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spk01: Good morning and welcome to Equitrand Midstream Corporation's fourth quarter 2023 earnings call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. 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.
spk08: 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 662- 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 31st, 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 Sharletta, President and CEO, Kirk Oliver, Executive Vice President and Chief Financial Officer, Justin Mackin, 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 Petrandrea, 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.
spk04: Thanks, Anthony, and good morning, everyone. As many of you know, effective January 1st, Tom Karam moved into the role of Executive Chairman. Tom has led Equitrans for the past five years, since we started as a standalone company. We want to thank him for his unwavering effort and continued support. Before we jump into the business discussion, I want to address a 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 outside advisors, 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 continued 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 target. More recently, the weather has been favorable and our productivity rates have shown improvement. As of February 15th, roughly 300 miles of pipe had been installed, leaving less than four 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 have 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 tasks, and the remaining construction is expected to be limited to three of the Project 9 working spreads, all in Virginia. The construction work in these areas will consist of finishing the remaining crossings, of which five are boards, completing the Appalachian Trail crossing, and installing pipe on some of the steepest slopes 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.
spk09: Thanks, Diana.
spk10: 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 levels. Our Hammerhead asset continued to provide interruptible service in the fourth quarter, and we will be ready to reverse flow and make deliveries to MVP when Hammerhead achieves full commercial in-service alongside MVP in-service and firm commitments 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 two and a half 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 Tesco 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 basin 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 two Southeast utility customers for the amended Southgate project. In aggregate, the firm capacity commitments total 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 systems. For 2024, our Water Cap Ex 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.
spk11: This morning, we reported full-year net income attributable to E-Train common shareholders of approximately $387 million in earnings per diluted common share of 89 cents. 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 of approximately $1 billion and free cash flow of negative $129 million. For the fourth quarter, we reported net income material E-Train common shareholders of $134 million and earnings for diluted common share of 31 cents. That 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 pre-cash flow of negative $241 million. That 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 to receive cash payments from EQT conditioned on specific NYMEX Henry Hub natural gas prices exceeding certain thresholds post-MVPs 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 for diluted E-Train common share was 91 cents. 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 in adjusted earnings for diluted share was 32 cents. 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 15 cents 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 to $1.315 billion, and deferred revenue of approximately $145 million. We're also forecasting full-year CapEx and capital contributions of $850 to $955 million, free cash flow of negative $65 million to negative $145 million, and retain free cash flow of negative $325 million to negative $405 million. I'll now hand the call back to Diana.
spk04: 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.
spk01: As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw any questions, please press star one again. Our first question comes from Spiro Dunas from Citi. Please go ahead. Your line is open.
spk07: Thanks, operator. Morning, everybody. Would, of course, have loved to have started with the strategic process, but it sounds like that's out of bounds today. So, maybe start with the MVP expansion, the opportunity there. and thinking about how to incorporate some value. Just curious if you all could 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 a half a day if you do looping and compression as well?
spk10: This is Justin. So I guess starting with the scope,
spk09: We expect the expansion will probably be in the range of a half a 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. You know, in terms of build multiples, you're probably looking in the three to four range because this is a very strong project limited to just the compression investment.
spk07: Got it. It's helpful color. And maybe turn back to MVP construction. Diane, I appreciate all the color on the process from here. You know, it sounds like some of the more challenging routes are still ahead, but all kind of anticipated. I guess with that rain that you had mentioned, you know, just looking at some of the local news reports, it seems like there was some runoff issues and, you know, potentially some local complaints. Just want to make sure if you just confirm all permits are still in good standing, the weather issues have not triggered any sort of delays from an oversight perspective either.
spk04: 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, yeah, We are actually, I think that issue has cleared up a bit as far as the turbidity and working with the landowner there, but everything's in good shape.
spk07: Great. I'll leave it there for today. Thanks for the time.
spk04: Thank you.
spk01: Our next question comes from John McKay from Goldman Sachs. Please go ahead. Your line is open.
spk05: Hi. Thanks for the time. Maybe I'll just pick up on that last point because it's kind of the theme here. Just in terms of the new timeline, I think you're pointing to, a June 1st in-service, at least kind of baked into your guidance. Curious just if you could frame that up. I mean, you know, it's a few months, you know, it's two 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, you know, maybe any more guideposts to watch from here.
spk04: 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 as we complete each task. 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'll 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 plan 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 how I look at it. We will finish up construction through March, and April will mostly be commissioning.
spk05: Just to clarify that, I think in the past you've talked about commissioning generally being about a month. Is that fair?
spk04: Yeah, that's our activities. We've been commissioning on the pipeline. You know, 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 pieces, we'll hydrotest and work as we go. So about a month is a good rule of thumb.
spk05: Thanks for that. Maybe just a second question here, thanks for that clarification. You got some incremental leverage relief, I think, on your revolver. Maybe, Turk, 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. Thanks.
spk11: Yeah, we're feeling 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 raised to six times or q1 6.25 for q2 and then it comes back to 5.85 and then down to 5.5 on the following quarters all right thank you appreciate the time our next question comes from michael bloom from wells fargo please go ahead your line is open uh thanks good morning everyone
spk02: Maybe we'll stay on the balance sheet since that was the last question. I wanted to just kind of get your thoughts on the dividend at this point as a lever, given that, you know, clearly with all the CapEx spending, that leverage is higher. Any thoughts to reduce the dividend to free up some cash to accelerate the leveraging process?
spk11: No, we haven't got any thoughts about doing anything with the dividend right now. We are focused on de-levering, and we have the MBP project financing that we will be turning to as soon as MBP is in service, and that'll be a big chunk of that reduction right there. We've set, I think, $800 to $1 billion on that, and we are looking at possibly increasing that amount if we can in the markets there at the time.
spk02: Okay, got it. That's helpful. Thank you. 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've already outlined. I know you have that, I think it's slide eight, you talk about, you know, sustaining CapEx of $2 to $2.50 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 cash?
spk09: costs we should be thinking about so so that number is specific to our gathering segments and I think as we look at this year we've guided to the two to 250 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 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.
spk02: Great. Thank you so much.
spk01: Our next question comes from Jeremy Tonay from JP Morgan. Please go ahead. Your line is open.
spk00: Hi. Good morning.
spk08: Good morning. Good morning.
spk00: Just wanted to start off with a question to hammer at here. It seems like the expected EBITDA
spk08: uh tick down a bit from the last disclosure if we have that correct just wondering if you could talk about some of the drivers there yeah jeremy this is nate um so we that slide now reflects 65 million of ebita which is really from the 1.2 bcf a day of firm commitments and those are directly tied to mvps in service i think previously on that site 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 mid-year, 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 it 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.
spk00: Got it. Thank you very much for that. At the risk of bringing too fine of a point on MVP timeline, just wanted to see when you put the May 30th to June 1st dates out there, is that just the most recent as of today? 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.
spk04: We didn't get snow over the weekend on the right-of-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.
spk00: Got it. That's very helpful. Thanks. And 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?
spk04: Yeah, we're not going to comment on that today.
spk00: Got it. Understood. Thanks.
spk04: Thank you.
spk01: Our next question comes from Neil Mitra from Bank of America. Please go ahead. Your line is open.
spk12: Hi. Good morning. Thanks for taking my question. I wanted to just understand where we are with two important crossings, the Appalachian Trail and Runnick River, and how long that would take to complete and if there's any challenges you see there.
spk04: Sure. On the trail, we have made Good progress. We're at about 60% complete. We have had some mechanical issues with equipment that has slowed us down a little bit. But when we are drilling, we are making good rate. So I feel pretty good about that. The Roanoke, we have about 20 feet left of that bore. 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.
spk12: Are there variance requests being filed for any of these crossings, or are you ready on that path to completely go forward?
spk04: So I believe we already have approved variance requests for the trail. Roanoke, there is one out there for Roanoke. It's a 24-7. so that we can operate 24-7 with two crews. Right now we're just working with one. Our existing guidance 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.
spk12: Okay, perfect. And if I could just follow up on one question on the balance sheet. I know you're your covenant leverage ratio has been revised upward. I'm just wondering where you see kind of the peak leverage going to with the increase in cost.
spk03: Yes, we believe that the amended revolver covenant is more than adequate cushion. We are probably in the high fives with this amended targeted MVP and service. And then we would expect that that would come down very quickly after we do the MVP project level financing.
spk12: Got it. Thank you very much.
spk01: Our next question comes from Brian Reynolds from UBS Financial. Please go ahead. Your line is open.
spk06: Hey, good morning, everyone. Maybe to follow up on the amended credit facility, it seemed like you had still enough room for to run, you know, based on your prior amendments. So just kind of curious of the reasoning to, you know, basically take it to six and partially above 6.25 times. 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? Thanks.
spk03: That action was primarily just to give ourselves adequate cushion and for some conservatism so that we didn't have any concerns with complying with it going forward. But it should not signal any concerns with regards to the MVP financing and our ability to execute on that.
spk11: Just to take any hurry off the table, Brian.
spk06: 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 project, can you just help me understand how maybe the new scope of the project maybe addresses some of these concerns around permitting there, or should we expect some additional permits to be filed in those jurisdictions over the coming months to pursue that project? Thanks.
spk09: Yeah, 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 de-risking the project, and we're more comfortable with our ability to execute because we're de-risking it in that way.
spk04: 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 date is pretty far out there. We haven't started that yet, but we have all the legwork and have the route. We've been working on this route for quite a long time.
spk06: Okay. Makes sense. Enjoy the rest of your morning.
spk01: We have no further questions in queue. I'd like to turn the call back over to Diana Shorletta for closing remarks.
spk04: Thank you all very much for your time. We appreciate it. Have a great day.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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