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EPD > SEC Filings for EPD > Form 10-Q on 9-Nov-2011All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

For the three and nine months ended September 30, 2011 and 2010.

The following information should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this quarterly report on Form 10-Q. The following information and such unaudited condensed consolidated financial statements should also be read in conjunction with the audited financial statements and related notes, together with our discussion and analysis of financial position and results of operations, included in our annual report on Form 10-K for the year ended December 31, 2010, as filed on March 1, 2011 (the "2010 Form 10-K"). Our financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States.

Key References Used in this Quarterly Report

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 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 Delaware limited liability company.

On September 3, 2010, Enterprise GP Holdings L.P. ("Holdings"), Enterprise, Enterprise GP, Enterprise Products GP, LLC ("EPGP," the former general partner of Enterprise) and Enterprise ETE LLC ("Holdings MergerCo," a Delaware limited liability company and a wholly owned subsidiary of Enterprise) entered into a merger agreement (the "Holdings Merger Agreement"). On November 22, 2010, the Holdings Merger Agreement was approved by the unitholders of Holdings and the merger of Holdings with and into Holdings MergerCo and related transactions were completed, with Holdings MergerCo surviving such merger (collectively, we refer to these transactions as the "Holdings Merger"). Enterprise's membership interests in Holdings MergerCo were subsequently contributed to EPO. For additional information regarding the Holdings Merger, see "Basis for Financial Statement Presentation" within this Item 2.

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

References to "EPCO" mean Enterprise Products Company and its privately held affiliates. A majority of the outstanding voting capital stock of EPCO is owned of record by a voting trust, the current trustees ("EPCO Trustees") of which are: (i) Ms. Williams, who 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. Ms. Williams, Dr. Cunningham and Mr. Bachmann are also directors of EPCO.

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On April 28, 2011, we, our general partner, EPD MergerCo LLC ("Duncan MergerCo," a Delaware limited liability company and our wholly owned subsidiary), Duncan Energy Partners L.P. ("Duncan Energy Partners") and DEP Holdings, LLC ("DEP GP," the general partner of Duncan Energy Partners) entered into a definitive merger agreement (the "Duncan Merger Agreement"). On September 7, 2011, the Duncan Merger Agreement was approved by the unitholders of Duncan Energy Partners and the merger of Duncan MergerCo with and into Duncan Energy Partners and related transactions were completed, with Duncan Energy Partners surviving such merger as our wholly owned subsidiary (collectively, we refer to these transactions as the "Duncan Merger"). See "Significant Recent Developments" included under this Item 2 for additional information regarding the Duncan Merger.

References to "Energy Transfer Equity" mean the business and operations of Energy Transfer Equity, L.P. and its consolidated subsidiaries, which include Energy Transfer Partners, L.P. ("ETP") and Regency Energy Partners LP. We own noncontrolling limited partner interests in Energy Transfer Equity, which we account for using the equity method of accounting. Energy Transfer Equity electronically files reports with the U.S. Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K and quarterly reports on Form 10-Q. The SEC maintains an Internet website at that contains periodic reports and other information regarding this registrant.

References to "Employee Partnerships" mean EPE Unit L.P., EPE Unit II, L.P., EPE Unit III, L.P., Enterprise Unit L.P. and EPCO Unit L.P., collectively, all of which were privately held affiliates of EPCO. The Employee Partnerships were liquidated in August 2010. See "Results of Operations" included under this Item 2 for additional information.

As generally used in the energy industry and in this discussion, the identified terms have the following meanings:

                    /d       = per day
                    BBtus    = billion British thermal units
                    Bcf      = billion cubic feet
                    MBPD     = thousand barrels per day
                    MMBbls   = million barrels
                    MMBtus   = million British thermal units
                    MMcf     = million cubic feet
                    TBtus    = trillion British thermal units

Cautionary Note Regarding Forward-Looking Statements

This discussion contains various forward-looking statements and information based on our beliefs and those of our general partner, as well as assumptions made by us and information currently available to us. When used in this document, words such as "anticipate," "project," "expect," "plan," "seek," "goal," "estimate," "forecast," "intend," "could," "should," "will," "believe," "may," "potential" and similar expressions and statements regarding our plans and objectives for future operations, are intended to identify forward-looking statements. Although we and our general partner believe that the expectations reflected in such forward-looking statements are reasonable, neither we nor our general partner can give any assurances that such expectations will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions as described in more detail under Item 1A "Risk Factors" included in our 2010 Form 10-K. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. You should not put undue reliance on any forward-looking statements. The forward-looking statements in this quarterly report speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.

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Overview of Business

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, refined products and certain petrochemicals. Our midstream energy asset network links producers of natural gas, NGLs and crude oil from some of the largest supply basins in the United States, Canada and the Gulf of Mexico with domestic consumers and international markets. Our assets include approximately 50,000 miles of onshore and offshore pipelines; 192 MMBbls of storage capacity for NGLs, refined products and crude oil; and 27 Bcf of total working natural gas storage capacity.

Our midstream energy operations include: natural gas gathering, treating, processing, transportation and storage; NGL transportation, fractionation, storage, and import and export terminaling; crude oil and refined products transportation, storage, and terminaling; offshore production platforms; petrochemical transportation and services; and a marine transportation business that operates primarily on the United States inland and Intracoastal Waterway systems and in the Gulf of Mexico. We have six reportable business segments:
(i) NGL Pipelines & Services; (ii) Onshore Natural Gas Pipelines & Services;
(iii) Onshore Crude Oil Pipelines & Services; (iv) Offshore Pipelines & Services; (v) Petrochemical & Refined Products Services; and (vi) Other Investments.

We conduct substantially all of our business through EPO and are owned 100% by our limited partners from an economic perspective. Enterprise GP owns a non-economic general partner interest in us.

Basis of Financial Statement Presentation

In accordance with rules and regulations of the SEC and various other accounting standard-setting organizations, our general purpose financial statements reflect the consolidation of financial information of businesses that we control. Our general purpose consolidated financial statements present those investments over which we do not have control as unconsolidated affiliates (e.g., our equity method investment in Energy Transfer Equity). Noncontrolling interest reflects third-party and related party ownership of our consolidated subsidiaries.

Prior to the Holdings Merger, Enterprise was a consolidated subsidiary of Holdings, which was Enterprise's parent. Upon completion of the Holdings Merger, Holdings merged with and into a wholly owned subsidiary of Enterprise. The Holdings Merger resulted in Holdings being considered the surviving consolidated entity for accounting purposes, while Enterprise Products Partners L.P. is the surviving consolidated entity for legal and reporting purposes. For accounting purposes, Holdings is deemed the acquirer of the noncontrolling interest in Enterprise that were previously recognized in Holdings' consolidated financial statements (i.e., the acquisition of Enterprise's limited partner interests that were owned by parties other than Holdings).

As a result of the Holdings Merger, Enterprise's consolidated financial and operating results prior to November 22, 2010 have been presented as if Enterprise were Holdings from an accounting perspective (i.e., the financial statements of Holdings became the historical financial statements of Enterprise). While it was a publicly traded partnership, Holdings (NYSE, ticker symbol "EPE") electronically filed its annual and quarterly consolidated financial statements with the SEC. You can access this information at

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The primary differences between Holdings' and Enterprise's consolidated results of operations were (i) general and administrative costs incurred by Holdings and EPGP (our former general partner); (ii) equity in income of Holdings' noncontrolling ownership interests in Energy Transfer Equity; and (iii) interest expense associated with Holdings' debt. In addition, for periods prior to November 22, 2010, the net assets, income, cash distributions and contributions and other amounts attributable to Enterprise's limited partner interests that were owned by third parties and related parties other than Holdings are presented as a component of noncontrolling interests. See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report for additional information regarding our noncontrolling interests.

Historical limited partner units outstanding and earnings per unit amounts presented in our financial statements have been retroactively presented in connection with the 1.5 to one unit-for-unit exchange that occurred under the Holdings Merger. See Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report for additional information regarding earnings per unit.

Significant Recent Developments

The following information highlights significant developments since January 1, 2011 through the date of this filing (November 9, 2011), including (i) information relevant to an understanding of our financial condition, changes in financial condition or results of operations, and (ii) certain unusual or infrequent events or transactions and known trends or uncertainties that have had or that we reasonably expect may have a material impact on our revenues or income from continuing operations.

Enterprise to Expand Its Natural Gas Pipeline and Processing Infrastructure in the Eagle Ford Shale

On November 1, 2011, we announced several new construction projects that will extend and expand our natural gas and NGL infrastructure in South Texas to accommodate expected production growth from the Eagle Ford Shale. As a result of additional demand from our Eagle Ford Shale producing customers, along with the execution of new gathering and processing agreements, we plan to expand natural gas processing capacity at our Yoakum facility (which is currently under construction) by an additional 300 MMcf/d. Once the expansion is completed, our Yoakum facility will have total gas processing capacity of 900 MMcf/d. We also plan to increase the size of the NGL takeaway pipelines originating at the Yoakum plant to handle the expected increase in NGL production. We expect the Yoakum facility to commence operations during the first quarter of 2013. The new Yoakum plant will complement our seven existing natural gas processing plants in South Texas, which currently have the capacity to process approximately 1.5 Bcf/d.

In addition to the Yoakum expansion, we are constructing 62 miles of natural gas pipeline loops and increasing compression to gather and transport an additional 300 MMcf/d of rich Eagle Ford Shale gas. These pipeline expansion projects are also expected to begin service in the first quarter of 2013.

Start of Service on Acadian Haynesville Extension

Full commercial operations on the Haynesville Extension of our Acadian Gas System commenced November 1, 2011. As a result of completing the Haynesville Extension project, we have provided producers in Louisiana's Haynesville and Bossier Shale plays with access to 1.8 Bcf/d of incremental natural gas takeaway capacity. As an extension of our Acadian Gas System, the Haynesville Extension offers producers access to more than 150 end-user customer service locations along the Mississippi River industrial corridor between Baton Rouge and New Orleans, as well as the Henry Hub. The Haynesville Extension features interconnects with twelve interstate pipeline systems and is the only southerly option that avoids potential natural gas supply bottlenecks at the Perryville Hub and offers producers flow assurance and market choice to assist in maximizing the value of their natural gas.

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Enterprise to Sell Mississippi Natural Gas Storage Facilities

In October 2011, Enterprise announced that it executed definitive agreements to sell all of its ownership interests in Crystal Holding L.L.C. ("Crystal") to Boardwalk HP Storage Company, LLC ("Boardwalk") for $550 million in cash. Crystal owns two underground salt dome natural gas storage facilities and related pipelines located near Petal and Hattiesburg, Mississippi. The facilities have approximately 29 Bcf of total storage capacity and are owned by Petal Gas Storage, L.L.C. ("Petal") and Hattiesburg Gas Storage Company ("Hattiesburg"). Proceeds from this sale will be used for general partnership purposes, including the funding of capital expenditures. This transaction is subject to customary regulatory approvals and is expected to close during the fourth quarter of 2011.

The Petal and Hattiesburg operations are a component of our Onshore Natural Gas Pipelines & Services business segment. The assets and liabilities of Petal and Hattiesburg were classified as held for sale and presented separately in the current assets and current liabilities sections, respectively, of our Unaudited Condensed Consolidated Balance Sheet at September 30, 2011. See Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Item 1 of this quarterly report for additional information regarding this presentation.

Enterprise to Develop Long-Haul Ethane Pipeline

In October 2011, Enterprise announced plans to design, construct and operate a long-haul pipeline to transport ethane from the Marcellus and Utica shale regions in Pennsylvania, West Virginia and Ohio to the U.S. Gulf Coast. The approximately 1,230-mile pipeline would have an initial capacity of 125 MBPD, which could be expanded to meet increased shipper demand. The pipeline would deliver ethane to our NGL storage complex in Mont Belvieu, Texas. Ethane production from the Marcellus and Utica shales would ultimately have direct or indirect access to every ethylene plant in the U.S. through connections in Mont Belvieu. The pipeline would be expected to begin commercial operations in the first quarter of 2014.

The project would utilize a combination of new and existing infrastructure. The northern portion of the proposed system involves construction of a pipeline that would originate in Washington County, Pennsylvania and extend west, then southwest, following existing pipeline corridors in order to minimize the footprint of the project. At Cape Girardeau, Missouri the pipeline would interconnect with our existing 16-inch diameter TE Products Pipeline, which would be reversed to accommodate southbound delivery of ethane to the U.S. Gulf Coast. At the terminus of our Products Pipeline System in Beaumont, Texas, we would construct a 55-mile pipeline to connect to our Mont Belvieu facility.

In November 2011, we announced the execution of a long-term take-or-pay contract with a shipper. The volume commitment under this anchor contract represents 75 MBPD (over a five-year ramp up period) of the pipeline's initial capacity of 125 MBPD. The open commitment period for other interested shippers remains open until November 10, 2011.

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Enterprise and Enbridge to Develop Crude Oil Pipeline

In September 2011, Enterprise and Enbridge Inc. ("Enbridge") announced plans to design, construct and operate a pipeline (the "Wrangler Pipeline") to transport crude oil from the oversupplied hub at Cushing, Oklahoma to the Texas Gulf Coast refining complex. Initially, the Wrangler Pipeline will have the capacity to transport up to 800 MBPD of crude oil and accommodate the medium-to-light crude oil currently stranded at Cushing, which is priced at a substantial discount to the oil imports that account for most of the supply being used by Gulf Coast refiners. In anticipation of future increases in crude oil volumes delivered to the Cushing area, the joint venture partners will design the pipeline to be expanded.

The proposed 36-inch diameter pipeline will originate at the existing Enbridge Cushing Terminal and extend approximately 500 miles southward, closely following existing pipeline corridors, to our ECHO crude oil storage terminal (which is currently under construction) in southeast Harris County, Texas, providing access to refineries in Texas City, Pasadena/Deer Park, Baytown and along the Houston Ship Channel. Installation of new storage tanks at the ECHO facility will be included in the proposed joint venture. The project will also include a new 85-mile pipeline extending from the ECHO facility to the Beaumont/Port Arthur refining center.

Subject to the required regulatory approvals and sufficient long-term commitments from interested shippers, the pipeline is expected to be in service by mid-2013. Construction of the project is expected to be managed by Enbridge with Enterprise serving as operator.

Completion of Duncan Merger

On September 7, 2011, the Duncan Merger Agreement was approved by the unitholders of Duncan Energy Partners and the merger of Duncan MergerCo and Duncan Energy Partners and related transactions were completed, with Duncan Energy Partners surviving such merger as our wholly owned subsidiary. Each issued and outstanding common unit of Duncan Energy Partners was cancelled and converted into the right to receive common units representing limited partner interests in Enterprise based on an exchange rate of 1.01 Enterprise common units for each Duncan Energy Partners common unit. Enterprise issued 24,277,310 of its common units (net of 9 fractional common units cashed out) as consideration in the Duncan Merger. No Enterprise common units were issued to Enterprise or its subsidiaries as merger consideration.

Since we have historically consolidated Duncan Energy Partners for financial reporting purposes, the Duncan Merger did not change the basis of presentation of our historical financial statements. Furthermore, we will continue to consolidate Duncan Energy Partners for financial reporting purposes; however, Duncan Energy Partners will no longer include any noncontrolling interest due to former owners of its limited partner interests.

Enterprise to Jointly Develop New NGL Pipeline

In September 2011, Enterprise, Enbridge Energy Partners, L.P. and Anadarko Petroleum Corporation announced an agreement to design and construct a new NGL pipeline (the "Texas Express Pipeline") that will originate from Skellytown, Texas in Carson County and extend approximately 580 miles to NGL fractionation and storage facilities in Mont Belvieu, Texas. The Texas Express Pipeline will allow producers in West and Central Texas, the Rocky Mountains, Southern Oklahoma and the Mid-continent maximize the value of their natural gas production by providing additional takeaway capacity and enhanced access to the Gulf Coast NGL market. Initial capacity on the pipeline will be approximately 280 MBPD, which can be expanded to approximately 400 MBPD.

In addition, the joint venture will include two new NGL gathering systems. The first will connect the Texas Express Pipeline to natural gas processing plants in the Anadarko/Granite Wash production area located in the Texas Panhandle and Western Oklahoma. The second NGL gathering system will connect the new pipeline to Central Texas, Barnett Shale gas processing plants. NGL volumes from the Rockies,

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Permian Basin and Mid-continent regions will be delivered to the Texas Express Pipeline utilizing Enterprise's existing Mid-America Pipeline assets between the Conway hub and Enterprise's Hobbs NGL fractionation facility in Gaines County, Texas. Enterprise will construct and serve as the operator of the pipeline, while Enbridge will build and operate the new NGL gathering systems. Subject to regulatory approvals, these pipeline and gathering systems are expected to begin service in the second quarter of 2013.

Enterprise to Build Sixth NGL Fractionator at Mont Belvieu, Texas Complex

In June 2011, we announced plans to construct a sixth NGL fractionator at our Mont Belvieu, Texas facility. The new fractionation facility will have a nameplate capacity of 75 MBPD and accommodate continued growth of liquids-rich natural gas production from the prolific Eagle Ford Shale basin in South Texas. All necessary approvals and permits have been obtained and we have started construction of the new facility, which is projected to begin service in late 2012.

In October 2011, commercial operations at our fifth NGL fractionator at Mont Belvieu commenced. This new fractionator increases total nameplate capacity at our Mont Belvieu facility to 380 MBPD. When the sixth fractionator (as noted above) is completed, we will have the capability to fractionate more than 450 MBPD of NGLs at our Mont Belvieu complex and our system-wide net fractionation capacity will increase to approximately 770 MBPD.

Enterprise to Extend Eagle Ford Shale Crude Oil Pipeline System

In May 2011, we announced plans to build an 80-mile extension of our 350 MBPD Eagle Ford Shale crude oil pipeline, which would allow us to serve growing production areas in the southwestern portion of the supply basin. The Phase II project, which is being designed with a capacity of 200 MBPD, would originate in Wilson County, Texas at the terminus of our previously announced 140-mile Phase I segment, and extend to a site near Gardendale, Texas in La Salle County, where a new central delivery point is planned for construction that will feature 500,000 barrels of storage. Phase I is projected to begin service by the second quarter of 2012, with Phase II set to commence operations in the first quarter of 2013. When completed, the approximately 220-mile crude oil pipeline system will provide Eagle Ford Shale producers with access to the Texas Gulf Coast refining complex through our integrated midstream network.

Expansion of Houston Ship Channel Import/Export Terminal

In March 2011, we announced the expansion of our import/export terminal on the Houston Ship Channel. The expansion project is expected to nearly double the fully refrigerated export loading capacity for propane and other NGLs at the facility to more than 10,000 barrels per hour, while enhancing its ability to load multiple vessels simultaneously. We expect to complete the expansion in the second half of 2012.

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Incident at Mont Belvieu Storage Facility

On February 8, 2011, we experienced an NGL release and fire at the West Storage location of our Mont Belvieu, Texas underground storage facility. West Storage consists of ten underground salt dome storage caverns with a storage capacity of approximately 15 MMBbls. Through the reconfiguration of product receipt and delivery capabilities and other measures, we have returned our Mont Belvieu plants and related assets to close to the same capabilities as we had prior to the incident; however, our West Storage location and associated underground storage wells remain partially inoperative at this time. Remaining repairs to this location are underway and are expected to be completed in stages by early 2012. Our insurance deductible for such property damage events was $5.0 million, which expense was recognized in our earnings for the first quarter of 2011.

Based on current information, we estimate that the total capital cost related to this incident will approximate $200 million. We participate as a named insured . . .

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