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Start of MVP Triggers Earnings Waterfall for Equitrans

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The Daley Note: July 6, 2023

The natural gas market impact of Mountain Valley Pipeline (MVP) may be up for debate, but there is no question that the outlook for Equitrans (ETRN) hinges on the project. Start-up of MVP would set off a waterfall effect and unlock new investment opportunities for the lead developer.

Dogged for years by legal challenges, MVP has new life courtesy of recent pro-pipe legislation from Congress. The expected financial impacts of MVP and related projects are included in the ETRN Financial Blueprint. Equitrans would see ~$220MM in annual Adj. EBITDA if MVP could finally cross the commercial finish line.

East Daley Analytics expects plenty of spare capacity on MVP when the 2 Bcf/d pipeline starts up. Nevertheless, due to contractual commitments, earnings are locked in for ETRN regardless of future pipeline flows.

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Completion of MVP would trigger several contracts contingent on start-up, shown in the table from the ETRN Blueprint. ETRN began the West Virginia and Pennsylvania gathering agreement with parent EQT in 1Q20 with a minimum volume commitment (MVC) of 3 Bcf/d. Once MVP enters service, the contract includes a step-up clause to 3.5 Bcf/d for the first year, 3.75 Bcf/d for the second year, and 4 Bcf/d for 10 years following start-up. The commitment then drops back to 3 Bcf/d for the rest of the 15-year contract. The first three years of MVP’s in-service come with associated rate relief to EQT, offsetting the benefit to ETRN for the step-up in volumes for the first year of service.

ETRN has several other agreements with EQT linked to completion of MVP. ETRN can recoup from EQT up to $60MM/year for three years following MVP’s in-service if Nymex Henry Hub futures prices exceed certain price thresholds. This agreement between ETRN and EQT expires at the end of 4Q24. EQT also holds a 400 MMcf/d contract on the Equitrans Expansion Project (EEP), which is expected to create $20MM in annual Adj. EBITDA. Finally, EQT has a 20-year firm transport contract for 1.2 Bcf/d on the Hammerhead pipeline that would go into effect when MVP comes online. The Hammerhead pipeline is a 1.6 Bcf/d header system that provides an outlet for southwestern Pennsylvania gas to Southeast markets via MVP. Hammerhead is expected to add $75MM in annual EBITDA.

MVP also has a planned extension line, Southgate, that could lead to future upside. Southgate would extend from southern Virginia to central North Carolina. A local utility, Public Service of North Carolina, backs the segment with a 300 MMcf/d commitment, leaving 200 MMcf/d of capacity unsubscribed.

Southgate is currently in limbo due to regulatory problems. The North Carolina Department of Environmental Quality has denied MVP’s request for a 401 water quality certification for the project. The division stated that work on the Southgate extension could lead to unnecessary effects on water bodies if ETRN cannot complete MVP’s mainline. Southgate is unlikely to see any progress until construction of MVP is certain. EDA estimates Southgate will generate ~$29MM in annual EBITDA if it is completed. – Alex Gafford Tickers: EQT, ETRN.



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