DT Midstream, Inc. Q4 FY2022 Earnings Call

Thank you for joining us today. My name is Brent, and I will be your conference operator. I would like to welcome everyone to the DT Midstream Fourth Quarter 2022 Earnings Conference Call. I will now hand the call over to Mr. Todd Lohrmann, Director of Investor Relations. Please proceed, Mr. Lohrmann.

Good morning, and welcome everyone. Before we get started, I would like to remind you to read the safe harbor statement on page two of the presentation, including the reference to forward-looking statements. Our presentation also includes references to non-GAAP financial measures. Please refer to the reconciliations to GAAP contained in the appendix. Joining me this morning are David Slater, President and CEO; and Jeff Jewell, Executive Vice President and CFO. I'll now turn it over to David to start the call.

Thanks Todd, and good morning, everyone, and thank you for joining and for your interest in DT Midstream. During today's call, I'll recap our major accomplishments in 2022, highlight our new disclosures, and provide an update on our major development projects that we are currently executing. I'll close with some remarks on the macro fundamentals and then turn it over to Jeff to review our financial results and new disclosure details. So with that, we had a very successful year in 2022, and I'd like to thank all of our employees for their exceptional performance throughout the year. We delivered full year adjusted EBITDA of $830 million, which exceeded our revised guidance range and represents 14% growth from our 2021 original guidance. Commercially, we executed on numerous organic growth opportunities that will deliver long-term growth and value creation. Foremost among these are expanding our LEAP asset in the Haynesville by 90% to 1.9 Bcf a day, expanding our Appalachia gathering system by 20%, terming out contracts on NEXUS and our Washington 10 Storage complex at attractive rates, and filing our Class VI well permit for our Louisiana CCS project. We also closed on the Millennium pipeline acquisition, which makes us a majority owner in the asset. On the construction front, we successfully executed our Stonewall and Appalachia gathering expansions, the Michigan Gathering Conversion Project, and a portion of our Blue Union expansion. Finally, we published our inaugural sustainability report, and we were recognized for our exceptional customer service, receiving the top ranking in the MASTIO Customer Service Study for midstream companies. Looking ahead to 2023 and beyond, I'm highly confident in our future growth and financial strength. Jeff will provide the details on our new financial disclosures, including our increased 2023 adjusted EBITDA guidance and a strong early outlook for 2024, our increased quarterly dividend, and our updated five-year capital outlook. Before I pass it off, I'd like to quickly address the natural gas fundamentals, given the recent pullback in natural gas prices. Firstly, we remain highly confident in our plan. Our portfolio is well contracted with long-term take-or-pay agreements, our gathering assets serve Tier 1 resource areas that are well-positioned on the drilling cost curve, and we have no direct commodity exposure. Our assets provide outlook capacity to premium demand markets, which are expected to grow significantly between now and the end of the decade. Our customers continue high levels of activity across both of our regions and are looking forward to the completion of our expansion projects. Over our 20 plus year history, we have a proven track record of strong performance in downward price cycles and are highly confident in the durability of our business even in this lower commodity price environment. I'll now turn it over to Jeff to walk through our financials and our new disclosure details.

Thanks, David, and good morning, everyone. In the fourth quarter of 2022, we delivered adjusted EBITDA of $227 million, which is a $20 million increase from the third quarter. Pipeline segment results were driven by the fourth quarter benefit of the Millennium Pipeline acquisition, higher short-term revenues at the pipeline joint ventures and Washington 10 Storage, and continued high levels of short-term optimization at LEAP. In total, the Pipeline segment results included approximately $7 million of favorable optimization and short-term revenue that resulted from the wide basis differentials across many of our assets. Gathering segment results were driven by higher revenue at the Appalachia gathering system, offset by lower revenues at Susquehanna gathering and the impact of a planned maintenance outage at one of our Blue Union treating facilities. Operationally, we hit an all-time high this quarter in total gathered volumes, which averaged approximately 3.1 billion cubic feet a day, driven by the in-service of expansion projects in both regions and partially offset by lower volumes at Susquehanna. Now onto our new disclosures. We are increasing our 2023 adjusted EBITDA guidance to $880 million to $920 million, which reflects the strength and durability of our base business, as well as the expected contribution from our organic growth projects. The midpoint of our revised range represents 14% growth from our 2022 original guidance. Similar to 2022, our plan for 2023 is built on the expectation that volumes and EBITDA will be stronger in the back half of the year as we execute on our expansion projects. We will also continue to seek opportunities to optimize the small amounts of uncontracted capacity on our assets. Due to our confidence in our portfolio, we are also providing an early outlook for 2024 adjusted EBITDA of $920 million to $970 million, which represents a 9% annual growth rate from our 2022 original guidance. Our growth plan is underpinned by fully contracted expansion with high levels of take-or-pay and no direct commodity exposure. We remain committed to a growing and durable dividend and have declared a quarterly dividend increase to $0.69 per share, which represents an 8% increase from our prior quarterly dividend. Our 2023 capital investment guidance of $605 million to $690 million reflects a heavier construction period as we execute on our contracted growth projects. The team is off to a great start this year with all projects on budget and on schedule. We are also providing our new five-year capital outlook of $1.7 billion to $2.2 billion. This new outlook is supported by strong contracted cash flow and a backlog of attractive organic projects. Our updated five-year capital outlook can be fully self-funded with no incremental debt or equity issuances, and we expect to naturally delever as the business grows, which will provide additional balance sheet capacity and further value creation optionality. Preserving our balance sheet strength and financial flexibility continues to be our top priority, with the ultimate goal of achieving an investment-grade rating. We remain committed to our long-term leverage ratio ceiling of four times and possess strategic options to delever further via project financing at our pipeline joint ventures, which are currently under leveraged. As of year-end, we had nearly $700 million of available liquidity and no debt maturities until 2027. Our decision framework for deploying distributable cash flow is designed to maximize shareholder value with our options, including deploying capital to accretive organic growth projects that fit our investment criteria, returning capital to shareholders through dividends or buybacks, or paying down debt. I'll now pass it back over to David for more details on our growth opportunity set and closing remarks.

Thanks, Jeff. We continue to see significant growth opportunities across our existing asset footprint. Active discussions continue for further expansions of LEAP, and we recently executed a five-year term extension on 500 million per day of existing capacity. This contract extension demonstrates the strong market support for this wellhead to water pathway and its connectivity to growing LNG markets. We also continue to see momentum for expansions across our Appalachia assets as demand for pathways to strong end-user markets remains high. We expect that our energy transition platform will become a meaningful contributor to the business towards the end of our five-year plan, with the near-term priority of advancing our CCS project towards a final investment decision and participation in hydrogen hub opportunities in Appalachia. So, in summary, we had an exceptional year in 2022. We have an exciting year in front of us as we execute on our growth projects, which will enable strong EBITDA growth through 2024 and beyond. Our entire team looks forward to continuing our track record of performance for our customers and shareholders. We can now open up the line for questions.

Your first question comes from Michael Blum with Wells Fargo. You may proceed.

Thanks. Good morning, everyone. I wanted to start on the CapEx budget. So, you mentioned the heavier construction period. I'm wondering if you can just provide a little more detail. I'm assuming, slide 14 is kind of what captures the project, but just wondering if there's anything more to that? And then, can you also just remind us on what you're targeting for returns?

Sure, Michael. Good morning. This is David. Yeah. So, this year, we'll be ahead of CapEx year as many of our projects are executing sort of at the same time this year. Just as you may recall, we reduced our organic capital guidance in previous years, and this is around the timing of when we're actually spending the capital for the construction of these new assets. So, this year is going to be a lumpy year for us. You can sort of see it if you look at the five-year CapEx revised guidance that $800 million is committed contracted organic investments. And you can see that this year, the bulk of that $800 million is being deployed. So that's just the background around the CapEx disclosure here for 2023. In terms of looking forward, we continue to focus on organic opportunities. As we look to sanction any of those projects, we're always looking for accretive multiples and accretion to the equity holders when we sanction and deploy that capital for organic opportunities. We're well aware that we have two primary businesses here, the Pipeline gathering in each one of those segments sort of have a different value thresholds around the capital deployment. So, we're constantly looking at that and make sure that we maintain a disciplined capital allocation regime here.

Great. That helps. I appreciate it. Second question I wanted to ask was just on M&A. Obviously, you did the Millennium deal. Wondering it just seems like there could be more assets in your backyard for sale in the near future. Just curious for your appetite for M&A? And yeah, I'll leave it there.

Sure. I think our first focus for capital deployment is organic opportunities. And we have been blessed over the last couple of years with an abundance of opportunities that the team is executing on. There are many more early-stage opportunities that we're pursuing. So that will be our number one priority for capital allocation. The way I think of M&A, M&A is option value for us, it has to compete with organic capital allocation and we have to ensure shareholder per unit accretion for any M&A transaction. So that's how I think about it. I think about it as option value. The market presents these opportunities from time to time, and we can't really predict when they're going to come. For us, it's really just maintaining that discipline of capital allocation, if it makes sense and if it fits strategically, it's consistent with our investment thesis, and it creates a clear line of sight to shareholder value accretion. We'll consider it. But the plan that we're laying out here today in our guidance does not require any M&A activity.

Got it. Thank you very much.

Your next question comes from the line of Marc Solecitto with Barclays. Your line is open.

Hi. Good morning. Maybe just to start on the Haynesville outlook. I wonder if you could give us any color on your expectations for basin growth here over the next couple of years. And then, you had a helpful slide there where you show the breakeven on your gathering acreage, and then obviously, you have the indirect contractual support on LEAP. But curious if you could maybe just elaborate on the visibility, whether it be MVCs or other factors and the embedded assumptions you have in the expected volume ramp on Blue Union over the next couple of years?

Sure, Marc. Good morning. Thanks for the question. I want to take a moment to discuss the fundamentals in the current commodity price environment. Our guidance is based on the latest information from our customers, making it very current. We're seeing continued discipline from producers in the basin. They maintained discipline even in the $8 price environment and are continuing to do so at the $3 level. The resource quality in the Haynesville is top-tier in North America, with a significant amount of highly economic resource even at sub-$2 price levels. Currently, rig activity is around the 80-rig mark. Public producers are slowing their growth rates while still expanding. Even though one producer is reducing rig counts, they're still projecting healthy volume growth in the basin. We're also observing volume growth across our assets, as seen before the higher price environment of the last year when growth was happening with around 50 rigs in the basin. I'm very confident in the resource quality we serve, and we expect to see growth. You mentioned the LEAP contracts, and as you know, our gathering expansions align with our LEAP expansions. Our LEAP contracts are demand-based, providing a strong economic incentive for our shippers to meet those contracts, which we anticipate, and this has been factored into our guidance for 2023 and 2024.

Great. That's helpful. And then if we look at the Gathering segment, volumes were up in 4Q. EBITDA was down a little, and you referenced some planned treating capacity made in 4Q. Can you talk about how much of the sequential decline in EBITDA was on the OpEx side versus margin dilution from the treating maintenance? I'm curious if you have the treating capacity expansion on Blue Union coming on later this year in 4Q, really what that does for the margin profile and your Gathering growth on Blue Union here?

Sure. I'll address that in two parts, Marc. First, what you mentioned is correct. Regarding Q4, one of the reasons we were recognized as the top midstream company in North America is due to the reliability of our assets, which is very important to us and our customers. We have scheduled maintenance at our largest treater in Haynesville in Q4. So, you are right; there is a cost and revenue effect from that maintenance, but it's crucial for maintaining reliability for our customers. Looking ahead, we plan to bring gathering and treating facilities online in 2023 and 2024, and we expect volumes to increase as those facilities become operational. I'll leave it at that.

Got it. Appreciate the time.

Thank you, Marc.

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

Good morning. Thank you for the time. I wanted to discuss the spending guidance and its implications for the new five-year outlook. As we consider 2023, especially regarding free cash flow and the dividend, we are expecting a significant amount of outspend this year. So, is the understanding that we will experience a considerable outspend this year, but that this will reverse significantly in 2024 and beyond? I'm trying to reconcile the outspend with your remarks about not planning for any incremental growth or additional debt or equity. Thank you.

Thanks John. I'll begin and then hand it over to Jeff for further details. The main point to understand is the variability in our business and the timing of capital expenditures. It's simply a matter of that. In previous years, we reduced our CapEx guidance as we adjusted and delayed spending to enhance the returns on our projects. This year is significant, with a noticeable increase in CapEx due to all the contracted organic opportunities we are currently executing. If you refer to our presentation, particularly slides 12 and 13, you'll notice that $800 million of our existing committed organic investments will be allocated this year. Therefore, when comparing the amounts, the contracts committed for future years will be considerably lower than the expenditures this year. So, this is primarily a timing issue. Now, I'll hand it over to Jeff to discuss the details of the balance sheet related to this.

Good morning, John. This is Jeff. This aligns with what David mentioned; our plan is to maintain a leverage ceiling of four times, and we feel very comfortable with that. Moving into 2024 and beyond, we expect to see a reduction in leverage to the mid to low threes as we approach the end of 2024. We have several strong contracted cash flow opportunities, and we also have some under-leverage at our joint ventures. We are examining all the options at our disposal since these could serve as investment-grade vehicles that we could use to enhance our balance sheet while maintaining our strong position. That's our perspective on the matter.

Okay. I appreciate that. Thanks for the color. Maybe just one, I'd love to hear an update on NEXUS. Just how recontracting is going? Whether or not you've made any progress on some of the kind of smaller scale, let's call it, kind of expansion opportunities, particularly with MVP seeming to continue to lag?

Yeah. Great question, John. Yeah. We continue to see the NEXUS leg in the market. And my sense is, the market has sort of moved on from there and NEXUS had a phenomenal year in 2022. And I'm sure as you guys put through all the details, the financial details, you'll see that as well. So, we're very happy with how that asset has been positioned and how we've repositioned it contractually in this new market structure that's in front of us right now. So, as I said in my opening remarks, we continue to see this very strong desire for pathways out of Appalachia to the strong market centers that all of our assets serve. So that pathway saw a lot of activity in 2022. We expect more going forward in 2023 and 2024. I'm going to ask for a little more time before I provide more color around some of the work that we're doing around NEXUS. But I'll just say this, John, what we've talked about in the past, we are continuing to work on and execute around, which is how can we create more capacity on NEXUS without going through a FERC process. And the team is working intensely on that right now, and I'm very optimistic that we're going to have some positive results from those efforts.

All right. Appreciate it.

Your next question comes from the line of Jeremy Tonet with JP Morgan. Your line is open.

Hi. Good morning.

Good morning, Jeremy.

I just want to pivot to the CapEx a little bit, if I could. And I just wanted to know if you could give us any sense for a little bit more detail as far as what bucket the CapEx is going, be it gathering versus interstate versus energy transition or Haynesville or Appalachia or even specific project kind of scoping size, just trying to dig in a little bit more.

Jeremy, I'll address that in two parts. First, regarding committed capital, most of it is currently directed towards the Haynesville, specifically the LEAP and its related gathering expansions. The capital deployment leans more towards the Pipeline segment compared to the Gathering segment. Looking at a five-year outlook, I estimate that a significant portion of the projected $2 billion in guidance will be allocated to energy transition initiatives. Although we emphasized these plans for the latter part of our five-year strategy, the CCS project in Louisiana is advancing. Last year, we submitted a Class VI well application and are actively consulting with the appropriate agencies to move the project forward. We anticipate reaching a final investment decision on it, at which time we will give investors more details about the capital expenditures involved. I feel very positive about this project. Additionally, there are exciting developments in our Northern region, particularly around Appalachia, with various hydrogen hub proposals we are engaged in. We are optimistic as these opportunities align well with our core strengths and relate closely to our existing assets and customer base. While these projects are still in the early stages, I expect a significant amount of our capital will be invested in this area.

Got it, that's helpful. Maybe let's discuss the CCS side. I know this is later in the decade, but I’d like to hear your thoughts at this point. Regarding the total addressable market, particularly in relation to the Haynesville, it seems that economies of scale could significantly improve the economics. There are several other treaters in the Haynesville, so how do you see this situation developing? It appears you would prioritize your own emissions first, but would you also consider collaborating with nearby companies? Would they be joint venture partners, or do you envision providing services to them? I'm just trying to get a sense of how this could evolve over time.

Yeah. That's a great question. So, you're right. Our focus to date has been on our own emissions and cleaning up our own emissions. And we provided some color around this project that we're targeting 1 million metric tons a year in terms of the, what I'll call, the storage or the sequestration capacity of the formation. We are very much thinking to design and develop a project that has an extended runway that will go beyond our own internal needs. And you're right, there are other neighbors in our neighborhood that have similar plans, but they may not have the concentration that we have of CO2, and you're very accurate in your statement that scale is important here. You have to have scale for the economics to box out with the 45G tax credit. So, I view that as an opportunity that will come. That will be like a Phase 2 opportunity for us once we take care of our own needs, look at potentially offering to third parties. I think it's premature to foresee how that third-party business would evolve, whether it would be a fee-for-service, or whether it would be a potential JV partner. I think the market still needs to evolve a little bit around that. But the other exciting part around CCS that we see, it's transportable to other geographic areas and footprint, particularly up here in the Northern part of our footprint. Any opportunities for CCS, we have lots of early-stage conversations going with clients where this would be probably the most economical way for them to mitigate their carbon emissions. So, again, our goal is to establish the project, get this project FID, take care of our own needs, and then replicate and export that to other jurisdictions where you have high concentrations of customers where this is an economic solution for them to decarbonize and you have the right geology in the region to accommodate it. So, very excited about this, quite frankly. I think this is going to be an emerging area for us and others that will really help the country as we navigate the pathway to a lower carbon future.

Got it. If I could just pick up on part of the last part there regarding your Northern footprint in CCS and customer outreach. Is this internal, within the oil and gas industry, or outside the oil and gas industry concerning customer conversations?

It's all of the above, Jeremy. It's both internal in terms of sector, but there's a lot of heavy industry up here, and that's a significant source of CO2. When you consider the current tax regime and the capital investments that some of these industries have, this presents a very viable and economical pathway for them to significantly decarbonize their operations. There are numerous discussions happening across all sectors of the economy, including the power sector, industrial sector, chemical sector, and agricultural sector, where this is highly relevant. That's what excites me so much, Jeremy.

And just sorry.

No, go ahead.

And just to clarify, when you say up here, are you saying Michigan or Appalachia Northeast?

Yeah. My apologies. I'm sitting in Detroit. So, when I say up here, I'm referring to the Northern footprint. So, what I'll call from New York right through to the Midwest where all of our assets are.

Got it. Very helpful. Thank you.

Your final question comes from Alex Kania with Wolfe Research. Your line is open.

Thanks. Good morning. You mentioned just the active discussions still going on with incremental LEAP expansion. Would you be able to have any kind of color thinking about what the opportunity is, maybe even with respect to timing? Do you think that it's fair to assume that would be something that may coincide more with the LNG capacity coming into play in the back half of the decade? Or is there a chance that could happen earlier? And then maybe if you could just talk a little bit just about what you're hearing with respect to LNG terminal development right now?

Thanks for the question, Alex. To begin, I want to reiterate what I mentioned earlier. For one of our key shippers, we extended their contract by 0.5 Bcf a day for an additional five years, resulting in a total contract term of 15 years. This highlights the significance of our asset's connectivity, linking the basin to the LNG corridor and reflecting the strength of the LNG market in North America, which encouraged this customer to continue working with us. We're very optimistic about that. Regarding the next phase of LEAP expansion, as I noted earlier, we are actively engaged in discussions with several clients. Over the past year, we've made considerable progress in expanding incrementally. These commitments usually align with longer-term agreements downstream of our assets. The process resembles a high school dance, where everyone is finding partners, and we are facilitating these connections through our asset. This takes time, so I won't make any predictions on the timeline. We understand that solid business transactions require patience, and we are confident that more opportunities will arise. Our asset is favorably situated, and we're planning an expansion that could reach up to 3 Bcf a day. We can continue to grow in appropriately sized increments, which sets us apart from other projects that need large commitments before proceeding. We are encouraged by our current position—we are operational and flowing gas today—and we anticipate further incremental expansions this year and next. We are optimistic about LEAP's future and will allow the market to dictate the timing of developments.

Great. Thank you.

There are no further questions at this time. I will now turn the call back over to Mr. David Slater.

Thank you, everybody. We truly appreciate your time and attention and interest in DT Midstream. Have a great day.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.