CANONSBURG, Pa.--(BUSINESS WIRE)--Equitrans Midstream Corporation (NYSE: ETRN) and EQM Midstream Partners, LP (NYSE: EQM), today, announced financial and operational results for the first quarter 2020.
Q1 2020 Highlights:
- Delivered strong first quarter 2020 financial results ahead of plan
- Raised full-year 2020 estimated earnings and cash flow guidance
- Reduced full-year 2020 total capital expenditures and capital contribution forecast by $150 million
- Generated 58% of total operating revenue from firm reservation fees
- Increased fresh water delivery and achieved water EBITDA above expectations
- Expected to close ETRN acquisition of EQM in June 2020
“Our business remains resilient in the current environment as highlighted by the strength of our first quarter operating and financial results. Our long-term contracts, increasing take-or-pay revenues, and minimal exposure to NGL volumes provide the core pillars for success in this or any environment,” said Thomas F. Karam, ETRN chairman and chief executive officer. “The new 15-year gathering agreement reached with EQT during the quarter further solidifies the stability of our cash flows and sets us on the path to significant free cash flow generation.”
“Since the onset of the COVID-19 pandemic, we have not experienced any material disruptions to our operations and have worked to ensure that the safety of our employees, contractors, families, and communities remains our top priority,” added Diana Charletta, ETRN president and chief operating officer. “As a result of the recent increase in natural gas strip prices, our producer customers are becoming stronger and we are optimistic that the activity level across our operating areas will remain steady. As we progress through the year, we will continue collaborating with our customers in order to optimize future development plans and maintain our acute focus on capital efficiency.”
FIRST QUARTER 2020 RESULTS
ETRN announced net income attributable to ETRN of $69.7 million and earnings per diluted share attributable to ETRN of $0.28 for the first quarter 2020. After adjusting for several non-recurring items and an unrealized gain on derivative instruments, ETRN reported adjusted net income attributable to ETRN of $117.9 million and adjusted earnings per diluted share attributable to ETRN of $0.46 for the first quarter 2020. See "Non-GAAP Disclosures" for important disclosures regarding the use of non-GAAP supplemental financial measures included in this news release, including information regarding their most comparable GAAP financial measures.
For the quarter, ETRN also reported net cash provided by operating activities of $249.3 million, free cash flow (FCF) of $31.2 million and retained free cash flow (RFCF) of $(179.5) million. FCF and RFCF are non-GAAP financial measures that ETRN began reporting with the first quarter 2020 financial results. More information, including the definitions of FCF and RFCF, are located in the Non-GAAP Disclosures section of this news release.
EQM announced the following financial results for the first quarter 2020:
| $ millions | |
| Net income attributable to EQM | $251.7 |
| Adjusted EBITDA | $381.3 |
| Net cash provided by operating activities | $285.1 |
| Distributable cash flow (DCF) | $283.1 |
For the first quarter 2020, EQM operating revenue increased by $63.3 million, or 16.2%, compared to the same quarter last year. The increase in revenue was primarily related to the addition of the Eureka and Hornet assets and increased water revenue and was partially offset by lower transmission revenue. EQM operating expenses increased by $79.9 million compared to the first quarter 2019, with $55.6 million related to the impairment charges and the remaining increase primarily from the addition of the Eureka and Hornet assets.
QUARTERLY DIVIDEND AND DISTRIBUTION
ETRN
For the first quarter 2020, ETRN will pay a quarterly cash dividend of $0.15 per share on May 21, 2020 to ETRN shareholders of record at the close of business on May 12, 2020.
EQM
For the first quarter 2020, EQM will pay a quarterly cash distribution of $0.3875 per common unit on May 14, 2020 to EQM common unitholders of record at the close of business on May 5, 2020.
For the first quarter 2020, EQM will pay a quarterly cash distribution on the Series A Preferred Units of $1.0364 per Series A Preferred Unit on May 14, 2020 to all Series A preferred unitholders of record at the close of business on May 5, 2020.
EQM EXPANSION AND ONGOING MAINTENANCE CAPITAL EXPENDITURES
Expansion
Expansion capital expenditures and capital contributions to Mountain Valley Pipeline, LLC (MVP JV) were $149 million for the first quarter 2020.
| $MM | Three Months Ended March 31, 2020 | 2020 Full-year Forecast |
| MVP JV | $45 | $600 - $640 |
| Gathering(1) | $92 | $350 - $370 |
| Transmission(2) | $9 | $60 - $80 |
| Water | $3 | $15 |
| Total | $149 | $1,025 - $1,105 |
| (1) | Includes 60% of Eureka expansion capital expenditures. |
| (2) | Includes capital contributions to MVP JV for the MVP Southgate project. |
OUTLOOK
Pro forma ETRN forecast
The 2020 forecast is pro forma for the pending acquisition of EQM, which is expected to close in June. ETRN and EQM have no financial guidance or operational guidance past 2020.
After completing the acquisition of EQM, ETRN intends to discontinue reporting DCF and ongoing maintenance capital expenditures as those metrics are primarily used by master limited partnerships and management believes that free cash flow and retained free cash flow will provide more useful information to C-corporation investors.
| $ millions | Q2 2020 |
| Net income attributable to ETRN(1) | $35 - $50 |
| Adjusted EBITDA | $255 - $275 |
| Deferred revenue(2) | $75 |
| $ millions | Full-year 2020 |
| Net income attributable to ETRN(1) | $390 - $425 |
| Adjusted EBITDA | $1,150 - $1,200 |
| Deferred revenue(2) | $227 |
| Free cash flow(3) | $(100) - $(150) |
| Retained free cash flow(3) | $(510) - $(560) |
| (1) | Includes $15 - $20 million of expected transaction costs in Q2 2020. |
| (2) | On February 26, 2020, EQM and EQT entered into a new gas gathering agreement. As a result of the new agreement, and beginning in Q2 2020, revenue under the EQT contract will be recognized based on an average gathering rate applied to each period's minimum volume commitment (MVC) over the 15-year contract life. The actual cash received under the contract is expected to be higher than the revenue recognized in the early years of contract, resulting in the deferral of revenue into future periods and a corresponding contract liability. The deferred revenue amounts are subject to the ultimate in-service date of MVP. The current deferred revenue estimate is based on MVP's targeted year-end 2020 in-service date. |
| (3) | ETRN's forecasts for free cash flow and retained free cash flow take into account the impact of transaction costs associated only with ETRN's pending acquisition of EQM; ETRN's purchase of its shares from EQT and EQM's new gas gathering agreement with EQT; and related transactions. |
On February 27, 2020, ETRN and EQM announced a share-for-unit exchange via merger in which each outstanding public common unit of EQM would be exchanged for 2.44 shares of ETRN common stock. The merger is subject to customary closing conditions and the approval of ETRN shareholders and EQM unitholders. The ETRN shareholder vote and the EQM unitholder vote are each scheduled for June 15, 2020 and, assuming approvals are received and closing conditions satisfied, the transaction is expected to close in June 2020.
In connection with the closing of the acquisition of EQM, $600 million of outstanding EQM Series A Convertible Preferred Units will be repurchased by EQM. The remaining $600 million of outstanding EQM Series A Convertible Preferred Units will be exchanged for $600 million of newly issued ETRN Series A Convertible Preferred Shares.
ETRN Share Purchase
On March 5, 2020, ETRN completed the purchase of 25.3 million ETRN common shares from EQT. ETRN paid $52 million of upfront cash consideration to EQT and the remaining consideration will be paid through reduced gathering fees in the two years following MVP’s in-service date.
ETRN Term Loan B
On March 3, 2020, ETRN paid off the $600 million ETRN Term Loan B with cash provided through an intercompany loan from EQM. The intercompany loan was funded with borrowings under the EQM revolving credit facility.
Outstanding Debt and Liquidity
As of March 31, 2020, EQM had long-term debt of $4.9 billion, $1.4 billion of borrowings and $235 million of letters of credit outstanding under its $3 billion revolving credit facility, and $14 million of cash. As of March 31, 2020, ETRN had zero long-term debt and $62 million of cash.
Water Services
In the first quarter 2020, EQM delivered 593 MMgal of fresh water, a 60% increase from the prior year quarter. EQM generated approximately $25 million of water EBITDA in the first quarter and EQM forecasts $60 - $65 million of water EBITDA for the full-year 2020.
Mountain Valley Pipeline
MVP JV is working through the project’s remaining legal and regulatory challenges and continues to have a narrow path to achieve the targeted late 2020 full in-service date at an overall project cost of approximately $5.4 billion. Based on the MVP JV's current budget for the project, EQM expects to fund approximately $2.7 billion of the total project cost and, through March 31, 2020, has funded approximately $2.1 billion.
Hammerhead Pipeline
Hammerhead is a gathering header pipeline that will span approximately 64 miles from southwestern Pennsylvania to Mobley, West Virginia, where both MVP and the Ohio Valley Connector originate. With a total estimated project cost of $555 million, the pipeline is expected to provide 1.6 Bcf per day of capacity, of which 1.2 Bcf per day is contracted under a 20-year firm capacity commitment by EQT. EQM has invested a total of approximately $490 million in the Hammerhead project through Q1 2020. The Hammerhead project is expected to become operational in the second quarter of 2020 and will provide interruptible service until the MVP is placed in-service, at which time the firm capacity commitment will begin.
Distributable Cash Flow
As used in this news release, distributable cash flow means EQM adjusted EBITDA, less net interest expense excluding interest income on the Preferred Interest, capitalized interest and AFUDC - debt, ongoing maintenance capital expenditures net of expected reimbursements, and cash distributions earned by Series A preferred unitholders.
Reconciliation of Adjusted EBITDA and Distributable Cash Flow (EQM)
| Three Months Ended March 31, | ||||||
| (Thousands, except coverage ratio) | 2020 | 2019 | ||||
| Net income | $ | 255,285 | $ | 251,931 | ||
| Add: | ||||||
| Net interest expense | 54,531 | 49,356 | ||||
| Depreciation | 61,114 | 47,065 | ||||
| Amortization of intangible assets | 14,581 | 10,387 | ||||
| Impairments of long-lived assets | 55,581 | — | ||||
| Preferred Interest payments | 2,764 | 2,746 | ||||
| Non-cash long-term compensation expense | 285 | 255 | ||||
| Separation and other transaction costs | 4,104 | 3,513 | ||||
| Less: | ||||||
| Equity income | (54,072 | ) | (31,063 | ) | ||
| AFUDC – equity | (236 | ) | (2,346 | ) | ||
| Unrealized gain on derivative instruments | (4,170 | ) | — | |||
| Adjusted EBITDA attributable to noncontrolling interest(1) | (8,515 | ) | — | |||
| Adjusted EBITDA | $ | 381,252 | $ | 331,844 | ||
| Less: | ||||||
| Net interest expense excluding interest income on the Preferred Interest(2) | (55,024 | ) | (50,962 | ) | ||
| Capitalized interest and AFUDC – debt(2) | (8,671 | ) | (4,687 | ) | ||
| Ongoing maintenance capital expenditures net of expected reimbursements(2) | (8,996 | ) | (9,398 | ) | ||
| Series A Preferred Unit distributions(4) | (25,501 | ) | — | |||
| Distributable cash flow | $ | 283,060 | $ | 266,797 | ||
| Distributions declared(3): | ||||||
| Limited Partner | $ | 77,677 | $ | 229,524 | ||
| Coverage ratio | 3.64x | 1.16x | ||||
| Net cash provided by operating activities | $ | 285,136 | $ | 160,973 | ||
| Adjustments: | ||||||
| Capitalized interest and AFUDC – debt(2) | (8,671 | ) | (4,687 | ) | ||
| Principal payments received on the Preferred Interest | 1,225 | 1,141 | ||||
| Ongoing maintenance capital expenditures net of expected reimbursements(2) | (8,996 | ) | (9,398 | ) | ||
| Adjusted EBITDA attributable to noncontrolling interest(1) | (8,515 | ) | — | |||
| Series A Preferred Unit distributions(4) | (25,501 | ) | — | |||
| Other, including changes in working capital | 48,382 | 118,768 | ||||
| Distributable cash flow | $ | 283,060 | $ | 266,797 | ||
| (1) | Reflects adjusted EBITDA attributable to noncontrolling interest associated with the third-party ownership interest in Eureka. Adjusted EBITDA attributable to noncontrolling interest for the three months ended March 31, 2020 was calculated as net income of $3.6 million plus depreciation of $2.7 million, plus amortization of intangible assets of $1.2 million, and plus interest expense of $1.0 million. |
| (2) | Does not reflect amounts related to the noncontrolling interest share of Eureka. |
| (3) | Reflects cash distribution declared of $0.3875 per common unit for the first quarter of 2020 and 200,457,630 common units outstanding as of March 31, 2020. Distributions declared to noncontrolling interest unitholders for Q1 2020 will be paid in May 2020. |
| (4) | Reflects cash distribution declared of $1.0364 per Series A Preferred Unit for the first quarter of 2020. |
ETRN previously defined its free cash flow as EQM’s DCF plus changes in net working capital, less growth capital expenditures (excluding 40% of Eureka growth capital expenditures), and less capital contributions to MVP JV. In connection with ETRN’s announcement that it intends to discontinue reporting DCF following its acquisition of EQM, ETRN has updated its definition of free cash flow to use adjustments derived solely from its statements of consolidated cash flows and eliminate the calculation derived from DCF. ETRN’s free cash flow for both periods presented in the table below is reconciled to net cash provided by operating activities, to be included in ETRN's statements of consolidated cash flows in ETRN's Quarterly Report on Form 10-Q for the three months ended March 31, 2020, per ETRN’s updated definition of free cash flow.
Retained Free Cash Flow
As used in this news release, ETRN’s retained free cash flow means free cash flow less dividends paid and distributions paid to noncontrolling interest unitholders. ETRN and EQM paid out aggregate dividends of $114.3 million and aggregate distributions to noncontrolling interest unitholders of $96.5 million, respectively, during the first quarter of 2020, and declared aggregate dividends of $34.4 million and aggregate distributions of $32.2 million, respectively, during the first quarter of 2020.
Reconciliation of Free Cash Flow and Retained Free Cash Flow (ETRN)
| Three Months Ended March 31, | ||||||
| (Thousands) | 2020 | 2019 | ||||
| Net cash provided by operating activities | $ | 249,303 | $ | 122,201 | ||
| Add back / (deduct): | ||||||
| Principal payments received on the Preferred Interest | 1,225 | 1,141 | ||||
| Net cash provided by operating activities attributable to noncontrolling interest(1) | (9,245 | ) | — | |||
| Series A Preferred Unit distributions(2) | (25,501 | ) | — | |||
| Capital expenditures(3) | (139,394 | ) | (208,966 | ) | ||
| Capital contributions to MVP JV | (45,150 | ) | (144,763 | ) | ||
| Free cash flow(4) | $ | 31,238 | $ | (230,387 | ) | |
| Less: | ||||||
| Dividends paid(5) | (114,254 | ) | (104,251 | ) | ||
| Distributions paid to noncontrolling interest unitholders(5) | (96,526 | ) | (94,030 | ) | ||
| Retained free cash flow | $ | (179,542 | ) | $ | (428,668 | ) |
| (1) | Reflects 40% of $23.1 million, or Eureka’s standalone net cash provided by operating activities, representing the non-controlling interest portion. |
| (2) | Reflects cash distribution paid of $1.0364 per Series A Preferred Unit for the first quarter of 2020. |
| (3) | Does not reflect amounts related to the non-controlling interest share of Eureka. |
| (4) | ETRN’s free cash flow for the three months ended March 31, 2020 and 2019, if calculated utilizing ETRN’s prior definition derived from DCF, would have been $42.6 million and $(221.6) million, respectively. ETRN’s calculations of free cash flow for the three months ended March 31, 2020 and 2019 under ETRN’s updated definition of free cash flow are $11.4 million and $8.8 million lower than the respective calculations under the prior definition because ETRN’s historical calculation of DCF excluded the impact of separation and transaction costs. ETRN believes that its calculation of free cash flow inclusive of the impact of separation and transaction costs is more reflective of the amount of cash available for corporate initiatives, which may include reducing debt, paying dividends and distributions, repurchasing shares, and similar matters. |
| (5) | Dividends paid and distributions paid to noncontrolling interest unitholders during the first quarter 2020 were based on the fourth quarter 2019 dividend of $0.45 per ETRN share and fourth quarter 2019 distributions of $1.16 per EQM common unit. The first quarter 2020 dividend declared was $0.15 per ETRN share and the distributions declared was $0.3875 per EQM common unit. Dividends declared and distributions declared to noncontrolling interest unitholders for the first quarter 2020 will be paid in May 2020. |
- ETRN’s and EQM’s operating performance as compared to other publicly traded companies in the midstream energy industry without regard to historical cost basis or, in the case of adjusted EBITDA, financing methods
- The ability of ETRN’s and EQM’s assets to generate sufficient cash flow to make distributions to ETRN’s shareholders and EQM’s unitholders, as applicable
- ETRN’s and EQM’s ability to incur and service debt and fund capital expenditures and capital contributions
- The viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities
ETRN and EQM are unable to provide a reconciliation of projected adjusted EBITDA from projected net income attributable to ETRN, the most comparable financial measure calculated in accordance with GAAP, or a reconciliation of projected free cash flow or retained cash flow to net cash provided by operating activities, the most comparable financial measure calculated in accordance with GAAP. ETRN and EQM have not provided a reconciliation of projected adjusted EBITDA to projected net income (loss), the most comparable financial measure calculated in accordance with GAAP, due to the inherent difficulty and impracticability of predicting certain amounts required by GAAP with a reasonable degree of accuracy. Net (loss) income includes the impact of depreciation expense, income tax expense, the revenue impact of changes in the projected fair value of derivative instruments prior to settlement, potential changes in estimates for certain contract liabilities and unbilled revenues and certain other items that impact comparability between periods and the tax effect of such items, which may be significant and difficult to project with a reasonable degree of accuracy. Therefore, a reconciliation of projected adjusted EBITDA to projected net income (loss) is not available without unreasonable effort.
ETRN and EQM are unable to project net cash provided by operating activities because this metric includes the impact of changes in operating assets and liabilities related to the timing of cash receipts and disbursements that may not relate to the period in which the operating activities occurred. ETRN and EQM are unable to project these timing differences with any reasonable degree of accuracy to a specific day, three or more months in advance. Therefore, ETRN and EQM are unable to provide projected net cash provided by operating activities, or the related reconciliation of each of projected free cash flow and projected retained free cash flow to projected net cash provided by operating activities without unreasonable effort. ETRN and EQM provide a range for the forecasts of net income attributable to ETRN, adjusted EBITDA, free cash flow and retained free cash flow to allow for the inherent difficulty of predicting certain amounts and the variability in the timing of spending and the impact on the related reconciling items, many of which interplay with each other.
Water EBITDA
As used in this news release, water EBITDA means the earnings before interest, taxes, depreciation and amortization of EQM’s water services business. Water EBITDA is a non-GAAP supplemental financial measure that management and external users of EQM’s consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, use to assess the impact of EQM’s water services business on EQM’s operating performance and EQM’s ability to incur and service debt and fund capital expenditures. Water EBITDA should not be considered as an alternative to EQM’s net income, operating income or any other measure of financial performance presented in accordance with GAAP. Water EBITDA has important limitations as an analytical tool because the measure excludes some, but not all, items that affect net income and operating income. Additionally, because water EBITDA may be defined differently by other companies in EQM’s industry, the definition of water EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing the utility of the measure. The table below reconciles water EBITDA from EQM's water operating income as derived from EQM's statements of consolidated operations to be included in EQM's Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
EQM has not provided a reconciliation of projected water EBITDA from projected water operating income, the most comparable measure calculated in accordance with GAAP. EQM does not allocate certain costs, such as interest expenses, to individual assets within its business segments. Therefore, the reconciliation of projected water EBITDA from projected water operating income is not available without unreasonable effort. EQM has provided a range for the forecast of water EBITDA to allow for the variability in the timing of spending and the impact on the related reconciling items, many of which interplay with each other.
Reconciliation of Water EBITDA (EQM)
| Three Months Ended March 31, | ||||||
| (Thousands) | 2020 | 2019 | ||||
| Water operating income | $ | 17,752 | $ | 1,186 | ||
| Add: Depreciation | 7,116 | 6,416 | ||||
| Water EBITDA | $ | 24,868 | $ | 7,602 | ||
About Equitrans Midstream Corporation:
Equitrans Midstream Corporation (ETRN) has a premier asset footprint in the Appalachian Basin and is one of the largest natural gas gatherers in the United States. With a rich 135-year history in the energy industry, ETRN was launched as a standalone company in 2018 and, through its subsidiaries, has an operational focus on gas gathering systems, transmission and storage systems, and water services assets that support natural gas producers across the Basin. ETRN is helping to meet America’s growing need for clean-burning energy, while also providing a rewarding workplace and enriching the communities where its employees live and work. ETRN owns the non-economic general partner interest and a majority ownership of the limited partner interest in EQM.
Visit Equitrans Midstream Corporation at www.equitransmidstream.com
About EQM Midstream Partners:
EQM Midstream Partners, LP (EQM) is a growth-oriented limited partnership formed to own, operate, acquire, and develop midstream assets in the Appalachian Basin. As one of the largest gatherers of natural gas in the United States, EQM provides midstream services to producers, utilities, and other customers through its strategically located natural gas transmission, storage, and gathering systems, and water services to support energy development and production in the Marcellus and Utica regions. EQM owns approximately 950 miles of FERC-regulated interstate pipelines and also owns and/or operates approximately 1,900 miles of high- and low-pressure gathering lines.
Visit EQM Midstream Partners, LP at www.eqm-midstreampartners.com
