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Thank you for standing by and welcome to the Equitrans Midstream Q3 2020 Quarterly Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I'd now like to hand the conference over to your speaker today Nate Tetlow. Thank you. You may begin.
Good morning, and welcome to the Third Quarter 2020 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 800-585-8367 or 416-621-4642. And the confirmation ID is 7529126.
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, 2019 and as updated by Form 10-Q for factors that could cause the actual results to differ materially from these forward-looking statements.
Today's call may also 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, and good morning. We hope everyone is continuing to stay safe. Today, we reported net income of $168 million and adjusted EBITDA of $282 million for the third quarter both exceeded our expectations. Our asset base and operations remain strong and the results reflect that. The third quarter results were driven by the efforts to optimize our assets, reduce operating costs and lower our CapEx.
I'll now turn it over to Diana for the operations update. Kirk will provide a finance update and I'll come back for some closing remarks before we open the call to your questions. Diana?
Thanks, Tom, and good morning. Let's start with MVP. There have been several developments since our last call. In September, the Fish and Wildlife Service issued a new biological opinion for the project following nearly a year of extensive analysis and review that was based on scientific and factual data. We are very pleased with the comprehensive nature of the opinion. In October, the FERC authorized forward construction to resume along the majority of MVP's route.
On the water crossings, the Army Corps of Engineers issued the Nationwide Permit 12 in September. In October, however, the permit was challenged. And the Fourth Circuit Court issued a temporary administrative stay to provide additional time for the court to thoroughly review and role on the motion to stay. The court has scheduled oral arguments on the full motion to stay for November 9. Lastly, we continue to expect a right-of-way permit for the Jefferson National Forest in the fourth quarter, allowing us to complete the 3.5 miles of forest work.
Based on the current project schedule, which takes into account project delays during prime construction season this year, the project's current inability to complete water body crossings and the timing of FERC's authorization to resume work in the roughly 25 miles of private lands in the National Forest. We are targeting a full in-service date during the second half of 2021 at a total project cost estimate of $5.8 billion to $6 billion. At the midpoint, E-Train expects to fund approximately $2.9 billion of the overall cost. While we are disappointed with the setbacks that have led to cost increases and delays, we remain steadfast that MVP will reach completion and more importantly that the value of this critical infrastructure project will be realized.
On Southgate the North Carolina regulators denied the application for a Section 401 water quality certification. We disagree with the merits of this decision and have already initiated an appeal. We expect a resolution during the first half of 2021. Upon receiving all necessary permits and authorizations construction is expected to commence in 2021 and the project is targeted for in-service during 2022.
In the third quarter, we averaged more than 8 Bcf per day of gathered volume. We did see some price-driven curtailments during the quarter with EQT curtailing roughly 570 million per day for the month of September. These volumes were brought back online during the first half of October.
As Tom mentioned in his opening remarks, there are several initiatives that are driving a reduction in our operating and maintenance expenses. First, the new gathering agreement with EQT provides the flexibility to connect our gathering and transmission assets and optimize compression across the overall system. This has allowed us to reduce redundant compression and in turn reduce costs.
Second we are utilizing technology and data to drive efficiency. For example, we've been able to decrease our pigging frequency by using instantaneous pressure data along with hydraulic modeling to pinpoint areas of fluid buildup in the system. By quickly identifying these areas, we've not only reduced our pigging frequency, but we've also reduced the amount of fluid handling by approximately 4x to 5x.
And lastly these types of optimization efforts have created opportunities for us to utilize internal resources for tasks that have been traditionally outsourced leading to an overall reduction of our external contractor costs. Put simply we are working more efficiently with the internal resources we currently have in place. We intend to build on these initiatives and carry the momentum into 2021 which includes maintaining our stringent focus on safety and also working to maximize free cash flow.
Finally we continue to improve on capital efficiency. We updated our full year 2020 capital guidance this morning reducing total CapEx by about $360 million versus the prior midpoint. Approximately $320 million is from MVP capital that will shift into next year with the remaining reduction, primarily driven by ongoing optimization and capital efficiency gains.
I'll now turn the call over to Kirk.
Thanks Diana and good morning everyone. This morning we reported net income attributable to E-Train common shareholders of $150 million and earnings per diluted E-Train common share of $0.35. Net income was $168 million and adjusted EBITDA was $282 million. We also reported net cash provided by operating activities of $231 million and free cash flow of $45 million.
Net income in the quarter was impacted by a $21 million unrealized gain on derivative instruments which is reported within other income. This is related 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 during the three years post MVP in service.
After adjusting for the gain on derivative, adjusted net income attributable to E-Train common shareholders was $135 million and adjusted earnings per diluted E-Train common share was $0.31. E-Train operating revenue for the third quarter 2020 was lower compared to the third quarter of last year by $58 million. This was primarily from the impact of $75 million of deferred revenue in the third quarter this year.
The reduced revenue was partially offset by increases in transmission and water revenue. Third quarter 2020 operating revenue was also impacted by the temporary production curtailments that Diana mentioned. Operating expenses for the third quarter 2020 were $297 million lower than the third quarter 2019. The decrease was mainly driven by a $305 million impairment of goodwill in the third quarter 2019 and O&M expenses were down about $9 million versus the same quarter last year. This was offset by an increase in depreciation and SG&A expenses.
For the third quarter of 2020 E-Train will pay a quarterly cash dividend of $0.15 per common share on November 13 to E-Train common shareholders of record at the close of business on November 3rd.
At the end of the third quarter, we had approximately $2 billion available under the EQM revolver and approximately $183 million of consolidated cash. And finally, we increased our full year 2020 earnings and cash flow guidance. At the midpoint we expect adjusted EBITDA just above $1.2 billion. And free cash flow of approximately $330 million.
I'll now hand the call back to Tom.
Thanks Kirk. So to summarize, we've made progress on the regulatory front with MVP and are back to forward construction. We're continuing to optimize our operations, to drive efficiency. Our financial performance is solid. And we have ample liquidity.
Our long-term strategy is designed to consistently generate substantial free cash flow, allocate our capital and free cash flow with discipline. And deliver maximum value to our shareholders.
Before going to the question-and-answer portion, I want to provide a brief updated on the Hammerhead contract dispute, with EQT. While this legal dispute is in arbitration, we will not comment further on it. But I want to reassure everyone, that this situation is isolated. And has not and will not, affect our broader very positive relationships.
Our teams work collaboratively each and every day to create value, for our respective shareholders. And to that end, we congratulate the EQT team, on the recently announced deal to acquire the Appalachian assets, from Chevron. Please stay safe, wash your hands, and don't forget to vote today.
With that we're happy to take your questions.
Thank you. [Operator Instructions] While we do so, CEO Tom Karam, do you have any further remarks?
Yeah. Thank you, Operator. I was remiss in not bringing up one more update, related to MVP. Yesterday afternoon, MVP's opposition filed a motion with the Fourth Circuit, asking that the court stay MVP's biological opinion. As we talked about earlier, this was not an unexpected development.
We remain confident in the strength of MVP's revised biological opinion. And we're preparing a response to that motion. Our confidence has not changed, because of these expected challenges at all. We'll continue to work with our partners, our federal and state agencies, to complete the pipeline in 2021.
In fact, just five minutes ago, FERC approved a package of bore variances, requested by MVP and the Forest Service, to facilitate the issuance of the right-of-way, through the Jefferson National Forest.
So with that operator, I think, we're now ready to open it up to questions.
Question-and-Answer Session
Thank you, Tom. Our first question comes from Jeremy Tonet with JP Morgan Securities. Your line is open.
Hi. Good morning guys. This is James on for Jeremy. I just want to start off with, any comment in general on 2021, just given the moving pieces, if you can provide a CapEx kind of ballpark number there.
And just given the -- your previous comments in previous quarters on, free cash flow and deleveraging, if there's any change of messaging there. I assume you guys are still targeting kind of long-term four times target there, but just any change in messaging there?
Yeah. I'll address the delevering. This is Kirk. We aren't providing an update to 2021. We're still working on that budget. But the delay of MVP obviously will impact free cash flow in the year. So, in the past we've been guiding to around four times, it will probably be a little higher than that.
Okay. Got it. And I know you mentioned -- you had a comment, I believe in the prepared remarks, just about the EQT and Chevron purchase last week. Just wondering what is -- if you can and how much you can disclose on that, just the midstream agreements on that deal?
And what the -- if any business impact on, EQT's long-term production cadence will be, compared to the impact on your business?
So this is Diana. Good morning. As far as the Chevron acquisition, we don't really think that it's going to have a material impact for us. We're already doing some of the gatherings of Chevron production in the eastern side of Green County. And there are likely some new opportunities for us. The acreage looks like it's going to be spread across several midstream areas. So some is going to go the laurel Mountain or is already there. Some goes to OVM. And then there are some Green County acreage positions that will fall within our dedicated area. But that's about -- EQT is still digesting. We're -- that's about all we have on that right now.
Okay. Fair enough. Thanks for the question.
Your next question comes from Michael Blum with Wells Fargo. Your line is open.
Thanks. Good morning, everyone. So first question it's sort of topical today I guess is just in light of these continued delays you have in MVP. Do you see any impact from the elections potentially on MVP or on the ability to get that to the finish line?
Hi, Michael, this is Tom. No we really don't.
Okay, great. And then second question just your thoughts about getting a time line and a path to get back to investment grade given the MVP delays? Is that still a long-term goal? And does that -- have you had any additional dialogue with the rating agencies on any of that?
Yeah. This is Kirk again Michael. Yeah, we -- that is still our long-term goal to get to investment grade -- and to get to investment-grade credit metrics. Obviously the delay in MVP delays that a bit. We stay in dialogue with the agencies and have talked to them all very recently. They remain -- the improvement in EQT's credit is a positive for us. But of course the agencies all remain very focused on MVP.
Got it. Thank you so much.
Your next question comes from Shneur Gershuni with UBS. Your line is open.
Hi, good morning everyone. Just -- I know that you don't -- you're in arbitration with respect to the Hammerhead situation. But I was just wondering if we can give us some color or clarity I guess about your relationship with EQT in general just given the fact that you've entered it into this arbitration proceeding? Is it specifically about that? And otherwise the relationship is very good. I was just wondering if you can give us some update with respect to how you're working and partnering with EQT just given the size of the relationship that you have with them economically?
Yeah, Shneur, this is Tom. Our relationship is really good. I mean this is an isolated legal dispute compartmentalized in the log departments. And as I said in my prepared remarks, our teams work with them all day every day. And I was really happy that EQT was able to announce that deal with Chevron. I texted Toby Rice to tell them that and got back to me right away. So look I think our relationship was good.
Okay. And maybe just a follow-up question. This is really a hypothetical sensitivity type of question. But I mean, obviously, we've been talking about MVP for years now at this point right now and the constant legal battles with the opposition and so forth. And I understand that you're doing what you can on your end. But if the MVP hypothetically is just not allowed and you have to go for individual permits what would be the hypothetical time line if you went down that path? I understand it's a worst-case scenario, but just to help us frame even if it's a low probability what the latest in-service date could be for this asset?
So -- hi, good morning. This is Diana. Our path still continues. If the nationwide 12 is not a possibility for us we actually still have two options: One is to ask FERC for approval to bore; and two is the individual permit. So I think it would be more of a combination of both and that time frame is worked into the guidance that we just gave. So the 2021 second half guidance incorporates one of three paths, I guess, the Nationwide 12 working under that or for combination bores and the individual permits.
Just to understand you're saying that that -- sorry, that you're actually considering the whole boring aspect? I'm just trying understand. Like if you have to go full boring requests from FERC, what would that time line be?
Yeah. So what I'm saying is any combination of those three is worked into our guidance right now. So we can do any of those three paths and hit the guidance that we've given. And I think it will be a combination of all of those.
Got it. Okay. Appreciate that color on that. Thank you very much, and enjoy your day guys.
Your next question comes from Spiro Dounis with Credit Suisse. Your line is open.
Hey, good morning everyone. I wanted to start out with Southgate. Just curious was the permit denial there foreseeable anyway? I understand that you disagree with the merits on it, but maybe you could just provide a little bit more color on what North Carolina specifically asking for and what the remedy is.
So, there weren't a lot of specifics. They said that they denied it, because the permits on the mainline were not -- we didn't have all the permits we needed on the mainline, but that was final, so that's why we appealed. There really isn't a remedy to once we get -- the way they left it wasn't that once we got the permit we would be allowed to proceed. That's why we had to do the appeal, so, that we wouldn't have to start a new application.
Okay. Okay. And then switching gears a bit to EQT. On the last call, they had talked about the ability to curtail more frequently and move volumes from one period to the next depending on maybe where the higher natural gas price is. How do you see that impacting your business? I imagine it will introduce some more seasonality. But are there any other impacts we should be thinking about?
So I would agree. I think that maybe the seasonality around it, we see a little more certainly I think in the shoulder months. And when prices are low, we're going to see it a bit. I think the good thing about Equitrans is that they can hit different markets at different times. So that does give them a little bit of flexibility and optionality. I would say that, it doesn't materially impact us as we've firmed up that MVC. And so we really firmed up the bulk of that business.
Okay. Got it. Last quick cleanup one for me and sorry to belabor it, but just on Hammerhead Tom, you used the phrase isolated. And it sounds like you're referring to the relationship that this is maybe the one sort of fly in the ointment when it comes to the overall relationships. But I guess just thinking more broadly about all the other contracts you have or pipelines that are still being developed, are there similar features in all of these contracts and approaching deadlines we need to be aware of?
No. No, Spiro, there's not. And not to belabor the point too much, but going back to your earlier point with Diana about the curtailments. The communication level between our two teams is critical to EQT being able to effectively execute on their curtailment plan and to our ability to help facilitate that to maximize their optimization, at the same time making sure that we can ratchet down our OpEx to mitigate any timing changes in those costs. So that's just to reconfirm that the communication between our two companies is really good. The Hammerhead situation is a one-off isolated legal issue that we don't spend any time on as it relates to managing our relationship with EQT.
Okay. Understood. I was going to ask you Tom, which way Pennsylvania flips today, but maybe I'll save that for offline. So appreciate the time. Thank you everyone.
Yes. Thanks.
Your next question comes from John Mackay with Goldman Sachs. Your line is open.
Hey, good morning. Thanks for the time. I just wanted to talk about the CapEx increase on MVP. Just wondering if that is mostly having more construction workers on standby and more lawyers, et cetera, or does it include kind of any potential contingency for a route change or anything like that?
So – good morning. It isn't really at all, because of the lawyers but they are expensive lawyers. It is really because we – of the delay in starting back. So as we start construction activities, we've had to continue to maintain the ENS controls. But the driver really, the bulk of the increase is that we're planning for now unfortunately more winter activity, so all else equal construction is less efficient in the winter which means more time and money. So there's additional work that we have to do, because we have to do temporary seeding of the right-of-way instead of final seeding which we were hoping to do by the end of this year. So it's really just the timing and the delay that drove those costs.
Got it. Thanks. Okay. And then on a related note just with the CapEx slightly higher and the time line pushed to the right a little bit, how comfortable are you feeling with the balance sheet going into 2021? And really where you're going to let leverage go-to kind of before this comes online?
Yeah. This is Kirk. Yeah. We're pretty comfortable with the balance sheet. We have access to capital. We have over $2 billion of liquidity available. So we're pretty comfortable with the balance sheet.
Okay. That's it for me. Thank you.
Your next question comes from Derek Walker with BofA. Your line is open.
Hey, good morning, guys. Just a couple of quick ones. Maybe Tom, I just wanted to make sure I heard you right. I believe, we said that, the FERC approved some of the boring for the Jefferson National Forest and that you're still waiting for the Forest Service sedimentation study. Is that correct?
No. Actually, the SEIS has been issued and posted. The – I think, it's probably four or six bore variances that FERC approved today and put on their docket. Those were gate-keeping issues that will facilitate the Forest Service issuing the ultimate right-of-way, which we expect sometime next month.
Yeah. So the draft was issued. But the final SEIS will be issued on – it's scheduled to be issued on 11/9, but that is one of the things they did ask us to do and they wanted that all to be done before the – before they had to close and issue the final. So we should be on track there. Good news.
Got it. That's helpful. And then I think on EQT's call, they kind of gave some commentary around just offloading some or all of unused capacity and hopefully having some of that wrapped up by the end of the year. Does this revised time line with MVP does that shift some of that discussion at all?
I don't think so. I was just looking to see, if Tom was going to answer that. I don't think so. I don't think that – we can't speak for what's going on with EQT and their counterparties, but I don't know that MVP in-service is something that is crucial to that release. I mean, obviously at some point it will be. But for them to make that deal right now, I don't think that that matters.
Got it. Okay. And then maybe just a last quick one for me, Tom I think you mentioned that you're working on response to the biological opinion. Is that something that we should expect this week? Next week? And what sort of the time line around that?
I think later this week is when we're scheduled to file it with the court.
Okay. Perfect. Thank you, guys. That's it from me.
Thank you.
[Operator Instructions] Our next question comes from James Carreker with U.S. Capital Advisors. Your line is open.
Hi, guys. Thanks for the question. Just thinking about 2021 capital. When you had put out that total transformation presentation earlier this year, which assumed MVP in-service at the end of 2020, I think the capital number for 2021 was around $800 million. I guess, just thinking about the pluses and minuses versus that number is that a good number to think about? And then add to that, the expected MVP spend or are there any other pushes and takes that affect that?
So we're still working on that final 2021 number especially with our producers to make sure that we have in there what we need to. I would say the biggest move right now is the MVP though. I don't know that there is anything else really that goes in or comes out.
Okay. And then, with respect to the overall arguments being heard on November 9th, would you expect a decision on that one way or another, I guess fairly quickly, or is this going to be a protracted decision from the Fourth Circuit?
We generally don't have any insight into that. Our hope is that it would be a quick decision from the Fourth Circuit. And obviously, our hope and belief is that the court would deny to stay.
Okay. Thank you.
And that's all the questions that we have. At this time, I'll turn the call back to the presenters for any closing remarks.
Well, thank you, everybody, and thanks for your attention to us, and wash your hands and vote. Have a good day. Thank you.
This concludes today's conference call. You may now disconnect.