Enable Midstream Partners, LP
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good day and welcome to the Enable Midstream Partners First Quarter 2018 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like turn the conference over to Enable’s Senior Director of Investor Relations, Mr. Matt Beasley. Please go ahead.

[Matt Beasley:]

Thank you and good morning, everyone. Presenting on this morning's call are Rod Sailor, our President and CEO; and John Laws, our Chief Financial Officer. We also have other members of the management team in the room today to answer your questions. Earlier this morning, we issued our earnings press release and filed our Form 10-Q with the SEC. Our earnings press release, Form 10-Q filing and the presentation that accompanies this call are all available in the Investor Relations section of our website. We will also be posting a replay of today’s call to the website. Today’s discussion will include forward-looking statements within the meaning of the securities laws. Actual results could differ materially from our projections and a discussion of factors that could cause actual results to differ from projections can be found in our SEC filings. We will also be referencing non-GAAP financial measures on today’s call, which we have reconciled to the nearest GAAP measures in the appendix to today’s presentation. We invite you to review the disclaimers in this presentation for both forward-looking statements and non-GAAP financial measures. With that, we’ll get started and I will turn the call over to Rod Sailor.

[Rod Sailor:]

Thanks, Matt. Good morning and thank you for joining us on today’s call. The first quarter of 2018 was another great quarter of performance for Enable. The partnership achieved record quarterly natural gas gathered and processed volumes, natural gas liquids production and intrastate transported volumes. These increased volumes contributed to a record quarterly adjusted EBITDA and DCF along with higher total revenues and gross margin for the quarter compared to the first quarter of 2017. With the strong first quarter performance and our expectations for continued strong business performance in 2018, we have updated our 2018 outlook, which John will discuss in further detail. In addition, we do not expect to access the equity markets in 2018. Turning to the next slide. We are a premier well-head end user midstream service provider and our integrated suite of assets are uniquely positioned to provide customers a suite of services across the midstream value chain. The scale and reach of our integrated gathering, processing, transportation and storage assets provide operating leverage and value as we support the significant drilling activity on and around our footprint and we continue to see developing market demand on and proximate to our pipeline systems. We have developed and will continue to develop creative market access solutions to support both the substantial supply growth of our producer customers and the demand needs of our end user customers. Moving to the next slide strong producer activity in the Anadarko Basin has resulted in a 25% increase in natural gas gathered volumes in the basin since the first quarter of 2016 and a 29% increase in natural gas processed volumes over the same period. Enable is uniquely positioned to serve the significant production growth and our project Wildcat remains on track to begin service in the second quarter of 2018 adding 400 million cubic feet per day of processing capacity and providing new markets for Anadarko Basin production. Just last week Continental announced that they were the producer that committed to the 400 million cubic feet per day of capacity on project Wildcat. We have been serving Continental's significant production growth in the Anadarko Basin for years and we are pleased to further strengthen our relationship and support Continental's future growth with this creative market access project. Finally, we have been awarded two long-term fee based gas gathering and processing contracts for multi-well infill projects in the SCOOP. As you can see on the next slide, we continue to see significant rig activity and production growth in the Ark-La-Tex Basin. Since the first quarter of 2016 gas gathered volumes have grown 109% as producers improve their completion techniques and drilled longer laterals. With the continued producer activity and strong well performance, gathered volumes on one of our Haynesville gathering systems are forecast to exceed MVC levels for the current annual measurement period, providing another opportunity for increased margin in the basin. The project to connect to the acquired Align Midstream assets is underway and once completed will enable further optimization of our midstream platform in the basin across both our gathering and processing and transportation and storage segments. Moving to the next slide. Enable’s transportation and storage assets provides significant fee based margin and are well-positioned to support natural gas demand growth in the Mid-Continent Gulf Coast and Southeast regions. In 2018, we have contracted to extended over 3,000 dekatherms per day of capacity on EGT. The CaSE projects, a 205,000 dekatherms per day firm transportation solution out of the Anadarko Basin remains on track to be fully in service by the fourth quarter of 2018. Also we continue to negotiate with potential shippers on the previously announced Line CP open season and plan to provide an update on the project by the second quarter of 2018’s earnings release. For MRT we plan to file a rate case on or before July 1st 2018 which will provide us the opportunity to adjust rates based on historical investments and updated contracted capacity levels. Our EOIT pipeline system continues to benefit from increased Anadarko production as well as its core position with Oklahoma utilities. When measured from the partnerships formation quarterly average deliveries on the system reached an all-time high in the first quarter of 2018, as a result of significant producer growth in the Anadarko Basin. We have also contracted 75,000 dekatherms per day of capacity on EOIT this year. Our Muskogee project remains on schedule to be in service by the end of 2018 and once online will provide OG&E 228,000 dekatherms per day of firm contracted transportation service for natural gas-fired electric generation. I will now turn the call over to John to further discuss our first quarter operational and financial results as well as our updated 2018 outlook.

[John Laws:]

Thank you, Rob and good morning everyone. I will cover a few of our key operational and financial metrics for the quarter. As always, you can find a more detailed and comprehensive overview of our financial and operational results in our first quarter earnings release and in our 10-Q both of which were released earlier this morning. Turning to our operational performance slide, the activity of our customers in the Anadarko and Ark-La-Tex basins continue to drive growth in our gathering and processing segment. As you can see we had a 30% increase in total natural gas gathered volumes and a 19% increase in total natural gas processed volumes in the first quarter of 2018 compared to the first quarter of 2017. We also saw increases in our crude oil gathered volumes for the first quarter of 2018 compared to the first quarter of 2017, primarily driven by several multi well pads coming online on our Williston Basin gathering systems and the expansion of our Bear Den system. In our transportation storage segment, the increase in our overall transportation volumes for the first quarter of 2018 was primarily driven by increased average deliveries on our intrastate pipeline system in Oklahoma, as a result of increased supply from the Anadarko Basin. Moving to our financial results on the next slide. Our adjusted EBITDA increased by $36 million to $257 million for the first quarter of 2018. The higher adjusted EBITDA was driven by a higher gross margin after adjusting for non-cash items due to higher natural gas and crude oil volumes as discussed on the previous slide and higher transported volumes attributable to higher off system, power plant and industrial deliveries and higher intrastate average deliveries. These margin increases were partially offset by higher O&M and G&A expenses. Distributable cash flow increased by $25 million to $196 million in the first quarter of 2018, due to higher adjusted EBITDA partially offset by higher adjusted interest expense associated with a higher outstanding debt balance and higher interest rates and certain amounts paid pursuant to the partnerships long-term employee incentive program. Our net income measures decreased for the first quarter of 2018 when compared to 2017 primarily due to a $21 million gain on derivative activity that was recognized in the first quarter of 2017, higher depreciation and amortization expense and higher O&M and G&A expenses in the first quarter of 2018. After considering the distributions declared, Enable generated a distribution coverage ratio of 1.42 times for the first quarter. We remain committed to maintaining our investment grade credit metrics which are supported by the continued volumetric growth in our gathering and processing business and from firm fee based and minimum volume commitment contracts in both of our business segments. To that end, we ended the quarter with a total debt to adjusted EBITDA metric of 3.8 times and significant liquidity under our revolver. Also on April 6, 2018 we amended and restated our $1.75 billion revolving credit facility, extending the maturity date from June of 2020 to April of 2023. Turning to the next section, as many of you know, on March 15th the FERC announced that it would revise its 2005 policy statement for recovery of income tax cost to no longer allow pipelines organized as MLPs to recover an income tax allowance in their cost of service rates. Enable and a number of peers and industry associations have filed requests for clarification and if necessary rehearing of FERC’s revised policy statement. While we don't expect any near-term impact, I thought it might be helpful to give you an overview of the areas of our business subject to FERC rate jurisdiction. First I want to remind everyone that 62% of our overall gross margin in 2017 was derived from our gathering and processing segment. Our natural gas gathering and processing business is by far the largest contributor in this segment and is not subject to FERC rate jurisdiction. Our water gathering business in the Williston Basin is also not subject to FERC rate jurisdiction. On a combined basis these two businesses contributed 99% of our gathering and processing revenues in 2017. For our Williston crude gathering business approximately 99% of crude gathering revenues in 2017 were derived from committed rates under long term contracts with a volume weighted average remaining contract term of approximately 12 years. These contracts are not expected to be impacted by the FERC policy revision. Turning to the transportation and storage segment, I’ll discuss each of our assets. Beginning with the EOIT its rates are largely market based rates and we expect no impact to these rates. The only non-market based EOIT rates subject to FERC jurisdiction our rates for EOIT’s interstate transportation services that contributed approximately 2% of the transportation and storage segments revenues in 2017. In any event EOIT does not anticipate any impact to these revenues prior to enable submitting its next EOIT rate filing on or before February of 2021. As it relates to MRT Enable plans to file a rate case on or before July 1. To that end I will not get into the specifics of the filing, but I will note that we plan to file for an expected cost of service in the rate case that would equate to revenues that are no less than the level of revenues MRT received for gas transportation and storage services in 2017. Moving to EGT, approximately 62% of EGT’s contracted transportation capacity and 100% of EGT’s storage capacity was contracted under negotiated rate agreements. The rates under those contracts are not expected to be impacted through the term of those agreements. In addition, 23% of EGT’s contracted transportation capacity was contracted under discounted rate agreements. The revenues from these contracts would only be impacted to the extent a change in EGT’s rates fall beneath the discounted rates. At this point in time we are not able to predict when or if EGT will be required to adjust its cost to service rates. We believe that if EGT was required to undergo a review of its rates, it seems unlikely that any such review would be completed much earlier than the second half of 2019 and any new rates would only be effective from the date of a final order. For our SESH joint venture, approximately 89% of SESH’s total contracted capacity as of December 31, 2017 was contracted under long-term negotiated rate agreements. These contracts are not expected to be impacted by the FERC policy revision. In summary, while this issue is not settled, I would like to underscore that we expect no near-term impact as a result of the revised policy statement. Now turning to our outlook. As we just shared, we had a strong first quarter. Given these results and our view for the balance of 2018, I'm pleased to share our updated outlook. I’ll start with the key operational metrics. As a result of the strong volume growth in the Haynesville and Cotton Valley plays, we are updating our range for 2018 Ark-La-Tex natural gas gathered volumes to 1.6 TBtu per day to 1.9 TBtu per day and there are no changes for the natural gas gathered volumes for the Anadarko or Arkoma basins. With this update the total gathered volumes are now expected to be between 4.1 TBtu per day to 4.8 TBtu per day and there is no change for the natural gas processed volumes. In the Williston Basin we are updating the outlook for crude oil gathered volumes to be between 28,000 barrels and 34,000 barrels per day to reflect updated well completion timing. For the interstate firm contracted capacity, we've updated the outlook to be between 5.6 billion cubic feet per day and 6.0 billion cubic feet per day which reflects the new transportation contracts that Rod discussed earlier. In terms of expansion capital we have updated our range to be $475 million to $625 million. In addition, we have updated our 2018 commodity price outlook taking into account both current market expectations and Enable’s forward view for commodity prices. Considering all these changes, we now expect our net income attributable to common units to be between $375 million to $445 million or adjusted EBITDA to be between $975 million and $1.05 billion and our DCF to be between $675 million and $735 million; all while maintaining a distribution coverage ratio between 1.2 times and 1.35 times and of course maintaining our total debt to adjusted EBITDA target of plus or minus four times. Lastly, and as Rod mentioned in his remarks, at this time we have now plan to access the equity markets in 2018. Moving to the final slide, we continue to deliver on our key priorities for commercial, operational and financial excellence that we set out for the year on our last call. We continue to win new gathering and processing and transportation contracts in 2018. Our volumes continue to grow as we set new records in the first quarter for natural gas gathered, processed and intrastate transported volumes. All of our major 2018 expansion projects remain on schedule and on budget. Our trend of solid financial performance continued in the first quarter and this continued business performance resulted in the new outlook that I just shared. We are excited to continue executing on our plans and I look forward to sharing more of our successes with you as we move through the year. With that, we'll now open the call up for your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeremy Tonet with JPMorgan. Please go ahead.

[Jeremy Tonet:]

Good morning.

[Rod Sailor:]

Hey. Good morning, Jeremy.

[Jeremy Tonet:]

Thanks. Just want to start-off with the Haynesville MVC as you noted there and it seems quite encouraging that it's going to be above the levels there. I was just wondering if you're in a position where you can provide a little bit more color as far as kind of the materiality of this contract relative to the whole MVC gap that you guys had discussed previously and also for the other contracts, is there anything you can share there as far as kind of activity picking up and closing the GAAP on the MVCs, any color would be great.

[Rod Sailor:]

Yeah. Thank, Jeremy. This is John. I'll take that and really we're not able to share a lot of further granularity and around that as you think we've got just a couple of producers behind those contracts on a minimum volume commitments in the Ark-La-Tex, as you noted and as we shared, we are pleased to see that on one of those contracts we have exceeded the minimum volume commitment level. I will say generally across both of those systems and across the contracts there we're seeing continued growth and overall our expectations are consistent with what they have been is if not exceeded it a little bit in terms of what we said on our last call and calls prior to that with the sustained level of activity that we're seeing on those systems, we weren't too far out on the skinny of the branch to say that we saw the MVCs being met or exceeded and now we've seen that here on one of the contracts.

[Jeremy Tonet:]

Great, thanks. And then turning over to the Oklahoma Interstate, it seems like the results really picked up nicely there and I'm just wondering you know how much more capacity is there for upside in that part of your business?

[Rod Sailor:]

Yeah. Well, we continue to build out that system to accommodate the volumetric growth that we have. And as you know we'll have Wildcat, that's expected to come online later this year which will unload effectively $400 million a day off of our intrastate system and to some degree our interstate system but will continue to fill that back up as we grow volumes on the core systems and we've got our CaSE project coming online which is also an expansion in part of the EOIT as well as EGT. And so we'll see some growth there. So we continue to make investments in expanding the capacity of the system, managing the capacity of the system and if we can accommodate all the growth that we're expecting there.

[Jeremy Tonet:]

Great, thanks for that. One last one, good to see the guidance ticking up here and I was just curious what we can glean from that, historically when you guys have been pacing above your guidance, it kind of didn't seem to raise guidance this early in the year. So it seems like this is a very positive indication here that just one quarter in the gate, you’re lifting this way. Any other thoughts you can provide as far as your comfort level of how things are going across the year and also the coverage 135 there is quite robust and if you can could just refresh us as far as your philosophy with regards to what's the right level of coverage for the partnership and balancing that against self-funding and growth.

[Rod Sailor:]

Yeah. This is Rod. Jeremy, well first off, I think the raising of our guidance just shows you the confidence we have and how we think that 2018 is going to play out. We clearly had a very strong first quarter and feel very good about the way the year is going to continue to play out and so you should again take raising guidance as the company is feeling very good about 2018. I think nothing has really changed in our thinking around coverage. We think right now the best use of cash is to put it back into the business, continue to try to self-fund as much as we can. With that increased coverage, there is still a lot of uncertainty around capital coming in to the midstream space in general and some questions around overhang on our units. And again, I think John's done a great job of managing the balance sheet. We've got a very strong balance sheet and growing coverage, and I think that puts us in as good a position as anybody in our space as we continue to win new business to be able to effectively fund those projects.

[Jeremy Tonet:]

Great. Thanks for that. That's all helpful. I’ll stop there.

[Rod Sailor:]

Thank you.

[Operator:]

Our next question comes from Dennis Coleman with Bank of America Merrill Lynch. Please go ahead.

[Dennis Coleman:]

Good morning. Thank you.

[Rod Sailor:]

Good morning, Dennis.

[Dennis Coleman:]

A couple from me. With regard to the guidance, you bumped up the CapEx a little bit as well. I wonder if you might talk about how that might impact CapEx say out into the out-years 2019 and 2020 say in? And how we should think about that – you've talked about projects on the horizon, but anything you can add there?

[Rod Sailor:]

Yeah, I don't think we want to go past the guidance that we've already put out. Again I think that now as we ended 2017 on a very strong note, 2018 has as it started on an even stronger note. We're very bullish on the trajectory of the business, and I think we indicated that with today’s guidance. But I'd hate to point anything much past our guidance range there. I do think that we've continued to show our ability to win not only our fair share if not more of the acreage dedications and opportunities on the gathering and processing side. But as you know we've continued to find I think some quality returning projects on the transportation storage side and we don't see that lighting up.

[Dennis Coleman:]

Okay. Thanks for that. And I guess just to ask you know always a difficult topic to comment on, but quite a lot of big news at CenterPoint and you mentioned a bit of overhang on the units in staying away from the equity market. Any discussions or further comments that you can share with your discussions with CenterPoint?

[Rod Sailor:]

No, not really. I don't think anything has really changed from what we have said and they have said. They have their earnings call I believe on Friday, but I think if you read or participated in their call after their announcement around their recently announced acquisition, nothing has changed in their thinking behind their Enable investment. And so that's really all we can comment on is what's been said publicly by them and by us.

[Dennis Coleman:]

Sure. No, I know it's a difficult one and just wanted to ask you that. And then finally, so you talked about…

[Rod Sailor:]

I appreciate the question and I hope you appreciate the non-answer.

[Dennis Coleman:]

No, I do, I do. But just given the news that it was worth another shot. So and then just lastly, you talked about the new gas gathering contracts in the SCOOP STACK, given that you're not saying who they're with, I guess, it's not perhaps new customers, anything you can say about or characterize those contracts or the producers?

[Rod Sailor:]

No. I mean, I would just say I think that again we can't talk about the name, but they are quality producers. And I think it shows the power of our reach and scale in the basin as our ability to attract, I think, some quality names and quality contracts on to our system. Very pleased with the work the team is doing around that. Again as I think we have – we have – we do have a tremendous system in the Anadarko that’s not only satisfying our current customer set, but it’s very attractive to other potential customers out there. And again, I think one of the strengths of Enable and we've said this before is not only are our gathering reach our advantage in processing capacity, but the fact that you know we have a significant transportation network and our ability to gather gas at the wellhead and get it to the end user, I think is unsurpassed in that region.

[Dennis Coleman:]

Okay. Yeah. That's clear and thanks very much.

[Rod Sailor:]

Thank you.

[Operator:]

Our next question comes from Nick Raza with Citi. Please go ahead.

[Nick Raza:]

Thank you. Just a couple of follow-up questions. Most of my questions were answered, but in terms of your case project, could you remind us we know that by the end of the year it's supposed to be about $205,000 a day contracted but could you remind us how much you guys are contracted maybe over the next two quarters?

[Rod Sailor:]

Nick, that's ramping up through the year. It'll be smaller amounts early on. I was trying to recall if we've exactly disclosed what those ramp-ups are. I don't I don't think that we have but fair to say it's going to be a little bit more back end loaded than front end loaded, Nick.

[Nick Raza:]

Okay. Is there is there more capacity that you could sell on that project or even on wildcatter or they’re fully contracted?

[Rod Sailor:]

I think there – the way that we would encourage you to think about it is capacity on the systems and we've alluded to that and certainly been successful in some of the other contracts that we've signed here that we've talked about the 300,000 a day that we added here. So there continues to be opportunities for expansion and I think when we talked about Wildcat initially, we said there could be some opportunities to do more than what we had put out initially, but at this point in time there's nothing further to discuss other than what we've announced, but we believe there's more capacity to do more things.

[Nick Raza:]

Fair enough. That's all I have. Thank you.

[Operator:]

Our next question comes from that Ned Baramov with Wells Fargo. Please go ahead.

[Ned Baramov:]

Good morning. A follow-up on the two new SCOOP gathering contracts, I guess, at a very high level how do the terms of these contracts compare to your current gathering agreements that you have in the SCOOP?

[Rod Sailor:]

Good morning, Ned. This is John. Generally we don't disclose the specifics of the fees or structures, but we can tell you that these are consistent with our overall contracting philosophy and that we do seek to bring on new gas to the system under fee based arrangements where that’s possible and these are new fee based agreements and at economic levels that we believe are attractive to Enable.

[Ned Baramov:]

Got it. And then another question on potential M&A and maybe any comments around multiples for assets in and around your footprint in the Haynesville, I believe, one of your producers is looking to monetize some acreage along with the midstream assets around it. So anything in terms of comments from you would be – would be great.

[Rod Sailor:]

Yeah. I would just say without reference to any one specific area. I mean we've continued to see relatively high multiples for asset transactions, continue I think to see a -- to be a bit disappointed in the – and again in the back fact that again financing costs haven't gone down, risk on some of these assets has only increased and multiples have stayed very high. So we really haven't seen much pullback in at least the expected multiple for asset acquisitions.

[Ned Baramov:]

Okay. And then a couple of housekeeping items if I may, so on the Bakken guidance I think you lowered volume -- your volume outlook by about 16% at the midpoint. Could you maybe just provide some details on producer activity and what drove the reduction in your volume forecast there?

[Rod Sailor:]

Sure Ned, I think the real gist of that is what we said on the call is that [indiscernible] just some timing of the development there and when we'll be bringing those wells online and there is no real broader change otherwise to think about it. It's just a timing perspective that we've layered in that update to the guidance.

[Ned Baramov:]

Understood. And then on Haynesville volumes relative to NBCs I think you indicated in order to keep the NBCs or sorry that the NBCs would be exceeded in the current measurement period, so does that mean fiscal 2018 or I guess what I'm asking is when does the measurement period end?

[Rod Sailor:]

Yeah. I think what we're trying to frame there little bit is there are some contract periods as opposed to fiscal year is really the delineation distinction that we were drawn there and we've also said in the past that we do have contract anniversaries in and around the third quarter that come up on our MVC contracts and so that's how we frame it for you to think about.

[Ned Baramov:]

Got it. Thank you.

[Operator:]

[Operator Instructions] It appears there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sailor for any closing remarks.

[Rod Sailor:]

Well, thank you. Thank you all very much for joining us on the call today. I do want to recognize all our employees for their hard work and dedication. Again thanking everybody for your interest in Enable. Please have a safe day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.