DT Midstream, Inc. (DTM) Q2 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the DT Midstream Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]. Thank you. And I will now turn the conference over to Todd Lohrmann, Director of Investor Relations. 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 2 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 Jeffrey Jewell, 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. Then I will share details on our Phase 2 expansion of our Haynesville system and reflect on some of our key accomplishments as we recently observed our 1-year anniversary as a stand-alone public company. I'll then provide an update on our other major development projects and commercial initiatives before turning it over to Jeff to review our second quarter financial results. So with that, we had a strong second quarter, and our year-to-date performance is running ahead of plan, putting us firmly on track to achieve our 2022 guidance, and I am highly confident in our ability to achieve our 2023 early outlook. I'm very excited to announce that we have reached a final investment decision on a Phase 2 Haynesville system expansion. The expansion represents 400 million cubic feet a day of incremental capacity on LEAP. Phase 2, along with the Phase 1 expansion that is out way, will result in us expanding LEAP by 70% from its current capacity of 1 Bcf a day to 1.7 Bcf a day. Phase 2 is fully underpinned by long-term take-or-pay commitments. This expansion highlights our ability to add timely and efficient increments of capacity to LEAP, providing a low-risk economic pathway for our customers to access the attractive domestic and LNG export markets on the Gulf Coast. We expect that we can achieve construction synergies with our Phase 1 expansion, which will allow us to have the full 1.7 Bcf per day of LEAP capacity and service by the first quarter of 2024. The continued growth of our Haynesville system is a great example of the excellent work the team has done over the past year, and I'd like to thank our customers for their confidence in choosing us. As a reminder, LEAP can be expanded up to 3 Bcf a day with looping and compression, and we remain in active discussions with customers interested in capacity that would be part of the Phase 3 expansion. We also recently celebrated our 1-year anniversary as a stand-alone public company. And I want to take a moment to thank each employee for all the great work they have done. The collective effort beginning with the execution of the spin to the numerous growth opportunities we have secured across our footprint has positioned the company for strong growth for years to come. Our commercial and operational successes over the past year are an outcome of the strong relationships that we have with our customers. And last week, we were recognized as the top-rated company out of 63 total participants in the MASTIO Midstream Customer Service Study. I am very proud of our team for achieving this recognition. Again, I'd like to thank all of our customers for their support and business. Turning to the execution of our growth projects. I am happy to report that all projects remain solidly on track, both from a cost and schedule perspective. During the second quarter, we placed in service our Stonewall expansion, which adds a new customer to the system under a long-term contract, representing approximately 15% of the system's capacity. We continue to see strong interest for capacity out of Appalachia on Stonewall as well as NEXUS as takeaway constraints remain an issue. On NEXUS, we recently added another Midwest LDC under a long-term agreement at attractive rates. In our emerging business platform, we are advancing our CCS opportunity in Louisiana towards a Class VI permit application, which we plan to file by the end of the year. This opportunity not only represents an attractive investment but will significantly reduce our emissions as part of our plan to be net 0 by 2050. So in summary, the company is very well positioned to grow and deliver stable, durable returns. We have no direct commodity exposure, and our portfolio is structured to be resilient through cycles, due to the high level of long-term take-or-pay contracts. We're 100% natural gas focused, and we expect domestic and global demand for natural gas to remain very strong for many years to come. 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 second quarter, we delivered overall adjusted EBITDA of $205 million, which was driven by strong performance in both our pipeline and gathering segments. Pipeline segment results were driven by the in-service of our Stonewall expansion, higher revenue on LEAP and the impact of a favorable onetime settlement with a supplier recognized in the second quarter. Gathering segment results were driven by higher revenues on Blue Union. Operationally, total gallery volumes across both the Haynesville and Northeast averaged 2.8 billion cubic feet a day in the second quarter, which was consistent with our plan for the year. With our gathering systems running at high utilization, the planned expansion projects in the second half of the year will support future volume growth. Our strong second quarter performance places us ahead of plan, and we are reaffirming our 2022 adjusted EBITDA guidance of $770 million to $810 million. We are also highly confident in our 2023 early outlook for adjusted EBITDA. I'll now pass it back over to David for more details on our ESG program and closing remarks.

Thanks, Jeff. At DTM, we are committed to operating in an ethical, environmentally sensitive and socially responsible manner. During the second quarter, we published our first sustainability report, which highlights where we currently stand on our ESG journey and some of the initiatives that we're executing on. I encourage you to review it, and we welcome any of your feedback. In closing, it's been a great first half of the year. We are well on track to deliver our full year 2022 guidance and achieve our 2023 early outlook. I'm also very excited about the continued commercial progress and momentum on projects that will deliver strong growth into 2024 and beyond. We can now open up the line for questions.

[Operator Instructions]. We will take our first question from Jeremy Tonet with JPMorgan.

This is Steve jumping on for Jeremy here. I guess just starting out, if we could looking at your first half performance versus the guide, if we kind of just double that out, obviously, you're running towards the top end of guide, but there was that onetime settlement in 2Q. So just wondering if you guys can run us through the puts and takes on the back half, how you see volume exiting and just puts and takes on the guide, in general?

Steve, and thanks for the question. This is David. Yes. So let's just hit the onetime settlement. Just for color, that's about $6 million. It relates to expenses we've taken in previous time periods, and we reached a positive settlement here in the second quarter. That was in the original plan for the year. So that's sort of baked into the guide for the year, Steve. In terms of what we expect in the second half of the year, we have a series of projects that we've previously announced laid out in the deck that will come into service and that will drive the back-end growth that gets us comfortably in that guidance span. And I think as I said earlier, we're running ahead of plan right now. So there's definitely a lift in the second half of the year. And as we sit here today, we're running ahead of the plan.

Got it. Okay. And then I guess just pivoting over to CCS. You you're talking about moving towards the Class VI while later this year. Just wanted to get your thoughts on the new bill as laid out with transferability and then also the improvements. And I know you guys have said before that, that doesn't matter much to you -- the economics on that doesn't matter much to you. But just wanted to get your thoughts on that. And then also Class V wells and if that has any input into the Class VI, would that have to come before? Would you guys look to do that after? Is that even in the thought process? Just anything around CCS?

Sure. Yes. So this is obviously fluid based on what's happening in Washington. So I'll start by saying it's very constructive and we're optimistic based on what we're hearing. As we all know, I think the devil is in the details here. But it's definitely pointed in an optimistic and constructive direction. As we said earlier, our project was viable under the existing 45Q structure. So any improvements to that structure will be obviously supportive to our plan. In terms of the details around the Class V, Class VI, I think we're going to just steer clear of those details publicly right now. I think, as everyone appreciates, there's a lot of projects and there's a lot of movement around this and whether Louisiana ultimately pulls in primacy and when. So I'm just going to leave that be for the time being. But what I will say is that we're pushing to have the filing occur before the end of the year. And we're doing a lot of work right now to prepare that filing and make it a high-quality filing so that it can move through the regulatory process with no drama. And that's what we're focused on right now.

We will take our next question from John Mackay with Goldman Sachs.

Let's start on the Haynesville. So volumes were flattish to a little down again this quarter. I know we're waiting on that Blue Union gathering expansion. Could you just share a little more detail on kind of where that sits now that we're a month into third quarter and maybe even kind of where volumes sit right now if you're able to share that?

John, thanks for the question. So I guess what, I'd just make a few observations here, John. So EBITDA was up in second quarter. So the margins were larger, even though the volume was flattish. And I think just at a high level, this is just a timing as we're building incremental facilities and the producer is incrementally drilling. Obviously, those 2 things need to be timed together to optimize that for both parties. So we're highly confident that these facilities are coming in service in the second half of the year. And to your point, and I don't want to get into too many details here on the call, but we are seeing incremental volumes showing up across the system. And recall, we also have expansions in Appalachia that are occurring in the second half. So we're seeing all those clicking in as we would expect and as is baked into our guidance. So again, just feeling really good that as we sit here today, we are ahead of our internal plan and very confident that we're going to deliver on our guidance as we progress through the second half of the year.

Okay. Maybe taking one on CapEx. So you guys reiterated the full year guide but you're running pretty far behind what that looks like. So I guess, could you share a little bit more of just how you're thinking about that second half step-up? Is the full year guidance still what we should think about? Or I don't know if anything slipping into 2023 potentially?

Yes, John, I don't see anything sliding into 2023, but we're going to have a heavy spend in the second half of this year and that's just a timing around as you engineer out these projects and actually start sending the money out the door just the way it's timed, it's going to come heavier in the second half of the year. But I will make one comment, just overall. We obviously want to spend less capital and deliver the same EBITDA. So we have a pretty rigorous process here to look at capital efficiency opportunities. And I alluded to that in my opening remarks that Phase 2, we're going to see some synergies with Phase 1 because of how quickly we can bring this into service. So again, we will be working diligently to peel off a little bit of that capital and leave all the EBITDA completely intact. But more to come on that as we get deeper into execution.

Okay. Maybe just one clarification, just to add on, if you don't mind. Can you just -- is any of the Blue Union expansion online yet? Or I guess when you're saying second half, does that still mean maybe a couple of months from now?

Yes. For Blue Union, that is going to play out -- that's prospective from the point in time that we're sitting at right now. So that's all still in front of us. We have seen some of the Northern gathering come on here in the third quarter as we sit here today. So it all comes on over the next basically 5 months, between now and the end of the year.

[Operator Instructions]. We will take our next question from Michael Blum with Wells Fargo.

I wanted to talk a little bit about the LEAP expansion that you just announced. What's the duration of that contract? And where is the average contract duration now overall for LEAP?

So yes, let me just talk a little bit about our Phase 2. So number one, we're really excited about it. I think it's a good example of our ability to bring timely capacity to market and bring it in scalable tranches. In terms of the counterparty details and all of the contract details, as I alluded to in the opening remarks, we're also actively engaged in Phase 3 discussions. So at this time, we're not going to share specifics about counterparties or term. But what I would say is these are all 100% take-or-pay contracts. They're all long term. We are not putting the capital to work without long-term commitments. My recollection of the average duration across LEAP is approximately 9 years for the entire system. That includes existing contracts and all of our new contracts. So the system is contracted for long term under 100% take-or-pay contract structures.

Great. No, that helps a lot. Appreciate that. Other -- second question is kind of a related question. I just wanted to -- if you could talk through the competitive dynamics in the Haynesville right now for incremental takeaway? It certainly seems like there are multiple projects that have been announced in the last few months. So just want to get your lay of the land and maybe if you could discuss maybe how returns on these projects are trending given how competitive it is right now?

Sure. So maybe I'll just step back for a minute and talk about the fundamentals and then I'll get into the competitive dynamics and what we see playing out there. So there's really strong fundamentals, both on the supply side and on the demand side around LEAP and also around other similarly situated projects. So we definitely are seeing reaction by the producer community to increase drilling. And we've all heard all the public announcements that the LNG terminals are making as they sign up incremental demand. So these 2 fundamental drivers want to connect to each other as the crow flies, they're 150 to 200 miles apart. And that's really what we're pursuing with these LEAP expansions. I'd say, in terms of the competitive dynamics, time to expansion is a critical element, and again, we believe we have a significant advantage because we're in the ground. I'd say when we originally announced the LEAP expansion, we announced it as a carbon-neutral wellhead water pathway. It's the first project of its kind in North America, and I think in the world for that matter. So we kind of -- we have a unique service offering that we're putting into the market. I think that's a competitive differentiator. We're very scalable. So as you've seen over the last 2 expansions, we've been just picking up a couple of customers at a time with, what I'll call, manageable incremental tranches of capacity that fit nicely into their drilling program. So that's another element that I think describes the competitive landscape. And we have a lot of delivery point flexibility in our system. We deliver it to multiple takeaway points at [indiscernible] not just one. And we have multiple other delivery points embedded in the system kind of inside the basin. So we have delivery point flexibility and we have a lot of optionality that's already designed into the existing system that's flowing today. So all of those matter. Obviously, price matters as well. And again, we're able to do these expansions consistently at the rates that we've had on the system from inception. So again, I think as all of that comes together in the competitive landscape, some of the other projects that are greenfield, they need to hit critical mass before they can FID, and we clearly have an advantage over those projects because we don't need to do that. We can do it in smaller tranches like we just announced today. So it's a very exciting market, strong fundamentals driving expansions. I think there's -- I will expect more opportunity in the future here. And our goal is to make sure that we pick up our share of the market and conserve our customers and give them a real strong value proposition with the service they buy from us.

We will take our next question from Robert Mosca with Mizuho Securities.

So maybe just staying in the Haynesville. Just wondering in the context of a Phase 3 expansion, will you be looking at -- maybe I think you have about 300 Mcf that's expandable with compression and then everything -- most of what's beyond that is looping. Can you try for a Phase 3 expansion to do some of that together? Or do you look at them in kind of 2 distinct buckets and is the bar a little bit higher to expand with looping?

Yes, great question. The way we are executing on our current projects, we really have extended our runway now to the 3 Bcf a day based on what we have publicly announced and what we feel we're still pursuing. We're definitely looking at optimizing the construction to be combo looping/compression. So the way I would describe it, Robert, is that old milestone is sort of in the rearview mirror. The new milestone that we have before us now is 3 Bcf a day.

Got it. That's really helpful. And maybe on switching to NEXUS, you said that you picked up an additional contract. Just wondering how much capacity you have -- or is there capacity left for maybe long-term contracting?

Yes. So we're really happy with how NEXUS is playing out. So we just continue to do, I think, what we've been doing in the last 3 or 4 quarters, which takes some of the shorter-term capacity that was contracted, extending out the term and expanding the rate. I'm really happy about what we announced this morning. This is another Midwest utility long-term contract, like I said, at attractive rates. The real interesting element here is that this utility also contracted for Washington 10 Storage capacity and Vector capacity to pair up with their NEXUS capacity. So it's just a great example of -- this pipe not only serves a host of producers, but it's directly serving an end-use market need based on its locational advantages and its interconnectivity to storage and to other regional pipelines. So yes, this is just kind of another step on our journey. The team continues to work on additional long-term contracts as we see some of those shorter-term contracts coming and rolling and there's a strong demand for those long-term contracts because the basin is so tight right now.

[Operator Instructions]. We will take our next question from Alex Kania with Wolfe Research.

I was just wondering if you had any initial thoughts potentially on these permitting reform proposals. Obviously, a lot of what you're doing has been interstate. So I'm wondering if this opens up any other options for you. And then maybe on a related note, to the extent that all this moves forward and Mountain Valley pipeline gets done, does that also kind of have any implications for you, maybe kind of on the upside and downside?

Sure. Yes. Good question. We'll start with the first part of your question, again, I would say that we're very optimistic and encouraged by what we're hearing out of Washington. It's not directly attached to the Inflation Reductions Act. So it's running a separate and parallel, I believe, pathway. So we'll be watching that really closely to see if the political support and alignment is there and how quickly it can move through the process, and quite frankly, to see the language. There's been a lot of discussion both at a high level what it is, but I think we need to see the details. And then we need to see action, for lack of a better word, out of Washington where it's moving forward. So again, very positive and optimistic signals. I know the industry has been working together on this for months. So again, very encouraged by what we're seeing. If that plays out as we expect, I think you're right. I think it does put a few more options back on the table in terms of potential to expand some pipelines. And I think it's most applicable to Appalachia, where there are expansion opportunities, and there's a strong desire in the producer community to grow. So I think it opens up an interesting dynamic in Appalachia. I hope that this gets done so that Mountain Valley can progress. The basin needs that asset to progress. The exact impact of that project going forward, I think it's different today than it was 4 years ago when it would have been in service. I'm not sure how much takeaway capacity at the other end of that pipe exists today given all the other projects that Transco has done. So I think we're going to -- I think the basin will digest that. Is it truly one-for-one or is it a different ratio? I think it's a different ratio, a lower ratio, but more to come on that. But I think it's encouraging and positive for the entire basin, and we're very happy about what's transpiring in Washington and very supportive.

[Operator Instructions]. And there are no further questions at this time. I would now like to turn the call back over to Mr. David Slater for any additional or closing remarks.

Well, thank you very much for joining us today. We certainly appreciate your interest and all your questions. Please stay safe. Enjoy your summer, and have a great day.

Ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.