Duncan Energy Partners (DEP: chart, web, Y!) reported Q3 financials today. They reported a net income of $4.5 million for the quarter, which rounds out to $0.22 per unit, fully diluted share, missing Reuters estimates by $0.01 per share.

Gross operating margin was $19.1 million for Q307 as compared to $22.5 million for Q306. The difference can be attributed to business interruption insurance recoveries, startup expenses for 2007 (remember that DEP went public in February of this year) and the write off of conversion costs when they tried to convert a NGL storage cavern to a natural gas storage cavern, and determined the cavern would not be suitable for natural gas storage.

Consequently, if you adjust for these unusual costs incurred in 2007, the gross operating margin was ahead of that in 2006.

Distributable cash flow for the third quarter was $8.7 million.

“We are pleased to increase the cash distribution rate to our partners this quarter for the first time since our IPO in February,” said Richard H. Bachmann, president and chief executive officer of the general partner of Duncan Energy Partners. “Future increases in the quarterly cash distribution rate are expected as the distributable cash flow from our commercial businesses, whether from our existing assets or the acquisition and/or construction of new assets, warrant.” -Source

Higher than expected capital expenditures brought the overall distributable cash flow for the quarter down, part of which was due to a state requirement to have partial pipeline integrity done by the middle of December.

Bachmann went on to say that he expects the capital expenditure levels to drop going through 2008.

Duncan Energy Partners owns a 66% interest in the following business segments:

NGL & Petrochemical Storage Services

This segment consists of 33 underground salt dome caverns in Mont Belvieu, Texas, with an underground storage capacity of approximately 100 million barrels

Third quarter gross operating margin for these storage services increased 24 percent to $7.7 million from $6.2 million in the third quarter of 2006.

Natural Gas Pipelines & Services

This segment consists of an Acadian intrastate natural gas system that gathers, transports, stores and markets natural gas in Louisiana. All together the system is made up of more than 1,000 miles of high-pressure transmission lines with a throughput capacity of 1 billion cubic feet (“Bcf”) per day and 3 Bcf of natural gas storage capacity.

Gross operating margin for the third quarter of 2007 decreased to $3.3 million from $6.2 million in the third quarter of 2006, primarily as a result of higher expenses associated with pipeline integrity work. DEP executives expect the higher operating costs to decline in the future.

Natural gas throughput volumes for the third quarter of 2007 were 761 billion Btus/day compared to 743 billion Btus/d for the third quarter of 2006. So they’re moving more gas per day than they were last year, attributed to expanded pipelines and processing.

Petrochemical Pipeline Services

This segment consists of two petrochemical pipeline systems, aggregating 284 miles of pipeline that transport propylene in Texas and Louisiana.

Gross operating margin decreased to $3.0 million in the third quarter of 2007 from $10.1 million in the third quarter of 2006. Approximately $6.1 million of this decrease is attributable to lower tariff rates period-to-period.

Prior to the DEP IPO, EPO (the owner of the general partner of DEP) paid the maximum tariff rate for the use of the Lou-Tex and Sabine Propylene Pipelines. In turn, EPO charged third parties a lower rate to ship volumes on these pipelines. The third party contracts were assigned to us at our IPO. Accordingly, DEP earns a lower transportation rate than that charged to EPO prior to February 2007. Petrochemical transportation volumes averaged 39,000 barrels per day (“BPD”) for the third quarter of 2007, compared to 38,000 BPD for the third quarter of 2006.

NGL Pipeline Services

This segment includes the partnership’s 286-mile, South Texas NGL Pipeline System that transports natural gas liquids (“NGLs”) from two fractionation facilities located in South Texas to Mont Belvieu, Texas. This system became operational in January 2007 and generated gross operating margin of $5.1 million during the third quarter of 2007 on 73,000 BPD of NGL transportation volumes. Volumes are based on NGL production from EPO’s Shoup and Armstrong fractionators.

The Corner Office Thoughts On The Quarter

In general I’m not too disappointed. They missed revenues by $0.01 per share. I don’t get too bent out of shape about one cent per share on a $25 stock.

Startup costs, insurance and conversion write off didn’t help, but these are not fundamental traits of the company, so I don’t see them affecting the long term potential of the company itself.

I like the developments in the natural gas pipeline and gathering systems that will come on as early as next quarter, and through next year that will add to revenues through the coming years.

Oil prices hit $91 per barrel in electronic trading today, and heating oil prices are high and headed higher going into winter.

They aren’t shy about increasing dividends, which is really a major reason I’m in the stock.

There is huge potential with the company, it’s well run by the likes of Dan Duncan who is no oil industry slouch.

I’ll continue to by DEP on dips, and look forward to what I foresee as strong fourth quarter results.

Tags: Dan Duncan | DEP | Duncan Energy Partners | EPD | EPO | natural gas pipelines | NGL storage | NGL transportation

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