Q3 2022 Equitrans Midstream Corp Earnings Call
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Good morning, My name is Rob and that'll be your conference operator today at this time I would like to welcome everyone to the equity Trans Midstream Corporation third quarter 2022 results conference 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. If you would like to withdraw your question again press Star one.
Nate Tetlow, Vice President corporate development and Investor Relations you May begin your conference.
Good morning, and welcome to the third 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 870 702030.
464736 to $91 99, 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 the risk factors in <unk> 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 reconciliation to the most comparable GAAP financial measure.
On the call today.
Tom Karam, Chairman and CEO , Diana <unk>, 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 per train, Andrea Vice President and Chief Accounting Officer, and Janice Brenner, Vice President and Treasurer.
After the prepared remarks, we will open the call to questions with that I'll turn it over to Tom.
Thanks, Nate and good morning, everyone.
Today, we reported third quarter results, including a net loss of $504 million.
Adjusted EBITDA of $259 million and deferred revenue of $85 million.
We also increased our full year free cash flow guidance.
Kirk will provide details on the financial results in a few minutes.
Let me start with MVP.
Today, we announced an impairment of $583 million.
Primarily on the basis of the increased timing uncertainty now present in the normal permitting path through the fourth circuit Court.
Kirk will discuss some of the factors in that analysis in a minute.
On that permitting path.
We remain actively engaged with all of the agencies since the fourth circuit vacated for the second time. These permits in early 2022.
We are continuing to work with the agencies to produce permits that when reissue will exceed all legal standards used by federal courts.
As well as this courts unreasonably high bar.
That said.
Based on the hearing conducted by the fourth circuit panel last week regarding a challenge to the West Virginia 401 certification.
It was evident that the same court panel that has consistently overrule technical conclusions of federal and state regulators more than 10 times.
Then appeared hospital to the West Virginia Department of environmental Protection's issuance of a permit for MVP.
As in any federal permitting project there remains some uncertainty on the federal agency front regarding timing.
As I said, we are engaged with the agencies as they work to develop and refine their proposed schedules for permit issuance.
Notwithstanding these uncertainties in our view that this fourth circuit panel far exceeds well established boundaries for agency difference, we will continue pursuing the permitting path available under the existing law.
However, having been under construction since early 2018.
And now being roughly 94% complete with total project work.
The best path to complete MVP by the second half of 2023 and.
And get off landowners property.
Low natural gas to help lower costs to consumers, while adding to our national and energy security is for Congress to pass legislation requiring the completion of the project.
Through the efforts of Senators mansion in capital.
Energy infrastructure permitting reform legislation has drawn significant bipartisan support including from representatives of the by the administration.
We remain encouraged by the continued support for permitting reform and in particular for mvps inclusion in that legislation.
We urge Congress to act on this bipartisan momentum and pass legislation in the near term.
And now I'll turn it to Diana for the operations update and then Kirk will discuss the financial results.
Diana.
Thanks, Tom Good morning, everyone.
This gathering and the <unk>.
Third quarter, we gathered about seven five Bcf per day, we continue to see producer holding to maintenance levels and believe that a basin volumes will remain roughly flat until further takeaway capacity becomes available for this year. We continue to expect the gathered volumes will be slightly down year over year based on current year development.
And pad timing.
Moving on to transmission and September issued a draft environmental impact statement for the Ohio Valley connector expansion or Ob CX project.
Expansion will add about 350 million cubic feet per day of deliverability.
The Ohio Valley connector pipeline, which provides access to the mid continent, and Gulf coast markets through Interconnects and clarity in Ohio.
The project is still on track to be placed in service during the first half of 2024 total.
Total capital for the project at the $160 million.
We expect to earn a build multiple of four to six times.
The water segment, we are progressing nicely and the next day system build out.
First we completed and started operations at the first of two above ground storage facilities.
Initial facility has a capacity of approximately 150000 barrel and in September the first full month of operation, we Offloaded and redelivered about 500000 barrel.
Producer customers are very focused on reusing water and reducing truck traffic and HR and storage services play a critical role in alleviating the logistics challenge around handling daily water production and Frac job timing.
The second storage facility, which will have approximately 200000 barrels of capacity is targeted to be in operation in the first quarter next year.
For the year, we continue to expect water EBITDA of approximately $30 million.
Lastly on ESG, we continue to make progress on methane mitigation pneumatic conversion either had lead to locally or to full animatic.
This year, we completed seven conversion the compressor sites and have three more conversions planned in the fourth quarter by year end, we will have reduced scope, one methane emissions by more than 20% since starting the mitigation program.
Additionally, in terms of reporting and disclosure. We recently responded to the CVP questionnaire on water security and completed the PTSD readiness assessment I'll now turn the call over to Kurt.
Thanks, Diana and good morning, everyone.
Today, we reported third quarter net loss attributable E train common shareholders.
$521 million and a loss per diluted E train common share of $1 20.
Net loss for the quarter was $504 million.
Adjusted EBITDA was $259 million and deferred revenue was $85 million.
We also reported net cash provided by operating activities.
$210 million and free cash flow of $3 7 million.
Net income attributable to <unk> common shareholders was impacted by several items.
First the $583 million impairment to our investment in the MVP joint venture.
Second by $117 million increase to income tax expense, primarily due to a valuation allowance placed on our deferred tax assets.
<unk> from cumulative losses that were driven by the impairment to our investment in the mountain Valley pipeline joint venture.
Third by a $2 million unrealized loss on derivative instruments, which is reported in other income.
This is related to the contractual provisions hurdling E train to receive cash payments from EQT conditioned.
Conditioned on specific Nymex Henry hub natural gas prices.
Exceeding certain thresholds post mvp's in service and through 2024.
And lastly by a $3 $7 million gain on sale of non core gathering assets.
This is a onetime item and relates to the sale of acre trans gathering assets.
Serve low pressure vertical wells.
After adjusting for these items.
Third quarter adjusted net income attributable to <unk> common shareholders was $38 million and adjusted earnings per diluted share.
Was <unk>.
With regard to the impairment of the MVP investment in determining the value of the investment we consider a lot of factors, including the remaining regulatory process.
The actions.
And we also have variable inputs like in service timing probabilities and cost of capital considerations.
The impairment resulted primarily from a decrease in the in service timing probabilities, which is a direct result of timing uncertainty around permit issuance and the continued challenges at the fourth circuit.
E train operating revenue for the third quarter of 2022.
Lower compared to the same quarter last year by $10 million.
This was primarily from higher deferred revenue and lower gathered volumes and was partially offset by increased water service revenue.
Operating expenses for the third quarter 2022 were nearly flat with the same quarter last year.
For the third quarter E train will pay a quarterly cash dividend of <unk> 15 per common share on.
On November 14th.
The common shareholders of record at the close of business on November 2nd.
In early July EQT elected to receive a $196 million cash payment and to forego up to $235 million of future rate relief.
Cash payment, which was made on October four.
Represents final consideration for approximately 25 million <unk> common shares that were purchased from EQT and retired in the first quarter of 2020.
Today, we updated our full year guidance to reflect a modest decrease in expected capex.
And an associated increase in free cash flow and retained free cash flow.
For the year, we now expect Capex and capital contributions.
$540 to $580 million and free cash flow of $355 million $375 million.
I'll now hand, the call back to Tom.
Thanks, Kurt so in summary.
The base business and operations continued to perform well.
We're executing on our organic gathering and transmission projects.
In establishing our premier water handling network.
And on MVP.
We are committed to completing the project.
We will continue to pursue durable permit from federal agencies and at the same time work to promote legislation to complete MVP and reform federal permitting process.
With that we're happy to take your questions.
I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of John Mackay from Goldman Sachs. Your line is open.
Hey, everyone. Good morning, Thanks for the time, let's let's start on MVP.
I guess could you share a little bit more I understand the moving parts of the impairment, but when youre talking about risks to timing I mean, what what Ken timing look like at this point are you comfortable if the process.
Plays out on different way and we start talking about 2024 in service 2025, I'm just trying to think about a buck and then kind of what went into.
The $580 million to kind of get you there.
Yes, John this.
This is Tom Thanks for the question look we remain confident that we're going to complete MVP through one path or another.
And along with with our MVP partners, we're fully committed to doing so.
It's difficult to provide a definitive timeline until we know which path, we will travel alright, but regardless of which path.
We can mobilize construction crews in the summer of 2023, we can still bring MVP into service in winter of 2023. So that's the message we're trying to deliver as opposed to hanging on any specific date or specific.
Schedule.
Order alright, so the messages we remain confident we remain committed as do our partners.
And that if we can mobilize construction crews by the summer of 2023, we can bring the needed natural gas relief.
Into winter of 2023, so that we can help lower the cost to consumers.
Aid in our National and energy security and provide some assistance through displacement with LNG exports to our outlook.
So that's the definitive answers for the questions.
Alright, I appreciate that maybe.
Maybe let's shift gears talk about gathering so I think going into the year at the beginning of there you talked about.
That water line that was down, causing a little bit of weakness.
Just curious is the is the <unk> softness we saw in gathering and then some of the softness we saw from your largest producer counterparty is that this the same thing or is there something incremental that was driving weaker volumes this quarter and maybe if we kind of think of how we are going to fourth quarter off of that thank you.
Hey, John This is Justin I can answer that one so the water line issues that we experienced earlier this year.
Require that we replace a few select lines to ensure the quality of that system that we were building out.
We're addressing that problem now.
And I think that's behind US at this point I think EQT touched on that on their call as well.
What you did see was some cascading impact two schedules because of that certain fracs, where reprioritise during the time period in which we were replacing certain lines.
So you see that play out throughout the year.
Is there a schedule was impacted but like I said, I think thats largely behind us at this point.
Yes.
Think as Diana touched on in her prepared remarks.
Our guidance throughout the year has been based on.
Flat to mid single digit declining volumes throughout the year.
Until more infrastructure built out of the basin and we do expect that the producers will remain in that maintenance mode.
So that can get built.
Okay I appreciate that thanks for the time.
Your next question comes from the line of Neel Mitra from Bank of America. Your line is open.
Hi, good morning.
First wanted to touch on EQT in.
The recent <unk> acquisition.
Some a little bit more flexibility.
Where they drill.
Was wondering if you.
<unk> had discussions with them about budgeting and planning for.
'twenty three.
If that would impact.
Kind of your base plan going forward.
Any color you can provide on that.
This is Joe.
Austin again.
So.
We certainly were in conversations with EQT regularly about their plans.
We have talked to them about.
With the acquisition as we see the <unk> assets are really built for purpose.
Around the upstream assets that they are acquiring not really any material overlap with our gathering assets.
<unk> system does have an interconnect into our <unk> system.
So we do see some opportunities there to bring additional volumes from the.
The newly acquired acreage for EQT onto our systems to give them some more downstream optionality for market.
But.
On a broader scale.
And all the producers continuing to signal that there'll be a maintenance mode.
At this time, we don't see really much of any impact on our volumes flowing into our system due to this acquisition.
And even beyond that I think.
Our system does offer.
The best path to downstream markets and certainly when MVP comes online.
<unk> be the best path to get to that capacity, so with all of those things in play.
At this time I don't see any any reason to believe that volumes will be moving away for us from ourselves.
Yes.
Got it and then.
Second question on MVP.
You noted that.
The watery hearing last week.
Some issues with the fourth circuit came up which.
<unk> created some doubt and then.
He also noted that you believe permitting it's something that's needed.
Could you elaborate more on kind.
Kind of what is happening in that hearing about the water permits and then.
When you look at potential legislation or are you looking for on MVP carve out like the mansion.
Deflation or just general permitting.
To get this through the finish line.
Yes, Thanks, Neil look two things can be true at the same time.
I think in a way, we just stating the obvious that when a panel overrides agencies expert conclusions 10 times. It is not a particularly friendly panel to the project. So so that's stating the obvious.
The second is is that with or without MBP.
Senator mentions proposed permitting reform and Senator capitals permitting reform, meaning two bipartisan.
Forms of permitting reform each include MVP legislation to complete the project.
So that.
We fully believe that there needs to be permitting reform.
We're on our third round of having federal permits issued.
That are have been overruled and it's just incredibly inefficient way to try to construct critical infrastructure in this country.
You can have certainty and finality.
Expert permits that are issued from federal agencies.
So.
I guess the answer to your question is is that if there were permitting legislation that were brought forward. We would fully expect that MVP Lang language would be included in whatever form that permitting.
Legislation would take but also true is that we're going to continue.
Very positive and constructive relationship with the federal agencies.
So that they can reissue durable comprehensive permits, but as I said earlier will pass muster to every federal court, even this court, which has not been the most friendliest of panels to us.
With this project.
So that's why we remain confident but also at the same time, we have to acknowledge the obvious that we need permitting reform in this country and that this panel has been particularly unfriendly to MVP.
I hope that answers your question.
No. That's very helpful. Thank you very much.
And your next question comes from the line of Brian Reynolds from UBS Financial Your line is open.
Hi, good morning, everyone.
Maybe just a quick follow up to MVP and just the cash burn rate per quarter or by month are there any contract changes are inflationary pressures to where that rate changes materially heading into 'twenty three.
Yes, Brian I think the run rate the burn rate of somewhere between 20 and $25 million a month largely for the maintenance of the rights of way, which because this court has continued to vacate permits has been remained.
Notwithstanding for four years, so of course, when the right of way is not permanently restored you have maintenance.
Because we're 94% complete theres really not significant or meaningful inflationary pressures are contractual pressures, it's really maintenance of the right of way because we remain on land owners property for far too long.
Okay.
Great I understand no that's super helpful and thanks for the clarification.
Maybe just touch a little bit on capital allocation, and just rising rates and floating interest rate exposure I know you have some excess free cash flow in 'twenty, two that should flow through into 'twenty three but.
Just curious with the aforementioned question on burn rate and then in addition, just some a little bit of.
Debt on your revolver and you have the perhaps are there any interest rate exposures that we should be thinking about the 23 that could impact that free cash flow profile.
Hi.
No no Brian this is Kirk.
No.
The revolver is basically the only interest rate exposure we have.
Okay, Brian you raised an interesting Brian you raise an interesting point right our core business setting MVP aside continues to perform well and generate significant free cash flow so even with the.
The heightened level of I'll call a burn rate for MVP, we will continue to delever at a slower pace.
But the free cash flow remains constant and predictable so that while we need to bring MVP into service to execute on our larger plans, there's not a deterioration.
Because we're generating such strong free cash flow quarter after quarter.
No. Thanks for the question.
That does answer my question. Thanks, So just touching on those moving pieces as it relates to MVP in just the overall business as a whole so I appreciate it and enjoy the rest of the morning. Thanks.
Thanks.
And your next question comes from the line of Alex Kania from Wolfe Research. Your line is open.
Great. Thanks, Thanks for taking my question.
It really just comes down to the comments just on the uncertainty on federal permitting.
I know previously there was an expectation that you'd have some by the end of the year. Early next is it is it just kind of a sense youre getting from the.
The program is just in terms of updated timelines that that might be extended or.
Or is that I think maybe as you suggested before it's a question of maybe wanted to see what goes on with the permitting reform before before.
Final permits are issued.
Yes.
Alex Good morning. This is Tom I don't think Theres anything specific that were pointing to we are just talking about.
The current circumstances surrounding this project and that even when permits are issued.
Our ability to quickly dispense of the relentless litigation if the federal agencies move the schedule a month or two either way that's not determinative of our ability to complete the project within our guidance as I said earlier, if we can get mobilized in the summer of 2023, we can bring the pre.
<unk> in line for winter of two.
2023.
I don't want to get hung up on or the permits issued on a specific date.
I'd like to frame the conversation in that regard.
Got it that makes a lot of sense and then maybe just.
A question just again thinking about the cash flow profile do you have that kind of an updated sense now that were.
Through the net EQT exercising its cash option, maybe how to think about.
Deferred revenue.
Maybe going into into next year and kind of beyond just what the profile of that might look like.
Yes. This is Brian betrayed area.
When EQT exercise the cash option.
Going about $235 million of rate relief.
We factor that into our analysis.
We will have 2024 guidance for excuse me 2023 guidance later, but.
We did adjust for that.
The foregoing that rate relief going forward.
Okay got it thank you very much.
Your next question comes from the line of John Mackay from Goldman Sachs. Your line is open.
Hey, I just wanted to hop on thanks for giving me a SEC.
Second one here.
In the past we've talked about the potential to maybe look to go to a higher court about the appeals court and try to get some of these decisions reversed is that is that still an eventual possibility here. If we continue to see bad news on the water permits.
Well, John first of all second round of questions cost more.
No.
Yeah.
So I'm not a lawyer I will talk about that offline.
Right.
Im not a lawyer, but based on all of the input that we've received from the lawyers.
Yeah.
There is nothing that is ripe for us to take to SCOTUS now that would solve the global issues in and of themselves right.
We have a series of individual permits from different agencies.
So that's the difficulty is what do you take to to the Supreme Court that actually is a comprehensive fix.
So right now I'm going to sound like a broken record, but right now we're going to continue to push to have the federal agencies again that we have really constructive and positive relationships with <unk>.
To reissue the permits.
And then get in front of that fourth circuit like we have so many times before and make the case that when is enough enough right.
On the third round of the Biden administration issuing these permits it's hard for us to fathom that this administration would.
Could be.
The arbitrary or capricious and issuing environmental permits and that theyre going to be issued accordance with the law and the fourth circuit should follow the law and give deference to the agencies. So that's that's our plan of attack here. If you will so that we can mobilize in the summer of 2023 and complete this project in winter 2023.
Okay.
Alright, I appreciate that thanks for all that time today.
Thank you.
And there are no further questions at this time, Mr. Tom I will turn the call back over to you for some final closing remarks.
So thank you all for joining the call today and.
We're pleased that you have continued interest in the company, we will not rest and have no intention of rest of nor do our partners until we complete MVP.
That does not mean, we're taking our eye off our core business as you can see by the consistently strong results.
So that hopefully in the very near future, we will bring MVP into service and the country will be better off in E train will be better off thank.
Thank you very much.
That does concludes today. This concludes today's conference call. Thank you for your participation you may now just.
Okay.
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Yes.
Okay.
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Okay.
Yeah.