Equitrans Midstream Corp (ETRN) 2022 Q1 法說會逐字稿

Good morning. My name is Joseph, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitrans Midstream Quarter 1 2022 Earnings Call. (Operator Instructions)

Nate Tetlow, Vice President of Corporate Development and Investor Relations, you may now begin your conference.

Good morning, and welcome to the First Quarter 2022 Earnings Call for Equitrans Midstream Corporation. A replay of this call will be available for 14 days beginning this evening. The phone number for the replay is (800) 770-2030 or (647) 362-9199, and the conference ID is 6625542.

Today's call may contain forward-looking statements related to future events and expectations. Please refer to today's news release and Risk Factors in ETRN's Form 10-K for the year ended December 31, 2021, and as updated by Form 10-Qs for factors that could cause the actual results to differ materially from these forward-looking statements.

Today's call may contain certain non-GAAP financial measures. Please refer to this morning's news release and our investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure.

On the call today are Tom Karam, Chairman and CEO; Diana Charletta, President and Chief Operating Officer; Kirk Oliver, Senior Vice President and Chief Financial Officer; Justin Macken, Senior Vice President, Gas Systems Planning and Engineering; Brian Pietrandrea, Vice President and Chief Accounting Officer; and Janice Brenner, Vice President and Treasurer. After the prepared remarks, we will open the call to questions.

With that, I will turn it over to Tom.

Thanks, Nate. Good morning, everyone. Today, we reported first quarter 2022 net income of $105 million, adjusted EBITDA of $277 million and deferred revenue of $87 million. The base business continues to deliver solid results. Kirk will provide details on the financial results in a few minutes.

Today, we also provided new guidance regarding MVP, which includes an in-service target of second half of 2023 and a total project cost of approximately $6.6 billion. After extended review of the recent court decisions and discussions with federal agencies, external counsel and our partners, we believe the path forward is to pursue new permits from the relevant federal agencies. Along with the agencies, we recognize the scrutiny that these permits will inevitably face. However, we have confidence that the agencies can produce not only technically sound permits as they have in the past, but also permits that connect the dots between the technical decisions and the respective federal law, effectively mitigating potential perceived ambiguities.

We are focused on everything within our control. And at the end of the day, we believe we live in a country of laws and regulations, and that projects like MVP that follow every required process and receive every required permit will and have to prevail.

On the permitting side, we recently received some positive news as FERC unanimously approved MVP certificate amendment relating to changing the construction method on certain water body and wetland crossings from open cut to trenchless].

Lastly, as I suspect you are all aware, in recent months, Senator Manchin has been leading the charge from Washington to make the case for MVP. He and others have consistently said that MVP's role in our energy security and reliability is critical as we continue to work toward a lower carbon economy. The current geopolitical unrest driven by the invasion of Ukraine by Russia has exacerbated the cost of a tight market and will continue to do so for some time. We have remained in frequent contact with Senator Manchin, Senator Capito and others discussing the possible paths to bring MVP into service. The public statements from Senator Manchin have outlined some of them. We appreciate the public support for the project and will remain engaged on all fronts while we will not speculate further on those statements.

And now I'll turn it over to Diana for the operations update, and then Kirk will discuss the financial results, and I'll come back later for more questions. Diana?

Thanks, Tom. Good morning, everyone. I'll start with the gathering segment. In the first quarter, we gathered about 8 Bcf per day. In the current environment, we expect A-Basin volumes to remain roughly flat. And based on development plans for this year, we do expect a decline in our 2022 gathered volumes versus 2021.

Moving on to transmission. In February, we announced the Ohio Valley Connector expansion or OVCX project and the start of the FERC application process. To remind you, OVCX will add about 350 million cubic feet per day of deliverability on our Ohio Valley Connector pipeline, which provides access to the Mid-Continent and Gulf Coast markets through interconnects in Clarington, Ohio. The incremental OVC capacity is targeted for in-service in Q3 2023, and we will keep you updated as we make progress on the project.

On the water side, the 10-year mixed-use water agreement with EQT commenced on March 1. The water services agreement includes an annual revenue commitment of $40 million for the first 5 years and $35 million in the remaining 5 years. In 2022, we expect water EBITDA of approximately $30 million. This year, we plan to invest approximately $75 million to complete the initial mixed-use system build-out. This amount includes approximately $20 million to replace certain previously installed water lines that we believe do not meet their prescribed quality standards. We do intend to seek recruitment of these replacement and related costs.

Next, an update on ESG. This year, we plan to build upon our momentum from last year, particularly in the area of methane mitigation, which is again included as a component of our short-term incentive plan. Last year, we began a program to replace high-bleed pneumatics with low bleed as well as replacing certain gas-driven pneumatics with instrument air systems. This program continues in 2022, and we are targeting a 6% reduction in annual pneumatic methane emissions relative to our 2019 methane emissions for the year.

We also plan to expand our reporting to include the CDP water security questionnaire and to undertake a TCFD readiness assessment to further expand our ESG platform. We are committed to the sustainability of our operations, and we will continue to make additional advancements this year and beyond.

I'll now turn the call over to Kirk.

Thanks, Diana, and good morning, everyone. Today, we reported first quarter net income attributable to E-Train common shareholders of $87 million and earnings per diluted E-Train common share of $0.20. Net income was $105 million. Adjusted EBITDA was $277 million and deferred revenue was $87 million. We also reported net cash provided by operating activities of $186 million and free cash flow of $24 million.

Net income attributable to E-Train common shareholders was impacted by 2 items. First, by a $6 million unrealized gain on derivative instruments, which is reported within other income. This is related to the contractual provision entitling E-Train to receive cash payments from EQT, conditioned on specific NYMEX Henry Hub natural gas prices exceeding certain thresholds post-MVP's in-service and through 2024. And second, by a $23 million reduction of valuation allowances because of decreases in deferred tax assets. This gets reflected through the net income tax expense line; and second, by a $23 million reduction of valuation allowances because of decreases in deferred tax assets. This gets reflected through the income tax expense line. After adjusting for these 2 items, first quarter adjusted net income attributable to E-Train common shareholders was $59 million and adjusted earnings per diluted E-Train common share was $0.14.

E-Train operating revenue for the first quarter 2022 was lower compared to the same quarter last year by $38 million. This was primarily from the impact of deferred revenue, lower gathered volumes and lower water services revenue. Operating expenses for the first quarter '22 were $10 million lower than the first quarter 2021. The decrease was driven by lower SG&A and O&M expenses. For the first quarter, E-Train will pay a quarterly cash dividend of $0.15 per common share on May 13 to E-Train common shareholders of record at the close of business on May 4.

Today, we introduced a full year 2022 financial guidance, which includes net income of $250 million to $330 million, adjusted EBITDA of $970 million to $1.05 billion and deferred revenue of approximately $355 million.

Lastly, we recently closed an amendment to our revolving credit facility. We appreciate the support of our lenders who worked with us to provide flexibility while MVP progresses toward completion. The key changes to the facility include a reduction to the facility size from $2.25 billion to $2.16 billion through October of 2023, and then $1.55 billion through the final maturity in April of 2025. The maximum consolidated leverage ratio will be 5.5x for the term of the facility except that the facility now includes a feature that provides for a step-up in the maximum leverage ratio to 5.85x for 4 quarters, beginning with the mobilization of forward construction on MVP.

I'll now hand the call back to Tom.

Thanks, Kirk. So in summary, the base business and operations remains resilient. We're committed to the path forward on MVP and confident that the new in-service target provides sufficient time for permit reissuance and for the 4 to 5 months of remaining construction. And as Kirk just mentioned, we gained flexibility under the credit facility to manage through the MVP build period. We're pleased that the natural gas has entered the national dialogue in a positive way. It is evident to us that our abundant domestic natural gas reserves must be developed and transported to meet the world's increasing demand for reliable energy.

And lastly, I'd like to congratulate Diana who was elected to the Board of Directors last week. Diana will bring the same thoughtful commitment to excellence to the Board as she does to operating the business.

With that, we are happy to take your questions.

(Operator Instructions) The first question comes from the line of Brian Reynolds.

Maybe to start off, congrats to Diana on the election to the Board. Maybe to start off with Diana. I was wondering if we could get an update just on MVP and specifically the signpost that helped drive the updated second half '23 in-service date. At the end of the day, any incremental color around the regulatory time line assumptions around the Fourth Circuit, the FERC and Army Corps would be great?

So from a time line perspective, what we have assumed there now is with the interaction that we're having with the agencies, which has been positive, we think we will be back to construction second quarter, which gives us the timing that we've given you, second quarter of 2023. Let me be clear.

Is there any kind of update on potential, I guess, Fourth Circuit ruling or just any update on when we could get additional permits from the FERC or Army Corps?

Yes. So we're not going to work through the details of every one of those pieces. The way that right now our guidance is that we get through all of that in the remainder of this year, and we have everything we need to start by Q2 2023 construction.

Great. Appreciate it. Maybe just as my one follow-up, just to talk on the updated guidance. First off, it seems like the free cash flow guidance was slightly revised onwards exclusive of the CapEx raise. Just curious if you could just provide some color around the drivers around that free cash flow assumption change.

And secondly, I was curious how we should think about the potential payment to EQT at year-end '22 now that the MVP time line has officially been pushed into 2023?

Sure. So there is an additional CapEx, which it sounds like you caught, which is the increase for the water replacement. And then the volumes are slightly down for this year over last. And that's a mixture of producer activity and some of the water issues that we have pushing a couple of pads into next year.

Certainly, we're going to continue to see producers stay disciplined and there is a physical limitation to the basin takeaway, but the long-term strength of the business remains. With additional takeaway capacity, we have the ability to grow.

Your next question comes from the line of John Mackay.

I just wanted to pick up maybe on that last comment. Maybe could you just talk a little bit about what's driving the declines for kind of gathering through the year. I understand kind of some of the 1Q issues, but it looks like most of the producers set is kind of flattered slightly up for the balance of the year. So just trying to balance those 2 and whether or not maybe going forward you might expect declines to continue as well before MVP comes online.

So I would say the biggest part of that producer activity and that bump out is because of the water and the timing of the pad. We're seeing some declines in some other places. But the key core acreage, we feel like it's certainly flat until we can get some takeaway capacity and then I think it grows.

Okay. So you would expect that to come online kind of once the water issues are fixed?

Correct.

And maybe just a follow-up. Maybe just another on the base business costs. I think you guys mentioned the costs were better this quarter. Just curious how much of that is ratable versus kind of a one-off, just how we should think about that going forward.

When you say costs, are you talking about expenses?

Yes, on the O&M side.

Yes. So on the O&M side, I mean, we are seeing a little bit of inflation pressure on light haul and oil, just like everybody else, but we certainly also have an asset optimization part of the business that can take advantage of a little bit of this commodity uptick. So they're balancing each other out. We are seeing inflation on the capital side as well.

Your next question comes from the line of Michael Blum.

Just had a couple of quick questions. The first, just given the updated terms of the credit agreement, is it fair to say that the dividend is safe now at current levels? Or is this still something that could be a lever depending on how MVP progresses?

No. This is Kirk. No, the dividend is safe. I mean the base business or cash flow from the base business supports the dividend fine. So we have no thoughts of doing anything with the dividend.

Okay. Great. And then I just wanted to make sure I understood. In the comments on MVP Southgate, you sort of referenced in the footnote potential changes to the sort of the design and timing. Can you just elaborate a little bit on that?

Yes. So I think there's really no question about the demand and the need for Southgate. But given the environment and some of the recent rulings, we are evaluating the projects, having discussions then and around whether there are ways we can better optimize the design and the timing with customers.

Your next question comes from the line of Neel Mitra.

Just wanted to come back to the timing of MVP. It sounds like once you submit your permits, you want to go straight to construction, get the project online in second half of 2023. In the past, you've had a lot of appeals, and the Fourth Circuit has come back and kind of looked at them. What makes you confident that there isn't going to be a legal process? And would you wait a certain amount of time to move forward after you submit your permits just to make sure that there isn't going to be a legal issue again before going forward with that final construction piece?

So there's no question that the court has departed from historical judicial deference. But we're also now dealing with a narrower scope of issues. One of which was just recently addressed by FERC. And there are certain foundation aspects of the permits that were upheld. Challenges to the route, hydrological assessment, framework for MVP's action areas and basis for incidental take. So while the agencies did do a much more substantive review in the last round and exceeded regulatory and legal requirements under applicable laws, we believe the agencies now understand the need and are working to specifically articulate the legal rationale for their technical decisions in order to proactively mitigate potentia ambiguous, you know the word that I'm trying to say here, which is generally not required in the permit application. So they need to really focus on the legal reasons why they're writing the decision, not the technical scientific aspects of the permit. They all understand that and they're working diligently to put those into the permit.

So just -- so I understand it right, you can file the permits. There's obviously going to be intervenors, but it's the Fourth Circuit who decides whether they're going to hear the issues. If they don't, then you move forward and can progress with construction. Is that correct?

That's correct.

Okay. And then just a quick one. I wanted to follow up on the agreement with [ETP]. I know they sold off the remaining amount of shares they had in ETRN and also the roughly $200 million in the gas gathering agreement, could potentially come up in terms of being reimbursed for not having the project on in 2022. Any discussion with them or thoughts on how that would play out?

I don't believe they've made a determination as to what they want to do there. So we're just waiting to hear what their determination is. Either way, we'll work through it, whatever they want.

Our next question comes from the line of Becca Followill.

Following up on the water CapEx that you're going to spend there. You said you're going seek recovery. Is that from the people that constructed the pipeline or the original owners?

So it is pending legal review, but it isn't really the people that constructed the pipeline that we're having an issue with. It's really a vendor issue. And we are going to receive recoupment, but it's not from the people that constructed the project.

Your next question comes from Sunil Sibal.

So my first question is related to the leverage. So I realize that you've reworked the covenants. Could you tell us where were you at the end of Q1 2022 vis-a-vis that 5.5x max leverage covenant?

Yes, this is Kirk. We're -- I mean right now, prior to MVP going in service, we're looking at getting up into like the low 5s.

Okay. And where specifically did the Q1 end or we can take it offline if you don't have that.

This is Diana. Yes, we just recently amended the revolver, and we appreciate the support of our banks as we did that. The revolver is smaller now, but we have sufficient coverage under the covenants. We are now at 5.5x through the maturity of April 2025, and it steps up to 5.85. So we have sufficient room under the covenant, and we are thankful for the support of the banks in order to address that revolver.

Understood. Any discussions with rating agencies post that? Or it's kind of a little bit hard for that?

This is Diana again. We remain in very close dialogue with the rating agencies, and we continue to highlight the strong core business that generates cash flow, along with the improving strength of our counterparties. They do remain focused on leverage in advance of MVP in service, but the increasing balance sheet strength and the recent upgrade to investment grade by 2 of the 3 agencies of our largest customer, coupled with our strong core business are certainly positive.

Your next question comes from the line of Jeremy Tonet.

Just was curious, I guess, the process for how it works for the partners to approve a budget and as construction costs change over time, how often does that happen? How has the process worked there? And I guess if the different partners had -- didn't want to participate or wanted to maybe decrease their ownership stake in the project. How does that process work and when is the next time there's the budget approval?

So we're good from a budget perspective right now. It doesn't come in a normal cadence. It's when we need the money. So what we have from that perspective is funded enough that we didn't need to ask for that from the partners. Although the partners are all on board with where we are and what we think that final cost will be. Our Board has approved the capital that we need, but we haven't had to go back to the MVP partnership as a normal course of business and ask for that as of yet. And I think your second...

Yes, go ahead, sorry.

Go ahead. I mean I think your second part of the question is how it works if a partner were to decide to maybe just walk away. And the JV agreement limits that ability for partnerships to walk away from those projects.

Got it. So there is no option for them to walk away. But if they wanted to decrease their ownership interest, sell their stake to a partner, is that part of the process? Or just any thoughts you could share with us there.

Yes. So there are ways that they can offer those interests. And of course, we have a first right of refusal on that, we and NextEra. But I will say we are still on lockstep in agreement with our partners as far as what the path is forward and what those costs will be.

(Operator Instructions) Your next question comes from the line of John Mackay.

I figure I'd just pop in with one more here. Could you -- so Tom, you talked a little bit about the kind of broader political support you're seeing in D.C. And I know you don't want to get into the details, but that's fine. I guess I'm just curious, this new time line you've shut out for second half of '23, does that assume any kind of incremental political support from here? Or is that still just kind of based on your base case time line that you redo the permits, you get FERC approval, et cetera, and not necessarily any new help out of D.C.?

John, I think that -- I'm loathed to say this because it's MVP, but the time line guidance that we put out, I would define as regular way guidance, meaning that we're actively engaged with the agencies for them to reissue the buy-up and right-of-way opinion. FERC has already acted. The Army Corps is continuing to do their work. So the guidance contemplate a time frame that would be consistent with their ability to complete the regular way, work that they have to do to issue the permits. And then the construction would commence immediately after that. And as Diana alluded to earlier, the only thing that could impair that or impact that would be if the Fourth Circuit panel were to issue a stay on any one of those permits. We're grateful for the political support both vocal and whatever other activity is going on. But that's not something that's within our control so that we're focused on doing the work we have to do to put out -- to work with the agencies to put out, in our minds, what will be unprecedented level of comprehensive permits and for the buy-up for the third time.

There are no further questions at this time. Thomas Karam, I turn the call back over to you.

And before we close, I'd just like to get on a soapbox here for a second, if I can. Follow up a little bit on what John was saying. It should be readily apparent to everybody given the geopolitical chaos that's occurring around the world that notwithstanding everyone's desire to very quickly move to a no or low carbon economy and world. There is no way to do that without continuing to support and use fossil fuels and in particular natural gas because this is a global issue. And as many of the producers have been saying, we have the ability and the resources to increase our production so that we can help accelerate the rest of the world to reduce their emissions, and at the same time, we can maintain reliability, energy security and national security for the residents of this country.

So a little bit of a soapbox, I apologize, but we can do 2 things at 1 time. We can quickly move and invest in technology and to try to find ways so that we can use renewables and as well as other energy sources to reduce our carbon emissions. But we have to accept and acknowledge that it's going to be a long period of time that we will absolutely continue to use natural gas as a critical component.

And with that, I'll say thank you for joining our call today, and we hope to talk to you all again soon.

This conclude today's conference call. You may now disconnect.