Q2 2023 Equitrans Midstream Corporation Earnings Call

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 equity tranche midstream second quarter 2023 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.

If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question Press Star One again I would now like to turn the conference over to Nate Tetlow. Please go ahead.

Good morning, and welcome to the second quarter 2023 earnings call for equity Trans Midstream Corporation.

A replay of this call will be available for 14 days beginning this evening.

The phone number for the replay is 870 702030 or 64736 to nine one and 99.

The conference I'd six.

625542.

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 <unk> 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 short letter 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 Janice Brenner, Vice President and Treasurer.

After the prepared remarks, we will open the call to questions.

I will turn it over to Tom Thanks.

Thanks, Nate and good morning, everyone.

Today, we reported second quarter 2023 results.

Including net income of $69 million, adjusted EBITDA of $235 million and deferred revenue of $82 million.

Kirk will provide details on the financial results in a few minutes.

It has been a remarkable couple months for M. B P.

We saw congressional leadership from both sides of the aisle together with the administration.

Work in a bipartisan way to enact the fiscal responsibility act of 2023 on June 3rd.

This legislation includes section 324, which ratifies and approves all permits and authorizations.

Necessary for the construction and initial operation of M. B P.

Importantly, the legislation also diverse any court of jurisdiction.

To review agency actions on approvals necessary for NV peak construction and initial operation.

And grants exclusive jurisdiction or claims against the legislation to the U S Court of Appeals for the district of Columbia.

On June 28.

After M V. P received all required permits.

Berke authorized all construction activities to resume after early days of active construction. The U S Court of appeals for the fourth circuit.

<unk> stay orders on two of the projects Federal authorizations again halting forward construction.

On July 14th we filed an emergency application with the United States Supreme Court seeking to vacate the stays and requesting a summary ruling on the extent of the fourth circuit's jurisdiction.

On July 27.

The Supreme Court vacated this stays and our previously filed motions to dismiss the underlying cases are pending with the fourth circuit.

We have now resumed forward construction.

And are still targeting completion by year end at a total project cost of approximately $6.6 billion.

Despite all the twists and turns we are grateful for the timely ruling by the Supreme Court.

And to be once again focused on construction.

And now I'll turn it to Diana for the operations update and then Curt will discuss the financial results and I'll have some brief closing comments.

Donna.

Thanks, Tom Good morning, everyone.

In the second quarter, we gathered about 7.4 Bcf per day, and we continue to expect volumes to be roughly flat for the year.

After MVP in service, we are optimistic and expect that we will see volume growth behind our gathering and transmission system.

The new takeaway capacity will serve to Debottleneck, the region and Alaska overall basin volume growth.

From an operations perspective, our systems provide the only direct upstream connectivity to N V P, making our assets well positioned to benefit our assets provide shippers with flexibility to direct their gas to N V. P from southwestern Pennsylvania, Northern West, Virginia, and Ohio. So.

Given our connectivity to MVP, we expect to gain a disproportionate share of volumes, even if overall basin volumes were to remain flat.

On the transmission segment, the Ohio Valley connector expansion project or a V. C acts received its FERC certificate on June 15th and received the final required federal authorization from the U S. Army Corps of Engineers on July 27, and just yesterday, we received the notice to proceed from FERC.

And expect to commence construction in the coming days.

Obviously X is a $160 million capital project that will add about 350 million cubic feet per day of deliverability on our Ohio Valley connector pipeline, which provides access to the mid continent and Gulf coast markets through Interconnects inclement in Ohio the Incrementals.

<unk> is targeted for in service in the first half of 'twenty 'twenty four.

On the water segment, our second storage facility was placed into service in July which brings total water storage capacity to 350000 barrels we expect the backbone of the mixed use water system to be substantially complete in 2023.

Additionally, we recently executed an agreement with a producer customer two side, the fresh and mixed use water service further extending the reach of the mixed use system.

We will invest approximately $30 million in this new project with most of the capital outlay in 2023 and 'twenty 'twenty four the agreement is for 10 years and is backed by a minimum volume commitment.

This new agreement is evidence that the hub and spoke strategy for the mixed use water system provides the connectivity and optionality that producers are looking for.

Moving onto an update on the regular mountain storage well incident that occurred in the fourth quarter last year.

We are progressing with the independent root cause investigation, which is expected to be completed this summer.

In the second quarter, we incurred approximately $2 $7 million of operating expense related to post incident activities and based on what we know today for the full year, we expect to incur approximately $10 million of expense and approximately $5 million to $10 million of capex related to this incident.

We will continue to work diligently throughout the review and expect to provide more information once the root cause analysis is complete.

So again, we will be very limited in what we say today beyond this brief update.

On the ESG front, we published our 2023 corporate sustainability report last week, which is based on year end 2022 data and information I'll highlight a few items and encourage everyone to access the full report for website at Echo Trans niche stream dot com.

We converted 10 compressor sites from hardly pneumatics to love bleed or Aeronautics for a total of 20 compressor conversion since 2021.

We formally adopted our environmental Justice policy to expand our project outreach efforts beyond regulatory requirements we.

We joined other industry participants as a founding member of the Appalachian methane initiative to further enhance methane monitoring through the basin and facilitate additional methane emission reductions in the region and now I'll turn the call over to Kirk.

Thanks, Diana and good morning, everyone.

Today, we reported second quarter net income attributable to E train common shareholders of $53 million and earnings per diluted common share of <unk> 12.

Net income was $69 million adjusted EBITDA was $235 million.

And deferred revenue was $82 million. We also reported net cash provided by operating activities of $299 million of free cash flow of $151 million.

Net income attributable to <unk> common shareholders was impacted by several items.

First by a $19 million unrealized gain 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 running through 2024.

Second by the previously mentioned $2 $7 million of operating expenses related to the rigor mountain storage into them.

After adjusting for these items second quarter adjusted net income attributable to E train common shareholders was $40 million adjusted earnings per diluted common share was nine.

Additionally, we reported second quarter equity income of $24 million, which is primarily associated with ASU D. C relating to the restart of MVP forward construction in June of 2023.

Operating revenue for the second quarter of 2023 was lower compared to the same quarter of last year by $10 million. The decrease was driven primarily from the impact of lower gathered volumes was partially offset by increased water service revenue.

Operating expenses for the second quarter of 2023 or $44 million higher than the second quarter of 2022. The increase was driven primarily by compensation expense related to the MVP performance Award program of $17 million, which includes $14 million.

Cumulative catch up.

Since the inception of the award.

The payout of the award was deemed probable given the enactment of the fiscal responsibility are.

The remaining expense variance was primarily related to expenses associated with the rigor mountain natural gas storage field incident.

Increased water operating expenses.

And increased other SG&A O&M and depreciation expenses.

For the second quarter E train will pay a quarterly cash dividend of <unk> 15 cents per common share on August 14, 2023 to shareholders of record at the close of business on August four 2023.

With MVP construction underway again, we wanted to remind everyone of the contributions expected and the contractual obligations and the gathering agreement with EQT that become effective following the completion of MVP.

First as detailed on slide 20 of our Investor presentation that was posted earlier today we.

We estimate MVP will contribute approximately $220 million of annual adjusted EBITDA Hammer.

Hammerhead is estimated to contribute approximately 75 million of annual adjusted EBITDA and the equity tranche expansion project is expected to contribute approximately $20 million of annual adjusted EBITDA.

With regard to the gathering agreement with EQT, the minimum volume commitment steps up to three five Bcf per day for one year and $3 75 Bcf per day for the following year and then four Bcf per day in the third year.

MVC stays at four Bcf per day through 2031, and then goes back of three Bcf per day through 2035.

With MVP in service, we would also be eligible to earn the Henry hub bonus in 2024, which could be up to $60 million depending on gas prices.

And lastly, there remains rate relief to EQT.

Specifically contingent on MVP in service.

Assuming contractual obligations commencing on January one 2024, this could be up to approximately $125 million in 2024 and up to approximately $140 million in 2025.

Additionally, the EQT global GTA provides for a fee credit to the gathering rate for certain gathered volumes that also received separate transformation services under certain transmission contracts.

On slide seven of our Investor deck, we have provided the estimated annual deferred revenue through the contract term.

Again. This is based on year end 2023, MVP completion and the contract obligations commencing on January one of 2024.

The actual deferred revenue was subject to the ultimate MVP in service date.

In terms of financing and Delevering plans during the second quarter, we retired approximately $100 million of senior notes maturing in 2023.

After MVP in service, we plan to issue debt at the joint venture level and anticipate our portion to be approximately $800 million to $1 billion.

These proceeds are expected to be used to pay down EQM debt.

From there we expect to utilize our retained free cash flow for further debt reduction and delevering.

And lastly, we refined our 2023 guidance, which is available in today's earnings release.

Assuming MVP completion by year end 2023.

Free cash flow and retained free cash flow are about $25 million higher than the previous guidance at the midpoint.

Merely based on year to date actual results and slight decreases in expected full year total capex.

All other financial guidance was largely in line with our previous expectations.

I'll now hand, the call back to Tom.

Thanks Kurt.

Well, it's been a long and challenging journey for MVP.

While we don't expect the acquisition to give up.

We have the highest degree of confidence that we will complete the project.

Our focus and commitment around the responsible completion of the remaining portion of construction which includes the.

The safety of everyone working on the right away and stringent environmental protection measures in accordance with our issued permits.

We look forward to bringing the benefits of reliable and affordable natural gas to consumers, while also enhancing natural energy security.

And helping to achieve state and national goals, we're lowering carbon emissions with that we're happy to take your questions.

At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Our first question will come from the line of Brian Reynolds with UBS. Please go ahead.

Hi, Good morning, everyone, maybe just to touch on the MVP timeline, just given year end 'twenty three versus your parent talking about first half 'twenty four.

Kind of curious around the winter timeframe, specifically previously there was always commentary around difficulty in building but.

Is there a point where construction could halt in the winter or a project developers and EPC contractors, perhaps aligned and incentivized to work through all seasons to complete MVP kind of by this year end 'twenty three are early 'twenty four timeline. Thanks.

Hi, Brian This is Tom Karam.

So first of all we are the parents we are the partner in MVP, along with Nextera Con, Ed Roanoke, and Washington gas light.

As we've repeatedly said, we expect four to five months worth of construction.

It's ordinary course, construction, where there could be some weather impact as with any project, but absent some of those.

Extreme conditions.

We were fairly confident that we're going to bring MVP into line.

Around year end.

Great. Thanks, and then just talking about you know migrating.

Migrating debts EBIT to the JP level. Once MVP is complete can you just give us an update on perhaps the absolute amount just given the $6 six total project costs.

And perhaps the timing of that of whether that could happen with the in service of and the pure perhaps before after thanks.

Are you talking about project level finance.

Yes, Okay, Janice Brenner, our treasurer will will answer that question for you Brian Good morning, Brian Yes, we do intend to pursue that project level debt. Once MVP is in service.

Net size will depend on a variety of factors, which include market conditions target credit rating as well as the underlying shipper quality.

As Kirk mentioned in the prepared remarks, we anticipate roughly $800 million to $1 billion of cash back to E train from the JV level debt issuance.

As we work towards completion by yearend, we will work with our partners and our banks to refine all of those details and the approach for that financing.

Great I appreciate the color have a good rest of your morning. Thanks.

Once again, Brian a question. Please press star one on your telephone keypad.

And we have no further questions at this time I will turn the call back over to Tom Karam for any closing remarks.

Well. Thank you all for joining US today, we have a lot of work ahead of US which is really what we do in the midstream business. So we're excited to continue that work and complete this project as well as the other projects we have underway.

We look forward to speaking to you all next quarter. Thank you.

Ladies and gentlemen that will conclude today's meeting we thank you all for joining and you may now disconnect.

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