Q3 2023 Equitrans Midstream Corp 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 Corporation third quarter 'twenty twenty-three earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there won't be ey.

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 to withdraw your question Press Star One again I would now like to turn the conference over to take that Nate Tetlow. Please go ahead.

Good morning, and welcome to the third quarter 2023 earnings call for <unk> Midstream Corporation.

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

The phone number for the replay is 870 702030464736 to 9199 the.

The conference I D.

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 <unk> Form 10-K for the year ended December 31st 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, Janice Brenner, Vice President and Treasurer, Brian Petra, Andrea 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 and good morning, everyone.

Today, we reported third quarter 2023 results, including net income of $130 million adjusted.

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 MBP.

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.

Including the unexpected difficulty in ramping up construction crews.

Particularly as a result of the history of court related construction stops <unk>.

Including the nearly three 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 4500 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 eight to nine weeks, we expect to complete the major boring activities.

And nearly all water body crossings.

Closer to year end, we anticipate the head count.

Would be reduced to about 1500.

As crews finish up and are released.

We're confident in the plan and schedule.

And optimistic that MBP can still provide consumers some much needed financial relief this winter.

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

Diana.

Thanks, Tom Good morning, everyone.

In the third quarter, we gathered about eight bcf per day, representing 8% sequential quarter, Chris 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 turned in line three 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 south east the ability to expand MVP capacity by 500 million cubic feet per day through compression unexpected improvements to petco and two pricing with MVP in service, we anticipate annual gathering volume growth in the mid single digits for the year.

Following MVP in service.

On the transmission segment, we commenced construction of the Ohio Valley connector expansion project or N V. CX in the third quarter, obviously 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 obesity pipeline will have the ability to move over one point to <unk>.

Yes, a day of gas declaring too.

And can also provide backhaul capacity to reach MVP with the same one two bcf per day of capacity enhancing based on liquidity and providing customer a significant optionality.

On the water segment, we have completed the trunk line connecting our two above ground storage facilities, which completes the majority of the backbone of our mixed use water system assist.

The system now allows for the delivery of over 140000 barrels per day of next slaughter, the connected well pad 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 regular mountain storage, while incident that occurred in the fourth quarter last year.

August we submitted a comprehensive root cause analysis to Finfet and then October sensor approved our injection plan and we began injections at the regular storage there and.

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 rigor 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.

Thanks, Diana and good morning, everyone.

Today, we reported third quarter net income attributable to <unk> common shareholders of $113 million and earnings per diluted common share a 26.

Net income was $130 million adjusted EBITDA was $250 million and deferred revenue was $83 million.

Also reported net cash provided by operating activities.

$202 million in free cash flow of <unk>.

<unk> $133 million.

Net income attributable to E train common shareholders was impacted by several items.

First by a $7 $8 million write down.

Contract assets in the water segment.

Second a $3 $4 million unrealized loss on derivative instruments, which is reported within the 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 posed to mvp's in service and through 2024.

And last by the previously mentioned $2 $3 million of operating expense related to the rigor mountain storage into that.

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 28 SaaS.

Additionally, we reported third quarter equity income.

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.

Your water volumes and was partially offset by lower gathering revenue.

Operating expenses for the third quarter, 2023, or $38 million higher than third quarter 2022.

The increase was primarily driven by the $7 $8 million write down of a contract asset in the water segment.

$7 5 million dollar expense related to a onetime cash bonus awarded to Tom for his efforts and the inclusion of MVP provisions and 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 rigor 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 155 billion.

<unk> to $1 45 billion in April of 2025.

For the third quarter E train will pay a quarterly cash dividend of <unk> 15 per common share.

<unk> <unk> thousand 14 to shareholders of record at the close of business on November three.

And last.

We updated our 2023 guidance to reflect revised MBP timing and project cost estimates.

The full year guidance is available in today's third quarter earnings release.

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

Thanks Kirk.

As you know Diana will be taking over as CEO on January one.

And I will be moving to the executive chair role.

So this will Mark my final earnings call.

Diana is respected by your colleagues and across the midstream industry. She displays and unrelenting work ethic and has undoubtedly earned this rule.

Looking back on the last five 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're seeing an integrated system that gathered and safely moved eight bcf per day.

In Q3 or about 8% of the total daily production in the United States.

This really didn't happen by accident took an amazing team effort to construct integrate and operate 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 five years.

Filled with many successes and challenges and.

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 <unk> leadership.

With that we're happy to take your questions.

At this time I'd like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad. Our first question will come from the line of Spiro <unk> with Citigroup. Please go ahead.

Hi, This is Chad on for Spiro I guess, just starting off just wanted to talk about the risking of the latest MBP timeline of the security there.

I believe you mentioned that the construction crews are sufficient now to hit that 124 target, but just wanted to see if there's any underlying assumptions that need to change in order for that timeline to be achievable or are you kind of status quo continues you should be able to hit one two important thank you.

Yes, so we should be able to hit <unk> 24 that were 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 issue is 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 yearend. We will still have a handful of crossings to complete and we may be finishing up some doors, but and maybe some upland work, but largely January will be commit.

<unk>.

Okay.

Okay. Okay. That's helpful.

And I guess just following up.

I know that you had mentioned the MVP opinion until MVP expansion on the opening remarks, I guess just thinking about it once the mainline comes online how quickly could that opportunity emerge and out.

Any kind of details that you can give there on time.

So.

It is a smaller and more compact project and 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 and 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 our customers are.

Asking.

Okay. Okay understood makes sense, thanks for the time today.

Your next.

Question comes from the line of <unk> <unk> with Wolfe Research. Please go ahead.

Hi, Good morning, Thank you for taking my questions.

On the listed factors for the MBP cost increase would you be able to identify any in particular is the largest.

Is it the workforce issues or items from the FEMSA agreement or any others.

So it wasn't items from the since the 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'd say more than half of the increase was linked to the slow ramp and crews that we didn't foresee and the challenges to construction in part due to the heightened environmental protocols that's the largest.

Thank you.

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.

<unk>.

The firm capacity gathering volumes was that from.

Any new NBC is that were signed.

The 350, <unk> B is that.

Right.

Yeah, 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.

That would be on the gathering systems would 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.

Alright. Thank you I appreciate the time.

Your next question comes from the line of John Mackay with Goldman Sachs. Please go ahead.

Hey, good morning, everyone. Thanks for the time 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 into the second quarter.

What are the incremental quarter of construction work.

Equal the same cost increase that we saw for this last quarter delay.

No so what you're going to see is we're at 4500.

Workers in the field right now.

Which I think Tom mentioned in his opening comments, we will step down in December and the end of December to 1500 people.

And as we keep completing work we get to January and we're at 516 people right. So if we have some weather issues.

And.

We have less and less people on location and there's less risk of that same type of cost increase.

Alright, 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 got 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 can matter for the rest of your gathering and transmission footprint, just what youre expecting for kind of flows onto MVP. Once it's in service and again, maybe how about 2027 timely.

Timeline for them impacts that.

Yeah. So.

I think first of all it's great news right. Its 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 producers and demand pull interest in MVP expansion expansion like we just talked about and extensions on south gate the market dynamics initially.

Dictate the flows on MVP, but our fundamental view is that Appalachia volumes will grow.

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 MBP 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.

Very clear I appreciate it.

Again, Brian a question press Star one on your telephone Keypad. Your next question will come from the line of Brian Reynolds with UBS. Please go ahead.

Yeah.

Hi, good morning, everyone.

You know it looks like E train is appearing to have line of sight to free cash flow inflection.

E train so kind of curious if we can think about you know future return of capital opportunities. You know first debt reduction is clearly the first priority, but kind of curious if you can just refresh us on whether four times is the right leverage target and if you can provide us a timeline on when you expect to reach this leverage target, which could open up the door for further return of capital opportunities down the road.

<unk>.

Yeah, Brian This is Kurt I would say.

Two years after MVP in service will be crossing that four times threshold.

And four times remains kind of the target for us.

And as we approach.

And we can we can.

See that glide path will be evaluating what the different.

Allocation of capital opportunities are.

At the time and we'll be considering.

Well you know what we might do.

Great makes sense and that's my follow up a counterparty on MVP you talked about some downstream contracts to fill up some of its contracts on mountain Valley pipeline.

So maybe just as a clarification will this impacts 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 MBP there. Thanks.

So the answer to your first question is no.

And as far as South gate, Yes, I think.

Extending into different areas from the end of the MBP then gives other cut.

Customers access to that gas and then helps with Chris on the pipe.

Great that all makes sense I'll leave it there enjoy the rest of your morning.

Thank you.

You have no further questions at this time I'll turn the call back to Tom Karam for any closing remarks.

Well. Thank you all for joining us today, and we hope everybody has a safe and fruitful day. Thank you.

That will conclude today's meeting we thank you all for joining you may now disconnect.

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