Q2 2020 Equitrans Midstream Corp Earnings Call
Let's begin with our corporate simplification.
In mid June we completed the final step of our simplification plan with the acquisitions EQM.
D train was now a single C Corp, with several key attributes.
First the train stable cash flow profile allows us to be resilient.
In this or any environment.
Second we are focused on delevering and strengthening our balance sheet.
Third.
The foreign capital efficiently is core to our business and our recent gathering agreement with Q team provides meaningful capital efficiencies.
And last we remain confident that we will get MVP over the goal line in early 2021.
Putting all this together our long term strategy is designed to consistently generate substantial free cash flow.
Allocate our capital and free cash flow with discipline.
And deliver maximum value to our shareholders.
It is also important that we operate responsible.
And one of our primary goals is to be on the midstream sector.
For each trade DSG management practices are intrinsic and deliver value that goes beyond financial drivers.
Our first annual corporate sustainability report last week.
Which was produced in accordance with GR rise quarter reporting decelerated to SaaS, the oil and gas midstream standards.
This report is an important reflection of our accomplishments our commitments and future endeavors.
Highlighting the imports.
Among all of our stakeholders.
I'll now turn it over to Diana who will provide an operations update.
Then Kirk will provide a financial updates and remarks before we open the line two questions Diana.
Thanks, Tom Thanks.
What's MDP.
Hello.
Last several weeks significantly.
On June 15th the Supreme Court of the United States reversed a lower court decision regarding a far services authority.
The Appalachian Trail.
This positive rolling clears the path.
For MVP is Appalachian Trail crossing.
MDP expects, a new biological opinion will be going forward construction activities.
Following the biologics.
If you go opinion, we expect to receive the nationwide permit twelves from the Army Corps, which combined with Fercs approval will allow the wide.
Lastly, we expect to receive right of way permit for the Jefferson National forests.
In the fourth quarter, allowing us to forest work.
Hey, 2021 hole in service date for MVP.
Based on the projects current overall by $1 billion, each train expects to find approximately $2.7 billion of the overall cost.
It is possible however that total project costs could increase by approximately 5% due to potential construction plan adjustments associated with judicial and regulatory outcomes.
Each training.
Specs that it may be required to fund million dollars related to the potential cost increase.
There is a significant amount of.
And we believe MDP will play a critical role in meeting these demands.
And they provide direct access to the larger.
Okay and offers pipeline diversity for potential demand pull customers, we feel the probability of in MDP compression expense.
And because pipeline.
Only 500 million cubic feet per day of capacity.
In addition to the potential mainline expansion were encouraged by the opportunities on Southgate and other potential lateral to serve customers in the southeast.
On the South Gates project received the certificate of public convenience and necessity from FERC on June 18.
That's very permits an authorization construction is expected to begin.
Targeted in service dates in 2000.
21.
Shotgun of approximately 450.
In terms of our operations. Our teams are following strict pandemic related working protocols as they continue to provide chase.
Customers.
During the second quarter are gathered volumes were impacted by each you tease temporary production curtailments curtailment averaged about 1.2 Bcf per day over 45.
In July the curtailed volumes were brought back online in a phased approach.
For several weeks.
Finally, we remain committed to deploying our capital efficiently we updated our four years.
Reducing total capex by about $85 million versus the prior mid point about half of the decrease is driven by capital efficiencies related to the new gathering http agreement as well as efficiency gain from other gathering contracts.
The remaining decrease is primarily from capital shifting to 2021, I'll now turn the call over to Kirk.
Thanks, Diana and good morning, everyone.
This morning, we reported net income attributable to eat train common shareholders $27 million and earnings per diluted share of 10 cents.
Net income was $143 million and adjusted EBITDA was $263 million.
We also reported net cash provided by operating activities of $344 million free cash flow of $155 million.
And retain free cash flow of $88 million.
There were a few items that impacted second quarter net income attributable to eat train common shareholders.
First we incurred about $11 million of transaction costs, primarily related to the UQM merger.
Second there was a 27 million dollar premium associated with the redemption of a portion of the EQM preferred units in connection with the UQM merger.
The premium represents the difference between the payment to redeem the convertible preferred units and the carrying value of a redeemed units.
This is classified as a preferred dividend and reduces net income attributable to eat train common shareholders.
Lastly.
Net income was impacted by a 13 million dollar unrealized gain on derivative instruments, which is reported within other income.
As a reminder, the unrealized gain on derivative is due to an agreement entitling you train to receive cash payments for me Qt conditioned on specific Nymex Henry hub index prices exceeding certain thresholds over three years post the M. VP in service date.
After adjusting for these nonrecurring items and gain on derivative adjusted net income attributable to eat train common shareholders was $57 million.
And adjusted earnings per diluted share was 22 cents.
As a reminder, billing under the new gathering agreement with the acuity began in the second quarter revenue from the Nvcs is recognized utilizing an average rate applied over the 15 year contract life and the difference between the cash received from the contracted MVC and the revenue recognized reais.
Yeltsin deferral of revenue into future periods.
For the second quarter deferred revenue was $74 million.
You train operating revenue for the second quarter was lower compared to that of last year by $66 million, primarily from the impact of the deferred revenue, partially offset by increased revenue from higher nvcs on gathering and water.
Second quarter 2020, operating EM revenue was also impacted by the temporary production curtailments operating expenses for the second quarter of 2020 were $75 million lower than the second quarter of 29 team.
Decrease was mainly driven by an 80 million dollar impairment of long lived assets in the second quarter of 29 team.
For the second quarter of 2020, you train will pay a quarterly cash dividend of 15 cents per share.
On August 13th to common shareholders of record at the close of business on August 4th.
We have ample liquidity to support our capital investment plan on June 18th we completed a 1.6 billion dollar EQM senior note issuance.
The proceeds from the offering were used to repay outstanding borrowings under the 3 billion dollar EQM revolving credit facility and for general partnership purposes at the end of the second quarter, we had approximately $2 billion available under the QM revolver.
Approximately $200 million of consolidated cash.
And finally, we increased our full year 2020 earnings and cash flow guidance at the midpoint, we expect adjusted EBITDA of approximately $1.2 billion and free cash flow of $25 million.
I'll now hand, the call back to Tom.
Thanks Kirk.
Let me just wondering has been a very busy year free trade and we are excited about where we're headed.
Now have enhanced corporate governance.
Long term contracts with stable affinity.
In a disciplined capital allocation policy.
Weve, taking positive steps on E.S.G. and have a line of sight on NBP completion.
We have now.
Dress most everything that is within our control in order to be successful in this low or no growth environment.
We expect our free cash flow will continue to grow over the next three years, even without production growth.
This is the cornerstone of our strategy.
Please remember to stay safe wash your hands and with that we're happy to take your questions.
At this time I would like to inform everyone in order to ask a question you want me to press Star one on your telephone.
To withdraw your question press, the pound or hash key please standby will be compiled acuity roster.
Your first question comes from Jeremy Tony with Jpmorgan. Please go ahead.
Hey, Good morning, guys. This is James on for Jeremy I, just want to start off with that with maybe just the MVP updates Oh, just to be clear and messaging change from last quarter in terms of the necessity of the nationwide permit 12 to complete the pipeline or need good.
Yeah, a lot of conversation last quarter was on potentially getting those individual permits remaining has that changed at all with this quarter I'm on what you're seeing now.
Hi, Good morning, this is Diana and no the messaging really hasn't changed on that we haven't gotten good news on the nationwide well and we expect that to be issued so as long as the issues will continue with our original plan.
And cross the water bodies that way if for some reason there is another challenge or something different with a nationwide 12 than we can fall back to the options that we talked about I believe last time, what's your sense.
Different crossing methods and individual permit option.
Got it okay. Thanks, and then it can you remind me <unk> is there a kind of a I beat their benchmarks you kind of get construction back going to to kind of meet the early 21 in service date.
So there's a couple we've been pivoting a lot right. So there's a lot of different combinations, but we do expect to get back to construction within a month or so but really then there's another piece, which is getting the U.S. for a service permit to cross the Nash.
Well for us and that is expected in the fourth quarter. So.
We still had that 3.7 miles to build after we get that permit.
Got it thanks, and then just one more if I could add to shifting kind of the conversation than maybe the leverage profile business. Yeah. I I saw you to you is based on any positive outlook by Fitch during the quarter.
Maybe is there any read through that you train there I know, it's I don't know if the rating agencies are still you are so rating eating or maybe the EQM sub but how conversations going with rate interested in terms of the leverage kind of creeping up in anticipation of MVP in service and is there any leverage threshold.
That they've got put on the business, where they might consider a downgrade.
Oh, Yeah. This is Kirk I'll take that one yeah, you know we just.
Recently did a bond deal a $1.6 billion and all the agencies a feel.
So we have been in dialogue with them any you know improvement in credit at each acuity.
Helps us and we're committed to hitting our investment grade credit.
And the agencies or you know obviously mountain Valley is the one thing that they are really keeping an eye on but so far a they haven't.
Perspective, since they affirmed the rating.
When we did the bond deal.
Not that answered your question.
Yeah, no that's a good things for questions.
All right.
It comes from Spiro do need from credit Suisse.
Hi, good morning, everyone.
The two quick follow ups on it.
VP first as fish and wildlife communicated I guess the reasons for the delayed biological opinion might be splitting hairs here in terms of theres been any communication there and then on 175 million of potential additional costs, you have a sensible and that could actually start to be realized when you're up better sense of how much is gonna.
Okay.
So on fish and wildlife.
And so there wasn't an extension.
What we're hearing is that they're doing their spinal reviews on.
Which is good we.
Necessary time to produce a good opinion. So I believe there is activity there and we expect something soon on the.
Really they were.
<unk> are based on.
<unk>.
Methods that need to be done are there additional delays so.
The potential.
Well as there, but it we can do seriously what gets held up in the future.
Okay understood.
And thinking about the high and low end of the rain.
I'm just curious what's driving it either side of it it sounds like you see cooked curtail again this fall and just just wondering if is that the only major.
Variable at this point and does the low end contemplate that are ready.
<unk> the a this is Kirk again.
The.
The range is really just you know range that we have to use because you know it doesn't contemplate any further.
Okay curtailments bike UTI.
Thanks, Ron.
Your next question comes from Derek Walker from Bank of America.
Hey, good morning, everyone. Thanks for the time.
HM.
So a quick question around or you could you tell us on just tied to the marquee or some or all other capacity on NDP are you guys viewing that or how does that kind of play into.
Yeah, I'd be p. compression Uh huh.
Some of the interplay there is a is that potential rate that you towards the compression similar to what you're trying to nail and the mainline. Thanks.
But.
Part of that question I'll pass the bounce off off to Diana.
Look we we.
We are supportive of you tease desire to offload some of their <unk>.
Absolutely, we think that it could be an opportunity to create.
Couple of different layers of benefit certainly if they can optimize their transmission portfolio.
As.
Well as NBP, operator, and and a larger so no we as partners have.
We will rights over the credit worthiness of whenever they.
Released the capacity could very well be an upgrade in the.
Which would then read through and strengthen and the underlying financing we may do.
Level, so we view all of that.
That has a positive.
Sure and by Q2 of their transportation portfolio.
The nimble at that managing.
Oh that portfolio all them and then could make with this release.
Good.
Push them further along in grade rating, which we think is up.
Really positive read through for us.
It's too early to talk the NBP expansion we've.
No that capacity HM.
It's just a bit early but we're certainly encouraged by the inbounds and I think for now we'll leave it at that.
And then you have anything to add to that.
No I think that covers that were certainly compression expansion is an easier expansion then I'm happy to effect and we can add about 500 million a day on an expansion perspective.
Got it thanks appreciate it.
The Colortyme day in and maybe just Oh.
A quick one on on South America, starting in 21, and then also the in service date or in 21.
I guess im assuming youre kind of the in service 21, they any any sort of items around southgate construction timeline or do you feel like or any kind of goes live on the mainline portion.
That that construction process should go fairly smoothly as from there that we should be thinking about for that particular project.
And I'll let.
Okay, I'll, let Diana answers the specifics about the construction, although I would just offer that.
I haven't experienced any project that's gone really smoothly.
Late.
Yeah.
Yeah, I think from that construction perspective, it's actually on.
It's less challenging then what the mainline lender farther south it's it's actually easier build from a construction prospectus.
Which will help with environmental animation controls and that kind of thing.
Okay great.
Hi, guys forget felt.
Your next question comes from Shneur Gershuni.
Hi, good morning, everyone I'm glad to your everyone as well.
Follow up on a on a couple of questions here.
<unk>, just starting off with the and W.P. 12, if it comes through and so forth how much of this cross seems that need to be.
We benefit from the MWP 12 versus the boring methodology.
I understand it would be easier in general, but just sort of thinking about like how many are our must.
From the end W.P. 12 is there.
You really would like to get done under that methodology versus having to default to the others. If there are some yeah challenges that often come down the road.
So it's it's quite a next there are younger probably about half that or fixing one half dozen the other you know it whether you do the open cat or a board its not really much different. The rats. Then there is a combination I think the important thing is the ones that are really Chris.
Michael we would try to do it quickly if possible before anything else Challenge then just strategically go through it what's that kinda thought process.
Okay, No that's kinda makes sense and maybe as a follow up you know just sort of giving the timing about when this could potentially come to fruition you know how do we think about and help you plans for the fact that some of this construction activity could be happening during a oh winter or rainy.
Season type of environment is wells with Covance 19, and you know the guidelines on how to construct in that type.
[noise] given some color on how your prepared for that.
Hi, Good night TV.
So we have then in our other construction projects, we did to hire a third party to help us manage that just to make sure that we have everything in place.
Ladies and.
Following what we need to follow on to keep everybody safe.
From the winter perspective, there won't be a ton of construction left in the winter. So that risk continues to be read it as we go farther and farther into the year, Although I will say very unhappy to have missed the last couple prime months of dry construction period.
Okay that makes sense and maybe a a final question just you know with with respect to get potential expansion I.
No it's not even time, yet, but now we're talking about expansion of and then BP you know using compression and so forth <unk> I know that you're reluctant to talk about rates and so forth, but is it fair to conclude that the return profile of that type of an expansion would be significantly higher than the base MVP that you know.
From a return perspective that you're putting in place right now is that way to think about it.
Yeah, typically compression expansion is much more favorable when it comes to.
To the returns because the pipeline construction.
It's more expensive.
Alright, perfect. Thank you very much appreciate the color today and have a safety guys.
You too. Thank you [laughter] no I'm before we go to the next question that I might add that.
Any capacity will be largely we're almost entirely demand pull conversations as opposed to the origination of NBP, which was a supply push so that changes the dynamics of the conversations with respect to how we how we look at the capacity and it's under.
Lying value.
Thank you operator next question.
I'm sorry glessner.
I was just going to say so you just to clarify so what you're effectively saying is that it's kind of do bad coal you you put into compression as needed. So there's never a scenario, where there's too much capacity and so forth right like you can literally sequencing in as the demand shows up basically right.
Yeah, I think I think that's fair and I think the way to look at it is we'll certainly have enough time to to lock in any precedent agreements on that before we started construction. So we'll know what the what the demand is.
Perfect. Thank you appreciate the color.
Your next question comes from Alex Kenny from Wolfe Research.
Hey, good morning, My two questions. The first one is I'm just really on the Capex update you know with the gathering a capex coming down a little bit do you think that that kind of fully reflects the potential.
Of what do you keep he's been doing on their side in terms of reducing development cost and optimizing that or is there still more runway should look forward.
That's the first question in the second one is I guess piling onto the MDP.
Questions, but just to the extent you have this they didnt thinking about like permanent financing it sounds like you'd probably want to get more clarity on the disposition of ft Bye.
By by Q, T., and maybe as well as I'm thinking about what precedent agreements might be on expansion.
And I want to you talk about the Capex first and then maybe I'll just follow up with the.
Expansion.
Yes, so actually I was going to pass the Capex to Justin I think that's a good one for him. So I'm just seem I take it.
Sure Hi, this is Justin I think the Capex reductions, you're saying you're in 2020.
Our <unk>.
Somewhat reflective of the new gathering agreement in the capital protections. We have there. Its also a continuation of our strategy to integrate systems.
And when we can tie together gathering systems and our transmission system, we can start to realize some pretty substantial capex savings leveraging existing assets existing compression.
As we look at each you tease ability to.
Future, that's when we really see some benefit to us in terms of our gathering Capex and then as we look even further down the line when they return to those same pads to drill out.
Our infrastructure is already a that in place and are or capital outlay for those projects will be will be minimal at best.
And.
I don't necessarily think that we're going to pin any additional financings around that the.
The project level financing to be done that MVP wont be done until after its in service. So we'll have all of all of the agreements.
And the expansion I think we've talked about about 500 million a day of compression capacity, which.
And the capital cost might be on an 80 basis maybe.
For share.
Roughly.
Oh that would.
Would generate to a D train may billion dollars' worth of or would there be the top so.
It's not something that would require financing we have ample liquidity to move.
The plan that.
And as a reminder to ask a quick question press Star one off.
On your telephone.
The next Ignasi from Jefferies.
Hey, good morning, Tom everybody.
Hi, Chris.
I just want to.
A follow up on.
These are these MVP questions credit approval rights are there any other approval rights that you carry in the process Q2 rounds, and potentially monetizing attempting or.
[laughter].
I think there.
Credit approval.
Is there any other that are.
Processed government too.
It would be no.
Okay and then.
Dan I mentioned, it but with the cancellation.
Yes, HCP clearly HCP was being built by and that's stated need for gas in that region.
And so.
What would what you supply push I'm just curious if if you teased success ones.
Like one of those parties that might want an expansion.
Embedded sooner I mean is there a cost savings NBP completion.
Would you contemplate that.
Hi.
It's like anything to try to be response.
But I.
Right.
I think that.
So the compressed timeframe you are talking.
We could compress it a bit.
But.
Just this certification process with some of the other hoops, we'd have to jump through.
I don't think we could.
Accelerated.
But but if I asked we would certainly try let's put it that way.
Yeah, No no doubt okay, I just I didn't know what was entailed in if it was even possible I figured there might be inefficiency pickup, but there might also be something that sits out there that prohibits you from doing into.
Yes, there's there's there's really no efficiency or synergy pick up Diana just and correct me, if I'm wrong, but because it just this would simply be a compression in addition.
On a new site Standalone sites. Okay. So you just put a new compressor units add horsepower to assist them, but it's not like you'd be upgrading a kearney compressor. It would be just a new standalone.
Well, there would be units added to certain of the existing sites as well right Diana.
We may have lost as a yeah. This is Justin that is correct. They the compression expansion would entail a new side and then some horsepower additions at existing sites to get the throughput along the entire one.
Okay all right.
It is simply about Symantec. So your point Tom is that it's it's it would be relatively small it's not the driving it wouldn't be the driving force behind it.
Correct Yeah.
Okay, well I was going to ask diner, a question, but maybe I'll just ask it broadly in.
You guys can correct me if my understanding is correct.
If it if it's not correct, but are these the following remaining items for MVP I guess first is fish and wildlife biological opinion.
And you have a nationwide 12.
And I had mentioned prioritizing problematic water crossings, but you know effect getting all of your water crossings Don.
In in order that prioritizes those problematic areas and then you still have the.
The U.S. Fs sedimentation erosion study in Jefferson National Forest, I think its anticipated in the fourth quarter and then you can complete the three plus mile portion of work there and then we're done because that is that correct order of operations or I guess, if not where I'm like where am I wrong.
This is Diana I actually got back and sorry about that and that's the correct order so yes.
Is that a complete list or are there things right. Okay. It is.
Okay and then final question for me and that's just maybe for Kirk is there any seem to be aware of in the guidance.
That I didn't see there or it would it be safe to effectively look at your full year net income and EBITDA outlooks.
Tractor year to date, Brazil, tenures third quarter guide and get an implied fourth quarter luck.
Yeah, there's nothing tricky there you should be able to do that math.
Okay, great. Thanks, a lot.
Yeah. Thanks.
There are no further questions at this time I will turn the call back over to the presenters.
Well, thanks, everybody for joining us today, well, we appreciate the interest and we hope everybody stay safe and wash your hands and we'll talk to you soon thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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