Enable Midstream Partners, LP
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Welcome to the Enable Midstream Partners First Quarter 2016 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode. And the floor will be opened for questions following the presentation. [Operator Instructions] Today’s call is being recorded [Operator Instructions]. It is now my pleasure to turn the floor over to Enable’s Senior Director of Investor Relations, Mr. Matt Beasley. Sir, you may begin.

[Matt Beasley:]

Thanks, Tanisha. Good morning and welcome to Enable Midstream Partners’ first quarter 2016 earnings call. I’m joined on today’s call by our President and CEO, Rod Sailor; and our Chief Financial Officer, John Laws; as well as other members of management. Statements made during this call that include Enable Midstream’s expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Act of 1933 and 1934. Actual results could differ materially from our projections, and the discussion of factors that could cause actual results to differ from our projections can be found in our SEC filings. Also, please see the appendix of the presentation for a reconciliation of non-GAAP financial measures. With that, we’ll get started, and I’ll turn the call over to Rod Sailor.

[Rodney Sailor:]

Thanks, Matt. Good morning and thank you for joining us on our first quarter call. Despite a very challenging commodity environment Enable posted a very solid first quarter for 2016. Compared to first quarter of 2015 we posted a 4% increase in adjusted EBITDA and a 20% increase in distributable cash flow. We saw volumes increase across our processing facilities and our crude gathering systems in the first quarter of 2016, driven by natural gas volume growth in the SCOOP and STACK plays and continued connection of new wells to our crude gathering system in the Bakken. We also recently announced our first quarter 2016 cash distribution of $31.8 per unit on all our outstanding common and subordinated units and we also announced a prorated first quarter cash distribution of $29.17 per unit on the partnership Series A Preferred Units. The common and subordinated distribution remains unchanged from the previous quarter. Turning to our next slide; we remain financially disciplined during this volatile commodity environment and continue to prioritize both our leverage metrics and our coverage ratio. In the first quarter we took steps to strengthen our balance sheet to the issuance of 363 million of Series A Preferred Units and we have ample liquidity to meet our 2016 objectives without needing to access the capital markets. Also like to point out we continue to take cost out of the business much of our integration work is behind us and we are also realizing benefits from the 2015 restructuring, reorganization and reduction – workforce reduction that we took. Both of which are reflected in lower O&M and G&A costs for the quarter. We are also high grading our capital spending to ensure that we are deploying our capital efficiently. With these steps Enable continues to be well positioned to navigate today's challenging market conditions. Our diversified business mix contributes to margin profile that is expected to be 96% fee-based or hedged in 2016 and our super-header processing system is uniquely positioned to serve the SCOOP and STACK plays, which have been recognized as two of the top plays in the country by producers, analysts, and investors. Moving to our next slide; in our Gathering and Processing segment 29 rigs are currently drilling wells that are contractually dedicated to Enable and customer activity levels remain stable on our STACK, SCOOP and Ark-La-Tex footprint compared to the fourth quarter 2015. And this compares very favorably when you think about the 35% decline in total U.S. rig count over that same period. Top Enable customers, Continental Resources and XTO Energy are the top two producers by active rig count in the continental United States and approximately 7% of the total U.S. rig count is currently contractually dedicated to Enable systems. The 200 million cubic feet per day Bradley II processing plant is scheduled to begin service in the second quarter of 2016 and we continue to connect new wells under our crude oil gathering systems located in the Williston Basin. Our Transportation and Storage business continues to provide margin certainty through firm, fee-based contracts with high quality customers that include affiliates of major utilities such as the CenterPoint Energy, Laclede Gas Company, OGE Energy, AEP and Entergy. We continue to believe our Transportation and Storage business is well positioned to transport natural gas from the Texas Panhandle and Western Oklahoma to downstream markets. As an example EGT’s previously announced Line AD expansion is expected to be in service during the second quarter of 2017. I’d now like to turn the call over to John to discuss our first quarter results.

[John Laws:]

Thank you, Rod. Turning to operating statistics, overall gathered volumes decreased 4% in the first quarter of 2016 compared to the first quarter of 2015. As expected, we continue to see decreases in gathered volumes in Ark-La-Tex and Arkoma basins, which were partially offset by overall gathered volumes in the Anadarko basin. From a gross margin perspective and as a reminder much of the decrease in the Ark-La-Tex and Arkoma basins is expected to be offset by payments under minimum volume commitment contracts. Processed volumes in NGL production increased 6% and 13% respectively for the first quarter 2016, compared to the first quarter 2015. This growth is associated with the continued activity by our producer customers in the SCOOP, STACK, and Granite Wash plays at the Anadarko basin. Crude oil gathered volumes on our two Williston basin systems increased by over 22,000 barrels per day for the first quarter 2016 compared to the first quarter 2015, which is also an increase over the levels reported for the fourth quarter of 2015. These increases were associated with the additional capacity made available on our system following the completion of certain construction activity. Turning to our Transportation and Storage segment, the total transportation volumes in interstate firm contracted capacity decreased by 11% and 8% respectively in the first quarter 2016 compared to the first quarter of 2015. The decrease in total transportation volumes was result of lower off-system, interstate volumes primarily due to the relatively mild winter. The change in intrastate transported volumes for the first quarter of 2016 compared to the first quarter of 2015 is primarily related to the completion of EGT, Bradley Lateral which was completed in the fourth quarter of 2015 is now transporting volumes under firm fee-based contracts that were previously served on an interruptible basis by our intrastate transmission system. Finally, the interstate firm contracted capacity in the first quarter 2016 became relative to the first quarter of 2015 was a result of the off-system contract expirations on EGT that we have disclosed previously. So if you were to compare the interstate firm contracted capacity in the first quarter 2016 to the fourth quarter 2015 you would actually see an increase in the interstate firm contracted capacity which again is largely attributable to the commencement of the contract associated with the Bradley Lateral. Moving on to our first quarter financial results, gross margin was $314 million for the first quarter 2016, which is a decrease of $10 million or 3% compared to the first quarter 2015. The decrease in Gathering and Processing margin was primarily related to lower commodity prices, lower processed volumes in the Ark-La-Tex basin and a decrease in unrealized gain on derivatives, which were partially offset by increased fees associated with gathered natural gas volumes in the Anadarko basin, as well as increased crude volumes that I mentioned in the Williston Basin and a $9 million benefit was associated with an annual fuel rate redetermination on our Anadarko gathering systems. In the Transportation and Storage segment, the gross margin change was primarily a result of higher margins associated with unrealized gains on natural gas derivatives and an increased contribution from our on-system optimization activities. These increases were partially offset by lower firm transportation revenues and decreased margins from off-system transportation revenues that I mentioned earlier related to the somewhat mild winter. Our O&M and G&A expenses decreased by $15 million compared to the first quarter of 2015. As Rod mentioned earlier, the decrease in these expenses was primarily a result of lower favorable cost, lower integration cost, and lower severance charges related to the 2015 workforce reduction. Adjusted EBITDA was $215 million for the quarter which is an increase of $8 million compared to the first quarter 2015. The increase in adjusted EBITDA was primarily a result of the lower O&M and G&A expenses and higher distributions from SESH which will partially offset by the lower gross margin items that I mentioned earlier. Correspondingly, distributable cash flow for the first quarter was $174 million, which is an increase of $29 million compared to the first quarter of 2015. In addition to the higher adjusted EBITDA items that I mentioned above, lower maintenance capital expenditures also contributed to the increase quarter-over-quarter. Our expansion capital expenditures were $117 million for the quarter and that compared to $200 million for the first quarter of 2015. Finally, I would like to close with this. We are reaffirming our 2016 outlook that we provided on our fourth quarter 2015 earnings release. The details of the outlook can be found in the appendix of this calls presentation. I will now turn the call back over to Rod for his closing remarks.

[Rodney Sailor:]

Thanks, John. Enable has a diversified business mix with significant fee-based cash flows and was able to achieve strong financial results in the quarter were crude prices hit a 13-year low, while commodity prices have stabilized over the past few weeks, headwinds still exist in the near-term as producers continue to evaluate drilling plans in a weak commodity environment. Our super-header processing system is uniquely positioned to serve customers in the stable SCOOP and STACK plays and we remained focused on being financially disciplined where every dollar we spend – with every dollar we spend as we monitor customer activity across our entire footprint. Finally, we will continue to prioritize our balance sheet and our distribution coverage. We believe that financial strength is a competitive advantage in today's challenging market environment. I would like to now open the call up to your questions.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] And our first question is coming from Ali Agha with SunTrust. Please go ahead. Your line is open.

[Ali Agha:]

Thank you, good morning.

[Rodney Sailor:]

Good morning.

[John Laws:]

Good morning.

[Ali Agha:]

First question, I wanted to get your prospective as you know CenterPoint obviously has announced the strategic review of that ownership, just wondering how involved in that process is the Enable management team and from the Enable prospective, management team perspective how do you see this process playing out and what impact it has for Enable overall from your perspective?

[Rodney Sailor:]

Well, again as we said was not a lot we can add to the public statements that have been made by our sponsor CenterPoint. We continue to deal with CenterPoint primarily at a Board level that’s where they represent their investment and again today it haven't been involved in any process. So I think you would need to direct any questions directly to the CenterPoint’s Investor Relations team.

[Ali Agha:]

Okay. So just to be clear so whatever they are doing, the Enable management team is not been consulted or involved in that process?

[Rodney Sailor:]

We are not currently working on or involved in any process.

[Ali Agha:]

Okay. And then secondly just to follow from your comments at the end, so as you are looking at the market over the next 12 months are you getting any signal or from our conversation with your customers producer activity et cetera, does that change your outlook versus where it was three months ago, is it better, worse, still the same. How would you categorize the outlook today versus three months ago?

[Rodney Sailor:]

Well, again I would say we’ve just come through some incredibly low crude oil prices. I think our customers are still working through what we think activity for the remainder of this year and into future year’s look like. Again, I would say I think we are all more optimistic today than we were in January when crude was at 26. I think we’re seeing some stability in prices I think that maybe changing producers outlook somewhat. Again, we reaffirmed our guidance. We had a very good first quarter, but again I think there is still a lot of unknowns in producer plans going forward. So I’m not sure was that fully answers your question and again I think we are cautiously optimistic. I think the thing that I’d like to leave you with is we kind of talked about a little bit on the call was – again we still are fairly stable rig count along our footprint, we think that we are well-positioned in the SCOOP and STACK plays and I think we will at sometime in the future and I don’t know that’s in the near future or later. We are going to see I think continued activity well results that we are seeing from producers look to be better than expected in those areas and so I think those are all positives.

[Ali Agha:]

Understood. Thank you.

[Operator:]

Thank you. And our next question comes from Neel Mitra with Tudor, Pickering. Please go ahead. Your line is open.

[Neel Mitra:]

Hi, good morning.

[Rodney Sailor:]

Good morning.

[John Laws:]

Hi, Neel.

[Neel Mitra:]

I had a question on the Transportation and Storage segment. Could you comment on when the major contract expirations are for your pipes and specifically with MRT? What the plan is if Laclede doesn't want to re-contract with you I guess in the 2017, 2018 timeframe?

[Rodney Sailor:]

You know I’ll talk a little bit about the contract expirations we have coming up on MRT [indiscernible] primarily we do have a few contracts with Laclede, the first expiry that we will be looking to work with Laclede on is the one that expires in 2017 and that’s about little under 20% of the total contracted demand on the MRT system.

[John Laws:]

As it relates to our plans for working with Laclede we continue to pursue and interface with them on a commercial basis regularly and we’ve got folks that speak with them readily - wouldn’t comment much beyond that as it relates to renegotiation activities or discussions.

[Neel Mitra:]

What would be the alternative if you were unable to re-contract with them? What would you do with pipe?

[Rodney Sailor:]

Well, again I think first and foremost we think we are still advantaged into that market. There are other players along that system that if we had the capacity that potentially could – we could re-contract there, so I think - and then also I’d say that parts of that system are bidirectional and there are ways we could potentially utilize that to move gas in a different direction. So we think that's still a very strategically placed piece of pie. As we think about gas flows coming both up from the Gulf and down from the East.

[Neel Mitra:]

Got it. And then, could you also comment on when the minimum volume commitments are rolling off? Are they specifically in the Haynesville and the Fayetteville or is any of that in the Anadarko Basin?

[Rodney Sailor:]

We have minimal volume commitments on our Bear Den system but we’re well above those levels on the crude side then primarily our minimum volume commitments are in the Ark-La-Tex and Oklahoma regions. In that Haynesville area, I think those being to roll-off late 2019 and are fully roll-off in 2021.

[Neel Mitra:]

Got it. And last question the commodity deck you’re using. I think is fairly similar to the one you used on the Q4 call. It seems like they’re below market prices now. Are you planning to remark those commodity curves or can you provide us a sensitivity on current prices?

[Rodney Sailor:]

We have - there is a sensitivity page in the appendix section on there. There is also a little profile on our hedge position so that that is in there, we’ll probably not sure that we’ll update prices given that we’ve given those price sensitivities. I’d also just add as we talked about the minimum volume commitments you know I would tell you a year ago that we saw really did have any rigs running in the Haynesville, right now I mean there are four rigs running in the Haynesville pointed towards our system. So again that is an area that continues to look like it's well-positioned for gas. Gas moving may be to the Gulf for any transport out.

[John Laws:]

Neel, just to round out on the commodity exposure, we have absorbed that our price deck is a little underneath the current marks, but again point back to that sensitivity there is not a lot of given how hedged we are. For 2016 there is not a lot of difference to our overall performance as it relates to the differences in the price deck that we see thus far any changes really going to be driven by volumetric increases or decreases.

[Neel Mitra:]

Is the way to look at it that it's just too early to tell what your producers are going to do based off of the recent commodity increases? So you guys are…

[John Laws:]

I think we set our guidance for 2016 in this environment and I think our view is that there is no basis for changing that at this particular point in time relative to where we were in February when we put out our guidance initially.

[Neel Mitra:]

And then just really quickly when do you plan to rollout 2017 guidance again?

[Rodney Sailor:]

Yes, I think that as we have said it will be I think later this year. I think we want to see – like to see some stability in prices and frankly I think producers have yet to go through their drilling plans for 2017. And so I think we will wait until we get some clarity around those two factors.

[Neel Mitra:]

Got it. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Jeremy Tonet with JP Morgan. Please go ahead. Your line is open.

[Jeremy Tonet:]

Thank you. Good morning.

[Rodney Sailor:]

Good morning, Jerermy.

[Jeremy Tonet:]

I was just hoping for the Line AD project if you might be able to share some more color with us there as far as interest and commitments to it or just any other thoughts you could share with us there?

[Rodney Sailor:]

Well, again that was our – kind of what we felt was the last open capacity out of sort of the Anadarko region, it was fully contracted and as we announced. And so really we think that once that comes into service in 2017 that you are going to have to look at another project to get gas out of the Anadarko, out of the SCOOP, STACK. It was a 175,000 dekatherms a day was the contracted amount. And again, we’ve announced what we call our case project is something that we talked about as a way maybe to move gas out of the STACK region. So again we think that we sort of – that project was the last capacity out of the area and so the activity we’re seeing there is going to have to be another residual gas line build. So I don’t know where that – Jeremy does that kind of….

[Jeremy Tonet:]

Yes, that’s helpful. Thank you. And then just wondering with the first quarter coming in strong as it did and looks like you’d be tracking towards the high end of your guidance and you have the Bradley plants that's coming online over the course of the year, and the strip being above where you guys have put your guidance for the beginning of the year. Just wondering is it fair to think that there is upside risk to the guidance at this point, just kind of being conservative and don't want to change it early in the year or did you expect kind of first quarter to be stronger and some volume roll offs over the course of the year. Could you help me think through…?

[Rodney Sailor:]

Yes. Look I appreciate the question. I think we had – I think what we should read into this quarter as we had a very strong first quarter. I mean there is seasonality to our business. The first quarter is always our strongest. As John mentioned, we were benefited by a couple of one-time items that helped us out on a cash flow perspective in the quarter. I just think we feel comfortable with our guidance and our guidance range and I wouldn't want to give the impression that something outside of that, because again I think there’s still three quarters to go. I think there’s still uncertainty in producer activities, we still see I think a weak gas strip. And so again I would just say that I think we feel very good about the quarter. We’re going to continue to focus on costs. Our anticipation is as we typically do, we’ll see a little more maintenance capital spend in the summer months, because the weather is better. We benefited in the first quarter with a little reduction in that, but we think we are on track for our guidance numbers across the Board. So, again I think we want to say much more than that. John, did you have anything you would like to add?

[John Laws:]

No, I think you covered it well and we would not Jeremy point you to extrapolating Q1 as reflection of the remainder of the three quarters of the year for some of the reasons that Rod mentioned generally the seasonality and some of the other one-time differences.

[Jeremy Tonet:]

In the Bradley plant that still looking for great ramp there is your expectation?

[Rodney Sailor:]

Yes, I think it will – we’ll try to fill it up as soon as it comes on as we typically do by backing off some of the current capacity we are utilizing in some of our other systems, we call that again I think one of the benefits that we bring to producers in the areas our super-header system and our ability to move molecules up and down the system. But again, we will utilize that as much as we can, because it’s our most efficient plant. I would also say that some of the well results that we see when some of these pads come on can largely almost fill up a planned when one comes on and they will then start to fall off, but again our volume forecast would tell you that we need – we are going to need that capacity and we’ll as we typically do we’ll fill that plant up, we’ll backload off some less efficient plants and then as volumes grow we’ll utilize all the plants along our system until the next processing plant needs to be built.

[Jeremy Tonet:]

That’s helpful. Thank you.

[Operator:]

Thank you. And we will go ahead and take our next question from Vimal Patel with RBC Capital Markets. Please go ahead. Your line is open.

[Vimal Patel:]

Hi, good morning and sorry if I missed this. But can you just provide more insight into the SESH distribution and just looks like in the past the revenue operating incomes have been pretty stable, but distribution was larger this quarter than we’ve seen in the past. And I was just wondering that was like an appropriate run rate to use going forward?

[John Laws:]

Again, I think the not one that we would also guiding to extrapolate one of the things we’ve done there with SESH and our partners were distributing the cash flow out of that business on a more real time basis. And so there was some benefit that we’ve seen in the first quarter as it relates to the change in the timing of distribution, so in another words we had our normal fourth quarter distribution that would have occurred there as well as couple of other months for January and February. So we are distributing on a monthly basis there now.

[Vimal Patel:]

Okay, got it. Thank you.

[Operator:]

Thank you. And we will go ahead and take our next question from Nick Raza with Citigroup. Please go ahead. Your line is open.

[Nick Raza:]

Thank you. Good morning guys.

[John Laws:]

Good morning.

[Nick Raza:]

So real quick, could you just provide us some update on any conversations that you guys have had with the rating agencies?

[John Laws:]

Yes, our conversations with the agencies were really most active around the time that we were placing the preferred, since than we’ve held some additional and incremental discussions with each of the agencies, but that really hasn’t been much intensity around those discussions and we think the forecast that we have – the numbers that we have were in good shape with the agencies as it relates to the current ratings that are out there.

[Nick Raza:]

Gotcha, fair enough. Just a real quick on the actual second plant coming online, you guys mentioned that you are going to fill that with the super-header system, so it assume that the utilization on all your processing capacity sort of drops to that 60% level it’s around 66%, 67% right now I guess?

[Rodney Sailor:]

Yes, I think it actually going to grow; it will be higher than that.

[Nick Raza:]

Okay, fair enough.

[Rodney Sailor:]

But again, that’s coming into an area where we are seeing pads coming on, so our anticipation is that you will see higher utilization across the system.

[Nick Raza:]

Okay, fair enough. I guess that’s all I had for now I guess. Thank you.

[John Laws:]

Thank you.

[Rodney Sailor:]

Thank you.

[Operator:]

Thank you. And our next question comes from Faisal Khan with Citigroup. Please go ahead. Your line is open.

[Faisal Khan:]

Sorry guys. I think Nick and I sort of hit the same button twice, but just – I’ll just ask one question if I can.

[Rodney Sailor:]

Sure.

[Faisal Khan:]

When you guys give the commodity price exposure and the sensitivity I just want to make sure I know you are hedged for this year, but if you were to on an unhedged basis sort of this 10% increase in natural gas and ethane prices. What would that do on an unhedged basis to EBITDA?

[John Laws:]

Well, I think ultimately it would depend on which commodities we were taking a look at, but if you are going back to – I think about the forecasted levels and we took a look at what a hypothetical decline would be for the next nine months on a 10% change. I think we decreased net income by $5 million for natural gas and $6 million for condensate and NGLs and that would be exclusive of the impact of hedges.

[Faisal Khan:]

Okay. And that said – you’re talking about the $5 million, you’re talking about quarter, year-over-year or you talking about your timing on a 10% basis?

[John Laws:]

Khan, it’s going to be for the balance of the year which is how we present our fee-based margin profile.

[Faisal Khan:]

Okay. I understand. And then in terms of ethane, how much ethane are you rejecting across your system right now?

[John Laws:]

We haven’t disclose that number out there just yet, but I think it’s safe to say, we put out that our average inlet stream is comprised of about 45% ethane and if you were to make some extrapolations and calculations there around plant recoveries and ultimate efficiencies there. I think you could get to a number that was not – that wouldn’t have us quite doubling our overall production, but in terms of NGLs, because you have some other efficiency and pick up from propane recoveries that also improved if you were get into ethane recovery environment, but it’s a substantial amount, we just haven’t provided any direct guidance on that.

[Faisal Khan:]

Okay. And the reason why? I mean is it or is it just because there something with the contracts that would prohibit you from disclosing that number or is it…

[John Laws:]

No, I just think it’s been [one we’re here to four] we haven’t seen a lot of interest in the question and then secondly would be our view for 2016 was such that we really wouldn’t see recovery this year – is that the earliest point which we would see recovery would be sometime in the later half of 2017.

[Faisal Khan:]

Okay. And then if you were to say in terms of the location where ethane is being rejected, is it mostly – I think it’s all in the Mid-Continent areas, is that right?

[John Laws:]

That’s right. I mean that’s where we’ve got the most flexibility in our systems and in our plans to be able to reject. And so I think if you just took a step back and took a look at where you might expect to see recovery take place across the country or you’ll see it first coming back in the Gulf and then progressing backup further North through the Mid-Con and so we would not be – not likely to be one of the first ones to in terms of our area of the country is to back into ethylene rejection or ethylene recovery excuse me.

[Faisal Khan:]

And the question on the Laclede contract I mean my understanding is that your pipeline sort of feeds into that service carry with sort of multiple interconnections, so I’m just trying to understand like – is that sort of supply outlet into that territory have been in place for a significant period of time?

[John Laws:]

That’s right. Well over 85 years and our view of the pipeline and how well it’s integrated into Laclede service territory is such that we feel like we provided really attractive rates to that service area and you really think about what will be driving some of those questions, it maybe some of the announcements that Laclede has made around potentially pursuing our own pipeline alternative as a supply diversity project. Again, we see Enable’s position particularly as far as MRT being very well situated from a competitive perspective.

[Faisal Khan:]

Got it. Great thanks for the time.

[Operator:]

Thank you. And it does appear there are no further questions at this time. I will now hand the floor back over to Rod Sailor for any additional or closing remarks.

[Rodney Sailor:]

Thank you. And in closing, I would like to thank our employees for their continued focus on safety and cost discipline in this environment. I would like to thank everybody on the call for your interest in Enable and have a safe day.

[Operator:]

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time. And have a wonderful day.