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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 1998    Commission File Number:  1-12872

                                       OR

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

                           EOTT ENERGY PARTNERS, L.P.
             (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.)

           1330 Post Oak Boulevard
                 Suite 2700
               Houston, Texas                                77056
     ----------------------------------------     -----------------------------
     (Address of principal executive offices)             (Zip Code)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

       Title of each class             Name of each exchange on which registered
    -------------------------          -----------------------------------------
          Common Units                          New York Stock Exchange


          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      None

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 X No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

     Aggregate market value of the Common Units held by non-affiliates of the
registrant, based on closing prices in the daily composite list for transactions
on the New York Stock Exchange on March 1, 1999, was approximately $198,656,900.

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                           EOTT ENERGY PARTNERS, L.P.
                                TABLE OF CONTENTS


<TABLE>
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<S>       <C>                                                                                   <C>
                                     PART I

Item 1.   Business                                                                                3
Item 2.   Properties                                                                             12
Item 3.   Legal Proceedings                                                                      13
Item 4.   Submission of Matters to a Vote of Security Holders                                    15

                                     PART II

Item 5.   Market for Registrant's Common Units and Related Security
              Holder Matters                                                                     16
Item 6.   Selected Financial Data                                                                17
Item 7.   Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                                          18
Item 7a.  Quantitative and Qualitative Disclosures about Market Risk                             32
Item 8.   Financial Statements and Supplementary Data                                            33
Item 9.   Disagreements on Accounting and Financial Disclosure                                   33

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant                                     34
Item 11.  Executive Compensation                                                                 36
Item 12.  Security Ownership of Certain Beneficial Owners
              and Management                                                                     41
Item 13.  Certain Relationships and Related Transactions                                         42

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedule and Reports on Form 8-K                         43
</TABLE>


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                                     PART I

ITEM 1. BUSINESS

GENERAL

     EOTT Energy Partners, L.P., a Delaware limited partnership, through its
affiliated limited partnerships, EOTT Energy Operating Limited Partnership, EOTT
Energy Canada Limited Partnership, and EOTT Energy Pipeline Limited Partnership,
is engaged in the purchasing, gathering, transporting, trading, storage and
resale of crude oil, refined petroleum products, natural gas liquids and related
activities. EOTT Energy Partners, L.P. has changed its principal business
segments and has restated segment information for earlier periods. EOTT Energy
Partners, L.P.'s principal business segments are its North American - East of
Rockies crude oil gathering and marketing operations, its Pipeline Operations
and its West Coast Operations, which includes crude oil gathering and marketing,
refined products marketing and a natural gas liquids business (see Note 19 to
the Consolidated Financial Statements for certain financial information by
business segment). Unless the context otherwise requires, the terms "EOTT" and
the "Partnership" herein refer to EOTT Energy Partners, L.P., its affiliated
limited partnerships, and for periods prior to the Partnership's initial public
offering in March 1994, EOTT Energy Corp., its wholly-owned subsidiary, EOTT
Energy Ltd., and its affiliated company, Enron Products Marketing Company
(collectively referred to as the "Predecessor").

     EOTT Energy Corp. (the "General Partner"), a Delaware corporation and an
indirect wholly-owned subsidiary of Enron Corp. ("Enron"), serves as the sole
general partner of the Partnership and its affiliated operating limited
partnerships. In addition to its aggregate approximate 2% general partner
interest in the Partnership, the General Partner owns an approximate 29% limited
partner interest in the Partnership in the form of subordinated units. Enron,
through its ownership of EOTT Common Units, more fully described in Note 1 to
the Consolidated Financial Statements, holds an approximate 14% interest in the
Partnership.

OVERVIEW

     On December 1, 1998, the Partnership purchased certain crude oil gathering
and transportation assets in key oil producing regions from Koch Pipeline
Company, L.P., a subsidiary of Koch Industries, Inc., and Koch Oil Company, a
division of Koch Industries, Inc. (collectively "Koch"). The transaction almost
tripled EOTT's pipeline mileage, almost doubled crude oil lease barrels under
contract and should strengthen profitability and cash flow. The acquisition
included approximately 3,900 miles of crude oil pipelines, crude oil transport
trucks, meter stations, vehicles, storage tanks and contracts for approximately
180,000 lease barrels of crude oil per day from production in 11 central and
western states including Texas, Oklahoma, Kansas and California (the "Assets").

     As an intermediary, EOTT seeks to earn profits primarily by buying crude
oil at competitive prices, efficiently transporting and handling the purchased
crude oil and marketing the crude oil to refinery customers or other trade
partners who can most benefit from the particular crude type. Through its crude
oil gathering and marketing operations, EOTT purchases crude oil produced from
approximately 40,000 leases in 18 states and is also a major purchaser of lease
crude oil in Canada. In addition to its gathering and marketing operations, EOTT
has pipeline operations which transport crude oil on intrastate and interstate
pipelines based on regulated published tariffs.

     In its crude oil gathering and marketing operations, EOTT purchases crude
oil from many of the largest integrated and independent crude oil producers in
the United States and Canada. Approximately 87% of EOTT's lease crude oil is
purchased from independent oil producers, and approximately 13% is purchased
from major 

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integrated oil companies ("majors"). EOTT markets the crude oil to majors and
independent refiners throughout the United States and Canada. EOTT was
purchasing approximately 270,700 barrels per day ("bpd") of lease crude oil
prior to the acquisition of Assets from Koch. In December 1998, after the
acquisition of Assets from Koch, EOTT purchased approximately 450,200 bpd of
lease crude oil. EOTT's pipeline systems and trucking operations provide the
vital link between the crude oil purchasing and marketing activities. Within the
United States, EOTT transports most of the lease crude oil it purchases with its
trucking operations, a fleet of 440 owned or leased trucks, and by pipelines,
including approximately 6,200 miles of active intrastate and interstate pipeline
and gathering systems owned by EOTT, as well as common carrier pipeline systems
owned by third parties. In addition, EOTT provides transportation and marketing
services for third party purchasers of crude oil. These pipeline systems and
trucking operations cover 18 states: Alabama, Arkansas, California, Colorado,
Florida, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico,
Oklahoma, Texas, Utah, Wyoming, Montana, North Dakota, and South Dakota.

NORTH AMERICAN CRUDE OIL - EAST OF ROCKIES OPERATIONS

     In its North American Crude Oil - East of Rockies gathering and marketing
business, EOTT purchased approximately 428,000 bpd of lease crude oil in
December 1998. EOTT purchases lease crude oil barrels at prevailing market
prices. Generally, as EOTT purchases lease barrels, it simultaneously enters
into a corresponding sale transaction involving physical deliveries of crude oil
to third party users, such as refiners or other trade partners, or a sale of
futures contracts on the New York Mercantile Exchange ("NYMEX"). This process
gives EOTT the opportunity to secure a profit on the transaction at the time of
purchase and to minimize or eliminate exposure to price fluctuations occurring
after the initial purchase. EOTT effects 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 controlled by EOTT.
Throughout the process, EOTT seeks to maintain a substantially balanced position
at all times; however, EOTT has certain basis risks (the risk that price
relationships between delivery points, grades of crude oil or delivery periods
will change) which cannot be completely hedged. It is EOTT's policy not to
acquire and hold crude oil, other petroleum products, futures contracts or other
derivative products for the purpose of speculating on price changes.

     While EOTT engages in several types of purchases, sales and exchanges of
crude oil, most transactions entered into by EOTT are at market responsive
prices for a term or duration of 90 days or less, with a large number of EOTT's
transactions done on a 30-day evergreen basis. These purchases are automatically
renewable on a month-to-month basis until terminated by either party. The
purchases are based on market related indices, which change frequently in
response to market changes. Conducting business on this basis helps EOTT reduce
the risk in its North American crude oil gathering and marketing business.

     The marketing of crude oil is complex and requires detailed current
knowledge of crude oil sources and outlets and a familiarity with a number of
factors including: types of crude oil, individual refinery demand for specific
grades of crude oil, area market price structures for the different grades of
crude oil, location of customers, availability of transportation facilities, and
timing and costs (including storage) involved in delivering crude oil to the
appropriate customer. EOTT engages in marketing transactions that have the
potential to enhance the value of the crude oil EOTT purchases.

     The purchase and resale of crude oil is a highly competitive activity with
very thin and volatile profit margins. Purchasers of crude oil at the lease
compete on the basis of being able to provide competitive prices and highly
responsive customer service. EOTT believes its ability to offer quality service
to producers is a key factor in maintaining lease purchase volumes and in
obtaining new volumes. Services offered by EOTT include gathering capabilities,
timely pickup of crude oil from tank batteries at the lease or production point,
accurate measurement of crude oil volumes delivered, avoidance of spills, and
certain accounting and administrative services. Accounting and administrative

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services include securing division orders (statements affirming the division of
ownership in lease crude oil purchased by EOTT), providing statements of the
crude oil purchased each month, disbursing production proceeds to interest
owners, and calculation and payment of severance and production taxes on behalf
of interest owners. In order to compete effectively, EOTT must handle title and
division order issues in a professional and timely manner, thereby ensuring the
prompt and correct processing or payment of crude oil production proceeds,
together with the correct handling or payment and regulatory reporting of all
severance and production taxes associated with such proceeds.

PIPELINE OPERATIONS

     EOTT's Pipeline Operations include approximately 5,300 miles of active
intrastate and interstate regulated pipelines and in December 1998, EOTT's
Pipeline Operations transported approximately 363,000 bpd through its regulated
pipeline systems. Through these pipeline systems, EOTT transports crude oil for
the North American Crude Oil - East of Rockies business segment, West Coast
Operations business segment and other third party customers pursuant to
published tariff rates regulated by the Federal Energy Regulatory Commission
("FERC") and state regulatory authorities. Accordingly, EOTT offers
transportation services to any shipper of crude oil, provided that the crude oil
meets the conditions and specifications contained in the applicable pipeline
tariff. Pipeline Operations revenues are primarily a function of the level of
crude oil transported through the pipeline, known as throughput, and the
applicable pipeline tariffs. The operating income from EOTT's Pipeline
Operations is generated by the difference between the published tariff and the
fixed and variable costs of operating the pipelines. Approximately 78% of the
Pipeline Operations' revenues in 1998 were generated from tariffs charged to
EOTT's North American Crude Oil - East of Rockies business segment.

WEST COAST OPERATIONS

     EOTT conducts three distinct business activities in the petroleum market on
the West Coast: crude oil gathering and marketing, natural gas liquids ("NGLs")
marketing, and refined petroleum products marketing.

     EOTT's activity in crude oil gathering and marketing represents the bulk of
the net income generated from the West Coast Operations. EOTT's margins for its
West Coast crude oil business are primarily tied to EOTT's ability to upgrade
heavy sour crude oil into a medium gravity, Alaskan North Slope ("ANS") type of
crude oil, called Line 63 Blended Crude. To accomplish this, EOTT gathers crude
oil by truck and pipeline and delivers it to proprietary blend stations
strategically placed along an EOTT owned gathering system. EOTT's strategy is to
maintain an optimum supply of blended crude oil necessary to meet its sales
commitments to Los Angeles Basin refiners. Approximately 40,000 bpd of Line 63
Blended Crude is shipped by EOTT to Los Angeles Basin refineries.

     The acquisition of assets from Koch added approximately 15,000 bpd to the
West Coast crude oil volumes gathered by EOTT from the lease and these leases
are pipeline connected to blending facilities obtained from Koch. The major
portion of these newly acquired crude oil lease barrels is light crude. This
light crude, together with other components, results in up to 20,000 bpd of Line
63 Blended Crude. The crude oil assets acquired by EOTT from Koch on the West
Coast included three blend stations or tank farms; nine trucks; approximately
300 miles of active pipeline connected to predominately light crude oil fields;
and direct connections to Arco's Line 63 Pipeline and the All American Pipeline.

     Strategies to use these assets include expanding throughput with majors,
refiners and crude oil producers. Additionally, these gathering assets will
permit EOTT to move crude oil north or south for delivery to the majors at the
most competitive economics.


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     The acquisition of assets from Koch greatly expanded EOTT's existing NGL
marketing business on the West Coast. Assets acquired by EOTT from Koch for the
NGL business primarily included a gas processing plant referred to as Plant 8,
with 20 million cubic feet per day of gas processing capacity and a
fractionation plant with 8,000 bpd of fractionation capacity and 5 million
gallons of refrigerated propane storage along with related distribution
facilities. EOTT's NGL strategy is to increase throughput for the gas and
fractionation plants as margins associated with these assets are primarily
generated by processing throughput for others for a fee.

     In addition, the West Coast Operations include a refined petroleum products
marketing business. This business specializes mostly in marketing distillate and
gasoline, including at terminals located between Seattle and San Diego.

RISK MANAGEMENT SERVICES / DERIVATIVES

     Sophisticated price risk management strategies, including those involving
price hedges using NYMEX futures contracts, are becoming increasingly important
in creating and maintaining intermediary margins. Such hedging techniques
require significant resources dedicated to the management of futures positions -
a capability that many smaller purchasers do not have. EOTT's risk management
personnel coordinate all of EOTT's NYMEX trading activities and other hedging
techniques to ensure that EOTT's hedging activities are meeting EOTT's
objectives. At the same time, this enables EOTT to net positions internally and
reduces overall volumes and associated commissions. The consolidation of price
risk management activities not only allows for more efficient hedging and
futures trading, but also provides marketers of physical volumes the freedom to
focus on their markets.

CREDIT

     Credit review and analysis are integral to EOTT's overall business. When
EOTT purchases crude oil at the lease, EOTT often makes payment for all or
substantially all of the crude oil production to one party (usually the operator
of the lease). The operator, in turn, is responsible for the correct payment and
distribution of such crude oil production proceeds to all parties who own an
interest in such funds. In these situations, EOTT must make sure that the
operator is creditworthy and able to indemnify and defend EOTT in the event any
third party should bring a protest, action or complaint in connection with the
ultimate distribution of crude oil production proceeds by the operator. In
addition, when EOTT markets crude oil, natural gas liquids or other petroleum
products, EOTT must determine the amount, if any, of the line of credit to be
extended to any given customer. Since typical EOTT sales transactions can
involve several thousand barrels of crude oil or product, the risk of
non-payment and non-performance by customers is a major consideration in EOTT's
business. Likewise, EOTT's credit standing is a major consideration for parties
with whom EOTT does business. At times, EOTT may furnish and receive letters of
credit to and from its business counterparties. The cost of furnishing letters
of credit and/or guarantees can be substantial. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Working Capital and
Credit Resources."

COMPETITION

     In the various business and marketing activities described above, EOTT is
in competition with major oil companies and a larger number of smaller entities.
The number and location of EOTT's pipeline systems and trucking facilities give
EOTT access to a substantial volume of domestic crude oil production throughout
the crude oil producing areas of the United States. EOTT also has considerable
flexibility in disposing of the volumes of crude oil that it purchases, without
dependence on any single customer or transportation or storage facility. EOTT's
principal competitors in the purchase of leasehold crude oil production are
Scurlock Permian 

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Oil Corporation, Equiva (formerly Texaco Trading & Transportation Co., Inc.),
Amoco Oil Company (and related affiliates), Sun Refining & Marketing, and TEPPCO
(formerly part of Duke Energy). Competitive factors include price, quality of
service, transportation facilities, financial strength, and knowledge of
products and markets.

     There are a number of major structural and economic changes impacting all
of EOTT's market segments that are driving new customer needs, changing
competitor dynamics and, consequently, creating new challenges and opportunities
for responsive market participants. The crude oil gathering and marketing
business is characterized by thin, volatile margins and intense competition for
supplies of lease crude oil. The decline in domestic crude oil production has
made competition among gatherers and marketers even more intense.

ENVIRONMENTAL MATTERS

     EOTT is subject to federal, state and local laws and regulations relating
to the protection of the environment. 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. Compliance with such laws and
regulations in the future could prove to be costly, and there can be no
assurance that EOTT will not incur such costs in material amounts.

     The Clean Air Act controls, among other things, the emission of volatile
organic compounds, nitrogen oxides, and all other ozone-producing compounds in
order to protect national ambient air quality in accordance with standards
established for ozone and other pollutants. Such emissions may occur from the
handling or storage of petroleum or natural gas. The sources of emissions that
are subject to control and the types of controls required are a matter of
individual state air quality control implementation plans that set forth
emission limitations. Both federal and state laws impose substantial civil and
even criminal penalties for violation of applicable requirements. As part of the
regular overall evaluation of its current operations, EOTT is updating the
operating permit status of certain of its recently acquired properties. EOTT
believes that its overall operations are in substantial compliance with
applicable air requirements.

     The Clean Water Act, as amended by the Oil Pollution Act of 1990 ("OPA"),
controls, among other things, the discharge of oil and other petroleum products
into waters of the United States. The Clean Water Act provides penalties for any
unauthorized discharges of pollutants (including petroleum products) into waters
of the United States and imposes substantial potential liability for the costs
of responding to an unauthorized discharge of pollutants, such as an oil spill.
State laws for the control of water pollution also provide varying civil and
criminal penalties and liabilities in the case of a release of petroleum or
other related products in surface waters or into the ground. Federal and state
permits for water discharges may be required.

     OPA also imposes a variety of requirements on "responsible parties" for oil
and gas facilities related to the prevention of oil spills and liability for
damages resulting from such spills in waters of the United States. The term
"responsible party" includes the owner or operator of an oil or gas facility
that could be the source of an oil spill affecting jurisdictional waters of the
United States. OPA assigns liability to each responsible party for oil spill
removal costs and a variety of public and private damages from oil spills. OPA
establishes a liability limit for onshore facilities of up to $350 million while
the limit for offshore facilities is all removal costs plus up to $75 million in
other damages. A party cannot take advantage of liability limits, however: if
the spill is caused by gross negligence or willful misconduct, if the spill
resulted from violation of a federal safety, construction or operating
regulation or if a party fails to report a spill or to cooperate fully in the
cleanup. Few defenses exist to the liability for oil spills imposed by OPA. OPA
also imposes other requirements on facility operators, such as the preparation
of an oil spill response plan, and a demonstration of the operator's ability to
pay for 

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environmental cleanup and restoration costs likely to be incurred in connection
with an oil spill. For onshore facilities that have the ability to affect waters
of the United States, recent amendments to OPA require an operator to
demonstrate $10 million in financial responsibility, and $35 million in
financial responsibility for offshore facilities. On August 11, 1998, the U.S.
Minerals Management Service ("MMS") promulgated a final rule implementing the
financial responsibility requirements set forth under the OPA amendments. The
financial responsibility may be increased to a maximum of $150 million if the
MMS determines that a greater amount is justified based on specific risks posed
by the operations or if the worst case oil-spill discharge volume possible at
the facility may exceed the applicable threshold volumes specified under the MMS
final rule. The General Partner fully anticipates that EOTT will be able to
satisfy the MMS's requirements for financial responsibility under OPA, as
amended, and the final rule. Failure to comply with these OPA requirements or
inadequate cooperation in a spill event may subject a responsible party to civil
or criminal actions.

     EOTT generates wastes, including hazardous wastes, that are subject to the
federal Resources Conservation and Recovery Act ("RCRA") and comparable state
statutes. The U.S. Environmental Protection Agency ("EPA") and various state
agencies have limited the approved methods of disposal for certain hazardous and
nonhazardous wastes. Furthermore, certain wastes generated by EOTT that are
currently exempt from treatment as "hazardous wastes" may in the future be
designated as "hazardous wastes" and therefore be subject to more rigorous and
costly operating and disposal requirements.

     The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances that have been
released at the site. Persons who are or were responsible for releases of
hazardous substances under CERCLA may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous substances
released into the environment. In the ordinary course of EOTT's operations,
substances may be generated that fall within the definition of "hazardous
substances." Moreover, EOTT may own or operate properties that in the past were
operated by third parties whose operations were not under EOTT's control. Those
properties and any wastes that may have been disposed on them may be subject to
CERCLA, RCRA and analogous state laws, and EOTT potentially could be required to
remediate such properties.

     EOTT potentially may have liability under CERCLA and similar state laws at
three known sites. In 1991, EOTT took a deed of trust on the Rattlesnake
refinery in Wickett, Texas, to secure delinquent accounts payable by the owner
of the refinery. The refinery had numerous operational problems and ceased
operating in 1992. Environmental contamination is known to exist at the
refinery, but EOTT cannot estimate the extent of the contamination and the
potential costs of remediation. EOTT's management believes that EOTT would not
be considered an owner or operator of the refinery and that EOTT does not have
any responsibility with respect to the environmental conditions at the
Rattlesnake refinery. Nevertheless, the potential liability, if any, of EOTT
with respect to this site cannot be predicted at this time.

     In 1987, EOTT purchased a crude oil terminal and transportation facility
from Fairway Crude, Inc. This facility is adjacent to the Mid-America Refining
Company site in Chanute, Kansas. The Mid-America refinery ceased operations in
1981, and environmental contamination is known to exist at the refinery site.
EOTT cannot estimate the extent of contamination or the potential costs of
remediation associated with the Mid-America refinery. In 1993, EOTT received a
request for information from the EPA that suggests the EPA believes EOTT may be
potentially responsible for the costs of remediating some contamination at the
Mid-America refinery site. 

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Since EOTT did not purchase the adjacent facility until 1987 and EOTT has been
careful to avoid contamination of its property, the General Partner believes
that EOTT should not be responsible for remediating environmental conditions at
the Mid-America refinery site. Nevertheless, the potential liability, if any, of
EOTT with respect to this site cannot be predicted at this time.

     In early 1991, EOTT entered into a crude oil processing agreement with a
California refiner pursuant to which EOTT's crude oil was processed into refined
petroleum products during 1991 and 1992. On December 31, 1992, EOTT entered into
a new, long-term processing agreement that replaced the agreement in effect
during 1991 and 1992. This latter agreement was terminated in September 1995 in
connection with the termination of EOTT's West Coast processing and asphalt
marketing business. The General Partner has been advised by the refiner that
environmental conditions exist in the area of the refinery, including soil and
groundwater contamination, that are the subject of ongoing, long-term
remediation. Conditions of this nature are frequently associated with petroleum
refineries. These conditions existed prior to EOTT's original processing
agreement and prior to the acquisition of the refinery by the current owners.
The General Partner has been advised that the refiner is implementing
groundwater and soil remediation that includes retrieval and treatment of the
contaminated groundwater and is preparing a long-term groundwater and soil
remedial action plan. The General Partner understands that the refiner is
working with the regulatory agencies in effecting this remediation.

     It is possible that EOTT could be named as a defendant in any legal action
that might be filed as a consequence of environmental conditions associated with
the California refinery, although the General Partner believes that valid
defenses exist to any claim that may be filed with respect to existing
environmental conditions. The General Partner cannot predict the nature or size
of future claims that might be filed as a consequence of environmental
conditions in the area of the refinery. The likelihood of such a claim against
EOTT could be increased if the refiner is unable to complete its environmental
cleanup and compliance program. In addition, because land surrounding the
refinery is devoted to residential, commercial and industrial uses, there may be
increased sensitivity within the local community to environmental issues
concerning the operations of the refinery. The General Partner can give no
assurances as to how courts or regulatory authorities will, in the future,
interpret or apply the liability provisions of applicable law, including federal
or state environmental laws and regulations.

     The National Environmental Policy Act ("NEPA") may apply to certain
extensions or additions to a pipeline system. Under NEPA, if any project is to
be undertaken which would significantly affect the quality of the environment
and require a permit or approval from a federal agency, the federal agency may
require preparation of a detailed environmental impact study. The issuance by a
federal agency of a permit or approval to construct or extend a pipeline system
may constitute a major federal action under this Act. The effect of NEPA may be
to delay or prevent construction of new facilities or to alter their location,
design or method of construction.
Similar state laws may also be applicable.

     In addition to the foregoing, EOTT is subject to state environmental laws
and regulations that address environmental considerations that may be of
particular concern to a state.

     The management of EOTT believes that there are no outstanding potential
liabilities or claims relating to safety and environmental matters the
resolution of which, individually or in the aggregate, would have a materially
adverse effect on EOTT's financial position or results of operations and that
EOTT has used reasonably diligent efforts to comply, in all material respects,
with all applicable environmental laws and regulations. No assurance can be
given, however, 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 anticipated. In the event of future
increases in costs, EOTT may be unable to pass on those increases to its
customers.


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REGULATION

     EOTT is subject to a variety of federal and state regulations relating to
its interstate and intrastate pipeline transportation and safety activities,
motor carrier activities, and commodities trading business, the most significant
of which are discussed below.

Pipeline FERC Regulation

     Interstate Regulation Generally. EOTT's interstate common carrier pipeline
operations are subject to rate regulation by the FERC under the provisions of
the Interstate Commerce Act ("ICA"). These operations include the Hobbs pipeline
in New Mexico and Texas, the crude oil system in Mississippi and Alabama ("the
Mississippi-Alabama Pipeline"), the crude oil systems acquired from CITGO
Pipeline Company ("CITGO Pipelines"), and portions of the crude oil systems
acquired from Koch Pipeline, L.P. ("Koch Pipelines"). The ICA requires, among
other things, that petroleum pipeline rates be just and reasonable and
non-discriminatory. The ICA permits interested parties to challenge proposed new
or changed rates and authorizes the FERC to suspend the effectiveness of such
rates for a period of up to seven months and to investigate such rates. If, upon
the completion of an investigation, the FERC finds that the new or changed rate
is unlawful, it is authorized to require the carrier to refund the revenues
collected during the pendency of the investigation in excess of those that would
have been collected under the prior tariff. In addition, the FERC, upon
complaint or on its own motion and after investigation, may order a carrier to
change its rate prospectively. Upon an appropriate showing, a shipper may obtain
reparations for damages sustained for a period of up to two years prior to the
filing of a complaint.

     EOTT has annually amended its tariffs on all of its regulated pipelines as
provided by FERC regulations effective July 1 of 1995, 1996, 1997, and 1998.
Although no assurance can be given that the tariffs charged by EOTT will
ultimately be upheld if challenged, EOTT believes that the tariffs now in effect
for all of its pipelines are within the maximum rates allowed under the current
FERC guidelines.

     Energy Policy Act of 1992 and Subsequent Developments. In October 1992,
Congress passed the Energy Policy Act of 1992, which, among other things,
required the FERC to issue rules establishing a simplified and generally
applicable ratemaking methodology for petroleum pipelines and to streamline
procedures in petroleum pipeline proceedings. The FERC responded to this mandate
by issuing several orders, including Order No. 561. Beginning January 1, 1995,
Order No. 561 enables petroleum pipelines to change their rates within
prescribed ceiling levels that are tied to an inflation index. Rate increases
made pursuant to the indexing methodology are subject to protest, but such
protests must show that the portion of the rate increase resulting from
application of the index is substantially in excess of the pipeline's increase
in costs. If the indexing methodology results in a reduced ceiling level that is
lower than a pipeline's filed rate, Order No. 561 requires the pipeline to
reduce its rate to comply with the lower ceiling. A pipeline must, as a general
rule, utilize the indexing methodology to change its rates. The FERC, however,
retained cost-of-service ratemaking, market-based rates, and settlement as
alternatives to the indexing approach, which alternatives may be used in certain
specified circumstances. In addition to the regulatory considerations noted
above, it is expected that the Hobbs, Mississippi-Alabama, CITGO, and Koch
Pipelines tariff rates will continue to be constrained by competitive and other
market factors.

     State Regulation. EOTT's intrastate pipeline transportation activities are
subject to various state laws and regulations, as well as orders of regulatory
bodies pursuant thereto.

     Petroleum Pipeline Safety Regulation. EOTT's petroleum pipelines are
subject to regulation by the Department of Transportation with respect to the
design, installation, testing, construction, operation, replacement, and
management of pipeline facilities. In addition, EOTT must permit access to and
copying of 


                                       10
<PAGE>   11

records, and to make certain reports and provide information as required by the
Secretary of Transportation. Comparable regulation exists in some states in
which EOTT conducts intrastate common carrier or private pipeline operations.

     Pipeline safety issues are currently receiving significant attention in
various political and administrative arenas at both the state and federal
levels. Significant expenses could be incurred if additional safety requirements
are imposed that exceed the current pipeline control system capabilities.

Trucking Regulation

     EOTT operates its fleet of trucks as a private carrier. Additionally, in
Louisiana and California it is engaged in contract carrier hauling of crude oil
and natural gas liquids for third parties, and in Oklahoma it hauls salt water
and other fluids for others. Although a private carrier that transports property
in interstate commerce is not required to obtain operating authority from the
Surface Transportation Board, the carrier is subject to certain motor carrier
safety regulations issued by the Department of Transportation. The trucking
regulations extend to driver operations, keeping of log books, truck manifest
preparations, safety placards on the trucks and trailer vehicles, drug and
alcohol testing, safety of operation and equipment, and many other aspects of
truck operations. EOTT is also subject to Occupational Safety and Health
Administration ("OSHA") regulations with respect to its trucking operations.

     EOTT provides contract carrier service in Louisiana pursuant to a permit
issued by the Louisiana Public Service Commission. Louisiana contract carriers
are also subject to certain safety regulations related to service and
operations.

Commodities Regulation

     EOTT's price risk management operations are subject to constraints imposed
under the Commodity Exchange Act (the "CEA"). The futures and options contracts
that are traded on the NYMEX are subject to strict regulation by the Commodity
Futures Trading Commission (the "CFTC"). Although NYMEX futures contracts
include contracts on sweet crude oil, No. 2 heating oil and other refined
petroleum products, there are many products that EOTT will purchase and sell for
which no futures contracts are available, due in part to the strict regulatory
scheme for futures contracts. In addition, the trading volumes and pricing bases
of futures contracts on some products are such that the ability to use them to
hedge EOTT's price risks may be limited.

Other Regulation

     After exiting the East of Rockies refined products business, EOTT primarily
markets refined gasoline at the wholesale level in 4 states. EOTT markets both
reformulated and conventional gasoline in ozone nonattainment areas during
control periods. EOTT is subject to extensive federal and state laws and
regulations governing product specifications, transfer documentation, record
keeping and sampling. Many of these laws and regulations impose significant
financial penalties for non-compliance.



                                       11
<PAGE>   12

INFORMATION REGARDING FORWARD-LOOKING INFORMATION

     The statements in this Annual Report on Form 10-K that are not historical
information are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such forward-looking statements include the discussion under "Business -
Environmental Matters," the discussion under "Legal Proceedings," the discussion
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and the discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000, Other Matters and Outlook." 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. Important factors
that could cause actual results to differ materially from those in the
forward-looking statements herein include the Partnership's success in
integrating recently acquired assets, the Partnership's success in obtaining
additional lease barrels, maintaining existing lease barrels, demand for various
grades of crude oil and the resulting changes in pricing relationships,
developments relating to possible acquisitions or business combination
opportunities, industry conditions, the ability of the Partnership to avoid
environmental liabilities, developments at FERC relating to pipeline tariff
regulation, the successful resolution of litigation, the success of the
Partnership's risk management activities and conditions of the capital markets
and equity markets during the periods covered by the forward-looking statements.
Although the Partnership believes that its expectations regarding future events
are based on reasonable assumptions, it can give no assurance that these are all
the factors that could cause actual results to vary materially from the
forward-looking statements or that its expectations regarding future
developments will prove to be correct.


ITEM 2. PROPERTIES

PIPELINE AND TRANSPORTATION ASSETS AND PROPERTIES

     At year end 1998, EOTT owned and operated 6,200 miles of active crude oil
gathering and transmission pipelines, including the assets acquired from Koch
Pipeline Company, L.P. discussed below, covering fourteen states (Alabama,
Arkansas, California, Louisiana, Mississippi, New Mexico, Oklahoma, Texas,
Kansas, Nebraska, Colorado, Montana, North Dakota, and South Dakota), including
5,300 miles of regulated intrastate and interstate common carrier pipeline
systems located in Alabama, Louisiana, Mississippi, Texas, New Mexico, Oklahoma,
Kansas, Nebraska, Colorado, California, Montana, North Dakota, and South Dakota.
There are approximately 9.2 million barrels of storage capacity associated with
these pipelines and field tanks. EOTT has operated the pipeline systems with
regular and continuous maintenance, although the pipelines from Koch were only
recently acquired. Inspections and tests have been performed at prescribed
intervals in an effort to ensure the integrity of the systems.

     In two separate transactions, on July 1 and December 1, 1998, the
Partnership acquired approximately 4,200 miles of intrastate and interstate
common carrier pipelines in Texas, Oklahoma, Kansas, Nebraska, Colorado,
Louisiana, California, Montana, North Dakota, and South Dakota from Koch
Pipeline Company, L.P. Storage associated with the pipeline systems totals
approximately 3.5 million barrels. In addition, EOTT acquired a gas processing
plant referred to as Plant 8, with 20 million cubic feet per day of gas
processing capacity; a fractionation plant with 8,000 bpd of fractionation
capacity; 5 million gallons of refrigerated propane storage and related
distribution facilities.

     EOTT operates six active barge facilities in Louisiana, and one in Alabama.
Approximately 2.2 million barrels of storage capacity are associated with these
barge facilities. EOTT owns three terminal facilities for the storage and
terminalling of bulk petroleum products in Ohio, which are currently held for
sale, and one refined products terminal in Alabama. Approximately 431,000
barrels of storage capacity are associated with these bulk petroleum product
facilities.


                                       12
<PAGE>   13

ITEM 3. LEGAL PROCEEDINGS

     EOTT is, in the ordinary course of business, a defendant in various
lawsuits, some of which are covered in whole or in part by insurance. Although
no assurance can be given, the General Partner believes that the ultimate
resolution of litigation, individually and in the aggregate, will not have a
materially adverse impact on the Partnership's financial position or results of
operations. Various legal actions have arisen in the ordinary course of
business, the significant of which are discussed below:

     Wyoming Refining Company Matter. EOTT had a possible loss exposure of
approximately $1.47 million as a result of a dispute between Wyoming Refining
Company ("WRC") and the U.S. Minerals Management Service ("MMS"). MMS was
claiming that it was underpaid by WRC for certain Montana crude oil which was
delivered to WRC over a several-year period prior to 1993. On December 14, 1998,
EOTT received a letter from WRC stating that the MMS had withdrawn its claim and
no price adjustments would be necessary.

     State of Texas Royalty Suit. EOTT was served on November 9, 1995 with a
petition styled The State of Texas, et al. vs. Amerada Hess Corporation, et al.
The matter was filed in District Court in Lee County, Texas and involves several
major and independent oil companies and marketers as defendants. The plaintiffs
are attempting to put together a class action lawsuit alleging that the
defendants acted in concert to buy oil owned by members of the plaintiff class
in Lee County, Texas, and elsewhere in Texas, at "posted" prices, which the
plaintiffs allege were lower than true market prices. There is not sufficient
information in the petition to fully quantify the allegations set forth in the
petition, but the General Partner believes that any such claims against the
Partnership will prove to be without merit.

     The State of Texas, et al. vs. Amerada Hess Corporation, et al., Cause No.
97-12040; In the 53rd Judicial District Court of Travis County, Texas. This case
was filed on October 23, 1997 in Austin by the Texas Attorney General's office
and involves several major and independent oil companies and marketers as
defendants. EOTT was served on November 18, 1997. The petition states that the
State of Texas brought this action in its sovereign capacity to collect
statutory penalties recoverable under the Texas Common Purchaser Act, arising
from Defendants' alleged willful breach of statutory duties owed to royalty,
overriding royalty and working interest owners of crude oil sold to Defendants,
as well as alleged breach of Defendants' common law and contractual duties. The
Plaintiffs also allege that the Defendants have engaged in discriminatory
pricing of crude oil. This case appears to be similar to the Lee County, Texas
case filed by the State of Texas on November 9, 1995 and disclosed previously.
EOTT and several of the defendants have engaged in settlement negotiations with
the State of Texas, which, if consummated, would result in a dismissal of the
claims of the State.

     McMahon Foundation and J. Tom Poyner vs. Amerada Hess Corporation, et al.
(Including EOTT Energy Operating Limited Partnership), Civil Action No.
H-96-1155; United States District Court, Southern District of Texas, Houston
Division (Texas Federal Anti-Trust Suit). This suit was filed on April 10, 1996
as a class action complaint for violation of the federal antitrust laws and
involves several major and independent oil companies and marketers as
defendants. The relevant area is the entire continental United States, except
for Alaska, New York, Ohio, Pennsylvania, West Virginia and the Wilmington Field
at Long Beach, California. The plaintiffs claim that there is a combination and
conspiracy among the defendant oil companies to fix, depress, stabilize and
maintain at artificially low levels the price paid for the first purchase of
lease production oil sold from leases in which the class members own interests.
This was allegedly accomplished by agreement of the defendants to routinely pay
for first purchases at posted prices rather than competitive market prices and
maintain them in a range below competitive market prices through an undisclosed
scheme of using posted prices in buy/sell transactions among themselves to
create the illusion that posted prices are genuine market prices. The 



                                       13
<PAGE>   14

plaintiffs allege violations from October of 1986 forward. No money amounts were
claimed, and it is not possible to determine any potential exposure until
further discovery is done.

     Randolph Energy, Inc., et al. vs. Amerada Hess Corporation, et al., Civil
Action No. 2:97CV273PG; In the United States District Court for the Southern
District of Mississippi, Jackson Division (Mississippi Federal Anti-Trust Suit).
EOTT received the summons in this matter on August 18, 1997. The case was filed
on August 5, 1997 and is a class action complaint for alleged violation of the
federal antitrust laws which involves several major and independent oil
companies and marketers as defendants. The plaintiffs claim that this litigation
arises out of a combination and conspiracy of the defendant oil companies to
fix, depress, stabilize and maintain at artificially low levels the prices paid
for the first purchase of lease production oil sold from leases in which the
class members own interests. The issues appear to be a duplication of the issues
in the Texas Federal Anti-Trust Suit previously discussed. No money amounts were
claimed, and it is not possible to determine any potential exposure until
further discovery is done.

     Cameron Parish School Board, et al. vs. Texaco, Inc., et al.; Civil Action
No. C-98-111; In the United States District Court for the Western District of
Louisiana, Lake Charles Division (Louisiana Federal Anti-Trust Suit). This case
was originally filed as a state law claim in Louisiana. When the case was
removed to federal court, the anti-trust claims were added, similar to the
claims made in the Texas Federal Anti-Trust Suit and the Mississippi Federal
Anti-Trust Suit. The plaintiffs claim that this litigation arises out of a
combination and conspiracy of the defendant oil companies to fix, depress,
stabilize and maintain at artificially low levels the prices paid for the first
purchase of lease production oil sold from leases in which the class members own
interests. The issues appear to be a duplication of the issues in the Texas
Federal Anti-Trust Suit and the Mississippi Federal Anti-Trust Suit, both
previously discussed. On October 22, 1998, the judge granted the Plaintiffs'
motion to amend the petition and add additional defendants. The Partnership and
the General Partner were added to the case as defendants at that time. No money
amounts were claimed and it is not possible to determine any potential exposure
until further discovery is done.

     The Texas Federal Anti-Trust Suit, the Mississippi Federal Anti-Trust Suit
and the Louisiana Anti-Trust Suit, along with several other suits to which EOTT
is not a party, were consolidated and transferred to the Southern District of
Texas by Transfer Order dated January 14, 1998. The Judicial Panel on
Multidistrict Litigation made this recommendation due to similarity of issues in
the cases. EOTT and the General Partner, along with a number of other
defendants, have entered into a class-wide settlement with the defendants which
has been preliminarily approved by the Court. A final approval hearing on the
class-wide settlement is scheduled for April 5, 1999.

     Mobil Oil Corporation vs. EOTT Energy Operating Limited Partnership and
EOTT Energy Corporation, Cause No. CV98-04881, M-298th Judicial District Court,
Dallas County, Texas (Mobil Suit). This suit was filed on June 25, 1998 against
both EOTT and the General Partner. Mobil alleged that it overpaid EOTT in
connection with a crude oil contract between the parties. EOTT claimed that it
was entitled to offsets to the overpayment alleged by Mobil and tendered the
amount EOTT believed it owed. The case was settled in November of 1998, with
EOTT tendering cash and services to resolve the matter.

     Assessment for Crude Oil Production Tax from the Comptroller of Public
Accounts, State of Texas. The Partnership received a letter from the
Comptroller's Office dated October 9, 1998 assessing the Partnership for
severance taxes the Comptroller's Office alleges are due on a difference the
Comptroller's Office believes exists between the market value of crude oil and
the value reported on the Partnership's 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 the Partnership's 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 



                                       14
<PAGE>   15

Comptroller's position is similar to claims made in several lawsuits, including
the Texas Federal Anti-Trust Suit, in which the Partnership is a defendant. The
amount of the assessment, including penalty and interest, is approximately $1.1
million. While the claim is still being reviewed, the General Partner believes
the Partnership should be without liability in this matter.

     The Partnership believes that it has obtained or has applied for all of the
necessary permits required by federal, state, and local environmental agencies
for the operation of its business. Further, the Partnership believes that there
are no outstanding liabilities or claims relating to environmental matters
individually and in the aggregate, which would have a material adverse impact on
the Partnership's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.




                                       15
<PAGE>   16

                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND RELATED SECURITY HOLDER
MATTERS.

     The following table sets forth, for the periods indicated, the high and low
sale prices per Common Unit, as reported on the New York Stock Exchange
Composite Tape, and the amount of cash distributions paid per Common Unit.

<TABLE>
<CAPTION>
                                              Price Range              Cash
                                        ----------------------     -------------
                                           High          Low       Distributions
                                        ---------     --------     -------------
<S>                                     <C>           <C>          <C>
1998
     First Quarter....................  $  19.188     $ 17.250     $    0.475
     Second Quarter...................     18.125       14.375          0.475
     Third Quarter....................     17.000       11.250          0.475
     Fourth Quarter...................     20.000       15.500          0.475


1997
     First Quarter....................  $  22.375     $ 19.750     $    0.475
     Second Quarter...................     21.625       18.375          0.475
     Third Quarter....................     20.000       17.125          0.475
     Fourth Quarter...................     20.625       14.750          0.475
</TABLE>

----------
     Distributions are shown in the quarter paid to Common Unitholders


     As of February 15, 1999, there were approximately 396 record holders of the
Partnership's Common Units, and there were an estimated 8,700 beneficial owners
of the Common Units held in a street name. There is no established public
trading market for the Partnership's Subordinated Units. Generally, the
Partnership will distribute 100% of its Available Cash as defined in the
Partnership Agreement within 45 days after the end of each quarter to
Unitholders of record and to the General Partner. Available Cash consists
generally of all of the cash receipts of the Partnership adjusted for its cash
distributions and net changes to reserves. The full definition of Available Cash
is set forth in the Partnership Agreement and amendments thereto, a form of
which is filed or has been filed previously as an exhibit hereto. Distributions
of Available Cash to the Subordinated Unitholders will be subject to the prior
rights of the Common and Special Unitholders to receive the Minimum Quarterly
Distribution of $0.475 per Unit ("MQD") for each quarter during the
Subordination Period and to receive any arrearages in the distribution of the
MQD on the Common Units for prior quarters during the Subordination Period.

     Enron has agreed that it will contribute up to $29 million to the
Partnership in exchange for Additional Partnership Interests ("APIs") if
necessary to support the Partnership's ability to pay the MQD on Common Units
with respect to quarters ending on or prior to December 31, 2001.



                                       16
<PAGE>   17


ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)

        (In Thousands, Except Per Unit and Operating Data)

<TABLE>
<CAPTION>
                                                                                                                             
                                                                         Year Ended December 31,                                 
                                               ---------------------------------------------------------------------------   
                                                 1998 (1)         1997            1996            1995            1994       
                                               -----------     -----------     -----------     -----------     -----------   
                                                                                                               (Pro forma)   
<S>                                            <C>             <C>             <C>             <C>             <C>           
INCOME DATA:
Revenue ...................................    $ 5,294,697     $ 7,646,099     $ 7,469,730     $ 5,088,240     $ 5,260,204   
Cost of sales .............................      5,162,092       7,533,054       7,320,203       4,996,439       5,164,447   
                                               -----------     -----------     -----------     -----------     -----------   
Gross margin ..............................        132,605         113,045         149,527          91,801          95,757   
Operating expenses ........................        104,425          96,158         101,945          72,951          70,079   
Depreciation and amortization .............         20,951          16,518          15,720          10,512          11,781   
Impairment of assets ......................             --           7,961              --              --              --   
                                               -----------     -----------     -----------     -----------     -----------   
Operating income (loss) ...................          7,229          (7,592)         31,862           8,338          13,897   
Interest and related charges ..............        (10,165)         (6,661)         (3,659)         (3,930)         (4,176)  
Other income (expense), net ...............         (1,131)           (146)            606           1,312           5,158   
                                               -----------     -----------     -----------     -----------     -----------   
Income (loss) from
   continuing operations (2) ..............    $    (4,067)    $   (14,399)    $    28,809     $     5,720     $    14,879   
                                               ===========     ===========     ===========     ===========     ===========   
Basic income (loss) from
   continuing operations per Unit:
     o Common ..............................   $     (0.17)    $     (0.75)    $      1.50     $      0.33     $      0.86   
                                               ===========     ===========     ===========     ===========     ===========   
     o Subordinated ........................   $     (0.26)    $     (0.75)    $      1.50     $      0.33     $      0.86   
                                               ===========     ===========     ===========     ===========     ===========   
Diluted income (loss) from
   continuing operations per Unit .........    $     (0.21)    $     (0.75)    $      1.50     $      0.33     $      0.86   
                                               ===========     ===========     ===========     ===========     ===========   

Cash distributions per Common Unit ........    $      1.90     $      1.90     $      1.90     $      1.80     $      0.88   
                                               ===========     ===========     ===========     ===========     ===========   

BALANCE SHEET DATA (AT END OF PERIOD):
Total assets ..............................    $   965,820     $   782,921     $ 1,026,197     $   696,127     $   708,997   
Long-term liabilities .....................             --             281             931           1,546          12,922   
Partners' capital (2) (3) .................         75,582          62,093         106,173          75,819         158,561   
Additional Partnership Interests (4) ......         21,928          12,775           9,091           9,091              --   
Capital expenditures (5) ..................        266,569          22,837           6,723          67,022          15,947   
Cash distributions ........................         22,842          29,681          28,831          12,218          15,314   

OPERATING DATA:
North American crude oil - East of Rockies:
   Gross margin per total barrel ..........    $      0.26     $      0.27     $      0.42     $      0.32     $      0.27   
   Gross margin per lease barrel ..........    $      0.88     $      0.80     $      1.15     $      0.91     $      0.88   
   Total gross margin (000) ...............    $    92,071     $    82,562     $   117,255     $    83,587     $    81,760   
   Total volumes (thousand bpd) ...........          953.3           822.9           770.9           718.5           822.5   
   Total lease volumes (thousand bpd) .....          285.6           282.4           278.6           250.9           255.7   

<CAPTION>
                                                 Nine Months    Three Months
                                                    Ended           Ended
                                                 December 31,     March 31
                                                    1994            1994
                                                 ------------   ------------
                                                               (Predecessor)
<S>                                              <C>             <C>        
INCOME DATA:
Revenue ...................................      $ 4,027,630     $ 1,232,576
Cost of sales .............................        3,955,030       1,209,419
                                                 -----------     -----------
Gross margin ..............................           72,600          23,157
Operating expenses ........................           50,076          19,853
Depreciation and amortization .............            8,974           2,805
Impairment of assets ......................               --              -- 
                                                 -----------     -----------
Operating income (loss) ...................           13,550             499
Interest and related charges ..............           (3,162)            (75)
Other income (expense), net ...............            1,331           3,827
                                                 -----------     -----------
Income (loss) from
   continuing operations (2) ..............      $    11,719     $     4,251
                                                 ===========     ===========
Basic income (loss) from
   continuing operations per Unit:
     o Common ..............................     $      0.67             N/A
                                                 ===========
     o Subordinated ........................     $      0.67             N/A
                                                 ===========
Diluted income (loss) from
   continuing operations per Unit .........      $      0.67             N/A
                                                 ===========

Cash distributions per Common Unit ........      $      0.88             N/A
                                                 ===========

BALANCE SHEET DATA (AT END OF PERIOD):
Total assets ..............................      $   708,997             N/A
Long-term liabilities .....................           12,922             N/A
Partners' capital (2) (3) .................          158,561             N/A
Additional Partnership Interests (4) ......               --              --
Capital expenditures (5) ..................           12,358           3,589
Cash distributions ........................           15,314             N/A

OPERATING DATA:
North American Crude Oil - East of Rockies:
   Gross margin per total barrel ..........      $      0.27     $      0.25
   Gross margin per lease barrel ..........      $      0.90     $      0.82
   Total gross margin (000) ...............      $    61,778     $    19,983
   Total volumes (thousand bpd) ...........            803.0           882.2
   Total lease volumes (thousand bpd) .....            250.8           270.7
</TABLE>

----------

(1)  1998 amounts include the acquisition of Assets from Koch on December 1,
     1998. See additional discussion in Note 3 to the Consolidated Financial
     Statements.

(2)  1997 includes non-recurring charges of (i) $6.5 million impairment of an
     information system development project, (ii) $1.5 million impairment of
     three Ohio products terminals held for sale and (iii) $2.0 million of
     severance costs related to the exit of the East of Rockies refined products
     business and corporate realignment. See additional discussion in Notes 5
     and 6 to the Consolidated Financial Statements.

(3)  The decrease in Partners' capital in 1995 is due primarily to the 1995
     losses incurred in connection with EOTT's decision to exit its West Coast
     processing and asphalt marketing business.

(4)  Subsequent to year-end, Enron contributed the $21.9 million Additional
     Partnership Interests to the Partnership pursuant to its commitment made in
     connection with the Support Agreement. See additional discussion in Note 12
     to the Consolidated Financial Statements.

(5)  The General Partner estimates that capital expenditures necessary to
     maintain the existing asset base at current operating levels will be $8-9
     million each year. 1995 includes $52.6 million for the purchase of crude
     gathering and pipeline assets in Mississippi and Alabama. 1997 includes $12
     million for the purchase of crude gathering and pipeline assets in
     Arkansas, Louisiana and Texas. 1998 includes $258.1 million for the
     purchase of crude oil gathering and transportation assets in multiple
     states. See additional discussion in Note 3 to the Consolidated Financial
     Statements.



                                       17
<PAGE>   18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


INFORMATION REGARDING FORWARD-LOOKING INFORMATION

     The statements in this Annual Report on Form 10-K that are not historical
information are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. 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, involve
significant risks and uncertainties and actual results may vary materially from
those in the forward-looking statements as a result of various factors. See Item
1. Business - Information Regarding Forward-Looking Information for statements
regarding important factors that could cause actual results to differ materially
from those in the forward-looking statements herein. Although the Partnership
believes that its expectations regarding future events are based on reasonable
assumptions, it can give no assurance that these are all the factors that could
cause actual results to vary materially from the forward-looking statements or
that its expectations regarding future developments will prove to be correct.


OVERVIEW

     Through its affiliated limited partnerships, EOTT Energy Operating Limited
Partnership, EOTT Energy Canada Limited Partnership, and EOTT Energy Pipeline
Limited Partnership, EOTT is engaged in the purchasing, gathering, transporting,
trading, storage and resale of crude oil and other petroleum products and
related activities. Statement of Financial Accounting Standards No. 131,
"Reporting Disaggregated Information About a Business Enterprise", requires that
segment reporting for public companies be measured the same way management
identifies and evaluates information internally. EOTT adopted this standard for
year end 1998 reporting and restated all prior year information based on the
following reportable business segments: North American Crude Oil - East of
Rockies, Pipeline Operations and West Coast Operations (see Note 19 to the
Consolidated Financial Statements for certain financial information by business
segment). In late 1997, EOTT exited the East of Rockies refined products
business. See further discussion in the Note 5 to the Consolidated Financial
Statements.

     The purchase and resale of crude oil is a highly competitive activity with
very thin and volatile profit margins. EOTT's operating results are sensitive to
a number of factors including: grades or types of crude oil, individual refinery
demand for specific grades of crude oil, area market price structures for the
different grades of crude oil, location of customers, availability of
transportation facilities, and timing and costs (including storage) involved in
delivering crude oil to the appropriate customer. EOTT purchases crude oil lease
barrels at prevailing market prices. Generally, as EOTT purchases lease barrels,
it simultaneously enters into a corresponding sale transaction to secure a
profit, thereby minimizing or eliminating exposure to price fluctuations. In
addition, EOTT's marketing strategies also provide the potential to enhance the
value of the crude oil that EOTT purchases.


RECENT DEVELOPMENTS

     On December 1, 1998, the Partnership purchased certain crude oil gathering
and transportation assets in key oil producing regions from Koch. The
transaction almost tripled EOTT's pipeline mileage, almost doubled crude oil
lease barrels under contract and should strengthen profitability and cash flow.
The acquisition included approximately 3,900 miles of crude oil pipelines, crude
oil transport trucks, meter stations, vehicles, storage 



                                       18
<PAGE>   19

tanks and contracts for approximately 180,000 lease barrels of crude oil per day
from production in 11 central and western states including Texas, Oklahoma,
Kansas and California (the "Assets").

     The total purchase price was approximately $235.6 million and included
consideration given to Koch of $184.5 million in cash, 2,000,000 Common Units
and 2,000,000 Subordinated Units. EOTT financed the cash portion of the purchase
price through borrowings from Enron Corp. ("Enron"), the parent of EOTT Energy
Corp., the general partner of the Partnership, consisting of a $42 million
bridge loan due December 31, 1999, $135.7 million of term debt, due December 31,
1999, and $6.8 million from the Partnership's existing credit facility with
Enron. EOTT also increased its existing credit facility with Enron to $1 billion
in order to provide increased credit support for the Partnership because of its
increased size following the Koch acquisition.

     The Assets acquired from Koch, which complement EOTT's core crude oil
gathering and transportation business, should result in substantial economies of
scale and should strengthen EOTT's ability to serve customers throughout North
America. This substantial acquisition should enhance EOTT's ability to fund
Common Unit distributions from cash flow.

     Pursuant to a Support Agreement dated September 21, 1998, (a) Enron agreed
to make loans to the Partnership to fund the cash portion of the consideration
to be paid to Koch for the Assets at closing and to refinance indebtedness
incurred in a prior acquisition of assets from Koch on July 1, 1998, (b) Enron
agreed to increase and extend the Partnership's credit facility with Enron to $1
billion through December 31, 2001, (c) the Partnership agreed to issue 1,150,000
Special Units to Enron, (d) Enron agreed to contribute $21.9 million in
Additional Partnership Interests ("APIs") to the Partnership on the earlier of
the date certain proposals, discussed further below, are approved by the
Unitholders at a special meeting of Unitholders or May 17, 1999, (e) Enron
agreed that if certain proposals were approved by the Unitholders it would
extend its cash distribution support through the fourth quarter of 2001, and (f)
the Partnership agreed that, if any additional APIs were issued prior to
approval of certain proposals by the Unitholders, it would issue additional
Common Units at $19.00 per share in exchange for such additional APIs.

     On February 12, 1999, the Partnership obtained approval of proposals
presented at a Special Meeting of Unitholders. Approval of these proposals,
among other things, (a) authorized the Partnership to issue an additional 10
million Common Units to raise cash to reduce indebtedness, for acquisitions and
other Partnership purposes, (b) changed the terms of the Special Units so that
they became convertible into Common Units and (c) resulted in an increase in
Enron's cash distribution support to $29 million and an extension of that
support through the fourth quarter of 2001. As a result of the approval of the
proposals, Enron contributed the $21.9 million in APIs outstanding pursuant to
its commitment made in connection with the Support Agreement discussed in Note
12 to the Consolidated Financial Statements.

     The following review of the results of operations and financial condition
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto. The results of operations for the twelve months ended December
31, 1998, 1997, and 1996 and the financial condition at December 31, 1998 and
1997 reflect the activities of EOTT Energy Partners, L.P. and its subsidiary
partnerships (the "Partnership"). Unless the context otherwise requires, the
term "EOTT" hereafter refers to the Partnership and its affiliated limited
partnerships.


RESULTS OF OPERATIONS

    EOTT reported a net loss of $4.1 million or $0.21 per diluted Unit for 1998,
a net loss of $14.4 million or $0.75 per diluted Unit for 1997, and net income
of $28.8 million or $1.50 per diluted Unit for 1996. EOTT reported a net loss of
$4.4 million or $0.23 per diluted Unit in 1997 excluding non-recurring charges
of $10.0 million or $0.52 per diluted Unit, which consisted primarily of a $6.5
million impairment of an information 



                                       19
<PAGE>   20

systems development project, a $1.5 million impairment of three Ohio products
terminals held for sale and a $2 million severance charge associated with the
realignment initiatives discussed further in the Notes to the Consolidated
Financial Statements.

     Selected financial data for EOTT's business segments are summarized below,
in millions:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                             ----------------------------------
                                               1998         1997         1996  
                                             --------     --------     --------
<S>                                          <C>          <C>          <C>     
Revenues:
     N. A. Crude Oil - East of Rockies ...   $4,637.8     $6,072.6     $6,029.0
     Pipeline Operations .................       31.5         19.4         14.3
     West Coast Operations ...............      590.1        811.2        770.9
     Corporate and Other  (1) ............      110.7        760.2        668.6
     Intersegment eliminations ...........      (75.4)       (17.3)       (13.1)
                                             --------     --------     --------
       Total .............................   $5,294.7     $7,646.1     $7,469.7
                                             ========     ========     ========

Gross margin:
     N. A. Crude Oil - East of Rockies ...   $   92.0     $   82.6     $  117.2
     Pipeline Operations .................       30.9         19.5         13.9
     West Coast Operations ...............        9.7          9.3         15.5
     Corporate and Other  (1) ............         --          1.6          2.9
                                             --------     --------     --------
       Total .............................   $  132.6     $  113.0     $  149.5
                                             ========     ========     ========

Operating Income (Loss):
     N. A. Crude Oil - East of Rockies ...   $   28.0     $   19.5     $   47.1
     Pipeline Operations .................        4.3          1.8          1.8
     West Coast Operations ...............        0.2          0.1          6.8
     Corporate and Other  (1) ............      (25.3)       (29.0)       (23.8)
                                             --------     --------     --------
       Total .............................   $    7.2     $   (7.6)    $   31.9
                                             ========     ========     ========
</TABLE>

     (1) Includes East of Rockies refined products business which was exited in
         1997.


     The North American Crude Oil - East of Rockies business segment and West
Coast Operations business segment are characterized by generally very thin and
volatile profit margins on purchase and sale transactions, and the absolute
price levels for crude oil and other petroleum products do not necessarily bear
a direct relationship to margins per barrel, although such price levels
significantly impact revenues and cost of sales. Gross margin is the difference
between the sales price of crude oil or other petroleum products and the cost of
crude oil and products purchased, including costs paid to third parties for
transportation and handling charges. As a result, period-to-period variations in
revenues and cost of sales are not meaningful, and therefore are not discussed
for the North American Crude Oil - East of Rockies and West Coast Operations
business segments. Pipeline Operations revenues are primarily a function of the
level of crude oil transported through the pipeline, known as throughput, and
the applicable pipeline tariffs.

TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH TWELVE MONTHS ENDED DECEMBER
31, 1997

     North American Crude Oil - East of Rockies. Operating income for the North
American Crude Oil - East of Rockies segment was $28.0 million in 1998 compared
to $19.5 million in 1997. Gross margin increased $9.4 million to $92.0 million
due primarily to renegotiations of uneconomic lease contracts during 1997 and
improved crude grade and basis differentials in 1998. East of Rockies crude oil
lease purchases were up slightly from an annual average of 282,400 bpd for 1997
to an annual average of 285,600 bpd in 1998. Operating expenses of $64.0 million
for 1998 were $0.9 million higher than 1997 due primarily to increased
depreciation and amortization related to the acquisitions of assets from Koch
partially offset by a reduction in employee related costs.


                                       20
<PAGE>   21

     Pipeline Operations. Pipeline Operations had operating income of $4.3 
million in 1998 compared to $1.8 million in 1997. Revenues increased $12.1
million to $31.5 million due primarily to increased activity related to the
acquisition of pipelines from Koch. Pipeline delivered volumes were 185,300 bpd
in 1998 compared to 142,000 bpd in 1997. Operating expenses of $26.6 million in
1998 were $8.9 million higher than 1997 due primarily to increased benefits and
employee related costs, increased operating costs and incremental depreciation
and amortization associated with the acquisition of pipelines from Koch.

     West Coast Operations. West Coast Operations had operating income of $0.2
million in 1998 compared to $0.1 million in 1997. Gross margin increased $0.4
million to $9.7 million due primarily to the acquisition of crude oil gathering
and natural gas liquid assets from Koch partially offset by a lower of cost or
market adjustment of certain propane inventories. Operating expenses of $9.5
million in 1998 were $0.3 million higher than 1997 due primarily to higher
benefits and other employee related costs partially offset by reduced operating
costs.

     Corporate and Other. Corporate and other costs of $25.3 million for 1998
were $3.7 million lower compared to 1997 due primarily to a non-recurring $6.5
million non-cash impairment associated with the termination of an information
system development project and $1.5 million impairment of three Ohio products
terminals held for sale due to the exit of the East of Rockies refined products
business in 1997 partially offset by increased legal expenses, system operating
costs, casualty and liability insurance costs, a non-recurring write-off of
certain information system development costs and severance payments made to a
former officer of the General Partner. Interest and related charges for 1998
were $10.2 million compared to $6.7 million in 1997. The increase is due
primarily to higher average short-term debt required to meet working capital
needs, primarily related to higher average crude inventories during 1998 and
debt used to finance the acquisition of assets from Koch in the third and fourth
quarters of 1998. Other income (expense), net, consisting primarily of gains
(losses) on transactions denominated in foreign currency; gains (losses) on the
sale of property, plant and equipment; and litigation settlements decreased $1.0
million to a loss of $1.8 million in 1998 due to an increase in litigation
settlements in 1998.

TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH TWELVE MONTHS ENDED DECEMBER
31, 1996.

     North American Crude Oil - East of Rockies. Operating income for the North
American Crude Oil - East of Rockies segment was $19.5 million in 1997 compared
to $47.1 million in 1996. Gross margin decreased $34.6 million to $82.6 million
due primarily to the deterioration in grade and basis differentials in 1997 and
1996 had unusually favorable crude oil market conditions. East of Rockies crude
lease purchases were up slightly from an annual average of 278,600 bpd for 1996
to an annual average of 282,400 bpd in 1997. Operating expenses of $63.1 million
for 1997 were $7.0 million lower than 1996 due to lower benefits and other
employee related costs, partially offset by severance costs associated with the
realignment initiatives discussed in the Notes to Consolidated Financial
Statements.

     Pipeline Operations. Pipeline Operations had operating income of 
$1.8 million in 1997 and in 1996. Revenues increased $5.1 million to $19.4
million due primarily to increased activity related to the acquisition of
pipeline and related assets from CITGO Pipeline Company. Pipeline delivered
volumes were 142,000 bpd in 1997 compared to 103,800 bpd in 1996. Operating
expenses of $17.7 million in 1997 were $5.6 million higher than 1996 due
primarily to increased operating costs and incremental depreciation and
amortization associated with the acquisition of pipeline and related assets from
CITGO Pipeline Company.

     West Coast Operations. West Coast Operations had operating income of $0.1
million in 1997 compared to $6.8 million in 1996. Gross margin decreased $6.2
million to $9.3 million due primarily to unusually favorable 


                                       21
<PAGE>   22

market conditions in 1996. Operating expenses of $9.2 million in 1997 were $0.5
million higher than 1996 due primarily to higher operating costs partially
offset by lower benefits and other employee related costs.

     Corporate and Other. Corporate and other costs of $29.0 million for 1997
were $5.2 million higher compared to 1996 due primarily to a $6.5 million
non-cash impairment associated with the termination of an information system
development project and a $1.5 million impairment of three Ohio terminals held
for sale due to the exit of the East of Rockies refined products business in
1997 partially offset by lower benefits and other employee related costs, lower
liability and casualty insurance costs, lower systems operating costs and
severance charges associated with the realignment initiatives and the exiting of
the East of Rockies refined products business discussed further in the Notes to
the Consolidated Financial Statements. Interest and related charges for 1997
were $6.7 million compared to $3.7 million in 1996. The increase is due
primarily to higher average short-term debt required to meet working capital
needs, primarily related to higher crude inventories and debt used to finance
the acquisition of crude oil pipeline assets from CITGO Pipeline Company in the
first quarter of 1997. Other income (expense), net, consisting primarily of
gains (losses) on transactions denominated in foreign currency; gains (losses)
on the sale of property, plant and equipment; and litigation settlements
decreased $0.9 million to a loss of $0.8 million in 1997 due primarily to losses
on foreign currency transactions.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows From Operating Activities

     Net cash provided by operating activities totaled $18.6 million in 1998
compared to net cash from operating activities being at breakeven in 1997. The
increase in operating cash flow is primarily due to an increase in gross margin
resulting from improved crude oil grade and basis differentials and the
renegotiation of uneconomic lease contracts during 1997 in the North American
Crude Oil - East of Rockies crude oil gathering business.

Cash Flows From Investing Activities

     Net cash used in investing activities totaled $224.7 million in 1998
compared to $21.5 million in 1997, primarily due to the asset acquisitions from
Koch. Cash additions to property, plant, and equipment of $232.9 million in 1998
primarily include $224.4 million representing cash consideration for the asset
acquisitions from Koch, $2.7 million for pipeline connections and improvements,
and $2.4 million for computer hardware.

     The General Partner estimates that capital expenditures necessary to
maintain the existing asset base at current operating levels will be
approximately $8 - $9 million each year. The level of capital expenditures by
the Partnership will vary depending upon prevailing energy markets, general
economic conditions and the current regulatory environment.

     The Partnership generally expects to fund short-term liquidity as well as
sustaining capital expenditures primarily from operating activities in addition
to lines of credit provided by Enron, more fully described in Note 7 to the
Consolidated Financial Statements. The Partnership may also issue additional
limited partner interests, the proceeds from which could be used to reduce
indebtedness, provide additional funds for acquisitions or other Partnership
needs.

Cash Flows From Financing Activities

     Net cash provided by financing activities totaled $205.4 million in 1998
compared to $20.0 million in 1997. The 1998 amount primarily represents
short-term borrowings to fund working capital needs and borrowings from Enron to
finance the asset acquisitions from Koch, reduced by distributions paid to
Unitholders of record for the period October 1, 1997 through September 30, 1998.


                                       22
<PAGE>   23

     During the first half of 1996, EOTT issued approximately 1.8 million Common
Units in exchange for $29.8 million in a private placement with Enron and
received $24.2 million for a promissory note issued to Enron. On July 16, 1996,
Enron and EOTT exchanged the Common Units for Special Units, more fully
described in Note 12 to the Consolidated Financial Statements.

     Cash distributions paid to Unitholders were $22.8 million and $29.7 million
for 1998 and 1997, respectively. In 1995, the Partnership issued Additional
Partnership Interests ("APIs") to Enron in exchange for $9.1 million in support
of the distributions paid to the General Partner and Common Unitholders during
the second and third quarters of 1995. Due to the losses incurred during 1997,
the third quarter distribution to all Common and Special Unitholders was paid
utilizing $2.0 million from the Partnership's Available Cash and the Partnership
issued APIs in exchange for $3.7 million in cash support from Enron. The 1997
fourth quarter distribution was paid in February 1998 using $1.9 million of
Available Cash from the Partnership and the issuance of APIs in exchange for
$3.8 million in cash support from Enron. The 1998 first and second quarter
distributions were paid using $6.1 million of Available Cash from the
Partnership and the issuance of APIs in exchange for $5.3 million in cash
support from Enron. Pursuant to the Support Agreement as discussed in Note 12 to
the Consolidated Financial Statements, all outstanding APIs were contributed to
the Partnership in February 1999.

Acquisition of Assets

     On February 1, 1997, the Partnership acquired over 400 miles of intrastate
and interstate common carrier pipelines in Louisiana and Texas from CITGO
Pipeline Company. Shipped volumes associated with these assets amount to
approximately 48,000 bpd from leases in certain regions of Arkansas, Louisiana
and Texas. Storage associated with the pipeline systems totals approximately 0.5
million barrels. The purchase price was approximately $12 million and was
financed with a note payable from Enron.

     On July 1, 1998, the Partnership acquired crude oil gathering and
transportation assets in West Texas and New Mexico from Koch. The asset purchase
included approximately 300 miles of common carrier pipelines, associated storage
facilities for approximately 500,000 barrels and lease purchase contracts for up
to 40,000 lease barrels of crude oil per day. The purchase price was
approximately $28.5 million and was financed with short-term borrowings from
Enron.

     As previously discussed in "Recent Developments," on December 1, 1998, the
Partnership acquired certain additional crude oil gathering and transportation
assets in key oil producing regions from Koch.

Working Capital and Credit Resources

     In 1995, Enron Corp. agreed to provide credit support (the "Credit
Facility") to the Partnership in the form of guarantees, letters of credit,
loans and letters of indemnity. The total amount of the credit support was $600
million, as amended December 19, 1996, had a maturity of March 31, 1999 and was
replaced with a new facility on December 1, 1998 as discussed below. As amended,
the agreement contained sublimits on the availability of the Credit Facility of
$100 million for working capital loans and $200 million for letters of credit.
Letter of credit fees were based on actual charges by the banks which range from
 .20% - .375% per annum. Interest on outstanding loans was charged at the London
Interbank Offering Rate ("LIBOR") plus 25 basis points per annum. At December
31, 1997, EOTT had a note payable of $39.3 million with Enron under a financing
arrangement for acquisitions and other capital projects (the "Note Payable").
This financing was provided at a rate of LIBOR plus 30 basis points per annum.
The maturity date of the Note Payable was March 31, 1999 and was redeemed and
reissued under the term loan discussed below.


                                       23
<PAGE>   24

     On December 1, 1998, Enron increased its existing credit facility with the
Partnership to provide additional credit support (the "Enron Facility") in the
form of guarantees, letters of credit and working capital loans through December
31, 2001. The total amount of the Enron Facility is $1.0 billion and contains
sublimits on the availability of the Enron Facility of $100 million for working
capital loans and $900 million for guarantees and letters of credit. Letter of
credit fees are based on actual charges by the banks which range from .20% -
 .375% per annum. Interest on outstanding loans is charged at LIBOR plus 250
basis points per annum.

     The Enron Facility is subject to defined borrowing base limitations
relating to the Partnership's activities and to the maintenance and protection
of the collateral. The Enron Facility permits distributions to Unitholders
subject to certain limitations based on the Partnership's earnings and other
factors. These covenants and restrictions are not expected to materially affect
EOTT's ability to operate the ongoing Partnership business.

     At December 31, 1998, EOTT had $175 million of debt (the "Term Loan")
outstanding with Enron under a financing arrangement to fund a portion of the
cash consideration paid to Koch for the assets purchased in 1998 and to
refinance indebtedness incurred in prior acquisitions. The Term Loan matures on
December 31, 1999. The interest rate on the Term Loan is LIBOR plus 300 basis
points.

     The Enron Facility and Term Loan are secured by a first priority lien on
and security interest in all receivables and inventory of the Partnership. The
borrowing base is the sum of cash and cash equivalents, specified percentages of
eligible receivables, inventory, and products contracted for or delivered but
not billed. The Enron Facility and Term Loan are non-recourse to the General
Partner and the General Partner's assets. The Partnership is restricted from
entering into additional financing arrangements without the prior approval of
Enron.

     In addition, at December 31, 1998, EOTT had $42.0 million of debt
outstanding with Enron under a $100 million bridge loan (the "Bridge Loan") to
finance a portion of the cash consideration for the acquisition of assets from
Koch. The interest rate on the Bridge Loan is initially LIBOR plus 400 basis
points. At the end of each three-month period, the spread on the Bridge Loan
will increase by 25 basis points. The Bridge Loan is unsecured and matures on
December 31, 1999.

     As discussed above, the interim Bridge Loan ($42 million) and Term Loan
($175 million) provided by Enron are due December 31, 1999. The General Partner
intends to refinance the Bridge Loan and Term Loan on a long-term basis before
maturity. The General Partner anticipates that the debt will be refinanced using
a combination of financing alternatives including (a) third party bank debt,
(b) private placement of debt, (c) an offering of high yield debt and/or (d) an
equity offering utilizing some portion of the additional 10 million Common Units
which were authorized to be issued subsequent to year end (See Note 20).

      At December 31, 1998, EOTT had $44.4 million in letters of credit and
$28.3 million in loans outstanding under the Enron Facility at an average annual
interest rate of approximately 6.1%. The amount outstanding at December 31, 1998
under the Term Loan was $175.0 million with an average annual interest rate of
8.5% and under the Bridge Loan was $42.0 million with an average annual interest
rate of 9.5%. The actual interest rate may vary based on the length of the
borrowings. In addition, guarantees outstanding totaled $366.4 million of which
$290.9 million were used.

     At December 31, 1997, EOTT had $92.5 million in letters of credit and $70.0
million in loans outstanding under the Credit Facility at an average annual
interest rate of approximately 5.8%. The amount outstanding under the Note
Payable at December 31, 1997 was $39.3 million with an average annual interest
rate of 6.0%. The actual interest rate may vary based on the length of the
borrowings. In addition, guarantees outstanding totaled $402.5 million of which
$292.3 million were used.


                                       24
<PAGE>   25

     At December 31, 1997, EOTT was in technical violation of the negative
covenants relating to the Tangible Net Worth, Leverage Ratio and Working Capital
Ratio in the Credit Facility and Note Payable due principally to the operating
loss associated with the deterioration of grade and basis differentials in the
crude oil markets. EOTT received a waiver for these violations from Enron.

     The General Partner believes that the Enron Facility, Bridge Loan, Term
Loan and subsequent refinancing discussed previously will be sufficient to
support the Partnership's crude oil purchasing activities and working capital
and liquidity requirements. No assurance, however, can be given that the General
Partner will not be required to reduce or restrict the Partnership's gathering
and marketing activities because of limitations on its ability to obtain credit
support and financing for its working capital needs.

     The Partnership's ability to obtain letters of credit to support its
purchases of crude oil or other petroleum products is fundamental to the
Partnership's gathering and marketing activities. Additionally, EOTT has a
significant need for working capital due to the large dollar volume of marketing
transactions in which it engages. Any significant decrease in the Partnership's
financial strength, regardless of the reason for such decrease, may increase the
number of transactions requiring letters of credit or other financial support,
make it more difficult for the Partnership to obtain such letters of credit,
and/or increase the cost of obtaining them. This could in turn adversely affect
the Partnership's ability to maintain or increase the level of its purchasing
and marketing activities or otherwise adversely affect the Partnership's
profitability and Available Cash as defined in EOTT's Partnership Agreement and
amendments thereto.

     Generally, the Partnership will distribute 100% of its Available Cash
within 45 days after the end of each quarter to Unitholders of record and to the
General Partner. Available Cash consists generally of all of the cash receipts
of the Partnership adjusted for its cash distributions and net changes to
reserves. The full definition of Available Cash is set forth in the Partnership
Agreement and amendments thereto, a form of which is filed or has been
previously filed as an exhibit to this Annual Report on Form 10-K. Distributions
of Available Cash to the Subordinated Unitholders are subject to the prior
rights of the Common and Special Unitholders to receive the Minimum Quarterly
Distribution ("MQD") for each quarter during the Subordination Period, and to
receive any arrearages in the distribution of the MQD on the Common Units for
prior quarters during the Subordination Period.

     MQD is $0.475 per Unit. As discussed in Note 20 to the Consolidated
Financial Statements, Enron has committed to provide total cash distribution
support in an amount necessary to pay MQDs, with respect to quarters ending on
or before December 31, 2001, in an amount up to an aggregate of $29 million in
exchange for APIs. See further discussion in Note 12 to the Consolidated
Financial Statements regarding the contribution of $21.9 million in APIs
subsequent to year-end.

     Any APIs purchased by Enron are not entitled to cash distributions or
voting rights. Originally, the APIs were required to be redeemed if and to the
extent that Available Cash for any quarter exceeded an amount necessary to
distribute the MQD on all Common and Subordinated Units and to eliminate
arrearages, if any, in the MQD on Common Units for prior periods. In February
1997, the General Partner amended the Partnership Agreement to provide that a
holder of APIs may, at its option, waive its right to receive distributions of
Available Cash to which it would otherwise be entitled to and to provide that in
such case the Partnership may retain such cash for later distribution to
partners or for use in the Partnership's business in subsequent periods. The
Partnership's Available Cash for the fourth quarter of 1996 was substantially in
excess of the amount necessary to distribute the MQD on all outstanding Units,
and upon adoption of the amendment, Enron, the holder of APIs, waived its right
to receive such excess cash in redemption of APIs. The February 1997 amendments
to the Partnership Agreement also provided that after the end of the
Subordination Period a holder of Subordinated Units may convert such Units into
Common Units either in whole or in part from time to time. The amendments also
provided that any unconverted Units will be renamed "Class B Units" after the
end of the 



                                       25
<PAGE>   26

Subordination Period. Prior to the amendments, the Partnership Agreement
provided that conversion would occur only on an all or none basis. See Part II,
Item 5, "Market for Registrant's Common Units and Related Security Holder
Matters."

     The Partnership Agreement authorizes EOTT to cause the Partnership to issue
additional limited partner interests, the proceeds from which could be used to
reduce indebtedness, provide additional funds for acquisitions or other
Partnership needs.

     At December 31, 1998, EOTT has outstanding forward commodity repurchase
agreements of approximately $83.0 million. Pursuant to the agreements, which had
terms of thirty days, EOTT repurchased the crude oil inventory on January 20,
1999 for approximately $83.4 million.

Summarized Financial Information of the General Partner

     EOTT Energy Corp., an indirect wholly owned subsidiary of Enron Corp.,
serves as the General Partner of the Partnership. Summary financial information
for 1998 and 1997 is shown below, in thousands:

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                               1998           1997
                                             --------      ---------
<S>                                          <C>           <C>     
Balance Sheet Data (at end of period)
     Total assets ......................     $ 43,099      $ 47,181
     Total liabilities .................     $  1,212      $  1,290
     Shareholder's equity ..............     $ 41,887      $ 45,891

Income Statement Data:
     Net income (loss) .................     $ (4,005)     $    138
</TABLE>

     Enron Corp. is a publicly traded company listed on the New York Stock
Exchange. Financial information about Enron Corp. can be obtained from its
filings with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934.

YEAR 2000

     The Year 2000 problem generally results from the use in computer hardware
and software of two digits rather than four digits to define the applicable
year. When computer systems must process dates both before and after January 1,
2000, two-digit year "fields" may create processing ambiguities that can cause
errors and system failures. For example, computer programs that have
date-sensitive features may recognize a date represented by "00" as the year
1900, instead of 2000.

     The effects of the Year 2000 problem are exacerbated because of the
interdependence of computer and telecommunications systems in the United States
and throughout the world. This interdependence certainly is true for the
Partnership and its suppliers, trading partners, and customers.

State of Readiness

     The General Partner's Board of Directors has been briefed about the Year
2000 problem. The Board has adopted a Year 2000 plan (the "Plan") aimed at
taking reasonable steps to prevent the Partnership's mission-critical functions
from being impaired due to the Year 2000 problem. "Mission-critical" functions
are those critical functions whose loss would cause an immediate stoppage of or
significant impairment to the Partnership's business.


                                       26
<PAGE>   27

     The Partnership is implementing the Plan, which will be modified as events
warrant. Under the Plan, the Partnership will continue to inventory its
mission-critical computer hardware and software systems and embedded chips
(computer chips with date-related functions, contained in a wide variety of
devices), and software; assess the effects of Year 2000 problems on the
mission-critical functions of the Partnership's businesses; remedy material
disruptions or other material adverse effects on mission-critical functions,
processes and systems; verify and test the mission-critical systems to which
remediation efforts have been applied; and attempt to ameliorate those
mission-critical aspects of the Year 2000 problem that are not remediated by
January 1, 2000, including the development of contingency plans to cope with the
mission-critical consequences of Year 2000 problems that have not been
identified or remediated by that date.

     Implementation of the Plan is directly supervised by the General Partner's
Chief Information Officer, who is the Year 2000 Project Director. The Project
Director coordinates the implementation of the Plan with the assistance of an
Oversight Committee, consisting of selected employees of the General Partner and
one member of its Board of Directors. The Partnership also has engaged (or will
engage, as appropriate) certain outside consultants, technicians and other
external resources to aid in formulating and implementing the Plan.

     The Plan recognizes that the computer, telecommunications, and other
systems ("Outside Systems") of outside entities ("Outside Entities") have the
potential for major, mission-critical, adverse effects on the conduct of the
Partnership's business. The Partnership does not have control of these Outside
Entities or Outside Systems. However, the Plan includes an ongoing process of
contacting Outside Entities whose systems, in the General Partner's judgment,
have, or may have, a substantial effect on the Partnership's ability to continue
to conduct the mission-critical aspects of its business without disruption from
Year 2000 problems. The Plan envisions the Partnership attempting to inventory
and assess the extent to which these Outside Systems may not be "Year 2000
ready" or "Year 2000 compatible" (that is, able to process data reliably, both
before and after January 1, 2000, without disruption due to an inability
reliably to process date information). The Partnership will attempt reasonably
to coordinate with these Outside Entities in an ongoing effort to obtain
assurance that the Outside Systems that are mission-critical to the Partnership
will be Year 2000 compatible well before January 1, 2000. Consequently, the
Partnership will work prudently with Outside Entities in a reasonable attempt to
inventory, assess, analyze, convert (where necessary), test (where necessary),
and develop contingency plans for the Partnership's connections to these
mission-critical Outside Systems, to ascertain the extent to which they are, or
can be made to be, Year 2000 ready and compatible with the Partnership's
remediation of its own mission-critical systems.

     It is important to recognize that the processes of inventorying, assessing,
analyzing, converting (where necessary), testing (where necessary), and
developing contingency plans for mission-critical items in anticipation of the
Year 2000 event are necessarily iterative processes. That is, the steps are
repeated as the Partnership learns more about the Year 2000 problem and its
effects on the Partnership's internal systems and on Outside Systems. As the
steps are repeated, it is likely that new problems will be identified and
addressed. The Partnership anticipates that it will continue with these
processes through January 1, 2000 and, if necessary based on experience, into
the Year 2000 in order to assess and remediate problems that reasonably can be
identified only after the start of the new century.

     As of February 1999, the Partnership is at various stages in implementation
of the Plan as shown in the following tables. The Plan includes verification and
validation of certain of the Partnership's mission-critical facilities and
functions by independent consultants. These consultants will participate to
varying degrees in many or all of the stages, including the inventory,
assessment, and testing phases. The Partnership will continue closely to monitor
work under the Plan and will revise estimated completion dates for the initial
iteration of each listed process according to experience. The Koch acquisition
in December of 1998 has caused some of the dates set forth below to be adjusted.
All dates are only relevant for the initial iteration of the applicable stage of
the Plan. Any notation of "complete" conveys the fact only that the initial
iteration of this phase has been substantially completed.


                                       27
<PAGE>   28

<TABLE>
<CAPTION>
                      -----------------------------------------------------------------------------------------------
                                                       Year 2000 Project Readiness

                      -----------------------------------------------------------------------------------------------
                      Inventory    Assessment    Analysis     Conversion    Testing    Y2K-Ready     Contingency Plan
                      ---------    ----------    --------     ----------    -------    ---------     ----------------
<S>                   <C>          <C>           <C>          <C>           <C>        <C>           <C>
Mission-Critical          C            IP           IP            IP          IP           IP               IP
Internal Items                                                                                      
                      ---------    ----------    --------     ----------    -------    ---------     ----------------
Mission-Critical          C            IP           IP            IP          IP           IP               TBI
Outside Entities                                                                                    
                      ---------    ----------    --------     ----------    -------    ---------     ----------------
</TABLE>
Legend:  C = Complete       IP = In Process        TBI = To Be Initiated

<TABLE>
<CAPTION>
                      ---------------------------------------------------------------------------------------
                                           Year 2000 Project Estimated Completion Dates

                      ---------------------------------------------------------------------------------------
                      Inventory   Assessment   Analysis   Conversion   Testing   Y2K-Ready   Contingency Plan
                      ---------   ----------   --------   ----------   -------   ---------   ----------------
<S>                   <C>         <C>          <C>        <C>          <C>       <C>         <C>
Mission-Critical        7/98         4/99        5/99        6/99       7/99        8/99           10/99
Internal Items                                                                 
                      ---------   ----------   --------   ----------   -------   ---------   ----------------
Mission-Critical        7/98         5/99        6/99        8/99       9/99       10/99           10/99
Outside Entities                                                               
                      ---------   ----------   --------   ----------   -------   ---------   ----------------
</TABLE>                                                                      

Costs to Address Year 2000 Issues

     Preliminary estimates of the total Year 2000 costs, which will be expensed
as incurred, range from $2 million to $3 million. However, the estimated costs
of implementing the Plan do not take into account the costs, if any, that might
be incurred as a result of Year 2000 related failures that occur despite the
Partnership's implementation of the Plan. These projects, which began in 1997,
will continue through 1999. Although management believes that its estimates are
reasonable, there can be no assurance, for the reasons stated in the "Summary"
section, below, that the actual costs of implementing the Plan will not differ
materially from the estimated costs or that the Partnership will not be
materially adversely affected by Year 2000 issues.

Year 2000 Risk Factors

     Certain of the Partnership's operations are regulated by governmental
authorities. The Partnership expects to satisfy these regulatory authorities'
requirements for achieving Year 2000 readiness. If the Partnership's reasonable
expectations in this regard are in error, and if a regulatory authority should
order the temporary cessation of the Partnership's operations in one or more of
these areas, the adverse effect on the Partnership could be material. Outside
Entities could face similar problems that materially adversely affect the
Partnership.

     Between now and 2000 there will be increased competition for people skilled
in the technical and managerial skills necessary to deal with the Year 2000
problem. While the Partnership is taking substantial precautions to recruit and
retain sufficient people skilled in dealing with the Year 2000 problem, and has
hired consultants who bring additional skilled people to deal with the Year 2000
problem as it affects the Partnership, the Partnership could face shortages of
skilled personnel or other resources, such as Year 2000 ready computer chips,
and these shortages might delay or otherwise impair the Partnership's ability to
assure that its mission-critical systems are Year 2000 ready. Outside Entities
could face similar problems that materially adversely affect the Partnership.
The General Partner believes that the possible impact of the shortage of skilled
people is not, and will not be, unique to the Partnership.

     The Partnership estimates that its mission-critical systems will be Year
2000-ready substantially before January 1, 2000. However, there is no assurance
that the Plan will succeed in accomplishing its purpose or that 



                                       28
<PAGE>   29

unforeseen circumstances will not arise during the implementation of the Plan
that would materially adversely affect the Partnership.

     The Partnership is taking reasonable steps to identify, assess, and, where
appropriate, to replace devices that contain embedded chips. Despite these
reasonable efforts, the Partnership anticipates that it will not be able to find
and remediate all embedded chips in the Partnership's systems. Further, the
Partnership anticipates that Outside Entities on which the Partnership depends
also will not be able to find and remediate all embedded chips in their systems.
Some of the embedded chips that fail to operate or that produce anomalous
results may create system disruptions or failures. Some of these disruptions or
failures may spread from the systems in which they are located to other systems
in a cascade. These cascading failures may have adverse effects upon the
Partnership's ability to maintain safe operations, and may also have adverse
effects upon the Partnership's ability to serve its customers and otherwise to
fulfill certain contractual and other legal obligations. The embedded chip
problem is widely recognized as one of the more difficult aspects of the Year
2000 problem across industries and throughout the world. The possible adverse
impact of the embedded chip problem is not, and will not be, unique to the
Partnership.

     The Partnership cannot assure that suppliers upon which it depends for
essential goods and services will convert and test their mission-critical
systems and processes in a timely manner. Failure of delay by all or some of
these entities, including the U.S. and state or local governments and foreign
governments, could create substantial disruptions having a material adverse
affect on the Partnership's business.

     In a recent Securities and Exchange Commission release regarding Year 2000
disclosures, the Securities and Exchange Commission stated that public companies
must disclose the most reasonably likely worst case Year 2000 scenario. Analysis
of the most reasonably likely worst case Year 2000 scenarios the Partnership may
face leads to contemplation of the following possibilities: widespread failure
of electrical, gas, and similar supplies by utilities serving the Partnership;
widespread disruption of the services of communications common carriers; similar
disruption to means and modes of transportation for the Partnership and its
employees, contractors, suppliers, and customers; significant disruption to the
Partnership's ability to gain access to, and remain working in, office buildings
and other facilities; the failure of substantial numbers of the Partnership's
mission-critical information (computer) hardware and software systems, including
both internal business systems and systems (such as those with embedded chips)
controlling operational facilities such as electrical generation, transmission,
and distribution systems and oil facilities and pipelines; and the failure of
Outside Systems, the effects of which would have a cumulative material adverse
impact on the Partnership's mission-critical systems. Among other things, the
Partnership could face substantial claims by customers or loss of revenues due
to service interruptions, inability to fulfill contractual obligations,
inability to account for certain revenues or obligations or to bill customers
accurately and on a timely basis, and increased expenses associated with
litigation, stabilization of operations following mission-critical failures, and
the execution of contingency plans. The Partnership could also experience an
inability by customers, traders, and others to pay, on a timely basis or at all,
obligations owed to the Partnership. Under these circumstances, the adverse
effect on the Partnership, and the diminution of the Partnership's revenues,
would be material, although not quantifiable at this time. Further in this
scenario, the cumulative effect of these failures could have a substantial
adverse effect on the economy, domestically and internationally. The adverse
effect on the Partnership, and the diminution of the Partnership's revenues,
from a domestic or global recession or depression, also is likely to be
material, although not quantifiable at this time.

     The Partnership will continue to monitor business conditions with the aim
of assessing and quantifying material adverse effects, if any, that result or
may result from the Year 2000 problem.


                                       29
<PAGE>   30

Contingency Plans

     As part of the Plan, the Partnership is developing contingency plans that
will deal with two aspects of the Year 2000 problem: (1) that the Partnership,
despite its good-faith, reasonable efforts, may not have satisfactorily
remediated all its internal mission-critical systems; and (2) that Outside
Systems may not be Year 2000 ready, despite the Partnership's good-faith,
reasonable efforts to work with Outside Entities. The Partnership's contingency
plans are being designed to minimize the disruptions or other adverse effects
resulting from Year 2000 incompatibilities regarding these mission-critical
functions or systems, and to facilitate the early identification and remediation
of mission-critical Year 2000 problems that first manifest themselves after
January 1, 2000.

     These contingency plans will contemplate an assessment of all its
mission-critical internal information technology systems and its internal
operational systems that use computer-based controls. This process has begun and
will continue as circumstances require. Further, the Partnership will in that
time frame assess any mission-critical disruptions due to Year 2000-related
failures that are external to the Partnership. These assessments will be
conducted for all of the Partnership's operations.

     These contingency plans include, where appropriate, the creation of teams
that will be standing by on the eve of the new millennium, prepared to respond
rapidly and otherwise as necessary to mission-critical Year 2000-related
problems as soon as they become known. The composition of teams that are
assigned to deal with Year 2000 problems will vary according to the nature,
mission-criticality, and location of the problem.

Summary

     The Partnership has a Plan to deal with the Year 2000 challenge and
believes that it will be able to achieve substantial Year 2000 readiness with
respect to the mission-critical systems that it controls. From a forward-looking
perspective, the extent and magnitude of the Year 2000 problem as it will affect
the Partnership, both before and for some period after January 1, 2000, are
difficult to predict or quantify for a number of reasons. Among these are: the
difficulty of locating "embedded" chips that may be in a great variety of
mission-critical hardware used for process or flow control, environmental,
transportation, access, communications, and other systems; the difficulty of
inventorying, assessing, remediating, verifying and testing Outside Systems; the
difficulty in locating all mission-critical software (computer code) internal to
the Partnership that is not Year 2000 compatible; and the unavailability of
certain necessary internal or external resources, including but not limited to
trained technicians and other personnel to perform adequate remediation,
verification, and testing of mission-critical Partnership systems or Outside
Systems. There can be no assurance, for example, that all of the Partnership's
systems and all Outside Systems will be adequately remediated so that they are
Year 2000 ready by January 1, 2000, or by some earlier date, so as not to create
a material disruption to the Partnership's business. If, despite the
Partnership's reasonable efforts under its Year 2000 Plan, there are
mission-critical Year 2000-related failures that create substantial disruptions
to the Partnership's business, the adverse impact on the Partnership's business
could be material. Year 2000 costs are difficult to estimate accurately because
of unanticipated vendor delays, technical difficulties, the impact of tests of
Outside Systems, and similar events. Moreover, the estimated costs of
implementing the Plan do not take into account the costs, if any, that might be
incurred as a result of Year 2000-related failures that occur despite the
Partnership's implementation of the Plan.

OTHER MATTERS

Recent Accounting Pronouncements

     Statement of Financial Accounting Standards ("SFAS") No. 130,
"Comprehensive Income" requires the presentation of comprehensive income which
is traditional net income (loss) adjusted for certain items that 


                                       30
<PAGE>   31

previously were only reflected as direct charges or credits to equity. EOTT
adopted SFAS No. 130 in the first quarter of 1998. For the years ended December
31, 1998, 1997 and 1996 traditional net income (loss) and comprehensive net
income (loss) are the same.

     SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires that segment reporting for public companies be measured
the same way management identifies and evaluates information internally. EOTT
adopted SFAS No. 131 for year end 1998 reporting and restated prior year
information based on the following reportable business segments - North American
Crude Oil - East of Rockies, Pipeline Operations and West Coast Operations. See
Note 19 to the Consolidated Financial Statements.

     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. The statement requires companies to capitalize
certain costs that are incurred in developing or designing computer software.
This statement is effective for financial statements beginning after December
15, 1998. The impact of this new standard will not have a significant effect on
EOTT's financial position or results of operations.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The standard cannot be applied retroactively but early adoption
is permitted. EOTT has not yet determined the impact of adopting SFAS No. 133;
however, this standard could increase volatility in earnings and partners'
capital, through other comprehensive income.

     In December 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." The Issue 98-10 is effective for fiscal years
beginning after December 15, 1998, and requires energy trading contracts (as
defined) to be recorded at fair value on the balance sheet, with the change in
fair value included in earnings. The consensus requires the effect of initial
application of Issue 98-10 to be recorded as a cumulative effect of a change in
accounting principle effective January 1, 1999, for calendar year companies.
Management has determined that the cumulative effect of the adoption of the new
accounting standard will be an increase in net income which will not be in
excess of $2.0 million.

OUTLOOK

     Management expects onshore North American crude oil production to continue
to decline annually. EOTT plans to continue aggressively pursuing strategies
that management anticipates would result in increased market share of domestic
lease barrel production. By offering an attractive combination of integrated
producer support, such as field level service and division order services, EOTT
plans to increase its producer base by maintaining its reputation for
high-quality, responsive customer service. By leveraging and enhancing its
multi-region presence, EOTT plans to increase marketing and trading
opportunities both domestically and in Canada.


                                       31
<PAGE>   32

     EOTT engages and will continue to engage in futures and over-the-counter
transactions principally for the purpose of hedging or enhancing the value of
the Partnership's physical business. Management believes that the hedging
program is effective and does not have a material adverse impact on the
Partnership's results of operations.

     The asset acquisitions from Koch are a major step forward for EOTT. The new
assets, which complement EOTT's core crude oil business, should result in
substantial economies of scale and should strengthen EOTT's ability to serve
customers throughout North America. In addition, these acquisitions should
enhance EOTT's ability to fund Common Unit distributions from cash flows.

     EOTT will continue to pursue attractive acquisition or business combination
opportunities to increase its scale of business, add cash flow, and reduce
earnings volatility. Acquisitions that result in increased lease purchase
volumes should help to enhance EOTT's marketing and trading opportunities. EOTT
management is committed to continue improving internal business processes in all
operational, marketing, and administrative areas and thereby achieve
improvements in productivity.

     Historically, this business has been very competitive with thin and
volatile profit margins. Due to the volatility of crude oil prices and the
decline in crude oil production, crude oil gathering margins continue to suffer
industry wide. Although there was improvement in crude margins in 1998, margins
have not returned to historical levels. The volatility of the market and the
amount of crude oil produced cannot be projected with any level of certainty.
The Partnership intends to continue to pay MQDs to all its Common and Special
Unitholders; however, due to the volatility of the market and the decline in
crude oil being produced which affects operating results, it is possible that
distribution support from Enron may be needed to pay MQDs for the first quarter
of 1999 and for other quarters in the future. Enron has committed to provide
total cash distribution support in an amount necessary to pay MQDs and has
increased its cash distribution support to $29 million and extended it through
the fourth quarter of 2001, which will further assure Common and Special
Unitholders of continued reliable distributions.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     EOTT enters into forwards, futures and other contracts primarily for the
purpose of hedging the impact of market fluctuations on assets, liabilities or
other contractual commitments. The use of financial instruments may expose EOTT
to market and credit risks resulting from adverse changes in commodity prices,
interest rates and foreign exchange rates. The major market risks are discussed
below:

     Commodity Price Risk. Commodity price risk is a consequence of gathering
crude oil at the lease and marketing the crude oil to refineries or other trade
partners. EOTT uses forwards, futures, swaps and options to mitigate price
exposure and manages this risk on a portfolio basis.

     Interest Rate Risk. Interest rate risk is the result of having variable
rate debt obligations, as changing interest rates impact the discounted value of
future cash flows.

     Foreign Currency Exchange Rate Risk. Foreign currency exchange rate risk is
the result of EOTT's Canadian operations. The primary purpose of EOTT's foreign
currency hedging activities is to protect against the volatility associated with
foreign currency purchase and sale transactions.


                                       32
<PAGE>   33

COMMODITY PRICE AND FOREIGN CURRENCY RISK

     EOTT has performed a value at risk analysis of virtually all of its
financial assets and liabilities. Value at risk incorporates numerous variables
that could impact the fair value of EOTT's investments, including commodity
prices and foreign exchange rates, as well as correlation within and across
these variables. EOTT's methodology includes the use of delta/gamma
approximations for option positions and relies to a certain extent on historical
correlations across commodity groups. EOTT estimates value at risk commodity and
foreign exchange exposures using a model based on Monte Carlo simulation of
delta/gamma positions which captures a significant portion of the exposure
related to option positions. Both value at risk methods utilize a one-day
holding period and a 95% confidence level. Cross-commodity correlations are used
as appropriate.

     The use of value at risk models allows management to aggregate risks across
the Partnership, compare risk on a consistent basis and identify the drivers of
risk. Because of the inherent limitations to value at risk, including the use of
delta/gamma approximations to value options, subjectivity in the choice of
liquidation period and reliance on historical data to calibrate the models, EOTT
relies on value at risk as only one component in its risk control process.

     The following table illustrates the value at risk for commodity price and
foreign currency risk (in millions):

<TABLE>
<CAPTION>
                                                         December 31, 1998
                                                         -----------------
<S>                                                      <C>
         Commodity price...........................        $   3.8(1)
         Foreign currency exchange rate............        $    --
</TABLE>

     (1) The above value at risk amount represents derivative commodity
         instruments, primarily commodity futures contracts, entered into to
         hedge future physical crude oil purchase commitments. These commitments
         to purchase physical crude oil have not been included in the above
         value at risk computation.

INTEREST RATE RISK

     The following table illustrates interest rate risk (in millions):

<TABLE>
<CAPTION>
                                                 Amount of             Average
                                              Debt Outstanding      Interest Rate
                                            December 31, 1998 (1)       1999            Maturity
                                            ---------------------   -------------    --------------
<S>                                         <C>                     <C>              <C> 
       Enron Facility  (2)...............       $     28.3              7.5%          December 2001
       Bridge Loan.......................       $     42.0              9.4%          December 1999
       Term Loan.........................       $    175.0              8.0%          December 1999
</TABLE>

     (1) Amounts approximate fair value because of their market-based interest 
         rate.

     (2) The Enron Facility has a maturity of December 2001. However, the
         borrowings under the Enron Facility are for working capital and are 
         classified as a short-term obligation. If the borrowings were held to 
         maturity, the average interest rates would be LIBOR plus 250 basis 
         points.

Accounting Policies

     Accounting policies for price risk management and hedging activities are
described in Note 2 to the Consolidated Financial Statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

     None


                                       33
<PAGE>   34

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The Partnership does not directly employ any persons responsible for
managing or operating the Partnership or for providing services relating to
day-to-day business affairs. The General Partner provides such services and is
reimbursed for substantially all of its direct and indirect costs and expenses
including compensation and benefit costs.

     The Board of Directors of the General Partner has established a committee
(the "Audit Committee") consisting of three individuals who are neither officers
nor employees of the General Partner or any affiliate of the General Partner.
The committee has the authority to review, at the request of General Partner,
specific matters as to which the General Partner believes there may be a
conflict of interest in order to determine if the resolution of such conflict is
fair and reasonable to the Partnership. In addition, the committee has the
authority and responsibility for selecting the Partnership's independent public
accountants, reviewing the Partnership's annual audit and resolving accounting
policy questions.

DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER

     Set forth below is certain information concerning the directors and
executive officers of the General Partner. All directors of the General Partner
are elected annually by and may be removed by Enron Liquids Holding Corp., a
wholly owned subsidiary of Enron Corp., as the sole shareholder of the General
Partner. All executive officers serve at the discretion of the Board of
Directors of the General Partner.

<TABLE>
<CAPTION>
                                          Years Employed
                                          by Enron or its
              Name                 Age   its Subsidiaries                Position
              ----                 ---   ----------------                --------
<S>                                <C>   <C>                  <C>
    Edward O. Gaylord..........    67                         Director and Chairman of the Board
    Michael D. Burke ..........    54            1            Director, Chief Executive Officer and President
    John H. Duncan ............    70                         Director
    Dee S. Osborne ............    68                         Director
    Daniel P. Whitty ..........    67                         Director
    Kenneth L. Lay ............    56           20            Director
    Stanley C. Horton..........    48           25            Director
    Mary Ellen Coombe .........    48           18            Vice President, Human Resources and Administration
    Stephen W. Duffy ..........    45           10            Vice President and General Counsel
    Douglas P. Huth ...........    52            7            Vice President, Operations
    Lori L. Maddox.............    34            2            Controller
</TABLE>

     Edward O. Gaylord has served as a member of the Board of Directors since
January 1993. Mr. Gaylord was elected Chairman of the Board of EOTT Energy Corp.
in February 1993. He was elected in December 1995 as a member of the Audit
Committee. Prior to joining EOTT Energy Corp., Mr. Gaylord owned and managed
Gaylord & Company, a private venture capital firm, and he has owned interests in
and managed various trucking, storage and manufacturing entities in his career
of more than 30 years. Mr. Gaylord serves on the Board of Directors of Imperial
Holly Corporation, Seneca Foods Corporation, Federal Reserve Bank of Dallas -
Houston Branch, and the General Partner of Kinder Morgan Energy Partners, L.P.

     Michael D. Burke joined EOTT Energy Corp. as President and Chief Executive
Officer in May 1998. He was also elected to the Board of Directors in May 1998.
Prior to joining EOTT Energy Corp., Mr. Burke served as President and Chief
Executive Officer of M.D. Burke & Co., a venture capital and management
consulting firm. Mr. Burke was previously associated with Tesoro Petroleum
Corporation as President and Chief Executive Officer from 1992 to 1995. From
1980 to 1992, Mr. Burke held a number of senior executive positions with Texas
Eastern Corp., including Group Vice President - Products and President/Chief
Executive Officer of TEPPCO Partners, L.P.


                                       34
<PAGE>   35

     John H. Duncan was elected to the EOTT Energy Corp. Board of Directors in
January 1993 and appointed to the Compensation Committee in February 1993. Since
1990, Mr. Duncan's principal occupation has been investments. Mr. Duncan is also
a director of Enron Corp. and Chase of Texas, N. A.

     Dee S. Osborne was elected to the EOTT Energy Corp. Board of Directors and
appointed to the Audit Committee and Compensation Committee in February 1993.
Mr. Osborne serves as President of Crest Investment Company, Chairman of Digital
and Wireless Communications, L.L.C. and Vice Chairman of Jacintoport Terminal
Company. He is a director of Seagull Energy Corporation and Trustee of Scott &
White Memorial Hospital.

     Daniel P. Whitty was elected to the EOTT Energy Corp. Board of Directors in
January 1993 and appointed to the Audit Committee and the Compensation Committee
in February 1993. Mr. Whitty is an independent financial consultant and serves
as the Chairman of the Audit Committee of Northern Border Partners, L.P. and as
a director of Enron Equity Corp. He has also served as a director of Methodist
Retirement Communities, Inc. and a Trustee of the Methodist Retirement Trust.
Until his retirement in 1988, Mr. Whitty served 35 years with Arthur Andersen
LLP and was elected to its worldwide partnership in 1962.

     Kenneth L. Lay was elected to the EOTT Energy Corp. Board of Directors in
January 1993 and for over five years has served as Chairman of the Board and
Chief Executive Officer of Enron Corp. Mr. Lay is also a director of Enron
Corp., Trust Company of the West, Eli Lilly and Company, Compaq Computer
Corporation and Enron Oil & Gas Company.

     Stanley C. Horton was elected to the EOTT Energy Corp. Board of Directors
in May 1998. Mr. Horton is the Chairman and Chief Executive Officer of Enron Gas
Pipeline Group and has held that position since January 1997. From February 1996
to January 1997, he was Co-Chairman and Chief Operating Officer of Enron
Operations Corp. From June 1993 to February 1996, he was President and Chief
Operating Officer of Enron Pipeline and Liquids Group. Mr. Horton was appointed
to the Partnership Policy Committee of Northern Border Partners, L.P. in
December 1998. Mr. Horton serves on the Board of Directors of the Interstate
Natural Gas Association. He also serves as Second Vice Chairman and Treasurer of
Gas Industry Standards Board and as Vice Chairman of Gas Research Institute.

     Mary Ellen Coombe has served as Vice President, Human Resources and
Administration of EOTT Energy Corp. since December 1992.

     Stephen W. Duffy has served as Vice President and General Counsel of EOTT
Energy Corp. since December 1992.

     Douglas P. Huth has served as Vice President, Operations of EOTT Energy
Corp. since December 1992. Mr. Huth serves as Vice Chairman on the Board of
Directors of the National Private Truck Council.

     Lori L. Maddox has served as Controller since October 1996. Prior to
joining EOTT Energy Corp., Ms. Maddox was associated with Arthur Andersen LLP
where she became a Senior Manager and served in the Energy Group for ten years.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires the officers
and directors of the General Partner and persons who own more than ten percent
of a registered class of the equity securities of the Partnership, to file
reports of ownership and changes in ownership with the SEC and the New York
Stock Exchange. Based solely on its review of the copies of such reports
received by it, or written representations from certain reporting persons that
no Form 5's were required for those persons, the General Partner believes that
during 1998, its reporting persons complied with all applicable filing
requirements in a timely manner.


                                       35
<PAGE>   36

     Officers of EOTT Energy Corp. will not receive any additional compensation
for serving EOTT Energy Corp. as members of the Board of Directors or any of its
committees. Each director who is not an employee of EOTT Energy Corp. or Enron
Corp. will receive an annual fee of $15,000 for serving as a director. In
addition, non-employee directors will be paid a fee of $1,000 for each
director's meeting attended and $1,000 for each committee meeting attended. The
Chairman of the Board receives an additional annual fee of $5,000 for serving as
Chairman in addition to the other fees described in this paragraph.

ITEM 11. EXECUTIVE COMPENSATION

     The following table summarizes certain information regarding compensation
paid or accrued by EOTT during each of the last three fiscal years to the Chief
Executive Officer and each of EOTT's four other most highly compensated
executive officers (the "Named Officers"):

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                   Annual Compensation             Long-Term Compensation
                                             -----------------------------------  --------------------------
                                                                                                Securities
                                                                    Other Annual   Restricted   Underlying      All Other
                                             Salary        Bonus    Compensation  Stock Awards  Options/SARs  Compensation
Name and Principal Position         Year       ($)          ($)       ($)(1)          ($)(2)       (#'s)         ($)(3)
---------------------------         ----     --------     --------  ------------  ------------  ------------  ------------
<S>                                 <C>      <C>          <C>       <C>           <C>           <C>           <C>
Michael D. Burke                    1998     $212,504     $ 30,000      --              --       450,000(5)     $    800
Chief Executive Officer               --           --           --      --              --            --              --
and President                         --           --           --      --              --            --              --
                                                                                             
Gary W. Luce (4)                    1998      232,921       30,100      --              --        15,000(5)        3,371
Executive Vice President,           1997      200,000           --      --              --        26,000           1,088
Commercial                          1996      180,250      250,000      --              --        40,000           3,023
                                                                                             
Stephen W. Duffy                    1998      160,000       25,100      --              --            --           3,308
Vice President and                  1997      160,000           --      --              --        16,000           1,129
General Counsel                     1996      140,000      145,000      --              --            --           3,060
                                                                                             
Douglas P. Huth                     1998      165,000       15,100      --              --            --           3,395
Vice President, Operations          1997      165,000           --      --              --        16,000           1,169
                                    1996      145,008      145,000      --              --            --           3,097
                                                                                             
Mary Ellen Coombe                   1998      160,000       15,100      --              --            --           3,308
Vice President, Human Resources     1997      160,000           --      --              --        16,000           1,129
and Administration                  1996      140,000      146,000      --              --            --           3,060
                                                                                             
Lori L. Maddox                      1998      146,666       10,100      --              --         3,000(5)          500
Controller/CAO                      1997      110,000           --      --              --         1,500              --
                                    1996       25,928       15,000      --              --            --             677
</TABLE>

----------

(1)  No Named Officer had "Perquisites and Other Personal Benefits" with a value
     greater than the lesser of $50,000 or 10% of reported salary and bonus.

(2)  The Named Officers had no unreleased restricted stock holdings as of
     December 31, 1998.

(3)  The amounts shown include the value as of year-end 1996, 1997, and 1998 of
     Enron Common Stock allocated during those years to employees' special
     subaccounts under Enron's Employee Stock Ownership Plan ("E.S.O.P").
     Included in 1996 is a special profit sharing made in December of 1996. Also
     included is matching contributions to employee's Enron Corp. Savings
     Account for 1998.

(4)  Mr. Luce resigned from his role as Executive Vice President effective
     December 15, 1998 and his employment with EOTT Energy Corp. ended February
     15, 1999.

(5)  The amounts shown include options granted in 1998 for Enron Corp. Common
     Stock and EOTT Subordinated Units as follows: Mr. Burke, 50,000 Enron
     options, 400,000 EOTT unit options; Mr. Luce, 15,000 Enron options; Ms.
     Maddox, 3,000 Enron options.


                                       36
<PAGE>   37


Stock Option Grants During 1998

     The following table sets forth information with respect to grants of
options pursuant to the Named Officers reflected in the Summary Compensation
Table and all employee optionees as a group. Unit options were granted during
1998 under the EOTT Energy Corp. Unit Option Plan. Stock options were granted
during 1998 under Enron's 1994 Stock Plan ("1994 Plan"). No SAR units were
granted during 1998, and none are outstanding.

<TABLE>
<CAPTION>
                                                           INDIVIDUAL GRANTS
                                           ----------------------------------------------------  
                                                        % OF TOTAL                               
                                           OPTIONS/     OPTIONS/SARS     EXERCISE                
                                             SARS        GRANTED TO      OR BASE                 
                                            GRANTED     EMPLOYEES IN      PRICE      EXPIRATION  
NAME                                          (2)       FISCAL YEAR       ($/SH)        DATE     
----                                       --------     ------------    ---------    ----------  
<S>                       <C>              <C>          <C>             <C>          <C>         
Michael D. Burke          EOTT             400,000        100.0%        $15.0000      5/18/08    
                          Enron Corp.       50,000         0.64%        $51.3750      5/18/03    
                          
Gary W. Luce              EOTT                  --           --               --           --    
                          Enron Corp.       15,000         0.19%        $50.0625       5/4/03    
                          
Stephen W. Duffy          EOTT                  --           --               --           --    
                          Enron Corp.           --           --               --           --    
                          
Douglas P. Huth           EOTT                  --           --               --           --    
                          Enron Corp.           --           --               --           --    
                          
Mary E. Coombe            EOTT                  --           --               --           --    
                          Enron Corp.           --           --               --           --    
                          
Lori L. Maddox            EOTT                  --           --              --            --    
x                         Enron Corp.        3,000         0.04%        $41.9375       2/9/03    
                          
                          
All Employee and          EOTT             400,000          100%        $15.0000          N/A    
  Director Optionees      Enron Corp.    7,854,054(4)       100%        $49.9120(5)       N/A    
                          
All Stock/Unit Holders    EOTT                  --           --               --           --    
                          Enron Corp.          N/A          N/A              N/A          N/A    
                          
Optionee Gain as % of     EOTT                 N/A          N/A              N/A          N/A    
  all Unit Holders Gain   Enron Corp.          N/A          N/A              N/A          N/A    

<CAPTION>
                          
                                   POTENTIAL REALIZABLE VALUE AT 
                                      ASSUMED ANNUAL RATES OF
                                      STOCK PRICE APPRECIATION
                                         FOR OPTION TERM(1)
                          ----------------------------------------------
NAME                      0%(3)          5%                    10%
----                      -----   ---------------        ---------------
<S>                       <C>     <C>                    <C>
Michael D. Burke          $--     $     3,773,368        $     9,562,455
                          $--     $       709,699        $     1,568,248
                          
Gary W. Luce              $--     $            --        $            --
                          $--     $       207,471        $       458,455
                          
Stephen W. Duffy          $--     $            --        $            --
                          $--     $            --        $            --
                          
Douglas P. Huth           $--     $            --        $            --
                          $--     $            --        $            --
                          
Mary E. Coombe            $--     $            --        $            --
                          $--     $            --        $            --
                          
Lori L. Maddox            $--     $            --        $            --
x                         $--     $        34,760        $        76,810
                          
                          
All Employee and          $--     $     3,773,368        $     9,562,455
  Director Optionees      $--     $   246,534,043(6)     $   624,765,648(6)
                          
All Stock/Unit Holders    $--     $   226,175,302        $   573,172,917
                          $--     $10,386,143,976(6)     $26,320,527,193(6)
                          
Optionee Gain as % of     $--     $          1.67%       $          1.67%
  all Unit Holders Gain   $--     $          2.37%       $          2.37%
</TABLE>

----------


(1)  The dollar amounts under these columns represent the potential realizable
     value of each grant of Enron Corp. stock options assuming that the market
     price of Common Stock appreciates in value from the date of grant at the 5%
     and 10% annual rates prescribed by the SEC and therefore are not intended
     to forecast possible future appreciation, if any, of the price of Common
     Stock.

     The dollar amounts under these columns represent the potential realizable
     value of each grant of EOTT Energy Corp. unit options assuming the
     Subordinated Unit option converts to a Common Unit option and the market
     price of a Common Unit appreciates in value from the date of grant at the
     5% and 10% annual rates prescribed by the SEC. The dollar amounts shown are
     not intended to forecast possible future appreciation, if any, of the price
     of Common Units.

(2)  Represents stock options awarded during 1998. Options have a five-year
     term, and were 25% vested on the date of grant with an additional 25%
     vesting each anniversary of the date of grant.

     Represents unit option grants under EOTT Energy Corp.'s Unit Option Plan.
     Grants are ten-year grants and become 20% vested on the first anniversary
     date of grant with an additional 20% vesting each anniversary of the date
     of grant.

(3)  An appreciation in stock price, which will benefit all stockholders, is
     required for optionees to receive any gain. A stock price appreciation of
     zero percent would render the option without value to the optionees.

(4)  Includes shares issued on December 31, 1998 under the All Employee Stock
     Option Program to employees hired during 1998.


                                       37
<PAGE>   38

(5)  Weighted average exercise price of all Enron stock options granted to
     employees in 1998.

(6)  Appreciation for All Employee and Director Optionees is calculated using
     the maximum allowable option term of ten years, even though in some cases
     the actual option term is less than ten years. Appreciation for all
     shareholders is calculated using an assumed ten-year option term, the
     weighted average exercise price for All Employee and Director Optionees
     ($49.9120) and the number of shares of Common Stock issued and outstanding
     on December 31.


AGGREGATED OPTIONS/SAR EXERCISES DURING 1998 AND OPTION/SAR
     VALUES AT DECEMBER 31, 1998

     The following table sets forth information with respect to the Named
Officers concerning the exercise of options under EOTT Energy and Enron's option
plans during the last fiscal year and unexercised options and SARs held as of
the end of the fiscal year:

<TABLE>
<CAPTION>
                                                                                        Value of Unexercised
                                                             Number of Securities           In-the-Money
                                                           Underlying Unexercised         Options/SARs at
                                 Shares                        Options/SARs at           December 31, 1998
                                Acquired      Value          December 31, 1998               ($)(1)(2)      
                                   on       Realized    -------------------------- --------------------------
       Name                     Exercise      ($)       Exercisable  Unexercisable Exercisable  Unexercisable
       ----                     --------    --------    -----------  ------------- -----------  -------------
<S>               <C>           <C>         <C>         <C>          <C>           <C>          <C>
M. Burke          EOTT               --     $     --           --      400,000     $     --     $300,000
                  Enron Corp.        --           --       12,500       37,500       71,094      213,282
                                                                                                --------
                  Subtotal           --           --           --           --           --     $513,282

G. Luce           EOTT               --     $     --          --       100,000     $     --     $ 75,000
                  Enron Corp.     7,000       78,750        9,750       24,250      124,125      290,813
                                                                                                --------
                  Subtotal           --           --           --           --           --     $365,813

S. Duffy          EOTT               --     $     --           --       60,000     $     --     $ 45,000
                  Enron Corp.     2,400     $ 86,550        8,000        8,000     $130,500     $130,500
                                                                                                --------
                  Subtotal           --           --           --           --           --     $175,500

D. Huth           EOTT               --     $     --           --       60,000     $     --     $ 45,000
                  Enron Corp.     2,000     $ 63,794       11,000        8,000     $246,750     $130,500
                                                                                                --------
                  Subtotal           --           --           --           --           --     $175,500

M.E. Coombe       EOTT               --     $     --           --       60,000     $     --     $ 45,000
                  Enron Corp.     1,200     $ 56,625       26,400        8,000     $911,375     $130,500
                                                                                                --------
                  Subtotal           --           --           --           --           --     $175,500

L. Maddox         EOTT               --     $     --           --           --     $     --     $     --
                  Enron Corp.        --     $     --        1,500        3,000     $ 23,579     $ 46,266
                                                                                                --------
                  Subtotal           --           --           --           --           --     $ 46,266
</TABLE>



(1)  The dollar value in this column for EOTT options was calculated by assuming
     the Subordinate Unit option converts to a Common Unit option and
     determining the difference between the fair market value of the Common
     Units and the exercise value of the option at the end of the fiscal year.
     The value of EOTT Energy Common Units at year-end 1998 was $15.75 and the
     Subordinated Unit grant price is $15.00.

(2)  The dollar value in this column for Enron options was calculated by
     determining the difference between the fair market value underlying the
     option as of December 31, 1998 ($57.0625) and the grant price.


                                       38
<PAGE>   39

LONG TERM INCENTIVE PLAN AWARDS IN 1998

     In October 1997, the Board of Directors adopted the EOTT Energy Corp. Long
Term Incentive Plan (Plan). The Plan is intended to provide key employees with
Phantom Appreciation Rights ("PAR"), which is a right to receive cash based on
the performance of the Partnership prior to the time the PAR is redeemed. The
Plan has a five year term beginning January 1, 1997 and PAR awards vest in 25%
increments over a four year period following the grant year. The following table
provides information concerning awards of PAR's under the Plan during 1998
pursuant to the Named Officers reflected in the Summary Compensation Table.

<TABLE>
<CAPTION>
                                                                        Future Estimated
                                           Performance                  Payments Under
                              Number        or Other                   Non-Stock Based Plans (1)
                            of Shares,    Period Until     ---------------------------------------------
                             Units or      Maturation
     Name                     Rights         Payout        Threshold $       Target $        Maximum $  
     ----                   ----------    ------------     -----------       --------        -----------
<S>               <C>       <C>           <C>              <C>               <C>             <C>
   M. Burke       EOTT         90,828       5  Years        $   --           $     0         $   316,990


   G. Luce        EOTT         25,000       5  Years        $   --           $     0         $    87,250


   S. Duffy       EOTT         13,000       5  Years        $   --           $     0         $    45,370


   D. Huth        EOTT         13,000       5  Years        $   --           $     0         $    45,370


   M.E. Coombe    EOTT         13,000       5  Years        $   --           $     0         $    45,370


   L. Maddox      EOTT          8,000       5  Years        $   --           $     0         $    27,920
</TABLE>


(1)  Future estimated payments were based on a 10% targeted growth for each year
     of the 5-year performance period. Maximum payments were estimated at a 20%
     growth rate for the 5 year performance period.


ENRON BENEFIT AND COMPENSATION PLANS

     EOTT Energy Corp. employees continue benefit accrual under the Enron Corp.
Cash Balance Plan. EOTT Energy Corp. employees continue to be eligible for
participation in the Enron Corp. Savings Plan.

RETIREMENT PLANS AND SUPPLEMENTAL BENEFIT PLANS

     Enron maintains the Enron Corp. Cash Balance Plan ("Cash Balance Plan")
which is a noncontributory defined benefit plan to provide retirement income for
employees of Enron and its subsidiaries. Through December 31, 1994, participants
in the Cash Balance Plan with five years or more of service were entitled to
retirement benefits in the form of an annuity based on a formula that uses a
percentage of final average pay and years of service. In 1995, Enron's Board of
Directors adopted an amendment to and restatement of the Cash Balance Plan
changing the plan's name from the Enron Corp. Retirement Plan to the Enron Corp.
Cash Balance Plan. In connection with a change to the retirement benefit
formula, all members became fully vested in retirement benefits earned through
December 31, 1994. The formula in place prior to January 1, 1995 was suspended
and replaced with a benefit accrual in the form of a cash balance of 5% of
annual base pay beginning January 1, 1996. Under the Cash Balance Plan, each
employee's accrued benefit will be credited with interest based on 10-year
Treasury Bond yields.


                                       39
<PAGE>   40

     Enron also maintains a noncontributory employee stock ownership plan
("ESOP") which covers all eligible employees. Allocations to individual
employees' retirement accounts within the ESOP offset a portion of benefits
earned under the Cash Balance Plan. December 31, 1993 was the final date on
which ESOP allocations were made to employees' retirement accounts.

     Directors who are not employees are not eligible to participate in the Cash
Balance Plan.

     In addition, Enron has a Supplemental Retirement Plan that is designed to
assure payments to certain employees of that retirement income that would be
provided under the Cash Balance Plan except for the dollar limitation on accrued
benefits imposed by the Internal Revenue Code of 1986, as amended.

     The following table sets forth the estimated annual benefits payable under
normal retirement at age 65, assuming current remuneration levels without any
salary projection, and participation until normal retirement at age 65, with
respect to the Named Officers under the provisions of the foregoing retirement
plans:

<TABLE>
<CAPTION>
                                                        Estimated           Current
                                   Current Credited  Credited Years       Compensation     Estimated Annual
                                       Years of       of Service at         Covered         Benefit Payable
                                      of Service        at Age 65           by Plans        Upon Retirement
                                   ----------------  --------------      -------------     ----------------
<S>                                <C>               <C>                 <C>               <C>
   M. Burke......................         0.6             10.8           $     212,505      $       19,420
   G. Luce.......................         5.1             31.1           $     232,921      $      118,190
   S. Duffy......................        11.9             31.4           $     160,000      $       66,906
   D. Huth.......................         7.4             19.4           $     165,000      $       36,889
   M.E. Coombe...................        18.3             35.2           $     160,000      $       75,176
   L. Maddox.....................         2.3             33.0           $     146,667      $       97,222
</TABLE>                         

----------

         Note: The estimated annual benefits payable are based on the straight
     life annuity form without adjustment for any offset applicable to a
     participant's retirement subaccount in Enron's Employee Stock Ownership
     Plan.

EOTT ENERGY CORP. SEVERANCE PLAN

     The EOTT Energy Corp. Severance Pay Plan as amended provides for the
payment of benefits to employees who are terminated for failing to meet
performance objectives or standards, or who are terminated due to reorganization
or economic factors. The amount of benefits payable for performance related
terminations is based on length of service and may not exceed six weeks' pay in
the event such employee signs a Waiver and Release of Claims Agreement. For
those terminated as the result of reorganization or economic circumstances, the
benefit is based on length of service with one week's pay per year of service up
to an amount of a maximum payment of 26 weeks of base pay. If the employee signs
a Waiver and Release of Claims Agreement, the severance pay benefits are
doubled. The plan provides a grandfather provision for those employees whose
employment date is prior to January 1, 1993. This provision provides a severance
benefit equal to two weeks of base pay multiplied by the number of full or
partial years of service, plus two weeks of base pay for each $10,000 (or
portion of $10,000) included in the employee's annual base pay, provided the
employee signs a Waiver and Release of Claims Agreement. In the event of an
unapproved change of control of the Company, any employee who is involuntarily
terminated within two years following the change of control will be eligible for
severance benefits equal to two weeks of base pay multiplied by the number of
full or partial years of service, plus two weeks of base pay for each $10,000
(or portion of $10,000) included in the employee's annual base pay. Under no
circumstances will the total severance pay benefit exceed 52 weeks of pay.

     Severance arrangements for Mr. Luce, Mr. Duffy, Mr. Huth, and Ms. Coombe
include an involuntary termination provision pursuant to which the executive
officer will receive severance pay equal to up to two years base salary. An
involuntary termination includes (a) termination without cause; (b) a
termination within 90 days after the happening of one of the following events
without the approval of the executive officer: (i) a substantial 


                                       40
<PAGE>   41

and/or material reduction in the nature or scope of the executive officer's
duties and/or responsibilities, which results in the executive officer no longer
having an officer status and results in an overall material and substantial
reduction from the duties and stature of the officer position he presently
holds, which reduction remains in place and uncorrected for 30 days following
written notice of such breach to the General Partner by the executive officer,
(ii) a reduction in the executive officer's base pay or an exclusion from a
benefit plan or program (except the executive officer may be subject to
exclusion from a benefit plan or program as part of a general cutback for all
employees or officers) or (iii) a change in the location for the primary
performance of the executive officer's services under the agreement to a city
which is more than 100 miles away from such location; and (c) a termination by
the executive officer within one year after a change of control of the General
Partner if one of the events described in (b) has occurred. The severance
agreement, the confidential information and noncompete provisions will continue
for one year.

Employment Agreements

     Mr. Burke entered into an Employment Agreement with EOTT Energy Corp. in
May 1998. The Agreement has a term through December 31, 2001 for an annual base
salary of $340,000. In addition, the Agreement provides for 90,828 units under
the EOTT Energy Long Term Incentive Plan, options to purchase 400,000
Subordinated Units under the EOTT Energy Unit Option Plan and options to
purchase 50,000 shares of Enron Corp. Common Stock under the Enron Corp. Stock
Plan. The Agreement contains involuntary termination provisions which include
severance benefits equal to one year's base pay plus a payment of a pro-rata
amount of bonus opportunity for the year of termination based on the higher of
the target bonus amount for the termination year or the amount of bonus paid for
the preceding year payable within 30 days of termination. In addition, an amount
equal to one year's base salary is payable one year following the involuntary
termination date. Upon Change of Control termination prior to the expiration of
term, the severance benefits include an amount equal to the sum of annualized
monthly base pay plus a bonus factor multiplied by 2.99. The bonus factor shall
be the greater of the target bonus for the year in which Change of Control
termination occurs or the actual amount of the previous year's annual bonus. The
Agreement provides for post-employment non-competition obligations for twelve
months after the date of Involuntary Termination or Change of Control
Termination.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The General Partner knows of no one who beneficially owns in excess of five
percent of the Common Units of the Partnership except as set forth in the table
below.

<TABLE>
<CAPTION>
                                                          Amount and Nature
                                  Name and Address     of Beneficial Ownership      Percent
         Title of Class          of Beneficial Owner   as of February 15, 1999      of Class
     ------------------------  ---------------------   ------------------------     --------
<S>                            <C>                     <C>                          <C>
     Common Units              Enron Corp.                      3,276,811(1)          21.88
     Subordinated Units        1400 Smith Street                7,000,000(2)          77.78
     General Partner Interest  Houston, Texas  77002                    1(2)(3)      100.00


     Common Units              Koch Pipeline Company            2,000,000             13.35
     Subordinated Units        4111 East 37th Street N.         2,000,000             22.22
                               Wichita, Kansas  67220
</TABLE>

----------

(1)  Includes Special Units converted into Common Units subsequent to December
     31, 1998.

(2)  Held by the General Partner, an indirect subsidiary of Enron Corp.

(3)  The reporting of the General Partner interest shall not be deemed to be a
     concession that such interest represents a security.


                                       41
<PAGE>   42

     The following table sets forth certain information as of February 15, 1999,
regarding the beneficial ownership of (i) the Common Units and (ii) the common
stock of Enron Corp., the parent company of the General Partner, by all
directors of the General Partner, each of the named executive officers and all
directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                 AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
                                                          -----------------------------------------------------------
                                                           SOLE VOTING    SHARED VOTING     SOLE VOTING
                                                          AND INVESTMENT  AND INVESTMENT   LIMITED OR NO     PERCENT
      TITLE OF CLASS                  NAME                  POWER            POWER         INVESTMENT POWER  OF CLASS
-------------------------    ---------------------------  --------------  --------------   ----------------  --------
<S>                          <C>                          <C>             <C>              <C>               <C>
EOTT Energy Partners, L.P.   Michael D. Burke                  -             -                 -               *
Common Units                 Mary Ellen Coombe              60,000           -                 -               *
                             Stephen W. Duffy               60,000           -                 -               *
                             John H. Duncan                  8,500           -                 -               *
                             Edward O. Gaylord                 -             -                 -               *
                             Stanley C. Horton                 -             -                 -               *
                             Douglas P. Huth                60,000           -                 -               *
                             Kenneth L. Lay                  5,000           -                 -               *
                             Lori L. Maddox                    -             -                 -               *
                             Dee S. Osborne                    -             -                 -               *
                             Daniel P. Whitty                  -             -                 -               *

                             All directors and executive
                             officers as a group
                             (11 in number)                193,500           -                 -             1.59


Enron Corp.                  Michael D. Burke               17,221           -                   19            *
Common Stock                 Mary Ellen Coombe              30,858           -               13,349            *
                             Stephen W. Duffy               12,000           -                  872            *
                             John H. Duncan                 82,871        27,848                278            *
                             Edward O. Gaylord                 -             -                   20            *
                             Stanley C. Horton             309,000         3,077             12,390            *
                             Douglas P. Huth                15,101           -                2,590            *
                             Kenneth L. Lay              3,190,482       559,137            117,511          1.14
                             Lori L. Maddox                  2,625           -                   13            *

                             All directors and executive
                             officers as a group
                             (11 in number)              3,660,158       590,062            147,042          1.29
</TABLE>

----------
* Less than 1 percent

     The above table includes Subordinated Units of the Partnership which are
     subject to conversion into Common Units and which are subject to unit
     options exercisable within 60 days as follows: Ms. Coombe, 60,000 units;
     Mr. Huth 60,000 units; Mr. Duffy, 60,000 units; and all directors and
     executive officers as a group, 180,000 units. The above table also includes
     shares of common stock of Enron Corp. which are subject to stock options
     exercisable within 60 days as follows: Mr. Duncan, 23,208 shares, for which
     he has shared voting and investment power for 22,888 of such shares; Mr.
     Burke, 17,220 shares; Mr. Lay, 2,741,640 shares, for which he has shared
     voting and investment power for 188,846 of such shares; Ms. Coombe, 30,400
     shares; Mr. Huth, 15,000 shares and all directors and executive officers as
     a group, 3,108,631 shares.

     The table also includes shares owned by certain members of the families (or
     family or charitable trusts or foundations) of the directors or executive
     officers, including shares in which pecuniary interest may be disclaimed.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See Note 12 to the Consolidated Financial Statements for information
regarding certain transactions between EOTT and Enron and its affiliates.


                                       42
<PAGE>   43


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

    (a)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

      See "Index to Financial Statements" set forth on page F-1.

    (a)(3)  EXHIBITS

    3.1   --  Form of Partnership  Agreement of EOTT Energy  Partners, L.P.
              (incorporated by reference to Exhibit 3.1 to Registration 
              Statement, File No. 33-73984)

    3.2   --  Amendment No. 1 dated as of August 8, 1995, to the Amended and
              Restated Agreement of Limited Partnership of EOTT Energy Partners,
              L.P. (incorporated by reference to Exhibit 3.2 to Annual Report on
              Form 10-K for the Year Ended December 31, 1995)

    3.3   --  Amendment No. 2 dated as of July 16, 1996, to the Amended and
              Restated Agreement of Limited Partnership of EOTT Energy Partners,
              L.P. (incorporated by reference to Exhibit 3.3 to Quarterly Report
              on Form 10-Q for the Quarter Ended June 30, 1996)

    3.4   --  Amendment No. 3 dated as of February 13, 1997, to the Amended
              and Restated Agreement of Limited Partnership of EOTT Energy
              Partners, L.P.

*   3.5   --  Amendment  No. 4 dated as of November 30, 1998, to the Amended and
              Restated Agreement of Limited Partnership of EOTT Energy Partners,
              L.P.

*   3.6  --   Amendment  No. 5 dated as of December 7, 1998, to the Amended and
              Restated Agreement of Limited Partnership of EOTT Energy Partners,
              L.P.

   10.04 --   Form of Corporate Services Agreement between Enron Corp. and EOTT 
              Energy Corp. (incorporated by reference to Exhibit 10.08 to
              Registration Statement, File No. 33-73984)

   10.05 --   Form of Contribution and Closing Agreement between EOTT Energy 
              Corp. and EOTT Energy Partners, L.P. (incorporated by reference to
              Exhibit 10.09 to Registration Statement, File No. 33-73984)

   10.06 --   Form of Ancillary Agreement by and among Enron Corp., EOTT
              Energy Partners, L.P., EOTT Energy Operating Limited Partnership,
              EOTT Energy Pipeline Limited Partnership, EOTT Energy Canada
              Limited Partnership, and EOTT Energy Corp. (incorporated by
              reference to Exhibit 10.10 to Registration Statement, File No.
              33-73984)

   10.07 --   Agreement to Increase and Extend Distribution Support dated
              August 8, 1995, amending the Ancillary Agreement referenced in
              10.06 (incorporated by reference to Exhibit 10.07 to Annual Report
              on Form 10-K for the Year Ended December 31, 1995)

   10.08 --   Form of Amended and Restated Agreement of Limited Partnership
              of EOTT Energy Operating Limited Partnership (incorporated by
              reference to Exhibit 10.11 to Registration Statement, File No.
              33-73984)

                                       43
<PAGE>   44

   10.09 --   EOTT Energy Corp. Annual Incentive Plan (incorporated by reference
              to Exhibit 10.14 to Registration Statement, File No. 33-73984)

   10.10 --   EOTT Energy Corp. 1994 Unit Option Plan and the related Option 
              Agreement (incorporated by reference to Exhibit 10.15 to
              Registration Statement, File No. 33-73984)

   10.11 --   EOTT Energy Corp. Severance Pay Plan (incorporated by reference to
              Exhibit 10.16 to Registration Statement, File No. 33-73984)

   10.12 --   Executive Employment Agreement effective March 24, 1994 between 
              EOTT Energy Corp. and executive officers with employment
              agreements. (incorporated by reference to Exhibit 10.05 to
              Registration Statement, File No. 33-73984)

   10.13 --   Credit Agreement dated as of June 30, 1995 between EOTT Energy
              Operating Limited Partnership, as Borrower, and Enron Corp., as
              Lender (incorporated by reference to Exhibit 10.13 to Annual
              Report on Form 10-K for the Year Ended December 31, 1995)

   10.14 --   Credit Agreement dated as of January 3, 1996 between EOTT
              Energy Operating Limited Partnership, as Borrower, and Enron
              Corp., as Lender (incorporated by reference to Exhibit 10.14 to
              Annual Report on Form 10-K for the Year Ended December 31, 1995)

   10.15 --   Amendment dated December 19, 1996 to the Credit Agreement dated as
              of June 30, 1995 between EOTT Energy Operating Limited Partnership
              as Borrower, and Enron Corp., as Lender

   10.16 --   Amendment dated February 25, 1997 to the Credit Agreement dated as
              of June 30, 1995 between EOTT Energy Operating Limited Partnership
              as Borrower, and Enron Corp., as Lender

   10.17 --   Amendment dated February 25, 1997 to the Credit Agreement dated as
              of January 3, 1996 between EOTT Energy Operating Limited
              Partnership as Borrower, and Enron Corp., as Lender

   10.18 --   Amendment dated as of February 13, 1997, to the EOTT Energy Corp.
              1994 Unit Option Plan

   10.19 --   EOTT Energy Corp. Long Term Incentive Plan (incorporated by
              reference to Exhibit 10.19 to Quarterly Report on Form 10-Q for
              the Quarter Ended September 30, 1997)

   10.20 --   Agreement to Extend Distribution Support dated November 5, 1997,
              amending the Agreement referenced in 10.07

   10.21      Form of Executive Employment Agreement between EOTT Energy Corp.
              and Michael D. Burke

   10.22      Support Agreement dated September 21, 1998 between EOTT Energy
              Partners, L.P., EOTT Energy Operating Limited Partnership and
              Enron Corp.

** 10.23      Crude Oil Supply and Terminalling Agreement dated as of December
              1, 1998 between Koch Oil Company and EOTT Energy Operating Limited
              Partnership

*  10.24      Amended and Restated Credit Agreement as of December 1, 1998
              between EOTT Energy Operating Limited Partnership, as Borrower,
              and Enron Corp., as Lender


                                       44
<PAGE>   45
*   10.25     Amended and Restated Term Credit Agreement as of December 1, 1998
              between EOTT Energy Operating Limited Partnership, as Borrower,
              and Enron Corp., as Lender

*   10.26     Amendment dated March 17, 1999 to the Amended and Restated Credit 
              Agreement as of December 1, 1998 between EOTT Energy Operating 
              Limited Partnership, as Borrower, and Enron Corp., as Lender

*   10.27     Amendment dated March 17, 1999 to the Amended and Restated Term 
              Credit Agreement as of December 1, 1998 between EOTT Energy 
              Operating Limited Partnership, as Borrower, and Enron Corp., as 
              Lender

**  10.28     Amendment dated December 1, 1998 to the Crude Oil Supply and 
              Terminalling Agreement dated as of December 1, 1998 between Koch 
              Oil Company and EOTT Energy Operating Limited Partnership

    21.1      Subsidiaries of the Registrant (incorporated by reference to
              Exhibit 21.1 to Annual Report on Form 10-K for the Year Ended
              December 31, 1994)

*   23.1      Consent of Arthur Andersen LLP

*   24        Power of Attorney

*   27.1      Financial Data Schedule


*   Filed herewith.
**  Filed herewith; however, confidential treatment has been requested with
    respect to certain portions of exhibit.


   (b)    Reports on Form 8-K

              December 14, 1998     RE: Closing of purchase transaction to
                                    acquire certain assets from Koch Pipeline
                                    Company, L.P. and Koch Oil Company.


                                       45
<PAGE>   46


SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 ON THE 29TH DAY OF
MARCH, 1999.

                                              EOTT ENERGY PARTNERS, L.P.
                                              (A Delaware Limited Partnership)

                                         By:  EOTT ENERGY CORP. as
                                                 General Partner



                                         By:  /s/  MICHAEL D. BURKE
                                            -------------------------
                                                   Michael D. Burke
                                           Chief Executive Officer and President



     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.


     Signature                       Title                           Date
     ---------                       -----                           ----

/s/  MICHAEL D. BURKE       Director, Chief Executive            March 29, 1999
----------------------      Officer and President
     Michael D. Burke       (Principal Executive Officer)

/s/  LORI L. MADDOX         Controller                           March 29, 1999
----------------------      (Principal Accounting Officer)
     Lori L. Maddox                    


/s/  EDWARD O. GAYLORD      Chairman of the Board and            March 29, 1999
----------------------      Director
     Edward O. Gaylord                  


/s/  DEE S. OSBORNE         Director                             March 29, 1999
----------------------
     Dee S. Osborne


/s/  DANIEL P. WHITTY       Director                             March 29, 1999
----------------------
     Daniel P. Whitty



                                       46
<PAGE>   47


     Signature                       Title                           Date
     ---------                       -----                           ----


/s/  JOHN H. DUNCAN         Director                             March 29, 1999
----------------------
     John H. Duncan


/s/  STANLEY C. HORTON      Director                             March 29, 1999
----------------------
     Stanley C. Horton


/s/  KENNETH L. LAY         Director                             March 29, 1999
----------------------
     Kenneth L. Lay


                                       47

<PAGE>   48

                           EOTT ENERGY PARTNERS, L.P.
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                     <C>
Financial Statements
     Report of Independent Public Accountants............................  F-2
     Consolidated Statements of Operations -
         Years Ended December 31, 1998, 1997 and 1996....................  F-3
     Consolidated Balance Sheets - December 31, 1998 and 1997............  F-4
     Consolidated Statements of Cash Flows -
         Years Ended December 31, 1998, 1997 and 1996....................  F-5
     Consolidated Statements of Partners' Capital -
         Years Ended December 31, 1998, 1997 and 1996....................  F-6
     Notes to Consolidated Financial Statements..........................  F-7

Supplemental Schedule

     Schedule II - Valuation and Qualifying Accounts and Reserves........  S-1
</TABLE>


                                      F-1
<PAGE>   49


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To EOTT Energy Partners, L.P.:

We have audited the accompanying consolidated balance sheets of EOTT Energy
Partners, L.P. (a Delaware limited partnership) as of December 31, 1998 and
1997, and the related consolidated statements of operations, cash flows and
partners' capital for each of the three years in the period ended December 31,
1998. These financial statements and the schedule referred to below are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EOTT Energy Partners, L.P. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in the index to financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.


                                                ARTHUR ANDERSEN LLP

Houston, Texas
February 15, 1999


                                      F-2
<PAGE>   50



                           EOTT ENERGY PARTNERS, L.P.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In Thousands, Except Per Unit Amounts)


<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                         ------------------------------------------
                                                            1998             1997              1996    
                                                         -----------     -----------     -----------
<S>                                                      <C>             <C>             <C>        
Revenue .............................................    $ 5,294,697     $ 7,646,099     $ 7,469,730

Cost of Sales .......................................      5,162,092       7,533,054       7,320,203
                                                         -----------     -----------     -----------

Gross Margin ........................................        132,605         113,045         149,527

Expenses
   Operating expenses ...............................        104,425          96,158         101,945
   Depreciation and amortization ....................         20,951          16,518          15,720
   Impairment of assets .............................             --           7,961              -- 
                                                         -----------     -----------     -----------
                                                             125,376         120,637         117,665
                                                         -----------     -----------     -----------

Operating Income (Loss) .............................          7,229          (7,592)         31,862

Other Income (Expense)
   Interest income ..................................            674             620             448
   Interest and related charges .....................        (10,165)         (6,661)         (3,659)
   Other, net .......................................         (1,805)           (766)            158
                                                         -----------     -----------     -----------
                                                             (11,296)         (6,807)         (3,053)
                                                         -----------     -----------     -----------

Net Income (Loss) ...................................    $    (4,067)    $   (14,399)    $    28,809
                                                         ===========     ===========     ===========


Basic Net Income (Loss) Per Unit (Note 4)
   Common ...........................................    $     (0.17)    $     (0.75)    $      1.50
                                                         ===========     ===========     ===========
   Subordinated .....................................    $     (0.26)    $     (0.75)    $      1.50
                                                         ===========     ===========     ===========


Diluted Net Income (Loss) Per Unit (Note 4) .........    $     (0.21)    $     (0.75)    $      1.50
                                                         ===========     ===========     ===========

Distributions Per Common Unit .......................    $      1.90     $      1.90     $      1.90
                                                         ===========     ===========     ===========

Average Units Outstanding for Diluted Computation ...         19,267          18,830          18,830
                                                         ===========     ===========     ===========
</TABLE>


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


                                      F-3
<PAGE>   51


                           EOTT ENERGY PARTNERS, L.P.
                           CONSOLIDATED BALANCE SHEETS
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,  DECEMBER 31,
                                                                       1998          1997    
                                                                    ------------  ------------
<S>                                                                   <C>          <C>
                        ASSETS

Current Assets
   Cash and cash equivalents ....................................     $  3,033     $  3,737
   Trade and other receivables, net of allowance for doubtful
     accounts of $1,860 and $1,660, respectively ................      403,335      463,983
   Inventories ..................................................      137,545      139,265
   Other ........................................................       30,328       23,059
                                                                      --------     --------
     Total current assets .......................................      574,241      630,044
                                                                      --------     --------

Property, Plant and Equipment, at cost ..........................      497,807      243,444
   Less: Accumulated depreciation ...............................      112,568       97,224
                                                                      --------     --------
     Net property, plant and equipment ..........................      385,239      146,220
                                                                      --------     --------

Other Assets, net of amortization ...............................        6,340        6,657
                                                                      --------     --------

Total Assets ....................................................     $965,820     $782,921
                                                                      ========     ========

           LIABILITIES AND PARTNERS' CAPITAL

Current Liabilities
   Trade accounts payable .......................................     $524,822     $586,897
   Accrued taxes payable ........................................        5,192        5,462
   Note payable - affiliate .....................................           --       39,300
   Short-term borrowings - affiliate ............................       28,297       70,000
   Bridge loan - affiliate ......................................       42,000           --
   Term loan - affiliate ........................................      175,000           --
   Repurchase agreements ........................................       83,016           --
   Other ........................................................        9,983        6,113
                                                                      --------     --------
     Total current liabilities ..................................      868,310      707,772
                                                                      --------     --------

Long-Term Liabilities ...........................................           --          281
                                                                      --------     --------

Commitments and Contingencies (Notes 14 and 15)

Additional Partnership Interests (Note 12) ......................       21,928       12,775

Partners' Capital
   Common Unitholders ...........................................       14,472        7,490
   Special Unitholders ..........................................       21,092       25,060
   Subordinated Unitholders .....................................       38,315       28,169
   General Partner ..............................................        1,703        1,374
                                                                      --------     --------
Total Partners' Capital .........................................       75,582       62,093
                                                                      --------     --------
Total Liabilities and Partners' Capital .........................     $965,820     $782,921
                                                                      ========     ========
</TABLE>


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


                                      F-4
<PAGE>   52



                           EOTT ENERGY PARTNERS, L.P.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,        
                                                                      ---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES                                    1998           1997           1996   
                                                                      ---------      ---------      ---------
<S>                                                                   <C>            <C>            <C>      
   Reconciliation of net income (loss) to net cash
   provided by (used in) operating activities
     Net income (loss) ..........................................     $  (4,067)     $ (14,399)     $  28,809
     Depreciation ...............................................        18,806         14,487         13,690
     Impairment of assets .......................................            --          7,961             --
     Amortization of intangible assets ..........................         2,145          2,031          2,030
     (Gains) losses on disposal of assets .......................            66           (503)            80
     Changes in components of working capital -
       Receivables ..............................................        60,648        240,801       (265,165)
       Inventories ..............................................         1,720         (4,339)       (67,922)
       Other current assets .....................................        (3,737)         1,893         (5,619)
       Trade accounts payable ...................................       (61,578)      (231,776)       311,909
       Accrued taxes payable ....................................          (270)        (3,003)         3,170
       Other current liabilities ................................         4,238        (14,057)        14,668
     Discontinued operations ....................................            --             --          3,460
     Other assets and liabilities ...............................           616            886            195
                                                                      ---------      ---------      ---------
   Net Cash Provided by (Used In) Operating Activities ..........        18,587            (18)        39,305
                                                                      ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from sale of property, plant
     and equipment ..............................................         7,330          1,243            880
   Acquisitions .................................................      (224,397)       (12,000)            --
   Additions to property, plant and equipment ...................        (8,492)       (10,837)        (6,723)
   Other, net ...................................................           866            129         (1,991)
                                                                      ---------      ---------      ---------
   Net Cash Used In Investing Activities ........................      (224,693)       (21,465)        (7,834)
                                                                      ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES
   Decrease in note payable .....................................            --             --        (85,000)
   Increase (decrease) in note payable - affiliate ..............       (39,300)        15,072         24,228
   Increase (decrease) in short-term borrowings - affiliate .....       (41,703)        31,500         36,300
   Increase in bridge loan - affiliate ..........................        42,000             --             --
   Increase in term loan - affiliate ............................       175,000             --             --
   Increase in repurchase agreements ............................        83,016             --             --
   Acquisition of treasury units ................................           (66)            --             --
   Issuance of Common Units .....................................            --             --         29,772
   Contribution from General Partner ............................           793             --            604
   Distributions to Unitholders .................................       (22,842)       (29,681)       (28,831)
   Issuance of Additional Partnership Interests .................         9,153          3,684             --
   Other, net ...................................................          (649)          (616)        (5,559)
                                                                      ---------      ---------      ---------
   Net Cash Provided by (Used In) Financing Activities ..........       205,402         19,959        (28,486)
                                                                      ---------      ---------      ---------
Increase (Decrease) in Cash and Cash Equivalents ................          (704)        (1,524)         2,985
Cash and Cash Equivalents Beginning of Period ...................         3,737          5,261          2,276
                                                                      ---------      ---------      ---------
Cash and Cash Equivalents End of Period .........................     $   3,033      $   3,737      $   5,261
                                                                      =========      =========      =========
</TABLE>


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


                                      F-5
<PAGE>   53



                           EOTT ENERGY PARTNERS, L.P.
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
                                 (In Thousands)

<TABLE>
<CAPTION>

                                                   COMMON       SPECIAL     SUBORDINATED    GENERAL
                                                 UNITHOLDERS  UNITHOLDERS    UNITHOLDERS     PARTNER  
                                                 -----------  -----------   ------------    --------
<S>                                              <C>          <C>           <C>              <C>     
Partners' Capital at December 31, 1995 ......     $ 37,992      $     --      $ 36,219      $  1,608

Net income ..................................       16,353         1,382        10,496           578
Cash distributions ..........................      (20,738)         (869)       (6,650)         (574)
Issuance of Common Units ....................       29,772            --            --            --
Exchange of Common Units for
   Special Units (Note 12) ..................      (29,395)       29,395            --            --
Contribution from General Partner ...........           --            --            --           604
                                                  --------      --------      --------      --------

Partners' Capital at December 31, 1996 ......       33,984        29,908        40,065         2,216
                                                  ========      ========      ========      ========

Net loss ....................................       (7,494)       (1,371)       (5,246)         (288)
Cash distributions ..........................      (19,000)       (3,477)       (6,650)         (554)
                                                  --------      --------      --------      --------

Partners' Capital at December 31, 1997 ......        7,490        25,060        28,169         1,374
                                                  ========      ========      ========      ========

Net loss ....................................       (1,623)         (490)       (1,854)         (100)
Cash distributions ..........................      (19,000)       (3,478)           --          (364)
Acquisition of Common Units for Treasury ....          (66)           --            --            --
Issuance of Common Units ....................       27,671            --            --            --
Issuance of Special Units ...................           --        15,905            --            --
Contribution receivable from Enron ..........           --       (15,905)           --            --
Issuance of Subordinated Units ..............           --            --        12,000            --
Contribution from General Partner ...........           --            --            --           793
                                                  --------      --------      --------      --------

Partners' Capital at December 31, 1998 ......     $ 14,472      $ 21,092      $ 38,315      $  1,703
                                                  ========      ========      ========      ========
</TABLE>


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


                                      F-6

<PAGE>   54


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

     In connection with a reorganization of the business conducted by EOTT
Energy Corp., an indirect wholly-owned subsidiary of Enron Corp. (Enron or the
Parent), into limited partnership form and a concurrent initial public offering
of Common Units of EOTT Energy Partners, L.P. (EOTT or the Partnership)
effective March 24, 1994, the net assets of EOTT Energy Corp. and its
wholly-owned foreign subsidiary, EOTT Energy Ltd., and Enron Products Marketing
Company (EPMC) (collectively referred to as the Predecessor) were acquired by
several operating limited partnerships in which the Partnership is directly or
indirectly the 99% limited partner. EOTT Energy Corp. serves as the General
Partner of the Partnership and its related operating limited partnerships.

     On March 24, 1994, the General Partner completed an initial public offering
of 10 million Common Units at $20.00 per Unit, representing limited partner
interests in the Partnership of approximately 58%. At December 31, 1998 the
General Partner owned an approximate 2% general partner interest in the
Partnership and an approximate 29% subordinated limited partner interest. Enron,
through its ownership of EOTT Common Units, holds an approximate 14% interest in
the Partnership.

     The accompanying consolidated financial statements and related notes
present the financial position as of December 31, 1998 and 1997 for the
Partnership, and the results of its operations, cash flows and changes in
partners' capital for the years ended December 31, 1998, 1997 and 1996.

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

     Unless the context otherwise requires, the term EOTT hereafter refers to
the Partnership and its affiliated limited partnerships.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation. The Partnership owns and operates its assets
through operating limited partnerships. The accompanying financial statements
reflect the combined accounts of the Partnership and the operating partnerships
after elimination of intercompany transactions.

     Nature of Operations. Through its affiliated limited partnerships, EOTT
Energy Operating Limited Partnership, EOTT Energy Canada Limited Partnership,
and EOTT Energy Pipeline Limited Partnership, EOTT is engaged in the purchasing,
gathering, transporting, trading, storage and resale of crude oil and refined
petroleum products and related activities. As discussed further in Note 19, EOTT
has changed the composition of its reportable segments and restated segment
information for previous periods. EOTT's principal business segments are its
North American Crude Oil - East of Rockies gathering and marketing operations,
Pipeline Operations and West Coast Operations. In late 1997, EOTT exited the
East of Rockies refined products business which is discussed further in Note 5.

     Cash Equivalents. EOTT records as cash equivalents all highly liquid 
short-term  investments  having original maturities of three months or less.

     Inventories. In the second quarter of 1996, the Partnership changed its
method of accounting for inventories from the last-in, first-out ("LIFO") method
to the average cost method. The change did not have a significant


                                      F-7

<PAGE>   55

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


effect on the results of operations for 1996. The change was made to conform the
inventory costing method used for financial reporting purposes to that used by
the Partnership to manage its commercial operations.

     Depreciation and Amortization. Depreciation is provided by applying the
straight-line method to the cost basis of property, plant and equipment, less
estimated salvage value, over the estimated useful lives of the assets. Asset
lives are 15 to 20 years for pipeline and gathering facilities, 5 to 10 years
for transportation equipment, 15 to 20 years for barge and terminalling
facilities and 3 to 20 years for other facilities and equipment.

     Goodwill and non-compete agreements are amortized over a period of 3 to 15
years, and are recorded net of their accumulated amortization in Other Assets.
Accumulated amortization of goodwill and non-compete agreements at December 31,
1998 and 1997 was $27.9 million and $25.7 million, respectively.

     Foreign Currency Transactions. Canadian operations represent all of the
foreign activities of EOTT. The U.S. dollar is the functional currency. Foreign
currency transactions are initially translated into U.S. dollars. Gains and
losses resulting therefrom are included in the determination of net income
(loss) in the period in which the exchange rate changes.

     Hedging Activities/Revenue Recognition. EOTT enters primarily into futures
and over-the-counter transactions in an effort to minimize the impact of market
fluctuations on inventories and other contractual commitments. Realized and
unrealized changes in the market value of these transactions, which are entered
into and accordingly designated as hedges, are deferred until the gain or loss
on the hedged transaction is recognized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 80. Any cash flow recognition
resulting from hedging activities is treated in the same manner as the
underlying transaction. Based on the historical correlations between the New
York Mercantile Exchange ("NYMEX") price for West Texas Intermediate crude at
Cushing, Oklahoma and the various trading hubs at which EOTT trades, EOTT
management believes the hedging program has been effective in minimizing the
overall price risk. EOTT continuously monitors the basis differentials between
its various trading hubs and Cushing, Oklahoma to further manage its basis
exposure.

     It is EOTT's policy to seek to maintain at all times purchase and sale
positions that are substantially balanced in order to minimize exposure to price
fluctuations and to lock in margins, although certain risks cannot be fully
hedged. EOTT has certain basis risks (the risk that price relationships between
delivery points, classes of products or delivery periods will change) which
cannot be completely hedged.

     Periodically, EOTT enters into agreements to sell United States dollars for
Canadian dollars to hedge commitments to sell petroleum in the United States
that is purchased in Canada. Any gains or losses resulting from these
commitments are recorded with the purchase and sale of crude oil and are
included in the determination of net income (loss).

     EOTT recognizes revenue on the accrual method based on the right to receive
payment for goods and services delivered to third parties.

     Derivatives. In addition to hedging its lease barrel purchases, EOTT
provided price risk management products to its energy customer base. Activities
for trading purposes were accounted for using the mark-to-market method of
accounting and the gain or loss recorded to cost of sales in the period of
change in the market. Trading activities were immaterial to EOTT's financial
position and results of operations for 1998, 1997 and 1996. Activities for
non-trading purposes consist of transactions entered into to hedge the impact of
market fluctuations on assets, liabilities, or contractual commitments. Changes
in the market value of these transactions


                                      F-8
<PAGE>   56


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


are deferred until the gain or loss on the hedged item is recognized. See Note
17 for further discussion of EOTT's price risk management activities. In
connection with the realignment initiatives discussed in Note 5, EOTT is no
longer providing price risk management products to customers.

     Use of Estimates. The preparation of these financial statements required
the use of certain estimates by management in determining the entity's assets,
liabilities, revenue and expenses. Actual results may differ from these
estimates.

3.   ACQUISITION OF ASSETS

     On February 1, 1997, the Partnership acquired over 400 miles of intrastate
and interstate common carrier pipelines in Louisiana and Texas from CITGO
Pipeline Company. Shipped volumes associated with these assets amount to
approximately 48,000 barrels per day from leases in certain regions of Arkansas,
Louisiana and Texas. Storage associated with the pipeline systems totals
approximately 0.5 million barrels. The purchase price was approximately $12
million and was financed with a note payable from Enron.

     On July 1, 1998, the Partnership acquired crude oil gathering and
transportation assets in West Texas and New Mexico from Koch Pipeline Company,
L.P., a subsidiary of Koch Industries, Inc., and Koch Oil Company, a division of
Koch Industries, Inc. (collectively "Koch"). The asset purchase included
approximately 300 miles of common carrier pipelines, associated storage
facilities for approximately 500,000 barrels and lease purchase contracts for up
to 40,000 lease barrels of crude oil per day. The purchase price was
approximately $28.5 million and was financed with short-term borrowings from
Enron.

     On December 1, 1998, the Partnership acquired certain additional crude oil
gathering and transportation assets in key oil producing regions from Koch. The
asset purchase included approximately 3,900 miles of active crude oil pipelines,
crude oil transport trucks, meter stations, vehicles, storage tanks and lease
purchase contracts for approximately 180,000 lease barrels of crude oil per day
from production in 11 central and western states including Texas, Oklahoma,
Kansas and California (the "Assets"). The transaction almost tripled EOTT's
pipeline mileage and almost doubled crude oil lease barrels under contract. The
total purchase price of the Assets was $235.6 million, which includes
consideration of $184.5 million in cash, 2,000,000 Common Units, 2,000,000
Subordinated Units and $11.4 million in transaction costs. EOTT financed the
majority of the purchase price through borrowings from Enron, consisting of a
$42 million bridge loan due December 31, 1999, $135.7 million of term debt, due
December 31, 1999, and $6.8 million from the Partnership's existing credit
facility with Enron. EOTT also increased its existing credit facility with Enron
to $1 billion in order to provide increased credit support for the Partnership
because of its increased size following the Koch acquisitions. See additional
discussion regarding Enron financing in Note 7.

     Since the Assets were historically used to support Koch's integrated
revenue producing activities, EOTT does not believe that the historical
operational results of the Assets provide a meaningful basis for evaluating the
results of operations that the Assets acquired would have realized had they been
part of EOTT. Therefore, summarized pro forma results of the Partnership as
though the acquisition of Assets had occurred at January 1, 1998 have not been
provided.

4.   EARNINGS PER UNIT

     In the fourth quarter of 1997, EOTT adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128
requires the presentation of "Basic" and "Diluted" earnings per unit in lieu of
"Primary" and "Fully Diluted" earnings per unit and requires restatement of
prior years' net


                                      F-9
<PAGE>   57


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


income (loss) per unit to conform to the new computation and presentation
guidelines. Basic earnings per unit differs from primary earnings per unit in
that it only 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. The impact of the restatement for
all years under SFAS No. 128 was to have two classes of Units (Common Units,
with Special Units considered Common Units, and Subordinated Units) in the basic
earnings per unit calculation and diluted earnings per unit is calculated
assuming the Subordinated Units converted into Common Units.

     Net income (loss) shown in the table below excludes the approximate two
percent interest of the General Partner. Earnings (loss) per unit are calculated
as follows (in millions, except per unit amounts):


<TABLE>
<CAPTION>
                                 1998                            1997                             1996
                    ----------------------------     ----------------------------     ----------------------------
                                   Wtd.                             Wtd.                            Wtd.
                        Net      Average    Per          Net      Average   Per         Net        Average   Per
                       Loss       Units     Unit        Loss       Units    Unit       Income       Units    Unit
                    ---------    -------  ------     ---------    -------  ------     ---------    -------  ------
<S>                 <C>           <C>     <C>        <C>           <C>     <C>        <C>           <C>     <C>    
Basic: (1)
   Common           $ (2,113)     12,097  $(0.17)    $  (8,865)    11,830  $(0.75)    $  17,735     11,830  $ 1.50
   Subordinated     $ (1,854)      7,170  $(0.26)    $  (5,246)     7,000  $(0.75)    $  10,496      7,000  $ 1.50
Diluted (2)         $ (3,967)     19,267  $(0.21)    $ (14,111)    18,830  $(0.75)    $  28,231     18,830  $ 1.50
</TABLE>

(1)     Net income (loss), excluding the 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,
        which is also reflected on the Statement of Partners' Capital, and
        Special Units are considered Common Units. Due to a negative capital
        account balance for the Common Unitholders during the second and third
        quarters of 1998, the loss allocated to the Common Unitholders
        attributable to these periods was reallocated to the remaining
        Unitholders based on their ownership percentage. The allocated loss will
        be recouped by the Unitholders allocated the additional losses through
        future income.

(2)     The diluted earnings (loss) per unit calculation assumes the conversion
        of Subordinated Units into Common Units.


5.   REALIGNMENT INITIATIVES

     In late 1997, EOTT decided to refocus on the core crude business, which
provides substantially all of the gross margin for the Partnership, as well as
improve overall operating efficiencies. As a result, EOTT announced the
following two initiatives. The decision was made to exit the marginal East of
Rockies refined products business in order to focus on business development
opportunities in the crude business, where management believes there is more
potential for growth. The Partnership re-deployed the working capital associated
with the East of Rockies refined products business and intends to sell its three
products terminals in Ohio. In connection with this decision, non-recurring
charges were recorded at December 31, 1997, which included severance costs of
$0.9 million and a $1.5 million impairment of the Ohio products terminals.

     In addition, EOTT streamlined business processes throughout the
organization and realigned reporting responsibilities to improve the
Partnership's overall cost structure. As a result, marketing and administrative
personnel were reduced by approximately 20 percent and an additional
non-recurring severance charge of $1.1 million was recorded at December 31, 1997
pursuant to the existing EOTT Energy Corp. Severance Plan.


                                      F-10
<PAGE>   58

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.   IMPAIRMENT OF ASSETS

     As a result of the decision to exit the East of Rockies refined products
business discussed in Note 5, the Partnership's three Ohio products terminals
are being held for sale. At December 31, 1997, a $1.5 million impairment charge
was recorded.

     During the fourth quarter of 1997, EOTT terminated an information system
development project due to the lack of third party vendor support and
foreseeable operating platform obsolescence. As a result, the Partnership
recorded a $6.5 million impairment charge.

7.   CREDIT RESOURCES AND LIQUIDITY

     In 1995, Enron Corp. agreed to provide credit support (the "Credit
Facility") to the Partnership in the form of guarantees, letters of credit,
loans and letters of indemnity. The total amount of the credit support was $600
million, as amended December 19, 1996, had a maturity of March 31, 1999 and was
replaced with a new facility on December 1, 1998 as discussed below. As amended,
the agreement contained sublimits on the availability of the Credit Facility of
$100 million for working capital loans and $200 million for letters of credit.
Letter of credit fees were based on actual charges by the banks which range from
 .20% - .375% per annum. Interest on outstanding loans was charged at the London
Interbank Offering Rate ("LIBOR") plus 25 basis points per annum. At December
31, 1997, EOTT had a note payable of $39.3 million with Enron under a financing
arrangement for acquisitions and other capital projects (the "Note Payable").
This financing was provided at a rate of LIBOR plus 30 basis points per annum.
The maturity date of the Note Payable was March 31, 1999 and was redeemed and
reissued under the term loan discussed below.

     On December 1, 1998, Enron increased its existing credit facility with the
Partnership to provide additional credit support (the "Enron Facility") in the
form of guarantees, letters of credit and working capital loans through December
31, 2001. The total amount of the Enron Facility is $1.0 billion and contains
sublimits on the availability of the Enron Facility of $100 million for working
capital loans and $900 million for guarantees and letters of credit. Letter of
credit fees are based on actual charges by the banks which range from .20% -
 .375% per annum. Interest on outstanding loans is charged at LIBOR plus 250
basis points per annum.

     The Enron Facility is subject to defined borrowing base limitations
relating to the Partnership's activities and to the maintenance and protection
of the collateral. The Enron Facility permits distributions to Unitholders
subject to certain limitations based on the Partnership's earnings and other
factors. These covenants and restrictions are not expected to materially affect
EOTT's ability to operate the ongoing Partnership business.

     At December 31, 1998, EOTT had an additional $175 million of debt (the
"Term Loan") outstanding with Enron under a financing arrangement to fund a
portion of the cash consideration paid to Koch for the assets purchased in 1998
and to refinance indebtedness incurred in prior acquisitions. The Term Loan
matures on December 31, 1999. The interest rate on the Term Loan is LIBOR plus
300 basis points.

     The Enron Facility and Term Loan are secured by a first priority lien on
and security interest in all receivables and inventory of the Partnership. The
borrowing base is the sum of cash and cash equivalents, specified percentages of
eligible receivables, inventory, and products contracted for or delivered but
not billed. The Enron Facility and Term Loan are non-recourse to the General
Partner and the General Partner's assets. The Partnership is restricted from
entering into additional financing arrangements without the prior approval of
Enron.


                                      F-11
<PAGE>   59
                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In addition, at December 31, 1998, EOTT had $42.0 million of debt
outstanding with Enron under a $100 million bridge loan (the "Bridge Loan") to
finance a portion of the cash consideration for the acquisition of assets from
Koch. The interest rate on the Bridge Loan is initially LIBOR plus 400 basis
points. At the end of each three-month period, the spread on the Bridge Loan
will increase by 25 basis points. The Bridge Loan is unsecured and matures on
December 31, 1999.

     As discussed above, the interim Bridge Loan ($42 million) and Term Loan
($175 million) provided by Enron are due December 31, 1999. The General Partner
intends to refinance the Bridge Loan and Term Loan on a long-term basis before
maturity. The General Partner anticipates that the debt will be refinanced using
a combination of financing alternatives including (a) third party bank debt, (b)
private placement of debt, (c) an offering of high yield debt and/or (d) an
equity offering utilizing some portion of the additional 10 million Common Units
which were authorized to be issued subsequent to year end (See Note 20).

     At December 31, 1998, EOTT had $44.4 million in letters of credit and $28.3
million in loans outstanding under the Enron Facility at an average annual
interest rate of approximately 6.1%. The amount outstanding at December 31, 1998
under the Term Loan was $175.0 million with an average annual interest rate of
8.5% and under the Bridge Loan was $42.0 million with an average annual interest
rate of 9.5%. The actual interest rate may vary based on the length of the
borrowings. In addition, guarantees outstanding totaled $366.4 million of which
$290.9 million were used.

     At December 31, 1997, EOTT had $92.5 million in letters of credit and $70.0
million in loans outstanding under the Credit Facility at an average annual
interest rate of approximately 5.8%. The amount outstanding under the Note
Payable at December 31, 1997 was $39.3 million with an average annual interest
rate of 6.0%. The actual interest rate may vary based on the length of the
borrowings. In addition, guarantees outstanding totaled $402.5 million of which
$292.3 million were used.

     At December 31, 1997, EOTT was in technical violation of the negative
covenants relating to the Tangible Net Worth, Leverage Ratio and Working Capital
Ratio in the Credit Facility and Note Payable due principally to the operating
loss associated with the deterioration of grade and basis differentials in the
crude oil markets. EOTT received a waiver for these violations from Enron.

     The General Partner believes that the Enron Facility, Bridge Loan, Term
Loan and subsequent refinancing discussed above will be sufficient to support
the Partnership's crude oil purchasing activities and working capital and
liquidity requirements. No assurance, however, can be given that the General
Partner will not be required to reduce or restrict the Partnership's gathering
and marketing activities because of limitations on its ability to obtain credit
support and financing for its working capital needs.

     The Partnership's ability to obtain letters of credit to support its
purchases of crude oil or other petroleum products is fundamental to the
Partnership's gathering and marketing activities. Additionally, EOTT has a
significant need for working capital due to the large dollar volume of marketing
transactions in which it engages. Any significant decrease in the Partnership's
financial strength, regardless of the reason for such decrease, may increase the
number of transactions requiring letters of credit or other financial support,
make it more difficult for the Partnership to obtain such letters of credit,
and/or increase the cost of obtaining them. This could in turn adversely affect
the Partnership's ability to maintain or increase the level of its purchasing
and marketing activities or otherwise adversely affect the Partnership's
profitability and Available Cash as defined in EOTT's Partnership Agreement and
amendments thereto.

     Generally, the Partnership will distribute 100% of its Available Cash
within 45 days after the end of each quarter to Unitholders of record and to the
General Partner. Available Cash consists generally of all of the cash receipts
of the Partnership adjusted for its cash distributions and net changes to
reserves. The full definition of 


                                      F-12

<PAGE>   60

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Available Cash is set forth in the Partnership Agreement and amendments thereto,
a form of which is filed or has been previously filed as an exhibit to this
Annual Report on Form 10-K. Distributions of Available Cash to the Subordinated
Unitholders are subject to the prior rights of the Common and Special
Unitholders to receive the Minimum Quarterly Distribution ("MQD") for each
quarter during the Subordination Period, and to receive any arrearages in the
distribution of the MQD on the Common Units for prior quarters during the
Subordination Period.

     MQD is $0.475 per Unit. As discussed in Note 20, Enron has committed to
provide total cash distribution support in an amount necessary to pay MQDs, with
respect to quarters ending on or before December 31, 2001, in an amount up to an
aggregate of $29 million in exchange for Additional Partnership Interests
("APIs"). See further discussion in Note 12 regarding the contribution of $21.9
million in APIs subsequent to year-end.

     The Partnership Agreement authorizes EOTT to cause the Partnership to issue
additional limited partner interests, the proceeds from which could be used to
provide additional funds for acquisitions or other Partnership needs.

     At December 31, 1998, EOTT has outstanding forward commodity repurchase
agreements of approximately $83.0 million. Pursuant to the agreements, which had
terms of thirty days, EOTT repurchased the crude oil inventory on January 20,
1999 for approximately $83.4 million.

8.   INVENTORIES

     Inventories are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                             -------------------
                                                               1998       1997
                                                             --------   --------
<S>                                                          <C>        <C>     
   Crude oil ..............................................  $135,872   $128,347
   Refined products .......................................     1,673     10,918
                                                             --------   --------
      Total ...............................................  $137,545   $139,265
                                                             ========   ========
</TABLE>


9.   PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                 December 31,
                                                             -------------------
Property, Plant and Equipment ("PP&E"), at cost ...........     1998      1997 
                                                             --------   --------
<S>                                                          <C>        <C>     
Land ......................................................  $  3,278   $  3,717
Buildings .................................................     7,505      6,294
Tractors and trailers .....................................    20,492     15,285
Office PP&E, including furniture and fixtures .............    34,023     32,539
Operating PP&E, including pipelines, storage tanks, etc ...   432,509    185,609
                                                             --------   --------
    Total PP&E, at cost ...................................  $497,807   $243,444
                                                             ========   ========
</TABLE>


     Certain assets included in PP&E, primarily pipelines, are affected by
factors, which could affect future cash flows, such as competition,
consolidation in the industry, refinery demand for specific grades of crude oil,
area

                                      F-13

<PAGE>   61


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


market price structures and continued development drilling in certain areas of
the United States. EOTT continuously monitors these factors and pursues
alternative strategies to maintain or enhance cash flows associated with these
assets; however, no assurances can be given that EOTT can mitigate the effects,
if any, on future cash flows related to any changes in these factors.

10.  SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest expense was $8.9 million, $6.2 million and $3.4
million for the years ended December 31, 1998, 1997 and 1996,respectively.

     On January 5, 1996, EOTT repaid the outstanding balance of the financing in
connection with the information systems development. As discussed further in
Note 12, 1,830,011 Common Units issued to Enron in connection with the Amerada
Hess Acquisition were exchanged for Special Units.

     On December 1, 1998, EOTT issued 2,000,000 Common Units and 2,000,000
Subordinated Units to Koch Pipeline as a portion of the consideration paid for
the Assets. See further discussion of the acquisition of Assets in Note 3.

11.  PARTNERS' CAPITAL

     The following is a reconciliation of Units outstanding for the years ended
December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                 Common           Special       Subordinated
                                                  Units            Units            Units   
                                               -----------      -----------     -----------
<S>                                            <C>              <C>             <C>      
Units Outstanding at December 31, 1995 ........ 10,000,000               --       7,000,000


Issuance of Common Units ......................  1,830,011               --              --
Exchange of Common Units for Special Units .... (1,830,011)       1,830,011              -- 
                                               -----------      -----------     -----------

Units Outstanding at December 31, 1996 ........ 10,000,000        1,830,011       7,000,000
                                               ===========      ===========     ===========


Units Outstanding at December 31, 1997 ........ 10,000,000        1,830,011       7,000,000
                                               ===========      ===========     ===========


Acquisition of Common Units for Treasury ......     (4,000)              --              --
Issuance of Common Units to Koch ..............  2,000,000               --              --
Issuance of Special Units to Enron ............         --        1,150,000              --
Issuance of Subordinated Units to Koch ........         --               --       2,000,000
                                               -----------      -----------     -----------

Units Outstanding at December 31, 1998 ........ 11,996,000        2,980,011       9,000,000
                                               ===========      ===========     ===========
</TABLE>


     As discussed further in Note 3, the Partnership issued 2,000,000 Common
Units and 2,000,000 Subordinated Units to Koch in connection with the
acquisition of Assets. In addition, subsequent to year-end as discussed in Note
20, the Partnership obtained approval to issue an additional 10 million Common
Units to raise cash to reduce indebtedness, for acquisitions and for other
Partnership purposes.


                                      F-14

<PAGE>   62


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Pursuant to a Support Agreement, discussed in Note 12, the Partnership
issued 1,150,000 Special Units to Enron in exchange for Enron's commitment to
contribute $21.9 million in APIs outstanding at December 31, 1998 on the earlier
of the date certain proposals were approved by the Unitholders or May 17, 1999.
At December 1, 1998, the Partnership issued 1,150,000 Special Units for a value
of approximately $15.9 million and recorded a contribution receivable from
Enron. As discussed in Note 20, subsequent to year-end, Enron contributed the
$21.9 million in APIs outstanding pursuant to its commitment made in connection
with the Support Agreement. In addition, the Special Units were converted into
Common Units in February 1999.

12.  TRANSACTIONS WITH ENRON AND RELATED PARTIES

     Revenue and Cost of Sales. A summary of revenue and cost of sales with
Enron and its affiliates follows (in thousands):

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                   ----------------------------------
                                     1998         1997         1996
                                   --------     --------     --------
<S>                                <C>          <C>          <C>     
Sales to affiliates ..........     $ 10,648     $ 44,025     $ 41,865
Purchases from affiliates ....     $232,486     $ 71,895     $100,143
</TABLE>

     Revenue in 1998, 1997 and 1996 consists primarily of sales of crude oil to
Enron Reserve Acquisition Corp. and natural gas liquids to Enron Gas Liquids,
Inc. Cost of sales consists primarily of crude oil and condensate purchases from
Enron Oil & Gas Company and Enron Reserve Acquisition Corp. and natural gas
liquids purchases from Enron Gas Liquids, Inc. These transactions in the opinion
of management are no more or less favorable than can be obtained from
unaffiliated third parties.

     Other related party balances related to purchases and sales of goods and
services have been classified as trade and other receivables or trade accounts
payable. Related party receivables at December 31, 1998 and 1997 were $0.2
million and $2.8 million, respectively. Related party payables at December 31,
1998 and 1997 were $1.6 million and $3.6 million, respectively. The payables
primarily represent amounts owed by EOTT on the purchase of crude oil and other
products from Enron affiliates.

     General and Administrative. As is commonly the case with publicly traded
partnerships, EOTT does not directly employ any persons responsible for managing
or operating the Partnership or for providing services relating to day-to-day
business affairs. The General Partner, under a corporate services agreement,
provides services to the Partnership including liability and casualty insurance
and certain data processing services. The General Partner is reimbursed by the
Partnership for these direct and indirect costs. Those costs were $3.3 million,
$3.6 million and $5.0 million for the years ended December 31, 1998, 1997 and
1996, respectively. Management believes that the charges were reasonable.

     Purchase of Common Units. On March 10, 1995, Enron authorized the purchase
of up to $15 million of EOTT units on the open market. As of February 15, 1998,
Enron had purchased 296,800 EOTT Common Units under the purchase program,
excluding the 3.0 million units discussed below.

     Financing of Acquisitions. In February 1997, the Partnership acquired
intrastate and interstate common carrier pipelines from CITGO Pipeline Company
for approximately $12 million which was financed with a note payable from Enron.
As discussed further in Note 3, on July 1, 1998 and December 1, 1998, the
Partnership acquired crude oil gathering and transportation assets from Koch
which was financed primarily with borrowings from Enron.


                                      F-15

<PAGE>   63


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Support Agreement. Pursuant to a Support Agreement dated September 21, 1998
(a) Enron agreed to make loans to the Partnership to fund the cash portion of
the consideration to be paid to Koch for the Assets at closing as discussed in
Note 3 and to refinance indebtedness incurred in a prior acquisition of assets
from Koch on July 1, 1998, (b) Enron agreed to increase and extend the
Partnership's credit facility with Enron to $1 billion through December 31,
2001, (c) the Partnership agreed to issue 1,150,000 Special Units to Enron, (d)
Enron agreed to contribute $21.9 million in APIs to the Partnership on the
earlier of the date certain proposals, discussed further below, are approved by
the Unitholders at a special meeting of Unitholders or May 17, 1999, (e) Enron
agreed that if certain proposals are approved by the Unitholders it will extend
its cash distribution support through the fourth quarter of 2001, and (f) the
Partnership agreed that, if any additional APIs are issued prior to approval of
certain proposals by the Unitholders, it will issue additional Common Units at
$19.00 per share in exchange for such additional APIs. As discussed further in
Note 20, the Partnership obtained Unitholder approval of these proposals
subsequent to year-end. Pursuant to the Support Agreement, EOTT borrowed from
Enron a $42 million Bridge Loan and $175 million Term Loan and entered into a $1
billion credit facility with Enron, to replace its existing $600 million credit
facility.

     Special Units. Effective July 16, 1996, EOTT created a new class of limited
partner interest designated as Special Units and exchanged the Special Units on
a one-for-one basis for the 1,830,011 Common Units issued January 3, 1996 to
Enron in connection with the financing of a previous acquisition. The Special
Units ranked pari passu with the Common Units in all distributions and upon
liquidation and will vote as a class with the Common Units. The exchange
permitted EOTT to avoid the cost of New York Stock Exchange listing of the
Common Units issued to Enron in connection with the financing of the
acquisition, including the cost associated with seeking Unitholder approval for
the listing. In connection with the Support Agreement, the Partnership issued
1,150,000 Special Units to Enron and as discussed further below Enron
contributed $21.9 million APIs to the Partnership subsequent to year end. The
Special Units became convertible into Common Units on a one-for-one basis and
were converted into Common Units during the first quarter of 1999. The Special
Units are considered Common Units for earnings per unit purposes, and the
exchange had no adverse impact on EOTT or on income or distributions per Common
Unit.

     Additional Partnership Interests. On November 14, 1997, February 13, 1998,
May 15, 1998 and August 14, 1998, Enron paid $3.7 million, $3.8 million, $2.8
million and $2.5 million, respectively, in support of EOTT's third and fourth
quarter 1997 and first and second quarter 1998 distributions to its Common and
Special Unitholders and the General Partner. In exchange for the distribution
support, Enron received APIs in the Partnership. APIs have no voting rights and
are non-distribution bearing; however, APIs will be entitled to be redeemed if,
with respect to any quarter, the MQD and any Common Unit Arrearages have been
paid, but only to the extent that Available Cash with respect to such quarter
exceeds the amount necessary to pay the MQD on all Units and any Common Unit
Arrearages. In February 1997, the General Partner amended the Partnership
Agreement to provide that a holder of APIs may, at its option, waive its right
to receive distributions of Available Cash to which it would otherwise be
entitled and to provide that in such case the Partnership may retain such cash
for later distribution to partners or for use in the Partnership's business in
subsequent periods. The Partnership's Available Cash for the fourth quarter of
1996 was substantially in excess of the amount necessary to distribute the MQD
on all outstanding Units, and upon adoption of the amendment, Enron, the holder
of APIs, waived its right to receive such excess cash in redemption of APIs. The
February 1997 amendments to the Partnership Agreement also provided that after
the end of the Subordination Period a holder of Subordinated Units may convert
such Units into Common Units either in whole or in part from time to time. The
amendments also provided that any unconverted Units will be renamed "Class B
Units" after the end of the Subordination Period. Prior to the amendments, the
Partnership Agreement provided that conversion would occur only on an all or
none basis. Enron had committed to support payment of EOTT Common and Special
Unit distributions through March 1999, as necessary (of which $7.1 million was
still available to be advanced at December 31, 1998). As discussed in Note 20,
certain Unitholder approvals were obtained subsequent to year end and as a


                                      F-16
<PAGE>   64

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


result, Enron increased its cash distribution support to $29 million and
extended it through the fourth quarter of 2001 and contributed the $21.9 million
in APIs currently outstanding pursuant to its commitment made in connection with
the Support Agreement.


13.  EMPLOYEE BENEFIT AND RETIREMENT PLANS

     Employees of the General Partner are covered by various retirement, stock
purchase and other benefit plans of Enron. In April 1993, the General Partner
adopted non-qualified benefit plans providing medical, dental, life, accidental
death and dismemberment and long-term disability coverage to employees, with all
related premiums and costs being incurred by the General Partner. Total benefit
costs for 1998 were $6.4 million, including $3.9 million in costs attributable
to health and welfare benefit plans. Total benefit costs for 1997 were $4.2
million including $3.3 million in costs attributable to health and welfare
benefit plans. Total benefit costs for 1996 were $ 6.3 million including $ 3.1
million in costs attributable to health and welfare benefit plans and $1.8
million in costs attributable to a profit sharing contribution to the Enron
Corp. Savings Plan based on 1996 financial results.

     Additionally, the General Partner maintains a variable pay plan based on
earnings before interest, income taxes, depreciation and amortization of which
none was recognized in 1998 and 1997, and $8.9 million in 1996.

     The General Partner's employees continue benefit accrual under the Enron
Cash Balance Plan. All accrued benefits under the Enron Cash Balance Plan will
be preserved in the Enron Cash Balance Plan until the General Partner adopts
separate plans or participating employees are eligible for distribution under
the plan. The General Partner's employees continue to participate in the Enron
Employee Stock Ownership Plan and continue to be eligible for participation in
the Enron Corp. Savings Plan.

     As of September 30, 1998, the most recent valuation date, the plan net
assets, including contributions to the trust during the fourth quarter of 1998,
of the Enron noncontributory defined benefit plan, in which the employees of the
General Partner participate, were less than the actuarial present value of
projected plan benefit obligations by approximately $25.0 million. As of
September 30, 1997, the plan assets, including contributions to the trust during
the fourth quarter of 1997, of the Enron noncontributory defined benefit plan,
in which the employees of the General Partner participate, were less than the
actuarial present value of projected plan benefit obligations by approximately
$6.5 million. The assumed discount rate, rate of return on plan assets and rate
of increases in wages used in determining the actuarial present value of
projected benefits were 6.75%, 10.5%, and 4.0% in 1998, respectively, and 7.25%,
10.5%, and 4.0% in 1997 respectively.

     The General Partner provides certain postretirement medical, life insurance
and dental benefits to eligible employees who retire after January 1, 1994.
Benefits are provided under the provisions of contributory defined dollar
benefit plans for eligible employees and their dependents. EOTT accrues these
postretirement benefit costs over the service lives of employees expected to be
eligible to receive such benefits. Enron retains liability for former employees
of the General Partner who retired prior to January 1, 1994. The accumulated
postretirement benefit obligation ("APBO") existing at December 31, 1998 and
1997 totaled $1.1 million and $0.7 million, respectively. The measurement of the
APBO assumes a 6.75% and 7.25% discount rate in 1998 and 1997, respectively.
EOTT does not currently intend to prefund its obligations under the Enron
postretirement benefit plan.

     EOTT adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," in 1998. This statement changed the disclosure
requirements, but not the method of measurement or


                                      F-17

<PAGE>   65
                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


recognition of these obligations. Prior year disclosures have been restated to
conform with the new disclosure guidelines under SFAS No. 132. The following
table sets forth information related to changes in the benefit obligations,
changes in plan assets, a reconciliation of the funded status of the plans and
components of the expense recognized related to postretirement benefits provided
by EOTT (in thousands):

<TABLE>
<CAPTION>
                                                           1998          1997
                                                          -------      -------
<S>                                                       <C>          <C>    
CHANGE IN BENEFIT OBLIGATION
    Benefit obligation at January 1 .................     $   745      $   776
    Service cost ....................................         114           76
    Interest cost ...................................          73           51
    Plan amendments .................................         147         (161)
    Actuarial loss ..................................          82           21
    Benefits paid ...................................         (52)         (18)
                                                          -------      -------
      Benefit obligation at December 31 .............     $ 1,109      $   745
                                                          =======      =======

CHANGE IN PLAN ASSETS
    Fair value of plan assets at January 1 ..........     $    --      $    --
    Company contributions ...........................          53           18
    Plan participants' contributions ................          --           --
    Benefits paid ...................................         (53)         (18)
                                                          -------      -------
      Fair value of plan assets at December 31 ......     $    --      $    -- 
                                                          =======      =======

RECONCILIATION OF FUNDED STATUS TO BALANCE SHEET
    Funded status at December 31 ....................     $(1,109)     $  (745)
    Unrecognized prior service cost .................         469          358
    Unrecognized actuarial gain .....................        (364)        (468)
                                                          -------      -------
      Accrued benefit cost at December 31 ...........     $(1,004)     $  (855)
                                                          =======      =======
</TABLE>


<TABLE>
<CAPTION>
COMPONENTS OF NET PERIODIC BENEFIT COST                        1998      1997       1996
                                                              -----      -----      -----
<S>                                                           <C>        <C>        <C>  
    Service cost ........................................     $ 114      $  76      $ 107
    Interest cost .......................................        73         51         55
    Amortization of prior service cost ..................        36         27         39
    Recognized net actuarial gain .......................       (22)       (14)       (17)
                                                              -----      -----      -----
      Total net periodic postretirement benefit cost ....     $ 201      $ 140      $ 184
                                                              =====      =====      =====
</TABLE>

     The General Partner provides unemployment, severance and disability-related
benefits or continuation of benefits such as health care and life insurance and
other postemployment benefits. SFAS No. 112 requires the cost of those benefits
to be accrued over the service lives of the employees expected to receive such
benefits. At December 31, 1998 and 1997, the liability accrued was $0.7 million
and $0.5 million, respectively.

     EOTT Energy Corp. Unit Option Plan. In February 1994, the Board of
Directors of the General Partner adopted the 1994 EOTT Energy Corp. Unit Option
Plan (the "Unit Option Plan"), which is a variable compensatory plan. To date,
no compensation expense has been recognized under the Unit Option Plan. Under
the Unit Option Plan, selected employees of the General Partner may be granted
options to purchase Subordinated Units at a price of $15.00 per Unit as
determined by the Compensation Committee of the Board of Directors of the
General Partner. Options granted under the Unit Option Plan vest to the
employees over a five-year service period and will expire on the tenth
anniversary of the date of grant. No options are vested or exercisable prior to
the third anniversary of the grant.


                                      F-18
<PAGE>   66

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following table sets forth the Unit Option Plan transactions for the years
ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                   Number of Unit Options
                                            -----------------------------------
                                               1998         1997         1996
                                            ---------    ---------    ---------
<S>                                         <C>          <C>          <C>      
Outstanding at January 1 ..............     1,155,000    1,155,000    1,175,000
       Granted ........................       400,000           --      160,000
       Exercised ......................            --           --           --
       Forfeited ......................       525,000           --      180,000
                                            ---------    ---------    ---------

Outstanding at December 31 ............     1,030,000    1,155,000    1,155,000
                                            =========    =========    =========

Available for grant at December 31 ....            --           --      395,000
                                            =========    =========    =========
</TABLE>

     In February 1997, the Board of Directors of the General Partner decided
that it would not grant any additional options under the Unit Option Plan. In
May 1998, options forfeited by a former officer were approved for reissuance by
the Board of Directors to the current President and Chief Executive Officer. In
addition, in February 1997, the Unit Option Plan was amended to provide that, if
the General Partner and the option holder agree, any option may be exercised on
a "net" basis with no cash payment (other than for withholding taxes), so that
upon exercise the holder will receive a number of Units with a fair market value
equal to the difference between the fair market value of the Units covered by
the option and the exercise price of the option. As a result, the General
Partner anticipates that the actual number of Units to be issued on exercise of
options will be substantially less than the number of Units covered by
outstanding options.

     In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." This standard establishes a fair
value based method of accounting for stock based compensation plans awarded
after December 31, 1995 and encourages companies to adopt the fair value based
method in SFAS No. 123 in place of the existing accounting method which requires
expense recognition only in situations where stock based compensation plans
award intrinsic value to recipients at the date of grant. Companies that do not
follow SFAS No. 123 for accounting purposes must make annual pro forma
disclosure of its effects. EOTT elected not to adopt the fair value method for
accounting purposes. If EOTT had elected to recognize compensation cost based on
the fair value of the options granted at grant date as prescribed by SFAS No.
123, net income (loss) and net income (loss) per diluted Unit would have been
reduced to the following pro forma amounts (in thousands):

<TABLE>
<CAPTION>
                                                            1998         1997          1996   
                                                          --------     ---------     ---------
<S>                                                       <C>          <C>           <C>      
Net Income (Loss) - as reported .....................     $ (4,067)    $ (14,399)    $  28,809
Net Income (Loss) - pro forma .......................     $ (4,140)    $ (14,491)    $  28,717

Diluted Net Income (Loss) per Unit - as reported ....     $  (0.21)    $   (0.75)    $    1.50
Diluted Net Income (Loss) per Unit - pro forma ......     $  (0.21)    $   (0.75)    $    1.50
</TABLE>


     The fair value of each option grant for 1998 is estimated on the date of
grant using the Cox-Ross-Rubenstein binomial method with the following
assumptions: (1) dividend of $1.90 per Common Unit, (2) expected unit


                                      F-19
<PAGE>   67

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


price volatility of 21.86%, (3) risk-free interest rate of 5.97% and (4)
expected life of option of 2 years. The fair value of each option grant for 1996
is estimated on the date of grant using the Cox-Ross-Rubenstein binomial method
with the following assumptions: (1) dividend of $1.90 per Common Unit, (2)
expected unit price volatility of 24.03%, (3) risk-free interest rate of 6.40%
and (4) expected life of option of 3 years. The weighted average fair value of
options granted during 1998 was $2.119 per unit and during 1996 was $2.065 per
unit.

     EOTT Energy Corp. Long-Term Incentive Plan. In October 1997, the Board of
Directors adopted the EOTT Energy Corp. Long Term Incentive Plan ("Plan"), which
is a variable compensatory plan. Under the Plan, selected key employees are
awarded Phantom Appreciation Rights ("PAR"). Each PAR is a right to receive cash
based on the performance of the Partnership prior to the time the PAR is
redeemed. Performance of the Partnership is measured primarily by calculating
the change in the average of Earnings Before Interest on Debt, related to
acquisitions, Depreciation and Amortization ("EBIDA"), for each of the three
consecutive fiscal years immediately preceding the grant date of the PAR and the
exercise date of the PAR. The Plan has a five-year term beginning January 1,
1997, and PAR awards vest in 25% increments in the four-year period following
the grant year.

The following table sets forth the Long-Term Incentive Plan transactions for the
years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>

                                                Number of PAR
                                           ----------------------
                                              1998        1997
                                           ---------    ---------
<S>                                        <C>          <C>
Outstanding at January 1 ..............      358,600           --
       Granted ........................      467,828      376,600
       Exercised ......................           --           --
       Forfeited ......................      188,500       18,000
                                           ---------    ---------

Outstanding at December 31 ............      637,928      358,600
                                           =========    =========

Available for grant at December 31 ....    1,245,072    1,524,400
                                           =========    =========
</TABLE>


14.  LITIGATION AND OTHER CONTINGENCIES

      EOTT is, in the ordinary course of business, a defendant in various
lawsuits, some of which are covered in whole or in part by insurance. The
Partnership is responsible for all litigation and other claims relating to the
business acquired from the Predecessor, although the Partnership will be
entitled to the benefit of certain insurance maintained by Enron covering
occurrences prior to the closing of the offering. The Partnership believes that
the ultimate resolution of litigation, individually and in the aggregate, will
not have a materially adverse impact on the Partnership's financial position or
results of operations. Various legal actions have arisen in the ordinary course
of business, the most significant of which are discussed below.

     Wyoming Refining Company Matter. EOTT had a possible loss exposure of
approximately $1.47 million as a result of a dispute between Wyoming Refining
Company ("WRC") and the U.S. Minerals Management Service ("MMS"). MMS was
claiming that it was underpaid by WRC for certain Montana crude oil which was
delivered to WRC over a several-year period prior to 1993. On December 14, 1998,
EOTT received a letter from WRC stating that the MMS had withdrawn its claim and
no price adjustments would be necessary.


                                      F-20


<PAGE>   68

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     State of Texas Royalty Suit. EOTT was served on November 9, 1995 with a
petition styled The State of Texas, et al. vs. Amerada Hess Corporation, et al.
The matter was filed in District Court in Lee County, Texas and involves several
major and independent oil companies and marketers as defendants. The plaintiffs
are attempting to put together a class action lawsuit alleging that the
defendants acted in concert to buy oil owned by members of the plaintiff class
in Lee County, Texas, and elsewhere in Texas, at "posted" prices, which the
plaintiffs allege were lower than true market prices. There is not sufficient
information in the petition to fully quantify the allegations set forth in the
petition, but the General Partner believes that any such claims against the
Partnership will prove to be without merit.

     The State of Texas, et al. vs. Amerada Hess Corporation, et al., Cause No.
97-12040; In the 53rd Judicial District Court of Travis County, Texas. This case
was filed on October 23, 1997 in Austin by the Texas Attorney General's office
and involves several major and independent oil companies and marketers as
defendants. EOTT was served on November 18, 1997. The petition states that the
State of Texas brought this action in its sovereign capacity to collect
statutory penalties recoverable under the Texas Common Purchaser Act, arising
from Defendants' alleged willful breach of statutory duties owed to royalty,
overriding royalty and working interest owners of crude oil sold to Defendants,
as well as alleged breach of Defendants' common law and contractual duties. The
Plaintiffs also allege that the Defendants have engaged in discriminatory
pricing of crude oil. This case appears to be similar to the Lee County, Texas
case filed by the State of Texas on November 9, 1995 and disclosed previously.
EOTT and several of the defendants have engaged in settlement negotiations with
the State of Texas, which, if consummated, would result in a dismissal of the
claims of the State.

     McMahon Foundation and J. Tom Poyner vs. Amerada Hess Corporation, et al.
(Including EOTT Energy Operating Limited Partnership), Civil Action No.
H-96-1155; United States District Court, Southern District of Texas, Houston
Division (Texas Federal Anti-Trust Suit). This suit was filed on April 10, 1996
as a class action complaint for violation of the federal antitrust laws and
involves several major and independent oil companies and marketers as
defendants. The relevant area is the entire continental United States, except
for Alaska, New York, Ohio, Pennsylvania, West Virginia and the Wilmington Field
at Long Beach, California. The plaintiffs claim that there is a combination and
conspiracy among the defendant oil companies to fix, depress, stabilize and
maintain at artificially low levels the price paid for the first purchase of
lease production oil sold from leases in which the class members own interests.
This was allegedly accomplished by agreement of the defendants to routinely pay
for first purchases at posted prices rather than competitive market prices and
maintain them in a range below competitive market prices through an undisclosed
scheme of using posted prices in buy/sell transactions among themselves to
create the illusion that posted prices are genuine market prices. The plaintiffs
allege violations from October of 1986 forward. No money amounts were claimed,
and it is not possible to determine any potential exposure until further
discovery is done.

     Randolph Energy, Inc., et al. vs. Amerada Hess Corporation, et al., Civil
Action No. 2:97CV273PG; In the United States District Court for the Southern
District of Mississippi, Jackson Division (Mississippi Federal Anti-Trust Suit).
EOTT received the summons in this matter on August 18, 1997. The case was filed
on August 5, 1997 and is a class action complaint for alleged violation of the
federal antitrust laws which involves several major and independent oil
companies and marketers as defendants. The plaintiffs claim that this litigation
arises out of a combination and conspiracy of the defendant oil companies to
fix, depress, stabilize and maintain at artificially low levels the prices paid
for the first purchase of lease production oil sold from leases in which the
class members own interests. The issues appear to be a duplication of the issues
in the Texas Federal Anti-Trust Suit previously discussed. No money amounts were
claimed, and it is not possible to determine any potential exposure until
further discovery is done.


                                      F-21
<PAGE>   69

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Cameron Parish School Board, et al. vs. Texaco, Inc., et al.; Civil Action
No. C-98-111; In the United States District Court for the Western District of
Louisiana, Lake Charles Division (Louisiana Federal Anti-Trust Suit). This case
was originally filed as a state law claim in Louisiana. When the case was
removed to federal court, the anti-trust claims were added, similar to the
claims made in the Texas Federal Anti-Trust Suit and the Mississippi Federal
Anti-Trust Suit. The plaintiffs claim that this litigation arises out of a
combination and conspiracy of the defendant oil companies to fix, depress,
stabilize and maintain at artificially low levels the prices paid for the first
purchase of lease production oil sold from leases in which the class members own
interests. The issues appear to be a duplication of the issues in the Texas
Federal Anti-Trust Suit and the Mississippi Federal Anti-Trust Suit, both
previously discussed. On October 22, 1998, the judge granted the Plaintiffs'
motion to amend the petition and add additional defendants. The Partnership and
the General Partner were added to the case as defendants at that time. No money
amounts were claimed and it is not possible to determine any potential exposure
until further discovery is done.

     The Texas Federal Anti-Trust Suit, the Mississippi Federal Anti-Trust Suit
and the Louisiana Anti-Trust Suit, along with several other suits to which EOTT
is not a party, were consolidated and transferred to the Southern District of
Texas by Transfer Order dated January 14, 1998. The Judicial Panel on
Multidistrict Litigation made this recommendation due to similarity of issues in
the cases. EOTT and the General Partner, along with a number of other
defendants, have entered into a class-wide settlement with the defendants which
has been preliminarily approved by the Court. A final approval hearing on the
class-wide settlement is scheduled for April 5, 1999.

     Mobil Oil Corporation vs. EOTT Energy Operating Limited Partnership and
EOTT Energy Corporation, Cause No. CV98-04881, M-298th Judicial District Court,
Dallas County, Texas (Mobil Suit). This suit was filed on June 25, 1998 against
both EOTT and the General Partner. Mobil alleged that it overpaid EOTT in
connection with a crude oil contract between the parties. EOTT claimed that it
was entitled to offsets to the overpayment alleged by Mobil and tendered the
amount EOTT believed it owed. The case was settled in November of 1998, with
EOTT tendering cash and services to resolve the matter.

     Assessment for Crude Oil Production Tax from the Comptroller of Public
Accounts, State of Texas. The Partnership received a letter from the
Comptroller's Office dated October 9, 1998 assessing the Partnership for
severance taxes the Comptroller's Office alleges are due on a difference the
Comptroller's Office believes exists between the market value of crude oil and
the value reported on the Partnership's 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 the Partnership's 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 the Texas Federal Anti-Trust Suit, in which the Partnership
is a defendant. The amount of the assessment, including penalty and interest, is
approximately $1.1 million. While the claim is still being reviewed, the General
Partner believes the Partnership should be without liability in this or related
matters.

      General Matters. EOTT believes that it has obtained or has applied for all
of the necessary permits required by federal, state, and local environmental
agencies for the operation of its business. Further, the Partnership believes
that there are no outstanding liabilities or claims relating to environmental
matters, individually and in the aggregate, which would have a material adverse
impact on the Partnership's financial position or results of operations.


                                      F-22
<PAGE>   70


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


15.  COMMITMENTS

     Operating Leases. EOTT leases certain real property, equipment, and
operating facilities under various operating leases. Future non-cancelable
commitments related to these items at December 31, 1998, are summarized below
(in thousands):

<TABLE>
<S>                                      <C>
         1999..........................  $ 6,805
         2000..........................    4,617
         2001..........................    3,171
         2002..........................    2,426
         2003..........................      718
           Later years.................      580
</TABLE>

     Total lease expense incurred was $10.9 million, $10.3 million and $10.3
million for the years ended December 31, 1998, 1997 and 1996, respectively.

16.  OTHER INCOME (EXPENSE), NET

     The components of other income (expense), net, are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                     Year Ended December 31, 
                                                --------------------------------
                                                  1998       1997         1996
                                                -------     -------     -------
<S>                                             <C>         <C>         <C>     
Loss on foreign currency transactions ......    $(1,055)    $(1,488)    $   (83)
Gain (loss) on disposal of fixed assets ....        (66)        503         (80)
Rental income ..............................         60          90          69
Litigation settlements and reserves ........       (969)        130         203
Other ......................................        225          (1)         49
                                                -------     -------     -------
   Total ...................................    $(1,805)    $  (766)    $   158
                                                =======     =======     =======
</TABLE>

17.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following disclosures on the estimated fair value of financial
instruments are presented in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments" and SFAS No. 119,
"Disclosures About Derivative Financial Instruments and Fair Value of Financial
Instruments." Fair value as defined in SFAS No. 107 represents the amount at
which the instrument could be exchanged in a current transaction between willing
parties. The estimated fair value amounts have been determined by EOTT using
available market data and valuation methodologies. Judgment is required in
interpreting market data and the use of different market assumptions or
estimation methodologies may affect the estimated fair value amounts.

     Credit Risk. In the normal course of business, EOTT extends credit to
various companies in the energy industry. Within this industry, certain elements
of credit risk exist and may, to varying degrees, exceed amounts recognized in
the accompanying consolidated financial statements, which may be affected by
changes in economic or other external conditions and may accordingly impact
EOTT's overall exposure to credit risk. EOTT's exposure to credit loss in the
event of nonperformance is limited to the book value of the trade commitments
included in the accompanying Consolidated Balance Sheets. EOTT manages its
exposure to credit risk through credit analysis, credit approvals, credit limits
and monitoring procedures. Further, the General


                                      F-23
<PAGE>   71


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Partner believes that its portfolio of receivables is well diversified and that
the allowance for doubtful accounts is adequate to absorb any potential losses.
EOTT requires collateral in the form of letters of credit for certain of its
receivables.

     Market Risk. EOTT trading and non-trading transactions give rise to market
risk, which represents the potential loss that can be caused by a change in the
market value of a particular commitment. EOTT closely monitors and manages its
exposure to market risk to ensure compliance with EOTT's stated risk management
policies which are regularly assessed to ensure their appropriateness given
EOTT's objectives, strategies and current market conditions.

     The following table presents the carrying amounts and estimated fair values
of the Partnership's financial instruments at December 31, 1998 and 1997 (in
millions):

<TABLE>
<CAPTION>
                                           1998                1997          
                                    ------------------  -----------------
                                    Carrying    Fair    Carrying    Fair
                                     Amount     Value    Amount     Value
                                    --------   ------   --------   -------
<S>                                 <C>        <C>      <C>        <C>
Financial assets
  Cash and cash equivalents .....    $  3.0    $  3.0    $  3.7    $  3.7
  Foreign currency contracts ....        --      12.2        --      22.9

Financial liabilities
  Short-term borrowings .........    $ 28.3    $ 28.3    $ 70.6    $ 70.6
  Bridge loan ...................      42.0      42.0        --        --
  Term loan .....................     175.0     175.0        --        --
  Repurchase agreements .........      83.0      83.0        --        --
  Note payable ..................        --        --      39.3      39.3
  Foreign currency contracts ....        --      12.2        --      22.9
  Long-term liabilities .........        --        --       0.3       0.3
</TABLE>


     The following methods and assumptions were used to estimate the fair value
of financial instruments:

     Cash and cash equivalents, short-term borrowings, note payable, bridge
loan, term loan and repurchase agreements. Fair value for these current assets
and liabilities was considered to be the same as the carrying amounts because of
their liquidity and market-based interest where applicable.

     Foreign currency contracts. Quoted market prices are used in determining
the fair value of financial instruments held or issued. If quoted prices are not
available, fair values are estimated on the basis of pricing models or quoted
prices for financial instruments with similar characteristics.

     Long-term liabilities. These liabilities represent long-term borrowings on
which the carrying amounts approximate fair value because the effective annual
interest rates of these instruments reflect interest rates at December 31, 1997.

OTHER THAN TRADING ACTIVITIES

     EOTT enters into forwards, futures and other contracts to hedge the impact
of market fluctuations on assets, lease purchases or other contractual
commitments. However, EOTT does not consider its commodity futures and forward
contracts to be financial instruments since these contracts require or permit
settlement by the delivery of the underlying commodity, and thus are not subject
to the provisions of SFAS No. 119. Changes in the market


                                      F-24
<PAGE>   72


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


value of these transactions are deferred until the gain or loss is recognized on
the hedged transaction at which time such gains and losses are recognized
through cost of sales.

     EOTT routinely enters into foreign currency futures contracts to hedge
foreign currency exposure from commercial transactions relating to current month
crude purchases and sales as well as fixed price swaps. These contracts
generally mature in one year or less. At December 31, 1998 and 1997, foreign
currency contracts with a notional principal amount of $11.7 million and $22.9
million, respectively, were outstanding, having exchange rates which
approximated current market exchange rates.

TRADING ACTIVITIES

     Prior to 1998, EOTT offered limited price risk management products to the
energy sector which were not material to EOTT's financial position or results of
operations. These products include swap agreements which require payments to (or
receipt of payments from) counterparties based on the differential between a
fixed and variable price for the commodities specified, options and other
contractual arrangements. EOTT accounted for these activities using the
mark-to-market method of accounting and recorded the gain or loss as a cost of
sales in the period of the change in the market with an offsetting entry to
trade accounts receivable or payable as appropriate. In connection with the
realignment initiatives discussed in Note 5, EOTT ceased providing price risk
management products to its customers.

18.  NEW ACCOUNTING STANDARDS

     SFAS No. 130, "Comprehensive Income" requires the presentation of
comprehensive income which is traditional net income (loss) adjusted for certain
items that previously were only reflected as direct charges or credits to
equity. EOTT adopted SFAS No. 130 in the first quarter of 1998. For the years
ended December 31, 1998, 1997 and 1996 traditional net income (loss) and
comprehensive income (loss) are the same.

     SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires that segment reporting for public companies be measured
the same way management identifies and evaluates information internally. EOTT
adopted SFAS No. 131 for year end 1998 reporting and restated prior year
information based on the following reportable business segments - North American
Crude Oil - East of Rockies, Pipeline Operations and West Coast Operations. See
Note 19.

     In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use", which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. The statement requires companies to
capitalize certain costs that are incurred in developing or designing computer
software. This statement is effective for financial statements beginning after
December 15, 1998. The impact of this new standard will not have a significant
effect on EOTT's financial position or results of operations.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, 


                                      F-25
<PAGE>   73


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


designate, and assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. The standard cannot be applied retroactively but early adoption is
permitted. EOTT has not yet determined the impact of adopting SFAS No. 133;
however, this standard could increase volatility in earnings and partners'
capital, through other comprehensive income.

     In December 1998, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." The Issue 98-10 is effective for fiscal years
beginning after December 15, 1998, and requires energy trading contracts (as
defined) to be recorded at fair value on the balance sheet, with the change in
fair value included in earnings. The consensus requires the effect of initial
application of Issue 98-10 to be recorded as a cumulative effect of a change in
accounting principle effective January 1, 1999, for calendar year companies.
Management has determined that the cumulative effect of the adoption of the new
accounting standard will be an increase in net income which will not be in
excess of $2.0 million.

19.  BUSINESS SEGMENT INFORMATION

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
standard requires that companies report certain information about operating
segments in complete sets of financial statements and in condensed financial
statements of interim periods for fiscal years beginning after December 15,
1997. EOTT adopted this statement for the fiscal year ending December 31, 1998.

     EOTT has changed the composition of its reportable segments and has
restated the corresponding items of segment information for earlier periods.
EOTT has three reportable segments, which management believes are necessary to
make decisions about resources to be allocated and assess its performance: North
American Crude Oil - East of Rockies, Pipeline Operations and West Coast
Operations. The North American Crude Oil - East of Rockies segment primarily
purchases, gathers, transports and markets crude oil. The Pipeline Operations
segment operates approximately 5,300 active miles of common carrier pipelines
operated in 15 states. The West Coast Operations include crude oil gathering and
marketing, refined products marketing and a natural gas liquids business.

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as discussed in Note 2. EOTT
evaluates performance based on operating income (loss).

     EOTT accounts for intersegment revenue and transfers between North American
Crude Oil - East of Rockies and West Coast Operations as if the sales or
transfers were to third parties, that is, at current market prices. Intersegment
revenues for Pipeline Operations are based on published pipeline tariffs.


                                      F-26
<PAGE>   74


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FINANCIAL INFORMATION BY BUSINESS SEGMENT
(In Thousands)
<TABLE>
<CAPTION>
                                           NORTH
                                          AMERICAN                       WEST        CORPORATE
                                         CRUDE OIL      PIPELINE        COAST           AND
                                           - EOR       OPERATIONS     OPERATIONS      OTHER (b)     CONSOLIDATED
                                        -----------    -----------    -----------    -----------    ------------
<S>                                     <C>            <C>            <C>            <C>             <C>        
YEAR ENDED DECEMBER 31, 1998

Revenue from external customers ....    $ 4,590,810    $     7,036    $   586,169    $   110,682     $ 5,294,697
Intersegment revenue (a) ...........         47,008         24,516          3,900        (75,424)             --
                                        -----------    -----------    -----------    -----------     -----------
   Total revenue ...................      4,637,818         31,552        590,069         35,258       5,294,697
                                        -----------    -----------    -----------    -----------     -----------
Gross margin .......................         92,071         30,856          9,698            (20)        132,605
                                        -----------    -----------    -----------    -----------     -----------
Operating income (loss) ............         28,050          4,285            199        (25,305)          7,229
Other expense ......................             --             --             --        (11,296)        (11,296)
                                        -----------    -----------    -----------    -----------     -----------
Net income (loss) ..................         28,050          4,285            199        (36,601)         (4,067)
                                        -----------    -----------    -----------    -----------     -----------
Long-lived assets ..................         83,866        270,739         25,335          5,299         385,239
                                        -----------    -----------    -----------    -----------     -----------
Total assets .......................        608,655        279,315         60,677         17,173         965,820
                                        -----------    -----------    -----------    -----------     -----------
Additions to long-lived assets .....         18,398        222,121         23,275          2,775         266,569
                                        -----------    -----------    -----------    -----------     -----------
Depreciation and amortization ......          9,263          9,287            470          1,931          20,951
                                        -----------    -----------    -----------    -----------     -----------
----------------------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31, 1997

Revenue from external customers ....    $ 6,070,799    $     5,687    $   809,466    $   760,147     $ 7,646,099
Intersegment revenue (a) ...........          1,795         13,717          1,783        (17,295)             -- 
                                        -----------    -----------    -----------    -----------     -----------
   Total revenue ...................      6,072,594         19,404        811,249        742,852       7,646,099
                                        -----------    -----------    -----------    -----------     -----------
Gross margin .......................         82,562         19,539          9,342          1,602         113,045
                                        -----------    -----------    -----------    -----------     -----------
Operating income (loss) ............         19,506          1,821             58        (28,977)         (7,592)
Other expense ......................             --             --             --         (6,807)         (6,807)
                                        -----------    -----------    -----------    -----------     -----------
Net income (loss) ..................         19,506          1,821             58        (35,784)        (14,399)
                                        -----------    -----------    -----------    -----------     -----------
Long-lived assets ..................         61,032         76,276          2,486          6,426         146,220
                                        -----------    -----------    -----------    -----------     -----------
Total assets .......................        604,663         80,528         63,279         34,451         782,921
                                        -----------    -----------    -----------    -----------     -----------
Additions to long-lived assets .....          4,923         13,349            234          4,331          22,837
                                        -----------    -----------    -----------    -----------     -----------
Depreciation and amortization ......          7,807          6,030            500          2,181          16,518
                                        -----------    -----------    -----------    -----------     -----------
----------------------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31, 1996

Revenue from external customers ....    $ 6,027,578    $     4,137    $   769,416    $   668,599     $ 7,469,730
Intersegment revenue (a) ...........          1,451         10,187          1,471        (13,109)             -- 
                                        -----------    -----------    -----------    -----------     -----------
   Total revenue ...................      6,029,029         14,324        770,887        655,490       7,469,730
                                        -----------    -----------    -----------    -----------     -----------
Gross margin .......................        117,255         13,916         15,523          2,833         149,527
                                        -----------    -----------    -----------    -----------     -----------
Operating income (loss) ............         47,066          1,778          6,835        (23,817)         31,862
Other expense ......................             --             --             --         (3,053)         (3,053)
                                        -----------    -----------    -----------    -----------     -----------
Net income (loss) ..................         47,066          1,778          6,835        (26,870)         28,809
                                        -----------    -----------    -----------    -----------     -----------
Long-lived assets ..................         54,256         72,200          2,919         17,324         146,699
                                        -----------    -----------    -----------    -----------     -----------
Total assets .......................        786,933         85,123         82,447         71,694       1,026,197
                                        -----------    -----------    -----------    -----------     -----------
Additions to long-lived assets .....          3,094          1,147            243          2,239           6,723
                                        -----------    -----------    -----------    -----------     -----------
Depreciation and amortization ......          8,884          5,133            520          1,183          15,720
                                        -----------    -----------    -----------    -----------     -----------
----------------------------------------------------------------------------------------------------------------
</TABLE>


     (a)  Intersegment sales for North American Crude Oil - EOR and West Coast
          Operations are made at prices comparable to those received from
          external customers. Intersegment sales for Pipeline Operations are
          based on published pipeline tariffs.
     (b)  Corporate and Other also includes the East of Rockies refined products
          business and intersegment eliminations.


                                      F-27
<PAGE>   75

                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


20.  SUBSEQUENT EVENTS

     On January 19, 1999, the Board of Directors of EOTT Energy Corp., as
General Partner, declared the Partnership's regular quarterly cash distribution
of $0.475 per Unit for the period October 1, 1998 through December 31, 1998. The
total distribution of approximately $6.9 million was paid on February 12, 1999
to the General Partner and all Common and Special Unitholders of record as of
the close of business on January 29, 1999. The fourth quarter distribution was
paid without using distribution support from Enron.

     On February 12, 1999, the Partnership obtained approval of proposals
presented at a Special Meeting of Unitholders. Approval of these proposals,
among other things, (a) authorized the Partnership to issue an additional 10
million Common Units to raise cash to reduce indebtedness, for acquisitions and
other Partnership purposes, (b) changed the terms of the Special Units so that
they became convertible into Common Units and (c) resulted in an increase in
Enron's distribution support to $29 million and an extension of that support
through the fourth quarter of 2001. As a result of the approval of the
proposals, Enron contributed the $21.9 million in APIs outstanding pursuant to
its commitment made in connection with the Support Agreement discussed in Note
12.


                                      F-28
<PAGE>   76


                           EOTT ENERGY PARTNERS, L.P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


20.  QUARTERLY FINANCIAL DATA (UNAUDITED)
     (In Thousands, Except Per Unit Amounts)

<TABLE>
<CAPTION>
                                                    FIRST          SECOND          THIRD         FOURTH
                                                    QUARTER        QUARTER        QUARTER      QUARTER (1)      TOTAL
                                                  ----------     ----------     ----------     -----------    ----------
<S>                                               <C>            <C>            <C>            <C>            <C>       
1998
   Revenues ..................................    $1,339,404     $1,231,875     $1,295,652     $1,427,766     $5,294,697

   Gross margin ..............................        27,547         29,156         33,736         42,166        132,605

   Operating income (loss) ...................          (357)         1,157          1,153          5,276          7,229

   Net income (loss) .........................        (1,723)        (1,274)        (1,806)           736         (4,067)

   Basic net income (loss) per Unit
     Common ..................................         (0.09)         (0.06)         (0.03)          0.01          (0.17)
     Subordinated ............................         (0.09)         (0.07)         (0.20)          0.08          (0.26)

   Diluted net income (loss) per Unit ........         (0.09)         (0.07)         (0.09)          0.03          (0.21)

   Cash distributions per Common Unit (2) ....         0.475          0.475          0.475          0.475           1.90

------------------------------------------------------------------------------------------------------------------------

1997

   Revenues ..................................    $2,279,168     $1,933,011     $1,774,230     $1,659,690     $7,646,099

   Gross margin ..............................        34,918         23,236         26,788         28,103        113,045

   Operating income (loss) (3) ...............         5,343         (4,681)          (370)        (7,884)        (7,592)

   Net income (loss) .........................         3,914         (6,191)        (1,911)       (10,211)       (14,399)

   Basic net income (loss) per Unit
     Common ..................................          0.20          (0.32)         (0.10)         (0.53)         (0.75)
     Subordinated ............................          0.20          (0.32)         (0.10)         (0.53)         (0.75)

   Diluted net income (loss) per Unit ........          0.20          (0.32)         (0.10)         (0.53)         (0.75)

   Cash distributions per Common Unit (2) ....         0.475          0.475          0.475          0.475           1.90

------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Fourth quarter 1998 amounts include the acquisition of the Assets from Koch
     on December 1, 1998. See Note 3 to the Consolidated Financial Statements.
(2)  Cash distributions are shown in the quarter paid and are based on the prior
     quarter's earnings. 
(3)  Fourth quarter 1997 operating income (loss) includes non-recurring charges
     of (i) $6.5 million for the impairment of an information system development
     project, (ii) $1.5 million impairment of three Ohio products terminals held
     for sale and (iii) $2.0 million of severance costs related to the exit of
     the East of Rockies refined products business and corporate realignment.
     See additional discussion in Notes 5 and 6 to the Consolidated Financial
     Statements.


                                      F-29

<PAGE>   77
                                                                     SCHEDULE II

                           EOTT ENERGY PARTNERS, L.P.
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
=========================================================================================
                                           Balance at  Charged to               Balance
                                           Beginning   Costs and    Deductions   at End
                                           of Period   Expenses     and Other   of Period  
                                           ----------  ----------   ----------  ---------
<S>                                         <C>         <C>         <C>          <C>    
Year ended December 31, 1996
   Allowance for Doubtful Accounts ....     $ 2,397     $   700     $  (831)     $ 2,266


Year ended December 31, 1997
   Allowance for Doubtful Accounts ....     $ 2,266     $    --     $  (606)     $ 1,660


Year ended December 31, 1998
   Allowance for Doubtful Accounts ....     $ 1,660     $   700     $  (500)     $ 1,860
   Litigation Reserves ................     $    --     $ 1,400     $    --      $ 1,400
   Safety and Environmental ...........     $    --     $    --     $ 1,000      $ 1,000
</TABLE>


                                       S-1
<PAGE>   78


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
  Exhibit
   Number                          Description
  -------                          -----------
<S>           <C>
    3.1   --  Form of Partnership  Agreement of EOTT Energy  Partners, L.P.
              (incorporated by reference to Exhibit 3.1 to Registration 
              Statement, File No. 33-73984)

    3.2   --  Amendment No. 1 dated as of August 8, 1995, to the Amended and
              Restated Agreement of Limited Partnership of EOTT Energy Partners,
              L.P. (incorporated by reference to Exhibit 3.2 to Annual Report on
              Form 10-K for the Year Ended December 31, 1995)

    3.3   --  Amendment No. 2 dated as of July 16, 1996, to the Amended and
              Restated Agreement of Limited Partnership of EOTT Energy Partners,
              L.P. (incorporated by reference to Exhibit 3.3 to Quarterly Report
              on Form 10-Q for the Quarter Ended June 30, 1996)

    3.4   --  Amendment No. 3 dated as of February 13, 1997, to the Amended
              and Restated Agreement of Limited Partnership of EOTT Energy
              Partners, L.P.

*   3.5   --  Amendment  No. 4 dated as of November 30, 1998, to the Amended and
              Restated Agreement of Limited Partnership of EOTT Energy Partners,
              L.P.

*   3.6  --   Amendment  No. 5 dated as of December 7, 1998, to the Amended and
              Restated Agreement of Limited Partnership of EOTT Energy Partners,
              L.P.

   10.04 --   Form of Corporate Services Agreement between Enron Corp. and EOTT 
              Energy Corp. (incorporated by reference to Exhibit 10.08 to
              Registration Statement, File No. 33-73984)

   10.05 --   Form of Contribution and Closing Agreement between EOTT Energy 
              Corp. and EOTT Energy Partners, L.P. (incorporated by reference to
              Exhibit 10.09 to Registration Statement, File No. 33-73984)

   10.06 --   Form of Ancillary Agreement by and among Enron Corp., EOTT
              Energy Partners, L.P., EOTT Energy Operating Limited Partnership,
              EOTT Energy Pipeline Limited Partnership, EOTT Energy Canada
              Limited Partnership, and EOTT Energy Corp. (incorporated by
              reference to Exhibit 10.10 to Registration Statement, File No.
              33-73984)

   10.07 --   Agreement to Increase and Extend Distribution Support dated
              August 8, 1995, amending the Ancillary Agreement referenced in
              10.06 (incorporated by reference to Exhibit 10.07 to Annual Report
              on Form 10-K for the Year Ended December 31, 1995)
</TABLE>


<PAGE>   79


<TABLE>
<S>           <C>

   10.08 --   Form of Amended and Restated Agreement of Limited Partnership
              of EOTT Energy Operating Limited Partnership (incorporated by
              reference to Exhibit 10.11 to Registration Statement, File No.
              33-73984)

   10.09 --   EOTT Energy Corp. Annual Incentive Plan (incorporated by reference
              to Exhibit 10.14 to Registration Statement, File No. 33-73984)

   10.10 --   EOTT Energy Corp. 1994 Unit Option Plan and the related Option 
              Agreement (incorporated by reference to Exhibit 10.15 to
              Registration Statement, File No. 33-73984)

   10.11 --   EOTT Energy Corp. Severance Pay Plan (incorporated by reference to
              Exhibit 10.16 to Registration Statement, File No. 33-73984)

   10.12 --   Executive Employment Agreement effective March 24, 1994 between 
              EOTT Energy Corp. and executive officers with employment
              agreements. (incorporated by reference to Exhibit 10.05 to
              Registration Statement, File No. 33-73984)

   10.13 --   Credit Agreement dated as of June 30, 1995 between EOTT Energy
              Operating Limited Partnership, as Borrower, and Enron Corp., as
              Lender (incorporated by reference to Exhibit 10.13 to Annual
              Report on Form 10-K for the Year Ended December 31, 1995)

   10.14 --   Credit Agreement dated as of January 3, 1996 between EOTT
              Energy Operating Limited Partnership, as Borrower, and Enron
              Corp., as Lender (incorporated by reference to Exhibit 10.14 to
              Annual Report on Form 10-K for the Year Ended December 31, 1995)

   10.15 --   Amendment dated December 19, 1996 to the Credit Agreement dated as
              of June 30, 1995 between EOTT Energy Operating Limited Partnership
              as Borrower, and Enron Corp., as Lender

   10.16 --   Amendment dated February 25, 1997 to the Credit Agreement dated as
              of June 30, 1995 between EOTT Energy Operating Limited Partnership
              as Borrower, and Enron Corp., as Lender

   10.17 --   Amendment dated February 25, 1997 to the Credit Agreement dated as
              of January 3, 1996 between EOTT Energy Operating Limited
              Partnership as Borrower, and Enron Corp., as Lender

   10.18 --   Amendment dated as of February 13, 1997, to the EOTT Energy Corp.
              1994 Unit Option Plan

   10.19 --   EOTT Energy Corp. Long Term Incentive Plan (incorporated by
              reference to Exhibit 10.19 to Quarterly Report on Form 10-Q for
              the Quarter Ended September 30, 1997)
</TABLE>


<PAGE>   80


<TABLE>
<S>           <C>
   10.20 --   Agreement to Extend Distribution Support dated November 5, 1997,
              amending the Agreement referenced in 10.07

   10.21      Form of Executive Employment Agreement between EOTT Energy Corp.
              and Michael D. Burke

   10.22      Support Agreement dated September 21, 1998 between EOTT Energy
              Partners, L.P., EOTT Energy Operating Limited Partnership and
              Enron Corp.

** 10.23      Crude Oil Supply and Terminalling Agreement dated as of December
              1, 1998 between Koch Oil Company and EOTT Energy Operating Limited
              Partnership

*  10.24      Amended and Restated Credit Agreement as of December 1, 1998
              between EOTT Energy Operating Limited Partnership, as Borrower,
              and Enron Corp., as Lender

*  10.25      Amended and Restated Term Credit Agreement as of December 1, 1998
              between EOTT Energy Operating Limited Partnership, as Borrower,
              and Enron Corp., as Lender

*  10.26      Amendment dated March 17, 1999 to the Amended and Restated Credit
              Agreement as of December 1, 1998 between EOTT Energy Operating 
              Limited Partnership, as Borrower, and Enron Corp., as Lender

*  10.27      Amendment dated March 17, 1999 to the Amended and Restated Term 
              Credit Agreement as of December 1, 1998 between EOTT Energy
              Operating Limited Partnership, as Borrower, and Enron Corp., as
              Lender

** 10.28      Amendment dated December 1, 1998 to the Crude Oil Supply and
              Terminalling Agreement dated as of December 1, 1998 between Koch
              Oil Company and EOTT Energy Operating Limited Partnership

    21.1      Subsidiaries of the Registrant (incorporated by reference to
              Exhibit 21.1 to Annual Report on Form 10-K for the Year Ended
              December 31, 1994)

*   23.1      Consent of Arthur Andersen LLP

*   24        Power of Attorney

*   27.1      Financial Data Schedule
</TABLE>

----------------

*   Filed herewith. 
**  Filed herewith; however, confidential treatment has been requested with
    respect to certain portions of exhibit.