Q3 2021 DT Midstream Inc Earnings Call

Welcome to the D G midstream third quarter 2021 earnings call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.

And to withdraw your question.

Press Star one again.

I will now turn it over to our speaker today, Todd Bornemann director of Investor Relations. Thank you. Please go ahead.

Good morning, and welcome everyone.

Before we get started I would like to remind you to read the safe Harbor statement on page two of the presentation.

The reference to forward looking statements.

Our presentation also includes references to non-GAAP financial measures.

Please refer to the reconciliations to GAAP contained in the appendix.

Joining me. This morning are David Slater, President and CEO, and Jeff <unk> Executive Vice President and CFO.

I'll now turn it over to David to start the call.

Thanks, Todd good morning, and thanks, everyone for joining us today I'll start on slide three.

This was their first quarter as a standalone public company and I'm happy to report that the business continued its strong performance based on the outperformance we are raising our 2021 operating earnings adjusted EBITDA distributable cash flow and EPS guidance. We are now on track to deliver 10% EBIT growth in two.

<unk> 21 compared to our 2020 original guidance. This is industry, leading organic growth. We're also reaffirming our 2022 early outlook, which we feel very confident in that.

On the commercial front, our team continues to execute on investment opportunities that will deliver distinctive future growth.

Lastly, we continued to advance our ESG initiatives, which we expect will also provide growth opportunities and uniquely positioned the company for success in the long term.

Let's turn to slide four.

<unk> has a very simple investment thesis and offers a unique opportunity for investors.

Our asset platforms are well positioned to serve key markets from the two premier dry gas basins in the country, providing wellhead to market services, we have.

Clean balance sheet with low leverage and no significant maturities for seven years supporting our self funded growth agenda.

Our strong cash flow generation is underpinned by long term take or pay contracts and we are committed to a leading ESG program with strong CCAR governance.

And a net zero carbon emissions by 2050.

Now I'll pass it to Jeff who will cover our financial results and guidance.

Thanks, David and good morning, everyone I'll start on slide five.

David noted because of our strong year to date performance, we are increasing our 2021 adjusted EBITDA.

Operating earnings and operating EPS guidance ranges.

Due to our well positioned asset platforms and strong contracts, we have benefited from favorable market opportunities, which has accelerated 2022 growth into 2021.

We now expect full year 2021, adjusted EBITDA to be between $745 million and $760 million.

The midpoint of this revised guidance range provides 10% growth from our 2020 original guidance.

Operating earnings for the full year 2021 are expected to be between $315 million and $325 million.

With the midpoint of this revised guidance range, providing 12% growth from our 2020 original guidance.

Additionally, we are increasing our distributable cash flow guidance midpoint for the full year 2021 by $35 million.

Let's turn to slide six.

Our performance for the first three quarters of 2021 delivered strong growth compared to the prior year.

Offsetting new public company costs in the third quarter.

Adjusted EBITDA for the first three quarters of 2021 was $572 million, which was $37 million higher than the prior year.

For the pipeline segment, adjusted EBITDA was $300 million and the gathering adjusted EBITDA was $272 million.

Operating earnings for the first three quarters of 2021 or $249 million, which was $21 million higher than the prior year.

The year over year increase in adjusted EBITDA and operating earnings were primarily driven by higher gathering and pipeline revenues, including higher revenues for our Interstate pipeline joint ventures, and the impact of the full year of leaf and service for 2021.

Let's turn to slide seven to discuss quarterly results.

Our third quarter results were in line with our full year expectations and guidance. Knowing this quarter was going to include the new ongoing public company costs.

Third quarter, adjusted EBITDA was $188 million compared to 194 million for the prior year.

For the pipeline segment, adjusted EBITDA was $101 million and the gathering adjusted EBITDA was $87 million.

Operating earnings for the quarter were $75 million compared to 86 million for the prior year.

Adjusted EBITDA and operating earnings performance were driven by increased gathering and pipeline revenues.

These increases were offset by the new ongoing public company costs that started in the third quarter of 2021, and the one time items that occurred in the gathering segment in 2020.

Now, let's move to the next slide to talk about 2022.

Our strong performance in 2021 has us highly confident in our 2022 growth expectations.

And in our 2022 early outlook range.

We expect 2022, adjusted EBITDA to be between $755 million and $795 million.

Representing 5% to 7% growth from our 2021 original guidance, which includes offsetting a full year of public company costs.

We expect 2022 operating earnings to grow in line with adjusted EBITDA to be between $314 million and $330 million.

We will keep you updated on our 2022 early outlook as we continue to make progress on our commercial projects and as we work with our key customers and their plans.

Now I'll turn it back over to David.

Thanks, Jeff moving on to slide nine in the third quarter of 2021, and we gathered over two six Bcf a day of production volumes, representing a 6% overall growth from the third quarter and 2020.

Year over year growth in the Haynesville was driven by higher production volumes on Blue Union.

And the system recently hit a record high for volumes during the month of October a one five Bcf a day.

Year over year growth in the northeast was driven primarily by higher volumes on the Appalachian gathering system.

Now turning to slide 10.

We continue to execute on organic investment opportunities across both business segments, which will deliver distinct to future growth.

On our Stonewall pipeline in Appalachia, we executed long term firm take or pay contract with a new customer.

<unk> launched new open season for additional capacity and a new market connection to generation pipeline. The open season is expected to receive strong commercial interests.

On Blue Union, we completed our treating plant expansion in late October on budget and ahead of schedule and we continue to see high utilization rates on our system given the favorable fundamental environment in the Haynesville.

Finally in the northeast we executed a long term firm agreement, representing roughly 25% of system capacity on our Appalachian gathering system.

Let's turn now to slide 11.

We continue to focus on our leading ESG program.

Made significant progress this quarter in.

In September we announced that we are pursuing a carbon neutral expansion.

Our Haynesville system. This is a first of its kind in North America.

We have seen strong interest both domestically and internationally on this project.

Earlier this week, we announced a new strategic partnership with Mitsubishi, which is geared towards advancing new hydrogen development projects.

We're very excited to work with Mitsubishi and believe that by leveraging the unique capabilities of both companies. We will establish a strong position in this emerging sector.

During the quarter. We also joined one future and look forward to collaborating on methane reducing initiatives.

Now, let's turn to slide 12, and I'll wrap up the presentation.

In summary, we continued to deliver strong results and are on track to deliver a great 2021, we expect to deliver industry leading growth in 'twenty two.

We're very well positioned for distinctive performance over the long term.

And with that we can now open up the line for questions.

As a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.

And our first question is from Jeremy Tonet with Jpmorgan. Your line is open.

Hi, Good morning, this is Steve jumping in for Jeremy.

Good morning.

Morning.

I guess I just wanted to start off on kind of producer activity and kind of seeing what youre seeing there.

<unk> public and then also in kind of your basins I see that.

On top of the customer connections and everything like that we're seeing production goes go up so I just wanted to see.

What youre seeing there.

Sure. Steve. This is this is David.

Yes, I think we've been experiencing this for some time now a little bit of a difference between the publics and privates I think theres lots of discipline now with public producers and <unk>.

Private producers.

They seem to be more attuned.

Attunity to growth.

However, when we look across our portfolio, Steve I really think it gets down to the quality of the resource.

Our assets lay over high quality resource across both Appalachia and the Haynesville.

And those high quality resources.

The primary focus of both producers, whether you're public or private.

And I think the volume growth that we're experiencing is really a reflection of the quality of the resource that we're serving.

Got it thank you.

Helpful. And then if I could kind of pivot a little bit on the on the guide.

Raise this and then also Stonewall for next year, you have the connection coming into 2022, but just wanted to see if you had a little bit of that.

Could help us out on timing of that when that should be expected to come in and then also keeping the guide steady where it is in 2022, but we're we're basing it off the original guide just wanted to kind of get your thoughts on what's behind that.

Sure.

So I'll say this we're highly confident in our growth for 2022.

The Stonewall transaction that we referenced does come in to the portfolio in 2022.

As we I think as we progress through the year end.

As our key customers sort of solidify their plans, we're certainly going to keep keep everyone tuned in but we feel really confident in that range that guidance range that we're laying out for 2022 and we will.

We will update you.

With new information as it appears.

Got it appreciate the color guys I'll leave it there.

Thanks, Steve.

Our next question is from John Mccabe with Goldman Sachs. Your line is open.

Hey, good morning, Thanks for the time.

Wanted to start off on obviously, great haynesville volumes on the gathering side.

Just curious if you could talk a little bit about what youre seeing for the Haynesville.

Takeaway.

Balanced overall, and maybe just give us an update on the potential for a leap expansion. Thanks.

Sure John.

Well, we're really.

Really pleased with our haynesville position in.

The recent activity that we're all observing in the Haynesville I think it's a function of the quality resource and the proximity to large growing demand along the Gulf coast.

So again as I think about our assets and our position.

Number one we have assets in the ground. We're currently serving those those LNG markets along the Gulf Coast.

We are in flight, we announced back in September.

Leave expansion, we actually announced a carbon neutral leap expansion.

Aynsley <unk> system expansion, which really is first of its kind in North America.

Not aware of any other project that he is offering a carbon neutral pathway.

From wellhead, all the way to market or in this case to the water. So we're really excited about that we're working closely with about half a dozen customers working through the details of that feel very optimistic and.

And we expect we'll be able to provide more color on that around year end or early in first quarter next year.

Alright Thats helpful. Thank you maybe one.

Quick follow up just a little on the weeds, but just on the new Appalachian gathering and the new Stonewall contracts are those kind of in addition to the kind of.

Existing EBITDA base or either of those kind of replacing maybe some contracts that have rolled off.

These are new these are new incremental contracts on those assets.

So there'll be new and incremental.

Awesome that's it for me thank you.

Thanks, John.

Our next question is from Michael Blum with Wells Fargo. Your line is open.

Thanks, Good morning, everyone.

Wondering if you could.

Give us a little more detail on the next open season, just trying to understand is this expansion of capacity you just.

Signing up existing capacity and how should we think about.

Rates going forward, assuming you have a successful open season and whats the timing of getting the open season wrapped up.

Sure Michael So the open season close at close to about a week ago, and we've received favorable responses from the market on that open season. So commercially the commercial team is working with those customers to work through the details to move those.

Expressions of interest into definitive agreements.

In terms of mechanically what we are doing.

Really doing two things one is they are part of the open season was to connect generation pipeline directly to Nexus so targeting.

What I'll call the greater Toledo market.

The other part of the open season was for mainline capacity on Nexus. So it's really two different components to that open season.

As I said, we're working through the results and as.

As we progress those.

As a definitive agreements again will be will be sharing that with with you folks.

Got it great and then second question I wanted to ask was around.

Southwestern very recent acquisition of Geo southern.

Just curious if that acreage is already dedicated to you is this an opportunity just wanted to understand how this could impact your overall haynesville position.

Sure Michael.

First I would like to congratulate southwestern for.

They continue to execute their strategic goals of consolidating in and gaining in scale.

When I looked at their strategic rationale it really aligns with the strategic rationale that we.

The guided us to the Haynesville, two and a half years ago, just high quality resource.

Large.

In growing markets that are proximal to that resource.

So just congratulate them for what looks to be a really excellent transaction for them.

It is early days I did look at a map yesterday, Michael in the there are.

Some of the southern acreage is adjacent to the indigo acreage as they acquired so I think there will be some.

<unk> is a scale that they will be able to realize.

As they develop that acreage and we just look forward to working with southwestern.

Now, we've got a really strong relationship with them and as they digest this and actually close the transaction.

Look for opportunities to work with them with this new acreage and I don't have the details Michael in terms of what acreage is dedicated and not dedicated.

Alright, Thank you very much.

Our next question is from Alex Kania with Wolfe Research Your line is open.

Thanks.

Hey, just a question on the carbon neutral service in the Haynesville.

And thinking about your seventh proposals that we're seeing in these reconciliation bills about a higher 45 Q credit.

Just wondering as you think about the economics of the project.

If there is an increase in the carbon.

Credit with that would that be economics that accrue to you would be shared with with any customers.

About what that means obviously, a higher credit probably means this assets more attractive, but im just curious about how those economics might work.

Sure Alex.

So the economics work with the current.

Tax credit regime that exists today, so I will just start there.

We are very <unk>.

Tuned into what's happening in Washington, right now, there's a lot of drama going on in Washington, right now but.

We're optimistic that the.

At the 45 key tax credit, we will see some reform and probably see some what I'll call improvement where that threshold level is lowered potentially the actual credit has increased.

<unk> for direct pay so any and all of those would be beneficial to our project, but our project is not dependent upon those so it works in the current regime.

Great. Thanks, and maybe just a follow up on the 21% in 2022 guidance.

Again, just thinking about that.

The potential growth into 2022, and having high confidence in that but obviously 2021 has gotten a lot better is that really just a question of things that you've been looking.

Acceleration of either cost efficiencies or operational efficiencies or a new connects it has happened quicker in.

In 2021 day than anticipated just trying to think of maybe maybe thoughts about what might carry from the strengthened in 2021 into 2022 incremental <unk> over the past couple of quarters since you've been you've been on your own.

Yes, great question Alex.

We definitely have seen.

Some commercial activity pulled forward.

The one item that I mentioned in the opening the treatment plant that we were able to get done early.

That's that's been very positive.

Two our financials here in 2021 and.

Just the new customers.

Also coming in and some of those coming in early are beneficial, but we have been seeing just just positive.

Activity around all of our assets. It isn't just one asset we have been seeing.

Nice activity around all of our assets this year that contributing to this favorability so.

Great. Thanks.

Again, Please press star one if you would like to ask a question. Our next question is from Robert Moskow with Mizuho Securities. Your line is open.

Hi, good morning, everyone.

So on the proposed carbon neutral expansion just wondering how much capacity on that system <unk> carbon neutral I'm wondering if this is maybe the first step towards a larger expansion.

Hoping you could frame that up for us.

Sure Rob.

The way we've laid it out to the market.

We have the ability to expand up to two Bcf a day, so that would be a one bcf a day expansion and we can do all of that carbon neutral.

Combinations of Ccs.

Electric compression.

Those are really compression and and the treatment plants are really the two big.

Emission sources.

On the expansion and we've got a plan and a pathway to eliminate those.

Through electrifying the compression and then feeding that with renewables.

And through carbon capture and sequestration of the treatment plant emissions.

Got it so the entirety of the expansion would be carbon neutral then.

Yes, and obviously that depends on what the shippers elect REIT the shippers can elect the green.

Project or they can elect to what I call. The Blue project, which is a more of a conventional project my anticipation is.

Rob it'll be some combination of the two.

Great. That's really helpful. And then maybe shifting to the northeast just wondering if you could talk about that long term agreement you had signed on the Appalachian gathering system, 25% of system capacity seems like a lot.

Assuming that might be a mix of a fee base and.

Hi, there.

Or commodity sensitive, but can you just frame that up for us as well.

Sure.

It's the typical contract structure that we have across our portfolio, Rob where we are.

We have a significant.

Take or pay component to that agreement.

And yes, it is a sizable contract on the.

The Appalachian gathering system. It represents approximately 25% of our mainline capacity.

It was a very important transaction.

The counterparty is a strong counterparty and.

A significant producer in the basin with a great operational track record. So we're really encouraged by that and it gets back to my earlier comment about the.

Quality of the resource.

The producers are drilling their best resource into a really favorable price environment right. Now so we're really happy to work without producer and be able to establish this agreement.

Yes, it just puts it puts a term.

And more and we seize into our gathering portfolio, which which as you guys know we love to do that whenever we can.

Yeah, that's great I appreciate all the color today.

Youre welcome.

We have no further questions at this time I'll turn the call back to the presenters.

Well. Thank you everybody again for joining us today and we truly appreciate your interest and in DCM, we look forward to working with everybody.

We move the company forward and with that I'd, just like to wish you all had great weekend. Thank you.

Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you.

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