DT Midstream Q4 2023 Earnings Call Transcript

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February 16, 2024

There are 9 speakers on the call.

Operator

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the DT Midstream 4th Quarter 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Todd Lorman, Director of Investor Relations.

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. 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.

Speaker 1

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. During today's call, I'll discuss our 2023 accomplishments and provide an update on our organic growth projects and future outlook. I'll then close with some remarks on the accomplishments the DTM team has made since we spun the company in 2021 before turning it over to Jeff to review our financial performance and outlook. So with that, 2023 ended strong. We delivered full year adjusted EBITDA of $924,000,000 which exceeded our guidance midpoint and represents 10% growth year over year.

Speaker 2

We also executed on the largest construction program in our company's history. And I'd like to thank the team for successfully completing these projects ahead of schedule and on budget. I'd also like to commend the team for their excellent safety performance. We finished the year with only one OSHA recordable, one of our best safety years on record. Most notably, we placed our LEAP Phase 1 and 2 expansions in service early, which are fully contracted and directly serve the growing LNG markets along the Gulf Coast.

Speaker 2

With these expansions completed, we're able to focus construction activities on Phase 3, which is currently running ahead of schedule. On Blue Union, we added additional treating and pipeline capacity, putting us in an advantage position to quickly ramp supply to serve the coming LNG demand wave beginning in 2025. Turning to the Northeast, we successfully completed our Appalachia Gathering System Phase 2 expansion, which added additional mainline capacity. In Ohio, our Ohio Utica project trunk line was completed early and we began collecting revenue under our take or pay agreement. On Nexus, we were able to unlock and sell new capacity through hydraulic optimization initiatives.

Speaker 2

Throughout the year, our business development team successfully executed several new commercial agreements, including our Ohio Utica project, a new supply interconnect on Blue Union in the Carthage area and an interconnect with the Gillis Access project on LEAP. Additionally, during the Q4, we finalized new agreements that will result in a Phase 3 expansion to our Appalachian Gathering System and expansion of the Tioga Gathering System and a pipeline expansion on the Blue Union System. The business development team remains focused on progressing our deep organic project backlog, which currently sits at over $1,300,000,000 through 2027. On LEAP, we are in advanced discussions for a Phase 4 expansion, which we are now estimating to be between 200,000,000 and 400,000,000 cubic feet a day. We have also updated our expansion potential on the LEAP system from 3 Bcf a day to 4 Bcf a day.

Speaker 2

This asset is fully integrated into the Haynesville supply region, operating today and easily expandable. It provides superior market access and connectivity to the Gulf Coast LNG corridor. LEAP offers tremendous value to our current and future customers and we feel confident in our ability to gain additional market share. Regarding the LNG permitting pause announced by the Biden administration, we see no material impact to our business in the near term. All LNG demand growth, which will be directly served via Leaf is fully permitted and under construction.

Speaker 2

We continue to view the U. S. Gulf Coast as the premier LNG export region and a critical supply source for our European and international allies. Energy security for allies will remain a long term geopolitical priority for the U. S.

Speaker 2

Additionally, LNG is the largest, most cost effective and reliable solution to reduce carbon emissions internationally by displacing coal and supporting the build out of intermittent renewable energy. Our assets are well positioned to support these long term energy fundamentals and priorities. I'd now like to provide an update on our carbon capture and storage project in Louisiana. In early January, we received our Class 5 well permit and we are currently drilling a characterization well to confirm our favorable view on the geology of our storage site. Throughout the project, our development approach has been methodical, leveraging our extensive storage, pipeline and tax credit expertise.

Speaker 2

Our goal is to minimize our capital at risk, while systematically derisking our CO2 storage site before reaching a final investment decision. Have been closely collaborating with Louisiana DNR, local geology experts and actively engaged in community outreach. Adhering to our disciplined development philosophy, we are pursuing a phased approach to this project. Phase 1 will include installing capture equipment and compression at our southernmost treating plant and constructing a dedicated CO2 pipeline to transport captured CO2 to our storage site. We expect Phase 1 to go in service in the second half of twenty twenty six.

Speaker 2

Phase 2 will capture CO2 from a second DT Midstream treating plant and is expected to be in service in 2027. As a reminder, the 45.2 tax credit will provide the revenue streams for the project. Finally, I want to take a moment to reflect on the achievements the DTM team has made since we spun the company. It's been a very exciting 3 years. Since the spin off, we've achieved significant growth while maintaining a high quality pure play natural gas asset portfolio.

Speaker 2

We have delivered 9% annual adjusted EBITDA growth, which has outpaced gas focused midstream peers. We have also consistently grown the dividend, including today's announced increase of 7%. Driving this growth has been our high quality natural gas pipeline segment, which represented less than 50% of our business mix at spin and has grown to represent about 2 thirds of our business today, ranking DTM as having the highest natural gas pipeline segment mix in the peer group. Our portfolio continues to be well contracted with a high level of take or pay agreements and an average contract tenure of 9 years. The same contract tenure is when we spun the company in 2021.

Speaker 2

We also have no direct commodity exposure, a unique feature among our peer group. Our integrated wellhead to market pipeline asset portfolio is positioned to serve growing demand markets from 2 world class dry gas basins and features a deep organic growth project backlog that is grounded in support of long term market fundamentals. One of our goals from the onset of the spin was to achieve an investment grade credit rating and we are in a very strong position to achieve that this year. We have maintained a strong balance sheet and financial flexibility with our current leverage in a very comfortable position. Our ESG program has also made great strides since the spin and is in a very strong position today.

Speaker 2

We have improved our MSCI rating 2 notches with our current rating at AA, the 2nd highest rating possible. This positions DTM as having a best in class rating. Our safety total recordable incident rate has community giving and volunteer hours on a per employee basis is leading among our sector peers. All of these great accomplishments could not have been achieved without the hard work and dedication from our individual team members, who have continued to demonstrate excellent performance and professionalism. Additionally, the team's unwavering commitment to customer service sets them apart, consistently delivering customer satisfaction and fostering strong relationships, a distinction that has been independently recognized as best in class within the sector, where we received the top ranking in the Mastio customer service study of midstream companies.

Speaker 2

In summary, I am very proud of the DTM team. Their dedication to delivering exceptional results for our shareholders, customers and communities is foundational to our business performance and future success. It is an honor to work with this group and I truly look forward to what the future has in store for the company. I'll now pass it over to Jeff to walk you through our financial results and outlook.

Speaker 3

Thanks, David, and good morning, everyone. As David mentioned, we delivered overall 2023 adjusted EBITDA of 924,000,000 which is up 10% over the prior year, driven by our pipeline segment. For the 4th quarter, we delivered overall adjusted EBITDA of $239,000,000 which was an increase of $3,000,000 over the 3rd quarter. Reviewing our segment quarterly results, our pipeline segment was up $11,000,000 over the prior quarter, driven by the early in service of our LEAP expansions, higher revenues at our pipeline joint ventures and increased rates on new contracts at our Washington 10 storage facility. Our gathering segment results were $8,000,000 lower than the prior quarter due to a $6,000,000 environmental reserve adjustment recognized in the 3rd quarter and modestly lower volumes in the Haynesville, partially offset by higher volumes in the Northeast.

Speaker 3

Operationally for the quarter, total gathering volumes across both the Haynesville and Northeast averaged around 3.1 Bcf a day, up around 100,000,000 cubic feet a day from the 3rd quarter, driven by 10% growth in the Northeast. Now looking forward to 2024 and beyond, as we have done in the past, we are providing the current year guidance as well as an early outlook for next year. Additionally, we are providing a long term growth target. For 2024, our adjusted EBITDA guidance range is $930,000,000 to $980,000,000 reflecting a $10,000,000 midpoint increase from our prior 2024 early outlook. Our 2025 early outlook range for adjusted EBITDA is $980,000,000 to 1,040,000,000 with the midpoint representing a 6% increase over the 2024 guidance midpoint.

Speaker 3

Our adjusted EBITDA guidance for 20242025 is supported by the incremental contribution from our growth investments, as well as expected activity from our major customers. Longer term, we are targeting adjusted EBITDA growth to be 5% to 7%, which is supported by our strong organic backlog, advantaged asset positions, our strong balance sheet and high level of take or pay contracts. Our 2024 growth capital guidance is $300,000,000 to 375,000,000 dollars For 2025, we expect a similar overall level of growth investment as 2024. We currently have approximately $50,000,000 of committed spend in 2025 and are working to advance a number of organic growth opportunities to FID. Our Board has declared a quarterly dividend increase to $0.735 per share, which represents a 7% increase.

Speaker 3

Going forward, we expect to increase the dividend annually in line with our long term adjusted EBITDA growth target of 5% to 7%. From a balance sheet perspective, we are pleased with our positioning on leverage and progress towards obtaining an investment grade credit rating. Our plan is to delever through 2027 into the lower 3s for our on balance sheet debt and into the mid-3s for proportional debt. We have continued to execute on the plans we have shared with the rating agencies and the credit profile for our largest customers continues to improve. Therefore, we expect to attain an investment grade credit rating by the end of 2024.

Speaker 3

And with that, I'll now pass it back over to David for closing remarks.

Speaker 2

Thanks, Jeff. So in summary, we are highly confident in our full year guidance for 2024 and early outlook for 2025. Over the course of our history, both pre spin off from DTE and post spin off, we have a proven track record of strong performance even in downward commodity price cycles. Our pure play natural gas portfolio is well contracted with long term take or pay agreements. We have no commodity exposure and our integrated assets provide critical pipeline capacity to premium demand markets, which are expected to grow significantly between now and the end of the decade.

Speaker 2

We have a sizable organic project backlog, and provide a reliable growing dividend to our shareholders. And provide a reliable growing dividend to our shareholders. And with that, we can now open up the line for questions.

Operator

Thank you. We'll go first to John McKay at Goldman Sachs.

Speaker 4

Hey, good morning, everyone. Thank you for the time. Maybe we'll just start on the gas macro. You guys have exposure to both the Northeast and the Haynesville. Obviously, we're seeing gas around $1.60 right now.

Speaker 4

Would just be curious to see hear from you guys what you're hearing from your producer customers, whether or not you are seeing any shut ins on your footprints right now? And I guess what you've baked into the 2024 guide in terms of activity levels from the Q4? Thank you.

Speaker 2

Good morning, John. And yes, that's a topic that's front and center on most folks' mind right now as the commodity price seems to be nearing the weather forecast that we've had this winter. I guess what I'd say is our current guidance, John, reflects the most current information that we have from all of our customers. The other item I mentioned here is that we have significant MVC protection across our gathering segment that protects the downside. You had asked about potential for shut ins.

Speaker 2

Last year when we saw very weak reflected that in our guide, for this year. Reflected that in our guide for this year. So the way I would describe our guidance is we're very aware of the current price environment. We are very close to all of our customers and their plans and all of that's reflected in our 2024 guide.

Speaker 4

All right. That's clear. Thank you for that. Maybe just looking to the new long term EBITDA growth guidance of 5% to 7%, you also mentioned you have hit effectively 60% coming from pipelines now. If we're thinking about that long term rate, do does pipelines continue to take share from gathering?

Speaker 4

Should they both kind of grow similarly? Anything on kind of that mix when you're looking towards the outer years? Thank you.

Speaker 2

Yes, great question, John. So yes, as we sit here today, pipelines is about 2 thirds of the portfolio and a significant increase from when we spun the company. And that's been very intentional. I mean, we've been very focused on growing that segment. It obviously carries a higher multiple.

Speaker 2

It's the most stable revenue segment in our portfolio. In terms of that 5% to 7% growth forward, I'd refer you to the deck, John. We laid out on Slide 14 a nice description of the backlog, and we broke it out by segment. And approximately 60% of the capital in the backlog is pointed towards the pipeline segment. So our plan is to continue to grow it proportionally at about the same size as it represents in the portfolio today.

Speaker 5

All right. Thank you

Speaker 4

very much. And appreciate all the new detail on the subsector breakdown as well. Thank you.

Speaker 2

Thanks, John. Appreciate that.

Operator

We'll move to our next question from Jeremy Tonet at JPMorgan.

Speaker 2

Hi, good morning. Good morning, Jeremy.

Speaker 6

Just wanted to talk about the guidance range for 2024 a little bit more. If you could dive into what maybe could drive high end versus low end there, what amount of EBITDA would be subject to maybe producer activity shifting in also I guess the Carthage connector, what type of impact do you see that having in the year?

Speaker 2

Jeremy, the two way that we laid out in the guidance, we feel really confident in that two way. And like I mentioned earlier with John's question, we've certainly calibrated to what I'll call the current realities in the commodity space that may affect some of our customers and factored in the behaviors that we saw last summer when we experienced some really weak cash prices. So that's baked into the guidance 2 ways. So I feel very confident that we're going to be in between those goalposts. In terms of some of the incremental activity in the portfolio, getting the Blue Union and LEAP system more deeply integrated to the Haynesville basin has been a strategic priority for us.

Speaker 2

That Carthage interconnect is an example of that, just getting it more deeply tied to the entire breadth and of the basin. Lots of customers sitting over there that are looking for incremental egress down into the Gulf region. And we're very bullish that interconnect that it will drive incremental activity and potentially help support incremental LEAP expansion.

Speaker 6

Got it. Thank you for that. And just want to see, I guess, over time, how you see capital allocation evolving for the company. You have CapEx stepped up a bit this year and it seems like there's still more opportunities. Also it seems like there is M and A potential out there in the market in which would argue for leaving some balance sheet capacity.

Speaker 6

So just wonder how you see balancing these competing priorities? Yes.

Speaker 2

We've got this really robust organic backlog of opportunities and everything that we've detailed in the disclosure are actively being worked. So we're in a really advantaged position of having that deep organic backlog, which typically drive higher returns for capital deployment. So our priority will be to deploy capital there and monetize those higher returns. That'll be priority number 1. We announced 7% dividend increase.

Speaker 2

Our plan and our goal is to continue to grow that dividend and make it very durable for investors, so people have confidence in it. That's our currently our primary tool to return capital to shareholders. In terms of M and A, lots of assets in the market, lots of activity happening in the space, especially upstream. I don't think that's going to abate. I think we're in a consolidation mode right now.

Speaker 2

Lots of bolt on opportunities in and around us. Those will just have to compete with the organic opportunities that we're pursuing. We're very aware of all those bolt on opportunities around us. We'll assess them and hold them to the standard of our organic. And if it makes sense, we'll pursue.

Speaker 2

That's one of the reasons why Jeff's kept the balance sheet as clean and pure as he has and why we continue to strengthen balance sheet to have that dry powder sort of in the cupboard if opportunities present themselves.

Speaker 6

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

Speaker 2

Thanks a lot, Jeremy.

Operator

We'll go next to Spiro Dounis at Citi.

Speaker 7

Thanks, operator. Good morning, guys. First question, maybe a 2 part one on the LEAP expansion. First, can you walk us through the scope of getting that extra 1 Bcf a day out of the pipeline? And how much of that's going to ultimately be dependent on new LNG FIDs?

Speaker 7

And the second part of the question is we think about the Phase 4 part of the expansion that you're especially moving forward with soon. Is any of that impacted right now by some of the litigation going on right now in Haynesville?

Speaker 2

Good morning, Spiro. Great questions. So I'll unpack that. For our Phase 4, we're in some detailed conversations with a handful of shippers. These are long term shippers with a long view on the basin and LNG export.

Speaker 2

I think those conversations are really driven by the commercial value that the system offers. It's like I talked about earlier with Jeremy, it's interconnectivity to numerous supply points in the basin and its egress capacity to multiple market areas out of the basin, both to the south, but also in the north. It's very well connected and I think the customers are recognizing that a lot of optionality for them to move their product to market. And I think that's driving the conversation more than some of the drama that's unfolding in the basin with some other pipelines. So that's my perspective on that, Spiro.

Speaker 2

In terms of extending the runway from 3 Bcf a day to 4 Bcf a day, that's sort of evolved organically, driven by a couple of things. We're we've completed Phase 1 and Phase 2 and we're now has schedule on Phase 3. So we're getting a much better feel from an engineering perspective, how the system is operating, where potential incremental gas is coming in on the system that affects the hydraulics of the system. As we have inbound requests for capacity and running different studies, it's become clear to us that we actually can expand this beyond 3 Bcf a day up to the 4 Bcf a day neighborhood. So that's obviously been well received in the market.

Speaker 2

We have no limitations on that right now like some other projects have. So we have a clear runway to expand on a relatively short notice with relatively low execution risks to that higher number. And if you look at what's under construction and FID in terms of incremental demand coming over the balance of this decade, there's definitely a need for significant incremental pipeline capacity. We laid that out in our deck and I'd point you to that slide just to look at the numbers.

Speaker 7

Got it. That's helpful color. Thanks for that, David. Your second question just going to the CapEx backlog of over $1,300,000,000 They sort of laid out 2024 and 2025 pretty clearly and then it seems like the capital spending in 2026, 2027 maybe is around that sort of $300,000,000 level. I'm curious if you look at that backlog and sort of tether that to the 5% to 7% EBITDA growth outlook, Does that level of spending get you 5% to 7% or is there an assumption there that you would be adding on more?

Speaker 2

No. That if you do the simple math on the EBITDA multiple, that'll get you the 5% to 7% growth rate.

Speaker 7

Got it. Helpful guys. Thanks for the time.

Speaker 2

Yes, no problem.

Operator

We'll move next to Robert Mosca at Mizuho Securities.

Speaker 5

Hey, morning, everyone. Wondering if you could speak to the viability of some of those Northeast pipeline expansions you flagged in that CapEx slide. Just understand there might be a commercial desire, but perhaps your thoughts on how they could navigate the regulatory backdrop in the Northeast?

Speaker 2

Sure, Rob. I'd say Millennium is probably one of the best examples of that. They're in a open season process. They had an open season on expansion that ties into the Algonquin expansion that I think Enbridge has talked about publicly recently. So both those two projects are sort of hand in glove and both of them are in active discussions with shippers as we speak.

Speaker 2

So they're very real, they're active. There's clearly an incremental demand need in that area. There's obviously a lot of political drama around this topic, around the reliability topic. But they're very real and they're being we're in active conversations with long term shippers around this as we speak.

Speaker 5

Got it. Appreciate it, David. And then for my second question and some consolidation on your acreage in the Haynesville, Could you talk about maybe base case assumptions on how it affects your volume outlook and growth plan in that region, just outside of having a stronger credit customer?

Speaker 2

Yes. I mean, that's a great question that, I think until that merger closes and the new entity emerges. When we look at it and you look at the acreage overlap, it just looking at the acreage map, you can see the kind of the industrial engineering rationale around that merger. The acreage is side by side. I think it's going to enable them and I think Chesapeake has said this publicly, it will enable them to drill laterals, more efficient capital deployment to release the same quantity of gas.

Speaker 2

So I think once the merger happens, there should be a good opportunity for us to sit down with the new entity, look at the dedications that we have, the SWN dedications, look at where maybe there's pockets of acreage, an island within that dedication that maybe has the Chesapeake label on it. I suspect there'll be opportunity, but it's really going to be a question post merger as to having more clarity on what those incremental opportunities may be. We're certainly bullish the transaction from a credit party counterparty exposure. It's a significant uplift for us and I think is one of the key items in our journey to investment grade for DTM.

Speaker 5

Got it. Appreciate the time everyone.

Operator

Next we'll go to Sunil Sibal at Seaport Global.

Speaker 8

Yes, hi, good morning and thanks for all the clarity on the call. So first question on your investment grade ratings targeted by year end 2024. So I was just curious, are there any specific milestones that the rating agencies have laid out for you for 2024 that help them get there? Or is it just basically executing on the

Speaker 2

things that the agencies have made very clear. And I think when you read the reports that they publish on us, they allude to them in the reports. So I'd say the first item would be, we're currently on positive outlook at Finch. They all mentioned Southwestern achieving investment grade, which the original plan for Southwestern was to achieve investment grade this year. So I think the merger is an accelerant to that.

Speaker 2

The agencies have already publicly stated that the new merged entity would be investment grade. So I think that's a catalyst that accelerates our journey to investment grade. It's one of the key measures that the agencies have mentioned in terms of our move from where we are to investment grade. And then the other item is what you alluded to, which is just continuing to have a disciplined execution of the detailed plans that we share with the rating agencies since we spun the company. And we're definitely doing that and we'll have an opportunity to sit down in the spring to do our annual checkup and we'll be demonstrating again to them that we continue to execute on that plan and deliver the outcomes that they were expecting.

Speaker 2

So I think we're well positioned to achieve that later in the year.

Speaker 8

Got it. And then on the $1,300,000,000 backlog that you laid out on the projects, I was curious if you could talk a little bit about some puts and takes, which might pull that backlog either up or might lead to some pruning in the backlog as you go along?

Speaker 2

Yes, that's another good question. I'd say the one area that has been evolving in the backlog. So I'd say our 2 core areas, pipeline and gathering, lots of projects in different stages of the development cycle. Some you can see, we brought a few in service, some are we're under construction on a few, some are in what I'll call late stage development and some further out our earlier stage development. But the fundamentals around every one of these projects that we detailed are strong, and we've got line of sight to these expansions.

Speaker 2

So that's what I'll call our current core business platforms. The one that's emerging, the energy transition, that one is emerging. But there are other opportunities that are emerging and growing in that segment. I'd say if there is any reallocation happening over time, my intuition would be that the Energy Transition segment grows quicker or attracts more capital quicker than some of the other segments. It just feels like it's on the verge of really stepping forward quickly, especially with a lot of the tax incentives that have been laid out that are really accelerant to some of these investment opportunities.

Speaker 8

So just one clarification on that. So do you mean that opportunity set might be widening beyond CCS for you or is it more of CCS as you kind of achieve success in that?

Speaker 2

Yes, I think there's more beyond just the Louisiana CCS. I think for us, Louisiana CCS is demonstrating to the market that we are very capable to execute a CCS project in a disciplined way. I think the low carbon fuels, which we laid out, is a really interesting space that's growing quickly. And taking our CCS expertise to 3rd parties and really growing a 3rd party carbon capture and storage business is very real for us as I look out over the next 5 years.

Speaker 8

Okay, got it. Thanks for that.

Speaker 5

You're welcome.

Operator

And there are no further questions at this time. I would like to turn the conference over to David Slater for closing remarks.

Speaker 2

Well, thank you very much for your time this morning, and thank you very much for your interest on DTM. We greatly appreciate everyone as investors and I look forward to meeting everyone in person at the next conference.

Speaker 1

Have a

Speaker 2

great Friday and enjoy your weekend.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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