Q3 2021 Equitrans Midstream Corp Earnings Call
Yeah.
Thank you for standing by my name is Cheryl and I will be your conference operator today at this time I would like to welcome everyone to the equity oriented Midstream Q3, 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there.
There will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Crestar. One. Thank you Nate Tetlow, Vice President of corporate development and Investor Relations you May begin your conference.
Okay.
Good morning, and welcome to the third quarter 2021 earnings call for <unk> Midstream Corporation.
A replay of this call will be available for 14 days beginning this evening.
The phone number for the replay is 800.
77020304647.
Three six to 9199.
And the conference I D.
Six six to $5 five for two.
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 the ETR and Form 10-K.
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.
Reconciliations to the most comparable GAAP financial measure.
On the call today are Tom Karam, Chairman and CEO.
Ana started letter 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 <unk>, 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 good.
Good morning, everyone.
For the third quarter net income was $91 million and adjusted EBITDA was $266 million.
Oh.
We're ahead of expectations.
Kirk will provide details on our financial results in a few minutes.
We believe eat drink continues to be a very compelling investment.
Let me summarize.
First we have a solid core business that generates consistent and meaningful free cash flow.
The core business is our foundation.
It's rooted by long term contracts high quality customers and substantial minimum volume commitments.
Second we are realizing capital efficiencies every day.
This is a result of the hard work, we've done to integrate both legacy and acquired gathering systems over the last few years.
We're also benefiting from simplified commercial agreements that provide design and operational flexibility.
This year. These benefits are reflected in our ability to continue refining and reduction of our gathering capex estimates.
And we are setting up for another step change in capital efficiency, when we're trying to pad drilling activity ramps up in the coming years.
Third the commodity environment is providing a boost to our customers' financial health position.
Positioning them and us.
Long term success.
Absolutely.
Mountain Valley pipeline completion will provide multiple long term benefits.
Not only will it provide incremental cash flow and accelerate our de levering.
But it will enhance Appalachian basin liquidity, providing mid Atlantic and southeast United States demand customers, the only direct access pipeline to the country's largest and most reliable natural gas supply.
We continue to have productive discussions with dominion customers and we are beginning to see signs of in basin organic growth opportunity as well setting up for the post MVP environment.
With that I'll now pass it to Diana for the operations update entered Kurt for financial update and I'll come back for some closing remarks Diana.
Thanks, Tom and good morning, everyone I'll start with MVP.
We are in the final stages of forward construction work for this year in total for 2021, we will have completed about 20 miles of upland work. This leaves approximately 20 miles of remaining work, which largely consists of the outstanding water crossings and the areas in and around the Jefferson National Forest.
On the permitting side, our timing expectation has not changed since our last update we believe the FERC Army Corps and state processes are all on track to wrap up by year end or early next year.
We remain appreciative of the comprehensive insignificant effort that the federal and state agencies are putting forth the.
The targeted in service date for N V. P remains summer of 2022, and the total project cost estimate remains approximately $6 $2 billion.
Moving on to our base business on the gathering side, we are seeing a consistent level of producer activity for the year, we still expect volumes to be roughly flat, if not modestly higher compared to 2020.
In the third quarter, we began recognizing fees related to some recent compression investments. This helped to drive the increase in total gathering revenue compared to the same quarter last year and sequentially.
As Tom mentioned, we continue to focus on capital efficiency initiative, we have further reduced our expected gathering capex for this year and we are now projecting approximately $230 million of gathering capex in 2021.
On transmission.
We're working toward final terms on the open season that we held earlier this year.
As a reminder, the open season with Senator round of capacity expansion to the Ohio Valley connector, which delivers gas declaring 10, Ohio for access to markets in the Midwest and Gulf Coast will provide more details on the project when we have arrangements in place on the water side, we recently signed a new agreement.
With EQT the 10 year agreement will commence early next year and replaces the letter agreement, we announced early last year.
As part of the agreement, we will build upon our existing water assets to create a mixed use network in Pennsylvania.
We did bump our water capex estimate for this year to reflect the initial build out we now expect water capex of approximately $35 million in 2021.
The agreement provides each year end with firm revenue of $40 million per year for the first five years and $35 million per year for the last five years.
Moving on to E. S G.
Earlier this year, we announced our climate policy, which includes an interim target a 50% reduction in scope, one and two methane emissions by 2030, we recently began executing a plan to convert gas driven pneumatics to air driven pneumatics at several compressor stations and to replace high bleed with.
Low bleed pneumatics at various operating facilities.
This initiative is expected to be complete by the end of 2022 and is estimated to achieve an approximate 20% reduction in overall methane emissions compared to 2019 level.
And lastly on ESG, we were very pleased to receive a two notch upgrade to triple B from MSCI and their ratings assessment in September.
I'll now turn the call over to Kirk.
Thanks, Diana and good morning, everyone. Today, we reported third quarter net income attributable to E train common shareholders of $73 million and earnings per diluted E train common share of <unk> 17 cents.
Net income was $91 million adjusted EBITDA was $266 million and deferred revenue was $79 million.
We also reported net cash provided by operating activities.
A $210 million and free cash flow of $18 million.
Net income attributable to E train common shareholders during the quarter was impacted by a $21 million unrealized gain on derivative instruments, which is reported in other income.
This relates to the contractual provision entitling E train 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 continuing through Q4 of 2024.
After adjusting for unrealized gain third quarter adjusted net income attributable to common shareholders was.
It was $57 million in.
And adjusted earnings per diluted common share was <unk> 13 cents.
E train operating revenue for the third quarter of 2021.
It was lower compared to the same quarter last year by about $8 million, primarily from lower water volumes and was offset by an increase in firm and volumetric gathering revenue.
Operating expenses for the third quarter of 2021 were approximately $5 million higher than the third quarter of 2020.
With the increase coming primarily from O&M and SG&A.
For the third quarter E train will pay a quarterly cash dividend of <unk> 15 cents per common share.
On November 12, the E train common shareholders of record at the close of business on November 2nd.
And lastly, we've narrowed our full year guidance ranges and increased the midpoint for adjusted EBITDA and free cash flow.
The full year range for adjusted EBITDA is now $1.11 billion to $1.13 billion.
And the free cash flow range is now $450 million to $470 million.
I'll now hand, the call back to Tom.
Thanks Kurt.
I'd like to briefly mentioned the hammerhead pipeline dispute, which came to a conclusion last week.
The arbitration panel.
The delay in Hammerhead and service was attributable to force majeure, and thus EQT did not have an early termination right.
We expect to begin collecting the firm reservation fees on hammerhead in conjunction with MVP in service.
We're pleased with the outcome and ready to put this isolated situation behind us.
Lastly, I'd like to commend both the E train and the EQT operations and commercial teams, but did not let this isolated dispute become a distraction, but instead advanced collaboration between the teams.
So let me summarize <unk> current state of play.
Our core business is strong and consistent.
Our customers are getting healthier and the macro outlook is encouraging.
As Diana mentioned, we're making tangible progress on the ESG front and it's beginning to be recognized by outside assessors.
Lastly, the mountain Valley pipeline construction and permitting are on track with our expectations.
Please stay safe continue to wash your hands and with that we're happy to take your questions.
As a reminder to ask a question. Please press star one well pause for just a moment to compile the Q&A roster.
Yeah.
Your first question comes from Brian Reynolds of UBS. Please go ahead. Your line is open.
Hi, Thanks for taking my question, maybe to first start off we just get a quarterly update from them than on MVP and specifically if theres any additional comments or timeline updates around the current fourth circuit proceedings, given the oral arguments have commenced.
Sure good morning.
So oral arguments were held by the fourth circuit last week on the biological opinion, and the Jefferson National Forest right away and we respect the judicial process and therefore, we are unable to provide additional details while the matter remains in litigation.
It's also difficult to predict but decisions are often announced within 60 to 90 days. So we don't have a firm time that we were here, but that's what we normally see.
The Army Corps process is moving along and it appears to be on schedule. We expect the West Virginia 401 decision by the end of November.
Remember in the Virginia 401 decision by the end of December.
We're uncertain exactly when FERC will act, but we expect them to issue an order on our certificate amendment application by year end or early 2022 so.
Current construction right now is winding down for the winter.
And the schedule so were almost completely done there's one crossing I think that we're still working on.
Construction schedule has very little work in January.
<unk> ramp up in February as weather starts to permit them and that gets us to the summer of 2022 in service.
Great I appreciate all that color as my one follow up just curious if there's any initial thoughts on eqt's divestments of MVP capacity I know previously you talked about a it improves MVP nonrecourse financing to roughly $1 billion. If it was sold to a utility just kind of curious of where we are and if we.
We'll need to see more capacity sold to ultimately reach that $1 billion mark. Thanks.
Yeah. This is Kirk.
I mean, we havent sat down and run through what it actually does further capacity, we've been saying between 800, and a 1 billion and I think that'll definitely move it you know more towards the 1 billion dollar number.
More being off laid would be good but I think this this chunk really helps.
Yeah.
Great. Thanks, I'll jump back in the queue I appreciate it.
Your next question comes from John Mccain of Goldman Sachs. Please go ahead. Your line is open.
Hey, everyone. Good morning.
I want to ask a little bit just on maybe some longer term free cash flow focus. So you spend some time talking about.
Kind of capital efficiencies and bringing down the gathering capex. This year. Just wondering if you can talk a little bit more about what that could look like in the future and how we should think about gathering capex coming down.
Alongside the EQT rate relief and how those two are kind of potentially balance out in the future.
Yeah, maybe maybe I'll just kick this off and ask Diana and Justin to jump in but.
We haven't provided long term free cash flow guidance. So I think the best way to think about it is to think about 2021 and what the cash flow situation. It looks like there and if you back out.
N V. P. You know you're going to get you know almost right on top of $700 million a year I think that's a pretty good run rate to be thinking about to start.
And then I'll, let you know Janice and Justin a comment on the Capex.
Sure as it relates to the Capex.
Tom mentioned it during his remarks, but over the last three years, we've been executing on a pretty consistent plan.
It started with integrating our gathering and transmission assets and taking advantage of of those capital synergies the latent capacity.
We simplified our contracts with our largest customer aligning our interest on both sides and then once MVP comes online.
I think we're well positioned to realize some additional capex savings on so you can see in some of our other producers.
Return to drill additional laterals off the existing pads and we'll already have existing.
Existing infrastructure in place so.
You know as we've talked about on previous calls I think the trajectory of our sustaining capex is a good one because we've done the hard work over the last three years to set ourselves up for success in the long run.
Alright, that's helpful. Thanks, maybe.
One more kind of shifting gears on Southgate, so you've talked about the potential to sign some more contracts on that.
We also have kind of a pre filing out of.
Are your competitors in the region on some contracts <unk> signed regionally.
I'm just trying to think about kind of upside that you guys might be able to get there and.
Really kind of the overall outlook first outfit.
Yeah. So we certainly are seeing interest in Southgate additional capacity I think the legislation in North Carolina has an impact on that expansion and so as.
It's going to promote that law to accelerate coal to gas switching. So that's really good for us. So we are we're very optimistic about expanding that capacity on southgate.
So thanks, everyone.
Again to ask a question. Please press star one on your telephone Keypad. Your next question is from Derek Walker with Bank of America. Please go ahead. Your line is open.
Hey, good morning, everyone.
Good morning.
I just wanted to touch base on it in the form of Mark's talked about just in basin organic growth on MVP I guess, just wanted to get a little more color around that specifically just referring to.
Yeah that compression expansion project that I think you guys talked about in the past or are there other components there that we should be thinking about.
Yeah. So our largest expansion would be N V. P compression expansion and that certainly is the largest piece on MVP off of Southgate and in the end of MVP. There's a compression that we can add onto South gate and then we also have some laterals that we can.
Do in conjunction to get to certain places off of the end of MVP or the end of South gate.
And then I guess, just do you have a sense on.
When those capital spend for those those projects that are still sort of wait and see.
Yes, so the expansion on.
Yeah.
It's wait and see on Southgate I believe but on the <unk>.
N V. P expansion, it's about 500 404 hundred to 500 million for 500 a day.
Okay.
That's helpful. And then maybe just a little bit further out I guess once MVP comes online, but just wanted to see if you guys had any sort of internal discussions yet just around how youre thinking about capital allocation when MVP comes online.
Whether it's just through distribution growth buybacks.
Special distribution announced today from one of your peers. So just wanted to get a feel for how you guys are thinking about things as you start to get MVP kind of fully within the portfolio.
Yeah, well, yeah, so all of that will be.
Chris I'm going to let you answer that but I want to make sure cause NATO yell at me if I don't that number I gave you for MVP expansion is the gross capital number. It's it's about 200 not to us. So NATO get me if I don't get that in there sorry.
Okay. That's okay, yeah on capital allocation I mean, you know out of the blocks. The goal is going to be to Delever and we will be using a project financing at N V. P to kick that off once it's in service.
But then will be I mean, we'll be open to looking at all different.
Our choices for capital allocation, whether it's dividend increase or stock repurchase or our investment.
So.
You're right now show that we get you know sub four times a couple of years. After MVP goes in service on the leverage.
And I don't think we feel like we need we need to just accelerate to get there. So.
We will start in that direction and then we'll be open minded.
Got it so is it fair to say just deleveraging and then perhaps some organic growth.
And then maybe look at some other opportunities within the.
On the capital allocation portfolio, that's sort of how it should be thinking about the priorities.
I think that's a good way to think about it.
Excellent well. Thank you very much guys I appreciate it.
Yes, Derrick Derrick this is Tom I think Kirk hit it spot on right are our focus will remain as we've been saying all along too.
The committed to delevering to get to the sweet spot so that.
We have a strong position.
Moving toward our capital allocation, which will be <unk>.
Taking into consideration each of those other opportunities to return capital to shareholders.
There are no further questions at this time I will turn the call over to Thomas <unk> for closing remarks.
Yeah.
Well. Thank you everybody for joining the call today is as we've gone through each of these quarterly phone calls it's not lost on anyone that MVP is a signature project for US we remain focused on it.
It's in the Red Zone I'll call. It now towards completion, and we will stay focused and dedicated to bringing MVP online.
So that it is just another added.
Benefit to the really strong core business that we have.
So thank you all for joining US today, we appreciate your interest in E train.
Everybody stay safe out there. Thank you.
This concludes today's conference call you may now disconnect.
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