Equitrans Midstream Corp (ETRN) 2021 Q4 法說會逐字稿

Good morning. My name is Chantel, and I'll be your conference operator today. At this time, I would like to welcome everyone to Equitrans Midstream Fourth Quarter 2021 Earnings Call.

(Operator Instructions)

Nathan Tetlow, Vice President of Investor Relations, you may begin your conference.

Good morning, and welcome to the year-end 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) 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, 2020, and as updated by Form 10-Qs for factors that could cause the actual results to differ materially from these forward-looking statements.

Also, the Form 10-K for the year ended December 31, 2021, is expected to be filed with the SEC this week. 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 Janis Brunner, Vice President, Finance and Treasurer.

After the prepared remarks, we will open the call to questions. With that, I'll turn it over to Tom.

Thanks, Nate. Good morning, everyone. Today, we reported full year 2021 net loss of $1.4 billion. Adjusted EBITDA of [$1 billion] and deferred revenue of $424 million. Our core business continues to deliver solid, predictable results, again, exceeding our guidance.

Kirk will provide details on the financial results in a few minutes. The recent Fourth Circuit decisions to vacate and remand MVP's Forest Crossing permit and biological opinion are, in our view, wrong and represent a significant departure from traditional judicial difference.

We believe the federal agencies completed an unprecedented review of MVP's permits going above and beyond their regulatory permitting requirements as well as beyond the level review that comparable infrastructure projects have faced. This was the second MVP forest permit that the court vacated and the biological opinion was reissued to MVP in 2020 after an extensive 1-year long review, which included a comprehensive reconsultation between Fish and Wildlife and FERC.

The court decisions elevate the uncertainty around our ability to bring MVP to completion. And just to remind you, MVP's total project work is about 94% complete. Obviously, we are no longer targeting a summer 2022 in service. We remain committed to completing the project and are actively engaged with federal agencies, legal counsel and our partners to find the best path forward.

When we conclude these discussions and determine that path, we will provide an update to the market. And now I'll turn it to Diana for operations update, and then Kirk will discuss the financial results. Diana?

Thanks, Tom, and good morning, everyone. First, I want to acknowledge our employees who once again delivered strong results and continued to keep safety a priority above all else. Thank you all.

Also, I'd like to thank both the internal and external MVP teams that continue to navigate through all of the challenges. Your countless hours of work, dedication and perseverance are truly appreciated. Now moving to the base business. On the gathering side, we moved an average of 8.3 Bcf per day in 2021 or about 1% higher than 2020.

Our initial 2022 free cash flow guidance is driven by our customers' development plans and currently implies a modest decline in year-over-year volumes. However, we do believe that at current strip pricing, there could be upside to 2022 gathered volumes.

Big picture, we continue to expect roughly flat volumes for the next few years as our producer customers stick to maintenance level drilling. We expect to spend about $275 million on gathering projects in 2022. This includes about $35 million for compression which does generate incremental revenue through a separate compression fee.

On transmission, we recently submitted an application to FERC for the Ohio Valley Connector expansion or OVCX. This project is a perfect example of the team finding ways to utilize our existing transmission and gathering assets to drive capital efficiency.

Rather than a greenfield project, we were able to design a project around existing assets, meet our customer needs and save about $30 million of capital relative to a greenfield build-out. The project includes approximately 350 million cubic feet per day of increased deliverability on the OVC pipeline, of which 330 million per day is contracted under long-term agreements.

Incremental access to key demand markets in the Mid-Continent and Gulf Coast through existing interconnects with long-haul pipes in Clarington, Ohio, an extension of approximately 1 Bcf per day of currently contracted capacity on our legacy transmission system, new receipt and delivery transportation paths and overall improvement to the long-term reliability of the system.

The incremental OVC capacity is targeted to be in service in Q3 2023. In total, we expect to invest approximately $160 million, which includes about $130 million for incremental compression, about $10 million is included in our 2022 CapEx guidance. We expect the project to realize a build multiple of approximately 5 to 6x and potentially better depending on throughput. On the water side, we have been working (inaudible) next use water system in Pennsylvania, which is backed primarily by the recently signed 10-year water services agreement with EQT. In 2022, we plan to invest approximately $50 million to finish a majority of the backbone infrastructure.

Beyond 2022, the water-related CapEx is expected to be closer to the $10 million to $15 million range. The new water services agreement includes an annual revenue commitment of $40 million for the first 5 years and $35 million in the last 5 years.

Moving on to ESG. In 2021, we made several important advancements: first, we established long-term emission reduction targets, including a 50% reduction in Scope 1 and 2 methane emissions by 2030 and a 50% reduction in total Scope 1 and 2 greenhouse gas emissions by 2040 as well as the goal of becoming net 0 for carbon by 2050.

And we've already made great progress. Specifically in 2021, we began a program to replace high bleed with low bleed pneumatics as well as certain gas-driven pneumatics with instrument air systems. As a result, we have lowered annual pneumatic methane emissions by approximately 52% relative to our 2019 methane emission baseline.

Second, we published our second annual corporate sustainability report which followed GRI and safety reporting standards. Lastly, we received an upgrade to BBB by MSCI and in our first year being asked to respond, we received a score of B- on our CDP climate change response. We are committed to the sustainability of our operations into improving our disclosure and look forward to making more advancements in 2022.

I'll now turn the call over to Kirk.

Thanks, Diana, and good morning, everyone. This morning, we reported a full year net loss attributable to E-Train common shareholders of $1.4 billion and a loss per diluted E-Train common share of $3.32. The net loss for the year was $1.4 billion.

Adjusted EBITDA was just over $1 billion and deferred revenue of $424 million. We also reported full year net cash provided by operating activities of approximately $1.2 billion and free cash flow of $488 million. For the quarter, we reported a net loss attributable to E-Train common shareholders of $1.6 billion and a loss per diluted E-Train common share of $3.68.

Net loss for the quarter was $1.6 billion, was $167 million, deferred revenue, $198 million. In the fourth quarter, we generated $347 million of net cash provided by operating activities and $140 million of free cash flow.

Also, we did have an adjustment to our deferred revenue in the fourth quarter that I want to spend a minute on. To remind you, deferred revenue is a difference between the cash we collect and the revenue we recognize as it relates to our gas gathering agreement with EQT. The agreement allows for a fee credit on certain volumes that receive both gathering and transmission services.

In December, we amended a transportation services agreement with EQT, where this fee credit applies. Although there is no impact of future free cash flow, we do expect the amendment to increase our future transmission revenue with the offset being lower average gathering rate over the life of the contract.

The lower average gathering rate gets applied back to the beginning of the contract. So in the fourth quarter, we had a cumulative adjustment to deferred revenue of approximately $106 million. The cumulative impact shows up in the financial statements through lower fourth quarter firm reservation fee revenue on the Gathering segment.

Several additional items impacted both the full year and the fourth quarter results. Net income for the quarter was impacted by a $1.9 billion impairment to our investment in the MVP joint venture, which was driven by the ongoing legal and regulatory challenges facing MVP.

Additionally, Q4 net income was impacted by a $97 million valuation allowance placed on our deferred tax assets, resulting from the cumulative losses that were driven by the impairment to our investment in the MVP joint venture and a $54 million unrealized loss on derivative instruments.

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 beginning with the quarter in which MVP's in-service occurs through 2024.

After adjusting for these items, Q4 adjusted net loss attributable to E-Train common shareholders was $32 million and adjusted loss per E-Train common share was $0.07. The full year results were also impacted by the $1.9 billion impairment investment in the MVP joint venture and the $97 million valuation allowance on our deferred tax assets, a $16 million unrealized loss on derivative instruments, $56 million impairment to long-lived assets associated with our Ohio water assets; and finally, a $41 million loss on extinguishment of debt from the tender offer we executed in early 2021 for $500 million of the 2023 outstanding bonds.

After adjusting for these items, full year -- adjusted net income attributable to E-Train common shareholders was $166 million and adjusted earnings per diluted E-Train common share was $0.38.

As mentioned earlier, we reported adjusted EBITDA for the year of just over $1 billion and deferred revenue of $424 million. We generated $488 million of free cash flow and $229 million of retained free cash flow.

Rating revenue for the year decreased by $194 million compared to last year, and operating revenue for the quarter decreased by $120 million compared to the same quarter last year. Both were driven by the impact of deferred revenue. Operating expenses for the year and for the fourth quarter were essentially flat versus the comparable period in 2020.

For the (inaudible) paid a quarterly cash dividend of $0.15 per common share on February 14 to common shareholders of record at the close of business on February 3. And lastly, today, we provided initial 2022 guidance for free cash flow, retained free cash flow and CapEx and capital contributions.

Because the ultimate MVP and service timing impacts certain items, including deferred revenue and revenue recognition under the gathering agreement with EQT. We are unable to provide [2020] net income, adjusted EBITDA and deferred revenue.

We expect to be able to provide guidance for these items after the completion of our review of the recent legal decisions and the evaluation of possible path forward for the MVP project. For the year, we expect free cash flow between $340 million and $420 million and retained free cash flow of between $80 million to $160 million.

We also expect our 2022 total capital expenditures to be $575 million at the guidance midpoint. I'll now hand the call back to Tom.

Thanks, Kirk. It's troubling that at a time when the nation is so focused on energy independence, critical reliability issues and transitioning to a lower carbon economy, overreaching court decisions of this type issued by the Fourth Circuit blunt this necessary infrastructure from being completed.

At both the macro and micro level, the need for projects like MVP could not be more clear. Additional natural gas supply in the form of Appalachian natural gas is essential to support the retirement of coal-fired power plants in the Southeast United States and to ensure reliability of supply to the very areas needing to ensure such reliability for the long term.

MVP is designed to transport affordable natural gas with the lowest methane intensity in the country. Further, Appalachian natural gas can play a key role in facilitating LNG exports, not only helping to displace coal globally and combat climate change, but to enhance energy security for valuable trading partners and allies.

However, as evidenced by the Fourth Circuit ruling regarding MVP, the challenges to constructing natural gas infrastructure and potentially other infrastructure are significant and increasing. As a nation, we risk our national security, our energy security and energy reliability with these legal obstacles. With that, we'll be happy to take your questions.

(Operator Instructions)

Our first question comes from John Mackay with Goldman Sachs.

I understand all the moving pieces on MVP, and I understand that you kind of can't give us a date yet. But I just kind of wanted to talk through. I mean, is 2023 still on the table right now? Or is there a reason that you think that 2 might not be possible?

John, this is Tom. Thanks for the question. I think what we're comfortable saying is, look, we're actively engaged with the agencies and our partners to first assess the court rulings. Second, to determine the scope of work required and timing needed to address these issues.

And lastly, we want to come away with a high degree of confidence that a newly issued permit will survive a court challenge. We're exploring every path to achieve this, and we've been encouraged by the way, by the recent public statements from a whole host of legislators supporting timely and certain completion of critical infrastructure projects.

I can't give you any timing. And I hope this can give you the answer you want, even though it's not directly the answer you want, but because we're still within the legal appeal period, I really can't say much more than that at this time.

Okay. No, that's totally fair. I understand the last point. Maybe I'll just ask one more on this. I understand the need to kind of consult the agencies and move forward on the regulatory side. But you're also talking about potential conversations with your partners there. Just curious if you can kind of flesh out what that means.

Would you be interested in taking a larger share of the project if your partners were less interested in this point or even vice versa? Just curious on your general thoughts there.

Yes. I think to go back to a little bit of the first answer, all of the conversations we're having with our partners right now are in the vein of finding the best path forward.

Our next question comes from Neel Mitra with Bank of America.

Looking at the -- what it seems to be about $50 million a quarter to keep the project alive while you're under construction and the leverage levels tending to trend up, how are you looking at the distribution kind of in the context of those 2 things?

Yes. This is Kirk. We have no plans to cut the dividend. It's not the time to address that. We're optimistic, cautiously optimistic that we have a path to completion. Our core business generates substantial cash flow to support the dividend and nothing that we've announced today changes that.

Got it. And then second question, maybe just looking aside from MVP, can you kind of just outline over the next few years the type of growth opportunities that you see intra basin? I know that the emphasis has been getting gas out of the Northeast, but with some of your projects and some other opportunities, what you can see if MVP ultimately doesn't survive.

It's Diana. So certainly, OVC is a growth opportunity that we're looking forward to. We just filed with FERC from that perspective. I would say that's probably the extent from a transmission perspective.

Gathering, we're looking at some other opportunities but certainly continue to look and drive our capital efficiencies, right? So we have this transmission system and the gathering system on top of it. We're finding ways to drive down capital on both sides by using both systems as efficiently as we can.

So really looking at repurposing pipe that's already in the ground and finding better uses for it. And I think the team has done a really good job with that this far.

Our next question comes from Becca Followill with U.S. Capital Advisors.

Where do you stand with your banks on the credit facility? There's the step down in leverage later in this year?

This is Diana. We have a very good relationship with our bank group, and they have been very supportive. And that's been largely driven by the strength of our core business. So we do not see any issues addressing that facility with the banks.

And then just asking one of the other questions in a different way. Do your partners -- I know one of the larger partners just wrote down the project also. Do they have the right to just walk from the project and then other partners would have to pick up the capital investment? Is there in the contract?

This is Tom. No, is the short answer in the current time frame. So the answer is no. And typically, nothing we say publicly is at odds with what our private conversations are with our partners. We're always in lockstep with each other. So we're all seeking the path forward here together, notwithstanding any accounting issues that have to be booked.

And if I can just sneak 1 more in. I know there's a lot to digest for you guys, but do you have any feel for the timing to get the clarity on some of these issues and what the next steps are? Is it months? Is it weeks? Is it maybe by next quarter? Any feel for that?

Yes. Rebecca, I have to wave off answering that because of the fact that we're still in the legal appeal period. So what I'd like to say is we will come back as soon as we can relative to the conversations we're having.

Our next question comes from John Mackay with Goldman Sachs.

Maybe just on '22 guidance. So I understand the deferred revenue and everything you can't really give on the EBITDA. But maybe if you can just comment, are your underlying assumptions for the kind of the base business pretty in line year-over-year, Diana, I know you said kind of maybe slight gathering volume declines, but otherwise, is everything else kind of in line?

Yes. There is a slight decline in producer volumes year-over-year in our guidance. There would be upside if they just stay flat. So depending on prices and what producers decided to do throughout the rest of the year, but that is really the only change to the base business.

Okay. That's helpful. And then I'll squeeze 1 more in. Just, I guess, we're speaking hypothetically here. But in the scenario where we're not able to go forward on MVP. Is there considerable spend on your side in terms of any remediation from the existing pipe that is in the ground? Just curious what that kind of scenario could look like.

Yes, John. Look, we're not at the point where we're willing to offer any guidance in that respect. I mean I would point you to the 10-K that NextEra filed and the estimates and filings they made, and those seem to be reasonable to us.

And Tom, sorry, just to clarify on that, you're kind of referring to the ARO they recorded there.

Correct.

There are no further questions at this time. I'll turn the call back over to Tom Karam for closing remarks.

Well, thank you, everyone, for joining us today. It's been a complicated quarter that we announced today, and I just want to revert back to the fact that our core business is strong, it's resilient and it's very predictable and that we're all hands on deck to find the right path forward that will get us success on MVP.

And stay tuned. We'll get back to you as soon as we have some clarity on that. Thank you very much. Have a good day.

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