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Equitrans Midstream Corp (NYSE:ETRN)
Q3 2020 Earnings Call
Nov 3, 2020, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Equitrans Midstream Q3 2020 Quarterly Earnings Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I'd now like to hand the conference over to your speaker today, Nate Tetlow. Thank you. You may begin.

Nate Tetlow -- Vice President of Corporate Development and Investor Relations

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 31st, 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.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

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?

Diana Charletta -- President and Chief Operating Officer

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're 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 rule on the motion to stay. The court has scheduled oral arguments on the full motion to stay for November 9th.

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, ETRN 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 have also reduced the amount of fluid handling by approximately four times to five times.

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.

Kirk Oliver -- Senior Vice President and Chief Financial Officer

Thanks, Diana, and good morning, everyone. This morning, we reported net income attributable to ETRN common shareholders of $150 million and earnings per diluted ETRN 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 ETRN 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 ETRN common shareholders was $135 million and adjusted earnings per diluted ETRN common share was $0.31.

ETRN 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 of 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 2020, ETRN will pay a quarterly cash dividend of $0.15 per common share on November 13th to ETRN 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.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

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 update on the Hammerhead contract dispute with EQT. While this legal dispute is an 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 relationship. Our teams work collaboratively each and every day to create value for our respective shareholders. And to that end, we congratulate the EQT team and 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.

Operator

Thank you. [Operator Instructions] While we do so, CEO, Tom Karam, do you have any further remarks?

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

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 are 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.

Questions and Answers:

Operator

Thank you, Tom. Our first question comes from Jeremy Tonet with JP Morgan Securities. Your line is open.

James Kirby -- JP Morgan Securities -- Analyst

Hey. Good morning, guys. This is James on for Jeremy. I just wanted to start off with any kind of general on 2021, just given the moving pieces, if you can provide a capex kind of ballpark number there. And just given your previous comments in previous quarters on free cash flow and deleveraging, if there's any change in messaging there. I see you guys are still targeting kind of a long-term 4 times target there, but just any change in messaging there?

Kirk Oliver -- Senior Vice President and Chief Financial Officer

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 4 times. It will probably be a little higher than that.

James Kirby -- JP Morgan Securities -- Analyst

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, how much you can disclose on that, just the midstream agreements on that deal and what if any business impact on EQT long-term production cadence will be compared to the impact on your business?

Diana Charletta -- President and Chief Operating Officer

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 gathering of Chevron production on the eastern side of Greene 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 [Indecipherable] and then there are some Greene County acreage positions that will fall within our dedicated area. But that's about -- EQT is still digesting -- that's about all we have on that right now.

James Kirby -- JP Morgan Securities -- Analyst

Okay, fair enough. I'll leave it there. Thanks for the questions.

Operator

Your next question comes from Michael Blum with Wells Fargo. Your line is open.

Michael Blum -- Wells Fargo -- Analyst

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?

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Hi, Michael. This is Tom. No, we really don't.

Michael Blum -- Wells Fargo -- Analyst

Okay, great. And then, second question, just your thoughts about getting a timeline and a path to get back to investment grade, given the MVP delays. Is that still a long-term goal? And have you had any additional dialog with the rating agencies on any of that?

Kirk Oliver -- Senior Vice President and Chief Financial Officer

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 dialog 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.

Michael Blum -- Wells Fargo -- Analyst

Got it. Thank you so much.

Operator

Your next question comes from Shneur Gershuni with UBS. Your line is open.

Shneur Gershuni -- UBS -- Analyst

Hi. Good morning, everyone. I know that you don't -- you're in arbitration with respect to the Hammerhead situation. But I was just wondering if you can sort of give us some color or clarity, I guess, about your relationship with EQT, in general, just given the fact that you've entered 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.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Yeah. Shneur, this is Tom. Our relationship is really good. 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 is good.

Shneur Gershuni -- UBS -- Analyst

Okay. And maybe as a follow-up question, this is really a hypothetical sensitivity type of question. 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 NWP hypothetically is just not allowed and you have to go for individual permits, what would be the hypothetical timeline 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 -- for this asset?

Diana Charletta -- President and Chief Operating Officer

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, bores or a combination of bores and the individual permits.

Shneur Gershuni -- UBS -- Analyst

Just to understand, you're saying that you're actually considering the whole boring aspect. I'm just trying to understand, you have to go full boring request from FERC. So, what would that timeline be?

Diana Charletta -- President and Chief Operating Officer

Yes. 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.

Shneur Gershuni -- UBS -- Analyst

Got it. Okay. Appreciate that color on that. Thank you very much and enjoy your day.

Operator

Your next question comes from Spiro Dounis with Credit Suisse. Your line is open.

Spiro Dounis -- Credit Suisse -- Analyst

Hey. Good morning, everyone. I wanted to start with Southgate. Just curious, was the permit denial there foreseeable anyway? Understand that you disagree with the merits on it, but maybe you could just provide a little bit more color on what North Carolina is specifically asking for and what the remedy is?

Diana Charletta -- President and Chief Operating Officer

So, there weren't a lot of specifics. They said that they denied it because the permit is on the mainline. We're 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.

Spiro Dounis -- Credit Suisse -- Analyst

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? Imagine it will introduce some more seasonality, but are there any other impacts we should be thinking about?

Diana Charletta -- President and Chief Operating Officer

So, I would agree. I think that maybe the seasonality around it. We see a little more certainly I think in this shoulder [Phonetic] month. 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.

Spiro Dounis -- Credit Suisse -- Analyst

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 at more broadly about all the other contracts you have, more [Phonetic] pipelines that are still being developed, are there similar features in all these contracts and approaching deadlines we need to be aware of?

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

No, no. Spiro, there is 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 communications 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.

Spiro Dounis -- Credit Suisse -- Analyst

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. Take care, everyone.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Thanks.

Operator

Your next question comes from John Mackay with Goldman Sachs. Your line is open.

John Mackay -- Goldman Sachs -- Analyst

Hey. Good morning. Thanks for the time. 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, etc.? Or does it include kind of any potential contingency for a route change or anything like that?

Diana Charletta -- President and Chief Operating Officer

So -- good morning. It isn't really at all because of the lawyers, but they are expensive those lawyers. It is really because we -- of the delay and starting back. So, as we start construction activities, we've had continue to maintain the E&S control. But the driver really, the bulk of the increases 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 is 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.

John Mackay -- Goldman Sachs -- Analyst

Got it. Okay, thanks. And then, on a related note, just with the capex slightly higher and the timeline pushed to the right a little bit, how comfortable are you feeling with the balance sheet going into 2021? And really, where are you going to let leverage go to kind of before this comes online?

Kirk Oliver -- Senior Vice President and Chief Financial Officer

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.

John Mackay -- Goldman Sachs -- Analyst

All right. That's it from me. Thank you.

Operator

Your next question comes from Derek Walker with BofA. Your line is open.

Derek Walker -- Bank of America -- Analyst

Hey. Good morning, guys. Just a couple of quick ones. Maybe, Tom, I just wanted to make sure I heard you right. I believe you said that the FERC approved some of the boring through the Jefferson National Forest and that you're still waiting for the Forest Service sedimentation study, is that correct?

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

No. Actually, the SEIS has been issued and posted. 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.

Diana Charletta -- President and Chief Operating Officer

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 they had to close and issue the final. So, we should be on track there. Good news.

Derek Walker -- Bank of America -- Analyst

Got it. It's helpful. And then, I think on the EQT's call, they gave us some commentary around just offloading some or all issued [Phonetic] capacity and hopefully we're having some of that wrapped up by the end of the year. Does -- this revised timeline with MVP, does that shift some of that discussion at all?

Diana Charletta -- President and Chief Operating Officer

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.

Derek Walker -- Bank of America -- Analyst

Got it, OK. And then maybe just a last quick one from 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 or what's sort of the timeline on that?

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

I think later this week is when we're scheduled to file it with the court.

Derek Walker -- Bank of America -- Analyst

Perfect. Thank you, guys. That's it from me.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from James Carreker with U.S. Capital Advisors. Your line is open.

James Carreker -- US Capital Advisors -- Analyst

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?

Diana Charletta -- President and Chief Operating Officer

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.

James Carreker -- US Capital Advisors -- Analyst

Okay. And then, with respect to the oral arguments being heard on November 9, 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?

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

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 courts would deny the stay.

James Carreker -- US Capital Advisors -- Analyst

Okay, thank you.

Operator

And that's all the questions that we have at this time. I turn the call back to the presenters for any closing remarks.

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Well, thank you, everybody, and thanks for your attention to us, and wash your hands and vote. Have a good day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Nate Tetlow -- Vice President of Corporate Development and Investor Relations

Thomas F. Karam -- Chairman of the Board and Chief Executive Officer

Diana Charletta -- President and Chief Operating Officer

Kirk Oliver -- Senior Vice President and Chief Financial Officer

James Kirby -- JP Morgan Securities -- Analyst

Michael Blum -- Wells Fargo -- Analyst

Shneur Gershuni -- UBS -- Analyst

Spiro Dounis -- Credit Suisse -- Analyst

John Mackay -- Goldman Sachs -- Analyst

Derek Walker -- Bank of America -- Analyst

James Carreker -- US Capital Advisors -- Analyst

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