Equitrans Midstream Corp (ETRN) Q1 2021 Earnings Call Transcript

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Equitrans Midstream Corp (ETRN 4.27%)
Q1 2021 Earnings Call
May 4, 2021, 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Equitrans Midstream Q1 2021 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Nate Tetlow, Vice President of Corporate Development and Investor Relations. Please go ahead.

Nate Tetlow -- Vice President, Corporate Development and Investor Relations

Good morning, and welcome to the First Quarter 2021 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 and the conference ID is 2864556. 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, 2020, and is 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 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 will turn it over to Tom.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Thanks, Nate. Good morning, everyone. Today, we reported first quarter net income of $77 million and adjusted EBITDA of $308 million. Both exceeded our forecast. Our operating assets continue to perform well with gathered volume, park and loan activity and delivered water volume all stronger than our forecast. Kirk will provide some more details on the financial results in a few minutes.

This morning, we announced changes to MVP's target in-service date and budget. The changes will provide governmental agencies with the time needed to complete a comprehensive regulatory process that meets or exceeds all requirements and will withstand any potential legal challenges. Diana will provide more details in a minute. Operating safely, executing on our projects and building out our ESG platform will remain top priorities for us. I am proud to have recently signed the CEO pledge offered by the CEO Action for Diversity & Inclusion Coalition.

At E-Train, we believe diverse perspectives create growth and innovation, build stronger teams and ultimately provide more opportunities to drive and maintain long-term success. We also reaffirmed our opposition to the EPA's 2020 rollback of methane regulations. It is vital that the oil and gas industry act to reduce climate change impacts. We believe that methane controls and reduction in our industry need to evolve as we transition to a low-carbon economy, and E-Train supports the methane resolution under the Congressional Review Act.

As a reminder, we've established a target of 50% reduction in our methane emissions by 2030. I'll now turn the call over to Diana for the operations update. Kirk will provide the finance update, and I'll come back for some closing remarks before we open the call to your questions. Diana?

Diana Charletta -- President and Chief Operating Officer

Thanks, Tom, and good morning, everyone. Let's start with MVP. In February, MVP submitted applications to the U.S. Army Corps of Engineers and FERC to cross the remaining water bodies and wetland areas. This included submitting an individual permit application to the Army Corps and related 401 water quality certificates to West Virginia and Virginia for approximately 300 crossings and filing an application with FERC to amend the project certificate in order to change the crossing method to bores for approximately 120 crossings.

The respective agencies are concurrently reviewing our applications and performing the necessary analysis and reviews. Recently, both the Virginia DEQ and the West Virginia DEP requested additional time beyond the 120-day review period. We do support and expect that the Army Corps will grant additional review time. And as a result, we do not believe that we will receive the necessary approvals during the third quarter of 2021, which we previously expected. This shift in permit timing now introduces another winter season to navigate, which led to our updated in-service target and costs.

We are now targeting a full in-service date during the summer of 2022 and a total project cost of approximately $6.2 billion. E-Train expects to fund approximately $3.1 billion of the overall cost. Given the shift in MVP timing and expectations for the timing of Southgate permit approvals, we now are targeting starting Southgate construction in 2022 and in-service during spring 2023. In terms of our existing assets, we had a strong first quarter.

Our transmission and storage business saw increased park and loan activity as a result of the extreme cold temperatures. We were able to optimize our assets and provide flexibility for our customers to help move incremental volume out of the region. Additionally, our gathered volume and water service volume were ahead of our forecast. Lastly, a quick update on Gulfport. The Gulfport bankruptcy process is almost complete. In late April, Gulfport agreed to assume our existing gathering contracts.

I'll now turn the call over to Kirk.

Kirk Oliver -- Senior Vice President and Chief Financial Officer

Thanks, Diana, and good morning, everyone. This morning, we reported first quarter net income attributable to E-Train common shareholders of $58 million and earnings per diluted E-Train common share of $0.13. Net income was $77 million. Adjusted EBITDA was $308 million and deferred revenue was $72 million. We also reported net cash provided by operating activities of $230 million and free cash flow of $110 million. Net income attributable to E-Train was impacted by two items: first, by a $7 million unrealized gain on derivative instruments, which is reported within other income.

This is related to the contractual provision entitling E-Train to receive cash payments from EQT, conditioned on specific NYMEX Henry Hub natural gas prices exceeding certain thresholds during the three years post the MVP in-service. And second, by a $41 million loss on extinguishment of debt primarily related to the purchase through a tender offer of $500 million in EQM 2023 senior notes. After adjusting for these two items, first quarter adjusted net income attributable to E-Train common shareholders was $83 million and adjusted earnings per diluted common share was $0.19. E-Train operating revenue for the first quarter 2021 was lower compared to the same quarter of last year by $73 million.

This was primarily from the impact of deferred revenue and lower water services revenue. The reduced revenue was partially offset by higher gathering MVCs and increased park and loan activity. Operating expenses for the first quarter 2021 were $57 million lower than the first quarter 2020. The decrease was mainly driven by a $56 million impairment of long-lived assets in the first quarter of 2020. O&M expenses were down about $4 million versus the same quarter last year, and this was offset by increases in depreciation and SG&A expenses. For the first quarter, E-Train will pay a quarterly cash dividend of $0.15 per common share on May 14 to common shareholders of record at the close of business on May 5.

In January, we addressed our near-term debt maturities. We raised $800 million of eight-year senior notes with a 4.5% coupon and $1.1 billion of 10-year notes with a 4.75% coupon. Proceeds from the new issuance were used to repay the $1.4 billion EQM Term Loan A and the $500 million was used for a tender of the EQM 2023 senior notes. We recently amended our EQM credit facility to reduce the size of the facility from $3 billion to $2.25 billion. This size better aligns with our liquidity needs going forward.

We also simplified the calculation of debt-to-EBITDA covenant, which is now 5.95 times through the third quarter of 2022. This provides flexibility for the updated MVP guidance. And lastly, as a result of our strong first quarter results, we raised our full year 2021 EBITDA guidance to a range of $1.05 billion to $1.12 billion.

I'll now hand the call back to Tom.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Thanks, Kirk. So to summarize, our business remains strong and resilient. We're well positioned from a liquidity perspective, and we believe the additional time provided for MVP regulatory review reinforces our confidence that we will bring MVP into service in the summer of 2022. Please stay safe, wash your hands.

And with that, we're happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Spiro Dounis from Credit Suisse. Your line is open.

Spiro Dounis -- Credit Suisse -- Analyst

Hey. Good morning, guys. First question, starting with MVP. I don't believe the Army Corps has yet to provide that updated time frame to Virginia to get you that permanent review. I believe they requested until March of 2022. And so I guess what I'm wondering is to the extent they do actually allow them up until that point, does that still align with your summer 2022 start-up? And I guess another way of asking it is, to the extent the Army Corps comes back and requests an earlier date, so September, October this year, does that mean MVP could come on in the spring or just the logistics of starting construction and stopping it really puts you in the summer, no matter what?

Diana Charletta -- President and Chief Operating Officer

Good morning. This is Diana. It's a very good question. So let me just kind of give you the order of what we're thinking, and I should answer all of those points. We started in March. We resumed construction in all of the upland areas where we're currently -- have approval to construct. And we're on track to complete all of that work by September of this year. So once that work is complete, we'll have roughly 10 miles of pipe to finish for the water crossings and eight miles of work in and around Jefferson National Forest. That's what we'll have left to do. So our current construction plan and targeted summer '22 in-service is based on receiving the water crossing approvals from the Army Corps and FERC and the lifting of the remaining exclusion zone around Jefferson National Forest by the end of 2021.

So if for some reason, the water crossing approvals go into early next year, like you talked about, the current budget and targeted in-service is still achievable. If we have the permits by year-end, we may be able to do some bore work during the winter. But for the most part, the current schedule assumes minimal activity in January and February, so really activity ramping up in March of 2022, which would allow us for an early summer. I wouldn't say spring, but I'd say early summer if we get those permits a little earlier than the March that they asked for.

Spiro Dounis -- Credit Suisse -- Analyst

Okay. That's helpful. Appreciate that, Diana. And then sticking on this a little bit, changing gears here, just on EQT, I believe they've got the option now to elect a cash payment, given that the pipeline won't be online by the end of the year. And so I guess I'm curious, I guess, have they expressed to you any preference one way or the other in terms of cash payment or lower tariff rates? And then could you just quickly walk us through the mechanics on if they were to elect a cash payment, when would they have to do that by? And I guess when would you have to pay it?

Kirk Oliver -- Senior Vice President and Chief Financial Officer

Yes. So this is Kirk. We don't have any indication yet as to what they may or may not want to do. But basically, starting on January one of '22, they have an option for one year to either stay with the reduction in rates, which will kick in when MVP goes into service, or take the cash up front, $196 million.

Spiro Dounis -- Credit Suisse -- Analyst

Got you. And then sorry, just last one if I could tag on there. I know you guys talked about being comfortable from a leverage position. You obviously relaxed some of your covenants recently. So it sounds like everything is fine. But I just want to sort of go right at it and say, to the extent they do elect that cash payment, is your balance sheet sort of prepared for that potential as well?

Kirk Oliver -- Senior Vice President and Chief Financial Officer

Yes, it is.

Spiro Dounis -- Credit Suisse -- Analyst

Perfect. That's all I have for today. Thanks, guys.

Diana Charletta -- President and Chief Operating Officer

Thank you.

Operator

Your next question comes from the line of John Mackay from Goldman Sachs. Your line is open.

John Mackay -- Goldman Sachs -- Analyst

Hey, good morning. Thanks for the time. Just wanted to circle up on a few of those comments from Spiro. Maybe just on the new time line, I think the detail is super helpful. Just curious if that bakes in any space in case the FERC comes back to you and says they want to do a full EIS on the amendment process.

Kirk Oliver -- Senior Vice President and Chief Financial Officer

That wasn't specifically contemplated in it. Basically, the idea on the bank amendment was to clean things up and streamline and give ourselves some flexibility. So we were able to eliminate the qualified add-back for MVP, which was a mechanism that was in the bank facility. We basically got rid of that and just took the leverage covenant up to the 5.95 times level.

John Mackay -- Goldman Sachs -- Analyst

Okay. Sorry. That makes sense. I guess I was curious more on the construction time line just with targeting construction sometime starting March of next year. If you do end up meeting the EIS out of the FERC on the amendment, is there time in there as well? Or would that be kind of incremental on the schedule, do you think?

Diana Charletta -- President and Chief Operating Officer

So we have...

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Yes, John, we just...

Diana Charletta -- President and Chief Operating Officer

Go ahead.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Go ahead, Diana.

Diana Charletta -- President and Chief Operating Officer

That's OK.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

John, this is Tom. The amendment to the certificate that we filed with FERC does not change the limits of disturbance of the original certificate. All it does is changes the method of crossing certain of the streams. So we don't anticipate nor do we think it's relevant to any requirements for an EIS. It's simply a change of crossing method.

John Mackay -- Goldman Sachs -- Analyst

All right. That's fair. Thanks, Tom. Maybe just my follow-up then. Some of your peers have talked about weakness in the Utica. I know it's obviously smaller for you, but just curious if you can kind of update us on trends there. And then it looks like Gulfport's being resolved nicely. Just maybe if you've seen any volume impact there that could come back. Thanks.

Diana Charletta -- President and Chief Operating Officer

So on the Gulfport side, yes, it has been resolved nicely or at least it's on its way to final resolution. We're not really seeing any impact there as far as volumes. They're flowing what they were flowing. From the Utica perspective, I would flip it to Justin. I don't have any other information on how things are changing differently in the Utica. I would just check with Justin and make sure he agrees.

Justin Macken -- Senior Vice President-Gas Systems Planning and Engineering

This is Justin. Yes, I agree. I mean our exposure to the Utica is primarily over in Ohio assets, and we have a number of customers that are still pretty active over there. But I don't think there's any other real changes to the report in mind.

John Mackay -- Goldman Sachs -- Analyst

Understood. Thanks for the time.

Operator

Your next question comes from the line of Brian Reynolds from UBS. Your line is open.

Brian Reynolds -- UBS -- Analyst

Hey. Thanks for taking my question. This is Brian on for Shneur. Just to start off around the follow-up to Shneur regarding the Army Corps and FERC regulatory processes. Is the current guidance kind of expecting that regulatory decisions come in 4Q for both at this point? Thanks.

Diana Charletta -- President and Chief Operating Officer

Yes. So our -- the guidance kind of encompasses a range, but our construction plan right now assumes that both of those approvals come before year-end. But we've also worked -- we're not going to do a ton of work over the winter. So if, for some reason, one of those lags to the first quarter, we can still hit that same guidance range.

Brian Reynolds -- UBS -- Analyst

Right. And I guess specifically related to the Army Corps regulatory process, it just seems like there will be a delay from the July two timeline. Is there any kind of update of when we should be expecting that at this time? Or is that kind of a black box and one just regulatory perspective thing, dot their Is and cross their Ts?

Diana Charletta -- President and Chief Operating Officer

Yes. So there are discussions going on, and we do expect that we'll find that out here in the next couple of months. But there's -- we don't have any further information as far as when we will know that. But the agencies are talking, so that's always a good sign.

Brian Reynolds -- UBS -- Analyst

Great. Thanks. And that's just a quick follow-up related to the capex changes. Is it mostly just one-for-one push into '22 with some timing delays? Or is there anything else that we should be thinking about as it relates to capex?

Diana Charletta -- President and Chief Operating Officer

Yes. So from a budget perspective, about half of the cost is due to timing adjustments, which require the need to maintain environmental controls on the right of way for a longer period of time. The remaining of that balance is really due to resequencing of construction activities and related mobilization of crews, delays in our ability to completely reclaim along certain portions of the route, so just some of that resequencing. We don't have much construction risk left. It's just we were hoping to get some of the upwind in the streams done at the same time, and now we're going to have to go back.

Brian Reynolds -- UBS -- Analyst

Great. That all makes sense. Thanks, everyone. Have a great day.

Diana Charletta -- President and Chief Operating Officer

Thank you.

Operator

Your next question comes from the line of Jeremy Tonet from JPMorgan. Your line is open.

James Kirby -- JPMorgan -- Analyst

Hey, good morning. This is James on for Jeremy. Just want to follow up with that previous question just on the cost. It seems like for the MVP, the cost increase, you said it's for maintaining the right of way for a longer period of time. Just want to make sure I heard that right and that $200 million cost increase is a result of that and not really a change of methodology in terms of how to get MVP to completion?

Diana Charletta -- President and Chief Operating Officer

Correct. It's not -- it's the delay that's really driving that and then just some resequencing, things that we had to do separately instead of all at one time, some of those mobilizations, but nothing other than delay.

James Kirby -- JPMorgan -- Analyst

Got it. And then just on the rating agencies and leverage side of the business. Have you had any conversations with rating agencies since kind of the pushback in time line? And have -- do they have any bogeys for their thresholds as to what they're looking for in terms of completion and where they stand on the readiness basis?

Kirk Oliver -- Senior Vice President and Chief Financial Officer

They haven't given us any bogeys or lines in the sand or anything of that nature. We keep a pretty regular dialogue with them, and we try never to surprise them. So we did let them know that the timing on MVP completion had changed. I suspect they'll be coming out with some comments or some of them will.

James Kirby -- JPMorgan -- Analyst

Got it. Makes sense. And then last one for me. Just on the quarter, you mentioned high park and loan in storage business. Have you seen that continue through 2Q? And what is the dynamic really in the storage for Northeast right now as you're seeing it play out?

Diana Charletta -- President and Chief Operating Officer

Justin, I'll pass that to you.

Justin Macken -- Senior Vice President-Gas Systems Planning and Engineering

Sure. I think as it relates to the overall transmission and storage business, we see some seasonality to that. So Q2 will be down from Q1 as a result of just that seasonality. I think from an overall standpoint, our park and loan activity in the first quarter is generally a function of volatility in the market. And as everybody saw in February, there was a lot of activity there that we were able to capitalize on. So hard to predict that going forward. But generally speaking, like I said, the transmission and storage business has some seasonality to it.

James Kirby -- JPMorgan -- Analyst

Got it, thanks. I'll stop there.

Operator

Your next question comes from the line of Derek Walker from Bank of America. Your line is open.

Derek Walker -- Bank of America -- Analyst

Hey. Good morning, everyone. Thanks for the color on MVP. Maybe I'll just start with just the leverage target of being below four times. I guess at this point, I know that there was a -- in a previous answer in relation to some project financing at some point and once the MVP came online. Is the four times target, I guess, assuming that? And should we be thinking of that as sort of a 2023 event at this point?

Kirk Oliver -- Senior Vice President and Chief Financial Officer

I think the best way to think about that is once we get MVP done, we'll immediately be doing some sort of a nonrecourse financing. If EQT stays the counterparty and keeps the capacity, we think we can do probably about $800 million at an investment-grade level. If that capacity goes to a utility company, probably get to like $1 billion. So that will be an immediate drop in the leverage ratio, and then we'll just continue to delever with cash flow from ops and probably hit that four times threshold in about two years after MVP goes into service.

Derek Walker -- Bank of America -- Analyst

Got it. I appreciate that. And just a quick one on just how -- on MVP here. Any lessons learned from this previous winter season around maintaining the right of way and sort of how you are approaching the next winter season? It sounds like you're not planning too much in January, February, but just how you -- just the approach on sort of maintaining right of ways going through next play.

Diana Charletta -- President and Chief Operating Officer

Yes. So I don't know that it's really a lesson learned, but it's certainly our utmost focus, which is we don't want to get ahead of ourselves and get too much right of way open. Our main goal is to make sure that we are controlling the right of way and have our E&S controls so that we don't get sideways. From a regulatory standpoint, we want to make sure we're following and complying with everything. So that's our main focus during those tough winter months.

Derek Walker -- Bank of America -- Analyst

Got it. Appreciate that data. And then maybe just last one for me is just if you talk about starting out construction in 2022. Is there a general time frame? Should we be thinking around the first half or the second half of '22? Any thoughts there would be helpful.

Diana Charletta -- President and Chief Operating Officer

Yes. So it would be a mid-year starting construction, that's our plan right now. Want to just make sure we get all of our permits and everything taken care of, and then that's why it will go into '23.

Derek Walker -- Bank of America -- Analyst

Thank you very much. Appreciate it.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Derek, this is Tom. I just want to add a little bit of color around your question because I think it's a good one. Part of the frustration that we felt around MVP's delay is that we've continued to have the right of way open when we could have otherwise permanently restored it. And we're on many landowners' property for far too long. And what our hope and objective is -- here now is to get these comprehensive regulatory reviews done as quickly as we can and to get the FERC approval to bore a certain amount of the crossings so that we can complete the project and permanently restore the right of way quickly and get off of everyone's property. And we think that, that is the most environmentally sound thing we can do at this point.

Derek Walker -- Bank of America -- Analyst

Thanks for the additional color, Tom. That's it for me.

Operator

Your next question comes from the line of Christopher Tillett from Barclays. Your line is open.

Christopher Tillett -- Barclays -- Analyst

Hey, guys. Good morning. Most of my questions have been asked already. But just one quick one, if I could. Can you give us an update on how your conversations with the partners and the projects are going or proceeding? I know a few of them have expressed interest in possibly selling their stakes in MVP over the last couple of months. So just curious to hear how that relationship is today.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

This is Tom. Look, the relationship is quite good. And over time, people's portfolios change and their requirements change for what they want to hold as assets. I think it's no surprise that some of our partners may, in fact, be exploring, monetizing some of their interest to us. But it certainly doesn't impact the transparency and quality of our relationship with our partners. We think that coming through a project like MVP with our partnership intact shows the strength of the partnership. But in terms of whether it's the capacity or their interest, each company makes a decision based on what their own strategy is.

Christopher Tillett -- Barclays -- Analyst

Yes. Understood. I guess the second part to that is obviously there's a number of considerations, but would Equitrans be interested in upping their stake in the project? Or are you guys happy with how it stands today?

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Well, I think the partnership agreement provides for us to have an opportunity to discuss that, and we're not at that point yet. But certainly, right now, we're focused on managing our capital discipline and making sure that we finish the project. And if an opportunity presents itself, we'll evaluate the opportunity at that time. For now, no more color on that right now.

Christopher Tillett -- Barclays -- Analyst

Okay, understood. That's it for me. Thanks.

Operator

[Operator Instructions] Your next question comes from the line of Sunil Sibal from Seaport Global. Your line is open.

Sunil Sibal -- Seaport Global -- Analyst

I just had a follow-up question with regard to the project debt at MVP, I think you mentioned $800 million to $1 billion. Is that on MVP on a 100% basis? Or is that sort of your part of MVP?

Kirk Oliver -- Senior Vice President and Chief Financial Officer

That would just be our part of MVP.

Sunil Sibal -- Seaport Global -- Analyst

Okay. That's all that I have. Thanks for the color.

Operator

There are no further questions at this time. I turn the call back over to Tom Karam.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Thank you, and thanks to everybody for joining us. So as our results show today, the core foundation of our company performs well quarter after quarter. And we need to complete MVP, as we talked about, and to take advantage of the narrowing regulatory process. We will continue to focus on operating safely and reliably, and we will continue to lean into creating initiatives on ESG that are close to our core competencies and uplift our assets in that regard to mitigate methane emissions and to hit our targets, particularly in 2030, by reducing methane emissions by 50%. So with that, thank you all for joining us today, and we look forward to speaking with you again.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Nate Tetlow -- Vice President, Corporate Development and Investor Relations

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

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

Spiro Dounis -- Credit Suisse -- Analyst

John Mackay -- Goldman Sachs -- Analyst

Brian Reynolds -- UBS -- Analyst

James Kirby -- JPMorgan -- Analyst

Derek Walker -- Bank of America -- Analyst

Christopher Tillett -- Barclays -- Analyst

Sunil Sibal -- Seaport Global -- Analyst

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