DT Midstream, Inc. — Q2 2023 Form 10-Q
Business and period: DT Midstream owns and operates natural-gas pipeline, storage and gathering assets serving U.S. and Canadian markets. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are with 2022 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
- Q2 revenue: $224 million, down 1% from $227 million. Pipeline revenue was $90 million, up from $83 million; Gathering revenue was $134 million, down from $144 million.
- Q2 operating income: $117 million versus $137 million. The 2022 quarter included a $23 million net asset gain, compared with a $3 million gain in 2023. Operating margin was approximately 52% versus 60%.
- Q2 net income attributable to DT Midstream: $91 million, unchanged; diluted EPS was $0.93, also unchanged.
- First-half results: Revenue was $444 million versus $442 million; operating income was $227 million versus $241 million; attributable net income was $172 million in both periods. Diluted EPS was $1.76 versus $1.77.
- Cash flow, first half: Operating cash flow was $389 million versus $379 million. Investing used $31 million in both periods; financing used $374 million versus $135 million. Cash ended at $45 million, down from $61 million at year-end 2022.
- Capital spending: Plant and equipment expenditures were $421 million in the first half, compared with $55 million in 2022; $111 million of current-period expenditures were in accounts payable and other accruals. Investing cash outflow was partly offset by $396 million of distributions from equity-method investees, including a $371 million net distribution from NEXUS.
- Debt and liquidity: Debt principal totaled $3.099 billion, including $100 million of revolver borrowings; balance-sheet long-term debt was $3.062 billion. Cash plus net revolver availability was approximately $929 million. No scheduled debt maturities are due before 2028. The company reported compliance with debt covenants: debt service coverage 8.6x, net leverage 2.4x and interest coverage 8.2x.
- Dividend: The company declared $0.69 per share for each of Q1 and Q2 2023. On August 1, it declared another $0.69 per share, payable October 15 to holders of record September 18.
Material changes and management commentary
- The Michigan System conversion was completed in Q1 2023; it now provides service under a long-term dry-gas transmission contract and is reported in Pipeline. Prior-year comparative activity remains classified as Gathering, limiting direct segment comparability.
- First-half Pipeline attributable income increased to $121 million from $100 million, supported by higher storage rates and the Michigan contract, as well as increased equity-method earnings. First-half Gathering attributable income fell to $51 million from $72 million, reflecting lower Blue Union revenue and the absence of a $17 million 2022 gain on asset sales.
- Management expects 2023 capital expenditures, including contributions to equity-method investees, of approximately $790 million–$850 million. It shifted capital previously committed for 2024 into 2023 for a new Ohio Utica greenfield gathering opportunity.
- Management says long-term firm contracts support relatively stable cash flows and that it expects adequate liquidity for operations, capital spending, debt service and dividends. It intends to pursue growth opportunities across its footprint and is targeting net-zero carbon emissions by 2050.
Risks, contingencies and unusual items
- Southwestern Energy is a significant customer; a loss of, or reduction in, its volumes could materially affect demand and results. Some customers are sub-investment grade, and production levels, natural-gas demand, interest rates and capital-market access remain risks.
- The company faces environmental and operating risks, including pipeline hazards and potential costs from regulation. It reported $19 million accrued for future slope restoration. Management said reasonably possible losses from legal proceedings are not expected to materially adversely affect the company.
- Potential indemnification under surety bond agreements was $31 million. A separate Vector revolving facility has a maximum potential payout of $53 million, though funding was considered remote. No guarantees of other parties’ obligations were outstanding.
- Goodwill was $473 million. Management found no interim impairment trigger, but noted that lower projected cash flows, sustained declines in market capitalization or industry multiples, and changes in Treasury rates could lead to impairment.
- The company had $499 million of floating-rate debt and reported that a hypothetical 10% rate increase would reduce the fair value of long-term debt by $91 million; this sensitivity is not a projected cash loss. A June 2023 credit agreement amendment replaced the Term Loan Facility’s Eurodollar provisions with Term SOFR provisions.
Key facts for investors to verify
- Whether the $790 million–$850 million 2023 capital-spending outlook and Ohio Utica project remain on schedule and within budget.
- Whether Gathering revenue and volumes stabilize, particularly at Blue Union, and how customer concentration and Southwestern Energy’s production affect results.
- Whether the large NEXUS distribution is recurring; distinguish equity-method earnings from cash distributions when assessing cash generation.
- How the Michigan System’s new Pipeline classification affects segment comparisons, and whether Pipeline growth offsets Gathering weakness.
- Whether liquidity, covenant headroom, floating-rate exposure and dividend coverage remain adequate as investment spending continues.
- Whether market conditions or projected cash flows change enough to trigger a goodwill impairment, and whether environmental or legal exposures materially change.