ETRN (2020 - Q2)

Ladies and gentlemen, thank you for standing by and welcome to the Equitrans Midstream's Q2 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] I would now hand the conference to your speaker today, Nate Tetlow. Thank you. Please go ahead. Nate Tet

Good morning everyone and welcome to the Second Quarter 2020 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 800-585-8367 or 416-621-4642. The conference ID is 8447957. Today's call may contain forward-looking statements related to future events and expectations. Factors that could cause the actual results to differ materially from these forward-looking statements are listed in today's news release and under risk factors in ETRN's Form 10-Ks for the year ended December 31 2019, which is filed with the SEC and as updated by any ETRN's quarterly report on Form 10-Q for the three months ended June 30, 2020 to be filed with the SEC and any subsequent Form 10-Qs. Today's call may also 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 and Brian Pietrandrea, Vice President and Chief Accounting Officer. After the prepared remarks, we will open the call to questions. With that, I'll turn it over to Tom.

Thanks, Nate. Good morning, everyone. I hope you all are continuing to stay safe in these difficult times. We've remained extremely grateful to the frontline healthcare and essential workers for their tireless efforts. For us, the dedication and professionalism of our workforce has never wavered. Our field and gas control teams haven't missed a beat to continuing to operate and maintain our assets and our various back office groups continue to execute, while working from home. This dedication is reflected in our financial and operational results for the quarter, which came in at the high-end of our guidance range. Kirk we'll give you the details in a few minutes. Let’s begin with our corporate simplification. In mid June we completed the final step of our simplification plan with the acquisition EQM. E-Train’s now a single C corp. with several key attributes. First E-Train’s stable cash flow profile allows us to be resilient in this or any environment. Second we are focused on delevering and strengthening our balance sheet. Third deploying capital efficiently is core to our business. And our recent gathering agreement with EQT provides meaningful capital efficiency. And last, we've remained confident that we will get MVP over the goal line in early 2021. Putting all of this together, our long-term strategy is designed to consistently generate substantial free cash flow, allocate our capital and free cash flow with discipline and deliver maximum value to our shareholders. It is also important that we operate responsibly, and one of our primary goals is to be among the leading ESG companies in the midstream sector. For E-Train ESG management practices are intrinsic and deliver value that goes beyond financial drivers. And I am pleased to announce that, we've released our first annual corporate sustainability report last week, which was produced in accordance with GRI's core reporting disclosures and also incorporated sand free oil and gas Midstream standards. This report is an important reflection of our accomplishments, our commitments and future endeavors, highlighting the importance of maintaining trust and transparency among all of our stakeholders. I'll now turn it over to Diana, who will provide an operations update, then Kirk will provide a financial update and I'll come back for some closing remarks before we open the line to questions. Diana?

Thanks, Tom and good morning, everyone. Let's start with MVP. Over the last several weeks significant legal and regulatory progress has been made. On June 15th, the Supreme Court of the United States reversed a lower court decision regarding the Forest Services Authority to grant a right away to cross the Appalachian trail. This positive ruling clears the path for MVP's Appalachian trail crossing. MVP expects a new biological opinion will be issued shortly, at which point, certain forward construction activities will resume upon approval from FERC. Following the biological opinion, we expect to receive the nationwide permit to us from Army Corps, which combined with FERC's approval will allow the water body crossing activities to resume. Lastly, we expect to receive the right of way permit for the Jefferson National Forest in the fourth quarter, allowing us to complete the 3.7 miles of forest work. We continue to target in early 2021 full in service date for MVP. Based on the project's current overall budget of approximately $5.4 billion E-Train expects to fund approximately $2.7 billion of the overall cost. It is possible however that, total project costs could increase by approximately 5% due to potential construction plan adjustments associated with judicial and regulatory outcomes. E-Train expects that it may be required to fund the approximately $175 million related to the potential cost increase. There is a significant amount of demand for gas in the Southeast, and we believe MVP will play a critical role in meeting these demands. MVP provides direct access to the largest natural gas producing region in the country and offers pipeline diversity for potential demand pull customers. We feel the probability of an MVP compression expansion is higher without the Atlantic Coast pipeline. Compression expansion can add approximately 500 million cubic feet per day of capacity. In addition to the potential mainland expansion, we're encouraged by the opportunities on South Gate and other potential lateral to serve customers in the Southeast. On South Gate the project received the certificate of public convenience and necessity from FERC on June 18. Upon receiving all the necessary permits and authorizations, construction is expected to begin in 2021 and has the target in services in 2021. South Gate has a total project cost estimate of approximately $450 million to $500 million. In terms of our operations, our teams are following strict pandemic related working protocols as they continue to provide safe and reliable midstream services for our customers. During the second quarter our gathered volumes were impacted by EQT’s temporary production curtailment, the curtailment averaged about 1.2 BCF per day, over 45 days during the quarter. In July the curtailed volumes were brought back online in a phased approach over several weeks. Finally, we remain committed to deploying our capital efficiently. We updated our full-year 2020 capital guidance this morning, reducing total CapEx by about $85 million versus the prior midpoint. About half of the decrease is driven by capital efficiencies related to the new gathering EQT agreement, as well as the efficiencies gained from other gathering contracts. The remaining decrease is primarily from capital shifting to 2021. I'll now turn the call over to Kirk.

Thanks, Diana. And good morning, everyone. This morning we reported net income attributable to ETRN common shareholders of $27 million and earnings per diluted share of $0.10. Net income was $143 million and adjusted EBITDA was $263 million. We also reported net cash provided by operating activities of $344 million. Free cash flow of $155 million and retained free cash flow of $88 million. There were a few items that impacted second quarter net income attributable to E-Train common shareholders. First, we incurred about $11 million of transaction costs primarily related to the EQM merger. Second, there was a $27 million premium associated with the redemption of a portion of the EQM preferred units in connection with the EQM merger. The premium represents the difference between the payment to redeem the convertible preferred units and the carrying value of the redeemed units. This is classified as a preferred dividend and reduces net income attributable to E-Train common shareholders. Lastly, net income was affected by a $13 million unrealized gain on derivative instruments, which is reported within other income. As a reminder, the unrealized gain on derivative is due to an agreement entitling E-Train to receive cash payments from EQT conditioned on specific NYMEX, Henry hub, index prices exceeding certain thresholds over three years post the MVP and service date. After adjusting for these non-recurring items and gain on derivative, adjusted net income attributable to E-Train common shareholders was $57 million and adjusted earnings per diluted share was $0.22. As a reminder, billing under the new gathering agreement will EQT began in the second quarter. Revenue from the MVCs is recognized, utilizing an average rate applied over the 15 year contract life and the difference between the cash received from the contracted MVC and the revenue recognized results and deferral of revenue into future periods. For the second quarter deferred revenue was $74 million. E-Train operating revenue for the second quarter was lower compared to that of last year by $66 million, primarily from the impact of the deferred revenue and partially offset by increased revenue from higher MVCs on gathering and water. Second quarter 2020 operating revenue was also impacted by the temporary production curtailments. Operating expenses for the second quarter of 2020 were $75 million lower than the second quarter of 2019. The decrease was mainly driven by an $80 million impairment of long-lived assets in the second quarter of 2019. For the second quarter of 2020, E-Train will pay a quarterly cash dividend of $0.15 per share on August 13th to common shareholders of record at the close of business on August 4th. We have ample liquidity to support our capital investment plan. On June 18th, we completed a $1.6 billion EQM senior note issuance. The proceeds from the offering were used to repay outstanding borrowings under the $3 billion EQM revolving credit facility, and for general partnership purposes. At the end of the second quarter, we had approximately $2 billion available under the EQM revolver and approximately $200 million of consolidated cash. And finally, we increased our full year of 2020 earnings and cash flow guidance. At the mid point, we expect adjusted EBITDA of approximately $1.2 billion and free cash flow of $25 million. I'll now hand the call.

Thanks, Kirk. 2020 has been a very busy year for E-Train, and we are excited about where we are heading. We now have enhanced corporate governance, long-term contracts with stable cash flow profiles, ample liquidity and a disciplined capital allocation policy. We've taken positive steps on ESG and have the line of sight on MVP's completion. We have now addressed almost everything that is within our control in order to be successful in this slow or no growth environment. We expect our free cash flow will continue to grow over the next three years, even without production growth. This is the cornerstone of our strategy. Please remember to stay safe, wash your hands and with that, we're happy to take your questions.

[Operator Instructions]. Your first question comes from Jeremy Tonet with JP Morgan. Please go ahead.

Hey. Good morning guys. This is James on for Jeremy. Just want to start off with maybe just the MVP updates there. Just to be clear, as necessary change from last quarter in terms of the necessity of the nationwide permit 12 to complete the pipeline or because you know, a lot of the conversation last quarter was on potentially getting those individual permits remaining. Has that changed at all with this quarter and what you're seeing now?

Hi. Good morning. This is Diana. No, the messaging really hasn't changed although we have gotten good news on the Nationwide 12. We expect that to be issued. So as long as this issue will continue with our original plan and across the water bodies that way, if for some reason there is another challenge or something different with the Nationwide 12, then we can fall back to the options that we talked about, I believe last time was different crossing message and individual permit options.

Got it, okay thanks and then can you remind me, is there a, a kind of a date for Corp benchmark to kind of get construction back going to kind of meet the early 21 service days?

So, there's a couple, we've been pivoting a lot, right. So, there's a lot of different combinations, but we do expect to get back to convert. But really, then there's another piece which is getting the US Forest Service permit to cross the National Forest. And that is expected in the fourth quarter. So, we still have that 3.7 miles to build after we get that permit.

And then just one more if I could just shift in kind of the conversation and maybe the leverage profile business. I saw the EQT is based on it because that was the best fit sure in the quarter. Is there any read through that E-Train there and I know none of the reading and reversal awaiting E-Train or maybe EQM. But how have conversations gone for you to see the terms of deleverage kind of creeping up in ex issue of MVP in service. And is there any leverage threshold that they come from the business where they might consider a downgrade?

Yes, this is Kirk. I'll take that one. Yes, we just recently did a bond deal on $1.6 billion. And all the agencies affirm their rating when we did that deal. So, we have been in dialogue with them. Any improvement in credit at EQT, helps us and we're committed to hitting our investment grade credit metrics, so and the agencies or obviously, mountain valley is the one thing that they're really keeping an eye on. But so far, they haven't changed their perspective since they affirmed the rating when we did the bond deal. I hope that answered your question.

And your next question comes from Spiro Dounis from Credit Suisse.

So, two quick follow ups on MVP, first as special model I communicated, I guess the reasons for the delayed biological opinion might be splitting hairs here in terms of which we could call it into just curious if there's been any communication there and then 175 million of potential additional costs. You have a sense of when that could actually start to be realized when we have a better sense of how much it's going to be?

So, on Fish and Wildlife, the consultation period did end, so there wasn't an extension to the consultation period. And what we're hearing is that they're doing their final reviews, which is good. We certainly support the agency taking the necessary time to produce a good opinion. So, I believe there's activity there and we expect something soon. On the additional dollars, really they were or are based on if there are different crossings and methods that need to be done or there are additional delays. So, the potential is there, but it'll just all depend on what we can do smoothly and what gets held up in the future.

Okay, understood. The second was just around EBITDA and thinking about the high low end of the range for 2020 at this point. Just curious what's driving it either side of it sounds like EQT could curtail again this fall. Just wondering, is that the only major variable at this point and does a low end compensate that already.

This is Kirk again. The range is really just a range that we have to use because we're estimating. But we haven't, it doesn't contemplate any further curtailments by EQT.

Got it. That's it for me. Thanks.

Your next question comes from Derek Walker from Bank of America.

Hey. Good morning, everyone. Thanks for the time. Maybe just a quick question around EQT’s comments on just sales and marketing some or all other capacity on MVP. I guess from your standpoint, how you guys viewing that? How does that kind of play into, I guess you also alluded to the MVP compression project as well. So I'm just trying to get a sense for some of the interplay there and is that potential rate that you would charge for compression similar to what you're charging now on the main line? Thanks.

Hi, Derek. This is Tom. I'll take part of that question pass the balance off, off to Diana. Look, we're supportive of EQT's desire to offload some of their capacity. We think that, it could be an opportunity to create a couple of different layers of benefit, certainly if they can optimize their transmission portfolio, that would make them more cost effective, as MVP operator and largest owner. We as partners have approval rights over the credit worthiness of whomever they release the capacity to own in essence, it could very well be an upgrade in the credit quality of our shippers, which would then read through and strengthen any underlying financing we may do at the MVP level. So, we view all of that as a positive, particularly the optimization by EQT of their transportation portfolio. They've shown themselves pretty adept and nimble at managing that portfolio, and the improvements they've made and could make with this release would push them further along the lines of getting back to their investment grade rating, which we think is a really positive read through for us. I think it's too early to talk about any rates, the MVP expansion. We're seeing active interest in that capacity and it's just a bit early, but we're certainly encouraged by the inbounds. And I think for now, we'll leave it with that. Diana, do you have anything to add to that?

No. I think that covers it. We're certainly anticipating that a compression expansion is an easier expansion than having between type or do something to that effect. And we can add about 500 million a day from an expansion perspective we believe.

Thanks. I appreciate the color. And maybe just a quick one on South Gate. I think you talked about construction starting with '21, and then also the in service date in '21. I guess, assuming that early in service '21 date, any sort of items around South Gate construction timeline. Do you feel like any kind of goes smoothly on the main line portion that construction process should go fairly smoothly? Just any items there that we should be thinking about for that project?

I'll Diana to answer the specifics about the construction although I would just offer that I haven't experienced any project that's gone really smoothly.

I think from a construction perspective, it's actually it's less challenging than what the main line was. So, the train is better, we’re farther south, it’s, it’s actually easier build from a construction perspective, which will help with environmental and erosion controls and that kind of thing.

Your next question comes from Shneur Gershuni from UBS.

Glad to hear everyone is well just to maybe follow up on a couple of questions here. Just starting off with the NWP 12, if it comes through and so forth, how much the crossings that need to be completed would really benefit from the NWP 12 versus the boring methodology. I understand it would be easier in general, but it's just sort of thinking about, like, how many are must haves that need that would really benefit from the NWP 12, so is there a percentage of crossings that you really would like to get done under that methodology versus having to default to the others if there are some challenges that often come down the road.

So, it's quite a mix, there are a number, probably about half that are six and one half dozen, the other, whether you do the open cut or a bore, it's not really much different. The rest, then there's a combination. I think the important thing is the ones that are really critical. We would try to do as quickly as possible, before anything is challenged and strategically go through it with that kind of thought process.

Okay, now that makes sense, and maybe as a follow up, just sort of giving the timing about when this could potentially come to fruition. How do we think about and how do you plan for the fact that some of this construction activity could be happening during a winter or rainy season type of environment, as well as with COVID-19 and the guidelines on how to construct in that type of environment. So, then if you can sort of give us some color and how you're prepared for that?

So, and the COVID-19 -- we have done in our other construction projects, we did hire a third party to help us manage that, just to make sure that we have everything in place and are following what we need to follow to keep everybody safe. From the winter perspective, there won't be a ton of construction left in the winter. So, that risk continues to be reduced as we go farther and farther into the year, although I will say, very unhappy to have missed the last couple prime months of dry construction period.

Okay, that makes sense, and maybe a sort of question with respect to the potential expansions, I mean it’s not even done yet. But now we're talking about expansion of MVP, using compression and so forth. I know that you're reluctant to talk about rates and so forth. But is it fair to conclude that the return profile of that type of expansion would be significantly higher than the base MVP that from a return perspective that you're putting in place right now? Is that the way to think about it?

Yes, it's typically a compression expansion is much more favorable when it comes to the returns because the pipeline construction is more expensive.

Alright. Perfect. Thank you very much. I appreciate the call today and have a safe day guys.

You too. Thank you.

And before we go to the next question, I might add that, any further conversations that we're having around capacity will be largely or almost entirely demand pull conversations, as opposed to the origination of MVP, which was a supply push. So, that changes the dynamics of the conversations with respect to how we look at the capacity and its underlying value. Thank you. Operator, next question. I'm sorry. Go ahead.

I was just going to say, just to clarify, so what you're effectively saying is that kind of demand pull you put in the compression as needed, so there's never a scenario where there's too much capacity and so forth, right? You can literally sequence it in as the demand shows up basically, right?

Yeah. I think that's fair, and I think the way we look at it is, we'll certainly have enough time to lock in any precedent agreements on that before we start construction. So, we'll know what the demand is.

Perfect. Thank you. I appreciate the color.

Your next question comes from Alex Kania from Wolfe Research.

Hey. Good morning. I have two questions. The first one is just really on the CapEx update, with the gathering CapEx coming down a little bit. Do you think that that kind of fully reflect the potential of what EQT has been doing on their side in terms of reducing development costs and optimizing that? Or is there still more runway as you look forward? That's the first question. The second one is I guess piling onto the MVP questions. But just to the extent you have this, I'm thinking about like permanent financing, it sounds like you would probably want to get more clarity on the disposition of FTE by EQT and maybe as well as thinking about what precedent agreements might be on expansion.

Diana, you talk about the CapEx first and then maybe I'll just, I'll follow-up with the expansion.

Yeah. So, actually I was going to pass the CapEx to Justin. I think that's a good one for him. So, Justin you want to take it?

Sure. Hi, this is Justin. I think the CapEx reductions you're seeing here in 2020 are somewhat reflective of the new gathering agreement in the capital protections we have there. It's also a continuation of our strategy to integrate systems. And when we can tie together gathering systems and our transmission system, we can start to realize some pretty substantial CapEx savings, leveraging existing assets, existing compression. As we look at EQT's ability to put together a combo path in the future, that's when we really see some benefit to us in terms of our gathering CapEx, and then as we look even further down the line, when they return to those same pads to drill out the rest of the laterals, our infrastructure is already been in place and our capital outlay for those projects will be minimal at best.

And then to your question about the expansion, I don't necessarily think that we're going to pin any additional financings around that. The project level financing to be done at MVP won't be done until after it's in service. So, we'll have all of the agreements in place there and in the expense and I think we should talk about 500 million a day of compression capacity which in a capital cost might be on an ad-hoc basis, maybe $400 million to $500 million or share, roughly $200 million or so, that would generate to the E-Train, maybe $65 to $70 million worth of EBITDA. So, it's not something that would require a financing. We have ample liquidity to move to fund that.

[Operator instructions] The next question comes from Chris Sighinolfi from Jefferies.

I just want to follow-up on these MVP question one more time. Just you had mentioned credit approval rights. Are there any other approval rights that you carry in the process it runs and actually monetizing it's FFT or transferring FFT?

I think the credit approval, right is the most important one. I don't think there are any other that are processed determinative.

Okay.

The short answer would be no.

Okay. And then, is there I mean, obviously Diana mentioned it, but with the cancellation of ACP, clearly ACP was being built by and owned by companies that had a stated need for gas in that region. So, what's with -- what you were saying about demand pull versus supply push? I'm just curious if they're successful in selling, if EQT is successful in selling its FT to somebody, like one of those parties that might want an expansion embedded sooner. I mean, is there a cost savings to doing it, while you're doing MVP completion, would you contemplate that? Or is it really something too far down the line?

Look, we will contemplate anything to try to be responsive to a customer. But I think that the compressed timeframe you're talking about we could compress it a bit. But just the verification process with FERC and some of the other hoops we have to jump through. I don't think we could accelerate it too much.

Okay.

But if you asked me, we'll certainly try. Let's put it that way.

Yes, no, no doubt. Okay. I didn't know what was entailed. And if it was even possible, I figured there might be an efficiency pickup, but there might also be something that sits out there that prohibits you from doing it so?

There's really no efficiency or synergy pick up and Diana, Justin correct me if I'm wrong, because this would simply be a compression addition on a new site, standalone site.

Okay, so you just put on your compressor unit add horsepower to the system, but it's not like you'd be upgrading a compressor beat is the new stand alone?

For their review, and it's added to certain of the existing sites as well. Right, Diana?

Maybe have lost.

Yes, this is Justin, that is correct. The compression expansion would entail a new site and then some horsepower additions at existing sites to get the throughput along the entire line.

Okay. It's much semantics. To your point, Tom, is that it's it would be relatively small. It's not the drive it wouldn't be the driving force behind anything?

Correct.

Okay. Well, I was going to ask another question but maybe I’ll just ask it broadly and you guys can correct me, if my understanding is correct, if it’s not correct. But, are these the following remaining items for MVP I guess first is Fish & Wildlife biological opinion, then you have the Nationwide 12, Diana had mentioned prioritizing problematic water crossings, but in effect, getting all of your water crossings done in an order that prioritizes those problematic areas. And then you still have the USFS sedimentation erosion study in Jefferson National Forest. I think it's anticipated in the fourth quarter. And then you can complete the three plus mile portion of work there, and then we're done. Is that a correct order of operations or I guess if not where am I wrong?

This is Diana. I actually got back in. Sorry about that. That's the correct order. Yes.

Is that a complete list or are there things that...

It is.

Okay. And then final question from me and that's just maybe for Kirk. Is there anything to be aware of in the guidance that, I didn't see there or would it be safe to effectively look at your full year net income and EBITDA outlook to track year-to-date results in your third quarter guide and get an implied fourth quarter look?

Yeah. There's nothing tricky there. You should be able to do that math.

Okay, great. Thanks a lot. I appreciate it.

Thanks.

There are no further questions. At this time, I will turn the call back over to the presenters.

Well, thanks everybody for joining us today. We appreciate the interest and we hope everybody stays safe and wash your hands, and we'll talk to you soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.