Equitrans Midstream Corp (ETRN) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Equitrans Midstream Q2 2021 Earnings Call (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker, Nate Tetlow. Please go ahead.

Good morning, and welcome to the second quarter 2021 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) 585-8367 or (416) 621-4642, and the conference ID is 4529988.

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, 2020, 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; and Brian Pietrandrea, Vice President and Chief Accounting Officer. After the prepared remarks, we will open the call to questions.

With that, I'll turn it over to Tom.

Thanks, Nate, and good morning, everyone.

For the quarter, net income was $40 million and adjusted EBITDA was $272 million, marking another quarter of solid results. Our assets, operations and people continue to deliver, as we exceeded the high end of our adjusted EBITDA guidance for the quarter. Kirk will provide more details on the financial results in a few minutes.

Last week, we released our annual corporate sustainability report. The report was produced in accordance with both GRI, Global Reporting Initiative; and SASB, Sustainability Accounting Standards Board standards. Our 2021 report expands our range of material ESG topics and outlines the progress we've made. I'll highlight a couple of items, but I also encourage everyone to access the full report through our website at equitransmidstream.com.

First, we've made great progress on reducing total air emissions, with 2020 being 12.5% lower than 2019. And specific to methane, our methane intensity rate decreased 17% year-over-year.

Second, in 2020, we formally launched a new inclusion program. The program provides employee education and is designed to enhance our recruitment processes, employee engagement and inclusion-related policies.

Lastly, over the past year, we further developed our sustainability framework and initiated a climate policy and human rights policy. We also established the position of Chief Sustainability Officer and enhanced our Board with additional independent Directors. We now have a 9-member Board of Directors, including 8 independent Directors, 4 of whom are female.

I'll now turn the call over to Diana for the operations update. Kirk will provide the finance update, and I'll come back for some short closing remarks before we open the call to your questions. Diana?

Thanks, Tom, and good morning, everyone.

I'll start with MVP. On the construction side, we have been working since spring on all approved upland areas and are on track to complete this work in the fall. Once the upland work is complete, the remaining work will include approximately 10 miles related to water crossings and 8 miles related to areas in and around the Jefferson National Forest.

On the permitting side, since applying for the remaining water body and wetland permits in February, MVP has been providing requested information to the U.S. Army Corps of Engineers and FERC. With regard to FERC certificate amendment process, FERC recently published the notice of schedule, which indicated that the environmental assessment is expected to be published in mid-August.

Moving on to the Army Corps individual permit process. As anticipated, both Virginia and West Virginia were granted additional time to perform their 401 water quality certificate reviews. We support these extensions, and the new time frames are the end of December for Virginia and the end of November for West Virginia.

The permitting process has been, and we expect that it will continue to be, very comprehensive, and we appreciate the effort that the federal and state agencies are putting forth. The expected permitting time lines for the FERC and Army Corps remain consistent with MVP's summer of 2022 targeted in-service, and the total project cost estimate remains approximately $6.2 billion.

One final comment on MVP. In July, the JV announced plans to neutralize MVP's operational emissions for its first 10 years of service through the purchase of carbon offsets. Upon full implementation of the carbon offset plan, MVP will become one of the first interstate natural gas transmission companies in the United States to achieve carbon neutrality for operational emissions. We are proud to make this important commitment with our MVP partners and advance Equitrans and the industry's efforts to reduce methane emission.

Moving on to our base business. Gathered volumes and transmission throughput were ahead of our forecast for the quarter, with the natural gas price drop providing some tailwind. Both Henry Hub and local natural gas prices had a nice uptick during the quarter, which continued in July.

While our customers remain focused on free cash flow generation over volume growth, the pricing strength means we have not experienced the same price-driven production curtailments we saw last summer. We are cautiously optimistic that prices will remain strong through the summer and into the winter withdrawal season, resulting in modest year-over-year gathered volume growth.

On the water segment, we are also running ahead of our plan for freshwater delivery and today increased our full year water EBITDA guidance from $25 million to $30 million.

In terms of capital, we've refined our plans for the year, which resulted in a reduction of $50 million from our previous guidance. The decrease is primarily a result of continued system optimization on the gathering segment, favorable contractor pricing and some shifting of project timing.

And lastly, we recently completed a binding open season related to our Equitrans transmission system. The open season resulted in shipper interest for access to markets in the Midwest and Gulf Coast primarily through existing delivery interconnects with interstate pipelines in Clarington, Ohio. We are pleased with the interest we received and are evaluating shipper requests. We expect to have more details to discuss later this year.

I'll now turn the call over to Kirk.

Thanks, Diana, and good morning, everyone.

Today, we reported second quarter net income attributable to ETRN common shareholders of $22 million and earnings per diluted common share of $0.05. Net income was $40 million, adjusted EBITDA was $272 million and deferred revenue was $75 million.

We also reported net cash provided by operating activities of $383 million and free cash flow of $220 million.

Net income attributable to ETRN common shareholders was impacted by 2 items during the quarter. The first item is a $56 million impairment to the Ohio water assets, which were acquired from Rice Midstream Partners in 2018.

The second item is a $9 million unrealized gain on derivative instruments, which is reported in other income. This relates to the contractual provision entitling ETRN to receive cash payments from EQT based on Henry Hub natural gas prices exceeding certain thresholds starting in the quarter of MVP's in-service and continuing through the fourth quarter of 2024.

After adjusting for these 2 items, second quarter adjusted net income attributable to ETRN common shareholders was $57 million and adjusted earnings per diluted common share was $0.13.

ETRN operating revenue for the second quarter 2021 was higher compared to the same quarter last year by $8 million primarily from increased gathering volumes and higher transmission throughput, partially offset by decreased water services volume.

Operating expenses for the second quarter of 2021 were $50 million higher than the second quarter of 2020, with the increase primarily driven by the $56 million impairment to the Ohio water assets.

For the second quarter, ETRN will pay a quarterly cash dividend of $0.15 per common share on August 13 to common shareholders of record at the close of business on August 4.

And lastly, as a result of our strong second quarter results and outlook for the remainder of the year, we raised our full year 2021 adjusted EBITDA guidance range to $1.07 billion to $1.14 billion and free cash flow guidance range to $380 million to $450 million.

I'll now hand the call back to Tom.

Thanks, Kirk. So to summarize, our base business continues to deliver. The natural gas price environment has strengthened, and the macro outlook is encouraging. Our customers are getting healthier and continuing to exhibit the discipline necessary for long-term benefit. We're making great strides on the ESG front. And lastly, MVP construction and permitting are on track with our expectations.

With that, please stay safe, wash your hands, and we're happy to take your questions.

(Operator Instructions) Your first response is from Shneur Gershuni with UBS.

Maybe to start off on the MVP updates, Diana, you'd sort of mentioned in your prepared remarks that you have set dates for West Virginia and for Virginia. If I recall correctly, at one point, Virginia was actually looking for like a larger extension into March and so forth.

Is that now a firm date? And if they don't act by then, does the Corps just issue? Just trying to understand kind of the dynamics about how that's going to specifically play out with Virginia.

Yes. So all indications that we have right now from the Corps and from the Virginia DEQ is that they can hit that 12/31 date that they've set. The Corps does, after that point, have the ability to proceed, assuming that Virginia would have waived, but they don't have to. So it's really up to the Corps. But everything we're seeing, which is important, is that all of the agencies are working to that date.

Okay. And would it impact your ability, like, if they did not hit that date? And the Corps that issued, would that create potentially a wedge issue from a legal perspective or that would supercede it?

So I mean, I think if they don't hit it, there's a little bit of time built into our schedule because we're not really going to do a lot in January and February. So if they go all the way to March, which is what they originally asked for, it really just pushes the COD on MVP from early summer to late summer.

Okay. Got it. Sort of a bit late for that a little bit.

Shneur -- this is Tom, Shneur. Let me just -- just to clarify just a little bit. The date that were put out for the West Virginia and Virginia 401s were not done in a vacuum. The Corps was in consultation and communication with Virginia and West Virginia, and those dates were a result of that consultation, so that there's agreement among the parties that those are the dates.

Okay. Perfect. I really appreciate that clarification there, so that everybody's done, is on board and are being sponsored. Maybe just to pivot a little bit here. I assume we really can't talk about Hammerhead, so I was wondering if maybe you can talk about the open season.

Have you moved to a binding open season? Does the higher transmission throughput that we're seeing sort of suggest there's some agreement signed outside of it? Just kind of what are your latest updates with respect to the open season that was originally filed a while ago?

Yes. So we did move to a binding open season, and that has also been closed. So what we're doing right now is evaluating all of the shipper requests that came in, and there were several, so that's really good.

And then part of that evaluation is really determining what capital is required, the project economics, and there is still some back and forth with those shippers as far as where they want to come from and where they want to go. So we're working through all of that right now with shippers. And we should have final results in the next couple of months to give you more information. But it was a good binding open season.

Your next response is from John Mackay of Goldman Sachs.

Just wanted to circle back on the change in gathering CapEx. I know you said there are a couple of moving parts there, but just curious if there's any kind of read on 2022 volumes from that.

This is Justin. I'll add a little bit of color there on the gathering, the CapEx. So you saw a downward revision of about $30 million on our 2021 gathering CapEx. That's really a mix of system optimization, which is made possible by our new gathering contracts, some lower realized contractor pricing that we're seeing as well and then some deferral of projects into '22.

I do want to note that the level of transparency and communication with our producer customers, especially EQT, creates a lot of the benefits that we're seeing now in terms of aligning our projects and optimizing our spend. But as it relates to your question and the deferrals, it falls into 2 categories.

A chunk of it is related to pad timing in 2022. Our goal is really always to avoid winter construction where possible. So if a pad is scheduled for early '22, we would generally construct those lines in the fall of '21. But if the pad moves to later in '22, we can shift that build into the spring of '22 and still meet the producers' timing. Again, the coordination efforts between the organizations is what really makes that level of scheduling possible.

The other category of deferrals is compression, and we add compression as needed by the producers to optimize their production. So some of the deferred CapEx that we're seeing move to '22 is related to compression projects that aren't required at this time.

And also keep in mind that most of our gathering contracts layer in incremental fees when those compression projects come online as it's a higher level of service. But in terms of volume implications for '22, we're still expecting volumes to remain flat. The deferral of projects is really just a function of our coordination efforts and our ability to optimize our spend accordingly.

That's great. Really helpful. And good to hear the relationship with EQT is still going well. Maybe I'll just ask one follow-up on MVP. We've seen some comments from the EPA recently.

I think they were kind of misunderstood by some. So just curious if you guys could give us an update on kind of where that kind of communication is going and kind of what the EPA's role in this process overall is and will be.

Sure. Yes. The EPA comments were provided as part of the Army Corps permitting process, so that's how it's actually intended to work. So now the Corps can take those comments and ensure that they are appropriately addressed as they go through the permitting process.

So we're confident that all the comments from the EPA either have been or will be addressed. And then the Army Corps is the agency that ultimately issues the individual water permit that those comments were just part of that process from the EPA.

Your next response is from Spiro Dounis of Credit Suisse.

First one is a multipart question on carbon neutrality. So obviously, you announced MVP offsetting its carbon. Just curious if you could talk a little bit more about your ability to implement something like that across the rest of your assets and how you're thinking about the ability to generate return from this initiative.

And then kind of more broadly, is there a permanent solution, I guess, over the long term rather than purchasing these offsets to do something more integrated?

So good questions. We've been spending a lot of time developing strategies to continue to reduce that greenhouse gas emissions, at the same time, meeting all of the essential needs that we have and the country has for energy. Certainly looking -- and we understand that we have an obligation to address and attack methane reduction, but really wanting to find something that fits within our strategy, our core competencies and also creates value for shareholders.

So if there's an economic opportunity to add that value, that's certainly something we're very interested in. We're taking some time to learn right now. We're doing small things, small solar things, some waste, heat, a little bit of hydrogen research to make sure that we're really paying attention, so learn as we implement some of the smaller-scale things.

And then as our balance sheet starts to strengthen, and we get MVP behind us, then I think there's an opportunity to size up a bit on what we've learned. We don't have -- we have a plan right now to get to 2030 as far as cutting our methane in half and continue to work through those other goals that we've set, which are to be net 0 by 2050, total greenhouse gas by the end, cutting that by 50% by 2040.

So we keep working and we keep learning. I think what I'm seeing from my seat is that we're approaching this a lot like we approach safety, which is I can see it permeating within the organization, and it's starting to show up in everybody's language. It's becoming part of the culture, and that's the best thing for us, so that every individual is really participating. And we've incorporated some of that into our targets for short-term incentive to make sure that the whole organization is following along and getting involved.

Great. Second one, I don't believe you've been asked about M&A in a while just given the focus on MVP and completing that. But just curious to check in on that front and where that stands, both as a potential buyer or a seller of assets.

We're seeing a lot more assets change hands in this market. I would have to think some of that is crossing your desk. So just curious how you're thinking about M&A here. And then even as MVP comes online, is there anything you'd be looking to sort of line up quickly once your balance sheet is ready for it?

Spiro, this is Tom. I mean, clearly, we always have our eyes on what's going on in the marketplace around us. But make no mistake, our first job here is to complete MVP and begin the delevering -- the rapid delevering of our balance sheet.

You're correct. There are a lot of assets out there that are attempting to change hands that we're aware of. We're not leaning forward on anything right now, but you never say never, but our focus right now is completing MVP.

Your next response is from Derek Walker of BofA.

Maybe just a couple of quick ones from me. Maybe you can provide an update on Southgate and sort of what your approach is there. I guess, how do you kind of see that approach evolving as potentially you get feedback from the FERC EA and perhaps some of these water permits in other states? Does that have any influence on sort of the approach for Southgate?

Yes. So right now, certainly, certainty on MVP in the mainline is -- will be helpful. Right now, we're working through all of those permitting obstacles, assuming that we start construction in '22 with a COD sometime spring '23 on Southgate. So yes, I think that the MVP mainline does any positivity on that helps with the permitting on Southgate.

Got it. And I guess for the FERC EA, you said mid-August. I guess, at this point, obviously, there's been some back and forth. Do they have everything they need at this point? Or do you anticipate anything else between now and the next couple of weeks here?

Yes. I think they have everything that they need, but we're in close contact with them as far as data requests and things like that. So if there is anything else, we're well positioned to give them what they need. But I think they have everything right now.

(Operator Instructions) Your next response is from Jeremy Tonet of JPMorgan.

Just want to follow up on some of the decarbonization, I guess, questions and comments so far and just want to see any thoughts you had on RNG at this point and opportunities for ETRN going forward with regards to RNG.

Yes. So we continue to look at that. It's something that's interesting to us. But I think, in our footprint and in our core competency, as that fits, that's something that's interesting to us. We don't have anything right now that we're moving forward with in that arena, but consider it -- continues to be part of our tool set.

There are no further questions in the queue at this time.

Well, thanks, everyone, for joining us. Please stay safe out there, and we look forward to talking to you again in a couple of months. Have a great day. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.