Business context and reporting period
DT Midstream, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company owns and operates natural gas pipeline, storage, and gathering assets. It became an independent, publicly traded company on July 1, 2021, following its spin-off from DTE Energy. Results before the spin-off are carve-out financials and may not reflect the costs of operating as a standalone company.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $212 million | $203 million | $617 million | $546 million |
| Operating income | $106 million | $124 million | $292 million | $320 million |
| Operating margin | 50.0% | 61.1% | 47.3% | 58.6% |
| Net income attributable to DT Midstream | $74 million | $101 million | $220 million | $243 million |
| Basic and diluted EPS | $0.77 | $1.05 | $2.28 | $2.52 |
| Operating cash flow | Not provided for the quarter | $464 million | $454 million |
At September 30, 2021, cash and cash equivalents were $128 million; total debt was $3.098 billion principal ($3.037 billion net carrying value). The $750 million revolving facility had $742 million of net availability after $8 million of letters of credit, with no borrowings outstanding. Management reported approximately $870 million of total available liquidity. Debt maturities include $10 million due within 12 months. The company was in compliance with debt covenants: debt service coverage 5.9x, net leverage 4.1x, and interest coverage 6.0x.
Material changes versus comparable periods
- Revenue grew 4% in Q3 and 13% year to date, while net income attributable to DT Midstream declined 27% and 9%, respectively.
- Pipeline segment revenue increased, mainly reflecting LEAP entering service in Q3 2020; higher equity-method earnings also contributed to improved year-to-date Pipeline results.
- Gathering segment earnings fell to $33 million in Q3 from $59 million and to $93 million year to date from $129 million. Higher operating costs, Blue Union operations, and public-company costs weighed on results; 2020 included a $20 million post-acquisition income settlement.
- Q3 operation and maintenance expense included approximately $1 million of Separation-related transaction costs; the nine-month amount was approximately $20 million. DTE corporate allocations ended with the spin-off, with transition services continuing under agreement.
- Cash from investing activities was $163 million versus $601 million used in the prior-year period, reflecting the $263 million settlement of a DTE Energy note receivable and lower capital expenditures and equity-investee contributions. Nine-month capital expenditures were $96 million.
Outlook, risks, and unusual items
- Management expects 2021 operating cash flow of approximately $620 million to $680 million and 2021 capital expenditures plus equity-method contributions of approximately $205 million to $230 million.
- The company expects to pay regular cash dividends, subject to Board approval and financial conditions; it targets long-term dividend growth consistent with cash-flow growth.
- In June 2021, DT Midstream issued $2.1 billion of senior notes and entered a $1.0 billion term loan facility, using proceeds to repay DTE-related borrowings and pay DTE a one-time $501 million special dividend. The term loan is variable-rate; $998 million was floating-rate debt at quarter-end.
- A $19 million loss was recorded in Q2 on a Utica-region note receivable after lower-than-expected volumes and proceeds; the note is on nonaccrual status, and further losses are possible if production forecasts or commodity prices weaken.
- Risks include dependence on key producers and counterparties, including non-investment-grade customers; lower production or customer defaults could reduce volumes. The company also cites interest-rate exposure, environmental and operating risks, and continued dependence on DTE transition services. Management stated COVID-19 had not materially affected results as of the filing.
- An equity-method investee is appealing a property-tax assessment; the eventual settlement could differ materially from its accrual and affect DT Midstream’s earnings and cash flows. DT Midstream also accrued $21 million for future slope-restoration work. Management said ordinary-course legal proceedings were not expected to materially adversely affect the company.
Important facts for investors to verify
- How Gathering revenue, costs, and earnings trend, including the effects of Blue Union operations and producer volumes.
- Whether forecast 2021 operating cash flow and capital spending/contributions track management’s ranges.
- Debt-service capacity, covenant headroom, and exposure to LIBOR-based floating-rate debt.
- Collection prospects for the impaired Utica note receivable and any further impairment risk.
- Developments in key-customer credit quality, the investee property-tax appeal, and environmental or slope-restoration obligations.
- Costs of becoming a standalone company and plans to replace DTE-provided transition services.