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Enable Midstream Partners LP  (NYSE:ENBL)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Enable Midstream Fourth Quarter 2018 Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions) Please also note, today's event is being recorded. And at this time, I'd like to turn the conference over to Mr. Matt Beasley, Enable's Senior Director of Investor Relations. Sir, please go ahead.

Matt Beasley -- Senior Director, Financial Planning & Analysis and IR

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-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 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 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 of 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 J. Sailor -- President and Chief Executive Officer

Thanks, Matt. Good morning and thank you for joining us on today's call. 2018 was an exceptional year for Enable and I am excited to reflect on significant accomplishments for the year as well as share our fourth quarter and full year 2018 results. In 2018, we placed the Wildcat, CaSE and Muskogee projects in service, on time and under budget. All three of these projects provide timely and capital efficient market solutions for our customers.

We also announced key expansions of our crude oil gathering business with the Velocity acquisition in the Anadarko Basin and our new contractual commitments from XTO Energy to support the continued build-out of our Williston Basin crude gathering systems. Last September, we announced the Gulf Run Project, a strategic project that expands our footprint to move natural gas from multiple producing regions to growing markets on the Gulf Coast. I will cover the latest developments for this key project later in the call.

Operationally, the partnership achieved record natural gas gathered and processed volumes and crude oil and condensate gathered volumes for both fourth quarter and full year 2018. These results were driven by continued producer activity and strong well results. Our business performance resulted in higher total revenues, net income, gross margin, adjusted EBITDA and DCF for the fourth quarter and full year of 2018 compared to the fourth quarter and full year of 2017. Slide five highlights our record of success over the last three years. Since 2016, our natural gas gathered volumes have grown 43%, our net income attributable to common units has grown 67% and our distributable cash flow has grown 19%.

As you can see, our growth in distributable cash flow has resulted in a significant increase in our distribution coverage ratio over the past three years. I am also pleased to announce that we significantly outperformed the upper end of our 2018 outlook ranges for net income, adjusted EBITDA and distributable cash flow.

Turning to the next slide. We continue to balance our business growth with a focus on cost discipline. We have seen significant margin growth over the last three years, while continuing to decrease our O&M and G&A expense as a percentage of gross margin. DCF exceeded distributions by over $200 million in 2018, which funded over 30% of our organic expansion capital and our new $1 billion term loan provides significant liquidity and pricing that is inside our revolving credit facility. Enable remains focused on long-term value creation and while it has been a choppy market for the energy space, when looking at our three year total unitholder return, Enable has significantly outperformed both the S&P 500 and the Alerian US Midstream Energy Index. Enable has outperformed the US midstream Index over the past one year and two-year periods and the S&P 500 over the last year.

Turning to the next slide. On February 5, Enable announced that an affiliate of Golden Pass LNG is the cornerstone shipper for the Gulf Run Pipeline project. Enable's announcement follows an announcement from Golden Pass that it had made a positive final investment decision for the liquefied natural gas facility to be served by Gulf Run.

Golden Pass is a joint venture between affiliates of Qatar Petroleum and ExxonMobil and we are very excited to be partnering with Golden Pass. We continue to advance the project and plan to make pre-filing submissions to the FERC by the end of the first quarter. We expect to have clarity on the the project's final scope by our second quarter call.

Moving to the next slide. Rig activity remains strong around Enable's gathering footprint. At last count, there were 54 rigs drilling wells expected to be connected to Enable's gathering systems, a level that we have not seen since 2014. This continued activity drove new volume records in the fourth quarter for natural gas gathered, natural gas processed and crude oil and condensate gathered volumes and the fourth quarter marked the 12th consecutive quarter of natural gas gathered volume growth. We are uniquely positioned to serve the significant production growth with our leading gathering and processing footprint in the areas we serve.

Turning to our Transportation and Storage segment on the next slide. During 2018, we contracted or extended over 2 million dekatherms per day of capacity. We recontracted for five years with EOIT's largest customer, OG&E, for approximately 336,000 dekatherms per day of firm transportation service. Taken together with EOIT's 228,000 dekatherms per day contract to serve OG&E's Muskogee Power Plant, Enable will provide over 550,000 dekatherms per day of firm transportation capacity to OG&E.

We placed both CaSE and Muskogee projects into service on time and under budget in 2018 and we continue to pursue additional transportation and storage opportunities across our footprint.

Finally, I briefly want to mention a couple of regulatory updates. The rate case initially filed by MRT on June 29, 2018, continues to progress. As of January 1, MRT's proposed rate increase is being billed to customers, subject to refund, depending on the outcome of the case. We remain focused on ensuring that MRT's rates appropriately reflect historical investments and current costs.

For SESH, the pipeline recently filed for a 3.1% rate reduction that was accepted by the Commission effective January 1st. This rate reduction is not expected to impact SESH's current revenues and current contract rates are significantly below the new maximum tariff rates. With this action, SESH will not be subject to an NGA Section 5 investigation for at least three years.

As I close my remarks, I want to reiterate that 2018 was a great year of execution and growth for Enable, and I am excited to continue that momentum into 2019. With that, I will now turn the call over to John to further discuss our fourth quarter and full year 2018 operational and financial results.

John Laws -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you. Rod, and good morning everyone. I will now cover a few of our key operational and financial metrics for the quarter and the year. As always, you can find a more detailed and comprehensive overview of our financial and operational results in our fourth quarter earnings release and in our 10-K, both of which were released earlier this morning.

Turning to slide 11. Customer activity and well results in the Anadarko and Ark-La-Tex Basins continue to drive volume growth in our Gathering and Processing segment. As you can see, we had a 12% increase in total natural gas gathered volumes and a 19% increase in total natural gas processed volumes in the fourth quarter of 2018 compared to the prior year.

The substantial increase in our crude oil and condensate gathered volumes for the fourth quarter of 2018 compared to the same period a year ago was primarily driven by our recent acquisition of the Velocity System in the Anadarko Basin, which was partially offset by a reduction in volumes flowing on our Williston Basin systems where third-party natural gas infrastructure constraints and flaring restrictions have caused delays in bringing new production on.

Worth mentioning is that our capital investments in this area will be sized commensurate with our expectations for volume timing. In our Transportation and Storage segment, the 16% increase in our transported volumes we a result of new contracted capacity of EGT , including volumes from EGT's CaSE project, and volume growth in the Anadarko Basin.

Moving to our financial results on the next slide. Our adjusted EBITDA increased for both the fourth quarter and full year of 2018 when compared to 2017. The higher adjusted EBITDA was driven by higher gross margins after adjusting for non-cash items due to higher natural gas gathered and processed volumes and higher crude oil and condensate volumes as discussed on the previous slide, and for full year 2018 compared to full year 2017, higher NGL prices and system management activities. The increase in gross margin was partially offset by higher O&M and G&A expenses associated with activity on our Ark-La-Tex assets, additional assets placed in service and an increase in equipment rental expenses.

Distributable cash flow when compared to the prior year increased by 18% and 15% for the fourth quarter and full year of 2018 respectively. The increase was primarily driven by higher adjusted EBITDA, partially offset by higher adjusted interest expense associated with higher outstanding debt and higher interest rates. Our net income measures increased for both fourth quarter and full year 2018 when compared to 2017, driven by higher gross margin, which includes the effect of gains and losses on our derivative activity. Specifically with respect to the fourth quarter of 2018 versus the fourth quarter of 2017, Enable saw a $55 million increase in gross margin associated with the change in the fair value of derivatives as the value of our hedges in place increased in value as commodity prices fell.

The favorable variance in gross margin was partially offset by higher O&M and G&A, depreciation and interest expense. After considering the distributions declared, Enable generated a distribution coverage ratio of 1.26 times for the fourth quarter and an impressive 1.38 times for the full year 2018.

Moving to slide 13, as Rod said, 2018 was a great year and we expect that momentum to carry into 2019. And we are affirming the 2019 outlook we provided on our third quarter 2018 call. In 2019, we expect to see full year contributions from the Wildcat, CaSE and Muskogee projects and our recent Anadarko Basin acquisition and Williston Basin expansion. As we have guided, previously, we expect to generate solid distribution coverage in 2019 that will fund a meaningful portion of our expansion capital. Further with the addition of our new $1 billion term loan, we have substantial liquidity to fund the remainder of our expansion capital program and near-term maturities of long-term debt.

Lastly, we plan to grow our business with a continued focus on cost discipline and efficient capital deployment. That concludes my remarks and we will now open up the call for your questions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (Operator Instructions) Our first question today comes from Jeremy Tonet from JPMorgan. Please go ahead with your questions.

Jeremy Bryan Tonet -- JPMorgan Chase & Co -- Analyst

Good morning.

Rod J. Sailor -- President and Chief Executive Officer

Good morning, Jeremy.

Jeremy Bryan Tonet -- JPMorgan Chase & Co -- Analyst

Just want to start with Oklahoma first, it seems like some producers were kind of pooling(ph) back their activity, they are laying down some rigs. But it seems like maybe in continental, and some of the others behind your system are still kind of having some nice results and going after. Just wondering if you could dive a bit more as far as what you're seeing in Oklahoma and kind of how your conversations with your producer customers have changed over the past several months or so with the change in commodity prices?

Rod J. Sailor -- President and Chief Executive Officer

Yeah. Great question. Thank you. We really haven't seen a change over the last couple of months in producer activity, again we've got some high quality customers kind of directed at our system and some larger customers. What we have been talking about over the last half of 2018 and poised into 2018, is we are seeing many of our producers moving some capital out of the STACK down into the SCOOP and really targeting the more oily areas of the SCOOP formation. So that's kind of the activity we've seen. We've been very pleased with well results across our footprint from our producer customers, I believe we will continue to see positive well results. But again, we've seen a lot of activity pick up in the SCOOP. That's an area where we have significant infrastructure. We've built significant infrastructure and have the ability to continue to serve our customers.

Again that fits in very well, as you well know, with our acquisition of Velocity Midstream, now we can also participate on the crude side as producers target the oilier areas in the SCOOP formation.

Jeremy Bryan Tonet -- JPMorgan Chase & Co -- Analyst

That's helpful. Thanks. And then this morning, there was some news announced with regards to A midstream sale in the Bakken, and it seemed like there was a very solid valuation there. I am and just wondering given -- although it's recent news just wondering if that impacts your thoughts as far as whether you be buyers or sellers of assets in the Bakken or any other thoughts that you could provide there?

Rod J. Sailor -- President and Chief Executive Officer

Well, what we've consistently said around the Bakken that, that is an area that we will continue to look at. We'd like to build our presence there. But clearly, as you know, we will always remain very disciplined around how we think about acquisitions, whether they're in the Bakken, or they're anywhere else along our footprint. As you know, we extended some contracts or we entered into some new contracts with XTO last year, we're expanding our group facilities out there. Right now, organically seems a better way to build value in the Bakken, but we'll continue to monitor what asset prices are and what we think are the best opportunities for our assets up there.

Jeremy Bryan Tonet -- JPMorgan Chase & Co -- Analyst

Great and then one last one if I could. Just with regards to Gulf Run, it seems like it's a pretty sizable project and there is some time lag there as far as capital deployed and getting that in service. Would you guys then consider bringing a JV partner to that at all or are you happy with the way the structure sits now and are you looking to bring more volumes to the system and could that present more opportunities as well?

Rod J. Sailor -- President and Chief Executive Officer

The answer to that question is yes. We are -- at least it's yes, we continue to believe there are opportunities along that system. As you know, we will have a fairly lengthy process on that. That's why there is a significant kind of lag between announcement and the in-service date. We do not believe that the build will be a difficult build. We've already started site work on that, we have a large part of that completed. Right now, we're very comfortable with the current structure as that stands. As you know, we had a very successful open season, but it was a non-binding open season, it remains to be seen if that capacity will show up now that folks know that we have a foundation shipper that we're moving forward with that project. And we continue to see interest in it along that route for potential additional capacity. As I said in my remarks, we'll probably have the ultimate size and capacity nailed down by our second quarter call. That's our timeline as it stands right now. Craig, I don't know whether there's anything else you'd want to add?

Craig Harris -- Executive Vice President and Chief Operating Officer

That's right. And as Rod mentioned, we continue to work with customers and as now we have the foundation shipper and they've announced their FID. So it is a live project and we're working on it. So we will reengage and see what the interest is and, as Rod mentioned in his remarks, yes, second quarter call is when we target having the exact scope of that.

And as far as the spend goes, it is a lengthy process, however the majority of the capital is going to be just prior to going into service.

Rod J. Sailor -- President and Chief Executive Officer

And just to close as the project stands now, we don't feel like we need to -- we don't need a partner. We're very happy with that project. John and his team has done a great job of making sure we always have capacity on the balance sheet to fund these kind of opportunities.

Jeremy Bryan Tonet -- JPMorgan Chase & Co -- Analyst

Great. That's it from me. Thank you.

Operator

(Operator Instructions) Our next question comes from Gabe Moreen from Mizuho. Please go ahead with your question.

Gabriel Moreen -- Mizuho Americas -- Analyst

Hey, good morning everyone. Couple ones from me. Can you talk about where Velocity sort of stands right now in terms of volumes. I think you had mentioned kind of a ramp through the year and maybe you can give us some more detail in terms of the cadence around the numbers. What you're expecting on Velocity numbers?

Rod J. Sailor -- President and Chief Executive Officer

Yes, I think for -- in terms of what we're expecting, that hasn't really changed for the year in total. I can tell you for the fourth quarter, what we had put out there in terms of volumes that we were seeing on a daily basis was about 48,000 barrels a today in terms of volumes, we haven't changed our guidance from what we talked about previously.

Gabriel Moreen -- Mizuho Americas -- Analyst

So it sounds like you're still expecting sort of a ratable increase to get to that 100 to 120?

Rod J. Sailor -- President and Chief Executive Officer

Yes. It will -- as the volumes develop there maybe a little bit lumpy because we've got large pads that will be coming and drive the volumetric growth, unclear how much we'll see that, exactly when in the year, but suffice it to say we expect to reach our targets here.

Gabriel Moreen -- Mizuho Americas -- Analyst

Great. And then can you just talk a little bit about, what is in your numbers for the MRT rate case? I know you talked a little bit about how that's subject to refund depending on how the discussions with the shippers go. If you could just maybe put some numbers around that, that'll be great.

Rod J. Sailor -- President and Chief Executive Officer

Yes, I think the way to think about that, Gabe, is we've not assumed anything specifically in terms of an outcome for resolution in our 2019 numbers. And naturally, as we said, given the rate case and process, we are billing pursuant to the rates that we filed, that those will be subject to refund. So you shouldn't see much difference in terms of overall contribution in our assumptions here now. We have said, we've got to understand exactly what Spire is going to do with some of their contracts that come up this year and next, but today we've made no specific assumption on our rate case outcome.

Gabriel Moreen -- Mizuho Americas -- Analyst

Got it. And then last one from me. You mentioned that -- congratulations on FID and Golden, sorry Gulf Run, but can you talk a little bit, you mentioned being happy about the project. You talk about returns with just your foundation shipper and then I'm just curious, I know you have the non-binding open season but the incremental interest you're getting is up from additional demand mostly on the Gulf Coast or is that mostly from producers trying to get the volumes to the Gulf Coast?

Craig Harris -- Executive Vice President and Chief Operating Officer

This is Craig, Gabe, and a lot of discussions with both, but, yes, we are getting interest from incremental demand, that's building along the Gulf, that much like our foundation shipper need to get a clear access to supply in the South Louisiana and Gulf Coast area. So a lot of discussions around that both on supply push and demand pull.

Gabriel Moreen -- Mizuho Americas -- Analyst

Great. Thanks, guys.

Rod J. Sailor -- President and Chief Executive Officer

Thanks, Gabe.

Operator

Our next question comes from TJ Schultz from RBC Capital Markets. Please go ahead with your question.

TJ Schultz -- RBC Capital Markets -- Analyst

Hey, guys, good morning. Does the foundation shipper hold any option to take an interest in Gulf Run?

Craig Harris -- Executive Vice President and Chief Operating Officer

You know, not specifically an option, I think we may, as Rod said, we'll look at all alternatives to make sure we've got the best available source of capital for our projects, but there's not an option.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay, great. Thanks. That's all I had.

Operator

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

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Yes. Good morning, everyone. Just another one, if I can clarify on Gulf Run. There is a bit of a time difference between what the Golden Pass partners are talking about in terms of bringing their facility on, I think, it's 2024, and your late 2022 date. Can you just talk a little bit about what drives that difference and what do you expect then when it comes onto to be earning revenue on the pipeline at full rates from the shippers?

Craig Harris -- Executive Vice President and Chief Operating Officer

Yes, this is Craig, Dennis. Two things, one, on the gap between the two, some of that has to do with the Open Season conversations. We're going to make sure that for other interested parties that we're there in time and we continue to have discussions with Golden Pass around their expectations and their terms. But when we do bring it online, they are obligated to begin demand payment for their portion of the pie. But we have a slight acceleration in our schedule right now just to help with some other customers that have indicated interest.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Got it. That's all I have. Thank you.

Rod J. Sailor -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Tim Howard from Stifel. Please go ahead with your question.

Tim Howard -- Stifel -- Analyst

Hi, thanks for taking the question. Just first off on a clarification on Velocity, when did that transaction close? And then the 48,000 barrels per day reported, is that for the full quarter or just after the closing date?

Rod J. Sailor -- President and Chief Executive Officer

That's going to be the full quarter in terms of from when we close it, which is November 1st. So it's probably understated on a daily basis, as you amortize those volumes across the 90 or 91 days in a quarter versus just a 60 days that we've held it. Thank you for the clarification.

Yes, I think we've consistently said that at some point in time, we will like to get back to growing the distribution. Right now, given some of the dislocations we've seen in the market, the price of equity, we think it's best to continue to put our excess coverage back into the business that's paid us well, that's kept a strong balance sheet, that's given us the flexibility to execute on our plan held out with our Velocity acquisition.

So again, what we've said is as you see coverage and kind of the range that we closed the year, then we have to start thinking about return to unitholders. But again, under our current back powder, we think it's best to continue to put that cash back into the business.

Tim Howard -- Stifel -- Analyst

Helpful. Thank you.

Operator

(Operator Instructions) Our next question comes from Ned Panama from Wells Fargo. Please go ahead with your question.

Ned Panama -- Wells Fargo -- Analyst

Good morning. Thanks for taking the question. One on the renewed contract with OG&E on the Intrastate system, could you maybe talk about how the terms of this new contract compared to the prior agreement you had in place?

John Laws -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, Ned. This is John. Thanks for the question. There is a series of contracts that we have with OG&E both expiring and renewing. I think the right way to think about it is, long-term we'd expect a contribution there to remain relatively constant over time.

Ned Panama -- Wells Fargo -- Analyst

Okay, that's great. And then a obligatory question on plans for the IDRs and anything in the Centerpoint process that you can talk about?

John Laws -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, specifically of the IDRs, we are not paying under the incentive distribution rights. We've consistently said that, look our job is to be sure that Enable has access to properly cost of capital, properly priced capital. We'll continue to do everything we can to maintain a competitive cost of capital to-date. Again, we're not in the IDRs and I think when the time comes, that we think that that's an impediment to our ability to raise capital, then we'll talk with our Board and I am confident that our Board will listen and take the appropriate action.

I think the second part of your question was around Centerpoint, again, you've heard us talk in the past at some of the conferences that we probably have more clarity from Centerpoint than we've had in a while. Again, I've talked about using their Enable shares to help fund the equity portion of their capital program. They also said that when they equitized, raised equity for the Vectren acquisition, they over equitized and they don't really need access to equity capital to fund their capital program for the next 24 months. I think they talked about that on their November call.

So that's-I'm just parroting what they have said publicly but that's where we're at right now. So, again, I think you've got more clarity around their enhancements than we have seen in a while and I appreciate CenterPoint getting out and making those statements.

Ned Panama -- Wells Fargo -- Analyst

That's helpful. And that's all I had. Thank you.

John Laws -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Ned.

Operator

And ladies and gentlemen, at this time we've reached the end of today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

Rod J. Sailor -- President and Chief Executive Officer

Well, thank you very much for participating in our call this morning. I'd also like to thank all of our employees that made 2018 a great year and please everyone have a safe day. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.

Duration: 31 minutes

Call participants:

Matt Beasley -- Senior Director, Financial Planning & Analysis and IR

Rod J. Sailor -- President and Chief Executive Officer

John Laws -- Executive Vice President, Chief Financial Officer and Treasurer

Jeremy Bryan Tonet -- JPMorgan Chase & Co -- Analyst

Craig Harris -- Executive Vice President and Chief Operating Officer

Gabriel Moreen -- Mizuho Americas -- Analyst

TJ Schultz -- RBC Capital Markets -- Analyst

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Tim Howard -- Stifel -- Analyst

Ned Panama -- Wells Fargo -- Analyst

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