DT Midstream, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. DT Midstream owns and operates natural gas pipelines, storage and gathering assets through its Pipeline and Gathering segments. It became an independent public company on July 1, 2021; 2021 comparative results include pre-separation carve-out reporting and may not be fully comparable.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $235 million | $212 million | $677 million | $617 million |
| Operating income | $121 million | $106 million | $362 million | $292 million |
| Net income attributable to DT Midstream | $113 million | $74 million | $285 million | $220 million |
| Diluted EPS | $1.16 | $0.77 | $2.94 | $2.28 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $574 million | $464 million |
| Capital expenditures, including equity-investee contributions | Not provided for the quarter | Not provided for the quarter | $177 million | Not provided |
Q3 revenue increased 11% year over year and net income attributable to DT Midstream increased 53%. Sequentially, revenue rose from $227 million in Q2 2022 to $235 million; attributable net income increased from $91 million to $113 million, and diluted EPS from $0.93 to $1.16. Q3 operating margin was approximately 51%, compared with 50% a year earlier; these margins are calculated from reported revenue and operating income.
For the first nine months, revenue increased 10% and attributable net income increased 30%. Results included a $17 million gain from the sale of a Utica-region investment in 2022, versus a $19 million loss on that investment in 2021. The 2022 nine-month results also included a $13 million loss from debt financing activities related to the term-loan repayment and modification.
Cash, debt and liquidity
- Cash and cash equivalents were $355 million at September 30, 2022, up from $132 million at December 31, 2021. Nine-month operating cash flow was $574 million; investing activities used $150 million and financing activities used $201 million.
- Long-term debt, net of discounts and issuance costs, was $3.058 billion; principal outstanding was $3.099 billion. The company issued $600 million of 4.30% senior secured notes due 2032 and used $593 million of net proceeds to repay term-loan debt. The term loan balance was $399 million, at a variable rate, and its remaining balance is due at maturity in 2028.
- At quarter-end, the $750 million revolving facility had no borrowings, $31 million of letters of credit and $719 million of net availability. The company reported approximately $1.1 billion of total liquidity, including cash.
- Financial covenants were met: debt service coverage ratio 7.1x, net leverage 3.4x and interest coverage 6.2x. The reported floating-rate debt balance was $399 million, or 13% of total debt.
- Quarterly dividends were $0.64 per share; $62 million was declared for Q3 and paid in October.
Material changes, outlook and commentary
- Pipeline revenue rose to $247 million for the first nine months from $227 million, primarily on higher LEAP volumes and rates and a new Stonewall customer. Equity-method earnings increased to $107 million from $90 million, mainly reflecting improved NEXUS and Vector results.
- Gathering revenue rose to $430 million from $390 million, driven largely by Blue Union expense recovery and higher volumes. Gathering operating and maintenance costs also increased, principally due to higher Blue Union costs and planned maintenance.
- On October 7, 2022, DT Midstream acquired an additional 26.25% of Millennium Pipeline for $552 million, taking ownership to 52.50%. The transaction was funded with cash and available revolving capacity and closed after the reporting date.
- On October 19, the company amended its credit agreement, increasing revolving commitments to $1.0 billion, extending maturity to October 19, 2027, and replacing LIBOR references with SOFR.
- Management forecast 2022 operating cash flow of $605 million to $655 million and total capital expenditures, equity-investee contributions and the Millennium acquisition of approximately $860 million to $910 million. It expects sufficient resources for planned operations, investment and debt service, and expects to pay regular dividends; future dividends remain subject to board approval, cash flows, capital needs and covenant compliance.
- Management cited long-term firm contracts and asset connectivity as sources of revenue and cash-flow stability, and identified Haynesville and Appalachia expansion opportunities. The company’s strategy includes disciplined investment and a goal of net-zero carbon emissions by 2050.
Risks, contingencies and unusual items
- Key risks include changes in production and demand, reliance on significant customers (including sub-investment-grade Southwestern Energy and Antero Resources), customer credit or volume reductions, interest rates, access to capital, project execution, supply-chain and labor constraints, cyber events, and environmental and regulatory requirements. Commodity exposure is described as limited by contract structure, but low gas prices could affect production and reserves accessible to the systems.
- Goodwill was $473 million. Management noted higher discount rates but concluded that no interim impairment test was required; it will continue monitoring assumptions and market conditions.
- The company reported $20 million accrued for future pipeline slope restoration. It said estimated losses from ordinary-course legal and environmental proceedings were not expected to materially adversely affect the business. A Vector Pipeline credit facility carries a maximum potential payout of $51 million, with funding considered remote.
- Pennsylvania tax-rate changes resulted in deferred-tax remeasurement and reduced the reported effective tax rate; the filing attributes a substantial portion of the year-over-year tax-expense decline to this change. The Inflation Reduction Act was not expected to have a material impact.
- Management identified risks to forward-looking statements including inflation and rising rates, natural-gas production and demand, counterparties, environmental rules, weather, geopolitical events, and the ability to execute growth and low-carbon plans.
Key investor verification points
- Assess the sustainability of earnings growth after considering the $17 million asset-sale gain, tax remeasurement effects and debt-related charges.
- Verify the cash-flow contribution and financing impact of the $552 million Millennium acquisition, including post-close liquidity and leverage.
- Track the expected 2022 cash-flow and capital-spending ranges against actual results, including the acquisition’s treatment in the capital-investment forecast.
- Monitor customer concentration and credit quality, gathering volumes and costs, and performance of equity-method investees.
- Review floating-rate exposure, covenant headroom, dividend capacity and the effect of continued interest-rate increases.