The following discussion of our results of operations and financial condition should be read in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included under Part I, Item 1 of this quarterly report, and the historical consolidated financial statements and notes thereto, which are included in theDT Midstream 2021 Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the midstream industry and our business and financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections entitled "Forward-Looking Statements" and "Risk Factors." OVERVIEW Our Business We are an owner, operator, and developer of an integrated portfolio of natural gas midstream assets. We provide multiple, integrated natural gas services to customers through our Pipeline segment, which includes interstate pipelines, intrastate pipelines, storage systems, and lateral pipelines, and through our Gathering segment. We also own joint venture interests in equity method investees which own and operate interstate pipelines, many of which have connectivity to our wholly owned assets. Our core assets strategically connect key demand centers in the MidwesternU.S. ,Eastern Canada ,Northeastern U.S. andGulf Coast regions to production areas of the Haynesville andMarcellus /Utica dry natural gas formations in theGulf Coast and Appalachian Basins, respectively. OnJuly 1, 2021 ,DT Midstream completed the Separation from DTE Energy and became an independent public company. See Note 1, "Description of the Business and Basis of Presentation" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 24 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations includes financial information prepared in accordance with GAAP. The following sections discuss the operating performance and future outlook of our segments. Segment information includes intercompany revenues and expenses, as well as other income and deductions that are eliminated in the Consolidated Financial Statements. InNovember 2020 , theSEC issued a final rule to modernize and simplify Management's Discussion and Analysis and certain financial disclosure requirements in SEC Regulation S-K. As permitted by this final rule, the analysis below reflects the optional approach to discuss results of operations on a sequential-quarter basis, which we believe will provide the most useful information to investors in assessing our quarterly results of operations going forward. In addition, as required by the final rule, we have continued to provide a comparison of the current year-to-date period to the prior year-to-date period. For purposes of the following discussion, any increases or decreases refer to the comparison of the three months endedJune 30, 2022 to the three months endedMarch 31, 2022 , and the six months endedJune 30, 2022 to the six months endedJune 30, 2021 , as applicable.
The following table summarizes our consolidated financial results:
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30,
2022 2022 2022 2021
(millions, except per share amounts)
Operating revenues $ 227 $ 215 $ 442 $ 405
Net Income Attributable to DT Midstream 91 81 172 146
Diluted Earnings per Common Share $ 0.93 $ 0.84 $ 1.77 $ 1.51
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30,
2022 2022 2022 2021
(millions)
Net Income Attributable to DT Midstream by Segment
Pipeline $ 52 $ 48 $ 100 $ 86
Gathering 39 33 72 60
Total $ 91 $ 81 $ 172 $ 146
25
--------------------------------------------------------------------------------
Pipeline
The Pipeline segment consists of our interstate pipelines, intrastate pipelines,
storage systems, lateral pipelines including related treatment plants and
compression and surface facilities. This segment also includes our equity method
investments. Pipeline results and outlook are discussed below:
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30,
2022 2022 2022 2021
(millions)
Operating revenues $ 83 $ 77 $ 160 $ 150
Operation and maintenance 12 13 25 32
Depreciation and amortization 15 16 31 31
Taxes other than income 4 4 8 7
Asset (gains) losses and impairments, net (6) - (6) -
Operating Income 58 44 102 80
Interest expense 13 13 26 22
Interest income - - - (1)
Earnings from equity method investees (35) (36) (71) (60)
Loss from financing activities 6 - 6 -
Other (income) and expense - - - (2)
Income Tax Expense 19 16 35 29
Net Income 55 51 106 92
Less: Net Income Attributable to
Noncontrolling Interests 3 3 6 6
Net income attributable to
$ 100 $ 86 Operating revenues increased$6 million for the three months endedJune 30, 2022 primarily due to higher volumes on Stonewall Gas Gathering and higher volumes and rates on LEAP. Operating revenues increased$10 million for the six months endedJune 30, 2022 primarily due to higher volumes and rates from new and existing customers on LEAP of$12 million , partially offset by decreased storage revenues. Operation and maintenance expense decreased$7 million for the six months endedJune 30, 2022 primarily due to lower Separation related transaction costs of$10 million , partially offset by increased LEAP and storage expenses.
(Gains) losses and impairments of assets, net increase
Interest expense increased
primarily due to higher interest rates on our external debt compared to interest rates on borrowings from DTE Energy.
Earnings from equity method investees increased$11 million for the six months endedJune 30, 2022 primarily due to higher revenue at NEXUS and Vector Pipeline as a result of improved contracting. Loss from financing activities increased$6 million for both the three and six months endedJune 30, 2022 due to the partial repayment of our Term Loan Facility. See Note 8 - "Debt" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for further details.
Income tax expense increased
Outlook
We believe our long-term agreements with customers and the location and
connectivity of our pipeline assets position the business for future growth. We
will continue to pursue economically attractive expansion opportunities that
leverage our current asset footprint and strategic relationships. These growth
opportunities include future Haynesville system expansion (LEAP) and additional
growth related to our equity method investments.
26
--------------------------------------------------------------------------------
Gathering
The Gathering segment consists of our gathering systems including related
treatment plants and compression and surface facilities. Gathering results and
outlook are discussed below:
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30,
2022 2022 2022 2021
(millions)
Operating revenues $ 144 $ 138 $ 282 $ 255
Operation and maintenance 51 48 99 75
Depreciation and amortization 27 26 53 51
Taxes other than income 4 4 8 6
Asset (gains) losses and impairments, net (17) - (17) 17
Operating Income 79 60 139 106
Interest expense 20 18 38 28
Interest income (1) - (1) (3)
Loss from financing activities 7 - 7 -
Income Tax Expense 14 9 23 21
Net income attributable to
$ 72 $ 60 Operating revenues increased$6 million for the three months endedJune 30, 2022 due to higher revenues onBlue Union and the Appalachia Gathering System. Operating revenues increased$27 million for the six months endedJune 30, 2022 primarily due to higherBlue Union production-related revenue of$26 million and higher revenues on the Appalachia Gathering System. Operation and maintenance expense increased$24 million for the six months endedJune 30, 2022 primarily due to higherBlue Union and Susquehanna Gathering System expenses of$39 million and$4 million , respectively, partially offset by lower Separation related transaction costs of$9 million , Appalachia Gathering System expenses of$5 million , and other general cost savings.Higher Blue Union expenses were driven by higher gathered volumes and associated variable costs to operate facilities and planned maintenance. Asset (gains) losses and impairments, net increased$17 million for the three months endedJune 30, 2022 due to a gain on sale of certain assets in theUtica shale region. Asset (gains) losses and impairments, net increased$34 million for the six months endedJune 30, 2022 . The increase was due to the 2022 gain of$17 million mentioned above as compared to the 2021 loss on notes receivable for an investment in certain assets in theUtica shale region of$19 million , partially offset by a$2 million gain on sale ofMichigan gathering assets. See Note 2 - "Significant Accounting Policies" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for further details.
Interest expense increased
primarily due to higher interest rates on our external debt compared to interest rates on borrowings from DTE Energy.
Loss from financing activities increased$7 million for both the three and six months endedJune 30, 2022 due to the partial repayment of our Term Loan Facility. See Note 8 - "Debt" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for further details.
Income tax expense increased
mainly due to an increase in earnings before income taxes.
Outlook
We believe our long-term agreements with producers and the quality of the natural gas reserves in theMarcellus /Utica and Haynesville shale regions position the business for future growth. We will continue to pursue economically attractive expansion opportunities that leverage our current asset footprint and strategic relationships. These growth opportunities include a future Haynesville system expansion (Blue Union ) and expansion opportunities at the Appalachia Gathering System. 27 --------------------------------------------------------------------------------
STRATEGY
Our principal business objective is to safely and reliably operate and develop natural gas assets across our premier footprint. Our proven leadership and highly engaged employees have an excellent track record. Prospectively, we intend to continue this track record by executing on our natural gas-centric business strategy focused on disciplined capital deployment and supported by a flexible, well capitalized balance sheet. Additionally, we intend to develop low carbon business opportunities and deploy greenhouse gas reducing technologies as part of our goal of being leading environmental stewards in the midstream industry and have announced a net zero carbon emissions goal by 2050. Our strategy is premised on the following principles:
•disciplined deployment of capital in assets supported by solid fundamentals;
• capitalize on opportunities for integration and use of assets;
•pursue economically attractive opportunities;
•growth in cash flow supported by long-term firm revenue contracts; and
•Provide exceptional service to our customers.
CAPITAL INVESTMENTS
Capital spending within our company is primarily for ongoing maintenance and expansion of our existing assets, and if identified, attractive growth opportunities. We have been disciplined in our capital deployment and make growth investments that meet our criteria in terms of strategy, management skills, and identified risks and expected returns. All potential investments are analyzed for their rates of return and cash payback on a risk-adjusted basis. We anticipate total capital expenditures, inclusive of contributions to equity method investees, in 2022 of approximately$350 million to$400 million .
ENVIRONMENTAL ISSUES
We are subject to extensiveU.S. federal, state, and local environmental regulations. Additional compliance costs may result as the effects of various substances on the environment are studied and governmental regulations are developed and implemented. Actual costs to comply with such regulation could vary substantially from our expectations. Pending or future legislation or regulation could have a material impact on our operations and financial position. Potential impacts include unplanned expenditures for environmental equipment, such as pollution control equipment, financing costs related to additional capital expenditures and the replacement costs of aging pipelines and other facilities. For further discussion of environmental matters, see Note 9, "Commitments and Contingencies" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 28 --------------------------------------------------------------------------------
CAPITAL AND LIQUIDITY RESOURCES
Cash needs
Our principal liquidity requirements are to finance our operations, fund capital expenditures, satisfy our indebtedness obligations, and pay approved dividends. We believe we will have sufficient internal and external capital resources to fund anticipated capital and operating requirements. We expect that cash from operating activities in 2022 will be approximately$605 million to$655 million . Six Months Ended June 30, 2022 2021 (millions) Cash and Cash Equivalents at Beginning of Period$ 132 $ 42 Net cash and cash equivalents from operating activities 379 328
Net cash and cash equivalents (used for) from investing activities
(31) 201 Net cash and cash equivalents used for financing activities (135) (534) Net Increase (Decrease) in Cash and Cash Equivalents 213 (5) Cash and Cash Equivalents at End of Period$ 345 $ 37 Operating Activities Cash flows from our operating activities can be impacted in the short term by the natural gas volumes gathered or transported through our systems, changing commodity prices, seasonality, weather fluctuations, dividends received from equity method investees and the financial condition of our customers. Our preference to enter into firm service revenue contracts helps minimize our long-term exposure to commodity prices and its impact on the financial condition of our customers and provides us more stable operating performance and cash flows. Net cash and cash equivalents from operating activities increased$51 million for the six months endedJune 30, 2022 primarily due to net changes in working capital, an increase in dividends received from equity method investees, and an increase in operating income after adjustment for non-cash items including depreciation and amortization expense, amortization of operating lease right-of-use assets, and assets (gains) losses and impairments. These increases were partially offset by an increase in interest expense and an increase in cash income tax expense. Investing Activities Cash outflows associated with our investing activities are primarily the result of plant and equipment expenditures, acquisitions, and contributions to equity method investees. Cash inflows from our investing activities are generated from proceeds from sale or collection of notes receivable, distributions received from equity method investees, and proceeds from asset sales. Net cash and cash equivalents from investing activities decreased$232 million to represent net cash and cash equivalents used for investing activities for the six months endedJune 30, 2022 , primarily due to the 2021 cash collection of the Notes receivable from DTE Energy, partially offset by proceeds from the sale of notes receivable. Financing Activities Prior to the Separation we relied on short-term borrowings and contributions from DTE Energy. InJune 2021 , we issued Senior Notes in an aggregate principal amount of$2.1 billion and a$1.0 billion Term Loan Facility. Proceeds were used for the repayment of the short-term borrowings due to DTE Energy as well as a one-time special dividend provided to DTE Energy. InApril 2022 , we issued Senior Secured Notes in an aggregate principal amount of$600 million . We used the net proceeds from the sale of the Senior Secured Notes of$593 million to partially repay indebtedness under our Term Loan Facility. See Note 8, "Debt" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 29 -------------------------------------------------------------------------------- Net cash and cash equivalents used for financing activities decreased$399 million for the six months endedJune 30, 2022 primarily due to the 2021 Separation-related repayment of short-term borrowings and special dividend to DTE Energy, partially offset by contributions from DTE Energy that did not recur in 2022. Additionally, the decrease was partially offset by lower proceeds from the issuance of long-term debt, higher repayment of long-term debt, and higher dividends paid on common stock. During the six months endedJune 30, 2022 ,DT Midstream paid cash dividends on common stock. See Note 5, "Earnings per Share and Dividends" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Outlook
We expect to continue executing on our natural gas-centric business strategy focused on disciplined capital deployment and supported by a flexible, well capitalized balance sheet. Other than the impact of the items discussed below on our debt and equity capitalization, we are not aware of any trends, other demands, commitments, events or uncertainties that are reasonably likely to materially impact our liquidity position.
Our working capital requirements will primarily be driven by changes in accounts receivable and accounts payable. We continue our efforts to identify opportunities to improve cash flow through working capital initiatives and securing additional long-term firm commitments from customers.
Historically, our sources of liquidity have included cash generated from operations and, prior to the Separation, loans obtained from DTE Energy. After the separation, our sources of liquidity include cash generated from operating activities and borrowings available under our revolving credit facility. We started investing in money market cash equivalents in
InJune 2021 , we issued long-term debt in the form of$2.1 billion Senior Notes and a$1.0 billion Term Loan Facility. We also entered into a$750 million secured Revolving Credit Facility for general corporate purposes and letter of credit issuances to support our future operations and liquidity. InApril 2022 , we issued the 2032 Notes in an aggregate principal amount of$600 million . We used the net proceeds from the sale of the Senior Secured Notes of$593 million to partially repay indebtedness under our Term Loan Facility. The Credit Agreement covering the Term Loan Facility and Revolving Credit Facility includes financial covenants thatDT Midstream must maintain. See Note 8, "Debt" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for additional discussion on the financial covenants.
From
We expect to pay regular cash dividends toDT Midstream common stockholders in the future. Any payment of future dividends is subject to approval by the Board of Directors, and may depend on our future earnings, cash flows, capital requirements, financial condition, and the effect a dividend payment would have on our compliance with relevant financial covenants. Over the long-term, we expect to grow our dividend consistent with cash flow growth and are targeting a payout ratio consistent with pure-play midstream companies. We believe we will have sufficient operating flexibility, cash resources and funding sources to maintain adequate amounts of liquidity and to meet future operating cash, capital expenditure and debt servicing requirements. However, virtually all of our businesses are capital intensive, or require access to capital, and the inability to access adequate capital could adversely impact future earnings and cash flows. See Note 1, "Description of the Business and Basis of Presentation", Note 8, "Debt" and Note 9, "Commitments and Contingencies" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. 30 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
The preparation of our Consolidated Financial Statements in conformity with GAAP requires that management applies accounting policies and makes estimates and assumptions that affect results of operations and the amounts of assets and liabilities reported in the Consolidated Financial Statements. Management believes that the area described below requires significant judgment in the application of the accounting policy or in making estimates and assumptions in matters that are inherently uncertain and that may change in subsequent periods.
We have goodwill that resulted from business combinations. An impairment test for goodwill is performed annually as ofOctober 1st , or whenever events or circumstances indicate that the value of goodwill may be impaired. In between annual impairment tests, we monitor our estimates and assumptions regarding estimated future cash flows, including the impact of movements in market indicators in future quarters, and will update the impairment analyses if a triggering event occurs. While we believe the assumptions are reasonable, actual results may differ from projections. To the extent projected results or cash flows are revised downward, the reporting unit may be required to write down all or a portion of its goodwill, which would adversely impact our earnings. We have noted an increase in our weighted average cost of capital resulting from interest rate increases since our last annual goodwill impairment test. We have determined that an interim impairment test is not required as there are no triggering events or changes in circumstances indicating that it is more likely than not that the goodwill for either of our two reporting units is impaired. We will continue to monitor our estimates and assumptions on a quarterly basis as market conditions continue to evolve. See Part I, Item 3, "Quantitative and Qualitative Disclosures About Market Risk", in this Quarterly Report for more information on our exposure to market risk. See also "Critical Accounting Estimates" included inDT Midstream's 2021 Annual Report on Form 10-K.
OFF-BALANCE SHEET ARRANGEMENTS
We are party to off-balance sheet arrangements, which include our equity method investments. See the section entitled "Principles of Consolidation" in Note 1, "Description of the Business and Basis of Presentation" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for further discussion of the nature, purpose and other details of such agreements. Other off-balance sheet arrangements include the Vector Pipeline Line of Credit and our guarantees, which are discussed further in Note 9, "Commitments and Contingencies" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q. NEW ACCOUNTING PRONOUNCEMENTS
See Note 3, “New Accounting Pronouncements” to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
31
————————————————– ——————————
© Edgar Online, source
:quality(70)/d1hfln2sfez66z.cloudfront.net/02-21-2022/t_fe60a38b407d469698d96799e42dfd03_name_file_960x540_1200_v3_1_.jpg)