Edgar Filing: EnLink Midstream, LLC

Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2019

¨ 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: 001-36336

ENLINK MIDSTREAM, LLC

(Exact name of registrant as specified in its charter)



Delaware	46-4108528
(State of organization)	(I.R.S. Employer Identification No.)

1722 Routh St., Suite 1300
Dallas, Texas	75201
(Address of principal executive offices)	(Zip Code)

(214) 953-9500

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT OF 1934:



Title of Each Class	Name of Exchange on which Registered	Symbol
Common Units Representing Limited	The New York Stock Exchange	ENLC
Liability Company Interests

Indicate by check mark whether 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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of April 25, 2019, the Registrant had 487,170,379 common units outstanding.

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TABLE OF CONTENTS



Item	Description	Page

	PART I—FINANCIAL INFORMATION

1.	Financial Statements	5

2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38

3.	Quantitative and Qualitative Disclosures About Market Risk	52

4.	Controls and Procedures	55

	PART II—OTHER INFORMATION

1.	Legal Proceedings	56

1A.	Risk Factors	56

2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

6.	Exhibits	57

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DEFINITIONS

The following terms as defined are used in this document:



Defined Term		Definition
/d		Per day.
2014 Plan		EnLink Midstream, LLC’s 2014 Long-Term Incentive Plan.
AMZ		Alerian MLP Index for Master Limited Partnerships.
ASC		The FASB Accounting Standards Codification.
ASC 842		ASC 842, Leases, a new accounting standard effective January 1, 2019 related to the accounting for lease agreements.
Ascension JV		Ascension Pipeline Company, LLC, a joint venture between a subsidiary of ENLK and a subsidiary of Marathon Petroleum Corporation in which ENLK owns a 50% interest and Marathon Petroleum Corporation owns a 50% interest. The Ascension JV, which began operations in April 2017, owns an NGL pipeline that connects ENLK’s Riverside fractionator to Marathon Petroleum Corporation’s Garyville refinery.
ASU		The FASB Accounting Standards Update.
Avenger		Avenger crude oil gathering system, a crude oil gathering system in the northern Delaware Basin.
Bbls		Barrels.
Bcf		Billion cubic feet.
Cedar Cove JV		Cedar Cove Midstream LLC, a joint venture between a subsidiary of ENLK and a subsidiary of Kinder Morgan, Inc. in which ENLK owns a 30% interest and Kinder Morgan, Inc. owns a 70% interest. The Cedar Cove JV, which was formed in November 2016, owns gathering and compression assets in Blaine County, Oklahoma, located in the STACK play.
CFTC		U.S. Commodity Futures Trading Commission.
CNOW		Central Northern Oklahoma Woodford Shale.
Consolidated Credit Facility		A $1.75 billion unsecured revolving credit facility entered into by ENLC that matures on January 25, 2024, which includes a $500.0 million letter of credit subfacility. The Consolidated Credit Facility was available upon closing of the Merger and is guaranteed by ENLK.
Delaware Basin JV		Delaware G&P LLC, a joint venture between a subsidiary of ENLK and an affiliate of NGP in which ENLK owns a 50.1% interest and NGP owns a 49.9% interest. The Delaware Basin JV, which was formed in August 2016, owns the Lobo processing facilities located in the Delaware Basin in Texas.
Devon		Devon Energy Corporation.
Enfield		Enfield Holdings, L.P.
ENLC		EnLink Midstream, LLC.
ENLC Class C common Units		A class of non-economic ENLC common units issued to Enfield immediately prior to the Merger equal to the number of Series B Preferred Units of ENLK held by Enfield immediately prior to the effective time of the Merger, in order to provide Enfield with certain voting rights with respect to ENLC.
ENLC Credit Facility		A $250.0 million secured revolving credit facility entered into by ENLC that would have matured on March 7, 2019, which included a $125.0 million letter of credit subfacility. The ENLC Credit Facility was terminated on January 25, 2019 in connection with the consummation of the Merger.
ENLC EDA		Equity Distribution Agreement entered into by ENLC in February 2019 with RBC Capital Markets, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., BMO Capital Markets Corp., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Jefferies LLC, Mizuho Securities USA LLC, MUFG Securities Americas Inc., SunTrust Robinson Humphrey, Inc., and Wells Fargo Securities, LLC (collectively, the “Sales Agents”) to sell up to $400.0 million in aggregate gross sales of ENLC common units from time to time through an “at the market” equity offering program.
ENLK		EnLink Midstream Partners, LP or, when applicable, EnLink Midstream Partners, LP together with its consolidated subsidiaries. Also referred to as the “Partnership.”
ENLK Credit Facility		A $1.5 billion unsecured revolving credit facility entered into by ENLK that would have matured on March 6, 2020, which included a $500.0 million letter of credit subfacility. The ENLK Credit Facility was terminated on January 25, 2019 in connection with the consummation of the Merger.
EOGP		EnLink Oklahoma Gas Processing, LP or EnLink Oklahoma Gas Processing, LP together with, when applicable, its consolidated subsidiaries. As of January 31, 2019, EOGP is wholly-owned by the Operating Partnership.
FASB		Financial Accounting Standards Board.
GAAP		Generally accepted accounting principles in the United States of America.
Gal		Gallons.
GCF		Gulf Coast Fractionators, which owns an NGL fractionator in Mont Belvieu, Texas. ENLK owns 38.75% of GCF.

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General Partner		EnLink Midstream GP, LLC, the general partner of ENLK, which owns a 0.4% general partner interest in ENLK. Prior to the effective time of the Merger, the General Partner also owned all of the incentive distribution rights in ENLK.
GIP		Global Infrastructure Management, LLC, an independent infrastructure fund manager, itself, its affiliates, or managed fund vehicles, including GIP III Stetson I, L.P., GIP III Stetson II, L.P., and their affiliates.
GIP Transaction		On July 18, 2018, subsidiaries of Devon closed a transaction to sell all of their equity interests in ENLK, ENLC, and the managing member of ENLC to GIP.
GP Plan		EnLink Midstream GP, LLC’s Long-Term Incentive Plan.
Greater Chickadee		Crude oil gathering system in Upton and Midland counties, Texas in the Permian Basin.
Gross Operating Margin		A non-GAAP financial measure. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for the definition and other information.
ISDAs		International Swaps and Derivatives Association Agreements.
Mcf		Thousand cubic feet.
Merger		On January 25, 2019, NOLA Merger Sub merged with and into ENLK with ENLK continuing as the surviving entity and a subsidiary of ENLC.
Merger Agreement		The Agreement and Plan of Merger, dated as of October 21, 2018, by and among ENLK, the General Partner, ENLC, the managing member of ENLC, and NOLA Merger Sub related to the Merger.
MMbbls		One million barrels.
MMbtu		Million British thermal units.
MMcf		Million cubic feet.
MVC		Minimum volume commitment.
NGL		Natural gas liquid.
NGP		NGP Natural Resources XI, LP.
NOLA Merger Sub		NOLA Merger Sub, LLC, previously a wholly-owned subsidiary of ENLC prior to the Merger.
Operating Partnership		EnLink Midstream Operating, LP, a Delaware limited partnership and wholly owned subsidiary of ENLK.
ORV		ENLK’s Ohio River Valley crude oil, condensate stabilization, natural gas compression, and brine disposal assets in the Utica and Marcellus shales.
OTC		Over-the-counter.
Permian Basin		A large sedimentary basin that includes the Midland and Delaware Basins in west Texas and New Mexico.
POL contracts		Percentage-of-liquids contracts.
POP contracts		Percentage-of-proceeds contracts.
Series B Preferred Units		ENLK’s Series B Cumulative Convertible Preferred Units.
Series C Preferred Units		ENLK’s Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units.
STACK		Sooner Trend Anadarko Basin Canadian and Kingfisher Counties in Oklahoma.
Term Loan		An $850.0 million term loan entered into by ENLK on December 11, 2018 with Bank of America, N.A., as Administrative Agent, Bank of Montreal and Royal Bank of Canada, as Co-Syndication Agents, Citibank, N.A. and Wells Fargo Bank, National Association, as Co-Documentation Agents, and the lenders party thereto, which ENLC assumed in connection with the Merger and the obligations of which ENLK guarantees.
Thunderbird Plant		A gas processing plant in central Oklahoma.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

(In millions, except unit data)



	March 31, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	0.7		$	100.4
Accounts receivable:
Trade, net of allowance for bad debt of $0.5 and $0.3, respectively	104.2			126.3
Accrued revenue and other	634.2			705.9
Related party	0.4			0.7
Fair value of derivative assets	8.7			28.6
Natural gas and NGLs inventory, prepaid expenses, and other	73.4			74.2
Total current assets	821.6			1,036.1
Property and equipment, net of accumulated depreciation of $3,080.1 and $2,967.4, respectively	6,975.4			6,846.7
Intangible assets, net of accumulated amortization of $453.1 and $422.2, respectively	1,342.7			1,373.6
Goodwill	1,123.7			1,310.2
Investment in unconsolidated affiliates	82.9			80.1
Fair value of derivative assets	4.6			4.1
Other assets, net	155.9			43.3
Total assets	$	10,506.8		$	10,694.1
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable and drafts payable	$	103.4		$	105.5
Accounts payable to related party	2.6			4.3
Accrued gas, NGLs, condensate, and crude oil purchases	492.6			500.4
Fair value of derivative liabilities	6.6			21.8
Current maturities of long-term debt	—			399.8
Other current liabilities	230.6			248.2
Total current liabilities	835.8			1,280.0
Long-term debt	4,475.6			4,031.0
Asset retirement obligations	15.0			14.8
Other long-term liabilities	89.5			20.0
Deferred tax liability	—			362.4
Fair value of derivative liabilities	0.2			2.4

Redeemable non-controlling interest	7.2			9.3

Members’ equity:
Members’ equity (487,160,080 and 181,309,981 units issued and outstanding, respectively)	3,471.1			1,730.9
Accumulated other comprehensive loss	(2.0		)	(2.0		)
Non-controlling interest	1,614.4			3,245.3
Total members’ equity	5,083.5			4,974.2
Total liabilities and members’ equity	$	10,506.8		$	10,694.1

See accompanying notes to consolidated financial statements.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Consolidated Statements of Operations

(In millions, except per unit data)



	Three Months Ended March 31,
	2019			2018
	(Unaudited)
Revenues:
Product sales	$	1,530.9		$	1,499.2
Product sales—related parties	—			3.6
Midstream services	246.5			92.2
Midstream services—related parties	—			166.2
Gain on derivative activity	1.8			0.5
Total revenues	1,779.2			1,761.7
Operating costs and expenses:
Cost of sales (1)	1,363.4			1,381.5
Operating expenses	114.5			109.2
General and administrative	51.4			27.5
Loss on disposition of assets	—			0.1
Depreciation and amortization	152.1			138.1
Impairments	186.5			—
Total operating costs and expenses	1,867.9			1,656.4
Operating income (loss)	(88.7		)	105.3
Other income (expense):
Interest expense, net of interest income	(49.6		)	(44.5		)
Income from unconsolidated affiliates	5.3			3.0
Other income	—			0.3
Total other expense	(44.3		)	(41.2		)
Income (loss) before non-controlling interest and income taxes	(133.0		)	64.1
Income tax provision	(1.8		)	(7.0		)
Net income (loss)	(134.8		)	57.1
Net income attributable to non-controlling interest	41.5			44.7
Net income (loss) attributable to ENLC	$	(176.3	)	$	12.4
Net income (loss) attributable to ENLC per unit:
Basic common unit	$	(0.45	)	$	0.07
Diluted common unit	$	(0.45	)	$	0.07

____________________________


(1)	Includes related party cost of sales of $8.1 million and $34.1 million for the three months ended March 31, 2019 and 2018, respectively.

See accompanying notes to consolidated financial statements.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Consolidated Statements of Changes in Members’ Equity

Three Months Ended March 31, 2019

(In millions)



	Common Units				Accumulated Other Comprehensive Loss			Non-Controlling Interest			Total			Redeemable Non-Controlling Interest (Temporary Equity)
	$			Units	$			$			$			$
	(Unaudited)
Balance, December 31, 2018	$	1,730.9		181.3	$	(2.0	)	$	3,245.3		$	4,974.2		$	9.3
Adoption of ASC 842	0.3			—	—			—			0.3			—
Balance, January 1, 2019	1,731.2			181.3	(2.0		)	3,245.3			4,974.5			9.3
Conversion of restricted units for common units, net of units withheld for taxes	(5.6		)	1.0	—			(2.8		)	(8.4		)	—
Unit-based compensation	12.2			—	—			1.4			13.6			—
Contributions from non-controlling interests	—			—	—			15.7			15.7			—
Distributions	(51.0		)	—	—			(127.6		)	(178.6		)	—
Fair value adjustment related to redeemable non-controlling interest	2.5			—	—			—			2.5			(2.1		)
Net income (loss)	(176.3		)	—	—			41.5			(134.8		)	—
Issuance of common units for ENLK public common units related to the Merger	1,958.1			304.9	—			(1,559.1		)	399.0			—
Balance, March 31, 2019	$	3,471.1		487.2	(2.0		)	$	1,614.4		$	5,083.5		$	7.2

See accompanying notes to consolidated financial statements.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Consolidated Statements of Changes in Members’ Equity (Continued)

Three Months Ended March 31, 2018

(In millions)



	Common Units				Accumulated Other Comprehensive Loss			Non-Controlling Interest			Total			Redeemable Non-Controlling Interest (Temporary Equity)
	$			Units	$			$			$			$
	(Unaudited)
Balance, December 31, 2017	$	1,924.2		180.6	$	(2.0	)	$	3,634.5		$	5,556.7		$	4.6
Issuance of common units by ENLK	—			—	—			0.9			0.9			—
Conversion of restricted units for common units, net of units withheld for taxes	(2.9		)	0.4	—			—			(2.9		)	—
Non-controlling interest’s impact of conversion of restricted units	—			—	—			(2.7		)	(2.7		)	—
Unit-based compensation	4.4			—	—			4.4			8.8			—
Change in equity due to issuance of units by ENLK	(1.3		)	—	—			1.7			0.4			—
Contributions from non-controlling interests	—			—	—			22.7			22.7			—
Distributions	(47.5		)	—	—			(121.2		)	(168.7		)	—
Net income	12.4			—	—			44.7			57.1			—
Balance, March 31, 2018	$	1,889.3		181.0	$	(2.0	)	$	3,585.0		$	5,472.3		$	4.6

See accompanying notes to consolidated financial statements.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In millions)



	Three Months Ended March 31,
	2019			2018
	(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	(134.8	)	$	57.1
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Impairments	186.5			—
Depreciation and amortization	152.1			138.1
Non-cash unit-based compensation	11.1			5.1
Gain on derivatives recognized in net income (loss)	(1.8		)	(0.5		)
Cash settlements on derivatives	4.6			3.1
Amortization of debt issue costs, net discount (premium) of notes	1.8			1.6
Non-cash lease expense	1.6			—
Distribution of earnings from unconsolidated affiliates	2.2			4.6
Income from unconsolidated affiliates	(5.3		)	(3.0		)
Other operating activities	(1.2		)	6.1
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable, accrued revenue, and other	93.8			(64.2		)
Natural gas and NGLs inventory, prepaid expenses, and other	3.6			9.2
Accounts payable, accrued product purchases, and other accrued liabilities	(50.2		)	36.5
Net cash provided by operating activities	264.0			193.7
Cash flows from investing activities:
Additions to property and equipment	(241.5		)	(181.5		)
Other investing activities	0.5			2.2
Net cash used in investing activities	(241.0		)	(179.3		)
Cash flows from financing activities:
Proceeds from borrowings	630.0			800.5
Payments on borrowings	(581.4		)	(428.6		)
Payment of installment payable for EOGP acquisition	—			(250.0		)
Debt financing costs	(5.6		)	—
Proceeds from issuance of ENLK common units	—			0.9
Distribution to members	(51.0		)	(47.5		)
Distributions to non-controlling interests	(127.6		)	(121.2		)
Contributions by non-controlling interests	15.7			22.7
Other financing activities	(2.8		)	(5.2		)
Net cash used in financing activities	(122.7		)	(28.4		)
Net decrease in cash and cash equivalents	(99.7		)	(14.0		)
Cash and cash equivalents, beginning of period	100.4			31.2
Cash and cash equivalents, end of period	$	0.7		$	17.2

Supplemental disclosures of cash flow information:
Cash paid for interest	$	23.8		$	15.5
Non-cash investing activities:
Non-cash accrual of property and equipment	$	9.5		$	(0.3	)

See accompanying notes to consolidated financial statements.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

(1) General

In this report, the terms “Company” or “Registrant,” as well as the terms “ENLC,” “our,” “we,” “us,” or like terms, are sometimes used as abbreviated references to EnLink Midstream, LLC itself or EnLink Midstream, LLC together with its consolidated subsidiaries, including ENLK and its consolidated subsidiaries. References in this report to “EnLink Midstream Partners, LP,” the “Partnership,” “ENLK,” or like terms refer to EnLink Midstream Partners, LP itself or EnLink Midstream Partners, LP together with its consolidated subsidiaries, including the Operating Partnership and EOGP.

Please read the notes to the consolidated financial statements in conjunction with the Definitions page set forth in this report prior to Part I—Financial Information.


(a)	Organization of Business

EnLink Midstream, LLC is a publicly traded Delaware limited liability company formed in October 2013. The Company’s common units are traded on the New York Stock Exchange under the symbol “ENLC.”

Transfer of EOGP Interest

On January 31, 2019, ENLC transferred its 16.1% limited partner interest in EOGP to the Operating Partnership in exchange for 55,827,221 ENLK common units, resulting in the Operating Partnership owning 100% of the limited partner interests in EOGP.

Simplification of the Corporate Structure

On October 21, 2018, ENLK, ENLC, the General Partner, the managing member of ENLC, and NOLA Merger Sub entered into the Merger Agreement pursuant to which, on January 25, 2019, NOLA Merger Sub merged with and into ENLK, with ENLK continuing as the surviving entity and as a subsidiary of ENLC. As a result of the Merger:


•	Each issued and outstanding ENLK common unit (except for ENLK common units held by ENLC and its subsidiaries) was converted into 1.15 ENLC common units, which resulted in the issuance of 304,822,035 ENLC common units.


•	The General Partner’s incentive distribution rights in ENLK were eliminated.


•	The Series B Preferred Units continue to be issued and outstanding, except that certain terms of the Series B Preferred Units have been modified pursuant to an amended partnership agreement of ENLK. See “Note 8—Certain Provisions of the Partnership Agreement” for additional information regarding the modified terms of the Series B Preferred Units.

•

ENLC issued to Enfield, the current holder of the Series B Preferred Units, for no additional consideration, ENLC Class C Common Units equal to the number of Series B Preferred Units held by Enfield immediately prior to the effective time of the Merger, in order to provide Enfield with certain voting rights with respect to ENLC. For each additional Series B Preferred Unit issued by ENLK in quarterly in-kind distributions, ENLC will issue an additional ENLC Class C Common Unit to the applicable holder of such Series B Preferred Unit. In addition, for each Series B Preferred Unit that is exchanged into an ENLC common unit, an ENLC Class C Common Unit will be canceled.


•	The Series C Preferred Units and all of ENLK’s then-existing senior notes continue to be issued and outstanding following the Merger.


•	Each unit-based award issued and outstanding immediately prior to the effective time of the Merger under the GP Plan and the 2014 Plan has been converted into an award with respect to ENLC common units with substantially similar terms as were in effect immediately prior to the effective time.


•	Each unit-based award with performance-based vesting conditions issued and outstanding immediately prior to the effective time of the Merger under the GP Plan has been modified such that the performance metric for such award relates (on a weighted average basis) to (i) the combined performance of ENLC and ENLK for periods preceding the

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

effective time of the Merger and (ii) the performance of ENLC for periods on and after the effective time of the Merger.


•	ENLC assumed the outstanding debt under the Term Loan and ENLK became a guarantor thereof. See “Note 6—Long-Term Debt” for additional information regarding the Term Loan.


•	We refinanced our existing revolving credit facilities at ENLK and ENLC. In connection with the Merger, we entered into the Consolidated Credit Facility, with respect to which ENLK is a guarantor. See “Note 6—Long-Term Debt” for additional information regarding the Consolidated Credit Facility.

•

We were required to allocate the goodwill in our Corporate reporting unit previously associated with the incentive distribution rights in ENLK granted to the General Partner which were created at the formation of ENLC in 2014, to the Permian, North Texas, Oklahoma, and Louisiana reporting units, which resulted in the recognition of a goodwill impairment of $186.5 million. See “Note 3—Goodwill and Intangible Assets” for more information on this transaction.


•	We reduced our deferred tax liability (“DTL”) by $399.0 million related to ENLC’s step-up in basis of ENLK’s underlying assets with the offsetting credit in members’ equity. See “Note 7—Income Taxes” for more information on the DTA.


(b)	Nature of Business

We primarily focus on providing midstream energy services, including:


•	gathering, compressing, treating, processing, transporting, storing, and selling natural gas;


•	fractionating, transporting, storing, and selling NGLs; and


•	gathering, transporting, stabilizing, storing, trans-loading, and selling crude oil and condensate, in addition to brine disposal services.

Our natural gas business includes connecting the wells of producers in our market areas to our gathering systems. Our gathering systems consist of networks of pipelines that collect natural gas from points at or near producing wells and transport it to our processing plants or to larger pipelines for further transmission. We operate processing plants that remove NGLs from the natural gas stream that is transported to the processing plants by our own gathering systems or by third-party pipelines. In conjunction with our gathering and processing business, we may purchase natural gas and NGLs from producers and other supply sources and sell that natural gas or NGLs to utilities, industrial consumers, marketers, and pipelines. Our transmission pipelines receive natural gas from our gathering systems and from third-party gathering and transmission systems and deliver natural gas to industrial end-users, utilities, and other pipelines.

Our fractionators separate NGLs into separate purity products, including ethane, propane, iso-butane, normal butane, and natural gasoline. Our fractionators receive NGLs primarily through our transmission lines that transport NGLs from east Texas and from our south Louisiana processing plants. Our fractionators also have the capability to receive NGLs by truck or rail terminals. We also have agreements pursuant to which third parties transport NGLs from our west Texas and central Oklahoma operations to our NGL transmission lines that then transport the NGLs to our fractionators. In addition, we have NGL storage capacity to provide storage for customers.

Our crude oil and condensate business includes the gathering and transmission of crude oil and condensate via pipelines, barges, rail, and trucks, in addition to condensate stabilization and brine disposal. We also purchase crude oil and condensate from producers and other supply sources and sell that crude oil and condensate through our terminal facilities to various markets.

Across our businesses, we primarily earn our fees through various fee-based contractual arrangements, which include stated fee-only contract arrangements or arrangements with fee-based components where we purchase and resell commodities in connection with providing the related service and earn a net margin as our fee. We earn our net margin under our purchase and resell contract arrangements primarily as a result of stated service-related fees that are deducted from the price of the commodities purchased. While our transactions vary in form, the essential element of most of our transactions is the use of our assets to transport a product or provide a processed product to an end-user or marketer at the tailgate of the plant, pipeline, or barge, truck, or rail terminal.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(2) Significant Accounting Policies


(a)	Basis of Presentation

The accompanying consolidated financial statements are prepared in accordance with the instructions to Form 10-Q, are unaudited, and do not include all the information and disclosures required by GAAP for complete financial statements. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. All significant intercompany balances and transactions have been eliminated in consolidation.


(b)	Revenue Recognition

Minimum Volume Commitments and Firm Transportation Contracts

Certain of our gathering and processing agreements provide for quarterly or annual MVCs. Under these agreements, our customers or suppliers agree to ship and/or process a minimum volume of product on our systems over an agreed time period. If a customer or supplier under such an agreement fails to meet its MVC for a specified period, the customer is obligated to pay a contractually-determined fee based upon the shortfall between actual product volumes and the MVC for that period. Some of these agreements also contain make-up right provisions that allow a customer or supplier to utilize gathering or processing fees in excess of the MVC in subsequent periods to offset shortfall amounts in previous periods. We record revenue under MVC contracts during periods of shortfall when it is known that the customer cannot, or will not, make up the deficiency in subsequent periods. Deficiency fee revenue is included in midstream services revenue.

For our firm transportation contracts, we transport commodities owned by others for a stated monthly fee for a specified monthly quantity with an additional fee based on actual volumes. We include transportation fees from firm transportation contracts in our midstream services revenue.

The following table summarizes the contractually committed fees that we expect to recognize in our consolidated statements of operations, in either revenue or reductions to cost of sales, from MVC and firm transportation contractual provisions. All amounts in the table below are determined using the contractually-stated MVC or firm transportation volumes specified for each period multiplied by the relevant deficiency or reservation fee. Actual amounts could differ due to the timing of revenue recognition or reductions to cost of sales resulting from make-up right provisions included in our agreements, as well as due to nonpayment or nonperformance by our customers. These fees do not represent the shortfall amounts we expect to collect under our MVC contracts, as we generally do not expect volume shortfalls to equal the full amount of the contractual MVCs during these periods. For example, for the three months ended March 31, 2019, we had contractual commitments of $38.5 million under our MVC contracts and recorded $3.8 million of revenue due to volume shortfalls.



MVC and Firm Transportation Commitments (1)
2019 (remaining)	$	196.7
2020	252.7
2021	104.7
2022	94.3
2023	91.6
Thereafter	279.7
Total	$	1,019.7

____________________________


(1)	Amounts do not represent expected shortfall under these commitments.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


(c)	Accounting Standards to be Adopted in Future Periods

On August 29, 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which amends ASC 350-40, Internal-Use Software (“ASC 350-40”) to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. ASU 2018-15 aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350-40 to include in its scope implementation costs of a cloud computing arrangement that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a cloud computing arrangement that is considered a service contract. To the extent costs incurred in a cloud computing arrangement are capitalizable, the corresponding amortization will be included in “Operating expenses” or “General and administrative” in the consolidated statement of operations, rather than “Depreciation and amortization.” We are currently evaluating the impact of ASU 2018-15 on our consolidated financial statements and will adopt ASU 2018-15 effective January 1, 2020.

(d) Adopted Accounting Standards

Effective January 1, 2019, we adopted ASC 842, Leases, using the modified retrospective approach whereby we recognized leases on our consolidated balance sheet by recording a right-of-use asset and lease liability. We applied certain practical expedients that were allowed in the adoption of ASC 842, including not reassessing existing contracts for lease arrangements, not reassessing existing lease classification, not recording a right-of-use asset or lease liability for leases of twelve months or less, and not separating lease and non-lease components of a lease arrangement. In connection with the adoption of ASC 842 in January 2019, we recorded a lease liability of $97.6 million, a right-of-use asset of $75.3 million, and a reduction of $22.6 million in other liabilities previously recorded related to lease incentives. For additional information about our adoption of ASC 842, refer to “Note 5—Leases.”

(3) Goodwill and Intangible Assets

Goodwill

In March 2014, at the time of our transactions with Devon that led us to become publicly held, we recorded goodwill in our corporate reporting unit at ENLC that was associated with the General Partner’s incentive distribution rights in ENLK. Prior to the completion of the Merger in January 2019, ENLC’s aggregate fair value of its reporting units was in excess of the consolidated book value of its assets, including all goodwill, which would not have resulted in a goodwill impairment on a consolidated basis. Upon the completion of the Merger, in accordance with ASC 350, Intangibles-Goodwill and other (“ASC 350”), the portion of goodwill on our corporate reporting unit that was previously associated with the General Partner’s incentive distribution rights in ENLK was required to be reallocated to the four remaining reporting units based on the relative fair value of each of the reporting units. Due to the application of ASC 350, we were required to allocate goodwill to reporting units at which goodwill had previously been impaired due to book value in excess of fair value. As a result of the allocated goodwill, we recognized a $186.5 million impairment related to our Louisiana segment in the consolidated statement of operations for the three months ended March 31, 2019.

The table below provides a summary of our change in carrying amount of goodwill (in millions) for the three months ended March 31, 2019, by segment. For the three months ended March 31, 2018, there were no changes to the carrying amounts of goodwill.



	Permian		North Texas		Oklahoma		Louisiana			Corporate			Totals
Three Months Ended March 31, 2019
Balance, beginning of period	$	—	$	—	$	190.3	$	—		$	1,119.9		$	1,310.2
Goodwill allocation	184.6		125.7		623.1		186.5			(1,119.9		)	—
Impairment	—		—		—		(186.5		)	—			(186.5		)
Balance, end of period	$	184.6	$	125.7	$	813.4	$	—		$	—		$	1,123.7

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Intangible Assets

Intangible assets associated with customer relationships are amortized on a straight-line basis over the expected period of benefits of the customer relationships, which range from 5 to 20 years.

The following table represents our change in carrying value of intangible assets (in millions):



	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Three Months Ended March 31, 2019
Customer relationships, beginning of period	$	1,795.8	$	(422.2	)	$	1,373.6
Amortization expense	—		(30.9		)	(30.9		)
Customer relationships, end of period	$	1,795.8	$	(453.1	)	$	1,342.7

The weighted average amortization period is 15.0 years. Amortization expense was $30.9 million and $30.8 million for the three months ended March 31, 2019 and 2018, respectively.

The following table summarizes our estimated aggregate amortization expense for the next five years and thereafter (in millions):



2019 (remaining)	$	92.8
2020	123.7
2021	123.7
2022	123.7
2023	123.6
Thereafter	755.2
Total	$	1,342.7

(4) Related Party Transactions

(a) Transactions with ENLK

Simplification of the Corporate Structure. On October 21, 2018, ENLK, ENLC, the General Partner, the managing member of ENLC, and NOLA Merger Sub entered into the Merger Agreement pursuant to which, on January 25, 2019, NOLA Merger Sub merged with and into ENLK, with ENLK continuing as the surviving entity and as a subsidiary of ENLC. See “Note 1—General” for more information on this transaction.

Transfer of EOGP Interest. On January 31, 2019, ENLC transferred its 16.1% limited partner interest in EOGP to the Operating Partnership in exchange for 55,827,221 ENLK common units, resulting in the Operating Partnership owning 100% of the limited partner interests in EOGP.

(b) Transactions with Devon

On July 18, 2018, subsidiaries of Devon sold all of their equity interests in ENLK, ENLC, and the managing member of ENLC to GIP for aggregate consideration of $3.125 billion. Accordingly, Devon is no longer an affiliate of ENLK or ENLC. The sale did not affect our commercial arrangements with Devon, except that Devon agreed to extend through 2029 certain existing fixed-fee gathering and processing contracts related to the Bridgeport plant in north Texas and the Cana plant in Oklahoma. Prior to July 18, 2018, revenues from transactions with Devon are included in “Product sales—related parties” or “Midstream services—related parties” in the consolidated statement of operations. Revenues from transactions with Devon after July 18, 2018 are included in “Product sales” or “Midstream services” in the consolidated statement of operations.

For the three months ended March 31, 2018, Devon accounted for 9.8% of our revenues.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

For the three months ended March 31, 2019 and 2018, we recorded cost of sales of $8.1 million and $13.0 million, respectively, related to our purchase of residue gas and NGLs from the Cedar Cove JV subsequent to processing at our central Oklahoma processing facilities. We had accounts receivable balances related to transactions with the Cedar Cove JV of $0.4 million and $0.7 million at March 31, 2019 and December 31, 2018, respectively. Additionally, we had accounts payable balances related to transactions with the Cedar Cove JV of $2.6 million and $4.3 million at March 31, 2019 and December 31, 2018, respectively.

Management believes the foregoing transactions with related parties were executed on terms that are fair and reasonable to us. The amounts related to related party transactions are specified in the accompanying consolidated financial statements.

(5) Leases

Effective with the adoption of ASC 842 in January 2019, we evaluate new contracts at inception to determine if the contract conveys the right to control the use of an identified asset for a period of time in exchange for periodic payments. A lease exists if we obtain substantially all of the economic benefits of an asset, and we have the right to direct the use of that asset. When a lease exists, we record a right-of-use asset that represents our right to use the asset over the lease term and a lease liability that represents our obligation to make payments over the lease term. Lease liabilities are recorded at the sum of future lease payments discounted by the collateralized rate we could obtain to lease a similar asset over a similar period, and right-of-use assets are recorded equal to the corresponding lease liability, plus any prepaid or direct costs incurred to enter the lease, less the cost of any incentives received from the lessor. The majority of our leases are for the following types of assets:

•

Office space- Our primary offices are in Dallas, Houston, and Midland, with smaller offices in other locations near our assets. Our office leases are long-term in nature and represent $64.1 million of our lease liability and $42.8 million of our right-of-use asset as of March 31, 2019. These office leases typically include variable lease costs related to utility expenses, which are determined based on our pro-rata share of the building expenses each month and expensed as incurred.

•

Compression and other field equipment- We pay third parties to provide compressors or other field equipment for our assets. Under these agreements, a third party installs and operates compressor units based on specifications set by us to meet our compression needs at specific locations. While the third party determines which compressors to install and operates and maintains the units, we have the right to control the use of the compressors and are the sole economic beneficiary of the identified assets. These agreements are typically for an initial term of one to three years but will automatically renew from month to month until canceled by us or the lessor. Compression and other field equipment rentals represent $19.2 million of our lease liability and $23.0 million of our right-of-use asset as of March 31, 2019. Under certain agreements, we may incur variable lease costs related to incidental services provided by the equipment lessor, which are expensed as incurred.


•	Office equipment- We rent office equipment for a monthly fee. These leases are typically for several years and represent $0.8 million of our lease liability and $0.8 million of our right-of-use asset as of March 31, 2019.


•	Land and land easements- We make periodic payments to lease land or to have access to our assets. Land leases and easements are typically long-term to match the expected useful life of the corresponding asset and represent $14.9 million of our lease liability and $13.2 million of our right-of-use asset as of March 31, 2019.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Lease balances are recorded on the consolidated balance sheets as follows (in millions):



	March 31, 2019
Finance leases:
Property and equipment	$	5.2
Accumulated depreciation	(0.7		)
Property and equipment, net of accumulated depreciation	$	4.5
Other current liabilities	$	0.8

Operating leases:
Other assets, net	$	75.3
Other current liabilities	$	17.3
Other long-term liabilities	$	80.9

Certain of our lease agreements have options to extend the lease for a certain period after the expiration of the initial term. We recognize the cost of a lease over the expected total term of the lease, including optional renewal periods that we can reasonably expect to exercise. We do not have material obligations whereby we guarantee a residual value on assets we lease, nor do our lease agreements impose restrictions or covenants that could affect our ability to make distributions.

Lease expense is recognized on the consolidated statements of operations as “Operating expenses” and “General and administrative” depending on the nature of the leased asset. The components of total lease expense are as follows (in millions):



	Three Months Ended March 31,
	2019
Finance lease expense:
Amortization of right-of-use asset	$	0.7
Interest on lease liability	—
Operating lease expense:
Long-term operating lease expense	6.3
Short-term lease expense	6.9
Variable lease expense	1.6
Total lease expense	$	15.5

Other information about our leases are as follows (dollar amounts in millions, lease terms in years):



	Three Months Ended March 31,
	2019
Supplemental cash flow information:
Cash payments for finance leases included in cash flows from financing activities	$	0.4
Cash payments for operating leases included in cash flows from operating activities	$	7.0
Right-of-use assets obtained in exchange for operating lease liabilities	$	80.6

Other lease information
Weighted-average remaining lease term - Finance leases	0.5 years
Weighted-average remaining lease term - Operating leases	11.6 years
Weighted-average discount rate - Finance leases	9.3		%
Weighted-average discount rate - Operating leases	5.2		%

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

The following table summarizes the maturity of our lease liability as of March 31, 2019 (in millions):



	Total			2019 (remaining)			2020			2021			2022			2023			Thereafter
Undiscounted finance lease liability	$	0.8		$	0.8		$	—		$	—		$	—		$	—		$	—
Reduction due to present value	—			—			—			—			—			—			—
Finance lease liability	0.8			0.8			—			—			—			—			—

Undiscounted operating lease liability	139.2			16.5			16.0			12.9			9.1			8.9			75.8
Reduction due to present value	(41.0		)	(3.6		)	(4.2		)	(3.7		)	(3.4		)	(3.0		)	(23.1		)
Operating lease liability	98.2			12.9			11.8			9.2			5.7			5.9			52.7
Total lease liability	$	99.0		$	13.7		$	11.8		$	9.2		$	5.7		$	5.9		$	52.7

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(6) Long-Term Debt

As of March 31, 2019 and December 31, 2018, long-term debt consisted of the following (in millions):



	March 31, 2019								December 31, 2018
	Outstanding Principal		Premium (Discount)			Long-Term Debt			Outstanding Principal		Premium (Discount)			Long-Term Debt
ENLC Credit Facility, due 2019 (1)	$	—	$	—		$	—		$	111.4	$	—		$	111.4
Consolidated Credit Facility due 2024 (2)	160.0		—			160.0			—		—			—
Term Loan due 2021 (3)	850.0		—			850.0			850.0		—			850.0
ENLK’s 2.70% Senior unsecured notes due 2019 (4)	400.0		—			400.0			400.0		—			400.0
ENLK’s 4.40% Senior unsecured notes due 2024	550.0		1.7			551.7			550.0		1.8			551.8
ENLK’s 4.15% Senior unsecured notes due 2025	750.0		(0.8		)	749.2			750.0		(0.9		)	749.1
ENLK’s 4.85% Senior unsecured notes due 2026	500.0		(0.5		)	499.5			500.0		(0.5		)	499.5
ENLK’s 5.60% Senior unsecured notes due 2044	350.0		(0.2		)	349.8			350.0		(0.2		)	349.8
ENLK’s 5.05% Senior unsecured notes due 2045	450.0		(6.1		)	443.9			450.0		(6.2		)	443.8
ENLK’s 5.45% Senior unsecured notes due 2047	500.0		(0.1		)	499.9			500.0		(0.1		)	499.9
Debt classified as long-term, including current maturities of long-term debt	$	4,510.0	$	(6.0	)	4,504.0			$	4,461.4	$	(6.1	)	4,455.3
Debt issuance cost (5)						(28.4		)						(24.5		)
Less: Current maturities of long-term debt (4)						—								(399.8		)
Long-term debt, net of unamortized issuance cost						$	4,475.6							$	4,031.0

____________________________

(1)

Bore interest based on Prime and/or LIBOR plus an applicable margin. The effective interest rate was 4.4% at December 31, 2018. In connection with the closing of the Merger, the ENLC Credit Facility was canceled, and all outstanding borrowings were refinanced through borrowings on the Consolidated Credit Facility. Since the borrowings under the ENLC Credit Facility were refinanced with long-term debt, they are classified as “Long-term debt” on the consolidated balance sheet as of December 31, 2018.


(2)	Bears interest based on Prime and/or LIBOR plus an applicable margin. The effective interest rate was 4.6% at March 31, 2019.


(3)	Bears interest based on Prime and/or LIBOR plus an applicable margin. The effective interest rate was 4.0% and 3.9% at March 31, 2019 and December 31, 2018, respectively.


(4)	ENLK’s 2.70% senior unsecured notes matured on April 1, 2019 and were refinanced through borrowings on the Consolidated Credit Facility. Therefore, the outstanding principal balance, net of discount and debt issuance costs, is classified as “Long-term debt” on the consolidated balance sheet as of March 31, 2019 and “Current maturities of long-term debt” as of December 31, 2018.


(5)	Net of amortization of $10.9 million and $16.5 million at March 31, 2019 and December 31, 2018, respectively.

Consolidated Credit Facility

On December 11, 2018, ENLC entered into the Consolidated Credit Facility, which permits ENLC to borrow up to $1.75 billion on a revolving credit basis and includes a $500.0 million letter of credit subfacility. The Consolidated Credit Facility became available for borrowings and letters of credit upon closing of the Merger. In addition, ENLK became a guarantor under the Consolidated Credit Facility upon the closing of the Merger. In the event that ENLC defaults on the Consolidated Credit Facility, ENLK will be liable for the entire outstanding balance ($160.0 million as of March 31, 2019), and 105% of the outstanding letters of credit under the Consolidated Credit Facility. The obligations under the Consolidated Credit Facility are unsecured.

The Consolidated Credit Facility includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its revolving commitment thereunder, subject to an aggregate maximum of $2.25 billion for all commitments under the Consolidated Credit Facility.

The Consolidated Credit Facility will mature on January 25, 2024, unless ENLC requests, and the requisite lenders agree, to extend it pursuant to its terms. The Consolidated Credit Facility contains certain financial, operational, and legal covenants. The financial covenants are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The financial covenants include (i) maintaining a ratio of consolidated EBITDA (as defined in the Consolidated Credit Facility, which term includes projected EBITDA from certain capital expansion projects) to consolidated interest charges of no less than 2.5 to 1.0 at all times prior to the occurrence of an investment

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

grade event (as defined in the Consolidated Credit Facility) and (ii) maintaining a ratio of consolidated indebtedness to consolidated EBITDA of no more than 5.0 to 1.0. If ENLC consummates one or more acquisitions in which the aggregate purchase price is $50.0 million or more, ENLC can elect to increase the maximum allowed ratio of consolidated indebtedness to consolidated EBITDA to 5.5 to 1.0 for the quarter in which the acquisition occurs and the three subsequent quarters.

Borrowings under the Consolidated Credit Facility bear interest at ENLC’s option at the Eurodollar Rate (the LIBOR Rate) plus an applicable margin (ranging from 1.125% to 2.00%) or the Base Rate (the highest of the Federal Funds Rate plus 0.50%, the 30-day Eurodollar Rate plus 1.0% or the administrative agent’s prime rate) plus an applicable margin (ranging from 0.125% to 1.00%). The applicable margins vary depending on ENLC’s debt rating. Upon breach by ENLC of certain covenants governing the Consolidated Credit Facility, amounts outstanding under the Consolidated Credit Facility, if any, may become due and payable immediately.

At March 31, 2019, we were in compliance with and expect to be in compliance with the covenants of the Consolidated Credit Facility for at least the next twelve months.

Term Loan

On December 11, 2018, ENLK entered into the Term Loan with Bank of America, N.A., as Administrative Agent, Bank of Montreal and Royal Bank of Canada, as Co-Syndication Agents, Citibank, N.A. and Wells Fargo Bank, National Association, as Co-Documentation Agents, and the lenders party thereto. On December 11, 2018, ENLK borrowed $850.0 million under the Term Loan and used the net proceeds to repay obligations outstanding under the ENLK Credit Facility. Upon the closing of the Merger, ENLC assumed ENLK’s obligations under the Term Loan, and ENLK became a guarantor of the Term Loan. In the event that ENLC defaults on the Term Loan, the outstanding balance immediately becomes due, and ENLK will be liable for any amount owed on the Term Loan not paid by ENLC. The outstanding balance of the Term Loan was $850.0 million as of March 31, 2019. The obligations under the Term Loan are unsecured.

The Term Loan will mature on December 10, 2021. The Term Loan contains certain financial, operational, and legal covenants. The financial covenants are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The financial covenants include (i) maintaining a ratio of consolidated EBITDA (as defined in the Term Loan, which term includes projected EBITDA from certain capital expansion projects) to consolidated interest charges of no less than 2.5 to 1.0 at all times prior to the occurrence of an investment grade event (as defined in the Term Loan) and (ii) maintaining a ratio of consolidated indebtedness to consolidated EBITDA of no more than 5.0 to 1.0. If ENLC consummates one or more acquisitions in which the aggregate purchase price is $50.0 million or more, ENLC can elect to increase the maximum allowed ratio of consolidated indebtedness to consolidated EBITDA to 5.5 to 1.0 for the quarter in which the acquisition occurs and the three subsequent quarters.

Borrowings under the Term Loan bear interest at ENLC’s option at the Eurodollar Rate (the LIBOR Rate) plus an applicable margin (ranging from 1.0% to 1.75%) or the Base Rate (the highest of the Federal Funds Rate plus 0.5%, the 30-day Eurodollar Rate plus 1.0% or the administrative agent’s prime rate) plus an applicable margin (ranging from 0.0% to 0.75%). The applicable margins vary depending on ENLC’s debt rating. Upon breach by ENLC of certain covenants included in the Term Loan, amounts outstanding under the Term Loan may become due and payable immediately.

At March 31, 2019, we were in compliance with and expect to be in compliance with the covenants of the Term Loan for at least the next twelve months.

(7) Income Taxes

The components of our income tax provision are as follows (in millions):



	Three Months Ended March 31,
	2019		2018
Current income tax provision	$	1.0	$	1.2
Deferred income tax provision	0.8		5.8
Income tax provision	$	1.8	$	7.0

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

The following schedule reconciles total income tax provision and the amount calculated by applying the statutory U.S. federal tax rate to income before income taxes (in millions):



	Three Months Ended March 31,
	2019			2018
Expected income tax provision (benefit) based on federal statutory rate	$	(36.7	)	$	4.1
State income tax provision (benefit), net of federal benefit	(4.4		)	0.5
Income tax provision from ENLK	0.9			1.0
Unit-based compensation (1)	0.1			1.6
Non-deductible expense related to asset impairment	43.8			—
Other	(1.9		)	(0.2		)
Income tax provision	$	1.8		$	7.0

____________________________


(1)	Related to tax deficiencies recorded upon the vesting of restricted incentive units.

Deferred Tax Assets and Liabilities

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred income tax assets and liabilities as of March 31, 2019 and December 31, 2018 are as follows (in millions):



	March 31, 2019			December 31, 2018
Deferred income tax assets:
Federal net operating loss carryforward	$	77.4		$	67.9
State net operating loss carryforward	13.1			11.7
Total deferred tax assets	90.5			79.6
Deferred tax liabilities:
Property, equipment, and intangible assets (1)	(54.0		)	(440.6		)
Other	(0.3		)	(1.4		)
Total deferred tax liabilities	(54.3		)	(442.0		)
Deferred tax asset (liability), net	$	36.2		$	(362.4	)

____________________________


(1)	Includes our investment in ENLK and primarily relates to differences between the book and tax bases of property and equipment.

As a result of the Merger, we acquired all issued and outstanding ENLK common units that were not already held by us or our subsidiaries in exchange for the issuance of ENLC common units. See “Note 1—General” for more information regarding this transaction. This was a taxable exchange to our unitholders, and we received a step-up in tax basis of the underlying assets acquired. In accordance with ASC 810, Consolidation, the step-up in our basis reduced our DTL by $399.0 million, and the resulting DTA will be realized over the tax-basis depreciable life of the underlying assets.

As of March 31, 2019, we had federal net operating loss carryforwards of $368.5 million that represent a net deferred tax asset of $77.4 million. As of December 31, 2018, we had federal net operating loss carryforwards of $323.6 million that represent a net deferred tax asset of $67.9 million. These carryforwards will begin expiring in 2028 through 2038. Management believes that it is more likely than not that the future results of operations will generate sufficient taxable income to utilize these net operating loss carryforwards before they expire.

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ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(8) Certain Provisions of the Partnership Agreement

(a) ENLK Series B Preferred Units

Prior to the closing of the Merger, Series B Preferred Unit distributions were payable quarterly in cash at an amount equal to $0.28125 per Series B Preferred Unit (the “Cash Distribution Component”) plus an in-kind distribution equal to the greater of (A) 0.0025 Series B Preferred Units per Series B Preferred Unit and (B) an amount equal to (i) the excess, if any, of the distribution that would have been payable had the Series B Preferred Units converted into ENLK common units over the Cash Distribution Component, divided by (ii) the issue price of $15.00 (the “Issue Price”).

Following the closing of the Merger, and beginning with the quarter ended March 31, 2019, the holder of the Series B Preferred Units will be entitled to quarterly cash distributions and distributions in-kind of additional Series B Preferred Units as described below. The quarterly in-kind distribution (the “Series B PIK Distribution”) will equal the greater of (A) 0.0025 Series B Preferred Units per Series B Preferred Unit and (B) the number of Series B Preferred Units equal to the quotient of (x) the excess (if any) of (1) the distribution that would have been payable by ENLC had the Series B Preferred Units been exchanged for ENLC common units but applying a one-to-one exchange ratio (subject to certain adjustments) instead of the exchange ratio of 1.15 ENLC common units for each Series B Preferred Unit, subject to certain adjustments (the “Series B Exchange Ratio”), over (2) the Cash Distribution Component, divided by (y) the Issue Price. The quarterly cash distribution will consist of the Cash Distribution Component plus an amount in cash that will be determined based on a comparison of the value (applying the Issue Price) of (i) the Series B PIK Distribution and (ii) the Series B Preferred Units that would have been distributed in the Series B PIK Distribution if such calculation applied the Series B Exchange Ratio instead of the one-to-one ratio (subject to certain adjustments).

A summary of the distribution activity relating to the Series B Preferred Units during the three months ended March 31, 2019 and 2018 is provided below:



Declaration period	Distribution paid as additional Series B Preferred Units	Cash Distribution (in millions)		Date paid/payable
2019
Fourth Quarter of 2018	425,785	$	16.5	February 13, 2019
First Quarter of 2019	147,887	$	16.7	May 14, 2019

2018
Fourth Quarter of 2017	413,658	$	16.0	February 13, 2018
First Quarter of 2018	416,657	$	16.2	May 14, 2018


(b)	ENLK Series C Preferred Units

Distributions on the Series C Preferred Units accrue and are cumulative from the date of original issue and payable semi-annually in arrears on the 15^th day of June and December of each year through and including December 15, 2022 and, thereafter, quarterly in arrears on the 15^th day of March, June, September, and December of each year, in each case, if and when declared by the General Partner out of legally available funds for such purpose. The initial distribution rate for the Series C Preferred Units from and including the date of original issue to, but not including, December 15, 2022 is 6.0% per annum. On and after December 15, 2022, distributions on the Series C Preferred Units will accumulate for each distribution period at a percentage of the $1,000 liquidation preference per unit equal to an annual floating rate of the three-month LIBOR plus a spread of 4.11%.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)


(c)	ENLK Common Unit Distributions

A summary of ENLK’s distribution activity relating to the common units for periods prior to the Merger is provided below:



Declaration period	Distribution/unit		Date paid/payable
2019
Fourth Quarter of 2018	$	0.39	February 13, 2019

2018
Fourth Quarter of 2017	$	0.39	February 13, 2018
First Quarter of 2018	$	0.39	May 14, 2018


(d)	Allocation of ENLK Income

Prior to the closing of the Merger and for the three months ended March 31, 2018, net income was allocated to the General Partner in an amount equal to its incentive distribution rights. Prior to the closing of the Merger, ENLK was required to pay the General Partner incentive distributions in the amount of 13.0% of ENLK distributions in excess of $0.25 per unit, 23.0% of ENLK distributions in excess of $0.3125 per unit, and 48.0% of ENLK distributions in excess of $0.375 per unit. The General Partner was not entitled to incentive distributions with respect to (i) distributions on the Series B Preferred Units until such units converted into common units or (ii) the Series C Preferred Units. At the closing of the Merger, the General Partner’s incentive distribution rights in ENLK were eliminated.

For the three months ended March 31, 2018, the General Partner’s share of net income consisted of incentive distribution rights to the extent earned, a deduction for unit-based compensation attributable to ENLC’s restricted units, and the percentage interest of ENLK’s net income adjusted for ENLC’s unit-based compensation specifically allocated to the General Partner. The net income allocated to the General Partner is as follows (in millions):



	Three Months Ended March 31,
	2019			2018
Income allocation for incentive distributions	$	—		$	14.8
Unit-based compensation attributable to ENLC’s restricted and performance units	(12.1		)	(4.4		)
General Partner share of net income	0.4			0.2
General Partner interest in EOGP acquisition	2.4			4.2
General Partner interest in net income (loss)	$	(9.3	)	$	14.8

(9) Members' Equity

(a)Issuance of ENLC Common Units related to the Merger

In connection with the consummation of the Merger, we issued 304,822,035 ENLC common units in exchange for all of the outstanding ENLK common units not previously owned by us.

(b) ENLC Equity Distribution Agreement

On February 22, 2019, ENLC entered into the ENLC EDA with the Sales Agents to sell up to $400.0 million in aggregate gross sales of ENLC common units from time to time through an “at the market” equity offering program. Under the ENLC EDA, ENLC may also sell common units to any Sales Agent as principal for the Sales Agent’s own account at a price agreed upon at the time of sale. ENLC has no obligation to sell any ENLC common units under the ENLC EDA and may at any time suspend solicitation and offers under the ENLC EDA. As of May 1, 2019, ENLC has not sold any common units under the ENLC EDA.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

As required under ASC 260, Earnings Per Share, unvested share-based payments that entitle employees to receive non-forfeitable distributions are considered participating securities for earnings per unit calculations. The following table reflects the computation of basic and diluted earnings per unit for the periods presented (in millions, except per unit amounts):



	Three Months Ended March 31,
	2019			2018
Distributed earnings allocated to:
Common units (1)	$	109.4		$	47.6
Unvested restricted units (1)	1.2			0.5
Total distributed earnings	$	110.6		$	48.1
Undistributed loss allocated to:
Common units	$	(283.8	)	$	(35.3	)
Unvested restricted units	(3.1		)	(0.4		)
Total undistributed loss	$	(286.9	)	$	(35.7	)
Net income (loss) allocated to:
Common units	$	(174.4	)	$	12.3
Unvested restricted units	(1.9		)	0.1
Total net income (loss)	$	(176.3	)	$	12.4
Basic and diluted net income (loss) per unit:
Basic	$	(0.45	)	$	0.07
Diluted	$	(0.45	)	$	0.07

____________________________


(1)	For the three months ended March 31, 2019 and 2018, distributed earnings represent a declared distribution of $0.279 per unit payable on May 14, 2019 and a distribution of $0.263 per unit paid on May 15, 2018.

The following are the unit amounts used to compute the basic and diluted earnings per unit for the periods presented (in millions):



	Three Months Ended March 31,
	2019	2018
Basic weighted average units outstanding:
Weighted average common units outstanding	392.0	180.9

Diluted weighted average units outstanding:
Weighted average basic common units outstanding	392.0	180.9
Dilutive effect of non-vested restricted units (1)	—	0.9
Total weighted average diluted common units outstanding	392.0	181.8

___________________________


(1)	All common unit equivalents were antidilutive for the three months ended March 31, 2019 since a net loss existed for that period.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(d) Distributions

A summary of our distribution activity relating to the ENLC common units for the three months ended March 31, 2019 and 2018, respectively, is provided below:



Declaration period	Distribution/unit		Date paid/payable
2019
Fourth Quarter of 2018	$	0.275	February 14, 2019
First Quarter of 2019	$	0.279	May 14, 2019

2018
Fourth Quarter of 2017	$	0.259	February 14, 2018
First Quarter of 2018	$	0.263	May 15, 2018

(10) Investment in Unconsolidated Affiliates

As of March 31, 2019, our unconsolidated investments consisted of a 38.75% ownership in GCF and an approximate 30% ownership in the Cedar Cove JV.

The following table shows the activity related to our investment in unconsolidated affiliates for the periods indicated (in millions):



	Three Months Ended March 31,
	2019			2018
GCF
Distributions	$	2.2		$	5.7
Equity in income	$	5.7		$	4.6

Cedar Cove JV
Distributions	$	0.3		$	0.3
Equity in loss	$	(0.4	)	$	(1.6	)

Total
Distributions	$	2.5		$	6.0
Equity in income	$	5.3		$	3.0

The following table shows the balances related to our investment in unconsolidated affiliates as of March 31, 2019 and December 31, 2018 (in millions):



	March 31, 2019		December 31, 2018
GCF	$	45.4	$	41.9
Cedar Cove JV	37.5		38.2
Total investment in unconsolidated affiliates	$	82.9	$	80.1

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

(11) Employee Incentive Plans


(a)	Long-Term Incentive Plans

Prior to the Merger, ENLC and ENLK each had similar unit-based compensation payment plans for officers and employees. ENLC grants unit-based awards under the 2014 Plan, and ENLK granted unit-based awards under the GP Plan. As of the closing of the Merger, (i) ENLC assumed all obligations in respect of the GP Plan and the outstanding awards granted thereunder (the “Legacy ENLK Awards”) and (ii) the Legacy ENLK Awards converted into ENLC unit-based awards using the 1.15 exchange ratio (as defined in the Merger Agreement) as the conversion rate. In addition, as of the closing of the Merger, the performance metric of each Legacy ENLK Award and each then outstanding award under the 2014 Plan with performance-based vesting conditions was modified as discussed in (c) and (e) below. Following the consummation of the Merger, no additional awards will be granted under the GP Plan.

We account for unit-based compensation in accordance with ASC 718, Stock Compensation (“ASC 718”), which requires that compensation related to all unit-based awards be recognized in the consolidated financial statements. Unit-based compensation cost is valued at fair value at the date of grant, and that grant date fair value is recognized as expense over each award’s requisite service period with a corresponding increase to equity or liability based on the terms of each award and the appropriate accounting treatment under ASC 718.

Amounts recognized on the consolidated financial statements with respect to these plans are as follows (in millions):



	Three Months Ended March 31,
	2019		2018
Cost of unit-based compensation charged to operating expense	$	0.3	$	2.0
Cost of unit-based compensation charged to general and administrative expense	10.8		3.1
Total unit-based compensation expense	$	11.1	$	5.1
Non-controlling interest in unit-based compensation	$	0.5	$	1.9
Amount of related income tax benefit recognized in net income (1)	$	2.5	$	0.7

____________________________


(1)	For the three months ended March 31, 2019 and 2018, the amount of related income tax benefit recognized in net income excluded $0.1 million and $1.6 million, respectively, of income tax expense related to tax deficiencies recorded on vested units.


(b)	EnLink Midstream Partners, LP Restricted Incentive Units

ENLK restricted incentive units are valued at their fair value at the date of grant, which is equal to the market value of ENLK common units on such date. A summary of the restricted incentive unit activity for the three months ended March 31, 2019 is provided below:



	Three Months Ended March 31, 2019
EnLink Midstream Partners, LP Restricted Incentive Units:	Number of Units		Weighted Average Grant-Date Fair Value
Non-vested, beginning of period	2,556,270		$	14.43
Vested (1)	(722,853	)	10.02
Forfeited	(4,490	)	11.93
Converted to ENLC (2)	(1,828,927	)	16.11
Non-vested, end of period	—		$	—

____________________________


(1)	Vested units included 249,201 units withheld for payroll taxes paid on behalf of employees.


(2)	As a result of the Merger, the Legacy ENLK Awards converted into ENLC unit-based awards using the 1.15 exchange ratio (as defined in the Merger Agreement) as the conversion rate.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

A summary of the restricted incentive units’ aggregate intrinsic value (market value at vesting date) and fair value of units vested (market value at date of grant) for the three months ended March 31, 2019 and 2018 is provided below (in millions):



	Three Months Ended March 31,
EnLink Midstream Partners, LP Restricted Incentive Units:	2019		2018
Aggregate intrinsic value of units vested	$	8.0	$	8.7
Fair value of units vested	$	7.2	$	12.8


(c)	EnLink Midstream Partners, LP Performance Units

Prior to the Merger, the General Partner granted performance awards under the GP Plan. The performance award agreements provided that the vesting of performance units (i.e., performance-based restricted incentive units) granted thereunder was dependent on the achievement of certain total shareholder return (“TSR”) performance goals relative to the TSR achievement of a peer group of companies (the “Peer Companies”) over the applicable performance period. The performance award agreements contemplated that the Peer Companies for an individual performance award (the “Subject Award”) were the companies comprising the AMZ, excluding ENLK and ENLC, on the grant date for the Subject Award. The performance units would vest based on the percentile ranking of the average of ENLK’s and ENLC’s TSR achievement (“EnLink TSR”) for the applicable performance period relative to the TSR achievement of the Peer Companies. As of the closing of the Merger, these performance-based Legacy ENLK Awards were modified, such that, the performance goal will, on a weighted average basis, (i) continue to relate to the EnLink TSR relative to the TSR performance of the Peer Companies in respect of periods preceding the effective time of the Merger; and (ii) relate solely to the TSR performance of ENLC relative to the TSR performance of such Peer Companies in respect of periods on and after the effective time of the Merger. At the end of the vesting period, recipients receive distribution equivalents, if any, with respect to the number of performance units vested. The vesting of units ranges from zero to 200% of the units granted depending on the extent to which the related performance goals are achieved over the relevant performance period.

The fair value of each performance unit was estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all performance unit grants made under the plan: (i) a risk-free interest rate based on United States Treasury rates as of the grant date; (ii) a volatility assumption based on the historical realized price volatility of ENLK’s common units and the designated Peer Companies’ securities; (iii) an estimated ranking of ENLK among the designated Peer Companies; and (iv) the distribution yield. The fair value of the performance unit on the date of grant is expensed over a vesting period of approximately three years.

The following table presents a summary of the performance units:



	Three Months Ended March 31, 2019
EnLink Midstream Partners, LP Performance Units:	Number of Units		Weighted Average Grant-Date Fair Value
Non-vested, beginning of period	451,669		$	17.74
Vested (1)	(161,410	)	10.54
Converted to ENLC (2)	(290,259	)	28.31
Non-vested, end of period	—		$	—

____________________________


(1)	Vested units included 62,403 units withheld for payroll taxes paid on behalf of employees.


(2)	As a result of the Merger, the performance-based Legacy ENLK Awards converted into ENLC performance-based awards using the 1.15 exchange ratio (as defined in the Merger Agreement) as the conversion rate.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

A summary of the performance units’ aggregate intrinsic value (market value at vesting date) and fair value of units vested (market value at date of grant) for the three months ended March 31, 2019 and 2018 is provided below (in millions).



	Three Months Ended March 31,
EnLink Midstream Partners, LP Performance Units:	2019		2018
Aggregate intrinsic value of units vested	$	2.1	$	2.0
Fair value of units vested	$	1.7	$	4.1


(d)	EnLink Midstream, LLC Restricted Incentive Units

ENLC restricted incentive units are valued at their fair value at the date of grant, which is equal to the market value of ENLC common units on such date. A summary of the restricted incentive unit activity for the three months ended March 31, 2019 is provided below:



	Three Months Ended March 31, 2019
EnLink Midstream, LLC Restricted Incentive Units:	Number of Units			Weighted Average Grant-Date Fair Value
Non-vested, beginning of period	2,425,867			$	14.62
Granted (1)	1,770,170			11.45
Vested (1)(2)	(1,214,354		)	10.35
Forfeited	(54,090		)	11.71
Converted from ENLK (3)	2,103,266			14.01
Non-vested, end of period	5,030,859			$	14.31
Aggregate intrinsic value, end of period (in millions)	$	64.3

____________________________


(1)	Restricted incentive units typically vest at the end of three years. In March 2019, ENLC granted 420,842 restricted incentive units with a fair value of $4.8 million to officers and certain employees as bonus payments for 2018, and these restricted incentive units vested immediately and are included in the restricted incentive units granted and vested line items.


(2)	Vested units included 409,384 units withheld for payroll taxes paid on behalf of employees.


(3)	Represents Legacy ENLK Awards that were converted into ENLC unit-based awards using the 1.15 exchange ratio (as defined in the Merger Agreement) as the conversion rate.



	Three Months Ended March 31,
EnLink Midstream, LLC Restricted Incentive Units:	2019		2018
Aggregate intrinsic value of units vested	$	12.4	$	8.9
Fair value of units vested	$	12.6	$	13.1

As of March 31, 2019, there was $44.6 million of unrecognized compensation cost related to non-vested ENLC restricted incentive units. The cost is expected to be recognized over a weighted-average period of 2.0 years.

For all restricted incentive unit awards granted after March 8, 2019 to certain officers and employees (the “grantee”), such awards (the “Subject Grants”) generally provide that, subject to the satisfaction of the conditions set forth in the agreement, the Subject Grants will vest on the third anniversary of the vesting commencement date (the “Regular Vesting Date”). The Subject Grants will be forfeited if the grantee’s employment or service with ENLC and its affiliates terminates prior to the Regular Vesting Date except that the Subject Grants will vest in full or on a pro-rated basis for certain terminations of employment or service prior to the Regular Vesting Date. For instance, the Subject Grants will vest on a pro-rated basis for any terminations of the grantee’s employment: (i) due to retirement, (ii) by ENLC or its affiliates without cause, or (iii) by the grantee for good reason (each, a “Covered Termination” and more particularly defined in the Subject Grants agreement) except that the Subject Grants will vest in full if the applicable Covered Termination is a “normal retirement” (as defined in the Subject Grants

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

agreement) or the applicable Covered Termination occurs after a change of control (if any). The Subject Grants will vest in full if death or a qualifying disability occurs prior to the Regular Vesting Date.


(e)	EnLink Midstream, LLC’s Performance Units

ENLC grants performance awards under the 2014 Plan. The performance award agreements provide that the vesting of performance units (i.e., performance-based restricted incentive units) granted thereunder is dependent on the achievement of certain performance goals over the applicable performance period. At the end of the vesting period, recipients receive distribution equivalents, if any, with respect to the number of performance units vested. The vesting of units ranges from zero to 200% of the units granted depending on the extent to which the related performance goals are achieved over the relevant performance period.

Performance awards granted prior to March 8, 2019 provided that the vesting of performance units granted was dependent on the achievement of certain TSR performance goals relative to the TSR achievement of the Peer Companies over the applicable performance period. Prior to the Merger, vesting of the performance units was based on the percentile ranking of the EnLink TSR for the applicable performance period relative to the TSR achievement of the Peer Companies. As of the effective time of the Merger, these performance-based awards were modified, such that, the performance goal will, on a weighted average basis, (i) continue to relate to the EnLink TSR relative to the TSR performance of the Peer Companies in respect of periods preceding the effective time of the Merger; and (ii) relate solely to the TSR performance of ENLC relative to the TSR performance of such Peer Companies in respect of periods on and after the effective time of the Merger.

The following table presents a summary of the performance units:



	Three Months Ended March 31, 2019
EnLink Midstream, LLC Performance Units:	Number of Units			Weighted Average Grant-Date Fair Value
Non-vested, beginning of period	418,149			$	19.15
Granted	907,337			13.53
Vested (1)	(161,286		)	11.71
Converted from ENLK (2)	333,798			25.84
Non-vested, end of period	1,497,998			$	18.04
Aggregate intrinsic value, end of period (in millions)	$	19.1

____________________________


(1)	Vested units included 62,219 units withheld for payroll taxes paid on behalf of employees.


(2)	As a result of the Merger, the performance-based Legacy ENLK Awards converted into ENLC performance-based awards using the 1.15 exchange ratio (as defined in the Merger Agreement) as the conversion rate.



	Three Months Ended March 31,
EnLink Midstream, LLC Performance Units:	2019		2018
Aggregate intrinsic value of units vested	$	1.8	$	1.9
Fair value of units vested	$	1.9	$	4.2

As of March 31, 2019, there was $16.6 million of unrecognized compensation cost that related to non-vested ENLC performance units. That cost is expected to be recognized over a weighted-average period of 2.2 years.

In connection with the GIP Transaction, certain outstanding performance unit agreements were modified to, among other things: (i) provide that the awards granted thereunder did not vest due to the closing of the GIP Transaction, and (ii) increase the minimum vesting of units from zero to 100% as described in our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2018. The modified performance units retained the original vesting schedules. As a result of the modifications, we will recognize an additional $2.1 million compensation cost over the life of these ENLC performance units.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

In connection with the Merger, Legacy ENLK Awards with “performance-based” vesting and payment conditions were modified to reflect the Performance Metric Adjustment (as defined in the Merger Agreement) as described in our Current Report on Form 8-K filed with the Commission on January 29, 2019. The modified performance units retained the original vesting schedules. As a result of the modifications, we will recognize an additional $0.7 million in compensation costs over the life of the Legacy ENLK Awards.

2019 Performance Unit Awards

For all performance awards granted after March 8, 2019 to the grantee, the vesting of performance units is dependent on (a) the grantee’s continued employment or service with ENLC or its affiliates for all relevant periods and (b) EnLink TSR and a performance goal based on cash flow (“Cash Flow”). At the time of grant, the Board of Directors of the managing member of ENLC (the “Board”) will determine the relative weighting of the two performance goals by including in the award agreement the number of units that will be eligible for vesting depending on the achievement of the TSR performance goals (the “Total TSR Units”) versus the achievement of the Cash Flow performance goals (the “Total CF Units”). These performance awards have four separate performance periods: (i) three performance periods are each of the first, second, and third calendar years that occur following the vesting commencement date of the performance awards and (ii) the fourth performance period is the cumulative three-year period from the vesting commencement date through the third anniversary thereof (the “Cumulative Performance Period”).

One-fourth of the Total TSR Units (the “Tranche TSR Units”) relates to each of the four performance periods described above. Following the end date of a given performance period, the Governance and Compensation Committee (the “Committee”) of the Board will measure and determine the TSR performance of ENLC (the “ENLC TSR”) relative to the TSR performance of a designated group of peer companies (the “Designated Peer Companies”) to determine the Tranche TSR Units that are eligible to vest, subject to the grantee’s continued employment or service with ENLC or its affiliates through the end date of the Cumulative Performance Period. In short, the TSR for a given performance period is defined as (i)(A) the average closing price of a common equity security at the end of the relevant performance period minus (B) the average closing price of a common equity security at the beginning of the relevant performance period plus (C) reinvested dividends divided by (ii) the average closing price of a common equity security at the beginning of the relevant performance period.

The following table sets out the levels at which the Tranche TSR Units may vest (using linear interpolation) based on the ENLC TSR percentile ranking for the applicable performance period relative to the TSR achievement of the Designated Peer Companies:



Performance Level	Achieved ENLC TSR Position Relative to Designated Peer Companies	Vesting percentage of the Tranche TSR Units
Below Threshold	Less than 25%	0%
Threshold	Equal to 25%	50%
Target	Equal to 50%	100%
Maximum	Greater than or Equal to 75%	200%

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Approximately one-third of the Total CF Units (the “Tranche CF Units”) relates to each of the first three performance periods described above (i.e., the Cash Flow performance goal does not relate to the Cumulative Performance Period). The Board will establish the Cash Flow performance targets for purposes of the column in the table below titled “ENLC’s Achieved Cash Flow” for each performance period no later than March 31 of the year in which the relevant performance period begins. Following the end date of a given performance period, the Committee will measure and determine the Cash Flow performance of ENLC to determine the Tranche CF Units that are eligible to vest, subject to the grantee’s continued employment or service with ENLC or its affiliates through the end of the Cumulative Performance Period. In short, the Performance-Based Award Agreement defines Cash Flow for a given performance period as (A)(i) ENLC’s adjusted EBITDA minus (ii) interest expense, current taxes and other, maintenance capital expenditures, and preferred unit accrued distributions divided by (B) the time-weighted average number of ENLC’s common units outstanding during the relevant performance period. The following table sets out the levels at which the Tranche CF Units will be eligible to vest (using linear interpolation) based on the Cash Flow performance of ENLC for the performance period ending December 31, 2019:



Performance Level	ENLC’s Achieved Cash Flow	Vesting percentage of the Tranche CF Units
Below Threshold	Less than $1.43	0%
Threshold	Equal to $1.43	50%
Target	Equal to $1.55	100%
Maximum	Greater than or Equal to $1.72	200%

The fair value of each performance unit is estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all performance unit grants made under the plan: (i) a risk-free interest rate based on United States Treasury rates as of the grant date; (ii) a volatility assumption based on the historical realized price volatility of ENLC’s common units and the Designated Peer Companies’ or Peer Companies’ securities as applicable; (iii) an estimated ranking of ENLC among the Designated Peer Companies or Peer Companies, and (iv) the distribution yield. The fair value of the performance unit on the date of grant is expensed over a vesting period of approximately three years.

The following table presents a summary of the grant-date fair value assumptions by performance unit grant date:



EnLink Midstream, LLC Performance Units:	March 2019
Beginning TSR price	$	10.92
Risk-free interest rate	2.42		%
Volatility factor	33.86		%
Distribution yield	9.7		%

(12) Derivatives

Interest Rate Swaps

We periodically enter into interest rate swaps in connection with new debt issuances. During the debt issuance process, we are exposed to variability in future long-term debt interest payments that may result from changes in the benchmark interest rate (commonly the U.S. Treasury yield) prior to the debt being issued. In order to hedge this variability, we enter into interest rate swaps to effectively lock in the benchmark interest rate at the inception of the swap. Prior to 2017, we did not designate interest rate swaps as hedges and, therefore, included the associated settlement gains and losses as interest expense, net of interest income, on the consolidated statements of operations.

In May 2017, we entered into an interest rate swap in connection with the issuance of ENLK’s 2047 Notes. In accordance with ASC 815, we designated this swap as a cash flow hedge. Upon settlement of the interest rate swap in May 2017, we recorded the associated $2.2 million settlement loss in accumulated comprehensive loss on the consolidated balance sheets. We will amortize the settlement loss into interest expense on the consolidated statements of operations over the term of the 2047 Notes. There was no ineffectiveness related to the hedge. For the three months ended March 31, 2019, we amortized an immaterial amount of the settlement loss into interest expense from accumulated other comprehensive income (loss). We expect to recognize $0.1 million of interest expense out of accumulated other comprehensive income (loss) over the next twelve months. We have no open interest rate swap positions as of March 31, 2019.

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Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Commodity Swaps

We manage our exposure to changes in commodity prices by hedging the impact of market fluctuations. Commodity swaps are used both to manage and hedge price and location risk related to these market exposures and to manage margins on offsetting fixed-price purchase or sale commitments for physical quantities of crude, condensate, natural gas, and NGLs. We do not designate commodity swaps as cash flow or fair value hedges for hedge accounting treatment under ASC 815. Therefore, changes in the fair value of our derivatives are recorded in revenue in the period incurred. In addition, our commodity risk management policy does not allow us to take speculative positions with our derivative contracts.

We commonly enter into index (float-for-float) or fixed-for-float swaps in order to mitigate our cash flow exposure to fluctuations in the future prices of natural gas, NGLs, and crude oil. For natural gas, index swaps are used to protect against the price exposure of daily priced gas versus first-of-month priced gas. For condensate, crude oil, and natural gas, index swaps are also used to hedge the basis location price risk resulting from supply and markets being priced on different indices. For natural gas, NGLs, condensate, and crude oil, fixed-for-float swaps are used to protect cash flows against price fluctuations: (1) where we receive a percentage of liquids as a fee for processing third-party gas or where we receive a portion of the proceeds of the sales of natural gas and liquids as a fee, (2) in the natural gas processing and fractionation components of our business and (3) where we are mitigating the price risk for product held in inventory or storage.

Assets and liabilities related to our derivative contracts are included in the fair value of derivative assets and liabilities, and the change in fair value of these contracts is recorded net as a gain (loss) on derivative activity in “Gain on derivative activity” in the consolidated statements of operations. We estimate the fair value of all of our derivative contracts based upon actively-quoted prices of the underlying commodities.

The components of gain on derivative activity in the consolidated statements of operations related to commodity swaps are (in millions):



	Three Months Ended March 31,
	2019			2018
Change in fair value of derivatives	$	(2.0	)	$	(3.5	)
Realized gain on derivatives	3.8			4.0
Gain on derivative activity	$	1.8		$	0.5

The fair value of derivative assets and liabilities related to commodity swaps are as follows (in millions):



	March 31, 2019			December 31, 2018
Fair value of derivative assets—current	$	8.7		$	28.6
Fair value of derivative assets—long-term	4.6			4.1
Fair value of derivative liabilities—current	(6.6		)	(21.8		)
Fair value of derivative liabilities—long-term	(0.2		)	(2.4		)
Net fair value of derivatives	$	6.5		$	8.5

Table of Contents

ENLINK MIDSTREAM, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Set forth below are the summarized notional volumes and fair values of all instruments held for price risk management purposes and related physical offsets at March 31, 2019 (in millions). The remaining term of the contracts extend no later than December 2022.



		March 31, 2019
Commodity	Instruments	Unit	Volume		Fair Value
NGL (short contracts)	Swaps	Gallons	(13.8	)	$	1.2
NGL (long contracts)	Swaps	Gallons	2.6		(0.1		)
Natural Gas (short contracts)	Swaps	MMBtu