UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

OR

  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
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
1100 Louisiana Street, 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    No

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    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
Accelerated filer
Non-accelerated filer    (Do not check if a smaller reporting company)
Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes    No

There were 1,935,026,941 common units of Enterprise Products Partners L.P. outstanding at the close of business on October 31, 2014.  Our common units trade on the New York Stock Exchange under the ticker symbol "EPD."
ENTERPRISE PRODUCTS PARTNERS L.P.
TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
1
PART I.  FINANCIAL INFORMATION.

Item 1. Financial Statements.

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

 
  
September 30,
2014
    
December 31,
2013
  
ASSETS
  
   
 
Current assets:
  
   
 
Cash and cash equivalents
  
$
1,061.6
    
$
56.9
  
Restricted cash
    
6.6
      
65.6
  
Accounts receivable – trade, net of allowance for doubtful accounts
of $14.8 at September 30, 2014 and $7.5 at December 31, 2013
    
5,320.8
      
5,475.5
  
Accounts receivable – related parties
    
2.6
      
6.8
  
Inventories
    
1,589.5
      
1,093.1
  
Prepaid and other current assets
    
384.4
      
325.5
  
Total current assets
    
8,365.5
      
7,023.4
  
Property, plant and equipment, net
    
27,963.3
      
26,946.6
  
Investments in unconsolidated affiliates
    
2,938.3
      
2,437.1
  
Intangible assets, net of accumulated amortization of $1,208.4 at
September 30, 2014 and $1,150.0 at December 31, 2013
    
1,391.1
      
1,462.2
  
Goodwill (see Note 8)
    
2,079.9
      
2,080.0
  
Other assets
    
167.4
      
189.4
  
Total assets
  
$
42,905.5
    
$
40,138.7
  
 
                
LIABILITIES AND EQUITY
                
Current liabilities:
                
Current maturities of debt (see Note 9)
  
$
1,939.9
    
$
1,125.0
  
Accounts payable – trade
    
728.0
      
723.7
  
Accounts payable – related parties
    
122.6
      
150.5
  
Accrued product payables
    
5,564.6
      
5,608.7
  
Accrued interest
    
172.5
      
304.3
  
Other current liabilities
    
444.2
      
326.5
  
Total current liabilities
    
8,971.8
      
8,238.7
  
Long-term debt (see Note 9)
    
17,706.5
      
16,226.5
  
Deferred tax liabilities
    
63.2
      
60.8
  
Other long-term liabilities
    
182.1
      
172.3
  
Commitments and contingencies (see Note 14)
                
Equity: (see Note 10)
                
Partners' equity:
                
Limited partners:
                
Common units (1,880,223,189 units outstanding at September 30, 2014
and 1,871,370,016 units outstanding at December 31, 2013)
    
16,063.6
      
15,573.8
  
Accumulated other comprehensive loss
    
(306.1
)
    
(359.0
)
Total  partners' equity
    
15,757.5
      
15,214.8
  
Noncontrolling interests
    
224.4
      
225.6
  
Total equity
    
15,981.9
      
15,440.4
  
Total liabilities and equity
  
$
42,905.5
    
$
40,138.7
  






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
Ended September 30,
    
For the Nine Months
Ended September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
Revenues:
  
   
   
   
 
Third parties
  
$
12,319.2
    
$
12,085.6
    
$
37,697.1
    
$
34,605.4
  
Related parties
    
11.0
      
7.7
      
63.8
      
20.3
  
Total revenues (see Note 11)
    
12,330.2
      
12,093.3
      
37,760.9
      
34,625.7
  
Costs and expenses:
                                
Operating costs and expenses:
                                
Third parties
    
11,198.1
      
11,055.3
      
34,198.9
      
31,404.5
  
Related parties
    
216.7
      
218.2
      
735.5
      
656.6
  
Total operating costs and expenses
    
11,414.8
      
11,273.5
      
34,934.4
      
32,061.1
  
General and administrative costs:
                                
Third parties
    
18.1
      
17.4
      
60.0
      
54.6
  
Related parties
    
31.9
      
26.5
      
90.9
      
84.3
  
Total general and administrative costs
    
50.0
      
43.9
      
150.9
      
138.9
  
Total costs and expenses (see Note 11)
    
11,464.8
      
11,317.4
      
35,085.3
      
32,200.0
  
Equity in income of unconsolidated affiliates
    
72.3
      
44.0
      
179.1
      
126.1
  
Operating income
    
937.7
      
819.9
      
2,854.7
      
2,551.8
  
Other income (expense):
                                
Interest expense
    
(229.8
)
    
(208.3
)
    
(679.6
)
    
(604.4
)
Interest income
    
0.3
      
0.2
      
1.1
      
0.7
  
Other, net
    
(1.3
)
    
0.4
      
(1.3
)
    
(0.5
)
Total other expense, net
    
(230.8
)
    
(207.7
)
    
(679.8
)
    
(604.2
)
Income before income taxes
    
706.9
      
612.2
      
2,174.9
      
1,947.6
  
Provision for income taxes
    
(7.7
)
    
(19.4
)
    
(22.5
)
    
(46.2
)
Net income
    
699.2
      
592.8
      
2,152.4
      
1,901.4
  
Net income attributable to noncontrolling interests (see Note 10)
    
(8.1
)
    
(0.8
)
    
(24.8
)
    
(3.4
)
Net income attributable to limited partners
  
$
691.1
    
$
592.0
    
$
2,127.6
    
$
1,898.0
  
 
                                
Earnings per unit: (see Note 13)
                                
Basic earnings per unit
  
$
0.38
    
$
0.33
    
$
1.16
    
$
1.07
  
Diluted earnings per unit
  
$
0.37
    
$
0.32
    
$
1.13
    
$
1.03
  
















See Notes to Unaudited Condensed Consolidated Financial Statements.
3

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

 
  
For the Three Months
Ended September 30,
    
For the Nine Months
Ended September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
 
  
   
   
   
 
Net income
  
$
699.2
    
$
592.8
    
$
2,152.4
    
$
1,901.4
  
Other comprehensive income (loss):
                                
Cash flow hedges:
                                
Commodity derivative instruments:
                                
Changes in fair value of cash flow hedges
    
58.1
      
(8.6
)
    
16.1
      
(22.1
)
Reclassification of losses (gains) to net income
    
(18.0
)
    
14.6
      
12.9
      
14.7
  
Interest rate derivative instruments:
                                
Changes in fair value of cash flow hedges
    
--
      
--
      
--
      
6.7
  
Reclassification of losses to net income
    
8.0
      
7.7
      
23.9
      
21.4
  
Total cash flow hedges
    
48.1
      
13.7
      
52.9
      
20.7
  
Other
    
--
      
--
      
--
      
0.4
  
Total other comprehensive income
    
48.1
      
13.7
      
52.9
      
21.1
  
Comprehensive income
    
747.3
      
606.5
      
2,205.3
      
1,922.5
  
Comprehensive income attributable to noncontrolling interests
    
(8.1
)
    
(0.8
)
    
(24.8
)
    
(3.4
)
Comprehensive income attributable to limited partners
  
$
739.2
    
$
605.7
    
$
2,180.5
    
$
1,919.1
  
 






























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,
  
 
  
2014
    
2013
  
Operating activities:
  
   
 
Net income
  
$
2,152.4
    
$
1,901.4
  
Reconciliation of net income to net cash flows provided by operating activities:
                
Depreciation, amortization and accretion
    
992.4
      
902.3
  
Non-cash asset impairment charges (see Note 4)
    
18.2
      
53.3
  
Equity in income of unconsolidated affiliates
    
(179.1
)
    
(126.1
)
Distributions received from unconsolidated affiliates
    
260.7
      
187.6
  
Net gains attributable to asset sales and insurance recoveries (see Note 16)
    
(99.0
)
    
(68.4
)
Deferred income tax expense
    
2.6
      
32.1
  
Changes in fair market value of derivative instruments
    
(3.8
)
    
(5.3
)
Net effect of changes in operating accounts (see Note 16)
    
(435.8
)
    
(513.9
)
Other operating activities
    
(4.2
)
    
3.2
  
Net cash flows provided by operating activities
    
2,704.4
      
2,366.2
  
Investing activities:
                
Capital expenditures
    
(1,879.5
)
    
(2,413.2
)
Contributions in aid of construction costs
    
20.0
      
19.9
  
Decrease (increase) in restricted cash
    
59.0
      
(31.6
)
Investments in unconsolidated affiliates
    
(583.3
)
    
(768.4
)
Proceeds from asset sales and insurance recoveries (see Note 16)
    
121.5
      
256.3
  
Other investing activities
    
(5.8
)
    
(0.5
)
Cash used in investing activities
    
(2,268.1
)
    
(2,937.5
)
Financing activities:
                
Borrowings under debt agreements
    
7,167.5
      
10,139.2
  
Repayments of debt
    
(4,856.3
)
    
(8,791.6
)
Debt issuance costs
    
(18.1
)
    
(23.7
)
Monetization of interest rate derivative instruments (see Note 4)
    
--
      
(168.8
)
Cash distributions paid to limited partners (see Note 10)
    
(1,948.2
)
    
(1,778.3
)
Cash payments made in connection with distribution equivalent rights
    
(2.4
)
    
--
  
Cash distributions paid to noncontrolling interests
    
(29.4
)
    
(6.4
)
Cash contributions from noncontrolling interests (see Note 10)
    
4.0
      
104.2
  
Net cash proceeds from the issuance of common units
    
304.9
      
1,134.7
  
Other financing activities
    
(53.6
)
    
(44.5
)
Cash provided by financing activities
    
568.4
      
564.8
  
Net change in cash and cash equivalents
    
1,004.7
      
(6.5
)
Cash and cash equivalents, January 1
    
56.9
      
16.1
  
Cash and cash equivalents, September 30
  
$
1,061.6
    
$
9.6
  













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, Accumulated Other Comprehensive
Income (Loss) and Noncontrolling Interests)
(Dollars in millions)

 
  
Partners' Equity
    
   
 
 
  
Limited
Partners
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Noncontrolling
Interests
    
Total
  
Balance, December 31, 2013
  
$
15,573.8
    
$
(359.0
)
  
$
225.6
    
$
15,440.4
  
Net income
    
2,127.6
      
--
      
24.8
      
2,152.4
  
Cash distributions paid to limited partners
    
(1,948.2
)
    
--
      
--
      
(1,948.2
)
Cash payments made in connection with distribution equivalent rights
    
(2.4
)
    
--
      
--
      
(2.4
)
Cash distributions paid to noncontrolling interests
    
--
      
--
      
(29.4
)
    
(29.4
)
Cash contributions from noncontrolling interests
    
--
      
--
      
4.0
      
4.0
  
Net cash proceeds from the issuance of common units
    
304.9
      
--
      
--
      
304.9
  
Amortization of fair value of equity-based awards
    
61.6
      
--
      
--
      
61.6
  
Cash flow hedges
    
--
      
52.9
      
--
      
52.9
  
Other
    
(53.7
)
    
--
      
(0.6
)
    
(54.3
)
Balance, September 30, 2014
  
$
16,063.6
    
$
(306.1
)
  
$
224.4
    
$
15,981.9
  

 
  
Partners' Equity
    
   
 
 
  
Limited
Partners
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Noncontrolling
Interests
    
Total
  
Balance, December 31, 2012
  
$
13,558.1
    
$
(370.4
)
  
$
108.3
    
$
13,296.0
  
Net income
    
1,898.0
      
--
      
3.4
      
1,901.4
  
Cash distributions paid to limited partners
    
(1,778.3
)
    
--
      
--
      
(1,778.3
)
Cash distributions paid to noncontrolling interests
    
--
      
--
      
(6.4
)
    
(6.4
)
Cash contributions from noncontrolling interests
    
--
      
--
      
104.2
      
104.2
  
Net cash proceeds from the issuance of common units
    
1,134.7
      
--
      
--
      
1,134.7
  
Amortization of fair value of equity-based awards
    
53.5
      
--
      
--
      
53.5
  
Cash flow hedges
    
--
      
20.7
      
--
      
20.7
  
Other
    
(44.6
)
    
0.4
      
0.6
      
(43.6
)
Balance, September 30, 2013
  
$
14,821.4
    
$
(349.3
)
  
$
210.1
    
$
14,682.2
  


















See Notes to Unaudited Condensed Consolidated Financial Statements.
6
Table of Contents
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 With the exception of per unit amounts, or as noted within the context of each disclosure,
 the dollar amounts presented in the tabular data within these disclosures are
stated in millions of dollars.

KEY REFERENCES USED IN THESE
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unless the context requires otherwise, references to "we," "us," "our," "Enterprise" or "Enterprise Products Partners" are intended to mean the business and operations of Enterprise Products Partners L.P. and its consolidated subsidiaries.  References to "EPO" mean Enterprise Products Operating LLC, which is a wholly owned subsidiary of Enterprise, and its consolidated subsidiaries, through which Enterprise Products Partners L.P. conducts its business.  Enterprise is managed by its general partner, Enterprise Products Holdings LLC ("Enterprise GP"), which is a wholly owned subsidiary of Dan Duncan LLC, a privately held Texas limited liability company.

The membership interests of Dan Duncan LLC are owned of record by a voting trust, the current trustees ("DD LLC Trustees") of which are: (i) Randa Duncan Williams, who is also a director and Chairman of the Board of Enterprise GP; (ii) Dr. Ralph S. Cunningham; and (iii) Richard H. Bachmann.  Each of the DD LLC Trustees also currently serves as one of the three managers of Dan Duncan LLC.

References to "EPCO" mean Enterprise Products Company, a privately held Texas corporation, and its privately held affiliates.  A majority of the outstanding voting capital stock of EPCO is owned of record by a voting trust, the current trustees ("EPCO Trustees") of which are:  (i) Ms. Williams, who also serves as Chairman of EPCO; (ii) Dr. Cunningham, who also serves as a Vice Chairman of EPCO; and (iii) Mr. Bachmann, who also serves as the President and Chief Executive Officer ("CEO") of EPCO.  Each of the EPCO Trustees is also a director of EPCO. 
  
In addition to owning our general partner, privately held affiliates of EPCO owned approximately 36.4% of our limited partner interests at September 30, 2014.

References to "TEPPCO" mean TEPPCO Partners, L.P. prior to its merger with one of our wholly owned subsidiaries in October 2009.


Note 1.  Partnership Operations and Organization

General

We are 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."  We were formed in April 1998 to own and operate certain natural gas liquids ("NGLs") related businesses of EPCO and are a leading North American provider of midstream energy services to producers and consumers of natural gas, NGLs, crude oil, petrochemicals and refined products. 

Our integrated midstream energy asset network links producers of natural gas, NGLs and crude oil from some of the largest supply basins in the United States ("U.S."), Canada and Gulf of Mexico with domestic consumers and international markets.  Our midstream energy operations currently include: natural gas gathering, treating, processing, transportation and storage; NGL transportation, fractionation, storage, and import and export terminals (including liquefied petroleum gas or "LPG"); crude oil gathering, transportation, storage and terminals; offshore production platforms; petrochemical and refined products transportation, storage and terminals, and related services; and a marine transportation business that operates primarily on the U.S. inland and Intracoastal Waterway systems and in the Gulf of Mexico.  Our assets include approximately 52,000 miles of onshore and offshore pipelines; 220 million barrels ("MMBbls") of storage capacity for NGLs, petrochemicals, refined products and crude oil; and 14 billion cubic feet ("Bcf") of natural gas storage capacity.  In addition, our asset portfolio includes 24 natural gas processing plants, 22 NGL and propylene fractionators, six offshore hub platforms located in the Gulf of Mexico, a butane isomerization complex, NGL import and LPG export terminals, and octane enhancement and high-purity isobutylene production facilities.
7
Table of Contents
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
We have five reportable business segments: (i) NGL Pipelines & Services; (ii) Onshore Natural Gas Pipelines & Services; (iii) Onshore Crude Oil Pipelines & Services; (iv) Offshore Pipelines & Services; and (v) Petrochemical & Refined Products Services.

We are 100% owned by our limited partners from an economic perspective.  We are managed and controlled by Enterprise GP, which has a non-economic general partner interest in us.  We, Enterprise GP, EPCO and Dan Duncan LLC are affiliates under the collective common control of the DD LLC Trustees and the EPCO Trustees.  We have no employees.  All of our operating functions and general and administrative support services are provided by employees of EPCO pursuant to an administrative services agreement (the "ASA") or by other service providers.  See Note 12 for information regarding the ASA and other related party matters.

On October 1, 2014, we announced our acquisition of the general partner and certain limited partner interests of Oiltanking Partners, L.P. See Note 18 for information regarding this subsequent event.


Note 2.  General Accounting Matters

Our results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of results expected for the full year of 2014.  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 and 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 annual report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K") filed with the SEC on March 3, 2014.

See Note 10 for information regarding a two-for-one common unit split completed on August 21, 2014.  All per unit amounts and number of units outstanding in these Unaudited Condensed Consolidated Financial Statements and Notes thereto are presented on a post-split basis.

Contingencies

Certain conditions may exist as of the date our consolidated financial statements are issued, which may result in a loss to us but which will only be resolved when one or more future events occur or fail to occur.  Management has regular quarterly litigation reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such assessment inherently involves an exercise in judgment.  In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, our management and legal counsel evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

We accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated.  If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued.  We do not record a contingent liability when the likelihood of loss is probable but the amount cannot be reasonably estimated or when it is believed to be only reasonably possible or remote.

For contingencies where an unfavorable outcome is reasonably possible and the impact would be material, we disclose the nature of the contingency and, if feasible, an estimate of the possible loss or range of loss.
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Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.  See Note 14 for additional information regarding our contingencies.

Derivative Instruments

We use derivative instruments such as futures, swaps, options, forward contracts and other arrangements to manage price risks associated with inventories, firm commitments, interest rates, foreign currencies and certain anticipated future commodity transactions.  To qualify for hedge accounting, the hedged item must expose us to risk and the related derivative instrument must reduce the exposure to that risk and meet specific hedge documentation requirements related to designation dates, expectations for hedge effectiveness and the probability that hedged future transactions will occur as forecasted.  We formally designate derivative instruments as hedges and document and assess their effectiveness at inception of the hedge and on a monthly basis thereafter.  Forecasted transactions are evaluated for the probability of occurrence and are periodically back-tested once the forecasted period has passed to determine whether similarly forecasted transactions are probable of occurring in the future.

For certain physical forward commodity derivative contracts, we apply the normal purchase/normal sale exception, whereby changes in the mark-to-market values of such contracts are not recognized in income.  As a result, the revenues and expenses associated with such physical transactions are recognized during the period when volumes are physically delivered or received.  Physical forward commodity contracts subject to this exception are evaluated for the probability of future delivery and are periodically back-tested once the forecasted period has passed to determine whether similar forward contracts are probable of physical delivery in the future.  See Note 4 for additional information regarding our derivative instruments.

Estimates

Preparing our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates that affect amounts presented in the financial statements.  Our most significant estimates relate to (i) the useful lives and depreciation/amortization methods used for fixed and identifiable intangible assets; (ii) measurement of fair value and projections used in impairment testing of fixed and intangible assets (including goodwill); (iii) contingencies; and (iv) revenue and expense accruals.

Actual results could differ materially from our estimates.  On an ongoing basis, we review our estimates based on currently available information.  Any changes in the facts and circumstances underlying our estimates may require us to update such estimates, which could have a material impact on our consolidated financial statements.

Recent Accounting Developments

In May 2014, the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board finished their joint project to converge U.S. GAAP and International Financial Reporting Standards in the area of revenue recognition.  The resulting accounting standards update eliminates the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replaces it with a principles based approach for determining revenue recognition.

The core principle in the new guidance is that a company should recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration the company expects to receive for those goods or services.  In order to apply this core principle, companies will apply the following five steps in determining the amount of revenues to recognize:

identify the contract;

identify the performance obligations in the contract;

determine the transaction price;

allocate the transaction price to the performance obligations in the contract; and
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recognize revenue when (or as) the performance obligation is satisfied.

Each of these steps involves judgment and an analysis of the contract's terms and conditions.
 
We are continuing to evaluate this recently issued accounting guidance; therefore, we are currently not in a position to estimate its impact on our consolidated financial statements.  The effective date of the new standard is January 1, 2017.  At present, we expect to adopt the new standard using the modified retrospective method.  This modified approach allows us to apply the new standard to (i) all new contracts after the effective date and (ii) all existing contracts as of the effective date through a cumulative adjustment to equity.  Consolidated revenues for periods prior to the effective date would not be retrospectively adjusted.

Restricted Cash

Restricted cash represents amounts held in segregated bank accounts by our clearing brokers as margin in support of our commodity derivative instruments portfolio and related physical purchases and sales of natural gas, crude oil, refined products and NGLs.  Additional cash may be restricted to maintain our commodity derivative instruments portfolio as prices fluctuate or deposit requirements change.  At September 30, 2014 and December 31, 2013, our restricted cash amounts were $6.6 million and $65.6 million, respectively.  See Note 4 for information regarding our derivative instruments and hedging activities.


Note 3.  Equity-based Awards

An allocated portion of the fair value of EPCO's equity-based awards is charged to us under the ASA.  The following table summarizes compensation expense we recognized in connection with equity-based awards for the periods indicated:

 
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
2014
  
2013
  
2014
  
2013
  
Equity-classified awards:
 
 
 
 
Restricted common unit awards
  
$
8.7
    
$
17.8
    
$
29.3
    
$
52.7
  
Unit option awards
    
--
      
0.1
      
--
      
0.7
  
Phantom unit awards
    
12.9
      
--
      
32.3
      
--
  
Liability-classified awards
    
0.1
      
0.1
      
0.4
      
0.4
  
Total
  
$
21.7
    
$
18.0
    
$
62.0
    
$
53.8
  

The fair value of equity-classified awards is amortized into earnings over the requisite service or vesting period.  Equity-classified awards are expected to result in the issuance of common units upon vesting.  Compensation expense for liability-classified awards is recognized over the requisite service or vesting period based on the fair value of the award remeasured at each reporting date.  Liability-classified awards are settled in cash upon vesting.

At September 30, 2014, EPCO's significant long-term incentive plans applicable to us were the Enterprise Products 1998 Long-Term Incentive Plan ("1998 Plan") and the 2008 Enterprise Products Long-Term Incentive Plan (Third Amendment and Restatement) ("2008 Plan").  Up to 14,000,000 of our common units may be issued as awards under the 1998 Plan.  The maximum number of common units available for issuance under the 2008 Plan was 25,000,000 at September 30, 2014.  This amount will automatically increase under the terms of the 2008 Plan by 5,000,000 common units on January 1, 2015 and will continue to automatically increase annually on January 1 thereafter during the term of the 2008 Plan; provided, however, that in no event shall the maximum aggregate number exceed 70,000,000 common units.  After giving effect to awards granted under the 1998 Plan and 2008 Plan through September 30, 2014, a total of 2,704,337 and 12,782,238 additional common units could be issued under these plans, respectively.
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Restricted Common Unit Awards

Restricted common unit awards allow recipients to acquire our common units (at no cost to the recipient apart from fulfilling service and other conditions) once a defined vesting period expires, subject to customary forfeiture provisions.  Restricted common unit awards generally vest at a rate of 25% per year beginning one year after the grant date and are non-vested until the required service periods expire.  Restricted common units are included in the number of common units outstanding as presented on our Unaudited Condensed Consolidated Balance Sheets.

The following table presents information regarding restricted common unit awards for the period indicated:

 
  
Number of
Units
    
Weighted-
Average Grant
Date Fair Value
per Unit (1)
  
Restricted common units at December 31, 2013
    
7,221,214
    
$
25.83
  
Vested
    
(2,586,398
)
  
$
23.92
  
Forfeited
    
(267,200
)
  
$
26.36
  
Restricted common units at September 30, 2014
    
4,367,616
    
$
26.93
  
  
 
(1)    Determined by dividing the aggregate grant date fair value of awards (before an allowance for forfeitures) by the number of awards issued.
  

Each recipient of a restricted common unit award is entitled to nonforfeitable cash distributions equal to the product of the number of restricted common units outstanding for the participant and the cash distribution per unit paid by Enterprise to its common unitholders.  These distributions are included in "Cash distributions paid to limited partners" as presented on our Unaudited Condensed Statements of Consolidated Cash Flows.

The following table presents supplemental information regarding our restricted common unit awards for the periods indicated:

 
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
2014
  
2013
  
2014
  
2013
  
Cash distributions paid to restricted common unitholders
  
$
1.6
    
$
2.6
    
$
5.7
    
$
8.2
  
Total intrinsic value of restricted common unit awards that vested during period
  
$
1.3
    
$
1.0
    
$
85.4
    
$
107.4
  

For the EPCO group of companies, the unrecognized compensation cost associated with restricted common unit awards was an aggregate $37.8 million at September 30, 2014, of which our allocated share of the cost is currently estimated to be $33.6 million.  Due to the graded vesting provisions of these awards, we expect to recognize our share of the unrecognized compensation cost for these awards over a weighted-average period of 1.6 years.

Unit Option Awards

EPCO's long-term incentive plans provide for the issuance of non-qualified incentive options denominated in the common units of Enterprise Products Partners L.P.  In general, unit option awards have a vesting period of four years from the date of grant and expire at the end of the calendar year following the year of vesting (e.g., an option vesting on May 29, 2013 will expire on December 31, 2014).  However, unit option awards only become exercisable at certain times during the calendar year following the year in which they vest (typically the months of February, May, August and November).
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The following table presents unit option award activity for the period indicated:

 
  
Number of
Units (2)
    
Weighted-
Average
Strike Price
(dollars/unit)
    
Weighted-
Average
Remaining
Contractual
Term
(in years)
    
Aggregate
Intrinsic
Value (1)
  
Unit option awards at December 31, 2013
    
4,050,000
    
$
13.24
      
1.3
    
$
57.0
  
Exercised
    
(2,720,000
)
  
$
11.83
                  
Forfeited
    
(60,000
)
  
$
16.14
                  
Unit option awards at September 30, 2014
    
1,270,000
    
$
16.14
      
1.3
    
$
30.7
  
  
 
(1)    Aggregate intrinsic value reflects fully vested unit option awards at the dates indicated.
  
(2)    None of the unit option awards outstanding at September 30, 2014 and December 31, 2013 were exercisable as of such dates, respectively.
  

In order to fund its unit option award-related obligations, EPCO may purchase common units at fair value either in the open market or directly from us.  When employees exercise unit option awards, we reimburse EPCO for the cash difference between the strike price paid by the employee and the actual purchase price paid by EPCO for the units issued to the employee.

The following table presents supplemental information regarding unit option awards during the periods indicated:

 
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
2014
  
2013
  
2014
  
2013
  
Total intrinsic value of unit option awards exercised during period
  
$
--
    
$
--
    
$
57.5
    
$
19.8
  
Cash received from EPCO in connection with the exercise of unit option awards
    
--
      
--
      
33.4
      
11.5
  
Unit option award-related cash reimbursements to EPCO
    
--
      
--
      
57.5
      
19.8
  

As of September 30, 2014, all compensation expense related to unit option awards had been recognized.

Phantom Unit Awards

Phantom unit awards allow recipients to acquire our common units (at no cost to the recipient apart from fulfilling service and other conditions) once a defined vesting period expires, subject to customary forfeiture provisions.  Phantom unit awards generally vest at a rate of 25% per year beginning one year after the grant date and are non-vested until the required service periods expire.

At September 30, 2014, substantially all of our phantom unit awards are expected to result in the issuance of common units upon vesting; therefore, the applicable awards are accounted for as equity-classified awards.  Compensation expense attributable to these awards is based on the grant date fair value of the award, net of an allowance for estimated forfeitures, amortized over the requisite service or vesting period.  The grant date fair value of a phantom unit award is based on the market price per unit of Enterprise's common units on the date of grant.  These awards were first issued in February 2014.
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The following table presents phantom unit award activity for the period indicated:

 
  
Number of
Units
    
Weighted-
Average Grant
Date Fair Value
per Unit (1)
  
Phantom unit awards at December 31, 2013
    
--
    
$
--
  
Granted (2)
    
3,522,990
    
$
33.12
  
Vested
    
(34,800
)
  
$
33.04
  
Forfeited
    
(92,800
)
  
$
33.04
  
Phantom unit awards at September 30, 2014
    
3,395,390
    
$
33.12
  
  
 
(1)    Determined by dividing the aggregate grant date fair value of awards (before an allowance for forfeitures) by the number of awards issued.
  
(2)    The aggregate grant date fair value of phantom unit awards issued during 2014 was $116.7 million based on a grant date market price of our common units ranging from $33.04 to $37.59 per unit. An estimated annual forfeiture rate of 3.4% was applied to these awards.
  

Our long-term incentive plans provide for the issuance of distribution equivalent rights ("DERs") in connection with phantom unit awards.  A DER entitles the participant to nonforfeitable cash payments equal to the product of the number of phantom unit awards outstanding for the participant and the cash distribution per common unit paid by Enterprise to its common unitholders.  Cash payments made in connection with DERs are charged to partners' equity when the phantom unit award is expected to result in the issuance of common units; otherwise, such amounts are expensed.

The following table presents supplemental information regarding our phantom unit awards and DERs for the periods indicated:

 
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
2014
  
2013
  
2014
  
2013
  
Cash payments made in connection with DERs
  
$
1.2
    
$
--
    
$
2.4
    
$
--
  
Total intrinsic value of phantom unit awards that vested during period
  
$
0.1
    
$
--
    
$
1.3
    
$
--
  

For the EPCO group of companies, the unrecognized compensation cost associated with phantom unit awards was $72.2 million at September 30, 2014, of which our allocated share of the cost is currently estimated to be $66.1 million.  Due to the graded vesting provisions of these awards, we expect to recognize our share of the unrecognized compensation cost for these awards over a weighted-average period of 2.2 years.
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Note 4.  Derivative Instruments, Hedging Activities and Fair Value Measurements

In the normal course of our business operations, we are exposed to certain risks, including changes in interest rates and commodity prices.  In order to manage risks associated with assets, liabilities and certain anticipated future transactions, we use derivative instruments such as futures, forward contracts, swaps, options and other instruments with similar characteristics.  Substantially all of our derivatives are used for non-trading activities.

Interest Rate Hedging Activities

We may utilize interest rate swaps, forward starting swaps and similar derivative instruments to manage our exposure to changes in interest rates charged on borrowings under certain consolidated debt agreements.  The following table summarizes our portfolio of interest rate swaps at September 30, 2014:

Hedged Transaction
Number and Type
of Derivatives
Outstanding
Notional
Amount
  
Period of
Hedge
Rate
Swap
Accounting
Treatment
Senior Notes AA
10 fixed-to-floating swaps
  
$
750.0
  
1/2011 to 2/2016
3.2% to 1.2%
Fair value hedge

As a result of market conditions in early October 2014, we elected to terminate all of our outstanding interest rate swaps. We terminated 10 fixed-to-floating swaps that were outstanding at September 30, 2014 having an aggregate notional value of $750 million, which resulted in cash gains totaling $17.6 million.  In addition, we terminated 16 fixed-to-floating swaps having a notional value of $800 million entered into in connection with the issuance of Senior Notes LL in October 2014 (see Note 18). The early termination of these 16 swaps resulted in cash gains totaling $10.0 million. Since both groups of swaps were accounted for as fair value hedges, the aggregate $27.6 million of gains will be carried as a component of long-term debt and amortized into earnings (as a decrease in interest expense) using the effective interest method over the remaining life of the associated debt obligations. The $17.6 million gain will be amortized through January 2016 and the $10.0 million gain will be amortized through October 2019.

In July 2014, six undesignated floating-to-fixed swaps having an aggregate notional amount of $600.0 million expired.  These swaps were accounted for as mark-to-market instruments with changes in fair value recorded in "Interest expense" on our Unaudited Condensed Statements of Consolidated Operations.

In connection with the issuance of Senior Notes II and HH in March 2013, we terminated 16 forward starting swaps having an aggregate notional amount of $1.0 billion, which resulted in cash losses totaling $168.8 million.  As cash flow hedges, losses on these derivative instruments are a component of accumulated other comprehensive loss and are being amortized into earnings (as an increase in interest expense) over the remaining life of the associated debt obligations using the effective interest method.  The $168.8 million loss will be amortized through March 2023.

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Commodity Hedging Activities

The prices of natural gas, NGLs, crude oil, refined products and petrochemical products are subject to fluctuations in response to changes in supply and demand, market conditions and a variety of additional factors that are beyond our control.  In order to manage such price risks, we enter into commodity derivative instruments such as physical forward contracts, futures contracts, fixed-for-float swaps, basis swaps and option contracts.  The following table summarizes our portfolio of commodity derivative instruments outstanding at September 30, 2014 (volume measures as noted):

 
Volume (1)
Accounting
Derivative Purpose
Current (2)
Long-Term (2)
Treatment
Derivatives designated as hedging instruments:
 
 
 
Natural gas processing:
 
 
 
Forecasted natural gas purchases for plant thermal reduction (Bcf)
1.1
n/a
Cash flow hedge
Forecasted sales of NGLs (MMBbls) (3)
0.3
n/a
Cash flow hedge
Octane enhancement:
 
 
 
Forecasted purchases of NGLs (MMBbls)
0.3
n/a
Cash flow hedge
Forecasted sales of octane enhancement products (MMBbls)
0.2
n/a
Cash flow hedge
Natural gas marketing:
 
 
 
Forecasted sales of natural gas (Bcf)
1.7
n/a
Cash flow hedge
Natural gas storage inventory management activities (Bcf)
5.1
n/a
Fair value hedge
NGL marketing:
 
 
 
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls)
5.2
0.1
Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls)
8.8
n/a
Cash flow hedge
Refined products marketing:
 
 
 
Forecasted purchases of refined products (MMBbls)
0.7
n/a
Cash flow hedge
Forecasted sales of refined products (MMBbls)
1.3
n/a
Cash flow hedge
Crude oil marketing:
 
 
 
Forecasted purchases of crude oil (MMBbls)
5.0
0.5
Cash flow hedge
Forecasted sales of crude oil (MMBbls)
7.0
0.5
Cash flow hedge
Derivatives not designated as hedging instruments:
 
 
 
Natural gas risk management activities (Bcf) (4,5)
63.5
15.3
Mark-to-market
Crude oil risk management activities (MMBbls) (5)
6.7
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 designated as cash flow hedges, derivatives designated as fair value hedges and derivatives not designated as hedging instruments is December 2015, October 2015 and March 2018, respectively.
(3)      Forecasted sales of NGL volumes under natural gas processing exclude 0.3 MMBbls of additional hedges executed under contracts that have been designated as normal sales agreements.
(4)      Current and long-term volumes include 28.9 Bcf and 0.9 Bcf, respectively, of physical derivative instruments that are predominantly priced at a marked-based index plus a premium or minus a discount related to location differences.
(5)       Reflects the use of derivative instruments to manage risks associated with transportation, processing and storage assets.
 
At September 30, 2014, our predominant commodity hedging strategies consisted of (i) hedging anticipated future purchases and sales of commodity products associated with transportation, storage and blending activities, (ii) hedging the fair value of commodity products held in inventory, (iii) hedging natural gas processing margins, and (iv) hedging octane enhancement margins.

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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, 2014
  
December 31, 2013
  
September 30, 2014
  
December 31, 2013
  
 
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
Derivatives designated as hedging instruments
Interest rate derivatives
Other current
assets
  
$
15.9
  
Other current
assets
  
$
20.2
  
Other current
liabilities
  
$
--
  
Other current
liabilities
  
$
--
  
Interest rate derivatives
Other assets
    
3.5
  
Other assets
    
12.4
  
Other liabilities
    
--
  
Other liabilities
    
--
  
Total interest rate derivatives
 
    
19.4
  
 
    
32.6
  
 
    
--
  
 
    
--
  
Commodity derivatives
Other current
assets
    
38.1
  
Other current
assets
    
30.9
  
Other current
liabilities
    
19.5
  
Other current
liabilities
    
46.5
  
Commodity derivatives
Other assets
    
1.2
  
Other assets
    
--
  
Other liabilities
    
1.4
  
Other liabilities
    
0.3
  
Total commodity derivatives
 
    
39.3
  
 
    
30.9
  
 
    
20.9
  
 
    
46.8
  
Total derivatives designated as hedging instruments
 
  
$
58.7
  
 
  
$
63.5
  
 
  
$
20.9
  
 
  
$
46.8
  
 
 
        
 
        
 
        
 
        
Derivatives not designated as hedging instruments
  
Interest rate derivatives
Other current
assets
  
$
--
  
Other current
assets
  
$
--
  
Other current
liabilities
  
$
--
  
Other current
liabilities
  
$
7.8
  
Interest rate derivatives
Other assets
    
--
  
Other assets
    
--
  
Other liabilities
    
--
  
Other liabilities
    
--
  
Total interest rate derivatives
 
    
--
  
 
    
--
  
 
    
--
  
 
    
7.8
  
Commodity derivatives
Other current
assets
    
1.4
  
Other current
assets
    
7.6
  
Other current
liabilities
    
0.8
  
Other current
liabilities
    
5.5
  
Commodity derivatives
Other assets
    
1.0
  
Other assets
    
2.8
  
Other liabilities
    
0.3
  
Other liabilities
    
2.8
  
Total commodity derivatives
 
    
2.4
  
 
    
10.4
  
 
    
1.1
  
 
    
8.3
  
Total derivatives not designated as hedging instruments
 
  
$
2.4
  
 
  
$
10.4
  
 
  
$
1.1
  
 
  
$
16.1
  

Certain of our commodity derivative instruments are subject to master netting arrangements or similar agreements.  The following tables present our derivative instruments subject to such arrangements at the dates indicated:

 
Offsetting of Financial Assets and Derivative Assets
  
 
Gross
Amounts of
Recognized
Assets
  
Gross
Amounts
Offset in the
Balance Sheet
  
Amounts
of Assets
Presented
in the
Balance Sheet
  
Gross Amounts Not Offset
in the Balance Sheet
  
Amounts That
Would Have
Been Presented
On Net Basis
  
Financial
Instruments
  
Cash
Collateral
Received
  
 
(i)
  
(ii)
  
(iii) = (i) – (ii)
  
(iv)
  
(v) = (iii) + (iv)
  
As of September 30, 2014:
 
 
 
 
 
 
Interest rate derivatives
  
$
19.4
    
$
--
    
$
19.4
    
$
--
    
$
--
    
$
19.4
  
Commodity derivatives
    
41.7
      
--
      
41.7
      
(24.8
)
    
(16.9
)
    
--
  
As of December 31, 2013:
                                                
Interest rate derivatives
  
$
32.6
    
$
--
    
$
32.6
    
$
(2.6
)
  
$
--
    
$
30.0
  
Commodity derivatives
    
41.3
      
--
      
41.3
      
(41.0
)
    
--
      
0.3
  

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
Offsetting of Financial Liabilities and Derivative Liabilities
  
 
Gross
Amounts of
Recognized
Liabilities
  
Gross
Amounts
Offset in the
Balance Sheet
  
Amounts
of Liabilities
Presented
in the
Balance Sheet
  
Gross Amounts Not Offset
in the Balance Sheet
  
Amounts That
Would Have
Been Presented
On Net Basis
  
Financial
Instruments
  
Cash
Collateral
Paid
  
 
(i)
  
(ii)
  
(iii) = (i) – (ii)
  
(iv)
  
(v) = (iii) + (iv)
  
As of September 30, 2014:
 
 
 
 
 
 
Interest rate derivatives
  
$
--
    
$
--
    
$
--
    
$
--
    
$
--
    
$
--
  
Commodity derivatives
    
22.0
      
--
      
22.0
      
(24.8
)
    
7.8
      
5.0
  
As of December 31, 2013:
                                                
Interest rate derivatives
  
$
7.8
    
$
--
    
$
7.8
    
$
(2.6
)
  
$
--
    
$
5.2
  
Commodity derivatives
    
55.1
      
--
      
55.1
      
(41.0
)
    
(9.3
)
    
4.8
  

Derivative assets and liabilities recorded on our Unaudited Condensed Consolidated Balance Sheets are presented on a gross-basis and determined at the individual transaction level.  The tabular presentation above provides a means for comparing the gross amount of derivative assets and liabilities, excluding associated accounts payable and receivable, to the net amount that would likely be receivable or payable under a default scenario based on the existence of rights of offset in the respective derivative agreements.  Any cash collateral paid or received is reflected in this table, but only to the extent that it represents variation margins.  Any amounts associated with derivative prepayments or initial margins that are not influenced by the derivative asset or liability amounts or those that are determined solely on their volumetric notional amounts are excluded from this table.

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
Hedging Relationships
 
Location
Gain (Loss) Recognized in
Income on Derivative
  
 
  
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
 
2014
  
2013
  
2014
  
2013
  
Interest rate derivatives
Interest expense
  
$
(4.1
)
  
$
(0.5
)
  
$
(9.5
)
  
$
(10.6
)
Commodity derivatives
Revenue
    
(0.3
)
    
(3.1
)
    
0.6
      
3.1
  
Total
 
  
$
(4.4
)
  
$
(3.6
)
  
$
(8.9
)
  
$
(7.5
)

Derivatives in Fair Value
Hedging Relationships
 
Location
Gain (Loss) Recognized in
Income on Hedged Item
  
 
  
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
 
2014
  
2013
  
2014
  
2013
  
Interest rate derivatives
Interest expense
  
$
3.9
    
$
0.4
    
$
9.3
    
$
10.3
  
Commodity derivatives
Revenue
    
1.0
      
(0.4
)
    
(1.4
)
    
(12.0
)
Total
 
  
$
4.9
    
$
--
    
$
7.9
    
$
(1.7
)

With respect to our derivative instruments designated as fair value hedges, amounts attributable to ineffectiveness and those excluded from the assessment of hedge effectiveness were not material to our Unaudited Condensed Consolidated Financial Statements during the periods presented.

17
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the effect of our derivative instruments designated as cash flow hedges on our Unaudited Condensed Statements of Consolidated Operations and Unaudited Condensed Statements of Consolidated Comprehensive Income for the periods indicated:

Derivatives in Cash Flow
Hedging Relationships
  
Change in Value Recognized in
Other Comprehensive Income (Loss)
on Derivative (Effective Portion)
  
 
  
For the Three Months
Ended September 30,
    
For the Nine Months
Ended September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
Interest rate derivatives
  
$
--
    
$
--
    
$
--
    
$
6.7
  
Commodity derivatives – Revenue (1)
    
58.8
      
(8.6
)
    
15.2
      
(22.1
)
Commodity derivatives – Operating costs and expenses (1)
    
(0.7
)
    
--
      
0.9
      
--
  
Total
  
$
58.1
    
$
(8.6
)
  
$
16.1
    
$
(15.4
)
  
 
(1)    The fair value of these derivative instruments will be reclassified to their respective locations on the Unaudited Condensed Statement of Consolidated Operations upon settlement of the underlying derivative transactions, as appropriate.
  

Derivatives in Cash Flow
Hedging Relationships
Location
Gain (Loss) Reclassified from
Accumulated Other Comprehensive Income (Loss)
to Income (Effective Portion)
  
 
  
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
 
2014
  
2013
  
2014
  
2013
  
Interest rate derivatives
Interest expense
  
$
(8.0
)
  
$
(7.7
)
  
$
(23.9
)
  
$
(21.4
)
Commodity derivatives
Revenue
    
17.8
      
(14.6
)
    
(14.5
)
    
(15.1
)
Commodity derivatives
Operating costs and expenses
    
0.2
      
--
      
1.6
      
0.4
  
Total
 
  
$
10.0
    
$
(22.3
)
  
$
(36.8
)
  
$
(36.1
)

Derivatives in Cash Flow
Hedging Relationships
Location
Gain (Loss) Recognized in Income
on Derivative (Ineffective Portion)
  
 
  
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
 
2014
  
2013
  
2014
  
2013
  
Commodity derivatives
Revenue
  
$
0.1
    
$
0.1
    
$
--
    
$
--
  
Commodity derivatives
Operating costs and expenses
    
(0.1
)
    
--
      
--
      
--
  
Total
 
  
$
--
    
$
0.1
    
$
--
    
$
--
  

Over the next twelve months, we expect to reclassify $34.8 million of losses attributable to interest rate derivative instruments from accumulated other comprehensive loss to earnings as an increase in interest expense.  Likewise, we expect to reclassify $14.5 million of net gains attributable to commodity derivative instruments from accumulated other comprehensive income to earnings, $14.3 million as an increase in revenue and $0.2 million as a decrease in operating costs and expenses.

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
as Hedging Instruments
Location
Gain (Loss) Recognized in
Income on Derivative
  
 
  
For the Three Months
Ended September 30,
  
For the Nine Months
Ended September 30,
  
 
 
2014
  
2013
  
2014
  
2013
  
Interest rate derivatives
Interest expense
  
$
--
    
$
(0.5
)
  
$
(0.1
)
  
$
(0.6
)
Commodity derivatives
Revenue
    
0.8
      
8.1
      
(26.8
)
    
17.0
  
Total
 
  
$
0.8
    
$
7.6
    
$
(26.9
)
  
$
16.4
  

18
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements

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, in the principal market of the asset or liability at a specified measurement date.  Recognized valuation techniques employ inputs such as contractual prices, quoted market prices or rates, 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 highest 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 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.

Recurring Fair Value Measurements

The following tables set forth, by level within the fair value hierarchy, the carrying values of our financial assets and liabilities at September 30, 2014 and December 31, 2013.  These assets and liabilities are measured on a recurring basis and are classified based on the lowest level of input used to estimate their fair value.  Our assessment of the relative significance of such inputs requires judgment.

 
  
September 30, 2014
Fair Value Measurements Using
    
 
 
  
Quoted Prices
in Active
Markets for
Identical Assets
and Liabilities
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Total
  
Financial assets:
  
   
   
   
 
Interest rate derivatives
  
$
--
    
$
19.4
    
$
--
    
$
19.4
  
Commodity derivatives
    
14.4
      
24.4
      
2.9
      
41.7
  
Total
  
$
14.4
    
$
43.8
    
$
2.9
    
$
61.1
  
 
                                
Financial liabilities:
                                
Interest rate derivatives
  
$
--
    
$
--
    
$
--
    
$
--
  
Commodity derivatives
    
8.2
      
10.2
      
3.6
      
22.0
  
Total
  
$
8.2
    
$
10.2
    
$
3.6
    
$
22.0
  
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
  
December 31, 2013
Fair Value Measurements Using
    
 
 
  
Quoted Prices
in Active
Markets for
Identical Assets
and Liabilities
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Total
  
Financial assets:
  
   
   
   
 
Interest rate derivatives
  
$
--
    
$
32.6
    
$
--
    
$
32.6
  
Commodity derivatives
    
17.2
      
20.2
      
3.9
      
41.3
  
Total
  
$
17.2
    
$
52.8
    
$
3.9
    
$
73.9
  
 
                                
Financial liabilities:
                                
Interest rate derivatives
  
$
--
    
$
7.8
    
$
--
    
$
7.8
  
Commodity derivatives
    
30.8
      
23.6
      
0.7
      
55.1
  
Total
  
$
30.8
    
$
31.4
    
$
0.7
    
$
62.9
  

The following table sets forth a reconciliation of changes in the fair values of our recurring Level 3 financial assets and liabilities on a combined basis for the periods indicated:

 
  
  
For the Nine Months
Ended September 30,
  
Location
  
2014
    
2013
  
Financial asset (liability) balance, net, January 1
 
  
$
3.2
    
$
(1.5
)
Total gains (losses) included in:
 
                
Net income (1)
Revenue
    
4.6
      
(0.6
)
Settlements
Revenue
    
(0.1
)
    
1.5
  
Financial asset (liability) balance, net, March 31
 
    
7.7
      
(0.6
)
Total gains (losses) included in:
 
                
Net income (1)
Revenue
    
(3.3
)
    
(0.2
)
Settlements
Revenue
    
(1.8
)
    
0.6
  
Financial asset (liability) balance, net, June 30
 
    
2.6
      
(0.2
)
Total gains (losses) included in:
 
                
Net income (1)
Revenue
    
(0.9
)
    
1.1
  
Other comprehensive income
Commodity derivative instruments – changes in fair value of cash flow hedges
    
(2.5
)
    
(0.9
)
Settlements
Revenue
    
0.1
      
0.1
  
Financial asset (liability) balance, net, September 30 (2)
 
  
$
(0.7
)
  
$
0.1
  
    
  
(1)    There were $0.8 million and $1.3 million of unrealized losses included in these amounts for the three and nine months ended September 30, 2014, respectively. There were unrealized gains of $1.1 million and $2.4 million included in these amounts for the three and nine months ended September 30, 2013, respectively.
  
(2)    There were no transfers into or out of Level 3 during the three or nine months ended September 30, 2014 and 2013.
  

The following table provides quantitative information about our recurring Level 3 fair value measurements at September 30, 2014:

 
  
Fair Value
  
 
 
   
 
  
Financial
Assets
    
Financial
Liabilities
  
Valuation
Techniques
Unobservable
Input
Range
Commodity derivatives – Crude oil
  
$
2.6
    
$
0.9
  
Discounted cash flow
Forward commodity prices
$70.32-$91.82/barrel
Commodity derivatives – Propane
    
--
      
0.1
  
Discounted cash flow
Forward commodity prices
$1.02-$1.05/gallon
Commodity derivatives – Natural gasoline
    
0.1
      
2.5
  
Discounted cash flow
Forward commodity prices
$1.84-$1.94/gallon
Commodity derivatives – Natural gas
    
0.2
      
0.1
  
Discounted cash flow
Forward commodity prices
$3.72-$4.54/MMBtu
Total
  
$
2.9
    
$
3.6
  
 
 
   

20
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We believe forward commodity prices are the most significant unobservable inputs in determining our Level 3 recurring fair value measurements at September 30, 2014.  In general, changes in the price of the underlying commodity increases or decreases the fair value of a commodity derivative depending on whether the derivative was purchased or sold.  We generally expect changes in the fair value of our derivative instruments to be offset by corresponding changes in the fair value of our hedged exposures.

Nonrecurring Fair Value Measurements

The following table summarizes our non-cash impairment charges by segment during each of the periods indicated:

 
  
For the Three Months
Ended September 30,
    
For the Nine Months
Ended September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
NGL Pipelines & Services
  
$
1.2
    
$
0.3
    
$
6.6
    
$
10.0
  
Onshore Natural Gas Pipelines & Services
    
0.4
      
--
      
0.7
      
--
  
Onshore Crude Oil Pipelines & Services
    
0.4
      
--
      
2.2
      
16.6
  
Offshore Pipelines & Services
    
--
      
13.2
      
--
      
13.2
  
Petrochemical & Refined Products Services
    
3.7
      
1.7
      
8.7
      
13.5
  
Total
  
$
5.7
    
$
15.2
    
$
18.2
    
$
53.3
  

These impairment charges are a component of "Operating costs and expenses" on our Unaudited Condensed Statements of Consolidated Operations.

Our non-cash asset impairment charges for the nine months ended September 30, 2014 primarily relate to the abandonment of assets classified as property, plant and equipment.  The following table summarizes our non-recurring fair value measurements for the nine months ended September 30, 2014:

 
 
Fair Value Measurements Using
  
 
 
Carrying
Value at
September 30,
2014
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Total
Non-Cash
Impairment
Loss
  
Impairment of long-lived assets disposed of other than by sale
  
$
--
    
$
--
    
$
--
    
$
--
    
$
11.7
  
Impairment of long-lived assets to be disposed of by sale
    
1.1
      
--
      
--
      
1.1
      
6.5
  
Total
                                  
$
18.2
  

During the nine months ended September 30, 2013, we recorded $53.3 million of non-cash asset impairment charges.  These charges primarily represent the abandonment of crude oil and natural gas pipeline segments in Texas, Oklahoma and the Gulf of Mexico, certain refined products terminal assets in Texas, and an NGL storage cavern in Arizona.  The following table summarizes our non-recurring fair value measurements for the nine months ended September 30, 2013:

 
  
   
Fair Value Measurements Using
    
 
 
  
Carrying
Value at
September 30,
2013
    
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Total
Non-Cash
Impairment
Loss
  
Impairment of long-lived assets disposed of other than by sale
  
$
--
    
$
--
    
$
--
    
$
--
    
$
43.3
  
Impairment of long-lived assets held and used
    
6.1
      
--
      
--
      
6.1
      
4.2
  
Impairment of long-lived assets to be disposed of by sale
    
11.7
      
11.7
      
--
      
--
      
5.8
  
Total
                                  
$
53.3
  

21
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other Fair Value Information

The carrying amounts of cash and cash equivalents (including restricted cash balances), accounts receivable, commercial paper notes and accounts payable approximate their fair values based on their short-term nature.  The estimated total fair value of our fixed-rate debt obligations was $20.1 billion and $17.93 billion at September 30, 2014 and December 31, 2013, respectively.  The aggregate carrying value of these debt obligations was $18.38 billion and $16.88 billion at September 30, 2014 and December 31, 2013, respectively.  These values are based on quoted market prices for such debt or debt of similar terms and maturities (Level 2), our credit standing and the credit standing of our counterparties.  Changes in market rates of interest affect the fair value of our fixed-rate debt.  The carrying values of our variable-rate long-term debt obligations approximate their fair values since the associated interest rates are market-based.  We do not have any long-term investments in debt or equity securities recorded at fair value.


Note 5.  Inventories

Our inventory amounts by product type were as follows at the dates indicated:

 
  
September 30,
2014
    
December 31,
2013
  
NGLs
  
$
973.4
    
$
593.8
  
Petrochemicals and refined products
    
338.7
      
395.1
  
Crude oil
    
238.8
      
42.6
  
Natural gas
    
38.6
      
61.6
  
Total
  
$
1,589.5
    
$
1,093.1
  

Due to fluctuating commodity prices, we recognize lower of cost or market adjustments when the carrying value of our available-for-sale inventories exceeds their net realizable value.  The following table presents our total cost of sales amounts and lower of cost or market adjustments for the periods indicated:

 
  
For the Three Months
Ended September 30,
    
For the Nine Months
Ended September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
Cost of sales (1)
  
$
10,455.1
    
$
10,371.3
    
$
32,213.1
    
$
29,522.1
  
Lower of cost or market adjustments
    
6.7
      
4.5
      
14.6
      
14.9
  
  
 
(1)    Cost of sales is a component of "Operating costs and expenses" as presented on our Unaudited Condensed Statements of Consolidated Operations. Period-to-period fluctuations in these amounts are primarily due to changes in energy commodity prices and sales volumes associated with our marketing activities.
  


22
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6.  Property, Plant and Equipment

The historical costs of our property, plant and equipment and related accumulated depreciation balances were as follows at the dates indicated:

 
  
Estimated
Useful Life
in Years
    
September 30,
2014
    
December 31,
2013
  
Plants, pipelines and facilities (1)
  
3-45 (6)
 
  
$
30,096.7
    
$
27,540.4
  
Underground and other storage facilities (2)
  
5-40 (7)
 
    
2,164.9
      
2,101.8
  
Platforms and facilities (3)
  
20-31
      
659.7
      
659.6
  
Transportation equipment (4)
  
3-10
      
142.0
      
138.9
  
Marine vessels (5)
  
15-30
      
782.3
      
744.8
  
Land
            
185.0
      
176.6
  
Construction in progress
            
1,805.7
      
2,655.5
  
Total
            
35,836.3
      
34,017.6
  
Less accumulated depreciation
            
7,873.0
      
7,071.0
  
Property, plant and equipment, net
          
$
27,963.3
    
$
26,946.6
  
 
(1)    Plants, pipelines and facilities include processing plants; NGL, natural gas, crude oil and petrochemical and refined products pipelines; terminal loading and unloading facilities; office furniture and equipment; buildings; laboratory and shop equipment and related assets.
  
(2)    Underground and other storage facilities include underground product storage caverns; above ground storage tanks; water wells and related assets.
  
(3)    Platforms and facilities include offshore platforms and related facilities and other associated assets located in the Gulf of Mexico.
  
(4)    Transportation equipment includes tractor-trailer tank trucks and other vehicles and similar assets used in our operations.
  
(5)    Marine vessels include tow boats, barges and related equipment used in our marine transportation business.
  
(6)    In general, the estimated useful lives of major assets within this category are: processing plants, 20-35 years; pipelines and related equipment, 5-45 years; terminal facilities, 10-35 years; office furniture and equipment, 3-20 years; buildings, 20-40 years; and laboratory and shop equipment, 5-35 years.
  
(7)    In general, the estimated useful lives of assets within this category are: underground storage facilities, 5-35 years; storage tanks, 10-40 years; and water wells, 5-35 years.
  

The following table summarizes our depreciation expense and capitalized interest amounts for the periods indicated:

 
  
For the Three Months
Ended September 30,
    
For the Nine Months
Ended September 30,
  
 
  
2014
    
2013
    
2014
    
2013
  
Depreciation expense (1)
  
$
283.2
    
$
253.4
    
$
822.1
    
$
749.6
  
Capitalized interest (2)
    
17.2
      
27.8
      
53.4
      
95.1
  
 
(1)     Depreciation expense is a component of "Costs and expenses" as presented on our Unaudited Condensed Statements of Consolidated Operations.
  
(2)     We capitalize interest costs incurred on funds used to construct property, plant and equipment while the asset is in its construction phase. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life as a component of depreciation expense. When capitalized interest is recorded, it reduces interest expense from what it would be otherwise.
  

In March 2013, we sold the Stratton Ridge-to-Mont Belvieu segment of the Seminole Pipeline, along with a related storage cavern, for cash proceeds of $86.9 million.  As a result, net income for the nine months ended September 30, 2013 includes a $52.5 million gain attributable to the sale of these assets.  The Seminole Pipeline remains connected to our Mont Belvieu complex through a newly constructed NGL pipeline that we own.

In April 2013, we sold certain lubrication oil and specialty chemical distribution assets for cash proceeds of $35.3 million.  As a result, net income for the nine months ended September 30, 2013 includes a $6.7 million gain from the sale of these assets.
23
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Asset Retirement Obligations

Property, plant and equipment at September 30, 2014 and December 31, 2013 includes $31.8 million and $37.4 million, respectively, of asset retirement costs capitalized as an increase in the associated long-lived asset.

The following table presents information regarding our asset retirement obligations ("AROs") during the nine months ended September 30, 2014:

ARO liability balance, December 31, 2013
  
$
90.2
  
Liabilities incurred
    
0.1
  
Liabilities settled
    
(2.3
)
Revisions in estimated cash flows
    
2.7
  
Accretion expense
    
4.5
  
ARO liability balance, September 30, 2014
  
$
95.2
  

The following table presents our forecast of accretion expense for the periods indicated:

Remainder
of 2014
  
2015
  
2016
  
2017
  
2018
  
 
$
1.6