Equitrans Midstream Corporation (NYSE:ETRN) Q1 2023 Earnings Call Transcript

Equitrans Midstream Corporation (NYSE:ETRN) Q1 2023 Earnings Call Transcript May 2, 2023

Operator: Hello and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitrans Midstream First Quarter 2023 Earnings Conference Call. I would now like to turn the conference over to Nate Tetlow. Please go ahead.

Nate Tetlow: Good morning and welcome to the first quarter 2023 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 800-770-2030 or 647-362-9199. 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 ended December 31, 2022 and as updated by Form 10-Q, the 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 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 Brenner, Vice President and Treasurer. After the prepared remarks, we will open the call to questions. With that I will turn it over to Tom.

Tom Karam: Thanks, Nate. Good morning everyone. Today we reported first quarter 2023 results ahead of expectations including net income of $106 million, adjusted EBITDA of $300 million and deferred revenue of $77 million. Kirk will provide details on the financial results in a few minutes. As you know, we have approximately four months to five months of construction remaining to complete Mountain Valley Pipeline. What you may not know is that we are now more than 100 months from the project’s initial filing with FERC. More than 100 months of analysis, reviews, and scrutiny, and repeated re-issuances of permits. We are now on our third Biological Opinion. The seemingly endless loop of permit challenges and court action is causing more negative environmental impact than allowing MVP to simply complete construction.

The adverse impact on our regional energy security and reliability and affordability is real, and so is the negative impact on our employees, communities and customers. We certainly empathize with the many landowners along the right-of-way who simply want us off their property. As I said, the best way to protect the environment is to finish the project, get off landowners’ property and permanently restore the right-of-way. And our view has been supported time and again by Federal and State agencies that are best positioned to evaluate this project and its impacts. And so, notwithstanding setbacks and continued risks, we are continuing to pursue the permitting path available under the law. Let’s talk about that path for a minute. The outstanding required permits are a right-of-way authorization to cross the Jefferson National Forest from the Forest Service and Bureau of Land Management.

We expect to receive this authorization in about two weeks. Beyond the Forest permit, we need a Water Quality Certification from West Virginia, and the individual water crossing permits from the U.S. Army Corps of Engineers. The Fourth Circuit vacated the previously issued West Virginia Water Quality Certification on April 3. This did not come as a surprise as the oral argument last October foreshadowed the ruling. Since the ruling, we’ve been in close contact with West Virginia DEP and have a high degree of confidence that the issues raised in the ruling can and will be adequately addressed. And lastly, once all permits are issued, we expect FERC will grant the necessary authorizations to resume full construction. We see a path to obtaining all approvals by early summer.

And while narrow, this will give us the opportunity to complete construction in late 2023. All of this of course is contingent and no additional court intervention. Last week, project opponents did file a motion seeking a stay of the Biological Opinion. We are confident that the Fish and Wildlife Service produced a Biological Opinion that addresses the previous court concerns and exceeds the standards required. We expect the court to rule on the stay request in a few weeks. In addition to the Fish and Wildlife, we’re confident that all the State and Federal agencies involved are producing permits that address previous court concerns and exceed the standards required for each authorization. And as we’ve said before, projects like MVP that follow every required process and receive every required permit should prevail.

Last week the Secretary of Energy, Jennifer Granholm sent a letter to the FERC commissioners highlighting the importance of energy infrastructure, and in particular Mountain Valley Pipeline. The letter highlights the many benefits of MVP and natural gas infrastructure, including supporting the reliability of the electric system and enhancing regional and national energy security. We are grateful for the Biden administration’s outward support of MVP. MVP truly is a real-time case study, supporting the critical need to pass permitting reform legislation. We believe permitting reform at a high level has the necessary bipartisan support to keep advancing, and the differences between the political parties can and should be reconciled. We continue to urge both sides to come together to act on comprehensive permitting reform legislation.

And now I will turn it over to Diana for the operations update, and then Kirk will discuss the financial results. Diana?

Diana Charletta: Thanks, Tom. Good morning everyone. In the first quarter, we gathered about 7.4 Bcf per day. Given takeaway constraints, we continued to expect A basin volumes to be roughly flat. Our full year 2023 gathering CapEx guidance is $265 million at the midpoint, and includes approximately $200 million of what we consider sustaining CapEx, that is estimated gathering CapEx to keep volumes flat this year. The remaining $65 million of capital is for various growth projects, primarily related to additional compression. Over the next few years, we expect the annual sustaining CapEx to trend lower as return to pad drilling increases. Lastly, in the first quarter, we received a one-time cash payment of $5 million in exchange for the termination of a gathering contract that was subject to acreage dedication.

It should be noted that we were not gathering any volumes under the terminated contract. On the Transmission segment, we also benefited from the execution of a contract buyout in the first quarter. We received a one-time cash payment of approximately $24 million in exchange for the early termination of 200 million per day capacity that was set to fully expire in 2025. We then successfully completed an open season for this newly available capacity and entered into an agreement with a new shipper. The capacity commitment commenced on April 1 for an average of 95 million per day through 2025, and an average of 58 million per day from 2026 through 2030. We are in active discussions with several potential shippers for the remaining available capacity.

On the Ohio Valley Connector Expansion Project, we anticipate having all necessary approvals by mid-year and expect to commence construction soon after. The expansion will add about 350 million per day of deliverability on our Ohio Valley Connector pipeline, which provides access to the mid-continent and Gulf Coast markets through interconnects in Clarington, Ohio. The incremental capacity is targeted for in-service in the first half of 2024. On the Water segment, strong delivered volumes drove the solid financial results for the quarter. We are seeing producers continue to shift towards using more produced water in frac jobs. This shift is supported by our hub-and-spoke strategy for the mixed-use water system that includes direct access to produced water storage facility and enhanced connectivity between producing pads and new pad.

Our second storage facility is expected to be placed in service early this month and will bring our total water storage capacity to 350,000 barrels. We are exploring several opportunities with producers to enhance the connectivity and scale of our mix water system. As a result of our strong first quarter, we now forecast to be at the high end of our previous water EBITDA guidance of $45 million for 2023. Next on ESG, in addition, continuing with mitigation efforts around our 2030 climate goals, the big focus items for this year are the implementation of an enhanced environmental management system and the development of our TCFD reporting framework. And last, with regards to the Rager Mountain storage well leak that occurred in the fourth quarter.

We are progressing with the independent root cause investigation and continue to closely coordinate with the Pennsylvania DEP and PHMSA. In the first quarter, we incurred approximately $4.1 million of operating expense related to post-incident activities. And based on what we know today, for the full year, we expect to incur approximately $8 million to $10 million of expense, and approximately $5 million to $10 million of CapEx. Additionally, we are continuing a comprehensive review of all of our storage wells and storage field integrity. We will continue to work diligently throughout the review, and expect to provide more information once the root cause analysis is complete, which is expected to be this summer. At present, it’s still premature to draw any conclusions.

So we will again be very limited on what we say today beyond this brief update. 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 ETRN common shareholders of $87 million and earnings per diluted ETRN common share of $0.20. Net income was $106 million, adjusted EBITDA was $300 million, and deferred revenue was $77 million. We also reported net cash provided by operating activities of $225 million and free cash flow of $94 million. Net income attributable to ETRN common shareholders was impacted by two items. First by an $8.5 million unrealized loss on derivative instruments, which is reported within other expense. This relates to the contractual provision entitling ETRN received cash payments from EQT, conditioned on specific NYMEX Henry Hub natural gas prices exceeding certain thresholds post MVPs in-service and through 2024.

And second, by the previously mentioned $4.1 million of operating expenses related to the Rager Mountain storage incident. After adjusting for these items, first quarter adjusted net income attributable to ETRN common shareholders was $96 million, and adjusted earnings per diluted share was $0.22. Operating revenues for the first quarter was higher compared to the same quarter last year by $34 million. The increase was driven primarily by the impact of the one-time transmission contract buyout of approximately $24 million, the one-time gathering contract buyout of $5 million, higher water services revenue and was partially offset by lower gathered volumes. Operating expenses for the first quarter of 2023 were $15 million higher than the first quarter of ’22.

The increase was driven by higher O&M, primarily from the Rager Mountain storage incident, and increased SG&A and depreciation expenses. The first quarter of 2023 was also favorably impacted by an income tax benefit, primarily driven by $23 million reversal of valuation allowances on certain deferred tax assets. For the first quarter, ETRN will pay a quarterly cash dividend of $0.15 per common share on May 15 the common shareholders of record at the close of business on May 5. Today, we provided updated guidance, which given the narrow path that Tom described for MVP, now assumes MVP completion by 12-31-2023. And accordingly contractual obligations will commence January 1, 2024. The updated full-year guidance includes, net income of $330 million to $410 million, adjusted EBITDA of $990 million to $1.07 billion, deferred revenue of $330 million to $335 million.

Total CapEx and capital contributions of $975 million to $1.075 billion, free cash flow of negative $175 million to negative $95 million, and retained free cash flow of negative $435 million to negative $355 million. In addition, we provided capital and cash flow guidance in the event that forward construction of MVP is not commenced in 2023. In that scenario, capital expenditures and contributions would be lower by approximately $445 million, and free cash flow and retained cash flow would each be higher by approximately $450 million. I’ll now hand the call back to Tom.

Tom Karam: Thanks, Kirk. As we appropriately focus on MVP, the value of our base business and existing assets sometimes gets overshadowed. Today, we have a gathering business anchored by over 5 billion cubic feet per day of minimum volume commitment. Our gathering system traverses Tier 1 acreage across Southwestern Pennsylvania and Northern West Virginia. The significant scale of our systems, combined with system integrations and return to pad drilling will drive sustaining gathering CapEx lower over the coming years. We anticipate a steady stream of annual growth capital investments in compression, and we are positioned to capture new wellhead gathering and header opportunities from our many producers. Our nearly 4.5 Bcf per day transmission system offers unmatched optionality and flexibility for customers to reach long-haul takeaway pipelines and tap into local markets.

The high demand for available pipeline capacity was on display this quarter when we saw significant interest in our open season for newly available capacity. We’ve already secured one new commitment and are negotiating with several others. Beyond leveraging our latent capacity, we’re focused on developing projects to extend and expand the system. The OVCX project is a good example, as it will add incremental capacity into REX and Rover pipelines, in addition to the many growth opportunities the transmission business is supported by a weighted average contract life of 12 years and a very stable cash flow profile. In fact, in 2022, more than 90% of transmission revenues were generated from firm reservation fees. And lastly, the Water team is developing, what I believe, will become the premier mixed-use water system in the basin.

A system that all nearby producers will want and need access to. The team took a business that was primarily a fresh-water delivery service, recognized where the market was headed and executed a strategy that maximizes the reuse of produced water. Not only does this create attractive investment opportunities and growth, but it also has significant environmental advantages by reducing freshwater utilization and the need for trucking. In closing, be assured that we are doing everything within our control to get MVP across the goal line, and at the same time, we are focused in executing on the base business that is as strong as ever. With that, we’re happy to take your questions.

Q&A Session

Operator: Our first question comes from the line of TJ Schultz with RBC Capital. Please go ahead.

TJ Schultz: Great, thanks. Appreciate all the information. Just first on MVP. So to start construction by this summer, I guess the question is, what’s the next critical hurdle for you all too clear? Is it just a function of the West Virginia DEP addressing the issues raised by the court, maybe how quickly you think they can turn that around? And then at a high level, your comment was that this is all contingent on no additional court intervention, which just seems unlikely from where I sit. So does that mean something from a legislative standpoint is needed to start work this summer? You highlighted the Granholm letter being very supportive

Tom Karam: TJ, thanks for the question. I think the road map of permits and required re-issuance of permits is pretty clear, and it’s on the Federal dashboard. I forget the name of it. But we expect all of those permits to be reissued and valid over the next couple of months, beginning in a couple of weeks when we expect the Forest Service and BLM. Each of those would be required in order for us to commence construction. I understand your skepticism on the Fourth Circuit. I don’t know that I share that dire a position. Going back to my comments, this is, for most of the permits, the third round of permits. Each time, the agencies, both State and Federal went back and put more man-hours, more analysis, more work behind them to far exceed what the standards are to withstand litigation.

And I am a believer that when you do the right thing, and that you follow the law and the rules, the law should be on your side. So it’s our position that while we understand skepticism out there, that we have done everything required of us under the law, and these permits should be durable and withstand litigation.

TJ Schultz: Okay, understood. But specifically on the permit that was vacated last month, it sounds like you are in close contact with the DEP, that’s addressing those issues. I mean — maybe if you can get a little more granular on kind of what they’ve got to get through. Is it reasonable that they can get through that within the next couple of months?

Tom Karam: Well, it’s pretty reasonable that all of the issues have been identified that the court cited in terms of the vacatur of the permit. And we’ve been in close contact with them in terms of understanding the issues around curing those things. But I can’t speak for the DEP as to timing. We’re just optimistic that the timing will fall within our schedule to complete the project by the end of the year, and get mobilized sometime later this summer.

TJ Schultz: Okay, that makes sense. Just lastly from me, on the dividend, just given the uncertainty on MVP, was there conspiration to eliminate the payout until the path forward is more clear? Or how do you view sustaining that, if you don’t start construction on MVP this summer? Thanks.

Kirk Oliver: Yes TJ, this is Kirk. Obviously we’re acutely focused and aware of the stress that these delays have put on the balance sheet. But we’re not going to speculate at this time on any kind of actions around the dividend.

Tom Karam: Thanks, TJ.

TJ Schultz: Okay. Yes, thank you.

Operator: Our next question comes from the line of Brian Reynolds with UBS. Please go ahead.

Brian Reynolds: Hi, good morning everyone. Maybe just to touch on the guidance update, some moving pieces between EBITDA, deferred revenue, and free cash flow obviously going to the upside. Just kind of curious if you can just talk us through the moving pieces, perhaps on maybe the base business, was there any change and you know, gathering and transmission assumptions, just given the headline nat gas and just given what’s happened in the Fourth Circuit, should we — what are the potential differences between the with MVP and without MVP guidance at this point given that year-end ’23 is pretty tight at this point?

Tom Karam: Yes, Brian, this is Tom. So just going back to what we put out there, right, Q1 had the benefit of the gathering contract buyout and the transmission contract buyout. Q1 also benefits from the simple seasonality in transmission. And then we had a pretty strong first quarter in the Water business, we don’t necessarily expect that same level in the second quarter or for it to be linear throughout the year. We do expect improvement in the business and growth in the business, but it won’t be linear. So there are some moving parts, and then you have to always factor in, because the — for modeling purposes, MVP is now later in the year, that affects the deferred revenue calculation. So there weren’t any step changes as it relates to the guidance and our performance in our gathering or transmission business.

It’s just those, the nuances of the deferred revenue sliding the in-service date a quarter for MVP, and then some of the seasonality around our Water business and those two one-time buyouts in Q1 of the gathering and transmission contract.

Brian Reynolds: Thanks. And then as a quick follow-up, it seems like deferred revenue could maybe slightly move up if MVP was pushed into ’24. And then on CapEx, fair to assume that free cash flow could increase for ’23 just given CapEx deference into ’24 in that scenario?

Tom Karam: Yes, those are fair assumptions.

Brian Reynolds: Okay, thanks. And then as a follow-up on the — with Rager methane leak, $4 million OpEx in 1Q, some incremental costs looking ahead. Just kind of curious, I know there’s still some incidents being resolved into the root cause. But how should we think about potential future liabilities related to the Rager methane leak? Thanks.

Diana Charletta: So we have worked into guidance $8 million to $10 million of expense for this year. We think we’re there at that range as far as what we know now. And there is about $5 million to $10 million of capital total for this year as well.

Brian Reynolds: And is that related to just cleanup costs or is that related to potential — accounting for potential fines? And is there an estimate around that from the EPA?

Diana Charletta: We did account for potential fines last year. So there was about an $8 million expense for the incident last year. And our reserve for fines, as far as, what we know right now are in that number.

Brian Reynolds: Okay, great. Appreciate all the color. And enjoy the rest of your morning. Thank you.

Diana Charletta: Thank you.

Operator: And there are no further questions at this time. I will turn the call back over to Tom Karam for any closing remarks.

Tom Karam: Thank you all for joining us today. And hope everybody has a good week. Thank you. Bye.

Operator: Ladies and gentlemen, that will conclude today’s meeting. Thank you all for joining. You may now disconnect.