Equitrans Midstream Corp
NYSE:ETRN
Earnings Call Analysis
Q4-2023 Analysis
Equitrans Midstream Corp
Equitrans Midstream Corporation, engaged with substantial infrastructure development, has revised its timeline for project completion to the second quarter of 2024, with estimated costs ranging between $7.57 billion to $7.63 billion. Despite encountering adverse weather and unforeseen construction predicaments, which hampered labor productivity, the firm persisted in aligning with earlier guidance. Encouragingly, as of mid-February, there's significant progress with roughly 300 miles of pipeline installed and only about 4 miles left. The focus remains on the last few construction activities in Virginia, aiming to finalize formidable tasks such as the Appalachian Trail crossing.
The company's Gathering segment reported stable gathered volumes at 7.7 billion cubic feet per day in 2023, with expectations for similar levels in 2024 due to producers maintaining low outputs. Upcoming service milestones include a new booster compression project and the full commercial in-service of the Hammerhead asset, which will feed into the MVP upon its completion.
Equitrans has set forth its capital expenditure guidance for 2024, allocating $210 million to $260 million for gathering and $75 million to $85 million for transmission, signifying growth and expansion efforts. Most notably, the Ohio Valley Connector expansion project, which is predicted to enhance capacity significantly, is expected to launch in Q2 2024. An important development is the completion of an open season, with the Southgate project anticipated to be completed by June 2028, providing a long-term outlook for infrastructure expansion.
For the year, Equitrans Midstream Corporation reported considerable financial achievements with net income attributable to shareholders at approximately $387 million, or $0.89 per diluted share, and a net income total of $455 million. The company's Adjusted EBITDA stood at $1,056 million with deferred revenue of $329 million, all while clocking in about $1 billion net cash from operating activities but a negative free cash flow of $129 million. Notably, the fourth quarter witnessed a net income of $134 million, earning $0.31 per diluted share. The financial performance was influenced by certain exceptional items, including an operating expense related to the Rager Mountain storage incident, a write-down in the Water segment, and an unrealized gain on derivative instruments tied to specific NYMEX Henry Hub gas price thresholds.
You don't have any saved screeners yet
Good morning, and welcome to Equitrans Midstream Corporation's Fourth Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Anthony DeFabio, Treasurer and Director, Investor Relations. Thank you. Please go ahead.
Good morning, and welcome to the Fourth Quarter 2023 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. 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, 2022. And as updated by Form 10-Qs, for factors that could cause the actual results to differ materially from these forward-looking statements. Also, the Form 10-K for the year ended December 31, 2023, is expected to be filed with the SEC later today. 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 most comparable GAAP financial measure. On the call today are Diana Charletta, President and CEO; Kirk Oliver, Executive Vice President and Chief Financial Officer; Justin Macken, Executive Vice President, Pipeline Operations and Project Execution; Nate Tetlow, Senior Vice President, Commercial Services; Janice Brenner, Senior Vice President, Finance and Investor Relations; 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 Diana.
Thanks, Anthony, and good morning, everyone. As many of you know, effective January 1, Tom Karam moved into the role of Executive Chairman. Tom has led Equitrans for the past 5 years since we started as a stand-alone company. We want to thank him for his unwavering efforts and continued support. Before we jump into the business discussion, I want to address the statement from this morning's News Release. Our Board has been engaged in a process with third parties that have expressed interest in strategic transactions with us. We are not surprised by this interest given the expected near-term completion of MVP and our view of the strength of our assets. Our Board has engaged with outside advisers and the process is ongoing. As you may expect, we will not be addressing questions on this matter. Moving on to the business update. Our priority remains bringing MVP into service safely, which includes a steadfast focus on the project's environmental protocols and maintaining permitting compliance. This morning, we updated our targeted completion to the second quarter of 2024 at a total estimated project cost ranging from approximately $7.57 billion to approximately $7.63 billion. Following the passing of the Fiscal Responsibility Act of 2023, we have made substantial construction progress. As we exited 2023, we continue to track to our prior guidance despite challenging construction conditions, which caused lower productivity than we forecasted. In addition to unforeseen construction issues, throughout much of January, we encountered considerably adverse weather conditions, including precipitation well above 20-year averages. While our construction plans took into account the potential effects of winter weather, these conditions were far worse and lasted much longer than anticipated, which had a significant impact on productivity, which, in turn, impacted our ability to reduce construction headcount. These factors resulted in our updated timing and total project cost targets. More recently, the weather has been favorable, and our productivity rates have shown improvement. As of February 15, roughly 300 miles of pipe had been installed, leaving less than 4 miles remaining. Of the 428 water crossings that remained when construction resumed in 2023, we had 13 left to cross. We are purged and packed through the first 77 miles of the project and a hydro tested just about 180 miles and progress continues every day. If the current weather conditions continue by the time we exit February, we expect to have further narrowed the list of overall construction time and the remaining construction is expected to be limited to 3 of the project sign working spreads, all in Virginia. The construction work in these areas will consist of finishing the remaining crossings of which fiberboard completing the Appalachian Trail crossing and installing pipe on some of the [indiscernible] along the route. Once construction is complete, only commissioning activities will remain before we place the pipe in service, which are less impacted by weather and require far less labor. While the majority of MVP construction is complete, the remaining construction includes some of the most difficult tasks on the project and could present further challenges. We are narrowing the scope of remaining activities and our focus remains to safely bring this critical pipeline into service.
I'll now turn it over to Justin for the operations update, and then Kirk will discuss the financial results. Justin?
Thanks, Diana. Good morning, everyone. Let's start with our Gathering segment. In 2023, we averaged about 7.7 Bcf per day of gathered volumes, which was roughly flat year-over-year. For 2024, we expect gathered volumes to again be flat on a year-over-year basis as we continue to see producers remain at maintenance lows. Our Hammerhead asset continued to provide interruptible service in the fourth quarter, and we'll be ready to reverse flow and make deliveries to MVP when Hammerhead achieves full commercial in-service alongside MVP in-service and firm commitment commence. In 2023, we also made progress on a compression project for a producer customer, who installed 32,000 horsepower of booster compression that is backed by a long-term firm commitment and is expected to be in service in the coming days. The majority of capital investment for this project was in 2023. Our gathering and transmission systems are highly integrated and currently provide the only direct upstream connectivity to MVP. MVP and the potential expansion project would add approximately 2.5 Bcf per day of takeaway capacity to an area of the basin that has been constrained for several years. Given this dynamic, combined with the growing demand in the Southeast and expected improvements to TETCO M2 pricing with MVP in-service.
We believe that over the next several years, there is a path for volume growth within the basin following MVP in-service. Today, we initiated 2024 gathering CapEx guidance of $210 million to $260 million. Moving on to transmission. We are nearing completion of the Ohio Valley Connector expansion project or OVCX, which we expect to place in service in the second quarter of 2024. OVCX will add about 350 million cubic feet per day of incremental capacity. Once the expansion is complete, our OVC pipeline will have the ability to move over 1.2 billion cubic feet per day of gas to Clarington, Ohio, and can also provide backhaul capacity to reach MVP with the same capacity, enhancing base in liquidity and providing customers significant optionality. Our 2024 transmission CapEx guidance is $75 million to $85 million, which includes approximately $40 million for the OVCX project. In December, the MVP joint venture executed 20-year binding precedent agreements with 2 Southeast utility customers for the amended Southgate project. In aggregate, the firm capacity commitments totaled 550 million cubic feet per day. The joint venture recently completed an open season and expects to finalize the project scope in the coming months. Currently, the Southgate project is targeted to be completed in June 2028. On the water segment, in 2023, we completed the majority of our mixed-use water system. For 2024, our water CapEx is expected to be approximately $25 million to $35 million. I'll now turn the call over to Kirk.
Thanks, Justin, and good morning, everyone. This morning, we reported full year net income attributable to E-Train common shareholders of approximately $387 million and earnings per diluted common share of $0.89. Net income for the year was $455 million. Adjusted EBITDA was $1,056 million, and deferred revenue was $329 million. We also reported full year net cash provided by operating activities approximately $1 billion and free cash flow of negative $129 million. For the fourth quarter, we reported net income attributable to E-Train common shareholders of $134 million and earnings per diluted common share of $0.31. Net income was $150 million. Adjusted EBITDA was $272 million, and deferred revenue was $88 million. We also reported net cash provided by operating activities of $291 million and free cash flow of negative $241 million. Net income attributable to E-Train common shareholders for the full year was impacted by several items. First, by $9.4 million of operating expense related to the Rager Mountain storage incident; second, a $7.8 million write-down of a contract asset in the Water segment; and last, a $1.5 million unrealized gain on derivative instruments, which is reported within other income. This relates to the contractual provision entitling E-Train receive cash payments from EQT, conditioned on specific NYMEX Henry Hub natural gas prices exceeding certain thresholds post MVP's in-service and through 2024. After adjusting for these items, full year adjusted net income attributable to E-Train common shareholders was $398 million, and adjusted earnings per diluted E-Train common share was $0.91. The fourth quarter was impacted primarily by a $5.9 million unrealized loss on derivative instruments related to the contractual provision with EQT mentioned earlier. After adjusting for this, Q4 adjusted net income attributable to E-Train common shareholders was $139 million and adjusted earnings per diluted share was $0.32. Additionally, we reported full year equity income of $175 million and fourth quarter equity income of $78 million, which is primarily associated with AFUDC relating to MVP construction. Operating revenue for the full year increased by $36 million compared to last year, which was primarily driven by increased transmission and water service revenue and was partially offset by lower gathering revenue. Revenue for the fourth quarter of 2023 increased by $5.4 million compared to the fourth quarter of 2022, primarily as a result of increased gathered volumes, partially offset by lower water volumes. Operating expenses for the full year increased by approximately $89 million compared to 2022 due to increased SG&A and O&M costs, primarily due to an increase in personnel costs related to the MVP Performance Award and other incentive compensation as well as an increase in water expenses, including the $7.8 million contract asset write-down and increased depreciation expense. Operating expenses for the fourth quarter of 2023 were roughly flat compared to the same quarter for 2022. For the fourth quarter of 2023, E-Train paid a cash dividend of $0.15 per common share on February 14, 2024 to shareholders of record at the close of business on February 6, 2024. Finally, today, we initiated guidance for 2024. For the full year, we're forecasting net income of $375 million to $455 million; adjusted EBITDA of $1.235 billion to $1.315 billion and deferred revenue of approximately $145 million. We're also forecasting full year CapEx and capital contributions of $850 million to $955 million, free cash flow of negative $65 million to negative $145 million and retained free cash flow of negative $325 million to negative $405 million. I'll now hand the call back to Diana.
Thanks, Kirk. Before we open the call to questions, I would like to take a minute to thank our employees. They remain endlessly committed to E-Train's success through their ongoing commitment to safety and environmental compliance. Thank you. And with that, we'll open the call to questions.
[Operator Instructions] Our first question comes from Spiro Dounis from Citi.
I'd, of course, I'd love to have started with the strategic process, but it sounds like that's out of balance today. So maybe start with the MVP expansion, the opportunity there and thinking about it incorporates some value. Just curious if you often speak to maybe some of the returns you'd expect from a project like that. I believe it's just compression and not to get too ahead of it, but is it expandable beyond 0.5 Bcf a day if you do loopring and compression as well?
This is Justin. So look, I guess, starting with the scope, we expect the expansion will probably be in the range of 0.5 Bcf a day as we've talked about previously. Based on where we have scoped out the fourth greenfield compressor station and what we are physically able to add at the other stations. That's probably the sweet spot for expansion. Technically, there are ways to go above that, but we'll have to weigh the economics of doing so. In terms of build multiples, you're probably looking in the 3 to 4 range because this is a very strong project limited to just the compression investment.
Got it. That's helpful color. And maybe turning back to MVP Construction, Diana, I appreciate all the color on the process from here. It sounds like some of the more challenging routes are still ahead, but kind of anticipated. I guess with that rain that you had mentioned, just looking at some local news reports, it seems like there was some runoff issues and potentially some local complaints. Just want to make sure if you can just confirm all permits are still in good standing, the weather issues have not triggered any sort of delays from an oversight perspective either?
Yes. So the permits are all still good, working very closely with the Virginia DQ and the other agencies. The inspectors are out there daily and we are actually -- I think that issue has cleared up a bit as far as the turbidity and working with the land owner there, but everything is in good shape.
Our next question comes from John McKay from Goldman Sachs.
Maybe I'll just pick up on that last point because it's kind of the theme here. Just in terms of the new time line, I think you're pointing to a June 1 in service, at least kind of baked into your guidance. Curious just if you can frame that up. I mean it's a few months -- 2 months kind of past your prior benchmark, you've probably seen a month of delays. So just trying to think of how conservative you're feeling on that number right now and maybe any more guidepost to watch from here?
Sure. With every week of good weather, we're able to narrow the variability of that cost and that timing. Challenges obviously still remain, but they're decreasing with as we complete each test. February weather has been better. We did have some rain, I think, the weekend before last, but the next 10 days look pretty good, and that will get us to the end of the month. So productivity has improved since January. Daylight continues to increase, which lengthens our workday. We have a handful of boards left to complete and some steeps, but the work planned for April is substantially commissioning work, which will require significantly less people and will not be as sensitive to weather. So that's kind of -- that's kind of how I look at it. We will finish up construction through March and April will mostly be commissioning.
Just to clarify that, I think in the past, you've talked about commissioning generally being about a month. Is that fair?
Yes, that's our activities. We've been commissioning on the pipeline. 77 miles already have gas in them and it's purged and packed, but we still have our third compressor station, and we need to get gas to it, which will happen sometime in March. And then after we complete these other couple of pieces, we'll hydro test and work as we go. So about a month is a good, real fun.
Maybe just a second question here, you got some incremental leverage relief, I think, on the -- on your revolver. Maybe, Kirk, I guess this is for you. Maybe just frame that up in the context of the increased CapEx cost and how you're feeling about your buffer versus these new ceilings?
Yes, ceilings, really good about the buffer. So what we did is -- and the banks have been really good to work with on this, but we got the leverage covenant raise to 6x for Q1, 6.25 for Q2 and then it comes back to 5.85 and then down to 5.5 on the following quarter.
Our next question comes from Michael Blum from Wells Fargo.
Maybe we'll stay on the balance sheet since that was the last question. Wanted to just kind of get your thoughts on the dividend at this point as a lever, given that clearly, with all the CapEx spending, debt leverage is higher. Any thoughts to reduce dividend to free up some cash to accelerate the deleveraging process?
No. We haven't got any thoughts about doing anything with the dividend right now. We are focused on delevering, and we have the MVP project financing that we will be turning to as soon as MVP is in service, and that will be a big chunk of debt reduction right there. We've said, I think, $800 million to $1 billion on that, and we are looking at possibly increasing that amount if we can in the markets there at that time.
Okay. Got it. That's helpful. And then just wanted to ask about kind of what steady-state sustaining CapEx would look like after MVP's in-service. And if we just kind of ignore some of these discrete projects that you already outlined.
I know you have that, I think it's Slide 8, you talked about sustaining CapEx of $200 million to $250 million. Is that what you would view as like the total amount of CapEx required to keep kind of the cash flows of the overall business flat? Or is there more cost we should be thinking about?
So that number is specific to our gathering segment. And I think as we look at this year, we've guided to the $200 million to $250 million for some time now in terms of gathering sustaining CapEx. We're probably on the low end of that range for '23 and now for '24. If you take some of the growth projects, compression-related projects that we have in the works this year, we're probably closer to that $200 million for the gathering segment, if that answers your question.
Our next question comes from Jeremy Tonet from JPMorgan.
Just wanted to start off with a question on Hammerhead here. It seems like the expected EBITDA ticked down a bit from the last disclosure, if we have that correct. Just wondering if you could talk about some of the drivers there.
Yes, Jeremy, this is Nate. So we -- that slide now reflects $65 million of EBITDA, which is really from the 1.2 Bcf a day of firm commitments and those are directly tied to MVP's in-service. I think previously on that slide, we had included about 200 a day of uncontracted capacity. Justin mentioned it in the opening remarks, but the Hammerhead pipeline, we've been moving volumes on that pipeline, it is bidirectional. So we have interconnects with other pipes beyond MVP. In '23, we earned about $5 million of revenue moving those volumes. We do have another pad that's coming on here, I think midyear and those volumes will flow north on Hammerhead. So that's additive to the $65 million. So I think we really just cleaned up that slide to make the EBITDA that's directly attributable to the timing of MVP in-service, but certainly, we're looking to earn above the $65 million, and that started to do that in '23.
Got it. And at the risk of bringing too fine of a point a bit on MVP and time line, just wanted to see what -- when you put the May 30, June 1 dates out there, is that considered -- is that just the most recent as of today, there was a bit of -- there's a lot of snow over the weekend. Just wondering if that's all considered here. Sorry, if this is too fine of a point.
We didn't get snow over the weekend on the right way. At least no one told me we did. So I don't think we had snow down there. So we're good. That is -- that second quarter as of right now, that's where we are.
Got it. That's very helpful. And I appreciate if you can't touch on this or don't want to touch on this. But as far as discussing the strategic review, is there any reason to talk about that today versus any point in the past? Or why, in general, just bring it forward?
Yes. We're not going to comment on that today.
Our next question comes from Neel Mitra from Bank of America.
I wanted to just understand where we are with 2 important crossings, the Appalachian Trail and Roanoke River, and how long that would take to complete and if there's any challenges you see there?
Sure. On the trail, we have made good progress. We're at about 60% complete. We have had the mechanical issues within the equipment that has slowed us down a little bit. But when we are drilling, we are making good rates. So I feel pretty good about that. The Roanoke, we have about 20 feet left of that bore. It's -- I think it's like 330 feet. We have about 20 feet left. It is slow going, but it is going. We're under the river. So I feel good. We're under the water. It's just been slow.
Are there variance requests being filed for any of these crossings? Or are you ready on that path to completely go forward?
Yes. So I believe we already have approved variance requests for the trail. Roanoke, there is 1 out there for Roanoke. It's a 24/7 so that we can operate 24/7 with 2 crews. Right now, we're just working with 1. Our existing guidance has -- doesn't require us to get that approval, but it would help speed things up for us. So if we can get it, that's what we're trying to do.
Okay. Perfect. And if I could just follow up on one question on the balance sheet. I know your covenant leverage ratio has been revised upward. I'm just wondering where you see kind of the peak leverage going to with the increasing costs?
Yes, we believe that the amended revolver covenant is more than adequate cushion. We are probably in the high 5 with this amended targeted MVP in-service. And then we would expect that, that would come down very quickly after we do the MVP project level financing.
Our next question comes from Brian Reynolds from UBS Financial.
Maybe to follow up on the amended credit facility. It seems like you had still enough room to run based on your prior amendments. So just kind of curious of the reasoning to basically take it to 6 and partially above 6.25x. Just wondering the drivers behind that? Is it just some extra doses of conservatism? Or does maybe some of the MVP level debt and timing of that maybe influence the decision to amend the facility periodically?
That action was primarily just to give ourselves adequate cushion and for some conservatism so that we didn't have any concerns with, combined it going forward, but it should not signal any concerns with regards to the MVP financing and our ability to execute on that.
Just to take any hurry off the table, Brian.
Okay. Makes sense. And then as a follow-up to Spiro's Southgate question. I know previously, there were some issues around permitting that part of the leg of the projects. Can you just help me understand how maybe the new scope of the project maybe addresses some of these concerns around permitting there? Or will -- should we expect some additional permits to be filed in those jurisdictions over the coming months to pursue that project?
Yes, I'll start. So the revised scope certainly shortens the project considerably. There'll be less stream crossings and other things that could be permitting challenges down the road. So I think the revised scope here goes a long way to derisking the project, and we're more comfortable with our ability to exit because we're derisking it that way.
We've also removed the compression. So that's helpful. But we will need to file permits. The shorter route is great, but we'll still have to go through the permitting process. That data is pretty far out there. So we haven't started that yet, but we have all the leg work and have the route. We've been working on this route for quite a long time.
We have no further questions in queue. I'd like to turn the call back over to Diana Charletta for closing remarks.
Thank you all very much for your time. We appreciate it. Have a great day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.