Equitrans Midstream Corporation, announced financial and operational results for the third quarter 2021. Included in the "Non-GAAP Disclosures" section of this news release are important disclosures regarding the use of non-GAAP supplemental financial measures, including information regarding their most comparable GAAP financial measure.
Q3 2021 Highlights:
• Generated $91 million of net income and achieved $266 million of adjusted EBITDA
• Delivered adjusted EBITDA ahead of forecast
• Recorded 69% of total operating revenue from firm reservation fees
• Raised full-year 2021 adjusted EBITDA and free cash flow guidance
• Received an upgraded MSCI ESG Rating of BBB
• Entered into a new 10-year water services agreement with largest customer
"Our quarterly financial results highlight the underlying strength of our existing assets," said Thomas F. Karam, Equitrans chairman and chief executive officer. "We continue to realize capital efficiency from a combination of system integrations and commercial transactions that we have undertaken during the last couple of years. Our focus on safety and operational excellence, coupled with our stable cash flow profile, are the foundation of our company and position E-Train for successful execution in any environment."
"We have been operating as a standalone midstream company for nearly three years, becoming stronger and more resilient amidst ever-changing circumstances," said Diana M. Charletta, Equitrans president and chief operating officer. "For the past 18 months, our business and operational teams have flawlessly navigated stringent working protocols to maintain safe operations, manage costs, and keep the gas flowing for our customers. Looking ahead, as we continue to enhance our many ESG initiatives and methane reduction efforts, we are embracing the important role that natural gas plays in our nation’s transition to a lower-carbon economy.”
Net income attributable to ETRN common shareholders for the third quarter 2021 was impacted by a $21.3 million unrealized gain on derivative instruments. The unrealized gain is reported within other income and relates to the contractual agreement with EQT Corporation (EQT) in which ETRN will receive cash from EQT conditioned on the quarterly average of certain Henry Hub natural gas prices exceeding certain thresholds beginning with the quarter in which Mountain Valley Pipeline (MVP) is placed in-service through the fourth quarter of 2024. The contract is accounted for as a derivative with the fair value marked-to-market at each quarter-end.
As a result of the gathering agreement with EQT, entered into in February 2020, revenue from the contracted minimum volume commitment (MVC) is recognized utilizing an average rate applied over the 15-year contract life. The difference between the cash received from the contracted MVC and the revenue recognized results in the deferral of revenue into future periods. In the third quarter 2021, deferred revenue was $78.8 million.
Operating revenue for the third quarter decreased by $7.9 million compared to the same quarter last year, primarily driven by lower water services volume and was partially offset by increased firm and volumetric gathering revenue. Operating expenses increased by $5.0 million compared to the third quarter 2020, primarily as a result of increased operating and maintenance and selling, general and administrative expenses.
QUARTERLY DIVIDEND
For the third quarter 2021, ETRN will pay a quarterly cash dividend of $0.15 per common share on November 12, 2021 to ETRN common shareholders of record at the close of business on November 2, 2021.
BUSINESS AND PROJECT UPDATES
Outstanding Debt and Liquidity
As of September 30, 2021, ETRN reported $6.4 billion of consolidated long-term debt; $350 million of borrowings and $266 million of letters of credit outstanding under EQM Midstream Partners, LP's (EQM) revolving credit facility; $295 million of borrowings under Eureka's revolving credit facility; and $194 million of cash.
Hammerhead
On October 25, 2021, the three-member panel appointed to arbitrate the previously disclosed dispute between ETRN and EQT relating to the Hammerhead gathering agreement issued a binding arbitration decision in favor of ETRN.
The arbitration panel unanimously determined that although the in-service date for the Hammerhead gathering pipeline was delayed beyond October 1, 2020, such delay was caused by force majeure and, accordingly, EQT has no early termination right relating to the timing of Hammerhead in-service or related right to purchase the Hammerhead gathering pipeline. Given the decision, ETRN is not entitled to charge EQT monthly firm capacity reservation fees related to Hammerhead until Hammerhead in-service is achieved, which ETRN expects in conjunction with MVP in-service.
Mountain Valley Pipeline
In February 2021, MVP JV initiated a permitting process with the U.S. Army Corps of Engineers (Army Corps) and the Federal Energy Regulatory Commission (FERC) related to the project’s remaining waterbody and wetland crossings. In August, FERC issued an Environmental Assessment for the MVP JV’s certificate amendment application, which requests a change to utilize boring methodology for approximately 120 water crossings. With regard to the Army Corps permitting process, which covers approximately 300 water crossings, the West Virginia Department of Environmental Protection and Virginia Department of Environmental Quality continue to work to complete their respective Section 401 reviews by November 29, 2021 and December 31, 2021, respectively.
The expected permitting timelines for both FERC and Army Corps remain in-line with ETRN's expectations. Accordingly, ETRN continues to target a full in-service date during the summer of 2022 at a total project cost of approximately $6.2 billion. Through September 30, 2021, ETRN had funded approximately $2.4 billion and, based on the total project cost estimate, expects to fund a total of approximately $3.1 billion and to have an approximate 47.8% ownership interest in MVP. ETRN will operate the pipeline.
MVP Southgate
Based on MVP's targeted full in-service date and expectations regarding timing of MVP Southgate permit approvals, ETRN is targeting commencing construction during 2022 and placing the project in-service during the spring of 2023. The approximately 75-mile pipeline is designed to receive gas from MVP in Virginia for transport to new delivery points in Rockingham and Alamance Counties, North Carolina. With a total project cost estimate of approximately $450 million to $500 million, MVP Southgate is backed by a 300 MMcf per day firm capacity commitment from Dominion Energy North Carolina and, as designed, the pipeline has expansion capabilities that could provide up to 900 MMcf per day of total capacity. ETRN has a 47.2% ownership interest in MVP Southgate and will operate the pipeline.
Water Services
In October 2021, ETRN and EQT entered into a new 10-year mixed-use water services agreement covering operations within a dedicated area in southwestern Pennsylvania. Service under the agreement is expected to commence in Q1 2022 and will replace the five-year Pennsylvania water services letter agreement announced in early 2020. The new water services agreement provides for firm water revenue of $40 million per year to ETRN for the first five years, and $35 million per year for the last five years. With the system buildout underway, ETRN expects water-related capital expenditures of approximately $35 million for the full-year 2021.
In the third quarter 2021, water operating loss was $4.4 million and water EBITDA was $(0.1) million. Water operating loss is forecast to be approximately $55 million for the full-year 2021 and water EBITDA is forecast to be approximately $30 million for the full-year 2021.
Environmental, Social, and Governance (ESG)
In September 2021, ETRN received a rating of BBB (on a scale of AAA-CCC) in the MSCI ESG Ratings assessment, which was a two-grade increase from ETRN's previous B rating. The increase was primarily based on ETRN's public statements and disclosures related to climate strategy, biodiversity and community engagement.
