ETRN - Equitrans Midstream Corp (ETRN) Q3 2022 Earnings Call Transcript
Equitrans Midstream Corp (ETRN)
Q3 2022 Earnings Conference Call
November 01, 2022, 10:30 ET
Company Participants
Nathan Tetlow - VP, Corporate Development & IR
Thomas Karam - Chairman & CEO
Diana Charletta - President, COO & Director
Kirk Oliver - SVP & CFO
Justin Macken - SVP, Gas Systems, Planning & Engineering
Brian Pietrandrea - VP & CAO
Conference Call Participants
John Mackay - Goldman Sachs
Indraneel Mitra - Bank of America Merrill Lynch
Brian Reynolds - UBS
Alexis Kania - Wolfe Research
Presentation
Operator
Good morning. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Equitrans Midstream Corporation Third Quarter 2022 Results Conference Call. [Operator Instructions]. Nate Tetlow, Vice President, Corporate Development and Investor Relations, you may begin your conference.
Nathan Tetlow
Good morning. and welcome to the third quarter 2022 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, 2021, 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; Brian Pietrandrea, Vice President and Chief Accounting Officer; and Janice Brenner, Vice President and Treasurer. After the prepared remarks, we will open the call to questions.
With that, I'll turn it over to Tom.
Thomas Karam
Thanks, Nate, and good morning, everyone. Today, we reported third quarter results including a net loss of $504 million, adjusted EBITDA of $259 million and deferred revenue of $85 million. We also increased our full year free cash flow guidance. Kirk will provide details on the financial results in a few minutes.
Let me start with MVP. Today, we announced an impairment of $583 million, primarily on the basis of the increased timing uncertainty now present in the normal permitting path through the Fourth circuit quarter. Kirk will discuss some of the factors in that analysis in a minute.
On that permitting path, we remain actively engaged with all of the agencies since the Fourth Circuit vacated for the second time these permits in early 2022. We are continuing to work with the agencies to produce permits that when reissued will exceed all legal standards used by federal courts as well as this courts unreasonably high bar. That said, based on the hearing conducted by the Fourth Circuit panel last week regarding a challenge to the West Virginia 401 certification, it was evident that the same court panel that has consistently overruled technical conclusions of federal and state regulators more than 10x, again appeared hostile to the West Virginia Department of Environmental Protection's issuance of a permit for MVP.
As in any federal permitting project, there remains some uncertainty on the federal agency front regarding timing. As I said, we are engaged with the agencies as they work to develop and refine their proposed schedules for permit issuance. Notwithstanding these uncertainties, in our view that this Fourth Circuit panel far exceeds well-established boundaries for agency deference. We will continue pursuing the permitting path available under the existing law.
However, having been under construction since early 2018 and now being roughly 94% complete with total project work, the best path to complete MVP by the second half of 2023 and get off landowners' property, flow natural gas to help lower cost to consumers, while adding to our national and energy security is for Congress to pass legislation requiring the completion of the project.
Through the efforts of Senator's management and capital, Energy infrastructure permitting reform legislation has drawn significant bipartisan support, including from representatives of the Biden administration. We remain encouraged by the continued support for permitting reform and in particular, for MVP's inclusion in that legislation. We urge Congress to act on this bipartisan momentum and pass legislation in the near term.
And now I'll turn it to Diana for the operations update, and then Kirk will discuss the financial results. Diana?
Diana Charletta
Thanks, Tom. Good morning, everyone. I'll start with gathering. In the third quarter, we gathered about 7.5 Bcf per day. We continue to see producers holding to maintenance levels and believe that A-Basin volumes will remain roughly flat until further takeaway capacity becomes available. For this year, we continue to expect that gathered volumes will be slightly down year-over-year based on current year development plans and pad timing.
Moving on to transmission. In September, FERC issued a draft environmental impact statement for the Ohio Valley Connector expansion or OVC X project. The expansion 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 in Clarington, Ohio. The project is still on track to be placed in service during the first half of 2024. Total capital for the project is $160 million, and we expect to earn a build multiple of 4 to 6 times.
On the Water segment, we are progressing nicely on the mixed-use system build-out. In August, we completed and started operations at the first of 2 aboveground storage facilities. The initial facility has a capacity of approximately 150,000 barrels and in September, the first full month of operations, we offloaded and redelivered about 500,000 barrels. Our producer customers are very focused on reusing water and reducing truck traffic. And ETRN storage services play a critical role in alleviating the logistics challenge around handling daily water production and frac job timing.
The second storage facility, which will have approximately 200,000 barrels of capacity is targeted to be in operations in the first quarter next year. For the year, we continue to expect water EBITDA of approximately $30 million. Lastly, on ESG, we continue to make progress on methane mitigation through pneumatic conversions, either high bleed to low bleed or to full air pneumatics. This year, we've completed 7 conversions at compressor sites and have 3 more conversions planned in the fourth quarter. By year-end, we will have reduced Scope 1 methane emissions by more than 20% in starting the mitigation program. Additionally, in terms of reporting and disclosure, we recently responded to the CDP questionnaire on water security and completed the TCFD readiness assessment.
I'll now turn the call over to Kirk.
Kirk Oliver
Thanks, Diana, and good morning, everyone. Today, we reported third quarter net loss attributable to E-Train common shareholders of $521 million and a loss for diluted E-Train common share of $1.20. Net loss for the quarter was $504 million. Adjusted EBITDA was $259 million and deferred revenue was $85 million. We also reported net cash provided by operating activities of $210 million and free cash flow of $37 million.
Net income attributable to E-Train common shareholders was impacted by several items. First, the $583 million impairment to our investment in the MVP joint venture, Second, by $117 million increase to income tax expense primarily due to a valuation allowance placed on our deferred tax assets resulting from cumulative losses that were driven by the impairment to our investment in the Mountain Valley Pipeline joint venture.
Third, by a $2 million unrealized loss on derivative instruments, which is reported in other income. This is related to the contractual provisions huddling E-Train to receive cash payments from EQT, additioned on specific NYMEX Henry Hub natural gas prices exceeding certain thresholds post-MVP's in-service and through 2024.
And lastly, by a $3.7 million gain on sale of non-core gathering assets. This is a onetime item and relates to the sale of Equitrans gathering assets that serve low-pressure vertical wells. After adjusting for these items, third quarter adjusted net income attributable to E-Train common shareholders was $38 million and adjusted earnings per diluted share was $0.09. With regard to the impairment of the MVP investment and determining the value of the investment, we consider a lot of factors, including the remaining regulatory process and core actions. And we also have variable inputs like in-service timing probabilities and cost of capital considerations. The impairment resulted primarily from a decrease in the in-service timing probabilities, which is a direct result of timing uncertainty around permit issuance and the continued challenges at the Fourth Circuit.
E-Train operating revenue for the third quarter of 2022 was lower compared to the same quarter last year by $10 million. This is primarily from higher deferred revenue and lower gathered volumes and was partially offset by increased water service revenue. Operating expenses for the third quarter 2022 were nearly flat with the same quarter last year. For the third quarter, E-Train will pay a quarterly cash dividend of $0.15 per common share on November 14 to common shareholders of record at the close of business on November 2. In early July, EQT elected to receive $196 million cash payment and to forego up to $235 million of future rate relief.
The cash payment, which was made on October 4, represents final consideration for approximately 20.5 million E-Train common shares that were purchased from EQT and retired in the first quarter of 2020. Today, we updated our full year guidance to reflect a modest decrease in expected CapEx and an associated increase in free cash flow and retained free cash flow. For the year, we now expect CapEx and capital contributions of $540 million to $580 million and free cash flow of $355 million to $375 million.
I'll now hand the call back to Tom.
Thomas Karam
Thanks, Kirk. So in summary, the base business and operations continue to perform well. We're executing on our organic gathering and transmission projects and establishing a premier water handling network. And on MVP, we are committed to completing the project. We will continue to pursue durable permits from federal agencies and at the same time, work to promote legislation to complete MVP and reform federal permitting process.
With that, we're happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions]. And your first question comes from the line of John Mackay from Goldman Sachs.
John Mackay
Let's start on MVP. I guess, could you share a little bit more? I understand the moving parts of the impairment, but when you're talking about risks to timing, I mean what can timing look like at this point? Are you comfortable if the process plays that in a different way and we start talking about a 2024 in service, 2025? I'm just trying to think of a book end and kind of what went into the $580 million to kind of get you there?
Thomas Karam
Yes. John, thanks. This is Tom. Thanks for the question. Look, we remain confident that we're going to complete MVP through 1 path or another. And along with our MVP partners, we're fully committed to doing so. It's difficult to provide a definitive time line until we know which path we will travel, right? But regardless of which path, if we can mobilize construction crews in the summer of 2023, we can still bring MVP into service in winter of 2023. So that's the message we're trying to deliver as opposed to hanging on any specific date or specific schedule order, right?
So the message is we remain confident, we remain committed as do our partners and that if we can mobilize construction crews by the summer of 2023, we can bring the needed natural gas relief into winter of 2023, so that we can help lower the cost to consumers aid in our national and energy security and provide some assistance through displacement with LNG exports to our [indiscernible]. So that's the definitive answer to the question.
John Mackay
All right. I appreciate that. Maybe let's shift gears, talk about gathering. So I think going into the year, at the beginning of the year, you talked about that water line that was down, causing a little bit of weakness. Just curious, is the 3Q softness we saw in gathering and then some of the softness we saw from your largest producer counterparty, is that the same thing? Or is there kind of something incremental that was driving weaker volumes this quarter? And maybe if we kind of think about how we're going to fourth quarter off of that?
Justin Macken
John, this is Justin. I can answer that one. So the water line issues that we experienced earlier this year required that we replace a few select lines to ensure the quality of that system that we are building out. We're addressing that problem now. And I think that's behind us at this point. And I think EQT touched on that on their call as well.
What you did see was some Cascading impacts to schedules because of that as certain fracs were reprioritized during the time period in which we were replacing certain lines. So you see that play out throughout the year as their schedule is impacted. But like I said, I think that's largely behind us at this point. And I think as Diana touched on in her prepared remarks, our guidance throughout the year has been based on flat to mid-single-digit declining volumes throughout the year and until more infrastructure is built out of the basin, we do expect that the producers will remain in that maintenance mode so that it can get built.
Operator
Your next question comes from the line of Neel Mitra from Bank of America.
Indraneel Mitra
First wanted to touch on EQT and the recent Tug Hill acquisition, just give them a little bit more flexibility on where they drill. I was wondering if you've had discussions with them about budgeting and planning for '23 and if that would impact kind of your base plan going forward? Any color you can provide on that?
Justin Macken
This is Justin again. So certainly, we're in conversations with EQT regularly about their plans. We have talked to them about this acquisition. As we see it, the XcL assets are really built for purpose around the upstream assets that they're acquiring, not really any material overlap with our gathering assets. That XcL system does have an interconnect into our OVC system. And so we do see some opportunities there to bring additional volumes from the newly acquired acreage for EQT onto our systems to give them some more downstream optionality for marketing.
But on a broader scale, EQT and all the producers continue to signal that there'll be in maintenance mode. At this time, we don't see really much of any impact on our volumes flowing into our system. Due to this acquisition. And even beyond that, I think our system does offer the best path to downstream markets. And certainly, when MVP comes online, really the best path to get to that capacity. So with all those things in play, at this time, I don't see any reason to believe that volumes would be moving away for us at market.
Indraneel Mitra
Got it. And then the second question on MVP. You noted that the water hearing last week, some issues with the Fourth Circuit came up, which created some doubt. And then you also noted that you believe permitting is -- it's something that's needed. Could you elaborate more on kind of what is happening in that hearing about the water permit? And then when you look at potential legislation, are you looking for an MVP carve-out like the mansion legislation or just general permitting to get this through the finish line?
Thomas Karam
Yes. Thanks, Neel. Look, 2 things can be true at the same time. I think in a way, we're just stating the obvious that when a panel overrides Agency's expert conclusions 10x it's not a particularly friendly panel to the project. So, that's stating the obvious. The second is that with or without MVP and both Senator Mansion's proposed permitting reform and Senator Capital's permitting reform, meaning 2 bipartisan forms of permitting reform, each include MVP legislation to complete the project. So that we fully believe that there needs to be permitting reform. I mean, we're on our third round of having federal permits issued that have been overruled. And it's just an incredibly inefficient way to try to construct critical infrastructure in this country. if you can't have certainty and finality of expert permits that are issued from federal agencies. So I guess the answer to your question is that if there were permitting legislation that were brought forward, we would fully expect that MVP language would be included in whatever form that permitting legislation would take.
But also true is that we're going to continue our very positive and constructive relationship with the federal agencies so that they can reissue durable, comprehensive permits that, as I said earlier, we'll pass muster to every federal court, even this court, which has not been the most friendliest of panels to us with this project. So that's why we remain confident. But also at the same time, we have to acknowledge the obvious that we need permitting reform in this country and that this panel has been particularly unfriendly to MVP. I hope that answers your question.
Operator
And your next question comes from the line of Brian Reynolds from UBS Financial.
Brian Reynolds
Maybe just a quick follow-up to MVP and just the cash burn rate per quarter or by month. Are there any contract rate changes or inflationary pressures to where that rate change is materially heading into '23?
Thomas Karam
Yes. Brian, I think the run rate -- the burn rate is somewhere between $20 million and $25 million a month, largely for the maintenance of the right-of-way, which -- because this court has continued to vacate permits has been remained not restored for 4 years. So of course, when the right-of-way is not permanently restored, you have maintenance. Because we're 94% complete, there's really not significant or meaningful inflationary pressures or contractual pressures. It's really maintenance of the right of way because we remain on landowners' property for far too long.
Brian Reynolds
And maybe just to touch a little bit on capital allocation and just rising rates and for an interest rate exposure. I know you have some excess free cash flow in '22, that should flow through into '23. But kind of just curious with the aforementioned question on burn rate. And then in addition, just to sum a little bit of debt on your revolver and you have the press. Are there any interest rate exposures that we should be thinking about the '23 that could impact that free cash flow profile?
Kirk Oliver
No, Brian, this is Kirk. No, it's the revolver is basically the only interest rate exposure we have.
Thomas Karam
Brian, you raise an interesting point, right? Our core business, setting MVP aside continues to perform well and generate significant free cash flow. So even with the heightened level of, I'll call it, burn rate for MVP, we will continue to delever at a slower pace, but the free cash flow remains constant and predictable so that while we need to bring MVP into service to execute on our larger plans, there's not a deterioration because we're generating such strong free cash flow quarter after quarter. Thanks for the question.
Brian Reynolds
That does answer my question. Thanks for just touching on those moving pieces as it relates to MVP and just the overall business as a whole. So I appreciate it, and enjoy the rest of your morning.
Thomas Karam
Thanks.
Operator
And your next question comes from the line of Alex Kania from Wolfe Research.
Alexis Kania
Great. I guess maybe just comes down to the comments just on the uncertainty on federal permitting. I know previously, there was an expectation you'd have it some -- by the end of the year or early next. Is it just kind of a sense you're getting from the federal government just in terms of updated time lines that, that might be extended? Or is it -- I think maybe as you suggested before, it's a question of maybe when to see what goes on with permitting reform before kind of final permit's issued?
Thomas Karam
Yes. Alex, this is Tom. I don't think there's anything specific that we're pointing to. We're just talking about just -- the current circumstances surrounding this project and that even when permits are issued, our ability to quickly dispense of the relentless litigation. If the federal agencies move the schedule a month or 2 either way, that's not determinative of our ability to complete the project within our guidance, as I said earlier.
If we can get mobilized in the summer of 2023, we can bring the project in line for winter of 2023. I don't want to get hung up on are the permits issued on a specific date, but I'd like to frame the conversation in that regard.
Alexis Kania
Got it. That makes a lot of sense. And then maybe just a question, just again thinking about the cash flow profile. Can you have kind of an updated sense now that we're through the EQT exercising its cash option, maybe how to think about deferred revenue maybe going into next year and kind of beyond just what the profile of that might look like?
Brian Pietrandrea
Yes, this is Brian Pietrandrea. So when EQT exercise their cash option, they're forgoing about $235 million of rate relief. So we factor that into our analysis. And we'll have 2024 guidance -- or excuse me, 2023 guidance later, but we did adjust for that and forgoing that rate relief going forward.
Operator
Your next question comes from the line of John Mackay from Goldman Sachs.
John Mackay
I just wanted to hop on. Thanks for second 1 here. In the past, you've talked about the potential to maybe look to go to a higher court above the appeals court and try to get some of these decisions reversed. Is that still an eventual possibility here if we continue to see bad news in the water permits?
Thomas Karam
Well, John, first of all, second round of questions cost more. So I'm not a lawyer.
John Mackay
I'll talk to Nate about that offline.
Thomas Karam
Right. I'm not a lawyer, but based on all of the input that we've received from the lawyers, there is nothing that is ripe for us to take to SCOTUS now that would solve the global issues in and of themselves, right? We have a series of individual permits from different agencies so that the difficulty is what do you take to the Supreme Court that actually is a comprehensive fix? So right now, as I'm going to sound like a broken record. But right now, we're going to continue to push to have the federal agencies, again, that we have really constructive and positive relationships with to reissue the permits and then get in front of that Fourth Circuit like we have so many times before and make the case that when is enough, enough, right?
When on the third round of the Biden administration issuing these permits, it's hard for us to fathom that this administration would be arbitrary or capricious in issuing environmental permits and that they're going to be issued in accordance with the law and the Fourth Circuit should follow the law and give deference to the agencies. So that's our plan of attack here, if you will, so that we can mobilize in the summer of 2023 and complete this project in winter 2023.
Operator
And there are no further questions at this time. Mr. Tom Karam, I'll turn the call back over to you for some final closing remarks.
Thomas Karam
So thank you all for joining the call today. And we're pleased that you have continued interest in the company. We will not rest and have no intention of resting nor do our partners until we complete MVP. That does not mean we're taking our eye off our core business, as you can see by the consistently strong results. So that, hopefully, in the very near future, we will bring MVP into service and the country will be better off and E-Train will be better off. Thank you very much. Have a good day.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.
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Equitrans Midstream Corp (ETRN) Q3 2022 Earnings Call Transcript