Q1 2022 Equitrans Midstream Corp Earnings Call
Good morning.
My name is Joseph and I will be your conference operator today.
At this time I'd like to welcome everyone to the equity transfer midstream quarter, one 2022 earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Would like to withdraw your question again press the star and the number one.
Thank you Nate Tetlow, Vice President of corporate development and Investor Relations you May now begin your conference.
Yeah.
Yeah.
Good morning, and welcome to the first quarter 2022 earnings call for equity Trans Midstream Corporation.
A replay of this call will be available for 14 days beginning this evening.
The phone number for the replay is 877 zero.
030464736 to 9199 and the conference I'd 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 each year and Form 10-K for the year ended December 31, 2021, and as updated by Form 10-Qs for factors that could cause the actual results to differ materially from these forward looking statements.
Today's call may contain certain non-GAAP financial measures. Please refer to this morning's news release and our investor presentation for important disclosures regarding such measures.
Including reconciliations to the most comparable GAAP financial measure.
On the call today are Tom Karam, Chairman and CEO .
I am sorry, let our 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 <unk>, Vice President and Chief Accounting Officer, and Janice Brenner, Vice President and Treasurer.
After the prepared remarks, we will open the call to questions.
That I will turn it over to Tom.
Thanks, Nate good morning, everyone.
Today, we reported first quarter 2022, net income of $105 million.
Adjusted EBITDA of $277 million and deferred revenue of $87 million.
The base business continues to deliver solid results Kirk will provide details on the financial results in a few minutes.
Today, we also provided new guidance regarding MVP, which includes an in service target of second half of 2023.
And a total project cost of approximately $6 $6 billion.
After extended review of the recent court decisions and discussions with federal agencies external counsel and our partners.
We believe the path forward is to pursue new permits from the relevant federal agencies.
Along with the agencies, we recognize the scrutiny that these permits will inevitably face however.
However, we have confidence that the agencies can produce not only technically sound permits as they have in the past, but also permits that connect the dots between the technical decisions and the respect of federal law.
Actively mitigating potential perceived ambiguity.
We are focused on everything within our control.
At the end of the day, we believe we live in a country of laws and regulations and that projects like MVP that follow every required process and receive every required permit will and have to prevail.
On the permitting side, we recently received some positive news as FERC unanimously approved MVP certificate of Amendment.
Relating to changing the construction method and certain water body and wetland crossings from open cut two trenches.
Lastly, as I suspect you are all aware in recent months Senator Manchin has been leading the charge from Washington to make the case for MVP.
He and others have consistently said that mvp's role in our energy security and reliability is critical as we continue to work toward a lower carbon economy.
Current geopolitical unrest driven by the invasion of Ukraine by Russia has exacerbated the cost of a tight market and we'll continue to do so for some time.
We have remained in frequent contact with Senator Manchin Senator capital and others discussing the possible paths to bring N V P into service.
The public statements from Senator Manchin.
We have outlined some of them. We appreciate the public support for the project and will remain engaged on all fronts, while we will not speculate further on those statements.
And now I'll turn it over to Diana for the operations update and then Curt will discuss the financial results.
And I'll come back later for more question Diana.
Thanks, Tom Good morning, everyone.
I'll start with the gathering segment and the first quarter, we gathered about eight Bcf per day.
In the current environment, we expect a basin volumes to remain roughly flat and based on development plans for this year, we do expect a decline in our 2022 gathered volumes versus 2021.
Moving on to transmission in February we announced the Ohio Valley connector expansion, where N V. C X project and the start of the FERC application process to remind you, obviously X will add about 350 million cubic feet per day and deliverability.
In our Ohio Valley connector pipeline, which provides us access to the mid continent, and Gulf coast markets through Interconnects and clearing 10, Ohio.
The incremental RBC capacity is targeted for in service and QC three.
320 23.
And we will keep you updated as we make progress on the project.
On the water side, the 10 year mixed use water agreement with EQT commenced on March 1st the water services agreement includes an annual revenue commitment of $40 million for the first five years and $35 million and the remaining five years.
In 2022, we expect water EBITDA of approximately $30 million. This year, we plan to invest approximately $75 million to complete the initial mixed use system build out. This amount includes approximately $20 million to replace certain previously installed water lines that we bill.
Please do not meet their prescribed quality standards, we do intend to seek recruitment of these replacement and related costs.
Next an update on ESG. This year, we plan to build upon our momentum from last year, particularly in the area of methane mitigation, which is again included as a component of our short term incentive plan.
Last year, we began a program.
Place high bleed pneumatics with locally.
As well as replacing certain gas driven pneumatics with instrument air system.
This program continues in 2022, and we are targeting a 6% reduction in annual pneumatic methane emissions relative to our 2019 methane emissions for the year.
We also plan to expand our reporting to include the CDP water security questionnaire and to undertake a T. C. F. D readiness assessment to further expand our ESG platform. We are committed to the sustainability of Barbara operations, and we will continue to make additional advancements this year and beyond.
I'll turn the call over to Kirk.
Thanks, Diana and good morning, everyone.
Today, we reported first quarter net income attributable to E train common shareholders.
Of $87 million and earnings per diluted he trained common share of <unk> 20 cents.
Net income was $105 million.
Adjusted EBITDA was $277 million.
Deferred revenue was $87 million.
We also reported net cash provided by operating activities.
$186 billion.
Free cash flow of $24 million.
Okay.
Net income attributable to E train common shareholders was impacted by two items.
First by a $6 million unrealized gain on derivative instruments, which is reported within other income.
This is related to the contractual provision entitling E train to receive cash payments from EQT condition.
Conditioned on specific Nymex, Henry hub natural gas prices exceeding certain thresholds.
<unk> N V peace and service and through 2024.
And second by a $23 million reduction of valuation allowances because of decreases in deferred tax assets.
This gets reflected through the net income tax expense line.
Stop.
And second by a $23 million reduction of valuation allowances because of decreases in deferred taxes assets.
Gets reflected through the income tax expense line.
After adjusting for these two items first quarter adjusted net income attributable to E train common shareholders was $59 million and adjusted earnings per diluted E train common share was <unk> 14 cents.
E train operating revenue for the first quarter 2022 was lower compared to the same quarter last year by $38 million.
This was primarily from the impact of deferred revenue lower gathered volumes and lower water services revenue.
Operating expenses for the first quarter 'twenty, two were $10 million lower than the first quarter 2021.
The decrease was driven by lower SG&A and O&M expenses.
For the first quarter E train will pay a quarterly cash dividend of <unk> 15 cents per common share on may 13th.
E train common shareholders of record at the close of business on May 4th.
Today, we introduced our full year 2022 financial guidance, which includes.
Net income of 250 million to $330 million.
Adjusted EBITDA of 970 million to $1.15 billion.
And deferred revenue of approximately $355 million.
Lastly, we recently closed an amendment to our revolving credit facility.
We appreciate the support of our lenders, who worked with us to provide flexibility while N V P progresses toward completion.
The key changes to the facility include <unk>.
A reduction to the facility size from 2.25 to 2.16 billion.
Through October of 2023.
And then 1.55 billion through the final maturity in April of 2025.
The maximum consolidated leverage ratio will be five five times for the term of the facility.
Except that the facility now includes a feature.
That provides for a step up in the maximum leverage ratio to 585 times for four quarters.
Beginning with the mobilization of forward construction on M V P.
Now I'll hand, the call back to Tom.
Thanks Kirk.
So in summary, the base business and operations remains resilient.
We're committed to the path forward on MVP and confident that the new in service target provides sufficient time or permit re issuance and for the four to five months of remaining construction.
And as Kirk just mentioned, we gained flexibility under the credit facility to manage through the MVP build period.
We're pleased that the natural gas has entered the national dialogue in a positive way it.
It is evident to us that our abundant domestic natural gas reserves must be developed and transported to meet the world's increasing demand for reliable energy.
And lastly, I'd like to congratulate Diana who was elected to the board of directors last week.
Diana will bring the same thoughtful commitment to excellence to the board as she does to operating the business.
With that we're happy to take your questions.
At this time I would like to remind everyone that in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Yeah.
Yeah.
And your first question comes from the line of John Hurt My Bad Brian Reynolds Your line is open.
Hi, good morning, everyone, maybe to start off congrats of dying on the elections to the board maybe to start off with Diane I was wondering if we could get an update.
Just on MVP and specifically the sign posts that helped drive the updated second half 'twenty three in service date.
At the end of the day any incremental color around the regulatory timeline assumptions around the fourth circuit, the FERC and army call it would be great. Thanks.
Okay.
So from a timeline perspective, what we have assumed there now is what the interaction that we're having with the agency which has been positive.
We think we haven't been back to construction second quarter, which gives us the timing that that.
That we've given you.
Second quarter of 2023, let me be clear.
And is there any kind of update on potential I guess, the fourth circuit ruling or just any update on when that could get additional permits from FERC or Army Corps.
Yeah.
Yeah. So we're not going to work through the detail of every one of those pieces the way that right now our guidance is that we get through all of that and the remainder of this year and.
We have everything we need to to start by Q2 2023 construction.
Great I appreciate I appreciate it.
And just as my one follow up just to talk on the updated guidance first off it seems like the free cash flow guidance is slightly revised downwards exclusive of the Capex rates I was just curious if you could just provide some color around the drivers around that free cash flow assumption change and secondly, I was curious how we should think about the potential payment to EQT at year end 'twenty. Two now that you know the MVP timing.
Line has officially been pushed into 2023.
Sure.
So there is an additional capex, which it sounds like you've part which is the increase.
Or the water replacement and then the volumes are slightly down this year over last and that's a mixture of producer activity and some of the water issues that we have pushing a couple of pads into next year.
Certainly we're going to continue to see producers ste.
Disciplined and there is a physical limitation to the basin takeaway, but the long term strength of the business remain with additional takeaway capacity, we have the ability to grow.
Great I appreciate it tell there have a great day everyone.
Your next question comes from the line of John Mackay.
And your line Hey, good morning, guys.
Thanks for the time good morning, I, just wanted to pick up maybe on that last comment.
Maybe you could just talk a little about what's driving the declines for kind of gathering through the year understand kind of some of the <unk> issues, but.
But it looks like most of the producers set is kind of flat or to slightly up for the balance of the year. So I'm just trying to balance those two.
And whether or not you know maybe going forward.
You might expect declines to continue as well before I, maybe it comes online.
So I would say.
The biggest part of that producer activity.
And that bump out is because of the water and the timing of the pad.
We're seeing some declines in some other places, but the key core.
Acreage.
We feel like it certainly flat.
Until we can get some takeaway capacity and then I think in gorilla.
Okay. So you would expect that to come online kind of once the water issues are.
Perfect.
Correct.
Okay. Thanks, and maybe just a follow up maybe just another on the base business cost you guys mentioned that costs were better this quarter. Just curious how much of that is ratable versus kind of a one off just how we should think about that going forward.
When you say costs or are you talking about expenses.
On the O&M side.
Yeah. So on the O&M side, I mean, we are seeing a little bit of inflation pressure on.
Like all in oil just like everybody else, but we certainly also have an asset optimization part of the business that can take advantage of a little bit of this commodity uptake so they're balancing each other off.
We are seeing inflation on the capital side as well.
Yeah.
Alright, that's that's fair I'll leave it there I'll get back in the queue. Thanks.
Okay.
Your next question comes from the line of Michael Blum. Your line is open.
Thanks, Good morning, everyone.
Just had a couple of quick questions.
First just given the updated terms of the credit agreement is it fair to say that the dividend is safe now at current levels or is this still something that could be a lever depending on how MVP progresses.
Yeah.
No. This is Kirk no the dividend is safe I mean.
Base business supports cash flow from our base business supports the dividend.
Fine so we have no thoughts or doing anything with the dividend.
Okay great.
Then I just wanted to try to make sure I understood.
The comments on MVP Southgate.
Could you sort of referenced in the footnote potential changes to the sort of design and timing can you just elaborate a little bit on that thanks.
Yeah, so what.
I think there's really no question about the demand and the need for South gate, but given the environment and some of the recent ruling we are evaluating the project having discussions on and around whether there are ways, we can better optimize the design and the timing with customers.
Okay, great. Thank you so much.
Yeah.
Your next question comes from the line of Neel Mitra.
You are not your line is open.
Hi, good morning.
Just wanted to come back to the timing of MVP. It sounds like once you submit your permits you want to go straight.
Straight to construction get the project online in second half of 2023.
In the past you've had a lot of.
Peels and the fourth circuit has come back and kind of looked at them what makes you confident that.
There isn't going to be a legal process and would you wait a certain amount of time to.
To move forward. After you submit your permits just to make sure that.
There isn't going to be a legal issue again.
Before going forward with that that final construction piece.
So there's no question.
The court has departed from historical and judicial deference.
But we're also now dealing with a narrower and narrower scope of issues.
One of which was just recently addressed by park and there are certain foundation aspects of the permits that were upheld.
Challenges to the route hydrological assessment framework for MVP action areas and basis for Internet I'll take so while the agencies did do a much more substantive review in the last round and exceeded regulatory and legal requirements under applicable laws. We believe the agencies now.
And the need and are working to specifically articulate the legal rationale for their technical decisions in order to proactively mitigate potential and be good and b get.
The word that I'm trying to.
Right right, we're just generally.
Not required in the permit applications. So they need to really focus on the legal reason why theyre writing their decision not the technical.
Scientific aspect of the permit they all understand that and they're working diligently to.
To put those into the permit.
So just so I understand it right you can file the permits there is obviously going to be intervenors, but.
It's the fourth circuit, who decides whether theyre going to here.
The issues if they don't then you then you move forward.
Can can progress with construction is that correct.
That's correct.
Okay, and then just a quick one I wanted to follow up on the.
The agreement with.
EQT.
No. They they sold off the remaining amount of shares they had an.
Each year and then also the <unk>.
Roughly 200 million in the gas gathering agreement.
Potentially come up in terms of being reimbursed.
For not having the project in 2022.
In your discussion with them or thoughts on how that would play out.
Yeah.
Okay.
I don't believe they've made a determination as to what they wanted to do there.
So we're just waiting to hear what their what their determination is either way, we'll work through it whenever they want.
Okay, great. Thank you very much.
[laughter].
Your next question comes from the line of Becca Followill.
Your line is now open.
Following up on the water.
Youre going to spend there you said youre going to see recovery is that from the people that constructed the pipeline or the <unk>.
Owners.
Okay.
Okay.
So.
It is pending legal review, but it isn't really the people that constructing the pipeline that where we're having an issue with it it's really a vendor issue.
And we are going to re seek recruitment, but it's not from the people that constructed the project gotcha. Okay. Thank you that's all I had.
Thank you.
Your next question comes from Sunil Sibal.
Your line is open.
Yes, hi, good morning, folks and thanks, a lot of liquidity.
So my first question is related to the leverage so I realize that.
Covenants could you tell us sort of weird weather you at the end of Q1 2022 reserve is the five five ex Max leverage.
Covenant.
Yeah. This is Kurt where I mean right now prior to MVP going in service. We're looking at you know getting up into the low fives.
Okay.
We are specifically did the Q Q1, and we can take it offline. If you don't have that you know.
This is janet.
Yeah, we do.
<unk> recently amended the revolver and we appreciate the support of our banks as we did that.
The revolver is smaller now, but we have sufficient.
Average under the Covenant, we are now at five and a half through the maturity of April 2025, and it steps up to five eight.
We have.
Sufficient room under the covenant and we are thankful.
Where does the bank.
In order to address that.
Understood any discussions with rating agencies that kind of a little bit early for that.
Yes. This is Dennis again, we remain in very close dialogue with the rating agencies and we continue to highlight the strong core business. It generates cash flow along with the improving strength of our Counterparties are they do remain focused on leveraging a ban of MVP in service.
But the increasing balance sheet strength and the recent upgrade to investment grade by two of the three agencies of our largest customer coupled with our strong core business are certainly positive.
Okay got it I'll leave it there thanks.
Your next question comes from the line of Jeremy Tonet.
Your line is open.
Hi, good morning.
Good morning.
Just was curious I guess the process for how it works for the partners to approve our budget and if.
The construction cost change overtime, how often does that happen how does the process work there and I guess, if the different partners had didn't want to participate or wanted to maybe decrease there their ownership stake in the project.
How would that process work and when is the next time there is a budget approval.
Yes.
So we're good from a budget perspective, right now it doesn't come in a normal cadence it when we need the money. So what we have from that perspective is funded enough that we didn't need to ask for that from that partner. Although the partners are all on board with where we are.
And what we think that final cost will be our board has approved the capital.
That we need but we haven't had to go back to the MVP partnership and then normal course of business and asks for that as of yet.
Got it and I think your second.
Yeah go ahead, sorry go ahead.
I think your second part of the question is how it works if a partner were to decide.
Maybe just walk away and the JV agreement limits that ability for sure for partners to walk away from that.
Jack.
Got it so there is no option for them to walk away, but if they wanted to decrease their ownership interest sell their stake to a partner is.
Is that part of the process or just any thoughts you could share with us there.
Yeah. So there there are ways that they can offer those interests.
Of course, we have a first right of use on that we and Nextera.
But I will say, we are still all lockstep in agreement with our partners as far as what the path forward and what those costs will be.
Got it okay, great I'll leave it there thank you.
Thank you.
Yeah.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Okay.
Yeah.
Your next question comes from the line of John Mackay.
Your line is hey, guys. Thanks, Thanks, again, I figured I'll just hop on with with one more here could you. So Tom you talked a little bit about the kind of broader political support youre seeing in D. C and I know you don't want to get into the details of that.
I guess I'm just curious this new timeline, you've cut out for a second half of 'twenty three does that assume any kind of incremental political support from here or is that still just kind of based on your base.
Base case timeline that you redo the permits you get FERC approval et cetera.
Not necessarily any new help out of D C.
Okay.
Yes, John Good morning, I think the.
Loads to say this because its MVP, but the timeline guidance that we put out I would define as regular way guidance, meaning that we're actively engaged with the agencies.
Them to reissue the buy up in <unk>.
Right away opinion FERC has already acted the army Corps is continuing to do their work. So the guidance contemplates a timeframe that would be consistent with their ability to two.
To complete the regular way.
Work that they have to do the issue the permits and then the construction would commence immediately after that and as Diana alluded to earlier the only.
The only thing that good.
Pair that or impact that would be if the fourth circuit panel were to issue a stay on any one of those those permits.
We're we're grateful for the political support both vocal and whatever other activity is going on.
That's not something that's within our control so that we're focused.
I am doing the work we have to do to put out to work with the agencies to put out in our minds, what will be unprecedented level of comprehensive permits and for the buy up for the third time.
That's very clear thank you for that.
Okay.
There are no further questions at this time.
Thomas Curran I turn the call back over to you.
Yes. Thank you.
Before we close I'd, just like to get on the soapbox here for a second if I can.
To follow up a little bit on what John was saying it should be readily apparent to everybody given the geopolitical.
That's occurring around the world.
That notwithstanding everyone's desire to very quickly move to a no or low carbon economy and world.
There is no way to do that.
Without continuing to support and use fossil fuels and in particular natural gas.
Because this is a global issue.
And as many of the producers have been saying we have the ability.
And the resources to increase our production so that we can help accelerate.
The rest of the world.
To reduce their emissions and at the same time, we can maintain.
Reliability energy security and National security for the residents of this country, so a little bit of a soapbox I apologize but.
We can do two things at one time, we can quickly move and invest in technology and to try to find ways. So that we can use renewables and as well as other.
Energy sources to reduce our carbon emissions, but we have to accept and acknowledge that it's going to be a long period of time that we will absolutely continue to use natural gas as a critical component.
And with that I'll say, thank you for joining our call today and we hope to talk to you all again soon.
Yeah.
This concludes today's conference call you may now disconnect.
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