Equitrans Midstream Corporation (NYSE:ETRN) Q2 2021 Earnings Conference Call August 2, 2022 10:30 AM ET
Company Participants
Nate Tetlow – Vice President, Corporate Development and Investor Relations
Tom Karam – Chairman and Chief Executive Officer
Diana Charletta – President and Chief Operating Officer
Kirk Oliver – Senior Vice President and Chief Financial Officer
Conference Call Participants
Jeremy Tonet – JP Morgan
John Mackay – Goldman Sachs
Neel Mitra – Bank of America
Michael Blum – Wells Fargo
Alex Kania – Wolfe Research
Brian Reynolds – UBS
Operator
Hello and thank you for standing by. My name is Rutina and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Equitrans Midstream Second Quarter 2022 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Nate Tetlow, Vice President of Corporate Development and Investor Relations Chairman and CEO. Please go ahead.
Nate Tetlow
Good morning, and welcome to the second 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 (800) 770-2030 or (647) 362-9199. 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-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 and 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. And good morning, everyone. Today, we recorded second quarter results ahead of our forecast, including net income of $74 million, adjusted EBITDA of $264 million and deferred revenue of $89 million. We also increased our full year financial guidance. Kirk will provide details on the financial results in a few minutes. The base business continues to deliver solid results, we secured a nice compression growth project that will further enhance our core assets. And we will continue to make progress with our many ESG efforts as detailed in our recently published Corporate Sustainability Report. On MVP, we reiterate the targeted pooling service state during the second half of 2023 at a total project cost of $6.6 billion. We are encouraged by and appreciate the work being done by the federal agencies on the permitting renewal process. We remain focused on everything within our control. And belief projects like MVP that follow every required process and receive every required permit should prevail.
And now I’ll turn it to Diana for the operations update and then Kirk will discuss the financial results. Diana?
Diana Charletta
Thanks, Tom. Good morning, everyone. I’ll start with gathering. During the quarter, we entered into an agreement with a producer customer to add booster compression to existing facilities backed by a firm long-term agreement. The project is targeted to be in service in mid-2024, with an investment total of about $70 million. On compression projects like this, we typically realize a build multiple in the four to six times range. At a high level, we still believe that A basin volumes will remain roughly flat until further take away 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 plans and pad timing.
Moving on to transmission. Earlier this year, we announced the Ohio Valley Connector Expansion or OVCX project and began the FERC application process. In July, FERC provided its notice of intent to prepare an environmental impact statement for the project. And based on the expected permitting timeframe, we are now targeting an in-service in the first half of 2024. OVCX will add about 350 million cubic feet per day of deliverability on our Ohio Valley Connector pipeline, which provides access to the midcontinent and Gulf Coast markets through interconnects in Claridon, Ohio. On the water side, we continue to accept our water EBITDA of approximately $30 million for the year and are making good progress on the mixed use system build out.
Next and update on ESG. Last week, we released our Annual Corporate Sustainability report. The report utilizes the Global Reporting Initiative newest consolidated set of GRI Standards 2021 and continues to follow the SASB Oil & Gas Midstream standards. The report also reflect the results of our 2022 materiality assessment, which for the first time included input from both internal and external stakeholders. In 2021, we formalized many commitments including the adoption of a supplier Code of Conduct, human rights policy and stakeholder engagement and community investment policy. And more recently, we published our environmental justice policy. As outlined in our climate policy, we are also taking active steps toward achieving the targeted 50% reduction in Scope 1 and Scope 2 methane emissions by 2030.
For example, last year, one of our methane reduction projects included the conversion of pneumatic controller at some of our compressor stations. As we exit 2022, this pneumatic conversion project together with additional methane reduction initiatives that we continue to implement, are expected to result in an estimated 20% decrease in methane emissions relative to our 2019 baseline inventory. There are many highlights to be found in the report including those around community partnerships and local giving, safety and environmental leadership, workplace culture initiatives and diversity inclusion. I encourage everyone to access the full report through our website at equitransmidstream.com to see the details of our ESG effort.
I’ll now turn the call over to Kirk.
Kirk Oliver
Thanks, Diana. And good morning, everyone. Today, we reported second quarter net income attributable to ETRN common shareholders $55 million and earnings per diluted ETRN common share of $0.13. Net income was $74 million. Adjusted EBITDA was $264 million and deferred revenue was $89 million. We also reported net cash provided by operating activities of $351 million and free cash flow of $184 million. Net income attributable to ETRN common shareholders was impacted by several items, first by a $40 million unrealized gain on derivative instruments, which is reported within other income. This is related to the contractual provision and entitling ETRN to receive cash payments from EQT, conditioned on specific NYMEX Henry Hub Natural Gas prices exceeding certain thresholds post MVPs in-service and through 2024,. Second by a $25 million loss on extinguishment of debt, which is related to the purchase of $1 billion of aggregate principal amount of EQM senior notes and tender offers. And lastly by a $60 million reduction of valuation allowances because of decreases in deferred tax assets. This gets reported within the income tax expense line.
After adjusting for these items, second quarter adjusted net income attributable to ETRN common shareholders was $47 million and adjusted earnings per diluted ETRN common share was $0.11. ETRN train operating revenue for the second quarter of 2022 was lower compared to the same quarter of last year by $20 million. This is primarily from the impact of deferred revenue, lower gathered volumes and lower water services revenue. Operating expenses for the second quarter of 2022 were $70 million lower than the same quarter last year, primarily as a result of a $56 million impairment of long lived assets in the second quarter of 2021. The remaining decrease was from lower SG&A and O&M expensive. For the second quarter, ETRN will pay a quarterly cash dividend of $0.15 per common share on August 12, to common shareholders of record at the close of business on August 3rd.
In June, we successfully access the bond market to address near-term debt maturities. We issued $1 billion of new senior notes split between a five year tranche and an eight year tranche. Net proceeds were used to purchase 500 million of the outstanding 2023 notes, 200 million of the outstanding 2024 notes and 300 million of the outstanding 2025 notes. In early July, EQT elected to receive $196 million cash payment to forego approximately $235 million future rate relief. We have ample availability under the revolver to make the payment. Because we no longer will be providing the $235 million of rate relief under the gas gathering agreement. The average gathering rate used for GAAP reporting will increase by approximately a $1.00. This slight increase in the average gathering rate means we’ll be deferring less revenue into future periods. This update is reflected in the financial guidance provided today.
As mentioned on the heels of a strong Q2, we have increased our full year guidance. For the full year 2022, we now forecast net income of $255 million to $325 million. Adjusted EBITDA of $1.015 billion to $1.085 billion and deferred revenue of approximately $340 million.
I’ll now hand the call back to Tom.
Tom Karam
Thanks, Kirk. So in summary, the base business and operations remain resilient. We’ve added a compression growth project that will enhance our core business. We’ve addressed near term debt maturities, and we are working hard on completing the MVP permitting process. It remains clear that our abundant domestic natural gas reserves must be developed and transported to meet the world’s increasing demand for reliable energy. It’s also clear that MVP would not only provide reliable energy, will also play a key role in our energy security as the geopolitical unrest continues. As we work toward the reissuance of permits, Mountain Valley recently completed its updated supplement to the biological assessment, which was submitted to the US Fish and Wildlife Service on July 29. We believe this comprehensive document, which far exceeds the legal and regulatory standards for the issuance of biological opinions, will address the concerns outlined in the Fourth Circuit’s decision to vacate and remand our previously approved 2020 Biological Opinion as well as issues raised by project opponents.
In addition, as part of MVP certificate extension process, we were extremely pleased with the support letters that were filed with FERC by several southeast utilities, and many Appalachian Basin producers. These companies offer the best real world insights into the consequences of inadequate access to natural gas supplies, and further highlight the critical need for MVP. And last, as it relates to the proposed Federal Permitting Reform and Jobs Act, announced yesterday, the need for this proposed bill should be crystal clear. By creating a very defined set of rules, this proposed legislation provides for a continued thorough review and approval process that is led by the expertise of federal agencies, and provides best practices for public participation.
It addresses and ensures our nation’s ability to produce and deliver our vast domestic energy resources, including renewables, and is absolutely essential for our nation’s energy security. It enhances our ability to construct export facilities to deliver energy to our allies, as well as our ability to effectively transition to a lower carbon future. This proposed permitting reform is essential to address the issues that have presented costly and time consuming delays in the construction of energy infrastructure, and supports Americans demands to execute a timely transition to clean energy, while at the same time ensuring energy reliability and affordability. A perfect case in point is our MVP project, which has been collateral damage as a result of an uncertain permitting review process and judicial system. Most importantly, this comprehensive reform goes far beyond MVP. It is about furthering our nation’s role as a leading energy producer for both natural and renewable resources in support of our national security and our allies. While MVP is nearing the end of its long and delayed permitting process, this proposed legislation will benefit an MVP expansion and the MVP Southgate project, as well as other energy infrastructure projects by providing a timely and certain permitting process, which is just as important for renewable energy infrastructure projects, as it is for oil and gas.
We look forward to further developments relating to this important and timely legislation. And we applaud the steadfast leadership and resolve of Senator Manchin in spearheading this legislation.
With that, we are happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Our first question will come from the line of Jeremy Tonet with JP Morgan,
Jeremy Tonet
Hi, good morning. Just wanted to kind of follow up with some of your points at the end there. There’s been media reports have indicated a separate side bill that Senator Manchin has proposed that could directly aid MVP pipeline permitting, just wondering if you’re familiar with these initiatives and if you can provide any thoughts there?
Tom Karam
Yes, Jeremy, thanks for the question. The proposed legislation that I referenced, the Federal Permitting Reform and Jobs Act is a comprehensive permitting reform bill that includes the direct treatment for MVP. So there is no additional side bill to that. That is the proposed legislation. And as you might have suspected, we’ve been engaging actively with Democratic and Republican senators for quite some time now, not only on MVP specific issues, but the broader reform issues. And we think much of what was disclosed yesterday, addresses those permitting reform issues that would be beneficial to all energy infrastructure, as I highlighted oil and natural gas infrastructure as well as renewable energy infrastructure.
Jeremy Tonet
Got it. Thanks for that. And if this bill were to be passed, how might that impact the expected timeline for MVP at this point?
Tom Karam
It’s too early to tell and it all depends on the timing of the legislation itself. But suffice it to say that we’re clearly pleased with this proposed legislation, and we’re cautiously optimistic that it will be passed in the near term. And once we get that — those data points, we’ll be able to revise our guidance as needed.
Operator
Your next question comes from the line of John Mackay with Goldman Sachs.
John Mackay
Hey, thanks for your time. I wanted to pick up if I can on just those last couple questions. Are you and understanding it is early days, are you comfortable with this potential legislation getting you through kind of, let’s say all the remaining issues for MVP, and I’m specifically thinking of the ongoing Fourth Circuit cases. Just wondering if you can comment on that.
Tom Karam
Yes, so John, let me respond. This is Tom, let me respond two ways. We’re comfortable and confident in the ordinary course process that we’re going through right now with the reissuance of the biological opinion, and our efforts to get the Army Corps and through the Fourth Circuit, we have a high degree of confidence that all of our submissions on our work far exceed any of the thresholds to have those permits issued and withstand judicial review. So that’s answer A, answer B is yes, we are confident that the proposed legislation what’s included in there would provide the requisite certainty around MVP.
John Mackay
All right, that’s great. And it’s clear, thank you. Maybe just pick up that last one. Let’s say we do still have to kind of go normal course for this. You might just sharing some thoughts on what you think of for the timing in terms of getting the federal permits and also hearing back from the FERC on the timeline extension. Thanks.
Tom Karam
So we have outstanding guidance that says second half of 2023 is when we expect to put MVP in service that incorporates the ordinary course, if you will process to complete with the permitting and get through the Fourth Circuit. So that’s already within our guidance.
John Mackay
With the permits probably is coming by the end of this year. So you can start construction early next year. Is that still the right way to think about it?
Tom Karam
Correct. We’ve provided our supplemental to the Fish and Wildlife, we expect them to act timely in that. We don’t have an exact date as to when they would issue the actual opinion. But we expect to have all of those permits in hand by year end.
Operator
Your next question comes from a line of Neel Mitra with Bank of America.
Neel Mitra
Hi, good morning. I wanted to understand just the current process right now. So can you describe where you are in the process with the Fourth Circuit on the West Virginia and Virginia water permits? And then when you would file for the Jefferson National Forests permit, I’m assuming you need the biological opinion first.
Tom Karam
So, Neel, the biological opinion is like the gatekeeper for the other agencies to actually issue their permits that would be the Forest Service, as well as the Army Corps of Engineers. The 401 litigation as it relates to Virginia, and West Virginia is ongoing through the Fourth Circuit. And I think that should run through the fall toward the end of this year. So again, all of those things are in process. We’re confident that we’re going to prevail, and exceed all statutory requirements for this sustained permits.
Neel Mitra
Okay. And then I did want to ask a question about the proposed legislation. So I wanted to understand kind of the interplay between legislation and the judicial branch, is there a way for legislation to be passed, so that the Fourth Circuit can intervene on past issues, like things in progress, like the water permits, as well as future issues. And there’s also other media reports saying that it could be pushed to the DC Circuit rather than the Fourth Circuit. So I was just wondering how that would fit together the legislation and the court cases there, because obviously the Fourth Circuit has been the major issue in terms of moving the project forward.
Tom Karam
Neel, I want to be careful not to swim outside my lane and talk about things that we can’t state with confidence and certainty. What I can tell you is that the proposed legislation provides the certainty that we needed MVP in a manner that is consistent within Congress’s purview.
Operator
Your next question comes from the line of Michael Blum from Wells Fargo.
Michael Blum
Thanks. Good morning, everyone. Yes, just wanted to first just clarify one of your earlier comments. Are you saying that what the media is reporting as a quote unquote, side deal between mansion and leadership is actually just the Federal Permitting Reform and Jobs Act? Or did I hear that correctly?
Tom Karam
Yes, I’m not commenting on any characterization, Michael, good morning, by the way. The only thing that I can respond to is the pieces of legislation that we’re aware of, are the Inflation Reduction Act. And the Federal Permitting Reform and Jobs Act. They’re the only two pieces of proposed legislation that we’re aware of and within the Federal Permitting Reform and Jobs Act, are many of the permitting reforms that our industry as well as the renewable industry is really anxious to have passed. And within the body of that proposed legislation is the direct focus on MVP.
Michael Blum
Okay, got it. Understood. Appreciate that. Just had another unrelated question. Just curious if you’re seeing any change in messaging or tone from your producer customers around drilling activity or plans to change drilling activity in light of the higher natural gas price environment we’re seeing.
Tom Karam
Yes, look, we can’t speak to the production forecasts of our customers, it’s up to them to speak publicly about that. What we can point you to, are public statements that I think some and maybe all of them have made about the takeaway capacity constraints within the basin, and that the need for additional takeaway capacity is one of the limiting factors in the ability for the basin to grow.
Operator
Your next question comes from the line of Alex Kania with Wolfe Research.
Alex Kania
Sorry, I was on mute. Good morning. Just a question on, in the press release. You mentioned there’s a discussion on kind of re-scoping the Southgate extension, I was wondering if you could provide a little bit more color on what that could entail. And then maybe again, maybe putting the cart before the horse just if there’s been any kind of evolving discussions that you’ve been having with entities just on trying to boost egress beyond what’s been, what’s going forward already cited under MVP for all these other uses of gas for export particular.
Diana Charletta
Yes, so this is Diana, Good morning. We don’t have an update right now, on Southgate, we do continue to have constructive conversations and discussions with our existing customer and potential customers. So I think the news, and the environment that we’re in right now is positive. And we continued to have those discussions to fit exactly what they need when they need it.
Operator
[Operator Instructions]
Your next question will come from the line of Brian Reynolds with UBS.
Brian Reynolds
Good morning, everyone. As a follow up you mentioned side deal, there’s a revision of the Clean Water Act is included in the Federal Permitting Reform Act ultimately, kind of curious if this would have any impact on MVP timeline, and whether any changes in the ultimate permitting process could unintentionally impact the existing timeline for the buy up Army Corps in the water permit, et cetera. Thanks.
Tom Karam
So I don’t think there’s going to be any impact on the timing as it relates to anything that’s in the proposed permitting provisions. I don’t think this is a side deal. I think this is a necessary piece of proposed legislation to make the industry both the oil and gas industry and the renewable energy industry more efficient in constructing infrastructure. And if you talk to anyone in the industry, we’ve been hoping that we could get such reforms. So I think this is a very important piece of legislation that both sides of the aisle have been supporting. And now’s the time for it to get passed, because there was a piece of leverage that may or may not have played into it. But for us, this is a critical piece of legislation of for this country’s ability to remain energy secure and independent, and to provide for an orderly transition over time. So first, part of your question is no, there’s no impacts on the timing as it relates to what’s proposed in this legislation. And secondly, this is a very important piece of legislation.
Brian Reynolds
Understood, and then as a follow up, appreciate the color from the energy permitting perspective. But maybe to switch to the tax side, there are proposals as it relates to corporate minimum tax. In addition to impact the prior NOLs, was curious if you could speak to the ETRN’s exposure to potentially not being able to offset future earnings of prior NOLS given MVP delays from prior years. Thanks.
Kirk Oliver
Yes. This is Kirk, Brian. Yes, we’ve looked at that. We don’t think it’s going to have any impact on us. Obviously, we’ll keep an eye on the language if anything changes. We’ll keep everyone updated. But as it stands right now, we don’t see any impact on us.
Operator
With that, I’ll turn the conference back over to management for any closing remarks.
Tom Karam
Thank you very much for joining us today. We’re very pleased with the results of our quarter. Our business remain strong. We hope that all of you on the call today will support this proposed energy permitting reform legislation and let everybody that you talked to know that this is critically important for the industry. With that everybody have a safe day and enjoy your weekend to come. Thank you.
Operator
Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.
Be the first to comment