Q4 2023 Equitrans Midstream Corp Earnings Call
Participants
Nate Tetlow; Senior VP, Commercial Services; Equitrans Midstream Corporation
Spiro Dounis; Analyst; Citi Investment Research (US)
John Mackay; Analyst; Goldman Sachs Group, Inc.
Michael Blum; Analyst; Wells Fargo Securities, LLC
Jeremy Tonet; Analyst; JP Morgan
Neel Mitra; Analyst; Bank of America
Brian Reynolds; Analyst; UBS Investment Bank
Presentation
Operator
Good morning and welcome to Equitrans Midstream Corporation's Fourth Quarter 2023 earnings call. All participants are in a listen only mode. After the speakers' presentation, we will conduct a question and answer session. (Operator Instructions)
As a reminder, this conference call is being recorded. I would now like to turn the call over to Anthony DeFabio, Treasurer and Director, Investor Relations. Thank you. Please go ahead.
Good morning, and welcome to the Fourth Quarter 2023 earnings call for Equitrans Midstream Corporation. A replay of this call will be available for 14 days beginning this evening. Phone number for the replay is (800) 770-2030 or (647)362-9199, the conference ID 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-Q factors that could cause the actual results to differ materially from these forward-looking statements. Also, the Form 10-K for the year ended December 31, 2023. It is expected to be filed with the SEC later today.
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 most comparable GAAP financial measure.
On the call today are Diana Charletta, President and CEO; Kirk Oliver, Executive Vice President and Chief Financial Officer; Justin Macken, Executive Vice President, pipeline operations and project execution; Nate Tetlow, Senior Vice President, Commercial Services; Janice Brenner, Vice President and Treasurer; 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 Diana.
Thanks, Anthony, and good morning, everyone. As many of you know, effective January first, Home Care moved into the role of Executive Chairman pharmacy-led equal chance for the past five years since we started as a standalone company, we wanted to thank him for his unwavering efforts and continued support.
Before we jump into the business discussion, I want to address the statement from this morning's news release. Our Board has been engaged in a process with third parties that have expressed interest in strategic transactions with us. We are not surprised by this interest.
Given the expected near-term completion of MVP and our view of the strength of our assets, our Board has engaged outside advisors and the process is ongoing. As you may expect, we will not be addressing questions on this matter.
Moving on to the business update, our priority remains bringing MVP into service safely, which includes a steadfast focus on the project's environmental protocols and maintaining permitting compliance.
This morning, we updated our targeted completion to the second quarter of 2024 at a total estimated project cost ranging from approximately $7.57 billion, so approximately $7.63 billion following the passage of the Fiscal Responsibility Act of 2023, we have made substantial construction progress as we exited 2023. We continued to track to our prior guidance despite challenging construction conditions, which caused lower productivity than we forecasted.
In addition to unforeseen construction issues, throughout much of January, we encountered considerably adverse weather conditions, including precipitation wells of 20-year averages. While our construction plans took into account the potential impacts of winter weather. These conditions were far worse and lasted much longer than anticipated, which had a significant impact on productivity, which in turn impacted our ability to reduce construction headcount.
These factors resulted in our updated timing and total project cost target. More recently, the weather has been favorable and our productivity rates have shown improvement as of February 15, roughly 300 miles of pipe had been installed, leaving less than four miles remaining of the 428 water crossings that remained with construction resumed in 2023, we have 13 left to craft.
We are encouraged impact through the first 77 mount with the project and hydro tested just about 180 miles and progress continues every day. If the current weather conditions continue by the time we exit February, we expect to have further narrowed the list of overall construction tax and the remaining construction is expected to be limited to three of the projects signed working spreads fall in Virginia.
The construction work in these areas will consist of finishing the remaining crossing of which fiberboard, including the Appalachian Trail crossing and installing pipe on some of the pieces slip along the route. Once construction is complete, only commissioning activities will remain before we place the pipe in service which are less impacted by weather and require far less labor.
While the majority of MVP construction is complete, the remaining construction includes some of the most difficult path on the project and could present further challenges. We are narrowing the scope of remaining activities, and our focus remains to safely bring this critical pipeline into service.
I'll now turn it over to Justin for the operations update, and then Kirk will discuss the financial results.
Yes, then Thank you, Diana. Good morning, everyone. Let's start with our gathering segment. In 2023, we averaged about 7.7 Bcf per day of gathered volumes, which was roughly flat year over year. For 2024, we expect gathered volumes to again be flat on a year-over-year basis as we continue to see producers remain at maintenance levels.
Our Hammerhead asset continued to provide interruptible service in the fourth quarter, and we will be ready to reverse flow and make deliveries to MDP. when Hammerhead achieves full commercial in-service alongside MVP in-service and firm commitments commence in 2023.
We also made progress on a compression project for a producer customer to install 32,000 horsepower of booster compression. That is backed by a long-term firm commitment and is expected to be in service in the coming days. The majority of capital investment for this project was in 2023.
Our gathering and transmission systems are highly integrated and currently provide the only direct upstream connectivity to MDP, MVP and the potential expansion project would add approximately 2.5 Bcf per day of takeaway capacity to an area of the basin that has been constrained for several years. Given this dynamic combined with the growing demand in the Southeast and expected improvements to Tesco M2 pricing with MVP and service. We believe that over the next several years, there is a path for volume growth within the basin following MVP in service.
Today, we initiated 2024 for gathering CapEx guidance of $210 million to $260 million. Moving on to transmission, we are nearing completion of the Ohio Valley Connector expansion project or OBCX., which we expect to place in service in the second quarter of 2024.
For OBCX will add about 350 million cubic feet per day of incremental capacity. Once the expansion is complete, our OBC pipeline will have the ability to move over 1.2 billion cubic feet per day of gas to Clarington, Ohio and can also provide backhaul capacity to reach MVP with the same capacity enhancing base and liquidity and providing customers significant optionality.
Our 2024 transmission CapEx guidance is $75 million to $85 million, which includes approximately $40 million for the OBCX. projects. In December, the MVP joint venture executed 20-year binding precedent agreements with two Southeast utility customers for the amended Southgate project. In aggregate, the firm capacity commitments totaled 550 million cubic feet per day. The joint venture recently completed an open season and expects to finalize this project scope in the coming months. Currently, the Southgate project is targeted to be completed in June 2028.
On the Water segment in 2023, we completed the majority of our mixed use water system for 2024. Our water CapEx is expected to be approximately $25 million to $35 million.
I'll now turn the call over to Kirk.
Thanks, Justin, and good morning, everyone. This morning we reported full year net income attributable to E-Train common shareholders of approximately $387 million and earnings per diluted common share of $0.89.
Net income for the year was $455 million. Adjusted EBITDA was $1,056 million and deferred revenue was $329 million. We also reported full year net cash provided by operating activities of approximately $1 billion and free cash flow of negative $129 million.
For the fourth quarter, we reported net income attributable to E-Train common shareholders of $134 million and earnings per diluted common share of $0.31. Net income was $150 million. Adjusted EBITDA was $272 million and deferred revenue was $88 million.
We also reported net cash provided by operating activities of $291 million and free cash flow of negative $241 million. Net income attributable to E-Train common shareholders for the full year was impacted by several items first by $9.4 million of operating expense related to the Raider Mountain storage and Salton. Second, a $7.8 million write-down of a contract asset in the water segment.
And last and a $1.5 million unrealized gain on derivative instruments, which is reported within other income relates to the contractual provision, entitling E-Train to receive cash payments from EQT conditioned on specific Nimex Henry Hub natural gas prices exceeding certain thresholds post the MVPD.s in service and through 2024.
After adjusting for these items, full year adjusted net income attributable to E-Train common shareholders was $398 million and adjusted earnings per diluted E-Train common share was $0.91. Fourth quarter was impacted primarily by a $5.9 million unrealized loss on derivative instruments related to the contractual provision with EQT mentioned earlier.
After adjusting for this Q4, adjusted net income attributable to E-Train common shareholders was $139 million and adjusted earnings per diluted share was $0.32. Additionally, we reported full year equity income of $175 million and fourth quarter equity income of $78 million, which was primarily associated with AFUDC relating to MBP construction.
Operating revenue for the full year increased by $36 million compared to last year, which was primarily driven by increased transmission and water service revenue. It was partially offset by lower gathering revenue.
Revenue for the fourth quarter of 2023 increased by $5.4 million compared to the fourth quarter of 2022, primarily as a result of increased gathered volumes, partially offset by lower water volumes.
Operating expenses for the full year increased by approximately $89 million compared to 2022 due to increased SG&A and O&M costs, primarily due to an increase in personnel costs related to the MDP. performance award and other incentive compensation as well as an increase in water expenses, including the $7.8 million contract asset write-down and increased depreciation expense.
Operating expenses for the fourth quarter of 2023 were roughly flat compared to the same quarter for 2022. For the fourth quarter of 2023, E-Train paid a cash dividend of $0.15 per common share on February 14, 2024, to shareholders of record at the close of business on February 6, 2024.
For Finally, today, we initiated guidance for 2024. For the full year, we're forecasting net income of $375 million to $455 million, adjusted EBITDA of [$1.235 billion, $1.315 billion] and deferred revenue of approximately $145 million. We're also forecasting full year CapEx and capital contributions of $850 million to$ 955 million, free cash flow of negative $65 million to negative $145 million and retained free cash flow of negative$ 325 million to negative $405 million. I'll now hand the call back to Diana.
Thanks, Kate. Before we open the call to questions, I would like to take a minute to thank our employees who remain absolutely committed to E-Train success through their ongoing commitment to safety and environmental compliance. Thank you. And with that, we'll open the call to questions.
Question and Answer Session
Operator
(Operator Instructions) Spiro Dounis, Citi. Please go ahead. Your line is open.
Spiro Dounis
Thanks, Everett, if everybody would, of course, love to started with the strategic process, but it sounds like that's out of bounds today. So maybe start with the MVP expansion and the opportunity there and thinking about it incorporates in value.
I'm just curious if you could speak to maybe some of the returns you'd expect from a project like that. I believe it's just compression and not to get too ahead of it, but is it expandable beyond it? Could be a day if you do looping and compression as well.
Hi, this is Justin. it does adjust. And so I guess starting with the scope, we expect the expansion will probably be in the range of a half a Bcf a day. As we've talked about previously, it's based on where we have scoped out the fourth greenfield compressor station and what we are physically able to add at the other stations, that's probably the sweet spot for expansion.
Technically, there are ways to go above that, but we'll have to weigh the economics of doing so in terms of build multiples, you're probably looking in the three to four range because this is a very strong project limited to just the compression investments.
Spiro Dounis
Got it. That's helpful color. And maybe turn back to MDP construction. Diana, appreciate all the color on the process from here. It sounds like some of the more challenging periods are still ahead, but I'll kind of anticipated I guess with that, Randy, you had mentioned just looking at some of the local news reports. It seems like there was some runoff issues and potentially some local complaints. Just want to make sure. Can you just confirm all permits are still in good standing the weather issues have not triggered any sort of delays from an oversight perspective either?
Yes. So the permits are all still good working very closely with the Virginia DEQ and the other agencies and the inspectors are out there daily and on. We are actually I think that issue has cleared up a bit as far as the turbidity and working with the landowner there. But everything's been good.
Spiro Dounis
Great, I'll leave it there for today. Thanks for the time.
Thank you.
Operator
John Mackay, Goldman Sachs.
John Mackay
Thanks for the time. Maybe I'll just pick up on that last point. It's a kind of theme here. Just in terms of the new time line, I think you're pointing to a June first in service, at least kind of baked into your guidance. Curious just if you could frame that up, I mean, you know, it's a few months or two months kind of past your prior benchmark, you've probably seen a month of delays.
So just trying to think of how conservative your feeling on that number right now and maybe anymore guide posts to watch from here.
With every week of good weather, we're able to narrow the variability of that cost. And that timing challenges, obviously still remain, but they're decreasing with as we complete each task. February weather has been better. We did have some rain I think the weekend before last, but the next 10 days look pretty good and that will get us to the end of the month.
So productivity has improved since January, daily continues to increase, which lengthens our work day. We have a handful of boards left to complete and some steep, but the work planned for April is substantially commissioning work and which will require significantly less people and will not be as sensitive to weather. So that's kind of that's kind of how I look at it. We will finish up construction through March and April will mostly be commissioning.
John Mackay
Just to clarify that, I think in the past, you've talked about commissioning generally being about a month, et cetera.
And that's that's our activities. We've been commissioning on the paper line, you know, [77] now we already have gas in them and it's purged impact. But we still have our third compressor station and we need to get gas to it, which will happen sometime in March. And then after we complete these other couple of pieces, we'll have to test them and work as we go. So about a month ago.
John Mackay
Thanks for that. Maybe just second question here. Thanks for that clarification. You've got some incremental leverage relief, I think on the on your revolver, maybe some talk, I guess this is for you maybe just frame that up in the context of the increased CapEx cost and how you're feeling about your buffer versus these new ceilings?
Yes, feeling really good about the buffer. So what we did is on the banks have been really good to work with on this, but we got the leverage covenant raise to [six times for Q1 6.25 for Q2, and then it comes back to 5.85 and then down to 5.5 on the following quarter].
John Mackay
Yes, I thank you. Appreciate the time.
Operator
Michael Blum, Wells Fargo.
Michael Blum
Thanks. Good morning, everyone, or maybe we'll stay on the balance sheet since that was the last question, I wanted to just kind of get your thoughts on the dividend at this point as a lever, given that you're clearly resolving the CapEx spending that that leverage is higher? Any thoughts to reduce the dividend to free up some cash flow accelerate the deleveraging process?
No, we haven't got any thoughts about doing doing anything with the dividend right now, we are focused on delevering and we have the MVP. project financing that we will be turning to as soon as MVP is in service and that will that will be a big chunk of that reduction right there. We've said, I think [$800 million to 1 billion] on that, and we are looking at possibly increasing that amount, if we can and the market's there at that time.
Michael Blum
Okay, got it. That's helpful. Thank you. And then just wanted to ask about kind of what's steady state sustaining CapEx will look like after entities and service. And if we just kind of ignore some of these discrete projects that you've already outlined, I noticed you have that metric at Slide 8, you talk about in our sustaining CapEx of [$200 million to $250 million]. Is that what you would view as like the total amount of CapEx required to keep kind of the cash flows of the overall business flatters there because they're more costs we should be thinking about.
So that number is specific to our gathering segments. And I think as we look at this year, we've guided to the [$200 million to $250 million] for some time now in terms of gathering sustaining CapEx, we're probably on the low end of that range for '23 and now for '24, if you if you take some of the growth projects, compression related projects that we have in the works this year, we're probably closer to that $200 million for the gathering segment, if that answers your questions.
Michael Blum
Great. Thank you so much.
Operator
Our next question comes from Jeremy Tonet, JPMorgan. Please go ahead.
Jeremy Tonet
Good morning.
Morning.
Jeremy Tonet
Just wanted to start off with a question Hammerhead here. It seems like the expected EBITDA ticked down a bit from the last disclosure. If we have that correct? Just wondering if you could talk about some of the drivers there.
Nate Tetlow
Yes, Jeremy, this is Nate. So that slide now reflects $65 million of EBITDA, which is really from the 1.2 Bcf a day of firm commitments, and those are directly tied to MVPs in service. I think previously on that side, we have included about 200 a day of uncontracted capacity. And just I mentioned it in the opening remarks, but the Hammerhead pipeline, we've been moving volumes on that pipeline. It is bidirectional. So we have interconnects with other pipes beyond MVP.
And in '23, we earned about $5 million of revenue moving those volumes, and we do have another pad that's coming on here midyear. And those volumes will flow north on Hammerhead. So and that's additive to the $65 million.
So I think we've really just cleaned up that slide to make it of the EBITDA that's directly attributable to the timing of MVP in-service. But certainly we're looking to earn above the $65 million. It started to do that in '23
Jeremy Tonet
Got it. Thank you very much for that. And at the risk of bringing too fine of a point of it on MVP and time line, I'm just wanted to see what when you put the May 30, June 1, dates out there, is that considered? Is that just the most recent as of today, there was a bit of there's a lot of snow over the weekend. Just wondering if that's all considered here. I'm sorry if this is too fine of a point.
we didn't get snow over the weekend up on the right-of-way and we've no unfolding we did so and I don't think we had slowed down that. We're were good. That is that second quarter is as of right now. That's where we are.
Jeremy Tonet
Got it. That's very helpful. Thanks, and appreciate if you can't touch on that, you don't want to touch on this, but as far as discussing the strategic review, is there any reason to talk about that today versus any point in the past or why in general just bring it forward?
Yes, we're not going to comment on that today.
Jeremy Tonet
Got it. Understood again.
Operator
Neel Mitra, Bank of America.
Neel Mitra
Hi, good morning and thanks for taking my question. I wanted to just understand where we are with two important crossings, the Appalachian Trail and learned forever and how long that would take to complete and if there's any challenges you see there.
So far and on the trail, we have made good progress. We're at about 60% complete and we have had some mechanical issues with equipment that has slowed us down a little bit. But when we are drilling, we are making good rates.
So and I feel pretty good about the Roanoke we have about 20 feet and of that for four, I think it's like 330 feet. We have about 20 feet left. It is slow going, but it is going and we're under the river. So I feel good. We're under the we're under the water. It's just it's and flow.
Neel Mitra
Are there various requests being filed for any of these crossings? Are you ready on that path to completely go forward?
If so and I believe we already have approved variance requests for the trail Roanoke. There is one out there for Roanoke. [It's a 247 so that we can operate 247 with two crews right now, we're just working with one. Our existing guidance has doesn't require us to get that approval, but it would help speed things up for us so if we can get it, that's what we're trying to do].
Neel Mitra
Okay, perfect. And if I could just follow up on one question on the balance sheet. I know your your covenant leverage ratio has been revised upward. And I'm just wondering where you see kind of the peak leverage on going to with the increase in costs.
Yes. We believe that the amended revolver covenant is more than adequate cushion. We are probably in the high fives with this amended targeted MVP in-service, and then we would expect that that would come down very quickly and we did the MVP project level financing.
Neel Mitra
Got it. Thank you very much.
Operator
Brian Reynolds, UBS Financial.
Brian Reynolds
Hey, good morning, everyone. And maybe a follow-up on the amended credit facility and seemed like you had still enough room to run based on your prior amendments. So just kind of curious of the reasoning to basically take it to 6 and impartially above 6.25 times.
Just wondering the drivers behind that? Is that just some extra dose of conservatism or does maybe some of the NDP level debt and timing of that maybe influence the decision to amend the facility up periodically? Thanks.
Be far off from where it was primarily just to give ourselves adequate cushion and for some conservatism on so that we didn't have any concerns with the balance sheet going forward, but it should not signal any concerns with regards to the MDP. financing and our ability to execute on.
Just to take it off the Brian.
Brian Reynolds
Right. Okay. Makes sense. And then as a follow-up, the Spiros Southgate question. I know previously there were some issues around permitting on that part of the leg of the projects. Can you just help me understand how maybe the new scope of the project maybe addresses some of these concerns around permitting there? Or will should we expect some additional permits to be filed in those jurisdictions over the coming months to pursue that project things?
Yes, I'll start. So the revised scope, certainly shortens the project considerably there. There'll be less stream crossings and other things that could be permitting challenges down the road so I think the revised scope here goes a long way to derisking the project, and we're more comfortable with our ability to act because we're derisking it that way.
Because everything is the compression count. That's helpful and that we will need to file permits. It will the shorter route is great, but we'll still have to go through the permitting process that data is pretty far out there. So we haven't started that yet. But where we have all the legwork and have the route, we've been working on this route for quite a long time.
Brian Reynolds
Okay. Makes sense for the rest of the morning.
Operator
We have no further questions in queue. I'd like to turn the call back over to Diana Charletta for closing remarks.
Thank you all very much for your time. We appreciate it. Have a great day.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.
