Equitrans Midstream Corporation (ETRN) CEO Thomas Karam on Q1 2022 Results - Earnings Call Transcript
Equitrans Midstream Corporation (NYSE:ETRN) Q1 2022 Earnings Conference Call May 3, 2022 10:30 AM ET
Company Participants
Thomas Karam – Chairman & Chief Executive Officer
Diana Charletta – President & Chief Operating Officer
Kirk Oliver – Senior Vice President & Chief Financial Officer
Janice Brenner – Vice President, Finance and Treasurer
Nathan Tetlow – Vice President-Corporate Development and Investor Relations
Conference Call Participants
Brian Reynolds – Union Bank of Switzerland
John Mackay – Goldman Sachs
Michael Lou – Oasis Petroleum
Neel Mitra – Bank of America
Becca Followill – United State Capital Advisors
Sunil Sibal – Seaport Global
Jeremy Tonet – JPMorgan
Operator
Good morning. My name is Joseph and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitrans Midstream Quarter 1 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. [Operator Instructions]. Thank you. Nate Tetlow, Vice President of Corporate Development and Investor Relations. You may now begin your conference.
Nathan Tetlow
Good morning and welcome to the First quarter 2022 earnings call for Equitrans Midstream Corporation. A replay of this call will be available for 14 days beginning this evening. The phone number for the replay is 8007702030 or 6473629199, and the conference ID is 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 ETRN's Form 10-K for the year end at December 31st, 2021 and as updated by Form 10-Q 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 most comparable GAAP financial measure.
On the call today are Tom Karam, Chairman and CEO. Diana Charletta, 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 Pietrandrea, Vice President and Chief Accounting Officer. And Janice Brunner, Vice President and Treasurer. After the prepared remarks, we will open the call to questions. With that, I will turn it over to Tom.
Thomas Karam
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, 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 that between the technical decisions and the respective federal law effectively mitigating potential perceived ambiguities. We are focused on everything within our control and 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 permits will and have to prevail. On the permitting side, we recently received some positive news. As FERC unanimously approved MVP certificate amendment relating to changing the construction method and certain water body and wetland crossings from open cut to trend tools.
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. We and others have consistently said that MVP's rolled in our energy security and reliability is critical as we continue to work toward a lower carbon economy. The current geopolitical unrest driven by the invasion of Ukraine by Russia has exacerbated the costs of a tight market, and will continue to do so for some time. We have remained in frequent contact with Senator Manchin, Senator Capitol, and others, discussing the possible path to bring MVP into service. The public statements from Senator Manchin 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 Kirk will discuss the financial results. And I'll come back later for more questions. Diana.
Diana Charletta
Thanks, Tom. Good morning, everyone. I'll start with the gathering segment. In the first quarter, we gathered about eight [Indiscernible] per day. In the current environment, we expect a base and 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, or OVCX project. And the start of the FERC application process.
To remind you, OVCX will add about 350 million cubic feet per day of deliverability on our Ohio Valley Connector Pipeline, which provides us access to the Mid-Continent and Gulf Coast markets through interconnects in Clarington, Ohio. The incremental OVC capacity is targeted for in-service in Q3, 3/2023. And we will keep you updated as we make progress on the projects. 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 in 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 believe 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 to replace high bleed pneumatics with low bleed, as well as replacing certain gas-driven pneumatics with instrument air systems. This program continues in 2022 and we are targeting a 6% reduction in annual pneumatics 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 TCFD readiness assessment to further expand our ESG platform. We are committed to the sustainability of our operations, and we will continue to make additional advancements this year and beyond. I'll now turn the call over to Kirk.
Kirk Oliver
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 E-Train common share of $0.20. Net income was a $105 million, adjusted EBITDA was $277 million and deferred revenue was $87 million. We also reported net cash provided by operating activities of a $186 billion and free cash flow of $24 million. 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 conditioned on specific NYMEX Henry Hub Natural Gas prices exceeding certain thresholds post MVP's in-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 evaluation allowances because of decreases in deferred taxes assets. This 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 $0.14. E-Train operating revenue for the first quarter 2022 was lower compared to the same quarter last year by $38 million. This is primarily from the impact of deferred revenue. lower gathered volumes and lower water services revenue.
Operating expenses for the first quarter '22 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 $0.15 per common share on May 13th to E-Train common shareholders of record at the close of business on May 4th. Today we introduced a full-year 2022 financial guidance, which includes net income of $250 million to $330 million, adjusted EBITDA of $970 million to $1.05 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 MVP progresses towards completion. The key changes to the facility include 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 5.5 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 5.85 times for four quarters beginning with the mobilization of forward construction on MVP. I'll now hand the call back to Tom.
Thomas Karam
Thanks, Kirk. 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 reissuance 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 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.
Question-and-Answer Session
Operator
[Operator Instructions]. We'll pause for just a moment to compile our Q&A roster. First question comes from the line of John, my bad, Brian Reynolds. Your line is open.
Brian Reynolds
Hi. Good morning, everyone. Maybe to start off, congrats to Diana on the elections to the board. Maybe to start off with Diana, was wondering if we could get an update just on MVP, and specifically the signposts that helped drive the updated second half 23 and service date. At the end of the day, any incremental color on the regulatory timeline, assumptions around the fourth Circuit, the FERC, and Army Corps would be great. Thanks.
Diana Charletta
From a timeline perspective, what we have assumed there now is with the interaction that we're having with the agencies, which has been positive, we think we will be back to construction second quarter, which gives us the timing that we've given you. Second quarter of 2023. Let me be clear.
Brian Reynolds
Is there any update on potential, I guess, fourth Circuit ruling, or just any update on when we could get additional permits from the FERC or Army Corp?
Diana Charletta
Yes. 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 start by Q2 2023 construction.
Brian Reynolds
Great. Appreciate it. Maybe just ask my one follow-up. Just to talk on the updated guidance. First off, it seems like the free cash flow guidance was 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 '22 now that the MVP timeline has officially been pushed into 2023? Thanks.
Diana Charletta
Sure. There is an additional Capex, which it sounds like you've caught, which is the increase for the water replacements. And then the volumes are slightly down for 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 stay disciplined and there is a physical limitation to the base and takeaway. But the long-term strength of the business remains, with additional takeaway capacity we have the ability to grow.
Brian Reynolds
Great, appreciate the color. Have a great day, everyone.
Operator
Your next question comes from the line of John Mackay. Your line is now open.
John Mackay
Good morning. Thanks for the time. Good morning. I just wanted to pick up maybe on that last comment. Maybe can you just talk a little bit with some driving, the declines foe gathering through the year. Understand some of the 1Q issues, but it looks like most of the producer set is flattered it slightly up through the balance of the year. So just trying to balance those two and whether or not maybe going forward, you might expect declines to continue as a well before MVP is online. Thank you.
Diana Charletta
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 key core acreage, we feel like it's certainly flat until we can get some takeaway capacity and then I think it grows.
John Mackay
Okay. You would expect that to come online once the water issues are fixed.
Diana Charletta
Correct.
John Mackay
Okay, thanks. I may wish to follow-up. Maybe another on the base business costs. You guys mentioned the costs were better this quarter, just curious how much of that is ratable versus a one-off. Just how we should think about that going forward.
Diana Charletta
When you say costs or are you talking about expenses?
John Mackay
Yeah, on the O&M side.
Diana Charletta
Yes. So on the O&M side, I mean, we are seeing a little bit of inflation pressure on coal and 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.
John Mackay
All right, that's fair. I'll leave it there and get back in the queue. Thanks.
Operator
Your next question comes from the line of Michael Lou (ph.). Your line is open.
Michael Lou
Thanks. Good morning, everyone. Just a couple of quick questions. The 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 leverage depending on how MVP progresses?
Kirk Oliver
This is Kirk. The dividend is, I mean, the base business -- cash flow from the base business supports the dividend fine, so we have no thoughts to do anything with the dividend.
Michael Lou
Okay, great. And then, I just wanted to make sure I understood. In the comments on MVP Southgate, you referenced in the footnote potential changes to the design and timing. Can you just elaborate a little bit on that? Thanks.
Diana Charletta
I think there is really no question about the demand and the need for Southgate. But given the environment and some of the recent rolling, we are evaluating the project, having discussions [Indiscernible] around whether there are ways we can better optimize the design and the timing with customers.
Michael Lou
Okay, great. Thank you so much.
Operator
Your next question comes from the line of Neel Mitra. Your line is open.
Neel Mitra
Hi. Good morning. I just wanted to come back to the timing of MVP. It sounds like once you submit your permits, you want to go straight to construction, get the project online in second half of 2023. In the past, you've had a lot of appeals. And the Fourth Circuit has come back and 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 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 final construction piece?
Diana Charletta
So there's no question that the court has departed from historical and judicial deference, but we're also now dealing with a narrow -- narrower scope of issues. One of which was just recently addressed by FERC; and there are certain foundation aspects of the permits that were up held, challenges to the route, ideological assessment framework for MVP's action areas and basis for incidental takes. 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 understand the need and are working to specifically articulate the legal rationale for their technical decisions, in order to proactively mitigate potential and be good -- you know the word that I'm trying to use.
Right.
Diana Charletta
Which is generally not required in the permit applications. So they need to really focus on the legal reasons why they're writing their decision, not the technical, scientific aspects of the permit. They all understand that and they're working diligently to put those into the permit.
Neel Mitra
So just so I understand it right, you can follow the permits. There's obviously going to be interveners, but it's the fourth Circuit who decides whether they're going to hear the issues. If they don't, then you move forward and can progress with construction, is that correct?
Diana Charletta
That's correct.
Neel Mitra
And then just a quick one. I wanted to follow up on the agreement with EQT. I know they sold off the remaining amount of shares they had in ETRN and also the roughly $200 million and the gas gathering agreement could potentially come up in terms of being reimbursed for not having the project on in 2022. Any discussion with them or thoughts on how that would play out?
Diana Charletta
I don't believe that they have made a determination as to what they want to do there. So we're just waiting to hear what their determination is. Either way, we'll work through it whenever they want.
Neel Mitra
Okay. Great. Thank you very much.
Operator
The next question comes from the line of Becca Followill. Your line is now open.
Becca Followill
Good morning, guys. Following up on the water Capex you're going to spend there. You said you're going to seek recovery. Is that from the people that constructed the pipelines or the original owners?
Diana Charletta
So it is pending legal review, but it isn't really the people that constructed the pipeline is that we're having an issue wit. It's really a vendor issue. And we are going to receive retreatment, but it's not from the people that constructed the project.
Becca Followill
Okay. Thank you. That's all I had. Thank you.
Operator
Your next question comes from Sunil Sibal. Your line is open.
Sunil Sibal
Hi, good morning, folks. And thanks for all the clarity. My first question related to the leverage. I related [Indiscernible] the covenants. Could you tell us, where were you at the end of Q1, 2022 with 5.5x max leverage covenant?
Kirk Oliver
Yeah. This is Kirk. We're right now -- prior to MVP going in service, we're looking at getting up into like the low fives.
Sunil Sibal
Okay. And where specifically did the Q1 end, or we can take it offline if you don't have that.
Janice Brenner
This is Janice. We just 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 coverage under the covenants. We're now at 5.5 times through the maturity of April 2025, and it steps up to 5.85. So we have sufficient room under the covenant and we are thankful from the support of the bank in order to address that revolver.
Sunil Sibal
Understood. Any discussions with reading agencies post that kind of little bit [Indiscernible] for that.
Janice Brenner
Yes, we -- this is Janice again. We remain in very close dialogue with the rating agencies, and we continue to highlight the strong core business that generates cash flow along with the improving strength of our counterparties. And they do remain focused on leverage in advance of MVP and service. But the increasing balance sheet strength, and the recent upgrade, the investment grade by two of the three agencies of our largest customer, coupled with our strong core business are certainly positive.
Sunil Sibal
Okay, got it. I'll leave it there. Thanks.
Operator
Your next question comes from the line of Jeremy Tonet. Your line is open.
Jeremy Tonet
Hi. Good morning.
Diana Charletta
Good morning.
Jeremy Tonet
Just was curious, I guess. The process for how it works for the partners to approve a budget, and as construction cost change over time, how often does that happen? How does the process work there? And I guess, if the different partners that didn't want to participate or wanted to maybe decrease their ownership stake in the project, how would that process work? And when's the next time there's a budget approval?
Diana Charletta
We are good from a budget perspective right now. It doesn't come in a normal cadence. It's 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 the partners. Although, the partners are all on board with where we are and what we think that final costs will be. Our board has approved the capital that we need, but we haven't had to go back to the MVP partnership as a normal course of business and ask for that as of yet.
Jeremy Tonet
Got it.
Diana Charletta
And I think your second --
Jeremy Tonet
Yeah. Go ahead, sorry.
Diana Charletta
Go ahead. I think your second part of the question is how it works if a partner where to decide maybe just walk away. And the JV agreement limits that ability for partners just to walk away from the project.
Jeremy Tonet
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 that part of the process or just any thoughts you could share with us there?
Diana Charletta
Yes. So there are ways that they can offer those interests up and of course, we have a first right of refusal on that. We and NextEra. But I will say we are still all lock step in agreement with our partners as far as what the path is forward and what those costs will be.
Jeremy Tonet
Got it. Okay, great. I will leave it there. Thank you.
Diana Charletta
Thank you.
Operator
[Operator instructions] Your next question comes from the line of John Mackay. Your line is open.
John Mackay
Thanks again, I forgot, I'd just hop in with one more here. Could you -- Tom you talked a little bit about the kind of broader political support you're seeing in DC. And I know you don't want to get into the details but that's time. I guess I'm just curious, this new timeline you've [Indiscernible] out for a second half of '23. Does that assume any kind of incremental political support from here? Or is that still just kind of based on your -- base case timeline, then you redo the permits, you get FERC approval, etc., and not necessarily any new help out of DC.
Thomas Karam
John, good morning. I think that -- I'm loads to say this because it's 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 for them to reissue the [Indiscernible] right-of-way opinion. FERC is already active. The Army Corps is continuing to do their work. So the guidance contemplates a timeframe that would be consistent with their ability to complete the regular way of work that they have to do to issue the permits, and then the construction would commence immediately after that. And as Diana alluded to earlier, the only thing that could impair that or impact that, would be if the Fourth Circuit panel were to issue a stay on any one of those permits. We're grateful for the political support, both vocal and whatever other activity is going on. But that's not something that's within our control, so that we're focused on 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.
John Mackay
That's very clear. Thank you for that.
Operator
There are no further questions at this time. Thomas Karam, I turn the call back over to you.
Thomas Karam
Thank you. Before we close, I'd just like to get on a 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 chaos that's occurring around the world, that not withstanding 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, 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.
Operator
This concludes today's conference call. You may now disconnect.
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