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Good day and thank you for standing by. Welcome to the Equitrans Midstream Q1 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. [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.
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 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 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. 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 and 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 transitioned 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?
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 cost. 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 big 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.
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 MVP and 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 of 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.
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.
[Operator Instructions] Your first question comes from the line of Spiro Dounis from Credit Suisse. Your line is open.
Hey, good morning guys. First question, starting with MVP, I don't believe the Army Core has yet to provide that updated timeframe to Virginia to get you that permit review, I believe they requested until March of 2022. And so, yes, 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 startup? And I guess another way to asking it is, recently Army Core comes back and request an earlier date, so September, October of 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?
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. So 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 in targeted summer 2022 in-service is based on receiving the water crossing approvals from the Army Core 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.
Okay. That's helpful. Appreciate that, Diana. And then just thinking on this a little bit changing gears here, just on EQT, I believe they've got the option now to elect the cash payment, given that the pipeline won't be online by the end of the year, as 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?
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 1 of 2022, they have an option for one year to either stay with the reduction in rates, which kick in when MVP goes into service or take the cash upfront $196 million.
Got you. And then, sorry, just last one, we can tag on there, I know you guys talked about being comfortable from a leveraged position, you obviously relax some of your covenants recently. So it sounds like everything is fine, I just want to sort of go right out and say, to the extend they do like that cash payment easier balance sheet sort of prepared for that potential as well?
Yes, it is.
Perfect. That's all I had for today. Thank guys.
Yes.
Thank you.
Your next question comes from the line of John Mackay from Goldman Sachs. Your line is open.
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 timeline, 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 – yes, on the amendment process?
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.
Okay. All right. That makes sense. I guess I was curious more on the construction timeline just with targeting construction sometime starting March of next year. If you do end up needing 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?
Yes, John, this is – go ahead, Diana.
That’s okay, go ahead.
John, this is Tom the amendment to the certificate that we probably look for 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.
All right. That's all right. Thanks Tom. Maybe this is 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 kind of update us on trends there. And then it looks like all parts being resolved nicely just maybe if you've seen any volume impact there that could come back? Thanks.
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.
Hi, 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 is any other changes to report from on it.
Understood. Thanks for the time.
Your next question comes from the line of Brian Reynolds from UBS. Your line is open.
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 Core and FERC regulatory processes. Is the current guidance kind of expecting that regulatory decisions come in 4Q for both at this point? Thanks.
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 first quarter, we can still hit that same guidance range.
Right. And I guess specifically related to the Army Core regulatory process just seems like there will be a delay from the July 2 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 in one – just from regulatory perspective things, I thought that hasn't crossed the T's?
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 is – 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.
Great. Thanks. And that's just quick follow-up related to the CapEx changes, is that mostly just one for one push into 2022 with some timing delays, or is there anything else that we should be thinking about as it relates to CapEx?
Yes. So from a budget perspective, about half of the classes do the timing adjustments which required the need to maintain environmental controls on the right way of a longer period of time. The remaining of that balance is really due to re-sequences 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 re-sequencing, we don't have much construction risk left, it's just – we were hoping to get some of the uplands and the streams done at the same time and now we're going to have to go back.
Great. That'll make sense. Thanks everyone and have a great day.
Thank you.
Your next question comes from the line of Jeremy Tonet from JPMorgan. Your line is open.
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 way for a longer period of time. Just to make sure I heard that right and that $200 million cost increase is a result of that and not really a change of mythology in terms of how they get MVP to completion?
Correct. It's not – it’s the delay that's really driving that, and then just some re-sequencing things that we have to do separately instead of all at one time, some of those mobilizations, but nothing other than delay.
Got it. Thank you for clearing that up. And then just on the [indiscernible] and leverage side of the business. Have you had any conversations with [indiscernible] since kind of the pushback in timeline 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 ready-mix basis?
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 for some of them.
Got it. It makes sense. And then last one from me, just on the quarter, you mentioned higher park and loan in storage business. Have you seen that continued through to Q1 and what is the dynamic really in the storage for Northeast right now, as you're seeing it play out?
Justin, I'll pass that to you.
Sure. I think as it relates to the overall transmission and storage business, we see some seasonality to that. So Q2, a little bit 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's 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 storage business has some seasonality to it.
Got it. Thanks. I'll stop there.
Your next question comes from the line of Derek Walker from Bank of America. Your line is open.
Hi, good morning, everyone. Thank you for the color on MVP. Maybe I would start with a target of being below 4x. I guess at this point, I know there's a – appreciate the patient in private financing at some point and what – that you online. Is the 4x target, I guess assuming that, and should we be thinking of that as sort of a 2023 event at this point?
I think the best way to think about that is, once we get MVP done, we’ll immediately be doing some sort of a non-recourse 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'll be an immediate drop in the leverage ratio. And then we'll just continue to delever with cash flow from ops, probably hit that four times threshold at about two years after MVP goes into service.
I appreciate that. And just a quick one on just how on MVP here, any lessons learned from this previous winter season around maintaining right-of-way and sort of how you are approaching the next winter season. Sounds like you're not planning too much in January, February, but just see your approach on maintaining right-of-way for next winter?
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.
Got it. Appreciate that, Diana. And then maybe just the last one for me is just talking about starting the construction in 2022, is there general timeframe particularly on the first half and the second half 2022, any thoughts there would be helpful? Thanks.
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 I don't go into 2023.
Perfect. Thank you very much. Appreciate it.
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.
Thanks for the additional color there, Tom. That’s it for me.
Your next question comes from the line of Christopher Tillett from Barclays. Your line is open.
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 in 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?
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 those assets. I think it's no surprise that some of our partners may in fact be exploring monetizing some of their interests 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 interests, each company makes a decision based on what their own strategy is.
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?
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 finished the project. And if an opportunity presents itself, we'll evaluate the opportunity at that time. No more color on that right now.
Okay. Understood. That’s it for me. Thanks.
[Operator Instructions] Your next question comes from the line of Sunil Sibal from Seaport Global. Your line is open.
Yes. Hi, good morning, everybody. And thanks for all the clarity. This is really a follow-up question with regard to the project DEP at MVP. I think you've mentioned $800 million to $1 billion. You start on MVP on 100% basis or is that sort of your part of MVP?
That would just be our part of MVP.
That's all I have. Thanks for the color.
There are no further questions at this time. I turn the call back over to Tom Karam.
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.
This concludes today's conference call. Thank you for participating. You may now disconnect.