Q3 2022 DT Midstream Inc Earnings Call
[music].
Good day and welcome to the D. T Midstream third quarter 2022 earnings Conference call. Please note today's conference is being recorded all lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session.
I'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star followed by the number one again thank you.
At this time I would like to turn the conference over to Todd Morman Director of Investor Relations. Mr. Lawrence You May begin your conference.
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.
And 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 and good morning, everyone and thank you for joining.
I'll start today's call by discussing our financial performance.
And review our key growth initiatives that we executed during the quarter.
Provide an update on our other major development projects and commercial initiatives.
Then I'll turn it over to Jeff to review, our third quarter financial results and notebooks.
So with that we had another strong quarter with both business segments delivering great results.
As I communicated on our second quarter call. The business was running ahead of plan and we expected growth to be weighted towards the second half of the year.
As you can see in our third quarter results, we are delivering that growth and as a result, we are increasing our 2022, adjusted EBITDA guidance range to $810 million to $825 million.
Which reflects the strong performance from our base business and.
And the uplift from our recent millennium pipeline acquisition.
We continue our focus on organic growth opportunities IMAX excited to report that we reached a final investment decision on a phase III haynesville system expansion.
Which will add another 200 million cubic feet a day of capacity on leap backed by a long term firm contract.
Yeah.
This is another example of our ability to add timely and efficient increments of capacity to leap and provide a low risk.
Economic pathway for our customers to access attractive domestic and LNG export markets on the Gulf Coast.
This latest phase combined with the previously announced expansions will increase the capacity of leap by 90%.
From one Bcf a day to one nine Bcf a day and we remain an active commercial discussions for further expansions.
A few weeks ago, we closed on the millennium pipeline acquisition that resulted enough doubling our ownership interest in the asset.
The transaction is immediately accretive significantly accelerates our growth plan and directly aligns with our core investment thesis.
This was a great opportunity for us to increase our ownership in this fully contracted pipeline and we are very pleased to be the majority owner of this premier asset, which we helped develop and have owned since 2008 and successfully expanded in 2019.
With our additional ownership with millennium, we are further increasing the contribution from our pipeline segment.
Which was approximately 55% this quarter.
We will be close to 60% in 2023.
Now for an update on our ongoing growth projects.
All projects remains solidly on track both from a cost and schedule perspective.
We have been successful in optimizing our capital outlays for these projects this year.
During the third quarter, we completed a portion of our Blue Union expansion, which will continue to phase in through the first quarter of 2020 for supporting our customers' drilling plan and our leap expansions.
We also placed in service our phase one Appalachian gathering system expansion during the third quarter.
Which supported incremental volume growth.
We continue to see strong interest for capacity out of Appalachia on Stonewall as well as Nexus as takeaway constraints remain an issue for producers.
And on Nexus, we recently executed another new five year agreements at attractive rates.
We are also advancing our Ccs opportunity in Louisiana and are finalizing our class six well permit application.
Which we plan to file with the EPA by the end of November representing an acceleration from our previous filing target.
I'll now pass it over to Jeff to walk you through our quarterly financials and outlook.
Thanks, David and good morning, everyone.
In the third quarter, we delivered overall adjusted EBITDA of $207 million.
Which was driven by strong performance in both our pipeline and gathering segments.
The pipeline segment delivered strong sequential quarterly growth after adjusting for the impact of a one time settlement that was recognized in the second quarter.
Segment results were driven by higher revenues from increased short term rates on Lee.
And improved contracting on Nexus.
Gathering segment results were driven by higher volumes on Blue Union due to capacity expansion.
Operationally total gathering volumes across both the Haynesville and northeast averaged over 3 billion cubic feet a day in the third quarter.
Which is a 15% increase from Q3 2021.
And was driven by the in service of expansion projects in both regions.
With our strong year to date business performance and confidence in the balance of the year.
We are increasing our 2022, adjusted EBIT guidance range to $810 million to $825 million.
Which also included the fourth quarter uplift of the Millennium pipeline acquisition.
We are also moving our overall 2022 capital guidance range to $816 million to $910 million to reflect the millennium pipeline acquisition.
And favorable re timing and efficiencies on our organic growth projects.
Additionally, we are raising our 2023 adjusted EBITDA early outlook range to 865 million to $905 million.
To reflect the incremental full year uplift of the millennium pipeline acquisition.
We look forward to providing a complete update of our 2023 guidance on our year end call, which.
Which will include a refresh view for our base business.
And our long term growth capital plan.
I also wanted to provide an update regarding our balance sheet strength and flexibility.
Earlier this month, we upsized, our revolving credit facility to $1 billion.
We extended the term out by another year to 2027.
Lowered the fee structure and included following language for when we achieve investment grade.
We remain committed to the strength of our balance sheet and our four times leverage ratio ceiling.
Now pass it back over to David for more details on our ESG program and closing remarks.
Thanks, Jeff we remain focused on advancing our ESG agenda.
We are participating in two industry organizations focused on energy transition initiatives, the Appalachian energy future.
In the Appalachian regional clean hydrogen hub.
Look forward to collaborating with these groups as we seek to develop clean energy opportunities for the region.
So in summary, we continue to be very pleased with our 2022 financial commercial and operational successes.
And the company is very well positioned to significantly only grow and deliver stable durable returns for 'twenty and into 'twenty, four and well beyond.
We can now open up the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
For just a moment to compile the Q&A roster.
Your first question comes from the line of Jeremy Tonet with J P. Morgan.
Hey, good morning.
Good morning, Jeremy.
Just wanted to dial in a little bit on your commentary with regards to the base business improving I'm wondering if you could help us kind of quantify that a bit or think about that a bit more especially as it relates to 2023 is there any reasons that wasn't kind of rolled into the guidance.
Guidance update update there for 'twenty three so just wondering along those lines what you can say.
Hey, Jeremy will provide a refreshed look on the year end call as you know a lot of our customers don't set a load on their planning until the end of the year, sometimes even early into the next year. So we want to give you a really clear and high quality look so we're going to set.
Sit tight on that we're very confident in what we're providing right now and.
I said, we'll refresh that for everybody and year end call.
Got it.
I was also wondering I guess, what more you can say on Ccs in Louisiana.
I guess thoughts on the state getting primacy and just the local environment. There I think we saw in Livingston parish some.
Kind of pushed back against Ccs infrastructure. So just wondering if you could kind of.
Update us on what you see on the ground there.
Sure. So the first thing is that we're accelerating our.
Class six well permit we expect to do that federally.
We're very aware that Louisiana is working with the EPA to get primacy.
But unclear as to when that will occur. So we just want to move forward.
Old schedule.
So that will happen here in November we're very engaged locally right now on this project.
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Doing what we normally do across our business, which is engaged at the local level worked through the details.
With all the local officials, including the state officials and individual landowners. So.
That's sort of the season of the project that we're in right now are in that local engagement season, and I don't really want to get into more details at this point, Jeremy but suffice to say that everything is moving forward as planned.
That's helpful. Just real quick last one here, who is the five year agreement with and what are the prospects for more of those coming through and what size was that contract again.
You are referring to the Nexus contract Jeremy.
Yes, Sir.
Yes so.
It's a five year contract.
This will.
He will be public information that says it all.
Investment grade counterparty 50 million a day.
Okay.
Got it I'll leave it there thank you.
Great. Thanks, Jeremy.
Your next question comes from the line of John Mackay with Goldman Sachs.
Hi, Brian Thanks for the time.
Wanted to maybe just pick up and then 'twenty two guidance again, it looks like a little under half of the increase is millennium. Another half like you said its base business I think Jeremy asked this but I wanted to follow up on it what exactly are you seeing so far this year thats pushing new hire maybe you could just kind of break out some more specifics.
Sure John I'll give you a few thoughts and then Jeff can maybe give you a few more details, but I would say a couple of things one is timing of some of the expansions.
That we're in flight on I believe a few of them came in a little earlier than we had in the original plan, which allowed those volumes to flow and corresponding incremental revenues come through but we're also seeing some favorability across the portfolio in our pipeline segment and Jeff maybe you can provide a few details on that.
Yes, Hey, good morning, Yes, that's really what we as a continuation of the discussion we've been providing and throughout the year, we've been seeing favorability across all of our platforms. We saw that all part of the year and so in that same thing as we saw here in the third quarter.
We also noted that we had.
Couple of short term, we're able to optimize around some of the capacity around leap and some of the other places, which again, which has added incremental favorability to us but we'd also just pointed to the year end guidance that we've provided we feel very confident about that guidance that we're providing for the full year and thats, what we would guide everybody.
Two.
Okay, and then maybe let's pick up on on gathering a little bit more there has been a little bit of a back and forth all year between volumes and margin.
We saw gathering EBITDA up less than volumes overall, where maybe you could just talk a little bit about what youre seeing on margins, there and maybe how that should trend over the next couple of quarters.
Sure John .
Maybe just remind everybody is sort of how some of this is working in the portfolio. So.
For some of our leap activity.
That is coming in on what I'll call a short haul on the gathering system. So we're seeing the gathering volumes ramp but.
That is coming through at a different rate than what I'll call. The.
The full Monty gathering, where we're doing gathering and treating and.
Delivering two to the pipelines.
So that's probably the easiest way to explain it.
To help you guys understand how that plays through.
Maybe just following thank you for that maybe just.
Following up on that quickly.
Any sense you can share on us as we're looking into fourth quarter and going forward on the volume side. I mean are those short term volumes that should roll off or.
Is this growth we saw in the third quarter kind of ratable.
As we look into 'twenty three.
Yes, I think we're going to have we're going to continue to see strong volumes in the in the fourth quarter.
As we sit here today, so that that's going to play through I beliefs and.
Yes, I wouldn't expect any surprises in the fourth quarter.
Alright, that's great I appreciate the time.
Yes.
Your next question comes from the line of Mark Sollecito with Barclays.
Hi, good morning, and congrats on the solid quarter, maybe just sticking with the Haynesville here should we think the sequential increase in volumes was really just the partial quarter contribution from the Blue Union expansion capacity that came on for any update on where volumes are today.
And then as it relates to the ramp through <unk> 2004 should we expect that to be fairly ratable from here.
Thanks, Mark for the comments on the quarter.
So maybe we'll just start with the third quarter, yet we brought in incremental facilities through the quarter. So.
That exit what I'll call, our exit rate is probably going to be more indicative of what the fourth quarter will look like.
In terms of next year.
Just to be honest with you I don't have those numbers sitting in front of me. So I don't want to make a comment.
Having that data in front of me and we can certainly follow up offline with you on the details around.
23.
Got it and just a follow up there what was the exit rate.
At the end of <unk>.
Jeff do you have that handy.
Yes, sure yes, right here on page, we've got that on page.
Page five you can see where our average volumes were for the quarter for.
Our haynesville were right at <unk>.
166 northeast is 135, so for our total gathering we've averaged about three bcf.
Got it and then you have no sanction 900 million cubic feet of capacity expansions on leap and you had a 500 million cubic feet of capacity being added on Blue Union should we think there is more expansion opportunities tied.
Tied to the lead capacity coming along with phase III year could you talk about some of the dynamics there.
Yes, I think the simplest way to describe that is for some of the leap expansions.
A portion of it is going to be fed through the.
The Blue Union gathering system, but a portion of those expansions were going to be picking up that treat a gas.
From third party gathering systems.
Okay.
Got it I appreciate the time.
Yes, no problem. Thanks for the questions. Okay. Thanks Mark.
Your next question comes from the line of Alex Kenya with Wolfe Research.
Hey, good morning. Thanks.
Thanks for taking the questions.
Maybe the first question is just following up on the classics well permit.
Just maybe the thought process behind accelerating it was it really just kind of an acceleration of interest from customers coming from.
Array and increased and decreased carbon <unk> tax credit.
And then maybe also just again thinking about their understanding about how the process of permitting goes in terms of.
<unk> lines from that as well through the EPA process.
Sure. Good morning, Alex Great question, I'd say, the <unk> acceleration that we just want to move through the process.
And if we can shave a month off that timeline thats great and.
We were ready to go with filing so it's no more complicated than that.
In terms of where we go from here once we actually file.
I think there is a lot of.
While there has not been a lot of people through the process I'll say it that way. So I think as we navigate through it will be as transparent as we can be with you as we get a better sense of the timeline I'd say the general consensus is it's an 18 to 24 months window, but I think we'll learn more.
As we get into the process and get engaging more directly with the.
With the regulator.
And navigate those.
Those different requirements, but again like I said earlier, we've been really working closely with all of the stakeholders with the goal to put forward a high quality application. So that we can move swiftly.
And successfully through the process.
Great Thanks, and just.
Because we have a follow up on.
Millennium.
Thinking if you could give a little bit more color on kind of ultimately how you. How you think about obviously it was financed with cash and kind of.
Credit facility draws but just how do you think about optimizing the financing cost in the current interest rate environment.
Maybe overtime.
Yes, so I'll start and then maybe pass it over to Jeff to fill it and but as you alluded to.
Sitting on a significant cash position that business has been performing really well since we've spun.
Running well ahead of plan.
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Yes, we had a significant cash component that we used for that acquisition and then as Jeff alluded in his comments.
We are using the revolver to top that up but Jeff maybe you can provide some comments on kind of the immediate term and maybe a longer term view, yes, sure Ken and good morning, Alex Yeah. So again, we're really pleased with where we sit strategically the way the balance sheet.
<unk> is set up and so like David mentioned, we use we use cash. We're ahead of plans, we're able to use more of that we use the revolver and so now because.
Well, we've got available both within the term loan B and then with the revolver, we've got strategic options the ability to be able to pay that down and we've got a couple of options on how to do that and we're reviewing those who've got project financing capabilities.
Able to.
To take that on and then we could also do term some of that activity.
And just as a reminder, we don't have any maturities due for several years.
So again, we've got a lot of flexibility in.
And how we manage this but again overall, we're pretty pleased with where we're sitting.
Great. Thanks very much.
Your next question comes from the line of Robert Moskow with Mizuho.
Hi, everyone. Thanks for taking my question.
Yes.
Wondering how does the millennium have millennium participate within your five year Capex outlook at one two to $1 7 billion.
Javier playing kind of I think that still exist that Saddam lending purchase or is it part and parcel.
Yes, good morning, Rob Great question, So I would say, we're using some of that original plan.
In this acquisition as we alluded to on the call. We will bring forward kind of a refreshed long term view on our capital plan on the year end call.
But.
Yes, that's kind of how we're thinking about it right now so a portion of that at the midpoint of one $1 5 billion.
As everyone on the call knows we've deployed a significant amount of that already organically across the portfolio and all of those projects are in flight over the next couple of years.
This.
As a piece of that total, but again, we will give you a refreshed view on the year end call and I'm going to pick up on my earlier comment from the earlier question. The business is running ahead of plan.
Cross the board also on the balance sheet side.
So, it's enabling us additional balance sheet flexibility.
As we pursue additional investment opportunities.
Yeah.
Got it that's helpful and maybe was hoping you can kind of talk about decision.
By the millenniums taken as opposed to maybe deploying capital in areas that might have a little bit more growth like the haynesville with it's just more about it as an asset you knew youre building scale with with a pretty high quality contract days.
And should we interpreted to mean that maybe had haynesville M&A is not really the playbook for right now.
Okay.
Yes, why don't I address sort of that strategic rationale first on the millennium acquisition, So number one.
We are deploying capital, we always look really closely at the fundamentals around an asset in for millennium.
First off it's an asset that we know intimately because of our ownership in our developments.
History with that asset very strong supply fundamentals on the supply side of the asset and.
And extremely strong demand fundamentals on the market side and just to remind everybody. This asset serves the highest price market in North America, which is new England.
Very strong demand signals the price signals would tell us and the general market that that is that.
That market is short natural gas capacity for the long term on the forward curve.
So the fundamentals of our very strong around the asset.
In terms of <unk>.
Aligning with our investment thesis as you alluded to it's fully contracted with strong stable cash flows. It's an irreplaceable asset in an area of the country that is very difficult to build incremental capacity and so again that was part of the thinking.
The other part would be our partnership agreements.
We've had two really good partners in that asset since it was built transcanada and national grid.
And.
The way the partnership agreements structured as partners have preferential rights, if one partner wants to exit so we can't predict when that's going to happen, but that option value is in our portfolio and we had an opportunity to exercise that option value.
With this transaction, so and I'd say lastly, add some scale to our pipeline segment, which is the higher value segments and our mix.
All of those considerations rolled into the rationale for.
Completing that transaction so.
Hopefully that was helpful.
Yeah, Thanks that was great.
Great color.
Lastly, I know in the past you've said that you plan to grow your dividend commensurate with cash flows and I guess when you talk to the board early next year is this something that you might highlight as to why you can nudge that dividend towards the higher end of your growth guidance range.
Yes.
Hi, Rob Yes.
Right and then we're going to continue with our guidance that we will continue to grow our dividend in line. We believe that's part of the total shareholder return and investment thesis for US we will grow it in line with our cash flows.
And obviously as our cash flows growth within will share consider that as a part of the dividend.
But that's probably about as far as we want to talk about.
What we're thinking about on the dividend, but we'll grow it in line with the cash flows and we did that this year earlier this year right.
Grew we had a really strong first year out of the gate post spin and that got reflected this year and our behavior with the dividend and you should expect similar behavior in the future.
Alright, I can certainly appreciate that have a great day, everyone, yes, Rob Thanks, Rob.
Your next question comes from the line of Michael Blum with Wells Fargo.
Hey, good morning, everyone.
Good morning, Michael.
Good morning.
Stan on the Millennium acquisition for a second.
I really want to get more of your broader thoughts on M&A here.
Do you see additional opportunities to increase interest in the assets, we already have a stake.
You look at other assets and neutral operating region I just wanted to get your kind of broader thoughts on.
Sure well.
As I said earlier for all of our partnership assets. We have unique features and all of those partnerships.
I refer to it as option value and.
If those options ever strike.
We'll obviously look at that.
As we've said in the past we've when we look at deploying the capital.
We really like to deploy it to organic opportunities and we have just a rich set of organic opportunities in our portfolio today in both Appalachia and the Haynesville and have been just meticulously executing on those.
Haven't missed any of those opportunities.
What happened with millennium was truly incremental.
Would have been outside the original plan, but again it was that option value.
Event that occurred.
So in terms of M&A more broadly we are very aware of the assets in our neighborhood that are consistent with our investment thesis that are on the market.
We look at them.
But again, we go back to that value creation.
Equation at the end of the day and that they have to fit within the capital plan and they have to drive long term value creation for you the shareholders ultimately.
So we continue to maintain that discipline lens on M&A.
<unk>.
Stay stay very aware of it.
But also aware of where it sits in the priority is probably number two in our capital allocation priority.
Vis vis organic greenfield.
Got it okay that makes sense. Thank you.
Second question just wanted to make sure.
The math correctly.
If I back off the millennium Capex it looks like most of your growth and maintenance Capex for 2022 came down so I'm wondering if you could just speak to that.
In terms of on a run rate going forward in 'twenty three and beyond thanks.
Sure.
And your math is correct. They did come down and I think we alluded to that a little bit on this or at least I did on our second quarter call and one of my comments is that we're always looking at ways to.
Number one reduce the capex on new projects or defer the outlay of capital, which enhances returns on those projects.
We were successful in doing that.
Without impacting the projects are impacting the schedule on any of the projects.
So.
Hats off to the construction group for being able to achieve that and then on the maintenance capex.
Again, just I think as we were doing our work this year, we're just able to.
Be a little more efficient on some of the maintenance capex vis vis what we had in the original guidance and we wanted to reflect that.
In the update here in Q3.
Great. Thank you so much.
There are no further questions at this time I will turn the call over to David Slater for closing remarks.
Well, thank you for joining us today and we certainly appreciate all the questions and your interest in <unk> midstream.
Have a great day, and a wonderful weekend everybody take care.
This concludes today's conference you may now disconnect.
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