Enable Midstream Partners, LP
Q4 2016 Earnings Call Transcript

Published: 21 Feb 2017

[Operator:]

Welcome to the Enable Midstream Partners Fourth Quarter and Full Year 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 [ph]. Good morning and welcome to Enable Midstream Partners’ fourth quarter 2016 earnings call. I am 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. This morning we issued our earnings press release and filed our Form 10-K with the SEC. Our earnings press release, Form 10-K filing and the presentation that accompanies this call are all available in the Investor Relations section of our website. We'll also be posting a replay of today's call through our 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 the discussion of factors that could cause actual results to differ from our projections can be found in our SEC filings. We'll also be referencing non-GAAP financial measures on today's call, which we've reconciled to the newest GAAP measures in the appendix of today's presentation. We invite you to review the disclaimers of forward-looking statements and non-GAAP financial measures included in today's presentation. With that, we'll get started and I'll turn the call over to Rod Sailor.

[Rod Sailor:]

Thank you, Matt. Good morning and thank you all for joining us on today's call. Enable Midstream ended 2016 with another strong quarter of performance. Our fourth quarter results included volume increases across both our transportation, storage and gathering and processing segments and a reduction in O&M and G&A expenses. Net income attributable to limited partners, adjusted EBITDA and distributable cash flow, all increased for the quarter compared to fourth quarter 2015. Turning to Slide 5, I'm proud to announce that we achieved our objectives for 2016 despite a challenging market backdrop, exceeding previously announced guidance for adjusted EBITDA and distributable cash flow. As a result, we achieved the highest distributable cash flow since Enable's formation resulting in a distribution coverage ratio of 1.18 times for 2016. In a year where crude had a 12-year low, Enable remained financially disciplined by focusing on reducing costs, deploying capital efficiently; and accessing the capital markets opportunistically. Our focus on cost reduction resulted in a $57 million decrease of O&M and G&A expenses, while our strong financial results, efficient capital deployment and demonstrated capital market access resulted in a total debt to adjusted EBITDA of less than 3.5 times and over $1.1 billion of available revolver capacity as of December 31, 2016. Finally, our 2016 gross margin profile was 87% fee-based with significant firm fee-based margin in both our transportation, storage and gathering and processing segments. Turning to Slide 6, details of commercial successes we achieved in the fourth quarter that further strengthened our commercial and financial position. These successes included a new 10-year fee-based gathering and processing contract in the STACK with one of the plays top producers, a new 20-year firm transportation service agreement with Oklahoma Gas & Electric. These commercial successes contributed to increased fee-based margin, reduced commodity exposure, extended contract lives and continued capital deployment, returns consistent with the Enables objectives. Slide 7 shows our continued producer activity in the Anadarko and Ark-La-Tex basins, has contributed to gathering, processing and transportation volume growth. Producer activity remained strong with 22 in rigs currently drilling wells dedicated to Enable in the Anadarko basin and 10 rigs drilling wells dedicated to Enable in the Ark-La-Tex basin. In the Anadarko basin, we saw this activity contribute to a 6% increase in gathered volume and a 9% increase in processed volume for the quarter compared to fourth quarter 2015. In the Ark-La-Tex basin, we saw a 16% increase in gathered volume for the quarter compared to fourth quarter of 2015. This gathered and processed volume growth contributed to 5% growth in transportation volume, we saw over the quarter compared to fourth of 2015. I'll now turn the call over the John to further discuss fourth quarter operational and financial results.

[John Laws:]

Thanks, Rod, and good morning everyone. As Rod mentioned in his remarks, Enable delivered a strong year of performance in 2016. I'll cover a few of our key metrics on Slide 9 and 10, as we take a look at our financial results for the fourth quarter of 2016. On Slide 9, gross margin was $314 million for the fourth quarter of 2016, a decrease of $11 million when compared to the fourth quarter of 2015. We saw increases in our gathering and processing segments associated with higher gathered and processed volume in the Anadarko basin. Higher commodity prices overall and increased rates on fee-based gathering services. These increases were more than offset by a decrease in gross margin associated with system management activity and the transportation in storage segment and non-cash losses associated with changes in fair value of commodity due evidence across both of our segments. O&M and G&A expenses decreased by $9 million compared to the fourth quarter of 2015. The decrease in these expenses was primarily a result of lower integration and other contract services cost, lower materials and supplies costs and a reduction in payroll related to cost due to work force reductions announced in 2015. Additionally, one-time project reimbursement expenses recognized in the fourth quarter of 2015 had now comparable expenses in the fourth quarter of 2016. These decreases were partially offset by an increase in payroll related cost due to an increase in short-term incentive compensation and an increase in losses on the disposition of assets. Turning to Slide 10, net income attributable to common and subordinated units was $59 million for the fourth quarter of 2016, a decrease of $6 million when compared to fourth quarter of 2015. While we did see lower O&M and G&A expenses and lower impairments for the quarter, these items were more than offset by a decrease in gross margin and increase in depreciation and amortization expense and distributions on the Series A Preferred Units, which were not outstanding in the fourth quarter of 2015. Adjusted EBITDA for the quarter was $218 million, an increase of $46 million compared to the fourth quarter of 2015. The key drivers of the increase in adjusted EBITDA were lower O&M and G&A expenses and higher gathering and processing gross margins. Both of these line items included non-cash losses for the fourth quarter 2016, which are backed out in the calculation of adjusted EBITDA. Distributable cash flow for the quarter was 132 million, an increase of 32 million compared to the fourth quarter of 2015, which was driven by the higher adjusted EBITDA offset by increases in maintenance capital expenditures, adjusted interest expense and again distributions for the Series A Preferred Units. Expansion capital expenditure was $44 million for the quarter compared to 168 million for the fourth quarter 2015. The higher levels of expansion capital expenditures in the fourth quarter of 2015 were primarily related to the Bradley II and Wildhorse Plant, the Bradley Lateral project and the Bear Den and Nesson crude oil gathering systems and certain other gathering expansion projects. As we stated previously, these investments enhanced the capacity of our system and positioned Enable well to benefit from operating leverage as volumes grow in the future. Before I turn the call back over to Rod, for his closing remarks, I wanted to take the moment and share with you some of my prospective on 2016. As we've discussed the partnership performed incredibly well, given the backdrop of what began as a very challenging year. 2016 also saw the partnership adhered to its strategy and policy, and now we continue to make investments in areas that we believe will provide our investors with an attractive rate of return in each of our business segments, and that we took tangible steps forward to preserve the quality of our balance sheet, including the formation of nearly $500 million in equity capital over the course of the year. Our business performance and these actions demonstrate our commitment to investment grade credit metrics and distribution coverage that continues to support our current level of distribution. As we look forward to the balance of 2017 and beyond, we will continue to look to our credit matrix and distribution coverage as guiding element of our financial policy, as we consider any increases to the rate of distribution. With that, I'll now turn the call back over to Rod.

[Rod Sailor:]

Thanks, John. And as we close the books on 2016 and look to 2017, we continue to see market environment in brief. We are located in some of the most attractive oil and gas place of the country where producer returns continue to improve. Enable's diverse suite of assets are well positioned to provide a full range of services for growing, producer supply and market demand. Over the next 10 years it's projected that the natural gas supply in and around our footprint could grow by over 4 Bcf per day while the natural gas demand in and around our footprint could grow by over 14 Bcf per day. We are especially excited about the strategic location of our assets in the SCOOP, STACK and Cana Woodford plays where we're well positioned to support projected 1.3 Bcf per day of supply growth over the next 10 years. As you can see on Slide 13, we remain a premier midstream provider in the SCOOP and STACK plays. We have significant acreage dedications with some of the most attractive producers in these plays and are well positioned to benefit from operational leverage associated with our leading processing capacity investments. In addition, the map on Slide 14 shows how our interstate and intrastate pipeline systems continue to be well positioned to meet residue gas transportation needs of the growing SCOOP and STACK plays. Our transportation storage assets are also well positioned to support the natural gas demand growth in the South Central, South East and Gulf Coast markets, especially our transportation storage segment provide significant fee-based margin. In 2016, 98% of the transportation storage segment's gross margin was fee-based and 93% of the transportation storage segment's gross margin was derived from firm contracts. In closing, our assets are strategically located in some of the most prominent crude oil and natural gas plays in the country and supported by favorable contract structures with significant fee-based and demand margin. We're uniquely positioned to serve our customers with the fully integrated suite of assets, which are interconnected with the end markets and consumer. We will also remain financially disciplined in 2017, focused on deploying capital efficiency while maintaining a strong balance sheet and consistent distribution to our unit holders. We believe that our strong asset mix in addition to our continued focus on financial disciplined positions us well to achieve our 2017 objectives and makes Enable an attractive investment opportunity. Along with John and myself, we have Craig Harris our Chief Commercial Officer, Paul Brewer, our Head of Operations and other members of our management team here. And we'd like now open the call up to your questions. Thank you. The floor is now open for questions. [Operator Instructions] Thank you and our first question is coming from Neel Mitra with Tudor Pickering. Please go ahead. Your line is open.

[Neel Mitra:]

Several E&P producers in the Anadarko are now kind of calling for takeaway capacity out of the Anadarko. I know that's kind of been an ongoing theme that we've been speculating about for the last year. Any updates you can share with us and maybe where you are in the process with that?

[Rod Sailor:]

Yes. Again as you know, we have looked at and worked on to need to get the residue gas out of the Anadarko for a significant period of time as something we looked at natural oil prices fell; and as we've now seen prices recover, we've seen producer activity to pick up. We continue to work with a number of our customers to provide them solutions to get that gas to market where we're going to have any announcements today. Again, we continue I think to have the infrastructure that will allow us to provide unique solutions to our customers to get their gas to the markets that they want to move gas to.

[Neel Mitra:]

And when will that infrastructure really be necessary the need to get the gas out of the region?

[Rod Sailor:]

Well, I think we probably said on our last couple of calls, if we continue to believe with those decisions deeply that needed to get made very soon. I think as we've seen producers talk about their potential volume growth in and around our footprint, we think again that those decisions will be forthcoming in the first half of 2017.

[Neel Mitra:]

You obviously had a great 2016, but just kind of reconciling the 2017 guidance, which is unchanged. Your guidance for processing and gathering volumes and pretty much all your basins were up pretty significantly, and your midpoint is a little bit lower than what you came out with 2016. Can you just walk us through the guidance drivers still a lot of your relatively flattish versus for '17 versus '16 on despite the growth and volumes?

[Rod Sailor:]

Yes, I'll take a stab with that and Craig or John can then comment. But again, yes, we are seeing growth in along the footprint. We're all appointed to pour more capital in 2017 to meet those demands and there some associated with costs associated with that as we deployed that capital. Again, we've also seen some cost increases on some of our operations we factor that in. I don’t want to leave it though that it looked as we see those cost increases working hard to maintain a very tight profile on cost, as we go forward. So, again we've got -- we've got some additional and we've also got some additional spend in '17 from a safety perspective to maintain some of our pipeline infrastructure. All of those things have been a bit of dampening effect on overall DCF. I do think though it sets up very nicely coming out of 2017. John, do you have any comments, if you want to make?

[John Laws:]

Yes. Neel, if I heard your question correctly. One, I was just thinking about volume; and then secondly, maybe just how that translates down the DCF, which I think Rod answered both. But as we look at it, what our guidance was for 2016? Total GAAP gathered volume was 31 to 35 TBtu a day where we set presently is that 3.3 to 3.8 TBtu a day for 2017. And as you dig into that a little bit, you expect to see at least expect to see growth. Looking again at the midpoint as now in 2017, we're providing growth on a by basin -- excuse me our guidance from a by basin outlook, and we see the Anadarko from where we exited full-year 2016 or full-year 2016 to midpoint of guidance is growing about 12%. But we also see a fairly significant increase volumetrically in the Ark-La-Tex almost 25% to 30%, that’s imply there. And as you recall in the Ark-La-Tex, we continue to benefit from minimum volume commitment there, so a lot of the volumetric growth out of the Ark-La-Tex basin doesn’t contribute today to margin increases, but does overtime close the gap between our flowing minimum volume -- flowing volumes and minimum volume commitments for short fall payments. I think as it relates to Bcf, overall the 639 million that we reported in 2016, you can see the midpoint of our range for 2017 is 580. Some of that as Rod said as has got a little bit more may have capital there at the midpoint, that's implied as well as we do have some increase cost associated with it, with interest expense and certainly a full-year of the preferred which also work as a headwind to 2017 DCF.

[Rod Sailor:]

But in closing, I would just add that I gave lower main focus on our costs and our stand; and again from everything we are seeing, from our customers to continue to see a very positive outlook, as we go through 2017.

[Neel Mitra:]

Would it be fair to say that when the increased volumes in the Ark-La-Tex specially short-term and EBITDA negative because your revenues are staying at same and your O&M and capital have to go up to accommodate the higher volumes?

[Rod Sailor:]

Really, the higher volumes don’t drive any significant increase, but they are on O&M again that infrastructure is deployed -- we're already using it will -- again, we have continued -- we have continued to build out our infrastructure since we came out as a public company, and we driven our O&M cost down every year. And in fact over the last couple of years, we've taken over $60 million of cost out of our cost structure. Again, our goal is to maintain that. So, I don’t see it as negative that volumes are growing in the Ark-La-Tex. And in fact as John mentioned, it's starting to close the gap on those NBCs as we start to point towards 2020 and 2021 when those volume commitment to a lot. So, I'm very excited about what we're seeing in and around the Ark-La-Tex region especially at these kinds of gas prices.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from TJ Schultz with RBC Capital Markets. Please go ahead. Your line is open.

[TJ Schultz:]

I think just for staying on those NBC contracts, as we think about 2017 and 2018 and just given the higher level of activity see in Ark-La-Tex. Can you just try to quantify how those short-fall payments associated with some of the NBCs may decrease, I think it was 62% of the NBC margin in 2016?

[Rod Sailor:]

No. I think that's exactly right as we move forward to 2017, we'll see that drop some probably getting closer to 50% of our overall following revenues versus short-fall on those items.

[TJ Schultz:]

Okay. And I know you've pointed 2020, 2021 for exploration, but are there any material NBC contracts that roll off this year that include shortfall payment?

[Rod Sailor:]

No.

[TJ Schultz:]

Just moving onto Spire I know filed on the St. Louis Pipe with FURC recently and targets in service by late next year. Any color there on interconnections into MRT as chain of rocks and thoughts or opportunities that may present as they consider going by directional there?

[Rod Sailor:]

Well, no, not really anything important to say that what we've said in the past. Again, we continue to look at that, that project and continue to monitor that project. Again, we think that we have supplied natural gas into that market for close to 90 years, continue to believe that MRT will supply a large amount of supply in. We bring Marcellus Gas into our East line now. Again, Spire is continuing to look at that project. And again impacts, any impacts, the MRT we think will be able to mitigate, but we really haven't talked publically about where that will interconnect lead to our systems or any impacts from that.

[Operator:]

Thank you. And our next question comes from Ali Agha with SunTrust. Please go ahead. Your line is open.

[Ali Agha:]

Rod and John, coming back to an earlier point, just wanted to be clear when you look at your '16 results with adjusted EBITDA and DCF and distributable cash flow, I mean they came in well above what your guidance range was for the year. I mean, were there expenditures that you had assumed you would be undertaking in '16 that got deferred into '17? Just a delta difference between even the high end of your range and your actual results was very large, and if there's one of the reason, why you still see the directional '17 to be flat to down or the some expenditures that were been deferred into next year? Or can you just elaborate why the numbers came in so far ahead of your original guidance?

[John Laws:]

Sure. Again I would just say we came in, we came into 2016; as we've said, we're going to be extremely focused on every single dollar that we spent. And so, I think we're very mindful -- mindful of that, we significantly appeared back on some of our maintenance spend. We did accelerate that later in the year as we saw returns coming in. So, there may be a little bit carryover into 2017 from that, but I wouldn't say it's a significant number. I think again one of the things that we're seeing in 2017 again is increased capital spend we're rolling out. Additional infrastructure, we're increasing our spent in 2017 around some of our safety projects. Again, we've aging infrastructure, we need to be sure that we're putting to right dollars just to those assets. So, that's really a conscious decision, it's not really a carryover from '16 but a conscious decision to get us as we think about our long-term spend on safety. We need to put a little bit more into '17. And again, we've also seen some cost increases. I think suppliers have been really pulled back in late '15 and in '16, and we're seeing some of those increases in the past onto us. But again, I think we did -- we're very mindful in '16, and we'll continue to be very mindful in '17, and not spent the dollar that we don't think we need to spend. Ali does that kind of answer your question?

[Ali Agha:]

Yes, but also maybe just related to that the macro backdrop as we sit here today versus three months ago. Are you increasingly more confident as it has gotten better from your vantage point today than it was three months ago or relatively similar? How would you categorize the macro backdrop?

[John Laws:]

No, I think the macro backdrop has continued to improve. And I think, we feel very comfortable today, as comfortable, more comfortable than we did three months ago. That said, producers will continue to rollout their plans, they're still finalizing a lot of their drilling schedules. 2017 will be a bit of transition year as I think as we see producer growth in '17, but could well lead a lot more producer growth in the out years, and so '17 is also a little bit of a transition year for us, as we gear up to meet those kind of demands.

[Ali Agha:]

And final question Rod, probably more have you folks been in CenterPoint strategic evaluation of that ownership? And as far as you know I mean, are we pretty close to the end here or is this process till in the middle stages?

[Rod Sailor:]

I wish that I had more to say, but really can't say much more than we said on our -- frankly on our third quarter call. And the answer is that we had not been too terribly involved in that discussion clearly, to your point really hasn’t made I don’t think any announcements since the third quarter call. Around that my guess is they will stay more on their fourth quarter call, but we really don’t have anything to add. Again, that process is ongoing. They talk about the options that they are looking at. But again, I think as I said, we really have not been too terribly involved in that process.

[Operator:]

Thank you. And our next question comes from Jeremy Tonet with JPMorgan. Please go ahead. Your line is open.

[Unidentified Analyst:]

This is Rahul on for Jeremy. Thanks for taking my questions here. The first one for me, the 35 million add back of non-cash losses there for the DCF, could you help us in breakdown across the segments there and how to think about it?

[John Laws:]

Sure. So, up to $35 million in overall non-cash losses, there is about $20 million that is unrealized losses in swaps, that is split across both of our G&P and our TNF segment wouldn’t get your breakdown as a follow-up here to this call. And then, the balance of the losses are really embedded within O&M of which there about 17 million and those are other non-cash expenses that we experienced in 2016.

[Unidentified Analyst:]

On the 2017 guidance range, I mean thanks for giving lot of color before on the previous questions. I just want to understand the driver for the top end versus the bottom end and specifically with regards to the contract rollout? And how the new contract as you guys entered in the last December to offset some of the roll off them, they're getting incremental color you can provide there?

[Rod Sailor:]

I think again we're seeing a pick up as to the contract we signed in December -- excuse me -- in the fourth quarter as related to sort of changing a PLP to fixed fee contract in the STACK, and we do see an impact in 2017 from that. The majority of our gathering and processing capital that we are deploying in '17 is to support that contract; and so, it is accretive to our cash flow in '17 for at least seeing good returns on that capital as we deploy it. And we really don’t have any significant NBCs lowing off in 2017. We continue to have some re-contracting going on, on our pipes. And again, all of that is again just a guidance number. So, hopefully, that answered your question, but again as we said on our third quarters call, it is very important to us that we fixed the -- or not fixed, but what we do our STACK gathering and processing contract. We think it allows us to deploy the capital as efficiently and at a speed that our customer needs to it to be deployed.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Andy Gupta with HITE Hedge. Please go ahead. Your line is open.

[Andy Gupta:]

Since your questions, if I'm looking at the feet, it's primarily driven by better commodities, working what is budgeted and better one only commodity prices, but also better NGL volumes that I saw in the fourth quarter. Is this primarily the reason why there is a beat there?

[Rod Sailor:]

Well, I would say that I think we're pretty significantly hedge through 2016, on the beat. So, while we're seeing prices improved, we have largely fixed our price exposure in 2016. And again as you know, we have -- we sort of take a lowing 12-month hedging programs. So, that again as we sit here today, we're hedging into, now into 2018 and always looking to lock up to put as much cash hold served into our numbers, as we can to our cash flow as we can. Again, I think it was largely a beat due to very efficient use of our balance sheet. We deployed capital efficiently. We make sure every dollar we spent was earning the return that it is to earn in very mindful of our cost profile. And again then we also have a slight impact again from fixing some of our contracts. So again, I think it was across the Board, it was enabled in very-very efficient with how they spent money in 2016. And again, I would tell you that we're looking to be everything efficient in 2017 with how we manage the business.

[Andy Gupta:]

So, again as a follow-up to that then from a previous question, there is not a commodity that beat and I'm looking at the significant volume increases. And so still sort of trying to understand why then, if you have these efficiencies in place which are commendable, and volumes are increasing significantly. Why we wouldn’t see a higher EBITDA ramp in 2017 versus 2016?

[John Laws:]

I think one of the things you have to be mindful of is that, that again volume increases in the Ark-La-Tex primarily to the Haynesville, really under those a minimum volume commitment. So, we don’t see an increase unfortunately to that volume pick up.

[Rod Sailor:]

Yes, in that, but Anadarko is increasing double digits as well.

[John Laws:]

And we're deploying capital and then our current outlook, we have some increased interest cost. And there again, we've got, as John mentioned, we got some hedges that currently are below the script pricing and that we ways bid on the 2007 EBITDA.

[Andy Gupta:]

My last question is, in terms of rig, I see the current rig count that you from the press release. Is there any guidance you want to give that supports the base of your volume increases in the Anadarko and at 23, which is unchanged from the third quarter. But when you look at key producers everybody has got some pretty robust CapEx plans in '17. So curious, if you can share even broadly what sort of rig counts you assume across the fee bases through perhaps exit rate '17 or average '17?

[Rod Sailor:]

Yes, we haven't really talked about the rig count in our guidance. It's not something that we've talked about, but when we built our volume profile we feel that working closely with producers. And again I think what we're seeing from producers is again they are turning the capital spigot back on, they're drilling more, they're still again the SCOOP. And primarily the STACK is producing a lot of development. They're still delineating. So again, the well results can be very good in some places and maybe not as much another they haven't really moved, just to get pad drilling, but again we think because as I mentioned, we're seeing a pickup in activity. And again depending on where they grow -- or excuse me, where they drill, we've seen some pretty, some very-very good results. But I think a lot of that would play and get into the out years of our forecast of significant volume pickup. But again, I think we have yet to give -- I think some of our customers are yet to finalize their 2017 drilling plans. All of that said, we're working with them closely to be sure we know we need to put more capital to meet what we anticipate are there need. So, Andy, I don't know whether or not that answers your question or not, but again I think as I mentioned, '17 is a little bit of a transition year as producers start to give backup for significant volume growth, and we deploy a lot of -- put a lot of steel in the ground to capture those molecules.

[Operator:]

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

[Rod Sailor:]

Well, thank you very much. Thanks everybody on the call. I'd also like to thank all of our employees for their continued -- for their contributions and continued focus on safety. And again, thanks everybody on the call for your interest in Enable, and everybody have a safe day. Thank you.

[Operator:]

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