DT Midstream, Inc.

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the DT Midstream fourth quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. And to withdraw your question, please press star one again. Thank you. Todd Lorman, Director of Investor Relations. You may begin. Todd Lorman, Director of Investor Relations. You may begin.

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 reconciliation 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 taking the time to join us today. I'll start on slide three. We had an excellent year in 2021. which marked our transition to a new independent public company. Looking back on the accomplishments throughout the year, I could not be more proud of the team, and I'd like to thank them for the job they've done. First, we executed the spinoff from DTE Energy with a successful debt raise and equity trading debut. We delivered strong financial performance with industry-leading organic growth that exceeded our revised guidance ranges and delivered distinctive total shareholder return for our investors. Our commercial team did a great job advancing our five-year investment plan. We've added new customers in both our pipeline and gathering segments. Then, just before the end of the year, we executed new agreements for the first phase of our Hainesville Wellhead to Water system expansion. As of today, approximately 50% of our five-year investment plan has been committed to organic growth opportunities across our asset portfolio. We also continue to advance our best-in-class ESG initiatives, and we're the first company in North America to offer a carbon-neutral pipeline system expansion. We made great progress advancing our carbon capture and storage opportunity in Louisiana and announced a new strategic partnership to advance hydrogen development projects with Mitsubishi. DTM, as of the new year, is now fully separated and operating independently from DTE under a strong C-Corp governance framework. Let's turn to slide four. Moving forward, the company is well positioned for continued success. We expect to maintain our strong financial performance and are increasing our 2022 adjusted EBITDA guidance, delivering 8% growth from our 2021 original guidance midpoint. Our primary focus is now on 23 and beyond, so we are providing our 23 early outlook for adjusted EBITDA, which reflects continued organic growth and confidence in our core businesses. We are increasing our quarterly dividend by 7%, reflecting our strong financial performance, and we plan to continue to grow our dividend in line with cash flows long term. As I mentioned earlier, 50% of our $1.2 to $1.7 billion five-year investment plan is committed to organic projects that achieve attractive returns. We remain focused on our disciplined investment criteria and will only invest in projects that create shareholder value. Looking forward at our ESG initiatives, we will continue executing on our net zero by 2050 goals. Key areas of focus for us include carbon capture and storage, hydrogen, and offering our customers low carbon service options. Our goal is to integrate all aspects of our ESG initiatives into the everyday operations of the company. Finally, we look forward to publishing our inaugural sustainability report in the second quarter of this year. I'll now pass it over to Jeff, who will cover financial results and guidance. Thanks, David. Good morning, everyone. I'll start on slide five. Our well-positioned assets and strong contracts continue to deliver premium growth. In 2021, adjusted EBITDA was $768 million, which was $58 million higher than the prior year. representing 12% growth versus our 2020 original guidance midpoint. Operating earnings were $336 million in 2021, which was $36 million higher than the prior year. 2021 marks the second year in a row of exceeding guidance for both adjusted EBITDA and operating earnings. Let's turn to slide six to talk more about our 2021 results. Our 2021 growth in both adjusted EBITDA and operating earnings were primarily driven by the performance in our pipeline segment, which included the benefit of a full year of leap in service and increased earnings from our interstate pipeline joint ventures. In 2021, the pipeline segment comprised 53% of our business mix, an increase from 49% in 2020. Additionally, strong volumes contributed to our performance in the gathering segment in 2021. with volume growth of approximately 20% throughout the year. Let's now turn to slide 7 to discuss our updated 2022 guidance. We are increasing both our adjusted EBITDA and operating earnings guidance for 2022. The increased 2022 adjusted EBITDA guidance range is $770 to $810 million, and the midpoint represents 80% growth over our 2021 original guidance midpoint. Our increased 2022 operating earnings guidance range is $319 to $335 million. And these guidance ranges include the impact of a full year of new interest expense and public company costs. Let's turn to slide eight to discuss our dividend increase. In addition to delivering strong earnings growth, we are also increasing our quarterly dividend by 7% to $0.64 per share, which equates to an annualized dividend of $2.56. This dividend increase is in line with our financial policy of maintaining at least a two times coverage ratio floor, and our current coverage ratio stands at approximately 2.4 times. Due to our long-term contracted cash flows, we were able to support a durable dividend, and we plan to continue to grow our dividend in line with cash flows long-term. Let's turn to slide nine, and I'll discuss our 2023 early outlook. As David discussed, given our high confidence in our business and its future growth, we are providing an early outlook for 2023 adjusted EBITDA. which we expect to be between $810 and $850 million. This outlook is supported by accretive growth coming from organic investment opportunities that are underpinned by long-term contracts in both the Hainesville and Appalachia and across both our pipeline and gathering segments. David will provide more detail on these growth investments later in the call. Let's now turn to slide 10 to talk about our strong cash flow generation. PT Midstream's strong cash flow provides multiple pathways to maximize value for our shareholders. We expect distributable cash flow to be between $575 and $625 million for 2022, which provides significant flexibility in the ways we create value. We believe the most effective way to create value is through highly accretive organic growth investments that align with our core business. We have a substantial set of growth opportunities in front of us, which we will evaluate to ensure they meet our disciplined investment criteria. Another key component of our value creation for shareholders is delivering a reliable and durable dividend that grows in line with cash flows. And the final piece of our value creation plan is ensuring that our balance sheet is well positioned with respect to our investment plans and changing market cycles. Our financial policy for leverage is to maintain a debt to adjusted EBITDA ratio of less than four times, which is enabled by our self-funded growth investment plan and the natural deleveraging that occurs as our adjusted EBITDA grows. I'll now turn it back over to David to provide more details on our growth investments. Thanks, Jeff. Over the course of the past year, we have made significant progress solidifying our growth investment plan. Our 2022 capital guidance reflects this progress, and we expect total CapEx to be between $350 and $400 million, with $320 to $360 million being deployed towards accretive growth projects. Touching on some of our recently executed and upcoming growth investments, in 2021, we placed into service the Vector Blue Water Energy Center Lateral. We executed on expansions of our Blue Union system in the Haynesville, which included a treating plant expansion and connections with three new customers. In 2022, we are investing in expansions of surveyors of growing Appalachian production, including the Stonewall Pipeline and the Appalachian Gathering System. In Michigan, we are converting a submitted portion of our gathering system to an intrastate pipeline, which is supported by a 20-year utility contract. Finally, we have executed new agreements for a phase one expansion of our Hainesville Gathering System, which will result in a multi-year investment to connecting increasing Hainesville supply to growing LNG export demand. Turn to slide 12 and I'll discuss in greater detail our newly announced Hainesville system expansion. The fundamentals around our Hainesville system continue to be strong, with expected growth in both production and LNG exports. I'm excited to announce that we have executed agreements with the largest Hainesville producer, Southwestern Energy, that will expand the system over a multi-year timeline. The expansion includes $500 million a day of gathering, $400 million a day of incremental treating, and $300 million a day of additional leak capacity that will utilize electric compression. This expansion preserves the option for a certified, carbon-neutral, well-head-to-water pathway for our customer. The second phase of the expansion is in advanced development, and we are currently in active discussions with multiple counterparties. we will update you on phase two as it evolves. Let's turn to slide 13 now. Looking ahead at our organic growth opportunity set, we are highly confident in our commercial ability to continue advancing projects. In the pipeline segment, we remain highly focused on our phase two Gainesville expansion and continued commercial discussions with participants in the recent Nexus Open season. On Millennium, we are focused on renewing our anchorship or contracts And we recently executed approximately $400 million a day of long-term capacity renewals with these customers. In the gathering segment, we looked to build upon the success we had and continue to grow and add new third parties to our Blue Union system. We are also working on new opportunities in Appalachia on our Appalachian Gathering and Tioga Gathering systems. Finally, we are very excited about developments in our emerging third platform, which represents accretive energy transition investments. We continue to advance our Louisiana carbon capture and storage project towards the EPA class six permanent application filing and continue to work with our strategic partner on evaluating and advancing multiple hydrogen project development opportunities. Let's turn to slide 14, and I'd like to discuss aspects of our ESG program in more detail. DCAM continues to focus on developing an industry-leading ESG program. I've already addressed our environmental focus, so I'd like to touch on social and governance dimensions. On the social front, we've established a $4 million community charitable fund. This along with our employee volunteerism program, will enable DTM to be a highly engaged community partner across our entire operational footprint. We believe this is a hallmark of successful companies. Additionally, we implemented a new talent management program that improves the way we attract and retain diverse talent. And we continue to strengthen our safety culture, leveraging industry-leading best practices. On the governance side, VTM is set up with strong C-Corp governance led by a highly engaged, independent, and diverse board with an established ESG subcommittee. Our management team's long-term incentive plan is tied to total shareholder return, so our success and our shareholder success are firmly linked. Finally, as I mentioned earlier, we will be publishing our inaugural sustainability report in the second quarter of this year. That will provide a complete picture of all these important elements. Let's now turn to slide 15 and I'll wrap up the presentation. In summary, we had a great first year and are firmly on track to deliver accretive growth in 2022 and 2023. We have a focused strategy and a robust set of development opportunities that positions us for distinctive performance over the long term. And with that, we can now open up the line for questions.

If you'd like to ask a question, please press star then one on your telephone keypad. Our first question is from Jeremy Tenet with JP Morgan. Your line is open.

Hi, good morning.

Morning, Jeremy.

Just want to start off with the Hainesville, if I could. You know, with all the production growth there, I think there's a focus in the industry on bottlenecks and egress there. And we've seen new projects announced, potential projects announced here. So I'm just wondering if you could touch on, I guess, how much expansion capacity could the pipe have if it's kind of fully maximized there with compression or any looking ACUs, low-hanging fruit there, and just wondering what the timeline for that could be and how this offering could compare to some of the newer potential project announcements we've seen.

Sure, Jeremy. We've mentioned this in the past that LEAP can be expanded up to about two BCF a day. So with what we shared here today, there's still a significant runway that we're working on and that's really contemplated in our phase two expansion work that we're talking to multiple parties about right now. So to extent, When we look at the competitive landscape, I think we have a leg up on many of our competitors in that, you know, our assets are in the ground, and the expansion work that needs to be done is a little simpler for us, primarily compression. And, you know, that allows us to have a very competitive offering. It allows us to execute quicker. And, you know, we've also positioned this asset as carbon neutral. As I mentioned, Swin, you know, it's very aligned with their strategic objectives for a responsible source of natural gas and with one of our biggest customer cheneers, long-term desires for low-carbon LNG cargos. So we believe we're in a really good competitive position right now in the basin, and our commercial focus is really to – to bring more customers to our asset footprint there.

Got it. That's helpful. Thanks for that. And turning to your phase one Haynesville wellhead to water project on slide 12 there, I was just wondering if you could provide any color, I guess, in how the commercial environment today compares to what it was in the past. Are rates, do you expect here, similar to what you've signed in the past, or is the marketplace different at this point?

Yeah, I mean, as you can expect, it's a pretty competitive market environment right now with the number of projects announced. But I would say, generally speaking, the rates that we're realizing are consistent with kind of what I'll call our anchor rates, for lack of a better word, the original Indigo agreements. You know, it's competitive. And again, I'll go back to my earlier comments that because we have pipe in the ground and we're flowing gas into the LNG complex today, we do have a leg up on some of the competitors in that regard that we're already flowing, demonstrated service. And again, this carbon neutral pathway is being well received in the market. It's a differentiator for us. And, you know, we're optimistic that we're going to be able to do another wave here, a phase two wave.

Got it. Just one last one, if I could. You know, it seems like MVP is faced with another hurdle here and a lot of questions around it. That's the path forward. As it relates to Appalachian egress, just wondering if you could provide a thought to it. That's how tight it is, how much... how that could impact basin production, and I guess more specifically, what this means for DTM and Nexus as far as what's left to expand on the pipe and how quickly that could materialize.

Yeah, that's been a hot topic in Appalachia just over the last couple of weeks here as they've run into additional headwinds. I'd say generally speaking, it feels like that project is delayed at least another year. You know, it'll be – it continues to keep the basin tight. It's been tight. It will continue to be tight. There's a strong price signal being delivered into the basin to drill and grow production. So, you know, the – some of the favorability that we've seen in our results that we just discussed, I mean, came from our interstate pipelines. and I've talked about that in the past, that we've been seeing favorability on Nexus as we've been able to take some of those shorter-term firm contracts and push them out to longer-term and higher rates. We continue to see that playing out in the market as it continues to tighten up. We're also seeing a lot of interest in our link asset, in particular the Stonewall Pipeline, that also serves the mid-Atlantic market. So our Stonewall system connects with TECO's system and is a pathway into the mid-Atlantic market. So generally speaking, we're seeing favorability across our portfolio as a result of these construction constraints that the Mountain Valley is dealing with right now.

Chad, maybe just specifically on Nexus, although serving a different market, could you just give us an update there on how, you know, the remaining capacity that could be put on the price, but the commercial outlook and timeline could be there?

Well, we continue to work with the parties that participated in the open season. And just to remind everybody on the call, there were really two key elements to that open season. One related to generation pipeline. which is an asset that we want to connect directly to Nexus that serves that greater Toledo market. And the other was expanding the access to supply on our Tennessee interconnect. So we continue to work through the details there with interested parties. And we continue, as I said earlier, to work. A lot of parties are looking at taking those shorter-term firm agreements and extending them out. And, again, we're just seeing a lot of interest in that and interest at very favorable rates from our perspective. So it's a positive environment right now around Nexus, and commercially we're just working to capture some of that value and lock it in.

Got it. Makes sense. That's been helpful. I'll leave it there. Thanks.

Thanks, Jeremy. The next question is from John McKay with Goldman Sachs. Your line is open.

Hey, guys. Hey, Maureen. Thanks for squeezing me in after those. Just wanted to follow up on Leap, maybe on the expansion. Can you talk about kind of what interest you're seeing for maybe this phase two? Is it more on the producer side, or are you seeing LNG kind of shipper demand coming in as well. And then, you know, in the context of both of those, what will it take to get CCS on this done? Yeah, maybe I'll touch on LEAP first. You know, so we continue to see strong interest to get down to the LNG corridor along the coast. And it's broad-based interest. So I'll just leave it at that. Again, it's It's a competitive environment that we're operating in right now, so I don't want to get into too many details. But strong interest, and it's really driven by the fundamentals. We're seeing strong indications of production growth. I think if you look at the rig count, it is foreshadowing what's going to happen in that basin in the next 6 to 12 months. And likewise, what we're hearing around the LNG utilization and additional LNG growth. So, you know, strong fundamentals on both sides of the asset, so there's lots of interest from lots of different parties. And, you know, our job is to just work through that and commercially get through those details. You know, we're in a great spot. We have, you know, pipes in the ground, the system's operating today. We're well interconnected with... all the LNG systems on the southern end of our asset footprint. So, you know, we believe that we have a competitive advantage here, just a matter of working it through commercially.

Okay, maybe shifting gears, just looking at the quarter, you know, gathering volumes are up a ton.

EBITDA was up slightly. Can you just kind of talk about some of the moving pieces here and how we should think about that going into 22? Is that an NBC thing? Are we seeing competitive pressure on rates? I don't know if there are any one-off items. Just really trying to balance the kind of difference in growth rates. Sure. John, I'd say there are two things there. to help reconcile that. One is just a reminder that we are carrying some incremental costs that get allocated across the two business segments, so that'd be one. The second item, or some of the incremental third parties that we brought on, they had fairly short hauls on the gathering side of the Haynesville system. And we're primarily focused on the LEAP corridor down to the south. So from a revenue recognition perspective, it was probably heavier skewed to the LEAP pipeline side than it was to the gathering side. So hopefully that helps. Yeah, no, that makes sense. Thanks for the time today. Appreciate it. No problem.

The next question is from Michael Bloom with Wells Fargo. Your line is open.

Thanks. Good morning, everyone. Maybe just to stay on that topic of handel gathering volumes, as was just mentioned, those are up quite a bit sequentially. Just wanted to get a sense, is that kind of a new level that's sustainable, and from there you'll continue to grow? Or is there anything in that number that would be sort of, you know, one time?

Yeah, good question, Michael. So a lot of what we saw in the fourth quarter was what we described as a pull forward of activity from 22. So it was three new customers that came on that I was just kind of talking to John about there. They came on earlier than we had planned, and our treatment facility also was completed, originally scheduled to be completed at the end of the year, and we were able to pull that forward later. into the beginning of the fourth quarter. So there was a significant amount of pull forward. So when you look at how the volumes ramped, we had quite a ramp in the fourth quarter related to what I just described. So I would expect that that'll be there. That is there today. And we'll be growing from there.

Great. That helps a lot. And then second question I just wanted to ask was about Basically, the remaining 50% of the capex, the 1.2 to 1.7, that's not yet committed. What amount of that do you think will ultimately go to energy transition versus your traditional pipeline and gathering segments?

Yeah, so we're really pleased. I'll just start by saying we're really pleased that we've got a lot of sight on deploying half of that capital program, you know, really in the last – six to 12 months. So the commercial team has done an amazing job capitalizing on what the markets presented to us. I do believe that we will have a portion of that and likely a significant portion of that going towards capital or energy transition programs. And it likely does come later in our plan just because it's still emerging and it's new. I'd say, you know, our a lot of focus right now on advancing the carbon capture project in Louisiana forward. We're in the land phase right now and in a phase where we have a lot of discussions going on with the state of Louisiana as we work through the details to file a successful class six well permit, which I'm sure as everyone knows, those are very detailed applications and they will get close inspection because of the nature of the permanent sequestration that everyone wants to have confidence in. So we're working hard on that. We're just doing it very diligently, one step at a time with high confidence. So we'll keep the investor base apprised as we approach that application. That'll be a key milestone for us on that project.

Great. Thanks so much.

You're welcome.

The next question is from Alex Kenya with Wolf Research. Your line is open.

Thanks. Good morning. Just maybe a couple questions. First is just on the, you know, the Hainesville phase one expansion. Can you give us maybe a little bit more sense in terms of the timing about how that rolls in, maybe in terms of, I suppose, 2023? and the outlook there, and maybe a little bit more just on some of the other variables to keep in mind on 23 or other things that, you know, maybe upsides or risks to keep in mind. And maybe the second one is just, this is more broad, but just when you've talked about kind of working on hydrogen with your partners there, do you kind of see any evolution on trying to integrate that with maybe a broader, like, hydrogen hub plan that the DOE is sort of beginning to kick off the process there? And then maybe just a sense in terms of timing on that. Thanks.

Sure. Well, Alex, I'll start with the Hainesville. I point you to slide 11 in the deck. We've tried to provide some color on in-service states around some of the new investments there. And for phase one, that's at Q4 23 in-service. So hopefully that gives you a sense of timing there. But we've tried to lay out a lot of the other projects on that page. Hopefully that's helpful. as you guys work through the details. In terms of hydrogen and our partnership with Mitsubishi, the way I would describe it, there's a lot of interest in this right now. Particularly for us, we're very focused right now on looking at blue hydrogen opportunities, especially if they can pair up with CCS. It feels more economic, a little easier to handle from a cost perspective for the ultimate consumer. There's very interesting tax credits that are being proposed for hydrogen. The hydrogen hub process that will play out this year, we're very interested in that and involved in that. And again, I don't really want to get into the details around that just because of the nature of the competitive aspect of that program. But we're very interested in that and we're very focused on that. And that is front and center in our development matrix for hydrogen.

Great, thanks.

You're welcome, Alex.

We have no further questions at this time. I'll turn the call over to Mr. Slater for any closing remarks.

Well, thank you very much, everybody, for joining us today. We certainly appreciate your interest in DTM and appreciate the questions that you had. I'd like to just ask everyone to stay safe and have a great weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.