epdform10q.htm


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

FORM 10-Q

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

For the quarterly period ended September 30, 2009

OR

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

For the transition period from ___  to  ___.

Commission file number:  1-14323

ENTERPRISE PRODUCTS PARTNERS L.P.
(Exact name of Registrant as Specified in Its Charter)
Delaware
76-0568219
(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
     
 
1100 Louisiana, 10th Floor
 
 
Houston, Texas  77002
 
 
    (Address of Principal Executive Offices, Including Zip Code)
 
     
 
(713) 381-6500
 
 
(Registrant’s Telephone Number, Including Area Code)
 
 


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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 Accelerated filer o
Non-accelerated filer   o (Do not check if a smaller reporting company)  
                Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No þ

There were 604,716,122 common units (including 2,797,822 restricted common units) and 4,520,431 Class B units (which generally vote together with the common units) of Enterprise Products Partners L.P. outstanding at November 4, 2009.  The common units trade on the New York Stock Exchange under the ticker symbol “EPD.”


ENTERPRISE PRODUCTS PARTNERS L.P.
TABLE OF CONTENTS

   
Page No.
 
 
 
 
 
 
   
 
 
 
 
 
       5.  Inventories
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
     

1

 
PART I.  FINANCIAL INFORMATION.

Item 1.  Financial Statements.

ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)

   
September 30,
   
December 31,
 
ASSETS
 
2009
   
2008
 
Current assets:
           
Cash and cash equivalents
  $ 73.8     $ 35.4  
Restricted cash
    102.8       203.8  
Accounts and notes receivable – trade, net of allowance for doubtful accounts of $14.4 at September 30, 2009 and $15.1 at December 31, 2008
    1,471.4       1,185.5  
Accounts receivable – related parties
    37.9       61.6  
Inventories (see Note 5)
    1,147.5       362.8  
Derivative assets (see Note 4)
    197.0       202.8  
Prepaid and other current assets
    118.6       111.8  
Total current assets
    3,149.0       2,163.7  
Property, plant and equipment, net
    13,661.6       13,154.8  
Investments in unconsolidated affiliates
    901.0       949.5  
Intangible assets, net of accumulated amortization of $492.5 at September 30, 2009 and $429.9 at December 31, 2008
    793.0       855.4  
Goodwill
    706.9       706.9  
Deferred tax asset
    1.1       0.4  
Other assets
    144.9       126.8  
Total assets
  $ 19,357.5     $ 17,957.5  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable – trade
  $ 327.1     $ 300.5  
Accounts payable – related parties
    47.2       39.6  
Accrued product payables
    1,675.6       1,142.4  
Accrued interest payable
    117.4       151.9  
Other accrued expenses
    46.1       48.8  
Derivative liabilities (see Note 4)
    263.1       287.2  
Other current liabilities
    220.9       252.7  
Total current liabilities
    2,697.4       2,223.1  
Long-term debt: (see Note 9)
               
Senior debt obligations – principal
    7,912.3       7,813.4  
Junior subordinated notes – principal
    1,232.7       1,232.7  
Other
    53.3       62.3  
Total long-term debt
    9,198.3       9,108.4  
Deferred tax liabilities
    69.6       66.1  
Other long-term liabilities
    95.8       81.3  
Commitments and contingencies
               
Equity: (see Note 10)
               
Enterprise Products Partners L.P. partners’ equity:
               
Limited Partners:
               
Common units (475,293,998 units outstanding at September 30, 2009 and 439,354,731 units outstanding at December 31, 2008)
    6,670.8       6,036.9  
Restricted common units (2,658,850 units outstanding at September 30, 2009 and 2,080,600 units outstanding at December 31, 2008)
    34.1       26.2  
General partner
    136.6       123.6  
Accumulated other comprehensive loss
    (67.1 )     (97.2 )
Total Enterprise Products Partners L.P. partners’ equity
    6,774.4       6,089.5  
Noncontrolling interest
    522.0       389.1  
Total equity
    7,296.4       6,478.6  
Total liabilities and equity
  $ 19,357.5     $ 17,957.5  

See Notes to Unaudited Condensed Consolidated Financial Statements.
 
2

 
ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
 (Dollars in millions, except per unit amounts)

   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues:
                       
Third parties
  $ 4,444.7     $ 5,997.7     $ 11,006.1     $ 17,498.4  
Related parties
    151.4       300.2       521.0       823.7  
Total revenues (see Note 11)
    4,596.1       6,297.9       11,527.1       18,322.1  
Costs and expenses:
                               
Operating costs and expenses:
                               
Third parties
    3,983.2       5,806.7       9,740.1       16,766.0  
Related parties
    237.0       165.2       655.6       477.1  
Total operating costs and expenses
    4,220.2       5,971.9       10,395.7       17,243.1  
General and administrative costs:
                               
Third parties
    17.1       8.4       33.5       22.4  
Related parties
    16.8       13.4       51.2       44.6  
Total general and administrative costs
    33.9       21.8       84.7       67.0  
Total costs and expenses
    4,254.1       5,993.7       10,480.4       17,310.1  
Equity in income of unconsolidated affiliates
    22.5       14.9       18.3       48.1  
Operating income
    364.5       319.1       1,065.0       1,060.1  
Other income (expense):
                               
Interest expense
    (128.0 )     (102.7 )     (374.6 )     (290.4 )
Interest income
    0.2       2.1       1.4       4.7  
Other, net
    (0.2 )     (0.9 )     (0.5 )     (1.9 )
Total other expense, net
    (128.0 )     (101.5 )     (373.7 )     (287.6 )
Income before provision for income taxes
    236.5       217.6       691.3       772.5  
Provision for income taxes
    (6.6 )     (6.6 )     (24.0 )     (17.2 )
Net income
    229.9       211.0       667.3       755.3  
Net income attributable to noncontrolling interest
    (17.0 )     (7.9 )     (42.5 )     (29.3 )
Net income attributable to Enterprise Products Partners L.P.
  $ 212.9     $ 203.1     $ 624.8     $ 726.0  
                                 
Net income allocated to:
                               
Limited partners
  $ 171.3     $ 167.6     $ 504.6     $ 620.5  
General partner
  $ 41.6     $ 35.5     $ 120.2     $ 105.5  
                                 
Basic and diluted earnings per unit (see Note 13)
  $ 0.36     $ 0.38     $ 1.09     $ 1.41  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.
 
3

 
ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED
COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)

   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net income
  $ 229.9     $ 211.0     $ 667.3     $ 755.3  
Other comprehensive income (loss):
                               
Cash flow hedges:
                               
Commodity derivative instrument losses during period
    (8.3 )     (244.0 )     (146.9 )     (124.1 )
Reclassification adjustment for losses included in net income related to commodity derivative instruments
    77.8       28.5       176.3       15.8  
Interest rate derivative instrument gains (losses) during period
    (8.0 )     (1.1 )     7.1       (22.9 )
Reclassification adjustment for (gains) losses included in net income related to interest rate derivative instruments
    1.3       --       3.3       (2.4 )
Foreign currency derivative gains (losses)
    0.2       --       (10.3 )     (1.3 )
Total cash flow hedges
    63.0       (216.6 )     29.5       (134.9 )
Foreign currency translation adjustment
    1.1       0.4       1.7       0.5  
Change in funded status of pension and postretirement plans, net of tax
    --       --       --       (0.3 )
Total other comprehensive income (loss)
    64.1       (216.2 )     31.2       (134.7 )
Comprehensive income (loss)
    294.0       (5.2 )     698.5       620.6  
Comprehensive income attributable to noncontrolling interest
    (17.3 )     (7.6 )     (43.6 )     (28.7 )
Comprehensive income attributable to Enterprise Products Partners L.P.
  $ 276.7     $ (12.8 )   $ 654.9     $ 591.9  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.
 
4

 
ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)

   
For the Nine Months
 
   
Ended September 30,
 
   
2009
   
2008
 
Operating activities:
           
Net income
  $ 667.3     $ 755.3  
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
Depreciation, amortization and accretion
    476.9       413.6  
Equity in income of unconsolidated affiliates
    (18.3 )     (48.1 )
Distributions received from unconsolidated affiliates
    63.6       69.9  
Operating lease expense paid by EPCO, Inc.
    0.5       1.5  
Gain from asset sales and related transactions
    (0.4 )     (1.7 )
Non-cash impairment charge
    1.7       --  
Deferred income tax expense
    2.5       5.6  
Changes in fair market value of derivative instruments
    11.7       5.4  
Effect of pension settlement recognition
    (0.1 )     (0.1 )
Net effect of changes in operating accounts (see Note 16)
    (590.0 )     (228.4 )
Net cash flows provided by operating activities
    615.4       973.0  
Investing activities:
               
Capital expenditures
    (851.1 )     (1,485.6 )
Contributions in aid of construction costs
    12.8       21.2  
Decrease (increase) in restricted cash
    100.8       (112.2 )
Cash used for business combinations
    (24.5 )     (57.1 )
Acquisition of intangible assets
    --       (5.1 )
Investments in unconsolidated affiliates
    (14.5 )     (72.0 )
Other proceeds from investing activities
    5.1       1.7  
Cash used in investing activities
    (771.4 )     (1,709.1 )
Financing activities:
               
Borrowings under debt agreements
    3,818.9       6,360.4  
Repayments of debt
    (3,724.2 )     (4,824.0 )
Debt issuance costs
    (5.2 )     (8.8 )
Cash distributions paid to partners
    (860.6 )     (770.9 )
Cash distributions paid to noncontrolling interest (see Note 10)
    (47.9 )     (39.2 )
Net cash proceeds from issuance of common units
    878.2       57.2  
Cash contributions from noncontrolling interest (see Note 10)
    137.4       --  
Acquisition of treasury units
    (1.8 )     (0.8 )
Monetization of interest rate derivative instruments
    --       (22.1 )
Cash provided by financing activities
    194.8       751.8  
Effect of exchange rate changes on cash
    (0.4 )     --  
Net change in cash and cash equivalents
    38.8       15.7  
Cash and cash equivalents, January 1
    35.4       39.7  
Cash and cash equivalents, September 30
  $ 73.8     $ 55.4  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.
 
5

 
ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED EQUITY
(See Note 10 for Unit History and Detail of Changes in Limited Partners’ Equity)
(Dollars in millions)

   
Enterprise Products Partners L.P.
             
               
Accumulated
             
               
Other
             
   
Limited
   
General
   
Comprehensive
   
Noncontrolling
       
   
Partners
   
Partner
   
Loss
   
Interest
   
Total
 
Balance, December 31, 2008
  $ 6,063.1     $ 123.6     $ (97.2 )   $ 389.1     $ 6,478.6  
Net income
    504.6       120.2       --       42.5       667.3  
Operating leases paid by EPCO, Inc.
    0.5       --       --       --       0.5  
Cash distributions to partners
    (735.2 )     (124.9 )     --       --       (860.1 )
Unit option reimbursements to EPCO, Inc.
    (0.5 )     --       --       --       (0.5 )
Cash distributions paid to noncontrolling interest (see Note 10)
    --       --       --       (47.9 )     (47.9 )
Net cash proceeds from issuance of common units
    860.2       17.5       --       --       877.7  
Cash proceeds from exercise of unit options
    0.5       --       --       --       0.5  
Cash contributions from noncontrolling interest (see Note 10)
    --       --       --       137.4       137.4  
Amortization of equity awards
    13.5       0.2       --       --       13.7  
Acquisition of treasury units
    (1.8 )     --       --       --       (1.8 )
Foreign currency translation adjustment
    --       --       1.7       --       1.7  
Cash flow hedges
    --       --       28.4       1.1       29.5  
Other
    --       --       --       (0.2 )     (0.2 )
Balance, September 30, 2009
  $ 6,704.9     $ 136.6     $ (67.1 )   $ 522.0     $ 7,296.4  
 
   
Enterprise Products Partners L.P.
             
               
Accumulated
             
               
Other
             
   
Limited
   
General
   
Comprehensive
   
Noncontrolling
       
   
Partners
   
Partner
   
Income (Loss)
   
Interest
   
Total
 
Balance, December 31, 2007
  $ 5,992.9     $ 122.3     $ 19.1     $ 427.8     $ 6,562.1  
Net income
    620.5       105.5       --       29.3       755.3  
Operating leases paid by EPCO, Inc.
    1.5       --       --       --       1.5  
Cash distributions to partners
    (663.9 )     (106.4 )     --       --       (770.3 )
Unit option reimbursements to EPCO, Inc.
    (0.6 )     --       --       --       (0.6 )
Cash distributions paid to noncontrolling interest (see Note 10)
    --       --       --       (39.2 )     (39.2 )
Net cash proceeds from issuance of common units
    55.4       1.1       --       --       56.5  
Cash proceeds from exercise of unit options
    0.7       --       --       --       0.7  
Amortization of equity awards
    8.7       0.1       --       --       8.8  
Interest acquired from noncontrolling interest
    --       --       --       (7.6 )     (7.6 )
Acquisition of treasury units
    (0.8 )     --       --       --       (0.8 )
Foreign currency translation adjustment
    --       --       0.5       --       0.5  
Change in funded status of pension and postretirement plans
    --       --       (0.3 )     --       (0.3 )
Cash flow hedges
    --       --       (134.3 )     (0.6 )     (134.9 )
Balance, September 30, 2008
  $ 6,014.4     $ 122.6     $ (115.0 )   $ 409.7     $ 6,431.7  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

6

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Except per unit amounts, or as noted within the context of each footnote disclosure, the dollar amounts presented in the tabular data within these footnote disclosures are stated in millions of dollars.


Note 1.  Partnership Organization and Basis of Presentation

Partnership Organization

Enterprise Products Partners L.P. is a publicly traded Delaware limited partnership, the common units of which are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “EPD.”  Unless the context requires otherwise, references to “we,” “us,” “our” or “Enterprise Products Partners” are intended to mean the business and operations of Enterprise Products Partners L.P. and its consolidated subsidiaries.

We were formed in April 1998 to own and operate certain natural gas liquids (“NGLs”) related businesses of EPCO, Inc. (“EPCO”).  We conduct substantially all of our business through our wholly owned subsidiary, Enterprise Products Operating LLC (“EPO”).  We are owned 98% by our limited partners and 2% by Enterprise Products GP, LLC (our general partner, referred to as “EPGP”).  EPGP is owned 100% by Enterprise GP Holdings L.P. (“Enterprise GP Holdings”), a publicly traded limited partnership, the units of which are listed on the NYSE under the ticker symbol “EPE.”  The general partner of Enterprise GP Holdings is EPE Holdings, LLC (“EPE Holdings”), a wholly owned subsidiary of Dan Duncan LLC, all of the membership interests of which are owned by Dan L. Duncan.  We, EPGP, Enterprise GP Holdings, EPE Holdings and Dan Duncan LLC are affiliates and under the common control of Dan L. Duncan, the Group Co-Chairman and controlling shareholder of EPCO.

References to “TEPPCO” and “TEPPCO GP” mean TEPPCO Partners, L.P. and Texas Eastern Products Pipeline Company, LLC (which is the general partner of TEPPCO), respectively, prior to their mergers with our subsidiaries.  On October 26, 2009, we completed the mergers with TEPPCO and TEPPCO GP (such related mergers referred to herein individually and together as the “TEPPCO Merger”).  See Note 18 for additional information regarding the TEPPCO Merger.
   
References to “Energy Transfer Equity” mean the business and operations of Energy Transfer Equity, L.P. and its consolidated subsidiaries.  References to “LE GP” mean LE GP, LLC, which is the general partner of Energy Transfer Equity.  Enterprise GP Holdings owns a noncontrolling interest in both LE GP and Energy Transfer Equity.  Enterprise GP Holdings accounts for its investments in LE GP and Energy Transfer Equity using the equity method of accounting.

References to “Employee Partnerships” mean EPE Unit L.P., EPE Unit II, L.P., EPE Unit III, L.P., Enterprise Unit L.P. and EPCO Unit L.P., collectively, all of which are privately held affiliates of EPCO.

For financial reporting purposes, we consolidate the financial statements of Duncan Energy Partners L.P. (“Duncan Energy Partners”) with those of our own and reflect its operations in our business segments.  We control Duncan Energy Partners through our ownership of its general partner, DEP Holdings, LLC (“DEP GP”).  Also, due to common control of the entities by Dan L. Duncan, the initial consolidated balance sheet of Duncan Energy Partners reflects our historical carrying basis in each of the subsidiaries contributed to Duncan Energy Partners.  Public ownership of Duncan Energy Partners’ net assets and earnings are presented as a component of noncontrolling interest in our consolidated financial statements.  The borrowings of Duncan Energy Partners are presented as part of our consolidated debt; however, neither Enterprise Products Partners L.P. nor EPO have any obligation for the payment of interest or repayment of borrowings incurred by Duncan Energy Partners.

Basis of Presentation

Effective January 1, 2009, we adopted new accounting guidance that has been codified under Accounting Standards Codification (“ASC”) 810, Consolidation, which established accounting and

7

ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

reporting standards for noncontrolling interests that were previously identified as minority interest in our financial statements.  The new guidance requires, among other things, that (i) noncontrolling interests be presented as a component of equity on our consolidated balance sheet (i.e., elimination of the “mezzanine” presentation previously used for minority interest); (ii) elimination of minority interest amounts as a deduction in deriving net income or loss and, as a result, that net income or loss be allocated between controlling and noncontrolling interests; and (iii) comprehensive income or loss be allocated between controlling and noncontrolling interest.  Earnings per unit amounts are not affected by these changes.  See Note 2 for additional information regarding the establishment of the ASC by the Financial Accounting Standards Board (“FASB”).  See Note 10 for additional information regarding noncontrolling interest.

The new presentation and disclosure requirements pertaining to noncontrolling interests have been applied retroactively to the consolidated financial statements and notes included in this Quarterly Report.  As a result, net income reported for the three and nine months ended September 30, 2008 in these financial statements is higher than that disclosed previously; however, the allocation of such net income results in our unitholders, general partner and noncontrolling interests (i.e., the former minority interest) receiving the same amounts as they did previously.

Our results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of results expected for the full year.

Essentially all of our assets, liabilities, revenues and expenses are recorded at EPO’s level in our consolidated financial statements.  Enterprise Products Partners L.P. acts as guarantor of certain of EPO’s debt obligations.  See Note 17 for condensed consolidated financial information of EPO.

In our opinion, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments consisting of normal recurring accruals necessary for fair presentation.  Although we believe the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).  These Unaudited Condensed Consolidated Financial Statements and Notes thereto should be read in conjunction with the Audited Consolidated Financial Statements and Notes thereto included in our Current Report on Form 8-K dated July 8, 2009 (the “Recast Form 8-K”), which retroactively adjusted portions of our Annual Report on Form 10-K for the year ended December 31, 2008.  The Recast Form 8-K reflects our adoption of the provisions under ASC 810 related to noncontrolling interests, our adoption of the provisions under ASC 260, Earnings Per Share, pertaining to the application of the two-class method to master limited partnerships in computing basic and diluted earnings per unit, and the resulting change in presentation and disclosure requirements.


Note 2.  General Accounting Matters

Estimates

Preparing our financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts presented in the financial statements (e.g. assets, liabilities, revenues and expenses) and disclosures about contingent assets and liabilities.  Our actual results could differ from these estimates.  On an ongoing basis, management reviews its estimates based on currently available information.  Changes in facts and circumstances may result in revised estimates.

Fair Value Information

Cash and cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, and other current liabilities are carried at amounts which reasonably approximate their fair values due to their short-term nature.  The estimated fair values of our fixed rate debt are based on quoted market prices for such debt or debt of similar terms and maturities.  The carrying amounts of our variable rate debt

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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

obligations reasonably approximate their fair values due to their variable interest rates.  See Note 4 for fair value information associated with our derivative instruments.  The following table presents the estimated fair values of our financial instruments at the dates indicated:

   
September 30, 2009
   
December 31, 2008
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
Financial Instruments
 
Value
   
Value
   
Value
   
Value
 
Financial assets:
                       
Cash and cash equivalents and restricted cash
  $ 176.6     $ 176.6     $ 239.2     $ 239.2  
Accounts receivable
    1,509.3       1,509.3       1,247.1       1,247.1  
Financial liabilities:
                               
Accounts payable and accrued expenses
    2,213.4       2,213.4       1,683.2       1,683.2  
Other current liabilities
    220.9       220.9       252.7       252.7  
Fixed-rate debt (principal amount)
    7,986.7       8,324.5       7,704.3       6,639.0  
Variable-rate debt
    1,158.3       1,158.3       1,341.8       1,341.8  

Recent Accounting Developments

The following information summarizes recently issued accounting guidance that will or may affect our future financial statements.

Generally Accepted Accounting Principles.  In June 2009, the FASB published ASC 105, Generally Accepted Accounting Principles, as the source of authoritative GAAP for U.S. companies.  The ASC reorganized GAAP into a topical format and significantly changes the way users research accounting issues.  For SEC registrants, the rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP.  References to specific GAAP in our consolidated financial statements now refer exclusively to the ASC.  We adopted the new codification on September 30, 2009.

Fair Value Measurements.  In April 2009, the FASB issued ASC 820, Fair Value Measurements and Disclosures, to clarify fair value accounting rules.  This new accounting guidance establishes a process to determine whether a market is active and a transaction is consummated under distress.  Companies should look at several factors and use professional judgment to ascertain if a formerly active market has become inactive.  When estimating fair value, companies are required to place more weight on observable transactions in orderly markets.  Our adoption of this new guidance on June 30, 2009 did not have any impact on our consolidated financial statements or related disclosures.

In August 2009, the FASB issued Accounting Standards Update 2009-05, Measuring Liabilities at Fair Value, to clarify how an entity should estimate the fair value of liabilities.  If a quoted price in an active market for an identical liability is not available, a company must measure the fair value of the liability using one of several valuation techniques (e.g., quoted prices for similar liabilities or present value of cash flows).  Our adoption of this new guidance on October 1, 2009 did not have any impact on our consolidated financial statements or related disclosures.

Financial Instruments.  In April 2009, the FASB issued ASC 825, Financial Instruments, which requires companies to provide in each interim report both qualitative and quantitative information regarding fair value estimates for financial instruments not recorded on the balance sheet at fair value.  Previously, this was only an annual requirement.  Apart from adding the required fair value disclosures within this Note 2, our adoption of this new guidance on June 30, 2009 did not have a material impact on our consolidated financial statements or related disclosures.

Subsequent Events. In May 2009, the FASB issued ASC 855, Subsequent Events, which governs the accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The date through which an entity has evaluated subsequent events is now a required disclosure.  Our adoption of this guidance on June 30, 2009 did not have any impact on our consolidated financial statements.

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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Consolidation of Variable Interest Entities.  In June 2009, the FASB amended consolidation guidance for variable interest entities (“VIEs”) under ASC 810.  VIEs are entities whose equity investors do not have sufficient equity capital at risk such that the entity cannot finance its own activities.  When a business has a “controlling financial interest” in a VIE, the assets, liabilities and profit or loss of that entity must be consolidated.  A business must also consolidate a VIE when that business has a “variable interest” that (i) provides the business with the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) funds most of the entity’s expected losses and/or receives most of the entity’s anticipated residual returns.  The amended guidance:

§  
eliminates the scope exception for qualifying special-purpose entities;

§  
amends certain guidance for determining whether an entity is a VIE;

§  
expands the list of events that trigger reconsideration of whether an entity is a VIE;

§  
requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE;

§  
requires continuous assessments of whether a company is the primary beneficiary of a VIE; and

§  
requires enhanced disclosures about a company’s involvement with a VIE.

The amended guidance is effective for us on January 1, 2010.  At September 30, 2009, we did not have any VIEs based on prior guidance.  We are in the process of evaluating the amended guidance; however, our adoption and implementation of this guidance is not expected to have an impact on our consolidated financial statements.

Restricted Cash

Restricted cash represents amounts held in connection with our commodity derivative instruments portfolio and related physical natural gas and NGL purchases.  Additional cash may be restricted to maintain this portfolio as commodity prices fluctuate or deposit requirements change.  At September 30, 2009 and December 31, 2008, our restricted cash amounts were $102.8 million and $203.8 million, respectively.  See Note 4 for additional information regarding derivative instruments and hedging activities.

Subsequent Events

We have evaluated subsequent events through November 9, 2009, which is the date our Unaudited Condensed Consolidated Financial Statements and Notes are being issued.


Note 3.  Accounting for Equity Awards

Certain key employees of EPCO participate in long-term incentive compensation plans managed by EPCO.  The compensation expense we record related to equity awards is based on an allocation of the total cost of such incentive plans to EPCO.  We record our pro rata share of such costs based on the percentage of time each employee spends on our consolidated business activities.  Such awards were not material to our consolidated financial position, results of operations or cash flows for the periods presented.  The amount of equity-based compensation allocable to our businesses was $5.5 million and $4.3 million for the three months ended September 30, 2009 and 2008, respectively.  For the nine months ended September 30, 2009 and 2008, the amount of equity-based compensation allocable to our businesses was $13.7 million and $10.6 million, respectively.

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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

EPCO 1998 Long-Term Incentive Plan

The EPCO 1998 Long-Term Incentive Plan (“EPCO 1998 Plan”) provides for the issuance of up to 7,000,000 of our common units.  After giving effect to the issuance or forfeiture of option awards and restricted unit awards through September 30, 2009, a total of 428,847 additional common units could be issued under the EPCO 1998 Plan.

Unit option awards.  The following table presents option activity under the EPCO 1998 Plan for the periods indicated:

               
Weighted-
       
         
Weighted-
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
   
Number of
   
Strike Price
   
Contractual
   
Intrinsic
 
   
Units
   
(dollars/unit)
   
Term (in years)
   
Value (1)
 
Outstanding at December 31, 2008
    2,168,500     $ 26.32              
Granted (2)
    30,000     $ 20.08              
Exercised
    (56,000 )   $ 15.66              
Forfeited
    (365,000 )   $ 26.38              
Outstanding at September 30, 2009
    1,777,500     $ 26.54       4.6     $ 3.0  
Options exercisable at
                               
September 30, 2009
    652,500     $ 23.71       4.7     $ 3.0  
                                 
(1)  Aggregate intrinsic value reflects fully vested unit options at September 30, 2009.
(2)  Aggregate grant date fair value of these unit options issued during 2009 was $0.2 million based on the following assumptions: (i) a grant date market price of our common units of $20.08 per unit; (ii) expected life of options of 5.0 years; (iii) risk-free interest rate of 1.81%; (iv) expected distribution yield on our common units of 10%; and (v) expected unit price volatility on our common units of 72.76%.
 

The total intrinsic value of option awards exercised during the three months ended September 30, 2009 and 2008 was $0.3 million and $0.1 million, respectively.  For each of the nine months ended September 30, 2009 and 2008, the total intrinsic value of option awards exercised was $0.6 million.  At September 30, 2009, the estimated total unrecognized compensation cost related to nonvested unit option awards granted under the EPCO 1998 Plan was $1.1 million.  We will recognize our share of these costs in accordance with the EPCO administrative services agreement (the “ASA”) (see Note 12) over a weighted-average period of 1.8 years.

During the nine months ended September 30, 2009 and 2008, we received cash of $0.5 million and $0.7 million, respectively, from the exercise of option awards granted under the EPCO 1998 Plan.  Conversely, our option-related reimbursements to EPCO during each of these periods were $0.5 million and $0.6 million, respectively.

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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted unit awards.  The following table summarizes information regarding our restricted unit awards under the EPCO 1998 Plan for the periods indicated:

         
Weighted-
 
         
Average Grant
 
   
Number of
   
Date Fair Value
 
   
Units
   
per Unit (1)
 
Restricted units at December 31, 2008
    2,080,600        
Granted (2)
    1,016,950     $ 20.65  
Vested
    (244,300 )   $ 26.66  
Forfeited
    (194,400 )   $ 28.92  
Restricted units at September 30, 2009
    2,658,850          
                 
(1)  Determined by dividing the aggregate grant date fair value of awards by the number of awards issued. The weighted-average grant date fair value per unit for forfeited and vested awards is determined before an allowance for forfeitures.
(2)  Net of forfeitures, aggregate grant date fair value of restricted unit awards issued during 2009 was $21.0 million based on grant date market prices of our common units ranging from $20.08 to $27.66 per unit. Estimated forfeiture rates ranged between 4.6% and 17%.
 

The total fair value of restricted unit awards that vested during the three and nine months ended September 30, 2009 was $6.2 million and $6.5 million, respectively.  At September 30, 2009, the estimated total unrecognized compensation cost related to nonvested restricted unit awards granted under the EPCO 1998 Plan was $39.6 million.  We expect to recognize our share of this cost over a weighted-average period of 2.5 years in accordance with the ASA.

Phantom unit awards and distribution equivalent rights.  No phantom unit awards or distribution equivalent rights have been issued as of September 30, 2009 under the EPCO 1998 Plan.

Enterprise Products 2008 Long-Term Incentive Plan

The Enterprise Products 2008 Long-Term Incentive Plan (“EPD 2008 LTIP”) provides for the issuance of up to 10,000,000 of our common units.  After giving effect to the issuance or forfeiture of option awards through September 30, 2009, a total of 7,865,000 additional common units could be issued under the EPD 2008 LTIP.

Unit option awards.  The following table presents unit option activity under the EPD 2008 LTIP for the periods indicated:
 
               
Weighted-
 
         
Weighted-
   
Average
 
         
Average
   
Remaining
 
   
Number of
   
Strike Price
   
Contractual
 
   
Units
   
(dollars/unit)
   
Term (in years)
 
Outstanding at December 31, 2008
    795,000     $ 30.93        
Granted (1)
    1,430,000     $ 23.53        
Forfeited
    (90,000 )   $ 30.93        
Outstanding at September 30, 2009 (2)
    2,135,000     $ 25.97       4.9  
                         
(1)  Net of forfeitures, aggregate grant date fair value of these unit options issued during 2009 was $6.5 million based on the following assumptions: (i) a weighted-average grant date market price of our common units of $23.53 per unit; (ii) weighted-average expected life of options of 4.9 years; (iii) weighted-average risk-free interest rate of 2.14%; (iv) expected weighted-average distribution yield on our common units of 9.37%; (v) expected weighted-average unit price volatility on our common units of 57.11%. An estimated forfeiture rate of 17% was applied to awards granted during 2009.
(2)  No unit options were exercisable as of September 30, 2009.
 

At September 30, 2009, the estimated total unrecognized compensation cost related to nonvested unit option awards granted under the EPD 2008 LTIP was $6.6 million.  We expect to recognize our share of this cost over a weighted-average period of 3.4 years in accordance with the ASA.

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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Phantom unit awards.  There were a total of 10,600 phantom units outstanding at September 30, 2009 under the EPD 2008 LTIP.  These awards cliff vest in 2011 and 2012.  At September 30, 2009 and December 31, 2008, we had accrued an immaterial liability for compensation related to these phantom unit awards.

Employee Partnerships

As of September 30, 2009, the estimated total unrecognized compensation cost related to the five Employee Partnerships was $37.7 million.  We will recognize our share of these costs in accordance with the ASA over a weighted-average period of 4.2 years.

DEP GP Unit Appreciation Rights

At September 30, 2009 and December 31, 2008, we had a total of 90,000 outstanding unit appreciation rights (“UARs”) granted to non-employee directors of DEP GP that cliff vest in 2012.  If a director resigns prior to vesting, his UAR awards are forfeited.  At September 30, 2009 and December 31, 2008, we had accrued an immaterial liability for compensation related to these UARs.


Note 4.  Derivative Instruments, Hedging Activities and Fair Value Measurements

In the course of our normal business operations, we are exposed to certain risks, including changes in interest rates, commodity prices and, to a limited extent, foreign exchange rates.  In order to manage risks associated with certain identifiable and anticipated transactions, we use derivative instruments.  Derivatives are financial instruments whose fair value is determined by changes in a specified benchmark such as interest rates, commodity prices or currency values.  Typical derivative instruments include futures, forward contracts, swaps and other instruments with similar characteristics.  Substantially all of our derivatives are used for non-trading activities.

We are required to recognize derivative instruments at fair value as either assets or liabilities on the balance sheet.  While all derivatives are required to be reported at fair value on the balance sheet, changes in fair value of the derivative instruments will be reported in different ways depending on the nature and effectiveness of the hedging activities to which they are related.  After meeting specified conditions, a qualified derivative may be specifically designated as a total or partial hedge of:

§  
Changes in the fair value of a recognized asset or liability, or an unrecognized firm commitment - In a fair value hedge, all gains and losses (of both the derivative instrument and the hedged item) are recognized in income during the period of change.

§  
Variable cash flows of a forecasted transaction - In a cash flow hedge, the effective portion of the hedge is reported in other comprehensive income (“OCI”) and is reclassified into earnings when the forecasted transaction affects earnings.

§  
Foreign currency exposure, such as through an unrecognized firm commitment.

An effective hedge is one in which the change in fair value of a derivative instrument can be expected to offset 80% to 125% of changes in the fair value of a hedged item at inception and throughout the life of the hedging relationship.  The effective portion of a hedge is the amount by which the derivative instrument exactly offsets the change in fair value of the hedged item during the reporting period.  Conversely, ineffectiveness represents the change in the fair value of the derivative instrument that does not exactly offset the change in the fair value of the hedged item.  Any ineffectiveness associated with a hedge is recognized in earnings immediately.  Ineffectiveness can be caused by, among other things, changes in the timing of forecasted transactions or a mismatch of terms between the derivative instrument and the hedged item.

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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Interest Rate Derivative Instruments

We utilize interest rate swaps, treasury locks and similar derivative instruments to manage our exposure to changes in the interest rates of certain consolidated debt agreements.  This strategy is a component in controlling our cost of capital associated with such borrowings.

The following table summarizes our interest rate derivative instruments outstanding at September 30, 2009, all of which were designated as hedging instruments under ASC 815-20, Hedging - General:

 
Number and Type of
Notional
Period of
Rate
Accounting
Hedged Transaction
Derivative Employed
Amount
Hedge
Swap
Treatment
Enterprise Products Partners:
         
Senior Notes C
1 fixed-to-floating swap
$100.0
1/04 to 2/13
6.4% to 2.8%
Fair value hedge
Senior Notes G
3 fixed-to-floating swaps
$300.0
10/04 to 10/14
5.6% to 2.6%
Fair value hedge
Senior Notes P
7 fixed-to-floating swaps
$400.0
6/09 to 8/12
4.6% to 2.7%
Fair value hedge
Duncan Energy Partners:
         
Variable-interest rate borrowings
3 floating-to-fixed swaps
$175.0
9/07 to 9/10
0.3% to 4.6%
Cash flow hedge

The changes in fair value of the fair value interest rate swaps and the related hedged items were recorded on the balance sheet with the offset recorded as interest expense.  This resulted in an increase of interest expense of $2.5 million and $3.1 million, respectively, for the three and nine months ended September 30, 2009.

At times, we may use treasury lock derivative instruments to hedge the underlying U.S. treasury rates related to forecasted issuances of debt.  As cash flow hedges, gains or losses on these instruments are recorded in OCI and amortized to earnings using the effective interest method over the forecasted term of the underlying fixed-rate debt.  In March 2008, we terminated treasury locks having a combined notional amount of $350.0 million.  On April 1, 2008, we terminated additional treasury locks having a notional amount of $250.0 million.  We recognized an aggregate loss of $20.7 million in OCI during the first quarter of 2008 related to these terminations.  We recognized no losses in OCI during the second quarter of 2008 in connection with such terminations.

During the nine months ended September 30, 2009, we entered into three forward starting interest rate swaps to hedge the underlying benchmark interest payments related to the forecasted issuances of debt.

 
Number and Type of
Notional
Period of
Average Rate
Accounting
Hedged Transaction
Derivative Employed
Amount
Hedge
Locked
Treatment
Enterprise Products Partners:
         
   Future debt offering
1 forward starting swap
$50.0
6/10 to 6/20
3.3%
Cash flow hedge
   Future debt offering
2 forward starting swaps
$200.0
2/11 to 2/21
3.6%
Cash flow hedge

The fair market value of the forward starting swaps was $8.1 million at September 30, 2009.  We entered into one additional forward starting swap for a notional amount of $50.0 million in October 2009 to hedge an anticipated 10-year note offering until February 2011.

For information regarding consolidated fair value amounts and gains and losses on interest rate derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” within this Note 4.

Commodity Derivative Instruments

The prices of natural gas, NGLs and certain petrochemical products are subject to fluctuations in response to changes in supply, demand, general market uncertainty and a variety of additional factors that are beyond our control.  In order to manage the price risk associated with such products, we enter into

14

ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
commodity derivative instruments such as forwards, basis swaps and futures contracts.  The following table summarizes our commodity derivative instruments outstanding at September 30, 2009:

 
Volume (1)
Accounting
Derivative Purpose
Current
Long-Term (2)
Treatment
Derivatives designated as hedging instruments:
     
  Enterprise Products Partners:
     
Natural gas processing:
     
Forecasted natural gas purchases for plant thermal reduction (“PTR”) (3)
16.6 Bcf
n/a
Cash flow hedge
Forecasted NGL sales
1.0 MMBbls
n/a
Cash flow hedge
Octane enhancement:
     
Forecasted purchases of NGLs
0.1 MMBbls
n/a
Cash flow hedge
Forecasted sales of NGLs
n/a
0.1 MMBbls
Cash flow hedge
Forecasted sales of octane enhancement products
1.0 MMBbls
n/a
Cash flow hedge
Natural gas marketing:
     
Natural gas storage inventory management activities
7.2 Bcf
n/a
Fair value hedge
Forecasted purchases of natural gas
n/a
3.0 Bcf
Cash flow hedge
Forecasted sales of natural gas
4.2 Bcf
0.9 Bcf
Cash flow hedge
NGL marketing:
     
Forecasted purchases of NGLs and related hydrocarbon products
2.7 MMBbls
0.1 MMBbls
Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products
7.0 MMBbls
0.4 MMBbls
Cash flow hedge
       
Derivatives not designated as hedging instruments:
     
   Enterprise Products Partners:
     
      Natural gas risk management activities (4) (5)
313.3 Bcf
34.4 Bcf
Mark-to-market
   Duncan Energy Partners:
     
      Natural gas risk management activities (5)
1.7 Bcf
n/a
Mark-to-market
(1)  Volume for derivatives designated as hedging instruments reflects the total amount of volumes hedged whereas volume for derivatives not designated as hedging instruments reflects the absolute value of derivative notional volumes.
(2)  The maximum term for derivatives included in the long-term column is December 2012.
(3)  PTR represents the British thermal unit equivalent of the NGLs extracted from natural gas by a processing plant, and includes the natural gas used as plant fuel to extract those liquids, plant flare and other shortages.  See the discussion below for the primary objective of this strategy.
(4)  Volume includes approximately 61.8 billion cubic feet (“Bcf”) of physical derivative instruments that are predominantly priced as an index plus a premium or minus a discount.
(5)  Reflects the use of derivative instruments to manage risks associated with natural gas transportation, processing and storage assets.

The table above does not include additional hedges of forecasted NGL sales executed under contracts that have been designated as normal purchase and sale agreements.   At September 30, 2009, the volume hedged under these contracts was 4.6 million barrels (“MMBbls”).

Certain of our derivative instruments do not meet hedge accounting requirements; therefore, they are accounted for as economic hedges using mark-to-market accounting.

Our three predominant hedging strategies are hedging natural gas processing margins, hedging anticipated future sales margins on NGLs associated with physical volumes held in inventory and hedging the fair value of natural gas held in inventory.

The objective of our natural gas processing strategy is to hedge a level of gross margins associated with the NGL forward sales contracts (i.e., NGL sales revenues less actual costs for PTR and the gain or loss on the PTR hedge) by locking in the cost of natural gas used for PTR through the use of commodity derivative instruments.  This program consists of:

§  
the forward sale of a portion of our expected equity NGL production at fixed prices through December 2009, and

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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
§  
the purchase, using commodity derivative instruments, of the amount of natural gas expected to be consumed as PTR in the production of such equity NGL production.

At September 30, 2009, this program had hedged future estimated gross margins (before plant operating expenses) of $131.0 million on 5.0 MMBbls of forecasted NGL forward sales transactions extending through December 2009.

The objective of our NGL sales hedging program is to hedge future sales margins on physical NGL inventory by locking in the sales price through the use of commodity derivative instruments.

The objective of our natural gas inventory hedging program is to hedge the fair value of natural gas currently held in inventory by locking in the sales price of the inventory through the use of commodity derivative instruments.

For information regarding consolidated fair value amounts and gains and losses on commodity derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” within this Note 4.

Foreign Currency Derivative Instruments

We are exposed to foreign currency exchange risk in connection with our NGL and natural gas marketing activities in Canada.  As a result, we could be adversely affected by fluctuations in currency rates between the U.S. dollar and Canadian dollar.  In order to manage this risk, we may enter into foreign exchange purchase contracts to lock in the exchange rate.  Prior to 2009, these derivative instruments were accounted for using mark-to-market accounting.  Beginning with the first quarter of 2009, the long-term transactions (more than two months) are accounted for as cash flow hedges.  Shorter term transactions are accounted for using mark-to-market accounting.

In addition, we were exposed to foreign currency exchange risk in connection with a term loan denominated in Japanese yen (see Note 9).  We entered into this loan agreement in November 2008 and the loan matured in March 2009.  The derivative instrument used to hedge this risk was accounted for as a cash flow hedge and settled upon repayment of the loan.

At September 30, 2009, we had foreign currency derivative instruments outstanding with a notional amount of $5.5 million Canadian.  The fair market value of these instruments was an asset of $0.3 million at September 30, 2009.

For information regarding consolidated fair value amounts and gains and losses on foreign currency derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” within this Note 4.

Credit-Risk Related Contingent Features in Derivative Instruments

A limited number of our commodity derivative instruments include provisions related to credit ratings and/or adequate assurance clauses.  A credit rating provision provides for a counterparty to demand immediate full or partial payment to cover a net liability position upon the loss of a stipulated credit rating. An adequate assurance clause provides for a counterparty to demand immediate full or partial payment to cover a net liability position should reasonable grounds for insecurity arise with respect to contractual performance by either party.  At September 30, 2009, the aggregate fair value of our over-the-counter derivative instruments in a net liability position was $5.7 million, the total of which was subject to a credit rating contingent feature.  If our credit ratings were downgraded to Ba2/BB, approximately $5.0 million would be payable as a margin deposit to the counterparties, and if our credit ratings were downgraded to Ba3/BB- or below, approximately $5.7 million would be payable as a margin deposit to the counterparties.  Currently, no margin is required to be deposited.  The potential for derivatives with contingent features to enter a net liability position may change in the future as positions and prices fluctuate. 

16

ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Tabular Presentation of Fair Value Amounts, and Gains and Losses on
Derivative Instruments and Related Hedged Items

The following table provides a balance sheet overview of our derivative assets and liabilities at the dates indicated:
 
 
Asset Derivatives
 
Liability Derivatives
 
September 30, 2009
 
December 31, 2008
 
September 30, 2009
 
December 31, 2008
 
Balance Sheet
Fair
 
Balance Sheet
Fair
 
Balance Sheet
Fair
 
Balance Sheet
Fair
 
Location
Value
 
Location
Value
 
Location
Value
 
Location
Value
Derivatives designated as hedging instruments:
Interest rate derivatives
Derivative assets
$ 23.2  
Derivative assets
$ 7.8  
Derivative liabilities
$ 6.0  
Derivative liabilities
$ 5.9
Interest rate derivatives
Other assets
  33.4  
Other assets
  39.0  
Other liabilities
  2.0  
Other liabilities
  3.9
Total interest rate derivatives
    56.6       46.8       8.0       9.8
Commodity derivatives
Derivative assets
  51.9  
Derivative assets
  150.5  
Derivative liabilities
  133.2  
Derivative liabilities
  253.5
Commodity derivatives
Other assets
  0.2  
Other assets
  --  
Other liabilities
  2.1  
Other liabilities
  0.2
Total commodity derivatives (1)
    52.1       150.5       135.3       253.7
Foreign currency derivatives (2)
Derivative assets
  0.3  
Derivative assets
  9.3  
Derivative liabilities
  --  
Derivative liabilities
  --
Total derivatives designated as hedging instruments
  $ 109.0     $ 206.6     $ 143.3     $ 263.5
                               
Derivatives not designated as hedging instruments:
Commodity derivatives
Derivative assets
$ 121.6  
Derivative assets
$ 35.2  
Derivative liabilities
$ 123.9  
Derivative liabilities
$ 27.7
Commodity derivatives
Other assets
  1.1  
Other assets
  --  
Other liabilities
  2.4  
Other liabilities
  --
Total commodity derivatives
    122.7       35.2       126.3       27.7
Foreign currency derivatives
Derivative assets
  --  
Derivative assets
  --  
Derivative liabilities
  --  
Derivative liabilities
  0.1
Total derivatives not designated as hedging instruments
  $ 122.7     $ 35.2     $ 126.3     $ 27.8
                               
(1)  Represent commodity derivative instrument transactions that either have not settled or have settled and not been invoiced. Settled and invoiced transactions are reflected in either accounts receivable or accounts payable depending on the outcome of the transaction.
(2)  Relates to the hedging of our exposure to fluctuations in the foreign currency exchange rate related to our Canadian NGL marketing subsidiary.

The following tables present the effect of our derivative instruments designated as fair value hedges on our Unaudited Condensed Statements of Consolidated Operations for the periods indicated:

Derivatives in
       
Fair Value
   
Gain/(Loss) Recognized in
 
Hedging Relationships
Location
 
Income on Derivative
 
     
For the Three Months
   
For the Nine Months
 
     
Ended September 30,
   
Ended September 30,
 
     
2009
   
2008
   
2009
   
2008
 
Interest rate derivatives
Interest expense
  $ 12.0     $ 4.2     $ (4.2 )   $ (1.7 )
Commodity derivatives
Revenue
    0.6       --       (0.1 )     --  
   Total
    $ 12.6     $ 4.2     $ (4.3 )   $ (1.7 )

17

ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Derivatives in
       
Fair Value
   
Gain/(Loss) Recognized in
 
Hedging Relationships
Location
 
Income on Hedged Item
 
     
For the Three Months
   
For the Nine Months
 
     
Ended September 30,
   
Ended September 30,
 
     
2009
   
2008
   
2009
   
2008
 
Interest rate derivatives
Interest expense
  $ (14.5 )   $ (4.2 )   $ 1.1     $ 1.7  
Commodity derivatives
Revenue
    (0.5 )     --       0.6       --  
   Total
    $ (15.0 )   $ (4.2 )   $ 1.7     $ 1.7  

The following tables present the effect of our derivative instruments designated as cash flow hedges on our Unaudited Condensed Statements of Consolidated Operations for the periods indicated:

Derivatives in
 
Change in Value
 
Cash Flow
 
Recognized in OCI on
 
Hedging Relationships
 
Derivative (Effective Portion)
 
   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest rate derivatives
  $ (8.0 )   $ (1.1 )   $ 7.1     $ (22.9 )
Commodity derivatives – Revenue
    (21.3 )     (25.3 )     44.5       (30.2 )
Commodity derivatives – Operating costs and expenses
    13.0       (218.7 )     (191.4 )     (93.9 )
Foreign currency derivatives
    0.2       --       (10.3 )     (1.3 )
Total
  $ (16.1 )   $ (245.1 )   $ (150.1 )   $ (148.3 )

Derivatives in
Location of Gain/(Loss)
 
Amount of Gain/(Loss)
 
Cash Flow
Reclassified from AOCI
 
Reclassified from AOCI
 
Hedging Relationships
into Income (Effective Portion)
 
to Income (Effective Portion)
 
     
For the Three Months
   
For the Nine Months
 
     
Ended September 30,
   
Ended September 30,
 
     
2009
   
2008
   
2009
   
2008
 
Interest rate derivatives
Interest expense
  $ (1.3 )   $ --     $ (3.3 )   $ 2.4  
Commodity derivatives
Revenue
    (12.5 )     (17.2 )     7.2       (23.3 )
Commodity derivatives
Operating costs and expenses
    (65.3 )     (11.3 )     (183.5 )     7.5  
   Total
    $ (79.1 )   $ (28.5 )   $ (179.6 )   $ (13.4 )

 
Location of Gain/(Loss)
 
Amount of Gain/(Loss)
 
Derivatives in
Recognized in Income
 
Recognized in Income on
 
Cash Flow
on Ineffective Portion
 
Ineffective Portion of
 
Hedging Relationships
of Derivative
 
Derivative
 
     
For the Three Months
   
For the Nine Months
 
     
Ended September 30,
   
Ended September 30,
 
     
2009
   
2008
   
2009
   
2008
 
Commodity derivatives
Revenue
  $ 0.8     $ --     $ 0.1     $ --  
Commodity derivatives
Operating costs and expenses
    (1.0 )     (5.7 )     (2.3 )     (2.9 )
   Total
    $ (0.2 )   $ (5.7 )   $ (2.2 )   $ (2.9 )

Over the next twelve months, we expect to reclassify $5.3 million of accumulated other comprehensive loss (“AOCI”) attributable to interest rate derivative instruments to earnings as an increase to interest expense. Likewise, we expect to reclassify $81.3 million of AOCI attributable to commodity derivative instruments to earnings, $32.1 million as an increase in operating costs and expenses and $49.2 million as a reduction in revenues.

18

ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table presents the effect of our derivative instruments not designated as hedging instruments on our Unaudited Condensed Statements of Consolidated Operations for the periods indicated:

Derivatives Not Designated
   
Gain/(Loss) Recognized in
 
as  Hedging Instruments
Location
 
Income on Derivative
 
     
For the Three Months
   
For the Nine Months
 
     
Ended September 30,
   
Ended September 30,
 
     
2009
   
2008
   
2009
   
2008
 
Commodity derivatives (1)
Revenue
  $ (6.1 )   $ 38.1     $ 25.4     $ 35.2  
Commodity derivatives
Operating costs and expenses
    --       1.9       --       (7.1 )
Foreign currency derivatives
Other income
    --       --       (0.1 )     --  
   Total
    $ (6.1 )   $ 40.0     $ 25.3     $ 28.1  
                                   
(1)  Amounts for the three and nine months ended September 30, 2009 include $0.9 million and $3.8 million of gains on derivatives excluded from the assessment of hedge effectiveness under fair value hedging relationships, respectively.
 

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a specified measurement date.  Our fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. Recognized valuation techniques employ inputs such as product prices, operating costs, discount factors and business growth rates.  These inputs may be either readily observable, corroborated by market data or generally unobservable.  In developing our estimates of fair value, we endeavor to utilize the best information available and apply market-based data to the extent possible.  Accordingly, we utilize valuation techniques (such as the market approach) that maximize the use of observable inputs and minimize the use of unobservable inputs.

A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements based on the observability of inputs used to estimate such fair values.  The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3).  At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy.  The characteristics of fair value amounts classified within each level of the hierarchy are described as follows:

§  
Level 1 fair values are based on quoted prices, which are available in active markets for identical assets or liabilities as of the measurement date.  Active markets are defined as those in which transactions for identical assets or liabilities occur with sufficient frequency so as to provide pricing information on an ongoing basis (e.g., the New York Mercantile Exchange).  Our Level 1 fair values primarily consist of financial assets and liabilities such as exchange-traded commodity financial instruments.

§  
Level 2 fair values are based on pricing inputs other than quoted prices in active markets (as reflected in Level 1 fair values) and are either directly or indirectly observable as of the measurement date.  Level 2 fair values include instruments that are valued using financial models or other appropriate valuation methodologies.  Such financial models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, the time value of money, volatility factors, current market and contractual prices for the underlying instruments and other relevant economic measures.  Substantially all of these assumptions are (i) observable in the marketplace throughout the full term of the instrument, (ii) can be derived from observable data or (iii) are validated by inputs other than quoted prices (e.g., interest rate and yield curves at commonly quoted intervals).  Our Level 2 fair values primarily consist of commodity financial instruments such as forwards, swaps and other instruments transacted on an exchange or over the counter.  The fair values of these derivatives are based on observable price quotes for similar products and locations.  The value of our interest rate

19

ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
derivatives are valued by using appropriate financial models with the implied forward London Interbank Offered Rate yield curve for the same period as the future interest swap settlements.
 
§  
Level 3 fair values are based on unobservable inputs.  Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.  Unobservable inputs reflect the reporting entity’s own ideas about the assumptions that market participants would use in pricing an asset or liability (including assumptions about risk).  Unobservable inputs are based on the best information available in the circumstances, which might include the reporting entity’s internally developed data.  The reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.  Level 3 inputs are typically used in connection with internally developed valuation methodologies where management makes its best estimate of an instrument’s fair value.  Our Level 3 fair values largely consist of ethane and normal butane-based contracts with a range of two to twelve months in term.  We rely on broker quotes for these products.

The following table sets forth, by level within the fair value hierarchy, our financial assets and liabilities measured on a recurring basis at September 30, 2009.  These financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value assets and liabilities and their placement within the fair value hierarchy levels.

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                       
Interest rate derivative instruments
  $ --     $ 56.6     $ --     $ 56.6  
Commodity derivative instruments
    10.9       151.8       12.1       174.8  
Foreign currency derivative instruments
    --       0.3       --       0.3  
Total
  $ 10.9     $ 208.7     $ 12.1     $ 231.7  
                                 
Financial liabilities:
                               
Interest rate derivative instruments
  $ --     $ 8.0     $ --     $ 8.0  
Commodity derivative instruments
    36.7       211.1       13.8       261.6  
Total
  $ 36.7     $ 219.1     $ 13.8     $ 269.6  

20

ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table sets forth a reconciliation of changes in the fair value of our Level 3 financial assets and liabilities for the periods presented:

   
For the Nine Months
 
   
Ended September 30,
 
   
2009
   
2008
 
Balance, January 1
  $ 32.6     $ (4.6 )
Total gains (losses) included in:
               
Net income (1)
    12.5       (2.3 )
Other comprehensive income (loss)
    1.5       2.4  
Purchases, issuances, settlements
    (12.5 )     1.9  
Balance, March 31
    34.1       (2.6 )
Total gains (losses) included in:
               
Net income (1)
    7.7       0.3  
Other comprehensive income (loss)
    (23.1 )     (2.4 )
Purchases, issuances, settlements
    (7.7 )     0.1  
Transfers out of Level 3
    (0.2 )     --  
Balance, June 30
    10.8       (4.6 )
Total gains (losses) included in:
               
Net income (1)
    6.5