter; therefore, this case will no longer be reported.

John H. Roam, et al. vs. Texas-New Mexico Pipe Line Company and EOTT Energy
Pipeline Limited Partnership, Cause No. CV43296, In the District Court of
Midland County, Texas, 238th Judicial District (Kniffen Estates Suit). The
Kniffen Estates Suit was filed on March 2, 2001, by certain residents of the
Kniffen Estates, a residential subdivision located outside of Midland, Texas.
The allegations in the petition state that free crude oil products were
discovered in water wells in the Kniffen Estates area, on or about October 3,
2000. The plaintiffs claim that the crude oil products are from a 1992 release
from a pipeline then owned by the Texas-New Mexico Pipe Line Company ("Tex-New
Mex"). We purchased that pipeline from Tex-New Mex in 1999. The plaintiffs have
alleged that Tex-New Mex was negligent, grossly negligent, and malicious in
failing to accurately report and remediate the spill. With respect to us, the
plaintiffs were seeking damages arising from any contamination of the soil or
groundwater since we acquired the pipeline in question. No specific amount of
money damages was claimed in the Kniffen Estate Suit, but the plaintiffs did
file proofs of claim in our bankruptcy proceeding totaling $62 million. In
response to the Kniffen Estates Suit, we filed a cross-claim against Tex-New
Mex. In the cross-claim, we claimed that, in relation to the matters alleged by
the plaintiffs, Tex-New Mex breached the Purchase and Sale Agreement between the
parties dated May 1, 1999, by failing to disclose the 1992 release and by
failing to undertake the defense and handling of the toxic tort claims, fair
market value claims, and remediation claims arising from the release. On April
5, 2002, we filed an amended cross-claim which alleges that Tex-New Mex
defrauded us as part of Tex-New Mex's sale of the pipeline systems to us in
1999. The amended cross-claim also alleges that various practices employed by
Tex-New Mex in the operation of its pipelines constitute gross negligence and
willful misconduct and void our obligation to indemnify Tex-New Mex for
remediation of releases that occurred prior to May 1, 1999. In the Purchase and
Sale Agreement, we agreed to indemnify Tex-New Mex only for certain remediation
obligations that arose before May 1, 1999, unless these obligations were the
result of the gross negligence or willful misconduct of Tex-New Mex prior to May
1, 1999. EOTT Energy Pipeline Limited Partnership ("PLP") and the plaintiffs
agreed to a settlement during our bankruptcy proceedings. The settlement
provides for the plaintiffs' release of their claims filed against PLP in this
proceeding and in the bankruptcy proceedings, in exchange for an allowed general
unsecured claim in our bankruptcy of $3,252,800 (as described above, the
plaintiffs filed proofs of claim in our bankruptcy proceedings totaling $62
million). The allowed general

21

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

unsecured claim was accrued at December 31, 2002. On April 1, 2003, we filed a
second amended cross-claim in this matter. In addition to the claims filed in
the previous cross-claims, we requested (i) injunctive relief for Tex-New Mex's
refusal to honor its indemnity obligations; (ii) injunctive relief requiring
Tex-New Mex to identify, investigate and remediate sites where the conduct
alleged in our cross-claim occurred; and (iii) restitution damages of over
$125,000,000. Tex-New Mex filed a motion to compel arbitration of these issues.
The motion to compel arbitration was denied at a hearing held on April 11, 2003.
At the April 11, 2003 hearing, the court also severed into a separate action
EOTT's cross-claims against Tex-New Mex that extend beyond the crude oil release
and groundwater contamination in the Kniffen Estates subdivision ("EOTT's
Over-Arching Claim"). Prior to the trial of the plaintiff's claims against
Tex-New Mex and EOTT's original cross-claim against Tex-New Mex arising from the
crude oil release and groundwater contamination in the Kniffen Estates
subdivision ("EOTT's Kniffen Claims"), Tex-New Mex reached a settlement with the
plaintiffs that provided for the release of the plaintiffs' claims. The trial of
EOTT's Kniffen Claims commenced on June 16, 2003, and the jury returned its
verdict on July 2, 2003. The jury found that Tex-New Mex's gross negligence and
willful misconduct caused the contamination in the Kniffen Estates. The jury
also found that Tex-New Mex committed fraud against us with respect to the
Kniffen Estates site. The jury awarded us actual damages equal to the expenses
we have incurred to date in remediating the Kniffen Estates site (approximately
$6.1 million) and punitive damages in the amount of $50 million. On July 28,
2003, we filed a motion with the court to enter judgment on the jury awards as
well as on stipulated amounts totaling approximately $3 million for attorneys'
fees and costs of settlements with the plaintiffs. We also requested a reduction
of the punitive amounts to approximately $22 million to reduce the punitive
damages to reflect statutory caps. We further asked the court to include in its
judgment an order requiring Tex-New Mex's specific performance of its indemnity
obligations with respect to the ongoing remediation at the Kniffen Estates site.
Tex-New Mex filed a motion for judgment requesting that we take nothing from the
verdict. Also, Tex-New Mex has indicated it intends to appeal any judgment that
is based on the jury's verdict, and we cannot predict the outcome of any such
appeal. A hearing on the motions for judgment is set for August 28, 2003. We
anticipate that the court will address scheduling of discovery for and trial of
EOTT's Over-Arching Claim when it enters judgment with respect to EOTT's Kniffen
Claims.

Bankruptcy Issues related to Claims Made by Texas-New Mexico Pipeline
Company and its affiliates. Tex-New Mex, Shell Oil Company and Equilon filed
proofs of claim in our bankruptcy, each filing the same claim in the amount of
$112 million. Equilon Pipeline Company LLC guaranteed, under certain
circumstances, the obligations of Tex-New Mex under the Purchase and Sale
Agreement dated May 1, 1999. According to Shell Oil Company's 2002 Annual
Report, in 2002, Shell became the sole owner of Equilon, which was merged into
Shell Oil Products US. The three claims filed each included the same supporting
information, consisting of indemnity claims under the Purchase and Sale
Agreement. In essence, there is only one claim of $112 million filed by three
entities and we have objected in our bankruptcy court to having the same claim
filed three times. The amount of the $112 million claim is equivalent to the sum
of the total amount of the proofs of claim filed in our bankruptcy proceedings
by owners of property on which the Tex-New Mex system is located and the
attorneys fees incurred by Tex-New Mex in defending the Kniffen Estates Suit and
other lawsuits (including our bankruptcy proceedings) with respect to the
Tex-New Mex system. The majority of these owners were plaintiffs in the Kniffen
Estates Suit and a group of New Mexico environmental claimants, with whom we
settled during our bankruptcy proceeding and accrued the allowed general
unsecured claim at December 31, 2002. A hearing on our objection to these claims
was scheduled for March 18, 2003, but the parties stipulated and agreed to delay
the hearing to allow the Kniffen Estates Suit to proceed. In July of 2003 we
entered into an agreement with Shell, Tex-New Mex and Equilon whereby all of
their claims were either withdrawn, estimated or allowed, leaving the value of
the claims estimated for distribution purposes at $56,924.52.

Jimmie B. Cooper and Shryl S. Cooper vs. Texas-New Mexico Pipeline Company,
Inc., EOTT Energy Pipeline Limited Partnership and Amerada Hess Corporation,
Case No. CIV 01-1321 M/JHG, In the United States District Court for the District
of New Mexico. Plaintiffs in this lawsuit, filed on October 5, 2001, are surface
interest owners of certain property located in Lea County, New Mexico. The
plaintiffs allege that aquifers underlying their property and water wells
located on their property have been contaminated as a result of spills and leaks
from a pipeline running across their property that is or was owned by Tex-New
Mex and us.

22

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The plaintiffs also allege that oil and gas operations conducted by Amerada Hess
Corporation resulted in leaks or spills of pollutants that ultimately
contaminated the plaintiffs' aquifers and water wells. Our initial investigation
of this matter indicated that the alleged contamination of the aquifers
underlying the plaintiffs' property was not caused by leaks from the pipeline
now owned by us that traverses the plaintiffs' property. EOTT and the plaintiffs
have agreed to the terms of a settlement, whereby the plaintiffs will release
their claims against EOTT and receive an allowed general unsecured claim in our
bankruptcy in the amount of $300,000. The allowed general unsecured claim was
accrued at December 31, 2002. Once the settlement documents are finalized, this
case will be dismissed as to EOTT and no longer reported.

Jimmie T. Cooper and Betty P. Cooper vs. Texas-New Mexico Pipeline Company,
Inc., EOTT Energy Pipeline Limited Partnership, and EOTT Energy Corp., Case No.
D-0101-CV-2002-02122, In the 1st Judicial District Court, Santa Fe County, New
Mexico. This lawsuit was filed on October 1, 2002. The plaintiffs in this
lawsuit are surface interest owners of certain property located in Lea County,
New Mexico. The plaintiffs are alleging that aquifers underlying their property
and water wells located on their property have been contaminated as a result of
spills and leaks from a pipeline running across their property that is or was
owned by Tex-New Mex and us. The plaintiffs do not specify when the alleged
spills and leaks occurred. The plaintiffs are seeking payment of costs that
would be incurred in investigating and remediating the alleged crude oil
releases and replacing water supplies from aquifers that have allegedly been
contaminated. The plaintiffs are also seeking damages in an unspecified amount
arising from the plaintiffs' alleged fear of exposure to carcinogens and the
alleged interference with the plaintiffs' quiet enjoyment of their property. The
plaintiffs are also seeking an unspecified amount of punitive damages. EOTT and
the plaintiffs agreed to the terms of a settlement, whereby the plaintiffs will
release their claims against us and will receive an allowed general unsecured
claim in our bankruptcy in the amount of $1,027,000. The allowed general
unsecured claim was accrued at December 31, 2002. Once the settlement documents
are finalized, this case will be dismissed as to EOTT and no longer reported.

Richard D. Warden and Nancy J. Warden v. EOTT Energy Pipeline Limited
Partnership and EOTT Energy Corp., Case No. CIV-02-370 L, In the United States
District Court for the Western District of Oklahoma. In this lawsuit, filed on
February 28, 2002, the plaintiffs are landowners, seeking damages allegedly
arising from a release of crude oil from a pipeline owned by us. Although we
undertook extensive remediation efforts with respect to the crude oil release
that is the subject of this lawsuit, plaintiffs allege that we did not properly
remediate the crude oil release and claim causes of action for negligence, gross
negligence, unjust enrichment, and nuisance. The plaintiffs filed a proof of
claim in our bankruptcy proceedings claiming damages of $900,000. We objected to
the plaintiffs' proof of claim, and the bankruptcy court entered an order
disallowing the claim on May 2, 2003. On July 29, 2003, the Court entered a
Joint Stipulation of Dismissal Without Prejudice.

David A. Huettner, et al v. EOTT Energy Partners, L.P., et al, Case No.
1:02 CV-917, In the United States District Court, Northern District of Ohio,
Eastern Division ("Securities Suit"). This lawsuit was filed on May 15, 2002,
for alleged violations of the Securities and Exchange Act of 1934 and common law
fraud. The suit was brought by three of our former unitholders who claim that
the General Partner, certain of the officers and directors of Enron and the
General Partner and our previous independent accountants were aware of material
misstatements or omissions of information within various press releases, SEC
filings and other public statements, and failed to correct the alleged material
misstatements or omissions. Plaintiffs maintain that they were misled by our
press releases, SEC filings, and other public statements when purchasing our
common units and were financially damaged thereby. On June 28, 2002, the
Judicial Panel on Multidistrict Litigation issued a Conditional Transfer Order
that provides for the transfer of this case to the Southern District of Texas
for consolidated pretrial proceedings with other lawsuits asserting securities
claims against Enron and Arthur Andersen. On September 20, 2002, EOTT Energy
Partners, L.P. filed a motion to dismiss on the basis of the plaintiff's failure
to state a claim upon which relief can be granted. EOTT Energy Corp. joined in
that motion on October 11, 2002. The plaintiffs filed a motion to lift the stay,
which was denied by the bankruptcy court judge. Additionally, the plaintiffs
filed proofs of claim in our bankruptcy proceedings in the amount of $500,000
each. We filed objections to these proofs of claim on February 21, 2003, and
pursued settlement negotiations with the plaintiffs. We reached a settlement
with the plaintiffs in May, 2003 that

23

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

provided the plaintiffs with one allowed unsecured claim in our bankruptcy
proceeding in the amount of $550,000 in exchange for a release as to EOTT and
the individually named defendants. Once the settlement documents are finalized,
a hearing on the settlement will be set in the Bankruptcy Court and the lawsuit
will be dismissed as to EOTT and the individually named defendants.

In re EOTT Energy Partners, L.P., Case No. 02-21730, EOTT Energy Finance
Corp., Case No. 02-21731, EOTT Energy General Partner, L.L.C., Case No.
02-21732, EOTT Energy Operating Limited Partnership, Case No. 02-21733, EOTT
Energy Canada Limited Partnership, Case No. 02-21734, EOTT Energy Liquids, L.P.,
Case No. 02-21736, EOTT Energy Corp., Case No. 02-21788, Debtors (Jointly
Administered under Case No. 02-21730), In the United States Bankruptcy Court for
the Southern District of Texas, Corpus Christi Division. On October 8, 2002, we
and all of our subsidiaries filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Texas (the "EOTT Bankruptcy Court") to facilitate
reorganization of our business and financial affairs for the benefit of us, our
creditors and other interested parties. Additionally, the General Partner filed
its voluntary petition for reorganization under Chapter 11 on October 21, 2002
in the EOTT Bankruptcy Court. The General Partner filed in order to join in our
voluntary, pre-negotiated restructuring plan filed on October 8, 2002. On
October 24, 2002, the EOTT Bankruptcy Court administratively consolidated, for
distribution purposes, the General Partner's bankruptcy filing with our
previously filed cases. Pursuant to the automatic stay provisions of the
Bankruptcy Code, all actions to collect pre-petition claims from us and to
interfere with our business as well as most other pending litigation against us,
were stayed. In addition, as debtor-in-possession, we had the right, subject to
the approval of the EOTT Bankruptcy Court, to assume or reject any pre-petition
executory contracts or unexpired leases. The EOTT Bankruptcy Court approved
payment of certain pre-petition liabilities, such as employee wages and
benefits, trust fund taxes in the ordinary course of business and certain
pre-petition claims of crude oil suppliers, critical vendors and foreign
vendors. In addition, the EOTT Bankruptcy Court allowed for the payment of the
certain bankruptcy professionals and retention of the professionals in the
ordinary course of business. Finally, the EOTT Bankruptcy Court extended the
time within which we must assume or reject any unexpired leases of
nonresidential property. Our Restructuring Plan was confirmed on February 18,
2003 and became effective on March 1, 2003. The provisions of the Restructuring
Plan are further described in Note 2. Shell and Tex-New Mex filed a notice of
appeal to our plan confirmation on February 24, 2003. We filed a motion to
dismiss the appeal as being moot in May of 2003. A hearing on the appeal is set
in the District Court for August 19, 2003. The bankruptcy remains open while we
resolve the outstanding claims. Until all of the claims are fully resolved, we
cannot complete the allocation of the 11,947,820 LLC units and the $104 million
senior unsecured notes to certain creditors under the Restructuring Plan. We
expect the Bank of New York, as depositary agent, to allocate the majority of
the LLC units and senior unsecured notes by the end of August 2003 and the final
allocation is expected to be completed by December 2003. Until the final
allocation is made, we will not know how many units each of our unitholders is
entitled to vote. If necessary, for any matters requiring unitholder approval,
our intention is to instruct the depositary agent to vote the units issued to it
as may be authorized by a vote of the Board of Directors in accordance with our
LLC agreement. See Note 6.

EPA Section 308 Request. In July 2001, Enron received a request for
information from the Environmental Protection Agency ("EPA") under Section 308
of the Clean Water Act, requesting information regarding certain spills and
releases from oil pipelines owned or operated by Enron and its affiliated
companies for the time period July 1, 1998 to July 11, 2001. The only domestic
crude oil pipelines owned or operated by Enron at the time of the request were
our pipelines. Our pipelines were operated by either the General Partner, a
wholly-owned subsidiary of Enron, or EPSC, also an Enron subsidiary, for the
time period in question. At the time the EPA issued the Section 308 request to
Enron, EPSC operated our pipelines. The General Partner and EPSC retain operator
liability for the time period at issue. Enron responded to the EPA's Section 308
request in its capacity as the operator of the pipelines actually owned by us.
We retain all liability for the pipelines for which an owner would be
responsible. In addition to the retention of ownership liability, we may also be
required to indemnify the General Partner and its Affiliates with regard to any
environmental charges. Under the terms of the MLP Partnership Agreement, we are
obligated to indemnify the General Partner and its

24

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

affiliates (including Enron) for all losses associated with activities
undertaken on our behalf. This indemnification obligation is limited to actions
undertaken in good faith, and may only be satisfied from our assets. Neither our
bankruptcy nor Enron's bankruptcy affects our liability as owner of the
pipelines, nor does it affect our indemnification obligations under the MLP
Partnership Agreement. While we cannot predict the outcome of the EPA's Section
308 review, the EPA could seek to impose liability on us with respect to the
matters being reviewed. The outcome of the EPA 308 request is not yet known, and
we are unaware of any potential liability of us, Enron, or its affiliates.
However, we assume that we are fully responsible as owner for any environmental
claims or fines in relation to the pipelines (subject to insurance claims or
other third party claims to which we may be entitled). Our bankruptcy
proceedings did not relieve us from potential environmental liability.
Consequently, we do not believe either our bankruptcy or Enron's bankruptcy has
had any material impact on our environmental liability.

Environmental. We are subject to extensive federal, state and local laws
and regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, and which require
expenditures for remediation at various operating facilities and waste disposal
sites, as well as expenditures in connection with the construction of new
facilities. At the federal level, such laws include, among others, the Clean Air
Act , the Clean Water Act, the Oil Pollution Act, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act, and the National Environmental Policy Act, as each may be amended
from time to time. Failure to comply with these laws and regulations may result
in the assessment of administrative, civil, and criminal penalties or the
imposition of injunctive relief.

Methyl tertiary butyl ether ("MTBE") is produced by us at our Morgan's
Point Facility. MTBE is used as an additive in gasoline. The governor of
California ordered a ban on the use of MTBE as a gasoline additive due to health
concerns. The implementation of this ban has been delayed until December 31,
2003. Both the U.S. House of Representatives and the U.S. Senate introduced
bills in 2003 (HR6 and S14, respectively) that would each bar the use of MTBE
within four years of enactment. Currently, action on these bills is pending in
the House/Senate Conference Committee, and further action is expected on them
later this year. Both HR6 and S14 contain provisions that would gradually phase
out the use of MTBE as a gasoline oxygenate. Each also provides for federal
grant assistance to MTBE manufacturing facilities to aid them in converting to
the production of other products. We can provide no assurances regarding the
likelihood of the passage of either of these bills in any form. However, if a
nationwide ban on the use of MTBE were enacted, it would materially reduce
demand for MTBE, which could have a material adverse effect on our financial
results. If MTBE were to be restricted or banned throughout the United States,
we could modify the Morgan's Point Facility to produce other products. We
believe that modifying our existing Morgan's Point Facility to produce other
gasoline blendstocks such as alkylates would require a substantial capital
investment and as a result of our restructuring, we may not have the resources
available to effect such a conversion. Further, we cannot predict whether
legislation regarding MTBE will be passed, whether the federal government will
take steps to reverse California's ban as of December 31, 2003 on the use of
MTBE as a gasoline component, or if the federal government will provide monetary
assistance for conversion.

In 2001, expenses incurred for spill clean up and remediation costs related
to the assets purchased from Tex-New Mex increased significantly. Based on our
experience with these assets, we filed an amended cross-claim against Tex-New
Mex alleging contingent claims for potential remediation issues not yet known to
us. We allege that Tex-New Mex failed to report spills, underreported spills,
failed to properly respond to leaks in the pipeline and engaged in other
activities with regard to the pipeline that may result in future remediation
liabilities. We obtained $20 million in insurance coverage in connection with
the acquisition from Tex-New Mex believing that amount would be sufficient to
cover our remediation requirements along the pipeline for a ten-year period.
After four years into the term of the insurance policy, we have made claims in
excess of the amount of insurance coverage.

In addition to costs associated with the assets acquired from Tex-New Mex,
we have also incurred spill clean up and remediation costs in connection with
other properties we own in various locations

25

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

throughout the United States. We also have insurance coverage to cover clean up
and remediation costs that may be incurred in connection with properties not
acquired from Tex-New Mex. However, no assurance can be given that the insurance
will be adequate to cover any such cleanup and remediation costs.

The following are summaries of environmental remediation expense, estimated
environmental liabilities, and amounts receivable under insurance policies for
the indicated periods (in thousands):

The environmental liability was classified in Other Current and Other
Long-Term Liabilities and the insurance receivable was classified in Trade and
Other Receivables at June 30, 2003 and December 31, 2002.

We may experience future releases of crude oil into the environment or
discover releases that were previously unidentified. While an inspection program
is maintained on our pipelines to prevent and detect such releases, and
operational safeguards and contingency plans are in place for the operation of
our processing facilities, damages and liabilities incurred due to any future
environmental releases could affect our business. We believe that our operations
and facilities are in substantial compliance with applicable environmental laws
and regulations and that there are no outstanding potential liabilities or
claims relating to safety and environmental matters of which we are currently
aware, the resolution of which, individually or in

26

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the aggregate, would have a materially adverse effect on our financial position
or results of operations. However, we could be significantly adversely impacted
by additional repair or remediation costs related to the pipeline assets we
acquired from Tex-New Mex if the need for any additional repairs or remediation
arises and we do not obtain reimbursement for any such costs as a result of the
pending litigation concerning those assets. Our environmental expenditures
include amounts spent on permitting, compliance and response plans, monitoring
and spill cleanup and other remediation costs. In addition, we could be required
to spend substantial sums to ensure the integrity of our pipeline systems, and
in some cases, we may take pipelines out of service if we believe the costs of
upgrades will exceed the value of the pipelines.

No assurance can be given as to the amount or timing of future expenditures
for environmental remediation or compliance, and actual future expenditures may
be different from the amounts currently estimated. In the event of future
increases in costs, we may be unable to pass on those increases to our
customers.

11. NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement requires
entities to record the fair value of a liability for legal obligations
associated with the retirement obligations of tangible long-lived assets in the
period in which it is incurred. When the liability is initially recorded, a
corresponding increase in the carrying value of the related long-lived asset
would be recorded. Over time, accretion of the liability is recognized each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss on settlement. We
adopted the accounting principle required by the new statement effective January
1, 2003. Determination of the fair value of the retirement obligation is based
on numerous estimates and assumptions including estimated future third-party
costs, future inflation rates and the future timing of settlement of the
obligations.

Our long-lived assets consist primarily of our crude oil gathering and
transmission pipelines and associated field storage tanks, our liquids
processing and handling facilities at Morgan's Point, our underground storage
facility and associated pipeline grid system, and transportation facilities at
Mont Belvieu and our gas processing and fractionation plant and related storage
and distribution facilities on the West Coast.

We identified asset retirement obligations that are within the scope of the
new statement, including contractual obligations included in certain
right-of-way agreements, easements and surface leases associated with our crude
oil gathering, transportation and storage assets and obligations imposed by
certain state regulatory requirements pertaining to closure and/or removal of
facilities and other assets associated with our Morgan's Point, Mont Belvieu and
West Coast facilities. We have estimated the fair value of asset retirement
obligations based on contractual requirements where the settlement date is
reasonably determinable. We cannot currently make reasonable estimates of the
fair values of certain retirement obligations, principally those associated with
certain right-of-way agreements and easements for our pipelines, our Morgan's
Point, Mont Belvieu and West Coast facilities, because the settlement dates for
the retirement obligations cannot be reasonably determined. We will record
retirement obligations associated with these assets in the period in which
sufficient information exists to reasonably estimate the settlement dates of the
respective retirement obligations.

As a result of the adoption of SFAS 143 on January 1, 2003, we recorded a
liability of $1.7 million, property, plant and equipment, net of accumulated
depreciation of $0.1 million and a cumulative effect of a change in accounting
principle of $1.6 million. The effect of adoption of the new accounting
principle was not material to the results of operations for the one month ended
March 31, 2003, the two months ended February 28, 2003 nor would it have had a
material impact on our net income for the three and six months ended June 30,
2002. The asset retirement obligation as of January 1, 2002 was not material.

27

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In October 2002, the Emerging Issues Task Force ("EITF") reached a
consensus in EITF Issue 02-03, "Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities." The EITF reached a consensus to rescind Issue
98-10, and related interpretive guidance, and preclude mark to market accounting
for energy trading contracts that are not derivative instruments pursuant to
SFAS 133. The consensus requires that gains and losses (realized and unrealized)
on all derivative instruments held for trading purposes be shown net in the
income statement, whether or not the instrument is settled physically. The
consensus to rescind Issue 98-10 eliminated EOTT's basis for recognizing
physical inventories at fair value. The consensus to rescind Issue 98-10 was
effective for all new contracts entered into (and physical inventory purchased)
after October 25, 2002. For energy trading contracts and physical inventories
that existed on or before October 25, 2002, that remained at December 31, 2002,
the consensus was effective January 1, 2003 and was reported as a cumulative
effect of a change in accounting principle. The cumulative effect of the
accounting change on January 1, 2003 was a loss of $2.4 million. With the
rescission of Issue 98-10, inventories purchased after October 25, 2002 have
been valued at average cost.

In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51"
("FIN 46"). FIN 46 is an interpretation of Accounting Research Bulletin 51,
"Consolidated Financial Statements", and addresses consolidation by business
enterprises of variable interest entities ("VIE"). FIN 46 requires an enterprise
to consolidate a VIE if that enterprise has a variable interest that will absorb
a majority of the entity's expected losses if they occur, receive a majority of
the entity's expected residual returns if they occur, or both. This guidance
applies immediately to VIE's created after January 31, 2003, and to VIE's in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to VIE's in which
an enterprise holds a variable interest that it acquired before February 1,
2003. We implemented FIN 46 effective with the adoption of fresh start reporting
on March 1, 2003. This statement did not have any impact on our financial
statements.

In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instrument and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new statement is effective for contracts entered into or modified after
June 30, 2003 (with certain exceptions) and for hedging relationships designated
after June 30, 2003. The accounting guidance in the new statement is to be
applied prospectively. We implemented SFAS 149 effective with the adoption of
fresh start reporting on March 1, 2003. This statement did not have any impact
on our financial statements.

In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. We implemented SFAS
150 effective with the adoption of fresh start reporting on March 1, 2003. The
adoption of this statement did not have any impact on our financial statements.

12. BUSINESS SEGMENT INFORMATION

We have three reportable segments, which management reviews in order to
make decisions about resources to be allocated and assess its performance: North
American Crude Oil, Pipeline Operations and Liquids Operations. The North
American Crude Oil segment is organized into five operating regions and
primarily purchases, gathers, transports and markets crude oil. For segment
reporting purposes, these five operating regions have been aggregated as one
reportable segment due to similarities in their operations as allowed by SFAS
No. 131. The Pipeline Operations segment operates approximately 7,200 miles of
active common carrier pipelines in 12 states. The Liquids Operations includes
the Morgan's Point Facility and the Mont Belvieu Facility. Effective June 1,
2002, we sold our West Coast refined products marketing operations.

28

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Effective June 25, 2003, we signed a definitive agreement to sell all of our
natural gas liquids assets on the West Coast and therefore the results of
operations related to these assets previously included in the West Coast
Operations segment have been reclassified to discontinued operations for all
periods presented herein.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as discussed in Note 2 included
in our Annual Report on Form 10-K for the year ended December 31, 2002. We
evaluate performance based on operating income (loss).

We account for intersegment revenue for our North American Crude Oil and
our Liquids Operations as if the sales were to third parties, that is, at
current market prices. Intersegment revenues for Pipeline Operations are based
on published pipeline tariffs.

29

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL INFORMATION BY BUSINESS SEGMENT
(IN THOUSANDS)

30

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

31

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(a) Intersegment revenue for North American Crude Oil and Liquids
Operations is at prices comparable to those received from external
customers. Intersegment revenue for Pipeline Operations is primarily
transportation costs charged to North American Crude Oil for the
transport of crude oil at published pipeline tariffs.

(b) Corporate and Other includes results from the West Coast refined
products operations and intersegment eliminations.

(c) Includes a loss from reorganization items of $7.3 million, a net gain
on the discharge of debt of $131.6 million and a loss from fresh start
adjustments of $56.8 million.

(d) Corporate and Other includes assets related to the West Coast
discontinued operations.

32

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes contained in this report and the
Consolidated Financial Statements, Notes and Management's Discussion and
Analysis contained in our Annual Report on Form 10-K for the year ended December
31, 2002.

INFORMATION REGARDING FORWARD-LOOKING INFORMATION

The statements in this Form 10-Q that are not historical information are
forward-looking statements including but not limited to statements identified by
the words "anticipate," "believe," "estimate," "expect," "plan," "intend" and
similar expressions and statements regarding our business strategy, plans and
objectives for future operations. Such forward-looking statements include the
discussions in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Any forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, and actual
results may vary materially from those in the forward-looking statements as a
result of various factors. These risks, uncertainties and other factors include,
among others, the risk factors described in our Annual Report on Form 10-K for
the year ended December 31, 2002, filed with the Securities and Exchange
Commission as well as other risks described in this Form 10-Q. See in this
section, "Bankruptcy Proceedings and Restructuring Plan," and "Liquidity and
Capital Resources" for statements regarding important factors that could cause
actual results to differ materially from those in the forward-looking statements
herein. Although we believe that our expectations regarding future events are
based on reasonable assumptions, we can give no assurance that these are all the
factors that could cause actual results to vary materially or that our
expectations regarding future developments will prove to be correct.

BANKRUPTCY PROCEEDINGS AND RESTRUCTURING PLAN

On October 8, 2002, EOTT Energy Partners, L.P. (the "MLP") and our four
affiliated operating limited partnerships, EOTT Energy Finance Corp. and EOTT
Energy General Partner, L.L.C. (the "Subsidiary Entities") filed pre-negotiated
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code (the "EOTT Bankruptcy"). The filing was made in the United
States Bankruptcy Court for the Southern District of Texas, Corpus Christi
Division (the "EOTT Bankruptcy Court"). Additionally, EOTT Energy Corp. (the
"General Partner") filed a voluntary petition for reorganization under Chapter
11 on October 21, 2002 in the EOTT Bankruptcy Court in order to join in the
voluntary, pre-negotiated Joint Chapter 11 Plan of Reorganization filed on
October 8, 2002. On October 24, 2002, the EOTT Bankruptcy Court administratively
consolidated for distribution purposes the General Partner's bankruptcy filing
with the previously filed cases. We operated as debtors-in-possession under the
Bankruptcy Code, which means we continued to remain in possession of our assets
and properties and continued our day-to-day operations.

The EOTT Bankruptcy Court confirmed our Third Amended Joint Chapter 11 Plan
of Reorganization, as supplemented ("Restructuring Plan") on February 18, 2003,
and it became effective on March 1, 2003. We emerged from bankruptcy as a
limited liability company structure and EOTT Energy LLC ("EOTT LLC") became the
successor registrant to the MLP. The consummation of our Restructuring Plan and
the level of success of our Restructuring Plan will materially affect matters
described in this report. For a discussion of the Restructuring Plan, see Note 2
to the Condensed Consolidated Financial Statements.

As of February 28, 2003 (the date chosen for accounting purposes), we
adopted fresh start reporting in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Under fresh
start reporting, EOTT has adjusted its assets and liabilities to their fair
values as of February 28, 2003. The reorganization value of EOTT of
approximately $856 million was determined based on discounted cash flow,
comparable transaction and capital market comparison analyses. The valuation was
based upon a number of

33

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

estimates and assumptions, which are inherently subject to significant
uncertainties and contingencies beyond our control. Accordingly, there can be no
assurance that the valuations will be realized, and actual results could vary
significantly. See Note 3 to our Condensed Consolidated Financial Statements.

As a result of the application of fresh start reporting under SOP 90-7,
EOTT's financial results for the quarter ended March 31, 2003 include two
different bases of accounting and accordingly, the financial condition,
operating results and cash flows of the Successor Company and the Predecessor
Company have been separately disclosed. For purposes of this Management's
Discussion and Analysis and the financial statements contained elsewhere herein,
references to the "Predecessor Company" are references to EOTT for periods
through February 28, 2003 (the last day of the calendar month in which EOTT
emerged from bankruptcy) and references to the "Successor Company" are
references to EOTT for periods subsequent to February 28, 2003.

Following the restructuring, the ownership of EOTT LLC is as follows:

(1) Assumes a management incentive plan with 1,200,000 new LLC Units is
approved by the board of directors of EOTT LLC. The board has approved
the development of a management incentive plan for certain key
employees and directors; however, such units have not been issued.

(2) Does not include up to 957,981 LLC Units to be issued if LLC Warrants
are exercised.

(3) Includes 957,981 LLC Units that may be issued upon exercise of the LLC
Warrants.

OVERVIEW

Through our four operating limited partnerships, EOTT Energy Operating
Limited Partnership, EOTT Energy Canada Limited Partnership, EOTT Energy
Pipeline Limited Partnership, and EOTT Energy Liquids, L.P., we purchase,
gather, transport, store, process and resell crude oil, refined petroleum
products, natural gas liquids ("NGL") and other related products. Our principal
business segments are our North American Crude Oil Operations, our Pipeline
Operations and our Liquids Operations. Our gathering and marketing operations
are characterized by large volume and narrow profit margins on purchase and sale
transactions and the absolute price levels for crude oil do not necessarily bear
a relationship to gross profit. Effective June 25, 2003, we signed a definitive
agreement to sell all of our natural gas liquids assets on the West Coast and
therefore the results of operations related to these assets previously included
in the West Coast Operations segment have been reclassified to discontinued
operations for all periods presented herein. See Note 12 to our Consolidated
Financial Statements for certain financial information by business segment.

RESULTS OF OPERATIONS

The following review of our results of operations and financial condition
should be read in conjunction with our Condensed Consolidated Financial
Statements and Notes thereto. As is more fully discussed in Notes 2 and 3 to the
Condensed Consolidated Financial Statements, EOTT emerged from bankruptcy and
adopted fresh start reporting pursuant to SOP 90-7 effective as of February 28,
2003. Accordingly, the financial statements of the Successor Company and
Predecessor Company are not comparable in total; however operating revenues,
gross profit and operating income (loss) (excluding changes in depreciation and
amortization where noted) and interest and financing costs (except where noted)
are comparable. For purposes of this Management's Discussion and Analysis, we
have supplementally combined

34

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

actual operating results for the Successor Company for the four months ended
June 30, 2003 and for the Predecessor Company for the two months ended February
28, 2003 in order to enhance a reader's understanding of our results of
operations. Ordinarily, such comparison would not be presented under SOP 90-7.
However, since the reorganization and the adoption of fresh start reporting only
impacted our depreciation and amortization, as a result of the change in the
carrying amount of our long-lived assets, and our interest expense, primarily
through the discharge of debt related to our senior notes, comparison of our
results of operations pre and post reorganization is useful once a reader
understands the impact on depreciation and amortization expense and interest and
financing costs. Variations resulting from reorganization items, net gain on
discharge of debt and fresh start adjustments will be discussed separately where
significant.

We reported a net loss of $18.1 million for the four months ended June 30,
2003, which was primarily related to operating losses from our Liquids
Operations. The operating losses of $13.2 million from our Liquids Operations
were primarily attributable to: (1) higher butane and methanol feedstock costs
as well as lower MTBE prices; (2) operational problems at our Morgan's Point
Facility, which required unanticipated downtime and additional repair expenses
of approximately $1.9 million; and (3) a lower of cost or market inventory
adjustment of approximately $3.0 million due to the volatility of the
commodities market and the higher than normal levels of inventory as a result of
the unanticipated downtime. In addition, we reported $18.1 million of operating
income from our crude oil marketing and transportation activities and interest
and related charges of $12.8 million.

We reported net income of $60.3 million for the two months ended February
28, 2003. Net income for the two months ended February 28, 2003 is primarily
attributable to: (1) reorganization expenses of $7.3 million related to legal
and professional fees related to the bankruptcy proceedings; (2) a net gain on
the discharge of debt of $131.6 million in connection with the Restructuring
Plan; (3) fresh start adjustments of $56.8 million resulting from adjusting
assets and liabilities to fair value in accordance with SOP 90-7; (4) losses
from the cumulative effect of accounting changes related to the adoption of
Emerging Issues Task Force ("EITF") 02-03 and Statement of Financial Accounting
Standards ("SFAS") 143; (5) operating losses of $0.4 million from our Liquids
Operations primarily due to higher prices for normal butane and methanol
feedstocks as well as lower MTBE prices; (6) operating income of $6.3 million
from our crude oil marketing and transportation activities; and (7) interest and
related charges of $5.6 million.

35

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002

Selected financial data for our business for the three months ended June 30,
2003 and 2002 is summarized below, in millions:

(1) Includes intersegment transportation costs from our Pipeline
Operations segment for the transport of crude oil at published
pipeline tariffs and purchases of crude oil inventory from our
Pipeline Operations segment. Intersegment transportation costs and net
purchases of crude oil inventory from our Pipeline Operations segment
were $22.6 million and $20.6 million for the three months ended June
30, 2003, and 2002, respectively.

Operating loss was $2.3 million in the three months ended June 30, 2003
compared to operating income of $4.5 million for the same period in 2002.
Interest and financing costs decreased $2.8 million as compared to 2002. The
following will detail the primary factors affecting operating income, interest
and financing costs and income from discontinued operations.

North American Crude Oil

Operating income from our North American Crude Oil business segment was
$0.8 million in the second quarter of 2003 compared to an operating loss of $3.8
million for the same period in 2002. The primary factors affecting gross profit
and operating income in this segment are:

36

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

o P+ averaged $ 4.61 per barrel in the second quarter of 2003 compared
to $3.30 per barrel for the same period in 2002. P+ is the forward
price spread between field postings and liquid market locations. Gross
profit on approximately 20% of our purchases of lease crude oil are
impacted by P+. The price difference between West Texas Intermediate
and West Texas Sour crude oil ("WTI/WTS differential") was $3.19 per
barrel in the second quarter of 2003 versus $1.22 per barrel in the
same period in 2002. Generally the larger the WTI/WTS differential,
the higher our gross profit will be. Approximately 5% of our purchases
of lease crude oil are impacted by the WTI/WTS differential.

o Crude oil lease volumes averaged 253,000 barrels per day ("bpd") in
the second quarter of 2003 compared to 287,000 bpd in the second
quarter of 2002. Total sales volumes averaged 484,000 bpd in the
second quarter of 2003 compared to 566,000 bpd in the second quarter
of 2002. The reduction in marketing activities and lease volumes
purchased reflects the loss of certain lease and spot barrels as a
result of increased requests for credit from our suppliers and other
factors resulting from Enron's bankruptcy and our bankruptcy as well
as the overall credit environment in the energy industry. Although the
average crude oil lease volumes purchased in the second quarter of
2003 is lower when compared to the second quarter of 2002, since our
emergence from bankruptcy, we have been able to increase the average
amount of lease crude oil volumes being purchased from 246,000 bpd in
the first quarter of 2003 to 253,000 bpd in the second quarter of
2003.

o Average margins per lease barrel increased in the second quarter of
2003 due to more favorable market conditions and low margin per barrel
contracts being renegotiated or terminated during 2002 and 2003 as a
part of our restructuring plan initiatives.

o In the second quarter of 2003, we received contaminated crude oil from
one of our customers. In order to properly segregate the contaminated
crude oil, we were required to build inventory in June 2003. As a
result, gross profit in the second quarter of 2003 was reduced by
approximately $0.7 million due to costs incurred, including a lower of
cost or market adjustment on approximately 60,000 barrels of
inventory. Additionally, we had reduced margins of approximately $0.9
million due to the storage of inventory. Margin from the sale of the
inventory will be realized in July and August 2003. We intend to
pursue all available remedies to recover our costs resulting from the
contamination.

o Total expenses decreased approximately $5.9 million primarily due to
lower employee related expenses of $2.7 million, lower safety and
environmental expenses of $0.4 million, a $1.2 million impairment of a
marine facility recorded in the second quarter of 2002, and lower
depreciation of $1.0 million. The decrease in depreciation is
attributable to the reduction in carrying value of assets resulting
from fresh start reporting.

Pipeline Operations

Operating income from our Pipeline Operations was $10.7 million in the
second quarter of 2003 compared to $8.5 million for the same period in 2002. The
primary factors affecting this business are as follows:

o Revenues from our Pipeline Operations decreased $1.4 million
reflecting reduced lease volumes transported by our North American
Crude Oil business segment. Average volumes transported in the second
quarter of 2003 were 404,000 bpd compared to 423,000 bpd in the second
quarter of 2002. Revenue per barrel was $0.71 per barrel in the second
quarter of 2003 and in the second quarter of 2002.

o Total expenses for our Pipeline Operations decreased approximately
$3.6 million primarily reflecting lower cost of sales of $2.2 million
due to lower losses for unaccounted crude oil volumes, lower
depreciation of $0.8 million, lower employee expenses of $0.4 million
and an $0.8 million reduction

37

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

in our litigation accrual due to the settlement/resolution of claims
made with respect to environmental contingencies during our bankruptcy
process. These amounts were partially offset by higher safety and
environmental costs of $0.8 million. The decrease in depreciation is
attributable to the reduction in carrying value of assets resulting
from fresh start reporting.

Liquids Operations

Operating losses from our Liquids Operations were $5.2 million in the
second quarter of 2003 compared to operating income of $6.1 million in the same
period in 2002. The primary factors affecting our Liquids Operations are:

o MTBE equivalent product margin per gallon declined from $0.28 per
gallon in the second quarter of 2002 to $0.02 per gallon in the second
quarter of 2003 due to higher prices for normal butane and methanol
feedstocks. Our feedstock prices increased due to upward pressure from
crude oil and natural gas markets, while the price for MTBE was under
pressure due to the phase out of MTBE by certain California refiners.

o MTBE sales volume in the second quarter of 2003 was 13,600 bpd,
compared to the second quarter of 2002 sales of 14,600 bpd.

o Total expenses from Liquids Operations decreased approximately $1.6
million primarily due to lower depreciation and amortization costs of
$0.9 million and $0.5 million of lower employee related costs, as
compared to the second quarter of 2002. The decrease in depreciation
and amortization is attributable to the fourth quarter 2002
impairment.

Corporate and Other

Corporate and other costs increased approximately $2.3 million, which
principally reflects higher legal costs of $1.7 million related to the Kniffen
Estates litigation and a gain on the sale of the NYMEX seats for $1.3 million in
the second quarter of 2002 offset by lower depreciation of $0.8 million. The
decrease in depreciation is attributable to the reduction in carrying value of
assets resulting from fresh start reporting.

Interest and Financing Costs

The primary factors affecting interest and financing costs are as follows:

o Facility fees on the credit facilities and term loan with Standard
Chartered, SCTS and Lehman were $0.5 million lower during the second
quarter of 2003 compared to the second quarter 2002.

o Interest on working capital loans was $0.9 million lower during the
second quarter of 2003 compared to the second quarter of 2002
resulting from lower average debt outstanding. Amounts outstanding
under financing facilities were $95 million and $125 million at June
30, 2003 and 2002, respectively. Borrowing rates under the SCTS
financing facilities range from LIBOR plus 75 basis points to LIBOR
plus 250 basis points (prior to the bankruptcy) to LIBOR plus 300
basis points under the DIP Facilities and exit facilities.

o Letter of credit costs were $2.4 million in the second quarter of 2003
under the credit facilities with Standard Chartered as compared to
$1.6 million for the second quarter 2002. Higher letter of credit
usage resulted from our bankruptcy and higher crude oil prices. Letter
of credit fees averaged 3.0%.

38

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

o Interest on the Term Loan totaled $1.9 million in the second quarter
of 2003. The Term Loan was entered into in connection with our DIP
Facilities in October 2002 and refinanced under the exit credit
facilities in February 2003.

o Interest expense on the 9% senior notes issued March 1, 2003 totaled
$2.7 million during the second quarter of 2003. Interest on the 11%
senior notes was $6.5 million in the second quarter of 2002.

Discontinued Operations

Income from our discontinued West Coast Operations was $0.5 million in the
second quarter of 2003 compared to $0.4 million in the second quarter of 2002.
The improvement is related to a decrease in total expenses of $0.2 million,
which is primarily a reduction of depreciation attributable to the fourth
quarter 2002 impairment.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002

Selected financial data for our business for the four months ended June 30,
2003, two months ended February 28, 2003, supplemental information for the six
months ended June 30, 2003 and for the six months ended June 30, 2002 is
summarized below, in millions:

(1) We have combined actual operating results for the Successor Company
for the four months ended June 30, 2003 and for the Predecessor
Company for the two months ended February 28, 2003 in order to
facilitate a comparative analysis to the prior fiscal period.

39

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

(2) Includes intersegment transportation costs from our Pipeline
Operations segment for the transport of crude oil at published
pipeline tariffs and purchases of crude oil inventory from our
Pipeline Operations segment. Intersegment transportation costs and net
purchases of crude oil inventory from our Pipeline Operations segment
were $43.0 million and $ 43.0 million for the six months ended June
30, 2003, and 2002, respectively.

Operating loss was $4.1 million in the first six months of 2003 compared to
operating income of $13.5 million for the same period in 2002. Interest and
financing costs decreased $5.2 million as compared to 2002. The following will
detail the primary factors affecting operating income, interest and financing
costs, reorganization and fresh start adjustments, the cumulative effect of
accounting changes and income from discontinued operations.

North American Crude Oil

Operating income from our North American Crude Oil business segment was
$7.0 million in the first half of 2003 compared to an operating loss of $3.5
million for the same period in 2002. The primary factors affecting gross profit
and operating income in this segment are:

o P+ averaged $4.37 per barrel in 2003 compared to $3.05 per barrel in
2002. The WTI/WTS differential was $2.78 per barrel in the first six
months of 2003, versus $1.38 per barrel in the same period in 2002.

o Crude oil lease volumes averaged 250,000 barrels per day ("bpd") in
the first six months of 2003 compared to 298,000 bpd in the first six
months of 2002. Total sales volumes averaged 463,000 bpd in the first
six months of 2003 compared to 604,000 bpd in the first six months of
2002. The reduction in marketing activities and lease volumes
purchased reflects the loss of certain lease and spot barrels as a
result of increased requests for credit from our suppliers and other
factors resulting from Enron's bankruptcy and our bankruptcy as well
as the overall credit environment in the energy industry.

o Average margins per lease barrel increased in the first half of 2003
due to more favorable market conditions and low margin per barrel
contracts being renegotiated or terminated during 2002 and 2003 as a
part of our restructuring plan initiatives.

o In the second quarter of 2003, we received contaminated crude oil from
one of our customers. In order to properly segregate the contaminated
crude oil, we were required to build inventory in June 2003. As a
result, gross profit in the second quarter of 2003 was reduced by
approximately $0.7 million due to costs incurred, including a lower of
cost or market adjustment on approximately 60,000 barrels of
inventory. Additionally, we had reduced margins of approximately $0.9
million due to the storage of inventory. Margin from the sale of
the inventory will be realized in July and August 2003. We intend to
pursue all available remedies to recover our costs resulting from the
contamination.

o Total expenses decreased approximately $10.6 million due to lower
employee related expenses of $5.5 million, lower operating expenses of
$0.6 million (primarily due to the significant decline in lease
volumes transported by our fleet operations), lower safety and
environmental expenses of $0.6 million, lower depreciation of $1.2
million and an impairment charge of $1.2 million related to a marine
facility in the first six months of 2002. The decrease in depreciation
is attributable to the reduction in carrying value of assets resulting
from fresh start reporting.

40

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Pipeline Operations

Operating income from our Pipeline Operations was $17.4 million in the
first six months of 2003 compared to operating income of $19.3 million for the
same period in 2002. The primary factors affecting this business are as follows:

o Revenues from our Pipeline Operations decreased $4.5 million
reflecting reduced lease volumes transported by our North American
Crude Oil business segment. Average volumes transported in the first
half of 2003 were 400,000 bpd compared to 431,000 bpd in the first
half of 2002. Revenue per barrel was $0.71 per barrel in the first
half of 2003 and in the first half of 2002.

o Total expenses for our Pipeline Operations decreased approximately
$2.6 million primarily reflecting lower cost of sales of $1.0 million
due to lower losses for unaccounted crude oil volumes, lower employee
expenses of $0.4 million, lower depreciation of $1.4 million and an
$0.8 million reduction in our litigation accrual due to the
settlement/resolution of claims made with respect to environmental
contingencies during our bankruptcy. These amounts were offset by
higher safety and environmental costs of $1.7 million. The decrease in
depreciation is attributable to the reduction in carrying value of
assets resulting from fresh start reporting.

Liquids Operations

Operating losses from our Liquids Operations were $13.6 million in the
first six months of 2003 compared to operating income of $9.7 million in the
same period in 2002. The primary factors affecting our Liquids Operations are:

o MTBE equivalent product margin per gallon declined from $0.30 per
gallon in the first half of 2002 to $0.07 per gallon in the first half
of 2003 due to higher prices for normal butane and methanol
feedstocks. Our feedstock prices increased due to upward pressure from
crude oil and natural gas markets, while the price for MTBE was under
pressure due to the phase out of MTBE by certain California refiners.

o MTBE sales volume in the first half of 2003 was 12,000 bpd, compared
to sales of 12,400 bpd during the first half of 2002. Production in
both years was curtailed due to facility maintenance normally
conducted in the first quarter of the year. In 2003, we discovered
operational problems at the Morgan's Point Facility that required
additional repair expenses and unanticipated downtime.

o Total expenses from Liquids Operations decreased approximately $0.5
million primarily due to lower depreciation and amortization costs of
$1.3 million, and lower employee costs of $0.6 million offset by $1.1
million of additional operating expenses primarily related to repair
expenses incurred related to the unanticipated downtime in March 2003.
The decrease in depreciation and amortization is attributable to the
fourth quarter 2002 impairment.

o Also during March 2003, the unexpected downtime of the Morgan's Point
Facility resulted in a build of feedstock inventories beyond our
operational requirements. Due to the volatility in the commodities
market and the higher than normal levels of inventory, we recorded a
lower of cost or market adjustment of approximately $3.0 million at
the end of the first quarter of 2003.

The deteriorating business and regulatory climate for MTBE is continuing to
adversely affect our Liquids Operations. During the six months ended June 30,
2003, the Liquids Operations had an operating loss of $13.6 million. In
connection with the development of our exit strategy from bankruptcy, the
Liquids Operations were identified as non-strategic. Since our emergence from
bankruptcy, we have been evaluating our options with regard to the future use of
these assets. The

41

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

options under consideration include continued operation, potential sale to a
third party, modification of certain assets to produce alternative products or a
partial or complete shutdown of the Morgan's Point Facilities at some point in
the future. We are currently engaged in discussions with a third party regarding
a possible sale of the Liquids Operations. If an agreement can be reached,
closing of the sale would likely occur no earlier than the fourth quarter of
2003. No assurances can be provided, however, that an agreement will be reached
and that the Liquids Operations will be sold to a third party. Should the
current discussions regarding a possible disposition of the Liquids Operations
be unsuccessful, we will need to reassess our remaining options with regard to
the future use of these assets. In addition, should the current business and
regulatory climate for MTBE continue, it is possible that a partial or complete
shutdown of the Morgan's Point Facilities would be necessary.

The amounts we will ultimately realize could differ materially from the
amounts recorded in the consolidated financial statements. Therefore, additional
non-cash impairments of long-lived assets could be possible in the near term. As
of June 30, 2003, the aggregate net carrying value of the long-lived assets of
the Liquids Operations was $35.4 million.

Corporate and Other

Corporate and other costs increased approximately $2.9 million, which
principally reflects higher insurance costs of $0.6 million, higher legal costs
of $2.4 million primarily related to the Kniffen Estates litigation, settlement
of an insurance claim for $1.1 million and a gain on the sale of NYMEX seats for
$1.3 million in the first six months of 2002. These amounts were partially
offset by lower employee costs of $0.7 million and lower depreciation of $1.1
million. The decrease in depreciation is attributable to the reduction in
carrying value of assets resulting from fresh start reporting.

Reorganization Items, Net Gain on Discharge of Debt and Fresh Start Adjustments

The reorganization items of $7.3 million are primarily comprised of legal
and professional fees related to the bankruptcy proceedings. The net gain on the
discharge of debt of $131.6 million was recorded net of the 9% senior notes and
limited liability company units issued to the creditors upon emergence from
bankruptcy. The fresh start adjustments of $56.8 million result from adjusting
assets and liabilities to fair value.

Interest and Financing Costs

The primary factors affecting interest and financing costs are as follows:

o Facility fees on the credit facilities and term loan with Standard
Chartered, SCTS and Lehman were $ 1.0 million lower during the first
half of 2003 compared to the first half 2002.

o Interest on working capital loans was $0.9 million lower in the first
six months of 2003 compared to the first six months of 2002 as a
result of lower average debt outstanding. Amounts outstanding under
financing facilities were $95 million and $125 million at June 30,
2003 and 2002, respectively. Borrowing rates ranged from LIBOR plus 75
basis points to LIBOR plus 250 basis points (prior to the bankruptcy)
to LIBOR plus 300 basis points under the DIP Facilities and exit
facilities.

o Letter of credit costs were $4.5 million in the first six months of
2003 under the credit facilities with Standard Chartered as compared
to $2.5 million for the first six months 2002. Higher letter

42

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

of credit usage resulted from our bankruptcy and higher crude oil
prices. Letter of credit fees averaged 3.0%.

o Interest on the Term Loan totaled $4.8 million in the first half of
2003. The Term Loan was entered into in connection with our DIP
facilities in October 2002 and refinanced under the exit credit
facilities in February 2003.

o Interest on the 11% senior notes was $12.9 million in first half 2002
compared to interest of $3.6 million recognized on the 9% senior notes
issued March 1, 2003.

Discontinued Operations

Income from our discontinued West Coast Operations was $1.2 million in the
first six months of 2003 compared to $0.3 million in the first six months of
2002. The improvement in income from discontinued operations is primarily
related to increased business activities from our natural gas liquids operations
due to the major upgrade of these facilities completed in 2002.

Cumulative Effect of Accounting Changes

The EITF reached a consensus in EITF Issue 02-03 to rescind EITF 98-10
effective January 1, 2003. The cumulative effect of the accounting change on
January 1, 2003, was a loss of $2.4 million. See further discussion in Note 11
to the Condensed Consolidated Financial Statements. In addition, we adopted SFAS
No. 143, "Accounting for Asset Retirement Obligations", on January 1, 2003. In
connection with the adoption of SFAS 143, we recorded a $1.6 million loss as a
cumulative effect of an accounting change. See further discussion in Note 11 to
the Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

General

We anticipate that our cash requirements, including sustaining capital
expenditures for the foreseeable future, will be funded primarily from cash on
hand, cash generated from operations, and our exit credit facilities, including
the inventory repurchase agreement and receivables purchase agreement discussed
below. We are also considering other sources of liquidity, which could include
the issuance of additional equity or sales of additional assets.

Our ability to obtain letters of credit to support our purchases of crude
oil and feedstocks is fundamental to our crude oil gathering and marketing
activities and Liquids Operations. As a result of the Enron bankruptcy filing
and our subsequent bankruptcy filing, our trade creditors have been less willing
to extend credit to us on an unsecured basis and we have had to significantly
reduce our marketing activities due to the amount of credit support available to
us under our credit facilities. Although we emerged from bankruptcy on March 1,
2003, we remain highly leveraged with substantial financing costs. Therefore, we
can give no assurance that in the event of continuing high crude oil prices we
will not be required to further reduce or restrict our gathering and marketing
activities because of continuing limitations on our ability to obtain credit
support and financing for our working capital needs.

Our ability to fund our liquidity and working capital requirements through
available cash, cash generated from operations and our exit credit facilities is
based on our ability to successfully implement our Restructuring Plan. Any
material decrease in our financial strength may make it difficult to meet our
debt covenants and, therefore, adversely affect our ability to fund our working
capital needs and obtain letters of credit, or may increase the cost thereof.
Additionally, we can give no assurance that our lenders will renew our
facilities when

43

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

they mature on August 30, 2004. In addition, we are limited in our ability to
raise funds through the issuance of additional equity unless holders of at least
two-thirds of the outstanding units approve such issuance.

Our ability to meet financial covenants in the future may be affected by
events beyond our control. While we currently expect to be in compliance with
the covenants going forward, there can be no assurance that we will be in
compliance with the covenants in the future or that we will be able to obtain
amendments to the exit credit facilities, if needed.

Cash Flows From Operating Activities

Net cash provided by operating activities totaled $17.0 million in the
first half of 2003 compared to $66.0 million in the first half of 2002. Cash
from operations in the first half of 2003 reflects a net increase of
approximately $13.0 million attributable to buy/sell contracts with a single
customer involving settlement of cash across year end 2002 and cash receipts
related to our environmental insurance receivable. Cash from operations in the
first six months of 2002 reflects an increase in cash of $63.0 million related
to the sale of crude oil inventory during the second quarter of 2002 when the
crude oil market moved into backwardation.

Cash Flows From Investing Activities

Net cash used in investing activities totaled $0.9 million in the first
half of 2003 compared to $22.7 million in the first half of 2002. Cash additions
to property, plant, and equipment of $24.2 million in the first half of 2002
primarily include $13.6 million related to expansion capital projects and $6.5
million related to the turnaround of the Morgan's Point Facility. Proceeds from
asset sales were $0.2 million in 2003 and $1.4 million in 2002.

We estimate that capital expenditures necessary to maintain the existing
asset base at current operating levels will be approximately $10 million to $13
million each year. The level of additional capital expenditures by us will vary
depending upon cash from operations, availability of financing, prevailing
energy markets, general economic conditions and the current regulatory
environment. Our credit facilities prohibit us from making capital expenditures
outside of our present businesses, and further place monetary limitations on
capital expenditures.

Cash Flows From Financing Activities

Net cash used in financing activities totaled $30.0 million in the first
half of 2003 as compared to $40.1 million in the first half of 2002. The 2003
amount represents a decrease in the amount outstanding under our receivables
financing. The 2002 amount represents decreases in short term debt and
repurchase agreements offset in part by an increase in receivable financing. We
suspended distribution payments to unitholders in April 2002 and are not
permitted to make any cash distributions to unitholders pursuant to the terms of
our exit credit facilities so long as we have any indebtedness or other
obligations outstanding under the exit credit facilities and certain
requirements are met under the indenture governing our 9% senior notes.

WORKING CAPITAL AND CREDIT RESOURCES

Summary of Debtor in Possession ("DIP") Financing

On October 18, 2002, we entered into agreements with Standard Chartered,
SCTS, Lehman and other lending institutions for $575 million in DIP financing
facilities. The DIP facilities provided (i) $500 million of credit and financing
facilities through Standard Chartered and SCTS, which included up to $325
million for letters of credit and $175 million of inventory repurchase/accounts
receivable financing through SCTS, and (ii) $75 million of term loans through
Lehman and other lending institutions. The credit facilities were subject to a
borrowing base and were secured by a first-priority lien on all, or
substantially all, of our real and personal

44

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

property. As of February 28, 2003, we had outstanding approximately $313.1
million of letters of credit, $125.0 million of inventory repurchase/accounts
receivable financing, and $75 million of term loans. The DIP financing
facilities contained certain restrictive covenants that, among other things,
limited distributions, other debt, and certain asset sales. On February 28,
2003, the DIP financing facilities were refinanced by the same institutions as
we emerged from bankruptcy. The following discussion provides an overview of our
post-bankruptcy debt.

Summary of Exit Credit Facilities, Senior Notes, and Other Debt

EOTT LLC's emergence from bankruptcy as of March 1, 2003, was financed
through a combination of exit credit facilities, senior notes and other debt
associated with settlement of claims during our bankruptcy proceedings. The
table below provides a summary of these financing arrangements as of June 30,
2003.

SUMMARY OF FINANCING ARRANGEMENTS
(IN MILLIONS)

* $50 million of this commitment is unavailable ten days each month.

** We plan to extend these arrangements by the end of August 2003 for an
additional 12 months if we are unable to exercise other options
currently being evaluated. Such an extension would be subject to the
payment of extension fees of 1% and an increase in the interest rate
from LIBOR plus 3% to LIBOR plus 7%.

*** These notes were adjusted to fair value pursuant to the adoption of
fresh start reporting required by SOP 90-7.

45

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following is a summary of certain contractual obligations at June 30, 2003
(in millions):

(1) We plan to extend these arrangements by the end of August 2003 for an
additional 12 months if we are unable to exercise other options
currently being evaluated. Such an extension would be subject to the
payment of extension fees of 1% and an increase in the interest rate
from LIBOR plus 3% to LIBOR plus 7%.

We provide certain purchasers with irrevocable letters of credit to secure
our obligations to purchase crude oil or feedstocks for our crude oil or liquids
marketing activities. Liabilities with respect to these purchase obligations are
recorded in accounts payable on our balance sheet in the month the crude oil or
feedstock is purchased. These letters of credit are generally issued for up to
sixty-day periods and are cancelled upon the payment of the purchase obligation.
At June 30, 2003 we had outstanding letters of credit of approximately $267.1
million.

Exit Credit Facilities

On February 11, 2003, we entered into our exit credit facilities with the
same lenders and under substantially the same terms in the DIP financing
facilities. These new facilities were effective March 1, 2003 and $2.9 million
of facility and extension fees were paid in connection with these new
facilities. Such fees are being amortized as interest expense over the terms of
the facilities.

Letter of Credit Facility

The Letter of Credit Facility with Standard Chartered provides $325 million
of financing until August 30, 2004 and is subject to defined borrowing base
limitations. The borrowing base is (as of the date of determination) the sum of
cash equivalents, specified percentages of eligible receivables, deliveries,
fixed assets, inventory, margin deposits and undrawn product purchase letters of
credit, minus (i) first purchase crude payables, other priority claims,
aggregate net amounts payable by the borrowers under certain hedging contracts
and certain eligible receivables arising from future crude oil obligations, (ii)
the principal amount of loans outstanding and any accrued and unpaid fees and
expenses under the Term Loans, (iii) all outstanding amounts under the Amended
and Restated Commodity Repurchase Agreement and the Amended and Restated
Receivables Purchase Agreement ("SCTS Purchase Agreements"). Pursuant to a
scheduled advance rate reduction, effective July 1, 2003, the specified
percentages of eligible receivables and fixed assets in the borrowing base were
reduced. The impact of this reduction at July 31, 2003 was to lower our
borrowing base by approximately $17 million. Standard Chartered has the right to
reduce these same percentages in the borrowing base at October 31, 2003.

The Letter of Credit Facility required an upfront facility fee of $1.25
million that was paid at closing. An additional reduction fee of $2.5 million
will be payable on March 29, 2004, if Standard Chartered's exposure is not
reduced to $200 million or less by that date. Letter of credit fees range from
2.25% to 2.75% per annum

46

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

depending on usage. The commitment fee is 0.5% per annum of the unused portion
of the Letter of Credit Facility. Additionally, we agreed to a fronting fee,
which is the greater of 0.25% per annum times the face amount of the letter of
credit or $250. An annual arrangement fee of 1% per annum times the average
daily maximum facility amount, as defined in the Letter of Credit Facility, is
payable on a monthly basis.

The exit credit facilities also include the following financial covenants
that we must adhere to on a monthly basis:

o Minimum Consolidated EBIDA. Starting with the month ended May 31,
2003, we must maintain a minimum, rolling cumulative four-month total
of consolidated Earnings Before Interest Depreciation and
Amortization, subject to certain adjustments, as defined ("EBIDA").
For the four-month period ended May 31, 2003, we were required to have
consolidated EBIDA of $750,000. Thereafter, the requirement increases
monthly until it reaches $17 million for the four-month period ended
September 30, 2004. Prior to May 31, 2003, we were only required to
maintain positive consolidated EBIDA.

o Minimum Consolidated Tangible Net Worth. At the end of each month,
from March 31, 2003 to December 31, 2003, we are required to maintain
a minimum consolidated tangible net worth, subject to certain
adjustments, as defined ("Minimum Consolidated Tangible Net Worth"),
of $8.5 million. From January 31, 2004 to September 30, 2004, we are
required to maintain a Minimum Consolidated Tangible Net Worth of $10
million.

o Interest Coverage. We are required to maintain a minimum ratio of
consolidated EBIDA to cash interest expense over rolling consecutive
four-month periods. For the four-month period ended May 31, 2003, the
ratio must be at least 0.07 to 1.00. Thereafter, the ratio increases
monthly until it reaches 1.40 to 1.0 for the four-month period ended
June 30, 2004. Thereafter the ratio requirement decreases monthly to a
level of 1.21 to 1.0 for the four-month period ended September 30,
2004.

o Current Ratio. We must maintain a ratio of consolidated current
assets, subject to certain adjustments, to consolidated current
liabilities less funded debt, as defined, of 0.90 to 1.00 for the term
of the exit credit facilities.

For purposes of determining the financial information used in the financial
covenants set forth above, we are required to exclude all items directly
attributable to our Liquids Assets and the West Coast natural gas liquids assets
("Designated Assets") for the first five months ended May 31, 2003 and to make
"permitted adjustments" (changes due to fresh start reporting, income and
expenses attributable to the Designated Assets during the first five months
ended May 31, 2003, changes due to the cumulative affect of changes in GAAP,
which are approved by the bank, and gains or losses from the sales of assets or
Designated Assets), as defined.

In addition, there are certain restrictive covenants that, among other
things, limit other debt, certain asset sales, mergers and change in control
transactions. Additionally, the exit credit facilities prohibit us from making
any distributions, or purchases, acquisitions, redemptions or retirement of our
LLC units so long as we have any indebtedness, liabilities or other obligations
outstanding to Standard Chartered, SCTS, Lehman, or any other lenders under
these facilities.

SCTS Purchase Agreements

We have an agreement with SCTS similar to our pre-bankruptcy inventory
repurchase agreement, which provides for the financing of purchases of crude oil
inventory utilizing a forward commodity repurchase agreement ("Commodity
Repurchase Agreement"). The maximum commitment under the Commodity Repurchase
Agreement is $75 million. It required an upfront facility fee of approximately
$378,000 and carries an interest rate of LIBOR plus 3%. The Commodity Repurchase
Agreement has an initial term of six months to

47

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

August 30, 2003, at which time we have the option to extend for an additional
twelve months. If we are unable to exercise other options currently being
evaluated by the end of August 2003, we plan to extend the maturity date which
will require the payment of an extension fee of $750,000 and the interest rate
will increase to LIBOR plus 7%. As a result of our intent and ability to extend
the maturity, the amount outstanding has been classified as long-term in the
June 30, 2003 Condensed Consolidated Balance Sheet.

In addition, we also have an agreement with SCTS similar to our
pre-bankruptcy trade receivables agreement, which provides for the financing of
up to an aggregate amount of $100 million of certain trade receivables ("Trade
Receivables Agreement") outstanding at any one time. The discount fee is LIBOR
plus 3% and an upfront facility fee of approximately $504,000 was paid. The
Trade Receivables Agreement has an initial term of six months to August 30,
2003, at which time we have the option to extend for an additional twelve
months. If we are unable to exercise other options currently being evaluated by
the end of August 2003, we plan to extend the maturity date which will require
the payment of an extension fee of $1 million and the interest rate will
increase to LIBOR plus 7%.

Term Loan Agreement

We entered into an agreement with Lehman, as Term Lender Agent, and other
lenders (collectively, "Term Lenders"), which provides for term loans in the
aggregate amount of $75 million (the "Term Loans"). The Term Loans mature on
August 30, 2004.

The financing included two term notes. The Tier-A Term Note is for $50
million with a 9% per annum interest rate. The Tier-B Term Note is for $25
million with a 10% per annum interest rate. Interest is payable monthly on both
notes. An upfront fee of $750,000 was paid and we agreed to pay a deferred
financing fee in the aggregate amount of $2 million on the maturity date of the
Term Loans. This latter fee was fully accrued as of February 28, 2003.

The Term Loans are collateralized and have certain repayment priorities
with respect to collateral proceeds pursuant to the Intercreditor and Security
Agreement that is discussed below. Under the Term Loan Agreement, term loan debt
outstanding is subject to a borrowing base as defined in the Letter of Credit
Agreement. Further, the Term Loan Agreement contains financial covenants that
mirror those outlined above in the discussion of the Letter of Credit Facility.

Intercreditor and Security Agreement

In connection with the Letter of Credit Facility, the Term Loans and the
SCTS Purchase Agreements, we entered into the Intercreditor and Security
Agreement ("Intercreditor Agreement"), with Standard Chartered, Lehman, SCTS and
various other secured parties ("Secured Parties"). This agreement provides for
the sharing of collateral among the Secured Parties and prioritizes the
application of collateral proceeds which provides for repayment of the Tier-A
Term Note and the Standard Chartered Letter of Credit exposure above $300
million prior to other secured obligations.

In addition, to the extent that drawings are made on any letters of credit,
Standard Chartered, as collateral agent, may distribute funds from our debt
service payment account to itself (as letter of credit issuer agent on behalf of
the letter of credit issuer) as needed to allow EOTT LLC to reimburse Standard
Chartered, as letter of credit issuer, for such drawings.

Senior Notes

On October 1, 1999, we issued to the public $235 million of 11% senior
notes. The senior notes were due October 1, 2009, and interest was paid
semiannually on April 1 and October 1. The senior notes were fully and
unconditionally guaranteed by all of our operating limited partnerships but were
otherwise unsecured. On

48

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

October 1, 2002, we did not make the interest payment of $12.9 million on our
$235 million 11% senior notes. These notes were cancelled effective March 1,
2003 as a result of our Restructuring Plan and the holders of these notes, along
with our general unsecured creditors with allowed claims, will receive a pro
rata share of $104 million of 9% senior unsecured notes, plus new EOTT LLC units
as discussed below.

EOTT LLC Senior Notes 2010

In February 2003, we issued the $104 million of 9% senior unsecured notes
to the Bank of New York, as depositary agent, which will be subsequently
allocated by the depositary agent to former holders of the 11% senior notes
described above and our general unsecured creditors with allowed claims.
However, the exact pro rata allocation of the senior notes cannot be determined
until the precise amount of each allowed claim is determined. This process is
underway in the EOTT Bankruptcy Court as part of our Restructuring Plan. We
expect the Bank of New York, as depositary agent, to distribute the majority of
the senior unsecured notes by the end of August 2003 and the final allocation of
notes is expected to be completed by December 2003. The senior notes are due in
March 2010, and interest will be paid semiannually on September 1 and March 1.
Under the terms of the indenture governing our senior notes, we are allowed to
pay interest payments in kind by issuing additional senior notes on the first
two interest payment dates. If we make payments in kind, we must make the
payments as if interest were being charged at 10% per annum instead of 9% per
annum. We may not optionally redeem the notes. The notes are subject to
mandatory redemption or sinking fund payments if we sell assets and use the
money for certain purposes or if we have a change of control. Provisions of the
indenture could limit additional borrowings, sale and lease back transactions,
affiliate transactions, purchases of our own equity, payments on debt
subordinated to the senior notes, distributions to members, sale of assets if
certain financial performance ratios are not met, or certain merger,
consolidation or change in control transactions.

Enron Note and Big Warrior Note

In connection with our settlement with Enron as part of the Restructuring
Plan, we executed a $6.2 million note payable to Enron ("Enron Note") that is
guaranteed by our subsidiaries. The Enron Note is secured by an irrevocable
letter of credit and bears interest at 10% per annum. Interest is paid
semiannually on April 1 and October 1, beginning on April 1, 2003 and we are
allowed to pay interest payments in kind on the first two interest payment
dates. Principal payments of $1 million are payable in October 2003 and October
2004 with the remaining principal due in October 2005.

In connection with a settlement with Big Warrior Corporation ("Big
Warrior") during our bankruptcy, we executed a $2.7 million note payable to Big
Warrior, which is secured by a second lien position in one of our Mississippi
pipelines. The four-year note is payable in quarterly installments which began
June 1, 2003 based on a seven-year amortization schedule, at an interest rate of
6% per annum. A final balloon payment is due March 1, 2007. Effective July 31,
2003, Farallon Capital Partners, L.P. ("Farallon") and Tinicum Partners, L.P.
("Tinicum") purchased this note from Big Warrior. Farallon and Tinicum are Term
Lenders and holders of allowed claims, which will allow them to receive a pro
rata allocation of our 9% senior unsecured notes and LLC units from the
depositary agent.

Ad Valorem Tax Liability

In conjunction with our Restructuring Plan, we agreed to pay accrued but
unpaid 2002 ad valorem taxes over six years from the effective date of our
Restructuring Plan. This debt bears interest at 6% with quarterly principal and
interest payments, with the first payment made on June 1, 2003.

EOTT LLC Equity Units and Warrants

Under our Restructuring Plan, the MLP's common units were eliminated. We
issued 12,317,340 new EOTT LLC units to be allocated to former equity holders,
former noteholders, and holders of allowed general

49

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

unsecured claims. We also issued to former equity holders 957,981 warrants to
purchase additional EOTT LLC units. See Table of EOTT LLC Ownership under
"Bankruptcy Proceedings and Restructuring Plan" above. As with the issuance of
our 9% senior unsecured notes, the allocation of 11,947,820 of these new LLC
units to former noteholders and holders of allowed general unsecured claims
cannot be determined until the precise amount of each allowed claim is
determined. We expect the Bank of New York, as depositary agent, to distribute
the majority of the LLC units by the end of August 2003 and the final allocation
of units is expected to be completed by December 2003. Until the final
allocation is made we will not know how many units each of our unitholders is
entitled to vote. If necessary, for any matters requiring unit holder approval,
our intention is to instruct the depositary agent to vote the units issued to it
as may be authorized by a vote of the Board of Directors in accordance with our
LLC agreement. We do not expect to make distributions to our unitholders in the
foreseeable future due to restrictions in our exit credit facilities.

NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement requires
entities to record the fair value of a liability for legal obligations
associated with the retirement obligations of tangible long-lived assets in the
period in which it is incurred. When the liability is initially recorded, a
corresponding increase in the carrying value of the related long-lived asset
would be recorded. Over time, accretion of the liability is recognized each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss on settlement. We
adopted the accounting principle required by the new statement effective January
1, 2003. Determination of the fair value of the retirement obligation is based
on numerous estimates and assumptions including estimated future third-party
costs, future inflation rates and the future timing of settlement of the
obligations.

Our long-lived assets consist primarily of our crude oil gathering and
transmission pipelines and associated field storage tanks, our liquids
processing and facilities at Morgan's Point, our underground storage facility
and associated pipeline grid system, handling and transportation facilities at
Mont Belvieu and our gas processing and fractionation plant and related storage
and distribution facilities on the West Coast.

We identified asset retirement obligations that are within the scope of the
new statement, including contractual obligations included in certain
right-of-way agreements, easements and surface leases associated with our crude
oil gathering, transportation and storage assets and obligations imposed by
certain state regulatory requirements pertaining to closure and/or removal of
facilities and other assets associated with our Morgan's Point, Mont Belvieu and
West Coast facilities. We have estimated the fair value of asset retirement
obligations based on contractual requirements where the settlement date is
reasonably determinable. We cannot currently make reasonable estimates of the
fair values of certain retirement obligations, principally those associated with
certain right-of-way agreements and easements for our pipelines, our Morgan's
Point, Mont Belvieu and West Coast facilities, because the settlement dates for
the retirement obligations cannot be reasonably determined. We will record
retirement obligations associated with these assets in the period in which
sufficient information exists to reasonably estimate the settlement dates of the
respective retirement obligations.

As a result of the adoption of SFAS 143 on January 1, 2003, we recorded a
liability of $1.7 million, property, plant and equipment, net of accumulated
depreciation of $0.1 million and a cumulative effect of a change in accounting
principle of $1.6 million. The effect of adoption of the new accounting
principle was not material to the results of operations for the one month ended
March 31, 2003, the two months ended February 28, 2003 nor would it have had a
material impact on our net income for the three months ended March 31, 2002. The
asset retirement obligation as of January 1, 2002 was not material.

50

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

In October 2002, the Emerging Issues Task Force ("EITF") reached a
consensus in EITF Issue 02-03, "Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities." The EITF reached a consensus to rescind Issue
98-10, and related interpretive guidance, and preclude mark to market accounting
for energy trading contracts that are not derivative instruments pursuant to
SFAS 133. The consensus requires that gains and losses (realized and unrealized)
on all derivative instruments held for trading purposes be shown net in the
income statement, whether or not the instrument is settled physically. The
consensus to rescind Issue 98-10 eliminated EOTT's basis for recognizing
physical inventories at fair value. The consensus to rescind Issue 98-10 was
effective for all new contracts entered into (and physical inventory purchased)
after October 25, 2002. For energy trading contracts and physical inventories
that existed on or before October 25, 2002, that remained at December 31, 2002,
the consensus was effective January 1, 2003 and was reported as a cumulative
effect of a change in accounting principle. The cumulative effect of the
accounting change on January 1, 2003 was a loss of approximately $2.4 million.
With the rescission of Issue 98-10, inventories purchased after October 25,
2002, have been valued at average cost.

In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51"
("FIN 46"). FIN 46 is an interpretation of Accounting Research Bulletin 51,
"Consolidated Financial Statements", and addresses consolidation by business
enterprises of variable interest entities ("VIE"). FIN 46 requires an enterprise
to consolidate a VIE if that enterprise has a variable interest that will absorb
a majority of the entity's expected losses if they occur, receive a majority of
the entity's expected residual returns if they occur, or both. This guidance
applies immediately to VIE's created after January 31, 2003, and to VIE's in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to VIE's in which
an enterprise holds a variable interest that it acquired before February 1,
2003. We implemented FIN 46 effective with the adoption of fresh start reporting
on March 1, 2003. This statement did not have any impact on our financial
statements.

In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new statement is effective for contracts entered into or modified after
June 30, 2003 (with certain exceptions) and for hedging relationships designated
after June 30, 2003. The accounting guidance in the new statement is to be
applied prospectively. We implemented SFAS 149 effective with the adoption of
fresh start reporting. The adoption of this statement did not have any impact on
our financial statements.

In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. We implemented SFAS
150 effective with the adoption of fresh start reporting on March 1, 2003. The
adoption of this statement did not have any impact on our financial statements.

CERTAIN LITIGATION AND ENVIRONMENTAL MATTERS

We are subject to federal, state and local laws and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental protection. At the federal level, such laws include, among others,
the Clean Air Act, the Clean Water Act, the Oil Pollution Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, and the National Environmental Policy Act, as
each may be amended from time to time. Failure to comply with these laws and
regulations may result in the assessment of administrative, civil, and criminal
penalties or the imposition of an

51

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

injunctive relief. Moreover, compliance with such laws and regulations in the
future could prove to be costly, and there can be no assurance that we will not
incur such costs in material amounts. For a more thorough discussion of certain
environmental matters that do or may impact us, see Note 10 to the Condensed
Consolidated Financial Statements. The clear trend in environmental regulation
is to place more restrictions and limitations on activities that may impact the
environment, such as emissions of pollutants, generation and disposal of wastes
and use and handling of chemical substances.

In connection with extensive asset purchases in 1998 and 1999, we
instituted a pipeline integrity management program in 1999. This program was
expanded in December of 2001 with a pipeline integrity assurance program to
comply with certain regulatory and legislative changes. Under this program, the
integrity of a pipeline is evaluated to avoid operating a pipeline that poses
significant risk of crude oil spills. Our written EOTT Pipeline Integrity
Program, which was intended to comply with the U.S. Department of Transportation
Office of Pipeline Safety ("OPS") Integrity Management regulations issued in
2001, was formally implemented in January 2002 and further expanded in January
2003. Anticipated operating expenses and capital expenditures to comply with
that program are budgeted annually; however, actual future expenditures may be
different from the amounts currently anticipated.

John H. Roam, et al. vs. Texas-New Mexico Pipe Line Company and EOTT Energy
Pipeline Limited Partnership, Cause No. CV43296, In the District Court of
Midland County, Texas, 238th Judicial District (Kniffen Estates Suit). The
Kniffen Estates Suit was filed on March 2, 2001, by certain residents of the
Kniffen Estates, a residential subdivision located outside of Midland, Texas.
The allegations in the petition state that free crude oil products were
discovered in water wells in the Kniffen Estates area, on or about October 3,
2000. The plaintiffs claim that the crude oil products are from a 1992 release
from a pipeline then owned by the Texas-New Mexico Pipe Line Company ("Tex-New
Mex"). We purchased that pipeline from Tex-New Mex in 1999. The plaintiffs have
alleged that Tex-New Mex was negligent, grossly negligent, and malicious in
failing to accurately report and remediate the spill. With respect to us, the
plaintiffs were seeking damages arising from any contamination of the soil or
groundwater since we acquired the pipeline in question. No specific amount of
money damages was claimed in the Kniffen Estate Suit, but the plaintiffs did
file proofs of claim in our bankruptcy proceeding totaling $62 million. In
response to the Kniffen Estates Suit, we filed a cross-claim against Tex-New
Mex. In the cross-claim, we claimed that, in relation to the matters alleged by
the plaintiffs, Tex-New Mex breached the Purchase and Sale Agreement between the
parties dated May 1, 1999, by failing to disclose the 1992 release and by
failing to undertake the defense and handling of the toxic tort claims, fair
market value claims, and remediation claims arising from the release. On April
5, 2002, we filed an amended cross-claim which alleges that Tex-New Mex
defrauded us as part of Tex-New Mex's sale of the pipeline systems to us in
1999. The amended cross-claim also alleges that various practices employed by
Tex-New Mex in the operation of its pipelines constitute gross negligence and
willful misconduct and void our obligation to indemnify Tex-New Mex for
remediation of releases that occurred prior to May 1, 1999. In the Purchase and
Sale Agreement, we agreed to indemnify Tex-New Mex only for certain remediation
obligations that arose before May 1, 1999, unless these obligations were the
result of the gross negligence or willful misconduct of Tex-New Mex prior to May
1, 1999. EOTT Energy Pipeline Limited Partnership ("PLP") and the plaintiffs
agreed to a settlement during our bankruptcy proceedings. The settlement
provides for the plaintiffs' release of their claims filed against PLP in this
proceeding and in the bankruptcy proceedings, in exchange for an allowed general
unsecured claim in our bankruptcy of $3,252,800 (as described above, the
plaintiffs filed proofs of claim in our bankruptcy proceedings totaling $62
million). The allowed general unsecured claim was accrued at December 31, 2002.
On April 1, 2003, we filed a second amended cross-claim in this matter. In
addition to the claims filed in the previous cross-claims, we requested (i)
injunctive relief for Tex-New Mex's refusal to honor its indemnity obligations;
(ii) injunctive relief requiring Tex-New Mex to identify, investigate and
remediate sites where the conduct alleged in our cross-claim occurred; and (iii)
restitution damages of over $125,000,000. Tex-New Mex filed a motion to compel
arbitration of these issues. The motion to compel arbitration was denied at a
hearing held on April 11, 2003. At the April 11, 2003 hearing, the court also
severed into a separate action EOTT's cross-claims against Tex-New Mex that
extend beyond the crude oil release and groundwater contamination in the Kniffen
Estates subdivision ("EOTT's

52

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Over-Arching Claim"). Prior to the trial of the plaintiff's claims against
Tex-New Mex and EOTT's original cross-claim against Tex-New Mex arising from the
crude oil release and groundwater contamination in the Kniffen Estates
subdivision ("EOTT's Kniffen Claims"), Tex-New Mex reached a settlement with the
plaintiffs that provided for the release of the plaintiffs' claims. The trial of
EOTT's Kniffen Claims commenced on June 16, 2003, and the jury returned its
verdict on July 2, 2003. The jury found that Tex-New Mex's gross negligence and
willful misconduct caused the contamination in the Kniffen Estates. The jury
also found that Tex-New Mex committed fraud against us with respect to the
Kniffen Estates site. The jury awarded us actual damages equal to the expenses
we have incurred to date in remediating the Kniffen Estates site (approximately
$6.1 million) and punitive damages in the amount of $50 million. On July 28,
2003, we filed a motion with the court to enter judgment on the jury awards as
well as on stipulated amounts totaling approximately $3 million for attorneys'
fees and costs of settlements with the plaintiffs. We also requested a reduction
of the punitive amounts to approximately $22 million to reduce the punitive
damages to reflect statutory caps. We further asked the court to include in its
judgment an order requiring Tex-New Mex's specific performance of its indemnity
obligations with respect to the ongoing remediation at the Kniffen Estates site.
Tex-New Mex filed a motion for judgment requesting that we take nothing from the
verdict. Also, Tex-New Mex has indicated it intends to appeal any judgment that
is based on the jury's verdict, and we cannot predict the outcome of any such
appeal. A hearing on the motions for judgment is set for August 28, 2003. We
anticipate that the court will address scheduling of discovery for and trial of
EOTT's Over-Arching Claim when it enters judgment with respect to EOTT's Kniffen
Claims.

Bankruptcy Issues related to Claims Made by Texas-New Mexico Pipeline
Company and its affiliates. Tex-New Mex, Shell Oil Company and Equilon filed
proofs of claim in our bankruptcy, each filing the same claim in the amount of
$112 million. Equilon Pipeline Company LLC guaranteed, under certain
circumstances, the obligations of Tex-New Mex under the Purchase and Sale
Agreement dated May 1, 1999. According to Shell Oil Company's 2002 Annual
Report, in 2002, Shell became the sole owner of Equilon, which was merged into
Shell Oil Products US. The three claims filed each included the same supporting
information, consisting of indemnity claims under the Purchase and Sale
Agreement. In essence, there is only one claim of $112 million filed by three
entities and we have objected in our bankruptcy court to having the same claim
filed three times. The amount of the $112 million claim is equivalent to the sum
of the total amount of the proofs of claim filed in our bankruptcy proceedings
by owners of property on which the Tex-New Mex system is located and the
attorneys fees incurred by Tex-New Mex in defending the Kniffen Estates Suit and
other lawsuits (including our bankruptcy proceedings) with respect to the
Tex-New Mex system. The majority of these owners were plaintiffs in the Kniffen
Estates Suit and a group of New Mexico environmental claimants, with whom we
settled during our bankruptcy proceeding and accrued the allowed general
unsecured claim at December 31, 2002. A hearing on our objection to these claims
was scheduled for March 18, 2003, but the parties stipulated and agreed to delay
the hearing to allow the Kniffen Estates Suit to proceed. In July of 2003 we
entered into an agreement with Shell, Tex-New Mex and Equilon whereby all of
their claims were either withdrawn, estimated or allowed, leaving the value of
the claims estimated for distribution purposes at $56,924.52.

Environmental Matters

We may experience future releases of crude oil, MTBE or other substances
into the environment or discover releases that were previously unidentified.
While an inspection program is maintained on our pipelines to prevent and detect
such releases, and operational safeguards and contingency plans are in place for
the operation of our processing facilities, damages and liabilities incurred due
to any future environmental releases could affect our business. We believe that
our operations and facilities are in substantial compliance with applicable
environmental laws and regulations and that there are no outstanding potential
liabilities or claims relating to safety and environmental matters that we are
currently aware of, the resolution of which, individually or in the aggregate,
would have a materially adverse effect on our financial position or results of
operations. However, we could be significantly adversely impacted by additional
repair or remediation costs related to the pipeline assets we acquired from
Tex-New Mex if the need for any additional repair or remediation arises and we
do not obtain reimbursement for any such costs as a result of the pending
litigation

53

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

concerning those assets. Our environmental expenditures include amounts spent on
permitting, compliance and response plans, monitoring and spill cleanup and
other remediation costs. In addition, we could be required to spend substantial
sums to ensure the integrity of and upgrade our pipeline systems, and in some
cases, we may take pipelines out of service if we believe the cost of upgrades
will exceed the value of the pipelines. See Note 10 to the Condensed
Consolidated Financial Statements for further discussion of environmental
matters affecting us.

No assurance can be given as to the ultimate amount or timing of future
expenditures for environmental remediation or compliance, and actual future
expenditures may be different from the amounts currently estimated. In the event
of future increases in costs, we may be unable to pass on those increases to our
customers.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") 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 actual revenues
and expenses during the reporting period. Although we believe these estimates
are reasonable, actual results could differ from those estimates. The
significant accounting policies summarized in Note 2 to the Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002 were:

o Revenues and Expenses;

o Depreciation and Amortization;

o Impairment of Assets; and

o Contingencies.

Additional critical accounting policies or changes to existing policies
that occurred in the first quarter of 2003 are discussed below.

Fresh Start Reporting

We adopted fresh start reporting required by SOP 90-7 as of February 28,
2003 (the date chosen for accounting purposes). In accordance with the
principles of fresh start reporting, we have adjusted our assets and liabilities
to their fair values. We used independent third party financial advisors and
valuation specialists to assist in the determination of the enterprise value of
EOTT, the allocation of our reorganization value to our tangible and
identifiable intangible assets and the fair value of our long-term liabilities.
The valuations were based on a number of estimates and assumptions such as
annual volumes and cash flows, terminal values and discount rates, which are
inherently subject to significant uncertainties and contingencies beyond our
control. Accordingly, there can be no assurance that the valuations will be
realized and actual results could vary significantly. See further discussion in
Note 3 to our Condensed Consolidated Financial Statements.

Energy Trading and Derivative Activities

Prior to the adoption of EITF 02-03, substantially all of our gathering,
marketing and trading activities were accounted for on a fair value basis under
EITF 98-10 or SFAS 133 with changes in fair value included in earnings. EITF
02-03 precludes mark to market accounting for energy trading contracts that are
not derivative instruments pursuant to SFAS 133. See further discussion in Note
11 to the Condensed Consolidated Financial Statements regarding the impact of
adopting EITF 02-03.

54

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information contained in Item 3 should be read in conjunction with
information set forth in Part II, Item 7a in our Annual Report on Form 10-K for
the year ended December 31, 2002, in addition to the interim Condensed
Consolidated Financial Statements and accompanying Notes presented in Part I.

COMMODITY PRICE RISK

We have performed a value at risk analysis of our financial derivative
commodity instruments. Value at risk incorporates numerous variables that could
impact the fair value of our investments, including commodity prices, as well as
correlation within and across these variables. We estimate value at risk
commodity exposures using a parametric model, which captures the exposure
related to open futures contracts. The value at risk method utilizes a one-day
holding period and a 95% confidence level.

Our value at risk for commodity price risk was less than $0.1 million at
June 30, 2003 and December 31, 2002. The value at risk amount represents
financial derivative commodity instruments, primarily commodity futures
contracts, entered into to hedge future physical crude oil purchase and sale
commitments. The commitments to purchase and sell physical crude oil have not
been included in the value at risk computation. At June 30, 2003, we had crude
oil futures contracts to purchase 1.0 million barrels of crude oil and to sell
1.0 million barrels of crude oil, with the majority of these contracts maturing
in the third quarter of 2003. At December 31, 2002, we had crude oil future
contracts to purchase 0.3 million barrels of crude oil and to sell 0.6 million
barrels of crude oil, with the majority of these contracts maturing in the first
quarter of 2003.

COMMODITY DERIVATIVE TRANSACTIONS ACCOUNTED FOR AT FAIR VALUE

Generally, as we purchase crude oil, we enter into corresponding sales
transactions involving physical delivery of crude oil to third party users or
corresponding sales transactions on the NYMEX. This process enables us to
minimize our exposure to price risk until we take physical delivery of the crude
oil. In 2002, substantially all of our crude oil and refined products marketing
and trading operations were accounted for on a fair value basis pursuant to SFAS
No. 133 or EITF Issue 98-10. Effective January 1, 2003, energy trading contracts
that are not derivative instruments pursuant to SFAS No. 133 are no longer
accounted for at fair value. Prior to the rescission of EITF 98-10, we accounted
for inventories used in our energy trading activities at fair value.

The following table indicates fair values and changes in fair value of our
commodity derivative transactions (in thousands):

* Approximately $0.5 million of the fair value gain at June 30, 2002
related to physical sales transactions or sales transactions on the
NYMEX entered into to hedge physical inventory. The fair value of
inventory is not included in the table above.

55

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FAIR VALUE OF COMMODITY DERIVATIVE INSTRUMENTS AT JUNE 30, 2003

* In determining the fair value of certain contracts, adjustments may be
made to published posting data, for location differentials and quality
basis adjustments.

ITEM 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by us in the reports that
it files or submits under the Exchange Act.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

56

PART II. OTHER INFORMATION

EOTT ENERGY LLC
(A LIMITED LIABILITY COMPANY)

ITEM 1. LEGAL PROCEEDINGS

See Part I. Item 1, Note 10 to the Condensed Consolidated Financial
Statements entitled "Commitments and Contingencies," which is incorporated
herein by reference.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

* Exhibit 10.1 Letter Agreement dated June 20, 2003 amending Crude Oil
Supply and Terminalling Agreement dated December 1,
1998

Exhibit 10.2 Executive Employment Agreement between EOTT Energy LLC
and Thomas M. Matthews, effective as of July 1, 2003

Exhibit 10.3 Executive Employment Agreement between EOTT Energy LLC
and H. Keith Kaelber, effective as of July 1, 2003

Exhibit 10.4 Executive Employment Agreement between EOTT Energy LLC
and Dana R. Gibbs, effective as of July 1, 2003

Exhibit 10.5 Letter of Offering from EOTT Energy LLC to James R.
Allred dated June 10, 2003

Exhibit 31.1 Section 302 Certification of Thomas M. Matthews

Exhibit 31.2 Section 302 Certification of H. Keith Kaelber

Exhibit 32.1 Section 906 Certification of Thomas M. Matthews and H.
Keith Kaelber

* Confidential treatment has been requested with
respect to certain portions of this Exhibit.

(b) Reports on Form 8-K.

Current Report on Form 8-K filed by EOTT Energy LLC on June 26, 2003
pursuant to Item 5. Other Events regarding its press release dated June 26,
2003.

Current Report on Form 8-K filed by EOTT Energy LLC on July 9, 2003
pursuant to Item 5. Other Events regarding its press release dated July 7, 2003.

Current Report on Form 8-K filed by EOTT Energy LLC on July 10, 2003
pursuant to Item 5. Other Events regarding its press release dated July 9, 2003.

57

SIGNATURES

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

EOTT ENERGY LLC
(A Delaware Limited Liability Company)

Date: August 14, 2003

/s/ H. KEITH KAELBER

H. Keith Kaelber
Executive Vice President and
Chief Financial Officer

58

INDEX TO EXHIBITS

- ----------

* Confidential treatment has been requested with respect to certain portions
of this Exhibit.