Earnings Call Transcript - ET Q2 2020

Operator, Operator

Good morning. My name is Marian, and I will be your conference operator today. I would like to welcome everyone to the Enable Midstream Second Quarter 2020 Earnings Conference Call and Webcast. Mr. Matt Beasley, you may begin your conference.

Matt Beasley, IR Representative

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. To achieve social distancing and limit travel, we only have a small group joining the call in the room today. But we also have other members of the management team on the phone 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 site. 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 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 of today's presentation. We invite you to review the disclaimers of 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, CEO

Thanks, Matt. Good morning, and thank you for joining us. I would like to begin my remarks on Slide four with a few high-level business updates. First, our COVID-19 safety protocols remain in place, and we continue to monitor local, state, and federal guidelines and recommendations from health organizations. Today, the pandemic has not impacted our ability to maintain safe and reliable operations. Since early May, we have seen a substantial increase in crude oil prices, due in part to this increase in crude focus shut-ins as we saw during the second quarter, which were not as significant as previously anticipated. With the outlook for higher future prices, we've seen some new gas wells in the stack shut-in, and we expect those shut-ins may continue through the third quarter. Based on current commodity prices, our latest discussions with our customers, and progress on our costs and capital reduction initiatives, we are reaffirming all aspects of our outlook for 2020 provided on our first quarter earnings call. Finally, despite industry challenges, Enable continues to benefit from its strong balance sheet, significant scale, key operating basins, and our overall diversified asset portfolio of gathering and processing systems interconnected with natural gas transportation and storage systems. I will now cover a few financial highlights on the next slide. First, our distributable cash flow exceeded our declared distributions by $76 million for the quarter, fully funding our expansion capital expenditures. As I mentioned, we have made good progress executing on our expansion capital and cost reductions we announced in early April. On the cost front, we recently took steps to align our organizational structure for the current industry environment, reducing staffing levels while building for flexibility in the future. This organizational restructuring resulted in a reduction of 165 positions across the company, including the impact of planned retirements and eliminating open positions. We have also achieved cost savings from releasing leased assets by redeploying existing assets and optimizing operating processing plant assets to match current volumes. As I've said before, we are limiting our capital expenditures to contracted long-term transportation storage projects and contracted capital-efficient gathering and processing projects. For our Gulf Run project, we continue to have commercial discussions to increase the firm commitments to the project. We expect those discussions will continue through the second half of the year. Once concluded, we will finalize the scope and execute our funding plans. While some producers have faced credit challenges in the current commodity price environment, we have not experienced any meaningful credit losses during the cycle. In our gathering and processing segment, we are typically a net payer for our natural gas processing customers, which helps mitigate our credit exposure. We generally have the right to request adequate assurance from non-creditworthy counterparties. Our credit profile is also supported by a strong base of large investment-grade utility customers in our transportation and storage segments. Finally, we repurchased approximately $22 million aggregate principal amount of our senior notes during the quarter for approximately $17 million plus accrued interest. We will continue to evaluate opportunistic note repurchases based on market conditions and available liquidity. Turning to our commercial highlights on the next slide. We contracted or extended almost 1 million decatherms per day of transportation capacity during the quarter, including our previously announced recontracted capacity with EGT's largest customer, CERC. The contracted term for the majority of the renewed CERC capacity is nine years. The effective date of the new contracts will be April 1, 2021. The CERC contracts, along with our recent MRT contract extensions and our 20-year Gulf Run commitment from Golden Pass L&G, demonstrate the strength of Enable's integrated transportation systems and significantly extend the partnerships' weighted average contract life. The Gulf Run project is proceeding on schedule, and FERC's current schedule anticipates an environmental assessment will be issued by the end of October, subject to FERC approval; we still anticipate placing the project into service in late 2022. EGT mass natural gas transportation project remains on schedule for anticipated second quarter 2021 startup. We also recently received a five-year commitment for 80,000 decatherms per day of firm capacity on MRT's southbound expansion project, with an anticipated fourth quarter 2020 in-service date. Finally, our joint venture pipeline, SESH, has upcoming contract explorations with a key shipper later this quarter; we believe SESH plays a key role in serving markets in the Southeast with a load factor of well over 90% in recent years, and we are focused on re-contracting this capacity. Turning to our gathering and processing commercial highlights. As I mentioned in my opening remarks, shut-in volumes for the second quarter were less than we had anticipated. Wells curtailed to the scoop and stack plays due to lower crude prices are substantially back online, but we have seen some shut-ins in the gassier part of the stack due to anticipated higher natural gas prices. We expect these shut-ins of approximately 0.2 TBTU per day to continue through the third quarter. In the Williston basin, all but two pads are now back online; importantly, to date, we have not experienced any significant degradation in well performance from the production that is coming back online. We have seen continued investment from producers in the Haynesville shale plays, and the play's long-term outlook remains strong. Rigs also remain active in the Anadarko and Williston basins, building ducks to support future volumes. I will now turn the call over to John to discuss second quarter results.

John Laws, CFO

Thank you, Rod, and good morning, everyone. I'll now 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 on our second quarter earnings release and in our 10-Q, both of which were released earlier this morning. You can see the impacts of recent production shut-ins on the operational performance overview slide. Our natural gas gathered, processed, and transported volumes saw decreases compared to the second quarter of 2019, primarily as a result of production shut-ins in the Anadarko basin. The decreases in our natural gas gathered volumes were partially offset by higher natural gas gathered volumes in the Ark-La-Tex Basin as a result of continued drilling activity in the Haynesville shale play. Our crude oil and condensate volumes were also lower as a result of the shut-ins in both the Anadarko and Williston basins. As Rod mentioned, the shut-ins we saw for the quarter were lower than what we assumed in the financial outlook we provided in May. Turning to our financial results on the next slide, we saw lower revenues, gross margin, and net income for the second quarter of 2020 compared to the second quarter of 2019, primarily as a result of the lower volumes and prices and changes in the fair value of derivatives as a result of increasing commodity prices from first quarter of 2020 to the second quarter of 2020. Net income was also impacted by an increase in O&M and G&A expenses for the quarter, primarily as a result of a non-cash loss on retirement of an Ark-La-Tex gathering system. Decreases in our adjusted EBITDA and DCF results were impacted by lower prices and volumes, but these measures exclude the non-cash impacts from the changes in the fair value of derivatives and the non-cash loss on retirement of assets. DCF also benefited from lower adjusted interest expense and lower maintenance capital expenditures for the quarter. After considering the distributions declared, Enable’s distributable cash flow exceeded distributions declared by $76 million, fully funding our $26 million of expansion capital expenditures for the quarter. This was yet another quarter of continued execution for Enable, albeit against a different plan than what we had envisioned at the beginning of the year. As Rod mentioned earlier in the call, we are reaffirming the outlook we provided last quarter, and we still expect to fully fund our anticipated expansion capital expenditures for the year while reducing total debt levels. With that, I'll turn the call back over to Rod.

Rod Sailor, CEO

Thanks, John. As I said before, Enable is a strong company that is built for the long term. We believe we entered this downturn from a position of strength. Our large scale, fully integrated midstream platforms provide a critical link between production and downstream markets. Our contracts are primarily fee-based, and we expect over 90% of gross margin for the balance of the year to be fee-based or hedged. In our transportation and storage segment, we continue to develop new capital-efficient projects and re-contract capacity. In our gathering and processing segment, we are aligned with key producers in key producing basins, and recent long-term natural gas outlooks from Wood Mackenzie support long-term growth in the scoop, stack, and Haynesville plays. We took decisive action earlier this year to strengthen the company, and we will continue to take the necessary actions to position Enable for success in 2020 and beyond. We will now open the call for your questions.

Gabe Moreen, Analyst

Quick question; my connection's kind of poor so hopefully you can hear me. I wanted to know your expectations regarding some of the stack on dry gas coming back. Has that come back entirely? And then also, you mentioned record volumes in the Ark-La-Tex trajectory for the back half of the year; if you can, speak to that a little bit too?

Rod Sailor, CEO

First on the stack, primarily the shut-ins that we talked about on the first quarter call were largely in the scoop area, the more crude-focused areas. As we said in the release, and as we noted on this call, what we've seen with the price dynamics looks like they’re strengthening in the back half and early 2021. We have now seen some, as the scoop crude and gas has come back online, we've seen some of our stack wells get shut-in, and again, as we mentioned, we would anticipate those volumes to stay curtailed for the third quarter. I believe you were breaking up a little bit, but I believe the back half of your question was around the Haynesville. Again, we continue to see those volumes growing through the year, and so I think that was your question.

Gabe Moreen, Analyst

Can you talk about MRT's southbound project? Was that new? And then also, sequentially, it looks like the amount of contracted capacity on the interstate side has declined lately, and what the impact was?

John Laws, CFO

That's right. So, as Rod was saying, we got the southbound contracts that is what we were referring to before we entered and got everything finalized with the MRT agreement. We did have some ability to close out. So that is new. It is new for this year, but it had been contemplated in the first quarter when we discussed the contribution that we were expecting from the rate case in future years. If you think about the sequential reductions, just to remind you, some of the time back that we had talked about in aggregate volumes on MRT from some of the larger customers, but again, much of that was replaced with the new rates that we talked about in the first quarter. Additionally, we also had expiration online CP earlier this year, which has shown up in the sequential numbers as well. So nothing really new from a development standpoint and what we had otherwise contemplated, and really no capital per se on the southbound expansion if that was your question.

Gabe Moreen, Analyst

That's very helpful. My last question is regarding the situation with the DAPL shutdown or the possibility of one and how it affects the Williston area and the few pads that are still offline. Is the situation dependent on a DAPL decision? If DAPL does go offline, what is your perspective on the expected volumes there?

Rod Sailor, CEO

I would say we feel like we have outlets for all of our crude, outside of DAPL capacity, but I would reiterate that if DAPL were to be shut down, that's going to put pressure on the entire basin and that would likely result in some curtailments; however, right now, we believe that the two pads that are offline are not related to DAPL.

Colton Bean, Analyst

Just looking at the full year guide to $900 million and $960 million adjusted EBITDA versus first half at a little over $500 million; can you speak more to your expectations for the back half of the year? It seems like the guide would imply flat to down versus Q2.

John Laws, CFO

As we affirmed on the call this morning, our range is that we really wouldn't point directionally anywhere kind of north of the midpoint. We're comfortable with the range as it stands today.

Colton Bean, Analyst

Understood. And then you mentioned you're still in commercial discussions around Gulf Run. Any preliminary thoughts on how you might fund that project, and whether the existing commitments are sufficient to attract or enable project financing?

Rod Sailor, CEO

Yes, again, we've got a lot of options around the Gulf Run funding. I think we need to, as we said on the call, it is wise. We still have some commercial discussions going on. We anticipate that we'd have everything wrapped up by the end of the year; project financing, yes, we've got really strong contracts and currently very good credit quality behind that. That is an option we did look at, along with some other discussions we're having both with financials and other players.

Jeremy Tonet, Analyst

Hi, good morning, just wanted to kind of pick up with the guidance questions before here, and you said you wouldn't point anywhere north of the midpoint? I guess just trying to think of how that ties to rigs running in your areas; is that assuming the current drilling activity levels stay consistent from what you’ve seen in July, with the seven rigs here or is that assuming rigs decline? Just trying to get a feeling for those signposts there?

Rod Sailor, CEO

Yes, I'll say a few words and then turn it over to John, Jeremy. As we said, we continue to see activity along our system, specifically in the Anadarko and the Haynesville. In Anadarko, we're not seeing a lot of completions. Primarily what we're seeing is duck counts grow in the Anadarko and in the Bakken area. Again, there's still some uncertainty around price, which is why we're guiding the way that we are, and John may add.

John Laws, CFO

I think that’s well said.

Jeremy Tonet, Analyst

Got it. Thanks for that. During the quarter, I think you guys made some bond repurchases; just wondering if that's something we should expect to continue seeing happen with the latest from the rating agencies there. I guess your thoughts on retaining investment-grade?

John Laws, CFO

Three-part question there as it relates to the repurchases. Those were opportunistic in nature throughout the second quarter, at least before we started seeing spreads wide. Those bonds and the complex were trading at a pretty deep discount. We saw meaningful recovery through the quarter, but we were able to take advantage of a little bit of that discount on an opportunistic basis. I think you should continue to expect us to think about and act opportunistically if that makes sense. Where we're at from a rating agency standpoint is not dissimilar to where we've been in the past, with ratings all recently affirmed; media negative outlooks at S&P and Fitch. But we're continuing to work towards the efforts that we've described for you this year, earlier in the second quarter, around the actions and initiatives we've taken to preserve liquidity and flexibility through the year and for the future. The agencies are well aware of that, and they’ve commented on that and interacted with us. So, our dialogue here hasn't changed; we continue to make good progress on the commitments we've made on cost, improve liquidity, and maintain that capital discipline as well.

Jeremy Tonet, Analyst

Got it; makes sense. Just one last one if I could, I wanted to get your thoughts regarding some M&A activity we've seen in midstream recently. We saw Berkshire make a significant purchase in this space. I wondered if you thought you guys own transmission assets of similar stature; and also, with the two new additions to the board, wondering if there'd be any kind of review or strategic outlook for Enable at this point.

Rod Sailor, CEO

As we've said in the past, we look at a number of things all the time. We're very active in understanding what transactions are taking place in the market. Probably, that would be the only answer I would give as it relates to some of the M&A activities that we've seen. As to the new board members, they were appointed yesterday; two very strong industry individuals having a lot of upstream and midstream experience, very well regarded in the space, and we look forward to working with them, but as to any change in the direction we're going in that's not something we’re currently pursuing.

Shneur Gershuni, Analyst

Good morning. Maybe just a follow-up on the last question regarding the new board members. It sort of seems every couple of years, this sort of discussion about your GP intent with respect to their holdings. Is this therapy as of late similar to the ones we heard a couple of years ago? Or does the current environment and the fact that you kind of disrupted earlier this year sort of accelerate and change the pace or interest in trying to resolve the entire GP versus LP relationships with Enable?

Rod Sailor, CEO

If you're addressing how CenterPoint views their investments in Enable, I think that's a question better asked of CenterPoint and their management.

Shneur Gershuni, Analyst

Got it. Moving into Gulf Run, you talked in one of your earlier responses that you've got financing options. If you were to go down that route, would you want to retain operating control or be willing to give up operational control if it was with a larger partner?

Rod Sailor, CEO

Generally, our predisposition is to own and operate our assets. We think that where Gulf Run sits gives us a lot of optionality around our system. But again, we'll evaluate all options and we would never dismiss any options if we think that it brings more value to Enable than any other alternative.

Shneur Gershuni, Analyst

Okay. For my follow-up, how should we think about the Haynesville production for the second half of '20 into '21? What we're seeing with gas prices and so forth; you've got an MVC contract rolling off—will that impact production volumes? Just kind of wondering if you talked about puts and takes here as we sort of think about?

John Laws, CFO

Yes, the MVCs have rolled up on that system, and we continue to see volumes grow. It’s our belief that producers are very significantly hedged. They've done a great job minimizing well costs and maximizing the returns around the Haynesville production, and we would continue to project that growing into 2021. However, we're not giving any guidance on 2021 yet.

Anil Duval, Analyst

Good morning, guys, and hopefully everybody is safe. Thanks for taking my question. I was wondering if you could talk a little bit about SESH, especially concerning the competitiveness of that natural gas in the Florida market?

Rod Sailor, CEO

Sure. Good morning. The way we think about SESH is that it comes off the eastern end of our line CP system and there are a number of other interconnection points that feed into the Gulfstream delivery point and into the Florida markets. We see this pathway as a cost-advantage one that has served the Florida and Southeast power markets for a long time. We believe that will continue to do so as the demand for power generation grows out of that area in that basin. Therefore, we see it as a very competitive alternative for the southeast power market.

Anil Duval, Analyst

As you look at re-contracting, can you give us a sense of the range of options you are considering in terms of terms or rates as you get further along in this process?

John Laws, CFO

I’ll stop short of going there; we are in active discussions with several parties regarding how we think about re-contracting. When I say we, I mean the SESH joint venture. Those discussions are competitively and commercially sensitive. But again, we strongly believe that this is a competitive source of supply for those markets, and we think there's good long-term viability for that asset.

Anil Duval, Analyst

In terms of the timing, are there any regulatory restrictions or considerations we should be aware of in relation to finalizing that re-contracting?

Rod Sailor, CEO

Not that I'm aware of.

Alex Kania, Analyst

Good morning. Two questions for you. First, could you talk a little bit about the cadence of O&M cuts? It looked like it was a little higher than Q1 just given G&A, through the constant things. And then, if you could also discuss the flex points on when you might want to look harder at additional contracts, as you mentioned there, as well as the environment where that will make sense or do things need to get worse?

Rod Sailor, CEO

On your cost cuts, we started after our announcement back in late March to begin cutting costs. We've gone through, as we said in the release, some redesign, and we're largely through that process. We've now identified and achieved the majority of the cuts we talked about for 2020; some of those, especially around headcount reductions, will have a full-year effect in 2021. We still have some work to do to achieve all of the cost cuts that we discussed in our release for 2021, but I think we're on track for those.

John Laws, CFO

And Alex, this is John. I just want to make sure you noted that the O&M and G&A numbers for this quarter included a $17 million loss on retirement embedded in the quarter.

Alex Kania, Analyst

And regarding the SESH transactions, with CenterPoint, there’s a provision where Enbridge could buy because they actually have an option to buy SESH, in the event that CenterPoint has a lower interest in the business. What are the mechanics of how that would look?

Rod Sailor, CEO

On your question regarding cost cuts, we started after our announcement back in late March to begin cutting costs. We've gone through, as we said in the release, some redesigning, and we're largely through that process. We've now identified and achieved the majority of the cuts we talked about for 2020; some of those, especially around headcount reductions, will have a full-year effect in 2021. We still have some work to do to achieve all of the cost cuts we discussed in our release for 2021, but I think we're on track for those.

Operator, Operator

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, CEO

Thank you all very much, and in closing, I want to recognize our employees for their hard work, dedication, and continued focus on safety during these challenging times. I want to thank everyone on the call for your interest in Enable and hope you all remain safe and healthy. Have a great day.

Operator, Operator

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