DT Midstream, Inc. — Q3 2023 Form 10-Q
Business and period: DT Midstream owns and operates natural-gas pipeline, storage and gathering assets, including equity-method joint ventures. This unaudited report covers the quarter and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods unless stated otherwise. Dollar amounts are in millions, except per-share data.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $234 | $235 | $678 | $677 |
| Operating income | $124 | $121 | $351 | $362 |
| Net income attributable to DT Midstream | $91 | $113 | $263 | $285 |
| Diluted earnings per share | $0.94 | $1.16 | $2.70 | $2.94 |
- Q3 operating margin was approximately 53%, versus 51% a year earlier; nine-month operating margin was approximately 52%, versus 54%. These are calculated as operating income divided by operating revenue.
- Q3 net income attributable to the Company fell $22 million despite slightly higher operating income. Nine-month income fell $22 million. Higher income tax expense was a major factor: $33 million versus $7 million in Q3 and $102 million versus $65 million for nine months. The comparative tax rates were affected by prior-year state deferred-tax remeasurement benefits.
- Segments: Nine-month Pipeline revenue increased to $271 million from $247 million and attributable income rose to $185 million from $170 million. Gathering revenue declined to $407 million from $430 million and attributable income declined to $78 million from $115 million. The 2022 Gathering comparison included a $17 million asset-sale gain.
- Cash flow: Nine-month operating cash flow was $614 million, up from $574 million. Investing used $223 million, including $622 million of plant and equipment expenditures; financing used $422 million. Cash decreased $31 million to $30 million.
- Debt and liquidity: Long-term debt was $3.064 billion carrying value, representing $3.099 billion principal; short-term revolver borrowings were $125 million. The revolver had $859 million net availability after borrowings and letters of credit; reported total available liquidity, including cash, was approximately $889 million. The Company reported compliance with debt covenants, with net leverage of 2.4x against a 5.0x maximum.
- Quarterly dividends declared were $0.69 per share, up from $0.64 in 2022. The board declared another $0.69 dividend on November 1, payable January 15, 2024.
Material changes and management commentary
- Pipeline’s nine-month revenue benefited from higher storage contracting rates at Washington 10 and new Michigan System transmission contracts. The Michigan System conversion to a long-term dry-gas transmission contract was completed in Q1 2023.
- Gathering’s nine-month revenue was lower, primarily due to lower Blue Union revenue and lower Susquehanna volumes, partly offset by higher Appalachia volumes. The Company attributed Blue Union’s decline mainly to lower rates and production-related expense recoveries, partly offset by new contracts.
- A $371 million distribution from NEXUS, net of fees and expenses, followed NEXUS’s issuance of senior notes; DT Midstream used the proceeds to repay revolver borrowings. The Company also received $405 million of distributions from equity-method investees in investing activities during the nine months.
- Capital expenditures, including equity-method contributions, were $628 million for nine months. Management expects approximately $790 million to $850 million for full-year 2023.
- Management expects liquidity to be sufficient for operations, capital spending, debt service and dividends, and plans to pursue disciplined growth, long-term firm contracts and low-carbon opportunities. It targets net-zero carbon emissions by 2050. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Key risks include dependence on natural-gas production and demand, customer credit and volume changes, and reliance on Southwestern Energy for a significant portion of revenue. The Company notes that some customers, including Southwestern Energy, are sub-investment grade.
- Floating-rate debt was $524 million, or 16% of total debt, exposing the Company to SOFR changes. Other risks include interest rates, access to capital, project execution, environmental regulation, operational hazards, cybersecurity and potential changes in customer obligations.
- The Company reduced its slope-restoration contingency accrual by $6 million in Q3, lowering operating and maintenance expense. Accrued future restoration costs were $13 million at September 30, down from $19 million at year-end 2022. Management considers the accrual sufficient; it stated that legal matters are not expected to materially adversely affect results.
- Management found no goodwill impairment trigger requiring an interim test, but noted that lower future cash-flow expectations, higher Treasury rates or weaker industry transaction multiples could lead to impairment. Goodwill was $473 million.
- Potential maximum exposures include $32 million under surety-bond indemnities and a $52 million Vector credit facility commitment for catastrophic-event response; management considers a Vector draw remote.
Important facts for investors to verify
- Whether Gathering revenue and earnings stabilize, particularly in Blue Union, and how producer volumes and Southwestern Energy’s credit and activity evolve.
- Execution, timing and returns on the 2023 capital program, including the stated $790 million–$850 million expenditure outlook and expansion projects.
- Cash generation and equity-investee distributions relative to capital spending, dividends and debt obligations.
- Interest-rate exposure, covenant headroom, revolver availability and the Company’s ability to maintain liquidity while funding growth and dividends.
- Whether environmental restoration estimates, goodwill assumptions or other contingencies change materially.