DT Midstream, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. DT Midstream owns and operates natural-gas pipeline and gathering assets, with Pipeline and Gathering segments. It became an independent public company on July 1, 2021; 2021 comparative results are pre-Separation carve-out results and may not be fully comparable to standalone results.
Financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Operating revenue | $227 million | $208 million | $442 million | $405 million |
| Operating income | $137 million | $86 million | $241 million | $186 million |
| Net income attributable to DT Midstream | $91 million | $68 million | $172 million | $146 million |
| Diluted EPS | $0.93 | $0.70 | $1.77 | $1.51 |
| Operating cash flow | Not separately provided | Not separately provided | $379 million | $328 million |
Q2 revenue grew about 9% year over year; first-half revenue grew about 9%. First-half operating cash flow rose $51 million. Q2 operating margin was approximately 60%, versus 41% in Q2 2021; this comparison is materially affected by gains recorded in 2022 and a loss in 2021. Net income attributable to DT Midstream was approximately 40% of Q2 revenue, versus 33% a year earlier.
- Segment performance: Q2 Pipeline revenue was $83 million and segment net income attributable to DT Midstream was $52 million; Gathering revenue was $144 million and segment net income was $39 million. First-half segment net income was $100 million for Pipeline and $72 million for Gathering.
- Cash flow and investment: First-half investing cash outflow was $31 million, including $55 million of plant and equipment spending, partly offset by $22 million from the sale of a note receivable. Financing cash outflow was $135 million, including $120 million of common dividends paid.
- Balance sheet at June 30: Cash and cash equivalents were $345 million; total assets $8.290 billion; total liabilities $4.219 billion; and equity $4.071 billion. Long-term debt, net of current portion, was $3.057 billion. Cash plus net available revolving credit totaled about $1.1 billion.
- Debt and liquidity: In April, the company issued $600 million of 4.30% secured notes due 2032 and used $593 million of proceeds to repay term debt. Term-loan principal stood at $399 million; no revolver borrowings were outstanding, with $719 million net availability after $31 million of letters of credit. Floating-rate debt was $399 million.
- Dividends: The company declared $0.64 per share for each of Q1 and Q2 2022. The August 2022 declaration maintained the $0.64 quarterly rate.
Material changes and unusual items
- Q2 included a $17 million gain from selling certain Utica-region assets and a $6 million gain from a supplier legal settlement. These helped lift reported operating income; they are not presented as recurring operating performance.
- First-half results also benefited from comparing against a $19 million note-receivable loss recorded in 2021. The related Utica investment was sold in Q2 2022 for $22 million, with no continuing involvement.
- The term-loan repayment produced $13 million of financing losses: $9 million from debt extinguishment and $4 million from debt modification.
- First-half interest expense increased to $64 million from $50 million, primarily reflecting higher rates on external debt versus prior DTE Energy borrowings. Gathering operating and maintenance costs also increased, primarily with higher Blue Union volumes and associated operating costs and planned maintenance.
Outlook, risks and contingencies
- Management expected 2022 operating cash flow of approximately $605–$655 million and capital expenditures, including contributions to equity-method investees, of approximately $350–$400 million. It stated that available resources should fund expected operating, capital and debt-service needs.
- Growth priorities include potential Haynesville/LEAP and Blue Union expansions and opportunities at Appalachia Gathering and equity-method investments. Management emphasized long-term firm contracts, disciplined capital deployment and a flexible balance sheet. The company also stated a goal of net-zero carbon emissions by 2050.
- Debt covenants were in compliance at quarter-end: debt-service coverage 6.8x, net leverage 3.5x against a 5.0x maximum, and interest coverage 6.2x against a 2.5x minimum. Covenant restrictions may constrain borrowing, dividends and other actions.
- Key exposures include natural-gas production and volumes, concentration in key customers (including sub-investment-grade Southwestern Energy and Antero Resources), customer credit, interest-rate changes, access to capital, operating and environmental hazards, regulation, and execution of growth projects. The filing says existing operations have limited direct commodity-price exposure because of contract structures.
- Legal and environmental proceedings arise in the ordinary course; management did not expect reasonably possible losses to materially affect the company. Accrued slope-restoration liabilities were $20 million. Certain guarantees totaled $7 million, with potential payment considered remote; the Vector Pipeline credit facility had a maximum potential payout of $54 million, with funding considered remote.
- After quarter-end, Pennsylvania enacted a phased corporate tax-rate reduction. DT Midstream expected a favorable deferred-tax remeasurement effect on Q3 net earnings but had not quantified it and was still evaluating other provisions.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring volumes, rates and equity-method earnings versus the $23 million of Q2 gains and other comparison-period items.
- Whether management’s 2022 operating-cash-flow and capital-spending ranges were achieved, and the resulting free cash flow after investment and dividends.
- Debt balances, variable-rate exposure, covenant headroom and the effect of future interest-rate changes.
- Customer concentration, customer credit quality and volume trends across Blue Union, LEAP and Appalachian assets.
- The eventual financial effect of Pennsylvania tax changes, and any material developments in environmental, legal or pipeline-restoration obligations.