Formation Agreement Dated 8/10/2000

FORMATION AGREEMENT


BETWEEN


PANHANDLE EASTERN PIPE LINE COMPANY


AND


MARATHON ASHLAND PETROLEUM LLC


AND


TE PRODUCTS PIPELINE COMPANY, LIMITED PARTNERSHIP


FORMATION AGREEMENT


This FORMATION AGREEMENT (this "Agreement") dated as of August 10, 2000 is made by and between Panhandle Eastern Pipe Line Company, a Delaware corporation ("PEPL"), Marathon Ashland Petroleum LLC, a Delaware limited liability company ("MAP"), and TE Products Pipeline Company, Limited Partnership, a Delaware limited partnership ("TEPPCO").


W I T N E S S


WHEREAS, March 9, 2000, PEPL, MAP and TEPPCO entered into a non-binding Memorandum of Understanding to form a limited liability company to own, construct and operate certain pipeline and related assets as a common carrier;


WHEREAS, PEPL, MAP and TEPPCO desire to set forth their agreement concerning the formation of Centennial Pipeline LLC, a Delaware limited liability company (the "Company"), the acquisition and construction of certain assets in connection with the Centennial Line and related facilities;


NOW, THEREFORE, in consideration of the premises and the mutual covenants of PEPL, MAP and TEPPCO, and upon the terms and subject to the conditions hereinafter set forth, PEPL, MAP and TEPPCO, intending to be legally bound, agree as follows:


ARTICLE I


DEFINED TERMS


1.1 DEFINED TERMS. Capitalized terms used in this Agreement shall have the meanings set forth in Exhibit A attached.


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ARTICLE II


SCHEDULE OF EVENTS


2.1 ACTIONS TO DATE. On March 9, 2000, the Parties signed a non-binding Memorandum of Understanding to form a limited liability company to own, construct and operate a refined petroleum products pipeline to extend from Beaumont, Texas to Bourbon, Illinois. On March 9, 2000, PEPL, through its Affiliate, filed with the FERC for abandonment of the Trunkline 26 from natural gas service (the "Abandonment Proceedings"). On May 17, 2000, the Parties signed an agreement confirming the sharing mechanism for certain costs incurred prior to the execution of this Agreement (the "Cost Sharing Agreement").


2.2 LIMITED LIABILITY COMPANY FORMATION. On March 27, 2000, MAP formed Centennial Pipeline LLC as a single member limited liability company pursuant to the Delaware Act. Upon execution of this Agreement, the Parties agree to execute and deliver the Amended and Restated Limited Liability Company Agreement in the form attached as Schedule 2.2 (the "LLC Agreement").


2.3 FERC ABANDONMENT PROCEEDINGS. The Parties desire that the order of the FERC issued in the Abandonment Proceedings (the "Abandonment Order") become final and no longer subject to rehearing on or before June 30, 2001 (the "Order Date").


(a) If the Abandonment Order has not become final and no longer subject to rehearing by the Order Date, then any Party may terminate this Agreement. Such termination will be by written notice to the other Parties given within the five (5) Business Day period immediately following the Order Date. The failure of a Party to provide such notice will be deemed to be a waiver by such Party of the provisions of this Section 2.3(a) except as provided in Section 2.3(b).


(b) In the absence of such termination, the Order Date will automatically be extended for successive periods of two (2) months. At the end of each such extension period any Party again may terminate this Agreement as provided in Section 2.3(a).


(c) When the Abandonment Order is issued, the Parties will have twenty (20) days in which to determine whether the Abandonment Order is acceptable (such twentieth day being the


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"Election Date"). For the purposes of this section, the Abandonment Order shall be deemed "acceptable" unless it may in the reasonable judgment of a Party have a material adverse effect on such Party or the Company.


(d) No later than the Election Date, each Party will provide written notice to the other Parties whether the Abandonment Order is acceptable or unacceptable to such Party. The failure of a Party to timely provide such notice will be deemed to be a notice that the Abandonment Order is acceptable to such Party.


(e) If the Abandonment Order is unacceptable to any Party, then the Parties agree to proceed in accordance with Section 2.6(b) of this Agreement.


2.4 TEPPCO'S MARKET BASED RATES. On May 11, 1999, TEPPCO filed with the FERC for the establishment of market based tariff rates for refined product movements on its mainline system (the "TEPPCO Market Based Rates"). If TEPPCO has not received an order from the FERC granting such market based rates as to all of the origin and destination points listed in Schedule 2.4 (the "Tariff Schedules") five (5) days prior to the Election Date, then TEPPCO may, no later than the Election Date, provide written notice to the other Parties of its election to terminate this Agreement. The failure of TEPPCO to timely provide such notice of termination will be deemed to be a waiver by TEPPCO of the provisions of this Section.


2.5 FINANCING ARRANGEMENTS.


(a) The Parties anticipate financing up to One Hundred Fifty Million Dollars ($150,000,000.00) of the costs for obtaining rights of way, constructing the new line segment from near Beaumont, Texas to Longville, Louisiana, converting Trunkline 26, constructing the terminal at Creal Springs, Illinois and purchasing and maintaining line fill and providing related working capital. It is expected that the financing needed to accomplish all of the foregoing (collectively, the "Construction Debt") will be in the form of loans from banks or similar institutions (the "Lenders") to be entered into as of the Formation Date. The terms for the Construction Debt must be presented by the Lenders as a firm commitment that is contingent only upon the election (or appropriate waiver) by all of the Parties under all Sections of this Article II to proceed with the transactions contemplated by this Agreement rather than to


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terminate this Agreement. The Parties further expect that, on or about the Commencement Date, the Construction Debt will be converted to the Long Term Debt, pursuant to borrowings thereunder, which the Parties further expect will be non-recourse to them and their Affiliates.


(b) Upon each Party's receipt of a reasonably accurate, detailed and complete summary of terms or other related term sheet setting forth proposed terms of the Construction Debt, and all related letter or similar agreements, from each Person or group of Persons that proposes to be the Lenders of the Construction Debt (each such set of terms and agreements, a "Term Sheet"), it will promptly review each Term Sheet. If based upon a review of any Term Sheet that is not rejected by all Parties, a Party or, if applicable, one or more of its Affiliates (such Party or any such Affiliate, each an "Affected Party") determines that its compliance with one or more terms or conditions of a Term Sheet (each such Term Sheet, an "Affected Term Sheet") will result in a breach of, default under, or lien creation pursuant to, the existing terms binding on it of one or more agreements to which it is a party or otherwise bound or to which its assets are bound or subject (each an "Affected Agreement"), then it will promptly (i) notify each other Party of such circumstances and (ii) will use commercially reasonably efforts to obtain from each requisite party to an Affected Agreement such necessary modifications to such Affected Agreement (each such modification with respect to each Affected Agreement, a "Compliance Modification") which will permit it to perform the terms and conditions of each Affected Term Sheet and to comply with each agreement to which such Party or any of its Affiliates is a party or otherwise bound or to which any of its or their property is bound or subject, provided however, in no event shall commercially reasonable efforts require any Affected Party, among other things, to incur, directly or indirectly, any costs or expenses or risk or liability, or to become subject to, directly or indirectly, any restriction or limitation, which in each case it reasonably believes is material in amount, scope, restriction or nature. If at least five (5) Business Days before the Election Date an Affected Party has not received each Compliance Modification that it has requested or a firm commitment to receive each such Compliance Modification, it will so notify each other Party, and from and subsequent to the date of that notice (unless revoked by such Affected Party without prejudice to the other Parties), the terms of each Affected Term Sheet, for all purposes of this Agreement (including without limitation, Section 2.5(c) hereof), shall not constitute "terms of the Construction Debt that are commercially


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reasonable for comparable transactions at such time" or words of similar import and shall constitute terms that are not in form and substance acceptable to the Affected Party.


(c) If (i) the terms of and commitment for the Construction Debt are not received by each of the Parties at least five (5) Business Days before the Election Date to enable the Parties to fully consider same, (ii) such terms are not in form and substance acceptable to each of the Parties, or (iii) the form and substance of the commitment by the Lenders are not acceptable to each of the Parties (each of the requirements of clauses (ii) and (iii) to be determined in each Party's discretion), then any of the Parties may terminate this Agreement. Notwithstanding the preceding sentence, if the terms of the Construction Debt are commercially reasonable for comparable transactions at such time, the Parties shall be bound thereby and shall not have the option to terminate this Agreement pursuant to Section 2.5(c)(ii). Any Party's approval or acquiesence to a Term Sheet under Section 2.5(b), or the authorization of Lenders to proceed with loan documentation, shall not be deemed an election or waiver of an election under this Section 2.5(c). In order to exercise the option to terminate under this Section 2.5, a Party must give notice of its exercise on or before the Election Date. The failure of any Party to timely provide such notice of termination will be deemed to be a waiver of such Party's right to terminate pursuant to this Section 2.5.


(d) In the event TEPPCO exercises the option to terminate pursuant to the provision of Section 2.5(b) and (c) as a result of the failure to obtain a satisfactory Compliance Modification, at the election of the remaining Party or Parties, as the case may be, such exercise shall not be considered as a termination of this Agreement but instead an election to withdraw. In such event, the provisions of the first sentence of Section 13.2(b) shall apply, and the obligations of TEPPCO hereunder shall be limited to one-third (1/3) of the amount of liabilities incurred by the Company through the effective date of TEPPCO's withdrawal, and the remaining Party or Parties shall indemnify TEPPCO and its Affiliates from any further costs, expenses or liabilities incurred by or on behalf of the Company. Additionally, the Parties agree to enter into, or to cause their Affiliates to enter into, as the case may be, the agreements listed below upon the execution by the other parties thereto, to be effective on and subject only to the Commencement Date occurring:


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(i) Division Agreement - MAPL Delivery Points (Schedule 11.4(c))


(ii) Division Agreement - TEPPCO Delivery Points (Schedule 11.4(b))


(iii) MAP/TEPPCO T&D


(iv) TEPPCO Conveyance Documents


(v) Tie-In and Procedure Agreements (Creal Springs and Beaumont
only)


(vi) Side Letter Regarding Natural Gasoline between MAP and TEPPCO


In such event, the Parties (including Centennial upon its execution of the Addendum and Joinder described in Section 14.15) agree that the following modifications shall be incorporated in the agreements discussed below:


(I) TEPPCO shall receive fair market value for the properties
conveyed pursuant to the TEPPCO Conveyance Documents.


(II) The MAP/TEPPCO T&D shall be amended to provide to TEPPCO
annual audit rights with respect to the satisfaction by MAP of
its annual volume obligations under the MAP/Centennial T&D.


2.6 CONDITIONAL ACCEPTANCE.


(a) If each of the Parties has provided notice that the Abandonment Order is acceptable and that the terms of the Construction Debt and the commitment therefor are acceptable, and if TEPPCO has received an order granting the TEPPCO Market Based Rates, or has waived such condition, then on the Election Date, the Parties will execute a conditional acceptance in the form attached as Schedule 2.6 (the "Conditional Acceptance"). If the Parties execute such Conditional Acceptance and no Petition for Rehearing of the Abandonment Order is subsequently filed by a third party intervenor in the Abandonment Proceeding, the Conditional Acceptance will become the irrevocable agreement, subject to the terms of this Agreement, of the Parties to proceed with the remaining provisions of this Formation Agreement. If a Petition for Rehearing is filed by a third party intervenor, the Conditional Acceptance will terminate upon the filing of such Petition for Rehearing.


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(b) In the event the Abandonment Order is unacceptable to a Party and as a result the Parties do not execute the Conditional Acceptance, then the Parties agree to negotiate in good faith and to use their reasonable efforts to agree upon the substance of a Petition for Rehearing. In the absence of such agreement, any of the Parties may file alone, or collectively with other Persons, a Petition for Rehearing.


(c) Following the filing of a Petition for Rehearing by one or more of the Parties or by one or more third party intervenors.


(i) If the Parties hereto do not file for rehearing, but one or more third party intervenors do, and the FERC denies such Petition(s) for Rehearing, and no third party intervenor files a timely judicial appeal of the FERC's order denying rehearing then the Conditional Acceptance previously executed by the Parties shall be reinstated and be effective as of the date of the FERC order denying rehearing. If a third party intervenor files a timely appeal of the FERC order denying rehearing and a Party hereto in its reasonable judgment determines that such FERC order may not withstand such judicial appeal, such Party may terminate this Agreement upon ten (10) days written notice after the filing of such appeal.


(ii) If one or more of the Parties hereto and/or one or more third party intervenors file Petitions for Rehearing and such petition(s) are granted, the FERC will ultimately issue an Order on Rehearing either affirming the Abandonment Order in all respects or modifying the Abandonment Order in one or more respects. From the effective date of the FERC's issuance of an Order on Rehearing (such order, whether a modification or reaffirmation of the original Abandonment Order, is herein referred as the "Modified Abandonment Order") the Parties will have twenty (20) days in which to repeat the determinations and actions set forth in Sections 2.3(c) and (d), and 2.5 with respect to the Modified Abandonment Order, including the right to terminate this Agreement pursuant to such provisions. In this regard, the twentieth day from such effective date of the issuance of the Order on Rehearing shall be the "Election Date" for such redeterminations and actions. Notwithstanding the foregoing:


(A) If none of the Parties has provided written notice, or in the absence of such notice, has been deemed to have waived its election, to terminate pursuant to Section 2.3 (d), and the Modified Abandonment Order does not change the Abandonment Order in any


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material respect, the Parties shall not be entitled to a redetermination under Section 2.3 or to reassert such condition, unless a third party intervenor files a timely judicial appeal of the Modified Abandonment.


(B) If, by notice or waiver pursuant to the provisions of Section 2.5, any of the Parties have indicated that the terms and form of commitment of the Construction Debt are satisfactory in form and substance to it, and if such terms and commitment of the Construction Debt as provided by the Lenders under Section 2.5 are unchanged in all material respects, then such Parties shall not be entitled to a redetermination under Section 2.5 or to reassert such condition.


(d) If "redetermination" is permitted of (i) the Modified Abandonment Order pursuant to Section 2.3(c), or (ii) the terms of the Construction Debt or the commitment with respect thereto pursuant to Section 2.5, then any Party may elect to terminate this Formation Agreement in accordance with, and to the extent permitted by, the provisions of Section 2.3 or 2.5, as applicable, by providing to the other Parties notice of its election to terminate within five (5) days of the new Election Date established in accordance with Section 2.6(c)(ii). The failure of a Party to timely provide such notice of non-acceptance or termination will be deemed to be a waiver of such Party's right to terminate pursuant to this Section. If, following the receipt of all notices hereunder or the waiver of such conditions, all Parties have elected to proceed, the Parties shall provide written confirmation thereof to the Construction Debt Lenders.


ARTICLE III


LLC AGREEMENT


3.1 PEPL INTEREST. On the date hereof, PEPL will execute the LLC Agreement and obtain a Membership Interest in the Company that represents a thirty-three and one-third (33 1/3) Percentage Interest in the Company.


3.2 TEPPCO INTEREST. On the date hereof, TEPPCO will execute the LLC Agreement and obtain a Membership Interest in the Company that represents a thirty-three and one-third (33 1/3) Percentage Interest in the Company.


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3.3 MAP INTEREST. On the date hereof, MAP will execute the LLC Agreement and retain a Membership Interest in the Company that represents a thirty-three and one-third (33 1/3) Percentage Interest in the Company.


ARTICLE IV


REPRESENTATIONS AND WARRANTIES OF PEPL


PEPL hereby represents and warrants to MAP, TEPPCO and to the Company with respect to itself and, as applicable and in accordance with Section 14.5, TGC and TPH:


4.1 DUE ORGANIZATION, GOOD STANDING AND POWER. PEPL is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with the power and authority to own, lease and operate its assets and to conduct the business now being or to be conducted by it. PEPL or its Affiliate owning and operating the Trunkline 26 is duly authorized, qualified or licensed to do business as a foreign corporation in good standing in each of the Jurisdictions. It has all requisite power and authority to enter into this Agreement and the Transaction Documents to which it is or will be a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.


4.2 AUTHORIZATION AND VALIDITY OF AGREEMENTS. The execution and delivery by PEPL of this Agreement and the Transaction Documents to which it is or will be a party and the consummation by PEPL and/or its Affiliates of the transactions contemplated hereby and thereby have been duly authorized and approved by all necessary corporate or other action on the part of PEPL or the Affiliate. This Agreement has been duly executed and delivered by PEPL and at the Formation Date, or the Closing Date, as the case may be, each of the Transaction Documents to which PEPL is or will be a party will have been duly executed and delivered by it. Except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and general principles of equity (regardless of whether the enforceability is considered at law or in equity), this Agreement is the legal, valid and binding obligation of PEPL, in each case, enforceable against it in accordance with its terms, and each of the Transaction Documents to which PEPL is or will be a


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party will be the legal, valid and binding obligation of PEPL in each case enforceable against PEPL in accordance with its terms.


4.3 LACK OF CONFLICTS. Neither the execution and delivery by PEPL of this Agreement, nor the execution and delivery by PEPL of any of the Transaction Documents to which PEPL is or will be a party, nor the consummation by it or its Affiliates of the transactions contemplated hereby and thereby does or will (i) conflict with, or result in the breach of any provision of, the charter or by-laws or similar governing or organizational documents of PEPL or such Affiliates, (ii) violate any applicable law or any permit, order, award, injunction, decree or judgment of any Governmental Authority applicable to or binding upon PEPL or such Affiliates, (iii) result in the creation of any lien upon any of the PEPL Transferred Assets or (iv) violate, conflict with or result in the breach or termination of, or otherwise give any other Person the right to terminate, or constitute a default, an event of default or an event which with notice, lapse of time or both, would constitute a default or an event of default under the terms of any material agreement or instrument to which PEPL or such Affiliates is a party.


4.4 NO CONSENTS. Other than such consents as may be required from landowners relating to the PEPL Rights of Way, and except as set forth on Schedule 4.4, no Governmental Approvals or other consents are required, or at the Formation Date or Closing Date will be required, for the execution and delivery by PEPL of this Agreement, any of the other Transaction Documents or for the consummation by its Affiliates of the transactions contemplated hereby and thereby, except where the failure to obtain such Governmental Approvals or other consents would not have a material adverse effect on the PEPL Transferred Assets, or on their ability to consummate the transactions contemplated hereby.


4.5 NO MATERIAL CHANGES. Except as set forth on Schedule 4.5, since January 1, 2000, there has not occurred with respect to the PEPL Transferred Assets (a) any Casualty or Condemnation Loss which has had or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the PEPL Transferred Assets or (b) any other event, occurrence or development which in any such case has had or would reasonably be expected to have, individually, a material adverse effect on the PEPL Transferred Assets. Except as set forth on Schedule 4.5, since January 1, 2000, PEPL and its Affiliates have operated the Trunkline 26


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in the ordinary course consistent with its current practices, including without limitation, the practices with respect to pollution control equipment replacements or upgrades and off-site and on-site storage, treatment and disposal of Hazardous Substances.


4.6 REAL PROPERTY.


(a) The PEPL Rights of Way are in full force and effect in all material respects and constitute the legal, valid and binding obligations of the landowners, PEPL, or its Affiliates, that are parties thereto, enforceable against the landowners, PEPL, or its Affiliates, in accordance with their respective terms. The PEPL Rights of Way constitute a continuous right of way for the Trunkline 26 from Longville, Louisiana to Bourbon, Illinois; provided however, that PEPL does not represent or warrant that all of the PEPL Rights of Way are valid for use with a petroleum products pipeline.


(b) All utility easements, rights of access, road or railway crossings, and other easements and similar rights serving the lands underlying or abutting the Trunkline 26 are of such a character or type that they will not have or would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Trunkline 26 or its operation.


4.7 TITLE TO THE TRUNKLINE 26. PEPL, directly or indirectly through its Affiliates, has good and valid title to all of the Trunkline 26, free and clear of all Liens except Permitted Encumbrances, and upon consummation of the transactions contemplated hereby, the Company will have good and valid title to the Trunkline 26, in each case free and clear of all Liens except Permitted Encumbrances.


4.8 PEPL PERMITS. Schedule 4.8 sets forth a list of all permits that have been issued or granted to PEPL, or any of its Affiliates, for the construction or operation of the Trunkline 26.


4.9 TAXES. There are no Liens for unpaid Taxes on any of the PEPL Transferred Assets and no claim has been made by any Governmental Authority which could give rise to any such Lien.


4.10 COMPLIANCE WITH LAWS. The PEPL Transferred Assets are being operated by PEPL or its Affiliates in compliance with all applicable laws, including Environmental Laws,


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rules and regulations. Neither PEPL, nor any of its Affiliates, has received any notice from any Governmental Authority that the operations of the Trunkline 26 are being conducted in violation of any applicable law, rules or regulations, or has Knowledge of any investigation or review pending or threatened by any Governmental Authority relating to any alleged violation, which violation would have or would reasonably be expected to have, individually (including a series of related violations), or in the aggregate a material adverse effect on the Trunkline 26.


4.11 LEGAL PROCEEDINGS. Except as set forth on Schedule 4.11, there are no Claims pending or, to the Knowledge of PEPL, threatened against PEPL, or any of its Affiliates, by or before any Governmental Authority or any Third Party (i) seeking to prevent or delay the Formation, the Closing or any of the transactions contemplated by this Formation Agreement, or (ii) which would have or would reasonably be expected to have, individually (including a series of related Claims) or in the aggregate a material adverse effect on the Trunkline 26 or its operation.


4.12 SUFFICIENCY AND CONDITION OF THE PEPL TRANSFERRED ASSETS.


(a) The PEPL Transferred Assets, which do not include the PEPL Excluded Assets, constitute all property and other rights currently comprising the Trunkline 26, and that are necessary to enable the Company to operate the Trunkline 26 in substantially the same manner as it is currently being operated.


(b) The Trunkline 26 is in good operating condition and repair (ordinary wear and tear excepted). The Trunkline 26 has been maintained in a manner consistent with customary industry practice except where the failure to so maintain the Trunkline 26 would not have, and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Trunkline 26 or its operation.


(c) The Trunkline 26 will have a maximum allowable operating pressure ("MAOP") of at least 900 p.s.i. on the Closing Date.


(d) To the Knowledge of PEPL, the Trunkline 26 has not been derated from its MAOP at any time in the last five (5) years.


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