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 June 30, 2015

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 2,003,159,484 common units of Enterprise Products Partners L.P. outstanding at the close of business on July 31, 2015.  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)

   
June 30,
2015
    
December 31,
2014
  
ASSETS
        
Current assets:
  
   
 
Cash and cash equivalents
  
$
551.1
    
$
74.4
  
Restricted cash
    
46.1
      
--
  
Accounts receivable – trade, net of allowance for doubtful accounts
of $13.9 at June 30, 2015 and $13.9 at December 31, 2014
    
3,346.1
      
3,823.0
  
Accounts receivable – related parties
    
2.4
      
2.8
  
Inventories
    
999.8
      
1,014.2
  
Assets held for sale (see Note 6)
    
1,710.7
      
--
  
Prepaid and other current assets
    
522.6
      
576.3
  
Total current assets
    
7,178.8
      
5,490.7
  
Property, plant and equipment, net
    
29,783.8
      
29,881.6
  
Investments in unconsolidated affiliates
    
2,607.2
      
3,042.0
  
Intangible assets, net of accumulated amortization of $1,164.0 at
June 30, 2015 and $1,246.3 at December 31, 2014 (see Note 9)
    
2,733.5
      
4,302.1
  
Goodwill (see Note 9)
    
5,664.8
      
4,292.7
  
Other assets
    
191.3
      
184.4
  
Total assets
  
$
48,159.4
    
$
47,193.5
  
 
                
LIABILITIES AND EQUITY
                
Current liabilities:
                
Current maturities of debt (see Note 10)
  
$
1,400.1
    
$
2,206.4
  
Accounts payable – trade
    
790.3
      
773.8
  
Accounts payable – related parties
    
115.5
      
118.9
  
Accrued product payables
    
3,240.1
      
3,853.3
  
Accrued interest
    
350.0
      
335.5
  
Liabilities related to assets held for sale (see Note 6)
    
116.4
      
--
  
Other current liabilities
    
453.7
      
585.8
  
Total current liabilities
    
6,466.1
      
7,873.7
  
Long-term debt (see Note 10)
    
20,892.9
      
19,157.4
  
Deferred tax liabilities
    
55.0
      
66.6
  
Other long-term liabilities
    
382.2
      
403.6
  
Commitments and contingencies (see Note 15)
                
Equity:
                
Partners’ equity:
                
Limited partners:
                
Common units (2,003,173,384 units outstanding at June 30, 2015
and 1,937,324,817 units outstanding at December 31, 2014)
    
20,404.2
      
18,304.8
  
Accumulated other comprehensive loss
    
(278.6
)
    
(241.6
)
Total  partners’ equity
    
20,125.6
      
18,063.2
  
Noncontrolling interests held (see Note 11)
    
175.4
      
1,629.0
  
Noncontrolling interests in assets held for sale (see Note 6)
    
62.2
      
--
  
Total noncontrolling interests
    
237.6
      
1,629.0
  
Total equity
    
20,363.2
      
19,692.2
  
Total liabilities and equity
  
$
48,159.4
    
$
47,193.5
  


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
Ended June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
Revenues:
  
   
   
   
 
Third parties
  
$
7,085.2
    
$
12,503.5
    
$
14,551.6
    
$
25,377.9
  
Related parties
    
7.3
      
17.3
      
13.4
      
52.8
  
Total revenues (see Note 12)
    
7,092.5
      
12,520.8
      
14,565.0
      
25,430.7
  
Costs and expenses:
                                
Operating costs and expenses:
                                
Third parties
    
6,090.4
      
11,382.4
      
12,474.7
      
23,000.8
  
Related parties
    
267.1
      
256.7
      
499.2
      
518.8
  
Total operating costs and expenses
    
6,357.5
      
11,639.1
      
12,973.9
      
23,519.6
  
General and administrative costs:
                                
Third parties
    
16.8
      
18.9
      
37.1
      
41.9
  
Related parties
    
28.1
      
28.8
      
57.1
      
59.0
  
Total general and administrative costs
    
44.9
      
47.7
      
94.2
      
100.9
  
Total costs and expenses (see Note 12)
    
6,402.4
      
11,686.8
      
13,068.1
      
23,620.5
  
Equity in income of unconsolidated affiliates
    
110.2
      
50.3
      
199.4
      
106.8
  
Operating income
    
800.3
      
884.3
      
1,696.3
      
1,917.0
  
Other income (expense):
                                
Interest expense
    
(240.4
)
    
(228.9
)
    
(479.5
)
    
(449.8
)
Change in fair value of Liquidity Option Agreement (see Note 15)
    
(11.5
)
    
--
      
(11.5
)
    
--
  
Other, net
    
0.3
      
1.1
      
0.8
      
0.8
  
Total other expense, net
    
(251.6
)
    
(227.8
)
    
(490.2
)
    
(449.0
)
Income before income taxes
    
548.7
      
656.5
      
1,206.1
      
1,468.0
  
Benefit from (provision for) income taxes
    
7.9
      
(10.0
)
    
1.1
      
(14.8
)
Net income
    
556.6
      
646.5
      
1,207.2
      
1,453.2
  
Net income attributable to noncontrolling interests (see Note 11)
    
(5.6
)
    
(8.8
)
    
(20.1
)
    
(16.7
)
Net income attributable to limited partners
  
$
551.0
    
$
637.7
    
$
1,187.1
    
$
1,436.5
  
 
                                
Earnings per unit: (see Note 14)
                                
Basic earnings per unit
  
$
0.28
    
$
0.35
    
$
0.61
    
$
0.79
  
Diluted earnings per unit
  
$
0.28
    
$
0.34
    
$
0.60
    
$
0.76
  

















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 June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
 
  
   
   
   
 
Net income
  
$
556.6
    
$
646.5
    
$
1,207.2
    
$
1,453.2
  
Other comprehensive income (loss):
                                
Cash flow hedges:
                                
Commodity derivative instruments:
                                
Changes in fair value of cash flow hedges
    
(4.3
)
    
(32.8
)
    
26.5
      
(42.0
)
Reclassification of losses (gains) to net income
    
(20.2
)
    
14.9
      
(81.3
)
    
30.9
  
Interest rate derivative instruments:
                                
Reclassification of losses to net income
    
8.7
      
8.0
      
17.4
      
15.9
  
Total cash flow hedges
    
(15.8
)
    
(9.9
)
    
(37.4
)
    
4.8
  
Other
    
0.4
      
--
      
0.4
      
--
  
Total other comprehensive income (loss)
    
(15.4
)
    
(9.9
)
    
(37.0
)
    
4.8
  
Comprehensive income
    
541.2
      
636.6
      
1,170.2
      
1,458.0
  
Comprehensive income attributable to noncontrolling interests
    
(5.6
)
    
(8.8
)
    
(20.1
)
    
(16.7
)
Comprehensive income attributable to limited partners
  
$
535.6
    
$
627.8
    
$
1,150.1
    
$
1,441.3
  
 






























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 Six Months
Ended June 30,
  
 
  
2015
    
2014
  
Operating activities:
  
   
 
Net income
  
$
1,207.2
    
$
1,453.2
  
Reconciliation of net income to net cash flows provided by operating activities:
                
Depreciation, amortization and accretion
    
774.9
      
651.0
  
Non-cash asset impairment charges (see Note 4)
    
112.3
      
12.5
  
Equity in income of unconsolidated affiliates
    
(199.4
)
    
(106.8
)
Distributions received from unconsolidated affiliates
    
265.5
      
157.1
  
Net losses (gains) attributable to asset sales and insurance recoveries (see Note 16)
    
2.4
      
(96.4
)
Deferred income tax expense (benefit)
    
(11.7
)
    
0.6
  
Changes in fair value of Liquidity Option Agreement
    
11.5
      
--
  
Changes in fair market value of derivative instruments
    
(9.9
)
    
(6.2
)
Net effect of changes in operating accounts (see Note 16)
    
(250.7
)
    
(198.6
)
Other operating activities
    
(0.5
)
    
5.5
  
Net cash flows provided by operating activities
    
1,901.6
      
1,871.9
  
Investing activities:
                
Capital expenditures
    
(1,638.0
)
    
(1,186.4
)
Contributions in aid of construction costs
    
7.8
      
13.9
  
Decrease (increase) in restricted cash
    
(46.1
)
    
8.9
  
Investments in unconsolidated affiliates
    
(114.1
)
    
(498.8
)
Proceeds from asset sales and insurance recoveries (see Note 16)
    
5.9
      
113.2
  
Other investing activities
    
(4.8
)
    
(5.7
)
Cash used in investing activities
    
(1,789.3
)
    
(1,554.9
)
Financing activities:
                
Borrowings under debt agreements
    
13,838.3
      
4,182.8
  
Repayments of debt
    
(12,905.0
)
    
(3,161.3
)
Debt issuance costs
    
(18.6
)
    
(18.1
)
Cash distributions paid to limited partners (see Note 11)
    
(1,437.3
)
    
(1,288.4
)
Cash payments made in connection with distribution equivalent rights
    
(3.4
)
    
(1.2
)
Cash distributions paid to noncontrolling interests
    
(24.8
)
    
(19.7
)
Cash contributions from noncontrolling interests
    
22.0
      
4.0
  
Net cash proceeds from the issuance of common units
    
944.1
      
223.3
  
Other financing activities
    
(50.9
)
    
(53.3
)
Cash provided by (used in) financing activities
    
364.4
      
(131.9
)
Net change in cash and cash equivalents
    
476.7
      
185.1
  
Cash and cash equivalents, January 1
    
74.4
      
56.9
  
Cash and cash equivalents, June 30
  
$
551.1
    
$
242.0
  













See Notes to Unaudited Condensed Consolidated Financial Statements.
5

ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED EQUITY
(See Note 11 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, 2014
  
$
18,304.8
    
$
(241.6
)
  
$
1,629.0
    
$
19,692.2
  
Net income
    
1,187.1
      
--
      
20.1
      
1,207.2
  
Cash distributions paid to limited partners
    
(1,437.3
)
    
--
      
--
      
(1,437.3
)
Cash payments made in connection with distribution equivalent rights
    
(3.4
)
    
--
      
--
      
(3.4
)
Cash distributions paid to noncontrolling interests
    
--
      
--
      
(24.8
)
    
(24.8
)
Cash contributions from noncontrolling interests
    
--
      
--
      
22.0
      
22.0
  
Common units issued in connection with Step 2 of Oiltanking acquisition
    
1,408.7
      
--
      
(1,408.7
)
    
--
  
Net cash proceeds from the issuance of common units
    
944.1
      
--
      
--
      
944.1
  
Amortization of fair value of equity-based awards
    
49.7
      
--
      
--
      
49.7
  
Cash flow hedges
    
--
      
(37.4
)
    
--
      
(37.4
)
Other
    
(49.5
)
    
0.4
      
--
      
(49.1
)
Balance, June 30, 2015
  
$
20,404.2
    
$
(278.6
)
  
$
237.6
    
$
20,363.2
  

 
  
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
    
1,436.5
      
--
      
16.7
      
1,453.2
  
Cash distributions paid to limited partners
    
(1,288.4
)
    
--
      
--
      
(1,288.4
)
Cash payments made in connection with distribution equivalent rights
    
(1.2
)
    
--
      
--
      
(1.2
)
Cash distributions paid to noncontrolling interests
    
--
      
--
      
(19.7
)
    
(19.7
)
Cash contributions from noncontrolling interests
    
--
      
--
      
4.0
      
4.0
  
Net cash proceeds from the issuance of common units
    
223.3
      
--
      
--
      
223.3
  
Amortization of fair value of equity-based awards
    
39.9
      
--
      
--
      
39.9
  
Cash flow hedges
    
--
      
4.8
      
--
      
4.8
  
Other
    
(53.1
)
    
--
      
(0.8
)
    
(53.9
)
Balance, June 30, 2014
  
$
15,930.8
    
$
(354.2
)
  
$
225.8
    
$
15,802.4
  



















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 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 by a voting trust, the current trustees (“EPCO Trustees”) of which are:  (i) Ms. Williams, who serves as Chairman of EPCO; (ii) Dr. Cunningham, who serves as a Vice Chairman of EPCO; and (iii) Mr. Bachmann, who 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, EPCO and its privately held affiliates owned approximately 34.4% of our limited partner interests at June 30, 2015.

References to “Oiltanking” and “Oiltanking GP” mean Oiltanking Partners, L.P. and OTLP GP, LLC, the general partner of Oiltanking, respectively.  In October 2014, we acquired approximately 65.9% of the limited partner interests of Oiltanking, all of the member interests of Oiltanking GP and the incentive distribution rights (“IDRs”) held by Oiltanking GP from Oiltanking Holding Americas, Inc. (“OTA”) as the first step of a two-step acquisition of Oiltanking.  In February 2015, we completed the second step of this acquisition.  See Note 11 for additional information regarding this acquisition.

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

References to “Offshore Gulf of Mexico Business” or “Offshore Business” refer to the operations we sold to Genesis Energy, L.P. (“Genesis”) in July 2015. See Note 6 for information regarding this sale.


Note 1.  Partnership Operations, Organization and Basis of Presentation

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 now a leading North American provider of midstream energy services to producers and consumers of natural gas, NGLs, crude oil, petrochemicals and refined products. 
7
Table of Contents
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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;  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 currently include approximately 49,000 miles of onshore pipelines; 225 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.  

Our historical operations are reported under five business segments: (i) NGL Pipelines & Services, (ii) Crude Oil Pipelines & Services, (iii) Natural Gas Pipelines & Services, (iv) Petrochemical & Refined Products Services and (v) Offshore Pipelines & Services.

On July 24, 2015, we completed the sale of our Offshore Business to Genesis. The assets, liabilities and related noncontrolling interest attributable to this business were classified as held for sale at June 30, 2015 (see Note 6). As a result of this sale, we renamed our Onshore Crude Oil Pipelines & Services business segment “Crude Oil Pipelines & Services.” In addition, we renamed our Onshore Natural Gas Pipelines & Services business segment “Natural Gas Pipelines & Services.” The operations reported within these two onshore segments did not change due to these name changes. We will continue to report the historical results of the Offshore Pipelines & Services segment through the closing date of the sales transaction. See Note 12 for additional information regarding our business segments.

See Note 18 for information regarding our recently completed acquisition of the member interests of EFS Midstream LLC.

We conduct substantially all of our business through EPO and are owned 100% by our limited partners from an economic perspective.  Enterprise GP manages our partnership and owns 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.  Like many publicly traded partnerships, we have no employees. All of our management, administrative and operating functions are performed by employees of EPCO pursuant to an administrative services agreement (the “ASA”) or by other service providers.  See Note 13 for information regarding the ASA and other related party matters.

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


Note 2.  General Accounting and Disclosure Matters

Our results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of results expected for the full year of 2015.  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, 2014 (the “2014 Form 10-K”) filed with the SEC on March 2, 2015.
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.  See Note 15 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.
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes
Provision for or benefit from income taxes primarily reflects our state tax obligations under the Revised Texas Franchise Tax (the “Texas Margin Tax”). For the three and six months ended June 30, 2015, we recognized a net income tax benefit of $7.9 million and $1.1 million, respectively, primarily due to certain legislative changes to the Texas Margin Tax enacted during the second quarter of 2015 that reduced the tax rate for business entities that operate within the state.  For the three and six months ended June 30, 2014, we recognized net income tax expense of $10.0 million and $14.8 million, respectively.

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, NGLs, crude oil and refined products.  Additional cash may be restricted to maintain our commodity derivative instruments portfolio as prices fluctuate or deposit requirements change.  At June 30, 2015, our restricted cash amounts were $46.1 million.  We did not have any restricted cash as of December 31, 2014.  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 June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
Equity-classified awards:
                
Restricted common unit awards
  
$
3.9
    
$
9.0
    
$
10.0
    
$
20.6
  
Phantom unit awards
    
22.7
      
13.6
      
39.9
      
19.4
  
Liability-classified awards
    
0.1
      
0.2
      
0.2
      
0.3
  
Total
  
$
26.7
    
$
22.8
    
$
50.1
    
$
40.3
  

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 June 30, 2015, 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 30,000,000 at June 30, 2015.  This amount will automatically increase under the terms of the 2008 Plan by 5,000,000 common units on January 1, 2016 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 June 30, 2015, a total of 3,016,992 and 16,092,392 additional common units were available for issuance under these plans, respectively.

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

The fair value of a restricted common unit award is based on the market price per unit of our common units on the date of grant.  Compensation expense is recognized based on the grant date fair value, net of an allowance for estimated forfeitures, over the requisite service or vesting period.

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, 2014
    
4,229,790
    
$
26.96
  
Vested
    
(1,940,044
)
  
$
25.96
  
Forfeited
    
(111,250
)
  
$
27.47
  
Restricted common units at June 30, 2015
    
2,178,496
    
$
27.83
  
    
(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 to our 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 June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
Cash distributions paid to restricted common unitholders
  
$
0.9
    
$
1.6
    
$
2.4
    
$
4.1
  
Total intrinsic value of restricted common unit awards that vested during period
    
3.0
      
2.7
      
65.4
      
84.1
  

For the EPCO group of companies, the unrecognized compensation cost associated with restricted common unit awards was an aggregate $15.9 million at June 30, 2015, of which our allocated share of the cost is currently estimated to be $13.5 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 1.2 years.

Unit Option Awards
EPCO’s long-term incentive plans provide for the issuance of non-qualified incentive options denominated in our common units. 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, 2014 will expire on December 31, 2015). 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).

The following table presents unit option award activity for the period indicated:

 
  
Number of
Units (1)
    
Weighted-
Average
Strike Price
(dollars/unit)
    
Weighted-
Average
Remaining
Contractual
Term
(in years)
    
Aggregate
Intrinsic
Value (2)
  
Unit option awards at December 31, 2014
    
1,270,000
    
$
16.14
          
Exercised
    
(1,060,000
)
  
$
16.14
    
   
 
Unit option awards at June 30, 2015
    
210,000
    
$
16.14
      
0.5
    
$
2.9
  
 
  
(1)     All of the unit option awards outstanding at June 30, 2015 were exercisable. None of the unit option awards outstanding at December 31, 2014 were exercisable.
(2)   Aggregate intrinsic value reflects fully vested unit option awards at the dates indicated.
  
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
Total intrinsic value of unit option awards exercised during period
  
$
2.2
    
$
2.8
    
$
19.6
    
$
57.5
  
Cash received from EPCO in connection with the exercise of unit option awards
    
1.2
      
1.6
      
11.3
      
33.4
  
Unit option award-related cash reimbursements to EPCO
    
2.2
      
2.8
      
19.6
      
57.5
  

As of June 30, 2015, 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 June 30, 2015, 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.  The grant date fair value of a phantom unit award is based on the market price per unit of our common units on the date of grant.  Compensation expense is recognized based on the grant date fair value, net of an allowance for estimated forfeitures, over the requisite service or vesting period.

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, 2014
    
3,342,390
    
$
33.13
  
Granted (2)
    
3,449,240
    
$
34.05
  
Vested
    
(846,990
)
  
$
33.08
  
Forfeited
    
(133,334
)
  
$
33.40
  
Phantom unit awards at June 30, 2015
    
5,811,306
    
$
33.67
  
 
  
(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 2015 was $117.4 million based on a grant date market price of our common units ranging from $33.72 to $34.40 per unit. An estimated annual forfeiture rate of 3.5% 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 to our 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 June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
Cash payments made in connection with DERs
  
$
2.2
    
$
1.2
    
$
3.4
    
$
1.2
  
Total intrinsic value of phantom unit awards that vested during period
    
2.1
      
1.2
      
28.7
      
1.2
  
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
For the EPCO group of companies, the unrecognized compensation cost associated with phantom unit awards was $123.3 million at June 30, 2015, of which our allocated share of the cost is currently estimated to be $113.7 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 2.1 years.

 
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.  At December 31, 2014, we did not have any interest rate hedging derivative instruments outstanding.  The following table summarizes our portfolio of interest rate swaps at June 30, 2015:

Hedged Transaction
Number and Type
of Derivatives
Outstanding
  
Notional
Amount
  
Period of
Hedge
Rate
Swap
Accounting
Treatment
Senior Notes OO
10 fixed-to-floating swaps
  
$
750.0
  
5/2015 to 5/2018
1.65% to 0.76%
Fair value hedge

Interest rate swaps exchange the stated interest rate paid on a notional amount of existing debt for the fixed or floating interest rate stipulated in the derivative instrument.
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 June 30, 2015 (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)
10.0
n/a
Cash flow hedge
Forecasted sales of NGLs (MMBbls) (3)
2.4
n/a
Cash flow hedge
Octane enhancement:
      
Forecasted purchases of NGLs (MMBbls)
0.2
n/a
Cash flow hedge
Forecasted sales of octane enhancement products (MMBbls)
1.2
n/a
Cash flow hedge
Natural gas marketing:
      
Forecasted purchases of natural gas for fuel (Bcf)
11.1
n/a
Cash flow hedge
Forecasted sales of natural gas (Bcf)
0.3
n/a
Cash flow hedge
Natural gas storage inventory management activities (Bcf)
9.3
n/a
Fair value hedge
NGL marketing:
      
Forecasted purchases of NGLs and related hydrocarbon products (MMBbls)
27.5
n/a
Cash flow hedge
Forecasted sales of NGLs and related hydrocarbon products (MMBbls)
32.1
n/a
Cash flow hedge
Refined products marketing:
 
    
Forecasted purchases of refined products (MMBbls)
4.9
n/a
Cash flow hedge
Forecasted sales of refined products (MMBbls)
1.5
n/a
Cash flow hedge
Refined products inventory management activities (MMBbls)
3.0
n/a
Fair value hedge
Crude oil marketing:
    
 
Forecasted purchases of crude oil (MMBbls)
7.8
0.8
Cash flow hedge
Forecasted sales of crude oil (MMBbls)
10.6
0.8
Cash flow hedge
Derivatives not designated as hedging instruments:
      
Natural gas risk management activities (Bcf) (4,5)
81.3
10.0
Mark-to-market
NGL risk management activities (MMBbls) (5)
8.2
n/a
Mark-to-market
Crude oil risk management activities (MMBbls) (5)
4.9
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 2016, April 2016 and March 2018, respectively.
(3)    Forecasted sales of NGL volumes under natural gas processing exclude 1.3 MMBbls of additional hedges executed under contracts that have been designated as normal sales agreements.
(4)    Current volumes include 55.2 Bcf 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 June 30, 2015, 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 natural gas processing margins and (iii) hedging the fair value of commodity products held in inventory.  

§
The objective of our anticipated future commodity purchases and sales hedging program is to hedge the margins of certain transportation, storage, blending and operational activities by locking in purchase and sale prices through the use of forward contracts and derivative instruments.

§
The objective of our natural gas processing hedging program is to hedge an amount of gross margin associated with these activities. We achieve this objective by executing forward fixed-price sales of a portion of our expected equity NGL production using forward contracts and commodity derivative instruments. For certain natural gas processing contracts, the hedging of expected equity NGL production also involves the purchase of natural gas for plant thermal reduction, which is hedged by executing forward fixed-price purchases using forward contracts and derivative instruments.
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
§
The objective of our inventory hedging program is to hedge the fair value of commodity products currently held in inventory by locking in the sales price of the inventory through the use of forward contracts and derivative instruments.
 
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
  
 
June 30, 2015
  
December 31, 2014
  
June 30, 2015
  
December 31, 2014
  
 
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
  
$
5.7
  
Other current
assets
  
$
--
  
Other current
liabilities
  
$
--
  
Other current
liabilities
  
$
--
  
Interest rate derivatives
Other assets
    
--
  
Other assets
    
--
  
Other liabilities
    
5.5
  
Other liabilities
    
--
  
Total interest rate derivatives
      
5.7
        
--
        
5.5
        
--
  
Commodity derivatives
Other current
assets
    
117.6
  
Other current
assets
    
217.9
  
Other current
liabilities
    
121.0
  
Other current
liabilities
    
145.3
  
Commodity derivatives
Other assets
    
0.5
  
Other assets
    
--
  
Other liabilities
    
0.7
  
Other liabilities
    
--
  
Total commodity derivatives
 
    
118.1
  
 
    
217.9
  
 
    
121.7
  
 
    
145.3
  
Total derivatives designated as hedging instruments
    
$
123.8
      
$
217.9
      
$
127.2
      
$
145.3
  
 
 
        
 
        
 
        
 
        
Derivatives not designated as hedging instruments
  
Commodity derivatives
Other current
assets
  
$
13.8
  
Other current
assets
  
$
8.1
  
Other current
liabilities
  
$
8.2
  
Other current
liabilities
  
$
0.7
  
Commodity derivatives
Other assets
    
0.4
  
Other assets
    
0.6
  
Other liabilities
    
1.4
  
Other liabilities
    
1.4
  
Total commodity derivatives
 
  
$
14.2
  
 
  
$
8.7
  
 
  
$
9.6
  
 
  
$
2.1
  

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
    
Cash
Collateral
Paid
  
 
(i)
  
(ii)
  
(iii) = (i) – (ii)
  
(iv)
  
(v) = (iii) + (iv)
  
As of June 30, 2015:
                            
Interest rate derivatives
  
$
5.7
    
$
--
    
$
5.7
    
$
(5.5
)
  
$
--
    
$
--
    
$
0.2
  
Commodity derivatives
    
132.3
      
--
      
132.3
      
(111.7
)
    
(4.0
)
    
--
      
16.6
  
As of December 31, 2014:
                                                        
Commodity derivatives
  
$
226.6
    
$
--
    
$
226.6
    
$
(147.3
)
  
$
(23.9
)
  
$
--
    
$
55.4
  

 
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 June 30, 2015:
                        
Interest rate derivatives
  
$
5.5
    
$
--
    
$
5.5
    
$
(5.5
)
  
$
--
    
$
--
  
Commodity derivatives
    
131.3
      
--
      
131.3
      
(111.7
)
    
--
      
19.6
  
As of December 31, 2014:
                                                
Commodity derivatives
  
$
147.4
    
$
--
    
$
147.4
    
$
(147.3
)
  
$
--
    
$
0.1
  
15
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 these tables, 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 these tables.
 
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 June 30,
    
For the Six Months
Ended June 30,
  
 
 
  
2015
    
2014
    
2015
    
2014
  
Interest rate derivatives
Interest expense
  
$
(0.8
)
  
$
(2.5
)
  
$
(0.8
)
  
$
(5.4
)
Commodity derivatives
Revenue
    
(0.3
)
    
1.3
      
0.4
      
0.9
  
Total
 
  
$
(1.1
)
  
$
(1.2
)
  
$
(0.4
)
  
$
(4.5
)

Derivatives in Fair Value
Hedging Relationships
 
Location
  
Gain (Loss) Recognized in
Income on Hedged Item
  
 
  
  
For the Three Months
Ended June 30,
    
For the Six Months
Ended June 30,
  
 
 
  
2015
    
2014
    
2015
    
2014
  
Interest rate derivatives
Interest expense
  
$
0.5
    
$
2.5
    
$
0.5
    
$
5.4
  
Commodity derivatives
Revenue
    
1.3
      
(1.0
)
    
9.9
      
(2.4
)
Total
 
  
$
1.8
    
$
1.5
    
$
10.4
    
$
3.0
  

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 consolidated financial statements during the periods presented.
 
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 June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
Commodity derivatives – Revenue (1)
  
$
(6.1
)
  
$
(32.9
)
  
$
26.5
    
$
(43.6
)
Commodity derivatives – Operating costs and expenses (1)
    
1.8
      
0.1
      
--
      
1.6
  
Total
  
$
(4.3
)
  
$
(32.8
)
  
$
26.5
    
$
(42.0
)
 
  
(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.
  
16
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 June 30,
    
For the Six Months
Ended June 30,
  
 
 
  
2015
    
2014
    
2015
    
2014
  
Interest rate derivatives
Interest expense
  
$
(8.7
)
  
$
(8.0
)
  
$
(17.4
)
  
$
(15.9
)
Commodity derivatives
Revenue
    
20.7
      
(15.4
)
    
81.8
      
(32.3
)
Commodity derivatives
Operating costs and expenses
    
(0.5
)
    
0.5
      
(0.5
)
    
1.4
  
Total
 
  
$
11.5
    
$
(22.9
)
  
$
63.9
    
$
(46.8
)

Derivatives in Cash Flow
Hedging Relationships
Location
  
Gain (Loss) Recognized in Income
on Derivative (Ineffective Portion)
  
 
  
  
For the Three Months
Ended June 30,
    
For the Six Months
Ended June 30,
  
 
 
  
2015
    
2014
    
2015
    
2014
  
Commodity derivatives
Revenue
  
$
0.1
    
$
0.1
    
$
0.4
    
$
(0.1
)
Commodity derivatives
Operating costs and expenses
    
--
      
(0.1
)
    
--
      
0.1
  
Total
 
  
$
0.1
    
$
--
    
$
0.4
    
$
--
  

Over the next twelve months, we expect to reclassify $36.3 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 $15.4 million of net gains attributable to commodity derivative instruments from accumulated other comprehensive income to earnings, $15.0 million as an increase in revenue and $0.4 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 June 30,
    
For the Six Months
Ended June 30,
  
 
 
  
2015
    
2014
    
2015
    
2014
  
Interest rate derivatives
Interest expense
  
$
--
    
$
--
    
$
--
    
$
(0.1
)
Commodity derivatives
Revenue
    
4.2
      
(6.6
)
    
3.9
      
(27.6
)
Commodity derivatives
Operating costs and expenses
    
0.3
      
--
      
0.3
      
--
  
Total
 
  
$
4.5
    
$
(6.6
)
  
$
4.2
    
$
(27.7
)

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.
17
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 the dates indicated.  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.

 
  
June 30, 2015
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
  
$
--
    
$
5.7
    
$
--
    
$
5.7
  
Commodity derivatives
    
17.0
      
114.5
      
0.8
      
132.3
  
Total
  
$
17.0
    
$
120.2
    
$
0.8
    
$
138.0
  
 
                                
Financial liabilities:
                                
Liquidity Option Agreement
  
$
--
    
$
--
    
$
223.7
    
$
223.7
  
Interest rate derivatives
    
--
      
5.5
      
--
      
5.5
  
Commodity derivatives
    
21.9
      
107.0
      
2.4
      
131.3
  
Total
  
$
21.9
    
$
112.5
    
$
226.1
    
$
360.5
  

 
  
December 31, 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:
  
   
   
   
 
Commodity derivatives
  
$
37.8
    
$
187.8
    
$
1.0
    
$
226.6
  
 
                                
Financial liabilities:
                                
Liquidity Option Agreement
  
$
--
    
$
--
    
$
212.2
    
$
212.2
  
Commodity derivatives
    
13.8
      
133.0
      
0.6
      
147.4
  
Total
  
$
13.8
    
$
133.0
    
$
212.8
    
$
359.6
  
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Six Months
Ended June 30,
  
 
Location
  
2015
    
2014
  
Financial asset (liability) balance, net, January 1
 
  
$
(211.8
)
  
$
3.2
  
Total gains (losses) included in:
 
                
Net income (1)
Revenue
    
(0.4
)
    
4.6
  
Other comprehensive income
Commodity derivative instruments –
  changes in fair value of cash flow hedges
    
(1.5
)
    
--
  
Settlements
Revenue
    
(0.5
)
    
(0.1
)
Transfers out of Level 3
      
0.1
      
--
  
Financial asset (liability) balance, net, March 31
 
    
(214.1
)
    
7.7
  
Total gains (losses) included in:
 
                
Net income (1)
Revenue
    
(0.4
)
    
(3.3
)
Net income
Other expense, net
    
(11.5
)
    
--
  
Other comprehensive income
 
Commodity derivative instruments –
  changes in fair value of cash flow hedges
    
(1.0
)
    
--
  
Settlements
Revenue
    
0.2
      
(1.8
)
Transfers out of Level 3
      
1.5
      
--
  
Financial asset (liability) balance, net, June 30
 
  
$
(225.3
)
  
$
2.6
  
               
  
(1) There were $0.1 million and $1.1 million of unrealized losses included in these amounts for the three and six months ended June 30, 2015, respectively. There were unrealized losses of $5.0 million and $0.5 million included in these amounts for the three and six months ended June 30, 2014, respectively.
  

The following table provides quantitative information about our recurring Level 3 fair value measurements at June 30, 2015:

 
  
Fair Value
  
 
 
   
 
  
Financial
Assets
    
Financial
Liabilities
  
Valuation
Techniques
Unobservable
Input
Range
Commodity derivatives – Crude oil
  
$
0.6
    
$
1.1
  
Discounted cash flow
Forward commodity prices
$58.95-$61.58/barrel
Commodity derivatives – Natural gasoline
    
0.2
      
1.3
  
Discounted cash flow
Forward commodity prices
$1.25-$1.27/gallon
Total
  
$
0.8
    
$
2.4
          

With respect to commodity derivatives, we believe forward commodity prices are the most significant unobservable inputs in determining our Level 3 recurring fair value measurements at June 30, 2015.  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.

As described in Note 15, we adjusted the expected life of OTA following exercise of the Liquidity Option Agreement to reflect an equal probability of the dissolution of OTA over each of the 30 years in our forecast period.   None of the other key valuation assumptions we listed in our 2014 Form 10-K for the Liquidity Option Agreement have changed.

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 June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
NGL Pipelines & Services
  
$
5.2
    
$
2.8
    
$
6.0
    
$
5.4
  
Crude Oil Pipelines & Services
    
18.1
      
0.8
      
25.9
      
1.8
  
Natural Gas Pipelines & Services
    
0.8
      
0.1
      
21.5
      
0.3
  
Petrochemical & Refined Products Services
    
--
      
--
      
0.4
      
5.0
  
Offshore Pipelines & Services
    
54.9
      
--
      
58.5
      
--
  
Total
  
$
79.0
    
$
3.7
    
$
112.3
    
$
12.5
  

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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 six months ended June 30, 2015 primarily reflect the write-down of a long-lived asset of our Offshore Business classified as held for sale (see Note 6) and the abandonment of certain natural gas and crude oil pipeline assets in Texas.  The following table summarizes our non-recurring fair value measurements for the six months ended June 30, 2015:

 
  
   
Fair Value Measurements Using
    
 
 
  
Carrying
Value at
June 30,
2015
    
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
  
$
--
    
$
--
    
$
--
    
$
--
    
$
55.1
  
Impairment of long-lived assets to be disposed of by sale (1)
    
1,689.4
      
--
      
--
      
1,689.4
      
57.2
  
Total
                                  
$
112.3
  
                                               
(1) Primarily includes long-lived assets of our Offshore Business that were reclassified to held for sale at June 30, 2015, net of an associated non-cash impairment charge of $54.8 million related to goodwill. See Note 6.
  

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

 
 
Fair Value Measurements Using
  
 
 
Carrying
Value at
June 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
  
$
--
    
$
--
    
$
--
    
$
--
    
$
7.5
  
Impairment of long-lived assets to be disposed of by sale
    
0.1
      
--
      
--
      
0.1
      
5.0
  
Total
                                  
$
12.5
  

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 $23.05 billion and $22.16 billion at June 30, 2015 and December 31, 2014, respectively.  The aggregate carrying value of these debt obligations was $22.33 billion and $20.48 billion at June 30, 2015 and December 31, 2014, 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.

20
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5.  Inventories

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

 
  
June 30,
2015
    
December 31,
2014
  
NGLs
  
$
586.8
    
$
579.1
  
Petrochemicals and refined products
    
220.4
      
295.6
  
Crude oil
    
157.9
      
97.8
  
Natural gas
    
34.7
      
41.7
  
Total
  
$
999.8
    
$
1,014.2
  

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 June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
Cost of sales (1)
  
$
5,257.9
    
$
10,705.3
    
$
10,936.0
    
$
21,758.0
  
Lower of cost or market adjustments
    
0.5
      
2.7
      
4.0
      
7.9
  
    
(1)    Cost of sales is a component of “Operating costs and expenses” as presented on our Unaudited Condensed Statements of Consolidated Operations. Fluctuations in these amounts are primarily due to changes in energy commodity prices and sales volumes associated with our marketing activities.
  


Note 6. Assets Held for Sale

Offshore Gulf of Mexico Business
On July 16, 2015, we announced the execution of a Purchase and Sale Agreement with Genesis whereby they agreed to acquire our Offshore Business, which primarily consists of our Offshore Pipelines & Services business segment, for approximately $1.53 billion in cash. Our Offshore Business served drilling and development regions, including deepwater production fields, in the northern Gulf of Mexico offshore Texas, Louisiana, Mississippi and Alabama. As of December 31, 2014, our Offshore Business included approximately 2,350 miles of offshore natural gas and crude oil pipelines and six offshore hub platforms. The transaction closed on July 24, 2015. We maintained ownership of this business until the closing date.

We viewed our Offshore Business as an extension of our midstream energy services network. As such, the sale of these assets does not represent a strategic shift in our consolidated operations that would have a major effect on our operations and financial results. At December 31, 2014 and June 30, 2015, segment assets for our Offshore Pipelines & Services segment represented 4.3% and 4.1%, respectively, of consolidated total segment assets. Likewise, gross operating margin from this business segment represented only 3.1% and 3.4% of our consolidated total gross operating margin for the year ended December 31, 2014 and six months ended June 30, 2015, respectively. The sale of this non-strategic business allows us to redeploy capital to other business opportunities that we believe will generate a higher return for us in the future (e.g., our recent acquisition of EFS Midstream LLC (see Note 18)). Also, proceeds from the closing of this sale will reduce our need to issue additional equity to support our ongoing capital spending program.

Given the status of negotiations as of June 30, 2015, this transaction met the criteria necessary to classify the underlying assets and liabilities of our Offshore Business as “held for sale.”  As a result, the associated assets and liabilities of this business were reclassified to current assets and current liabilities, respectively, on our Unaudited Condensed Consolidated Balance Sheet at June 30, 2015.  In addition, the noncontrolling interest attributable to this held for sale business was also identified within equity at June 30, 2015.

We recorded a non-cash asset impairment charge at June 30, 2015 of approximately $54.8 million, which reflects the excess of the net assets of the business at June 30, 2015 over its estimated fair value based on the transaction price.
21
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ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Since the fixed and intangible assets of our Offshore Business were classified as held for sale at June 30, 2015, we no longer depreciate and amortize the subject assets. Our consolidated results of operations for the six months ended June 30, 2015 and 2014 included $44.6 million and $45.9 million, respectively, of depreciation and amortization expense attributable to these assets.

Carrying Values of Major Classes of Assets and Liabilities Designated as Held for Sale
The following table presents the major classes of assets and liabilities designated as held for sale on our Unaudited Condensed Consolidated Balance Sheet at June 30, 2015:

 
  
Offshore
Gulf of Mexico
Business
  
Assets held for sale:
  
 
   Current assets
  
$
26.9
  
   Property, plant and equipment, net
    
1,135.9
  
   Investments in unconsolidated affiliates
    
482.4
  
   Intangible assets, net
    
37.1
  
   Goodwill
    
82.0
  
   Other assets
    
1.2
  
Subtotal
    
1,765.5
  
Impairment charge related to goodwill
    
(54.8
)
Total presented in Current Assets
  
$
1,710.7
  
 
        
Liabilities related to assets held for sale:
        
   Current liabilities
  
$
24.1
  
   Other long-term liabilities
    
92.3
  
Total presented in Current Liabilities
  
$
116.4
  
         
Noncontrolling interests in assets held for sale
  
$
62.2
  
         
Net assets of Offshore Business before impairment charge
  
$
1,586.9
  
         
Fair value of Offshore Business based on estimated transaction price
  
$
1,532.1
  

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

Note 7.  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
    
June 30,
2015
    
December 31, 
2014
  
Plants, pipelines and facilities (1)
  
3-45 (6)
 
  
$
31,449.8
    
$
30,834.9
  
Underground and other storage facilities (2)
  
5-40 (7)
 
    
2,726.6
      
2,584.2
  
Platforms and facilities (3)
  
20-31
      
659.7
      
659.7
  
Transportation equipment (4)
  
3-10
      
159.0
      
154.2
  
Marine vessels (5)
  
15-30
      
826.1
      
796.4
  
Land
            
261.2
      
262.6
  
Construction in progress
            
3,588.2
      
2,754.7
  
Total historical cost of property, plant and equipment
            
39,670.6
      
38,046.7
  
    Less accumulated depreciation
            
8,750.9
      
8,165.1
  
Subtotal property, plant and equipment, net
            
30,919.7
      
29,881.6
  
    Carrying values reclassified to assets held for sale (8)
            
(1,135.9
)
    
--
  
Total property, plant and equipment, net
          
$
29,783.8
    
$
29,881.6
  
  
 
(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 included offshore platforms and related facilities and other associated assets located in the Gulf of Mexico (see Note 6).
  
(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.
  
(8) See Note 6 regarding the reclassification of $1.84 billion of offshore Gulf of Mexico property, plant and equipment values, net of $706.8 million of accumulated depreciation, to assets held for sale at June 30, 2015.
  

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

 
  
For the Three Months
Ended June 30,
    
For the Six Months
Ended June 30,
  
 
  
2015
    
2014
    
2015
    
2014
  
Depreciation expense (1)
  
$
292.6
    
$
271.0
    
$
583.9
    
$
538.9
  
Capitalized interest (2)
    
35.7
      
17.7
      
65.3
      
36.2
  
   
(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.