Enable Midstream Partners (ENBL) Q2 2020 Earnings Call Transcript

Enable Midstream Partners (ENBL)
Q2 2020 Earnings Call
Aug 05, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enable Midstream second-quarter 2020 earnings conference call and webcast. [Operator instructions] Mr.

Matt Beasley, you may begin your conference.

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. 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 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 in 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 Sailor -- President and Chief Executive Officer

Thanks, Matt. Good morning, and thank you for joining us. I would like to begin my remarks on Slide 4 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.

To date, 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, the crude focused shut-ins we saw during the second quarter were not as significant as previously anticipated. With the outlook for higher future prices, we have seen some lean 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 cost 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 in key operating basins at 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 also have achieved cost savings from releasing leased assets by redeploying existing assets and optimizing operating processing plant assets to match current volumes.

As I have said before, we are limiting our capital expenditures to contracted long-term transportation and 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 this 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, and 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 segment. 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 dekatherms 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, and 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 LNG, demonstrate the strength of Enable's integrated transportation systems and significantly extend the partnership's 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's MASS natural gas transportation project remains on schedule for an anticipated second-quarter 2021 start-up.

We also recently received a five-year commitment for 80,000 dekatherms 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 expirations 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 recontracting 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 in 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 play and the play's long-term outlook remains strong. Rigs also remain active in the Anadarko and Williston basins, building DUCs to support future volumes. I will now turn the call over to John to discuss second-quarter results.

John Laws -- Chief Financial Officer

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 Rob 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 in prices and changes in the fair value of derivatives as a result of increasing commodity prices from the first quarter of 2020 to the second quarter of 2020. Net income was also impacted by an increase in our O&M and G&A expenses for the quarter, primarily as a result of a noncash 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 noncash impacts from the changes in the fair value of derivatives and the noncash 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. And 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 -- President and Chief Executive Officer

Thanks, John. As I've 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 platform is 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 recontract 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.

Questions & Answers:

Operator

[Operator instructions] Our first question is from Gabe Moreen with Mizuho. Your line is open.

Gabe Moreen -- Mizuho Securities -- Analyst

Hello?

Rod Sailor -- President and Chief Executive Officer

Hello, Gabe.

Gabe Moreen -- Mizuho Securities -- Analyst

Hello. Good morning. I had a quick question and my connection is kind of poor, so hopefully, you can hear me. I [Inaudible] expectations sort of in some of the STACK on the dry gas coming back, has that come back entirely? And then also, you mentioned record volumes in the Ark-La-Tex trajectory that you expected for the back half of the year, if you can speak to that a little bit, too?

Rod Sailor -- President and Chief Executive Officer

Sure, Gabe. 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 -- they're more crude-focused areas. And as we said about -- in the release and as we said on this call, what we've seen just with the price dynamics, look like they're strengthening 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 their STACK wells get shut-in. And again, as we said, right now, we would anticipate that to stay -- those to stay -- those volumes to stay curtailed through 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. And again, we continue to see those volumes growing through the year.

And so I think, that was your question.

Gabe Moreen -- Mizuho Securities -- Analyst

Yeah. That was it. Two questions. Can you talk about the MRT Southbound project? Was that new? And then also sequentially, it looks like the amount of contracted capacity on the Interstate side may have declined slightly.

Can you [Inaudible] that? And what the impact was?

Rod Sailor -- President and Chief Executive Officer

Yes. We did announce the expansion of our Southbound capacity on -- oh, I'm sorry.

John Laws -- Chief Financial Officer

Yeah. No. That's right. So, Gabe, I think as Rod was saying, we got the Southbound contract, that is what we were talking about before we had entered and got everything finalized with the MRT agreement.

We did have some ability to flow south. So that is new. It is new for this year, but had been contemplated in the first quarter when we talked about the contribution that we were expecting from the rate case in future years. I think as you think about the sequential reductions, we did have -- just to remind you, some of the turnback that we had talked about in aggregate volumes on MRT from some of the larger customers there.

But again, much of that was replaced with the new rates that we talked about in the first quarter. And then we also had an exploration online CP earlier this year so that's showing up in the sequential numbers as well. So nothing really new from a development standpoint than what we had otherwise contemplated.

Rod Sailor -- President and Chief Executive Officer

And really no capital per se, de minimis capital on the Southbound expansion, if that was your question.

Gabe Moreen -- Mizuho Securities -- Analyst

Yes. That's really helpful. And last one from me is just on -- there's some language in the queue about the DAPL shutdown or potential shutdown and the impact on the Williston in the last couple of pads still being off-line, is that waiting on a DAPL decision? And if DAPL does go off-line, your view in terms of how volumes look there?

Rod Sailor -- President and Chief Executive Officer

Yeah. I would say we feel like we have outlets for all of our crude outside of DAPL capacity. But I would say that, again, 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. But again, right now, we believe that, again, the two pads that are off-line, that's not related to DAPL.

Operator

Our next question is from Colton Bean with Tudor, Pickering. Your line is open.

Colton Bean -- Tudor, Pickering, & Holt Co. -- Analyst

Good morning. Just looking at the full-year guide, the $900 million to $960 million of 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 -- Chief Financial Officer

Yeah, Colton. I think where we're at, as we affirmed on the call this morning, our range is -- we really wouldn't point you directionally anywhere kind of north of the midpoint. We're comfortable with the range as it sits today.

Colton Bean -- Tudor, Pickering, & Holt Co. -- 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 project financing?

Rod Sailor -- President and Chief Executive Officer

Yes. Again, we've got a lot -- as John has mentioned in the past, we got a lot of options around the Gulf Run funding. I think we need to -- as we said on the call and in the slides, we still have some commercial discussions going on. We need to get those settled.

We would anticipate that we'd have everything wrapped up by the end of the year on that. As to the answer of project financing, yes, we've got really strong contracts and currently very good credit quality behind that. That is an option we could look at, along with some other discussions we're having, both with financials and other players.

Colton Bean -- Tudor, Pickering, & Holt Co. -- Analyst

Great. Appreciate your comments.

Operator

Your next question is from Jeremy Tonet with JP Morgan. Your line is open.

Jeremy Tonet -- J.P. Morgan -- Analyst

Hi. Good morning. Just wanting to kinda pick up with the guidance question from before here. And you said, "wouldn't point to anything north of the middle of the range." And I guess, just trying to think of how that ties to, I guess, rigs running on your area.

Is that kind of assuming you have the current drilling activity levels, stay consistent from what you've seen in July with the seven rigs here or is that assuming kind of rigs decline? Just trying to get a feeling for those signposts there.

Rod Sailor -- President and Chief Executive Officer

Yes. I'll just say a few words and then turn it over to John, Jeremy. But I think, again, as we've said, we continue to see activity along our system, specifically in the Anadarko and Haynesville. And in Anadarko, we're not seeing a lot of completions.

Primarily, what we're seeing is DUC counts grow in the Anadarko and in the Bakken area. Again, there's still some uncertainty around price and that's why we're guiding the way that -- again, that the way we're guiding. And John, you may have --

John Laws -- Chief Financial Officer

No. I think that's well said.

Jeremy Tonet -- J.P. Morgan -- Analyst

Got it. And during the quarter, I think you guys made some bond repurchases out there. Just wondering if that's something we should expect to continue seeing happen, what's the kind of the rate -- the latest with the rating agencies there, and I guess your thoughts on retaining investment grade.

John Laws -- Chief Financial Officer

Yes. So I think, Jeremy, it's John, a three-part question there. As it relates to the repurchases, those were opportunistic in nature. Through the second quarter, at least when we started early, spreads were very wide.

Those bonds or the complex was trading at a pretty deep discount. We saw a meaningful recovery, of course, 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. But where we're at from a rating agency standpoint is not dissimilar from where we've been in the past.

Ratings have all recently been affirmed. We do have negative outlooks at S&P and Fitch but I think we're continuing to work toward the efforts that we've described for you this year, earlier in the second quarter around the actions and initiatives that we've taken to preserve liquidity and flexibility through the year and for the future. So the agencies are well aware of that. They've commented on that and are out there.

And so our dialogue there hasn't changed, and we continue to make good progress on the commitments that we've made on cost, improving liquidity and maintaining that capital discipline as well.

Jeremy Tonet -- J.P. Morgan -- Analyst

Got it. Makes sense. And just the last one, if I could. Wanted to get your thoughts with regards to some M&A activity we've seen in midstream.

Recently, you saw Berkshire kind of make a big purchase in this space. And wondering your thoughts there. You guys own transmission assets of kind of similar stature of that. And just also, I guess, with the two new additions to the board, wondering if there'll be any kind of review of the strategic outlook for Enable at this point?

Rod Sailor -- President and Chief Executive Officer

Well, I think 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. So it would probably be the only answer I would give as it relates to some of the M&A activity that we've seen. I would say as to the new Board members, they were appointed yesterday, got two very strong industry individuals, have a lot of upstream and midstream experience, very well-regarded in the space.

And we look forward to working with them but as we see it, they don't see that it has any change in the direction that we're going in.

Jeremy Tonet -- J.P. Morgan -- Analyst

Got it. Fair enough. I'll stop there. Thank you.

Rod Sailor -- President and Chief Executive Officer

Thank you, Jeremy.

Operator

Our next question is from Shneur Gershuni with UBI. Your line is open.

Shneur Gershuni -- UBS -- Analyst

Good morning. Maybe to follow-up on the last question there with respect to kind of the new board members and so forth. It sort of seems every couple of years, there sort of seems to be a discussion about your GP's intent with respect to their holdings and so forth. It's just -- is this therapy as of late? Is that just similar to the ones we heard a couple years ago or does the current environment, the fact that kinda your distribution earlier this year sort of accelerated and sort of changed the pace or interest in trying to sort of resolve the entire GP versus LP relationships with Enable?

Rod Sailor -- President and Chief Executive Officer

Well, again, I think if you're addressing that as to how CenterPoint fused their investment in Enable, I think that's a question better asked of CenterPoint and their management.

Shneur Gershuni -- UBS -- Analyst

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

Rod Sailor -- President and Chief Executive Officer

Well, I would say this way, again, generally, our predisposition is to own and operate our assets. We think that where Gulf Run sits, and again, the ability to bring gas in from both the Carthage and Perryville sides, that gives us a lot of optionality around our system. But again, we'll evaluate all options, and we would never, out of turn, just dismiss any options if we think that it brings more value to Enable than any other option.

Shneur Gershuni -- UBS -- Analyst

OK. And maybe one last follow-up. How should we think about Haynesville's production for the second half of '20 into '21? Just kind of 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 can talk about the puts and takes as we sort of think about your Haynesville setup.

Rod Sailor -- President and Chief Executive Officer

Yes. The MVCs have rolled on that system, and we continue to see volumes grow. Again, it's our belief that, again, those are fairly and significantly hedged. They've done a great job in maximizing -- minimizing well costs and maximizing the returns around the Haynesville production, and we would continue, as we sit here today, to see it growing into 2021.

And again, we're not giving any guidance on 2021 yet.

Shneur Gershuni -- UBS -- Analyst

Fair enough. Appreciate all the color today, guys. Thank you very much and have a safe day.Thanks, Shneur. You too.

Operator

Your next question is from Anil Duval with Seaport Global Securities.

Unknown speaker

Hi. Good morning, guys, and hopefully you're all safe. Thanks for taking my question. I was wondering if you could talk a little bit about SESH and especially with regards to the competitiveness of that natural gas in the Florida market.

John Laws -- Chief Financial Officer

Sure. Good morning. Look, I think the way that we think about SESH is SESH comes off as sort of the Eastern end of our line GP system, and there's a number of other interconnection points and feeds down into the Gulf Stream delivery point and on into the forward markets. We think that that pathway is a cost-advantaged pathway, is one that has served the Florida and Southeast power markets for a long time, and we believe that it will continue to do so.

As the call for generation over time, we expect to continue to grow out of that area in that basin. So we see it as a very competitive alternative for the Southeast power markets.

Unknown speaker

And then as you look at recontracting, could you give us a sense of kind of range of options that we should think about in terms of terms or the rates as you process?

John Laws -- Chief Financial Officer

I'd stop short of going exactly there. We are in active discussions with a number of parties around how we think about recontracting. And when I say we, I mean, the SESH joint venture. And so those are competitively and commercially sensitive.

But again, I'll fall back to we do believe that this is a competitive source of supply for those markets, and we think there's a good long-term viability for that asset.

Unknown speaker

On that, in terms of the timing, are there any regulatory restrictions or kind of things that we should be aware of in terms of resolving that recontracting?

John Laws -- Chief Financial Officer

Not that I'm aware of.

Unknown speaker

OK. Thanks for taking my questions.

John Laws -- Chief Financial Officer

Yeah. You bet.

Operator

[Operator instructions] Our next question is from Alex Kania with Wolfe Research. Your line is open.

Alex Kania -- Wolfe Research -- Analyst

Thank you. Good morning. Two questions for you. I think first is, could you talk a little bit about the cadence of O&M cuts? Just looking at Q2, it looks like it was flat or a little bit higher than Q1, just O&M and G&A, and so that includes things like cost to achieve? And then maybe if you could talk a little bit more about the flex points on when you might wanna look at -- look more -- look harder at additional cost cuts, I guess, just as you've mentioned there as well.

Are we in an environment where that still makes sense or do you think it could get worse again? And the second question would just be on, I guess, following up on SESH as well, as putting into context with CenterPoint. Kind of how -- as I recall in the Q, there's a provision where, I guess, Enbridge could buy -- could exercise an option to buy SESH in the event that CenterPoint kind of has a lower interest in the business. Kind of what are the mechanics of how that would work?

Rod Sailor -- President and Chief Executive Officer

Yes. On your cost cuts, yes, I mean, we started after our announcement back in late March to start cutting costs. We've gone through, as we said in the release, some work redesign and we're largely through that process. We've now identified and achieved the majority of the cuts that we talked about for 2020.

Some of those, especially around headcount reductions, we'll get a full year effect in 2021. We've still got some work to do to achieve all of the cost cuts that we talked about in our release for 2021 but I think we're on track for those, and we're going through them. And so again, I think you can continue to see our O&M come in line with -- or the cost cuts come in line with what we announced in late March and early April.

John Laws -- Chief Financial Officer

And, Alex, it's John. I just want to make sure you took note. In the O&M and G&A numbers for this quarter, there was a $17 million loss on retirement embedded in the quarter.

Rod Sailor -- President and Chief Executive Officer

And take the SESH question.

John Laws -- Chief Financial Officer

Yes. And then as it relates to SESH, you're right, there is a mechanism in there. But look, at the end of the day, there are -- it's not quite as straightforward as you might think. It's complex.

There are a number of triggers that one would have to work through in order to understand if the test had been satisfied to trigger the repurchase option. And then the repurchase, to the extent there would be one, would be at fair market value in any event.

Alex Kania -- Wolfe Research -- Analyst

Great. Thanks.

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 -- President and Chief Executive Officer

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, and have a great day.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Matt Beasley -- Head, Investor Relations

Rod Sailor -- President and Chief Executive Officer

John Laws -- Chief Financial Officer

Gabe Moreen -- Mizuho Securities -- Analyst

Colton Bean -- Tudor, Pickering, & Holt Co. -- Analyst

Jeremy Tonet -- J.P. Morgan -- Analyst

Shneur Gershuni -- UBS -- Analyst

Unknown speaker

Alex Kania -- Wolfe Research -- Analyst

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