Equitrans Midstream Corporation (NYSE:ETRN) Q3 2021 Earnings Conference Call November 2, 2021 10:30 AM ET
Nate Tetlow - Vice President-Corporate Development and Investor Relations
Tom Karam - Chairman & Chief Executive Officer
Diana Charletta - President & Chief Operating Officer
Kirk Oliver - Senior Vice President & Chief Financial Officer
Justin Macken - Senior Vice President, Gas Systems, Planning & Engineering
Conference Call Participants
Brian Reynolds - UBS
John Mackay - Goldman Sachs
Derek Walker - Bank of America
Thank you for standing by. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitrans Midstream Q3 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Nate Tetlow, Vice President of Corporate Development and Investor Relations, you may begin your conference.
Good morning, and welcome to the third 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 800-770-2030 or 647-362-9199 and 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, 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. For the third quarter, net income was $91 million and adjusted EBITDA was $266 million both were ahead of expectations. Kirk will provide details on the financial results in a few minutes. We believe E-Train continues to be a very compelling investment.
Let me summarize. First we have a solid core business that generates consistent and meaningful free cash flow. The core business is our foundation. It's rooted by long-term contracts, high-quality customers and substantial minimum volume commitments.
Second, we're realizing capital efficiencies every day. This is a result of the hard work we've done to integrate both legacy and acquired gathering systems over the last few years. We're also benefiting from simplified commercial agreements that provide design and operational flexibility.
This year, these benefits have reflected in our ability to continue refining and reducing our gathering CapEx estimates, and we are setting up for another step change in capital efficiency when return-to-pad drilling activity ramps up in the coming years.
Third, the commodity environment is providing a boost to our customers' financial health positioning them and us for long-term success. Lastly, Mount Valley Pipeline completion will provide multiple long-term benefits, not only will it provide incremental cash flow and accelerate our delivering, but it will enhance Appalachian Basin liquidity providing Mid-Atlantic and Southeast United States demand customers the only direct access pipeline to the country's largest and most reliable natural gas supply. We continue to have productive discussions with demand-pull customers and we are beginning to see signs of in-basin organic growth opportunity as well setting up for the post-MVP environment.
With that, I'll now pass it to Diana for the operations update and to Kirk for a financial update then I'll come back for some closing remarks. Diana?
Thanks, Tom, and good morning, everyone. I'll start with MVP. We are in the final stages of forward construction work for this year. In total for 2021, we will have completed about 20 miles of upland work. This leaves approximately 20 miles of remaining work, which largely consists of the outstanding water crossings and the areas in and around the Jefferson National Forest.
On the permitting side, our timing expectation has not changed since our last update. We believe the FERC, Army Corps and state processes are all on track to wrap up by year-end or early next year. We remain appreciative of the comprehensive and significant effort that the Federal and State agencies are putting forth. The targeted in-service date for MVP remains summer of 2022 and the total project cost estimate remains approximately $6.2 billion.
Moving on to our base business. On the gathering side, we are seeing a consistent level of producer activity. For the year, we still expect volumes to be roughly flat if not modestly higher compared to 2020. In the third quarter, we began recognizing fees related to some recent compression investments. This helped to drive the increase in total gathering revenue compared to the same quarter last year and sequentially.
As Tom mentioned, we continue to focus on capital efficiency initiatives. We have further reduced our expected gathering CapEx for this year and we are now projecting approximately $230 million of gathering CapEx in 2021. On transmission, we are working towards final terms on the open season that we held earlier this year. As a reminder, the open season was centered around the capacity expansion to the Ohio Valley Connector, which delivers gas to Clarington Ohio for access to markets in the Midwest and Gulf Coast. We'll provide more details on the project when we have arrangements in place.
On the water side, we recently signed a new agreement with EQT. The 10-year agreement will commence early next year and replaces the letter agreement we announced early last year. As part of the agreement, we will build upon our existing water assets to create a mixed-use network in Pennsylvania. We did bump our water CapEx estimate for this year to reflect the initial build-out. We now expect water CapEx of approximately $35 million in 2021. The agreement provides ETRN with firm revenue of $40 million per year for the first five years and $35 million per year for the last five years.
Moving on to ESG. Earlier this year, we announced our climate policy, which includes an interim target of 50% reduction in Scope 1 and 2 methane emissions by 2030. We recently began executing a plan to convert gas-driven pneumatics to air-driven pneumatics at several compressor stations and to replace high bleed with low-bleed pneumatics at various operating facilities. This initiative is expected to be complete by the end of 2022 and is estimated to achieve an approximate 20% reduction in overall methane emissions compared to 2019 levels. And lastly on ESG, we were very pleased to receive a two-notch upgrade to BBB from MSCI in their ratings assessment in September.
I'll now turn the call over to Kirk.
Thanks Diana, and good morning everyone. Today we reported third quarter net income attributable to E-Train common shareholders of $73 million and earnings per diluted E-Train common share of $0.17. Net income was $91 million, adjusted EBITDA was $266 million and deferred revenue was $79 million. We also reported net cash provided by operating activities of $210 million and free cash flow of $18 million.
Net income attributable to E-Train common shareholders during the quarter was impacted by a $21 million unrealized gain on derivative instruments, which is reported in other income. This relates to the contractual provision entitling E-Train to receive cash payments from EQT based on Henry Hub natural gas prices exceeding certain thresholds, starting in the quarter of MVP's in-service continuing through Q4 of 2024. After adjusting for unrealized gain, third quarter adjusted net income attributable to E-Train common shareholders was $57 million and adjusted earnings per diluted common share was $0.13.
E-Train operating revenue for the third quarter of 2021 was lower compared to the same quarter last year by about $8 million, primarily from lower water volumes and was offset by an increase in firm and volumetric gathering revenue.
Operating expenses for the third quarter of 2021 were approximately $5 million higher than the third quarter of 2020, with the increase coming primarily from O&M and SG&A.
For the third quarter, E-Train will pay a quarterly cash dividend of $0.15 per common share on November 12th to E-Train common shareholders of record at the close of business on November 2nd. And lastly, we've narrowed our full year guidance ranges and increased the midpoint for adjusted EBITDA and free cash flow. The full year range for adjusted EBITDA is now $1.11 billion to $1.13 billion, and the free cash flow range is now $450 million to $470 million.
I'll now hand the call back to Tom.
Thanks, Kirk. I'd like to briefly mention, the Hammerhead pipeline dispute, which came to a conclusion last week. The arbitration panel rule that the delay in Hammerhead in service was attributable to force majeure and thus EQT did not have an early termination rate. We expect to begin collecting the firm reservation fees on Hammerhead in conjunction with MVP in service. We're pleased with the outcome and ready to put this isolated situation behind us.
Lastly, I'd like to commend both the E-Train and the EQT operations and commercial teams that did not let this isolated dispute become a distraction, but instead advanced collaboration between the teams.
So let me summarize, E-Train's current state of play. Our core business is strong and consistent. Our customers are getting healthier and the macro outlook is encouraging. As Diana mentioned, we're making tangible progress on the ESG front, and it's beginning to be recognized by outside assessors. And lastly, the Mountain Valley Pipeline construction and permitting are on track with our expectations. Please stay safe, continue to wash your hands.
And with that, we're happy to take your questions.
[Operator Instructions] Your first question comes from Brian Reynolds of UBS. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. Maybe to first start off on – can we just get a quarterly update from Diana on MVP? And specifically, if there's any additional comments or time line updates around the current Fourth Circuit proceedings given the oral arguments have commenced? Thanks.
Sure. Good morning. So oral arguments were held by the Fourth Circuit last week on the biological opinion and the Jefferson National Forest right away, we respect the judicial process and therefore we're unable to provide additional details, while the matter remains in litigation. It's also difficult to predict, but decisions are often announced within 60 to 90 days. So we don't have a firm time that we will hear, but that's what we normally see.
The Army Corps process is moving along, and it appears to be on schedule. We expect the West Virginia 401 decision by the end of November, and the Virginia 401 decision by the end of December. We're uncertain exactly when FERC will act, but we expect them to issue an order on our certificate amendment application by year-end or early 2022. So, current construction right now is winding down for the winter and the schedule so we're almost completely done. There's one crossing, I think that, we're still working on. Construction schedule has very little work in January likely ramp up in February as weather starts to permit. And that gets us to the summer of 2022 in service.
Great. Appreciate all that color. As my one follow-up just curious, if there's any initial thoughts on EQT's divestments of MVP capacity. I know, previously you have talked about improved MVP non-recourse financing in roughly $1 billion, if it was sold to utility. Just kind of curious of where we are and if we still need to see more capacity sold to ultimately reach that $1 billion mark? Thanks.
Yes, this is Kirk. I mean we haven't sat down and run through what it actually does for the capacity. We've been saying between $800 million and $1 billion and I think that will definitely move it more towards the $1 billion number. More being off laid would be good, but I think this chunk really helps.
Great. Thanks. I'll jump back in the queue. Appreciate it.
Your next question comes from John MacKay of Goldman Sachs. Please go ahead, your line is open.
Hey everyone. Good morning. I want to ask a little bit just on maybe some longer term free cash flow focus. So, you spent some time talking about kind of capital efficiencies and bringing down the gathering CapEx this year. Just wondering if you can talk a little bit more about what that could look like in the future and how we should think about gathering CapEx coming down alongside the EQT rate relief? And how those two kind of potentially balance out the future? Thanks.
Yes, maybe I'll just kick this off and ask Diana and Justin to jump in. But we haven't provided long-term free cash flow guidance. So, I think the best way to think about it is to think about 2021 and what the cash flow situation looks like there. And if you back out MVP, you're going to get almost right on top of $700 million a year. I think that's a pretty good run rate to be thinking about to start.
And then I'll let Diana and Justin comment on the CapEx.
Sure. As it relates to the CapEx and Tom mentioned it during his remarks, but over the last three years, we've been executing on a pretty consistent plan. It started with integrating our gathering and transmission assets and taking advantage of those capital synergies and the latent capacity.
We simplified our contract with our largest customer aligning our interest on both sides. And then once MVP comes online, I think we're well-positioned to realize some additional CapEx savings on EQT and some of our other producers return to drill additional laterals off the existing pads and we'll already have existing infrastructure in place.
So, as we've talked about on previous calls, I think the trajectory of our sustaining CapEx is a good one because we've done the hard work over the last three years to set ourselves up for success in the long run.
All right. That's helpful. Thanks. Maybe one more kind of shifting gears on Southgate. So, you've talked about the potential to sign some more contracts on that. We also kind of saw a prefiling out of one of your competitors in the region on some contracts they've signed regionally. Just trying to think about kind of upside that you guys might be able to get there and really kind of the overall outlook for Southgate.
Yes. So, we certainly are seeing interest in Southgate additional capacity. I think the legislation in North Carolina has an impact on that expansion. And so as it's going to promote that law to accelerate coal-to-gas switching. So, that's really good for us. So, we're very optimistic about expanding that capacity on Southgate.
[Operator Instructions] Your next question is from Derek Walker of Bank of America. Please go ahead, your line is open.
Hey good morning everyone.
Just wanted to touch base on the formal remarks you talked about just in-basin organic growth on MVP. I guess I just wanted to get a little more color on that. Are you specifically just referring to the compression expansion project that I think you guys talked about in the past or are there other components there that we should be thinking about?
Yes. So, our largest expansion would be MVP compression expansion. That certainly is the largest piece on MVP. Off of Southgate and then the end of MVP, there's a compression that we can add on to Southgate and then we also have some laterals that we can do in conjunction to get to certain places off of the end of MVP or the end of Southgate.
And I guess just do you have a sense on those capital spend for those projects yet or still wait and see?
Yes, so the expansion on -- it's wait and see on Southgate I believe. But on the MVP expansion, it's about $500 – $400 million to $500 million – for $500 million a day.
Okay. That's helpful. And then maybe just a little bit further out I guess once MVP comes online but just wanted to see if you guys have had any sort of internal discussions yet, just around how you're thinking about capital allocation, when MVP comes online, whether it's just through distribution growth buybacks? We saw special distribution announced today from one of your peers. So just wanted to get a feel for how you guys are thinking about things as you start to get MVP kind of fully within the portfolio?
Yes we'll – I mean we'll be...
Yes, so I'll – I'm sorry, Kirk, I'm going to let you answer that but I want to make sure because Nate will yell at me if I don't. That number I gave you for MVP expansion is a gross capital number. It's about $200 million net to us. So Nate will get me if I don't get that in there. Sorry, Kirk.
That's, okay. That's, okay. Yes on capital allocation I mean, out of the blocks the goal is going to be to delever and we'll be using project financing at MVP to kick that off once that's in service. But then we'll be I mean we'll be open to looking at all different choices for capital allocation whether it's dividend increase or stock repurchase or investment. So we right now show that we get sub-four times a couple of years after MVP goes in service on the leverage. And I don't think we feel like we need to just accelerate to get there. So we'll start in that direction and then we'll be open-minded.
Got it. So is it fair to say just deleveraging and then perhaps some organic growth then maybe look at some other opportunities within the capital allocation portfolio? Is that sort of how we should be thinking about the priorities?
Yes. I think that's a good way to think about it.
Excellent. Thank you very much, guys. Appreciate it.
Yes. Derek, this is Tom. I think Kirk hit it spot on, right? Our focus will remain as we've been saying all along to be committed, to delivering, to get to the sweet spot, so that we have a strong position moving toward our capital allocation, which will be taking into consideration each of those other opportunities to return capital to shareholders.
There are no further questions at this time. I will turn the call over to Thomas Karam for closing remarks.
Well, thank you, everybody for joining the call today. As we've gone through each of these quarterly phone calls, it's not lost on anyone that MVP is a signature project for us. We remain focused on it. It's in the red zone. I'll call it now towards completion and we will stay focused and dedicated to bringing MVP online. So that it's just another added benefit to the really strong core business that we have. So thank you all for joining us today. We appreciate your interest in E-Train. Everybody stay safe out there. Thank you.
This concludes today's conference call. You may now disconnect.