DT Midstream Q1 2023 Earnings Call Transcript

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May 2, 2023

There are 8 speakers on the call.

Operator

Thank you for standing by. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the DT Midstream First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I will now turn the call over to Todd Lerman, Director of Investor Relations. You may begin your conference.

Speaker 1

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. Following the successful issuance of debt in NexSys Pipeline, we are modifying our adjusted EBITDA calculation To reflect full proportional EBITDA from our equity method investees, Please refer to the updated definition of adjusted EBITDA and the reconciliation to GAAP contained in the appendix, As well as the definitions and reconciliations of our other non GAAP financial measures. The appendix also contains details on the debt balances and interest expense at our Equity Method Investease.

Speaker 1

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.

Speaker 2

Thanks, Todd, and good morning, everyone, and thank you for joining. I am pleased to report we had another strong quarter With both business segments delivering great results that are in line with our full year plan, as I communicated on our year end call, We expect growth to be weighted towards the second half of the year as we bring projects online. Standing here today, I'm confident in our full year guidance range for 2023 and early outlook range for 2024.

Speaker 3

All of

Speaker 2

our key growth projects remain on budget and on schedule. And during the quarter, we made significant progress de risking these projects By completing major construction activities and firming up project costs, approximately 80% of our overall growth project capital costs I've been locked in through our spend to date and committed procurement contracts. And I'd like to give a big thanks to the entire team for their dedication As they work to ensure these projects meet the expected in service dates for our customers. I also want to commend our employees for their excellent safety performance With no recordable safety incidences so far this year. We are continuing to advance our CCS opportunity in Louisiana, Following the acceptance of our Class 6 well permit application by the EPA, we have completed seismic surveys and continue to evaluate Geological characteristics in support of our application.

Speaker 2

Last Friday, the EPA announced they are opening a public comment window On a proposal to grant the State of Louisiana's request for primacy over Class 6 injection wells. We are very encouraged by this announcement and we'll continue to work closely with both the EPA and the State of Louisiana As we advance the project towards a final investment decision, I want to take a moment to address the natural gas fundamentals And share our observations on producer activity levels. We are starting to see rig reductions in response to the low gas price environment. Recently announced customer activity reductions and our footprint are fully contemplated in our guidance and our long term view on the market remains very constructive. The resource areas served by our assets are Tier 1 with a long runway of highly economic drillable well locations.

Speaker 2

There was also a high drilled and uncompleted well inventory in the basins that we operate in, Especially in the Haynesville, where the DUC inventory has grown significantly. On the demand side, LNG feed gas is at record levels, Following the return of Freeport LNG and the next wave of new export facilities is quickly approaching. Power demand for natural gas is running well above last year and the potential increased power burn, especially if we have a hot summer could accelerate the tightening of the market. Our asset footprint with wellhead to market connectivity serving the 2 best dry gas basins Provides advantages in this very dynamic market. Our pipelines serve growing and durable demand centers And the pipeline segment has increased from approximately 50% of our business mix in 2021 To closely 65% today, we continue to add to our backlog of organic business development opportunities with our focus on short cycle, right sized growth investments.

Speaker 2

We recently added 2 new producers to our Haynesville system And at our storage complex, we are contracting into a favorable pricing environment. Now, I'll pass it over to Jeff to walk you through our quarterly financials and outlook.

Speaker 4

Thanks, David, and good morning, everyone. In the Q1, we delivered overall adjusted EBITDA of $225,000,000 Our pipeline segment results Reflect continued strong performance at our storage complex and our pipeline joint ventures, offset by reduced Short term revenues following a strong Q4. Our Gathering segment results were in line with the 4th quarter, Except for the $2,000,000 impact from the transferring our Michigan Gathering asset to the pipeline segment, Following the service conversion and the start of the new 20 year transport contract. Operationally, total gathering volumes across both the Haynesville and the Northeast averaged approximately 3,000,000,000 cubic feet a day In the Q1, we expect gathering volume growth to be back half weighted this year, which is driven by the in service of our expansion projects and timing of customer activity. Growth CapEx for the quarter was $227,000,000 As we made significant progress de risking our organic growth projects, we are maintaining our full year Growth CapEx range of $575,000,000 to $650,000,000 Our total committed growth Capital remains approximately $800,000,000 and is slated for organic growth projects.

Speaker 4

The committed total, Which is inclusive of our 2023 investment implies a significant step down in capital spend in 2024. We recently took the opportunity to further optimize our balance sheet with the issuance of 7 $1,000,000 of new investment grade debt at NexSys Pipeline, with DTM's proportional share being approximately 375,000,000 Funds from the transaction will be distributed in early May and will be used to support organic growth And pay down our revolving credit facility. This transaction will free up additional liquidity and provide interest expense savings. Overall, we are very pleased with the results of this financing. We remain committed to the strength of our balance sheet And our 4 times long term leverage ratio ceiling.

Speaker 4

As Todd mentioned, We are modifying our adjusted EBITDA metric, which impacts our adjusted EBITDA guidance. The updated 2023 guidance Can be found on Page 6 in the earnings presentation. This update to our guidance solely reflects the change in our adjusted EBITDA metric And does not reflect any changes to the base business. I'll now pass it back over to David for closing remarks.

Speaker 2

Thanks, Jeff. So in summary, we feel really good about our full year guidance range for 2023 And our early outlook range for 2024. Our construction projects have been significantly derisked and are primarily backed by take or pay contracts. We continue to have a healthy business development inventory of organic growth projects and expect that improving market fundamentals Over the course of the year, we'll yield additional opportunities. We can now open up the line for questions.

Operator

Your first question comes from the line of Spiro Dounis with Citi. Your line is now open.

Speaker 5

First question, you guys mentioned that the natural gas prices to some degree have any impact On rigs here in the near term, but just curious as you sort of think that it sounds like your outlook really hasn't changed when we think longer term. And so I know one thing You are pursuing with an expansion of LEAP towards 3 Bcf a day at some point. Just curious if you could maybe just walk us through customer interest levels On continuing that expansion now versus maybe a quarter or 2 ago, and how you're thinking about the timing of that potential expansion?

Speaker 2

Sure, Ken. Spiro, great question. So we continue to have really active dialogue with a Series of customers on the next phase of leap expansion. As we sit here today, we're mid 2023 and that 20 25, 20 26 next wave of LNG is quickly approaching. And I think one of the advantages that we offer the market is our ability to expand in what I'll call it, bite sized increments just like Phase 1, 2 and 3 were.

Speaker 2

So we continue to have a lot of customers interested in incremental lead capacity. Again, I think just recognizing the environment we're in, we're in a bit of a weak moment in the commodity cycle right now. I think Most of those customers are very self aware of that. And one has things kind of lined out and ready to go When they're prepared to make those the next incremental commitment. So we feel real good about our competitive position.

Speaker 2

We've Done really well in what I'll call the 1st wave of the expansion work. We punched above our weight, And we're able to contract a large portion of the market share and I expect the same thing will happen in the second wave.

Speaker 5

Got it. Thanks for that color. 2nd one, maybe just going to the new EBITDA methodology, 2 part question on this one. So first, I guess, what was the thinking in not Sort of keeping it the way it was and reducing that EBITDA by the interest levels, especially now that you're going to have a little bit more JV debt, It would seem like that gap or that variable between EBITDA and cash flow will also be a little bit bigger now. And then second part of that question, As we think about the 2024 preliminary outlook, that did not change to reflect this methodology, it looks like.

Speaker 5

Any sort of reasoning behind that or just sort of too early?

Speaker 4

Hey, good morning. Yes, this is Joe. So I'll take the first piece and then David will help on the 24. Yes, so for us, it was pretty simple. We just want to make sure that we're being transparent and simple.

Speaker 4

And again, that's a well known approach of when you've got material JV debt that you Sort of move to a proportional reporting method and so that's what we're trying to do. And obviously with the next additional that was a material change And our JV debt, so that's why we're doing it now. And of course, we really like our the JV debt, been able to finance at that level because able to do it investment grade, non recourse. And as we're as you can see the rate that we got, we're just tickled pink with that rate that we've got. We can do it at a lower cost.

Speaker 4

So that's kind of why we made the change at this time.

Speaker 6

Yes, maybe I'll pick up

Speaker 2

on the second half. So I'll comment briefly on Nexus. It was always contemplated that at the right time in the evolution of that pipe, we would put JV level debt on it. So this is really just us executing the plan. In terms of 2024, There's puts and takes every quarter on forward looking guidance, and This is no different.

Speaker 2

We have puts and takes in 2024. It doesn't hasn't changed our view on our confidence in our 2024 guidance. And it's been our practice that we'll refresh 2024 typically at the end of the current year and as we bring it into the current Prompt year cycle. So that's just kind of been our practice here. So no concerns there.

Speaker 5

Got it. Understood. That's all I had today, guys. Thanks as always for the color.

Speaker 3

Thanks for the questions. Yes.

Operator

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

Speaker 6

Thank you. Good morning, everyone. Just had a couple of just wanted to make sure I understand a couple of things. On Slide 11, I think you reiterate Your long term 4 times leverage ratio ceiling. So just wanted to understand that a little bit better.

Speaker 6

Is that would you allow yourself to go above that in the short term if you had good line of sight that you get back below 4 within a reasonable amount of time? Or is that what long term means in that slide now or is that really like a hard cap at 4 times?

Speaker 4

Hi, Michael. It's Jeff. No, again, another good very good question. So you're right, our commitment is to the long term four times, Which includes the proportional, just so that we're clear on that. And again, why we're comfortable with that Four times is because we've got a high degree of demand contracts, stable cash flows, and we have no direct commodity So that's how we're why we feel good with that 4.

Speaker 4

But you're spot on with the investment profile that we currently have. We are going to be temporarily over that 4x, probably by at the end of this year. But with our plan, We feel that we're going to be able to delever down into the mid-3s over the next several years on how things are going to play out.

Speaker 6

Got it. Thanks for that. And then just wanted to ask about the increase in storage rates. I'm wondering if you can just quantify Maybe uplift in terms of either contribution or just like rate of change, how much upside are you seeing in storage rates?

Speaker 2

Yes, Michael. We've just seen a really strong storage market present itself over the last probably 5 to 6 months, And we had a significant amount of capacity rolling actually in our portfolio, just the way we have that portfolio structured. So the commercial team has been doing just an excellent job here in the Q1, renewing a number of contracts and capturing these higher rates. We're probably seeing rates that are, geez, 40% to 60% higher than we've seen Perhaps last year in the storage market, so we're really encouraged by that. I think we have talked To you folks about the storage market in the past, and I'd say a couple of years ago, we were sort of in the trough, If I can use that term, in the storage market, it was a pretty weak storage market, and we were intentionally not terming out capacity in that weak market.

Speaker 2

So as the market has materially improved, and I think it's a function of just a higher volatility in the energy complex here in North America, We're looking to take advantage of that and contract up and term out to the extent that we can inside our storage business. So That's a bright start in the portfolio at the moment, and it's always nice to have a diversified portfolio.

Speaker 6

Got it. Perfect. And then just last one for me. Just apologize if I missed this, but have you declared the dividend for the Q1? Thanks.

Speaker 2

We have not, but we expect that will be coming shortly. We have a Board meeting later this week. So stay tuned on that one.

Speaker 6

Thank you.

Operator

Your next question comes from Robert Mosa with Mizuho. Your line is now open.

Speaker 3

Hey, thanks everyone. So I was wondering if you could provide any additional color on those 2 producers you signed up in the Haynesville. And then also, I think a couple of years back, you announced some contracts with new customers on Blue Union. Just wondering if you could update us with respect To, I guess, the tenor and bond commitments on those or expectations? And could that be a potential headwind to Haynesville volume in the short term?

Speaker 2

Yes, Rob. Thanks for the question. So we did. We signed up 2 new customers. And I think as you know, over the last couple of years, It was one of our strategic objectives as we wanted to bring on more new customers on to the Haynesville platform And start to diversify that platform a little bit.

Speaker 2

So these 2 new customers, I can't get into the details other than I'll just characterize The type of producers they are, they're both smaller private producers. They're long term contracts With dedications to our network, I think what was really encouraging for me to observe as a commercial team that's Working this is the value that these new customers see in our network. We have A wellhead to market network in the Haynesville. I'll call it a wellhead to water network to the LNG Giolus procurement location. So they really saw a lot of value in that, Where they could deal with 1 company, just plug into the network and they're ready to go, so to speak.

Speaker 2

So we expect those 2 customers to come on towards the end of the year. But yes, just encouraged by the efforts of the team be able to do that, and we just continue to add counter parties to the network and diversify the network and grow the network.

Speaker 3

No, that's helpful. And maybe just on those contracts that you had signed a couple of years back. I'm not sure if those were kind of more short term offload agreements or Were those long term contracts as well?

Speaker 2

Those customers are still on the system, and they're actually growing their volume on the system. I'm just recalling in my mind right now, Rob, what we disclosed on those customers. But Yes, I would characterize them as longer term customers on the system.

Speaker 3

Okay, great. That's helpful. And then maybe for that 20% of committed CapEx that is in derisk, so to speak, I mean, Which projects could you talk about which projects those relate to specifically and whether you're seeing anything above or below what you initially Bottled in that $800,000,000 bucket.

Speaker 2

Yes. So let's just start at the highest level. We're very confident And our capital costs on all of our projects, both in the North and in the South. And 80% of that capital, As you just pointed out, has been deriskedlocked in. I'd say the open portion, the 20% is open, it's primarily related to the install cost.

Speaker 2

So it's what I'll call labor and the mechanical of putting it together, so to speak. And all the projects are running on schedule. So as I called out in my opening remarks, I think our construction team has done a fabulous job In a very difficult environment with significant cost pressures coming from all sides and delivery schedule pressures coming from all sides To hold the budget and hold the schedule for our customers so that we can deliver These products on time for our customers. So feel really good about the de risking on the capital side. And Maybe just some additional commentary on why we feel good about our guidance for this year.

Speaker 2

So just to remind everybody, The gathering side of our business now only represents about 35% of our business, so I'll just start there. But All the wells that need to be drilled and brought online to support the expansion work that we're doing here in 2023, 75% of those wells have either been drilled and completed and are waiting on the facilities or are being drilled as we speak. So that gives us a lot of confidence in that portion of our business, Which is just one piece of our total business in terms of what we're going to deliver here in 2023.

Speaker 3

Great. That's helpful. Thanks, everyone.

Operator

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

Speaker 7

Great. Thanks. Good morning. Maybe two questions. First, just hopefully a quick A lot of talk on Haynesville activities, but just is there any kind of changes in tone that you're hearing from Your Appalachian producer counterparty is there in the gas environment.

Speaker 7

And the second one maybe just with respect to CCS. Can you remind us just what the timeline may end up being right now just with respect to the federal EPA process Or maybe how you see the primacy discussions moving forward on Louisiana, just to maybe get a sense of maybe when You could potentially get to a FID timing decision.

Speaker 2

Sure, Alex. I'll start with Appalachia. Those percentages that I just quoted previously in terms of the activity we're seeing that supports our growth this year, That is that covers our total gathering business. So it reflects both Appalachia and Haynesville. So We continue to see our customers performing what we would expect them to perform In terms of our expansions in Appalachia, but a more general comment about Appalachia.

Speaker 2

We continue to see the activity. You've heard some of the publics. There's a moderation occurring in Appalachia, but probably not to the same extent That we're seeing in the Haynesville, my sense is it's primarily related to costs. There was a lot more inflationary cost pressure in the Haynesville than there was in Appalachia. And I think This is just my view is that I think producers are sending a little signal into the service sector in the Haynesville right now to That they need to bring their cost in line.

Speaker 2

And I expect that will play out here over the summer that there'll be a cost Acknowledgment and adjustment that will support continued drilling in the back half of the year. And we all I also sense that Market fundamentals, I think the ship will right itself towards the back end of the year here in the second half of the year. We certainly still see pretty Strong price signals in Cal 24, Cal 25. I think it's upper $3.24 and low $4.25 Pretty healthy numbers in either basin for producers to drill into. So that's our That's kind of what we're hearing at a high level in the market, and I hope that's helpful.

Speaker 2

Your second question related to CCS in Louisiana. We've kind of publicly said timing for us is sort of the back end of 2025. Just to remind everybody for our project. Our project involves the capture, our Capturing emissions from our own facilities in Haynesville, we will pipe it and we will sequester it. So we're doing all three components in this project.

Speaker 2

We've been working hand in hand with both The Louisiana Department of Natural Resources and the EPA with the expectation that At some point, the primacy would shift to Louisiana. So both parties have been sort of in the tent with us from day 1 I'm fully aware of all the work that has been done and that we're planning to do to support the application. So we're encouraged by the letter last week. We know that Louisiana is very supportive Of CCS within the state to support both their industrial base and their resource base in the state, and We look forward to working with the state assuming the primacy does shift.

Speaker 7

Thanks very much.

Operator

Your next question comes from Robert Moza with Mizuho. Your line is now open.

Speaker 3

Hey, thanks. Just a quick follow-up here. Just wondering if you could address the decline in Haynesville volumes quarter over quarter, what drove that?

Speaker 2

Yes, Rob, it wasn't anything more than just the timing of well completions. I think we had a similar phenomenon last year. I think we kind of the first half of the year tends to be a little lower, and we tend to see the ramps in the second half of the year. That seems to be the pattern of our largest customer. And again, It was fully contemplated in our plan and in our guidance.

Speaker 2

So we're very happy with Q1. We are on track For full year guidance based on our Q1 results.

Speaker 3

All right. Thanks, everyone.

Operator

There are no further questions at this time. David Slater, I turn the call back over to you.

Speaker 2

Well, thanks everybody for joining us today, and certainly appreciate your support and interest. And I look forward to seeing many of you later in the month at EIC. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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