The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 2, 2009. Our Management's Discussion and Analysis includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in "Item 1A. Risk Factors" included in this report and in our Annual Report for the year ended December 31, 2008.

Overview

Our business activities are primarily conducted through our Operating Companies. The Partnership and the Operating Companies are sometimes referred to collectively in this report as "we," "us," "Energy Transfer" or "ETP."

Our primary objective is to increase the level of our cash distributions over time by pursuing a business strategy that is currently focused on growing our natural gas midstream and transportation and storage businesses (including transportation, gathering, compression, treating, processing, storage and marketing) and our propane business through, among other things, pursuing certain construction and expansion opportunities relating to our existing infrastructure and acquiring certain additional businesses or assets. The actual amount of cash we will have available for distribution primarily depends on the amount of cash we generate from operations.

During the past several years, we have been successful in completing several acquisitions and business combinations, including the combination of the retail propane operations of Heritage Propane Partners, L.P. and the midstream and intrastate transportation and storage operations of ETC OLP in January 2004. Subsequent to this combination, we have made numerous significant acquisitions, of assets totaling $3.9 billion in our natural gas operations and $0.85 billion in our propane operations.

In addition to our acquisitions, we have grown through internal growth projects, consisting primarily of the construction of natural gas transmission pipelines, both intrastate and interstate. From September 1, 2003 through September 30, 2009, we made growth capital expenditures, excluding capital contributions made in connection with the Midcontinent Express pipeline ("MEP") and Fayetteville Express pipeline ("FEP") joint ventures, of approximately $5.0 billion, of which more than $4.3 billion was related to natural gas transmission pipelines. We expect our fee-based revenue to increase as a result of the completion of recent pipeline expansions to our existing natural gas system in addition to projects expected to be completed in the next twelve to eighteen months. These projects include MEP, the Texas Independence pipeline, FEP and the Tiger pipeline.

In January 2008, in conjunction with the signing of transportation commitments, MEP entered into an option agreement with a subsidiary of MarkWest Energy Partners, L.P. ("MarkWest"), providing it a one-time right to purchase a 10% ownership interest in MEP. In October 2009, MarkWest provided notice that it would not exercise the option.

Operations

Our principal operations are conducted in the following reportable segments (see Note 18 to our unaudited condensed consolidated financial statements):

• Intrastate transportation and storage - Revenue is typically generated from fees charged to customers to reserve firm capacity on or move gas through the pipeline on an interruptible basis. A monetary fee and/or fuel retention are also components of the fee structure. Excess fuel retained after consumption is typically valued based on the published market prices as of the first of the month and sold at market prices. The HPL System also generates revenue from the sale of natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users and other marketing companies. The use of the Bammel storage reservoir allows us to purchase physical natural gas and then sell financial contracts at a price sufficient to cover its carrying costs and provide a gross profit margin, in addition to generating revenue from fee-based contracts to reserve firm storage capacity.

• Interstate transportation - The revenues of this segment consist primarily of fees earned from natural gas transportation services and operational gas sales.

• Retail propane - Revenue is generated from the sale of propane and propane-related products and services.

Trends and Outlook

In light of the current conditions in the capital markets, and based on our projected growth capital expenditures and capital contributions to joint venture entities, we have taken significant steps to preserve our liquidity position. These measures include, but are not limited to, reducing discretionary capital expenditures, maintaining our cash distribution rate at $3.575 per Common Unit on an annualized basis since the second quarter of 2008, and continuing to manage operating and administrative costs. During the nine months ended September 30, 2009, we received approximately $578.3 million in net proceeds from our January and April Common Unit offerings and $993.6 million in net proceeds from an offering of $1.0 billion of aggregate principal amount of senior notes in April. As of September 30, 2009, in addition to approximately $50.1 million of cash on hand, we had available capacity under the ETP Credit Facility of approximately $1.45 billion. In addition, we received approximately $276.0 million in net proceeds from our October Common Unit offering. Based on our current estimates, we expect to utilize these resources, along with cash from operations, to fund our announced growth capital expenditures and working capital needs without the need to access the capital markets until the latter half of 2010; however, we may issue debt or equity securities prior to that time as we deem prudent to provide liquidity for new capital projects or other partnership purposes.

As noted above and despite the economic challenges and volatile capital markets, we have successfully raised approximately $2.4 billion in proceeds from the recent debt and equity offerings since December 1, 2008, which includes approximately $595.7 million in net proceeds from our December 2008 Senior Notes offering. We believe that the size and scope of our operations, our stable asset base and cash flow profile and our investment grade status will be significant positive factors in our efforts to obtain new debt or equity funding; however, there is no assurance that we will continue to be successful in obtaining financing under any of the alternatives discussed above if the capital markets deteriorate further from current conditions. Furthermore, the terms, size and cost of any one of these financing alternatives could be less favorable and could be impacted by the timing and magnitude of our funding requirements, market conditions and other uncertainties.

Our natural gas transportation and midstream revenues are derived significantly from companies that engage in natural gas exploration and production activities. Prices for natural gas and NGLs have fallen dramatically since July 2008 and have remained at low levels due to the continued effects of the economic recession and higher than normal storage levels. Many of our customers have been negatively impacted by these recent declines in natural gas prices as well as current conditions in the capital markets. These factors have caused several of our customers to decrease drilling levels and, in some cases, to shut in or consider shutting in natural gas production from some producing wells.

In our intrastate and interstate natural gas operations, a significant portion of our revenue is derived from long-term fee-based arrangements pursuant to which our customers pay us capacity reservation charges regardless of the volume of natural gas transported; however, a portion of our revenue is derived from charges based on actual volumes transported in addition to the excess of fuel retention charged to our customers after consumption. As a result, our operating cash flows from our natural gas pipeline operations are not tied directly to natural gas and NGL prices; however, the volumes of natural gas we transport may be adversely affected by reduced drilling activity of our customers, as well as the shutting in of production from producing wells, as a result of lower natural gas prices. As a portion of our pipeline transportation revenue is based on volumes transported and fuel retention, lower volumes of natural gas transported and lower natural gas prices generally result in lower revenue from our intrastate and interstate natural gas operations. During the first nine months of 2009, natural gas spot prices have ranged from $1.925 per MMbtu to $5.25 per MMbtu, and the closing price on the NYMEX on November 6, 2009 for natural gas to be delivered in December 2009 was $4.595 per MMbtu. As a result, drilling activity in our core operating areas has declined and natural gas producers have shut in production from some wells, which in turn has resulted in lower than expected natural gas volumes transported on our intrastate and interstate pipelines. There are no assurances that commodity prices will not decline further, which could result in a further reduction in drilling activities by our customers.

Since certain of our natural gas marketing operations and substantially all of our propane operations involve the purchase and resale of natural gas and NGLs, we expect our revenues and costs of products sold to be lower than prior periods if commodity prices remain at or fall below existing levels. However, we do not expect our margins from these activities to be significantly impacted as we typically purchase the commodity at a lower price than the sales price. Since the prices of natural gas and NGLs have been volatile, there are no assurances that we will ultimately sell the commodity for a profit.

Current economic conditions also indicate that many of our customers may encounter increased credit risk in the near term. We actively monitor the credit status of our counterparties, performing both quantitative and qualitative assessments based on their credit ratings and credit default swaps where applicable, and to date have not had any significant credit losses associated with our transactions. However, given the current volatility in the financial markets, we cannot be certain that we will not experience such losses in the future.

Results of Operations

Consolidated Results



                                                  Three Months Ended September 30,                               Nine Months Ended September 30,
                                                     2009                  2008               Change                2009                  2008               Change

Revenues                                       $      1,129,596      $      2,206,215     $   (1,076,619)     $      3,911,513      $      7,499,062     $   (3,587,549)
Cost of products sold                                   678,148             1,633,454           (955,306)            2,263,280             5,737,244         (3,473,964)

Gross margin                                            451,448               572,761           (121,313)            1,648,233             1,761,818           (113,585)

Operating expenses                                      158,883               197,493            (38,610)              517,337               573,606            (56,269)
Depreciation and amortization                            81,684                70,508              11,176              230,461               191,757              38,704
Selling, general and administrative                      33,534                44,252            (10,718)              143,015               136,632               6,383

Operating income                                        177,347               260,508            (83,161)              757,420               859,823           (102,403)

Interest expense, net of interest
capitalized                                           (101,503)              (67,792)            (33,711)            (284,228)             (191,757)            (92,471)
Equity in earnings (losses) of affiliates                 9,581                 (654)              10,235               11,751                 (749)              12,500
Gains (losses) on disposal of assets                    (1,088)                 2,520             (3,608)              (1,333)                 1,584             (2,917)
Gains (losses) on non-hedged interest rate
derivatives                                            (18,241)                   394            (18,635)               32,327                   149              32,178
Allowance for equity funds used during
construction                                                 30                19,727            (19,697)               18,618                45,275            (26,657)
Other, net                                                3,433                 (805)               4,238                4,400                 9,486             (5,086)
Income tax benefit (expense)                              2,897                 7,150             (4,253)              (8,594)               (8,754)                 160

Net income                                     $         72,456      $        221,048     $     (148,592)     $        530,361      $        715,057     $     (184,696)

See the detailed discussion of revenues, costs of products sold, margin and operating expense by operating segment below.

Interest Expense. Interest expense increased principally due to higher levels of borrowings, which were used to finance growth capital expenditures primarily in our intrastate transportation and storage and interstate transportation segments, including capital contributions to our joint ventures. Interest expense is presented net of capitalized interest and allowance for debt funds used during construction, which totaled $5.7 million and $7.9 million for the three months ended September 30, 2009 and 2008, respectively, and $15.5 million and $24.3 million for the nine months ended September 30, 2009 and 2008, respectively.

Equity in Earnings (Losses) of Affiliates. The increase in equity in earnings of affiliates for both the three and nine month periods was primarily attributable to earnings of MEP during the three months ended September 30, 2009, for which we recorded $7.0 million and $1.8 million, respectively.

Gains (Losses) on Non-Hedged Interest Rate Derivatives. Changes between the periods are a result of changes in the relevant floating index rates.

Allowance for Equity Funds Used During Construction. The decrease in AFUDC on equity was due to the completion of the Phoenix project in February 2009. AFUDC on equity amounts recorded in property, plant and equipment were $0.02 million and $12.1 million for the three months ended September 30, 2009 and 2008, respectively, and $11.4 million and $27.7 million for the nine months ended September 30, 2009 and 2008, respectively.

Other Income, Net. The decrease between the nine month periods was primarily due to contributions in aid of construction, which exceeded our project costs during the nine months ended September 30, 2008.

Income Tax Expense. As a partnership, we are generally not subject to income taxes. However, certain wholly-owned subsidiaries are corporations that are subject to income taxes. For the three months ended September 30, 2009, the tax benefit resulted from the settlement of the FERC's market manipulation claims in August 2009. For the three months ended September 30, 2008, the tax benefit resulted from trading losses incurred by our corporate subsidiaries in July 2008.

Segment Operating Results

We evaluate segment performance based on operating income, which we believe is an important performance measure of the core profitability of our operations. This measure represents the basis of our internal financial reporting and is one of the performance measures used by senior management in deciding how to allocate capital resources among business segments.

Detailed descriptions of our business and segments are included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 2, 2009.

Operating income by segment is as follows:

                                                  Three Months Ended September 30,                             Nine Months Ended September 30,
                                                     2009                  2008              Change               2009                  2008              Change

Intrastate transportation and storage          $        109,781      $        229,921     $   (120,140)     $        410,425      $        554,140     $   (143,715)
Interstate transportation                                41,610                33,698             7,912              101,755                91,414            10,341
Midstream                                                43,414                39,862             3,552               96,603               157,517          (60,914)
Retail propane and other retail propane
related                                                (16,550)              (39,728)            23,178              152,079                61,705            90,374
Other                                                   (3,021)                 (186)           (2,835)              (4,803)                 (528)           (4,275)
Unallocated selling, general and
administrative expenses                                   2,113               (3,059)             5,172                1,361               (4,425)             5,786

Operating income                               $        177,347      $        260,508     $    (83,161)     $        757,420      $        859,823     $   (102,403)

Unallocated Selling, General and Administrative Expenses. Selling, general and administrative expenses are allocated monthly to the Operating Companies using the Modified Massachusetts Formula Calculation. The expenses subject to allocation are based on estimated amounts and take into consideration actual expenses from previous months and known trends. The difference between the allocation and actual costs is adjusted in the following month, which results in over or under allocation of these costs due to timing differences.

Intrastate Transportation and Storage



                                               Three Months Ended September 30,                            Nine Months Ended September 30,
                                                  2009                  2008              Change               2009                2008             Change

Natural gas MMBtu/d - transported                 11,111,011            11,613,933         (502,922)           12,769,022         10,515,132         2,253,890
Natural gas MMBtu/d - sold                           886,463             1,409,348         (522,885)              879,861          1,556,524         (676,663)

Revenues                                    $        466,713      $      1,509,555     $ (1,042,842)     $      1,589,298      $   4,862,641     $ (3,273,343)
Cost of products sold                                278,868             1,150,799         (871,931)              895,433          3,965,931       (3,070,498)

Gross margin                                         187,845               358,756         (170,911)              693,865            896,710         (202,845)

Operating expenses                                    45,053                86,332          (41,279)              155,461            227,026          (71,565)
Depreciation and amortization                         27,188                23,820             3,368               78,080             60,293            17,787
Selling, general and administrative                    5,823                18,683          (12,860)               49,899             55,251           (5,352)

Segment operating income                    $        109,781      $        229,921     $   (120,140)     $        410,425      $     554,140     $   (143,715)

Gross Margin.

Three Months

Intrastate transportation and storage gross margin decreased between the three month periods primarily due to the following factors:

• Our fuel retention revenues are directly impacted by changes in natural gas prices and volumes. Increases in natural gas prices increase our fuel retention revenues and decreases in natural gas prices decrease our fuel retention revenues. Due to the decrease in natural gas prices, fuel retention margin decreased approximately $62.1 million compared to the prior period despite increases in volumes transported. Natural gas prices for retained fuel decreased from an average of $8.98/MMBtu during the three months ended September 30, 2008 to $3.16/MMBtu during the three months ended September 30, 2009.

• We experienced a net decrease in storage margin of $90.1 million between the periods due primarily to unfavorable changes in derivative activity. During the 2008 period, we accounted for our storage-related derivative instruments using mark to market accounting, with changes in the fair value of these derivatives being recorded directly in earnings. Due to the sharp

• Transportation fees decreased approximately $9.6 million primarily as a result of decreases in volumes transported due to weaker price differentials between major market hubs where our assets are located.

• In addition to the above factors, we experienced a reduction in margin of $9.1 million as compared to the prior period principally due to the decrease in natural gas sold as a result of lower natural gas prices, lower west to east price differentials, and lower demand from industrial end users and local distribution companies.

Nine Months

Intrastate transportation and storage gross margin decreased between the nine month periods primarily due to the following factors:

• As mentioned above, our fuel retention revenues are directly impacted by changes in natural gas prices and volumes. Due to the increased transportation volumes discussed above, fuel retention margins increased approximately $32.0 million compared to the prior period. However, natural gas prices for retained fuel decreased from an average of $8.99/MMBtu during the nine months ended September 30, 2008 to $3.25/MMBtu during the nine months ended September 30, 2009 resulting in a decrease to the retention margin of $179.0 million.

• We experienced a net decrease in storage margin of $87.5 million primarily due to a decrease in realized margin of $87.9 million as a result of a 24.7 Bcf decrease in natural gas sold between the periods from our Bammel Storage Facility. In addition, we experienced fluctuations related to our storage-related derivative activities that resulted in a net increase of $0.4 million. During the 2008 period and the first three months of 2009, we accounted for certain of our storage-related derivative instruments using mark to market accounting with changes in the value of these financial derivative instruments being recorded directly in earnings. During the nine months ended September 30, 2008, we recognized unrealized gains of $23.1 million from mark to market adjustments and realized losses of $5.7 million from the settlement of derivative contracts. During the three months ended March 31, 2009, we recognized $66.3 million in net gains from mark to market adjustments and the settlement of storage-related derivative contracts primarily due to expected natural gas withdrawals that were ultimately deferred. Beginning in April 2009, we elected fair value hedge accounting for certain storage-related transactions and recognized $3.5 million in realized gains from the settlement of derivative contracts and $2.1 million in unrealized gains from inventory fair value adjustments related to changes in the spot prices for natural gas and changes in value of the financial derivatives associated with storage during the nine months ended September 30, 2009. In addition, during the nine months ended September 30, 2009, we recognized $54.0 million in unrealized losses as a result of a non-cash lower of cost or market write-down of our natural gas inventory.

• Transportation fees increased approximately $84.8 million primarily due to increased volumes through our transportation pipelines. Overall volumes on our transportation pipelines were higher principally due to increased capacity of our pipeline system as a result of the completion of the Paris Loop, Maypearl to Malone pipeline, Carthage Loop, Southern Shale pipeline, Cleburne to Tolar pipeline and the Katy expansion during 2008 and 2009.

• In addition to the above factors, we experienced a reduction in margin of $53.1 million as compared to the prior period principally due to the decrease in natural gas sold as a result of lower natural gas prices, lower west to east price differentials, and lower demand from industrial end users and local distribution companies.

Operating Expenses.

Three Months

Intrastate transportation and storage operating expenses decreased between the three month periods primarily due to a decrease in consumption expense of $35.9 million, which was principally caused by lower natural gas prices between periods despite increases in volumes transported, and a decrease in electricity costs of approximately $4.8 million.

Nine Months

Intrastate transportation and storage operating expenses decreased between the nine month periods primarily due to a decrease in consumption expense of $82.6 million, which was principally caused by lower natural gas prices between periods despite increases in volumes transported, and a decrease in electricity costs of approximately $6.6 million. Offsetting the decrease were increases in ad valorem taxes of $12.9 million, resulting from increased property values, and pipeline maintenance expenses of approximately $5.0 million.

. . .