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Enable Midstream Partners LPÂ (ENBL)
Q4Â 2019 Earnings Call
Feb 19, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Enable Midstream Partners Fourth Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Enable's Senior Director of Investor Relations, Mr. Matt Beasley. Please go ahead.
Matt Beasley -- Head-Investor Relations
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 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 J. Sailor -- President and Chief Executive Officer
Thanks, Matt. Good morning, and thank you for joining us for today's call. Enable rose to the challenge during a year of significant change for the energy industry in 2019. And I want to start my remarks by highlighting some of our accomplishments for the year.
Operationally, Enable achieved record results in 2019 for natural gas gathered, natural gas processed, natural gas transported and crude oil and condensate gathered volumes. Crude oil directed drilling drove significant increases in crude oil and condensate volumes during the year, further validating our 2018 purchase of crude and condensate gathering assets in the Anadarko Basin.
Through our contracting efforts during the year, we extended our weighted average remaining firm transportation contract life from 3.6 years to 4.1 years, demonstrating continued customer demand for our transportation services. We also made significant progress in our MRT rate case during 2019, and we have agreed to settlement terms with all of MRT's customers that participated in the pipeline's recent rate cases.
Our business performance resulted in higher adjusted EBITDA and DCF for both the fourth quarter and full year when compared to 2018. We achieved the upper end of our 2019 outlook ranges for both measures, and our continued focus on capital efficiency resulted in expansion capital expenditures below our 2019 outlook range.
With our continued growth in distributable cash flow since 2015, we increased the cash return to common unitholders in 2019 by raising the rate of our quarterly distribution by approximately 4% while still maintaining healthy distribution coverage. Although we had a strong year of performance in 2019, I want to acknowledge the industry backdrop we face.
Commodity prices and U.S. rig counts have decreased in recent months and forward commodity prices point to significant challenges in 2020. With these headwinds, I want to highlight why I believe Enable is well positioned for the current market environment.
Financially, Enable is strong with an investment-grade balance sheet, substantial distribution coverage and well over $1 billion of liquidity as of the end of 2019. We have a diversified business mix and asset footprint. Our gathering and processing business spans four different basins, and our customers include high-caliber operators in some of the best areas of the SCOOP, Haynesville and Bakken plays. These operators continue to deploy significant capital in these plays while demonstrating improved results at lower costs.
Our transportation and storage business is often overlooked. But it contributed over 30% of our total gross margin in 2019, which doesn't include the additional contribution from our 50% investment in the SESH interstate pipeline. This business provides a strong base of firm fee-based cash flows, and we plan to grow this business with our MASS and Gulf Run pipeline projects.
We have two strong utility sponsors in CenterPoint and OG&E, and both sponsors are significant holders of common units with combined ownership of almost 80%. Enable is focused on costs, and we demonstrated this by making difficult decisions and achieving significant cost savings in a challenging business environment following the fall of commodity prices in late 2014.
All the employees are rewarded through our short-term incentive programs to reduce costs and improve returns on invested capital. And Enable's management team is well aligned with our common unitholders, with all management equity compensation tied to our common units.
The next slide highlights our continued execution over the past four years. Since 2016, our natural gas gathered volumes have grown 62%, our transported volumes have grown 27%, our adjusted EBITDA has grown 31%, and our distribution coverage ratio improved from approximately 1.2 times in 2016 to almost 1.4 times in 2019. With our strong business performance and a focus on capital discipline, Enable was able to self-fund nearly 80% of our 2019 capital program, after distributions.
Turning to the next slide. We continue to balance our business growth with a focus on operating efficiency and cost discipline. We have grown gross margin over the last four years while significantly improving our O&M and G&A expense as a percentage of gross margin. As I mentioned earlier, our businesses generate significant fee-based cash flows, and we expect over 90% of our cash flows in 2020 to be either fee-based or hedged. Our strong financial position is highlighted by our year-end debt-to-EBITDA level of approximately 3.8, which was below our target and favorable when compared to many of our peers.
The next slide provides a brief update on our Gulf Run Pipeline project. Enable expects to file certificate applications with the FERC by the end of the first quarter 2020, seeking authorization for the project. The project scope filed in the application would provide approximately 1.7 Bcf per day of capacity, which would both accommodate Golden Pass' 1.1 Bcf per day commitment, and allow for additional capacity subscriptions that may develop from ongoing discussions.
At an estimated total cost for the filed scope of approximately $640 million. The project will be appropriately sized to meet contracted customer capacity commitments and we estimate a capital cost of approximately $500 million to meet Golden Pass' current 1.1 Bcf per day commitment.
Turning to our fourth quarter 2019 commercial highlights. Producers remain active across Enable's gathering footprint with 27 rigs currently drilling wells expected to be connected to Enable's gathering systems. Our market share in the Anadarko Basin remains strong with 47% of all active rigs in the SCOOP and STACK plays, drilling wells expected to be connected through Enable's gathering systems.
While rig counts in the Anadarko Basin declined over the year, we still saw record annual volumes in 2019, highlighting a growing disconnect between rig activity and volumes in the basin that was featured in a recent Gas Daily article.
In the third quarter of 2019, operators saw average cycle time improvements of 17% in the basin when compared to a year ago. We are partnered with some of the best operators with significant acreage positions in the core areas of the basin that continued to allocate significant capital and deliver favorable results. Crew-directed drilling remained strong, and in the fourth quarter, Enable's crude oil and condensate gathered volumes reached 153,000 barrels per day, which is primarily driven by continued growth in the Anadarko Basin.
In our transportation and storage business, Enable contracted or extended over 1.2 million dekatherms per day of transportation capacity during fourth quarter 2019, including contracts associated with the MRT rate cases that are subject to FERC approval. EGT has seen continued increases in activity on its Line CP segment. And in the fourth quarter, EGT contracted or extended over 235,000 dekatherms per day of firm transportation service on Line CP.
As I previously mentioned, MRT has agreed to rate case settlement terms with all of MRT's firm capacity customers that participated in the pipeline's recent rate cases, with 90% of third-party capacity now extended into 2024. MRT expects FERC to rule on the proposed settlements in the first half of 2020 and the pipeline's new recourse rates and newly negotiated rate agreements will become effective upon FERC approval.
Upon approval of the settlements, MRT will make any necessary refunds to customers, and recognizes income in the amounts that have been reserved but not refunded for periods prior to the effective date of the FERC approval. Assuming the settlements are approved in 2020, MRT expects revenues for 2020 to be higher than the revenues MRT recognized in 2018 on the old rates and volumes that were unaffected by capacity turnbacks.
As I close this section, I just want to reiterate how pleased I am with what Enable accomplished in 2019. Even with the challenges of the current market environment, we expect 2020 to be another strong year of execution.
With that, I will now turn the call over to John to further discuss our fourth quarter and full year 2019 operational and financial results.
John Laws -- Executive Vice President, Chief Financial Officer & Treasurer
Thank you, Rod, and good morning, everyone. I'll now cover a few of our key operational and financial metrics for the quarter and 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 the operational performance overview slide. 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 have a 2% increase in natural gas gathered volumes and a 5% increase in natural gas processed volumes in 2019 compared to full year 2018.
The substantial increase in our crude oil and condensate gathered volumes for full year 2019 compared to the prior year was primarily driven by our Anadarko Basin crude and condensate gathering system acquisition as well as a 24% increase in crude oil gathered volumes in the Williston Basin as a result of continued drilling activity by XTO.
In our transportation and storage segment, an 11% increase in our transported volumes over the prior year was a result of newly contracted capacity, including volumes from EGT's CaSE project and EOIT's Muskogee project.
Moving to our financial results on the next slide. Our adjusted EBITDA increased for both the fourth quarter and full year 2019 when compared to 2018. The higher adjusted EBITDA was driven by higher gross margin after adjusting for non-cash items, which for Q4 '19 compared to Q4 '18 was driven by increased fee-based crude oil, condensate, water and natural gas gathering business and increased system management activities.
For full year 2019 compared to full year 2018, the increased gross margin was driven by increased fee-based gathering business and an increase in realized gains on natural gas, condensate and NGL derivatives. For both the fourth quarter and full year of 2019 when compared to 2018, the increase in gross margin was partially offset by higher O&M and G&A, primarily due to increases in payroll costs and outside services costs associated with pipeline safety and storage integrity work as well as a loss on retirement of assets.
Distributable cash flow increased by 3% year-over-year and 2% quarter-over-quarter. These increases were primarily driven by higher adjusted EBITDA, partially offset by higher adjusted interest expense. Maintenance capital also increased year-over-year as a result of increased pipeline safety and storage integrity work.
Our net income measures decreased for both fourth quarter and full year 2019 when compared to 2018. The decrease for each period was primarily related to a non-cash goodwill impairment charge of $86 million associated with the Anadarko Basin reporting unit in the Gathering and Processing segment. The impairment was driven by a decrease in forecast cash flows as a result of lower forward commodity prices and reduced producer activity and an increase in the partnership's weighted average cost of capital.
Net income was also impacted by higher O&M expenses, higher depreciation and amortization expense and higher interest expense for both the fourth quarter and full year of 2019. For fourth quarter 2019, Enable's gross margin included a $2 million gain on derivative activity compared to a $49 million gain on derivative activity for the fourth quarter of 2018, resulting in a decrease in net income of $47 million.
After considering the distributions declared, Enable generated a distribution coverage of 1.23 times for the fourth quarter and an impressive 1.38 times for the full year of 2019. For 2020, we are affirming the ranges for the financial outlook that we have previously provided to include a distribution coverage ratio of approximately 1.3 times and leverage of approximately 4 times.
That said, in order for Enable to perform at or above the midpoint of the range for net income, adjusted EBITDA and DCF, commodity prices and producer activity would need to improve from current levels.
As I close my remarks, I want to reiterate the points Rod made at the beginning of the call. Enable is financially strong with a diverse, high-quality asset base. We acknowledge the challenges of the current environment and will remain focused on cost discipline and efficient capital deployment.
I will now turn the call back over to Rod.
Rod J. Sailor -- President and Chief Executive Officer
Thanks, John. Turning to the next slide, I want to share with you some of our key focus areas for the year. Enable takes pride in its strong financial position. As we have highlighted in our 2020 outlook, we plan to generate substantial cash flow in 2020 while maintaining our investment-grade credit metrics.
Our large integrated system provides significant optimization opportunities, and we continue to identify new opportunities for cost savings and revenue enhancements. We remain committed to commercial excellence and we see additional high-value opportunities across our footprint.
Our pursuit of new commercial projects remain balanced by our commitment to capital discipline. And we will continue to be laser-focused on rightsizing our expansion capital program for customer activity.
Finally, Enable is a strong company that is built for the long term, and we have developed a plan to expand our reporting on important sustainability issues by the end of the year.
This concludes my remarks and we will now open the call up for your questions.
Questions and Answers:
Operator
Yes, thank you. [Operator Instructions] And the first question comes from Gabe Moreen with Mizuho.
Gabriel Moreen -- Mizuho Securities -- Analyst
Hi, good morning, everyone. I just had a question on O&M trends. I think 4Q O&M came in a bit above what we were expecting. And I think on your comments, you referenced outside services. Should we think of the 4Q run rate for O&M as sort of a onetime tick up or how should we think about that within the context of 2020 guidance?
John Laws -- Executive Vice President, Chief Financial Officer & Treasurer
Yes. I think that you should think of that as kind of a one-time hiccup pickup. We had some break fix that we had to put into the fourth quarter.
Gabriel Moreen -- Mizuho Securities -- Analyst
Got it. And Rod, maybe can you talk about sort of the basins and where some -- you're seeing some potential lower activity, some of the commercial maybe objectives you're trying to achieve? Are there any combinations you're looking at with third parties or rationalizations of capacity between yourselves and others?
Rod J. Sailor -- President and Chief Executive Officer
Sure. Look, we do that all the time. Again, we'll be more focused on 2020 around that, ways that we can potentially avoid some capital outlay by either offloads or other efficiency methods to use some facilities that are already in place, whether there are ours or someone else's.
Gabriel Moreen -- Mizuho Securities -- Analyst
Okay. And then maybe last one for me. I noticed Williston crude oil volumes were down pretty significantly, sequentially, 4Q over 3Q, if I'm thinking about it right. Can you speak to that and what's embedded in the 2020 guidance? Then also, I noticed you didn't put your volume outlook in the slides, like you did last quarter. Is there any areas where you'd, I guess, want to shift that guidance volume-wise based on sort of the current outlook and what you're seeing?
Rod J. Sailor -- President and Chief Executive Officer
Yes. No, great question. First, pulling some of the volume information out is consistent with what we've done in years past. We were, again, focused on reaffirming the financial guidance. And so that was the primary rationale there. As you ask questions around the Bakken, we continue to see some deferral of activity up there related to some infrastructure issues. So we're seeing a debt count sort of build in that area.
And so we think that, that may push volumes off to the back half of '20 into early '21, don't want to give -- we're not giving any guidance past '20, but we're seeing some activity getting pushed down a little bit. Some of that's consistent with what we were thinking in November and some of it's, again, due to some constraints by our producer up there. Not infrastructure on our side, but other issues.
Gabriel Moreen -- Mizuho Securities -- Analyst
Got it. Great, thank you.
Operator
Thank you. [Operator Instructions]. And the next question comes from Jeremy Tonet with J.P. Morgan.
Jeremy Tonet -- J.P. Morgan -- Analyst
Hi, good morning. Just wanted to pick up on the guidance. And I think in your prepared remarks, you talked about commodity prices need to improve to hit the midpoint of the guide. Was just wondering if you could help us think through that a bit more as far as the different levels of sensitivity you have?
As the strip is laid out in front of us as it is, do you still anticipate being in the bottom half of the guide or kind of what parameters should we think about to make sure the bottom end of the guide is still kind of a floor level? Any details that you could provide there would be helpful.
Rod J. Sailor -- President and Chief Executive Officer
Yes. I mean, I'll start, and John, will weigh in. But again, we're reiterating guidance. So we're -- again, we think that we'll be within that range as we sit here today. Clearly, as John made the comments in his remarks that we need to see some help from commodity prices and from activity to be at or above that midpoint. So that would point you toward the back half of the range, as we currently sit here. We're clearly seeing some activity impacts on the gas side from the coronavirus, that's impacting, I think, natural gas, not just across our footprint, but in other areas.
I would just say, again, we're putting guidance together in November, we were expecting a little more activity than we saw at the tail end of December, we saw some wells drilled, but not completed. Those completions are getting pushed off into this year. So again, we're setting up for we feel, still a constructive back half of 2020 and construction out past our current guidance period.
John, I don't know whether you want to add anything there?
John Laws -- Executive Vice President, Chief Financial Officer & Treasurer
Yes. Hey Jeremy, good morning. It's John. Just a couple of things to add. So first, on your question explicitly around sort of where we're at with the strip, and will that still land us within guidance. The way that we look at things with our current assumptions, the strip would not take us out of guidance range. And we did provide some sensitivities for 2020 that were based on the assumptions that we had previously laid out for sensitivities to give you some ability to calibrate from where we were to where we may be now. And that's in the -- I think it's on Page 16 in the deck from this morning.
Jeremy Tonet -- J.P. Morgan -- Analyst
Got it, thanks. And maybe just coming at this from a slightly different direction here. It seems like the rig count maybe declined a little bit more quarter-over-quarter than you were expecting at this point. As you look forward now and still contemplating being at the bottom half of the guidance, what type of rig count do you see kind of going forward that would land you there? Do you still see kind of declines across the year or do you expect it to stabilize at some point? Any color you could provide there.
Rod J. Sailor -- President and Chief Executive Officer
Well, I would say, as I mentioned in my commentary, we can't just focus on rig count. We're seeing improved completion methods. And again, it's also highly dependent on specifically what areas that producers drill in. And we see them testing other areas. Clearly, in the Anadarko, they're still drilling -- are focused on drilling for oil. Again, the Haynesville, it's largely -- it is natural gas.
So again, I don't want to focus just on rig count because we are seeing improved efficiencies and increased cycle times around our footprint. I'd leave it there, but as I mentioned, we are seeing in a couple of our areas, some increase in DUC count. Not a, I would say, a material increase, but again, it just shows that there are some completions getting pushed off until later in the year.
Jeremy Tonet -- J.P. Morgan -- Analyst
Got it, thanks. And maybe just want to follow-up with the impairment as well. I mean, it seems like the Anadarko is one of the places that you guys have a good rig count, seem to have some good activity behind your system there. And I was wondering if you could just give us a little bit more detail on what drove the impairment or if there's something different about this asset versus the rest of your footprint?
John Laws -- Executive Vice President, Chief Financial Officer & Treasurer
Yes. Sure, Jeremy. There's a couple of things there. I'd say, one, is we test our goodwill every year. And generally, that happens in the fourth quarter. And if you just think about commodity prices from, call it, fourth quarter of last year to where they ended up fourth quarter of this year. It's a pretty marked change across the board to include NGLs. And when you think about some of the other factors that we mentioned, again, we saw the shift in rig activity from the STACK to the SCOOP.
And again, some of the customer decisions there where they removed some rigs. That had some impact there. And then lastly, look, I think where the market multiples are in valuation as they have direct implications to cost of capital, that gets considered in that analysis. We're not afforded the ability to look at it on a temporary basis. It's as of that point in time, it's how the accounting literature works.
And so it really is the confluence of those three factors coming together at what we believe is a low point for each of those three things come together, again, around the commodity prices, current levels of rig activity and the increased cost of capital that's been inherent in the partnership units.
Jeremy Tonet -- J.P. Morgan -- Analyst
Got it. And just last one if I could. With regards to kind of target leverage there. Just wondering if there's any consideration to kind of bring that number lower, maybe closer to something -- closer to low 3s or three, just given kind of where market sentiment is and just kind of the concern in the market, bringing -- targeting a bit of a lower level there? And would it ever make sense to kind of reduce the distribution to achieve that ends or anything that you could talk about on that side would be helpful.
Rod J. Sailor -- President and Chief Executive Officer
Yes. No, I'll address that one. First and foremost, as I said in my closing remarks, a key priority for us in 2020 is leverage. We've always prided ourselves on a strong balance sheet. So we need to continue to work on our leverage levels, specifically in times like these. We'll be -- again, key focus on costs and key focus on the balance sheet. And right now, that is kind of our -- two of our top priorities.
Jeremy Tonet -- J.P. Morgan -- Analyst
Got it. That's it from me. Thank you.
Operator
Thank you. And the next question comes from Alex Kania with Wolfe Research.
Alex Kania -- Wolfe Research -- Analyst
Thanks for taking my questions. I had a question just related to the MVC update that you gave in the 10-K. It looked like, if I was just reading it right that the make whole payment, I guess, on a gross number, looked like it was a little bit higher in 2019 than it was in 2018. I was just kind of wondering how you think about -- if that was the right reading and kind of how you think about that into 2020.
John Laws -- Executive Vice President, Chief Financial Officer & Treasurer
Yes. So Alex, good morning. This is John. I'd say on the -- I think you're referring to the Ark-La-Tex MVCs, in particular, where what we did see in 2019 was the roll-off of one set of our MVC contracts out of '19 into 2020. As Rod mentioned, we have seen some deferrals of well completion activity. The Ark-La-Tex was an area where we saw that. We're seeing some shifting out of that production curve into future periods.
So, from our standpoint, again, as we roll out of 2020 entirely, the Ark-La-Tex MVCs will be completely satisfied, at least from a time standpoint. And we'll be operating more in line there and collecting revenues on a volume-driven basis. And so, from our standpoint, we continue to see and expect growth over time in the Haynesville area based on conversations from our producers. It just has been shifted out a little bit from what we had anticipated in the fourth quarter.
Alex Kania -- Wolfe Research -- Analyst
Got it. And then on Gulf Run, it sounds like the certificate is going to have a sizing of the pipe at -- I think at 1.7 Bcf a day. I think that in the past you talked about being potentially getting as large as 2 plus. Is there a sense that just as the original sizing of the certificate, you could still potentially know over the long term, if there's good momentum on contract in the future that it could be kind of upsized to a larger capacity by a compression or something like that?
John Laws -- Executive Vice President, Chief Financial Officer & Treasurer
Yes.
Rod J. Sailor -- President and Chief Executive Officer
Yes. As we sit here right now as we've discussed, Golden Pass is signed up for 1.1. Bcf. We've continued to look for opportunities to upside off of the 1.1 Bcf. The 1.7 Bcf is consistent with our pre-filing that we made with the FERC. And so we're making our formal application consistent with what we've pre-filed. We will continue to look at opportunities to grow above our currently contracted 1.1 Bcf.
At a point in time, we will need to make a decision. We'll have to get into queue on, on pipe orders. And we'll have to put commercial -- we have to put some of their pencils down as it relates to subscribing new transportation capacity there. But I think you should think about it as, we're at 1.1 Bcf, and we're filing at 1.7 Bcf. There's always the opportunity to go -- if you see the activity higher, would have to amend the filing. But right now, those are sort of the levels that we're working within.
Alex Kania -- Wolfe Research -- Analyst
Great, thanks so much.
Operator
Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sailor for any closing remarks.
Rod J. Sailor -- President and Chief Executive Officer
Well, thank you very much for participating in the call today. Appreciate your questions and commentary. In closing, I want to recognize our employees for their hard work, dedication and continued focus on safety. Thank you all for your interest in Enable and have a safe day.
Operator
[Operator Closing Remarks]
Duration: 33 minutes
Call participants:
Matt Beasley -- Head-Investor Relations
Rod J. Sailor -- President and Chief Executive Officer
John Laws -- Executive Vice President, Chief Financial Officer & Treasurer
Gabriel Moreen -- Mizuho Securities -- Analyst
Jeremy Tonet -- J.P. Morgan -- Analyst
Alex Kania -- Wolfe Research -- Analyst
