DT Midstream, Inc.

To the DT midstream second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one of your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now turn it over to our speaker today, Todd Lohrman, 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, including 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 Jewell, 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'm very excited to be hosting our inaugural quarterly earnings call after a successful spinoff from DTE. We've been operating as a standalone company for just over a month now, and I am pleased to see our business continue its strong performance. I could not be happier with the job the team has done getting us to this point today. I'd like to personally thank the many people involved in our successful spin, including the employees of both DTM and DTE, the boards of both companies, and research analysts along with debt and equity investors. Because of your contributions, we are well positioned for continued success. Let's start on slide three. For the first half of the year, we delivered strong growth across both business segments and are on track to achieve our 2021 adjusted EBITDA and operating earnings guidance with a bias to the upper end of both ranges. Our board of directors is officially in place and yesterday approved our first quarterly dividend of $0.60 per share, which will be paid in the fourth quarter of this year. DTM announced dividend, when combined with that of DT Energy, is delivering the higher combined dividend that we described pre-spend. We are also highly confident in our growth trajectory beyond 2021. We are affirming our 22 early outlook for adjusted EBITDA and increasing our 2022 early outlook for operating earnings. Let's turn to slide four. As a standalone C-Corp, DTM 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 well-headed market services. We have a 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 best-in-class ESG program with leading C-Corp governance and net zero carbon emissions by 2050. I'll now pass it over to Jeff, who will cover our financial results.

Thanks, David, and good morning, everyone. I'll start on slide five. We continue to deliver strong results from both business segments. Our first half 2021 adjusted EBITDA of $384 million, which was $43 million higher year over year, and was split roughly 50-50 between pipeline and gathering. Pipeline adjusted EBITDA was $199 million, and gathering adjusted EBITDA was $185 million. Our first half 2021 operating earnings were $174 million, which was $32 million higher year over year. The year-over-year increases in adjusted EBITDA and operating earnings were driven by the in-service of leaf gathering lateral pipeline and higher gathering volumes. Now let's turn to slide six and discuss the full year 2021. Based on our strong year-to-date performance, we are reaffirming both our 2021 adjusted EBITDA and operating earnings guidance, with the potential to be at the higher end of both guidance ranges. This year-over-year growth is driven by strong operational performance across our portfolio and includes offsetting a half-year of new public company expenses. Moving to slide seven, year-to-date distributable cash flow is driven by strong performance across both segments. We are revising our 2021 capital guidance range to be $205 million to $230 million. due to cost efficiency and a small amount of project timing. Our five-year growth agenda of $1.2 billion to $1.7 billion remains unchanged. We have significant financial flexibility with our cash flows, and we will allocate to maximize value for our shareholders. Moving on to the next slide to talk about 2022. Looking ahead to 2022, we are highly confident in achieving our growth targets. We expect 2022 adjusted EBITDA to be between $755 million and $795 million, representing 5% to 7% growth from 2021 guidance, which includes offsetting a full year of public company costs. We now expect 2022 operating earnings to grow in line with adjusted EBITDA, driven by interest expense favorability. Therefore, we are raising our outlook for 2022 operating earnings to $314 million to $330 million. I'll now turn it back over to David.

Thanks, Jeff. Moving on to slide nine. In the second quarter of 2021, we gathered over 2.5 BCF a day of production volumes, representing 3% overall growth from the prior quarter. Growth in the Hainesville was driven by higher production volumes on Blue Union, and the system recently hit a record high for volumes during the month of July. In the Northeast, we saw strong volume growth on the Appalachia gathering system, which offset declines in other gathering areas. As you know, our portfolio has high contributions from contracted take or pay agreements, which minimize the impact of volumes on results. Let's turn to slide 10 and I'll discuss why we are so confident in our 2022 growth. We continue to see strong organic growth into 2022, and the number of assets are delivering highly accretive growth, including contracted growth on LEAP and higher rates on longer contract terms on Nexus. Also, we continue to support growing production from our producer base, with contract expansions on Appalachia Gathering, contract treating and gathering expansions on Blue Union, and new third-party expansions. In summary, we are highly confident in our 2022 growth. Moving to slide 11, looking beyond 2022, our commercial team has been busy developing and executing multiple transactions to solidify accretive growth. We have made significant progress in achieving our strategic priorities, which includes adding new counterparties to enhance portfolio diversification, extending the portfolio contract center across both segments, and increasing contract rates. At Blue Union, we have executed agreements with four new counterparties that strong supply and demand fundamentals in the Hainesville and Gulf Coast improved the value of our assets. We continue to extend contract tenors across the portfolio. At our Appalachia Gathering system, we extended about one third of the capacity for five years with two shippers. Emerging constraints in Appalachia have led to improved nexus rates and contract tenors, and Millennium has also benefited with contract renewals. Nexus has also completed two new market lateral connections. In Michigan, we received a positive regulatory ruling to convert and expand a portion of our gathering assets to serve ET gas. Now let's turn to slide 12, and I'll wrap up the call. In summary, we are on track for a strong 2021. We delivered great first half results and expect to be at the upper end of our adjusted EBITDA and operating earnings guidance ranges. We are also well positioned for continued distinctive growth into 2022. And with that, we can now open up the line for questions.

And as a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star one to ask a question. And we'll pause for a moment to compile the Q&A roster. And your first question comes from the line of Jeremy Tonnet of J.P. Morgan.

Jeremy Tonnet Hi. Good morning. Jeremy Tonnet Good morning, Jeremy. I just wanted to start off kind of, you know, given the recent move up in gas prices, I'm wondering if you could provide a bit more detail on your producer-customer conversations and, you know, what reactions you might see, maybe not this year, but in, you know, going into 2022, response to these kind of higher prices if producers are looking to drill a bit more in your footprint or what you're hearing.

Sure, Jeremy. Let me provide some color around that. So I'll start off at the highest level. This higher price environment is supportive to all of our producer customers and is going to, you know, increase their cash flow and improve their balance sheets. We've been watching the Q2 announcements probably just like your team has been. And we're definitely seeing for the public's, you know, this continued disciplined approach to them deploying capital. ensuring that they have positive free cash flow and a continued trend to improve their balance sheets we think that's very favorable for the sector that provides a stronger foundation in the sector it certainly improves our customers financial position and financial rating over time so we view that as very positive we continue to see growth in our portfolio in the public sector, and that's what I'll call a disciplined growth, Jeremy. The private side of our business is a little different. I think we see more activity happening inside our portfolio on the private side, and some of that we've talked about here on the call already in terms of some of the new contracting that we've done. But there seems to be a little bit of a different behavioral response on the private side. They seem to be more inclined to accelerate activity into this stronger price deck. But we view this very favorably and believe this will be very supportive for our business longer term.

Got it. That's very helpful there. Just wanted to kind of pivot towards capital allocation philosophy, and this being kind of the first call, just wanted to have you guys walk us through how you think about, you know, a capex versus, you know, return to shareholders versus deleveraging. How do you see these different, you know, competing asks on capital?

Yeah, great question, Jeremy. We have a really robust growth agenda in front of us right now, and it's coming primarily from organic opportunities on and around our existing footprint. We're in a really good spot in terms of having a clean balance sheet and have a clear line of sight around growth that will be self-funded with our cash flow, which naturally will de-lever us over time. So we feel really positive right now about deploying capital to growth projects that meet that very disciplined investment criteria that we've talked to you about in the past. To the extent that projects don't meet that criteria, we will look at deploying that capital in other ways to maximize shareholder value. And those options are either through an accelerated de-levering or through a mechanism to return more cash to the shareholders. So again, we're always going to look at this to maximize shareholder value in the longterm. And, uh, we, we feel very blessed and fortunate that we have a really robust portfolio of opportunities in front of us that we believe will deliver, um, returns, uh, that will be very favorable for the shareholders.

Got it. That's helpful. It seems like that, um, lends itself to continue deleveraging as well, given the retained cash flow. So helpful there. And just wanted to see, I guess, the last one real quick. The aiming traders that you guys have in the Hainesville, it seems like that might lend itself towards some CCS opportunities there. Wondering if you might be able to talk about that a bit.

Yeah, sure can, Jeremy. You know, I think as we've said previously, we are very actively pursuing you know, investment opportunities and what I'll call a lower carbon future. And yeah, our situation in the Hainesville with the aiming treaters, I think puts us in a very good position to develop a CCS project down in the Hainesville. We're actively working on that. It's probably too early to get into the specifics, but we view that as an area of focus here over the next six to 12 months to get a project like that off the ground. We're also looking at projects up in Michigan, sort of a similar structured project around CCS. So that is an area that is getting a lot of attention inside our organization right now. And I feel that it aligns a lot of our natural assets and competencies that's right in our geographic footprint and it's right inside our competencies in terms of being able to capture, CO2 pipe it, and store it. So more to come on that, Jeremy, as the project advances, but definitely an area of focus for us.

Got it. That's very helpful. I'll leave it there. Thank you.

And your next question comes from Lauren of Fibro Donuts with Credit Suisse.

Hey, morning team. Congrats on the spin out. David or Jeff, maybe you just want to start with growth capex. It took a pretty meaningful reduction this first quarter out, and yet you're still able to maintain that 2022 EBITDA growth target. So just curious, I know you mentioned optimization and some timing there, but maybe a little more color on the exact nature of that reduction and how you're able to still maintain the growth outlook.

Yeah, sure, Ken. You know, it was a very modest reduction. I think we pulled it back around $40 million or so. And it's really real simple. It's just some timing. And some of the projects are coming in under budget right now and still delivering the EBITDA. So, you know, I think the way I look at it is, you know, we're delivering really strong EBITDA growth next year with a very accretive deployment of capital to generate that.

Perfect. The second one, sticking with the CapEx theme, looking at the sort of five-year range of $1.2 to $1.7 billion, a two-part question here. So first, what's going to determine the high or low end of that range? And then second, when you think about what that range represents, are these projects that are in sort of various stages of development that are very visible to you, or are these more aspirational in nature? Is this a target you think you need to hit to develop and grow at a certain rate?

Yeah, I'd say the projects that are very visible to us right now, which probably play out over the first three or four years of that five-year plan, would be a LEAP expansion, which we're in very active conversations around a LEAP expansion. We continue to see expansions in a number of our gathering platforms, both in Haynesville and in Appalachia. And we continue to see really robust, you know, inbound inquiries on lateral expansions across our pipeline network, you know, particularly up in the north. And I think we referenced a few in the deck where, you know, Nexus is building two more connections to market connections. But we continue to see a really strong, uh, lateral, um, business developing, uh, around our asset footprint in the North, you know, much like the Birdsboro project that's currently in the portfolio. And, uh, so those, I'd say, uh, those are the three areas that are very visible to us and we're very active in the development cycle that will absorb, uh, you know, large portions of that capital agenda. And, uh, Yeah, I'm just trying to give you a little color here to directly answer your question, but those are the areas that we will deploy capital around.

Great. That's helpful color. I'll leave it there. Have a good weekend, guys. Great. Thank you.

Your next question comes from the line of Robert Moskov-Mazuho.

Hi, everyone. Thanks for taking my question. Just on those newly executed blue union agreements, were any of those signed in 2Q? And is there anything you can provide in the way of volume expectations or perhaps the potential to wrap those volumes onto LEAP eventually?

Yeah, Rob, great question. Yeah, those agreements are very hot off the press. In aggregate, there's $150 million a day of commitments amongst those counterparties. The diversified piece is just an allocation of capacity from Indigo to diversified. So the three others that are what I'll call truly incremental represent about $150 million a day of capacity. And yes, we expect, at least in the near term, much of those volumes, if not all of those volumes, to flow on LEAP.

Got it. Okay, that's helpful. And then with respect to the shift that you're seeing in some of the Northeast gathering volumes, just curious to hear what's driving the growth in Appalachian, presumably decline on Susquehanna. Is that just producers electing to shift production to more NGL-rich areas? Anything you provide would be helpful.

Yeah, I think it's more just timing, timing of how people's growth plans have played out over the year. So we're definitely seeing growth on AGS, and AGS is a dry system, so it's dry Appalachia production. Susquehanna is probably going to be flat. I'm going to say flat this year. Swin will be holding production there. And then in the other gathering assets in the north, so the Michigan assets, Tioga, we did see some declines there. And that's sort of why Appalachia in aggregate was relatively flat when you kind of put all those numbers together. And then we're seeing really encouraging growth in the Haynesville. The Haynesville system, we hit a high this month on the Haynesville, the whole union system, which is very encouraging. And we're very happy with the gathering results. We're seeing... And we're running ahead of plan in both segments, both the pipeline segment and the gathering segment.

Okay, great. Yeah, and that's all the questions I had. Thank you.

Your next question comes from the line of Gina in Salisbury of Bernstein.

Hi, good morning. Just a couple about your assets. So I appreciate the Hainesville kind of 1.23 BCFD gathering volume that you disclosed. I think that you said that the capacity of that gathering system is 2 BCFD. So I guess my question is, is there a way to think about it that you can basically grow another 0.8 BCFD with very little CapEx, maybe some WellConnect CapEx, but other than that, the backbone is already there?

Yeah, good morning, Jean. The Blue Union system is a complex gathering system, so I wouldn't simplify it the way you described it, but what I will say is that we're always looking to make sure that we optimize all of our systems such that they're creating the maximum accretion possible to the company. As that system gets built out, there certainly is open runway for in pockets and areas in that system that we expect Indigo or Swin to be utilizing as they continue to drill the acreage. But I do expect we will continue to see expansions in Blue Union, especially in some of the areas, the most economic resource areas where You know, if you rationally are deploying capital, you would tend to deploy it first, the very best rock. And those areas of the system will attract a lot of drilling attention and as such may require expansions over time.

Okay, that makes sense. And then just wanted to ask about the new contract for the 165 on Nexus. My understanding on Nexus was that it was originally built to be 1.5 VCFD, but then you could only flow 1.2 VCFD because you didn't have enough market demand. Is this 165 kind of incremental to that 1.2 because of the market connections that you discussed? So it would sort of be flowing like over 1.3, between 1.3 and 1.4. Is that the right way to think about it? Or is it like some of the 1.2 rolled off and got replaced by this 165?

Yeah, let me help with that. First off, let's just level set what the capacity is on Nexus. So the 1.5 that you are referencing was the original capacity design early in the project lifecycle. We elected not to construct one of the compressor stations. So the actual nameplate of the capacity on Nexus is 1.3 and change. So that's just kind of point number one. I'd say point number two on the incremental 165. So we're really encouraged by that contracting activity that's occurred over the last couple months. We're seeing strong price signals coming out of the Appalachian. We're seeing rate expansions on all those longer-term contracts. And there's a nice suite of customers that are primarily investment-grade customers that stepped into that capacity. So the way to think about it is that portion of the capacity that we didn't sell long-term with anchor agreements that we have been selling seasonally and annually, we're simply taking those agreements and extending those out long-term and reducing the amount of capacity that we've been managing in the annual market. And the fundamentals that are playing out will... I expect the team will continue to contract and extend the contract term at favorable rates, just given the dynamics of the market right now. We're seeing tremendous inbound interest on that nexus capacity. I'd say we are probably the only exit pipe in Appalachia that has material capacity to offer the market right now.

Okay, so on this 165, that's not really incremental like flows. It's just replacing seasonal with contracted, which I agree is very good. But there's still more that you could add if there was a market for it by adding a compressor station in the future. Is that the right way to think about it?

Yeah, that's exactly how to think about it. You know, so that station that we chose not to build, we could certainly build it and create incremental capacity out of the basins. And that certainly is something that the team is looking at and evaluating continuously.

Perfect. Thank you so much for talking to me. And as a reminder, to ask a question, you will need to press star 1. And your next question comes from the line of Sunil Sabal of Seaport Global.

Hi. Good morning, everybody, and thanks for the color. So I just had a couple of follow-ups from previous questions. So first on the recent contracts that were signed in Hainesville, could you give us a sense of, you know, what kind of rates you're seeing on these new contracts versus what you had previously?

Yeah, so maybe I'll just keep it at a high level. So number one, we're really encouraged by bringing those new third parties onto the system. That was one of our strategic goals. priorities and opportunities that we saw when we did the acquisition over two years ago. With the activity that's in the Hainesville right now, there are 55 rigs running in Hainesville. We're seeing a lot of robust activity. So at this time, we will not be providing more public information on the details around those contracts, just given the nature of the competitive environment in Hainesville. But as I said earlier, You know, the contract MDQs in aggregate are $150 million a day, and those three incremental parties, Rockcliffe, Comstock, and Clarion, are all actively growing and I think have been public about their growth aspirations. So we're very happy to have them as customers and certainly want to work closely with them as their plans solidify and grow over time.

Understood. Then just pivoting to their ESG goals, I realized that, you know, you've got some existing assets which fit well with the CCS technology. I was just kind of curious if you had, you know, looked at some other alternative kind of technologies in addition to amine treating in terms of taking out CO2 from the gas stream and if you have any thoughts there.

You know, as we think about, you know, I guess I'm going to just back up one second here. When we think about our aspirations to be net zero by 2050 and look across our footprint, you know, where our emissions are, certainly the emissions in the Haynesville is an area of focus and thus why there's great, there's a great opportunity there for CCS for us and that's going to be our primary area of focus. But there's lots of other opportunities across our portfolio to reduce our footprint, both when we look at pipeline expansions using electric compression and making sure we have a clean source of electricity to power that electric compression. That's certainly something that we're evaluating very closely across our footprint. We're also having lots of conversations with different parties related to hydrogen and and how hydrogen can be used inside the current footprint, as well as with some of our large industrial customers, their desire to explore a hydrogen blend for their feedstock. So we've got a lot of different areas that we're exploring right now. It's early days, but, you know, it's a very exciting development. You know, we want to be part of that in North America, and I really want DTM to establish a – a position in what I'll call utilizing our assets around a lower carbon footprint in the future. So a very exciting developing area. There's going to be lots of new technologies, I think, that come around. My perspective on this from a strategic perspective is we want to use proven technology that exists today so we don't carry large amounts of technological risk. as we deploy capital. And again, that's why some of our priorities are really around what I'll call proven technology, and CCS is one of those areas.

Understood. One kind of follow-up on that. So the capital outlet at $1.2 to $1.7 billion that they have laid out, could you give us a sense of, you know, how much of these ESG evaluations that you're doing are a component of that, or is it a potential or meaningful upsides on that capital spend if some of these things that you're evaluating would get to FID?

Yeah, the way I would think about it in terms of that capital agenda, I would think about it that some of that capital agenda will get deployed into these new emerging areas. And at this point, I wouldn't describe it as incremental per se. You know, I think as we get a little further along and start to move these projects forward and firm them up, we will certainly be updating you on our thinking around that. But, yeah, it's a great question, you know, how much of that will go towards what I'll call this new platform. And it's just a little early to really provide detailed guidance on that. But, yeah. As we mature, we will definitely be providing that to the investors.

All right. We will stay tuned. Thanks for taking my questions.

Thank you. Appreciate that.

And there are no further questions at this time.

Well, thank you. And I just want to thank everybody for joining us today. And please stay safe and have a great weekend.

And this concludes today's conference call. Thank you for participating. You may now disconnect.