Equitrans Midstream Corporation (NYSE:ETRN) Q4 2022 Earnings Call Transcript

Equitrans Midstream Corporation (NYSE:ETRN) Q4 2022 Earnings Call Transcript February 21, 2023

Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Equitrans Midstream Year End 2022 Earnings 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 . It’s now my pleasure to turn today’s call over to Mr. Nathan Tetlow. Sir, please begin.

Nate Tetlow: Good morning, and welcome to the year-end 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 (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, 2021, and and as updated by our Form 10-Qs for factors that could cause the actual results to differ materially from these forward-looking statements. Also, the Form 10-K for the year ended December 31, 2022, is expected to be filed with the SEC later today.

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; 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 Patrandria, Vice President and Chief Accounting Officer; and James 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.

Tom Karam: Thanks, Nate, and good morning, everyone. Today, we reported full year 2022 results, including a net loss of $257 million, adjusted EBITDA of nearly $1.1 billion and deferred revenue of $345 million. Kirk will provide details on the financial results in a few minutes. I’ll start today by addressing MVP and the paths being pursued. First, on the permitting path, we are actively engaged with the relevant agencies as they work through yet another exhaustive round of analysis and review. Specifically for the biological opinion, based on the Fish and Wildlife Services recent statements, we expect the biological opinion to be issued by February 28th. And based on the permitting time line announced by the other agencies, we expect to receive all of the required permits and approvals over the next few months.

This timing will allow for mobilization of construction crews in the summer of 2023, which will position us to bring MVP into service in 2023. However, as we all know, we expect project components to yet again challenge these issued permits. As such, we believe the agencies are focused on issuing permits that will exceed all legal standards as well as address points previously raised by the Fourth Circuit. Projects like MVP that comply with every process and receive every approval should prevail, which is why we remain committed to the regular way permitting path. That said, we also believe that our country desperately needs federal permitting reform. This view has gained traction with members of Congress and the White House, especially since the passage of the Inflation Reduction Act, which promotes a variety of new infrastructure, primarily renewable projects.

Companies need to have some assurance that if permits our issue and construction is authorized, their investment won’t be endlessly held hostage by legal channels. On the legislative path, we were disappointed that Congress couldn’t pass a permitting reform bill in December during the lame duck congressional session. Although there are differences between and within the parties as to potential reform, we believe there remains support from both sides of the aisle to work on a bipartisan solution and we think there continues to be prospects for legislation in the new Congress. And now I’ll turn it over to Diana for an operations update, and then Kirk will discuss the financial results. Diana?

Diana Charletta: Thanks, Tom. Good morning, everyone. First, I want to address the storage well incident that occurred on November 6th at our Rager Mountain storage field, which is located in a remote area of Cambria County, Pennsylvania. Shortly after notification, Equitrans technicians arrived on site and observed natural gas escaping from the vent on a single storage well, which was working as designed to relieve pressure from the casing. We immediately notified the Pennsylvania DEP and FINSA, and engaged a leading specialty well control services company. The venting gas was successfully halted on November 19th. So during and after the incident, we were approved to withdraw gas from several other wells in the field for customer needs.

We currently do not have permission to inject gas into the Rager Mountain field, but we are having active productive discussions with FINSA and are hopeful that they’ll authorize us to inject gas during the coming season. We’ve completed an inventory verification test on the Rager field and comparing to the previous inventory tests, the results indicate the storage inventory was reduced by approximately 1.29 Bcf. We continue to evaluate whether and to what extent all of the inventory loss was due to venting or whether some was due to potential migration. The root cause investigation phase is now underway. We have engaged a leading firm with expertise in storage field incidents to conduct an independent investigation. And we also continue to closely coordinate our activities with the PA, DEP and FINSA.

In addition to the root cause analysis, we have initiated a comprehensive review of all of our storage wells and storage filled integrity. We will continue to work diligently throughout the review and expect to provide more income available. including the cause of the incident, once the root cause analysis is complete. Our 2023 guidance, which Kirk will review in a moment, does include expense and capital estimates related to the Rager incident based on what we know today. We are continuing to gather and evaluate information about the incident, including related financial impacts. So we will be very limited in what we can say today beyond what I’ve already provided in these prepared remarks. Now moving on to the segments. I’ll start with gathering.

In 2022, we averaged about 7.7 Bcf per day of gathered volume. Our outlook continues to be that A-Basin volumes will remain roughly flat in 2023 as producers hold to maintenance level development plans, largely driven by takeaway constraints in the basin. Today, we initiated 2023 gathering CapEx guidance of $235 million to $285 million. This includes approximately $40 million for the new booster compression expansion project that we announced in 2022, which is slated for in-service in 2024 and approximately $20 million for the other gathering growth projects. Moving on to transmission. Last month, FERC issued a final environmental impact statement for the Ohio Valley Connector expansion, or the OVCX project. The expansion will add about 350 million cubic feet 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.

We expect to receive all necessary approvals in the first half of 2023 and the project remains on track to be placed in service during the first half of 2024. Our 2023 transmission CapEx guidance is $90 million to $100 million, which includes approximately $65 million for the OVCX project. On the water segment, the mixed-use system build-out is going well. In 2022, we started operations at our first aboveground water storage facility, which has a capacity of approximately 150,000 barrels. We expect to bring the second aboveground water storage facility into service in the next few months. This will bring our total water storage capacity to about 350,000 barrels. In addition to storage, the water system will consist of approximately 70 miles of pipelines and two interconnects with the existing freshwater system.

We’re also discussing multiple opportunities with producers to potentially expand and enhance the systems as they continue to see the benefits of reducing the number of trucks on the road and simplifying the logistics of water handling. In 2022, we reported water operating income of $15 million and water EBITDA of approximately $35 million. And for 2023, we expect water EBITDA of approximately $40 million to $45 million. Lastly, on our ESG program, we made many advancements during 2022. Some of the highlights include: submitting our first voluntary CDP water security questionnaire, for which we received a score of B, completing the TCFD readiness assessment, instituting a new environmental justice policy and converting 10 compressor sites from high-bleed pneumatics to low-bleed or full-air pneumatics, which is in addition to the 10 sites we converted in 2021.

In addition to our company specific efforts, we also announced last month that Equitrans is joining other industry participants as a founding member of the Appalachian Methane Initiative. AMI is committed to further enhancing methane monitoring throughout the basin and facilitating additional methane emission reductions in the region. We are committed to the sustainability of our operations and look forward to continuing our efforts in 2023. I’ll now turn the call over to Kirk.

Kirk Oliver: Thanks, Diana, and good morning, everyone. This morning, we reported a full year net loss attributable to E-Train common shareholders of $328 million and a loss per diluted common share of $0.76. The net loss for the year was $257 million, adjusted EBITDA was $1.07 billion and deferred revenue was $345 million. We also reported full year net cash provided by operating activities of approximately $846 million and free cash flow of $380 million. For the quarter, we reported a net income attributable to E-Train common shareholders of $66 million and earnings per diluted E-Train common share of $0.15. Net income for the quarter was $82 million, adjusted EBITDA was $271 million and deferred revenue was $84 million. In the fourth quarter, we generated $99 million of net cash provided by operating activities and $136 million of free cash flow.

Several items impacted both the full year and the fourth quarter results. Net income attributable to E-Train common shareholders for the fourth quarter was impacted by a $5.1 million unrealized gain on derivative instruments, which is related to the contractual provision entitling E-Train to receive cash payments from EQT. These cash payments are conditioned on specific NYMEX Henry Hub natural gas prices, exceeding certain thresholds, beginning with the quarter in which MVP is placed in service and running through 2024. In addition, the quarter was impacted by $8.1 million of operating expenses related to the Rager Mountain storage incident that Diana described. After adjusting for these items, Q4 adjusted net income attributable to E-Train common shareholders was $58 million and adjusted earnings per diluted E-Train common share was $0.13.

The full year 2022 results were impacted by a $583 million impairment of our investment in MVP and an associated $70 million decrease in income tax benefit, primarily due to a valuation allowance placed on deferred tax assets. Other items impacting full year results include a $25 million loss on extinguishment of debt, primarily from the tender offers we executed in early 2022, a $10 million unrealized gain on derivative instruments, a $4 million gain on sale of noncore gathering assets, and the previously mentioned $8.1 million of expenses related to the Rager Mountain storage incident. After adjusting for these items, full year adjusted net income attributable to E-Train common shareholders was $200 million and adjusted earnings per diluted E-Train common share was $0.46.

Operating revenue for the year increased by $41 million compared to last year, and for the quarter, operating revenue increased by $109 million compared to the same quarter last year. Both the year and quarter were higher primarily from deferred revenue and increased water services revenue, and partially offset by lower gathered volumes. Operating expenses for the year were lower by $62 million compared to last year, primarily from a $56 million impairment of long lived assets in 2021 and lower SG&A expenses. For the fourth quarter, operating expenses increased by $18 million compared to last year, primarily from the $8.1 million of expenses related to the Rager Mountain storage incident and higher O&M, SG&A and depreciation. For the fourth quarter, E-Train paid a quarterly cash dividend of $0.15 per common share on February 14th to E-Train common shareholders of record at the close of business on February 6th.

And finally, the day we initiated guidance for 2023. With the ongoing uncertainty around the ultimate MVP path to completion and timing of forward construction and in-service, we’re providing guidance using two scenarios. The first assumes second half of 2023 in-service for MVP and the second assumes the absence of MVP forward construction and completion in 2023. Also, based on initial estimates, we’ve included approximately $8 million to $10 million of operating expenses and approximately $5 million of CapEx related to the ongoing work following the Rager Mountain incident and our 2023 guidance. While we are able to estimate these expenses and capital associated with the Rager Mountain incident, based on what we know today, under scenario two with the absence of MVP forward construction and completion in 2023, the full year forecast, our CapEx and capital contributions of $510 million to $630 million, free cash flow of $270 million to $350 million and retained free cash flow of $10 million to $90 million.

I’ll now hand the call back to Tom.

Tom Karam: Thanks, Kirk. Before moving to your questions, I want to acknowledge the outstanding work of our employees who continued to embrace our core values of safety, integrity, collaboration, transparency and excellence. Specifically, I want to acknowledge our employees who persevered while battling the extreme cold weather in December, and also those employees who have been directly managing the Rager Mountain incident with true professionalism and commitment. And lastly, for our stakeholders, as we look to the remainder of 2023, we are focused on operating a sound base business, keeping safety as a priority above all else and working as hard as we possibly can on all paths to get MVP to completion. With that, we’re happy to take your questions.

Q&A Session

Operator: Your first question comes from the line of Olivia Holford with Goldman Sachs.

Olivia Halferty: If we could start on the permit still outstanding from the Forest Service and the Fish and Wildlife Service. What data are you targeting to receive both of these permits in order to achieve a second half ’23 in-service date? And on that front, do you have any concerns on the second extension of the Endangered Species Act consultation period?

Tom Karam: No, we don’t have any concern. We’ve been in consultation and in agreement with that additional extension. The Fish and Wildlife put on the FERC docket of statement that extended the consultation period for the biological opinion to be issued by February 28th, which is next week. The permits to cross the Jefferson National Forest, the comment period from the Forest Service ends on February 21, 2023, and we expect the SEIS to be issued by April 15th. Then there will be a 30-day console of environmental quality review period, which would end May 15th. So we expect the Forest Service to issue immediately following that and the Bureau of Land Management within a day or two following that. We expect the Army Corps of Engineers to issue the individual permits to cross the water bodies in mid-April.

And subsequent to that, we expect FERC to lift the stop work order and allow work in the forest. And we should have about four to five months, probably closer to five months of remaining construction, which will allow us then to bring MVP into service in 2023.

Olivia Halferty: And then staying on MVP, given the cost overruns and labor price inflation we have seen with other large-scale North American natural gas projects. Do you see any risk for further MVP spending needs above the guidance provided today?

Tom Karam: Well, Olivia, MVP is 94% complete so that the other projects that you’re referencing, I think, maybe more vulnerable to large scale inflationary pressures. That’s not to say that there won’t be inflationary pressures with respect to MVP, but not of order of magnitude of projects that are not as far along as MVP. So we’ll just have to wait and see how that impacts but I don’t expect it to be a significant order of magnitude impact.

Operator: There are no further questions at this time. I will now turn the call back over to Mr. Tom Karam.

Tom Karam: Thank you, everybody, for joining the call today. I hope everyone has a good rest of your day and be safe out there. Thank you very much.

Operator: Ladies and gentlemen, thank you for participating. This concludes today’s conference call. You may now disconnect.