Q3 2023 Equitrans Midstream Corp Earnings Call
Participants
Diana M. Charletta; President, COO & Director; Equitrans Midstream Corporation
Kirk R. Oliver; Senior VP & CFO; Equitrans Midstream Corporation
Nathan Tetlow; VP of Corporate Development & IR; Equitrans Midstream Corporation
Thomas F. Karam; Chairman of the Board & CEO; Equitrans Midstream Corporation
Brian Patrick Reynolds; Analyst; UBS Investment Bank, Research Division
John Ross Mackay; Research Analyst; Goldman Sachs Group, Inc., Research Division
Unidentified Analyst
Presentation
Operator
Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitrans Midstream Corporation Third Quarter 2023 Earnings Conference Call. (Operator Instructions)
I would now like to turn the conference over to Nate Tetlow. Please go ahead.
Nathan Tetlow
Good morning, and welcome to the Third Quarter 2023 Earnings Call for Equitrans Midstream Corporation. A replay of this call will be available for 14 days beginning this evening. The phone number for the replay is (800) 770-2030 or (647)362-9199. The conference ID is 6625542.
Today's call may contain forward-looking statements related to future events and expectations. Please refer to today's news release and risk factors in ETRN's Form 10-K for the year ended December 31, 2022, 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; Janice Brenner, Vice President and Treasurer; and Brian Pietrandrea, Chief Accounting Officer. After the prepared remarks, we will open the call to questions.
With that, I'll turn it over to Tom.
Thomas F. Karam
Thanks, Nate, and good morning, everyone. Today, we reported third quarter 2023 results, including net income of $130 million, adjusted EBITDA of $250 million and deferred revenue of $83 million. Kirk will provide details on the financial results in a few minutes.
Let me start with MVP. About two weeks ago, we revised our targeted completion to the first quarter of 2024 at a total project cost of approximately $7.2 billion, inclusive of a $120 million contingency. The revision was driven by multiple factors, including the unexpected difficulty in ramping up construction crews, particularly as a result of the history of court-related construction stops, including the nearly 3-week court stay in July. Additionally, it was more challenging than expected to source crews with the necessary experience, which was a critical factor, given our commitment to the unprecedented level of environmental protocols and safety measures being utilized.
While it took longer than originally planned, by mid-October, we were able to reach about 4,500 people working on the right of way, which represents the full complement of workers, and we are making good progress every day. Over the next 8 to 9 weeks, we expect to complete the major boring activities and nearly all waterbody crossings. Closer to year-end, we anticipate the headcount to be reduced to about 1,500 as crews finish up and are released. We're confident in the plan and schedule and optimistic that MVP can still provide consumers some much-needed financial release this winter.
And now I'll turn it to Diana for the operations update, and then Kirk will discuss the financial results, and I'll conclude with some closing comments. Diana?
Diana M. Charletta
Thanks, Tom. Good morning, everyone. In the third quarter, we gathered about 8 Bcf per day, representing 8% sequential quarter growth and 6% year-over-year growth. This quarter is a good demonstration of the capability of our system to quickly handle significant production increases.
To give you some context, since late Q2, we had a customer turn in line 3 large pads, each pad producing at an initial flow rate above 200 million cubic feet per day and also added a producer that previously had no volumes on our system and had an average of over 100 million cubic feet per day in Q3.
Operationally, we have our backbone gathering and transmission systems in place, and these assets will provide direct upstream connectivity to MVP. Given this dynamic, combined with the growing demand in the Southeast, the ability to expand MVP capacity by 500 million cubic feet per day through compression and expected improvements to TETCO M2 pricing with MVP in service. We anticipate annual gathering volume growth in the mid-single digits for the years following MVP in service.
On the Transmission segment, we commenced construction of the Ohio Valley Connector expansion project or OVCX, in the third quarter. OVCX is a $160 million capital project that will add about 350 million cubic feet per day of incremental capacity. The incremental capacity is targeted for in-service in the first half of 2024. Once the expansion is complete, our OVC pipeline will have the ability to move over 1.2 Bcf a day of gas to Clarington and can also provide backhaul capacity to reach MVP with the same 1.2 Bcf per day of capacity, enhancing basin liquidity and providing customers significant optionality.
On the Water segment, we have completed the trunk line connecting our two aboveground storage facilities, which completes the majority of the backbone of our mixed-use water system. The system now allows for the delivery of over 140,000 barrels per day of mixed water to connected well pads and the ability to receive up to 750 trucks per day for offloading produced water into the system.
Moving on to an update on the Rager Mountain storage well incident that occurred in the fourth quarter last year. In August, we submitted the comprehensive root cause analysis to PHMSA. And in October, PHMSA approved our injection plan, and we began injections at the Rager storage field. In the third quarter, we incurred approximately $2.3 million of operating expense related to post-incident activities. And for the full year, we expect to incur approximately $10 million of expense and approximately $5 million to $10 million of capital related to the Rager incident.
Lastly, on ESG, we are making meaningful progress on incorporating an enterprise data collection framework, which will help standardize processes and improve the efficiency of data collection and reporting requirements.
I'll now turn the call over to Kirk.
Kirk R. Oliver
Thanks, Diana, and good morning, everyone. Today, we reported third quarter net income attributable to E-Train common shareholders of $113 million and earnings per diluted common share of $0.26. Net income was $130 million. Adjusted EBITDA was $250 million and deferred revenue was $83 million. We also reported net cash provided by operating activities of $202 million and free cash flow of negative $133 million.
Net income attributable to E-Train common shareholders was impacted by several items. First, by a $7.8 million write-down of a contract asset in the Water segment; second, a $3.4 million unrealized loss on derivative instruments, which is reported within other income. This relates 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 post MVP's in-service and through 2024. And last, by the previously mentioned $2.3 million of operating expense related to the Rager Mountain storage incident.
After adjusting for these items, third quarter adjusted net income attributable to E-Train common shareholders was $123 million and adjusted earnings per diluted E-Train common share was $0.28. Additionally, we reported third quarter equity income of $73.8 million, which is primarily associated with AFUDC relating to MVP construction. Operating revenue for the third quarter of 2023 was $6.8 million higher compared to the same quarter of last year. The increase was primarily driven by increased transmission usage volumes and higher water volumes and was partially offset by lower gathering revenue.
Operating expenses for the third quarter 2023 were $30.8 million higher than third quarter 2022. The increase was primarily driven by the $7.8 million write-down of the contract asset in the Water segment, $7.5 million expense related to a onetime cash bonus awarded to Tom for his efforts in the inclusion of MVP provisions in the Fiscal Responsibility Act of 2023, $4.5 million of favorable net gas sales, which occurred in the third quarter 2022, $2.3 million of expenses associated with the Rager Mountain storage field incident and increased other operating and maintenance, selling, general and administrative expenses.
In October, we entered into an amendment to the EQM credit facility, extending the maturity by one year to April of 2026. As of today, the revolver size is $1.55 billion and reduced to $1.45 billion in April of 2025. For the third quarter, E-Train will pay a quarterly cash dividend of $0.15 per common share on November 14 to shareholders of record at the close of business on November 3. And last, we updated our 2023 guidance to reflect revised MVP timing and project cost estimates. The full year guidance is available in today's third quarter earnings release.
I'll now hand the call back to Tom.
Thomas F. Karam
Thanks, Kirk. As you know, Diana will be taking over as CEO on January 1, and I'll be moving to the Executive Chair role. So this will mark my final earnings call. Diana is respected by our colleagues and across the midstream industry. She displays an unrelenting work ethic and has undoubtedly earned this role.
Looking back on the last 5 years, I can say with near certainty that no company, management team or Board of Directors has handled adversity as well as this group. I'm honored to be associated with all of them.
When you focus on our core business, you see an integrated system that gathered and safely moved 8 Bcf per day in Q3 or about 8% of the total daily production in the United States. This really didn't happen by accident. It took an amazing team effort to construct, integrate and operate the assets, while at the same time, maintaining much needed financial flexibility, and all of this done with safety and environmental stewardship as top priorities.
So in closing, it's been an eventful last 5 years, filled with many successes and challenges, and I could not have had a better team or Board by my side. I look forward to serving as Executive Chair and to the future success under Diana's leadership.
With that, we're happy to take your questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question will come from the line of Spiro Dounis with Citigroup.
Unidentified Analyst
This is Chad on for Spiro. I guess just starting off, just want to talk about the risking of the latest MVP time line and the security there. I believe you mentioned that the construction crews are sufficient now to hit that 1Q '24 target. But just wanted to see if there's any underlying assumptions that need to change in order for that time line to be achievable? Or are you kind of status quo continues, you should be able to hit 1Q '24?
Diana M. Charletta
Yes. So we should be able to hit 1Q '24. We're making steady progress right now. Last week, we passed over the halfway point for number of water crossings. The weather has been cooperative. So our current schedule was developed considering the full complement of crews based on their productivity over the last 60 days or so and certainly considering the heightened environmental protocols that we've been talking about. The labor issues behind us. We're prioritizing more of that difficult work first, while we have more daylight and more favorable weather.
We expect to have the majority of construction complete by year-end. We'll still have a handful of crossings to complete and we may be finishing up some bores, but -- and maybe some upland work, but largely January, we'll be commissioning.
Unidentified Analyst
Okay. Okay. That's helpful. And I guess, just following up. I know that you mentioned the MVP -- a potential MVP expansion in the opening remarks. I guess just thinking about it once the mainline comes online, how quickly could that opportunity emerge? And how -- any kind of details that you can give there [on time]?
Diana M. Charletta
So it is a small and more compact project in the mainline. It's more simplistic when it comes to regulatory and permits that we need. We need about 12 months. After we get an open season, everybody ready for the regulatory process and then about 12 months for construction. And we should -- we're working -- we've seen a lot of demand from both producer and demand pull customers for that expansion, and we'll go out -- you'll see us go out for an open season when we feel like the time is right, but we are -- customers are asking.
Operator
Your next question comes from the line of [Burgan Severo with] Wolfe Research.
Unidentified Analyst
On the listed factors for the MVP cost increase, would you be able to identify any in particular as the largest? Is it the workforce issues or items from the PHMSA agreement or any others?
Diana M. Charletta
So it was an item from the PHMSA agreement. We were largely aligned and had largely planned to do the things that were outlined in the order before the agreement was done. I would say more than half of the increase was linked to the slow ramp in crews that we didn't foresee and the challenges to construction in part due to the heightened environmental protocol. That's the largest.
Unidentified Analyst
And is the anticipated mid-single-digit growth specific to just the gathering system or across all the assets and also the 350 million cubic feet step up and the firm capacity gathering volumes, is that from any new MVCs that were signed?
Diana M. Charletta
The 350 OVC? Is that...
Nathan Tetlow
MVC.
Diana M. Charletta
Yes.
Nathan Tetlow
Yes, I think there was -- I think, largely associated with the new customer on the gathering.
And then your first question on the mid-single-digit growth. I mean, yes, that's -- that would be on the gathering systems. We do have a pretty integrated system with the transmission, so we would expect to see related growth in the transmission system as well as those gathered volumes, some of them move on the transmission as well. But that mid-single digit was related to gathering -- gathered volume growth.
Operator
Your next question comes from the line of John Mackay with Goldman Sachs.
John Ross Mackay
I wanted to just touch on some on the last couple of answers you've given. Could you confirm that if, let's say, we got very wet weather and construction slipped in the second quarter, what an incremental quarter of construction work equal the same cost increase that we saw for this last kind of quarter delay?
Diana M. Charletta
No. So what you're going to see is we're at 4,500 workers in the field right now, which I think Tom mentioned in his opening comments. We will step down in December -- at the end of December to 1,500 people. And as we keep completing work, we get to January, and we're at 560 people, right? So if we have some weather issues and we have less and less people on location, then there's less risk of that same type of cost increase.
John Ross Mackay
All right. That's awesome. Maybe a quick follow-up. Just on EQT's announcements of their new firm sales agreements now starting in 2027. Obviously, they still hold the capacity until we get there. Could you just share any updated thoughts you have on -- and I know it doesn't matter necessarily for the pipe earnings itself, but it could matter for the rest of your gathering and transmission footprint, just what you're expecting for kind of flows on to MVP once it's in service? And again, maybe how that 2027 time line for them impacts that?
Diana M. Charletta
Yes. So I think, first of all, it's great news, right? It's evidence -- those contracts are evidence of the long-term appetite and the support for demand in the Southeast. It also supports the data points we've been seeing for both producer and demand pull interest an MVP expansion, like we just talked about and expansions on Southgate.
The market dynamics initially are going to dictate the flows on MVP. But our fundamental view is that Appalachia volumes will grow and displace that Northeast more expensive gas coming from the Northeast giving the Southeast demand customers access to the lower cost gas in Appalachia. So even if there is just modest growth in the basin, we're uniquely positioned with the only access into the inlet of MVP to capture a disproportionate amount of that growth on our pipes. So I think they were -- that announcement was really good, and it's just another data point that adds to the fundamentals that are going to happen on the pipe.
Operator
(Operator Instructions) Your next question will come from the line of Brian Reynolds with UBS.
Brian Patrick Reynolds
It looks like E-Train is appearing to have line of sight to free cash flow inflection at E-Train. So kind of curious if we can think about future return of capital opportunities. First, debt reduction is clearly the first priority, but kind of curious if you can just refresh us on whether 4x is the right leverage target? And if you can provide us a time line on when you expect to reach this leverage target, which could open up for further return of capital opportunities down the road?
Kirk R. Oliver
Yes, Brian, this is Kirk. I would say 2 years after MVP in service, we'll be crossing that 4x threshold. And 4x remains kind of the target for us. And as we approach and we can see that glide path, we'll be evaluating what the different allocation of capital opportunities are to us at the time, and we'll be considering what we might do.
Brian Patrick Reynolds
Great. Makes sense. And as my follow-up, a counterparty on MVP talked about some downstream contracts to fill up some of its contracts on Mountain Valley Pipeline. So maybe just as a clarification, will this impact E-Train cash flows at all as it relates to its [GMP] or transmission-based business?
And then second, I think you touched a little bit on MVP Southgate opportunities. But kind of curious if any of these downstream commitments could ultimately flow through to further growth on MVP there?
Diana M. Charletta
So the answer to your first question is no. And as far as Southgate, yes, I think extending into different areas from the end of MVP then gives other customers access to that gas and then help with growth on the pipe.
Operator
We have no further questions at this time. I'll turn the call back to Tom Karam for any closing remarks.
Thomas F. Karam
Well, thank you all for joining us today. And we hope everybody has a safe and fruitful day. Thank you.
Operator
That will conclude today's meeting. We thank you all for joining. You may now disconnect.
