Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the P.R. and and Q on Q3 2019 earnings call.
This time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone.
If you require any further assistance please press star zero.
I would now like to hands the conference over to your Speaker today, Nate Tetlow, Vice President of corporate development and Investor Relations. Please go ahead.
Good morning, and welcome to third quarter 2019 earnings call.
Trans midstream and EQM midstream partners.
A replay of this call will be available for 14 days beginning this evening.
The phone number for the replay is 80 558 Fivenine to 056 and the conference I'd is one nine to four four to eight.
Today's call may contain forward looking statements related to future events and expectations.
Factors that could cause actual results to differ materially from these forward looking statements are listed in today's news release.
And under risk factors and both each year end and eat QM Form 10-K 's for the year ended December 31st 2018.
Both of which are filed with the FCC.
And as updated by any subsequent Form 10-Q 's.
Today's call May also 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.
Joining me on the call today or Tom Carroll.
Carmen and CEO .
Diana Charlotte, President and Chief operating Officer.
And Kirk Oliver Senior Vice President and Chief Financial Officer.
After our prepared remarks, we will open the call to questions.
With that I'll turn it over to Tom.
Thanks, Mike Good morning, everyone.
Before we discuss our third quarter results I want to take a minute to discuss the critical rule that natural gas plays.
Mitigating the impact of climate change.
As an industry, we need to be more vocal about the benefits of natural gas.
How we continue to mitigate the effects of greenhouse gas emissions.
We benefited from the tremendous success in developing domestic natural gas reserves from our abundant shale formations.
Creation.
Tax revenues are growing economy.
And very importantly financial security to so many families where this development occurs.
Yes, there are common misperceptions regarding the industry's practices surrounding methane and the environment.
As you know methane is the most significant component of natural gas.
Therefore.
We as an industry any trading as a company must be accountable and responsible for understanding and improving our methane management practices from cradle to grave.
And while there's always room for improvement.
We do have a successful story to tell on each of these fronts.
Our industry has made great strides during the past several decades.
With U.S.P.P.H. April 2019 inventory report.
So in total methane emissions are down more than 15% since 1990.
In addition, every conversion of traditional coal fired electric generation facilities to clean burning natural gas brings an exponential benefit of overall greenhouse gas reduction.
The midstream industry in particular is continuing to push forward in a meaningful way to effectuate real mitigation of climate change impacts.
Where are you train any QM, we believe it is not enough to achieve regulatory compliance on methane emissions.
We must and will do better by proactively pursuing the implementation of best practices, reducing our overall carbon footprint overtime.
You train has recently joined the environmental partnership voluntary reduction program offered through the American Petroleum Institute.
And the one future phone coalition.
Which is a group of natural gas companies working together to voluntarily reduce methane emissions across the natural gas supply chain.
And as a member of the Interstate Natural gas Association of America.
Train and other companies work with regulators to ensure that natural gas pipelines compressor stations and storage facilities are designed and built safely and operate in ways that minimize methane emissions.
Banning fossil fuels is not the answer.
Perfect continuing to develop and utilize our domestic energy resources in a responsible manner.
Natural gas should be viewed as the gateway to the future possibilities offered by the world of renewables.
Protecting the environment and future generations as a shared responsibility and the natural gas industry has been doing and we'll continue to do its part.
And he train we do not believe.
That energy development and environmental stewardship are mutually exclusive.
Now, let's move onto our earnings information.
This morning, UQM and you train reported third quarter results with adjusted EBITDA coming in at the high end of our guidance.
Kirk will provide more details behind those financial shortly.
As we've discussed in past quarters, we're operating within a new paradigm of lower for longer natural gas prices.
Resulting in a slowdown in a basin production growth.
2018, the average rig count in the Marcellus and Utica was 77 rigs.
And as of last week, there were approximately 51 rigs operating.
This 35% reduction is a positive sign.
Over the long term more moderate production growth will make GMP customer stronger.
It will reduce our gathering capital needs.
And we'll provide more stable and consistent long term or earnings growth.
Not only can we survive in this new paradigm.
We can also thrive in it.
With that I'll turn the call over to Kirk for the finance update.
And Diana will provide an operations update and I'll come back for some closing remarks FERC.
Thanks, Tom Good morning, everyone.
Before discussing the financial results I want to remind you of two accounting items.
First EQM third quarter 2018 results have been recast to include the pre acquisition results of RMP.
Which came under common control in 2017.
And second the Urika joint venture is consolidated any UQM and eat trains financial statements for accounting purposes.
Now the results.
BQM reported third quarter 2019 adjusted EBITDA.
$335 million.
Distributable cash flow of $234 million.
Net loss attributable the EQM of $11 million.
We're also reporting a net loss attributable to eat trait of $66 million.
He trained and eat QM third quarter net loss was impacted by a 299 million dollar impairment charge to goodwill and intangible assets.
Impairment was primarily driven by lower forecasted natural gas production growth behind the RMP Urika and Hornet gathering systems.
For the third quarter of 2019.
BQM operating revenue was $408 million, an increase of $44 million versus the same quarter last year.
The increase was primarily related to higher contracted from gathering capacity.
And the addition of Urika and Hornaday assets.
Stable cash flow profile of the business remains a core highlight as he UQM generated approximately 94%.
Its mission operating revenue at approximately 52% of gathering operating revenue from firm reservation fees during the third quarter.
UQM <unk> third quarter operating expenses were $440 million, an increase of $308 million from the prior year quarter.
The impairment expense accounted for $299 million of the increase.
The remaining increase was primarily related to the addition of the recur Hornet systems as well as higher gathering system throughput and additional assets placed in service.
Or the third quarter of 2019.
QM will pay a quarterly cash distribution of one dollar and 16 cents per common unit, which will be paid on November 13 to common unit holders of record at the close of business on November one.
Additionally, each train will pay a quarterly cash distribution of 45 cents per share.
Which will be paid on November 22nd.
The shareholders of record at the close of business on November 13.
We intend to hold the UQM distributions and the train dividends constant at least through the in service date of MVP.
Once MVP is in service, we will reevaluate that distribution and dividend growth rates.
In August EQM entered into a three year term loan for $1.4 billion with the proceeds primarily being used to pay down our revolver borrowings.
At the end of the quarter, we had about $300 million drawn and UQM $3 billion revolver. So we have ample liquidity to fund our growth projects.
We are currently in the middle of our annual planning process and we expect to provide guidance in mid December after finalizing and receiving board approval of the 2020 plan.
I'll now turn the call over to Diana for the operations update.
Thanks, Kirk and good morning, everyone. The third quarter 2019, with another successful operating quarter for our team.
Our systems gathered a record of 8.2 Bcf per day, we continued to make progress on our large growth projects and we remain focused on operating efficiently and safely.
We recognize the need to be disciplined with our class and this new operating environment and our expenses highlight our commitment to managing costs.
Our year to date gathering Elena and expense unit rate of just over three cents reflects our ongoing focus on operating as efficiently as possible without compromising our commitment to safety.
In addition to own and expenses, we have been very focused on overall corporate costs.
It has been almost a full year since standing up a new independent company and I'm pleased that our SGN a expenses have averaged lower than our guidance that $30 million to $35 million per quarter.
In terms of our large growth projects I'll start with NBP.
Total project work will be approximately 90% complete by the end of the year, we continue to work through the remaining permitting and regulatory items.
First we're very pleased that the Supreme Court, a great to hear the Atlantic Coast pipeline case related to its Appalachian Trail crossing authorization and we're hopeful that the lower court decision will be overturned.
Second with regard to NBP biological opinion, the fish and Wildlife service recently began the necessary re consultation process and we expect the permit will be reissued early in 2020.
Lastly, the U.S. Army Corps of Engineers is currently doing their review on the nationwide 12 permit and we expect to have that permit issued in the next couple of months.
We're currently winding down construction for the winter and plan to ramp construction backup next April .
We recently adjusted the project schedule and budget to reflect our current expectations regarding regulatory milestones and construction strategy.
We're now targeting a late 2020 answer to stay at an overall project costs of $5.3 billion to $5.5 billion.
Additionally, con Edison recently expressed that it intends to exercise an option to cap its investment in NBP.
This decision would increase each UAMS ownership interest in the MVP JV to approximately 47% and each UN would be expected to fund approximately $2.7 billion today. Each UN has funded about $1.7 billion.
The two main supply feeder projects for NVP Equitrans expansion project and the Hammerhead pipeline will both be completed ahead of NVP a portion of the Equitrans expansion project is currently operational and a portion of hammerhead is expected to be operational by year end.
Both projects can provide partial interruptible service capacity until MVP is on line.
Upon MVP and service the two projects have long term firm capacity commitments that will commence.
Moving on to NVP Southgate.
As a reminder, the project as a 70 mile pipeline that is expected to receive gas at MVP and transfer cast to new delivery points in North Carolina. The project is backed by a 300 million per day commitment from P. SNC energy.
Southgate is currently in the regulatory review process with for numerous state and federal agencies.
The project is expected to be placed in service and 2021 at an overall project costs of $450 million to $500 million.
As it relates to each UTI, we're having productive discussions with the new team regarding their updated development plans and simplifying the midstream agreements. We continue to believe that a mutually beneficial outcome can be achieved.
As a starting point, we don't expect any deal to take effect prior to MVP in service.
Our focus is attaining the best outcome for our shareholders and unit holders.
Executing on our main growth projects remains our top priority. Once these projects are in service they will provide the backbone for valuable expansion and extension opportunities.
This new infrastructure will be critical to serving future demand growth in the mid Atlantic and southeast regions of the United States.
I'll now turn the call back to Tom.
Thanks Diana.
So it's been just about a year since the spin off of you train from acuity.
Say it has been an active year with many unexpected events would be an understate.
Yes, there has been one constant and that is the strength of our business and the commitment of our management team.
He will remain focused on executing on its projects and creating shareholder value added return.
With that we'll be happy to take your questions.
At this time I would like to remind everyone in order to ask your question. Please press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad.
She withdraw your question you May press the pound key.
First question comes from the line of Jeremy Tonet with JP Morgan Your line is open.
Good morning, guys. This is it off alone for Jeremy.
Correct.
Taking my questions here, Oh, Bushman can you provide us an update on the Providence health you'd be negotiations on how they are shaping up so far.
They are shaping up well, we're having very constructive conversations with the new team and continue to make progress.
I think there's nothing the deal for both sides that we come out with a positive income.
Positive outcomes.
Farm income.
Got it.
Did you bought notes on the MVP project of it seemed that provisions on the investment.
Well look on its lead at this point on if so would you Jim Barrett like more something because of for these parties to stop distributions to NBP.
There's there's no other contractual ability.
For many of the other partners.
Understood and then one last thing on the level its budget 300 or is there any changes to your long term outlook at this point from the 3.5 to four times, which you hide and your previous flights.
Well, we're working on this is Kirk we're working on our.
Forecast and planning, which we will have some time in.
December and we'll have a better handle on what those numbers look like at that point in time.
It will take us longer I think to get to those targets now with.
With just whats happening within the basin with production.
Understood.
Thanks, Thanks for taking my questions guys. That's it for me.
Your next question comes from the line of Shneur Gershuni with UBI US Your line is open.
Good morning, everyone.
If I can just sort of revisit the discussion about the renegotiations with the dealing interesting comments.
Slide.
It was worth it is if the no no change would happen until NBP comes into service. So is this negotiation is going on right now is something that you'll agree to potentially in the next few quarters or so but would be signed before MVP comes in service, but nothing would happen until it actually come service that kind of we'd beat.
How's it.
Going.
Yes, I think we both come to the agreement that nothing will change until after NBP comes in service as far as rate. So.
My thought is that we'll have assigned a negotiated.
Before then but nothing will come into effect until after in service.
Okay and in your response to the last question.
Out of positive outcome income and so forth.
Can we talk about it on an NPV basis, I mean are we looking for something that can be close to.
NPV neutral that kind of the way that to be thinking about it where you've given take somewhere else and so on an NPV neutral basis.
We're in the middle of negotiations right now so we would prefer to let that till later date.
Okay Fair enough just a couple of follow ups.
Guidance or lack thereof.
Yeah, he's going to align their their plans for 2020.
You've taken down capex on the gathering side.
I mean.
Do you have enough.
<unk> bread crumbs for us or do you have a few bread crumbs for us just how you're thinking about 2020 stage right now.
That gathering capex being deferred into 2020 or is it going to go beyond 21.
You know how do we think about.
Volumes here.
If you can sort of give us color.
Thinking about.
You might want to every asset asked that question because you're breaking up.
I apologies there. So just wanted to better understand you. If you have any thoughts or early views on on a 2020 guidance I mean, just given the in the context that you tease already given some volume metric guidance I mean.
Obviously, you want to tighten it up when you give your proper guidance from the board, but as to at least how you're thinking about it for 2020 at this stage in the context of what do you T. said last week.
We're still working through that we so as far as volume 2020, and what do you keep he has ready for us and we can kind of start.
Working through that but from a capital perspective, we really need to understand their 2021 locations and that's still we don't have that all pinned down yet so as we work through it we should be in a better position mid December to be able to get that guidance.
Alright, perfect. Thank you very much appreciate the color today.
Your next question comes from the line of Spiro Dounis with Credit Suisse. Your line is open.
Hey, good morning, everyone.
Just following up on negotiations with the UTI totally respect that obviously are the millen negotiations, but maybe just want to try and Mary two comments that I guess I guess, both parties really talked about in the past I think.
More recently could you seem to offer up increased acreage dedications in exchange for a lower rate I guess I'm. Just wondering is that consistent with where the understanding what's going on right now and maybe how does that tie to your goal, which I think at one point was to be revenue neutral at a minimum.
So I think there a couple things that we're working through one is an increase on acreage dedication, but theres also an increase of NBC, which is very important to us an extension of those contracts. So longer term. So there is theres a couple of things on both.
That we're working through.
Okay fair enough and is that Golar revenue neutral still part of it or is that sort of still evolving.
It's still evolving.
Understood second question, just with respect to the Supreme Court decision certainly.
Positive in your direction I, just curious now with respect to the land swap is that or is that become kind of an option at this point, where you sort of pick that up maybe mid way through next year. After a decision to the extent you need to or is there a parallel process you can run simultaneously here.
Our goal would be to run that parallel.
Okay, and so by the time, you would get a Supreme Court decision and let's call. It June and any sense for how much longer after that a land swap could sort of occur.
No there's.
Our goal would be that we have it tied up and ready to go.
Okay very helpful. Thanks, everyone.
Your next question comes from the line of Ross Payne with Wells Fargo. Your line is open.
How you doing guys. First question is what kind of permitting is needed to get through Virginia to Transco and second of all what kind of hurdles do you see getting through North Carolina.
Transco question Weve already completed those interconnects with Transco side I think were good there with regard to North Carolina the standard.
Water permit we would need from them and believe it before before so.
We've made that application in that process is ongoing.
Okay.
Given the increase cost and your increased ownership than MVP sounds like you're not going to cut your distribution.
Until him or you're not going to address your distribution until after MVP is cutting your distribution something we can think about to shore up cost on that front and.
To potentially protect urology rating.
No I wouldn't think [noise].
I wouldn't think about I wouldn't look for distribution cuts, that's not something that we would consider.
Okay. How are your conversations going with the rating agencies are related to your investment grade ratings and how important is it for you to keep those.
Well, it's very important for us to keep the investment grade rating and as you know we're on outlook by.
Two of the agencies, we keep a very.
Consistent dialogue with all three of the rating agencies, we try to keep them updated when there's something that seems we're updating will make sure. They don't have any questions. After this call.
And we will be meeting with all of them once we have our.
Plan put together a in December .
So we keep a good dialogue with them all.
But as you know we don't have any.
Any clear.
Yea, or nay or but what they might do in the future. We do believe that we'll have plenty of time to react anything that they might.
Raise with us.
[noise] do you have any idea what they need to see happen from from their standpoint in terms of Sterne Agee given given their hurdles you have with increasing costs and changes in your rate structure with the acuity.
I don't really want to speak for them on that I mean, they I'm, obviously want to see our leverage metrics improve.
And as I mentioned earlier, given the what's happening with production in the basin and the delays with MVP, a that improvement will happen a little bit more slowly than what we've previously thought so.
You know that's going to be something obviously they'll be looking at and we'll be talking to them about but.
Our generally.
In terms of where they're not office.
Okay, and finally, a number of fixed income investors, including ourselves on the sell side of it hard time getting through to or so can they be more responsive to a returning or phone calls.
Yeah, absolutely [laughter].
No it would be appreciated.
Thank you that's it for me.
Okay.
Your next question comes from the line of Derek Walker with Bank of America. Your line is open.
Well I guess.
The first one for me I think you can see on their call of mentioned that there's some asset sales outside of the core them ourselves into looking to divest or if any that acreage behind a EQM systems and if so the contracts associated with that acreage transfer over to the potential customer there.
So I don't think we can speak to what that acreage really as they didnt disclose what that was so it would be out of time for us to speak to what about it.
Okay fair enough and I think they also mentioned that a sort of after the gathering re contracting that sort of a natural follow up would be around the water.
That was a getting a produced water solutions so.
If that's the case or should we kind of thinking about produced water solution as a 2021, maybe 22 sort of event.
So we continue to work through freshwater with them, even that I think will change a bit.
With the way that they want to use water and then on the produce side, we continue to work with them.
For what they need I don't think it's going to be a huge capital build but if there are certain aspects on the could decide that they need and we can help with we're certainly working through that so we're in active conversations.
With both of those things so that we can we can meet what they need on the water side.
Okay, Great and then maybe just a quick one on a on a process I think on the nationwide.
Side of things you mentioned the next couple of months you expect to get that is that something that you would expect after.
Official mine life a piece.
I don't think it necessarily has to be but I think they're close to the same timing. So I'd say early next year for both of them.
And then our current scheduled really doesn't have a hitting at heart until April .
Got it okay.
Okay. That's it from me thank you.
Your next question comes from the line of Chris <unk> with Barclays. Your line is open.
Hi, guys. Good morning, I'm, just I guess the follow up on a couple items in the release are you able to provide any further breakdown of the write downs that you took in the quarter just in terms of how much was attributable to RMP versus.
The Urika and horn insistence.
Oh sure RMP was about 100, and just under 170 million.
And you recall horn it was about 99 million up a goodwill impairment.
And then there was some deferred tax component to both of those of about 7 million.
And then we had intangible assets and Hornet midstream related to contracts with producers of about 36 million.
Okay. Thank you that's helpful.
And then to follow up on Diana comments from a little earlier.
How much capacity or or how much volume flow or you guys able to provide on the interruptible service today on the Equitrans expansion in the the Hammerhead project.
So it really depends on I think the capacity is are you looking at 600, but it really depends on market and what the what the differentials are as far as what we can it.
Whether would.
Okay, I mean, I guess is it any of that built into.
Your current outlook or should we expect that is just being more opportunistic.
No it's opportunistic.
Yeah.
That's it for me then thanks guys.
Your next question comes from the line of Chris Sighinolfi with Jefferies. Your line is open.
Hey, good morning, everyone. Thanks for the time.
And Chris.
I wanted just to follow the lots lots been asked and answered I. Appreciate it all I just have one follow up if I could not just to circle back on some ross's questions just with regard to the dividend.
Provision reassessment process I think we all understand the decision a whole payouts flat over the remaining NBP execution timeline, just given the insert uncertainty inherent in it and the escalating cost the project, but I guess presuming envy BNN Southgate commence on your current guidance.
Im wondering Tom what factors go away or how you've come to think about shareholder payouts after that point.
At the Analyst day, you guys. So it's a year ago is when you eat CRM was for spinning.
It was articulated as a full payout C Corp.
And I'm just you know it seems to be changed views at least in regards to the C Corp entities versus you know piece in terms of how shareholders returns get allocated whether that be.
Through the dividend through buyback or more improvements and leverage and so I'm just curious your current thoughts on that.
Yeah, Chris This is Tom that's that's a really good question. We don't have an answer for you as we sit here today, because we're still.
Yes, you were facing is we have so many balls up and year with these different projects with MVP with reopening of the contracts with the Qt with some other things that you know the next 12 months.
Could bring to bear.
We're just trying to keep our powder dry and our options open as it relates to.
The ultimate use of use of funds and use of proceeds from our cash flow. So let me differ answering that today, but the question is on point with something that.
As we get into early next year, we're going to be much more clear about.
Okay is it I guess.
Clearly, we're very sensitive to our leverage.
Yeah.
I think that that is priority number one for us right.
Okay, I guess, what I'm, what I'm getting after and maybe it's just premature given the timetable is.
If you were too for example, resume growth in the payout at EQM.
Is it an option I certainly an option is is it a view that you think is credible that maybe the growth doesn't follow a commensurate pay city trn and net cash either builds or is used for.
Accelerate term loan repayment or share repurchase or something other than commensurate level dividend growth.
Understood and then I'd like to answer the question this way.
That cash will be used to maximize shareholder return in some form or fashion.
Okay.
Alright, thanks, sometimes my guess.
Your next question comes from the line of TJ Schultz with RBC capital markets. Your line is open.
Hey, good morning, just one follow up on the manned exchange plan.
Just trying to understand the next steps there understanding the goal to have it tied up and ready to go by next summer.
If you can kind of just walk through what needs to happen to get there. Thanks.
So we're still working with the agency on what those steps need to be and as we continue to define them. We can continue to talk about them.
Okay. Thank you.
Your next question comes from the line of Ross Payne with Wells Fargo. Your line is open.
Oh, sorry, guys. One more question I guess, you know based on your comment to protect the balance sheet and de leverage why does it not make sense to go ahead, you cut the distribution now to help fund to keep the balance sheet in shape.
On the increased cost of MVP and ultimately to deal with any kind of decreasing rates, where the Q2.
Why don't you go and do that no.
As we've made the determination not to Ross.
All right that's all I got.
There are no further telephone questions at this time I turn the call back to our presenters.
Thank you very much for joining the call today, we appreciate everybodys.
Attention to us have a good day be careful up there go vote.
This concludes today's conference call.
Now disconnect.