EnLink Midstream, LLC

Greetings, welcome to the NLINK Midstream Second Quarter 24 earnings call and webcast. At this time all participants will be in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. Please note this conference is being recorded. At this time I'll turn the conference over to Brian Brungardt. Brian, you may now begin.

Thank you, and good morning everyone. Welcome to NLINK Second Quarter of 2024 earnings call. Participating on the call today are Jesse Aranevis, President and Chief Executive Officer, Delonza Simon, Executive Vice President and Chief Commercial Officer, and Ben Lam, Executive Vice President and Chief Financial Officer. Walter Pinto, Executive Vice President and Chief Operating Officer is also in the room to answer any questions during the Q&A session. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. A replay of today's call will also be made available on our website at .nlink.com. Today's discussion will include forward-looking statements including expectations and predictions within the meaning of the federal securities laws. The forward-looking statements speak only as of the date of this call, and we undertake no obligation to update or revise. Actual results may differ materially from our projections, and a discussion of factors that could cause actual results to differ can be found in our press release, presentation, and SEC files. This call also includes discussions pertaining to certain non-GAP financial measures. Definitions of these measures, as well as reconciliation comparable GAP measures, are available in our press release and the appendix of our presentation. We encourage you to review the cautionary statements and other disclosures made in our press release and our SEC filings, including those under the heading, risk factors. We'll start today's call with a set of brief prepared remarks by Jesse, Delonza, and Ben, and then leave the remainder of the call open for questions and answers. With that, I would now like to turn the call over to Jesse Aranevas.

Thanks, Brian, and good morning, everyone. Thank you for joining us today to discuss our second quarter 2024 results. For the quarter, we generated $306 million of adjusted EBITDA, driven by our Target II plant pulling into service in the Caribbean. The return of volume that was impacted by weather or temporary shut-in in the first quarter and normal seasonality in our Louisiana segment. These results were in line with our expectations and drove solid free cash flow after distributions of approximately $53 million. Consistent with our approach to return capital to investors, we repurchased approximately $50 million of units outstanding, taking our total buyback execution to more than 10% of our estimated outstanding over a little more than two years, all while continuing to invest in and grow our business. As we reported earlier this year, we previously agreed with ExxonMobil to reassess the Pecan Island CCS project with the expectation that other joint CCS opportunities along the Gulf Coast might be prioritized ahead of the Pecan Island project. Since that time, we and ExxonMobil have been unable to find alternative CO2 transportation projects for inland. We are now pursuing a financial agreement for the value to inland

of

the Pecan Island CO2 transportation agreement. We plan to provide an update when appropriate. Despite the CCS business being slower to develop, I continue to be impressed by our team's execution on multiple fronts where we can create value for our unit holders. We'll discuss these in more detail later on the call, but I want to give you some quick highlights. On the commercial front, we announced last night the first expansion of our natural gas storage assets in Louisiana. We've talked in prior quarters about the shifting supply and demand market, and this new announcement represents our third project to meet this evolving market. On the operations front, we successfully brought on online our third relocated processing plant in the Permian, Tiger II. Consistent with our broader optimization approach, when compared to new build alternatives, this plant relocation strategy represents an efficient capital allocation with significant cost savings and shorter period to end service. On the balance sheet front, we announced last night a proactive step to simplify our capital structure with a significant reduction in the Series B preferred stock outstanding. In short, we've been very active over the last several months managing the parts of our business where we can create the biggest impact. With that, I'll turn it over to Alanka to provide an update on our commercial opportunities.

Thanks, Jesse, and good morning, everyone. For the last several quarters, we have discussed the shifting Louisiana gas supply and demand market and how we are focused on meeting the needs of the market and creating value for our unit holders. As I mentioned during the last call, we are approaching the Louisiana gas opportunity in three phases. The first phase is well underway with 2024 explorations mostly contracted, and the team is now focused on 2025 renewals. While some work remains to be done, we have now captured a large majority of this value, and we are seeing it in the recent financial results in Louisiana. The second phase of opportunities is leveraging our assets to drive attractive quick to market projects. Last quarter, we announced the Henry to River project, which brings approximately 210 MMCF a day of capacity to the Mississippi River corridor. We're pleased that this project execution is progressing very well. We also commenced operations of another such previously announced project, expanding deliveries to venture global, Calcasieu PATH, LNG export facility. Both of these projects expand our capacity primarily through additional compression and therefore result in attractive economics. We have done several optimizations of our system to increase the flow rate of our Sabine, Lig, and Bridgeline systems and are presently marketing that increased capacity, and we continue to see a healthy funnel of these opportunities over time. We're very excited to announce the expansion of Jefferson Island Storage Hub, or JISH, the first project in the third long-term phase of opportunities. We previously disclosed that we had already progressed engineering work for a ground-field expansion at JISH, which is located near the Henry Hub and is very well connected to regional supply and demand points. The market responded very quickly, and we received excellent customer interest. We will expand our JISH working gas storage capacity to approximately 10 BCF from two BCF today. The project will cost approximately $85 million, and we expect to begin injecting gas in 2028. Like our other Louisiana projects, this project represents -to-mid single-digit EBITDA multiples as we leverage our existing assets to generate attractive returns. With this expansion, we increase our total natural gas storage position to nearly 20 BCF. As we look forward, we are encouraged by the strong potential for new gas power generation and data center growth around our assets, particularly in the key North Texas market, where we are one of the largest gatherers and processors of natural gas. The diversity of EndLinks assets in key locations in Louisiana, North Texas, the Permian, and Oklahoma continues to set us up for commercial opportunities. With that, I'll turn it over to Ben to provide an overview of our operations and our financial results.

Thanks, DeLonka. Good morning, everyone. Let's start with the Permian, where segment profit for the second quarter of 2024 came in at $93.1 million. Segment profit in the quarter included approximately $16.8 million of gross operating expenses tied to plant relocations and $1.3 million of unrealized derivative losses. Excluding plant relocation OPECs and unrealized derivative activity, segment profit in the quarter of 2024 grew 10% sequentially and also grew 10% from the prior year quarter. Our diverse mix of producers remained active during the quarter. Average natural gas gathering volumes were approximately 7% higher sequentially and 17% higher than the prior year quarter. During the quarter, our third relocated processing plant, Tiger II, came online and provides much needed capacity for our customers in the Delaware basin. Turning now to Louisiana, we experienced another quarter of solid performance reflecting normal seasonal effects in the last natural gas liquid segment. Segment profit for the second quarter of 2024 came in at $84.3 million, including $5.6 million of unrealized derivative gains. Excluding the impact of unrealized derivative activity, segment profit in the second quarter of 2024 decreased approximately 39% and decreased approximately 9% compared to the prior year quarter. The sequential decrease reflects both seasonality and an outsized result in the first quarter driven by weather-related activity. Moving up to Oklahoma, we delivered segment profit of $103.5 million for the second quarter of 2024, including approximately $0.1 million of gross operating expenses tied to the plant. Excluding the impact of plant relocation and unrealized derivative activity, segment profit in the second quarter of 2024 grew 14% sequentially and decreased approximately 5% from the prior year quarter. During the second quarter, we saw operators remain active with rigs on our acreage. Average natural gas gathering volumes were 7% higher sequentially and 3% lower compared to the prior year quarter. Wrapping up with North Texas, segment profit for the quarter was $52.4 million, including $1.1 million of unrealized derivative losses. Excluding unrealized derivative activity, segment profit in the second quarter of 2024 decreased 11% sequentially and decreased 28% from the prior year quarter, driven by the full quarter impact of the previously discussed one-time contract reset. Natural gas gathering volumes were 2% higher sequentially but 8% lower compared to the prior year quarter. These solid results reflect the benefits of our diverse asset mix. In total, our segments drove $306 million in adjusted EBITDA. We are tracking close to the midpoint of our adjusted EBITDA guidance range of $1.31 billion to $1.41 billion for full year 2024. While we don't give quarterly guidance, we anticipate our second half of 2024 results will be weighted towards the fourth quarter, driven by the normal winter seasonal strength in our Louisiana NGL business. Capital expenditures, plant relocation expenses, net to NLINK, and investment contributions were $103 million in the second quarter of 2024. Free cash flow after distributions for the second quarter came in at approximately $53 million. On the balance sheet side, we continue to be in a very strong position with a leverage ratio of 3.3 times at the end of the second quarter and we retain ample liquidity. Consistent with our capital allocation plan, we maintained our common unit distribution of 13.25 cents per unit in the second quarter, which represents a 6% increase over the second quarter of 2023. Additionally, we remain active with our common unit repurchase program with approximately $50 million spent in the second quarter. After the quarter, the board expanded our common unit repurchase authorization to $250 million. Since the end of 2021, we have now repurchased approximately 50 million common units, or over 10% of total units outstanding. Lastly, after the quarter, we took a significant step towards simplifying our balance sheet through the purchase of nearly $200 million of our Series B preferreds.

In total,

the balance of the Series B preferred stock has been reduced by about half since the beginning of 2024. In summary, the InLink team delivered solid results in the second quarter of 2024 and we expect the momentum to continue for the rest of the year. With that, I'll turn it back over to Jesse. Thank you, Ben. The InLink team delivered another quarter of solid execution that showcased our ability to drive value in multiple areas of our diverse business integrated value chain. With that, you may now open the call for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask questions this time, please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to please will be polled for questions. Thank you. Our first question is from the line of Bernice Satish with Wells Fargo. Please receive your questions.

Thanks. Good morning, all. Just turning to guidance, if we look at the first half results and compare against the midpoint of full year EBITDA guidance, it would imply a fairly steep ramp in the second half. You mentioned a lot of it is weighted towards Q4. Maybe if you could just kind of further unpack some of the drivers of growth between first half and second half and how much visibility you have into the ramp.

Good morning, Bernice. This is Ben. Happy to unpack that a little bit. A few moving parts. One item is we placed the Tiger II plant in service just in May and it's already well utilized. We'll expect to be at a higher run rate for the Permian in the second half versus the first half. We also have the normal seasonality of the NGL business. The fourth quarter is our strongest quarter just based on the timing of some of our deliveries to customers that will be the same this year as it has been in past years. I'd also mention in the Louisiana gas business where we have a storage business, we have some storage related activity that we'll expect to realize in the quarter. And then a fairly small item, but we'll expect to have some contribution from the Matterhorn JV in the fourth quarter. So all of those are parts of the way that you get to a higher run rate for the second half than we saw in the first half.

Got it. That's helpful. And maybe switching gears, I wanted to talk about your NGL contracts in the Permian. Our understanding is that Endlink controls around 150,000 barrels per day of NGLs in the Permian. These NGLs are being transported to Bellevue on higher cost pipelines and there's an opportunity to renegotiate those rates lower over time. So I guess the first question is, is this an accurate summary? Is it an opportunity for you guys? And then second, if so, can you help us understand maybe the timeline for when some of these volumes come off contract?

Good morning, Delanka here. I'll take that one. In the Permian, we have about 220,000 barrels of NGL that we market about 75%. So your 150 number is accurate. We have adequate pipeline capacity today and then this capacity starts to expire over the next year. Which is a time where NGL pipeline capacity is expected to increase. Given the expirations are still a few years out and the NGL build out relative to the demand of capacity is yet not clear. I think it's too early to talk too much in specificity. But as you say, these contracts are various rates and depending on when they were executed on average, I think safe to say that we will be able to contract, re-contract at lower TNF rates and we expect to capture some value there.

Great, thank you.

Our next question is from the line of Spiro Jonas with Citi. Please receive your questions.

Thanks, operator. Morning, gentlemen. I want to know what should we expect next? It sounds like on phase one you are already focused on 2025. But the next two phases are on phase three. Are there other projects like JISH you have in the hopper and anything that could be quicker to market?

Sure. I think in all three phases, we are working on the first phase, given that 24 expirations are mostly re-contracted, we are quickly turning our attention to the 25 expirations. So teams are working hard on renewing those. On the phase two expansions, we are working on a good funnel of debottle-necking type projects and talking about incremental deliveries to our existing customers who are already connected as well as newer customers that are coming online. If you were to think about where the gas demand is coming through, it's from basically LNG, power demand, and industrial. On the LNG front, Venture Global's projects, Calc-repass, and Plackeman's LNG, as they ramp up, I think there will be more opportunities for us to bring incremental volume to those facilities on top of what we already have contracted for. And then there are obviously other LNG projects that are being progressed. On the power side, I think everyone understands the incremental demand for gas-fired power generation. And particularly in Louisiana, we are seeing the utilities reacting pretty quickly with plans for incremental power generation. On the industrial side, most of the incremental demand seems to be coming from the ammonia sector. Each million tons of ammonia is about 130 MMCF a day of gas demand. And a few of these projects are expected to take FID next year. And given that most of these around the River Cardo are quite close to our two systems being bridge-lined and linked, I think we are well positioned to serve them and we like our chances there. So a combination of these, I think, will fill in the buckets of the Phase II and Phase III from a transport perspective. On the storage side, now that we've completed the engineering studies, sold the capacity and our development phase of this expansion, we are turning our eyes on the next expansion, it's going to be a mix of between do we expand Napoleonville storage more or do we turn our eyes to a further expansion at JISH? As we did in the recently announced expansion, we will optimize for the best solution there. So more to come on storage, but I think it's a combination of transport and storage that will fill these Phase II and Phase III buckets.

Great. I appreciate the color there, Dallanka. Second question, a two-part one on capex. First part, just curious how you're thinking about the need for that next processing plant. Ben, you mentioned that Tiger II is ramping up pretty quickly. If I look at path cadence, maybe you'd need another one by the end of 25 on my math, so just want to kind of sense-check that. And then just give me some of the moving pieces around CCS maybe moving out and some of these Louisiana projects moving in. Maybe just update us on how you're thinking directionally about capex into 2025.

Yes, Biro, this has been so first on the next plant, you're right, we have been roughly on a pace of a plant a year in the Permian, and as I said earlier, we just brought Tiger II online in May. Next plant very likely would be in the Midland Basin and also very likely would be another very cost-effective plant relocation. We're not at the point of announcing it today, but I would say watch this space. We're progressing well toward making that decision still in consultation with our customers to make sure that we understand the outlook for volumes, but we may have news on that front in the fairly near future. In terms of 2025 capital listen, it's obviously too early to say too much about that because we don't have full picture of what our producers are going to be doing, but I think that directionally you're correct to say less CCS capital in the near term, more capital devoted to Louisiana, probably reasonable to think that things today roughly offset one another so that we stay on roughly the same pace we've been on the last couple of years.

Great, I'll leave it there for today. Thank you guys.

Thank you. Our next question is from the line of Jeremy Tonet with JP Morgan. Please receive your question.

Hi, good morning. This is Jeremy Tonet from JP Morgan. Just want to, I guess, start off a little bit more with the CCS side and appreciate that we're still kind of early innings in everything that is happening here, but just over what type of time frame do you see, I guess, this market maturing and to support more commercial arrangements?

Thanks Jeremy, it's Jesse. Look, as we've said, the space is slower to develop. You know, what's not changed on our end is we, our core principles have not changed. You know, CCS, we are, it will be the mitigating, the key mitigating factor to the industrial space, so that's going to happen. And let me just remind you, we have in the region, the second highest emitting region in the US, 80 million metric tons emitted today and growing. You know, we have nearby sequestration, we have pipe in the ground. So we feel very well positioned for the long term. You know, just let me remind you, we have multiple conversations with, you know, the public parties we've talked about, Shell and Oxy and a couple others. Those discussions are ongoing. With respect to timing, it's just been tough. You know, I think we are moving at the pace of the emitters and the emitters are still focused on reducing their carbon footprint. They're still in the process of evaluating and choosing their counterparties. So timing we can't really speak to. It's been slower, but longer term we feel very well positioned to take advantage of our core competencies in the area.

Got it. Understood. And maybe just pivoting to the base business here, just curious if you could remind us, I guess, with the level of commodity price exposure in the business today, maybe after recent bolt on acquisitions, the margins came in a bit lighter than we expected in the Barnett and the Permian. It's often declines there quarter of quarter. So just trying to get a sense. Are these kind of just the new contracts or how much is commodity price influence there? Trying to get a feeling for margins.

Hey, Jeremy, it's Ben. So when you think across all of InLink, we're about 90% fee based, about 10% commodity based and we're very well hedged on that commodity piece for this year. And in fact, we're already layering in hedges for next year. So not a ton of commodity sensitivity. You're right though that where we have the commodity sensitivity primarily is in the Permian and particularly the Midland Basin side of the Permian where we have a component of a POP gathering and processing agreements. So it does have some impact on Permian margins, not a huge impact, especially in that of the hedging. On North Texas, the bigger factor when you look at this quarter versus the prior year quarter or even versus the first quarter is you're seeing a full three month impact of that one time rate reset that we talked about in the last call. So we had one month impact of that in Q1. Now you see a three month impact. So from this point forward, you can expect to see those margins stay relatively stable and track more closely with volumes.

Got it. That's helpful. Thank you for that.

Thank you. Our next question is from the line of Zach Van Everen with TPH. Please proceed with your questions.

Perfect. Thanks for taking my question, guys. Maybe just going to the Permian. You all mentioned you hope to see contributions from Matterhorn. I know you guys aren't operating the pipe, but any updates you can give on the timeline for that to kind of start service or start line fill.

Yeah, this is Ben again. First, let me say how happy we are with our Matterhorn investment. The Whitewater team runs an excellent project. They do a great job commercially. We couldn't be happier with the investment in Matterhorn. As far as timing, we expect the pipeline to be in service in the month of September. That's maybe a two week difference to what the original plan was toward the very end of August, but a very minor delay in the grand scheme of things. Some of that weather related with Hurricane Barrel, in fact. So that's our current expectation. And so we'll expect to begin seeing some contribution to the financials in the fourth quarter.

Gotcha. That makes sense. Maybe just to follow up on that. Do you guys have a sense for, it seems like you all and all the other mainstream GMP companies have not really seen an effect from negative WAHOP prices. When that comes online, is there gas trapped behind that pipe that will fill it relatively quick, or do you guys kind of see it growing with the cadence of the Permian, which is second half weighted on the ramp as it is right now?

I think it's going to fill pretty quickly. Yeah. You know, as far as speaking for the pipe, I think it's going to fill very quickly. You know, in terms of our exposure to WAHOP basis, we really have two exposures. One is that POP exposure that I mentioned earlier. We are very proactive in hedging our WAHOP basis to protect ourselves. We had all of our WAHOP basis for this year done before the year even began. The second exposure, of course, is if it changes producer behavior. But, you know, as you can imagine in an oil directed basin, you know, the producer is frankly not that sensitive to it. So you're right. We really haven't had much of an impact from weak WAHOP prices.

Got it. That was super helpful. Thank you guys.

Thank you. If you'd like to ask a question at this time, you may press star one from your telephone keypad. Thank you. At this time, this concludes our question and answer session. I'll hand the floor back to management for any closing remarks.

Thank you, Rob, for facilitating the call this morning. Thank you everyone for being on the call today and for your continued support. As always, we appreciate your continued interest and investment in EnLi. We look forward to updating you with our third quarter results in November. In the meantime, we wish you well and have a great day.

Thank you. This will conclude today's webcast. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.