Enable Midstream Partners (ENBL) Q3 2020 Earnings Call Transcript

Enable Midstream Partners (ENBL)
Q3 2020 Earnings Call
Nov 04, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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

Matt Beasley, senior director of investor relations. Thank you, Mr. Beasley. Please go ahead.

Matt Beasley -- Senior Director of 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 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 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. As you may recall from our last earnings call, the impact from shut-in production this year has been less than we anticipated, and I am pleased to now report that all production that was off-line due to depressed commodity prices is back online.

In our transportation and storage segment, we recently received the FERC's environmental assessment for our Gulf Run Pipeline, a key milestone for that project. Earlier today, we released our inaugural sustainability report demonstrating our commitment to transparency and sustainable business practices. I plan to share some highlights from the report with you at the end of today's call. 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. Finally, I want to once again emphasize that we continue to benefit from our significant scale, diversified assets, integrated systems, unique market solutions and a strong base of firm demand-driven transportation and storage contracts. I will now cover a few financial highlights on the next slide. Due in part to lower-than-expected impacts from producer volume curtailments this year, I am pleased to report that we now anticipate performing in the upper half of our previous 2020 outlook ranges for adjusted EBITDA and distributable cash flow.

If it weren't for the noncash impairment of our investment in the SESH joint venture, we would have expected to perform in the upper half of our 2020 outlook for net income. Due to our business performance and the actions we took to reduce distributions, capital and operating costs in response to the industry downturn earlier this year, we have seen DCF exceed distributions by $293 million, allowing us to fully fund our expansion capital program while decreasing total debt by almost $100 million. We remain focused on the aspects of our business that we can control, including our cost structure. Our progress on cost-reduction initiatives includes annualized savings of $21 million for aligning our organizational structure to the current industry environment, including the impact of planned retirements and eliminating open positions, $14 million from reducing rental compression and treater assets and $2 million from optimizing our processing fleet by putting plants in standby operations and implementing crew less operations in select plants.

As we look forward to 2021, we remain focused on capital discipline and will continue to prioritize contracted long-term transportation and storage projects and contracted capital-efficient gathering and processing projects. Finally, while some producers have faced credit challenges in the current commodity price environment, we have not experienced any meaningful credit losses during this cycle. Now turning to the next slide. Enable's Gulf Run Pipeline project is a key energy infrastructure project serving growing LNG markets.

The project is backed by a 20-year commitment from Golden Pass LNG, a joint venture between Qatar Petroleum and ExxonMobil. The project will help add to the global supply of LNG, which should support the displacement of higher carbon intensity fuels worldwide. We continue to advance the project and just last week, on schedule, the FERC issued the project's Environmental Assessment. We anticipate finalizing the project scope and financing plans in the coming months.

And we continue to believe that we will have a number of financing options for the project, given its firm demand-driven revenues and strong customer base. Turning to our transportation and storage commercial highlights on the next slide. The segment continues to benefit from its firm fee-based contracts and the segment is anchored by large investment-grade utilities. Our integrated systems serve as a crucial link between supply and downstream markets, and we continue to have success contracting capacity.

Through September, we have contracted or extended almost 1.5 million dekatherms per day of transportation capacity with an average volume-weighted contract life of over five years. On our EGT system, the MASS project has received all required regulatory approvals and construction has begun. The project is backed by a firm five-year commitment for 100,000 dekatherms per day and we anticipate placing it in service in the second quarter of 2021. On our MRT system, the Southbound Expansion project is in service and the project is backed by a firm five-year commitment for 80,000 dekatherms per day.

Finally, despite recent contract expirations, our SESH joint venture with Enbridge remains a critical artery serving utility markets in the Southeast. Turning to our Gathering and Processing and commercial highlights on the next slide. As I mentioned in my opening remarks, we have seen all production that was shut-in due to depressed commodity prices come back online. And we have experienced no noticeable production performance degradation from these wells.

Producers remain active on our gathering footprint with six rigs currently drilling wells expected to be connected to Enable's gathering systems. Substantial DUC inventories have been built behind both our Anadarko and Williston Basin systems with approximately 175 DUCs between both systems. These DUCs provide an inventory of wells with the lower economic hurdle to be completed because they do not require drilling capital investment. On our Anadarko crude oil and condensate gathering system, we recently completed an extension of that system into McClain County, Oklahoma, increasing the system's reach and ability to add new customers.

In the Haynesville Shale, significant increases in natural gas forward curves should benefit our producers into play and further support continued drilling activity. Finally, we added a new customer to our Williston Basin system and recently completed a connection to a seven-well pad for that customer. I will now turn the call over to John to discuss third-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 in our third-quarter earnings release and in our 10-Q, both of which were released earlier this morning. Turning to our operational performance overview slide.

Our natural gas gathered, processed and transported volumes saw decreases compared to the third quarter of 2019, primarily as a result of lower gathered volumes across all basins, inclusive of continued producer shut-ins in the Anadarko Basin that ended in the third quarter. Our crude oil and condensate volumes increased compared to the third quarter of 2019 as a result of higher production in the Anadarko Basin, offset by lower production in the Williston Basin. Turning to our financial results on the next slide. We saw lower revenues, gross margin and net income for the third quarter of 2020 compared to the third quarter of 2019, primarily as a result of lower volumes and lower prices.

While net income benefited from lower O&M and G&A expenses and lower interest expense, as Rod mentioned earlier, net income was impacted by a noncash impairment of our investment in our SESH joint venture. Adjusted EBITDA and DCF were both lower for the quarter compared to the third quarter of 2019, primarily as a result of lower volumes and lower prices, partially offset by lower O&M and G&A expenses. Adjusted EBITDA and DCF exclude the noncash impacts from changes in the fair value of derivatives and the SESH impairment. DCF also benefited from lower adjusted interest expense and lower maintenance capital expenditures for the third quarter.

After considering the distributions declared, Enable's distributable cash flow exceeded distributions declared by $75 million fully funding our expansion capital expenditures for the quarter. While this year has had some unexpected challenges, this was yet another quarter of continued execution for Enable. As Rod mentioned earlier, we now expect to achieve the upper half of the outlook we provided during our first-quarter 2020 earnings call for adjusted EBITDA and DCF. And excluding the third-quarter 2020 noncash impairment of our SESH investment Enable would have expected to achieve the upper half of our net income range.

The business has generated significant cash flows this year to fully fund our distribution and capital program while reducing total debt levels. And we remain focused on further optimizing our cost structure and aligning it with the industry environment. With that, I will now turn the call back over to Rod.

Rod Sailor -- President and Chief Executive Officer

Thanks, John. As I mentioned in my opening remarks, Enable issued its inaugural sustainability report earlier this morning. You can find the report under the Sustainability section of our website at enablemidstream.com. Sustainable business practices are deeply embedded across our business, and we have a long history of operating in a safe, efficient and responsible manner.

At Enable, part of our mission is to partner in the success of our employees, customers, investors and communities. As you read our report, you will find just some of the ways Enable has demonstrated and continues to uphold that partnership commitment. Some of the reports highlights include, our conservation efforts for vulnerable species, including Enable's participation in the American Burying Beetle Oil & Gas Industry Conservation Plan, a species that was recently downlisted from endangered to threatened status. Enable's award-winning integrated vegetation management program along our rights-of-ways.

Our pipeline inspection program that inspected almost twice the miles of pipelines in 2019 as required by current regulations. The commitments we have made to minimize methane emissions across Enable's operations through INGAA's Methane Emissions Commitments. Community partnerships, including Enable's Safety Partner Program honoring first responders, a program to build or refurbish community basketball courts and a program to support STEM-focused educational initiatives. We also support community organizations by offering our employees 16 company paid volunteer hours each year.

In 2019, Enable employees recorded over 22,000 volunteer hours, including over 15,000 company paid hours. Finally, our comprehensive contractor safety initiative has helped contribute to a reduction of reported contractor incidents from 22 in 2015 to three in 2019. We aligned the report with the voluntary Sustainability Accounting Standards Board, or SASB, reporting standards for midstream companies, allowing for better comparisons of Enable's sustainability performance. I am proud of our team's work on our inaugural report, but know that this is only one more step on our sustainability journey.

We welcome your feedback and look forward to updating you on our progress. Before we open the call up for questions, I wanted to say that management will not be commenting on strategic alternatives for Enable. Since CenterPoint announced its business review, there has been published speculation related to possible actions by those sponsors. It is not the first time a sponsor has announced such a review or that has been reported that they are considering options with respect to their ownership interest in us over the years since our formation.

As has been the case over that period, we have declined to comment on such reports, and we'll continue in that tradition today. We will now open the call up for your questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Jeremy Tonet from JP Morgan. Your line is open.

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

Hi, good morning.

Rod Sailor -- President and Chief Executive Officer

Hey, good morning.

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

Just wanted to start off with SESH here, if I could. Just want to see what factors fed into the impairment now. And just updated thoughts as far as recontracting is concerned on the pipe and how you think about discounting or what approaches you might take to kind of secure contract there and what type of contract tenor would make sense. And then, the debt at the JV level as well.

So just wondering how you think about leverage there. Is the debt cheap enough to buy in? Would that make sense at all to reduce leverage? Just any of these different factors would be helpful for your thoughts.

Rod Sailor -- President and Chief Executive Officer

Yeah, sure, and I'll start with sort of the first question on SESH recontracting. And again, we had a large contract roll-off. But again, we still expect to enter into discussions with that and other counterparties about recontracting. So I don't think it's appropriate to really talk about anything other than again, we expect -- because, as I said in my opening remarks, we think SESH is a vital piece to the transportation artery into the continuing growing Florida market.

Again, we continue to expect to realize value on recontracting there. I'll turn it over to John to maybe talk a little bit about the other part of that question.

John Laws -- Chief Financial Officer

Yeah, sure. Jeremy, it's John. Just to follow up there. I think the drivers of the impairment now really do relate to the timing of the recontracting.

And when we believe some of that might take place, as you know, that contract that Rod alluded to rolled in early September. We've not recontracted all that capacity just yet. And as we said, we're in the midst of doing so. But the accounting rules really do require to look at things on a basis that does contemplate some of that timing and with our view of those accounting rules and how we've interpreted those, that's what drove the timing of the impact.

As it relates to the debt that's at the SESH level, that's really not anything that we thought about doing anything with here in the near term. Those notes do not mature until 2024.

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

Got it. And just want to be clarifying the point as far as recontracting. Have you guys recontract any portion of it so far that rolled?

John Laws -- Chief Financial Officer

We are in the midst of recontract. We've done some short-term things here, and we are in the midst of recontracting some things now that -- and we'll leave it at that.

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

Got it. That's helpful. Thanks. And just wanted to see what your crystal ball might say as far as 2021 is concerned and really thinking more on the natural gas side, we've seen some good strength into '21 with the strip there.

So it seems like that could be levels that could incentivize some activity across parts of your footprint. So anything you can share with us as far as producer activities or what you're seeing out there, particularly in the gas side or even on the rest of your footprint as well? Any color would be helpful.

John Laws -- Chief Financial Officer

Yeah, Jeremy, it's John. I'll start, and then may have others come in here as well. So look, I think what you've observed here in the gas trip has certainly been something that what we've been very interested in. I think as we continue to have dialogue with our producers, particularly those that have more gas exposure, dry gas exposure, that continues to buoy their interest.

It was just last quarter in the Ark-La-Tex that we reported record volumes on that system that are there. And so we continue to be encouraged by the activity that we've seen in some of the leaner gas or dryer gas areas, as well as what the strip and the curve is showing for some of these producers on a go-forward basis. So Look, I think in terms of current rig activity, we reported six rigs running across our footprint today. We expect those to continue to run and the DUCs that we have in and across our footprint in the Anadarko.

We expect the economics here to continue to support activity on a go-forward basis. But we'll wait and see how producers evolve and finalize their plans as they roll into completing their budget season here over the next couple of months.

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

Got it. That's helpful. One last one, if I could. Just with I think on Slide 5, you talked about cost reductions here.

And just wondering if I'm thinking about sustainability of that into '21 or other opportunities there? Just any thoughts on that would be helpful.

John Laws -- Chief Financial Officer

Yeah, Jeremy, we've made really good progress on the goals that we announced in early April for 2020. We're on track there and expect to continue to be on track to meet the goals and objectives that we had set for ourselves in the company in early April.

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

Got it. I'll top there. Thank you.

Rod Sailor -- President and Chief Executive Officer

Thank you, Jeremy.

Operator

Your next question comes from the line of Sunil Sibal from Seaport Global. Your line is open.

Sunil Sibal -- Seaport Global Securities -- Analyst

Yes, hi, good morning, guys, and thanks for taking my question. Just to follow up on SESH. How should we be thinking about the distributions from SESH going forward? Are there any kind of restrictions in terms of the debt structure there that would impact the distributions that you received from that entity?

John Laws -- Chief Financial Officer

There are no restrictions per se at the entity to think about and the distributions on a go-forward basis will continue to be a function of the entity's free cash flow.

Sunil Sibal -- Seaport Global Securities -- Analyst

OK. So there are no restrictive covenants or holding back cash there, right?

John Laws -- Chief Financial Officer

No. That's correct.

Sunil Sibal -- Seaport Global Securities -- Analyst

Got it. Thanks for that. And then, just a broader question. We've seen a fair bit of upstream consolidation in Permian, which probably could accelerate in other basins to.

How do you view your asset position specifically in the Mid-Con with regard to that? And then, more specifically, with regard to the midstream consolidation, do you see any opportunities for Enable?

Rod Sailor -- President and Chief Executive Officer

Yeah, it's Rod. I'll take that. Again, yes, we've been watching the upstream consolidations. Look, there are a number of smaller, less well-capitalized E&P companies along our footprint specifically in the Anadarko would not be surprising, and we would expect some consolidations just based on forward strip, and I think the need for everybody to think about cash flow costs and those things.

So it would not surprise us. To date, we haven't seen anything that's been of an impact on our -- on any of our system. As you talk about midstream consolidation, we have said in the past that we believe that scope and scale matter on the midstream side of the business, and that will likely lead to some consolidation probably starting with some of the smaller and private players, and we'll continue to watch that environment. But again, stating we do believe scope and scale matter on the midstream side.

Sunil Sibal -- Seaport Global Securities -- Analyst

OK, got it. Thanks.

Operator

Your next question comes from the line of Gabe Moreen from Mizuho. Your line is open.

Gabe Moreen -- Mizuho Securities -- Analyst

Good morning, guys. A quick question on Gulf Run. Can you talk about how negotiations or discussions are going with potentially attracting third-party volumes to that project? And then, maybe you can walk us through the timeline there in terms of capital spend '21 versus '22 and beyond? Just how we should be thinking about that?

Rod Sailor -- President and Chief Executive Officer

Yeah. As it relates to -- I'll take the first part of that question. Again, as it relates to commercial discussions, I hate to sound like a broken record, but we've continued to have a number of discussions with potential counterparties. Clearly, in this environment, those discussions have been somewhat muted.

We've continued to move along with our plan, and we'll evaluate it. We're evaluating a number of potential financing options, both with financial and strategic players that will also lead us down the proper scoping of that project in the near future. John, I don't know if you want to add anything?

John Laws -- Chief Financial Officer

Yeah, no, I think that's right. And Gabe, ultimately, the total quantum of capex will be a function of the finalized scope. But as we've said in the past and with a late '22 or early '23 start date, it's not a particularly long way of pipe. And so we would expect that most of that capital would probably be concentrated in the second half of that build cycle.

So as you were kind of thinking for '21 and '22, I would expect that we'd see more of that capital -- majority of that capital show up in '22 as opposed to '21.

Gabe Moreen -- Mizuho Securities -- Analyst

Thanks. And then, if I can follow up on shifting to the oil side of things, just what you're seeing from completion crews there with TI trading where it is your outlook, do you think in terms of DUC completions, you can be flat from here into '21. So just curious there.

John Laws -- Chief Financial Officer

Yeah, won't get too much into expectations for '21, as I mentioned, really important for us there to hear from the producers and their finalized budgets, which is a process that they're going through here at the moment. I think what we intended to do is show you a little bit of how we think about the inherent backlog that's there in terms of the DUCs that are on our system. And you can see that there are a substantial number of DUCs out there that we've reported in each of the Anadarko, as well as the Bakken. And so that's ready inventory that's out there and available for producers to complete in a lower bar from a commodity price standpoint and an all-in half-cycle return economics that are there and available.

So we see inherent capability in terms of what's out there in terms of the DUCs that are out there to come online and add good volumes to the system. But we just unfortunately need to leave it at that for the moment as it relates to '21.

Gabe Moreen -- Mizuho Securities -- Analyst

Thanks, John. And then, not to probe again on '21, but a two-pronged question on capex. Can you talk about where you think you might end up coming in on the growth capex side of things for '20. And ex Gulf Run, is there any reason to think that growth capex for '21 should be different than the range you've laid out for '20?

John Laws -- Chief Financial Officer

Won't comment on '21, Gabe, but thanks for the preface there. Look, I think on capex, we've not pointed specifically to a spot in the range there. But we're doing everything that you would expect us to be doing in terms of optimizing the capital spend that we'll have show up in 2020. And again, prioritized around those things that Rod mentioned, which our committed transportation and storage projects that we've got under way and good returning and capital-efficient gathering and processing arrangements that we have with producers that are bringing volumes online to the system.

Gabe Moreen -- Mizuho Securities -- Analyst

Thank you.

Operator

[Operator instructions] Your next question comes from the line of Ned Baramov from Wells Fargo. Your line is open.

Ned Baramov -- Wells Fargo Securities -- Analyst

Hi, good morning. Thanks for taking the question. Just one from me. Could you maybe talk about ethane recoveries across your system? It seems produced NGL volumes increased from the prior quarter and part of this is driven by the higher processing volumes across your system, but I presume some of the increase is also a function of ethane recovery.

So any thoughts there?

John Laws -- Chief Financial Officer

Yeah, no, I think that's right. We did see some higher recoveries of ethane in the quarter. And look, I think that that's something that on our system, we have the ability to flex into and out of ethane recovery really as it relates to our plants. And what we see across the system, I think as we've seen gas prices strengthened.

You see a little bit of E&P fall off. We may see something different in the fourth quarter, but we did see and have seen throughout the course of the year, floating into and out of ethane rejection and recovery.

Ned Baramov -- Wells Fargo Securities -- Analyst

Thanks. That's all I had.

John Laws -- Chief Financial Officer

Thanks, Ned.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Sailor for any closing remarks.

Rod Sailor -- President and Chief Executive Officer

Thank you, all, so much for joining us on the call today. In closing, I want to recognize our employees for their hard work, dedication and continued focus on safety during these challenging times. I thank everybody on the call again for your interest in Enable, and I hope you all remain safe and healthy. Please have a great day.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Matt Beasley -- Senior Director of Investor Relations

Rod Sailor -- President and Chief Executive Officer

John Laws -- Chief Financial Officer

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

Sunil Sibal -- Seaport Global Securities -- Analyst

Gabe Moreen -- Mizuho Securities -- Analyst

Ned Baramov -- Wells Fargo Securities -- Analyst

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